Episode summary
Even God Would Be Fired | Wes Gray on Bubbles, AI Valuations and Why Size Was Never the Edge
Excess Returns
· · 56 min · Guests: Wes Gray
Summary
Wes Gray argued that high market valuations should change long-run return expectations, but they do not offer a reliable market-timing signal. He said factor investors should accept that expensive markets can stay expensive, and that the practical response is diversification, lower fees, and an awareness that future portfolio returns may be muted over the next 20 or 30 years.
He also framed today’s concentrated S&P 500 as a large-cap, quality, and growth bet, and said long-only value investors should focus on valuation rather than size. In his view, book-to-market is a weak anchor in an intangible economy because it mixes in low-quality, often unprofitable companies, while earnings and operating income better capture cheapness plus quality.
Gray said AI has likely altered the market in pockets, especially for growth companies, but he still thinks valuation matters and that the long-run relationship between cheapness and returns remains intact. He also said AI is already a major tool in his own work, though its biggest market impact may be on short-horizon trading rather than long-term investing. The second half of the discussion focused on 351 ETF exchanges, which he described as a tax-efficient way to move appreciated or messy portfolios into ETF structures without an immediate taxable sale.
Key takeaways
- Gray said high valuations imply lower expected long-term returns, but he does not think valuation-based timing models work reliably.
- He argued the S&P 500 is currently a heavy bet on large cap, quality, and growth, so investors should think about how much of that exposure they already own.
- Gray said value investing should emphasize earnings and operating income, not book-to-market, because book-based screens often include unprofitable junk.
- He said small-cap value’s edge comes from cheaper valuation, not size itself, and that size disappears once valuation is held constant.
- Gray said AI may have helped growth stocks for a period, but he still expects valuation to matter over full cycles.
- He described 351 exchanges as most useful for concentrated, low-basis, or operationally messy portfolios that need to be moved into an ETF wrapper tax-efficiently.
Notable quotes
“if you pay high prices for something, you would expect lower returns in the long run”
“The only thing that works might be momentum or trend”
“valuation is what drives the is drives the returns, not size”
“book to market is weirdly is negatively correlated with quality”
“you should embrace and enjoy underperformance”
How the episode opens
Wes, thank you very much for joining us. It's been a while since we've seen you, bud. Nice to see you. — Likewise, gents. Long time no talk.
We always like to check in with you to talk markets, to talk factors, ETFs, and a whole host of various, I think, topics that we're going to work through today. Um what we thought we'd do is kind of take the first part of today's kind of discussion and talk about how maybe you're thinking about markets and looking at markets from a factor perspective. You guys run a number of factor-based strategies at Alpha Architect.
And then, in the second part, what we thought we'd do is kind of shift over to what you're up to on the ETF Architect side of things, where you're doing 351 exchanges and helping firms launch and convert to ETFs. And it's been, you know, a really fun uh fun time to watch, you know, the success that you've had over at ETF Architect. I think there's over 100 funds now on the platform and over 37 billion in assets, which is just amazing.
It's been fun to watch the success of that business, for sure.
Been on a good run. Uh glad I live in Puerto Rico. Uh that's for sure. — Made that move at just the right time. — I did. I We had good timing on that. — Yeah, we launched our ETF Justin not too long after Wes launched uh QMA and QVAL like uh the obviously the path of success was what we Wes was a little bit different than ours. Um I'm going forward. Wes is turning into like this is this massive business. But uh yeah, congratulations on that. That's awesome.
Hey, it's always good to be lucky than good, right?
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- factor investing
- market bubbles
- ai valuations
- s&p 500 concentration
- section 351 etf exchanges
Companies and tickers mentioned
- Alpha Architect
- ETF Architect
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Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
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Excess Returns, this episode and its artwork belong to Excess Returns. Octagon is not affiliated with the show; this page is an independent summary.
