WESLEY R. GRAY: The problem with investing — just like if you’re in a combat situation or anything that’s stressful — is that you don’t want to go into those situations without a highly rigid, systematic plan. If you do, the minute there’s any amount of stress, the likelihood that you’re going to make a bad decision will keep ratcheting up and up — especially as you see your stock going down and your life savings blow up.

CHARLES MIZRAHI: My guest today is Dr. Wesley Gray. After serving as a captain in the U.S. Marine Corps, Wes received a PhD in finance from the University of Chicago. He then worked as a finance professor at Drexel University. His research on how to make money in the stock market is cutting edge. And that led him to found Alpha Architect in 2010.

CHARLES MIZRAHI: Alpha Architect is an asset management firm dedicated to empowering investors through education. He’s the coauthor of three outstanding books on investing — Quantitative Value, DIY Financial Advisor and Quantitative Momentum.

CHARLES MIZRAHI: I recently sat down with Wes, and we talked about how he uses different investment strategies that are fully transparent, evidence-based and systematic to produce outstanding returns — and how any investor can do the same.

CHARLES MIZRAHI: Wes, thanks so much for being on the show. I was really looking forward to this. I think we spoke last year, and I asked you about coming on the show. I’m glad we’re all settled down, and I get to spend some time with you.

WESLEY R. GRAY: Yeah, I appreciate you having me. And I look forward to chatting again.

CHARLES MIZRAHI: I think the last time we worked together on a project was about 11 or 12 years ago — in 2010 or so.

WESLEY R. GRAY: I remember right after that, we hosted Richie. We did the tour with the Wharton professors.

CHARLES MIZRAHI: Yeah, that was my son.

WESLEY R. GRAY: That was eight years ago. Yeah.

CHARLES MIZRAHI: Just to fill listeners in: My son Richie got a perfect score in math on the SAT. He’s a brilliant guy. And that was the year of the common app. He applied to all the Ivies. He was totally dejected that he didn’t make an Ivy. So, I called my buddy Wes — who was teaching at Drexel University at the time. He had all his buddies at Wharton. And I said: Richie, let’s go see Wes. He’ll set your head straight.” And you set his said straight — which was great. Thanks so much.

WESLEY R. GRAY: I remember we talked to the professors. You asked them all kinds of realistic, practitioner questions, and they couldn’t address them. And I was like: “I told you. Just because you’re a professor, it doesn’t mean you know much.”

CHARLES MIZRAHI: Right. Those guys were all of your Wharton buddies, right?

WESLEY R. GRAY: Yeah. A lot of them are old Chicago PhD classmates. They got jobs as professors there.

CHARLES MIZRAHI: All right, man. Time flies and goes on. And time is doing extremely well for you. When we first met, you were a professor at Drexel University and teaching finance. And now, you’re managing $1.5 billion at Alpha Architects. You’re busting it up tremendously with all sorts of great research and DIY. And you’re helping average investors.

WESLEY R. GRAY: Yeah, we’ve been hooking and jabbing for over 10 years now. We’re a 10-year overnight success. I still feel like I eat ramen noodles most of the time. But now, we’ve got $1.5 billion. To your point, it still doesn’t even feel real when you mention it. But fortunately, it is a fact.

CHARLES MIZRAHI: All right, great. So, let’s go back to the beginning. I really think that what you set out to do was so unique in the world of finance. From day one, you set out to use research and make it transparent. And you made it so that the average investor could get returns that eluded them because Wall Street makes things complex, difficult and charges a whole bunch of fees. So, let’s jump back to your University of Chicago days. You got a PhD in 2004?

WESLEY R. GRAY: Yeah. I started there in 2002. And then, I was there 2002 to 2004 doing the core — which is where you study 16 hours a day and get beat up by the math champs. And then, I obviously left because I joined the service. I took a sabbatical. And when I came back, I ended up finishing. I got back in 2008. I went into the s from 2004 to 2008, came back and finished from 2008 to 2010. So, there were four years total — but disjointed by a four-year sabbatical when I was in the Marines.

CHARLES MIZRAHI: How many PhD finance people from the University of Chicago stopped their dissertations and PhD programs and joined the Marines? I think you were an Arabic translator in Marine intelligence.

WESLEY R. GRAY: Yeah. I did FID missions — foreign internal defense — where I had been in bed with foreign militaries — one of which was Iraq’s. I also hung out in Japanese and Filipino [areas] — you name it. As far as the number of people who have done that — I imagine that number is pretty low. Possibly one. But, there are a lot of weirdoes out there. So, I’m sure someone else has. Back in the day, it probably happened all the time — like in the World War II time period. The old-school days. But in the new-school days, I don’t know of any. I’m sure there’s someone out there.

CHARLES MIZRAHI: So, what happened? 9/11 impacted you a lot. You’re getting on with your life. You’re a brilliant math student. You go to a top university in terms of finance — the University of Chicago. For folks who don’t know, you had a Nobel Prize winner. I think you had Thaler.

WESLEY R. GRAY: Fama was my advisor.

CHARLES MIZRAHI: And Richard Thaler was also there.

WESLEY R. GRAY: In the early times of my curriculum paper, they weren’t that famous. But I had two people that would go on to win Nobel Prizes for helping me out there. When I entered back into the program, Thaler was too famous. I don’t know if he still interacted with his students. But Professor Fama was hardcore. He was on my dissertation committee.

CHARLES MIZRAHI: So, you went with the best. You’re a smart guy. You go to the University of Chicago. You want to learn finance. I remember the first time that we spoke about 11 years ago. You were sending me research papers. You were getting all excited about stuff — with all sorts of crazy letters. I said: “Wes, I don’t understand what this means. I don’t even understand the abstract.” So, it was really cool stuff. You then decide: “I want to take a break. I want to serve the nation. I want to serve my country.” And what do you do? You stop? You tell them you’re taking a leave of absence?

WESLEY R. GRAY: So, I always wanted to do the service. And the problem was that, originally, I was going to do it after high school. But then, I got into college. And then, I was like: “Oh, I should probably go to college.” Then, I went through college. And I was a Wharton undergrad. I immediately got into the Chicago PhD program — which usually doesn’t happen. You get these full-ride scholarships — where they basically pay you to go to school. And so, I was like: “Well, I don’t want to join the service now. I have to take advantage of this.”

