Challenging "Stocks for the Long Run" with Jason Buck

[00:00:00] [SPEAKER_02]: Welcome to Excess Returns, where we focus on what works over the long term in the markets.

[00:00:04] [SPEAKER_02]: Join us as we talk about the strategies and tactics that can help you become a better

[00:00:07] [SPEAKER_00]: long-term investor. Jack Forehand is a principal at Validia Capital Management.

[00:00:11] [SPEAKER_00]: The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital.

[00:00:16] [SPEAKER_00]: No information on this podcast should be construed as investment advice.

[00:00:19] [SPEAKER_00]: Securities discussed in the podcast may be holdings of clients of Validia Capital.

[00:00:22] [SPEAKER_02]: Hey guys, this is Justin. In this episode of Excess Returns, Jack sits down with Mutiny funds

[00:00:27] [SPEAKER_02]: Jason Buck. Many investors, including us, are big believers in the idea of stocks for the long run.

[00:00:33] [SPEAKER_02]: But the fact that we have that as a high conviction belief makes it important that we

[00:00:36] [SPEAKER_02]: challenge it from time to time. Jason, along with his partner Taylor Pearson,

[00:00:40] [SPEAKER_02]: had a really interesting recent episode of their Mutiny Fund podcast where they did exactly that

[00:00:45] [SPEAKER_02]: and we wanted to have Jason on to dig into it. Jack and Jason talk about why the experience

[00:00:49] [SPEAKER_02]: of the US stock market is an outlier when compared to international markets,

[00:00:53] [SPEAKER_02]: what the long-term returns of other global markets look like, and what it all means for investors.

[00:00:58] [SPEAKER_02]: They also discussed constructing multi-asset portfolios, sustainable withdrawal rates,

[00:01:03] [SPEAKER_02]: what investors can learn from sports, and a lot more. We hope you find Jason's insights as

[00:01:07] [SPEAKER_02]: interesting and thought-provoking as we did. As always, thank you for listening. Please

[00:01:12] [SPEAKER_02]: enjoy this discussion with Jason Buck. Jason, thank you for coming back on.

[00:01:16] [SPEAKER_04]: It's a pleasure to be back on. I'm surprised you guys had me at

[00:01:19] [SPEAKER_04]: go and I have to put people to sleep talking about options Greek last time.

[00:01:22] [SPEAKER_03]: Your other episode did really well. Everybody loved it. It was really,

[00:01:26] [SPEAKER_03]: you know, we talked about if people want to find it, we talked to you about how you manage

[00:01:29] [SPEAKER_03]: your personal portfolio on our show, your portfolio series. Yeah, it was really interesting and we're

[00:01:33] [SPEAKER_03]: going to get into a lot of the similar topics today to what we covered there.

[00:01:37] [SPEAKER_03]: But what I wanted to start with today is I was listening to your Mutiny podcast,

[00:01:41] [SPEAKER_03]: which is really good and I would recommend anybody subscribe to it because it's great.

[00:01:45] [SPEAKER_03]: But you were talking about stocks for the long run, this idea. And I'm one of these stocks

[00:01:49] [SPEAKER_03]: for the long run guys. I'm the big believer in the stocks for the long run thing and so

[00:01:52] [SPEAKER_03]: I love challenging myself on that. And there was a lot of stuff in that podcast

[00:01:56] [SPEAKER_03]: that challenges me on that. So I'm really excited to talk to you today about that

[00:02:00] [SPEAKER_03]: and about how that carries to other countries and a lot of other ideas around that.

[00:02:04] [SPEAKER_04]: Great. That's a shout out to you for being a stocks for the long run guy

[00:02:08] [SPEAKER_04]: and wanting to find a disconfirming bias, right? Most people are always looking for

[00:02:11] [SPEAKER_04]: that confirmation bias and I'd love to be a stock. It's really hard to argue

[00:02:15] [SPEAKER_04]: against stocks for the long run because I feel like it's one of those scoreboard

[00:02:17] [SPEAKER_04]: things. Everybody just points to the last 40, 50 years and it's like scoreboard and you're

[00:02:22] [SPEAKER_04]: deterred in the punch bowl at the parties pointing out what could potentially go wrong.

[00:02:26] [SPEAKER_04]: So I understand why most people are stocks for the long run and at a really high level,

[00:02:30] [SPEAKER_04]: what I try to think about is what can and could go wrong? And from a really high level,

[00:02:34] [SPEAKER_04]: I think it really boils down to something very simple for me is that a lot of times you'll see

[00:02:38] [SPEAKER_04]: these stock charts that just go up and to the right for the last 150 years in the US

[00:02:42] [SPEAKER_04]: specifically. And I go, okay, what happened in the last 150 years? Well, we had the

[00:02:47] [SPEAKER_04]: full advent of the Industrial Revolution and we went from about 1 billion people in the

[00:02:50] [SPEAKER_04]: workforce to 5 billion people in the workforce. And the US has been the most dominant country

[00:02:54] [SPEAKER_04]: in the world for the last 150 years. And I'm like, does that play out into the future?

[00:02:58] [SPEAKER_04]: And you just look at population growth and statistics, it's not very likely. So

[00:03:02] [SPEAKER_04]: what I always question is that, is this a 150 year period? And then more specifically

[00:03:06] [SPEAKER_04]: the last 40 year period that we'll get into, are these likely to continue on

[00:03:10] [SPEAKER_04]: into the future? What can I learn from the past and can I project that into the future?

[00:03:14] [SPEAKER_04]: I'm always uncertain of my own biases there. Yeah, Adam Butler, who I know is a friend of

[00:03:18] [SPEAKER_03]: yours has had this quote he said at our podcast, which I think is really good,

[00:03:21] [SPEAKER_03]: which is the past is only one sample draw on an infinite series of sample draws.

[00:03:24] [SPEAKER_03]: And that stuck with me ever since he said it, because even these really,

[00:03:27] [SPEAKER_03]: really long periods could have played out really differently than they did.

[00:03:31] [SPEAKER_04]: Yeah, exactly. I mean, I think about all the time, even the sample draws of like,

[00:03:35] [SPEAKER_04]: even my brother and sister, they're twins and they're a year and a half younger than me.

[00:03:38] [SPEAKER_04]: We grew up in the same household and we're all vastly different. Like those billions of epigenetic

[00:03:42] [SPEAKER_04]: influences on a daily basis can start to lead to larger peturbations over a long enough time

[00:03:48] [SPEAKER_04]: horizon. So you just, you never really know that's that one sample size.

[00:03:51] [SPEAKER_03]: So before we start out, I want to talk about real versus nominal returns because this is

[00:03:54] [SPEAKER_03]: something you guys did in that podcast, which I think was really excellent,

[00:03:56] [SPEAKER_03]: because anytime in the financial media anywhere, like all you see is nominal returns,

[00:04:00] [SPEAKER_03]: you never see real returns anywhere. But real returns are really, really important.

[00:04:04] [SPEAKER_03]: So I was wondering if you could talk about that? Why do you focus on real returns instead

[00:04:07] [SPEAKER_04]: of nominal returns? I mean, to me it's really a basic thing. I always just think about what's

[00:04:11] [SPEAKER_04]: my net that I can eat at the end of the day. Right? And so most people always talk about

[00:04:15] [SPEAKER_04]: nominal returns, the two things that drive me nuts to talk about nominal returns and they're

[00:04:18] [SPEAKER_04]: usually just talking about your annual arithmetic return like each year and they don't think about

[00:04:23] [SPEAKER_04]: the time horizon in that we have to actually compound those returns in real life.

[00:04:27] [SPEAKER_04]: And then they're just looking at the nominal return prior to inflation, but that inflation

[00:04:30] [SPEAKER_04]: over time can be a pernicious drag on your portfolio. So if it's average 3%, etc.,

[00:04:35] [SPEAKER_04]: you have to subtract that out from your nominal returns to get your real return.

[00:04:39] [SPEAKER_04]: Because what you really think about is I think the industry has led us wrong in talking about

[00:04:43] [SPEAKER_04]: our savings as investment and it takes unusual risks then with our savings because then we think

[00:04:48] [SPEAKER_04]: this investment should really grow over time. But what we really want our savings to do is

[00:04:52] [SPEAKER_04]: outpace inflation and be there when we need them most. And so that's why we have to really

[00:04:56] [SPEAKER_04]: think about real returns of taking your nominal return minus inflation gives you

[00:04:59] [SPEAKER_04]: the real return and maybe we'll get into it later, but people love to debate what the

[00:05:02] [SPEAKER_04]: inflation number is. I don't necessarily want to get in that bait, but over a longer

[00:05:07] [SPEAKER_04]: time horizon, let's just say it averages about 3% a year. So if let's say the stock market was

[00:05:12] [SPEAKER_04]: compounding at like 10%, you have to minus that 3% out of there. There's a little more math to it,

[00:05:17] [SPEAKER_04]: but that gives you the rough heuristic about a 7% compounded growth rate over the last 100 years

[00:05:22] [SPEAKER_03]: plus. So when you looked at the long-term real returns of the US market, what did you find

[00:05:26] [SPEAKER_04]: with that? Yeah, so I think the rule of thumb I always like to use because everybody

[00:05:31] [SPEAKER_04]: unfortunately will use different bookends for their time horizons, right? Like you'll

[00:05:35] [SPEAKER_04]: hear a 100 year return and that's really like 1916 to 2016 or like 1920 to 2020. And it's like

[00:05:43] [SPEAKER_04]: everybody's using kind of different bookends, which gives you a little bit different numbers.

[00:05:46] [SPEAKER_04]: But the easiest one to think about long-term, I think Med Faber has done great

[00:05:49] [SPEAKER_04]: publications on this and I think some of it comes from trying for the optimists.

[00:05:53] [SPEAKER_04]: But over the long, whether you want to use 100 years, 120, 180 years that we'll talk about later,

[00:05:58] [SPEAKER_04]: the idea is the real returns that rough heuristic I use is

[00:06:02] [SPEAKER_04]: stock markets about 6.5%. Let's call it 7% because some of those windows will say 7%. So let's be

[00:06:07] [SPEAKER_04]: optimistic. Let's say the real returns of the US stock market are 7%. The real returns of global

[00:06:12] [SPEAKER_04]: developed stock markets are about 5%. Interestingly enough, the 60-40 portfolio over the really

[00:06:16] [SPEAKER_04]: long term is about 5% real. Commodity trend followers do about 4% real compounded.

