Ep668: Jason Hsu – The Market Can Be Crazy for Longer than You Have the Conviction

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning. In our community we know that to win in investing, you must take risks but to win big, you've got to reduce it ladies and gentlemen, you may notice I have a bit of a froggy voice as I'm coming off a little bit of a cold. I am on a mission to help 1 million people reduce risk in their lives. So join me go to my worst investment ever.com and sign up for my free weekly becoming better investor newsletter where I share how to reduce risk and create grow and protect your wealth fellow risk takers. This is your words podcast host Andrew Stotz, from a Stotz Academy, and I'm here with Jason Hsu. Jason, are you ready to join the mission?

Jason Hsu 00:47
Absolutely,

Andrew Stotz 00:48
you can see that I'm going to be counting on you to be speaking in this podcast episode. I know you have the qualifications to do that. So let me introduce you to the audience. Jason is founder, chairman and CIO of radiant Global Advisors, a global investment management group with more than 15 billion in assets managed using its strategies. As of June 30 2022. The business applies quantitative methods to assess behavioral based Alpha prevalent in inefficient markets like China. Jason also co founded Research Affiliates, a smart beta and asset allocation leader with over 143 billion in assets in managed using its various strategies. I'm first met Jason as an audience member when he presented at a CFA event in Hong Kong. And I was quite impressed. But it's taken us a long time to get this meeting together. And I'm happy to be here. So maybe, Jason, why don't you take a moment and tell us the unique value that you're bringing to this wonderful world?

Jason Hsu 02:03
Andrew? Well, I don't know how unique it is. But I guess the one thing that I think I do well, is I can take complicated ideas and synthesize it for for my audience. You know, I, in addition to being a founder and CIO of a investment management company, I'm also a professor at UCLA in the United States, and at the National University of political science in Taiwan. And part of that responsibility is to take complicated financial macroeconomic concepts and help. And generally, because I teach an MBA program, I help people we have, you know, a general business sophistication, but not really in depth technical knowledge with regard to financial markets, or the macro economics. And so I think that's kind of my unique value proposition, which is I can make complicated investment thesis investment strategies, I think consumable understandable to my institutional clients all the way down to MBA students. And through that, hopefully, they make better decisions.

Andrew Stotz 03:14
Yeah. Well, one of my questions for you is, when you started, you know, as a young person, and you were, you know, getting started in, in your career and in markets. And then you compare where you're at now, it's just a whole different space. But at that time, what was it that got you excited? Were you immediately into quant? Or were you into other stuff? And then you slowly started to see that there's, you know, a framework that you could build?

Jason Hsu 03:42
Well, Andrew, I'll tell you, I didn't even know what we sort of do in academic research. In kind of what we teach and learn within business schools, I didn't know that was referred by the industry as quant, all I thought was, like, if you're going to study something, you should look at data. If you're going to tell a story, you should find ways to use the data to illustrate that story and illustrate that story isn't just a one off story, but seems to happen with some consistency and regularity. Over time, I discovered while in the industry, we call that the quantitative way of investing. But for me, you know, I'm naturally gravitated toward understanding how the economy works, how the financial markets work, how to interact with each other, and why they create value, and it's sort of a good thing for human prosperity. But just in trying to understand that we look at so much data, right because you have a lot of compelling hypotheses and by looking at data you really don't know which one holds water. And you know, when I started my own investment management firm company, they realize okay, this habit of looking at data and using data to inform decision making, is known as quantitative vesting and there's, you know, at least a meaningful part of the market, who believes in that approach to investing. So I guess, I've always been one who believes in the power of data. And it's good that within our industry, that is a well defined, well accepted way to invest.

Andrew Stotz 05:18
I remember when I started as an analyst in 1993, in Thailand, I had a boss in Hong Kong, who was one of the top strategists in the world. And when I saw the way he wrote research, it was kind of a revelation because he would, he would write, write, write, and then he put in a mark on his paper that says, Insert Chart of m two here, Insert Chart of such and such here. And I got the feeling like he started with narratives and stories. And then he searched for data to support those stories. And I never could do that myself. And one of the best compliments I, I felt was a compliment was when a fund manager client of mine said, the thing I like about you is, every time you make a statement, you provide evidence to try to back it up. And so I know what you're saying, is that the idea of trying to prove, you know, and understand that, and I'm just curious, you know, it's always a thing that people feel like it's such a dichotomy, because we think that the market is efficient. And therefore, this type of things, and standard structured ways of investing wouldn't produce alpha. And then we have times when it's just clearly obvious that the markets not efficient, and it's going kind of nuts. How is a person who doesn't know much about the markets think about? Is the market efficient or not?