WESLEY R. GRAY: And then, I went into the Chicago program. And after a few years there, I started thinking: “OK, I need to either do this or not do it.” And I decided that it was only going to get worse if I graduated from the University of Chicago with a PhD. The chances that I was going to be able to say: “OK, let’s stop it all, join the service and do my time” were going to be even [slimmer].

WESLEY R. GRAY: So, it was one of those things where I thought: “You know what? I just have to do this.” And you have a natural break in those programs — where you’re doing normal studies during the first two years. And then, you reach what they call ABD, which is “all but dissertation.” At that point, you have your own free will. So, that’s what I did. I got through the first two years and passed what they called the “composite exams.” I thought it was a good time. If I didn’t want to have regrets, I had to do it then. So, that’s why I had the weird, awkward timing of doing it.

CHARLES MIZRAHI: But you didn’t get some cushy job. You were over in Iraq. It was 160 degrees in the shade. And you were interrogating in full gear. You were right near the fighting.

WESLEY R. GRAY: Yeah. I was in the Marines — active duty and in combat. I was getting IED-ed and shot at. And I was hanging out with the Iraqis all day. But I wanted to serve — just like everyone else does. It was great experience. The interesting thing about the PhD program in Chicago — a lot of people don’t know this, and I don’t know if they specifically recruit people. But as you’re probably aware, PhD programs are not really about your IQ. They’re about how much pain, anguish, and focus you have to survive staring at the wall and thinking about one subject for a long time.

WESLEY R. GRAY: So, they recruit a lot of Israeli defense force folks out there. So, the funny thing is that I think most programs — if you said: “I’m going to join the service and go into the military,” most of your classmates would say: “You’re insane. What are you thinking?”

WESLEY R. GRAY: But at the time, I’d say that half of my classmates were former Israeli Defense Forces soldiers. And then, a few others were Finnish snipers. So, when I told them I was joining the military, they were like: “Doesn’t everyone do that?” And I said: “No, man. In America, it’s not like that. We don’t all join the service.”

WESLEY R. GRAY: And so, they all thought it was pretty normal and what you should do. I thought that was kind of unique because a lot of people wouldn’t expect that. But when you mostly deal with international people — I think I was one of two other Americans in the PhD program. They come at it from a different perspective. So, it wasn’t surprising to them.

CHARLES MIZRAHI: Yeah, it’s great you were in that cohort. It made all sense in the world to you.

WESLEY R. GRAY: There were a lot of officers who were actually giving me more advice about joining the military and getting prepped for the service than doing regressions or quantitative analysis. So, it’s kind of interesting.

CHARLES MIZRAHI: So, I want to talk about the books first. But before I do that, I want to jump over. When you built Alpha Architect, you had military people with you, right? You brought those folks with you. How many people do you have in your firm that were in the military?

WESLEY R. GRAY: My COO, Pat, is a former Marine captain as well. Another gentleman, Doug, is a former Navy pilot. Actually, there’s an older guy who’s an old Army officer. He’s one of our backers and funders. So, we have a lot of service members.

CHARLES MIZRAHI: Outstanding.

WESLEY R. GRAY: Yeah, there are a lot more than most financial firms. We used to be at about 50%, but we keep growing faster than we can recruit veterans at the moment. But So, I think we’re probably down to 30% or 40%-veteran. we’ll see how it goes as we move forward.

CHARLES MIZRAHI: Just as an aside: When you hire veterans, they have a different mindset than the people you’re hiring, right? These people are disciplined. They know what order is. They understand the chain of command. They understand responsibility. I don’t understand why more businesses don’t hire military veterans right off the top.

WESLEY R. GRAY: Yeah, I think there are probably a lot of communication issues — translating your skillsets and what you’ve done in the service to the private sector. And then, a lot of times, people are worried or scared. “How do I talk to this person? Is he crazy? Did he used to kill babies?” And that’s nothing against civilians. It’s actually against the veterans. They need to make civilians at ease and explain that “I’m not crazy. I’m not a weirdo. Yes, my old job was kind of crazy. My mind is probably screwed up. But I am a normal person. I do normal things just like you.”

WESLEY R. GRAY: I think that, a lot of times, there’s a cultural gap that creates challenges for folks. But I think firms are getting better at it. There are a lot of groups in the charitable sector that help facilitate the communication gaps. It’s like anything. When you have bad communications and cultural riffs, things don’t [always] match up as well as they should. But we’re getting there. We’re working on it.

CHARLES MIZRAHI: Yeah. All right, man. You’re doing great on that end. That’s really great. So, I remember you sent the first book to me around 2010, 2011 or 2012. Quantitative Value. When did that book come out?

WESLEY R. GRAY: Yeah. That was 2012.

CHARLES MIZRAHI: So, I think you sent it to me at the beginning of 2012 or 2011. I don’t remember. You sent me a manuscript. The book is, Quantitative Value: A Practitioner’s Guide to Automating Intelligent Investment and Eliminating Behavioral Errors. So, you definitely didn’t have marketing come up with a title for that. That had to be something you came up with. That’s a mouthful.

WESLEY R. GRAY: Yeah, it’s pretty terrible. And actually, I can’t even take credit for it. As you know, when you publish books, they’ll take author input. But it’s more like: “It’s our way or the highway.”

CHARLES MIZRAHI: Right.

WESLEY R. GRAY: I think what Wiley’s goal was — at the time, I was a professor. And I think they make the most margin on selling books to universities. So, I think they wanted to sell it — and they did. They sold it as a textbook. So, there weren’t going to be awesome stories and adventures in value investing land. It was going to be something geeky and boring that would get professors and students to buy. So, that’s why they called it the mouthful.

CHARLES MIZRAHI: All right. That’s cool. It sold a lot and did well. OK, so here’s the thing. You sent this manuscript to me. And I remember reading it through. I think I stopped what I was doing that day and read it for the next three or four hours. And I remember what jumped out at me was something that many people didn’t speak about in investing. And that’s the behavioral bias. It’s how you are programed to screw up.

CHARLES MIZRAHI: And the quantitative part is the systematic approach that were going to talk about in a second. You and your coauthor — it was Toby Carlisle, right? Tobias Carlisle.

WESLEY R. GRAY: Yeah, Toby.

