"AQR’s ‘Hard to Believe’ Study Spurs Clash Over AI Use for Quants"

The writer, Justina Lee has obviously done her homework. 

From Bloomberg, August 20: 

Wall Street quants and leading financial academics are clashing over whether artificial intelligence has upended one of the core principles of systematic investing.

Quant traders, who use rules-based strategies derived from data analysis, have long believed their models get less effective when they become too complicated. That’s because they suck in too much of the distortive noise that makes predicting markets such a challenge in the first place.

But a researcher at AQR Capital Management has sparked a backlash with a study claiming the opposite — that rather than being a liability, bigger and more complex models might offer advantages in finance. The paper, titled The Virtue of Complexity in Return Prediction, showed that a US stock market trading strategy trained on more than 10,000 parameters and just a year of data beat a simple buy-and-hold benchmark.

“This idea of preferring small, parsimonious models is a learned bias,” said Bryan Kelly, head of machine learning at AQR and one of the paper’s three authors. “All of us are on a day-to-day basis using these large language models that were revolutionary in their success because of this push toward extraordinarily large parameterizations.”

The research has triggered a heated debate since it was published in the prestigious Journal of Finance last year, among both peers in the quant industry and those in related academic circles.

At least six papers, including from scholars at Oxford University and Stanford University, have now challenged its findings. Some argue the Virtue of Complexity study has a questionable design that renders it irrelevant for live trading. Others say it’s less cutting-edge than it appears anyway. (Kelly has subsequently written a defense.)

Among the most notable critics is Stefan Nagel, a finance professor at the University of Chicago — the very school where two of AQR’s founders met and where the firm’s original investment philosophy took shape. His first reaction? “I found the empirical results hard to believe,” he said.

After digging into the details of the Virtue of Complexity study, Nagel concluded that because the model was dissecting just 12 months of data, it was simply copying signals that had worked more recently. In other words, it was following a momentum strategy — a well-established trading approach.

“It’s not because the approach learned from the data that this effect is there,” Nagel said. “It’s because they did something mechanical implicitly, and this mechanical thing happened to work well by luck.”

Jonathan Berk, a Stanford economist who was among the first and fiercest critics of the Virtue of Complexity paper, called it “virtually useless” for aiming at predictions that tell you nothing about what drives asset returns. Daniel Buncic at the Stockholm Business School said the study makes some obviously wrong design choices to reach its conclusions.

Co-written with Semyon Malamud at EPFL in Switzerland and Kangying Zhou at Yale University, the Virtue of Complexity paper has provoked this response because it challenges a long-held assumption about forecasting financial markets.

While modern AI can perform remarkable tasks like telling cats from dogs in an image, that’s because it can learn from a massive supply of photos, and because animals have defined and unchanging features. In contrast, stocks provide an inherently limited amount of data (especially for slower-moving strategies that may only trade once a month), and each can be swayed by countless different forces.

The fear has always been overfitting — that complex models will learn from all the noise in historical data, much of which may not apply in future trading. So quants have traditionally relied on relatively simple insights, like the famous Fama-French three-factor model (which analyzes returns based on each company’s size, valuation and relationship with the broader market).

AQR itself was built on such so-called factors, which aim to outperform over long stretches of time. It is only in recent years that the $146 billion money manager has raised capital for machine-learning strategies and said not all trading signals have to be backed by economic theory. Kelly’s main contention is that traditional quant models are so simple they under-fit, producing inferior forecasts, while sufficiently complex models actually learn not to overfit too much....

....MUCH MORE 

Here's Quote Investigator digging into the history of the line "That Works Very Well in Practice, But How Does It Work In Theory?" 

And some previous visits with the Quantfather:

• Cliff Asness’s AQR Staff Built Him A Robot Warren Buffett (BRK.B)
• UPDATED--Cliff Asness vs. Paul Krugman: Let's Get Ready To Rumble
• Let's Get Ready To Rumble II: Paul Krugman Responds to Cliff Asness
• Asness' AQR to Launch First Catastrophe Bond Fund Strategy
• The Last Word On Asness' Alpha, Buffet's Beta and The Failure of Commodity Quants (and how to turn hyperlinks into footnotes)
• Testing Small-batch Artisanal Portfolio Construction With Cliff Asness and Grantham, Mayo's James Montier
• "Capitalisn’t: Why Cliff Asness Believes Markets Are Getting Dumber"

Many more, including the Asness - Arnott dustup. Use the 'Search blog' box upper left if interested. 

"Dr. Frankenstein’s Benchmark: The S&P 500 Index and the Observer Paradox"

From American Affairs Journal,  Fall 2025 / Volume IX, Number 3:

The most popular understanding of the U.S. stock market is the S&P 500 Index (SP5) of leading U.S. companies. Introduced in 1957, it is the most widely cited index, and more money is managed to it, by far, than any other benchmark. As such, SP5 has become a proxy for the health of U.S. investors, corporate America, and the overall economy. While SP5’s growth and prominence over the past half-century is well known, few market observers stop to ask basic questions: Why was it created? What need did it fill? What has happened since? And most importantly, is it still fit for purpose? That last question is the focus of this essay.

Nearly seventy years after its creation, SP5 may be fit for purpose, but it is clearly no longer the narrow one of the 1950s. While SP5 was initially a tool for measurement and understanding, it has over time become a central actor in shaping investor behavior. The widespread use of SP5-based products now actively influences the market SP5 was intended merely to observe. Though not a true observer paradox in the quantum physics sense, the feedback loop between measurement and subject has become pervasive. The consequences have been many, but perhaps the most significant one has been the widening gap between investment in the stock market and actual ownership of businesses through the stock market. This phenomenon, in turn, is a distinguishing characteristic of “financialization,” a criticism leveled against Wall Street in recent decades for focusing on generating financial returns regardless of, or even in opposition to, outcomes in the real economy.

The personification of an impersonal system is not unusual in a complex society. In the case of SP5, I would suggest that Dr. Frankenstein’s creature is the right character. Mary Shelley’s story, Frankenstein from 1818, is a tale of how scientific progress can diverge wildly from the plan.¹ SP5 tracks that narrative all too well.

Bringing Order to Chaos

It did not start out this way. When SP5 was launched, it was a vast improvement over the numerous industry and early market averages that had appeared in the late nineteenth and early twentieth centuries. Those primitive measures struggled with stock splits, stock dividends, and dividend payments. Over time, they tended to become distorted. As one critic noted in 1957 at the launch of SP5, even if all the constituent elements of those older indices went to zero, the index could still have a positive value. More importantly, these earlier market measures, often associated with media platforms, were mostly indices of price, not size. They did not capture what we now call market capitalization but what was referred to at the time as market value. While indices of value existed, due to calculation limitations, they were neither broad nor timely. The most advanced Standard & Poor’s products prior to 1957 were a value-weighted index of 233 stocks calculated weekly, and one representing ninety companies calculated daily after the market close. Both had been launched in the 1920s.

By contrast, the new index was calculated hourly during the trading day. And with the five hundred largest NYSE stocks (out of nearly 1,100 on the exchange at that time), it covered more than 90 percent of the market’s value. Reflecting the structure of the economy and the market as it existed then, the new index had 425 industrials, twenty-five rails, and fifty utilities. (At that time, banks did not trade on the NYSE. Forty financials were added to the index starting in 1976.)

As the media around the introduction emphasized, SP5 was a technological development, taking advantage of emerging computation capability and communication coordination to provide a comprehensive value-weighted index measure on an hourly basis.² The result gave investors and the financial media an intraday, easy-to-understand, and non-distorted answer to the question of how the overall stock market was doing in absolute and percentage terms: up, down, sideways. SP5 was designed to and initially did serve as a transparent reflection of the reality of the underlying securities trading on the NYSE, the country’s largest exchange by far.

