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Michael Green - Logica


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This was one of the most interesting macro/quant discussions I found recently:

 

https://podcasts.apple.com/us/podcast/the-grant-williams-podcast/id1508585135?i=1000483139066

 

The guest is Michael Green and he talks about how the rise of passive investment vehicles seem to have made the US stock market more prone to extreme boom/bust cycles since around 1995. He also discusses what that means for various investment strategies and how he’s running his fund in response.

 

The fund’s website: https://www.logicafunds.com/

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green has a special mind.  but if you agree with his take, and you dont go long gamma a la Taleb, there is no way you dont go momo stocks as oppose to value stocks

 

thanks for posting!

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It's interesting to hear someone make the case for upside volatility. Something of a rarity because of everyone's interest in world-ending black swans. It pays to take a balanced view sometimes, right? He's definitely one of the high-IQ types with tons of worldly wisdom. FYI, I asked him a few questions via Twitter DM and he responded almost immediately. 

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Obviously a value guy here but have to give some of his thoughts deep consideration. Knowing who's on the other side of the trade (passive) and where those flows are likely to head/what makes them tick. Being a big follower of Klarman he speaks on the other side of passive weaknesses. Where you can take advantage of indiscriminate selling due to specific mandates at the fund level. Buy from passives (uneconomic selling ie dividend cuts) and selling to passives above intrinsic (buyer at any price) sounds like nirvana to me  8)

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It's interesting to hear someone make the case for upside volatility. Something of a rarity because of everyone's interest in world-ending black swans. It pays to take a balanced view sometimes, right? He's definitely one of the high-IQ types with tons of worldly wisdom. FYI, I asked him a few questions via Twitter DM and he responded almost immediately.

 

what I thought.  upside and downside convexity, but I guess skewed upside given how he looks at the market dynamics given passive growth

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This is very important stuff, and very helpful.  Another interview with Mike Green here on the same topic is helpful too:

 

https://investresolve.com/podcasts/investing-in-the-upside-down-logicas-michael-green-describes-why-passive-flows-corrupt-market-structure-and-how-to-profit/

 

The potential for dislocations on the downside is a big deal, and if the Fed fails to convince investors that they can save the day we may see unprecedented market drops.

 

The role of passive in indiscriminate buying creates higher price levels today, and is an updated view of Klarman's view of index funds 30+ years ago.  In the meantime, passive has become a huge market, and the volume of indiscriminate buying is astronomical compared to anything Klarman imagined when he wrote Margin of Safety.

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having said I loved the podcast, I must admit my away from green is similar to my takeaway from bass of Hayman cap (post 2008)....super smart, sounds right, but can I make money on it?

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having said I loved the podcast, I must admit my away from green is similar to my takeaway from bass of Hayman cap (post 2008)....super smart, sounds right, but can I make money on it?

 

I love Kyle Bass. Listening to him is quite enjoyable and he is excellent at bringing forth unique logical framework and outside the box ideas. At the same time, yeah, you're better off just listening.

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Green makes some valid points about the indexing phenomenon. But his theories don't explain why indexing doesn't push up all the component stocks in the S&P 500 index. For example, all the financials are down a lot in 2020. So it must be the active managers who are pushing up tech and pushing down Wells Fargo for example.

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I’m glad you guys liked it.

 

As to whether you can make money from this, that’s hard to say. He doesn’t really give a stock pitch, just an indication that his fund has lots of cash and a certain kind of straddle (which is vague enough to repel any cloners). But if you understand what he’s saying there are some useful takeaways. For instance if you are long only with a quality/growth focus you have a nice tailwind but you may want to be hedged if you want/need to avoid big drawdowns. Or if you are more of a classical value person you may want to pay special attention to catalysts and exit strategies because betting on valuation mean reversion may not work as well as it has in the past.

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Green makes some valid points about the indexing phenomenon. But his theories don't explain why indexing doesn't push up all the component stocks in the S&P 500 index. For example, all the financials are down a lot in 2020. So it must be the active managers who are pushing up tech and pushing down Wells Fargo for example.

 

I believe his take on this is that classical value stocks are underperforming because they are being sold by active managers who tend to be value oriented and are facing net redemptions as their core clients retire, and they are not being bought enough by the index funds that younger people tend to buy.

 

For banks though, you are probably right. I’m sure there are plenty of active managers who are underweight/short them at the moment.

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  • 3 months later...

He seems to be making a deliberately paradoxical argument. He's saying "the market isn't efficient, nobody can make money any more." But that's why you can make money in the market, because it's not efficient. He just sounds like a quant who's complaining because quant value strategies don't work any longer. That might be true. But there is no guarantee that mechanical strategies would work forever. I have to add that part of my annoyance with his argument is that he begins every answer with "So . . ."

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I like him.  Seems nice and smart.  I've watched/read most of his stuff. 

 

I think I follow the reduced liquidity/higher volatility hypothesis which I gather (if I'm able to follow him) is actually what he does/uses to inform his strategies to make $$$ (my caveman way of articulating it is basically he thinks many derivatives are underpricing this risk/feature of markets). 

 

The sort of hypothetical endgame about the value premium:  I don't think he's actually betting on, but it is interesting to think about.  Seems like maybe the price simulations and like extreme conclusions could be missing the impact of carry/actual businesses doing stuff with their cash (i.e., mkt is not just zero sum traders back and forth...there are bidnesses and cash and income/shareholder yield derived therefrom).

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