[00:06:23] [SPEAKER_04]: Bonds 2% and bills are about a half to 1% over time. So that's the kind of rough

[00:06:29] [SPEAKER_04]: heuristics we use is I think about as like 75421 gives you a rough idea.

[00:06:35] [SPEAKER_03]: Inside of that global number, there's a big amount of dispersion with all these other countries.

[00:06:39] [SPEAKER_03]: So what did you find when you looked at that? Because one of the things I've always wanted

[00:06:41] [SPEAKER_03]: to say in a podcast is now due to Japan. And so this is your opportunity to now

[00:06:45] [SPEAKER_04]: do Japan. Yeah, so what we were looking at is there's a great book by Jeremy Segal called

[00:06:52] [SPEAKER_04]: Stocks for the Long Run that is one of the best-selling books of all times in finance

[00:06:55] [SPEAKER_04]: and investing. And more recently, Arunar Kullova et al in the Journal of Financial Economics did kind

[00:07:02] [SPEAKER_04]: of a takedown of that paper. Not necessarily a takedown, but they want to look at like

[00:07:05] [SPEAKER_04]: developed economies globally going from 1841 to 2019. So there's like a 180-year study of

[00:07:12] [SPEAKER_04]: kind of global stock markets and thinking about real returns over those global stock markets

[00:07:17] [SPEAKER_04]: or even nominal returns. It doesn't really matter. But you're pointing out the dispersion

[00:07:21] [SPEAKER_04]: in using 30-year rolling windows. 1990 to 2020 for Japan is negative 20%, 1% real return total.

[00:07:28] [SPEAKER_04]: So you had a 30-year period of being underwater in Japan. And it's interesting, like you said,

[00:07:33] [SPEAKER_04]: that's usually the anomaly that people point to. And I wonder, we like to throw it out there as

[00:07:37] [SPEAKER_04]: anomaly because people don't want to deal with it. Like you said, now do Japan and people's

[00:07:40] [SPEAKER_04]: brains kind of break because they're like, well, it just doesn't, you can't count Japan.

[00:07:44] [SPEAKER_04]: I always wonder why or how that happened. I really don't know the answer

[00:07:47] [SPEAKER_04]: other than I really wonder if I'm being compassionate towards my MMT friends. I wonder

[00:07:53] [SPEAKER_04]: if that's the first time we really had that developed economy have that underwater period,

[00:07:57] [SPEAKER_04]: you know, post going off the fixed rate exchanges. And so maybe Japan is the leader,

[00:08:01] [SPEAKER_04]: maybe some of these other developed countries are going to see something that's,

[00:08:03] [SPEAKER_04]: you know, similar to that in the future. But then you're talking about what is the

[00:08:06] [SPEAKER_04]: actual dispersion in those returns? If we look across global stock markets on real returns

[00:08:11] [SPEAKER_04]: over like 30-year rolling windows, like the first percentile is a negative 94% return.

[00:08:17] [SPEAKER_04]: And the top percentile that 99% else is 70x. That's a massive dispersion in returns that gets you to

[00:08:23] [SPEAKER_04]: an average of 7% keger on real terms. So like, that's the kind of dispersion we're talking about

[00:08:28] [SPEAKER_04]: from negative 94 all the way up to 70x. And then what they tout in the media is that your average

[00:08:34] [SPEAKER_04]: is 7% keger and we'll get to this as like, are you likely to be average? I'm not so certain of that.

[00:08:40] [SPEAKER_03]: Yeah, what's interesting about Japan too is Japan is a developed country. I mean,

[00:08:42] [SPEAKER_03]: people can give Russia and all those examples all the time and people will just say, well,

[00:08:45] [SPEAKER_03]: what happened to Russia is never going to happen here. And they're right about that probably. But

[00:08:48] [SPEAKER_03]: like Japan is a legitimate developed country that has very, very different results than we did.

[00:08:53] [SPEAKER_04]: Yeah, and it's even better if you ever been to Japan?

[00:08:57] [SPEAKER_03]: I know I haven't. Have you?

[00:08:58] [SPEAKER_04]: But yeah, it's like, I mean, I still haven't been there too, but like everything you read

[00:09:02] [SPEAKER_04]: about it and everybody knows going to visit, it's an amazing country, right? It's very advanced.

[00:09:06] [SPEAKER_04]: Like you said, it's a full economic, there's a lot of people things to people take from

[00:09:09] [SPEAKER_04]: daily life that are that are better in Japan than they are here. So it's not like

[00:09:12] [SPEAKER_04]: that negative 21% real return over 30 years has not necessarily destroyed the country. It's just

[00:09:17] [SPEAKER_04]: what you've actually seen in their stock market, which we can get to another question of like,

[00:09:20] [SPEAKER_04]: you know, how real is that? But if that's our savings vehicle, it's very real to us.

[00:09:24] [SPEAKER_04]: But like you're saying, it's not necessarily under affecting the underlying economics of

[00:09:29] [SPEAKER_04]: Japan and the country or the actual daily life of the people involved there.

[00:09:32] [SPEAKER_03]: Yeah, this is the big challenge. You got, you talked about this a little at the beginning.

[00:09:36] [SPEAKER_03]: This idea of is the US different? That's the question a lot of us have to ask because

[00:09:39] [SPEAKER_03]: how many countries were there with like better returns in the US, right? Australia maybe?

[00:09:44] [SPEAKER_03]: Well, we were right at the top. Yeah, you can.

[00:09:46] [SPEAKER_04]: Yeah, it depends on like especially if you take more modern 30 day rolling windows,

[00:09:50] [SPEAKER_04]: like you had Australia and Canada didn't really feel too much of the 2008

[00:09:54] [SPEAKER_04]: special Australia. And then if you especially look at like their housing markets,

[00:09:57] [SPEAKER_04]: it's insane over the last like 30 years because they didn't have that,

[00:10:00] [SPEAKER_04]: the GFC that 2007 2008 collapse like we did. So yeah, but over the longer term,

[00:10:06] [SPEAKER_04]: we're right at the top. Like I said, globally average is more about a 5%

[00:10:09] [SPEAKER_03]: Kager and we're at about a 7% Kager. So can you come up with any reasons why the US should

[00:10:14] [SPEAKER_03]: continue like in the next 100 years to view what it was in the past 100 years?

[00:10:17] [SPEAKER_03]: And we think about, I mean, if I just look at today and not over 100 years and we've got

[00:10:20] [SPEAKER_03]: the best companies here, you could argue with the center of the free world.

[00:10:23] [SPEAKER_03]: I think you pointed out in your podcast, we've got oceans around us that certainly helps us.

[00:10:26] [SPEAKER_03]: Like how do you think about that? Is there anything in there that would justify

[00:10:29] [SPEAKER_03]: like the US having this gap over the rest of the world like we did in the past?

[00:10:33] [SPEAKER_04]: Yeah, I think there's a lot of things. But I mean, you know, I also want to point out like you

[00:10:38] [SPEAKER_04]: said, like let's do now do Japan. The other thing that a lot of people point out with like even 6040

[00:10:42] [SPEAKER_04]: portfolios being underwater globally over like rolling 20 year windows to Unreal returns. Like

[00:10:46] [SPEAKER_04]: you see like even going back to 1990, you had Russia negative 100% China negative 100% Germany

[00:10:52] [SPEAKER_04]: negative 100%. So it's not just Japan. And then the whole point is like, Oh, people can go,

[00:10:56] [SPEAKER_04]: okay, let's take out the first world war and second world war because it's understanding

[00:10:58] [SPEAKER_04]: how their economies or stock markets got destroyed. You have more modern versions,

[00:11:02] [SPEAKER_04]: even like Italy 1960, 1980 negative 72% on a 6040 portfolio. You know,

[00:11:08] [SPEAKER_04]: similarly with India negative 66%, Spain negative 59%. So it at least broadens us out to not think

[00:11:14] [SPEAKER_04]: only Japan's anomaly like this has happened kind of globally across developed markets.

[00:11:18] [SPEAKER_04]: So what do we have American exceptionalism? Like I'm born and raised in America,

[00:11:22] [SPEAKER_04]: thankfully lived all over the world. But I mean, I'd love to believe in American exceptionalism,

[00:11:26] [SPEAKER_04]: but I can't help the little voice in the back of my head going, you know,

[00:11:29] [SPEAKER_04]: we're not that special. You know, if it can happen anywhere, it can also happen to us.

[00:11:33] [SPEAKER_04]: And like you were referencing, you have, you know, you read your Peter Zei hand, right?

[00:11:37] [SPEAKER_04]: We're surrounded by two massive oceans. We have unbelievable two weather patterns that create

[00:11:41] [SPEAKER_04]: this, you know, bread basket in the Midwest and upper Midwest. We have all these amazing things

[00:11:46] [SPEAKER_04]: going for America that and then obviously our innovation that we get out of Silicon Valley.

[00:11:49] [SPEAKER_04]: And then now are we in a two headed race on AI between the US and China and Europe's kind

[00:11:53] [SPEAKER_04]: of gone off that race, we'll see. I mean, so there's there's a lot of reasons to be

[00:11:57] [SPEAKER_04]: very strong and bullish the US and I am, you know, like I'm an optimistic entrepreneur in the US.

[00:12:03] [SPEAKER_04]: So I'm very happy if the US continues to to outperform. But just looking at a historical

[00:12:08] [SPEAKER_04]: perspective or the context of the things we've been talking about, you know, it's not very likely

[00:12:12] [SPEAKER_04]: or it's possible that we could we could experience drawdowns and more importantly,

[00:12:16] [SPEAKER_04]: we can experience, you know, severe drawdowns and then it's more the duration of the drawdown

[00:12:20] [SPEAKER_04]: like how long is that going to happen and relative to your lifetime. And we don't need to even

[00:12:25] [SPEAKER_04]: be American exceptionalists to see like historically how many times US stock market in real terms has

[00:12:29] [SPEAKER_04]: been deeply underwater or had really negative returns for, you know, one to two decades at a time

[00:12:34] [SPEAKER_04]: and that really can affect you if it lines up with your retirement or your peak earnings.

[00:12:38] [SPEAKER_03]: Do you know what the longest period of negative real returns was for the US?

[00:12:42] [SPEAKER_03]: I mean, I know that there's this chart that always goes around where people love to do the

[00:12:45] [SPEAKER_03]: nominal return. So there's always like this idea like 20 year period 100% of the time,

[00:12:49] [SPEAKER_03]: you know, there's been positive nominal returns over 20 year periods. But I'm wondering

[00:12:52] [SPEAKER_03]: like how would you take that to the real world? Like how it plays out?

