One year ago today, Bitcoin traded for around $5,200…
Today, it’s hovering around $58,000…
When one of your investments has grown to a massive winner, what’s the next step?
It’s a tough question that every investor needs to face on their own. But on this week’s rant Dan looks back to the story of Robert Kirby and the coffee can portfolio, which suggests sometimes the best thing to do… is nothing at all.
Then on this week’s interview, Dan invites Jason Hsu onto the show. Jason is Chairman and CIO of Rayliant, an asset manager who focuses on generating alpha from investing in China and other inefficient emerging markets.
Some asset managers tend to lean towards a quantitative approach… Some use a fundamental approach…
Jason shares how Rayliant has blended the two into one in order to take advantage of the massive opportunity in China and other emerging markets.
During their discussion, Dan and Jason discuss the massive opportunity in China today… how the Chinese government’s hands-on approach differs from the U.S. government’s way of doing things… and how his firm is making it easier than ever for investors to gain exposure to emerging markets around the globe that are often overlooked.
Then on the mailbag, Dan answers your questions, comments and politely-worded criticisms. But this week, there’s only one big question that Dan wants to focus on… It’s one that many investors – retail and institutional alike – have been wondering.
Is it better to buy Bitcoin outright or are Bitcoin ETFs, like GBTC, a suitable way to gain exposure?
Listen to Dan’s take on this popular question and more on this week’s episode.
1:32 – Is it time to question Bitcoin? If a big sell-off happens, what should you do?
4:48 – Dan shares some lessons learned from Robert Kirby and the coffee can portfolio, “You can make more money being passively active than actively passive…”
9:29 – Being a great investor is not easy, “but it seems like Peter Lynch might be right. The best way to make money in stocks is not to be scared out of them.”
13:20 – On this week’s interview, Dan invites Jason Hsu onto the show. Jason is Chairman and CIO of Rayliant, an asset manager who focuses on generating alpha from investing in China and other inefficient emerging markets.
19:48 – Why would many Chinese companies fudge their numbers to make them look worse? Jason explains the logic behind it… “They do it because the rules in China are different than in the U.S…”
26:06 – Dan points out that famous investor Jim Rogers has said, “in many ways China is more capitalistic than the U.S…” Does Jason agree?
29:54 – Dan digs into Jason’s unique approach. What exactly is “quantamental investing?”
35:31 – “…those are really the outliers, they’re the exceptions, it’s not really repeatable. We can all read Steve Jobs biography, Elon Musk’s maybe, and Jim Simons… Those are great for storytelling, but if that’s really replicable, I think we’d have a lot more billionaires today.”
43:12 – Jason says it’s important to keep your ego in check when you’re handling other people’s money, “We’re in an industry where people are paid well, and that’s an understatement, I think we’re in an industry where just about everyone is overpaid…”
46:50 – Jason explains how Rayliant does things differently than many other asset managers… “If you only pay if we outperform, then we’re maximally both aligned in terms of our desired outcome. But also, some of that heads-I-win, tails-you-lose asymmetric outcome goes away as well…”
51:46 – Dan asks Jason about Rayliant’s new ETF (RAYC) which utilizes their quantamental China strategy and is the world’s first active ETF in China.
53:35 – Jason leaves the listeners with one final thought on the emergence of China… “Don’t see it as U.S. vs Russia during the Cold War days… See it as U.S. vs Japan as Japan was emerging, and that emergence ultimately meant more business for both sides…”
56:12 – On the mailbag this week, Dan answers your questions, comments and politely-worded criticisms. And this week, he has one big question on Bitcoin… Is it better to buy Bitcoin or are alternatives like GBTC a suitable way to gain exposure? Dan gives his take on this week’s episode.
Announcer: Broadcasting from the Investor Hour Studios and all around the world, you're listening to the Stansberry Investor Hour.
Announcer: Tune in each Thursday on iTunes, Google Play, and everywhere you find podcasts for the latest episodes of the Stansberry Investor Hour. Sign up for the free show archive at investorhour.com. Here’s your host, Dan Ferris.
Dan Ferris: Hello and welcome to the Stansberry Investor Hour. I’m your host Dan Ferris, I’m also the editor of Extreme Value published by Stansberry Research. Today we’ll talk with Jason Hsu, he’s the founder and CIO of Rayliant, a firm that combines quantitative investing with fundamental investing. And they call it "quantamental" investing. We’ll talk with him – he’s a great guy, it’ll be a lot of fun. This week in the mailbag, I have a single mailbag item about how to buy bitcoin. In my opening rant this week I’ll talk about a topic that I plan to mention frequently. Maybe once a year, maybe twice, but I was reminded of it recently while listening to two investors talk about equity returns since the peak of the Internet bubble. That and more right now on the Stansberry Investor Hour.
So I’m going to talk about this topic that I plan to mention with some regularity. I’ve mentioned it before and I will mention it again. But first, I have to talk a little bit about bitcoin just for a minute. I’m starting to wonder about it just because it trades like a risk asset, right? Risk on, it goes up... risk off, it goes down. And I’m trying, I’m starting to think about something I never think about which is like what's going to happen to the price of this thing in the future if other people are selling? Normally we care about the fundamental value, but it’s difficult to think about fundamental value of bitcoin.
