In this episode of The Acquirer’s Podcast Tobias chats with Michael Green. He is a Partner and Chief Strategist at logicafunds. Michael is a regular guest on Real Vision and his proprietary research into the shift from actively managed portfolios and investment funds to systematic passive investment strategies has been presented to the Federal Reserve, the BIS, the IMF and numerous other industry groups and associations. During the interview Michael provided some great insights into:
- Passive Risks To The Market
- Shorting The XIV
- When Will Value Investing Recover
- What Makes Chuck Royce Such A Phenomenal Investor
- This Bull Market Is Different From Any Other
- Warren Buffett Buying Index Funds
- Baby Boomers And The Impact Of Mutual Fund Redemptions
- What Caused The Recent Surge In Tesla
References in this episode:
Michael Green Slideshow – MWG Acquirers Multiple Feb 2020
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Full Transcript
Tobias Carlisle:
When you’re ready, sir.
Michael Green:
I’m ready.
Tobias Carlisle:
Hi, I’m Tobias Carlisle. This is the Acquirers podcast. My special guest today is Michael Green of Logica. Michael’s got a fascinating thesis on how passive investing is going to cause the market to melt up and then crash. We’ll be talking to him right after this.
Speaker 3:
Tobias Carlisle is the founder and principal of Acquirers Funds. For regulatory reasons, we will not discuss any of the Acquirers Funds on this podcast. All opinions expressed by podcast participants are solely their own and do not reflect the opinions of Acquirers Funds or affiliates. For more information, visit acquirersfunds.com.
Tobias Carlisle:
Hi, Michael. How are you?
Michael Green:
I’m doing well, Tobias. How about yourself?
Tobias Carlisle:
I’m very well, thank you. Just give us a brief background, your background in brief, if you would please.
Michael Green:
A brief background, I’ve been involved with markets now for embarrassingly closing in on 30 years. Graduated from the University of Pennsylvania, The Wharton School of Business as an undergrad, flirted with the idea of getting a PhD.
Michael Green:
Ultimately decided that was terrible idea. Went into management consulting for a firm called Bain & Company and then left with a couple of senior guys from Bain to become a principal at a small startup that ultimately grew into a large consulting firm called the Parthenon Group and was just recently acquired by Ernst and Young, developed expertise in valuation for corporate business units and as part of my consulting.
Michael Green:
In the early 1990s, there was far less familiarity with the tools of Excel and there’s far less diffusion of the capabilities in terms of financial modeling into the corporate sector. Myself and a group of guys build a company with a corporate valuation tool that was designed for corporate finance departments.
Michael Green:
That actually caught the attention of Mitch Julis of Canyon Partners. He asked us if we could link it to the public equity databases. That, in turn, led to an additional business unit going after the asset manager world. I spearheaded that. That ultimately led to the sale of that business in 1999, which was when I transitioned to the buy side, chose to go to a small long-only shop up in Boston that was focused on small-cap value. Because of my focus in valuation, I had done kind of a survey of the world, recognized that there had been this huge valuation dispersion that had occurred between growth and value similar to the conversations we’re having today.
Michael Green:
The difference is back then, the value sector had become absolutely cheap. We were looking at homebuilders trading at less than half of book value. We were looking at banks, regional banks all over the United States. They were trading well below book value, auto parts, companies trading at three times earnings, et cetera. My attraction was to the value side of the equation, took advantage of that, had a wonderful experience from 2000 to 2003 with that firm.
Michael Green:
Then, got called down to New York to manage mutual funds for a firm called Royston & Associates, which was the largest small-cap specialist, second only to Fidelity in size for actively managed small-cap funds, went through a period of intense growth there. We went from 19 billion in assets to about $55 billion in assets, an incredible learning experience. I still think that a Chuck Royce is probably the single greatest individual stock picker I’ve ever encountered.
Tobias Carlisle:
Really? I have to come back to that.
Michael Green:
Yeah, he’s astonishingly talented crew, really, really amazing crew there. Then, Mitch Julis and Josh Friedman at Canyon Partners came back to me and they had repeatedly tried to get me to join them in Los Angeles. They finally, in 2006, came back and said, “Is it us or is it LA?” As a San Francisco native, it’s impossible to enjoy spending significant quantities of time down in Los Angeles. I know you can’t imagine that.
Tobias Carlisle:
I’ve lived in both.
Michael Green:
You’ve lived in both. Well, then you know Northern California is much better, but it’s a little bit less of a beach environment but also not quite as hot. I hated Los Angeles. My wife doesn’t like to drive, et cetera. I told Mitch and Josh, “Well, it’s LA.” He said, “That’s great because we want you to open the New York office.”
Michael Green:
I joined Canyon Partners in March of 2006. Stayed through the end of the year in 2013 and then was approached by the CIO at Soros at the time, a guy by the name of Scott Bessent who asked me if I would be interested in joining Soros. The answer to that was no, and he then said, “Well, you’ve been an entrepreneur in the past. Would you like to run your own firm,” and seated me with a firm that was called Ice Farm Capital.
Michael Green:
Unfortunately, we had a number of challenges at Ice Farm Capitol, in particular, we had a lawsuit that was maliciously filed against us asserting that I had stolen all of my investment ideas and that I was engaged in outright fraud. Ended up winning the lawsuit, but lost the war, won the battle, lost the war. It’s impossible to raise capital as an asset manager if somebody has a, particularly as a startup asset manager, if there’s a lawsuit that’s been filed against you.
Michael Green:
Then, unfortunately, the CIO had Soros left right after we’d won the lawsuit. Soros fired all their external managers that Scott had brought in. That led to a period of transition during which I did a lot of this research and, and built a lot of this analysis. I was fortunate that Peter Thiel, who I’d met when I was launching Ice Farm, gave me the opportunity to come in and manage a piece of his internal capital. That’s what I did until November just last year when I left to go join Logica and launch the Logica Absolute Return Fund.
Tobias Carlisle:
That’s another Santa Monica-based firm. You could easily have transitioned to Los Angeles at that time.
Michael Green:
My life would’ve been much better from a commute standpoint if I had just accepted the idea of Los Angeles, but I continue to fight it to this day.
Tobias Carlisle:
Honestly, the flight from San Francisco to Los Angeles is probably shorter than some of the commutes in Los Angeles. That’s probably not a bad trade off.
Michael Green:
It’s even better for me, actually, because I live in Marin County and so I actually just shoot over to the Oakland Airport. That’s even faster.