In its earliest incarnation, SP5 also played a bit role in the emergence of modern finance. Starting in the late nineteenth century, economists had sought to bring to human affairs the measurement, rules, and formulas that had so advanced the natural sciences: hence the rise of what has come to be called the “social sciences.” Human behavior, it was understood, was no different than any other natural system. It was just a matter of getting the right data and figuring out the formulas that explained it. While the science of finance was late to the party, by the middle of the twentieth century, academics were hard at work bringing it up to then-current scientific standards, including the creation of measurement tools, such as SP5. This tale was well told by financial journalist Peter Bernstein in his must-read Capital Ideas (1991). It is countered somewhat—or at least placed in historical context—by my own Getting Back to Business (2018).

To be clear, SP5 has been wildly successful in a traditional sense. It is “the” serious benchmark for measuring and understanding the broad U.S. stock market. (The Dow Jones Industrial Average is older, but it is analytically of little use. That’s one of the reasons SP5 was created.³ The popular Nasdaq-100 is more recent and leans heavily toward the new economy.) Most other major market indices are similar to SP5 in design, including the leading “growth” and “value” benchmarks used by institutional investors and licensed by another index vendor. But SP5 is no longer just a yardstick. It has taken on a life of its own and changed the whole nature of stock investing in ways that most investors have not paused to consider.

“It Lives!”: The Creature Comes Alive

The creature’s first sign of life independent of its components came in the form of estimates for what SP5 itself would “earn.” These new “top-down” estimates took advantage of the growing availability in the postwar decades of greater and more detailed macroeconomic data. That data permitted market participants, especially brokerage strategists, to begin forecasting SP5’s expected change in profits per unit of the index compared to the prior year’s actual results. The move coincided with the emergence of macrolevel market investment strategies.

By the 1970s, Wall Street forecasts for individual companies and the market as a whole became sufficiently ubiquitous that a business sprung up to aggregate the estimates and provide “consensus” forecasts. I/B/E/S (Institutional Brokers’ Estimate System) was founded in 1976. Today, forward estimates for SP5 earnings are common. There were twenty-two on the Bloomberg terminal the last time I checked. Investors and traders can easily track how the consensus based on these estimates rises (and sometimes falls) during the course of the year as strategists revise their numbers. It is worth noting that the two sets of calculations—the top-down ones based on macroeconomic data, and the bottoms-up ones tallied from individual company forecasts—can and regularly do differ. Whether or not the forecasts coincide, the top-down projections for the index have become distinct from the specific prospects of the underlying companies. They may be directionally parallel, but they are analytically separate.

Once SP5 had its own estimates no longer directly linked to the underlying constituents, its evolution to sentient being progressed rapidly when these forecasts were used to calculate the market’s P/E ratio, the basic valuation measure of any stock. Assigning the market a P/E number was akin to Dr. Frankenstein throwing the switch and giving his creation life. If it has a P/E, it breathes. It can be cheap, it can be expensive, it can be fairly priced. It has a character. (That character is not completely transparent. The forward estimates are usually for “operating earnings,” after all the bad stuff is taken out. Actual reported earnings are historically up to 10 percent lower than those operating earnings: that is, forward P/Es are regularly understated.) However analytically useful, the use of valuation metrics like the P/E ratio further blurred the distinction between a constructed aggregate and a distinct investment asset.

Combining earnings estimates and P/E ratios, the creature has also developed hopes and dreams. These are known as “price targets.” As an institutional investor, I struggle with the very idea of a price target, but market strategists spend a lot of time on getting SP5’s bullseye right. What is more important, however, is that the price target exercise is nearly fully attenuated from the current valuation or future prospects of the companies that make up SP5.

Earnings growth from the index—note the semantics: earnings are now attributed to the index itself—has been generally consistent, with a relatively low degree of variance except in times of crisis, such as Covid, the global financial crisis, etc. In contrast, the valuation—the P/E multiple—can vary widely. Not surprisingly, there are now numerous, necessarily top-down models that try to determine the right valuation multiple for SP5. The “Fed model,” created by economist and strategist Ed Yardeni in the 1990s, notes the relationship between the market’s valuation and interest rates, especially the rate on the ten-year Treasury bond. This is not surprising as that bond is the basis for discount rates of future earnings or dividends. There should be a relationship.

Yale’s Robert Shiller assesses the valuation of SP5 earnings in terms of long-term historical P/E ratios adjusted for inflation. The result is the CAPE model, the market’s cyclically adjusted P/E. There are others, such as market capitalization to GDP ratio, a measure favored by Warren Buffett. I have my own much more subjective approach, a very distant derivative of Francis Fukuyama’s underappreciated Trust: The Social Virtues and the Creation of Prosperity (1995) with a heavy dose of Michael Jensen’s agency theory. The resulting simple algorithm is that high-trust societies trade with high multiples. Low-trust societies trade with low multiples. The reader can decide where we currently are or should be on that spectrum. These approaches all share one characteristic: they effectively view SP5 as an independent entity, not just a calculation derived from something else.

In the past five years or so, the direct relationship between SP5 and the underlying securities has become even more distant due to only a handful of companies (first the faangs, and now the Mag7) driving the index. What good is the Yardeni or Shiller model if only a half dozen stocks account for much of the market’s movement? By the time you read this, there may be a new acronym. In this environment, market strategists find themselves valuing—putting a prospective P/E multiple on—something that is supposed to be a broad measure of business activity when it is, in fact, increasingly narrow. SP5 was first an entirely neutral index, then it became a forecastable macroeconomic entity, and now it is the tail of the dog.

Initially just an idea, SP5 first took on corporeal form in August 1976 as an index fund, the Vanguard First Index Investment Trust, that was created specifically to track SP5. The age of so-called passive index investing had begun. Many other products followed suit. In recent decades, these index funds have been joined by ETFs. The well-named SPY (pronounced “spider”) debuted in 1993. Options contracts on SP5 began trading on the CBOE and CME in the early 1980s. The popular mini futures were introduced in 1997. These are real securities, not just a measure of stocks.

S&P Global estimates that, as of the end of 2023, total assets indexed (~$7 trillion) or benchmarked (~$6 trillion) to SP5 amounted to $13 trillion. That equaled just under one-third of the market value of $40 trillion of SP5 at that time. Another ~$3 trillion (notional value) of derivatives were based on SP5.⁴ All told, up to 40 percent of the index’s value was in SP5-based or SP5-oriented products. More recent figures, through the end of 2024, suggest a similar percentage of index assets are managed to the index itself.⁵ Think about that. While SP5 still measures the market, models based on it have become the largest single investment in the market.

As a youngster, SP5 was pliant, keeping to its original mission of measuring the market, not moving it. No longer. At its current size, our lumbering giant knocks heavily into the furniture as it moves through our portfolios. It is so large that inclusions and exclusions lead to material share price swings in the affected securities. There is a voluminous academic literature on the impact on security prices when there are changes in the index. Traders keenly participate in the “better to buy” and “better to sell” activity upon those inclusions and removals.⁶

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"What John von Neumann Can Teach Us About Risk, Uncertainty, and Edge"

"The Word Genius Is Often Overused But....John von Neumann and Pretty Much Everything"

—One of our previous visits with von Neumann

And from The Great Wall Street, July 14:

The Forgotten Genius Who Could Outsmart Anyone—And Why Investors Should Study Him 

Look, I get it. Buffett quotes are everywhere. You can’t open a finance article without tripping over one. And to be clear, Buffett is brilliant. This isn’t some cheap shot at him. But trying to copy the playbook of someone managing hundreds of billions, with a time horizon measured in decades, doesn’t make much sense if your holding period is closer to a few months and you’re working with a couple of million, not the GDP of a small country.