So if it behaves that way and we get a big market selloff, do you really want to give up 50% or 40 or 50% of everything that you've made on bitcoin? I kind of don’t. And bitcoin is my second-biggest winner in my Extreme Value newsletter, it’s up like 450% in about a year. So there’s a lot to think about there. And I just want everybody to know I’m still holding bitcoin – I love the idea of it. I think it’s brilliant, I think it has a future. It’s the most incredible innovation. But I care a lot about – I’ve recommended it in the pages of Extreme Value so I care a lot about what happens to that in the Extreme Value portfolio for Extreme Value readers. And I’m not just a mindless bull, a mindless bitcoin permabull. I care about what happens.
So just going to put that bug in your ear and move on to this topic which is the coffee can stock. Which I was reminded of recently, I was listening to a couple of investors talk about returns to some stocks since the dot-com highs in March of 2000. And since the high in March of 2000, just take Amazon. I think Amazon has compounded at something like 20% a year or something. Since the high, the high of the dot-com and it got murdered, it was down 60 or 70% or more. It was down a ton, I don’t even care what the exact number is because it doesn’t matter. I mean 60, 70, 80, whatever, murdered. Apple, same thing, absolutely obliterated, 60, 70, 80%, whatever from the dot-com high.
But Apple has compounded at something like 25% a year, from the highs. You get what I’m saying? You could have bought the thing at the worst moment to buy it and if you just held on for the long term and thought it was a great company and didn’t look at your account and didn’t really care from year to year, you'd have made a ton of money. Which is pretty amazing, and that reminds me of the story of the coffee can stocks. This is from the Journal of Portfolio Management back in 1984, the fall of 1984, Journal of Portfolio Management. It’s an article by a guy named Robert Kirby who when you type Robert Kirby into a search engine, he’s like the coffee can guy. And it’s called "The Coffee Can portfolio." And he says you can make more money being passively active than actively passive.
And he tells this story when he worked for this firm even years before he wrote this thing. He said he had this one client who was this woman whose husband had died recently and she wanted to put his account and her account together into one. And he looked at the two accounts and he was amazed by what he saw, right? So the woman was a bona fide client of the firm. And she took all their advice, she bought when they said buy and she sold when they said sell. But the husband was just piggybacking off of her advice that she was getting from the firm with one exception. And that one exception was he didn’t take their sell advice, he never sold, in fact. He just put $5,000 into every buy recommendation and forgot about them, right?
So years later, she had I forget, I mean I’ve got the article in front of me. But it doesn’t say how much she had. It only says that he had several, I’m quoting from the article. It said he owned a number of small holdings with values of less than $2,000. He had several large holdings with values in excess of $100,000. There was one jumbo holding worth over $800,000 and that exceeded the total value of his wife’s entire portfolio. And that one jumbo holding came from a small commitment in a company called Haloid which later turned out to be a zillion shares of Xerox.
So when he bought Haloid he probably had no idea it was going to become Xerox and go to the moon and make him like more than $800,00 off of, what, a $5,000 stake? It seems like that what's he did with every stock. So it’s an odd time for me to point this out, isn’t it? Because I’ve been saying that stocks are overvalued and even recently, I’ve said it’s like they’re more expensive than ever before in history, certainly by many traditional measures. And people are more – like if you follow SentimenTrader's Jason Goepfert, who we've talked to on the program on Twitter, he’s saying they’re nearing an all-time record on the sentiment indicators being bullish, right? So I’m saying, hey, be careful. And I also said in the Extreme Value – or I’m sorry, in the Stansberry daily Digest recently that the top has begun to form, right? Bottoms are an event, tops are a process.
And the process has begun. So why would I choose to point out that the best – that you should never sell? Do I really want you to buy stocks here and never sell them? Hey, you know me, I’m not going to tell you what to do. You're a grown-up, man, you do what you think is best. You do you. My point is here, and the reason that I want to bring this up is simply that it’s hard to be an investor. And it's always hard to be an investor. It’s hard at the bottom, it’s hard at the top. It’s hard in the middle. And what's hard is holding, right? The guys who reminded me of the coffee can, they were talking about stocks at the top of the dot-com. But the coffee can wasn’t about the top of the dot-com. It was about just stocks bought over a period of many years and held, right?
And in that article, he goes on to make the point that he’s talking about institutional investors. Because he – this is a Journal of Portfolio Management, he’s an institutional guy, that's what his thing is. But he points out that even at that time in 1984 he said the methods are a lot different now. He said we make our decisions on a much shorter time horizon. He said most of us are faster than Wyatt Earp ever dreamed of being when it comes to taking a profit, right? People just don’t buy and hold anymore. And you'll hear people say buy and hold just doesn’t work. I don't know that that's necessarily true. But I know that at all times all throughout history, buying and holding has been extremely difficult for the overwhelming majority of people. It’s probably even difficult for the people who actually do it.
I’m sure this guy was sweating bullets near the bottom of bear markets while he was holding this stuff. But it seems like Peter Lynch might be right. The best way to make money in stocks is not to get scared out of them. And you should remember that equity is permanent capital. I was talking to a friend of mine recently, runs a public company. And we're talking about equity and compensation and stuff. And I came away from that conversation thinking, yeah, equity. Equity is permanent capital. And that leads me straight into one of my two quotes of the week this week. One of them – they’re both by Felix Dennis, he wrote this book called How to Get Rich. Which is really a great little book, I love Felix Dennis’ book, he’s got a great kind of in your face style. And one of the quotes is, “Ownership isn’t the important thing if you want to be rich, it’s the only thing.” But he also says, this other quote, “Public companies are not sane places and their share prices are not decided by sane people.”
