74. Systems Thinking and Quantitative Finance with Wes Gray

Brock Briggs  0:00  

Hello and welcome to the Scuttlebutt podcast. I'm your host, Brock Briggs. And each week, I talk with an interesting veteran to explore their unique knowledge. We talk benefits, business, entrepreneurship, current events and everything in between. What you will learn is what you can only learn from this unique individual. This week, that person is Wes Gray. Wes is a former Marine Intel officer and currently the founder and CEO of Alpha Architect. This episode might double as an intro to financial markets. 

We talk about what quantitative investing is and how that differs from the famous stock pickers, like Warren Buffett. We talk about systems based thinking where and why that's relevant. And we also talk about the future of investing and how to use our strengths to best play into that. In addition to this episode, you can get more from me at scuttlebuttpodcast.co. There, you'll find transcripts, the YouTube channel and a free weekly newsletter, where I break down episodes in more depth as well as give content recommendations and more. Please enjoy this conversation with Wes Gray. 

Brock Briggs

One of the ways that I have found is the best to get to know people in like, a really short amount of time, is to ask them what they're most proud of? 

Wes Gray  1:31  

Yeah, I saw that question. I was like, man, I gotta think about that. So for me, probably the individual thing that I'm most proud of is, you know, I actually decided to take a sabbatical out of my PhD program to go join the service. Just looking back, I was like, man, that was kind of crazy thing to do it. And that's an individual effort basis. And then probably on a team basis, I'm most proud of just our business. And like the team, like, we've survived through a lot of crazy, insane episodes through the ups and downs. And the fact that we're still alive 13 years later, is I’m pretty proud of that. But that's not just me, that's obviously more of a team, team effort type thing. So

Brock Briggs  2:18  

I did think about your history and kind of like, how the timeline works. I thought it was extremely interesting that you chose to join the Marines. Why was that?

Wes Gray  2:32  

Well, so basically, what happened is as I went from right from undergrad into the PhD program and you know, most people don't do that, like, usually you gotta go out, do something, get a Master's or what have you, but I just end up getting into the Chicago PhD program directly. And so I went there and I was not, I was prepared, but not compared to all my comrades there. And so I was whooping it on like, 50-68 hours a day studying. It was like, you know, it was like going to war, but the intellectual war and joining the service of some as always wanted to do, but it was just a matter of timing. And so I was like, well, I'll go after high school. But then I got into college. 

And I was like, why should I go to college and then after college, I got into a PhD program. So it's like, that's, you know, it's probably do that. And then, but then I was getting to that stage where after the first few years in the program there, you know, one, I just, I was like, okay, I'm going to be successful if I graduate from this thing, which I think I will. And if I want to ever do the service, I got either to it now or never because I'm 24. And if I wait till I graduate from PhD program and I make up another excuse. So it's just one of those things where I just had to pull the, you know, just pull the ripcord. And that's why I did it. It was convenient because I also kind of needed a break. I was financed out after the first two years of the program there.

Brock Briggs  4:02  

I can't even imagine. It's so much school in such like quick succession on top of each other. Given that experience, do you recommend that people join up with a program like that immediately after their undergrad? I've heard very mixed reviews about doing that.

Wes Gray  4:20  

Well, I think there's a cost and a benefit. So the good news is you're naive and you're young. And you could just grind harder than you probably should, right? Whereas you don't know a lot like you don't have a lot of experience. So the benefit of going in young and dumb, is you can just whip it on, right? The problem is you're not experienced enough to know that you need to kind of go slow and steady. So for example, like a lot of my cohort, they had wife and kids usually like five to six years older than me and they were just a little bit smarter about like work-life balance because that comes with experience. 

And so it's just a trade off but the trade off, the benefit Being young and dumb, is you just grind it out. Whereas if you go into those programs later and age where you have like wife, kids, now you have all these responsibilities, it's harder to focus. You know, you can't just study 16 hours a day without causing issues with other aspects of your life. So I could see going both ways. And I don't think there's a right answer. I think it's just, it's up to personal decisions and your personal circumstances.

Brock Briggs  5:27  

Do you think that work life balance, and maybe being well rounded in that case is a good thing? Growing up, I felt like I was taught that that was good. And the older I get, I see people who are at the top of their game and they are just absolutely obsessed, like and that's, I feel like what it takes to be extremely great at one thing.

Wes Gray  5:54  

Yeah, that's kind of the problem is, if you want to get a PhD, you have to be the best. And you have to kind of focus on what you're trying to achieve there. And necessarily, just like, if you want to be really good Marine, you have to be kind of all in almost to a level that's unhealthy from a “work life balance”. And that just is what it is. And I don't know. So that's the fundamental issues, if you want to be at the top of anything, if you want to compete against everyone else, you're going to have to sacrifice in other areas of your life. And it's just the nature of the business, I guess. Not just in like PhD or finance, but in the Marines, really anything you do. If you want to be the best of the best, you're probably going to have to get worked a little bit.

Brock Briggs  6:46  

When you joined and throughout your time in the Marines, would you have considered yourself all in on that? I know, it was something that you had wanted to do for some time.

Wes Gray  6:54  

Yes, I was crazy. I would say I was literally insane when I was in the Marine Corps, like I was so all in, like warrior mentality. It's kind of hard to even think about at this stage because I've got a lot softer and weak. And I just not the same person. But I was an extreme Marine. I wasn't a like what they call mo tarted, which you probably remember, but I was very, very serious about that business. Just because I don't know when you were about, you know, I was an O-4, O-8. So you knew you were going to go to war, you had to be prepared. And you obviously want to take care of your team and everything. So I was pretty intense, I'd say.

Brock Briggs  7:40  

The Marines is extremely well known for their, it's an extreme. They are with the far, far right of the branches. And they are kind of breed some of the wildest people. And I think that that's really admirable. One of the things, looking back on my time I was in from 2014 to 2018. And there, you do encounter a lot of extremes in the lifestyle and it does take embracing that and accepting that. Some of it though, looking back, I feel like is extreme just for the sake of being extreme. I look at like the sacrifice that I made to my sleep schedule and all of these other things just for the cause. And I'm not sure how much of that was all I don't know, what if it was all serving a purpose.

Wes Gray  8:30  

You know, I don't know, to be honest, like as you get older, especially now that I'm you know, I'm 42, almost 43. And my body's all busted up. And over time, kind of going back to that original PhD comment there like, as you get older, you get more experience and you start to realize, hey, resting is a lot of times as important as investing in the actual activity that you're trying to get good at. 

And if you don't rest appropriately, you kind of burn out the wick on your candle over there. Obviously, when you're younger, you have an ability to do that without the consequences of it. So I just don't know, like, it's unclear to me, like because I can't rewind the tape and redo it again and think like okay, if I didn't stay out, you know, do four hours a night sleeping and go PT all the time and go crazy. Like had I done it the old guy version, where like it's stretching mobility, like diet, like that's not smarter about all my decisions would have I been better or worse, I just don't know to be frank, hard to say.

Brock Briggs  9:43  

Maybe that roughness is actually the rite of passage in itself. The extreme abuse of your mind and body for a few years. It's critical to the next form you're going to take.

Wes Gray  9:55  

Yeah, you know what? That's actually true. Like, I'm sure you're familiar with, like David Goggins. And he has this concept of callusing the mind and he basically says like, hey, your mind and your ability to monitor your willpower and your discipline is really a trained muscle. And so to extent you rest up and like, kind of live soft slash smart, like you work smarter, not harder. In some sense, that's great because technically, you could kind of optimize because you're working smarter, not harder. 

But the problem is, you're not exercising that discipline part of your brain. And so I don't know. That's what I'm thinking like, there could be something to that fact that the very point of working harder not smarter, might actually train and strengthen your ability to callus your mind, which might allow you to do crazier stuff. And you know and that's just a trade off, you give up efficiency for being an idiot. But sometimes you need to be an idiot because you need to bash your head against the wall in order to get something done. But if you didn't train bashing your head against the wall to get stuff done, yeah, maybe you're not going to be that good at it when you actually need to do it. So I just don't know. I can see it going both ways.

Brock Briggs  11:06  

Are there any memories or experiences that you had in the Marines that you felt like were particularly impactful and that you remember fondly, maybe in a good way or a bad way?

