Talk Your Book: Price Is the Ultimate Factor

0:00Ben Carlson:Today's Animal Spirits Talk, your book, is brought to you by The Motley Fool Asset Management. Go to fooletfs.com to learn more about all of The Motley Fool's various strategies and ETFs. That's motleyfoolassetmanagement, fooletfs.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnick and Ben Carlson as they talk about what they're reading, writing, and watching. All opinions expressed by Michael and Ben are solely their own opinion and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions.

0:35Clients of Britholtz Wealth Management may maintain positions in the securities discussed in this podcast.

0:43Michael Batnick:Welcome to Animal Spirits with Michael and Ben. On today's show, we spoke with Bill Mann from Motley Fool Asset Management.

0:49Ben Carlson:We've talked to him a number of times before. The internet boom the first time was the first really, you know, we had these internet chat rooms, right? Where you could kind of spread information faster. And that whole hurting thing has always happened. But it does just seem to go up another level with every new technology we have. It started with the chat rooms and then social media came along and blogging and now AI. I do think that the momentum type behavior, which we're talking about today, a lot of momentum strategies, I do think that stuff is going to just get put on steroids and those cycles are going to be happening way, way faster.

1:25Michael Batnick:One of the things that has become more and more difficult in the modern world is long-term thinking and long-term investing. I think a lot of people are of the mind that, all right, this cycle is going to end at some point, right? We've gone up a lot. We're going to go down a lot. And then that's it. The stock market goes away. Don't you think that that's sort of some people's, I know not literally, but some people think like, all right, when the cycle ends. Yeah. But no, guess what? We're going to be alive. You will be investing, God willing, for the next 10, 20, 30, 40 years and beyond. People always try to equate investing

2:00Ben Carlson:to some sort of sports analogy, like what inning are we in? The game just keeps going. That's right. It's a different kind of game. We're still trying to figure out, like, how does this end? What does this mean with AI? And it feels like we're talking in circles in some ways, but that's what I like the idea of. Bill talked about how they have, they call them passive strategies and they're rules-based. And I think that to me is the, that's how you force yourself to be a long-term investor is you put rules in place and you don't try to let it, you know? Because how many people are going to be putting in, hey, listen, I want to invest in the AI theme, but I want to stay away from the hyperscalers, but I want to avoid companies that are below this level.

2:35Ben Carlson:And how many people are getting spit out those same exact companies to invest in and putting it in? And then how willing are you going to be to stick with one of those stocks that you just, it spits out to you, right?

2:44Michael Batnick:Rules are more important now than ever.

2:46Ben Carlson:I agree. So here's our talk with Bill Mann. He is the chief investment strategist at Motley Fool Asset Management.

2:54Bill, it is great to see you again. Michael, you guys look healthy. You look good. You've got your summer glow. Still got it. Ben's got a mustache. He does. I have to look close when I see it.

3:06Michael Batnick:All right. We are talking about momentum today. And I've used this example a million times, probably with you. When talking about momentum, it seems to be an under-allocated space, at least from the advisor side. I think a lot of advisors have drunk the value serum. I don't want to use coolly. That's a bad word. Nothing wrong with value. We believe in it. There's a wide acceptance among all sorts of investors, particularly advisors with value. And if you compare the assets and value strategies versus momentum strategies, value dwarf momentum. And they really are two sides of the same coin. There's a lot of behavioral anomalies that make the factors persist to the extent that they do.

3:47Michael Batnick:But I think even though there's been an underallocation to momentum compared to value, I think investors have largely come around to the idea that momentum exists, that it is pervasive, especially in a world today where the factor exists because of behavioral anomalies, the way information spreads, and it spreads a lot faster today than it did 40 years ago when it was first discovered or whatever year that was. How do you think the general investor, I know this is sort of an unfair question, how do you think momentum is understood today? I would love to come up with a better word than momentum for momentum as you think about it as an investing strategy, because it really sounds like Mr.

4:26Toad's wild ride. Like you're getting put into the catapult, you know, an angry bird type situation. You're getting, you know, slingshot out into space. And what momentum is functionally is a way of tracking those behavioral anomalies of what is working in the market. And that doesn't necessarily mean the hottest components of the market. What it means is the parts of the market that are showing outsized performance relative to how they usually perform. So you can end up with a substantial overlap between a value strategy and a momentum strategy depending on the kinds of markets that you're in.