He owned a publishing company and they were the publisher of Maxim magazine among other publications. And he passed away I think in 2014 or so. Anyway, wealthy, successful guy, had a lot of thought about getting rich. And the thing about ownership is it really is available to you on the public equity market. But he’s right. I don't know if public companies are not sane places, but their share prices are not decided by sane people. We can definitely say that. I mean when we're running stocks like GameStop up to, I think like I want to say a $15 billion market cap at the top of that recent ridiculous mania. And people are still buying the thing and it’s still way overvalued by any rational assessment. That's not sane.
But it’s still true that ownership is really – ownership of a business, it’s hard to beat ownership of a good business as a way to grow wealth, right? Warren Buffett and Charlie Munger like – or Warren Buffett mostly says if you're not in too much of a hurry, it’s kind of easy to get rich. Meaning, all you've got to do is buy a bunch of good businesses on the stock exchange and forget about them for 30 or 40 years and boom-chaka-laka, you're rich. All right, so this is a long-term proposition this thing we do in the stock market. And I just wanted to underscore that today. All right, let’s talk with Jason Hsu. Let’s do it right now, man. Let’s go.
Dan Ferris: OK, let me just take a moment here and talk about an event that we've all been a part of for the past 12 years. Which is simply the tremendous momentum of the stock market. My friend and colleague Dr. Steve Sjuggerud has been bullish for the past 12 years. However, the tides are shifting and Steve is getting worried about how much higher this bull market can go. He believes at some point this year, this year, we will face one of the most critical investing decisions of our lifetimes. And so Steve wants every investor to stop and think right now. Do you have an exit plan for stocks? What would a 50% hit on your portfolio mean to you? Would you be able to delay retirement for ten years?
If you're riding the stock market rainbow, take a moment to watch Steve’s new video which is free of charge. Visit meltdownprediction.com today. Steve is filmed sharing what he is personally doing to prepare for the inevitable Melt Down and explains how his prediction can have a dramatic impact on your wealth in the coming months. The website again is meltdownprediction.com.
Dan Ferris: Today’s guest is Jason Hsu, chairman, and CIO of Rayliant, an asset manager focused on generating alpha from investing in China and other inefficient emerging markets. Jason also helped found Research Affiliates as a board – a member of the board of directors at the Anderson School of Management at UCLA as well as an adjunct professor in finance and is an associate editor of the Journal of Investment Management among other journalistic publications. Jason, welcome to the program.
Jason Hsu: Dan, glad to be here.
Dan Ferris: So, Jason, it looks like we really have two topics with you today. We have China and perhaps more generally emerging markets. And then we have this style of investing of yours which you call quantamental. Which is obviously a portmanteau of quantitative and fundamental. And I’m really interested in getting into that. I’ve read some of the explanation on the website so I have a basic idea what you're doing. But maybe we could talk about China first. Because I know that's something that’s definitely on our listeners minds. At Stansberry, we've written quite a bit about China. So why do you choose to focus on China?
Jason Hsu: If you think about China today it certainly is the second-largest economy. It is rising rapidly and likely to overtake the U.S. I think by 2025 in terms of just total GDP. So it’s too large to ignore but yet it is a minuscule portion of the investor’s portfolio. And so the question is should you have more? Do you need more, what are the opportunities? And these are fascinating questions I think for all investors and their advisors. My focus on China in part was driven by the highly anticipated greater inclusion of China into global benchmarks.
And you know that's going to drive at least for passive investors just an automatic indexing and rebalancing to China. And certainly, I think for more active investors you like to get ahead of that flow. And for managers, you like to get ahead of that opportunity and really build out capabilities and expertise today. I think I’m going to use, say overused cliché here. It’s about skating to where the puck will be instead of skating to where the puck is. And so that's really my entire MO for building out a dedicated China capability today.
Dan Ferris: OK, that – I know a lot of people use that expression. But I think it fits, it sounds great. So the first thing, unfortunately, the first thing some people think of still I’m afraid when they talk about investing in China, about buying individual securities is the issue of fraud that has come up. And I have this book on my shelf, well, it’s not there now. My whole library is in boxes because we're moving. But I do have this book called Asian – I think it’s called Asian Financial Statements, or Asian Financial Analysis, or something like that. And the subtitle is detecting financial irregularities.
But it strikes me that the main title on there is just very generic. And yet, it’s a whole book about detecting fraud. And their famous examples – Sino-Forest and Harbin Electric, Puda Coal – there’s a bunch of others in there. So that seems to me like a little bit of a hurdle to get over. But is it still as much of a hurdle as it was? How do you feel about that today?
Jason Hsu: Dan, so first of all, there is no denying that the bad reputation is partly earned. So if you look even as recently as last year, Muddy Waters had a report how and ultimately this Chinese firm listed in the U.S, Luckin Coffee was found to have fabricated fake coffee receipts to the tune of about $200 million. Of course, all in the service of driving up their share prices so the chairman could dump his shares. So I think the two points that I’ll make here, one is about the adverse selection. The adverse selection issue here refers to a lot of Chinese companies list in the U.S. and subsequently blow up because listing standards in the U.S. is just significantly lower than listing standards in say China with the two stock exchanges there, or even in Hong Kong.
So the U.S. stock market actually faces when it comes to Chinese companies this adverse selection problem. Companies that fail listing requirements or their backers are known to be financial manipulators come to the U.S. and leverage all that information asymmetry to essentially take advantage of U.S. investors. And I think our regulators are sort of finally catching up to that and putting in policies to help alleviate some of those concerns with the holding foreign company accountable act. So that's one point I want to make which is, yes, that poor reputation is partially earned. And investors should be concerned by that problem.