Buffett has said it himself: with smaller sums, he’d invest differently—and get much better returns. I’ve written before about how your time horizon changes which metrics actually matter. Still, people keep clinging to See’s Candies, moats, and the Circle of Competence like they’re God-given. They’re not.

Let me introduce someone who’s inspired me since I was a college student. You won’t find him mentioned much in the investing world: John von Neumann. He’s one of the people I admire most, not just for his intellect, but for how he thought.

Now, before you click away thinking "Who the heck is that?" stick with me. Among mathematicians, mentioning von Neumann is like name-dropping Babe Ruth at a baseball game. The man was a legend.

Most people have never heard of him. And that's a shame, because his story is absolutely fascinating with an heartbreaking end.

Ready to meet one of history's most remarkable minds? 

The first time I came in touch with John von Neumann was when I was an undergraduate student taking my first class in functional analysis. I noticed something weird: this guy's name was attached to half the theorems we were studying. At first, I thought it was just coincidence.

Then his name started popping up everywhere. Quantum mechanics? There's von Neumann's "Mathematical Foundations of Quantum Mechanics"—a book I devoured in one weekend. Even my master's thesis ended up being on topics related to von Neumann's work on operator algebras.

At that time I only knew about his work in pure mathematics and physics. Turns out, while von Neumann was casually revolutionizing the foundations of physics, he was also inventing game theory, creating the Monte Carlo method, laying the groundwork for modern economics and decision making under uncertainty, building the first computers, and helping design the atomic bomb. You know, just typical Tuesday activities....

....MUCH MORE

For more on von Neumann (and students of Kobayashi Maru scenarios) we have "The Curse of Game Theory: Why It’s in Your Self-Interest to Exit the Rules of the Game"

"Capitalisn’t: Can the Dollar Be Dethroned?"

From the University of Chicago's Booth School of Business, Chicago Booth Review, July 29:

Americans are often told that they benefit from the privilege of the dollar serving as the world's currency. A strong dollar makes imports cheaper, facilitates demand for American companies, and is tied to cheap government borrowing. But what happens when this powerful privilege weakens? What does it even mean for the dollar to be “strong” or “weak” as a medium of exchange and investment? Why should Americans care that the dollar serves as the reserve currency for the world’s central banks?

Harvard’s Kenneth Rogoff, former chief economist for the International Monetary Fund, argues that the dollar’s global dominance will erode in the coming years and that it will eventually share power with the European Union’s euro and Chinese renminbi in a “tripolar” world. On this episode of Capitalisn’t, Rogoff joins hosts Bethany McLean and Luigi Zingales to discuss why the dollar’s shifting dominance matters so much to the United States and what implications this has for the rest of the world’s payment network. 

Audio Transcript 

Kenneth Rogoff: The thing we really care about over the long run is having the dollar be like English, that everybody uses it. That’s what brings our interest rates down on a long-term basis.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Bethany: Way back in the 1960s, a French finance minister called the position that the dollar occupied in the global financial system “America’s exorbitant privilege.”

Luigi: Then there is the paraphrase of Churchill: “Indeed, it has been said that the dollar is the worst form of reserve currency, except for all those other forms that have been tried from time to time.”

Bethany: That always makes me laugh. I mangle the Churchill quote, or rather, I plagiarize it and change it in so many contexts.

OK, I will admit it, Luigi, in the past, when I’ve seen headlines about a strong dollar or a weak dollar, I mostly tune out—unless I’m about to travel to Europe and buy some shoes, of course.

Let me start with a question for you, Luigi. Why does the strength or weakness of the dollar matter? What does that quote about exorbitant privilege mean?

Luigi: I think that you are mixing two related ideas. One is whether the dollar is strong in terms of the exchange rate vis-à-vis other currencies. The Argentinian peso is relatively overvalued in this moment, but nobody would think about investing or using it as a reserve currency, ever.

You look at the exchange rate, and you compare the exchange rate with what you can buy in that particular country. For example, the magazine The Economist shows how much a Big Mac costs in different countries. If your currency is relatively appreciated, it’s pretty cheap to buy McDonald’s in another country. Vice versa, if your currency is depreciated, then when you go to another country, you spend a fortune to buy a Big Mac.

Bethany: I like the shoe index more than a Big Mac index, but that’s OK. We can keep going.

Luigi: I suspected that was the case, but anyway, you get the point.

A different thing is to what extent people want to use the dollar to, number one, write contracts in dollars; number two, invest in dollars; and number three, pay each other in dollars. This is the use of the currency as a medium of exchange, as a unit of account, and as a reserve of value.

Basically, the dollar has a very large market share of all three components around the world. It is a big advantage that the United States has. This big advantage is twofold. Number one, you can pay for your imports with printed money. Most other countries, in order to import a good, need to export a good and get some currency to pay for the good in foreign currency. The United States can buy foreign shoes just by printing pieces of paper that are dollars, which are very cheap to print. That’s one benefit.

The second benefit, which is connected but even more important, is that people feel safe investing in the US dollar and feel particularly safe when things really, really go badly.

The 2008 financial crisis actually originated in the United States. You would think that this is the last country in the world where you want to have your money invested. But people rushed to the dollar as a safe currency in that moment.

As a result of this unique quality, the US government and US households and firms can issue dollars and pay less than they would otherwise if they were located in the UK or in Europe. That really is an exorbitant privilege because you can save a lot on your debt.

Bethany: That makes sense. The influential economist Ken Rogoff has argued that we pay one-half to one percent lower in interest because of the dollar’s position. I think what you’re saying is that the strength of the dollar isn’t just this abstract financial-markets thing that only currency traders care about. It’s a real-world thing, one that affects the amount households pay in interest on, say, credit-card debt or mortgage debt.

But it’s also this abstract thing in that it serves as an unofficial barometer of US power, in a way. It allows all these advantages that are more abstract than the level of interest you pay but are connected to that and are really important in their own way.

How did the dollar get that role in the first place? It’s not like the world voted for the dollar to have exorbitant privilege—or did it?

Luigi: You know this little thing called World War II?

Bethany: Yeah.

Luigi: There is a fascinating episode of Planet Money about what happened in Bretton Woods. As the war was ending, the Allies met in this little town in New Hampshire called Bretton Woods. They were trying to figure out how they would organize the world moving forward. There was major tension between the UK representative, none other than John Maynard Keynes, and the US representative, Harry Dexter White.

What the Planet Money episode suggests is that surprisingly enough, Harry Dexter White outmaneuvered Keynes. Keynes was trying to save the role that the pound had in the international market. Harry Dexter White said, “No, no, let’s talk generically about a currency and then organize everything as a generic currency without specifying what currency it is.” Then at the last minute, in a tricky moment, he replaced this generic currency with the US dollar. The US dollar all of a sudden had the entire role.

By the way, it’s not related, but it’s too hard to resist: did you know that Harry Dexter White then was accused—and apparently accused rightly—of being a spy for the Soviets?....

....MUCH MORE, inclyding the podcast.

"Nvidia and Foxconn Aim to Use Humanoid Robots in AI Server Factory"

In the words of Warren Buffett, "we eat our own cooking." 

From PYMNTS.com, June 20:

Humanoid robots could reportedly begin helping assemble Nvidia artificial intelligence servers at a factory in Houston by the first quarter of 2026.