Wes Gray  11:20  

I mean, obviously, like being deployed overall, I used to live with Iraqis. I thought that that was a good and a bad experience. I thought it was actually a good and bad experience for the same reasons like getting access and really like living with Iraqi battalion, speaking their language, learning their culture, kind of hearing how they think, hearing how they consider the world. That was good because it like opened my eyes to like, holy cow. These people are very, very foreign. 

And my whole mentality and view on life is just extremely different. And that was actually the bad thing. Because then I started to recognize it was like, what are we doing here, man? This is crazy. Like, we're wasting a lot of money, time resources because we're viewing this whole situation through a lens of like, you know, a gringo hanging out in America, not like in an era about thinking about surviving every day. So I thought that was a very, very special and unique experience, just getting to actually live and sleep and fight with Iraqis. It is eye opening, to say the least.

Brock Briggs  12:33  

The military is very notorious for bringing about and kind of rounding out your worldview certainly brings some different things to light that you may not have been able to experience otherwise. And it's interesting that you call out that you felt like maybe it was a waste of time, even back then. Not even knowing that the war would be going on for another 15 years passed when you were there.

Wes Gray  13:02  

Yeah, I mean, I unfortunately wrote a whole book about this. And unfortunately, all the predictions of that book came true. And we had to live them out for the next 15 years. And I think it all boils down to just a lack of understanding their culture and their incentives and what drives them. And that's obvious to see if you actually hung out with them and lived with them and dealt with them for a long time. 

And, but if you don't and you just always had the lens and the viewpoint of like a western society, culture needs, wants, incentives, obviously, you're gonna think and try to achieve what we want them to achieve, like, oh, you guys want freedom, you want to be a democracy. You want to be, you know, first world, you know, all these things that seem obvious to us. That's not obvious to them. And, you know, it's like trying to jam a square into a round hole. It just doesn't make sense. But you need to know that the whole is round, not square in order to know what you're trying to do doesn't make any sense. So, yeah, difficult but it is what it is, live and learn, right? 

Brock Briggs  14:11  

Live and learn, indeed. It's curious that you point out this very kind of gray relationship we have with like the global and like kind of back row how the world interacts geopolitics, I guess is the word I'm looking for. How we interact is not a black and white decision. And many of what the Marines like do and like what they're called on to do is like they're acting in areas that are kind of gray sometimes. I find that so interesting that you like have kind of gone on to like a very rules and like a black and white type of decision making process for things. Do you naturally lean towards, like black and white decisions?

Wes Gray  14:59  

No, not really. I've just came to realize that I'm stupid like all they're humans and we're super affected by behavioral biases, environmental situation, cultural nuance, what have you. And so the more that you allow a monkey brain or your lizard brain to make a decision, especially in the context of a stressful situation, it's usually going to be a bad decision. So the only way to fix that is you need to codify rules, that in a time when you're like calm, you've had a lot of time to analyze the data, be rational, be sensible about it, you develop these rules or kind of like SOPs. 

And then in practice, you just implement the SOP. Because what I've learned is you don't want to be thinking when shit hits the fan, right? Just like in the Marines, you don't want to be in like an IED attack and then start just rolling with it. That's not going to work, right? You gotta have SOPs and you just follow a model that you've already practiced, rehearsed, trained, thought about a lot during like a context where there's not a lot of stress because these execute. So same thing like in financial markets, really any decision making situation.

You want to go in with a plan, where you kind of have the SOPs already in place, you know, the left or right lateral boundaries and you just execute on that plan. Because inevitably, if you start thinking too much, all your bias all your, you know, problems with the monkey brain, are gonna start seeping in. So for me, it's just a disciplining device. Like, I just kind of came to the conclusion that you know the humility of making a lot of dumb decisions that it's better to just do them systematically then on the fly because I'm not disciplined or smart enough to control my own idiocy, essentially.

Brock Briggs  16:52  

I don't think anybody is. You just might be one of the very few people willing to admit it.

Wes Gray  16:58  

Well, the first, yeah, the first way to solve psychology problems is just admitting that you're human and that you're overconfident and probably crazy and have all the problems everyone else has. But that's actually a hard thing to do, took me a good 20 years to figure that out. And that seems to be the case with everybody so you know, long time to get things simple.

Brock Briggs  17:26  

In another interview you referenced, I think it's Daniel Kahneman's System 1 and System 2 type thinking. Was that the origin or inspiration for you leaning that way and kind of trying to systematize those decision making? Or was that even predated to that?

Wes Gray  17:45  

Yeah, that was predated. But he just codified it in a way that was obvious after the fact, right? Because that's how, now that he said it. And the reason the guy has a Nobel Prize, it's like always this case, right? Like, oh, well, that's obvious. But it wasn't necessarily obvious beforehand. But the idea that, okay, we have like, system 2 brain, which is rational calculated, it makes sense. We weigh cost benefits appropriately. Yep, I've had opportunities sometimes where I'm thinking like that, but then also System 1 brain where you're just crazy reacting, just going off critical instinct. And that's where you make all your errors. Yeah, I've recognized that too. 

And he just, he's just was able to tell a narrative that aligned perfectly with my lived experience and everything I've ever seen. And now everybody knows that. And, you know, obviously, I think everyone should read that book, Thinking Fast and Slow, because I think he kind of nailed it. That's how humans operate. And now he has a cookbook of how to think about it, right? Anything that involves stress or cortisol spikes, you know, you're going to move to System 1. And System 1 is the exact time when you make bad decisions. So how would you fix that? Well, think about the problem when you're in System 2 mode and put in rules systems and SOPs. So anytime you have to do a System 1 decision, you just eliminated all the problems because you're back to System 2 because you have a system. You just want to avoid System 1 at all times, if you can.

Brock Briggs  19:26  

I think we're going to talk about a little bit later how you implement that in your work today. But when it comes to your personal life and kind of how we operate day to day, do you have like an example of how you have implemented that?

Wes Gray  19:42  

Well, you know, so I kind of mechanically like in my personal life because being System 2 sucks. And it's boring because everything's just codified. And it's not a fun way to live, right? Like it's kind of nice to just be free will. So in my personal life like, I'm not that systematized like, usually exercise and stuff I am but like, in general, you know, I'm kind of like seat of the pants because that's a lot more fun. But in contexts where it actually matters or it's going to affect other people like in investing, now I gotta worry about, you know, my stupid decisions affected other people. 

In those contexts, you know, all we do in like operations, like our investment programs, all these sorts of things, everything is checklists, systematized, well thought out ahead of time. So in practice, the probability of us having to be in a, you know, non rational state of mind for screwing something up is minimized because now I'm worrying about other people's, in this case, not their lives, but you know, their money or what have you. So, it just depends on the context. It's very hard to be totally rational all the time and going back to Goggins. You know, it's hard to be David Goggins and beat your head against the wall every day, no matter what, like, that's just a tough way to live. Sometimes it's easy, cognitively to just roll with it, right? It takes a lot less glucose to just kind of be intuitive. A lot less energy and a lot, you know, so you got to balance it, I'd say.

Brock Briggs  21:28  

I'm not sure what system Goggins is running on, probably some system that nobody else is on. He’s on a completely different plane.

Wes Gray  21:36  

Yeah, he's in System 2. And he I think the guy's like calloused his mind so much, that he has such a strong muscle on discipline. Whereas like, most people, they talk about this, like the ability to think rational. The reason people don't like it is because it takes a lot more glucose and a lot more energy to do that, right? It's actually high. It's like a workout to be rational all the time and discipline all the time. So that's why a lot of people are like, yeah, screw it, I'll just eat the cheeseburger as opposed to broccoli, right? Because it's just easy. 

Like cognitively, I think that guy has worked that muscle so much, that he's literally like an ultra marathoner on discipline, like, his ability through training and discipline is he's built that muscle where he's just more efficient and he can control it. Whereas you and I, you know, if we have an opportunity like that, let's just do that, that sounds a lot easier. We're just gonna take it. He's got that, you know, that mindset that's been built up over like, you know, decades. So good on him for doing that.

Brock Briggs  22:42  

If you had to take your financial knowledge and expertise that you've learned over the last 20 years and look back and talk to your younger marine self about maybe financial decisions that you made while you're in the service, what would you have told yourself? And or what would you tell a junior or young service member today about how their finances should be dealt with or managed?

