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Data drives nearly every aspect of modern life, from the algorithms suggesting what you should watch tonight to the autonomous vehicles navigating city streets. Yet in the world of finance—where you might expect data to reign supreme—the relationship between information and decision-making is surprisingly complicated (and relatively new).

Professor Mike Gallmeyer pulls back the curtain on this fascinating paradox, revealing why financial markets present unique challenges for data-driven approaches. While Tesla collects millions of data points daily to perfect self-driving technology, investors working with a century of stock market returns have barely over a thousand data points to analyze. This fundamental limitation—what Gallmeyer calls the difference between "big data" and finance's "small data" reality—creates profound implications for how we should think about investment decisions.

The conversation delves into the historical evolution of financial data, from the pre-1960s era when decisions relied heavily on intuition and "soft information," through the development of the CRISP database at the University of Chicago, to today's sophisticated algorithmic trading systems. Gallmeyer explains how market participants continuously adapt to new information sources, creating an ever-evolving landscape where yesterday's winning strategy becomes tomorrow's conventional wisdom. This endogenous change within financial markets makes them fundamentally different from systems where data collection leads to steady, predictable improvement.

For anyone fascinated by markets, data science, or the intersection of human judgment and quantitative analysis, this episode offers valuable perspective on the promises and limitations of data-driven decision making. Whether you're managing your retirement portfolio or simply curious about how markets function, you'll gain insights into why certain problems remain resistant to even our most sophisticated analytical tools—and where human judgment still provides irreplaceable value.

Show Notes:

• Dimson, Marsh, & Staunton, Global Investment Returns Yearbook 2025
• Kim, Muhn, et al., Financial Statement Analysis with Large Language Models (2024)
• New York Fed Staff Nowcast
• Federal Reserve Bank of Atlanta, GDPNow

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Take everything you thought you knew about how markets work and prepare for a fundamental rethinking. When NVIDIA's stock price skyrockets after negative news, or the Federal Reserve successfully manipulates interest rates through bond purchases, classical economic theories struggle to explain what we're witnessing in real time.

Professor Aditya Chaudhry from Ohio State University joins us to explore the revolutionary concept of "demand-based asset pricing" - a framework that's challenging decades of financial orthodoxy. Traditional models suggest that when investors irrationally pile into a stock, deep-pocketed arbitrageurs should quickly step in to correct any mispricing. But what if there simply isn't enough arbitrage capital available to enforce rational pricing, especially at the macro level?

We dive into groundbreaking research showing that shifts in investor demand might impact security prices up to 100 times more than classical theories predict. This "inelastic markets hypothesis" helps explain everything from market booms and busts to why quantitative easing actually works. The implications extend from central bank policy to government debt issuance, potentially reshaping how we interpret market movements.

The conversation bridges complex financial theory with practical examples, making sophisticated concepts accessible without sacrificing depth. Whether you're trying to understand the current bull market, puzzling over Federal Reserve decisions, or simply seeking to make smarter investment choices, this episode provides crucial context for navigating today's financial landscape.

While uncertainty remains a fundamental feature of markets, the one clear takeaway reinforces timeless wisdom: for most individual investors, passive products remain the most reliable strategy rather than attempting to outguess the market's complex demand dynamics.

Show Notes:

Supply and Demand

Gaigax & Koijen, Inelastic Markets Hypothesis (2023)

Chaudhry & Li, Endogenous Elasticities (forthcoming)

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Discover the secrets of disciplined investing and strategic asset allocation with Stephen Parker, head of specialized strategies at JP Morgan Private Bank. In our conversation, we explore the nuances of aligning investments with personal goals, focusing on the importance of understanding individual needs, investment horizons, and risk tolerance. Stephen shares JP Morgan's insights on long-term forecasts for over 200 asset classes, emphasizing the critical role of maintaining discipline and the power of staying invested over time.

