Gavin Baker – Investing Through a Bear Market

**Patrick O'Shaughnessy** (0:00)
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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** (0:56)
Patrick O'Shaughnessy is the CEO of 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 and the securities discussed in this podcast.

**Patrick O'Shaughnessy** (1:21)
My guest today is with past guest, Gavin Baker, the founder and CIO of Atreides Management LP.
We discuss investing during a bear market and the major ways in which the COVID-19 outbreak has dramatically altered the investment landscape. Please enjoy my second conversation with Gavin Baker.

**Gavin Baker** (1:40)
You said this is absolutely unprecedented market, nothing other than 809 really compares in my experience, and I did live through 00, 01, 02, and while that obviously had a much greater peak to trough decline, particularly for tech, the volatility was not what we saw in 0809, and you can see that in the VIX.
So why is this kind of game seven of the NBA finals, the Super Bowl, the deciding match in a eSports tournament? Valuation spreads within a sector between individual stocks are at all time highs.
It was a four and a half standard deviation relative to the norm only a few days ago. I think today it's three and a half standard deviations. So it's swinging around wildly. You have peak volatility, peak valuation spreads, and then very high correlations, which means when you put all those together, this is the biggest opportunity if you're focused on alpha, are you a long short investor? If you're an absolute return investor, it's a little bit of a different environment because you don't care as much about valuation spreads, you care about absolute valuations. But if you were focused on alpha as a long only, or you were a long short manager, this is statistically as rich of an opportunity set as we have seen in the last hundred years.

**Patrick O'Shaughnessy** (3:00)
One of the most interesting things about those spreads, which is something we in the quant world monitor extremely closely, and like you said, it's just there's no other word for it than historic. No matter how you measure the spread in sectors between market cap anywhere, it's really crazy.
The interesting thing about spreads in this environment though is that we're operating on a lot of uncertain information because we haven't seen the first round of quarterly financial statements that reflect exactly how coronavirus is impacting firms. So I'm curious with that crazy spread environment, but understanding we don't have the official numbers yet and companies are just withdrawing guidance. They're not just changing it, they're withdrawing guidance.
How you as an active, concentrated, active manager deal with that problem of information uncertainty?

**Gavin Baker** (3:45)
Well, I would say broadly speaking, I think there are two choices if you're an active investor in a market like this. Either you can do nothing, believe in your companies, hopefully your companies have good balance sheets, they have strong competitive advantages and they were well positioned for this or you can trade really actively and if you're going to trade actively, I wrote on Medium that it's like being in a knife fight when you're blindfolded and covered in grease and part of that is it's just risk versus uncertainty. This is a time of really high uncertainty. This is the fog of war and the only information you can rely upon is information that is wildly stale and that is trailing numbers.
That is the best information, but at least trailing numbers are actual. They happened. They mean something.
No forward number means anything.
Every company is going to miss. They're all going to guide down.