Highlights from the Asness Interview
By David Henderson
Tyler Cowen has posted the video and transcript of his interview with famous investor Cliff Asness. Here are some highlights from the transcript, with my occasional comments.
On future returns:
Asness: So you invest half your money in stocks, half your money in bonds. Historically, you’ve made about five percent over inflation. We think it’s priced now, at this level, to make about 2.5 percent over inflation.
Of all the things he said, this is most relevant to me as an investor.
On high-frequency traders:
I think the world has gotten more just and fair. I’m going to say something potentially controversial. Something that is often attacked, the high frequency trading, has made the world more just and fair, particularly for small investors.
High frequency traders have – I watched the Republican debates last night, so I know to change the topic to something I’m comfortable with. They do a lot of different things, but the core trading strategy is just to do the other side of whatever you want to do.
So, if you want to trade, sell X, they’ll buy it from you. They charge a little thing called the bid‑ask spread. They will buy it from you for a little less than they’ll sell it to you for. It’s very competitive. They fight with each other to do your trade, so they can’t just charge any bid‑ask spread they want.
They get attacked because they charge a bid‑ask spread, and when you ask them to do a lot, they start moving the prices, because they’re getting scared you might know something they don’t know.
But we’ve always had to trade with someone else. We’ve always needed market makers out there. It used to be much more expensive. Worse bid‑ask spreads, worse execution, particularly for the small person.
There is some controversy with high frequency. I mean small investors, not literally small people. You know that, right?
For very large investors, you’re trading very large amounts of money. I believe high frequency has made our trading costs cheaper, but there’s at least an argument for the other side. Some will say, market impact. The price moving on you when you try to execute and buy or sell a lot of a stock is bigger now. I don’t think so, but that’s a fair argument.
On Ayn Rand:
COWEN: What’s her most underappreciated side or aspect or angle?
ASNESS: Again, I’m going to try to flip it around. I don’t think she was as anti-helping people as she sometimes comes off. If you read her talk about it she certainly – I disagree with her on this, by the way – she didn’t consider charity a primary virtue. But she didn’t have a problem with it whatsoever. She considered the individual sovereign and “if that’s important to you, do it.”
I think it’s a larger virtue. Benevolence, charity is one of the things in her world – and my favorite thing, which you didn’t ask about her, is “you own your own life.” It’s one line. I’m in love with that.
But the idea of a virtue being the desire to help other people – not someone forcing you to, which she was dead set against, but wanting to help other people – I disagree with her on. But I think people come off and think that she’s snarlingly against it. I don’t think she was for it enough, but I think she was rather passive and said it.
If you care about it, she talked about examples – giving up your own life to save someone else. If you value that person more than yourself, it’s rational. Do it. So I don’t think she was quite as nasty about that. Nastier than I think she should have been, but not quite as nasty.
And she could have used an editor. I admit that.
ASNESS: Come on. Come on. That speech – oh my Lord.
I agree strongly. I think benevolence is a virtue and that someone who is not benevolent has something missing. As Asness says, Ayn Rand was more benevolent than people gave her credit for, but she taught people not to regard benevolence as an important virtue. And, of course, that speech, oh my Lord.