CHARLES MIZRAHI: So, you guys came up with an approach. But even if you don’t look at the other stuff … I want to talk about the behavioral biases for a minute because people totally miss them. First of all, how did you come about the behavioral bias stuff? And why do you spend so much time talking about it?

WESLEY R. GRAY: Well, unfortunately, I used to be a hardcore stock picker — with the Ben Graham and Warren Buffett style. I used to trade stocks in the PhD lab at the University of Chicago. And my original goal was to be the Warren Buffett-type. And then, I quickly realized — through a lot of painful experiences — that I would like to be like them, but I’m also human. And I have all these irrational problems and emotional decision-making issues. And so, that was one thing.

WESLEY R. GRAY: Also, when I first started at the University of Chicago, there was a gentleman named Nick Barberas, who’s now a famous professor at Yale. He was actually at Chicago at the time. And obviously, Dick Thaler was at the forefront of these ideas about behavioral finance. He tried to emphasize to the efficient market team: “People are kind of crazy. They do all this weird stuff, and it does have effects on market prices. And just because you know about it, that doesn’t mean you’re immune to it.”

WESLEY R. GRAY: And so, throughout that whole experience, I got really interested. As an individual investor — with everything they kept mentioning in the textbook — I was like: “Wait a second. That’s my problem. I’m overconfident. I anchor on things.”

CHARLES MIZRAHI: Wes, let me interrupt you for a second. For those who are listening and don’t have a background or PhD like you do, explain what a behavioral bias is. Give me one example of how it screws you up. And even if you know about it, it’s still fighting you when you try to make money.

WESLEY R. GRAY: Yep. They do all these studies on people like us. And you can present people with the same data, but you can do weird things to them, and they’ll come up with different decisions. So, a rational decision would be: There’s a hamburger over here from McDonald’s, and you’re hungry. And there’s a piece of broccoli over there. And you’re also hungry. Now, your rational brain should think: “OK, a McDonald’s hamburger is going to give me a heart attack. I’m going to have to run 20 miles to burn it off. Or, I could go eat my broccoli.”

WESLEY R. GRAY: In theory, if you’re thinking sensibly about things, you’ll say: “OK. I’m not going to eat the McDonald’s hamburger. I’m going to eat the broccoli and the lean steak.” So, that’s how you’re supposed to think. But of course, your behavioral biases are your innate tendencies — or things that kind of happen at a subconscious level — where you smell that McDonald’s hamburger, and it starts making you salivate. And you’re like: “You know what? I understand, intellectually, that that’s the right decision. But damn, that hamburger smells good.” And you jump on it and eat it.

WESLEY R. GRAY: So, that’s the basic idea of bias. Sometimes, we know we should do something because our rational brain says it’s the right thing to do. But our irrational brain or system 1 brain … It’s the brain that was developed when you’re a monkey or a lizard brain. You’re going to do things that aren’t optimal. Humans — just like any other animal out there —do things that that are not rational. And the problem is that, the more you amp up stress — you’re tired, and you didn’t have coffee. You get even worse. Your ability to eat the broccoli versus the hamburger — under stress, it’s even more difficult to make the right decision.

CHARLES MIZRAHI: For example, on late-night TV, they have infomercials at 2:00 a.m. They know that your guard is down. You’re more relaxed, and you’ll buy stupid things at 2:00 a.m. And when you wake up at 7:00 a.m., you’ll say: “What the hell did I do?”

WESLEY R. GRAY: Yep. You got it. We all know this. This is not something that’s new to people. We’ve all made bad decisions. And you usually make the worst decisions when you’re under stress, drinking, tired or you haven’t had your coffee — whatever it is. So, the problem with investing — just like if you’re in a combat situation or anything that’s stressful — is that you don’t want to go into those situations without a highly-rigid, systematic plan. Because if you do, the minute there’s any amount of stress, the likelihood that you’re going to make a bad decision keeps ratcheting up — especially as you see your stock going down and your life savings blows up.

WESLEY R. GRAY: I kind of learned the hard way through my own learning experience of being a stock picker. And simultaneously, I was lucky to have professors who were at the forefront of behavioral finance. And not only that, but going through the military, they have standard operating procedures. Again, they don’t want you to think too much because they know that, if you’re in a stressful scenario and don’t have good training or systems in place, you’re always going to do the stupid thing.

CHARLES MIZRAHI: It seemed logical — after a lot of hard experience and problems with my own decision-making — that if I was going to invest, I’d need to get systems up front and in place. So, I could build while I was thinking rationally and sensibly and follow those systems.

CHARLES MIZRAHI: So, what you did was create a systematic approach that made sure your caveman brain didn’t go for that McDonald’s hamburger. It leveled the playing field and said: “OK, put all that aside — the fact that I’m hungry, it smells good and looks beautiful. Put that aside. Rationally, what is the next move I should make?”

WESLEY R. GRAY: Yes, exactly. What does the evidence suggest? What makes sense from a high-level financial economics perspective? What was I doing in my head as a stock picker? Instead of repeating that in my head every time, why don’t I have a system do that? And that was the ethos of Quantitative Value. Let’s do value investing but leverage computers and systems to make sure that that process is the same every single time — regardless of how stressed I am or how much the marketplace is.

WESLEY R. GRAY: “Well, value investing is for old idiots who don’t know what they’re doing because cash doesn’t matter anymore. It’s all about revenue” — or whatever people say nowadays. It’s really hard to defend against these stories because our human brain is amenable to them. But the bottom line is that we’ve got to focus on the evidence. We’ve got to focus on the systems and deploy things that make sense systematically. We almost have to be religious about it.

CHARLES MIZRAHI: Buffett said the most important thing for any investor is to have the proper temperament — to know how to deal when stocks are falling and not panic. In fact, do the exact opposite and buy. And when everyone’s euphoric, do the exact opposite and look to sell. He says it’s second nature, but there’s only one Warren Buffett. And all the wannabes who think that they’re going to go into a firefight and act like superheroes — like Captain Marvel — you’re not going to do that. Your primitive brain is going to say: “Gunfire. The market is losing. I’m freaking out. I’m diving into a foxhole.”

WESLEY R. GRAY: Exactly. Buffett even says it: “Investing is simple but not easy.” What people don’t recognize is that he and Charlie Munger…

WESLEY R. GRAY: Munger is basically a PhD and psychologist — in my opinion — even though he’s not. When you read those guys’ reports — I know you’ve probably read and memorized every single one of them — it’s very clear that their superpower has nothing to do with their investing IQs and prowess. It has to do with their discipline and ability to not worry and be affected by what most people get affected by. It’s amazing. That is their superpower.