Wes Gray  23:11  

Yeah, so this is one of those things where you can talk about and tell people what to do. The bottom line is the main thing I would say is like, don't be overconfident. Don't think you actually know more than other people. I.E, don't be a Marine, which is impossible, right? So I can tell you in the face. Hey, you've got to find a way to even though you're going to naturally be overconfident and think you know everything about everything. Somehow you got to put in guardrails to prevent that. But of course, the only way that ever happens is after like especially for like someone who's got like, like a Marine typically, you're the type of people that need to touch a burning flame. 

And then when your fingers got like third degree burns and blisters on it, you're like, oh, okay, yeah, now I need to not do that anymore. So again, I can tell you don't touch the fire. But of course, knowing full well Marines in general, they're going to touch the fire, they need to get burned and then they'll figure it out. So what I would say is, as opposed to like, my actual advice would be like, hey, go build systems, like focus on low fees, low complexity, simple, you know, brain dead things that a caveman could do. That's not going to appeal to kind of like a marine type brain where they're gonna always think like, oh, I'll just try harder because it'll make me better because everything I've done in life I try harder I get better get you know, faster. In investing in that mentality it doesn't work actually trying less, ends up earning you more, which is very counterintuitive. 

So instead of giving the advice of like, hey, go build a system, keep it simple, stupid. My advice is actually go out there and touch the flame because at least you're gonna be touching the flame when you don't get any money. You don't have a lot to lose and your opportunity to learn and figure out your own way is actually pretty hot, right? So, go start trading stocks, go get involved in different markets and just go touch the flame a few times and figure out where you get burnt where you don't and you're just gonna have to eventually learn. So that actually, weirdly enough is would be my advice to people that like, have a marine kind of mindset, which is a good thing in general, bad for investing. So yeah, go on testifying and get burned a few times, eventually, you'll figure it out. Because you're not going to actually listen to my actual advice of keep it simple, stupid, keep it low cost, don't try too hard. So that'd be my recommendation.

Brock Briggs  25:55  

You heard it here first, folks from West gray himself, get on Wall Street bets, start going YOLO into Dogecoin. Do it all, learn fast.

Wes Gray  26:05  

Yeah, learn fast and fail fast and hopefully adapt. And you'll be good. Yeah, don't do what the old guys do, don't do what the old rich guys do. Even though that may be what you end up doing, it's just not going to work because you're gonna get bored. And then, you know, you're and then you'll have a midlife crisis. And then when you're 40 or 50 and you actually got a lot to lose. That's probably the time when you be like, I gotta just go for it. But now you're gonna blow the whole thing up. So better to just smoke it out when you're young and dumb.

Brock Briggs  26:38  

It's an interesting perspective, that was probably the very last thing I thought you were going to recommend. But I see why. And I think that that's good advice. Honestly, people that are maybe looking for personal finance advice early on in their life or career, don't want to hear hey, go get a low cost index fund and dollar cost average in every month.

Wes Gray  27:01  

No, that ain't gonna work. Or what you can do, I mean, one way you can psychologically outwit yourself, is it's kind of like when you go to a casino with Marines, you say, like, hey, man, take out, give me your credit cards, give me any access to capital you have and put like, $100 in your pocket. You're containing the damage to whatever's in that pocket, right? And you're preventing yourself from screwing the rest up. So you could use that kind of mentality here where you get to placate your need to be overconfident, be an idiot and do stupid shit because you think you know better than everyone else, but at least you could contain the damage. So for example, you might say, you know what, for 80% of my money, I'm going to do this boring, lame thing. 

But for the other 20%, which I'm just going to go buck wild and go for it. That's my learning money, right? So you could do that. But that's difficult because they gotta have like a one hand you gotta be thinking rationally about containing some amount into like a rational bucket. And you gotta be able to separate that from your crazy bucket. But that's almost too smart for a lot of people. Because what happens just like the people at the casino, they're like, oh, I got a credit card. Oh, let's take out advance even though I lost that. 100 Because now I'm due. And even though I lost my ass, like, I have to take this out, man. I got to double down. So that's, you know, that's also inevitably what happens when people try that a lot of times, but there might be a technique if you wanted to try to get the best of both worlds, but it may not work is the problem. 

Brock Briggs  28:42  

You've said that one of the first stocks you bought, if not the first, was Swisher sweet. And I'm curious to hear of any kind of early fire touching experiences that you've had that kind of help get you down the path to where you are today.

Wes Gray  28:59  

Yeah, so like I was saying, usually people with like, kind of like A personality, they're generally overconfident, think they know everything and then say all this work harder than everybody, because I'll beat them because your whole life that's what you've done. You just work harder, try harder, beat your head against the wall more and usually end up winning because that's how most things work. And so I did that in investing, you know, early age, I was like, I used to be broke when I was a kid. As like, this sucks. I hate being poor. I've got to figure out how to make money. Finance seems to be a way to do it because you can just somehow make money, make more money. That's a lot better than working like a normal job. And so I kind of became obsessed and I did what Marines do. I just like I'm just gonna outwork everybody and just get smarter, bigger, faster, stronger on like investing. 

And then of course when you do that, now you have endowment effects because you put all this time, effort, and knowledge into learning. And now you think you know something and you think you have an edge. And then you go into the marketplace. And so I was like, okay, I'm going to be the next Warren Buffett. Well, what does Warren Buffett do? Warren Buffett, pick stocks, pretty concentrated, does the deep dive homework and roles, right? So that's what I did. And I had the unfortunate situation of it working early on, right? Like Swisher Sweets was a great example. Like, I like doubled my money. And I was like, oh, this is easy. And then I had kind of a string of those situations. And so and the problem with that is that reinforced overconfidence because what happens is, there's something called self attribution bias. 

And you learn about all this stuff once you start reading about psychology textbooks and you've had the opportunity to get your head handed to you. And what self attribution bias says is like, whenever you make good decisions, you go back and say, oh, well, that was obvious because I put in extra work. I'm smarter than everyone, etc. And then whenever something goes wrong, you always blame it on things that were outside of your control, right? Like, oh, the Fed did it? Or oh, how would I have ever known that that wasn't even my decision. And so what happens over time is self attribution bias is you attribute wins to your skill, you attribute losses to bad luck, which said, systematically makes you more and more overconfident. You're all bullshit. And so that's what I did, basically. 

So I was stock picking and things were working. And then that reinforced, you know, oh, wow, you're just a genius. And then, of course, when things went bad, you know, in the early days, I'd be like, well, that's just because, you know, bad luck. Who could have predicted this? Like, you know, I started a hedge fund in 2008. And like, all of a sudden, I couldn't short anymore because it was outlawed. Oh, well, that's just bad luck. Like I need to transition to do something else. And so anyways, fast forward, like for me, I end up getting more and more Warren Buffett wanna be. I actually went quant a little bit in 2008. And then I stopped being quant because I was like, oh, I used to do stock picking. I was really good at it. You know, this quant stuff. Even though I was doing it, the whole point of it was to be disciplined. I transitioned back to stock picking. And then, you know through overconfidence end up taking concentrated bets and got smoked out. And then it put me in a trap. I was down like I don't remember like 70-80%. 

And I thought I was done. And then I end up getting lucky to like kind of pull it all back. But the good news was when I got smoked, it was in like a fraud situation, which yeah, it was just devastating. I learned my lesson. I was like I'm never picking stocks ever again, the whole point of the systems is to avoid this overconfidence. And now even though I got lucky, pretty soon after we're like it all came back. I was confident enough to realize that I was lucky that I get that ahead of TEDx. Or on my other hand, that kind of came all the way back. And I wasn't able to attribute that as my skill. I had already been so smoked on, like bad decision making. It was probably around 2010 or 11. I just vowed to never ever pick a single stock ever again. And I haven't done it since then. Everything is systems based when it comes to investing. It just took me about, you know, 10-15 years to get there.

Brock Briggs  33:32  

Sounds like a very big lesson. And it's admirable that you haven't gotten back and you kind of were able to attribute that situation to luck in terms of the recovery. For maybe anyone who is not interested in finance or doesn't have a background in it. Can you maybe describe what quantitative investing is at a high level?

Wes Gray  33:57  

Yep, at a high level, all you're trying to do is put rules in place to help you make investment decisions. So instead of watching CNBC and listening to The Economist or contemplating what you think inflation is going to do or what oil is going to do or what Exxon is going to do, what have you and you're kind of making decisions on the fly, that would be ad hoc or discretionary investing. Systematic or quantitative investing is just putting a rule in place. For example, I'm just going to make this up. I will put 60% of my money in stocks and 40% of my money in bonds and I will rebalance it every year. Period. It's just a system. 