But it’s I think significantly more concentrated with the Chinese firms that list in the U.S. Now I’m going to sort of a pivot a little bit and talk about what about the Chinese firms that list locally in China like on the Shanghai Stock Exchange or the Shenzhen Stock Exchange. Clearly, there is still a great variety of firms that have different accounting standards and some are conservative, some are aggressive. When we look at the data, there is, in fact, widespread data massaging. But the surprising fact is most of the time, most of the firms massage their earnings downward, not upward. So quite the opposite of what you expect, OK.
So it is massaging but it’s massaging the numbers downward. Now, why would you do that? They do it because the rules in China are different than in the U.S. The stock exchanges in China are quite paternalistic in the sense that they think they need to protect the end investor. And the way they do so is requiring companies to be profitable all the time. So if you have negative earnings one year, the exchange will come and kind of slap you on the wrist. Maybe even slap you in the face. If you do it again the next year, its heavy sanctions are imposed, your stock’s liquidity essentially dries up because they take away your ability to margin those shares. Very tight cap on daily price movements and, of course, if you lose money again you're on course to be delisted.
And companies are terrified of that and so what they do is whenever they have a strong earnings year they will underreport it to build up a reserve. If they have a bad year where they absolutely have to report a negative number they will report a much larger negative number. Again, all in service of building up a reserve to smooth out earnings. So if you think about it, a company like Amazon, Netflix, even Apple in the early days, they would have been delisted in China many times over. And so a lot of what companies do in China, you may not want to interpret that as sort of fraudulent manipulation to drive up stock prices by misrepresenting earnings. But more of an earnings smoothing management to essentially avoid some of these unintended consequences put into place by the exchange.
Dan Ferris: I see. And I just went for our listeners sake, Jason, Jason used this term adverse selection. If you know it at all you probably know it in the insurance industry with something like flood insurance where the only people who seem to get flood insurance are the ones who live in flood plains. So there are adversely select, right? So the only – the companies that commit the worst fraud we're saying, in China, are listed in the U.S. So we've adversely selected for those companies. But, Jason, you make an interesting point about the difference between Chinese and U.S. regulation. And I have to say there’s also for our listener on rayliant.com Jason has a research note called "'Tiger Mom' vs. Montessori," a simple analogy for comparing Chinese and U.S. financial regulation.
As I read through this it seemed to be a relatively straightforward comparison of the two approaches. Which you've just sort of laid out for us. But, Jason, I swear to you as I came to the end of it I was – I almost thought that you were of a mind to believe that the Chinese system should be more like the U.S. and not vice versa? It was just the beginning of a feeling... do I have that at all, right?
Jason Hsu: Well, I think it’s not just me I think. As I speak to many regulators in China, I think they hold that belief as well. The U.S. system, being very hands off is built on the belief that look, if you make a mistake you'll learn from it. And you'll either be better or you simply would sort of exit the game, right? So when it comes to the stock market it’s not the job of the regulators or the exchange to make sure only good companies with great managements get to list, right? Bad companies with bad management, look, investors, consenting adults making deals. If you lose money, if you invest in a bad company, you'll learn from it and don’t do it. Maybe you'll learn to delegate to the more professional funds manager instead of trading stocks yourself. That's know the U.S. attitude.
China has taken the other approach where the exchange goes out of its way to engage companies to make sure bad management team gets a talking to. Firms with disastrous stock price performance are sent a warning all in the hope that they can protect otherwise less sophisticated individual investors who perhaps don’t understand how stock market works, don’t read financials. But the result of that is you continue to have a lot of sort of noise traders, right? Individuals who simply don’t learn from their bad experience. And that reduces the equality of the overall market then the regulators almost have to work doubly hard just to maintain order in a market that’s otherwise extremely noisy and inefficient.
So and when I speak with regulators the thing they want more than anything else is to attract long-term U.S. discipline capital that could come in and discipline prices, right? To have market mechanism do its work rather than have regulators do that work. So, yeah, in the short run, maybe it’s very efficient to have a tiger mom or a tiger dad to just sort of come in and sort of dictate how things ought to work. But really I think in the long run there is something to be said about the market mechanism and really having the participants learn and sort it out instead of having the regulators playing judge and jury all the time.
Dan Ferris: This sort of – that last comment of yours reminds me – it reminds me a little of Jim Rodgers who’s been very bullish on China for a couple of decades here. And every now and then he’ll say in some ways China’s more capitalistic or more free market or something than the U.S. Do you agree with that? And if so, like how is it true if it is true at all?
Jason Hsu: So there’s a very interesting dichotomy in that in terms of the regulatory environment, the ethos is much less capitalistic and much more I would say interventionist, right? So it’s not about trusting the invisible hand of the market. It's actually very distrusting of that. And as a result, government intervention is often viewed as necessary and perhaps wise because the market can’t be trusted. Now, the part that is true about China being more capitalistic is that the participants are certainly extremely profit aware and profit-driven. All right, so the amazing growth story you see in China today does come from people incredibly well-linked to outwork other people to put in crazy i-banking hours even if you're not working i-banking job to outcompete globally. To generate profits, so this animal spirit of sort of responding to monetary incentives is stronger in China than any other country I ever visited, right?