WESLEY R. GRAY They are computers in human bodies. I can’t do that. You can’t do that. And 99.9% of the population does not have that superpower because they’re human beings. There’s a non-zero probability that Charlie Munger and Warren Buffett might be robots — in my opinion. The fact that they’re over 90 years old and still doing those annual meetings…

CHARLES MIZRAHI: They’re getting better. It’s like a 40-year-old, right-handed pitcher who’s having a career year. You shouldn’t have that. You should be sliding down. And these guys get stronger.

WESLEY R. GRAY: Yeah, they might be cyborgs. Most of us aren’t cyborgs. So, we need to lean on systems.

CHARLES MIZRAHI: Casinos are built by people who think they’re card counters. Everyone walks in there and thinks: “I could beat the house.” But only a small fraction can actually do that. The rest think they can. When I read your book for the first time, I said: “Very few books have ever dealt with both aspects — identifying the problem and creating an approach that takes every single bias and puts it aside so you have no other choice than to act rationally.” Is that — more or less —what you got there?

WESLEY R. GRAY: Yeah, that’s right. Have a system that keeps you in the guard rails and makes you make the right decision approximately every time — as opposed to trying to be perfect and have influence from bias every time. I think it’s suboptimal — unless you’re Warren Buffett.

CHARLES MIZRAHI: So, what bias would you say most people get sucked into? You’ve seen investors. You’ve dealt with them for a while now.

WESLEY R. GRAY: The biggest one is overconfidence. Naturally, if you ask people: “Are you a better driver than average or better looking than average?” You know, 90% of people always think they’re better than average. But guess what? When we sample the population, on average, you can’t be better than average. The problem is — and you see it a lot in the marketplace right now. I deal with 25-year-olds who tell me how great they are at investing every single day because they’ve made 10,000%.

WESLEY R. GRAY: When you put a little bit of time and effort into something — even though there’s a lot of noise associated with that decision— i.e. luck, but it works — your brain codifies that as skill. And then, if something doesn’t work, your brain codifies that as bad luck.

WESLEY R. GRAY: It’s called self-attribution bias. If, over time, you codify anything that works and think: “I’m a genius,” and anything that doesn’t work gets blamed on some circumstance, such as “The Fed did it,” “The Democrats did it,” or “The Republicans did it” … Whatever it is, we’ve all made these excuses. Over time, you’re going to start believing in your own bullshit too much. And it’s almost like a slow-motion train wreck.

WESLEY R. GRAY: I can give you example. Even down here, these are not young people. I live in Puerto Rico now. And there’s a huge crypto community. And I have nothing against crypto. I think it’s interesting and all that good stuff. But I was asking them. And they asked me what I did. I said: “I’m in the ETF business.” And they said: “What’s that?” I was like: “Have you ever heard of Vanguard?” And they said: “No, what’s Vanguard?” And then, I said: “Holy cow!” But they asked: “Is that like ETXs?” And I was like: “What’s ETX?” It’s some crypto index. So, I asked: “So, what do you guys do? Do you just invest in crypto?” And they’re like: “Yeah. We have diversified portfolio of crypto coins.” And I asked: “Is all your money in crypto coins?” And they said: “Yeah, why wouldn’t you? We can diversify among a bunch of them.”

WESLEY R. GRAY: My mind was exploding with thoughts. But then, it kind of made sense through the lens of behavior. And I thought: “Oh, these folks did this for the last five, six or seven years. They’ve knocked it out of the park. Now, obviously, they want to invest in crypto because that’s the best deal. And if you find the new ones, they always work.” You get overconfident. And your brain and focus — you can no longer see the scope of what’s out there.

WESLEY R. GRAY: You probably have a million observations on this, too. But overconfidence is, by far, the most dangerous thing that I think humans naturally engage in — especially guys. They’re the worst. At least women go talk to people to get outside input. And they’re a bit more rational. That’s also what the literature suggests. But guys — we’re like natural cavemen. It’s like: “I’m stronger than you.” And a little bit of success can sometimes be the worst thing that ever happened to you because you think you know what you’re doing.

CHARLES MIZRAHI: What I found made me a better investor over the years — and I started on the floor at the Futures Exchange in 1983. Almost from the get-go, I was told to keep a book of mistakes. I didn’t know what that was. And now, I have six or seven notepads of these books. When one of my subscribers says: “I don’t want a financial editor who makes mistakes,” I go: “You definitely want someone who makes mistakes.” I identify what they are. And hopefully, I won’t repeat them. Hopefully, the mistakes become smaller in the future.

CHARLES MIZRAHI: When I ask other friends of mine — who have managed hedge funds, investors and traders — “Do you have a book of mistakes?” They look at me like I’m crazy. It’s like a gambler who only remembers the winners. And I find so much with the losers — the mistakes where I dropped the ball. I just find them. Shame on you if you do it again. But I’m totally on there with you on overconfidence. When you make it, it’s all because of you. And when you lose it, it was never me. It was COVID. It was an interest rate rise or something. I guess that’s way we naturally evolved as humans. If we weren’t overly-confident, we’d still be in caves.

WESLEY R. GRAY: Yeah, for sure. And you see it in everything. It also ties back to ego. A lot of people don’t have natural humility. I think, by nature, you want to have an ego to pump yourself up so you have the confidence to go do stuff. But you need to really harness that ego. And I personally like to do extreme exercise events. When you beat yourself down so hard, you’re just happy to have water. You’re happy to have a piece of bread. You go back to ground zero again. And I’m humbled. Man, I would hope and pray to God that I could have a drip of water — let alone the Ferrari or something.

WESLEY R. GRAY: If people don’t rebase themselves all the time — you need to eat humble pie during your life. Somehow, you always have to do something to make you eat humble pie because it is so easy to pump that ego up, get that overconfidence and actually think you’re important in the world. And the reality is that none of us are really important. If you step back and think about it, I think there’s eight billion humans out there. So, just from a rational perspective, the odds that you’re that one in eight billion that’s so special is probably pretty low. But that’s not an easy thing for most people to contemplate, unfortunately.