Jason Hsu 06:54
I would say whether the markets efficient or not, maybe less relevant. I think the right question for any person to ask is, should I invest? As if markets efficient? Or should I invest as also, should I invest as if I'm smarter than the market? Or should I invest as if I'm dumber than the market? Because it's entirely possible, the market is very inefficient, or you're still dumber than the market? I mean, that is a very significant possibility. And for most of us, that's probably a true statement. So I think, you know, if you're at the top of the food chain, maybe you think about philosophically how its market efficient, if it's efficient, it's probably hard for me to beat the market with all the data and all the fancy machineries. But again, most of us are not there, right. Most of us are, you know, retail, maybe slightly more informed retail, who reads the Wall Street Journal, or who, you know, watch Andrew, your podcast. But, you know, the question they ask is, do I believe I'm smarter than the market? And that doesn't require the market to be efficient or inefficient, that really just require you looking at you versus the more successful participant in the marketplace? And say, can I beat him reliably? And if I can't? How then should I invest?

Andrew Stotz 08:11
And if you think that you don't, you're not as smart as the market? I'm not gonna call you dumb. But I'm gonna say you're not as smart as the market, then how do you invest? Let's go back in time, maybe to when you started off at with research affiliates, and you guys were doing what you were originally doing? How do you approach the market, then in that case?

Jason Hsu 08:32
Well, if you don't believe you are smarter than the market, first and foremost is, well, you probably should pay up for someone to do it for you. Right? Delegate to a professional manager by buying a mutual fund. Now, of course, you still have to have some knowledge, right, like, you know, which is the right mutual fund to buy, what's the cost of them mutual fund is a credible manager at a credible institution. So you know, there's still some level of knowledge required, but certainly sort of a lower level requirement than knowing exactly which stocks to buy and when to sell it. That's a you want to outsource, right? It's like everything we do in life, right? We don't perform surgery ourselves, we go to the doctor. So I think when it comes to investing, which certainly matters, it has huge impact on your happiness, and your ability to retire and then look after you retire. I like that you want to outsource to someone who does it professionally and who's trained to do it because even the trained professionals don't beat all the time and can have very negative returns by the chance of us, outperforming them as even lower. So I would say you want to delegate first and foremost.

Andrew Stotz 09:42
You know, one of the things I've always thought about is share repurchases. When we look at share repurchases in the market, you got all these people saying that they're bad or executives are manipulating them. Now when I look at the fund managers who are my clients over the years These are some of the brightest people out there. And they're looking for an edge, you know, at every, every, little edge that they can possibly get. And it doesn't make sense to me that someone would say, well, executives are manipulating by doing share price, share buybacks. Are these guys. So they're really smart in some areas, but they're not in others? How could it be that CEOs could be manipulating? And the smart hedge funds are not betting right against that? And seeing right through that? Or is the market such that it's really not as smart as you think?

Jason Hsu 10:40
You know, when you look at the hedge fund, so they're really thinking about two things, right? They're thinking about the corporate fundamentals. So they're thinking about the CEO of the company, and what does he know how you see, how's the investing when he does a share buyback? Is that really true? Because he always says, oh, it's because I think my stock price is undervalued, is it really true, that his stock is so undervalued, that it's better to spend the money to buy shares, versus spending the money to hire more engineers, more product people, more salespeople? Or is the truth really well, the firm doesn't have attractive growth opportunities. And rather than having cash sitting there collecting barely 1%, it's maybe a better deal to, you know, buy shares back and therefore use the cash that way. So I think, if you think about hedge fund managers, they ask that question, they're trying to understand what is it what does information contain with insurance buyback? But they also have to ask the other question, which is, what even if the reality is the company is slowing down? If the marketplace, right, if the marketplace right now is too euphoric, it's dominated by retail is dominated by robinhood.com, and Reddit, you know, Wall Street bedform. People mind mistaken, all shares buyback as the company is so cheap, that it's going to rally up. And the hedge fund might say, look, in this case, the fundamental doesn't matter in the short run, there may be sort of market euphoria market, irrationality matters. So I might ignore the fundamental and simply assume that the market will repeat the recent craziness we have seen. So I would say it's, you know, whenever you see prices, it's always the interaction between the fundamental and market sentiment. And if you're a good investor, you just got to think about both.

Andrew Stotz 12:29
Yeah, you just can't ignore it. So if the market is misinterpreting something, they could misinterpret it for a while. And then maybe one day they interpreted correctly. If we go back in time, and we look at the different research that you've done over the years, you know, that feeling when you've done research that, you know, is good. And you know that it's original, and it's something that really is valuable? What was the first time that you felt that in the research that you've done over the years, whether it was published or internal?