Ever struggled with market volatility or wondered how to balance short-term needs with long-term growth? We unpack the concept of bucketing in financial planning, a strategy that segments investments into liquidity, lifestyle, and growth categories to meet various life goals. This approach not only helps navigate market fluctuations but also protects long-term plans from being disrupted by short-term market movements. Learn how strategic asset allocation, rebalancing, and viewing portfolio construction as a series of dimmers and dials can enhance your investment strategy.

Join us as we tackle the complexities of economic forecasting, market timing, and the active versus passive management debate. Stephen sheds light on the importance of seeking contradictory information to improve decision-making and the strategic use of alternative investments. Even seasoned investors will find value in the discussion on the role of recessions in investment decisions and the balance between active management and passive strategies. This episode promises a wealth of knowledge to enhance your understanding of disciplined investing, making it a must-listen for anyone eager to sharpen their financial acumen.

Show Notes:

JPMorgan, 2025 Long Term Capital Market Assumptions
Cembalest, Eye on the Market Outlook 2025
Marks, On Bubble Watch (Jan 7 2025)

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What if you could transform your understanding of the commercial real estate market in one insightful conversation? Join me, Edward Finley, as I engage with John Sweeney from Park Madison Partners, who guides us through the complexities and potential of this dynamic sector. Together, we uncover how commercial real estate is anything but a singular asset class, highlighting its diverse components and the significant role location plays in its valuation. From the ripple effects of corporate giants like Amazon on local economies to understanding commercial real estate as a hedge against inflation, this episode provides a comprehensive view of the market's intricacies.

Our discussion takes a deeper dive into the strategies investors use to navigate the commercial real estate landscape. We categorize investment opportunities into Core, Core Plus, Value-Add, and Opportunistic, demystifying industry jargon like Internal Rate of Return (IRR) and capitalization rates (cap rates) along the way. By examining how major market shifts and macroeconomic factors affect each investment type, we offer listeners the tools to assess risk and return potential in this fluctuating environment. John shares real-world insights into how recent economic conditions, including post-COVID realities and rising interest rates, have reshaped investor strategies and asset pricing.

With an eye on the future, we explore the transformative changes that the commercial real estate market faces today. The evolution of workplace dynamics and the pervasive shift towards high-end office spaces are set against the backdrop of hybrid work models and remote collaboration. As we reflect on the challenges and opportunities these changes present, it becomes clear that active management and strategic foresight are essential. Whether you're a seasoned investor or simply curious about the future of real estate, this episode invites you to consider new perspectives and adapt to a rapidly changing market landscape.

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This episode delves into the complexities of hedge funds and private credit, exploring their distinct roles within investment portfolios. We address the performance challenges of hedge funds over the past two decades and the rising prominence of private credit, considering how both options can coexist as alternative assets in investor strategies. 

• Discussion on misconceptions about hedge funds 
• Overview of various hedge fund strategies and their risks
• Analysis of hedge fund performance in relation to equities and bonds
• Examination of fees associated with hedge fund investments
• Insight on private credit as a growing investment avenue
• Comparison between the roles of hedge funds and private credit
• Understanding the implications of competition on future returns
• Emphasis on the evolving landscape of alternative investments

Show notes:

Malkiel, A Random Walk Down Wall Street
Lowenstein, When Genius Failed:  the Rise and Fall of LTCM

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The headlines today are full of scary references to how corporate lending has become too agressive with phrases like "cov-lite" and "wall of maturities".  What does it all mean?

Discover the fascinating dynamics of corporate credit and loan covenants with Edward Finley as he sits down with the esteemed professor of finance David C. Smith from the University of Virginia. David and his co-authors have studied the evolution of loan covenants and particularly whether there is any cause for concern today.

David unravels the complexities of credit risk and lender behavior, especially in the realm of syndicated loans. Learn how large banks transform these loans into investment opportunities and uncover the crucial differences between bank loans and bonds, from their public versus private nature to how their interest rates are structured.