CHARLES MIZRAHI: Yeah. I want to clarify one thing. To people listening: I want you to realize that Wes is an experienced, professional investor. He has tons of knowledge and an off-the-charts IQ. And it’s not about being pessimistic. It’s not about being confident in yourself or positive. It’s being even-keeled enough to realize: “I can make mistakes. Here’s what I need to look out for. And I’m not invincible.” And if you do happen to make money, it wasn’t you. It was the approach. And when you do lose money, it was all you because you should not have been there.

WESLEY R. GRAY: Yeah. You got it. It’s all about the process. It’s not about the outcome. Outcomes, as you mentioned, are noisy. Annie Duke has a great book is called Thinking in Bets. It’s so important to think about that. What is your process? Because that’s something you can learn about and improve on. You did this well. You did this poorly. OK, fine. You’re incorporating the process.

WESLEY R. GRAY: But if you look at outcomes, because of the noise, it’s a terrible way to think about the world. That’s why the SCC and regulators make you say: “Past performance is no indication of future results.” Past performance is not an indication of future results. Your process is. But that confuses the heck out of a lot of folks. It’s not intuitive. But it’s really important to think: “What is the process?” And outcome matters — but only to extent that it’s tied to a process where you learn, develop and improve.

CHARLES MIZRAHI: I think the worst thing that could happen to any investor or gambler is to have a terrible process and a very positive outcome. It usually happens on your first trade or bet. The gods of investing or betting let you win that first one. So now, you think you have a process that produces an outstanding outcome. And you spend the rest of your money and life trying to replicate that. And it’s never so because the process sucked.

WESLEY R. GRAY: Yeah. That happened to me. I still remember when I bought Swisher Sweets cigars back in 1998 or something. Three months later, it was a classic Buffett stock. It was really cheap and high quality. I was like: “Oh, everyone uses it. They’re addicted to it.” I was smoking them in college, and they’re the ghetto cheap cigars there. And was got bought out for a 50% premium. That was my first real pick. And I was like: “This is so easy.”

WESLEY R. GRAY: So, I had that same problem. But I also got lucky in the sense that I had a huge win. I thought I was a genius in the early 2000s — when value was a great trade. But then, I also got humble-pied really hard in 2008 — when I didn’t have a ton of money to lose because I was in the service for four years. Thank God. I had the benefit of a really big winner, and I thought I was awesome. And then, I also had the luxury — in some sense — of being in the service. So, I didn’t make a lot of money. When I got out, I lost a shitload of money. I was able to rethink and rebuild from a low base. I feel like I got lucky.

CHARLES MIZRAHI: It’s all about timing. If you started at the wrong time, life would have been a whole lot different. If you had a ton of money in 2008 — without those experiences —- you would have lost it all, and you’d probably be selling paper.

WESLEY R. GRAY: You’re right. Timing is everything. Hell, we’re born today versus 100 years ago. You can only imagine life and what the difference was.

CHARLES MIZRAHI: But I want to tell you something. There’s something that I think about and use often. It’s something you told my son Richie when we met with you 10 or 11 years ago. It’s from your Marine days. You said: “Grow where you’re planted.” And I said: “What the hell does that mean?” And you go: “Wherever you are, make the best of what you’ve got, and deal with it.” I’ve thought about that so many times. Just grow where you’re planted. People walk around complaining about how life screwed them. “Hey, dude. Grow where you’re planted.”

WESLEY R. GRAY: Yeah. I think it’s a great thing. The Marine Corps has tons of life lessons because it is life — amplified. And yeah, it’s same thing there. You never know. They call it “getting the green weenie.” In the Marine Corps, you may say: “I want to live here. I want to do this job.” And then, they say: “No, you’re living in the opposite place. You’re doing the opposite job. Get after it.”

WESLEY R. GRAY: The reality is that, in the end, you’ve got to take responsibility for your own actions, make stuff happen and grow where you’re planted. If you’re just going to whine and complain about everything, that’s fine. You’re free to do that, but you’re never going to get any better or improve. You’re going to be mad and pissed off the whole time. I don’t know why people want to live like that, personally. But, obviously, a lot of people do.

CHARLES MIZRAHI: No one said that life is supposed to be fair. It’s not supposed to be a fair game. It is what it is. Just deal with that. OK, so you write Quantitative Value. I won’t even talk about what the form is because you should definitely buy the book.

CHARLES MIZRAHI: Folks, I want to tell you something about what West writes. When Wes writes anything, he deals with a lot of research. He’s totally transparent. In fact, you don’t have to read them — all the footnotes to the research papers. It’s all evidence-based. It’s nothing magical. It’s nothing like: “On Wednesday — under a full moon and in the month of July — buy pork bellies.” It’s nothing like that. It’s an approach that makes sense.

CHARLES MIZRAHI: Buy companies that trade at a certain quantitative valuation and have a certain financial aspect to them. Buy a whole boatload of them, and do it from there. That’s what was great about that first book — and why I was so excited when you when you sent it to me. I said: “Wow. someone finally took both ends and put them together.” You took the approach and why you screw up.

CHARLES MIZRAHI: Charlie Munger said: “Let me know where I’m going to die. And this way, I won’t go there.” If I could avoid these biases, I would be OK. And that’s why I did the mistake book from the beginning. I said: “I’m going to overlook them. This is tuition. I just paid tuition with my loss. How could I not learn something from that? And if I don’t, I’m an idiot. I’m going to keep making that same mistake again.

CHARLES MIZRAHI: So, that book is not for everybody. But if you’re really serious about making money — and it’s not difficult. I’ll tell you why at the end. Keep listening, and I’ll tell you how Wes put this all together in exchange-traded funds.

CHARLES MIZRAHI: The second book that comes out was DIY. OK. Now, you come up with this book, and you’re basically telling the investing public…? Sum it up for me in a sentence.

WESLEY R. GRAY: So, I’m basically telling the investment public: “We’ve all got a family office. You want to avoid fees, taxes and complexity.” And in the end, it’s not that hard. You can DIY — or do it yourself — when it comes to financial advisory. That’s not to say that everyone should DIY it because of the behavioral bias problems we’re talking about.

WESLEY R. GRAY: But I wanted to write an almost self-help book — where, to an extent, someone wanted to DIY it. They wanted the frameworks, tools and understanding to be successful in that endeavor. Elisa was kind of a cookbook for them to go with.