Jason Hsu 13:04
I think the one piece of research that really defined my career, and so you know, special emotional attachment to as I'll talk about it here, was my paper that talked about how cap weighting is not the efficient way to construct a portfolio active or passive in inefficient markets. Right. So I started off by saying, Look, you know, we all know from kind of traditional MBA textbooks that if markets efficient, you're constructing a portfolio that's weighted based on market capitalization, so that, you know, big company gets way too small company gets less way. It's a good idea, right? Because it guarantees liquidity, right, you get more ways to big companies. But, you know, big companies that have grown so big must be, you know, better, right, versus a company that can't grow. Right. So you know, the market doesn't believe it's worth very much. So you know, waiting to efficient prices will be just fine as a folio. But if markets are inefficient, right, if you look at, say, Mainland China stock market, you look at emerging markets more broadly. It's very difficult, you don't even need to look at data, right. So some anecdotes very difficult to convince yourself that those markets are efficient. In that case, would you use the construct that we used to build the s&p 500 to build an index or build portfolio in those markets and say, hey, that's the best way to access the markets. My my I've said clearly no, right. So okay, so what might be different ways of constructing simple weighting, portfolio weighting schemes? I said, Look, you know, we've maybe you should look at fundamentals right, prices can go crazy. If you wait like crazy prices, you get a crazy portfolio, right? A bubble stock will become such a big fraction of your portfolio, that when the collapse happens, you're gonna be really hurt. So if you wait the portfolio by, you know, blended average of kind of fundamentals that matter. First of all, it's a low turnover and a slow moving portfolio and you know, exactly what are the fundamentals you're buying. So even if price moves again, Unless you at least, you know, hey, it's probably going to come back just because the fundamental is there. So, you know, I wrote this paper first of all attacking, using cap weighting as a way to build portfolios for inefficient markets and proposing an alternative just to, you know, wait portfolio fundamentals. And the benefit of that and then quantify, you know, the benefit of that is showing that the benefit for us is minimal, because fairly efficient market, so you can weight it by market cap or something else different is not that big. And that benefit is quite meaningful when you take it down to emerging markets, or specifically very noisy market like China and Vietnam, small Asian economies and Latin economies. So that's the one research that I want to take this opportunity to share. So thank you for asking that question.

Andrew Stotz 15:54
Yeah. Well, I mean, I've read, you know, some of that. And also, you know, though, that so if I think about different types of weighting, so we have market cap weighting, we were waiting companies by size, we also have equal cap weighting sometimes, which is difficult to do, if you have a broad investment universe, because, you know, it's difficult to put $50 million in a small cap company, but it's not a big deal to put $50 million in apple. So there are some constraints to that. But when I saw the your research, and you know, proponent, proponent of the idea of fundamental waiting, it was fascinating. My question to you now is, how does that fit into your work that you do now? Does that still? Is that a core part of what you're doing? Or have things changed since then?

Jason Hsu 16:43
So I built on that recognizing, one can do better in more inefficient markets? Then, how do you move away from just a cap weighted index and into kind of more active construct that can add value? Using fundamental for short, right, you weight the portfolio by fundamentals, you're going to tilt your portfolio to better quality company calling a company that are cheaper, relative to their fundamental, but you know, you also want to sort of diversify from just simple fundamentals, like oh, you know, the cash flow, or the actual sort of book equity value, which are very sort of accounting based, I think, are fundamental, you want to look at other metrics like that active analysts would look at, you know, your ROA, right, you know, your your capital structure, your historical growth, and then you want to then include things that are not related to fundamentals, like market sentiment, you know, are there a lot of retail trading your portfolio? Is it mostly institutional, so it's really, it's kind of expanding outside of CAP weighting and into other salient operations, be it you know, simple accounting base fundamentals, more active management type of fundamental characteristics, all the way to sort of more market sentiment driven information. So you know, it's a, it's a meaningful extension versus kind of the fundamental weighting research work I did, almost almost 20 years ago now. But I think it's kind of along the same direction of travel.

Andrew Stotz 18:21
Right. And my, my, I did my PhD at the University of Science and Technology and Hefei, in China. And I'm a much, much more of a lightweight than you. But I tried to look at the performance of analysts forecasting earnings, and you find that they're not very good at it. And they're always optimistic. And I'm just curious when you're doing fundamental index type of indexation type of stuff. Are you using forward data or using historic data, and there's pros and cons to both such as with forward data, you run the risk that there could be many, many more large mid cap or small cap companies that are very interesting, but there simply is no reliable forecast for them. And then when you just rely only on historic data, you could say while you're not taking in consideration, you know, the latest interest rate moves on the balance sheet of banks as an example. And so I'm just curious, how do you think about the historic versus forward when you use data?

Jason Hsu 19:27
We definitely look at both. And of course, the question is, well, is looking at one better than the other? If you look at both, which one dominates? Or do you combine the information? And this is where now with machine learning, with ability to process more data, we can ask that question and answer much more scientifically, right? It used to be you sort of gather some US data and construct some very carefully curated portfolios and do kind of a clinical case study and Okay, you know, like, for looking data is too optimistic. So if you build fulfill just using forward looking data, you don't really get anything while now you can say, hey, you know, that's built different types of forward looking analysts base portfolio, and that's build a variety of different or portfolios depending on just a past data that's even in Jack them and see, can they be combined in some nonlinear way and do different types of horse race to see what works and why. And you're probably not surprised that there's information contained in both. And it's much better to use them in combination than any one individually, there's going to be more information being aggregated, and there's going to be more diversification that, you know, gets rid of the noise and any single pieces of information. And so the combination is almost always better than the parts.