That is the goal of Nvidia and Foxconn, Reuters reported Friday (June 20), citing unnamed sources. The companies are expected to finalize the deployment within months.

It is not clear what type of humanoid robots would be used, how many would be put to work in the factory or what they would be doing, according to the release. Foxconn has been training them to move objects and do assembly work, it added.

The project would mark the first time Nvidia products were made with the participation of humanoid robots, and the first time Foxconn used such robots on one of its artificial intelligence (AI) server production lines, according to the report.

Nvidia already supplies a platform that helps manufacturers build humanoid robots, and the company’s CEO, Jensen Huang, said in March that he expects such robots to be widely used in manufacturing facilities within five years, per the report.

It was reported in December that Nvidia was turning to robotics amid rising competition in the AI chip space and was jockeying to become the top platform in an anticipated robotics boom.

“The ChatGPT moment for physical AI and robotics is around the corner,” Deepu Talla, Nvidia’s vice president of robotics, said at the time.

Humanoid robots, with their human-like form and potential for complex movements, could revolutionize the manufacturing, warehousing and customer service sectors, PYMNTS reported in July. They may be able to perform tasks that are challenging for traditional robots, such as navigating cluttered environments or manipulating objects with human-like dexterity.

Huang said in July: “The next wave of AI is robotics, and one of the most exciting developments is humanoid robots. We’re advancing the entire Nvidia robotics stack, opening access for worldwide humanoid developers and companies to use the platforms, acceleration libraries and AI models best suited for their needs.”....

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"Capitalisn’t: Why Cliff Asness Believes Markets Are Getting Dumber"

From the University of Chicago's Booth School of Business' Capitalisn’t  podcast, June 19:

Are financial markets becoming less efficient? Clifford S. Asness of AQR Capital Management certainly thinks so. In a paper published last year, “The Less-Efficient Market Hypothesis,” Asness argues that social media and low interest rates, among other factors, have distorted market information so that stocks have become disconnected from their true values. This distortion has directed funds toward undeserving assets and firms and staved off necessary market corrections.

Asness joins Bethany McLean and Luigi Zingales to discuss how the market has fundamentally changed due to new technologies and macroeconomic trends and how investment strategies must adapt, what these changes mean for long-term productivity and growth, how researchers and investors should think about emerging market factors like tariffs and artificial intelligence, and why he’s not investing in US President Donald Trump’s memecoin anytime soon.

Audio Transcript 

Cliff Asness: Our goal is to make our clients money, not to make markets more efficient. That is a lovely secondary thing that I believe we help with, I hope we help with, but we don’t wake up every day saying, “Our job today is just to make markets better.” I probably should not have admitted that on a major podcast.

Bethany: I’m Bethany McLean.

Phil Donahue: Did you ever have a moment of doubt about capitalism and whether greed’s a good idea?

Luigi: And I’m Luigi Zingales.

Bernie Sanders: We have socialism for the very rich, rugged individualism for the poor.

Bethany: And this is Capitalisn’t, a podcast about what is working in capitalism.

Milton Friedman: First of all, tell me, is there some society you know that doesn’t run on greed?

Luigi: And, most importantly, what isn’t.

Warren Buffett: We ought to do better by the people that get left behind. I don’t think we should kill the capitalist system in the process.

Bethany: From my very early days as a journalist, I remember the famous investor Cliff Asness, not just because he was a hugely successful quant—meaning someone who invests not so much on the fundamentals of a company but, rather, due to quantitative factors in the market—but because he was willing to say things other people weren’t and in such a memorably biting way.

In 2000, he published a piece called “Bubble Logic,” which exposed the fallacies being used to justify crazy stock prices like that of Cisco. Then, in 2004, he wrote a piece entitled “Stock Options and the Lying Liars Who Don’t Want to Expense Them.” Cliff now manages $128 billion across various strategies, and those who follow him on X know that he’s as outspoken on lots of issues as ever before.

When fellow billionaire Bill Ackman described Trump’s tariff policy change as brilliantly executed, Asness replied: “One of the main benefits of making some money is not having to wear a gimp suit for anybody. To each his own.”

Cliff later apologized for the language, but he still said Ackman was being illogical, and he said: “It may or may not have been good negotiating, but the man clearly feels any trade deficit with any country is stealing from us and has believed this for 40 years. So, there’s clearly some idiocy about the actual topic at hand to go with potential luck or brilliance.” Wow, certainly outspoken.

Luigi: Indeed. He also wrote a fascinating paper arguing that the market is less efficient than ever before, in part due to the rise of social media, about which he says, “Has there ever been a better vehicle for turning a wise, independent crowd into a coordinated, clueless, even dangerous mob than social media?”

Bethany: He’s also willing to be colloquial and experimental with ideas in a way that I don’t think are typical of University of Chicago finance types. Sorry, Luigi.

Another factor he thinks explains the growing inefficiency of markets is these several decades of super-low interest rates, and he wrote this: “Well, perhaps super-low interest rates for a long time make investors go cray-cray. Yes, I know cray-cray is not covered in the standard CFA exam and rarely the result of formal analysis, but it seems at least possible to me.”

Luigi: The reason we wanted to have Cliff on the show is precisely because he’s so opinionated, and it’s so refreshing to see him attacking left and right. He’s not somebody who is in a position trying to push something. He’s really a free spirit. He once described himself as a part-time Republican, a full-time libertarian, and he has been outspoken in his defense of capitalism as leading to a better living standard for everyone: “If you go by living standard, you cannot escape that things are wildly better. I will attribute most of that to capitalism.”

Bethany: Cliff has no shortage of things to say for himself, so we’ll stop waxing on and start talking to him. He is the founder, managing principal, and chief investment officer at AQR Capital Management. And a quick disclosure we need to make, which is that Chicago Booth a year and a half ago received a $60 million gift from Cliff Asness and John Liew to name its Master in Finance program.

One of the things you’ve been talking about a lot recently is your less-efficient market theory, and I think, the market is reasonably close to efficient, but there are lots of little inefficiencies. Anyway, you’ve argued that for a bunch of reasons, the markets have gotten less efficient.

You wrote this in one piece, “Hence, if those prices don’t reflect reality, there are real consequences to long-term productivity and growth.” How much do you worry about that? How important is it that the market actually does reflect back real-time information about prices?

Cliff Asness: Well, you started out with a hard one. First, let’s back up. It’s a total straw man that markets are perfect. Literally, no one believes that.

I was Gene Fama’s TA for two years. The first two weeks of class he teaches us what the efficient market hypothesis is, and the third week of class he says something like, “Markets are assuredly not perfectly efficient,” and you get a gasp, which you get nowhere else in the world. The rest of the world either has no idea what you’re talking about, but if they do, they’re like: “Of course it’s not perfect. Perfect is silly.”

Gene, I’m pretty sure he thinks they’re more perfect than I do—and I might think they’re more perfect than many others—but once you acknowledge they’re at all imperfect, the questions of how imperfect, and has that changed over time, become still very hard to answer, but very legitimate questions to ask.

We are mostly, in the piece I wrote . . . I start out at the very beginning saying this is a highly opinionated piece. There’s not a lot of hard data. It’s life experience and a few vignettes of some huge things that I would call bubbles. That’s not a word Gene Fama likes, but it’s my contention that markets have gotten materially . . . In the piece I think I kept saying less efficient. After writing it, I decided it would be more accurate to say “prone to bouts of extreme inefficiency.”

I have two periods I really point to. What we’ve lived through always carries more weight with us than what we can look at in the CRSP data going back to 1926. But the dot-com bubble at the end of the ’90s—I reveal my opinion by even calling it the dot-com bubble. Gene Fama would call it “the time the dot-coms were priced as very low-risk assets to a very low expected return.” It rhymed more than it didn’t but also was not perfectly the same.