Whereas if you look at U.S. and Europe and Japan today, right, ESG investing, purpose investing, impact investing, where investors are saying, hey, I’m willing to make less money, lower return for other reasons, right? It’s not my investing, my work isn’t purely profit-driven. And that sort of ethos almost points at kind of the anti-capitalism, right? Capitalism requires you to be entirely selfish and sort of profit-motivated. And so that's the dichotomy really in China is on the one hand, you have just extreme sort of profit-motivated behaviors that’s lead to phenomenal growth, right? That's led to everyone acquiring tremendous amount of education and working tremendously hard and then producing prosperity and growth. But with a backdrop of a society that’s also so very distrustful of a market mechanism.
Dan Ferris: I see, right. So, yeah, I get it. I see. So let’s talk now about this quantamental approach of yours that you pursue at Rayliant. Obviously, a portmanteau of quantitative and fundamental. And the obvious question as far as I can see is quantitative exactly how and fundamentally exactly how? We want to know the like about each of the pieces and then I’m curious to know how do they come together rather than – when I see something like that I think, OK. Are you just doing quantitative research and then you're doing fundamental research? When the same stocks, let’s say or is there a true melding of those two somehow? Do they really overlap in some way that you've discovered? You see what I’m trying to get at? I’m unable to form a direct question, but –
Jason Hsu: No, that was super clear. A lot of people do quantamental now. They say on their website, say on their marketing material they do quantamental. And it’s a little hard to figure out exactly what do they mean, right? You see managers out there who tap into traditional stock pickers and I think they mean quantamental by, well, we now use maybe computers to do some screening. We use computers to do some underlying factor analysis to help our stock pickers. And, of course, you got quants going the other direction and I think oftentimes they now mean maybe they’ll have a team of fundamental guys just looking at the portfolio coming out of the machine just for a sanity check. What we at Rayliant have been shooting to do is to truly create a melding, right? It’s not one is a primary and the other one’s sort of on the fringe.
So what do we mean when we say quantamental? It really starts with the fundamental part. We – it’s not that we think pure quant, pure stat, or pure "let the machine do what it does and the human get out of the way." That could work. But our belief is there is something else that could work equally well. And that is if you take the deep insights that a fundamental analyst has about companies and markets and the investors behavioral psychology. So you really understand why something works, why something doesn’t work. And then you quantify it, meaning you can write it down in a model so you can take data and test those hypotheses and you can say, hey, how reliable is this pattern? How often does it repeat? When it happens how much money can you make? How big is that alpha? And when it goes against you how bad can it get? And what are sort of the extreme black swan event when you apply this kind of intuition.
So it's really taking data and a scientific approach to model a lot of intuitions that I think all the great investors, great managers have practiced. So that's what we mean by quantamental. Now, you can’t model everything. Not all of that gut instinct can be modeled. But I think the science tells us a lot of it can be and at least enough of it can be so that you are likely to produce something that is better than just a human acting on sort of gut instinct alone, all 7n then bring to that approach the latest technology from machine learning. The latest empirical techniques such that you can really tease out more information and also take risk into account more scientifically.
All of which leads to better long-term success versus just a human doing it alone without the data science. So that's what we mean by quantamental, right? It’s moving away from pure black-box type of quant. And it’s really sort of augmenting the human insight but in such a way that and to a degree of accuracy and sophistication that a team of humans could never achieve.
Dan Ferris: That's interesting to me. Jason, years ago I went and I visited one of the turtle trader firms, I won’t say which one it is. But I remember that the guy who was giving us a tour, he said if a trader doesn’t follow the signal that our PhDs have developed on this big computer system if they don’t follow the signal they can get fired. And then he said I’m going to leave you in the hands of our head trader here and he walked away. And the head trader showed us a chart. And he said – and it was cable, it was the British pound. And it went down five days in a row and the computer spit out a sell signal.
And he said but do you really want to short it after five days of this? So we didn’t short it. So right away, like that was my introduction to this idea that following the – just getting humans out of the way is probably never going to happen. So over the years, I’m happy to talk to you. And we talked to actually Jim Masturzo from Research Affiliates.
Jason Hsu: Yeah.
Dan Ferris: And I know you co-founded that firm. And we've talked to other folks over the years and I have to say I always drill into that question. And it makes perfect sense to me that what you guys are doing is saying, of course, you'd never do that. And then you're systematic on sort of both sides of it. The discretion versus the pure quantitative output which to me makes people like – makes renaissance technologies this sort of head scratcher. It’s like, wow, it's just amazing. But maybe they’re the – maybe they’re just the exception to the rule. And the world is really headed in the director of Rayliant, perhaps, I don't know.
Jason Hsu: I mean, Dan, you're absolutely right. When you think about the legends that we memorialize in books, right? Those are really the outliers or the exceptions, right? They’re not what's repeatable, right? We can all read Steve Jobs' biography, Elon Musk’s maybe. And then Jim Simons, right, those are great for storytelling. But if that's very replicable I think we have a lot more billionaires today. And so those books really aren’t a recipe for success, right? They’re a recipe for what's unlikely to repeat again. And really for most everyone else, it really is about, well, what can you reliably repeat? And I would say something that has intuition, insight, and married with data science.
The data science part is very much figuring out what’s likely to repeat. And really the human insight there is to make sure that, well, sometimes the data science can get it wrong. Or sometimes the machine can get it wrong. And so when there’s human intuition at least you can relate to what comes out of the machine and be able to detect what doesn’t make sense.
Dan Ferris: Right. And it's interesting too isn’t it that the melding of these two things it seems to me that the way it’s happened is we've applied more data science and more insights from studies in behavioral finance and things. It seems like there’s more science being applied to the fundamental side rather than doing anything at all with the quant strategies are what they are. I mean it is a black box. And it puts out what it puts out. And then you have to figure out what you're going to do with it seems like. But overall, I think you're – there’s a good point in here which is – and I’ve made it before. If you're picking stocks by just sort of the normal way, you read about things in the paper and you know, you believe that you know what a good business is when you see one. And you know what an overvalued business is when you see one.