Andrew Stotz 20:54
And is there a time when that combination starts to lose effectiveness? Like if we think about when we, you know, study regression as an example, there's a point where the next variables already can probably be captured in some of the prior information that you've got, like, is there a point where it becomes either a bad it starts to become a bad signal, or it just doesn't add any value?

Jason Hsu 21:19
Absolutely. And it's always a trade off of the add more information? Are you starting to dilute the information you already have? Like, you've got some really strong information that allows you to pick the stocks? And so just holding on waiting for the information of as review revealed, so we keep on adding more information? And these information are probably less sharp, less relevant? Do you dilute your portfolio? Absolutely, there's a risk of that. So, you know, even though quantitative investing appears to be very data driven, there's still a lot of art in it. What data do you use, what they arrange? And as you add more information, at what point do you sort of stop building signals, because you're just adding noise to the process? All that is a bit of an art applied on top of otherwise very scientific approach.

Andrew Stotz 22:13
And when I look at most of the if I look at investing in this way, I would classify it into two general classification for the general listener and that is what I would call exposure investment, meaning if small cap companies produce outperformance relative to large cap, let's just say, then we can build a portfolio that has exposure to small caps. We're not trying to outperform in the small cap space, we're just providing exposure to what we know has some long term potential advantage. Now another person may say, well, all you're giving is exposure, what I want you to do is outperform in that small cap space. And I'm just curious, how do you describe this type of investing that you do? Is it exposure? Is it active? Is it a combination? How would you describe them?

Jason Hsu 23:14
Because most of our clients are lonely. For us, we always sell the exposure, and try to add a little bit on top of that, meaning, you know, when someone buys our China Fund that say, first and foremost, they're going to do well, if China does well, and you're gonna do poorly when China does poorly. And of course, all of our research then is to add on top of that same thing, you know, when people buy our value portfolio, yeah, we're going to focus on things that have good characteristics, but are trading cheap. And when value is recognized, they do well, when growth and sex and goods do well, the value underperform, so that beta for that exposure is front and center and driving returns. And then we try to add on top of that by thinking of Li You know, is this company truly a value stock? Or is it a value, because it's just a state owned enterprise that will always be mismanage. And then, you know, if we're right, in that identification, we'll add a little bit more. So our portfolios is always a lot of exposure. And it's understood that people want the whole that exposure, because it's diversifying your portfolio or its exposure to have a view on and our job, of course, it provided exposure efficiently, and then at alpha on top of it.

Andrew Stotz 24:28
And in order to add alpha, basically, you're trying to identify what, you know, some advantage or idea that you have, and you've got to take a sizable bet. In that particular idea. If you only take a 1% bet in that idea, then if you're right, it barely impacts your portfolio. But the larger the bat that you take, the more risk that it could go wrong. And when I think about Today I want to talk about risk management. Before we get into the real big question of the podcast, you know, sometimes risk management, when I think back as an analyst on the sell side, a stock price, you know, would start falling. And then we just call around and ask people, What do you think are what's going on call the company, what's, what's the buzz, oh, it's still a good company, you know, good fundamentals, just keep buying, you know, an analyst would not necessarily change their mind, easily. And then later, I realized, like, I hate that feeling of a stock falling, and not really knowing what to do. But so eventually, I started to implement stop losses for individual stocks in the investments that we do. And that helped, you know, that helped to reduce risks to some extent, of course, you're giving up some potential for upside. But on the average, it tended to add value to the overall portfolio. But it gets a little bit harder when you look at particularly certain ETFs like of a country or of a sector. I think, right now, we know the financial sector is kind of crashing in America right now for some different reasons about increased interest rates and stuff like that. And what we've done when we've tested, doing stop losses on sectors or kind of higher level indices, is that it's much harder to add value through a stop loss. And I'm just curious, maybe you could give some background on your opinion on risk management and kind of how you do things or how you think about things.

Jason Hsu 26:30
Yeah, so when I think about risk management, I think investing and of course, this is gonna link to kind of, you know, the Hindi biggest investment mistakes, topic, but in investing, I think the biggest risk is not external risks, right? It's not, you know, a war it's not a company committing fraud. It's not, you know, a global financial crisis, those are all sure risks, and they can be large, they can be unpredictable. But I would say the unifying theme, because risk in our industry is overconfidence. You think something is true when it isn't, you think you know, more than when you actually do you think you're smarter than the market when you aren't. And the result of that overconfidence cause you to not be open to, you know, contradictory data, not to open to learn under perspective, and to take on a bet size that is entirely too large. Given what you actually know, I think that is the biggest risk, because this is an industry that attracts, generally very intelligent people. It's an industry that attracts people who are comfortable with risk, even risk seeking. So when you combine, you know, someone who's smart, and as a result of that can be dismissive of other opinions and ideas, because they're used to being the smartest person in the room, you combine that with risk loving, and then you give him other people's money, right? Like these are ingredients and combine into making very large bets, driven much more by ego than actual data. And blinded by ego to data that might suggest risks. And then I think that that is the, you know, probably the biggest risk in investing.