Tobias Carlisle:
Yeah, you also have some phenomenal interviews on Real Vision, which I should have pointed out in the intro.
Michael Green:
Yeah, no. I regularly appear on Real Vision both…
Tobias Carlisle:
On both sides.
Michael Green:
… now that I’m out from behind a compliance firewall, I can appear as an interviewer. I had about a three year stretch where I wasn’t able to do that.
Tobias Carlisle:
Interviewee.
Michael Green:
Interviewee, I’m sorry. I appear as an interviewer in part, I love that process because it gives me access to people and it gives me the excuse to have them sit in a focused conversation for an hour like this, that as you know, it very difficult to get. I’m sure this is part of the advantage that you generate from your podcast as well.
Michael Green:
I have conversations with everyone ranging from politicians to other fund managers to political figures and it’s been a phenomenal resource for me and I think it’s probably the finest source of financial information for those who are really actually interested in how the markets work.
Tobias Carlisle:
You’re series with Josh Wolfe, I think you’ve done three, no?
Michael Green:
Three or four, but yeah. I mean, Josh has such an intellect. He’s just an extraordinarily motivated and talented individual who happens to be in the venture capital space. Like me, started down the path of being a scientist and then got sucked into the dynamics of being a an investor. He just chose to do it in probably a more interesting and topical space.
Tobias Carlisle:
I followed Josh since he was at Crain’s New York, 30 under 30 in about 2002. He would’ve been very young because he had the biotech report with Forbes.
Michael Green:
Well, I think that’s just cruel, though. I think Josh is well over 30 inches tall, but it’s possible he’s under 30. I don’t think so though. I think he’s over 30.
Tobias Carlisle:
You said that.
Michael Green:
Oh, come on. Josh knows I’m teasing. He is a great friend and those interviews with Josh are literally what having dinner with Josh and I is like. We just go back and forth talking about various obtuse topics.
Shorting The XIV
Tobias Carlisle:
Yeah, it’s inspirational stuff. I certainly like listening to them. Your background, that’s interesting. Your background is in valuation and in equities, small-cap equities and value but when we met, chatted about six months ago, it was just after the XIV, the VIX, Inverse VIX-ETN had blown up pretty spectacularly and you guys traded that. Can you just talk a little bit about what you saw and how you positioned yourself in that?
Michael Green:
It’s a little bit longer then than that now we’re dating ourselves. The market has been so boring in so many respects that that time has flown but that was actually February of 2018 that the XIV blew up.
Michael Green:
It was probably soon after that that you and I first started talking about it. There’s some limitations when I was working for Peter in terms of the compliance dynamic. XIV is really interesting. There’s been a number of articles that were written about that and the involvement from Peter’s capital. It was one of those interesting experiences, a little bit like a Men in Black where if you want the best story, you go to ZeroHedge or the tabloids as compared to the official news reporting.
Tobias Carlisle:
Truth, yeah.
Michael Green:
For all those that hate on ZeroHedge, I will tell you that that was by far the most accurate reporting. They actually managed to capture an audio recording of me getting into an argument at a conference with the founder of XIV, a guy by the name of Nick Cherney of VelocityShares in which I had presented some of my analysis and suggested that there was extraordinary risk in a product like XIV that it could go to zero on as little as a 4% decline in the S&P, hold for one second. I just have some things popping up. His contention was that they had back tested this, that it would survive the crash of ’87 and of course on February 5th, 2018, it went to zero on a 3.9% decline in the S&P. I’ll take that as a win.
Michael Green:
We were fortunate in realizing how to trade this. There was a companion product or identical product to XIV called SVXY that was offered by ProShares. What was unique about it was that it actually had options struck against this product. When we looked at the options, what we realized was that the pricing or the distribution that was embedded in the pricing of the options modeled effectively a Black-Scholes type distribution.
Michael Green:
Just to explain that very quickly, a Black-Scholes distribution or a log-normal distribution assumes that something similar to the current price is the most likely price adjusting for the pattern of interest rates and dividends that can be paid and that the forward price against which you’re struck can only differ by those amounts. Then, the distribution of outcomes is basically decreasing probability away from that, all right?
Michael Green:
The unique feature about XIV and SVXY was because they were inverse products. They behaved minus 100% effectively to the VIX or more accurately to a product called VXX. As they were going up in price, the underlying was actually declining in price. What that meant was that the point move that was required in the VIX to cause it to double and leading to 100% loss in XIV or SVXY was actually becoming easier and easier to achieve.
Tobias Carlisle:
Smaller and smaller because it was so low.
Michael Green:
As the VIX fell in price, it would only, if it got to nine, for example in 2017, in early 2018, it would only require a nine point increase for it to double and thereby cause the inverse product to go to zero.
Michael Green:
It was a little bit worse than that for XIV, in particular, because they had an 85% force majeure clause. If it declined by 85% in a single day, Credit Suisse, who was the sponsor said, “We’re going to shut it off.” It became actually shockingly easy. It’s very frequent in history to get roughly a six point increase in the VIX, right? That’s how I was actually pulling out a significant fraction of the analysis that said 4%, 4% sort of decline in the S&P could lead to that.
Michael Green:
The second thing that was happening was that these products had become so large that the ability to hedge them in the UX future, which CBOE’s VIX contract, it outstripped the capacity of that market. On any given day, these products alone accounted for about two thirds of the behavior or the activity that was occurring in the UX futures.
Michael Green:
On a spike, like we saw, there was zero capacity for the futures market to absorb this and so in fact, the market makers had begun using the S&P itself to hedge their exposure, presuming that the negative correlation with volatility was going to remain perfectly intact.
Michael Green:
This actually exhibited itself. If you run the behavior of XIV or SVXY or even the UX future is relative to the S&P, the beta became unstable and began to increase. You would see more and more percentage point and point moves in the UX relative to the movements in the S&P 500.
Michael Green:
The beta that the product was launched at and planned for was about four. An expectation that the move in the, in the first UX future would be about 400% of what the move was in the S&P and by the time this product blew up, that beta had risen to 22. The UX futures were moving 22 times as much as the S&P itself. Hence, a 4% decline in the S&P causes an 80% decline in XIV and knocks it out. The options market didn’t price this at all. There were a long dated LEAP puts that were available on SVX . We managed to buy them phenomenally cheaply. I was careful to inform my counterparties after we had our position in, tell them, “Do not hold this risk. I know you want to, but I’d prefer not to see my friends lose their jobs.”