[00:12:56] [SPEAKER_04]: Yeah, there's there's an argument between the 30s and 40s and then the 60s and 70s.

[00:13:00] [SPEAKER_04]: And it's anywhere from 15 to 20 years being underwater in real returns.

[00:13:04] [SPEAKER_04]: And that's whether it's, you know, stock market and or 60 40 portfolio. But I mean,

[00:13:09] [SPEAKER_04]: even like even on nominal terms, you've had, you know, the Great Depression was a negative

[00:13:12] [SPEAKER_04]: 83% drawdown in the stock market. And then even more recently, I think people forget from

[00:13:16] [SPEAKER_04]: 2000 to 2013 in nominal terms, the stock market was underwater for 13 plus years,

[00:13:22] [SPEAKER_04]: like 13 years and four months. And that's very recent history for us. And it had that

[00:13:25] [SPEAKER_04]: the peak drawdown was negative 60% just in nominal terms during that period. And then

[00:13:29] [SPEAKER_04]: I think we can argue more recently how much inflation is fluctuated. So it's really hard

[00:13:34] [SPEAKER_04]: to figure out I think real returns. If you have to line up yours than doing it,

[00:13:38] [SPEAKER_04]: I think an average of the last 20, especially we talk about the US over the last 20 years.

[00:13:42] [SPEAKER_03]: I want to shift to how we think about building a portfolio in a world like this.

[00:13:46] [SPEAKER_03]: If we assume like what's going on with the US is maybe not as likely in the future

[00:13:50] [SPEAKER_03]: as it was in the past. And I want to lead into that with an article you wrote because,

[00:13:53] [SPEAKER_03]: and I think you just read this for Meb Beaver's podcast, if I'm correct. He has a new podcast

[00:13:58] [SPEAKER_03]: where he's taken the best investment writing. And I think he's carved it out into a separate

[00:14:01] [SPEAKER_03]: podcast and used to do it on the Meb Beaver show. But you wrote this article about

[00:14:04] [SPEAKER_03]: this idea of Herschel Walker syndrome. And I wonder if you can talk about what that is.

[00:14:08] [SPEAKER_04]: Yeah. And I think as I get into Herschel Walker and this will relate is the things we've been

[00:14:11] [SPEAKER_04]: talking about, like even if the US continues as it is, you know, there's a dispersion of

[00:14:15] [SPEAKER_04]: returns, right? That we have to really think about and what is our individual path. And

[00:14:19] [SPEAKER_04]: this will relate to Herschel Walker. But you know, we talked about, you know, the first

[00:14:22] [SPEAKER_04]: percentile and the 99th percentile. But even when I take the 25th percentile,

[00:14:26] [SPEAKER_04]: you still have a one in four chance over 30 year rolling windows to only make a 82%

[00:14:32] [SPEAKER_04]: total return, which is a 2% keger. I don't think Americans realize that like if you have

[00:14:36] [SPEAKER_04]: a one in four chance over a 30 year period for a 2% keger, I don't think we're thinking

[00:14:40] [SPEAKER_04]: about that very often. And then as we were highlighting earlier, if we use global

[00:14:44] [SPEAKER_04]: develop markets, you have a one in 10 chance of being negative over a 30 year window. And I

[00:14:48] [SPEAKER_04]: just don't think people think about those dispersion returns and that's going to relate

[00:14:52] [SPEAKER_04]: very simply to what we talk about later. But related to that is like,

[00:14:55] [SPEAKER_04]: I'd like to put hard numbers on it. If you're in that 25th percentile, and let's say

[00:14:58] [SPEAKER_04]: you're 35 and you want to retire at 65, that means you went from, you know,

[00:15:02] [SPEAKER_04]: in that 25th percentile, you went from 500,000 in savings to 910,000 in savings. That's not a

[00:15:07] [SPEAKER_04]: lot over your time horizon of peak earning years versus if you got the average,

[00:15:12] [SPEAKER_04]: you would have went from 500,000 to 3.8 million. So that dispersion of returns makes

[00:15:15] [SPEAKER_04]: very real when we think about our retirements and what's our income at retirement for those

[00:15:19] [SPEAKER_04]: distributions, which I know we're going to probably talk about later.

[00:15:22] [SPEAKER_03]: I love the idea to use the word savings all the time because it's a great way to think

[00:15:26] [SPEAKER_03]: about it. Like there's a safety in that and thinking about your portfolio as savings

[00:15:29] [SPEAKER_03]: versus thinking about it the way most people think about it. And I think it's really good

[00:15:33] [SPEAKER_03]: like for investors to maybe use that word instead of some of the other words because

[00:15:36] [SPEAKER_04]: they'll view their portfolio different. Yeah, I very specifically choose to use that word because

[00:15:42] [SPEAKER_04]: that's actually what we're talking about and especially I use it as a business owner and

[00:15:47] [SPEAKER_04]: entrepreneur and most of our clients are as well is like, you know, whatever you have left

[00:15:51] [SPEAKER_04]: that you can't put back into your business is savings, right? And that's what we need to,

[00:15:55] [SPEAKER_04]: you know, to compound and be there when we need it most. So that's why I'd really try to

[00:15:58] [SPEAKER_04]: harness on savings. Herschel Walker. So what's interesting is Herschel Walker was

[00:16:03] [SPEAKER_04]: drafted the Dallas Cowboys in 1985. And over his lifetime, Herschel Walker was a Hall of Fame player.

[00:16:08] [SPEAKER_04]: He had over 8000 rushing yards, 61 touchdowns and almost 5000 receiving yards at a time when

[00:16:13] [SPEAKER_04]: running backs weren't receivers. So he was really a multi tool player, a really diverse threat.

[00:16:18] [SPEAKER_04]: And in 1989, the Minnesota Vikings decided they had to have Herschel Walker that was going to

[00:16:23] [SPEAKER_04]: be their missing piece to win a Super Bowl. And then that time in 1989, I believe the Dallas

[00:16:28] [SPEAKER_04]: Cowboys went one and 12. So Herschel Walker was by far their best player. So why would you

[00:16:32] [SPEAKER_04]: get rid of your best player? They decided to do a trade with the Minnesota Vikings that eventually

[00:16:36] [SPEAKER_04]: was three draft picks and an additional five players. So essentially eight players for one

[00:16:41] [SPEAKER_04]: Herschel Walker, for one great trade. What's interesting actually, you can watch a documentary

[00:16:45] [SPEAKER_04]: that sound on 30 for 30, but actually the Jimmy Johnson and Dallas Cowboys, they traded their

[00:16:50] [SPEAKER_04]: way from like that three draft picks and five players, it ended up being like an 18 player

[00:16:53] [SPEAKER_04]: trade when they got set and done with San Diego and everything else. I mean, it's just a

[00:16:56] [SPEAKER_04]: crazy story overall. But in the end, Dallas Cowboys used all those draft picks to go out and

[00:17:03] [SPEAKER_04]: get people like Emmett Smith, Darren Woodson and build a team approach. And over the 1990s,

[00:17:08] [SPEAKER_04]: the Dallas Cowboys ended up winning three Super Bowls in the early 90s. And that's how

[00:17:11] [SPEAKER_04]: they became America's team. Meanwhile, Herschel Walker was kind of a boss for the Minnesota

[00:17:15] [SPEAKER_04]: Vikings got traded later to other teams. And so what we try to use this as an example of

[00:17:21] [SPEAKER_04]: the Minnesota Vikings were thinking about with the one great trade while the Dallas

[00:17:24] [SPEAKER_04]: Cowboys were thinking about a team approach or the ensemble approach. And that's what

[00:17:28] [SPEAKER_04]: that helped them to win championships. And it was eventually called the great train

[00:17:31] [SPEAKER_04]: robbery because that's what Jimmy Johnson bragged to reporters is that for one player,

[00:17:36] [SPEAKER_04]: he ended up parlaying that into 18 different trades. So it was the great train robbery.

[00:17:40] [SPEAKER_04]: And that's why it's known as both the Herschel Walker trade and the great

[00:17:43] [SPEAKER_04]: train robbery. And like I said, there's a great documentary on 30 for 30 about it on ESPN.

[00:17:47] [SPEAKER_04]: But this is why we always like to think about an ensemble approach and a portfolio

[00:17:51] [SPEAKER_04]: construction approach versus a singular trade. And I think most people think about

[00:17:56] [SPEAKER_04]: their investments or savings as an individual as is, you know, singular trades, whether that's

[00:18:01] [SPEAKER_04]: SP 500 index or if they're a stock picker, and they're not necessarily thinking about the portfolio

[00:18:05] [SPEAKER_03]: construction of their team. Yeah, I was thinking about that when you were saying it.

[00:18:09] [SPEAKER_03]: I mean, those trades where you trade like the whole is the whole farm system or all the draft

[00:18:12] [SPEAKER_03]: picks, like for one guy, they don't they rarely work out. I mean, I guess the only time

[00:18:16] [SPEAKER_03]: they work out is if you like win the if you win the championship that year, because

[00:18:19] [SPEAKER_03]: you could argue the odds of winning the championship are not that great. So like if they'd taken

[00:18:23] [SPEAKER_03]: Herschel Walker and maybe they had won two championships, then you could say it was worth

[00:18:26] [SPEAKER_03]: giving that up. But those trades seem to never work out.

[00:18:29] [SPEAKER_04]: But to your point, I think that's basically what the LA Rams did, right? Like they went

[00:18:33] [SPEAKER_04]: there like we're going to win a Super Bowl this year. So they went all out on that.

[00:18:37] [SPEAKER_04]: But even then they still had to get like three or four players to really build out

[00:18:41] [SPEAKER_04]: their roster. And it was still because they had already great players on their team.