You've got serious competition. I mean people like you and even Research Affiliates, let alone Renaissance or anybody who’s doing something with a fair amount of money. The competition is getting more, it’s getting more fierce it seems to me. The more folks like you apply these models to the fundamental side it just seems like it's getting more and more difficult. Do you think that's right?
Jason Hsu: That's absolutely right. And while it’s bad news for people like myself, it’s generally good news for the end consumer. Basically, investors into funds, big pension funds, and sovereign wealth funds who hire managers like myself. And then that's the beauty of competition and I guess of the capital market. As we compete and drive down prices and drive up market efficiency and drive about comfort for clients, it’s what kind of the invisible hand desires, right? It wants the competition to compete away profits for managers and to generate better social welfare overall. So I think that's all good at the end of the day. I think that there’s an interesting point there in that the fact that quant managers are good managers start to do similar things.
And these similar things then start to sort of crowd out each other. At least it’s said that there’s some kind of universal truth at least when it comes to investing and evaluation, right? There is universal agreement in terms of what is a good stock, what is a good investment. What are good practices? And that at least make our business and make this science, this craft respectable, right? What would be concerning would be a lot of people, a lot of managers competing and they all do completely different things. And at the end of the day, neither the client nor the market’s better for it. That would be the concerning outcome.
Dan Ferris: I hope you don’t mind me jumping around on topics a little bit. I noticed we talked about modeling what great investors do and so forth. But I noticed on your website you have some material about your values and your principles. And right up at the top, one of the biggest ones is – says we are deeply opposed to manager ego and all it represents. Right, we strive for authenticity and humility and education and perspective and all. It’s this anti-ego kind of a thing. That is very interesting to me. Because look, we're all human, right? It’s we're human beings. And the dynamics of a group of people doing something is that one guy gets all the credit, right? And it's typically the guy at the top.
So we’ll say, boy, that Jason Hsu, he’s an amazing investor. Like no matter how many times you tell me that you're opposed to manager ego and all it represents. I know people are going to say, wow, Jason Hsu, he’s smart. How do – you're fighting human nature there aren’t you? How do you do that in your firm on a day to day basis? What kind of culture do you have to have to really act on that principle?
Jason Hsu: Well, there are a couple dimensions. So I – so, Dan, I apologize. I’m going to give you a long answer here. And then I’m giving a long one because this is super important. So I’m going to start with a story. All right, I once saw an incredibly successful investment manager speak to a group of kind of aspiring, young, financial engineers. And he was explaining why investment managers make many hundreds of thousands even millions while say schoolteachers and engineers make significantly less than that. And he was explaining, well, that's what the market’s telling us. We need more bankers and hedge-fund managers and less of the other stuff. And it just struck me, it’s like, wow.
Here’s someone who’s incredibly intelligent and yet because of market failure that some of us have become so grossly overpaid and the hubris instead of feeling a little embarrassed by the windfall, just the hubris of wanting to feel like we deserve it, we earned it. We come to a conclusion where we point to the market failure and say, no, that's actually the market working perfectly fine. And we are not just worth it, we are better than, right? And that bothered me tremendously. And so part of when I point to sort of manager ego, it’s about that, right? We're in an industry where people are paid well and that’s an understatement. I think we're an industry where just about everyone is overpaid. And yet, we try to give it a spin, right? We try to justify that by saying, no, it’s because we generate more value.
And then that bothers me and I feel like it starts this sort of corrode, the individuals in this industry and kind of set us on a bad path. So now from that, that's pitting that to what does it mean for my firm and kind of the culture we're trying to build. Well, part of it is really to be aware of like there’s a difference between the price you can negotiate and the value you generate. And if you always keep that in mind, not only are you going to be a more sensible investor... you're just going to be a more sensible human being. And like you say, within an organization if you keep that in mind, right, then when you take more credit than is due you, yeah, you negotiated a big price. But you didn’t really deliver an equivalent value and you should feel bad about that.
And that's the kind of culture we want to make sure we have. If you feel like, hey, success looks like when I generated more value than the price I extract. So I’m leaving something for someone else, right? Someone’s interaction with me resulted in a good deal for them, right? If that's how you feel about having purpose and building value I think you're going to be a wonderful colleague to work with. You're going to be a wonderful person to do business with. And in the long run, that's going to attract the right kind of client, that's going to attract the right kind of colleagues, and that's going to build good business. So that's really kind of at the core of Rayliant's ethos.
Dan Ferris: Sounds like Costco.
Jason Hsu: [Laughs], I love Costco.
Dan Ferris: Yes, pass the value along to the consumer, don’t just keep the margin high. Keep it as low as possible. So do you keep fees as low as possible at Rayliant?
Jason Hsu: We certainly make fees fair. We can’t quite go to Vanguard which is a mutual. Which makes them non-profit. But that's sort of energetically certainly an aspiration, right? We want to make sure that we're charging fair and that we're not charging when we aren’t delivering. So all of our products have a version where investors can choose to not pay unless we deliver alpha. And then that's something that’s sort of front and center when we engage with clients is it’s not just about the return we generate for you. What's more important is about the fee we charge, right? Are we charging you so much that really if we're great managers we – all the benefit accrues to us not to you, right? That would be grossly unfair.