WESLEY R. GRAY: In the end, we’ve had a lot of people that read that book. But they read that book, and they’re like: “Actually all the biases and things that I need to overcome in order to DIY it — I don’t really want to DIY. I still have to hire someone. I know that I’m going to be irrational. So, I’m going to go hire someone.”

WESLEY R. GRAY: Those are the people who are ultra-rational — where they are so cognizant of their own fragility that they know they need to hire someone. And those people are never going to have a problem. It’s really the people on the other end. They don’t think they have a problem — or everything in between. But that’s really what that book is about — helping people know and have the confidence to do this stuff themselves and avoid paying extra fees they don’t need.

CHARLES MIZRAHI: Right. Another thing I loved when you came out with that book — I think you sent me the manuscript of that. Or maybe I bought it. I don’t remember. We have the same publisher: Wiley. In fact, did I introduce you to Wiley?

WESLEY R. GRAY: You might have.

CHARLES MIZRAHI: OK, good. I don’t remember how you got involved with Wiley. Because I remember what the odds were. Maybe you did. All right. No problem.

WESLEY R. GRAY: Bill Faloon is my guy. Yeah, maybe. I can’t even remember.

CHARLES MIZRAHI: It was a long time ago. All right. Maybe that’s how I got a free book from you.

WESLEY R. GRAY: You definitely had a lot of great comments and amazing insights on that manuscript. So, regardless, even if you didn’t introduce me, that book is a heck of a lot better through your comments.

CHARLES MIZRAHI: Sure. I appreciate that. I can’t take any credit. You put it down on paper. I just gave you my one year of Brooklyn College and my other 30 years of hardcore experience. I couldn’t give you any PhD stuff. I looked at it and said: “This doesn’t make any sense,” or “This is perfect.”

CHARLES MIZRAHI: So, what I really liked about the DIY book was that you had — once again, you put one thing in that makes it worth reading. You don’t have to read the rest of it. Just read these one or two chapters on it — which set a lightbulb off in my head. A checklist — a systematic approach — beats the experts. And you cite a meta study of all these things. Please share with us the study that was done with wine selection. The great wine tasting — grading them 96 or 98 — whatever it might be. Wine tasters have such perfect pallets, and these experts know everything.

WESLEY R. GRAY: Yeah, so long story short: You can take a very simple algorithm. And I don’t remember the exact details offhand. But it’s going to look like the age of the grapes — where the grapes are made and a few other things. And they’re going to be better than all the best similes in the entire world by a long shot.

WESLEY R. GRAY: And that’s just one study of hundreds of studies. Psychologists have been doing this for a long time. It’s like the model versus expert debate. The overall summary — and this is not just in wine tasting but in everything you can ever imagine — is that you can usually build simple models that achieve the same, or better, outcomes. I think it’s 90% to 95% of the time.

WESLEY R. GRAY: The problem is that experts are so seductive. They’re like me. They’ve got PhDs. They have pedigrees from the best schools. So, if I wanted to do the opposite and be less transparent, opaquer and sell the snake oil, I could easily do that with my background. And a lot of people would believe me. They’d be like: “Oh yeah, this guy has to know what he’s talking about because look how many degrees he has and all the stuff he’s done. He must be amazing. But the reality is that, unfortunately, I’m too transparent.

CHARLES MIZRAHI: You’re not only transparent, but you have too much integrity. That’s really what it comes out to be.

WESLEY R. GRAY: Yeah. I know I’m full of shit like everyone else. I put my pants on every day like everyone else does. And so, I don’t want to portray that just because I have a lot of background and experience, I somehow know something better than everyone else does. I just happen to be more cognizant and aware. And I’m trying to present tools to folks.

WESLEY R. GRAY: But you can see the seduction of expert — especially the expert scares you. You’re going into a field like finance, insurance or home-buying and you don’t know anything about it. And there’s a big decision on the line. It’s like: “God, I’m don’t have to spend all this money,” or “I’m going to have to get this lawyer. And if I don’t get the right lawyer, I’ll get screwed.”

WESLEY R. GRAY: And so, when that expert says: “Listen, if you don’t hire me, you could die. You could go bankrupt. It’s going to be ugly. All you have to do is pay me a little fee, and we’ll get it taken care of.” Most people don’t have a cousin or brothers with a PhD in XYZ field. They’re going to say: “I should probably hire that expert.”

WESLEY R. GRAY: So, you can see how experts can influence people who are uninformed to hire them. It’s scary to not have an expert with you on a lot of these journeys. You need a Sherpa. And unfortunately, the marketplace in different industries exploit this to take advantage of a lot of people. That’s why there are a lot of fees for a lot of things that don’t require that much knowledge. You just need a few tools to be successful.

CHARLES MIZRAHI: And that’s why Buffett says that Wall Street is the only place where people with limousines give their money to people who take the subway. You’re giving it to a 25-year-old broker or advisor who basically shows you a nice deck. Here’s a 50-year-old guy who made a million dollars grinding it out. And he’s giving his money to someone who has no idea. Wall Street built up all this complexity. It reminds me of the Wizard of Oz standing behind the curtain. “I’m the great powerful Oz.” We found that time and time again, the simple S&P index fund — charging three basis points — knocks the hell out of 95% of all managers.

WESLEY R. GRAY: No, that’s right. We also learn time and time again that — to your point — the emperor doesn’t have any clothes. In 2008, what are these guys doing? Well, it’s called leverage. Everyone I know who’s really rich is now diversified. At some point in their lives, they realized: “I got really lucky. Maybe I had a good call. But in the end, the reason I’m a billionaire is because I got lucky.”

WESLEY R. GRAY: You’re only a billionaire if you realize that. If you’re a billionaire and you haven’t realized that, you’re eventually going to put 60% to 70% of your money in on another bet. And it’s going to come to the crashing realization that: “Wait a second. You were a lucky individual, and now you’ll be broke.” So, most really wealthy people are still wealthy for a reason. They eventually realize that it was all luck — or most of it. And now, they’re diversified — low cost, complexity and taxes. It’s all the boring stuff that Vanguard — and a lot of folks — have been talking about their whole lives. Buffett does. It’s just hard to get to that realization.

CHARLES MIZRAHI: In all the years that I’ve managed money … And then, I started a newsletter — writing really simple stuff. What do we do? We buy great businesses that are run by excellent CEOs, have industry tailwinds and are bought at bargain prices. And when they ask: “What else do you do?” I go: “That’s all you need to do. It doesn’t require any more sophistication than that.” And then, they say: “I understand this.” It doesn’t have to be harder than that.

