David R. Henderson  

Highlights from the Asness Interview

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Tyler Cowen has posted the video and transcript of his interview with famous investor Cliff Asness. Here are some highlights from the transcript, with my occasional comments.

On future returns:

Asness: So you invest half your money in stocks, half your money in bonds. Historically, you've made about five percent over inflation. We think it's priced now, at this level, to make about 2.5 percent over inflation.

Of all the things he said, this is most relevant to me as an investor.

On high-frequency traders:

I think the world has gotten more just and fair. I'm going to say something potentially controversial. Something that is often attacked, the high frequency trading, has made the world more just and fair, particularly for small investors.
High frequency traders have -- I watched the Republican debates last night, so I know to change the topic to something I'm comfortable with. They do a lot of different things, but the core trading strategy is just to do the other side of whatever you want to do.
So, if you want to trade, sell X, they'll buy it from you. They charge a little thing called the bid‑ask spread. They will buy it from you for a little less than they'll sell it to you for. It's very competitive. They fight with each other to do your trade, so they can't just charge any bid‑ask spread they want.
They get attacked because they charge a bid‑ask spread, and when you ask them to do a lot, they start moving the prices, because they're getting scared you might know something they don't know.
But we've always had to trade with someone else. We've always needed market makers out there. It used to be much more expensive. Worse bid‑ask spreads, worse execution, particularly for the small person.
There is some controversy with high frequency. I mean small investors, not literally small people. You know that, right?
For very large investors, you're trading very large amounts of money. I believe high frequency has made our trading costs cheaper, but there's at least an argument for the other side. Some will say, market impact. The price moving on you when you try to execute and buy or sell a lot of a stock is bigger now. I don't think so, but that's a fair argument.

On Ayn Rand:
COWEN: What's her most underappreciated side or aspect or angle?
ASNESS: Again, I'm going to try to flip it around. I don't think she was as anti-helping people as she sometimes comes off. If you read her talk about it she certainly -- I disagree with her on this, by the way -- she didn't consider charity a primary virtue. But she didn't have a problem with it whatsoever. She considered the individual sovereign and "if that's important to you, do it."
I think it's a larger virtue. Benevolence, charity is one of the things in her world -- and my favorite thing, which you didn't ask about her, is "you own your own life." It's one line. I'm in love with that.
But the idea of a virtue being the desire to help other people -- not someone forcing you to, which she was dead set against, but wanting to help other people -- I disagree with her on. But I think people come off and think that she's snarlingly against it. I don't think she was for it enough, but I think she was rather passive and said it.
If you care about it, she talked about examples -- giving up your own life to save someone else. If you value that person more than yourself, it's rational. Do it. So I don't think she was quite as nasty about that. Nastier than I think she should have been, but not quite as nasty.
And she could have used an editor. I admit that.
[laughter]
COWEN: Absolutely.
ASNESS: Come on. Come on. That speech -- oh my Lord.

I agree strongly. I think benevolence is a virtue and that someone who is not benevolent has something missing. As Asness says, Ayn Rand was more benevolent than people gave her credit for, but she taught people not to regard benevolence as an important virtue. And, of course, that speech, oh my Lord.




COMMENTS (7 to date)
John Thacker writes:

I definitely agree on high frequency trading. Is HFT worse for small investors than the days when stock prices were in eighths-- and evidence suggested that market makers avoided "odd-eighths" prices and priced everything in quarters of a dollar? No, the bid-ask spread was higher.

Roger McKinney writes:

Front running by HFT is the bigger problem. From wikipedia:

One common practice of high-frequency traders (HFT) is a form of front running, where they peer into various exchanges and try to detect orders as they propagate from a broker's order router.

HFT traders place many small orders that indicate buying/selling pressure. Those with the shortest lag in reaching other exchanges then place orders on those exchanges to catch the rest of the order, at a more advantageous price

One group of private investors is working on an exchange that blocks such front running by HFT.

Daniel Klein writes:

And that plot! Good Lord!

And those characters!

Colombo writes:

My two cents on helping people.

Only those who are capable to help and also want to help should help. Those who are not capable to help or can but don't want to, should not help.

This looks like a riddle, but it is not. Read ahead.

Being a legally disabled person, I've received "help" from people who were not capable of helping me. From my persepective of a person in need, I can assure you that was bad. I also have received help from people who didn't want to help, and were forced to. That was bad too. Even today, years after the "help" I can still experience the bad effects of this two kinds of help.

Please, in the name of all handicapped people in the world, please, listen to me. Examine yourself before trying to help anyone, even those who are not handicapped. Discern if you only want to help from your actual ability to help. Do calculate the consequences. Do not fall prey of the myth that any help is good help.

Instead, bring your help to people who actually know what to do to help people like me. Thanks.

One last thing, government workers do not know what they are doing, no matter how high their IQ is. So discard also this idea of outsourcing the help to the disabled and the poor and the sick to this kind of people. A bad set of rules hurts everyone, not only businessmen.

Michael Byrnes writes:

Daniel Klein wrote:

And that plot! Good Lord!

And those characters!

:) :) :)

There are lots of places where "reductio ad absurdum" can be appropriate and useful, but isn't that really the only note she could play (at least based on her more popular writings)?

I seem to recall a very free-market-oriented economist who said "self-sufficiency is the road to poverty", but Rand gave us "going Galt".

But the biggest problem I find in her work (at least that limited amount of it that I am familiar with) is this: Her characters say "greed is good" a lot... and when they do they mean something very specific by it. What other character is popularly known for "greed is good"? Gordon Gekko - but to me he has far more in common with a Randian "bad" character than with a Randian "good" character? (eg, he's more Orren Boyle than Hank Rearden).

The same thing with "the virtue of selfishness"... by which she means the virtue of "I want what is rightfully mine". "Selfishness" is popularly used in that sense, but also to mean "I want what is rightfully YOURS", which Rand describes as "selflessness".

Lots of confusion on these points, and (IMO) lots of Gordon Gekko types who look in the mirror and see John Galt starting back at them.


Hazel Meade writes:

Yeah, I don't think Rand was against all forms of charity. What she was against was the sort of shaming people into charity behavior. Feeling that it's an obligation or making other people feel it's an obligation, which so often went along with communist ideology that she hated. She didn't feel that people should slave away their whole lives in service of amorphous others, which is basically what communism forces upon people, which she experienced.

It's sort of the same thing you see a lot of on Twitter and Facebook. All the obnoxious moral posturing and sharing of memes advocating some moral crusade. Rand would have unfriended such people instantly.


Rich Berger writes:

Interesting that he says a balanced portfolio should earn 2.5% over inflation at these prices. If I believed that I would have to recalibrate my retirement expenditures since I have been assuming 4% above inflation. Retirement financial advisors would also have to take note.

I haven't read Ayn Rand in years, but I recall that she was a very astute essayist, a melodramatic novelist and a rather unappealing person.

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