Invest Like The Best
Episode 73 The Three Body Portfolio
Invest Like The Best

Episode 73: The Three Body Portfolio

The Three Body Portfolio

Dr. Ben Hunt is the Co-founder and Partner at Second Foundation Partners and author of the Epsilon Theory website. We cover his post on the three-body problem, why growth has been beating value, and his favorite lessons from the farm.

This episode is brought to you by:

The CFA Institute. The CFA Institute is the global association of investment professionals, whose mission is to lead the investment profession by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world.

[00:01:54] – Applying the three-body problem to investing

[00:07:24] – Fundamental view of investing, Profound Agnosticism

[00:08:24] – Why has value done so poorly relative to growth in this framework

[00:11:01] – Ben’s thoughts on why value has been underperforming for so long

[00:13:52] – Investors should be able to adapt

[00:17:49] – Thoughts on the risk parity approach

[00:23:23] – Ben’s strategy for working with several teams

[00:26:48] – What’s the best way to gain an edge, top-down factors vs company/bond individual analysis

[00:28:29] – How do you measure risk amid the large amount of uncertainty that exists in markets

[00:32:40] – How does Ben personally think about investing

[00:34:41] – Ben’s farm and the investing lessons learned by some of the animals

[00:39:55] – How bees can plan out their entire work structure by the angle of the sun

[00:42:58] – Defining basis risk

[00:44:59] – Personal risk vs portfolio risk

[00:49:30] – The concept of fingernail clean and our perception of what eggs are

[00:53:57] – How ETFs are like mass-produced eggs

[00:54:56] – Exploring the idea of quality vs scaling

[00:58:39] – What is the current challenge/puzzle that Ben is focused on right now

[01:01:59] – What is Ben looking for when looking into game theory and applying it to the words that are published and spoken about investing

[01:03:57] – The most memorable day on Ben’s farm

[01:05:04] – Kindest thing anyone has done for Ben

The Three Body Portfolio

Intro

Patrick
My guest this week is Dr. Ben Hunt, the Chief Investment Strategist at Salient and the author of the extremely popular website, The Epsilon Theory. I've always enjoyed Ben's writing style, particularly his use of farm and animal-based analogies to describe market phenomenon. In this conversation, we discuss his recent post, The Three-Body Problem, why growth has been beating value, and why a strategy that he calls profound agnosticism, a sort of take on risk parity, may be the most appropriate investment strategy in what he views as a very uncertain world. Please enjoy our conversation.

Views on Investing

Ben
It's an old problem in physics, and it refers to Henri Poincaré who was one of the geniuses of mathematics of the last millennium. It was the 1800s, and what he was trying to figure out is this ... Well, back up a second. What's he's interested in ... This is going to be your connection to bees and, actually, I think, to humans and investing and to your original question of what's your fundamental idea about investing. He was wrestling with this question of algorithms, which is a formula, which is a process that you can apply over and over again, where you put in your values and you turn the crank of the algorithm and it gives you an answer. What I will tell you is that whether it's human beings, the way we construct our societies and our markets, whether it's bees and the way they construct their hives and the way that they search for honey or search for pollen and make nectar and make honey, they're all dominated by these algorithms, which are just our simple formulas for making sense of the world. In my experience, that whether you're a value investor or a growth investor or a momentum guy or a quant or whatever you are, in the back of your head, you've got a collection of algorithms for how you make sense of the investing world.

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