[00:18:44] [SPEAKER_04]: So it wasn't necessarily all out on one player is allowed to win the Super Bowl

[00:18:47] [SPEAKER_04]: and all out to win the Super Bowl means we need to build the best team that has the highest

[00:18:51] [SPEAKER_04]: probability of winning the Super Bowl. So even in that case scenario, they still went with the

[00:18:55] [SPEAKER_03]: team approach. Yeah, that makes sense. I was also thinking when you were talking about that

[00:18:59] [SPEAKER_03]: about Eric Krittenin is a good friend of yours. Like his Dennis Rodman thing is like the

[00:19:03] [SPEAKER_03]: opposite of your Herschel Walker thing. Like he always talks about Dennis Rodman is a great

[00:19:06] [SPEAKER_03]: example of like how to build a portfolio whereas Herschel Walker is like the example of baby

[00:19:10] [SPEAKER_04]: How Not To. Yeah, I think I think and Eric, I think originally got that from Chris Cole that

[00:19:15] [SPEAKER_04]: really popularized Dennis Rodman. And I was actually talking about that recently and I was

[00:19:18] [SPEAKER_04]: like, I'm going to talk you about the greatest basketball player of all time from the Chicago

[00:19:21] [SPEAKER_04]: Bulls and everybody's like Michael Jordan. I'm like, Nope, Dennis Rodman because Dennis Rodman

[00:19:26] [SPEAKER_04]: is the lowest scoring player ever to be in the Hall of Fame. But at his height, he was

[00:19:29] [SPEAKER_04]: six standard deviations better than any other defensive rebounder in the league.

[00:19:34] [SPEAKER_04]: And so he ranks number one for the highest efficiency of a points differential percentage

[00:19:39] [SPEAKER_04]: when he's in the game versus out of the game. Because if you think about it,

[00:19:41] [SPEAKER_04]: he was able to garner 17% of offensive rebounds and he's kicking that back

[00:19:46] [SPEAKER_04]: to Michael Jordan, Scottie Pippin, Steve Kerr or Paxton. And that's what's increasing the

[00:19:51] [SPEAKER_04]: offense efficiency of the team. But we always are enamored by these high scoring players like

[00:19:55] [SPEAKER_04]: a Michael Jordan. And we're not thinking about the defense or the rebounding that helps us as

[00:20:00] [SPEAKER_04]: the ensemble of the team to eventually win championships. Like we are moniker for our

[00:20:05] [SPEAKER_04]: firm is offense wins game, but defense wins investing championships. And I think people

[00:20:10] [SPEAKER_04]: really understand that in sports. And that's why I love sports analogies, but they tend to

[00:20:13] [SPEAKER_04]: forget about it in their portfolios when they tend to hold all offensive assets. And when

[00:20:17] [SPEAKER_04]: correlations go to one in the equity event, they all go down together.

[00:20:20] [SPEAKER_03]: Yeah, I kind of wish Robin played like in the world of like advanced metrics like we are today,

[00:20:24] [SPEAKER_03]: because he would have been he probably would have made a lot more money first of all,

[00:20:27] [SPEAKER_03]: because now they I think it's easier to understand what his value is probably than it was back then.

[00:20:32] [SPEAKER_04]: His daughter plays for the US women's soccer team. She was just in the Olympics,

[00:20:36] [SPEAKER_04]: she scored some goals in the Olympics. Yeah, a lot of people don't know that.

[00:20:39] [SPEAKER_04]: That's his daughter on that team. But like you're saying is like the money ball era

[00:20:42] [SPEAKER_04]: is what I think is interesting that's come out of that is like coming out of the

[00:20:46] [SPEAKER_04]: the Great Trainer Robert Herschel Walker trade we talked about, then you have examples where

[00:20:49] [SPEAKER_04]: you know Billy Bean got famous with the Oakland A's and then you know part of that book that

[00:20:54] [SPEAKER_04]: was written in the movie with Brad Pitt. But what people forget is Theo Epstein took

[00:20:58] [SPEAKER_04]: their those ideas to the Boston Red Sox and I believe they won their first world series in

[00:21:01] [SPEAKER_04]: 85 86 years. And the reason I bring up the Red Sox is because the owner of the Red Sox,

[00:21:07] [SPEAKER_04]: John Henry is a commodity trend follower, a very guy that's really focused on statistics. So that's

[00:21:11] [SPEAKER_04]: why he really believed in moneyball. But he went on to buy Liverpool FC in England, so the British

[00:21:16] [SPEAKER_04]: soccer team. And what they did, he bought it in 2010 but in 2015, they hired Jurgen Klopp,

[00:21:21] [SPEAKER_04]: the coach from Germany. And he played what they called heavy heavy metal football was just

[00:21:25] [SPEAKER_04]: all out attack just beautiful game just all out goals that scored as many goals as possible.

[00:21:29] [SPEAKER_04]: But for the first few years, they scored a lot of goals, but they had a lot of goals

[00:21:32] [SPEAKER_04]: scored on them. So their win loss percentage wasn't as great. But in 2018, they went out and

[00:21:36] [SPEAKER_04]: got at least some Becker from Brazil, which was arguably the best goalkeeper in the world.

[00:21:40] [SPEAKER_04]: And they got Virgil van Dijk from Holland, who is a Netherlands who is allegedly the best defender

[00:21:45] [SPEAKER_04]: in the world. So they showed up that defense with that all out attack. And then they went on to

[00:21:48] [SPEAKER_04]: win the UEFA Champions League and then they won the Premier League for the first time in 30 years.

[00:21:53] [SPEAKER_04]: So as once again, it's just an example of the moneyball approach but more importantly,

[00:21:56] [SPEAKER_04]: shoring up your defense so that way your offense can be a lot more aggressive.

[00:22:00] [SPEAKER_03]: I could probably spend the whole time on sports, but I think the listeners would

[00:22:03] [SPEAKER_03]: probably not like that. So I probably should pivot back to investing. But I want to ask you

[00:22:08] [SPEAKER_03]: the question I get all the time when we talk about because we run a lot of these more diversified

[00:22:11] [SPEAKER_03]: in stocks and bonds, multi-asset portfolios. And the question you get all the time is,

[00:22:16] [SPEAKER_03]: you gave me the real returns at the beginning. Stocks had the highest real returns of all

[00:22:20] [SPEAKER_03]: the various things you talked about. Like why shouldn't somebody just who has a 30 year

[00:22:23] [SPEAKER_03]: timeframe who's got the behavioral skills to stick with it? Why shouldn't they just

[00:22:27] [SPEAKER_03]: own stocks? And that's a question you hear from individual investors all the time.

[00:22:32] [SPEAKER_04]: Yeah, it's a hard, like I said, it's going back to what we started about with scoreboard.

[00:22:36] [SPEAKER_04]: People are looking at recency bias when they think about that. But also like we said,

[00:22:40] [SPEAKER_04]: if you look at the long history, you see it goes from the bottom left to the top right over the

[00:22:43] [SPEAKER_04]: last 100, 150 years, especially in the US. But what people are missing is they zoom in

[00:22:47] [SPEAKER_04]: as those underwater periods. If you have those underwater periods for 10,

[00:22:51] [SPEAKER_04]: 20 years that we were talking about or during your peak earning years or your

[00:22:54] [SPEAKER_04]: retirement years when you're taking those distributions, it can be really detrimental

[00:22:58] [SPEAKER_04]: and negative to your portfolio. So the way we like to think about it is this fancy word called

[00:23:03] [SPEAKER_04]: ergodicity. But it's what we call sequencing risk, right? It's like your path is not that

[00:23:08] [SPEAKER_04]: ensemble average path. So this is what I'm saying is not only the industry tend to

[00:23:12] [SPEAKER_04]: you know lie to us and treat our investments, you know, as something that we can get rich

[00:23:16] [SPEAKER_04]: off of instead of talking about them as their savings. The other one is they start,

[00:23:19] [SPEAKER_04]: they talk about those averages that and that's what we started talking about is like,

[00:23:22] [SPEAKER_04]: is the average path what you're going to return? And that's why they're looking at 7%

[00:23:26] [SPEAKER_04]: Kager or 10% nominal that people started to affix to these days is like,

[00:23:30] [SPEAKER_04]: are you likely to get the average in the future? Or is that average of all the players?

[00:23:34] [SPEAKER_04]: So to think about ergodicity, the real simple version is ergodic ergodic system

[00:23:40] [SPEAKER_04]: when the ensemble average is equal to the path average over time. The keyword being time. And

[00:23:46] [SPEAKER_04]: so a lot of times when we think about expected value and things we're not adding in the addition

[00:23:49] [SPEAKER_04]: of time. And throughout our lives, we compound through time. And so a lot of times when

[00:23:55] [SPEAKER_04]: your individual path does not line up with the average path of the ensemble, that's a non ergodic

[00:24:00] [SPEAKER_04]: system. And unfortunately, market savings compounding are non ergodic systems. And so if we treat them

[00:24:06] [SPEAKER_04]: like they're ergodic systems, we're likely to fall for a lot of things that can be really

[00:24:10] [SPEAKER_04]: detrimental for our portfolio. To put it like a finer example on it, I think a good example

[00:24:15] [SPEAKER_04]: would be is if 100 people were going to go into the casino, let's say 100 people go into

[00:24:19] [SPEAKER_04]: Caesar's Palace and let's say I have a game plan where they can make 50% returns. So I give them

[00:24:25] [SPEAKER_04]: each $1,000, 100 people go in the casino, they're expected to make 50% returns or $500, but let's

[00:24:31] [SPEAKER_04]: say one out of the 100 is going to totally blow up. So their expected value is $1,495 per

[00:24:37] [SPEAKER_04]: player, plus 495. That's great in unexpected value. So the 100 people go to Caesar's,

[00:24:42] [SPEAKER_04]: one blows up, but it doesn't affect any of the other ones. Let's say player number 28

[00:24:47] [SPEAKER_04]: blows up, but 99 other players come back with $1,500. That's all good. That's the ensemble average.

[00:24:53] [SPEAKER_04]: But let's say Jack goes to the casino and every day he uses this system to make 50% of his money.

[00:24:59] [SPEAKER_04]: So he goes day one, puts down his $1,000, comes home with $1,500, goes back the next day,

[00:25:03] [SPEAKER_04]: compounds at 50%. We get to day 27 and Jack has $56 million. Fantastic. You're on Zillow,

[00:25:12] [SPEAKER_04]: you're looking at dream properties down in South Florida. Ken Griffin's going to be your neighbor.

[00:25:18] [SPEAKER_04]: Everything is amazing, right? But then day 28 shows up and you blow up, game over, you lose everything.

[00:25:24] [SPEAKER_04]: There is no day 29 in the casino now. You are totally blown up. And that's the difference

[00:25:29] [SPEAKER_04]: between your path ensemble through time as we compound versus the ensemble of a group.