But 2019 and 2020 culminating in COVID—COVID was not the sole thing, but even before COVID, we saw models for what we considered spreads between cheap and expensive stocks getting to at least tech-bubble-like levels. They were getting there before COVID, but then COVID kicked them up to, as they say in Spinal Tap, “They kicked it up to 11.”

You remember COVID, when all you were supposed to own was Tesla and Peloton? We didn’t see that stuff, at least in the data, if you measure things similarly for the prior, call it 50 years. The dot-com bubble was the largest event in this disparity we look at, ever in the data. You can argue with how good the data is as you go back in time. You can literally go back to the ’20s. I’d probably go back to the ’50s, where I feel like I’m at all confident in it.

But it was the biggest by far we’d ever seen, and you could say that was a once-in-a-lifetime event, and then, almost exactly 20 years later, it became a twice-in-a-lifetime event. That sent me down a road of thinking, “I probably can’t solve this, I can’t put three decimal points on it, but what might have changed to cause this?”

Like everything else in our field, it can be completely random, and we could all be trying to explain randomness, but I’m of the belief that we have seen at least two . . . You could say the GFC was one also, though the GFC was probably more of an economic event that became a market event, as opposed to just a pure euphoric mispricing. But call it two-and-a-half-times in my career that we’ve seen craziness that I didn’t expect to see more than once every 50 years.

Luigi: Bob Schiller, in his book Irrational Exuberance, has a very interesting observation that bubbles—and he does believe in bubbles—got started with the beginning of media....

....MUCH MORE, including audio options.

Here's a prior visit to Capitalisn't (one of many) that stood out, March 2024:

Another Look At John Coates' "When a Few Financial Institutions Control Everything" With Bethany McLean and Luigi Zingales 
A very sharp little discussion group....

Okay, one more:

Is Short Selling Dead? Luigi Zingales and Bethany McLean Interview Jim Chanos

Infrastructure: "Wall Street Is Investing Billions in Marinas for Bigger Yachts"

From Bloomberg, June 12:

Blackstone and others pledge to improve aging boatyards amid fears that rising slip fees are pricing out the middle class.

On a rainy spring morning, Jack Brewer is watching workers prep boats for another season on Long Island Sound. In a world where yachts can stretch longer than a football field, the marina is relatively modest, handling boats that would max out at the 20-yard line. Here in the New York suburb of Mamaroneck, even the smaller craft are refined: bespoke Hinckleys, built in Maine with gleaming teak; powerboats bursting with the newest technology; and low-slung sailboats whose Italian designers relied on an older science in their pursuit of speed.

Brewer, 84, started his business in 1964, back when this property wasn’t much to speak of. “Most marinas were muddy gunk holes,” he says. “They were not a place to bring your wife and kids.” He spent his career buying similar properties, fixing them up and appealing to a more discerning, higher-paying clientele.

By the time he retired, Brewer had assembled a collection of 30 marinas along the Eastern Seaboard, including this one, his first, on Post Road, named after the mail route that’s connected New York City and Boston since colonial times. He was one of the first consolidators in this mom-and-pop industry. Some 9,000 US marinas generate a total of almost $8 billion a year, from renting slips, repairing boats or selling fuel and meals to those anchoring down for a few hours or a few nights, according to researcher IBISWorld.

Lately, some of the biggest companies on Wall Street are following in his footsteps. Their investment thesis: Most marinas don’t meet the needs of the modern boater, who’s willing to pay more for more. Many marina owners can barely afford the rising costs of insurance and labor, let alone pay for new floating docks or harbor dredging. New investors are betting they can roll up properties, make improvements and increase rent—especially because the number of marinas seems to shrink every year.

More than 30 investment firms, including publicly traded companies and family offices, are scouting for marinas, according to Andrew Cantor, a managing director at real estate company Colliers International Group Inc. Carlyle Group, Kuwait-linked Wafra and Koch Industries’ real estate arm have bought and sold marinas in recent years. (Koch Industries has since changed its name to Koch.) So has Centerbridge Partners LP, which backs Suntex Marina Investors LLC, a Dallas-based outfit that already owns about 100 marinas and is looking for more. Suntex considered an initial public offering in 2022 that would have valued it at more than $3 billion but dropped the idea because of the impact of rising interest rates on the market.

Another Dallas-based company, Safe Harbor Marinas, is the biggest of all. It had bought Brewer’s operation in 2017 and, in May, was itself acquired by a behemoth: Blackstone Inc. The firm paid $5.65 billion for Safe Harbor, the largest transaction by far in an industry where perhaps 100 properties change hands in a typical year. Blackstone got 138 marinas, including a Safe Harbor in West Palm Beach, Florida, known for hosting the kind of superyachts favored by billionaires.

Now, Blackstone plans to continue the work that Brewer started, according to people familiar with its strategy. It wants to acquire more marinas in the US and possibly in Europe, where Safe Harbor has none. And it plans to improve existing properties, widening and lengthening slips to accommodate bigger boats or adding infrastructure and amenities that their more upscale clients require. “Our customers’ needs have evolved as boats have grown in size and complexity,” Baxter Underwood, Safe Harbor’s chief executive officer, said in an email. “We must continue investing into our marinas to meet the shifting demands of the members we serve.”

The new corporate operators are changing the down-home, Jimmy Buffett vibe of many marinas. In the summer of 2014, Mike Melillo wanted to cruise from Newport to Block Island off the Rhode Island coast. He spent a day calling a marina repeatedly but failed to get an operator on the phone, so he canceled the trip and booked a tee time at a golf course instead. When the marina finally called him back, he discovered the property had been relying on two college kids as dockhands who came in late after a long night drinking.

Sensing opportunity, he founded Dockwa, a company that handles online booking and other services for more than 1,200 marinas, giving Melillo a good view of the kinds of inefficiencies that are attracting investors. One big one: the service Melillo was originally seeking, a slip for a one-day stay, as opposed to the long-term rentals that are the industry’s bread and butter. About 60% of the marinas on Dockwa keep the price of a short-term booking static from year to year instead of adjusting rates to account for rising demand, as is standard in the hotel industry. For now, even high-end marinas might charge $250 a night for a 50-foot boat, less than many hotels in fancy resort areas....

....MUCH MORE 

Everyone is courting that "discerning, higher-paying clientele." And the discerning bit is optional.

Berkshire Hathaway Annual Meeting: "Buffett to Step Down From Berkshire Hathaway at Year-End" (BRK)

Both Barron's and Bloomberg were doing the equivalent of live-blogging the meeting, here's Bloomberg (Barron's tomorrow), May 3:

Berkshire Hathaway Annual Meeting

• Warren Buffett will step down as CEO by year end.
• Buffet downplayed market turmoil, warned against weaponizing trade.
• Berkshire’s energy businesses still need coal plants.
• Auto insurer Geico has cut tens of thousands of jobs.

That’s a wrap of our TOPLive blog coverage of Berkshire Hathaway’s first-quarter results and annual meeting. Thanks for joining us. Here are the key takeaways:

• Warren Buffett, 94, said he intends to step down as CEO at year-end, handing the reins to Greg Abel.
• Buffett on tariffs: Although balanced trade can be valuable, it shouldn’t be used as a weapon. The US became dominant in part by trading with other nations and should continue to do so.
• Berkshire’s cash hoard hit a record $347.7 billion in the first quarter. Buffett said that’s much bigger than he wants it to be, but the company has to wait for the right moments to deploy capital.
• Berkshire’s Ajit Jain said Geico reduced the insurer’s headcount from approximately 50,000 to roughly 20,000. That has helped make the company sharper and more competitive.
• Artificial intelligence is likely to significantly disrupt the auto insurance industry, according to Jain and Buffett. Policies will shift from operator error to product liability.
  