Explore the nuanced world of corporate loan covenants and the strategic decisions lenders face when borrowers violate these agreements. Instead of immediately declaring defaults, lenders often prefer renegotiation. Delve into the reasons behind this approach, including the costs and complexities of declaring defaults, and see how financial covenants serve as vital performance benchmarks. This episode also highlights the challenges bonds present due to their weaker covenants and dispersed bondholder structure, offering listeners a comprehensive view of the current financial landscape.

In the final segment, trace the evolution of financial covenants and the syndicated loan market. Understand why the shift towards an "originate and distribute" model has influenced covenant stringency and learn about the improvements in covenant quality over time. David also shares invaluable insights on following your passion within the investment world, leaving listeners inspired to pursue what truly excites them. Don't miss the chance to gain unique perspectives from a leading expert in the field.

Show Notes:

Griffin, Nini, & Smith, "Losing Control? The Two-Decade Decline in Loan Covenant Violations" (forthcoming)

Nini, Sufi, & Smith, "Creditor Control Rights, Corporate Governance, and Firm Value" (2012)

Kahle & Stulz, "Is the US public corporation in trouble?" (2017)

Kashyap & Stein, "Monetary Policy When the Central Bank Shapes Financial Market Sentiment" (2022)

Jang, "Are Direct Lenders More Like Banks or Arm's Length Investors" (2024)

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What happens when the traditional safeguards of portfolio diversification unravel? Join me, Edward Finley, with my distinguished guest, Larry Kochard, as we navigate the complexities of a changing financial world where stocks and bonds, once reliable opposites, have lately moved in tandem. We promise you'll walk away with a fresh perspective on the classic 60-40 portfolio and insights into the impact of today's macroeconomic forces. Inflation, interest rates, and the Federal Reserve's moves no longer just affect markets—they reshape investment strategies, pushing investors to rethink their approach to risk and seek alternatives beyond traditional assets.

Larry and I explore the shifting dynamics of equity risk premiums, the allure of credit allocation, and the strategic decisions that come with navigating rising bond yields and expensive U.S. stocks. As portfolio managers adapt to new market conditions, you'll gain a deeper understanding of the opportunities in private equity and private credit, as well as the importance of a flexible bond portfolio during volatile times. We also tackle the evolution of today's corporate giants and the regulatory challenges they face, discussing whether the tech leaders dominating the market can sustain their reign amidst growing scrutiny and the AI investment surge.

Finally, we delve into the ongoing debate of active versus passive strategies, the diminishing small-cap premium, and the contrasting roles of public and private markets in fostering financial discipline and growth. Discover how private equity's alignment of incentives might provide an edge over public markets, especially in an era of fluctuating interest rates and refinancing hurdles. As we wrap up our conversation, Larry and I offer insights into strategic investment approaches that balance short-term challenges with long-term opportunities, helping you navigate the evolving landscape with confidence.

Research links:

• Bessembinder, Which US Stocks Generated the Highest Long-Term Returns

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Join me as we kick off the exciting second season of Not Another Investment Podcast, featuring an in-depth conversation with Jeff Henriksen, the visionary founder of Thorpe Abbotts Capital. This episode offers a wealth of insights into the realm of behavioral investing and market dynamics, particularly within the US small-cap equity landscape. Jeff sheds light on market inefficiencies caused by behavioral mispricings and unravels how he uses those as a tool for seizing opportunities amidst market biases. Gain a fresh perspective on how crowd wisdom can enhance market efficiency and the intricate dance between investor preferences and market errors.

Listeners will be intrigued by our exploration of market extremes and valuation reversals, where we dissect the patterns of systematic behavioral mistakes that create windows for strategic investing. Using Keynes' analogy of newspaper beauty pageants, we unpack how collective biases can cloud intrinsic value assessments, especially under the influence of inflation and fluctuating interest rates. Dive into the concept of the "correction fulcrum" and discover how markets self-correct after overreactions. Our conversation also delves into Mandelbrot's fractal theories, highlighting the potential for arbitrage across market cycles.