Andrew Stotz 28:25
And when you look at it from a quantitative perspective, how do you mean when you present to clients about your methodology, and it gets to the topic of risk management? How do you explain how you guys implement risk management now, fundamental indexation type of thing, or fundamental investing is kind of risk management in the sense that, well, we're investing in good companies. So even if they fall, we think that they're going to still rise in the long run. But maybe you could just explain to us how you explain that to clients about risk management in your overall portfolio.

Jason Hsu 29:05
So you know, for us, risk management is diversification. So you won't see any of our strategies be sort of concentrated in, you know, 10 names, you won't see kind of our alpha process be driven by one big bet on one stock or one big bet on one sector. So what we do is really diversified. And then really kind of when you look through, we're exposed to, you know, hundreds of names. We're exposed to all the sectors. Within each sector, we're exposed to a number of quality names. We're exposed to all of the reasonable factors that one would say, oh, yeah, those factors are sort of good things to hold right now. You're exposed to value factors or buying cheap stuff. You're exposing to low vol factors you don't get into ill liquid, very speculative stocks have bounced around with no fundamental correspondence, were exposed to quality growth, you know, low debt ratio in the capital structure. So these are kind of factors we're exposed to, but again, not concentrated into any one of them, assuming that is the best factor. So our risk management is diversification. And at the heart diversification, you know, we run into clients who always asked like, like, can you do more research, and as a result of doing more research that bet on one factor just bid on that one fact that I'll go out or bail industry? They'll go up? And they said, look, it's because we don't know, right? I mean, there's humility indoors. Keishon. And what we're communicating in those occasions that laziness, right, some people assume you're diversified, because you're lazy. I'm saying like, you know, this is just self awareness, we recognize that doesn't matter how much research you do, you will never know exactly what's going to happen.

Andrew Stotz 30:56
And how do you balance that with a investor potential investor that says, Well, why don't I just buy an ETF abroad market ETF relative to you?

Jason Hsu 31:06
And I would say, I'm a big proponent, people who buy a low cost drop market ETF that is almost never a bad answer, right? So I'm a big proponent of that. And I would say, look, but in more inefficient markets, when you believe that you have the capability to to talk with a manager to review like an ETF perspective and pitch deck, and from there saying, oh, you know, I believe in this process of doing better attic, adding incremental alpha over time, then I would say only done, you know, you might want to move to something more active. And so we got a big proponent of people holding ETF if, unless they know, they're better informed, and no better. But, you know, for us, we're diversifying across names and sectors and factors that we think gives you an incremental advantage over just holding the entire market. And I think for some people, they go well, yeah, you know, if you eliminate a very expensive names, right, if you eliminate very speculative names, eliminate firms that seem to systematically have accounting red flags, yeah, we could believe that, that overtime, could do better, then then we'll kind of right answer for people.

Andrew Stotz 32:18
And now, how would you describe the after fee gain that they're gonna get? From that, let's just say that the average long term, you know, broad base mutual fund, or ETF, maybe he's giving, you know, 8% 10%, whatever that number is, and applying your methodology gives a slight uptick from there, how would you describe that? Or how do you use to describe that to the potential and investors?

Jason Hsu 32:49
So first of all, it's definitely a noisy statement, because we can say, historically, if you look at the data, if you're willing to, you know, hold an idea, you know, a strategy for a full market cycle, you know, through the bull market and the bear market. And, and multifactor active approach. In, like emerging markets, where there's most inefficiency, you can probably do four to 5%, better. But that's based on historical data. And I've had a number of published paper and others have replicated, that kind of suggests why that could happen. But the truth, of course, the next market cycle, the number could be larger number could be smaller. And certainly, if there's suspicion that emerging markets are becoming more efficient, the number of be smaller. If there's believe that, you know, markets are more inefficient, because you know, efficient economy get promoted out emerging markets, right, and the more inefficient frontier market is added. So you know, that basket could actually become more inefficient than the alpha could be larger.

Andrew Stotz 33:58
I want to shift gears for just a second and talk about China. I moved to Thailand in 1992. And I never went to China until 2016 or 2015. And I met a professor from the University of Science and Technology of China. He was at an event that I was at in Bangkok. And he said, Why don't you come and teach to my MBA or my executive MBA students and I was like, I've never been to China and he said, Come so within a month, he had me there teaching and eventually convinced me to do my PhD with him. And I really enjoyed the time on the campus and getting to know people and having lived out of the US for 30 years. You know, it breaks your mind, right? You know, when you come to other countries and you're gonna go quickly back to your home, it's easy to walk into a country and go Well, they do this all wrong. And I went into China with a much more open mind having already had to adapt my mind to living in Thailand. And so I really, you know, was fasting aided by what I saw and interested. And now what we see is that it's like America when I saw that America put down China as the main adversary in the strategic policy of the Defense Department, or maybe the Department of offense when it comes to America. But the Defense Department put up this paper and I remember writing out to clients at that time, like, this is, you know, bad news and watching it just continue to grow. I'm just curious, what you see about the US China relationship, Middle East, geopolitics, you know, you're in a unique spot to see kind of it from a different perspective.