Michael Green:
Lo and behold, on February 5th, the product basically went to zero. We had kind of figured out that the probability of it going to zero over the two-year time horizon that we held the options was about 95%.
Tobias Carlisle:
Wow.
Michael Green:
That was a pretty good trade from that standpoint. We’re limited somewhat in terms of the size that we could achieve. We managed to get decent size, but the options market didn’t price that in any way. One of the ironies of course is that we bought two-year LEAP puts that had over a year left to expiry when the product went to zero. I was too conservative in my construction of the trade.
Tobias Carlisle:
Wow. Yeah, that’s a great trade. That’s fascinating to hear that from the inside. Let’s talk about your Passive thesis. I don’t want to foreshadow it too much, but basically there are these ongoing flows to passive that you said at some point there’s a tipping point and we may have already reached that tipping point, but perhaps it’s better if you explain it.
Passive Risks To The Market
Michael Green:
Yeah, I mean, I think the core of the observation with passive, what we absolutely know about passive is that it doesn’t meet its own definition, right? If you go back and you read Bill Sharpe’s, the Arithmetic of Active Management, which of course passive managers will trot out in a very enthusiastic fashion to say, “See, it’s self-evident why passive outperforms. It’s all a function of the fees.”
Michael Green:
The definition of passive investing is that you hold securities, you hold all the securities. If you transact and this is explicitly stated, if you transact in any way, then you are no longer a passive player, right? You have to, by definition, influence the market if you transact.
Michael Green:
The idea that passive players are passive players is just completely absurd. What they are is active players that have super, super simple rules and a massive regulatory advantage. You have to start with that recognition and the minute you do that, then you recognize that you should be looking for why you aren’t seeing the influence of this as compared to searching for the influence of it.
Tobias Carlisle:
Just to be clear, you’re not saying that passive… The S&P 500 is famously constructed by a committee. It’s not just buying the largest float-adjusted companies. That’s not your argument but you’re saying it’s not passive because they have to trade?
Michael Green:
Correct.
Tobias Carlisle:
Okay.
Michael Green:
I mean, the theory behind passive has its own challenges, which is the idea that the market has to be complete, right? The markets are clearly not complete. As you point out, the construction of the S&P 500 itself is not actually an observation of all of the available securities and all of the available potential investments that are available to the private sector, which is what would be required in terms of the construction of a truly passive index is presumed that it is a subset and that it becomes somewhat self-limiting.
Michael Green:
That has its own problems, which is what most people tend to focus on. I’m actually saying something very different, which is that the actual participants themselves are what’s driving the phenomenon that we’re seeing. They’re just another form of quantitative investor that operates under a tremendous regulatory advantage.
Tobias Carlisle:
What’s the regulatory advantage that they have?
Michael Green:
Well, the simplest one is with the introduction of what are called qualified default investment alternatives in 401(k)’s and to a lesser extent IRA plans and the focus in the DOL fiduciary rule in the United States on the need to provide for companies that are offering 401(k) plans to provide low cost passive index choices. This was accomplished because of lobbying by Vanguard and others.
Michael Green:
With that type of framework, there’s no alternative for many to invest in terms of their biweekly paychecks. The money goes into the market and then automatically is defaulting into these vehicles. That’s just a massive regulatory advantage and it’s driven a phenomenon that is much more demographic in nature than people really understand. Passive penetration in aggregate is closing in on about 40% of the total market cap.
Michael Green:
Of managed assets, it’s now greater than 50% and I just distinguished between those two to be clear that some of the phenomenon, it matters more what assets are traded than the assets that are actually invested in terms of total market gap. That split though, is not uniform across demographics. Millennials are almost 95% passive.
Tobias Carlisle:
Really?
Michael Green:
I mean, it’s just like it’s absolutely insane and boomers are only about 20% passive and that brings, what?
Tobias Carlisle:
Is that because of the markets that they’ve seen? For the last decade, it’s been the best performing asset in the world is probably the S&P 500.
Michael Green:
On a risk-adjusted basis, it’s probably the NASDAQ, but yeah, overall, I would say yes, it’s something like the S&P 500.
Tobias Carlisle:
Boomers have seen different markets where value has worked.
Michael Green:
I think you’re assigning too much thought to it.
Tobias Carlisle:
Okay.
Michael Green:
I actually think it is literally as simple as the vast majority of the investments that millennials have in markets are a function of the withholding that has done in their 401(k) and the increased prevalence of things like employment matching as we’ve entered in an increasingly tight labor market and benefits begin to be offered both because of a tax dynamic that was introduced. I want to say it was in 2005 and then enhanced with the SECURE Act they passed in December of 2019 that makes it very important and much more advantageous for employers to pay a portion of the savings that go into the 401(k). This is the classic 401(k) match.
Michael Green:
We’ve expanded all of those programs. For the vast majority of millennials, their only exposure to the market… We make a lot of hype about things like Robin Hood and stuff, but the actual assets and those are tiny. The vast majority of the money that they’re getting is actually just going into things like Vanguard target-date funds.
Tobias Carlisle:
Right. Okay. Why is it a problem that the flows seem to go to the largest, most liquid companies? Why does that create an issue?
Michael Green:
Well, the issue that is created is, again, because we presume… We could discard the idea that the markets are efficient allocators of capital. If you’re willing to do that, then it’s “not a problem.” But what we’re actually doing is, is we’re sending all the money to vehicles that allocate the capital on the basis of the current market cap or the current float-adjusted market cap.
Michael Green:
When you do that, one, you’re presuming that the market has actually done the work to say that that current level of price is the right price. The second is, is that you’re actually concluding that the price that it transacts at next is the price that it would have transacted at next had you not been involved. That’s kind of one of these weird things. Prices are a little bit like Schrodinger’s cat, they tell you where something was on the last transaction, but they don’t actually tell you what the price is, right? The price could be up, it could be down. We don’t know that until the next transaction occurs. Passive is assuming that they’re not having any influence on that next price but they have to be because they are transacting.
Tobias Carlisle:
But aren’t these companies the ones that are most… By virtue of the fact that they are the largest float-adjusted, the largest float-adjusted companies receive more than their fair share of the flows. Even just putting aside the question of valuation at the moment, because any other measure that we could look at if we looked at equal weight, that’s sort of a proxy for value in the sense that just getting away from market capitalization weighting means that you are getting closer to value or you could look at some sort of price ratio as a question of value. Just putting aside value, the price relative to the fundamentals completely, just in terms of which companies are able to absorb the most amounts of capital, wouldn’t you expect it to be those that have the largest float-adjusted market capitalization?
