Episode Summary
Executive Summary: This episode of the Rational Reminder Podcast covers a wide range of financial topics, including the historic state of value investing, an in-depth critique of Wealthsimple's portfolio claims, the role of bonds post-COVID, and a rapid-fire Q&A session. Hosts Ben Felix and Cameron Passmore analyze recent academic research, share book recommendations, and discuss risk profiling methods. The episode provides a comprehensive reality check on sensible investing for Canadians.
Main Topics: Historic State of Value Investing (Priority: 5/5): An analysis of the current extreme cheapness of value stocks relative to growth stocks, using data from AQR and Cliff Asness, showing that value spreads are at the 100th percentile historically, with no 'this time is different' explanation holding up. Critique of Wealthsimple's Portfolio Claims (Priority: 5/5): A detailed rebuttal of Wealthsimple's 'victory lap' regarding their low-vol and long-bond portfolio performance during the COVID downturn, arguing that long-term consumption-based risk metrics show worse outcomes for such portfolios historically. Rapid-Fire Listener Q&A (Priority: 4/5): Answers to multiple listener questions covering factor tilting aggressiveness, capturing size premium in Canada, RESP asset allocation, Smith Maneuver ETF selection, and the role of bonds post-COVID. Risk Profiling Methodologies (Priority: 3/5): A comparison of psychometric risk profiling versus prospect theory/gamble-based approaches, discussing stability, ease of use, and the importance of capacity and need for risk alongside tolerance. Book and Content Recommendations (Priority: 2/5): Shane Parrish's 'The Great Mental Models Vol. 2' and Charles Duhigg's 'Smarter Faster Better' are highlighted, along with commentary on the Joe Rogan-Elon Musk interview regarding wealth and capital allocation. Bad Advice of the Week (Priority: 2/5): A retrospective on Jeff Rubin's 2008 prediction of $225 oil by 2012, serving as a cautionary tale against making portfolio decisions based on bold macro predictions.
Key Arguments: Value investing is not dead; current value spreads are at historic extremes, suggesting medium-term odds favor value, as per AQR and Cliff Asness. Wealthsimple's victory lap is unjustified because replacing long bonds with shorter-term bonds improves historical consumption-based success rates (failure rate drops from 4.6% to 0.13%). Factor tilting adds independent equity risks, not total portfolio risk akin to reducing bond exposure; tracking error is the main risk. RESP asset allocation should be flexible; the time horizon is longer than many think, and leftover funds can be withdrawn tax-efficiently into a child's TFSA. Central bank interventions and low rates do not negate value strategies; the duration concept does not carry over to equities because expected cash flows are not fixed. Intangibles and share buybacks do not explain value's underperformance; industry-neutral and multi-metric value measures still show value is historically cheap. Psychometric risk profiling is more stable than gamble-based questions and easier for a broader population to answer, but both methods should be used alongside capacity and need analysis.
Data Points: Value spread percentiles: 100th percentile - For price-to-book value spread (1967-present), not constraining industries; also near 100th for industry-neutral and excluding top 5% stocks. Long bond ETF return (ZFL) YTD: +12% - Year-to-date return for BMO Long Federal Bond ETF, contributing to Wealthsimple's outperformance. Historical failure rate comparison: 0.13% vs 4.6% - For a 70/30 portfolio with 5-year treasuries vs long bonds under a 4% withdrawal rule over 764 rolling 30-year periods. Small value + treasuries avg ending assets: $33 million vs $6 million - 70% US small value / 30% 5-year treasuries produced 5x the average ending assets of 70% US market / 30% 5-year treasuries. Profitability of cheap vs expensive stocks: 52nd percentile - Current gross profitability spread between cheap and expensive stocks is in line with historical average. Japanese government bond returns (hedged to USD): 5.83% annualized - 1990-present, similar to US government bonds (5.77%) despite Japan's >200% debt-to-GDP ratio.
Pivotal Quotes: "We think the medium-term odds are now rather dramatically on the side of value with no 'this time is different' explanation we can find, and we've tested a lot of them." — Cliff Asness (paraphrase by Ben Felix): Summarizing Cliff Asness's conclusion from his brute-force commentary on the AQR paper about value. "What is risk? Really fascinating question." — Ben Felix: After presenting his consumption-based model showing that long bonds increase historical failure rates, highlighting the difference between drawdown/volatility risk and consumption risk. "Investigators are simply paying way more than usual for the stocks they love versus the ones they hate." — Ben Felix (quoting Cliff Asness): Explaining the widening value spread: investors are overpaying for growth stocks relative to value stocks.
Implications: The episode reinforces a disciplined factor-tilt approach for long-term investors, warns against relying on recent performance narratives, and emphasizes the importance of aligning portfolio risk with consumption goals rather than volatility. It also underscores the value of questioning bold macro predictions.
About The Rational Reminder Podcast
A weekly reality check on sensible investing and financial decision-making, from three Canadians. Hosted by Benjamin Felix, Cameron Passmore, and Dan Bortolotti, Portfolio Managers at PWL Capital.