Jason Hsu 35:38
I mean, you know, my business is very much kind of bridging China in the US, you know, we, we educate, you know, our clients in China, both institutional and retail a lot about so best practice adopted from kind of, you know, us academic research and US industry practice, and advice clients, their how to globally asset allocation, and us being a really important part of the global portfolio. And, of course, you know, when we work with our western, in general, US centric clients, it's about, you know, China being a useful diversifier within a portfolio how to think about and understand China. So I see myself, you know, as you yourself do, so cringe at some of what is being hyped around in media and also, where kind of the government is sort of steering the country and steering public opinion tour, which is to sort of see China as a, a adversary, and to focus on China with that lens, right, because when you want to see the bad in someone, you will see that just as if you want to see the good in Psalm one, you will see that, you know, China is one country that is trying to figure out what is good for itself, it will do many things, some are mistakes, some are good ideas, some are conflicting with US interests, some really is win win. But if you focus on where it encroaches on us, values were us, you know, strategic intent. The focus on the mistake of Meg's right it could be a horrible regime that is a front to us value and us benefits. But that is not the entire story. Certainly I that is driven by bias.

Andrew Stotz 37:28
I remember when the Trans Pacific Partnership came up, I was obviously I was in Thailand, and the Trans Pacific Partnership, basically was trying to build Well, partnerships across the ocean. And Thailand, outside China, of course, is the number one trading partner with the US. And for some reason, they weren't included in the Pacific partnership. And I just thought, wow, that's odd. And then we realized that what they were trying to do was to build a block to kind of, and that's when I really saw the American, let's call it I don't know, Neo cons or people that really feel like they've gotten knocked China out or down. That was when I first kind of realized, Oh, God, these guys are going to come after, you know, China like this. And I said to myself at the time that from my experience in China, is that America managed to take what could have been their biggest ally in Asia, and made him potentially their biggest adversary. What is your perspective on what you're seeing, you know, right now, and kind of where things go.

Jason Hsu 38:37
So, you know, I think continual escalation and deterioration relationship at this point feels unavoidable. Us, I think, since postwar, as needed, or gotten used to having a adversary in managing or otherwise, and serve the country well, and so it's like a playbook that we, the US are used to, and even if it's just out of sheer inertia, right, it's constantly looking for, what's that adversary, for us to put in front of us to rally around our military complex rally around our trade policy, our diplomatic policy, so on and so forth. So I think even out of inertia, right, the USS, you know, identify China as an adversary and rolling out the exact same playbook without really thinking, you know, is there a different ways or better playbook? Do we really need this? So, you know, inertia is a very powerful force of nature. And then the other part is, I think, if you look at the 1000s of years, so humanity, right? Organizational Behavior, anytime a number two gets too close to a number one, it doesn't matter how good of friends they War, that conflict of interest, right? The enormous benefit of being number one, right? You start to fear number two, it just doesn't matter what number to say number one knows and number two gets too close to number one could overtake number one, just enormous value being number one being taken away is painful, uncomfortable. And then from selfish reasons clearly bad and you want to stop the rise of number two, it doesn't matter. Number two is a good person, bad person have good intent, bad intent is the value being number one. So how you will knock down someone who's number two, whether they are intending to be an adversary or not. And so with that, I think my prognosis is a combination inertia. And just the fact that being number one is Oh, good, the benefit of that being the one who dictates terms and standards. Yeah, us, us, I think it's unlikely to change course from word steering.

Andrew Stotz 41:01
And where it gets complicated is if you look at the developed, developing world, the emerging world, the Global South, majority of people do not want to see this happen. And I think, you know, if we look at the vote at the UN for condemning Russia's invasion of Ukraine, we can see that almost every country voted to condemn it. But when there came a vote to kick Russia out of the Human Rights Council, I can't remember which one it was within the, within the UN, basically, you could see that there was a very different story, that majority of people and I remember writing about this showing that the majority of people that are represented by their governments are not in favor of what's happening. It now, you know, it brings in another factor. And it's kind of funny, because in America, they always talk about diversity and inclusion and all of that stuff. But the minute he comes to an adversary, you know, it's like, yeah, it's like, just want to go after them. And I'm just wondering, how does the Middle East and the global south factor into this? And can that either help us prevent a showdown? Or does that exacerbate a showdown?