Michael Green:
Well, that’s part of the challenge, is when you… First of all, you made a couple of assumptions there, right? Equal weight does not actually have to be equated to value. You could have a scenario in which you have [crosstalk 00:22:43].
Tobias Carlisle:
Relative to market cap is all I’m saying. It’s just-
Michael Green:
Yeah, that’s not actually true though, right? Because you could actually have… A good example of this was in China in June of 2015 where you had a couple of large SOEs that traded at low P/Es and many, many companies in the Chinese stock market that traded at very high P/Es but represented very low market cap. The actual equal weighted was far more growth or momentum-oriented than the market cap was, right? That idea equal weight versus market cap weight tends to behave in that fashion, but there’s actually no requirement that it behaves in the fashion that you’re describing.
Michael Green:
The second dynamic that you mentioned is this idea of absorbing capital, right? The only way that the capital gets absorbed is through a transaction in which somebody is willing to sell their shares in exchange for cash. If I want to buy shares, I have to deploy my cash and find somebody who’s willing to sell to me.
Michael Green:
One of the challenges that it gets created as passive becomes a larger and larger share is because there is no discretion. There is no consideration of should the incremental dollar go in in the exact same fashion, right? That passive player has no instruction to sell. You exhibit increased inelasticity in terms of each incremental dollar that goes in.
Michael Green:
Imagine a scenario in which 100% of the owners of a company were passive and you tried to buy a share. There is no price at which they would be willing to sell to you unless they received an instruction from their end investors saying to sell shares to you. Prices could theoretically become infinite on that type of dynamic. Eventually, you would expect somebody to respond by saying, “All right, I will sell an additional share to you.”
Michael Green:
Traditionally, that’s been accomplished by price sensitive or return sensitive discretionary managers who say, “Okay, this price is unwarranted by the fundamentals. Therefore, I’m willing to sell some of these shares to this person who’s expressing, in my view, an irrational demand for these shares.” If that demand is so strong and it gets absolutely extreme, people can synthetically create shares by shorting but that is incredibly dangerous to do, an environment in which stocks are exhibiting this reduced elasticity. They have the potential, as we just saw with Tesla to explode to the top side, turning those who have synthetically manufactured shares, which is what a short seller is. Turning them into forced buyers and increasing the demand for the shares at exactly the wrong time.
What Caused The Recent Surge In Tesla?
Tobias Carlisle:
Is that what you interpret the price action in Tesla to be?
Michael Green:
The way I interpret the price action in Tesla is, is that there were two large discretionary players, T. Rowe Price and Fidelity that were selling shares on a somewhat continuous basis over the period of 2018 to 2019.
Michael Green:
Underneath that, you had continuous buying that was coming from the passive players, BlackRock, Vanguard, et cetera, and then you had a whole bunch of players who exhibit high inelasticity in their price. Cathy Wood at ARK Investment, for example, who responds to the dramatic increase in price, not by saying, “Hey, I was right,” and taking money off the table…
Tobias Carlisle:
By raising the price target.
Michael Green:
… but by raising her price target, right? All she’s communicating to you as effectively, she has a perfectly inelastic response function. The higher it goes in price, the more she’s going to tell you what’s validating her price targets, which now need to be increased because the market clearly can’t incorporate it.
Michael Green:
That type of dynamic is largely what happened to Tesla. Once you’d exhausted the discretionary selling from Fidelity and T. Rowe, you then had a continuous buying that was happening under the surface from BlackRock and Vanguard and a few other players that changed the demand function and prices began to explode for the shorts causing the shorts to be forced to cover.
Tobias Carlisle:
When you say they’re synthetically creating a share, are you saying does that require naked shorting because in most instances you need to borrow the short before you can sell it? How is that creating?
Michael Green:
Well, when you’re borrowing it, you’re not actually getting somebody to sell, right? You’ve entered into a forward contract in which you’re going to return those shares at a point in time. You are absolutely synthetically increasing the shares that are available.
Michael Green:
Now, that is another area where passive has dramatically influenced the market because the way that a short seller would have traditionally received a signal that shares were in short supply is through an increase in the cost of loaning, her cost of borrowing those shares, the security lending dynamics.
Michael Green:
Security lending dynamics in turn are influenced by passive because the largest player is Vanguard and BlackRock have actually become dramatically aggressive share lenders, right? The way they pay for a zero cost or a three-basis point ETF or mutual fund is by lending those shares out and that’s one of the advantages that ETFs have is, is that they can actually specifically lend out those shares and take on leverage up to about 30%.
Michael Green:
They don’t have anywhere near that type of leverage. I’m not trying to scare people from that dynamic, but when you have a single large lender of shares, almost nothing goes special anymore, because so many shares are available from BlackRock or Vanguard who are not trying to optimize the lending rates like a Goldman Sachs or Morgan Stanley used to do in their prime brokerage units that the cost of lending has collapsed.
Michael Green:
You see this. We read the 10K on BlackRock, they’ll tell you that the returns associated with security lending have fallen dramatically. This has led to under-performance in terms of their fundamentals and now you’re seeing them try to change that through the introduction of things like ESG, right? They’re trying to create a reason why they can increase the cost of their funds. It’s a backing off of the ETF price war.
Tobias Carlisle:
The price section that you’d expect to see with these ongoing passive flows is just a gradual melt up. Is that fair to say?
Michael Green:
Well, it’s an exponential melt up, right? Because as fewer and fewer shares are held by those with discretionary capability to either lend them out or to sell them in response to a higher price as there’s less and less discretionary shares available, basically prices need to move in a more aggressive fashion. That’s what I’m referring to. The economic term is inelasticity, right? There’s no longer a substantive increase in supply on an increase in price.
Michael Green:
Perversely, actually, each incremental dollar that goes into the market tries to buy more of something that’s actually risen in price because of the market cap weighted phenomenon, which is part of the reason you have this dramatic rise in the momentum factor, which captures that dynamic versus the value factor, which tries to fade that dynamic.
Tobias Carlisle:
At some point, you say that this unwinds and you’ve modeled that?