5:10And what's important that is different between momentum and value is that as we know, and people who are dyed in the wool value investors, value investing can have a bad decade or two as we've gone through. And what Momentum is doing is taking a little bit of the edge out of putting all of your eggs into that value basket, waiting for it to work with the other understanding that at some point it will. But in the meantime, why are you not allocating a component of your portfolio to the things that are working within reason?

5:48Ben Carlson:I've often talked about the fact that in a roundabout way, the S &P 500 is like a momentum strategy, right? The cream rises to the top, you're letting your winners ride, the losers are kind of cutting themselves short. But obviously, that's not the quantitative definition of momentum, right? Like a quant would tell you. I'm curious how you think about because even with value factors, any type of type of quantitative strategy, you can slice and dice it in a million ways, right? Certain value factors for large cap stocks will look different because of the rules that are chosen. So how do you, how do you think about like the 80, 20 principle of getting the big stuff, right.

6:25Ben Carlson:Versus trying to get too much into the nitty gritty, into the weeds and the details in over-optimizing a strategy for momentum that like, it's kind of, or do you just keep it simpler? I'm curious how you think about like the level of detail that's desired in a quantitative strategy like this. We are simple bears first and foremost that, you know, at the Motley Fool and Motley Fool asset management, our, you know, I, our philosophy is finding high quality companies. And so the top of our universe is always going to be one of the highest quality companies that we would like to have a long-term investing relationship with.

6:59And if you understand the simplicity of that, it's endlessly complex, right? But the fundamental of it is very simple. We're not looking into the hottest parts of the market. We're looking into making sure that we're getting that 80 % right. Like we are invested at all times in the types of companies that we would like to be invested in. And so if you get that right over time, that should pay off. So I think probably, you know, thinking about your question is, I think that we tend to think or that people generally think of momentum as being the same thing as leverage, you know, a leverage strategy.

7:41And we are fundamentally unlevered. And even more so than that, you know, when you're looking at high quality companies, they tend to be unlevered as well. What we are trying to do is to ensure that we are focusing in the market within that space in the, you know, in the companies that the market is, you know, is favoring and valuing at that moment.

8:06Michael Batnick:I want to talk more about some of the quantitative measures and thinking about longer-term momentum versus short-term breaks and how they all shake out. But just getting back to how it's perceived, momentum to me is a fair description. I understand your point that people think it's like this crazy strategy, but it's sure way better than the chase stock strategy. I don't have a better word, by the way. But I think one of the reasons, so when people think about investing, they think about, all right, how to get smart on companies and let's do research. We research the fundamentals, the income statement, the balance sheet, cash flows, all of that sort of stuff.

8:45Michael Batnick:Try to normalize, look at the moat, the competitive advantage, the governance, the board, the C-suite, all those sort of things. And you try and understand. And those can be sliced in terms as like factors, different factors, quality, whatever you're looking at. I think people don't consider that price is the ultimate factor. And price distills all of it. And the reason that momentum exists fundamentally before even the behavioral things kick in is because these companies are doing well. Stocks don't just get momentum. They get momentum because all of the things that you would research are clicking in the right direction.

9:26Michael Batnick:And then, of course, there's the pile on and the underreaction, the overreaction, all of those sort of things. But price is it. And I think people are too quick to dismiss it because it sounds so simple. We have all seen in our careers in investing in individual equities where you own an equity and you're very excited about it and the company is doing well, but then suddenly the stock starts to perform poorly and there's a lag of nine months. And then suddenly the news that somehow that price factor understood comes out and becomes well understood by the market. So, yeah, I absolutely do agree that price is the ultimate factor.

10:07And a momentum strategy is simply leaning on the fact that that is true. We can agree or disagree. And it does seem like every time I come on to your podcast, I complain about something. But, you know, last time it was active versus passive. And this time it's momentum. I'm becoming grumpy in my old age. But I mean, you know, ultimately, when you think about price and what is working in the market, it's not like it, you know, things are being pulled out of a scrabble bag. There's there's not randomness to it. It is based on entities that are, you know, that are ideally, you know, capitalally appreciative.