And, of course, there’s research that points to actually some managers, they charge so much that not only do they take all the benefit from their investment services, they actually take more than that. So clients always get sort of a net a fee, a negative alpha. So we're certainly very opposed to that way of doing business. And certainly opposed to that outcome. And we have a fee that sort of avoids that, right? If you only pay if we outperform then we're maximally both aligned in terms of our desired outcome. But also some of that heads I win, tails you lose sort of an asymmetric outcome goes away as well.
Dan Ferris: Well, we could certainly use a lot more of that in the financial world. Heads I win, tails you lose seems to be the norm. But I have to admit, thanks to people like you and from Vanguard all the way to people like you and everything in between there seems to be a movement that, hey, it’s time to stop charging egregious fees and saying that whatever the market will bear. Hey, but investors are pushing back, too. So it’s not just from within the industry. Eventually, people get tired of not making any money and buying billionaires new yachts and stuff. So I like what you're doing and people can read more about this on your website.
Let’s talk about specific strategies. You guys have – there’s a tab on your website, on rayliant.com and there are four strategies. China Managed Futures, China All Alpha, Quantamental Emerging Markets, and Quantamental China. What's the difference – we talked about Quantamental. So we applied those principles to emerging markets in general and China specifically. What's the difference? What's China All Alpha about? How is that different from Quantamental?
Jason Hsu: Our China All Alpha product tries to be a fixed-income replacement solution. What we see globally is that if you buy fixed income, it’s really no longer risk-free return. It’s probably much more return-free risk, right? Yields are really low and the risk of the rate going up and creating large capital losses for your fixed income is high. Or if rate stays low and inflation continues to run in the background because of so much money printing, again, you're a loser. So people want to move out of fixed income just they don’t want to move into equities. A lot of pension funds are maturing and perhaps going into decumulation mode, meaning they have to sell their assets to fund retirement payments. So they can’t take equity risks. So then people are stuck, right?
You don’t want fixed income because it doesn’t really deliver a return. And there’s quite a bit of risk. You can’t move to equities, that's just more volatile than you can afford to handle at this stage. So what can you do? So we've been looking to create a fixed-income replacement solution that tries to be as diversified as possible. So that it can mimic at least sort of intermediate horizon bond portfolio but just with a significantly better return. Now, China happens to be a part of that solution. There are a lot of beta sources. So commodities, different index derivatives, different equities instrument, large-cap, small-cap, micro-cap. If you blend all of that at least because they up to this point, not been accessed by global investment communities, they become a great diversifier to existing alternative portfolios, existing sort of quasi-fixed-income solutions out there.
And so when we built the China All Alpha fund, it’s really with the eye toward global alternative funds. Be it multi-strategy or fund-to-fund manager could include this as a part of their overall portfolio diversifier and instantly reduce the volatility of their portfolio and produce more return. So that's what we’ve sort of created. So within that strategy, basically anything and everything you could invest in China will be in there. Not only do you get sort of this uncorrelated diversifying beta sources that you couldn’t buy elsewhere, but because China across all of its markets are heavily retail driven. So the alpha reservoir is quite large and quite persistent. So you get to package that in as another uncorrelated source of return as well. So that's our China All Alpha fund in a nutshell.
Dan Ferris: OK, we’ve actually been talking quite a while. But I do, I have two more things. Let’s talk about your new ETF which seems to have been on the market for just a few months here. It's the ticker symbol is RAYC and it's called the Rayliant Quantamental China Equity ETF. So that would be your Quantamental China strategy in an ETF. And you say it’s the world’s first active ETF in China. So this is your little marketing tag line here, the next generation of China ETFs. So maybe we’ll see more active China ETFs but this is the first one?
Jason Hsu: It’s the first one, yeah. We've been, obviously, running our China Quantamental strategy onshore in China and also for global institutions for a while. We have now reached a three-year track record which is why we thought it makes sense now to make that available to essentially U.S. financial advisors and U.S. individual investors in the format of an active ETF. So, in fact, it is the first China active ETF listed anywhere in the world. I think New York Stock Exchange was very, very happy to point that out to us. And thus, we're very happy to remind any and everyone whenever we go on podcasts to talk.
Dan Ferris: Right, OK, and there’s a whole bunch of stuff, documents, prospectus, fund prospectus, fact sheet, and an overview, all on the Rayliant, that you can get to on the Rayliant website. So it is actually time, Jason, for my final question which is the same question for every guest of the podcast. And the question is simply this: if you could leave our listener with a single thought today, what might that be?
Jason Hsu: See the emergence of China and the resulting tension between U.S. and China not as a you have to pick a winner and bet on that winner and take sides. See it as a virtuous competition, all right? Don’t see it as U.S. versus Russia during the cold war days but see it as U.S. versus Japan, as Japan was emerging. And that emergence ultimately meant more business for both sides. Another source of interesting beta to invest in and that through this sort of healthy completion the world’s more prosperous. Everyone’s better off.
So if you keep that in mind, you'll realize this isn’t about forecasting which stock market will have the better return. But it’s about understanding that both will have fantastic returns driven by more prosperity and that you want to be diversified and have both winners in the long run.
Dan Ferris: I think that's a great message, that's exactly right and it’s great for investors, right? Because the more winners there are to pick the better it is for everybody. And it reminds me of the old Avis car rental commercial. China’s second so they try harder, right?
Jason Hsu: That's right.
Dan Ferris: Yeah, it’s actually been a real pleasure to talk with you. I hope that we can do it again sometime.