Michael Green:
The quick answer is yes, it unwinds, right? The way that it unwinds is challenging to determine in part because of that demographic feature, right? We have such incredible passive gain that’s simply occurring because of the aging of the population, right? The millennials are 95%. There’s almost nothing that’s going to get them below that, I mean, or at least not substantively below that.
Michael Green:
The boomers are rolling off the stage at 20%. They’re selling their shares to the extent that they’re selling their shares and reinvesting them in the market. If you’re taking it from a 401(k) or an IRA, which is a tax advantage vehicle that is tax deferred, when you roll it back into the market, you want to put it into a tax advantage, a tax advantage vehicle in a taxable component, which is typically an ETF. ETFs are much more tax efficient than mutual funds are, right? This is natural process where the market is just firing the active managers simply because that’s what the old people own and the money that is then reinvested is disproportionately being reinvested into passive while as all new money is coming into passive as well, all right.
Michael Green:
It’s very difficult to see where this reverses itself. Where it unquestionably reverses itself is in two fronts. One, valuations rise high enough where the value of the securities rise high enough that the dynamics of how capital goes into the market versus how capital comes out of the market become important. Almost all institutions 401(k)s, IRAs are forced to take a percentage withdrawal, right?
Michael Green:
That scales up with security prices and the value of securities. Money that’s going in only scales with income. As the price of the market or the value of the market rises relative to national income, this is the classic kind of market cap versus national income that Warren Buffet and others have referred to, the ability for inflows to match the outflows becomes increasingly constrained. At some point, the outflows will overwhelm the inflows.
Baby Boomers And The Impact Of Mutual Fund Redemptions
Michael Green:
The second way it happens is that there is a structural increase in outflows relative to inflows and I think you’re seeing a component of that with just the natural growth of the baby boom cohort and their need to start to take funds out of their retirement accounts and put it into their bellies
Tobias Carlisle:
My impression is that the baby boomers hold vastly more assets than any other cohort beneath them, including any other cohort beneath them when the baby boomers were at the same age. That must be, I guess, that’s right. There are two drivers. There’s the just the sheer fact that the market cap being so… The total market capitalization being so divorced from the underlying GNP or whatever metric you choose. Then there’s-
Michael Green:
Yeah, national income.
Tobias Carlisle:
Then there’s also the… The baby boomers must be getting very close to being selling down now.
Michael Green:
We’ve started to see this. In December 2018, we actually and actually that’s not just isolated to December 2018 but we saw it in ’17, ’18, ’19. We’ll see it again in ’20.
Tobias Carlisle:
That’s the year end selling.
Michael Green:
That’s the year-end stuff. We actually saw this, even last year, where we saw a rally versus the big selloff that we saw in 2018. We saw a significant step up in mutual fund redemptions in the fourth quarter of 2018 and there’s a very clear pattern. I sent you a couple of charts, which we can discuss as we go through this, but I didn’t include this one, but there is a very clear step up that occurred in selling and that’s only going to grow, because the rules, at least as they were originally constructed, is that you had put money into a 401(k) and IRA, you were theoretically contributing it while you were working and experiencing a high tax rate, as you hit retirement age and you begin taking those distributions ostensibly or withdrawing it into a lower tax rate regime because you’re making less money, this is part of the tax advantage component of it. There’s also a value, of course, with the ability to compound on a pretax basis.
Michael Green:
The rule is constructed or that once you turn 70.5, you have to start taking distributions. The baby boomers are the first generation that had 401(k)s and IRAs as their primary mode of retirement vehicles. The generations that came before them had defined benefit plans. Defined contribution became really important following 1972, the adoption of IRAs and then in 1978 the introduction of 401(k)s. The history of those two products is basically a history of the baby boomers.
Michael Green:
The very first baby boomers were born in 1946. The year they turned 70 is, of course, 2016. The year they just turned 70.5 is 2017, the year after that is actually when they had to first start selling. That, in my estimation, is what happened in 2018 is that we saw large supply that occurred in the fourth quarter of 2018.
Tobias Carlisle:
Is there any policy prescription to fix this or more importantly, is there any way to take advantage of the distortion that it creates from a trade perspective?
Michael Green:
I think there’s a couple of things that are interesting. I mean, I have yet to find… There’s elements of market timing, like you could try to change your positioning based on your expectation for flows. Of course, it’s a dynamic system. After 2018, there was an increased recognition that selling strictly at the end of the year had adverse consequences.
Michael Green:
A lot of people stuck around 2018 hoping for a big Santa Claus rally. As that failed to materialize, there is a need to take a tremendous amount of money out. December 2018 had the largest withdrawals in history from the US equity markets, about three and a half times the level of what we saw on the Lehman events.
Michael Green:
I think that’s going to be difficult to replicate, at least in the same sort of dramatic fashion because people would become more aware of the need to take continuous distributions as compared to wait in the market until the end of the year. We’ll see how much damage was created in 2019 by the performance, but I would expect the dynamic system to begin to respond to that. That makes it difficult.
Michael Green:
Eventually, those numbers start to become large enough that they become overwhelming. That’s where the second component has occurred. The SECURE Act that passed in Congress in December 2019 and it was signed by Donald Trump is a fascinating insight in terms of kind of the regulatory dynamics of what has occurred.
Michael Green:
The SECURE Act was initially introduced by a Republican congressman with the idea being that it would be an offset to the Trump tax cuts. We were behaving fiscally, irresponsibly. It was proposed with the initial implementation of the SECURE Act that you had to eliminate the tax deductibility of 401(k)s above a certain level, right?
Michael Green:
Once Vanguard and BlackRock lobbyists got their hands on this legislation, it morphed into an extension of the tax deductibility of 401(k)s and IRAs, pushing the retirement date of withdrawal from 70.5 to 72 and expanding the tax benefits associated with employers offering 401(k) plans to their employees. No good deed goes unpunished in this type of dynamic. We actually have short-term reduced the impact of the aging of the baby boomers, but on a longer term basis, we’ve actually just accelerated those outflows that are going to happen post 2022.
When Will Value Investing Recover
Tobias Carlisle:
In terms of trading, because it creates a distortion. Is there any way to sort of take advantage of it, perhaps from the perspective of a value investor? You don’t… Let’s just… Sorry, answer that question first then I’ll circle back to the next one.
Michael Green:
Well, I think the biggest challenge that you have from a value investor standpoint, is that you are inherently associating yourself with people that are being fired. That’s not a good look. It doesn’t do well in a nightclub. It also doesn’t do well in the markets.
Tobias Carlisle:
You have to expand on that a little bit.