*****

• “That’s the news hook for the day. Thanks for coming,” Buffett says.  
•  Abel is standing and clapping next to Buffett, who remains seated
• Buffett gets a standing ovation.
• Sustained applause in the arena for Buffett.
  
• Buffett says he has no intention of selling one share of Berkshire, but that he will give it away gradually.
  
• Abel didn’t know this was coming, per Buffett. Nor did any board members other than his kids. 
• Buffett says he “would still hang around” and be helpful but the “final word” would be Abel’s.  
• Buffett says Abel should become CEO at year-end. 

....MUCH MUCH MORE, so much more, including a handy index:

Key Events

Coal Energy

US Deficit

Wildfire Risk

Buybacks

Recent Market Turmoil

PE

Weaponizing Trade

American Exceptionalism

"Italian mafia gangs now target ‘green gold’ as olive oil value surges"

Two quick points up front:

1. Olive oil prices are coming back down but that won't mean much to the criminals.

2. The history of the mob was agricultural.

From The Telegraph, April 13:

Producers forced to beef up security as criminals steal lorry loads of commodity

Police are hunting five masked men who forced a lorry driver off the road in southern Italy before detaining him at gunpoint and making off with his highly-prized cargo.

The paramilitary operation in the Italian region of Puglia, best known for its Baroque treasures, slow food and breathtaking coastline, happened earlier this month and shocked the country.

But there were no priceless artworks, jewels or drugs on board the lorry – only crates of fresh olive oil worth an estimated £260,000.

This latest robbery highlights the alarming penetration of organised crime into the production of one of Italy’s biggest agricultural exports.

With olive oil now fetching up to €15 (£13) a litre, mafia gangs are targeting what’s known as “green gold”.

In a region that produces 40 per cent of the nation’s olive oil, producers are taking drastic measures to protect their olives at every stage of the production process.

‘Olives have to be guarded like diamonds at night’
Coldiretti, the country’s largest farmers’ organisation, is urging its member to use helicopter surveillance, mount GPS tracking devices on olive oil tanks and demand police escorts to move the finished product across the region.

Pietro Piccioni, the director of Coldiretti’s branch in Bari, said: “During the harvesting period, marauders across the countryside raid the olives that have to be guarded like diamonds at night and escorted during transfers to the olive mills.

“Then the oil mills are forced to notify the police before letting trucks of extra virgin oil leave.”

Leonardo Palmisano, a sociologist and mafia expert, said: “Puglian mafia organisations are hiring specialised international criminals to carry out these attacks.

“It is at such a high level that they send thieves from other parts of Europe, like they do with car robberies, and then they immediately move the stolen oil into the market for bottling and distribution.

“Olive oil can be stolen and sold for half the price, and sometimes the robberies are even commissioned by mafia-run businesses masquerading as legitimate companies.”

But criminal gangs are also plundering Puglia’s olive groves at source. Using sledgehammers to assault the trees, gang members can steal more than 30kg (65lb) of olives per tree in just a few minutes.

The gangs drag nets under the olive trees as accomplices beat the branches to collect as many of the falling olives as possible, often causing irreparable damage....

....MUCH MORE

Previously:

May 2012
The Sicilian Mafia and the International Lemon Cartel

December 2018

 "How the Mafia got to our food"

February 2019
"Sicily’s mafia sprang from the growing global market for lemons – a tale with sour parallels for consumers today"

February 2020
Strange Mafia Histories: New York Bans Artichokes

A Very New York Story: "How New York’s Bagel Union Fought — and Beat — a Mafia Takeover"  

April 25, 2023
Uh Oh: Drought Hits Both Spanish And Italian Olive Crops
This is going to lead to one of two things (I mean beyond the fact that people won't be able to afford basic sustenance). Either the Mafia gets into the "let's adulterate the olive oil" biz or a reprise of the Great Salad Oil Swindle of 1963....
***
....we should probably be on the lookout for funny-smelling oil-and-lemon juice salad dressings.
The worst of the adulterations was probably the one in Spain in 1981 when contaminated rapeseed oil was sold as olive oil with horrific results.

On the oil scam, Global Financial Data did a nice write-up in 2013:
The Fiftieth Anniversary of JFK and the Great Salad Oil Swindle

Although the scandal led to the bankruptcy of a major broker-dealer: "In Re Ira Haupt & Co., 234 F. Supp. 167 (S.D.N.Y. 1964)" it did allow Warren Buffett to pick up some American Express on the cheap. He got a five-banger out of it.

"Dow Futures Sink 1,000+ Points. S&P 500 Set to Open in a Bear Market."

From Barron's, April 6:

Updated April 06, 2025, 7:08 pm EDT / Original April 06, 2025, 6:24 pm EDT 

Stock futures were plunging again Sunday evening, continuing a steep selloff that began after President Donald Trump announced reciprocal tariffs.

Just after 6 p.m. EST on Sunday, Dow Jones Industrial Average futures were down more than 1,700 points, or 4.4%; S&P 500 futures were down 5%; and Nasdaq Composite futures fell 5.3%.

A selloff at the market open in New York on Monday would extend two consecutive days of steep declines that have erased $6 trillion in stock market value.

The Dow Jones Industrial Average fell 3,269 points, or 7.9% last week, to 38,315. The S&P 500 dropped 9.1% last week, to 5074, and the Nasdaq Composite fell 10% to 15588.

The tech-heavy Nasdaq Composite entered a bear market on Friday, sinking more than 20% below its December record. The Dow Jones Industrial Average sank 2,231 points, down 5.5%, after China said it would retaliate against the U.S. with 34% tariffs of its own....

....MUCH MORE

DJIA futures down 1640 (-4.26%) S&P 500 down 241.75 (-4.73%)

Stocks go up and stocks go down and if you can't sleep at night because you are worrying about your net worth, you are betting far more of your bankroll than you should be.

And to contextualize April 5's "Warren Buffett defended his massive $300 billion cash pile in February. Now he doesn't have to." (BRK), Mr. Buffett wasn't selling 60% of Berkshire's Apple position (or whatever the exact number is) and building one of the largest cash positions outside of the central bank realm because of the tariffs but because he thought stocks were pricey and he couldn't find anything worth buying i.e. the market was too expensive. Stocks were expensive and now they are less so.

Here's a repost from June 7, 2008, almost exactly three months before all hell broke loose that may give one some comfort (and for the curious, we were as on top of that unpleasantness as anyone):

Okay, the Dow Jones Industrials are Down 428 Points in the First Five Days of June. Now What?

Well, the retail guys have their lips on autopilot: "And Mr. Big, if you annualize that...", but I suppose that sounds better on the upside.

Grandmother would say something like "If the initial condition given is 'The sky is falling', your course of action would be to short sky, try the eggplant"

Unplanned Freefall? Some Survival Tips
By David Carkeet

Admit it: You want to be the sole survivor of an airline disaster. You aren't looking for a disaster to happen, but if it does, you see yourself coming through it. I'm here to tell you that you're not out of touch with reality—you can do it. Sure, you'll take a few hits, and I'm not saying there won't be some sweaty flashbacks later on, but you'll make it. You'll sit up in your hospital bed and meet the press. Refreshingly, you will keep God out of your public comments, knowing that it's unfair to sing His praises when all of your dead fellow-passengers have no platform from which to offer an alternative view.

Let's say your jet blows apart at 35,000 feet. You exit the aircraft, and you begin to descend independently. Now what?