[00:25:36] [SPEAKER_04]: And that's what we're missing a lot of times is what is our individual path look like

[00:25:40] [SPEAKER_04]: over time and what are the sequencing those returns and how do we compound them? That's why

[00:25:45] [SPEAKER_04]: it is so detrimental when we have these massive drawdowns of 50% in the stock market. You have

[00:25:50] [SPEAKER_04]: to make 100% to get back to even. And people aren't thinking about that. And we can get into

[00:25:54] [SPEAKER_04]: behavioral things where people capitulate then and they miss the run back up too. So

[00:25:58] [SPEAKER_04]: there's a lot of other things involved when we think about our individual path versus what

[00:26:03] [SPEAKER_04]: has been the average for hundreds of millions of people over the last 40, 50 years.

[00:26:07] [SPEAKER_03]: I think that's what people miss a lot in retirement when they think about sequence risk

[00:26:11] [SPEAKER_03]: is it's great to have this thing where you multiply the outcome by the percentage chance

[00:26:15] [SPEAKER_03]: of the outcome. But the problem is when 20% of the time, you have no money left,

[00:26:20] [SPEAKER_03]: you can't use that standard framework. You got to think about now I'm broke.

[00:26:23] [SPEAKER_03]: Like do I want a 20% chance that in retirement I'm completely broke?

[00:26:27] [SPEAKER_03]: That's the problem I think when people think about stuff like this.

[00:26:31] [SPEAKER_04]: Yeah, we try to build a total portfolio solution that helps you muddle along in

[00:26:36] [SPEAKER_04]: any kind of macro environment. But I do not envy financial advisors because like you're

[00:26:40] [SPEAKER_04]: dealing with retiree savings, right? And they need the savings to like outpace the rest of

[00:26:45] [SPEAKER_04]: their life and that glide path and all the metrics you're running and Monte Carlo simulators

[00:26:50] [SPEAKER_04]: to make sure that they maintain their level of wealth on that glide path.

[00:26:54] [SPEAKER_04]: That scares me to death. I wouldn't want to do that because once again,

[00:26:58] [SPEAKER_04]: you're using averages, right? And we're talking about individual paths.

[00:27:00] [SPEAKER_04]: I think the most perfect example of that is our buddies at resolve asset management wrote about

[00:27:06] [SPEAKER_04]: this years ago about your sequencing risk and talking about just using the Dow's index average.

[00:27:12] [SPEAKER_04]: So from like 1966 to 1997, the Dow index averaged an 8% annual return.

[00:27:20] [SPEAKER_04]: And you'll go great over that whole period, 8% average return.

[00:27:23] [SPEAKER_04]: If I was thinking about retirement, it'd be just fine. The problem was that those returns

[00:27:29] [SPEAKER_04]: varied greatly over that 30 year time horizon, roughly 30 years, right?

[00:27:33] [SPEAKER_04]: So from 1966 to 1982, there are essentially no returns. You know, $1,000 invested in the Dow

[00:27:38] [SPEAKER_04]: index from 1966 to 1982 returned $1,080 by 1982. So there's zero returns over the first 15 years.

[00:27:46] [SPEAKER_04]: Then from 82 to 97, the Dow grew at 15% per year for those second 15 years.

[00:27:51] [SPEAKER_04]: But then we hear a 30 year average of 8%. And this is what people aren't thinking about,

[00:27:56] [SPEAKER_04]: especially in retirement when there comes their savings. So if we think about like a couple that's

[00:28:00] [SPEAKER_04]: going into retirement, let's say they're high power lawyers, whatever, and you know, they're in

[00:28:04] [SPEAKER_04]: reaching those mid 60s, they're 63 years old, they've accumulated $3 million in savings.

[00:28:09] [SPEAKER_04]: Now it dramatically affects their portfolio glide path on whether they're able to live well

[00:28:15] [SPEAKER_04]: off those returns depending on the sequencing of those returns. And so, you know, let's say

[00:28:19] [SPEAKER_04]: the financial advisor comes in, they figure out the normal glide path of the average,

[00:28:22] [SPEAKER_04]: I said, okay, great, we're going to have an 8% average return given your $3 million,

[00:28:26] [SPEAKER_04]: your lifestyle needs over the next 30 years. We think it's a safer you'd have a 6% withdrawal rate,

[00:28:32] [SPEAKER_04]: and then we'll go up that by 3% a year for inflation, right? And they go, great, let's run it.

[00:28:37] [SPEAKER_04]: Well, the problem is if they got those that return sequence similar to the Dow Jones average,

[00:28:42] [SPEAKER_04]: where it was flat for those first 15 years, and they're taking those 6% withdrawals and

[00:28:47] [SPEAKER_04]: then opening it by 3% a year, by year 13, they're broke, they're completely out of money.

[00:28:52] [SPEAKER_04]: So it matters dramatically how those returns come. Whereas if you flipped around,

[00:28:56] [SPEAKER_04]: and they had those second 15 years that were compounded at 15%,

[00:28:59] [SPEAKER_04]: they would be much better off. And then vice versa, if we think about somebody that's,

[00:29:03] [SPEAKER_04]: you know, a young person that's 34, that's thinking about, okay, I'm going to save until

[00:29:07] [SPEAKER_04]: I hit my retirements at 63, 64 years old, and they want almost the flip side of that.

[00:29:13] [SPEAKER_04]: You know, meanwhile, would they put, let's say, they put down $100,000 into savings,

[00:29:16] [SPEAKER_04]: they add, you know, $1,000 a month into their savings, and they're looking for that

[00:29:20] [SPEAKER_04]: to compound until their retirement? Well, if they have a large sequence of returns initially

[00:29:25] [SPEAKER_04]: on that low capital base, that's not very good for them. That's not going to help their compounding.

[00:29:29] [SPEAKER_04]: They want the large sequence of returns become their peak earning years, and when

[00:29:32] [SPEAKER_04]: they built up a larger capital base. And so we don't talk about that often because I can

[00:29:37] [SPEAKER_04]: understand it's very difficult for one, for financial advisors to explain that to their

[00:29:41] [SPEAKER_04]: clients. But two, when we don't know what that future path looked like,

[00:29:44] [SPEAKER_04]: it's very difficult to figure that out for the clients.

[00:29:47] [SPEAKER_03]: Yeah, it's funny. When we work with people in their 20s, you want to be so excited.

[00:29:51] [SPEAKER_03]: This bear market cave, this is the greatest thing ever. This is so awesome for you and your

[00:29:55] [SPEAKER_03]: future. And people don't want to hear that though. When they put their first amount of money in

[00:29:58] [SPEAKER_03]: the stock market, their first hard earned money and they lose half of that money, they hate it.

[00:30:03] [SPEAKER_03]: But it is true though, that's when you want the drawdowns when you're really young.

[00:30:08] [SPEAKER_04]: Yeah, I think, and Mebs talked about recently, millennials are Gen Z or Gen F cheering for

[00:30:14] [SPEAKER_04]: for the stock market to go up is crazy. You want the stock market to have right now,

[00:30:19] [SPEAKER_04]: but that's not the case for people. They just like to see that up and to the right. And I think

[00:30:24] [SPEAKER_04]: it's interesting, I think what is the last five years? We've been at like 14-15% returns for

[00:30:28] [SPEAKER_04]: the stock market. So now people are getting attenuated for that when they do surveys. They

[00:30:31] [SPEAKER_04]: expect like 12 to 15% returns moving for the rest of their lives by just indexing or

[00:30:37] [SPEAKER_04]: doing target date funds. And going back to pulling samples of that path,

[00:30:41] [SPEAKER_04]: I think it's unique this last 40 years in America where you've had that

[00:30:45] [SPEAKER_04]: 60-40 portfolios done so well and you had negative correlations between stocks and bonds

[00:30:49] [SPEAKER_04]: when they can be highly correlated during the broader swath of history more often than

[00:30:54] [SPEAKER_04]: not the majority of the time, especially during times of inflation. And that we just had this

[00:30:58] [SPEAKER_04]: kind of Goldilocks moment for the last 40 years. And I think a lot of people are

[00:31:01] [SPEAKER_04]: attenuating their savings to this Goldilocks period. Now, I hope it runs on for their

[00:31:06] [SPEAKER_04]: sake, but I don't know the future and neither do they. So I just try to take

[00:31:10] [SPEAKER_04]: a broader historical context. So now that we've talked about the problem,

[00:31:13] [SPEAKER_03]: I want to talk a little bit about how you think about solving it. So your approach,

[00:31:17] [SPEAKER_03]: you think about the different quadrants of economic outcomes and then you have your

[00:31:20] [SPEAKER_03]: own four quadrants in terms of how you think about protecting against them. So can you talk

[00:31:23] [SPEAKER_04]: about what that is? Yeah, so the four quadrant model was popularized by Ray Dalio, but it

[00:31:29] [SPEAKER_04]: was really come up with by Harry Brown in the early 1970s. And the idea of the four quadrant

[00:31:33] [SPEAKER_04]: model is everything is on the axis of growth and inflation, right? Whether in growth or

[00:31:38] [SPEAKER_04]: recession, inflation or deflation. And it's kind of like a Venn diagram that can obviously

[00:31:41] [SPEAKER_04]: overlap a little bit. But Harry Brown talking in the 70s is like he wanted his portfolio to do

[00:31:46] [SPEAKER_04]: fine and any of those kind of global macro environments or any of those quadrants.

[00:31:50] [SPEAKER_04]: So he used stocks for growth. He used cash for recessions. He used gold for inflation

[00:31:56] [SPEAKER_04]: and use bonds for deflation. And now you split them evenly. That was this kind of four

[00:32:00] [SPEAKER_04]: quadrant model. Dalio kind of took that four quadrants copied, you know, Harry Brown's

[00:32:05] [SPEAKER_04]: work didn't give him credit for it, but then kind of leveraged up the bond side and called

[00:32:09] [SPEAKER_04]: it risk parity. Right? And then we saw, you know, as I was always worried about, you know,

[00:32:13] [SPEAKER_04]: risk parity in 2022 has a rough go at it when stocks and bonds become correlated.

[00:32:19] [SPEAKER_04]: But like I said, over the long swath of history, you know, the majority of the time

[00:32:22] [SPEAKER_04]: stocks and bonds are correlated or more than 50% of the time I should say.

