Dr. Ben Hunt - The Three-Body Portfolio

**Patrick O'Shaughnessy** (0:00)
This podcast is sponsored by CFA Institute, the Global Association of Investment Professionals, whose mission is to lead the investment profession by promoting the highest standards of ethics, education and professional excellence for the ultimate benefit of society. CFA Institute serves a global community of investment professionals, working to build an investment industry where investors' interests come first, financial markets function at their best, and economies grow. The Chartered Financial Analyst credential is the most respected and recognized investment management designation in the world.
The views expressed in this podcast do not necessarily represent the views of CFA Institute.
Hello and welcome everyone. I'm Patrick O'Shaughnessy, and this is Invest Like the Best. This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com.

**SPEAKER_2** (0:59)
Patrick O'Shaughnessy is a principal and portfolio manager at O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaughnessy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
My guest this week is Dr. Ben Hunt, the Chief Investment Strategist at Salient and the author of the extremely popular website, The Epsilon Theory. I've always enjoyed Ben's writing style, particularly his use of farm and animal-based analogies to describe market phenomenon. In this conversation, we discuss his recent post, The Three Body Problem, why growth has been beating value and why a strategy that he calls profound agnosticism, a sort of take on risk parity, may be the most appropriate investment strategy in what he views as a very uncertain world.
Please enjoy our conversation.

**Ben Hunt** (1:54)
It's an old problem in physics. And it refers to Henri Poincaré, he was one of the geniuses of mathematics of the last millennium. And it was in the 1800s, and what he was trying to figure out is this, well, back up a second, what he's interested in, this is going to be your connection to bees and actually, I think, to humans and investing into your original question of what's your fundamental idea about investing. He was wrestling with this question of algorithms, which is a formula, which is a process that you can apply over and over again where you put in your values and you turn the crank of the algorithm and it gives you an answer. What I will tell you is that whether it's human beings, the way we construct our societies and our markets, whether it's bees and the way they construct their hives and the way that they search for honey or search for pollen and make nectar and make honey, they're all dominated by these algorithms, which are just our simple formulas for making sense of the world.
And in my experience, whether you're a value investor or a growth investor or a momentum guy or a quant or whatever you are, in the back of your head, you've got a collection of algorithms for how you make sense of the investing world.
And what Poincare was trying to wrestle with was one of these classic problems of geometry. He was a geometry nut.
And it's related to physics and the three-body problem really takes a problem from physics, which is to imagine you've got, you're in outer space and you've got three planets or stars or what have you, three massive bodies.
And you know exactly how they interact with each other. Gravity. And you know the laws of gravity. And that's all that acts here. There's no drag from atmosphere. It's just a pure calculation of, here's where these different three objects are. You know exactly how gravity works. Now, the question is, what's the formula, what's the algorithm to say where those three bodies will be 10 minutes from now or an hour from now? And again, you know everything about these three bodies. You know exactly where they are. You know how fast they're moving. And you know how they act on each other. And what Poincaré proved was that, and this is crazy talk, there is no algorithm. There is no algorithm. There is no formula that you can plug in all those starting conditions and turn the crank and say 10 minutes later or 10 years later, here's where all those objects will be. It does not exist. And that's such a hard thing to wrap one's head around. And you can, if you see pictures of it, you can kind of imagine it. But what it's really saying is that these are, we can use a term like a chaotic system or the like, which is kind of right, maybe not quite right, but for our purposes, right enough. So the three body problem is simply that when you've got these three entities, there is no formula because the starting conditions, you can really end up anywhere. It's not governed by a two body problem where you've got something orbiting around something else. They keep messing each other up, three bodies in space, such that there is no formula to ever predict this.