So what I'm going to do every year? Well, like at the end of the year, I'm going to move my stocks to 6% and I move my bonds 40% and I follow those rules. It doesn't matter what you know, places do, it doesn't matter what the economist said. It doesn't matter what my Uncle Joe told me about like his Bitcoin investing. I just do those rules. That's all systematic quant is doing is just, it's just putting rules in place to manage your investment decisions. And then obviously there's like there's different levels of how deep you go there. But at a high level, that's all it is. 

Brock Briggs  35:20  

Can you maybe compare what your or Alpha Architects approach to quantitative investing is compared to maybe other people who do the same?

Wes Gray  35:31  

Sure. So I guess there's two types of quants, they call them. And I'll just give you the two extremes, right? So one extreme would be like the PhD in physics, who doesn't even care know or think about the economics or fight like the financial economics of the situation? They're just pure data, computers, data in system out, we just do that, right? They're like pure quants, black box, smoking cigarettes in a closed room with, you know, math PhDs and 200 IQs. And they just, that's what they do. They're not thinking about like the financial economics, it just, it's like, computers and black boxes. 

On the other extreme is you could just say, hey, this is Warren Buffett. But I'm just going to codify what Warren Buffett does in a set of rules. So for example, I'm going to buy the 10% cheapest stocks based on P/E ratios. Why? Because I believe in the financial economic principle, that low price paid, necessarily means higher expected returns are just kind of like a bond yield, right? If I pay higher prices for a bond, I expect to get lower returns, if I play lower prices for a bond, I'm expected to get higher, higher yields in the future, right. 

So I'm just going to codify that first principle in financial economics in a system. And so that's why I'm buying low p e stocks is because I believe in this fundamental principle, that low price paid generally earns higher expected returns in the future. So I'm gonna put that system. So that's more of a financial economic background and first principle way of building a quantum system versus like total black box. And then you have everything in the middle there, right? There's that range, I gave you kind of the left tail and the right tail of critical quants, with two very, very different approaches. And then everyone kind of lies along that spectrum or on the quant spectrum.

Brock Briggs  37:51  

You said in another interview, you'd like to buy cheap, buy strong and hold them long. Is that still your thesis for what you guys tried to do?

Wes Gray  38:03  

Yep. So going back to what is the definition of a quant, I'm definitely on the left side of that tail where I'm much more like, hey, let's just codify rules that are grounded in financial economics and first principles. And the basic things that we think about is what drives markets on like a core basis. Well, it's humans and humans are essentially driven by fear and greed. And so what are some rules that help us capture and take advantage of these human elements of the marketplace? 

Well, let's buy cheap, right? That captures fear, right? Let's and we also got to worry about greed. Well, let's buy strong because everyone thinks like the stock that's moving a lot like I am buying the strong stock, oh, it's gonna keep going. Because people feel like the shiny rock is going to keep getting shinier. And so everything we do, like buy strong, buy cheap and then hold them long. It's just codifying basically the first principles of capturing fear and greed in the marketplace through a system. It’s that simple. 

Brock Briggs  39:13  

Why do you think that that is better than the black box data approach? I'm assuming that you guys have done significant backtesting and kind of comparisons of different approaches and probably settled on this as the most valid. Everybody always kind of sites back test. Oh, the back tests say this but 

Wes Gray  39:36  

Yeah, so that's the problem in my mind, like I don't know if there's better. I think it's everyone's got a different approach. And it really in the end, it boils down to what do you have most confidence in and ability to stick with. So for me, I like things that I can understand. And they make sense to me like A leads to B. Without the back test, I just intuitively, that makes sense to me because it's grounded in some core element of the system. And going back to first principles, I fundamentally believe and I don't think this will ever change that humans, in general, because they're not all using computers, are going to be influenced by fear or they're going to throw the baby out the bathwater, like worry about things too much. Because naturally when you get afraid, that's what you want to huddle up, right? 

And I also think there's another extreme of greed, like people, they start getting greedy. Things are working well, like, oh, instead of just the 5%, let's go for the 50. Let's go for the yellow. They love that, right? And so I just want to build systems that are fundamentally anchored on those core principles because I want to take advantage of fear and greed in the marketplace. And the reason we say hold along, is it these are long term phenomena, right? So that's what I like. Whereas if I build a system, that's blackbox and totally data mine, totally quant. The problem is, it might work. And it might find new adaptive insights that my, you know, dumb, dumb brain can't figure out. 

But that'd be the potential benefit. The potential cost is you might be trading on sunspots or something that it just has no, it's not going to last, right? It's not a real phenomenon that's robust to the future over the long haul. It's just you data mined. Well, you know, when the sunspots are extreme, you know, commodities all of a sudden do well. And you may didn't know, that's what you did. But that's in principle, what you did you basically just data mined in a fancy way. And I'm not confident or yeah, it's not comfortable for me to take that approach.

Brock Briggs  42:01  

One of the questions that I have about how the cheap and strong the fear and greed aspect that you're going for, I have to imagine that the market on a long enough time horizon is going to be right, the market kind of sets the price and short term erratic movements will aren't really necessarily reflective of the true value of something. If something is cheap, for a long time I would assume that the market thinks is either maybe going obsolete, or it's not a valuable business. And something that is strong. 

Something that we've seen in the last two years is everybody's cooped up at home, you know, perhaps that there's an element of greed that is far surpassing the regular amount of greed. I had a really good question from Jake Taylor on Twitter. He was talking, I asked him what I should ask you and it kind of feeds into this. He said, how do you know that there isn't unintentional bets on interest rates and tech, in this type of strategy?

Wes Gray  43:07  

You don't and there almost always is because the bets are generally correlated, right? So let's just take value, for example or even momentum. So in general, like the value trade at least from a behavioral standpoint, why does it exist? It goes back to the Ben Graham concept that there's a thing called Mr. Market, who's just the world, right? And Mr. Market is sometimes rational, sometimes crazy. And sometimes, you know, depressive and that usually is dealing with a narrative or some sentiment in the marketplace. And it doesn't like it's not like it affects only one company. So for example and we've seen it real time, right? So flash back two or three years ago, the whole energy patch, anything having to do with like, just energy in general, was they threw the baby out with the bathwater, right? 

A lot of these firms were prices if they're never ever going to make money ever again because that in general sector was under fire because the narrative was not in their favor, right? Oh, we're going to alternatives. We're doing this, that, the other thing that always happens in kind of like a fear tray, like the market gets depressive about something overall. So if you're out there buying cheap stocks, you're not going to find any cheap stocks in the work from home bucket. They're all going to be at 500 P/E and 50 times revenue, which makes no sense because that general sentiment that general narrative is strongly correlated, usually with sectors or broad industries. And so obviously, when you go by, if you're just buying a generic value strategy, you're going to be focused on cheap stocks, right? 

Let's go buy the stuff that's the cheapest in the marketplace. Well, the things that are cheapest in the marketplace are usually going to be bunched up together. Because the poor sentiment, the poor narrative is going to usually be tied to like a part of the market. It's not like they're like, hey, Exxon is a big turd. But Chevron is amazing. It's going to be like, in general, Exxon and Chevron, like maybe they got some idiosyncratic costs or benefits there. But they're both cheap, i.e. the industry at large is cheap because cost of capital is really high. No one can raise money. Everyone thinks they're all terrible. They're all going bust. So almost inevitably, these bets are always correlated with a bunch of things. And then the question is, well, what is the first principle that's driving this? 

And again, it goes back to price. All value is, is price scaled by a fundamental? And we're using the price, which is a fundamental market input. We're all humans, like through their bet, and said, Hey, this would I think, and we're saying, we think that in general, when things have a low price to fundamental that people had too much fear, they threw the baby out the bathwater. And on average, like two or three years down the road, or whatever it is, the world changes, and they're like, oh, wait a second, Exxon isn't going bankrupt? Is it going to be Google? No, but it's doing better than we thought. And all it needs to do is have an expectation revision to make money, right doesn't need to become like Google. It just needs to become not as bad as previously thought. And you get like expectations change. So that's the value trade, right? 

