David Rosenthal: evaluation

Transcript context

…They just have a lifetime of investment results to prove it. They actually can generate alpha. Otherwise, you have to believe that Buffett has flipped a coin and it's come up heads 100,000 times in a row. You're into these crazy probabilistic scenarios where at some point, it's too many standard deviations away from the mean for you to believe that it's possible. Yup. The reason this is important for what's about to come in, all this is theory. This is like economic theory, but it has a very, very important real-world consequence in the ‘80s. Which is that people who use to their advantage the academic thinking behind the efficient market hypothesis that risk equals volatility, realized that if risk equals volatility and you can't get alpha, the way you can get more returns if you take something that has a certain degree of volatility and then you lever the crap out of it with debt, you magnify that volatility, and then you can magnify your returns if you arbitrage that. This is when the ‘80s are the debt-fueled decade. Mortgage-backed securities get introduced. All the junk bonds, Michael Milken, DLJ, and corporate raiders, and corporate takeovers are all happening. Massive leverage buyouts. You get barbarians at the gate.…

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