First of all, you're starting off a full mile higher than Everest, so after a few gulps of disappointing air you're going to black out. This is not a bad thing. If you have ever tried to keep your head when all about you are losing theirs, you know what I mean. This brief respite from the ambient fear and chaos will come to an end when you wake up at about 15,000 feet. Here begins the final phase of your descent, which will last about a minute. It is a time of planning and preparation. Look around you. What equipment is available? None? Are you sure? Look carefully. Perhaps a shipment of packed parachutes was in the cargo hold, and the blast opened the box and scattered them. One of these just might be within reach. Grab it, put it on, and hit the silk. You're sitting pretty.

Other items can be helpful as well. Let nature be your guide. See how yon maple seed gently wafts to earth on gossamer wings. Look around for a proportionate personal vehicle—some large, flat, aerodynamically suitable piece of wreckage. Mount it and ride, cowboy! Remember: molecules are your friends. You want a bunch of surface-area molecules hitting a bunch of atmospheric molecules in order to reduce your rate of acceleration.

As you fall, you're going to realize that your previous visualization of this experience has been off the mark. You have seen yourself as a loose, free body, and you've imagined yourself in the belly-down, limbs-out position (good: you remembered the molecules). But, pray tell, who unstrapped your seat belt? You could very well be riding your seat (or it could be riding you; if so, straighten up and fly right!); you might still be connected to an entire row of seats or to a row and some of the attached cabin structure.
 

If thus connected, you have some questions to address. Is your new conveyance air-worthy? If your entire row is intact and the seats are occupied, is the passenger next to you now going to feel free to break the code of silence your body language enjoined upon him at takeoff? If you choose to go it alone, simply unclasp your seat belt and drift free. Resist the common impulse to use the wreckage fragment as a "jumping-off point" to reduce your plunge-rate, not because you will thereby worsen the chances of those you leave behind (who are they kidding? they're goners!), but just because the effect of your puny jump is so small compared with the alarming Newtonian forces at work.

Just how fast are you going? Imagine standing atop a train going 120 mph, and the train goes through a tunnel but you do not. You hit the wall above the opening at 120 mph. That's how fast you will be going at the end of your fall. Yes, it's discouraging, but proper planning requires that you know the facts. You're used to seeing things fall more slowly. You're used to a jump from a swing or a jungle gym, or a fall from a three-story building on TV action news. Those folks are not going 120 mph. They will not bounce. You will bounce. Your body will be found some distance away from the dent you make in the soil (or crack in the concrete). Make no mistake: you will be motoring.

At this point you will think: trees. It's a reasonable thought. The concept of "breaking the fall" is powerful, as is the hopeful message implicit in the nursery song "Rock-a-bye, Baby," which one must assume from the affect of the average singer tells the story not of a baby's death but of its survival. You will want a tall tree with an excurrent growth pattern—a single, undivided trunk with lateral branches, delicate on top and thicker as you cascade downward. A conifer is best. The redwood is attractive for the way it rises to shorten your fall, but a word of caution here: the redwood's lowest branches grow dangerously high from the ground; having gone 35,000 feet, you don't want the last 50 feet to ruin everything. The perfectly tiered Norfolk Island pine is a natural safety net, so if you're near New Zealand, you're in luck, pilgrim. 

 

When crunch time comes, elongate your body and hit the tree limbs at a perfectly flat angle as close to the trunk as possible. Think!

Snow is good—soft, deep, drifted snow. Snow is lovely. Remember that you are the pilot and your body is the aircraft. By tilting forward and putting your hands at your side, you can modify your pitch and make progress not just vertically but horizontally as well. As you go down 15,000 feet, you can also go sideways two-thirds of that distance—that's two miles! Choose your landing zone. You be the boss....

....MUCH MORE 

"Warren Buffett defended his massive $300 billion cash pile in February. Now he doesn't have to." (BRK)

From Yahoo Finance, April 4:

In February, Warren Buffett took pains in his annual letter to Berkshire Hathaway shareholders to explain why the conglomerate had a cash pile of $334 billion at the end of 2024.

"Despite what some commentators currently view as an extraordinary cash position at Berkshire, the great majority of your money remains in equities," Buffett wrote. "That preference won’t change."

Now, with Berkshire's annual meeting just a month away, Buffett may not feel quite the same pull to further explain his decision.

When Buffett published his annual letter on Saturday, Feb. 22, Trump's tariff threats were mostly that.

The S&P 500 (^GSPC) had closed at a record high on Tuesday, Feb. 19, a few days earlier.

"Berkshire shareholders can rest assured that we will forever deploy a substantial majority of their money in equities — mostly American equities although many of these will have international operations of significance," Buffett wrote.

"Berkshire will never prefer ownership of cash-equivalent assets over the ownership of good businesses, whether controlled or only partially owned."

Buffett didn't mention tariffs in his letter once, nor did he suggest any sense of foreboding or even loosely predict any imminent market turbulence in this letter. (In an interview that aired in March, Buffett did warn on the negative impacts of tariffs, calling them "an act of war, to some degree.")

Still, Buffett's actions in 2024 were clear: The Oracle of Omaha preferred sitting on cash to buying more stocks.

A prescient move that has rewarded investors — Berkshire Hathaway (BRK-B, BRK-A) stock is up over 12% this year; the S&P 500 has lost 11%....

...MUCH MORE

"‘Keep your head’ if you’re spooked by tariffs: Warren Buffett suggests reading a 19th century poem when stocks fall"

From CNBC, April 3:

Stock prices fell sharply on Thursday after President Donald Trump the day before announced sweeping tariffs of 10% on all U.S. trading partners and higher levies on countries with which the U.S. has a trade deficit.

With Thursday’s decline, the S&P 500 — a proxy for the broad U.S. stock market — has now slid more than 11% from its record high in February, putting the index in correction territory, defined as a drop of 10% or more from recent highs.

Investors and economists alike fear that Trump’s tariff policies could ignite a trade war with the nation’s trading partners and push inflation higher, two factors that could push the U.S. toward an economic slowdown. Should a recession become imminent, markets could sell off — and quickly. Just ask Berkshire Hathaway chairman and investing legend Warren Buffett.

“There is simply no telling how far stocks can fall in a short period,” he wrote in his 2017 letter to shareholders.

But should a major decline occur, he continued, “heed these lines” from Rudyard Kipling’s classic poem “If,” circa 1895.

“If you can keep your head when all about you are losing theirs ... If you can wait and not be tired by waiting ... If you can think — and not make thoughts your aim ... If you can trust yourself when all men doubt you ... Yours is the Earth and everything that’s in it.”

....MUCH MORE

Dividend Recaps: "Private Equity's Version of 'The Sting'"

Cue the soundtrack:

And from Eric Salzman via Matt Taibbi's Racket News substack, March 26:

THE SCHEME: Beating the “marks” with their own money

THE COMPANY: Main Street USA

THE NEWS: Private equity firms and Wall Street banks loaded American businesses up with debt from leveraged buyouts over the last decade and now they are loading them with more debt to cash out their winnings with an outlandish strategy, the “dividend recap.”

In the classic 1973 movie The Sting, con men extraordinaire played by Paul Newman and Robert Redford hatch a plan to take down a fearsome mob boss played by Robert Shaw in a high-stakes poker game. The cons first pickpocket Shaw, stealing his billfold and then, using Shaw’s own money, outcheat him at cards to take him to the cleaners.

The stakes are a lot higher with Private Equity (PE). While Redford and Newman ripped off a mob boss, PE firms take over companies that provide important services — healthcare facilities and nursing homes, for example — and manufacturers that employ thousands.

