We Asked a $1 Billion Quant Manager Why Concentration Isn't a Warning — and Small Caps Aren't Dead

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**Matt Zenz** (0:56)
If it didn't feel bad, if it wasn't painful to keep holding it, you wouldn't get rewarded with higher returns. A lot of these AI companies, Google, Microsoft, etc., they are investing a lot into CapEx, into these data centers, etc. But as a percentage of their overall company, it's actually not that much. At the time, it always feels like these companies are going to take over the world, and then 10 years later, it's a different 10 companies. In hindsight, it makes perfect sense as to why these ones are not the biggest versus those. There's lots of companies that could have IPO'ed as small caps at the same time SpaceX could have that went to zero. Think like WeWork. WeWork was an extremely popular company. Everybody was talking about it. It took a while before it was going to think about IPO'ing, and it went bankrupt.
Welcome to Excess Returns. I'm Jack Forehand. Today, I'm excited to be joined by Matt Zenz. Matt is the Founder and Chief Investment Officer of Longview Research Partners, and also the Manager of the Longview Advantage ETF and the newly launched Longview Advantage Fixed Income ETF. Matt, welcome to Excess Returns. Hey Jack, how are you doing? Good. It's great to have you. And I'm kind of excited because you are an evidence-based investor, which is what I've tried to be my whole career as well. And I feel like we might be in a world right now where people might need a little bit of that. You know, I don't know if you think that's an exaggeration, but I feel like evidence-based investing might be something that's good for everybody right now. Yeah. I mean, personally, in my investment philosophy, I think it's what everybody should be doing all of the time. But yeah, there are certainly times when maybe people need a reminder or need to dive into it a little bit more. And so, you know, with social media now and everybody touting these, you know, levered products or the new IPOs that are coming out, and people get real excited about these types of things. Sometimes it's good to kind of go back to basics in terms of what drives returns. Yeah, you're definitely right. I mean, we should always be evidence-based investors. But during these, I don't want to say bubble, but like bubble-like periods, people tend to be a little more detached maybe from evidence than they normally are. Yeah, exactly. Yeah. They live in the moment and kind of forget about what's happened in the past.
I'm just curious before we start, do you, like going through these periods, you've looked at evidence like through 100 years of history in terms of how things happen. When you go through these periods, like do you feel differently in the period than looking at the evidence? Like it's something I've experienced a lot in my career. Like you look at the data and you're like, all right, value investing can struggle. And you're like, oh, look at the chart though. It came right back up. But then you go through it and you're like, this is a disaster. Or you go through these bubble periods and it's like, oh, I know, if I went through the 1990s, I would have been like, no problem. Like I understand the evidence will take over again. But then like you're in it and you're like, AI will change the world forever. And I mean, do you see that disconnect between like being in the real period and also like looking at the evidence? Yeah, I mean, I try to divorce myself that as much as possible. But when we talk to clients and prospects and those types of things, it is almost impossible to divorce yourself from what you're hearing today to the history. Like there's so many people who are just like, oh yeah, 2008, yeah, I would have bought back in. Like I wrote those returns, no problem. But you know, that 20% drop in the first couple of weeks of COVID, like they were freaking out. Or, you know, any type of small drop. And so, and at the time it always feels worse, but that is ultimately what drives the return. If it didn't feel bad, if it wasn't painful to keep holding it, you wouldn't get rewarded with higher returns. And so, it's that discomfort is what actually drives the return that you get if you're actually able to stick with it for the long term. Yeah, I don't know if it was Corey Hofstede, but someone said no pain, no premium. And I think that's a great saying to like think about, you know, things like that and how they work over the long term. Yeah, yeah, no, I totally agree with that assessment. You get paid for risk, right? And if you're willing to bear risk, and risks can be defined as, you know, feeling uncomfortable, not being able to meet your goals, downside, you know, returns. And so that's, you got to balance those. And if you're willing to stick with it, then you're going to get rewarded with return.