[00:32:26] [SPEAKER_04]: And so that's kind of the four quadrant model of thinking about global macro regimes

[00:32:30] [SPEAKER_04]: and thinking about your portfolio in the past and in the future is like how do

[00:32:33] [SPEAKER_04]: you manage those? So we just view it if Harry Brown were alive today, he would have

[00:32:37] [SPEAKER_04]: more modern tools in his toolkit. And so for growth, we use global stocks instead of US

[00:32:41] [SPEAKER_04]: stocks for stuff we've talked about. But in fairness, you know, using global stocks for the

[00:32:45] [SPEAKER_04]: last 10, 20 years has been more of a detriment than it has been a creative

[00:32:49] [SPEAKER_04]: door portfolio, but we still feel that broad diversification is a better way to go.

[00:32:54] [SPEAKER_04]: For a recessionary environment, instead of cash, we use long volatility and tail risk.

[00:32:57] [SPEAKER_04]: And I probably talked about this a lot on our last podcast.

[00:33:00] [SPEAKER_04]: Is the idea there is you have a much more convex like cash position the way I look at it.

[00:33:04] [SPEAKER_04]: It's like, if the market, you know, sells off, you have, you know, those deterministic

[00:33:08] [SPEAKER_04]: put options explode in value. And now you have, you know, instead of,

[00:33:12] [SPEAKER_04]: you know, harboring a bunch of cash on your books, you can use a much lower premium,

[00:33:16] [SPEAKER_04]: almost like insurance where you're spending 2 to 3% a year on insurance premium against the

[00:33:19] [SPEAKER_04]: market and then explodes in value to really protect you against those drawdowns. But

[00:33:23] [SPEAKER_04]: more importantly, to rebalance into those drawdowns, which you'll hopefully get to.

[00:33:27] [SPEAKER_04]: And then for the inflationary environment, we use commodity trend following instead of gold.

[00:33:32] [SPEAKER_04]: I think gold's great. I'm not sure exactly what gold is. People love to debate that, but you know,

[00:33:36] [SPEAKER_04]: it's got a, you know, some would say 6,000 year history and it tends to protect your

[00:33:41] [SPEAKER_04]: purchase power parity over the very long term, but maybe not in the cute short term.

[00:33:44] [SPEAKER_04]: So we think commodity trend following trading those, you know, 60 markets that you can

[00:33:49] [SPEAKER_04]: get in managed futures both long and short across, you know, energies, metals, softs,

[00:33:52] [SPEAKER_04]: you know, agricultural meats, etc. Tends to have a higher-bated inflation. So we like that better

[00:33:57] [SPEAKER_04]: for inflationary environment. And then for deflationary environment, that's where we use global bonds

[00:34:02] [SPEAKER_04]: and other income-like sources because in a deflationary environment, you want more of a

[00:34:06] [SPEAKER_04]: fixed deterministic income flow than anything else in a deflationary environment.

[00:34:11] [SPEAKER_03]: Yeah, gold seems to be one of those things that works 100% of the time, 75% of the time

[00:34:14] [SPEAKER_03]: or something. Like 22 is a good example. Like people expected to add gold, expected it

[00:34:19] [SPEAKER_03]: to be more of an inflation hedge in 22 than it actually was.

[00:34:23] [SPEAKER_04]: Yeah, you just, it's hard. Like if you look, you know, you always see it quoted probably that like

[00:34:27] [SPEAKER_04]: it's the equivalent of like a bespoke suit or something, right? Like a suit of armor cost

[00:34:32] [SPEAKER_04]: the same amount of ounces of gold as like a Savile Row bespoke suit now does. So it's like,

[00:34:35] [SPEAKER_04]: it maintains your purchase power over like centuries, but in any given year, quarter,

[00:34:40] [SPEAKER_04]: decade, it's probably not going to, right? It's going to disappoint you.

[00:34:43] [SPEAKER_03]: And I'm wondering on the long volatility, like for your average investor who,

[00:34:46] [SPEAKER_03]: you know, doesn't invest in hedge funds, that's probably the hardest thing, right? Because

[00:34:49] [SPEAKER_03]: long volatility is very hard to do without having that bleed. The money you're losing when

[00:34:54] [SPEAKER_03]: you're not getting those volatility at events like that and tail risk. Is that,

[00:34:58] [SPEAKER_03]: you think that's the hardest one for your individual investor to do?

[00:35:01] [SPEAKER_04]: Yeah, it's definitely the hardest one. That's the one we started with because we debated

[00:35:05] [SPEAKER_04]: for a long time if we started with our full total portfolio solution with the Cochroach

[00:35:09] [SPEAKER_04]: Fund or we just started with that sleeve of long volatility. And that's, we originally

[00:35:12] [SPEAKER_04]: started with the sleeve of long volatility because I just got tired of, you know, friends

[00:35:15] [SPEAKER_04]: and family read, you know, Naseem Taleb, Mart Spick Signal or a lot of more modern people about,

[00:35:20] [SPEAKER_04]: you know, managing your tail risk or Black Swans. And they go, great. Now, how do I do this? And I

[00:35:24] [SPEAKER_04]: said, you have over $100 million. And they're like, no, well, like, well, none of these firms

[00:35:28] [SPEAKER_04]: will talk to you. So good luck to you. So we figured we're, you know, better probably

[00:35:32] [SPEAKER_04]: entrepreneurs than traders. So we figured there had to be a solution for that. So now

[00:35:35] [SPEAKER_04]: we're invested with 14 long volatility and tail risk managers across our ensemble.

[00:35:39] [SPEAKER_04]: And we allow retail accredited clients to get access to like those portfolios that they

[00:35:43] [SPEAKER_04]: normally would never have access to. And the reason we use that ensemble approach

[00:35:47] [SPEAKER_04]: is because there's a lot of path dependencies to a sell off. And I think

[00:35:50] [SPEAKER_04]: a lot of retail clients maybe don't realize is they think that, you know, hedge funds are

[00:35:54] [SPEAKER_04]: really just trying to get like a total return in any environment and really just do well.

[00:35:58] [SPEAKER_04]: But it's not how it works because the institutional clients want them to do the

[00:36:01] [SPEAKER_04]: allocators want them to do very niche strategies. So when we look across

[00:36:04] [SPEAKER_04]: the long volatility tail risk landscape, there's maybe 3035 managers that we track,

[00:36:08] [SPEAKER_04]: which is the entire space, and we allocate to like 14 of them. And the idea there is

[00:36:12] [SPEAKER_04]: there's a lot of different paths to a sell off and a lot of different paths of

[00:36:16] [SPEAKER_04]: moneyness and volatility. And you want to be trading, you know, whether it's

[00:36:19] [SPEAKER_04]: the VIX markets, the options markets, the, the manage futures indices, there's a

[00:36:23] [SPEAKER_04]: lot of different paths to the, to the way sell off can manifest. And we want to

[00:36:27] [SPEAKER_04]: make sure we capture at least the meat of that move through an ensemble

[00:36:30] [SPEAKER_04]: approach because I think what's happened historically is 2020 happens or 2022

[00:36:34] [SPEAKER_04]: happens and people chose what they thought was going to be the best manager

[00:36:37] [SPEAKER_04]: for long volatility at a chair risk. And maybe they didn't perform or they

[00:36:40] [SPEAKER_04]: didn't monetize it perfectly. And then people are really disappointed with that

[00:36:43] [SPEAKER_04]: asset class where I'm like, you know, I'm just trying to get like a beta like

[00:36:46] [SPEAKER_04]: return by having a broad ensemble of that asset class because I think if you

[00:36:49] [SPEAKER_04]: heard anything from me in this podcast, I'm pretty agnostic and I'm not,

[00:36:53] [SPEAKER_04]: I'm not high on my own predictive crystal ball powers. So I try to,

[00:36:57] [SPEAKER_04]: you know, diversify as much as I broadly can to get much more of a beta like

[00:37:00] [SPEAKER_04]: signal and, and not rely on luck to help out my portfolio.

[00:37:05] [SPEAKER_03]: We won't be seeing your macro letter anytime soon, I guess.

[00:37:10] [SPEAKER_04]: If you do, man, I should think what we should do if I ever do like that's a

[00:37:14] [SPEAKER_04]: great April Fool's joke for me though. Actually, like that's it.

[00:37:17] [SPEAKER_04]: You should do that on Twitter. That'd be great.

[00:37:20] [SPEAKER_03]: Yeah, it's always an issue with those kind of things, but then the less.

[00:37:24] [SPEAKER_03]: Well, I mean, it's shocking.

[00:37:27] [SPEAKER_03]: Yeah, but so this is a good lead into this idea of fractal diversification

[00:37:31] [SPEAKER_03]: that you talked about. I would think like in the volatility space,

[00:37:34] [SPEAKER_03]: like in the tail risk space, that might be where it's most important

[00:37:37] [SPEAKER_03]: is this idea that you have to be diversifying inside of the diversifying in order to get the

[00:37:41] [SPEAKER_03]: right stuff that works in all the different possible outcomes.

[00:37:45] [SPEAKER_04]: Yeah, so fractal diversification is, this is a shout out to Ben Walmando brought that came

[00:37:49] [SPEAKER_04]: up with fractal geometry and the idea before was like geometry is really Euclidean is all about

[00:37:54] [SPEAKER_04]: smooth services and Ben Walmando brought was as most geniuses are the one that points

[00:37:59] [SPEAKER_04]: out the obvious that's never really been spoken before. And what he was pointing out is

[00:38:03] [SPEAKER_04]: like nature has a lot of self similarity to it. Like if I look at the tree outside my house,

[00:38:06] [SPEAKER_04]: but then I kind of frame into a branch, the branch has a self similarity, it looks like a mini

[00:38:10] [SPEAKER_04]: tree. And if I then zoom into a leaf, it has a self similarity where it almost looks like a mini

[00:38:15] [SPEAKER_04]: tree in the leaf. And so he's showing like these there's very rough surfaces to nature,

[00:38:18] [SPEAKER_04]: but they have this fractal nature to it of self similarity as you go up and down the scale,

[00:38:23] [SPEAKER_04]: like especially if you look at like coastlines, you know from very high up from 30,000 feet,

[00:38:27] [SPEAKER_04]: it looks like a jagged coastline, you get in closer, it looks more jagged,

[00:38:30] [SPEAKER_04]: you get down to the granular sand level, there's jagged nature to that and the rocks.