10:45That's what businesses is. they are the core element. And so a momentum strategy looking at those behavioral anomalies is simply a distillation of the fact that the market is in fact smarter than all of us, regardless of how much sophistication we bring to our analysis.

11:07Ben Carlson:Bill, there shouldn't be that much to complain about right now because we're in a bull market. We've been in a nice bull market for a while now. You had this topic that you call the NOAA principle. I'm curious to just for explain to me what the Noah principle is and why it's important. So we can think about the Noah principle as being, you know, going back to the Old Testament, Noah at one point had to build an ark, right? And, you know, that we, I won't recount the story. I believe that, you know, most people are familiar with the story of Noah, but Noah went through a period of time where he was building this large boat and looked like an idiot, right?

11:43Why are you building a boat, Noah, right? What is it that you're going to do? How is it that you're going to collect two of everything? You know, when, look, it's sunny out. When we think about investing, one of the, you know, one of the key elements that is simply true is that people have a very, very hard time preparing for, in a really principled way, the upcoming flood, right? We can talk about AI now, right? Right now, we know that there are a lot of people who believe that AI is in a bubble. There's like circular investment. There are all these things that we can worry about. And at some point, the market will decide to worry about it.

12:27It'll just decide. Now is the time in which I do not believe anything in AI has to be true. We saw it with semiconductors. Suddenly, you had semiconductors. They were the hottest thing on the planet in the first quarter, and they were ice cold in the second quarter. Why? So when we think about managing money and when we think about making those decisions, it is a very, very difficult thing to get out away from the things that are working at the moment, even if you can see that there are storm clouds on the horizon.

12:59Michael Batnick:Bill, those storm clouds happen faster today than they used to. So when building a strategy that is dictated fundamentally on price, how do you think about what happens when a company and you're just staring at the chart? Clearly, the short-term momentum is lost. A company went from$50 up to$100 over a two-year period. And then over a one-month period, it falls down to$82 pretty rapidly. The shorter-term trader would say, I'm out, done, right? Clearly has lost the momentum. The longer term trader would look at say a weekly chart or whatever, a longer term moving average and say, no, this is totally normal within the scope of a long-term winner.

13:46Michael Batnick:It pulls back, but it hasn't really violated what we think to be the longer term momentum signals. How do you think about balancing those two competing forces? So the way that our strategy is, you know, has worked. And again, you know, we are, we are primarily a passive shop. So we are updating quarterly. And so in some ways, the short-term charts are somewhat irrelevant to us. We're singing in the hems of the church of what's happening now. When we come to those rebalances quarterly, we have a fairly stochastic method of favoring more what the longer-term momentum is showing rather than being super sensitive.

14:25And again, I think that that comes from a belief that the market does tend to overreact to news. But if you think again, what I was saying about a company that nine months ago hit its peak, and then you figure out longer term that there actually was something wrong, and we see a bunch of those in the news today, some formerly high-flying brands that are no longer that are seeing a lot of trouble. The way that we tend to think about setting up our reacting is reacting much more to the longer term than to the shorter term.

15:03Ben Carlson:I guess my big broad thing on your NOAA principle is that people have been hit over the head for years with predictions about what the next shoe to drop is going to be. This is going to be the thing that gets us. We're going to be in a recession. We're going to be in stagflation. It's going to be a lower term. Michael and I have talked about all these things ad nauseum about what the next thing is that's going to get us. And now, of course, AI is obviously an easy one. And to be honest, I think AI is the one that probably makes the most sense. If there is a pullback in CapEx, it's such a big part of the economy and the markets now.

15:33Ben Carlson:If that did happen, it would seem like you would have a meaningful pullback on maybe the economy and the market. I'm just curious how you think about just preparing for the flood with the understanding that the floods don't happen very often. and how people can kind of balance that. Because it is hard when you're a constant drumbeat of this is going to crash and that's going to crash. Then the crashes don't happen. And then you're like, well, maybe I'm becoming too not worried about stuff. And it's hard, right? It's endlessly fascinating too, right? The degree to which economists have called 15 of the last five recessions, for example, you know, like, yes, there are always, you know, we talk about the markets climbing a wall of worry.