PE firms typically hold companies between four and seven years before exiting. Small to mid-size companies are often sold to another PE firm, while large companies are usually taken public with an initial public offering (IPO).

But high interest rates and uncertainty over President Trump’s tariffs policy have made IPOs an unattractive option. For one, high interest rates are bad for a debt-laden company, and there’s concern that tariffs will disrupt global supply chains.

Not to worry if you’re a PE investor. There’s still what’s called the “dividend recap.” Take the case of Clarios International — America’s largest producer of electric vehicle batteries with 16,000 employees. It’s an example that would surely earn the respect of Newman and Redford’s characters.

A PE firm — Brookfield Asset Management — and Canadian pension fund manager Caisse de dépôt et Placement du Quebec bought Clarios in 2019 for $13 billion. About $4 billion of that was funded by PE investors. The new owners had success reducing debt — it dropped by $2.1 billion between 2020 and 2024, according to Fitch Ratings.

But Clarios added debt when it came time to sell in 2025. The company took on about $4.5 billion in loans from a syndicate of lenders led by J.P. Morgan to pay a special dividend to its PE investors....

....MUCH MORE

A couple related posts (among dozens):

 Private Equity: "having your industry compared to a Ponzi scheme is less than ideal"

.... My question going forward is: "Should times get really tough will we see a return to the asset stripping/bankruptcy bust-out model?"

Wait. Did I say that out loud? I meant "will we see a semi-permanent step-change to lower valuations that trap capital?"
Yeah that's it, that's what I meant.

Berkshire Hathaway as Idealized Private Equity
We quoted Buffett on P.E. in last month's "How Vulture Capitalists Ate Toys 'R' Us", updated below....

****

The quote was:
And then there's 2011's "The Porn Shop Operators Strike Again: Harry & David files for bankruptcy";

``You can sell it to Berkshire, and we'll put it in the Metropolitan Museum; it'll have a wing all by itself; it'll be there forever,'' he says at the February meeting.  

``Or you can sell it to some porn shop operator, and he'll take the painting and he'll make the boobs a little bigger and he'll stick it up in the window, and some other guy will come along in a raincoat, and he'll buy it.''

-Warren Buffett 

 June 25, 2008 

On why a business may prefer selling to Berkshire Hathaway rather than a private equity firm.

I know Warren is talking down the bidding pressure that PE firms might put on the price he has to pay for privately held businesses but looking at his comments on PE over the years it's more than that:
He actually loathes private equity and its practitioners....

Sometimes it's hard to tell the difference between a bankruptcy bust-out/bleed-out fraud and private equity.

Also between private equity with its internal rate of return, IRR, and piracy with its eerily similar Arrgh, but that's a whole 'nother post.

Howard Marks: «The Idea That the Market Is Always Right Is Crazy»

From Neue Zürcher Zeitung's TheMarket.ch, February 3:

Greed and fear are powerful drivers in financial markets. Few understand their impact better than Howard Marks. In this interview, the renowned value investor explains why market excesses keep happening, shares his thoughts on the current hype around artificial intelligence, and reveals where investors might find bargains. 

Deutsche Version

Stocks have kicked off the year on a strong note, fueled by a great deal of confidence. The prospect of business-friendly reforms under the new Trump administration and groundbreaking advancements in artificial intelligence have sparked optimism, particularly in the US. However, valuations are inflated, and the market is heavily concentrated in just a few superstar names.

Is it a bubble?

Few people are better qualified to address this question than Howard Marks. When the co-founder and co-chairman of Oaktree Capital Management speaks, investors around the world are listening up. His memos, which he sends out sporadically to Oaktree’s clients, are required reading, even for Warren Buffett.

In an in-depth conversation with The Market NZZ, the renowned value investor talks about why market bubbles keep forming and how to spot them. He also shares his take on the current market environment, where he sees potential risks, and where it might be worth looking for bargains.

«Investing is not about buying good things, but about buying things well –
and if you don’t understand the difference, you shouldn’t be an investor»
: Howard Marks.

The title of your latest memo is «On Bubble Watch». How do you define a bubble, and where do you think investors should be wary of one?

A bubble, much like a crash, is more a state of mind than a quantitative calculation. While some may define it as a period of extraordinary high prices, I believe that’s insufficient. A real bubble is more than just a financial miscalculation, where people make the mistake of overpaying for something. It goes beyond that to a psychological extreme. It’s a mania where people’s psyche gets engaged, their interest in something becomes excessive, and they lose their reason.

How is it even possible for such excesses to happen?

A bubble usually surrounds something new. The newness is very important because it gets people excited, and it defies precedent. This pattern is observable throughout history. For instance, the 1630s craze in Holland was over recently introduced tulips, and then the South Sea Bubble of 1720 in England was fueled by enthusiasm for new trade opportunities. I learned this lesson early. When I came into the investment business in 1969, it was during the «Nifty Fifty» bubble, which centered on the stocks of the best and fastest growing companies in America.

And what did you learn at that time?

It’s as they say: experience is what you got when you didn’t get what you wanted. The Nifty Fifty companies benefited from their involvement with areas of innovation such as computers, drugs, and consumer products. They were considered to be so good that nothing bad could ever happen, and people thought there was no price too high for these stocks. But if you bought them on the day I started my first job, they were so many times overpriced that, five years later, you would have suffered a 95% loss on your investment.

In other words, a good company is not necessarily a good investment?

That’s the key lesson. Investing is not about buying good things, but about buying things well – and if you don’t understand the difference, you shouldn’t be an investor. The next step in my career led me to high-yield bonds. Now, I invested in the worst public companies in America, but I made money steadily and safely because I was buying them so well. This shows what is at the heart of a bubble: there is nothing so good that it can’t become overpriced and dangerous. Conversely, there’s almost nothing so bad that it can’t be a good buy at a low enough price.

But here’s the problem: bubbles are glaringly obvious in hindsight, but rarely so when they’re unfolding. In efficient markets, they shouldn’t even exist.

The idea that the market is always right is crazy. When I studied at the University of Chicago, Eugene Fama had just introduced his pioneering work on the efficient-market hypothesis. However, as I noted in my 2001 memo, «What’s It All About, Alpha?», my real-world experience soon taught me that the market is not always right. Consider this: The day I started work, Xerox was trading at, let’s say, $100. Five years later, it had plummeted to $5. It’s hard for me to accept that those prices were both right. And yet, I am very comfortable with the concept of market efficiency.

How come?

In its essence, the efficient-market hypothesis says that the other people in the market are intelligent, highly motivated, and hard working. So why should they leave bargains around for you to pick up? The point is, the market does a good job of instantly incorporating all the available information. That’s what today’s price is: it’s an accurate, efficient reflection of the consensus opinion. But that opinion can be wrong – and that’s what bubbles are: profound mistakes, driven by psychological extremes, allowing prices to depart from sanity.

How significant a role does government intervention play in creating such distortions? Notably, in a memo from last fall, you expressed concerns about the increasing interventionism of central banks and governments.

One of the big divisions in life is that there are people who think the government can solve the problem, and there are people who think they cannot. The first are the Democrats, and the second are the Republicans. But eventually, the laws of economics will always win out. Right before the peak of the dotcom bubble, for example, there was a period of Fed activism. The Fed thought if there was ever any problem, you just squirt in a little extra liquidity and then the problem is solved. This belief led them to preemptively flood the banking system with liquidity in anticipation of the so-called Y2K bug threat, which was expected to disrupt computers when the calendar flipped from 1999 to 2000. However, such fears proved to be greatly exaggerated. As a result, the Fed solved an imaginary problem....

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