CHARLES MIZRAHI: It seems to me that the more complex you make something, the more you’re playing on people’s fears that: A, they can do it. And B, even if they try to do it, they’re going to be met with utter failure. And C, don’t even try. That’s the worst part of it. Don’t even try. And what I think you did is you built up the reader’s confidence enough to say: “Wait a second, these experts are no smarter than me. Here are the actual numbers.” They underperformed a simple checklist. They underperformed the simple algorithm. So, that’s a big confidence builder.

WESLEY R. GRAY: Yeah people need to invest time into their own educations. And our firm’s mission is to empower investors through education. We need to bring the horse to water. You have to drink the water, and you also have to be willing to walk up to it. It is the case — and we have noticed this in our own history at this point — that when you’re young and stupid, you start an impact-mission business. You’re like: “We’ll put out all this great content, be super transparent and try to help people learn and understand. We’ll write books. Everyone’s going to want to do this.”

WESLEY R. GRAY: It still turns out that humans like to be humans. They’ll go read all of this material, come back to us and say: “Wes, why don’t you do this? Why don’t you do that? Why don’t you make it 50 times more complex?” It’s as if I didn’t already know and haven’t been down this rodeo 100 times. I always have to emphasize to people: “The reason it’s simple is because I’ve been thinking about it for a lot longer than you have. Do you think that I haven’t tried all the whiz-bang mousetraps and crap that people talk about and add?”

WESLEY R. GRAY: Obviously, I’ve been doing this for three decades now. It’s simple for a reason. It works better. I’m not trying to sell you anything here. You have to understand that. It’s simple and transparent because it works better. That’s why I put my own money into these things. If I thought complexity was useful — and I have my own skin in the game — I would have done that. But it’s all the time.

WESLEY R. GRAY: People are so enamored with complexity. I know why. Actually, I wrote a blog. It’s coming out tomorrow. There’s an article in nature that actually goes to this very thing. What they do is they present people with a Lego block and say: “You have two things. You can either add blocks to solve the problems, or you can take blocks away.” And, of course, all the humans need to do is remove one little block, and the problem solved. But 90% or more of the people in these studies add three or four blocks.

WESLEY R. GRAY: People want to add to solve problems. People are very bad at like taking away things to solve a problem. And unfortunately, as you know, in investing in particular, simple is usually better the more complex something is. So, our innate nature to always want to add to make them better is the worst in an investing context. Usually, the simple makes it better because it keeps costs, trading and taxes down.

CHARLES MIZRAHI: Also, the more variables you have, the more complex and prone to error it is. All you really need to know is two or three variables about a business. Many times, you only need one or two to decide. And I know you’ve done all these studies. They did it with horse handicappers. They said: “OK, how many pieces of information are they being fed?” The more information they had, the more confident their picks were. And in fact, the more information they had, the more confident they were. And their win rates continued to slide down.

WESLEY R. GRAY: Yeah, it’s crazy.

CHARLES MIZRAHI: So, they kept winning less. It’s winning by subtracting. People just don’t get it. And by the way, when I write my monthly newsletter, we isolate one company. And I always point to the one or two drivers of the business that, if I’m on a desert island, I’d want to know X. That’s all you really need to know about a business. You don’t need to know about the minutia of this or that. What drives it? How do they make their money? And if they screw up, what happens then?

CHARLES MIZRAHI: People get so lost in the weeds. You we have one analyst. I’m not going to mention who he is. But I gave him a timer because he used to get lost in the weeds for hours — looking up footnotes. So, I gave him a timer and said: “OK, I want to ask you something. Hit the timer. You have 20 minutes. If you can’t find in 20 minutes, you never finding it.

CHARLES MIZRAHI: It doesn’t count.

CHARLES MIZRAHI: It doesn’t matter. All right, let me go because I want to finish up. I want to get to the end of this — in terms of where you took all of this and put it together in a basic one stop shop. And that’s when you and your created Alpha Architects. What was the goal of creating Alpha Architects, and what do you do?

WESLEY R. GRAY: We have an impact mission that started from the very first day — which is to empower investors through education. So, that’s what we do as a firm. That’s why we exist and what we’re trying to do [in] the marketplace. But we’re a for-profit business. And so, we embed all these systems in these books and strategies that we have in our ETF products. Because you can manage taxes there.

WESLEY R. GRAY: A lot of times, people will read the books. And we’re more than happy to help people facilitate if they want to do it DIY. But as you know, a lot of times, people don’t want to DIY. As long as it’s affordable — and they understand the process and what they’re getting into — they’re willing to pay somebody to do that on their behalf.

CHARLES MIZRAHI: By the way, I’d like to think of that as the IKEA model. You can buy something from IKEA, and there are no words on how to put it together. It’s just three or four pictures. But there’s a whole subculture of people who charge to put IKEA models and furniture together. Even though it’s DIY, I don’t want to do it.

WESLEY R. GRAY: Yeah, and as long as you don’t charge too much for your services and it’s affordably priced…

CHARLES MIZRAHI: It’s a good deal.

WESLEY R. GRAY: Yeah! Some people want to pay for your time and effort. You’re doing the work for them. There’s a reason that people buy stuff on Amazon. So, what we try to do in the marketplace is become the Vanguard of weird, boutique active strategies that aren’t really scalable. And they’re really hard to access at affordable costs. And Vanguard’s not going to compete against us.

WESLEY R. GRAY: The reality of the marketplace these days is if you’re in big, scalable and “I can put $100 billion into this” things, Vanguard is already doing it. It has hundreds of millions of dollars. But guess what else? I guess this is a good or bad thing. But they can’t do strategies. They can only take $1 billion or $2 billion because they don’t even wake up for that much. And so, there are always going to be opportunities for boutiques to do unique, weird stuff at the margins. And if we can deliver these affordably and efficiently — with low fees and taxes — and you find a segmented buyer, it could be valuable.

WESLEY R. GRAY: Amazon is out there. And then there’s Shopify. Shopify hosts thousands of different stores that are all boutiques and successful. The marketplace has something for everyone. And the 800-pound gorillas can’t possibly do everything. They can’t do the boutique, weird stuff — which is where we tend to focus.