16:13I think that that's absolutely true. When I think about building the arc, if you will, ultimately, we are talking about individuals and individual investors who have to be able to live with their own portfolios, right? At the end of the day, a perfectly built portfolio will do you no good if you either overreact or underreact to reality, right? And we worry more about people who overreact than underreact. And I think that this history would show that people who trade the most tend to do the least well. So ultimately, what we are trying to do is create a balance between between worrying about things like that and just having a mechanism in place that adjusts naturally.

17:07And Michael, you mentioned the S &P 500 earlier. On some levels, that's exactly what that is. It's exactly what the S &P 500 does. It is a prietuated mechanism that measures how the market is thinking about companies at any given point. It's why it's one of the most powerful things that's ever been devised, but it was not mined. It was not discovered. It was in fact devised.

17:31Ben Carlson:Do you think with the momentum stuff, there was some chatter going around today that, listen, every analyst now has access to the same tool, whatever LLM you're using, OpenAI or Cloud or whatever. We're all asking it kind of the same questions. We're taking the same data and filtering it through. And they're probabilistic by nature, right? They're not going to give you the answers, but they're going to say, hey, here's probably the baseline. Do you think that there's actually the case to be made that there'll be more hurting in the future because of this and more momentum, but that maybe the momentum crashes.

18:01Ben Carlson:Well, I'm getting very theoretical here, but maybe the momentum crashes will be even bigger because people are all just going to, you know what, we're outsourcing all our thinking to these robots anyway. Let's just do it. Why think? Yeah. I mean, you see it too with the Reddit forums and all that. Like, there's going to be more hurting into these things. And it seems like the behavioral stuff that causes momentum is going to be even more amplified going forward. I wish I'd thought about pulling this up beforehand, but there's a fascinating study that looks at 70 different models. The University of Washington did it.

18:3170 different AI models, and they would query questions that were things like, why is six afraid of seven? Give me 500 words on this. And they were dramatically the same. And this is a tendency that's called high T. So yes, absolutely, within AI models, they are designed and they are meant to give you the highest level of consensus. So I think that there probably will be additional herding. We thought the same thing about the internet, by the way, right? Hey, suddenly information is available. Google is out there, I guess at the time, AltaVista and Lycos are out there. And so people are going to be asking the same questions.

19:16It didn't really happen that way. And so I think that there will be a curve. But the thing that we try to remember first and foremost is that although the market is a giant parimutuel system, the logic of the market is based on how these companies are performing. The instruments themselves are not on a one-to-one correlation with the market, right? The businesses perform or do not perform completely separate from the market itself. And so ultimately, the convergence happens naturally.

19:51Michael Batnick:So how do you think about the evolving nature in terms of like the sectoral composition? Do you put any guardrails around this? because for much of the last couple of years, it was really clustering around technology and communication services. I believe I read the other day that we had the highest concentration in 2025 in technology in the U.S. markets since the railroads in the early 20s when they were 70 % of the market. So it's obviously a huge concentration. I guess the difference being between the technology companies and, say, the railroads, although I could talk myself into the opposite position, that generally speaking, they have incredible returns on capital still, even with the capital investment budget that they have.

20:44I think one of the ways that a momentum strategy can actually pay off is by picking up on the real subtle changes in the markets, or even not so subtle. In the first quarter of 2026, everything was semiconductors. And then the second quarter of 2026, we were back to capital investment in AI. We can assume that those changes are going to continue. I think one of the things that is fundamental about a factor model is that it will pick up on what the market is seeing way before the average investor can see it.

21:23Ben Carlson:So what do you think happens like when this stuff does or I think that's the interesting part to me about the momentum strategies is that they are kind of these chameleons where it's not just like some people assume, well, momentum, that's just you're investing in tech or growth stocks. But there's a big difference between growth and momentum, obviously. And for the people who don't invest in momentum, I think that's a surprise. So if the, you know, if dividend stocks start working again in high quality stocks, like those are the ones that are going to show up on the screen. I'm just curious how you think about the transition periods, though, of getting there.