The conversation provides a thought-provoking discussion of the interplay between passive investing and active strategies like Jeff's. Understand how passive funds can inadvertently intensify market cycles, presenting challenges for active managers while simultaneously offering strategic openings for those adept at navigating market momentum.

Whether you're a seasoned investor or new to the market, this episode promises to equip you with actionable insights and a deeper understanding of market behavior, enriching your investment journey.

Research links:

• Cochrane, Discount Rates (2011)
• Mandelbrot, The (Mis)behavior of Markets
• Damadoran, Narrative and Numbers: The Value of Stories in Business 
• Soros, The Theory of Reflexivity
• Bhaskar & Suleyman, The Coming Wave: Technology, Power, and Twenty-first Century's Greatest Dilemma
• Bernanke, 21st Century Monetary Policy
• Gabaix & Koijen, In Search of the Origins of Financial Fluctuations:  The Inelastic Markets Hypothesis

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Unlock the secrets of sophisticated investment strategies with seasoned Wall Street investor Edward Finley. Discover how to leverage probabilistic methods like Monte Carlo simulations to evaluate the potential success of your asset allocations. You'll gain a practical understanding of how to visualize potential portfolio outcomes, allowing for smarter, goal-oriented investment decisions.

Dive into the complexities of stress testing and learn how it can complement Monte Carlo simulations to give a comprehensive view of your portfolio's resilience. Edward guides you through real-world scenarios, from the dot-com crash to the post-financial crisis landscape, to illustrate the importance of understanding market dynamics on your investment journey. This discussion places a strong emphasis on personal risk tolerance and the necessity of strategic asset allocation, preparing you to withstand even the most severe economic downturns.

Edward explains how to evaluate the role of active risk in your tactical allocation and its impact on long-term investment goals.  And he delves into the significance of liquidity profiles, providing invaluable insights into achieving financial objectives.

As we wrap up season one, anticipate season two's engaging interviews with market leaders. Thank you for your loyalty, and continue to spread the word about the insights and knowledge shared here!

Episode Notes:  https://1drv.ms/p/s!AqjfuX3WVgp8uwEkTm1rQxc8Qod-

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Have you ever wondered how a seemingly straightforward investment strategy can spiral into unexpected risk over time? Join Edward Finley, a veteran Wall Street investor and occasional professor at the University of Virginia, as he unpacks the complexities of dynamic asset allocation. We challenge the status quo by illustrating how a typical strategic asset allocation, like one with a 75% equity and 25% credit risk, can morph into a much riskier portfolio if left unadjusted, potentially ballooning to 94% equity risk after 30 years. Learn why adaptability and periodic adjustments are crucial for maintaining a consistent risk profile and ensuring long-term investment success.

But that's not all—we also dive deep into the mechanics and psychology of portfolio rebalancing. Discover the merits of counter-cyclical strategies that compel you to sell winners and buy losers, despite the psychological hurdles. We dissect periodic and contingent rebalancing techniques to show how these approaches can stabilize your portfolio's risk levels, enhance returns, and minimize volatility.

Then, we explore the realm of tactical tilting, where portfolio managers make calculated moves based on economic indicators or expecting returns to revert to their mean.  But as we will see, that is easier said than done.

Finally, we discuss how portfolio managers can use active risk in portfolios to fine-tune their risk allocations.  Bringing into focus asset classes like hedge funds, private equity, real assets, and others, we see that active risk can be an equally important decision in asset allocation.

Tune in to understand the potential rewards and pitfalls of these dynamic strategies, and join the debate on the efficiency of markets over shorter intervals. This episode is packed with insights that will elevate your investment game.

Episode notes:  https://1drv.ms/p/s!AqjfuX3WVgp8un_-h7LOKuedrf1a

Thanks for listening! Please be sure to review the podcast or send your comments to me by email at [email protected]. And tell your friends!