Jason Hsu 42:21
I don't know. So I was just in the Middle East about a month ago. And the reason for heading out there was, you know, we're looking for people who are interested in learning about China investing in China, because we have, you know, a really successful China product. And, you know, the reception in Middle East is very different. And as I speak more to them understand, first of all, they don't start with the kind of us bias. So if you look at the Middle East, reporting the Algis era, so reporting on China is a completely different, versus the US reporting by the same facts are interpreted differently. And they're willing to gather kind of more comprehensive facts to tell more balanced story, right. So it's not that they're pro China, anti China, but just, they're probably more comprehensive in terms of being neutral and exposing people to data and open it. So you don't have this natural negative headwind. And you're also experiencing that Middle East is sizing up the opportunity, right. You know, if China being such a big economy is willing to extend out good trade deals to win more friends and Middle East is very open to here. And the Middle East knows that it's in a very enviable position right now, you know, being a major energy producer with Russia offline globally. It's really reevaluating its global partnerships. And now I think with Middle East supporting, using the Chinese yuan or the renminbi to purchase Middle Eastern oil, we're really signaling to the USA look, you know, the dollar is not the only game in town, US policy isn't going to be the only policy consideration in this part of the region. And the Middle East is happy to build partnerships with China, they can come and extract oil and Bogota, and build infrastructure, just given China's ability today to build infrastructure. So I think people are now realizing that number two is very close to number one in terms of the benefits and the deals that they offer. And I think most people recognize that you get a much better deal when they're competitors in marketplace, offering services and friendship than when there's only one clear leader who gets to charge monopoly pricing. So I think you are seeing the global South, you're seeing the Middle East, recognizing that I mean, even India, right, India has been a frenemy of China, right? We in the end that a fan of China, even India say, hey, how many issues were not aligned with the West? You know, we're not going to, you know, you know, align with the West in sanctioning. And then blockchain China and like we're happy to use the renminbi to trade commodities. So you're seeing in the out of sheer self interest understanding that yeah, it's a good deal when number two is rising and challenging, number one?

Andrew Stotz 45:17
And does that, can that help us avert a conflict? Or does that just cause America to squeeze harder and say, Well, we're gonna cramp down on your banking system, your access to US dollars, or I think about MSCI as an example, where they were bringing China a shares into the MSCI very slowly over time, and, you know, or is it going to be a case where all of a sudden fund managers, you know, can't invest in Asia or not, you know, the index doesn't have China in it anymore, or something like that? Definitely, the use of the financial system as a weapon has been going on really aggressively since after 2008, I think during Obama times is when FATCA and other other tools that they started using really cramped down and I'm just curious, there's this the global south as a, as an example, like India or Middle East? Do they have enough? Is there enough there that could prevent a showdown? Or does it accelerate a showdown?

Jason Hsu 46:22
Hard to say right now, I think it's really hard to say right now. I think if you balk when it comes to the global South, the Middle East, to the rally in support of China, and starting to cause Europe to go, Hey, look, you know, that is an option, right? Maybe the US was start to say, Okay, if it's not an obvious when to you know, it's like in high school, right? If you can't tell everyone ignored a new kid. And a lot of people willing to extend out all the brands and make friends. You might reach strategize and say, hey, look, maybe maybe I'll go over and be the first one to be his best friend instead of, you know, kicking him down. So maybe in bulk, that is willing to stand up and say, Hey, we're happy to, to back at number two, to not take sides. That would change number one strategy, God love to see that. But the too early to say?

Andrew Stotz 47:33
Well, it's been great talking about all these things and learning so much, but now it's time to share your worst investment ever. And since no one goes into their worst investment thing it will be tell us a bit about the circumstances leading up to it then tell us your story. Well,

Jason Hsu 47:48
this is about two years ago, so relatively fresh, right? Because I've been in this industry for 20 plus years, but two years ago. I hope many of your listeners are aware of the stock called GameStop. GME is the ticker, right? Yeah. I mean, GameStop is this sleepy, almost dead, brick and mortar retail store that sells, like video games, right? Like not not online streaming video games, we're talking about video games that come in a DVD ROM that you put into your laptop to play. It sells like, you know, cartridges for your Nintendo. It is a dying business. And the stock price shows it right. I mean, the stock price is trading a couple bucks. And then a forum internet forum Reddit started hyping up the stock and just convincing everyone you know, this is a company it's shorted by hedge fund because all the hedge funds realized this company is going to declare bankruptcy because it's got a lot of debt and it's going to be so that's, that's, you know, do a short squeezes and screw the hedge fund and it started off as a joke. But then, you know, this army of Robin hood.com traders piled on and the share price I think got as high as 200 or $300. And it literally destroyed if the hedge funds you know, the people who you know, I think, you know, there was a very well known tiger cub protege whose heads went almost went under and have to be bailed out because he was short against me. Now, when I first of all caught wind of this, I just thought oh, this is a fascinating case study. You know, I'm going to do a case study and I can you know, use this to teach my MBA class about how markets can become inefficient right and how these prices clearly violates any rationality after completing that go wow, you know and the price right now like it's it kind of pulled back and the price has fallen to you know, gradually better back down. And by that time most people recognize that was just a crazy short squeeze and now things going back. So I think the stock is gradually back to, you know, 30 $40 So still expensive, right? Okay, you know, but goes back to normal or it could fall in another 70 80%. So I decided to make a bet on that. This is when the second wave of the main stock rally on GME happened and the stock for about a two three day run went from $40 shot through 100. On its way up to 200. Plus, before you know it again crater back down and again today GME is probably in the teens maybe $20 A share that that investment I made last a lot of money.

Andrew Stotz 50:59
And you were going long or short.

Jason Hsu 51:02
I was going short. Okay.