And then the momentum trade is also fundamentally anchored on price. But it's just price alone. This is the shiny rock trade, find things where the prices are moving better than all the other prices, that usually attracts the sentiment crowd, right? That's the man or that's the manic people in the Ben Graham Mr. Market mantra. This is the work from homes two years ago, this is the energy right now, like price is telling you specifically where all the maniacs are, because they're not they're not even paying attention, the fact that 50 times price is sales, and that there's no DCF model that could ever justify the valuation on Tesla. It's insane, right? You have to be in lala land to ever think, you know, back with Tesla, like, you know, a while ago, when I was going to be able to justify that it's impossible, if you have any sort of rational brain, but it doesn't matter. Because the price has momentum. 

And the sentiment and the narrative are in your favor. And to the extent that you believe people are greedy, and they're gonna keep you know, they're like flies to the light. You know, you don't need to disregard that. That's just a fundamental aspect of the marketplace, you should take advantage of it. That's called momentum. You know, so but there's still value and momentum are fundamentally tied to price, which is the only indicator that markets and holds all truth in the marketplace. Because that's what all the humans agree to, right? So interest rates, all this other stuff. That's just noise. What matters is the price. That's what drives everything in the market.

Brock Briggs  48:16  

As you've been talking about this relationship between value and momentum, do you think that you have to pick just one? I think that a lot of self proclaimed value investors are really anti momentum. And I'm curious if you think that you have to just choose one lane.

Wes Gray  48:36  

So I used to because I used to suffer from the same problem that all humans suffer from is you get a tribe and you get a religion. And anyone who's not your religion is just wrong, right? So the value of religion, funny enough, is usually anchored in Ben Graham, intelligent investor, where the mantra is, hey, in the long run the markets are a weighing machine. In the short run, it's insane. So Ben Graham, if you really think about it is basically telling you, hey, value, i.e. buying things that are cheap price to fundamental in the long game is a pretty good way to make money. But in the same breath, if you really thought about it, he's also telling you that it's a gambling, sentiment driven machine. You could also make money with momentum. It's just a different trade. But people never read into that enough, right? 

They always think, oh, Ben Graham said to me that I should think of this as a weighing machine. So as long as I focus on fundamentals and price paid and buying with a margin of safety, i.e. the value mentality, that's a good way to make money. And I agree with that. 100% because that's how I think intuitively, great. But then you start thinking about well, okay, so people basically overreact to bad news. I buy things cheap, ugly, nasty and eventually they you know, the market, the weighing machine matters and people come my way. Totally makes sense. But why do we need to disregard the other part of what Ben Graham talks about where it's the manic depressive Mr. Market? What if we could take advantage of that as well, right? What if we knew that sentiment begets sentiment and shiny rocks beget more shiny rock buyers? Why wouldn't we deploy a system that would take advantage of the maniacs out there? 

And it's not necessarily a weighing machine, it's a front running machine. And that's momentum. And the thing is, like, if I believe in one religion and it has this idea of like, value investing, great! But you should also consider other religions and a lot of people have their religion where price matters, sentiment matters, you know. These things matter as well technicals matter. And there's a lot of people that follow that religion. And you should be able to step back and say, well, these religions have good ideas. And they both make sense. Why would I want to take the best ideas from multiple religions and use those? And in a financial market context, that makes a lot of sense because usually, different religions have different mantras and how the market works. And they generally work at different times. 

And as you know, through portfolio theory, to the extent that you could pool that's like good ideas or good religions together. And these religions work at different times, that's going to kind of give you this diversification or smoothing effect over time and which is awesome. But the problem is, you need to be able to admit that someone else's religion might also have valid ideas. And as you know, going back to human psychology, that's just a difficult thing for people to do. Not just in a finance context, but it's like saying, hey, you know, you're a right winger. Great. Let's talk about this left winger idea, what do you think about it? Most of the time, the right wingers gonna be like, ah, they're just bad evil. They're gonna like destroy the world. They don't even consider the idea on its own merits, right? They just blanketly think it's a bad idea because it's not part of the religion. And you see that same sort of concept tribalism in financial markets all the time.

Brock Briggs  52:16  

Why does that get us so polarized? And this is maybe kind of a high level question because as you pointed out, it applies to more than just financial markets. It's religion, it's politics, it's all these things. Why does it need to be that way when we all at the end of the day are trying to make money?

Wes Gray  52:33  

I don't know, man. It's gotta be buried in monkey brain code. And I'm sure there's some evolutionary psychologists, dude. I'm sure Rogan's got a 50 hour podcast with someone talking about it. But like my dumbed down version is, you know, tribalism, it gives you like a bond that like the tribe wants to fight in one direction, which is probably beneficial for whooping it on and survival back in a day versus like the wacko that just like, oh, I'm gonna go do things on my own and think independently, like, they're probably not going to survive that long in the old day, the way societies and tribes are set up. 

So I think that's what the, you know, the PhDs in that world say, I don't know, but I can't explain people, man. Like, it's just that's just how everyone is. And you see it in your own behavior. You probably see it in your parents, you see it in everyone, you see it in society right now. It's just that's just how humans are. They bond to tribes, they bond to religions, they bond a cohesive ideas that unify people. So then you have like good social interactions and you get benefits from having common bonds  and common beliefs. But that can also be bad if you're trying to be purely rational about something.

Brock Briggs  53:54  

You were talking a few minutes ago about front running. Is quantitative investing, all primarily front running?

Wes Gray  54:02  

Well, all investing if you're trying to make money in the end, is front running, right? Like for the most part, if you're thinking from a behavioral lens and even if you think it through a risk lens, right? So in general, the way people think about investing, is they're like, okay, you're gonna earn some amount of returns, right? Usually, one idea is like, well, efficient market passes, The reason you get to earn higher returns is because you're taking on more risk. But that's kind of a form of front running in some sense. We're like, let's say you and I were like, hey, I'm gonna buy this stock for 10. But it's risky. So we know it may earn 10% returns in the future, but you're willing to say, well, let's all sell it because it is also in expectation, it earns 10% returns, but it could also lose 50% or whatever it is. 

And so you basically admitted to me, you're like, you know what? You can front run me in the sense that I'm just giving you the risks to deal with. And you get to take advantage of any of those benefits that precedes you from there on out. That's one kind of mantra on the market that everything is risk reward. You know, there's a lot of arguments why that doesn't make sense. But then you've got the behavioral side of the market, which is, I'm basically having to do decisions that are taken advantage of the other person's idiocy in some sense, right? So how might the value front running trade work? Well, let's go back to say, example, you're going to sell me the stock at 10. 

And even though, let's say fundamentally, it's worth 15 or something, right? I am front running you. Because I know, let's say it's a value stock that yes, right now, the reason that you're saying this to me is because it is ugly, nasty, every single story about this is terrible. And you just need to offload this pain in English to us. So yes, I'm front running you in a long term sense because I believe that in expectation or next three to five years, you know, sentiments change, you know, the world adapts and the weighing machine matters. And so I'm kind of front running you in a long term sense as value investor, right? Because that's what I'm doing. I'm saying, yeah, I'm gonna buy it from you ahead of this expectation change that might occur down the future. 

In the momentum trade, it's more of a short term front run from it, right? Well that's a much more faster moving front running, where it's like, I know, this is a shiny rock right now. And I think it's going to keep getting shinier. But the minute it loses its luster, I gotta get out of the way. So momentum is basically saying shiny rock identified. On average, I know the shiny rock gets shinier because people like to buy shiny rocks. So as long as this rock stays shiny, keeps getting shiny air, I know it's gonna keep attracting more people to this fire. And that's how you get these big sentiment, i.e. these big momentum trades. But I need to make sure that the minute that the shiny rock is losing its luster, I get out of the way because it also works in reverse. 

Also, front running trade, right? Momentum and value, value is kind of like a longer term front run. Momentum is kind of a shorter term front running, but it's all front running, I'm trying to get ahead of a change before, you know before someone else, because I have to buy it from someone. And if I'm buying it from someone, I'm mechanically front running that person, because they're, they're giving me something that I think I'm going to get ahead of this curve before they do. That's how I'm going to make money on this deal. So yeah, it's all front running in some sense.

Brock Briggs  57:45  

After you started explaining that to me, I realized how silly of a question that was. And so I appreciate you saving me and explaining that in a thoughtful manner. 