[00:38:33] [SPEAKER_04]: And so that's the idea of kind of Ben Walmando brought it's like fractal geometry. The way we

[00:38:39] [SPEAKER_04]: think about it with our portfolio construction is that we started out as a very high level is like

[00:38:42] [SPEAKER_04]: we like to combine offense plus defense, as I said, defense wins investing championships,

[00:38:46] [SPEAKER_04]: most people's portfolios are 99 to 100% in offense. So we're very unique or 50% of our

[00:38:52] [SPEAKER_04]: portfolio reviews and defensive assets. So we started at a high level, offense plus defense,

[00:38:56] [SPEAKER_04]: we think about correlations in broad terms of like when you have conditional

[00:38:59] [SPEAKER_04]: correlations and liquidity events, we'd like to be have strategies that are correlated to GDP or

[00:39:04] [SPEAKER_04]: liquidity uncorrelated and negatively correlated. Then below that we had the four quadrant model

[00:39:09] [SPEAKER_04]: that we discussed. But then within the quadrants of the four quadrant model, we'd like to broadly

[00:39:13] [SPEAKER_04]: diversify there and like we're saying 14 different managers and long volatility

[00:39:16] [SPEAKER_04]: terrorists but even within those managers, a lot of them have like maybe five strategies

[00:39:21] [SPEAKER_04]: within volatility and then they have different ways of trading those strategies and different

[00:39:24] [SPEAKER_04]: instruments. So we start with one allocation to let's say our cockroach fund where on any given day

[00:39:30] [SPEAKER_04]: we can have 2000 to 2500 positions on underlying that on both the offensive and defensive side.

[00:39:36] [SPEAKER_03]: How do you think about adding something to this? Because this is obviously a very,

[00:39:40] [SPEAKER_03]: very diversified thing. How do you think about a framework in terms of whether it adds value?

[00:39:44] [SPEAKER_03]: And I guess this would work on an asset class level or on a manager level. Like I saw you

[00:39:47] [SPEAKER_03]: have some crypto in there. So you obviously had to go through this when crypto came on the

[00:39:50] [SPEAKER_03]: scene like thinking about does this add value to our already diversified approach?

[00:39:53] [SPEAKER_04]: Like how do you think about that? Yeah, so there's so many things in there that impact.

[00:39:59] [SPEAKER_04]: When we talked about the four quadrant model, I kind of talked about the way we look at it,

[00:40:02] [SPEAKER_04]: but we also have what we hold 20% and what we call fiat hedges because we don't necessarily want to

[00:40:06] [SPEAKER_04]: get that argument too much. But in the fiat hedges is 16% gold, 6% of which is physical

[00:40:11] [SPEAKER_04]: gold and vaults and segregated vaults. And then 4% is crypto and it's market capway. So

[00:40:16] [SPEAKER_04]: it's about 2.5% Bitcoin, 1.5% Ethereum using the futures because this we did this long before

[00:40:20] [SPEAKER_04]: the ETFs and the spot ETFs kind of came online. And the idea there was, you know, that broad

[00:40:25] [SPEAKER_04]: diversification is fiat hedges like things happen like wars, diasporas, markets shut down,

[00:40:30] [SPEAKER_04]: all those sorts of things. And that's why we're looking for those fiat hedges of

[00:40:33] [SPEAKER_04]: golden cryptocurrencies. Now we can argue all day long about is gold a proper fiat hedge?

[00:40:38] [SPEAKER_04]: I mean historically yes. What would be the exponential return of that? What's your

[00:40:42] [SPEAKER_04]: multiple? I don't know. But like I think it's 16% gold were pretty good, especially 6%

[00:40:46] [SPEAKER_04]: physical if the even the liquid market shut down. And then the idea with the cryptocurrency

[00:40:50] [SPEAKER_04]: position especially in Bitcoin is like, what if the Bitcoin maxes are right? You know,

[00:40:54] [SPEAKER_04]: what if that is the new gold? What if you know we do have a true fiat devaluation and

[00:40:58] [SPEAKER_04]: and Bitcoin goes up 50x? Well, a 2% position is pretty solid there. And that's we're just

[00:41:04] [SPEAKER_04]: trying to be agnostic and really have that humility to know that we don't know what

[00:41:09] [SPEAKER_04]: the future holds and some people might be right. But in the meantime, what's great about

[00:41:12] [SPEAKER_04]: even having that position in Bitcoin or other cryptocurrencies, etc. is we can harness the volatility

[00:41:17] [SPEAKER_04]: there. We can use rebalancing on a monthly basis to harness that volatility and hopefully get a

[00:41:21] [SPEAKER_04]: rebalancing premium out of it. So it's not like a one thing, one kind of solution. So that's

[00:41:26] [SPEAKER_04]: broadly how we think about even like gold and cryptos in there. But like going back to your

[00:41:30] [SPEAKER_04]: question about even line the volatility space is if you think about the sell-offs and you do

[00:41:35] [SPEAKER_04]: phenomenal podcast with Brent at Spot Gamma that I absolutely love. I mean, it's probably

[00:41:38] [SPEAKER_04]: me and five other people actually watching it though and get it. I think it is.

[00:41:41] [SPEAKER_03]: Because you know, it's very... It's very... The five people really love it. The five people

[00:41:44] [SPEAKER_04]: that watch it are like huge fans though. Yeah, yeah, it's that. Yeah, people, you know, they,

[00:41:49] [SPEAKER_04]: you know, that's how I try to woo women at the bars, you know, talking about

[00:41:53] [SPEAKER_04]: market maker gamma positioning, you know, it's really exciting stuff. But I obviously,

[00:41:57] [SPEAKER_04]: I love that kind of stuff. But the idea though in long volatility and tail-to-space is

[00:42:01] [SPEAKER_04]: like we first try to cover the paths of moneyness, right? You have to decide like if you're

[00:42:05] [SPEAKER_04]: covering from close to at the money, to out of the money, deep out of the money.

[00:42:08] [SPEAKER_04]: And we want to overlay and overlap those paths of moneyness. And if you use active long volatility

[00:42:14] [SPEAKER_04]: traders that are actively trading options, what they're trying to do is less that premium

[00:42:17] [SPEAKER_04]: bleed you're talking about of paying that almost insurance premium like you have with

[00:42:21] [SPEAKER_04]: house insurance, car insurance, life insurance. And so what they do is they might trade in

[00:42:25] [SPEAKER_04]: on the markets or looking like a forest fire, right? They're looking for wind conditions.

[00:42:29] [SPEAKER_04]: They're looking for humidity levels, you know, is there lightning strikes?

[00:42:31] [SPEAKER_04]: Then they might jump into markets. But by having that active participation on the

[00:42:36] [SPEAKER_04]: long optionality side for those different paths of moneyness, you know, they might

[00:42:40] [SPEAKER_04]: miss the timing of the market. So we like to overlay the deterministically, permanently

[00:42:43] [SPEAKER_04]: on tail-risk positions. Like if you have something over the weekend happen like in

[00:42:46] [SPEAKER_04]: the Nikkei, like you want those positions on in case the other managers aren't in there.

[00:42:49] [SPEAKER_04]: And then we use things like relative value volatility with a lot of different

[00:42:53] [SPEAKER_04]: trading styles in there too, to help, you know, maybe pay for a little bit

[00:42:56] [SPEAKER_04]: of that premium bleed. And then, you know, what happens when markets expand in 2020 and

[00:43:01] [SPEAKER_04]: then apply volatility or options makes it prohibitively expensive to roll those

[00:43:03] [SPEAKER_04]: positions and you monetize them. What do you do? And so the second leg down, we love

[00:43:07] [SPEAKER_04]: things like shorting the managed future stock indices around the world on an

[00:43:11] [SPEAKER_04]: intraday basis. So like it's really thinking about all the things that can

[00:43:14] [SPEAKER_04]: and will go wrong and finding niche managers that do very specific things.

[00:43:18] [SPEAKER_04]: But at the same time, like I said, I don't necessarily look for them to

[00:43:21] [SPEAKER_04]: litter over alpha. I'm trying to roll them up an ensemble approach where I can

[00:43:24] [SPEAKER_04]: get more of a beta like return signal from the entire environment.

[00:43:28] [SPEAKER_03]: Yeah, when I want to explain the rebalancing premium, I always use tail-risk as my

[00:43:31] [SPEAKER_03]: example because you could have a tail-risk strategy and people hate this example,

[00:43:34] [SPEAKER_03]: but you can always, you can have a tail-risk strategy that has a 0% long-term return.

[00:43:37] [SPEAKER_03]: And if you rebalance that strategy at the right time, it is going to add to the

[00:43:41] [SPEAKER_03]: return of your portfolio in many cases despite having a 0% return. And people

[00:43:44] [SPEAKER_03]: don't get that, but that is the benefit of a strategy like that.

[00:43:48] [SPEAKER_04]: That's the hardest part I think I've found is like people either read like

[00:43:52] [SPEAKER_04]: Taleb or whatever and they get that or they don't. And I find if people don't

[00:43:56] [SPEAKER_04]: get that, I don't try to argue with them anymore or try to like just

[00:43:59] [SPEAKER_04]: like everything in life, you can't really win people over to your side of way to

[00:44:02] [SPEAKER_04]: thinking. It's like they either get it or they don't. The other prime example I use is

[00:44:05] [SPEAKER_04]: like you can't have coastal real estate without home insurance, right? You can't

[00:44:10] [SPEAKER_04]: have a 20 to 50 million dollar house on the coast of Florida or South Carolina

[00:44:14] [SPEAKER_04]: without home insurance. Like you could, you could self-insure, but like do you

[00:44:18] [SPEAKER_04]: have 20 to 50 million cash in the bank when that does happen to rebuild your house

[00:44:22] [SPEAKER_04]: or else it's game over. And it's interesting that we either like

[00:44:25] [SPEAKER_04]: we have house insurance, we have health insurance, we have life insurance and car

[00:44:28] [SPEAKER_04]: insurance, but all of it is going back to sequencing risk because we don't know

[00:44:31] [SPEAKER_04]: when that emergency event is going to happen. And we need that convex cash

[00:44:35] [SPEAKER_04]: position that insurance provides, assuming it pays out obviously.

[00:44:39] [SPEAKER_04]: And that's what if you don't have portfolio insurance as Taleb said,

[00:44:42] [SPEAKER_04]: you don't have a portfolio. But then like you said, I find it's really hard

[00:44:46] [SPEAKER_04]: if people don't get that or why you would want to return a zero or

[00:44:50] [SPEAKER_04]: negative returning asset to a portfolio, then it's hard to convince people.