Andrew Stotz 51:05
And how did you decide to eventually close the position? What was it that gotten you to say, Okay, that's enough.

Jason Hsu 51:13
Pay pain. No pain of losing a lot of money. So initially, I was saying, okay, the market rally, you know, there's some craziness, I'm going to double down on my position because this is clearly irrational. And that causes even more pain, right? And then yeah, at some point, the pain was unbearable. Even if I knew, if I stay, if I am able to stay the course that eventually the bubble will burst and it'll go back down, and I'll be okay. But just, you know, the short term pain. And then that is something that unless you experienced that, if you're just doing some kind of academic research in a laboratory looking at data, you don't quite feel it that way. It literally requires looking at your brokerage account and seeing the value, you know, cratering to understand what it means the pain of looking at your investment,

Andrew Stotz 52:07
and I assume that we're talking about a personal investment personal related to your fun. Yep. And for some people who know you as a very quantitatively driven, you know, data driven guy, they may ask why did you do it?

Jason Hsu 52:21
Yeah, I mean, you know, I've shared that story with, with some of my, my academic colleagues at UCLA, and they say, clearly, you know, markets efficient, right? It doesn't matter how much research you do how much you believe, you know, GME as a company that loses lots of money and is about to go bankrupt, right? It doesn't matter what research you do. If the market trades at 200. It's worth 200. Right? Like, you should just remember market efficiency and make big bets. And then I kind of thought about it. And what I realized is no, no, it's not is that the market efficiency part that I got wrong? You know, clearly that was the case where markets inefficient? what I got wrong is the probably I think a wiser saying is the market can be crazy for longer than you have the conviction to stay invested. And that is the one thing that I think I want to share it with Andrew, your audience, you might be right, you might really be smarter than the market on one stock, you know, over a long horizon. But in the short run, the market can really stay crazy. Stay stupid for longer than you have the money to stay on. And if you forget that, right, the market will remind you in as painful of a way as possible.

Andrew Stotz 53:41
Yeah, I guess what I would take away from that is just the fact that the market can wear you down. And you can you know, it can definitely last longer. And it doesn't mean that you're wrong. It just means that you are wrong timing. It's part of the reason why stop losses I like because sometimes I tell clients that basically because what sometimes happens is I get stopped out of a stock and then a couple of months later I go back into it and they say well, why are you going into something you just got stopped out of I said, it couldn't be a good investment, you know, could be a good stock, it's just that I went in the wrong time. And so the stop loss helped me in that case, but definitely the market can grind you down. So let me ask you based upon what you learn from this story and what you continue to learn what one action would you recommend our listeners take to avoid suffering the same fate?

Jason Hsu 54:37
Well, I would say risk management be it stop loss, be it like position constraint like doesn't matter how convince how sure you are like no matter if you're the CEO of the company, doing insider trading on your own company, size it so that if it if you lose the entire position or not. going to have to commit suicide because the pain is so intolerable. So you know, either stop loss, so you can't lose too much heart position constraint. And when you have heart position constraint, you will naturally be quite diversified. And of course, be diversified, you know, don't research one stock and bet big on it, right? Have lots of research and lots of uncorrelated possibilities. So that, you know, if you're only average, more intelligent in the market, then on average, more of your bets will pay off and you're going to do fine. If you're on average mortality, but you only bet on one thing, sometimes you can get really unlucky.

Andrew Stotz 55:42
So what's a resource of yours that you'd recommend for people to go to to learn more about what you're doing? Or maybe your research or, you know, things that you've written? What would be the best place for them to go?

Jason Hsu 55:56
Well, definitely look me up on LinkedIn. I know there are many wonderful social media platform, but LinkedIn is the one I'm on I put in the commentaries, random musings, links to my for follow link, research papers that I have done, you can find that there. And you can always text message me. So that's a great place to attack with me.

Andrew Stotz 56:20
And last question, what's your number one goal for the next 12 months?

Jason Hsu 56:25
You know, for the next 12 month, I think is to keep dry gunpowder, because there's going to be some turbulence, but I don't think over the next 12 months are going to be very clear trends. But I do expect we're in the bonding process for global equities. So if you can keep a lot of dry gunpowder. You know, you don't have to tie the absolute bottom, but do participate in the next global bull market cycle. And I think you're gonna do really, really well. So that's, you know, my own goal and I hope that that's good advice for others to follow suit as well.

Andrew Stotz 57:03
Fantastic. Well, listeners, there you have it another story of loans to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your life. As we conclude, Jason, I want to thank you again for joining our mission and on behalf of a Stotz Academy I hereby award you alumni status for turning your best your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Jason Hsu 57:37
I would say always ask yourself before you make any trade, and my smarter than the person who's selling me that share of stock.

Andrew Stotz 57:47
And that is a great question to ask. And that's a wrap on another great story to help us great grow and protect our wealth fellow risk takers, let's celebrate that today. We added one more person to our mission to help 1 million people reduce risk in their lives. This is your words podcast shows Andrew Stotz saying I'll see you on the upside.