Wes Gray  57:53  

Yeah and it should add context to that, right? Because front running in a very narrow sense is evil. So let me give you the evil version of front running, which is what regulators care about, like what I was just talking about is just generic investing, all investing, long term investing is you're basically front running, in some sense, right? Like you're taking a trade, that's a long term. I'm believing this to give you better than expected. So you're basically front running in a long term sense. But that's just investing like it is what it is, it's transparent. The one that people that's bad and it screws up transparency and market confidence is the evil front running where like you put an order in at Schwab. 

And you know, okay, you think you put an order in to get it at 10. But some asshole with the computer is going to turn around because they're going to sell your order to someone who can literally come in, steal it at 10 and then flip it to you at 10.01, right? That's because that's so opaque, not transparent. And you're that's like real front running. That's I would say nefarious. Because it's not transparent to the consumer. When you sell your stock to me, some dirty, ugly, nasty value stock at a five PE, you kind of know you're getting rid of a dirty, nasty value stock and you still want to deal with the pain and anguish. And you take that with full transparency.

The other type of front running, that's the evil kind of nefarious type, the regulator's don't like is when you do something and you're selling something, you think it's transparent, but what's happening is someone's coming in, you know, clipping you without you really kind of knowing it explicitly. That's the evil front running. It's like, you know, you're basically taking advantage of people in a short run fence sense. It's not transparent, that what's being done. That's another kind of front runner that most people are familiar with and that one isn't. I don't think that's good for markets in general, markets should always be transparent. You should always know what you're getting and why just because that gives people confidence and the ability to think, at least more rational about how things work.

Brock Briggs  1:00:12  

How has the popularity of quantitative investing trended over time? And does the incoming have higher computing power and faster computers and things like that lead to more people playing in this front running, but in a short term sense, not in the nefarious way? I appreciate you explaining that.

Wes Gray  1:00:35  

Yeah, I mean, I don't know. I think it all goes in waves and humans are going to humans. And so in theory, the ecosystem is set up right now for people to be better investors, more rational investors, more data because now anybody with, you don't even need money anymore, you can get all the data, all the information, you could trade for free. All these things should lead to hyper rational computerized investment decision making. However, it also can lead to all the behavioral problems. So having access to tons of information for free, can also lead you to be overconfident. Because now you think you know a lot about a lot of things. And there's all these psychology studies that basically highlight that when you give humans like you give an opportunity for information, where you're like, hey, I'll give you like three pieces of information. And they give you like some sort of confidence bound. 

And then you give some other people like 10 pieces of information, you give other people 50 pieces of information, you give some people 100 pieces of information. All that happens is you give people more and more information is after they get like the main pieces of information, they have like some forecasts, and it doesn't really get any better. As you give them more and more information. However, their confidence goes up linearly. So the more information you give people, the more access to data, the more access to tools and more access to things that they think is adding value, their confidence goes up, but their ability to actually forecast accurately goes nowhere. That's a problem. And you can see that, the other thing is frictional costs. So right now you could trade for free. In theory, free trading should limit arbitrage bounds and make it very easy to take advantage of opportunities. 

The other thing it does is it maximizes your opportunity to be an idiot, because there's no cost to being an idiot, right? The great thing about real estate and private investments is it's like going to cost you 10-20% of the NAV of your investment to get in and out of the thing. And that prevents people from transacting or playing. But that's actually good because what we've created now in the current marketplace is an opportunity to get extraordinarily overconfident. Because there's so much data out there are so many tools, but they're not going to increase your forecast accuracy. And the ability to make decisions and buy and sell is free. Which means your opportunity to not be an idiot is minimized, right? You could just trade for free. But that means now you can buy and sell and do stupid things at a whim and get exposed to your behavioral problems at a moment's notice at zero cost. 

Jack Bogle used to talk about this at Vanguard when he was alive. Like that's why he hated ETFs. He's like I think ETFs are the worst thing that's ever going to occur to the world because at least for my mutual funds, there's a little bit of barrier to entry. Now you can trade daily for almost free. This is going to be a terrible outcome for investors. And guess what he's right. People day trade ETFs now, when they should just buy them and hold them for 20 years. So I'm on the fence. I think just knowing humans, I think the marketplace has actually set people up more for failure with technology data access and low cost than it has set them up for success.

Brock Briggs  1:04:13  

If you were to look forward, maybe the next 5, 10, 20 years at the quantitative investing space. Do you think that we will have more information than we do now? And or what changes do you think like if there even is any more information to get. And like as that gap kind of closes and confidence rises. Like you said in a linear fashion, what else can change?

Wes Gray  1:04:41  

So in the end, it doesn't matter the inputs, but you're gonna be settled on price, right? Value trades on price, measured by or divided by some fundamental, but price is a big component. Momentum trades on price, price is going to be fed by everything in the end. So in the old days, it was some dude or some lady reading some 10k that they had printed off or they go with DC to go pick up an Indian though all the information related to their decision making is in that price. Nowadays, I have supercomputers that pipe in 10,000 things natural language processing, data mining, whatever the hell the new technology is doing. But in the end, all the information is going to get buried in price, period. So it doesn't matter to me. Value and momentum in the end are going to be trading on fear and greed, as measured by price. Price is truth in markets, period. 

And price is fed by all these things you're talking about. And I just don't think it's gonna matter. 20 years from now, 100 years from now, a million years from now, to the extent that human beings are involved in basically a big gambling parlor called the stock market, it's going to always be driven by fear and greed and how they figure out the prices. It's gonna get more complex and all that stuff. But in the end, you just see like at the price. That's going to tell you what's feared and where the greed is and you're going to do value momentum is going to work because humans are not going to change. It's really that simple. And I think people that overcomplicate it, they just lack understanding and clarity on how markets work. That's just my opinion on it. 

Brock Briggs  1:06:49  

I’m incredibly inspired by veterans who go on to start businesses and take part in entrepreneurship and similar activities. Would you kind of give us a brief backstory on the inspiration to start Alpha and ETF Architect? Talk about your vision for that, where you guys are and what you do today? And what the next couple years looks like?

Wes Gray  1:07:14  

Yeah, so you know, I get questions about this all the time. Like, hey, you know, why'd start a business? How'd you start a business? You recommend it to me. I would say that I just don't know. All I know is ever since I was a little kid, I'm just DNA and wired to want to run my own business. Is this something I was wanting to do? I can't explain why, how, what have you. My middle brother's doctor has no interest in starting to like, this is not his mentality. So I was just been wired like that. And I think a lot of people that are in the service, they're probably wired like that as well. And I can't explain it. Some people are just born that way. So I always wanted to start a business or kind of do my own thing because that's just genetically kind of what I always wanted to do. 

And then obviously, it's on you to figure out like, well, what do you like doing? What kind of turns you on? Where do you think your unique skill sets and passions lie, such that you could create and add value to society? For me, that was finance, right? But maybe for other people, that's, I don't know, like doing contracting or building houses or being a scientist. So that's the backstory on like why I decided to be an entrepreneur because I was just born that way. I don't really have any. And I would not say if you don't feel like it's something you need to do, then you shouldn't do it. Like being entrepreneurs sucks, right? You're gonna, like be broke and poor and eat ramen noodles for a decade. And then yeah, maybe you'll get rich and have a lot of money. But you need to be able to survive to that decade and have fun. 

And if that's not your wiring, because that's not what you really want to do, why would you do that? It's a lot easier, just go work for someone else and get paid. And let them take all the entrepreneur risk. And yeah, you may not get rich down the road, but you didn't take all the risk. So it's better for you. So anyways, that's the backstory that a non answer because I just don't know. So what do we do? Well, so we started off with Alpha Architect, which is basically an asset management business. And we end up getting backed by this billionaire family who's to read my blog and read my dissertation. And our whole mantra was, hey, I love investing. And I have the systems I built that I have a lot of confidence in and I would like to invest my own money in these systems. 

And I don't see him out there. Like no one is out there building concentrated, just go buy, you know, top 10% cheapest piece stocks. Even though Ben Graham talked about that concept, you know, 70-80 years ago. You can't actually buy a fun that just does that, more or less, right? And I was like, well, let's do that because that's what I want to do. That's what I put my money in. There's no products out there. Let's build that business. And so that's what we did. And then, over time, we, you know, we wanted to do that as tax efficiently as possible because the investors that we started with had to pay a lot of taxes and they don't like doing that. And so we learned about the ETF wrapper. And they're like, wow and ETF is basically a way to defer taxes, we should probably figure out how to do that. So that's probably like 2012-2013. We said, let's just do that. We didn't really ask like, well, should we do that? Or how would we do that? Or why doesn't everyone else think they should do that? 