Michael Green:
Yeah. I mean, if the baby boomers are only 20% passive, then they’re 80% active and active managers naturally gravitate to value because one, it sounds more intelligent and two, because what sort of value you were going to add relative to a market cap-weighted or a float-weighted index if you’re basically doing the exact same thing that the underlying market is, right? Everybody wants to sound intelligent, particularly those of us that grew up in, were part of the AV squad and not necessarily part of the football team. All you have is intelligence, right? I have to sound more intelligent in this process. Otherwise, my wife would have no interest in me.
Michael Green:
The problem is, is that those are the people that are getting fired, right? The baby boomers are taking the money out and giving it to ETFs, cap-weighted ETFs. Inherently, you are investing alongside people showing a similar approach and methodology to people who are getting fired. That means, there’s to be increased pressure on your securities relative to those that are being bought by the passive indices.
Tobias Carlisle:
I mean, that’s certainly seems to have been the case that’s evident in the market. I just wonder if there’s some… Aside from the benefits of appearing intelligent, there’s also historically some outperformance to holding value securities, which is probably the reason that attracts me most to it rather than that the simple fact of looking a little bit intelligent. There’s some price at which… In 2000, there’s a bifurcated market. There’s an extremely expensive portion of the market. Then, there’s undervalued stocks. I don’t care so much about the market performance of those stocks if I can see that the underlying fundamentals are improving because that will be recognized at some stage. Why does that not appear now and why is that [crosstalk 00:39:29]?
Michael Green:
I would say two very simple things, right? One, the historical returns associated with the value factor are a very different statement than I think the companies that I’m buying represent value. Mostly-
Tobias Carlisle:
… factor, ignore price.
Michael Green:
The factor is… Forget price to book or any other factor but the really critical insight is, is that when you look at those historical results and those historical dynamics, a huge portion of what you’re actually capturing is portfolio construction techniques. Give me one second. I apologize. Sorry. My dog has insisted on being led out. They are far less tolerant than you are of my ramblings.
Michael Green:
The historic factor that we’re looking at is largely a construction technique. I would argue that it’s very similar to the selling of volatility because the construction of a systematic value strategy is basically saying if something falls in price, i.e. book value is relatively stable so price falls, if something falls in price relative to the inverse, then I am going to buy it. If something rises in price relative to the inverse, then I’m going to sell it. Well, then all I’ve done is I’ve shorted a put and I’ve shorted a call. I should receive compensation for being short those two option-like instruments. That is, by and large, with the “value factor” is.
Michael Green:
There is obviously, the Ben Graham approach of buying really cheap stocks, et cetera, but most of that unfortunately, you have to very heavily adjust it for the risk components in order to get an accurate picture of it. Most of the evidence suggests that it’s the opposite, that there’s just a very few stocks that have lottery-like characteristics that have done extraordinarily well overtime. We’ve seen a lot of this evidence.
Michael Green:
The momentum factor tends to be actually dominant over long periods of time unless you are constructing a portfolio in which you’re inherently short volatility, which gives you an additional return factor. That would be part of my pushback on does value ever need to recover? The answer is, is probably not.
Michael Green:
The second component though, is what actually differs between today and 2000 and what happened in 2000 was because the market construction was actually improper because the indices were market cap weighted in an environment in which there were a number of companies that had low floats, right? Microsoft, Cisco, Dell had relatively low floats, what we used to call high levels of insider ownership. It meant that when the indices were trying to buy in proportion the market cap, they were actually buying twice as many shares of Microsoft as were available, causing Microsoft to dramatically outperform.
Michael Green:
There was no real rebalancing pressure on this dynamic because of the way we used to do rebalancing. Used to give a manager three years and you would never take money away from them if they were outperforming, you’d never take money away from them if they were underperforming and then every three years you’d decide if you’re going to continue with them or you’re going to fire them.
Michael Green:
Portfolios were able to get much more out of balance in that time period. What we saw eventually was as people decided to allocate money to technology funds and other players, money was being stripped from value without any real source of increase. Excuse me. You had absolutely cheap companies with fantastic economic prospects. Homebuilders right before the biggest home-building bubble of all time, we’re trading at less than half of book value, significantly discounted multiples, et cetera.
Michael Green:
Today, that’s just not the case, right? If I look at the value stocks, the multiples are actually quite high. You’re not buying things cheaply. You’re buying them cheap relative to the growth stocks if I look at it on a simple metric, but that’s just another way of saying that, if I have a stock that’s trading at 10 times P/E and another stock that’s trading at 20 times P/E and they both go up 10%, well, the spread was 10 P/E points before. If I go to 22 and 11, now the spread is 11 points. Has the value stock gotten cheaper in that scenario? No. It’s got more expensive.
Tobias Carlisle:
Right. I think that this… have got cheaper though.
Michael Green:
No. If you look at the data, the deciles have not gotten cheaper. The deciles have gotten more expensive.
Tobias Carlisle:
I think we’re talking about different time periods. I think that the cheap decile is probably rich to its long run mean, but it’s definitely fallen over the last 12 to 18 months.
Michael Green:
I can’t speak over the last 12 to 18 months. I have to confess that I don’t have the data sitting in front of me. I know that the cheap decile is expensive relative to its history, as you were alluding to.
Tobias Carlisle:
I wouldn’t say it’s very expensive though. I think it’s probably a little bit rich to its mean, but I can see the point. I just wonder if at some stage that the distortion becomes so great that aren’t you paid as a private equity firm or an activist to sort of go after these companies and whack them until the candy falls out?
Michael Green:
Well, I guess it just depends on what you mean by that. I mean, one, you’re presuming the value ultimately as a driver, but let’s just extend the scenario that we were just talking about. Let’s continue that process. Instead of going up 10%, they all go up 500% with no change in fundamentals. The stock that was at 20 is now trading in a hundred times. The stock that was at 10 is now trading at 50 times. What’s the incentive for the P/E firm?
Tobias Carlisle:
This is assuming that it’s gone up 500%.
Michael Green:
That’s the question, does it go down and when it goes down, is that actually… Then you introduce an entirely different factor, which is what happens if the market corrects? Does George Soros’s reflexivity of a crash in the market reduce the capacity to spend from the household sector and in turn drive an economic recession, which is going to adversely affect that cheaper stock in terms of its fundamentals almost definitely more severely particularly because those companies tend to carry significant quantities of leverage and that leverage has been never been so cheap and in an attempt to keep up with their friends and neighbors, the CEO’s from successful growth companies, many of these companies have dramatically deteriorated their balance sheets.
