Capitalizing research and development can improve valuation measures such as price-to-book and earnings, especially for modern technology companies. Asness argues that this cannot be the primary explanation for value's post-crisis weakness because measures such as price-to-sales, which are less affected by that accounting issue, performed similarly badly.

R&D spending may represent investment rather than a current expense
Intangible adjustments can improve book-value and earnings measures
Price-to-sales is less contaminated by uncapitalized intangibles
Value's weakness probably had multiple causes rather than one accounting explanation

“The notion, for instance, that R and D that's viewed as an expense, maybe all of it, maybe part of it should actually be capitalized”
Cliff Asness · 26:23

“Everyone's always looking for single explanations when a lot of things have multiple explanation.”
Cliff Asness · 27:53

#intangibles#value investing#accounting#r&d

Myth Buster55:47

Stock Options Are a Real Expense Even When Pro Forma Earnings Ignore Them

Asness rejects the argument that stock-based compensation is costless because employees accept it in place of cash salary and shareholders ultimately bear dilution or expense. Accounting standards improved by requiring option expensing, but some companies and analysts still emphasize adjusted earnings that remove the cost.

Employees trade salary for stock-based compensation
That exchange demonstrates that options have economic value
Shareholders ultimately bear the cost
Pro forma earnings can obscure the expense
Analysts should not accept adjusted figures uncritically

“These people accept a lower salary and want these things. Obviously they're costly ultimately to shareholders.”
Cliff Asness · 56:23

“They're just not real.”
Cliff Asness · 56:58

#stock options#accounting#compensation#earnings

Myth Buster57:01

Buybacks Are Mostly Capital Reallocation, Not Corporate Theft

Asness characterizes buybacks as economically similar to dividends rather than inherently good or evil. They return shareholder-owned capital that recipients can reallocate to companies with better investment opportunities, although buybacks can obscure stock compensation or violate creditor protections in specific cases.

Buybacks are broadly comparable to tax-efficient dividends
Shareholders already own the cash held by the corporation
Capital can move from companies lacking projects to companies needing funding
Debt covenants can legitimately constrain buybacks
Using buybacks to mask executive compensation is a more credible criticism

“a company that has great investment opportunities is seeking more capital and a company that doesn't should be giving capital back.”
Cliff Asness · 59:27

“The shareholders own earn the money. They own the money.”
Cliff Asness · 59:41

#buybacks#capital allocation#shareholders#corporate finance

Myth Buster1:04:00

The Small-Cap Premium Shrinks After Fixing Delistings and Beta

Asness argues that the classic small-cap effect may never have existed in the form originally claimed. Small-stock databases understated negative delisting returns, while conventional monthly regressions underestimated beta because illiquid small stocks incorporate market moves slowly; both errors inflated estimated alpha.

The original claim was excess return beyond small stocks' higher beta
Delisting assumptions made historical small-cap returns look too favorable
Illiquidity causes measured beta to appear too low at monthly frequencies
Higher corrected beta attributes more return to market exposure and less to alpha
Factor effects such as value may still be stronger within small caps

“Our view is there never really was one.”
Cliff Asness · 1:04:32

“If their betas are underestimated, meaning we thought they were too low, we've overestimated their alphas.”
Cliff Asness · 1:07:39

#small caps#beta#survivorship bias#market efficiency

Explainer· 4

Explainer13:25

Why Low-Beta Stocks Can Match High-Beta Returns With Smaller Swings

Asness explains that the expected relationship between beta and return is much flatter within the stock market than the basic capital asset pricing model predicts. Investors can own low-beta stocks for reduced volatility or build a hedged long-low-beta, short-high-beta portfolio to isolate the anomaly.

Low-beta stocks have historically kept pace with high-beta stocks
A low-beta long-only portfolio still remains highly correlated with the market
A long-short implementation needs a hedge ratio to approach zero beta
The strategy has experienced bad periods despite attractive long-run risk-adjusted returns

“low beata stocks have kept up with high beta stocks, which in the simplest theory, they're not supposed to.”
Cliff Asness · 15:19

“you can create a very diversifying stream of returns”
Cliff Asness · 17:29

#low beta#capm#risk#portfolio construction

Explainer28:08

How Publishing Research Helps AQR Recruit Elite Academics

AQR publishes partly for reputation and intellectual influence, but publication also supports its talent model. Professors can conduct commercially relevant research without abandoning their academic careers, while AQR gains credibility and access by contributing to the same journals and debates.