CHARLES MIZRAHI: So, you created ETFs. There are about a handful, right? You have about four or five of them. That’s it?

WESLEY R. GRAY: Yeah. We do evergreen ideas. We’re not a product shop. We have the same ETFs out there that do value. They do momentum. And then, there’s one that blends them. I put my capital in our own products. That’s what we do.

CHARLES MIZRAHI: And you also have international exposure with the same process.

WESLEY R. GRAY: Yep.

CHARLES MIZRAHI: So, you have to have all of that.

WESLEY R. GRAY: That’s right. We have U.S. versions and U.S. versions. I am personally into global diversification. But as you know, a lot of people have home bias — where they’re like: “I don’t want to own international. I want to own 100% in the U.S.” And that’s fine. That’s not what I personally do or recommend. But some people are like that. So, that’s why we have the strategies bifurcated into U.S. and international — to facilitate that.

CHARLES MIZRAHI: Right. And anyone could buy. Go to Alpha Architect. Go online and check it out. By the way, your website is a world of information. All free stuff. You have videos. You have a whole bunch of PDFs. You are totally transparent in what you do, why it works and what your goal is. And you charge something that, if you have the money, is not an enormous amount to be paying in fees. You’re doing an enormous amount of work. You’re trying to beat the benchmark and indices. [You’re] bringing that extra alpha and doing it in a cost-efficient way. So, it’s a happy day.

WESLEY R. GRAY: Yeah, and we have fun, too. I’m not here to sell any of our investment products. We always tell folks: “Most products in the marketplace are sold — not bought.” We don’t even want that. Our products need to be bought — not sold. So, I’m not even going to mention the ticker. I just say: “Go to our website. Engage in the literature. Engage in the process. Engage in your own education.” And then, we offer products and strategies that I feel someone who engages in that kind of education might find interesting. But it’s definitely not for everybody.

WESLEY R. GRAY: Like I said, our main mission is to empower through education. Even if you don’t like any of our stuff, that’s totally cool. At least you can learn something and become a better investor. And that’s what our impact mission is. I’m a millennial, right? So, I have to have an impact mission. We’re pie-in-the-sky thinkers. That’s what we do. So, that’s our impact.

CHARLES MIZRAHI: I’m so happy for you. You started this idea. I was speaking to you at the beginning of it — when you were still working with the family office. You came up with those things. You took everything. You put it in books. You wrote about it. You researched it. Then, you did something most academics never do. You actually went out and did it. I wish you continued success. You’re doing a tremendous service for investors. And you’re one of the very few people where I refer to their books often. I look at your site because you have all these research papers that keep coming out. I really enjoy them. You put a lot of effort into free stuff. So, all the power to you. Just keep growing. Get bigger, and make a lot more money.

WESLEY R. GRAY: I appreciate it. And the only thing I will plug — because it also helps the marketplace — is we’re now doing infrastructure for people who want to enter the ETF market. So, if anyone out there has a mutual fund or SMA account, we’re trying to lower the infrastructure costs on launching ETFs. We’ve, unfortunately, eaten those costs for a long time.

WESLEY R. GRAY: So, if anyone out there is interested in the ETF marketplace, and you want to access that, that’s another thing. We’re trying to leverage low-cost tech and affordability to try and offer other people a chance to get into the ETF market. Historically, it’s such a racket. And fortunately, we survived and made it here. But it’s very challenging for a startup or new asset management company. I don’t even know if I would want to do this again if I looked back.

CHARLES MIZRAHI: Nah. I remember running a small fund. The amount of money we were spending on auditors, accounting and legal — just to get one piece of paper audited. Something so simple cost tens of thousands of dollars. And it was all in Schwab. It was nothing fancy. There was no complexity or level-3 pricing.

WESLEY R. GRAY: It could be because there’s monopolistic competition in the ETF business — and asset management in general. So, obviously, if you’re BlackRock or Vanguard, you probably have a lot of incentives. “Hey, let’s make it so everyone has to hire 50 lawyers and burn all kinds of money.” They don’t want competition. So, I’m sure there’s an element of that that goes on.

WESLEY R. GRAY: So, we’re almost like the insurgents in the business. We want to try and facilitate competition. And we know that we’re not the only ones with good ideas. Other people [have them], too. So, we’re just trying to break that market open. We’re boutiques. And smaller players can access the broad marketplace without chopping their legs off to get there. At least, that’s the idea. That’s another business we’re starting. Serendipitously, we had to survive. And now, we can offer that service to other people who can maybe lean on our experiences and cost structures to enter the market a bit cheaper.

CHARLES MIZRAHI: If anyone wants to start an ETF, speak to us. You’ll save a lot of money, and you’ll probably be a lot happier — with less regulatory problems — because you can learn through his mistakes.

WESLEY R. GRAY: Well, you still have to deal with them. But, at least, we’ll deal with it and coach you through it.

CHARLES MIZRAHI: Wes, I want to thank you. It’s been way too long. Next time I’m down in Puerto Rico, I’m definitely stopping by. We have to catch up. It’s been 10 or 11 years since we’ve spoken. But I’m so glad to see how you’ve grown, given so much to the investing community and successful you’ve become. It’s outstanding. I bet the most surprised person is your wife. You really freaked her out, huh?

WESLEY R. GRAY: Yeah, exactly. She knew what she was getting into, originally. But it all worked out for her. Sometimes, you get lucky.

CHARLES MIZRAHI: Yeah. It’s another one of those lucky things.

WESLEY R. GRAY: She married down, but it worked out. I’m still way too ugly, though. She probably could have upgraded on that front.

CHARLES MIZRAHI: It doesn’t matter. You’re rich now.

WESLEY R. GRAY: I’m getting there.

CHARLES MIZRAHI: All right, folks. Dr. Wes Gray, thanks so much for being on the show. I greatly appreciate it. I wish you continued success.

WESLEY R. GRAY: Thank you, sir. I appreciate it, Charles.

CHARLES MIZRAHI: OK, take care.

CHARLES MIZRAHI: Thanks for listening to this episode of The Charles Mizrahi Show. If you’re a new listener, welcome! If you’ve been listening for a while, we’re glad to have you back. Either way, we’d love to know what you think of the show. Please leave a review if you listen on Apple Podcasts. Reviews make it easier for others to find the show. You can also see the video of the interview on The Charles Mizrahi Show channel on YouTube.