Tobias Carlisle:
There’s still some very good balance sheets out there particularly, I mean, you don’t have to buy pure value. You can buy a value, quality, some sort of mix of that and get… There are some very healthy cheap companies, good balance sheets, foreign cash flows, buying back stock, they look pretty interesting to me as a plain old value investor.
Michael Green:
It’s possible. I mean, that is certainly, that is an eventual outcome that could occur. Eventually, these names will suffer from a degree of neglect that may make them very attractive. I guess my pushback is who else is going to buy them? All right. Will the P/E companies buy them? Possibly, but they think they would have to get to levels of absolute cheapness that I certainly am not seeing yet.
Tobias Carlisle:
One of the phenomena that I have seen recently, I was lamenting the performance of value on Twitter and you commented underneath something like value you guys need to evolve. There are a lot of value guys who follow me who were discretionary, who follow that Buffet model of looking for high growth in earnings.
Tobias Carlisle:
Those guys have been doing quite well in this market where they’re looking for compound-type growth and trying to buy that future growth at a price that is cheap today relative to where it could get in the future. They’ve been performing fairly well. I think that when I look at the best performing stocks in the market, many of these have been companies that I think that the market is doing a pretty good job of sorting at the moment. The ones that are performing very well tend to be companies that are growing very rapidly with lots of free cash flow doing the right things, Microsoft being one of them, those sorts of companies. You don’t think that that’s evidence that the market at some level perhaps ignoring the ones that are at the darlings of the S&P 500. You don’t think that it’s functioning at that lower level?
Michael Green:
I think that it is functioning somewhat on a relative basis, but I don’t think it’s functioning on an absolute basis. To be clear, the phenomenon that I’m highlighting is an inflationary phenomenon. I use that word carefully where financial assets broadly are being increased in their valuations as a function of this passive dynamic.
Michael Green:
Within the markets themselves, there is an element of a relative sorting that remains efficient because there are actually discretionary managers trading. On the margin, they will sell something. On the margin, they will buy something and that is influencing the relative behavior but the absolute prices at which those are occurring are all being lifted by the passive phenomenon.
Why Is This Bull Market Different From Any Other
Tobias Carlisle:
How do you distinguish a market like this from any other bull market where passive tends to be most calm right before the market blows that people get most relaxed as the market just by virtue of the fact that it’s gone up for so long.
Michael Green:
I think that’s one of the challenges and in the charts that I sent you, I mean, one of the strange phenomenon is that a market that is benefiting from a growth of a strategy like passive that reinforces momentum components and deemphasizes the dynamics of valuation because there is no consideration in a passive allocations your strategy to what is my forward expected return, right? I just put the money in because that’s what I’m supposed to do. I’m supposed to buy every two weeks. I’m not supposed to time the market, et cetera.
Michael Green:
That type of phenomenon has just honestly never existed before. Saying, “How does it compare to prior periods?” I think that’s part of the challenge is that as this phenomenon grows, it doesn’t look so crazily different from what we’ve experienced before, which is just another way of saying that as prices go higher, people tend… The Bitcoin phenomenon, people tend to decide that there’s something really special about what they own and they are less willing to sell it. That’s just another way of saying reduced elasticity, right? An increase in inelasticity means that prices can begin to rise in an exponential fashion.
Michael Green:
The difference this time is that we are seeing, we’re just now, 10 years into this bull market or 11 years, I guess actually, we’re just now beginning to see some of the signs of people saying, “Oh my God, what is actually going on? This feels completely crazy.”
Michael Green:
The economy is very clearly slowing. Profit growth is very clearly slowing across on an aggregate basis. We’re facing extraordinary outcomes like the Corona virus that theoretically is slowing things even more than they had already begun to slow and yet prices seem completely disconnected. I think you’re finally starting to see people start to question that. You saw this phenomenon in 2007 where the argument was valuations are not rich, the market is cheap. Then, we were all shocked to discover could fall a 50%.
Tobias Carlisle:
I mean, Buffet was among the people saying that at the time too.
Michael Green:
Well, I mean if you go back and you look at Buffet’s lauded article in December of 1999 where he basically, I forget the title of the article, but it was effectively a love song to the value investing frameworks of you can’t possibly generate the returns on a look forward basis that we’ve delivered historically. He pointed to things like corporate profits as a percentage of GDP and suggested that that was mean reverting and it’s six and a half percent in 1999, it was near the historical peaks, right? Therefore, it was likely to retreat. Profit growth wasn’t going to be high and then multiples were extremely high and all this other stuff.
Michael Green:
Literally every single part of that forecast was wrong. I mean, every single part of it was wrong, except for the observation that from the period of 2000 through 2003, we experienced the bear market. Corporate profit margins are now double in aggregate. Corporate profits as a percentage of GDP have expanded dramatically. Multiples are even higher. The returns associated with the market from 1999 crazily enough, weren’t anywhere near as bad as anybody would have thought, right?
Michael Green:
What was supposed to be the greatest bull market in history, the greatest bubble in history, far greater than 1929 was eclipsed in a framework that made 1929 to 1949 the last cycle look a million times worse, right? This was nothing.
Tobias Carlisle:
What happens? Does it become possible for a crash in your framework? Does a crash, a near term crash in validate the thesis or do you think that whatever happens, if we have a crash, the two weekly investing keeps on going through the other side or problem doesn’t necessarily go away?
Michael Green:
I think part of the irony is that… This is clearly not the only factor. There have been policy changes where the focus of central banks has shifted towards asset price support. In part, recognition of the fact that if asset prices were to fall, you’d likely see a significant decline in consumption that would show up as a very bad recession and reinforce many of the deflationary characteristics that we’ve had to deal with for the past decade or so.
Michael Green:
Central banks have changed their policy basically post 1998 away from targeting inflation and towards targeting financial asset price support. Very difficult to predict how that will play out but there is a limit and I think there’s reasons why those policies have been successful to this point that are not what the central banks think they are but those are likely to reverse themselves at some point.
Michael Green:
The issue that you have with central bank policy is that the way that they think it affects the markets is through the consumption function in terms of lowering interest rates theoretically pulls forward consumption from future periods what’s called the oiler coefficient. It’s the relationship between consumption and interest rates and effectively by lowering the cost of borrowing, you’re pulling forward consumption.