Jason Hsu: It’s been a tremendous pleasure for me as well, Dan. I hope we get to speak very soon.
Dan Ferris: All right, talk to you again sometime, bye-bye. That was pretty neat. And I do encourage you to go to Rayliant's website, it’s rayliant.com. And the ETF is tiny... we didn’t get a chance to spend much time talking about it. But it’s tiny, different sources are giving me different numbers. But it looks like it’s maybe $10 million in net assets. So it’s really tiny. And you'd want to read about that, tiny is by definition less liquid. So you've got to be careful. But I mean these guys seem really worried about how they treat their clients.
And there’s more to read at rayliant.com about that too. Pretty cool, it’s always good to discover like a brand new investor that you didn’t know anything about who has got their head in the right place. And I think they do. I think they have their heads in the right place. All right, very cool. Let’s look at the mailbag now, let’s do it right now.
Dan Ferris: In the mailbag each week, you and I have an honest conversation about investing or whatever is on your mind. Just send your questions, comments, and politely worded criticism to [email protected] I read as many e-mails as time allows and I respond to as many as possible. Or you can give us a call at our listener feedback line, that's 800-381-2357. Just tell us what's on your mind at 800-381-2357. Kind of a light mailbag this week. I exercised discretion, I read them all. And I do respond to as many as time allows. But it’s also like as many as are really compelling me to answer them. And that was a grand total of one this week.
And Hank C. was that one, Hank C. writes in and says, "Hi, Dan, you have for some months recommended value investors get exposure to bitcoin. Typically that involves a rather complicated process of setting up a Coinbase account, depositing cash into it, then acquiring digital tokens that can get lost or maybe even hacked. Now there is a Canadian ETF with a U.S. ETF apparently in the works. Both of which are meant to make bitcoin ownership a lot easier. I was surprised to learn a few months ago about the Grayscale Bitcoin Trust, symbol GBTC. It’s been around for about two years and can be bought in the over-the-counter market just like a stock or ETF.
"It appears to be structured somewhat like the gold and silver units available from Sprott today. The net asset value, of course, trails that of bitcoin itself. Do you think this equity is a viable substitute for buying bitcoin directly? Please keep up all of our good work for us value investors, regards, Hank C." Hank, I don't know a lot about the Grayscale Trust, but I, to me, I prefer to buy it more directly. It’s just kind of my – a quirk in my personality. These things, they’re never direct substitutes, you mentioned the Sprott gold and silver trusts, right? So you can redeem those for metal, but the gold metal is like good delivery bars from London. So that's a 400 ounce bar.
So anything below that you're going to get in cash if you try to redeem. So it’s mainly geared toward – if redemption is part of your deal with that, if you plan to redeem it’s geared toward a larger investor, obviously. And redeeming, I don't know what the redemption feature is on the Grayscale Trust. But it seems like buying an ETF and redeeming and bitcoin, it just adds – it would add a lot of noise to it. So is it a viable substitute for buying bitcoin directly? I don’t – ultimately, I have to be honest. I don't know. But my question is I can only answer the question with a question. Why would you buy the ETF if you could just buy bitcoin? And I get what you’re saying that it’s a complicated process. But I’ve been representing to people that the process is really easy.
Because I’m comparing it to setting up an online brokerage account which is a – that's a major hassle, right? There’s a lot of stuff to do. Whereas with Coinbase, I mean I was up and running pretty quick. Like almost right away, you're just filling out a bunch of stuff online which I thought was a lot less to fill out than for a brokerage account. And then deposit some cash in away you go. And actually, I didn’t even have to deposit cash, I’m just linked to my – to a cash account that feeds it. So when I sell, I’ll have cash in my Coinbase account.
But it let’s say I take all of that out and I buy, it just comes out of my cash account that I have linked at the bank. So, yeah, I thought it was really easy. And to me, I’m like, well, why wouldn’t you do this? Because it was so easy, so you and I are kind of at different places on what’s easy and what's complicated. For me, there’s no substitute. I just want to have bitcoin. I want to be able to buy bitcoin and potentially even take it offline and put it in a wallet in cold storage. So that it can’t be accessed by anyone. Good question though, and I brought it up even though I don't know the answer and don’t really care about the Grayscale Bitcoin Trust.
Because it’s something people should think about. Do you want to buy bitcoin directly, do you want to put it in cold storage, or just kind of leave it in your account on Coinbase or whatever. Do you want to buy this ETF? You say there’s a U.S. ETF coming out like the Canadian one. And there’s this unit trust, the Grayscale Trust. How do you want to own it? And it’s a great question, Hank, and it’s rather than me – questions are better than answers. Question beat the hell out of answers any day of the week. And I would even go so far as to say it's a hallmark of this podcast. That's why I don’t worry about whether or not I even know anything about the Grayscale Trust.
And I’ll take the question because questions beat the hell out of answers period. All right, thank you, Hank. Well, that's another mailbag and that's another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as I did. If you're listening to this episode and you really enjoy it, send somebody else a link to the podcast so we can continue to grow. Anybody you know who might also enjoy the show, just tell them to check it out on their podcast app or at investorhour.com.
Dan Ferris: Do me a favor, subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you’re there, help us grow with a rate and a review. You can also follow us on Facebook and Instagram, our handle is @investorhour. Also, follow us on Twitter where our handle is @investor_hour. If you have a guest you want me to interview, drop me a note at [email protected] or give me a call at the new listener feedback line, 800-381-2357. Tell me what's on your mind, 800-381-2357. Until next week, I’m Dan Ferris, thanks for listening.
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