Public research supports branding but also reflects the founders' academic identity
Some genuinely proprietary findings remain private
Professors can align their AQR work with publishable academic research
Producing research earns more credibility than merely consuming it
The model helps AQR recruit and retain leading academics

“part of the way you measure success is whether you influence the intellectual debate”
Cliff Asness · 29:42

“I don't think we could have even access to these people to the same degree if we weren't producers as well as consumers of this…”
Cliff Asness · 31:54

#research#recruiting#academia#aqr

Explainer1:15:08

Puts Hedge Sudden Crashes; Trend Following Hedges Slow Bear Markets

Options and managed futures protect against different paths into a drawdown. Long puts can respond immediately to abrupt shocks but continually consume premium, while trend following needs time to detect a move and is therefore better suited to prolonged declines such as 2022.

Rolling put protection loses premium during normal periods
Puts performed strongly during the sudden March 2020 crash
Trend following cannot protect against a shock before a trend exists
Managed futures benefited from 2022's slower, persistent decline
Combining both approaches can broaden crash protection

“Puts hedge bolt from the blue crashes U and trend following hedges long slow crashes.”
Cliff Asness · 1:18:54

“A portfolio of the two as an insurance product could make a lot of sense because they hedge different things.”
Cliff Asness · 1:18:47

#tail risk#puts#trend following#managed futures

Explainer2:15:21

Why 60/40's Expected Real Return Fell—and Why Three Percent May Suffice

AQR estimates long-horizon 60/40 returns by combining valuation-based stock forecasts with real bond yields. The forecast fell below two percent at the end of 2021 and recovered to roughly three percent after 2022, still below its historical four-and-a-half-percent real return; lower modern costs and diversification may make today's three percent more competitive than it appears.

High stock valuations imply lower long-term real returns
Bond forecasts depend on yields relative to expected inflation
The 60/40 forecast reached an observed low near the end of 2021
One bad year did not reverse thirteen years of repricing
Modern investors retain more return through lower fees and better diversification

“You don't fix thirteen years of getting more expensive in general in one year.”
Cliff Asness · 2:17:50

“the three today may this is very arguable, but maybe as good as the four and a half historically in terms of what you get…”
Cliff Asness · 2:19:15

#60/40#expected returns#asset allocation#inflation

Tool· 1

Tool2:02:45

Backtests Let Quants Study Market Regimes They Never Personally Lived Through

Asness notes that investors do not need firsthand experience of every inflation or rate regime when historical data are available. Backtests can examine how strategies behaved in earlier environments, although their conclusions must still account for data quality and changing market structure.

A manager's career may omit important economic regimes
Historical analysis extends evidence beyond personal experience
Backtests are a comparative advantage for quantitative investors
Factor returns show limited consistent dependence on macro regimes
Historical tests remain vulnerable to poor data and overfitting

“just because I haven't lived through inflationary periods doesn't mean we can't look at inflationary periods and that is a quant advantage.”
Cliff Asness · 2:03:48

“Back tests can be really helpful”
Cliff Asness · 2:03:44

#backtesting#inflation#quant investing#history

Takeaway· 1

Takeaway2:28:46

Career Advice: Blend Interest With Economics and Avoid What's Hot

Asness rejects both choosing a career solely for money and following a passion with no economic prospects. He recommends blending genuine interest with practical opportunity, avoiding currently fashionable fields, and developing the emotional endurance required for value investing.

A lucrative career without interest may not produce a happy life
Passion alone may not support a viable livelihood
Hot career paths can cool before a new graduate becomes established
Value investing requires psychological endurance as well as analysis
Compatible partners and emotional makeup affect career durability

“you want to blend those two things.”
Cliff Asness · 2:29:28

“try very hard not to chase what's currently hot, particularly starting out your career.”
Cliff Asness · 2:29:33

#career advice#finance careers#psychology#value investing

Frameworks in this episode

Open-Mind-to-Plant-Your-Feet Test

Sin a Little

Value-Momentum Diversification

Insights & moments

⚡Myth Buster· 4

Why Intangibles Do Not Fully Explain Value's Lost Decade