Michael Green:
Unfortunately, empirically, the data works in the exact opposite direction, which is low interest rates actually retard consumption because people are trying to save money. What it actually does is it increases the price of bonds that expands the collateral that is available to borrow to buy financial assets and securities. You see an increase in the prices of financial assets on that policy and that increase in price of financial assets then contributes to a modest increase in consumption, what’s called the wealth effect.
Michael Green:
The challenge that you have in this type of environment is if central banks cut interest rates, they think they’re stimulating native consumption, they’re actually just stimulating financial assets and a wealth effect but because their model is saying that consumption should be going up, they’re ignoring the wealth effect. This is creating constraints is why we can’t raise interest rates. We’re setting up a situation in which the increase in interest rates reduces the available collateral causes a decline in financial asset prices and then the central banks are forced to go in the opposite direction.
Michael Green:
That, I think, is kind of the core driver of the central bank phenomenon that is very different than the way people think it works. In turn, that stimulated borrowing from the corporate sector because they want to buy back their shares, they want to increase the pay packages for their CEOs who are ultimately benefiting from that in a disproportionate way.
Why Is Warren Buffett Buying Index Funds?
Tobias Carlisle:
Warren Buffett’s 13F has come out recently. It shows him with $24 million in VOO and SPY to S&P 500 ETFs. He’s got 0.01% of the portfolio $24 million each, which is a tiny holding. How do you interpret that?
Michael Green:
My guess is, is that a component of it is just him trying it. That would be my gut reaction is, is that this is probably Todd Combs or somebody else who’s just trying to experiment with can they place this sort of size? I’ll tell you candidly, we tried similar dynamics and institutional portfolios that I’ve been involved with just to experiment on it.
Michael Green:
I had a Twitter exchange with somebody about this. I think it was Eric Balchunas of Bloomberg on this topic of what is Warren Buffett thinking when he’s talking about the index funds? I don’t know whether Warren Buffett has done this analysis and has figured out the index fund dynamic. I genuinely don’t know if he knows more than he is letting on. I’ve been in trading situations with Warren in the past. I will tell you he is really smart. He’s really, really smart, particularly in the way he structures his trades. It’s hard to read anything into a $50 million Buffett auction.
Michael Green:
I think the more frightening aspect for me is that potentially Warren has figured this out and is behaving cynically. I wouldn’t put it past him. I think people tend to think of him as a soft and cuddly grandpa and he definitely is not that. His participation there, I think, should actually be a flag for people that this may not be over.
What Makes Chuck Royce Such A Phenomenal Investor
Tobias Carlisle:
It’s absolutely fascinating. Just because we’re almost running out of time and I want to get to Chuck Royce. Let’s total non-sequitur? Tell me a little bit about why Chuck Royce is such a phenomenal investor.
Michael Green:
Chuck is one of… First of all, Chuck has just an incredible mind and an incredible awareness of the embedded optionality in securities. His philosophy is it related to security selection at Royce was that he focused on small-cap stocks, but he required that they have very low levels of leverage and the reason why he did that, but I don’t think that he, I think he intuitively knew this, but I don’t think he certainly was explicitly modeling it in the same way that I would be forced to do, when he recognizes that they had option-like characteristics, owning a portfolio that has small-cap names and is the greatest potential to exhibit that type of lottery, like winner capability.
Michael Green:
He was very agnostic between value and growth from that standpoint, always looking for that option-like characteristic but his simple rules were that the company couldn’t have enough leverage that would lead to an abrogation or a shortening of that option duration. He was effectively trying to pick infinitely live to option-like assets. He just did it extraordinarily well. I mean, he had seen so many management teams and he’d seen so much in… I met him in 2003 for the first time and he had been running Penn Mutual Fund, which was the core of the Royce Universe since he acquired it for $1 in 1974.
Michael Green:
People forget how bad things got. There’s maybe a little bit of this feeling in the active manager community today, but he was able to buy Penn Mutual Fund for $1 because the owner, it had assets and it had a bit of a track record, but the owner was an incapable of paying director salaries, registration fees, et cetera. He bought it for a dollar and then they proceeded to lose money for a period of time as he paid directors and others but it turned into just an extraordinary vehicle on the back of his talent.
Tobias Carlisle:
My interpretation of Royce, the firms, they seem to have a holding in every single stock that I look at. They’ve got a tiny little holding.
Michael Green:
I think that’s true. I think that is, again, a reflection of Chuck’s philosophy that each of the securities represents option-like characteristics. Typical portfolio at Royce would have somewhere in the neighborhood of 160 to 300 stocks. There would be multiple portfolios. Portfolios would typically be launched. We’d typically launch a new fund at what we thought was the peak of a market, which sounds counterintuitive until you realize that what that actually means is that you’ve launched a vehicle that has an excess of cash in an environment of high valuations.
Michael Green:
As the market selloff, that cash creates actually an outperformance characteristic so that when the next cycle emerges, not only did you have cash to deploy it more attractive valuations, but you benefited from the cash components. I mean, that type of insight, again, I highly doubt that Chuck modeled it, but he just knew it intuitively. That’s part of what I referred to with my respect for Chuck is just like, I think he’s probably the single finest investor I’ve encountered.
Tobias Carlisle:
It’s fascinating. We’re coming up on time. If folks want to get in touch with you or to follow along on your Twitter handle, what’s your handle and how do they get in contact?
Michael Green:
I’m @profplum99 on Twitter. Then, you can reach us through our website at logicafunds, logicafunds.com. I’d be remiss if I didn’t mention my partner, Wayne Himelsein, who was also on Twitter and who I’m embarrassed to say, I don’t know his Twitter handle, but give me two seconds.
Tobias Carlisle:
I’ll put it in the show notes.
Michael Green:
Perfect. Okay.
Tobias Carlisle:
There’s a great interview between Corey and Wayne, The Quant Philosopher. It’s fascinating.
Michael Green:
Yeah, Wayne is very much a philosopher. It’s @waynehimelsein, W-A-Y-N-E Himelsein, H-I-M-E-L-S-E-I-N and he is also a fantastic resource. Our website is logicafunds.com. You can find some of our writings there and as I mentioned early on, I shared some slides with you that your listeners can take a look at. We’re very happy to talk to anyone.
Tobias Carlisle:
Michael Green, thank you very much.
Michael Green:
Thank you, Tobias. I really enjoyed it.
Tobias Carlisle:
Okay.
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