Because it's pretty risky and crazy and hard. We just said, we're just going to do that. Again, being kind of marine mentality, overconfident, not really thinking things through or so we're going to get it done. So that's what we did. And then fast forward to around I don't even know, you know, 5, 6, 7, 8 years later, you know, through just dumb luck. We're running our ETF business, doing our, you know, concentrated factor things. But we're also in the background, figuring out how to do more with less kind of do in the Marine Corps style of like, basically putting together an ETF operating business on a shoestring. Well, it turns out that now a lot of other people want to get into ETF business. But it's really expensive. It's really hard. It's really difficult. And oh, by the way, Wes and his, you know, gang of pirates over here. 

They've already figured this out because they've been doing this for 70 years, right? How do you survive in this crazy competitive business? And keep costs way down? Well, we would like to borrow your infrastructure. Can you sell it to us, is basically how we started ETF Architect, which is a low cost infrastructure provider to the ETF business. So if you want to build your ETF, but you'd like to pay low cost, you know that that's what we did there. It's kind of like AWS, right? Like Amazon, is like, hey, we got to put all these servers. We got to do all this technology, so we can run amazon.com.

And then, you know, down the road, they're like, well, wait a second, like this amazon.com business is kind of interesting. But there's a lot more demand for infrastructure. And oh, by the way, we DIY didn't do it cheaper, better, faster, stronger than anyone else. Why don't we just sell that instead and so that's what we kind of serendipitously found ourselves in with the ETF architect business is it's kind of like AWS, for ETFs. It's kind of like low cost infrastructure. If you don't want to build your own server farm and all these sorts of things. So we'll use it as an analogy with AWS. 

Brock Briggs  1:12:51  

I love to study business and different business models so much and some of the greatest companies of all time have like gone through that exact same process. You know, hey, we need to solve this problem for ourselves. And it turns out that enabling others to do the same turns out to be almost what's more valuable than the original thing. Have you found that to be the case with ETF versus alpha?

Wes Gray  1:13:17  

100 percent! Yeah, all of our businesses. So we have another business in the same called in 1042 qualified replacement rollovers, which 99.99% of the world has never even heard of. It's this esoteric tax thing having to do with Aesop's employee stock ownership programs. How the heck do we get into that business? Because that's run by investment banks and commercial banks typically. Well, one of my old business partners, dad, who's actually a former Marine, hit us up and he's like, hey, if you guys ever heard of this or like no, he's like, well, can you investigate it and solve it? Sure, we'll give it a whirl and then never even heard of this business. We looked at it. We're like, oh, my God. 

There are no efficient, transparent, low cost, ways to solve this problem. They're all overpriced, totally opaque and not efficient. We need to just solve this problem for this marine. And so we started our business, you know, eight, nine years ago. It's just yeah, everything we've always done, which I was not ever planning when I launched Alpha Architect. I'm going to be in the 1042 QRP business. Like, I never had heard of that before my entire life in the PhD program. Same thing, like I never thought I'd ever be in like doing operational, you know, shovel selling for ETF infrastructure business. 

Like I didn't even know what an ETF was when I was in my PhD program in finance, right? So yeah, 100% and you only learn that through being in the game and like getting presented problems look into the marketplace. Hey, is there a solution already out there? Nope. Well, I guess we're gonna have to figure it out. And then that’s how to start a business. And we just kind of cobble together three or four of those at this point.

Brock Briggs  1:15:14  

Stories like that are such a great reminder that you can't even dream that up without having been so deep in the industry that, you know. I think that the takeaway from what I'm hearing from you is just kind of get started doing something, if you're entrepreneurship inclined, start solving a problem. And that may or may not be actually what you end up doing down the road. But we'll give you exposure to other interesting problems to be solved.

Wes Gray  1:15:45  

100%, you can't, it's kind of like the Marine Corps mentality on mission planning. You gotta think through, you gotta have a plan, you gotta get like the 70-80% solution. But if you're the type of mentality where you need 100% clarity, you're never going to be an entrepreneur. It's gonna drive you insane, your anxiety is gonna go through the roof. You have to be able to operate, maybe 70-80%. There's just going to be 20%, you got to roll with it, figure it out as you go and adapt. And obviously veterans are super well trained, either from DNA and through nurture, through, you know, the service, how they transition Marine Corps, like Marines are the perfect entrepreneurs, man. It's like, the Marine Corps is training you, in the end to be an entrepreneur, through all the mission planning, like how you think about life. It's perfect.

Brock Briggs  1:16:45  

Getting to know several Marines over the course of the last year and doing this podcast, I would certainly agree with that. And counter that to a navy background where we're trained very specifically on how to operate under certain conditions, you're taught a skill or a trade about how this thing does get done. There's an SOP, there's a textbook, there's a process that you follow for everything. But the life and work of a Marine is much more gray, like we were talking about in the beginning. It's much more ambiguous, and there's nuance and you gotta kind of learn along the way.

Wes Gray  1:17:25  

Yeah and you can and all the branches, there's opportunities, you know, for obviously, planning and leadership, but yeah, the Marine Corps, just in particular, that's like their bread and butter. And like, you know, I take a corporal that's run like a squatter fire team. And I just know from that person's training, that the way they've thought about the world, the way they go about solving problems, they're gonna be good at being an entrepreneur because you're just ready to roll. It's like, you're perfect. 

And the only thing that's a challenge is in like, you know, in the Marines, like you're trying to go kill something or go take that hill or whatever. In the civilian world, you know, the objectives are obviously very different. Like, hey, I have this problem I need to solve. And the context is just radically changed but the principles are very similar. So now you just need, in the civilian world, you gotta have some skill set. So you can actually solve the problem, like get good at finance or get good at X or Y or Z. Because you gotta have a different skill set and like being able to shoot 500 yard targets. But you could figure that out. But then the other principles will flow through seamlessly.

Brock Briggs  1:18:46  

Can you give us a sense of the size and scale of Alpha and ETF Architect, whether that be headcount, size of business?

Wes Gray  1:18:57  

So our business is big now, just through dumb luck. So we like actually, this week, we're launching, like $800 million mutual fund conversion. So we have right now I think we have like 34-35 funds, around two and a half billion plus on our platform. And by the end of this year, it will probably be $5,000,000,000.50 funds because that's just, that's crazy. But two, three years ago, like well, let's say going back to 2000, that COVID times like March 2020, you know, we were at like 500 mil, like, we all had to take salary cuts. And we're bleeding red ink and it was like oh my god, you know, it wasn't lights out, but it's like, hey, we're going into survival mode here for the foreseeable future. And fast forward literally three years, I mean, it's crazy. 

Now I live in Puerto Rico and you know, kind of living the dream but it is life changes quick and so but we spent just to give people perspective, like we've been in this deal 13 years now in this business, like 10 of those years have pretty much been broke. Like, it's not wasn't that exciting, you know, it's been like March 2020, which was,  that was 10 and a half years into the business. Like, it almost went out, like it almost was gone, like so then would have been a 10 years zero. It just, we just hadn't like the world changed. And we adapted and all worked out. 

But so I've only really kind of been recently enjoying success and being like, oh, this is how people get rich. Like literally last year, too. But it's still fresh in my mind of being broke, grinding it out, like, you know, having I'll probably adapt and get soft and be pathetic here pretty quick. But you know, right now I'm still in like the survival mentality. Because I was in that mode for, you know, 10 plus years. But I'm finally seeing the light of how these business things work. And, you know, I could have never predicted that. This is what it is.

Brock Briggs  1:21:14  

Might be some mixed interpretation when it comes to financial markets. But certainly when it comes to business, it certainly seems that time in market is better than timing the market.

Wes Gray  1:21:24  

Yep, if you just survive, especially in finance, you will win. But surviving is extremely hard because all your revenue, like you have a ton of fixed costs in your business typically and all your revenue is driven by the market, right? Because usually charge like some fee as a percentage of your assets. But if the assets go down 50%, your revenue goes down 50%, but your costs don't. They usually stay the same. So if you just live over like 5, 10 years in financial services, it's almost inevitable, you're going to be successful. But that's really, really hard to do. But if you could figure that out, at least in our business, like if you say, hey, I have a plan to live for 10 years, let's say you're gonna be rich and you're gonna make it, right? I don't even have to know what you're doing. 

If you told me somehow you guarantee you'll be alive in 10 years from now, I will say I guarantee you've been successful. Because through compounding, like, let's say whatever you're doing, your revenue is probably growing through, you know, the equity risk premia, which is usually like 6-7% a year, that means just if you're just alive, your revenue is going to at least double or triple just by being alive, you didn't have to do anything. And no other business I know of has a revenue that can grow it double triple the rate of inflation by just being alive, right? You just didn't do anything, you're just alive and your revenue is going to double or triple. But that revenue also can drop in half, multiple times along the journey. And so that's what you have to plan for. And that's what makes financial services in particular, extraordinarily challenging.

Brock Briggs  1:23:13  

Where is the primary source of the demand coming from for your guys's ETF business? And what does the future of ETFs look like? Is it all going to be hyper niche super specific, like customized for everybody? And everything that you could want?

Wes Gray  1:23:33  

Yes, pretty much. So our offering is kind of like Alpha Architect, right? Like, in Alpha Architects business, we're trying to deliver affordable alpha, right? How do we vanguardize weird boutique-y stuff that's not scalable. And so but we have a lot of fixed costs. But we have to like figure this problem out. How do I compete with Vanguard in a weird boutique-y non scalable thing that delivers affordable costs? But it can't be free because it's expensive to generate, and it can't scale forever. You know, same thing and in ETF side of things. It's always been run by banks who are super inefficient, super expensive, it's totally non-transparent. And so it's really, really hard to enter the ETF business, right? You gotta be like, you know, some monster shop. However, we came in and said, well, we've been doing this for 10 years. We figured out how to do it cheap. 

We figured out how to do it turnkey, we figured out how to do it with total transparency because that's our mantra. Because we believe that if you understand what you're getting into, you're gonna make better decisions and it's a win-win for everybody. We have no desire to convince you that we're awesome in all proprietary because we have just a lot of confidence that it's better to keep you informed and educated and just operate as a team, as opposed to like the black boxing. That's kind of what the other competitors done. So what our vision for the ETF If industry is we want to be that beacon of light, where if you want to get into this business and you need someone who can deliver you to this market with high confidence and low cost, you know, you don't need to have $100 million day one. You don't need to have 50 mil, you can maybe come out 10 to 15 mil or even 5 mil, if you have a plan to maybe get the 25 in a couple of years, you know, you're actually survivable, right? 

So our vision is we're trying to open this market up where a lot of players that a three year plan of getting to like 100 or 200 million, they're just like, that's impossible, man, how would I ever do that? Like if the barrier to entry is too high. And so we're trying to do is say, well, what if you have a two to three year plan to get to 25 or 50 mil, right? Now you've got a rockin business. And we're the platform that can help you achieve that. And that's much more realistic, it's never going to be easy because we're in like the most regulated space of all time. And there's just too many lawyers involved in this and too many things like that. But at least we can try to lower the barrier to entry to allow this blue ocean of folks who have a lot of good ideas, but they can't get to the scale to compete with like a Vanguard. That's basically what we're trying to do there.

Brock Briggs  1:26:22  

What kind of benefits can you offer the people who are interested who I'm assuming might include like, family offices and maybe ultra high net worth folks, other than maybe simplicity and I'm assuming tax implications?

Wes Gray  1:26:37  

Yep. So our offering is basically affordable turnkey and totally transparent, which is awesome. Because it solves basically all the problems of energy and ETF space it and we have very, very niche skill sets, specific to tax structuring, which violent in Puerto Rico, like my whole business is about tax. And so we have focused in what they call tax free conversions. So if you have assets that are sitting in estimates, separately managed accounts, sitting in a mutual fund or sitting in a hedge fund wrapper, we can take those assets and via a tax free conversion, turn them into an ETF wrapper. 

And we're transparent about how that works. But a fortune is just complex and a pain in the ass. But that's what we specialize in, right? And we've tried to bring the break even cost down enough that you still have to be pretty rich, right? You got to have at least probably 25-50 mil if that's all you're thinking about as the tax benefits to do it, but at least it's not 100 or 200 mil. But yeah, so if you have taxable assets and you'd like to move them into the ETF structure to take advantage of the tax benefits from the ETF, that's what we're very specialized in doing is helping you get there legally. So

Brock Briggs  1:28:03  

Wes, this has been a really, really fun conversation. I appreciate you giving me the rundown. I have a couple rapid fire questions from Twitter. I want to ask you a couple of sources here that were really fun. What would you do if you didn't work in finance?

Wes Gray  1:28:20  

I honestly don't know, man. I might. I just don't know like I just like finances by it's my baby. I don't know maybe be like a scientist or maybe like a coach. Like back in the day, I used to play football in high school. Like I would be like a high school coach, just like an athletic coach. I probably would do that. I don't know. Finance is all I have ever thought about since I was like 10. That's a good question. I have no clue, maybe be a coach.

Brock Briggs  1:28:54  

Who do you look up to most in the industry?

Wes Gray  1:28:59  

I like AQR pride number one by far. Like I always tell people hey, we're like a mini AQR, just dumber with less assets. But I like them. They do great research. I like their principles. I just, yeah, just like their firm, like how they hold themselves out there feel like they're very, very intellectually honest about research because obviously we all have incentive to sell and tell people that's the best thing since sliced bread. But I feel like they go about their research and their communications in a very academic way. Like academics care about intellectual truth, for the most part, where it's like asset managers care about selling product because that's how we get paid. So it's, you know, firms that can manage that conflict of interest very well. I just have a lot of respect for it. And I feel like AQR is the number one. And we tried to do that as well. But that's because I'm modeling off of AQR.

Brock Briggs  1:30:02  

What is something that you do to build wealth every day?

Wes Gray  1:30:08  

I try to get smarter and better at my processes and my jobs because that's all the thing I want to do. So I always tell people, like, the one thing you could compound is your knowledge, right? You can't tell the stock market what to do. You can't like, you know, go gamble on Bitcoin, say, hey, double tomorrow, but what you can do is control your process and get your knowledge going. And over time, like use the little bits, but it kind of compounds on itself. 

So if you just do a little bit every day, in a nice controlled fashion, something you could control, you know, 10-20 years later, you have all the journals, the finance memorized, which is basically my status, right? Like, I've read every paper and every journal for the last 20 years. I forgotten more about finance long people know. And that's it's not because I magically woke up with that knowledge because every day, you know, I got like, there's just a little snippet or a paper I read. Just if you do that for 20 years, you end up having a lot of knowledge. And so that's what I recommend. And that’ll probably make you a better investor over time.

Brock Briggs  1:31:17  

I normally ask, what's something that we could implement in our lives that we can take away from you today, would that be it?

Wes Gray  1:31:26  

Yeah, I would say just little changes done all the time is what's going to have the biggest effects on your life, right? Like so recently, like this example, not in finance, because that's a little more esoteric, but you know, I was starting to, I've never been fat, but like, I was like, hey, you know, I need to lose some weight. So I just said, you know what? I'm just going to drink coffee and stop eating breakfast. It's a little change, I don't even need to eat breakfast normally. And I've been doing it for like three or four months now. I lost two or three pounds. Like, it's just a little thing that you do every day. But if you stay on it, like it starts adding up a lot in the longtail so little decisions. You don't want to make big decisions, you don't want to do things that are really hard, little things that are simple that you do all the time, those seem to be the things that stick in whatever aspect of life you're, you know, trying to solve a problem for.

Brock Briggs  1:32:24  

Last one, what is something that myself and or the listeners can do to be useful to you?

Wes Gray  1:32:31  

Ah, I don't need anything, man. I'm at this point, I'm a pure giver. Like, my life is all good. Like, yeah, I don't need shit from anybody. That said, I'm more than happy to be a positive NPV project for society. So I would say, we try to produce content out there, as we're always pumping out blogs on Twitter everywhere, like tickseed, you want to try to learn and get better. Like, we try to facilitate that because that's our main mission on how far tech apart education. So I would just try to lean on us to help you because I personally don't need at this point, like I've made it, you know. So I wouldn't even sweat that. The way you can help me is by like, leaning on our content and making me feel good about myself in a sense I'm trying to give back now. And so if you could take advantage of that, that'd be a great thing.

Brock Briggs  1:33:29  

I'll include links to Alpha Architect and your information in the show notes. Wes, I really appreciate your time. Thank you so much.

Wes Gray  1:33:35  

You got it.