[00:44:54] [SPEAKER_04]: But then I think we're also able to use what we call you know implicit

[00:44:57] [SPEAKER_04]: leverage or capital efficiency that we use in options and futures markets where we

[00:45:00] [SPEAKER_04]: can give them a spoonful of medicine with the full allocation to their long beta

[00:45:04] [SPEAKER_04]: and kind of overlay that tail risk so it makes it a little bit hopefully more

[00:45:08] [SPEAKER_04]: palatable at the total portfolio level. I want to talk about withdrawal rates

[00:45:12] [SPEAKER_03]: because in the space we operate in, and I talked to a lot of financial planners,

[00:45:16] [SPEAKER_03]: they have big Bill Bangans work around the 4% rule and it would seem to me,

[00:45:20] [SPEAKER_03]: I don't know if people have done a ton of work like around this, but it would seem to

[00:45:23] [SPEAKER_03]: me like these total return type of portfolios that are more, you know,

[00:45:26] [SPEAKER_03]: that can handle various economic scenarios would likely support higher

[00:45:29] [SPEAKER_03]: withdrawal rates than a stock and bond portfolio. Have you looked into that at all

[00:45:33] [SPEAKER_04]: or do you have any thoughts on that? Yes, I think it goes back to like the

[00:45:37] [SPEAKER_04]: example I gave that resolved use for the retirement couple and using the Dow index

[00:45:41] [SPEAKER_04]: from you know 66 for the next 30 years is it really depends on the sequencing

[00:45:45] [SPEAKER_04]: as those returns along our individual path. So a lot of people think about

[00:45:49] [SPEAKER_04]: their investing in expected value but we think about expected path.

[00:45:52] [SPEAKER_04]: And what I love about things like what we do with these total portfolio solutions

[00:45:55] [SPEAKER_04]: that are broadly diversified is they're very boring, right? If you would we go back to

[00:45:59] [SPEAKER_04]: those four macro quadrants is like you want to make sure you kind of chug along

[00:46:02] [SPEAKER_04]: with any of those macro environments. Like 2022 was phenomenal for like commodity

[00:46:07] [SPEAKER_04]: trend following in like that environment. So if you think about the defensive side is like

[00:46:11] [SPEAKER_04]: long volatility and tail risk is great for liquidity events like those really

[00:46:14] [SPEAKER_04]: acute ones like March or 2020 or like a little bit of what we saw in October 2008.

[00:46:19] [SPEAKER_04]: They do really well to that you have that convex cash position for that

[00:46:22] [SPEAKER_04]: rebalancing effect to them by your stocks and bonds at a lower nav point.

[00:46:25] [SPEAKER_04]: But if you have a more protracted recession or inflationary period the CTAs commodity

[00:46:29] [SPEAKER_04]: trend followers tend to do a lot better in those environments. So it's kind of a one-two punch

[00:46:32] [SPEAKER_04]: on your defensive side and that's why we like rebalancing with those but what I'm

[00:46:36] [SPEAKER_04]: getting at the more important thing on the four quadrant model is like whether we have

[00:46:40] [SPEAKER_04]: growth or recession inflation or deflation that portfolio is going to do pretty good.

[00:46:44] [SPEAKER_04]: It's going to muddle along just fine. The problem is it's going to trail

[00:46:47] [SPEAKER_04]: just a pure S&P 500 portfolio of any given quarter or year or even 6040 from time to time.

[00:46:52] [SPEAKER_04]: And so if people are thinking about keeping up with the Joneses it's really hard behaviorally

[00:46:56] [SPEAKER_04]: to be part of these portfolios and I say that so like example you know Mab does these great things

[00:47:00] [SPEAKER_04]: on portfolios too of like broad portfolio diversification whether you go with permanent

[00:47:05] [SPEAKER_04]: portfolio risk parity IV etc they tend to muddle along in kind of any environment.

[00:47:09] [SPEAKER_04]: They all come around the same level of returns but if you did an unleveled permanent

[00:47:14] [SPEAKER_04]: portfolio over like the last 40 years I think like the your real returns are about 6%.

[00:47:18] [SPEAKER_04]: Just I think it's fantastic if the inflation rate is 3% and your real is 6% and you can count on it

[00:47:24] [SPEAKER_04]: like any decade has actually positive real returns that's a phenomenal portfolio to me

[00:47:29] [SPEAKER_04]: but it's less than people expect from like a stocks or stocks bond portfolio.

[00:47:33] [SPEAKER_04]: So the way we think about it is we use some of that implicit leverage to kind of lever that

[00:47:36] [SPEAKER_04]: up two to one so that gives you an idea of those portfolios and I say all that because

[00:47:39] [SPEAKER_04]: then like you said if the if the quoted rate is you should think about a 4% you know withdrawal rate

[00:47:46] [SPEAKER_04]: if you have a broadly diversified portfolio that you expect to have like let's say a 10 to 12% return

[00:47:50] [SPEAKER_04]: rate that makes a lot more sense on that 4% level and then you start you know subtracting inflation

[00:47:55] [SPEAKER_04]: etc whereas as we go with the sequencing risk if you have just stocks or just stocks and bonds

[00:48:00] [SPEAKER_04]: I'm really worried about the sequencing risk where with a broadly diversified total portfolio

[00:48:04] [SPEAKER_04]: solution you can really reduce the variance of that portfolio so you can much more rely on those

[00:48:10] [SPEAKER_04]: kind of return profiles on any given year or any given decade and that to me makes it much more

[00:48:15] [SPEAKER_04]: likely to be able to hit those targets on your withdrawal rate if it's 4% but there's not a lot

[00:48:20] [SPEAKER_04]: of great work being done and then the hard part like once again it's still sequencing risk so

[00:48:24] [SPEAKER_04]: like I'm not sure like I would really stamp it with a guarantee that you should be able to do

[00:48:28] [SPEAKER_04]: this but like if you look at the kind of broad arc of history and even those times and stocks

[00:48:32] [SPEAKER_04]: and bonds are down hopefully your commodity trend is going to do well or your long volatility

[00:48:36] [SPEAKER_04]: until risk put some cash on there or maybe your fiat hedges are doing well but yeah that's the

[00:48:40] [SPEAKER_04]: idea is like to me it gives you the best shot of hitting like a 3-4% return rate with inflation

[00:48:46] [SPEAKER_04]: but I wouldn't guarantee it I don't think there is any guarantees in life

[00:48:50] [SPEAKER_03]: and I think people miss like max drawdown when you're thinking about sequence risk max drawdown

[00:48:53] [SPEAKER_03]: is a really important stat and that's where these permanent portfolio type things are better

[00:48:58] [SPEAKER_03]: than stocks and bonds they have significantly lower max drawdowns which limits the sequence

[00:49:02] [SPEAKER_04]: risk in your portfolio. Yeah it's not just sequencing risk it's behavioral risk right like

[00:49:07] [SPEAKER_04]: I'm sure you saw this as well as like 2008 happens right you you hit a 50% drawdown

[00:49:12] [SPEAKER_04]: plus and that's when people tend to really capitulate so you had a lot of people that

[00:49:17] [SPEAKER_04]: just said that's it I'm going to cash like you know their financial advisor had them in there

[00:49:21] [SPEAKER_04]: they said stocks for the long runs or 60-40 for the long run it drew down 20% 30% they were

[00:49:26] [SPEAKER_04]: okay but when it hit like 50% drawdown they capitulated they said that's it

[00:49:29] [SPEAKER_04]: they fired their financial advisor they just went purely to cash and then they were so gun shy

[00:49:34] [SPEAKER_04]: they missed the rebound from in 2009, 10, 11, 12 and so that behavioral effect hurts people

[00:49:40] [SPEAKER_04]: compounding more than anything else so it's not necessarily those unrealized drawdowns

[00:49:45] [SPEAKER_04]: and gains is that we realize them in a behavioral level and I think Jason's why he said

[00:49:49] [SPEAKER_04]: it best is like I can draw you a picture of a snake but until I throw a snake in your lap

[00:49:53] [SPEAKER_04]: you're going to respond very differently and I get a lot of like younger guys that are always

[00:49:57] [SPEAKER_04]: telling me you know if the market's down 50% I'm a buyer and I'm like we'll see

[00:50:01] [SPEAKER_03]: yeah exactly you can never understand what it's actually like to be sitting there and I was I

[00:50:05] [SPEAKER_03]: was managing money in 2008 it was ugly out there um nobody was looking to buy anything

[00:50:10] [SPEAKER_03]: yeah what's also interesting to me on the 4% rule is like if you we had Wade Fowell in the

[00:50:14] [SPEAKER_03]: podcast who looked at Bangin's work but applied it to other countries going back to what we

[00:50:17] [SPEAKER_03]: talked about at the beginning like the 4% rule does not hold up in the majority of these

[00:50:20] [SPEAKER_03]: countries like it did work in the US but when you start going to these other countries

[00:50:24] [SPEAKER_03]: it doesn't work as well so if we think about like our future in the US might be maybe not

[00:50:28] [SPEAKER_03]: like our past but it might be more like the average of what these other countries are

[00:50:31] [SPEAKER_03]: the 4% rule might be a little weaker you know with a stock and bond portfolio at least than

[00:50:35] [SPEAKER_04]: people think yeah I think like quick saying like I think we attenuate our portfolios too

[00:50:40] [SPEAKER_04]: strongly to recency bias like we look at what 60-40 portfolios done for last 40 years and we

[00:50:45] [SPEAKER_04]: expected to do the same over the next 40 years and I think that's pretty illogical if you

[00:50:48] [SPEAKER_04]: think you know baby boomers were really the luckiest generation of world history on a

[00:50:53] [SPEAKER_04]: financial basis with you know rates coming down and their actual financial assets especially

[00:50:57] [SPEAKER_04]: leverage real estate you know skyrocketing you know is that going to happen for the next 40 years

[00:51:01] [SPEAKER_04]: I mean I hope it does for everybody involved but I just think it's unlikely so yeah it's

[00:51:06] [SPEAKER_04]: hard like yeah where does this 4% return come from it's because you're looking at

[00:51:09] [SPEAKER_04]: an unusual period that you think that would have worked for like and so we're

[00:51:12] [SPEAKER_04]: we're attending in the real view mirror and I always think about it's like

[00:51:14] [SPEAKER_04]: soren kirkegaard is like the real problem with finance is we we are trying to learn

[00:51:19] [SPEAKER_04]: everything we can through the rear-view window and yet we have to drive forward looking

[00:51:24] [SPEAKER_04]: through the windshield and unfortunately those two a lot of times don't line up but that's how

[00:51:29] [SPEAKER_04]: we're unfortunately from an insecure basis we're trying to understand the world by looking at the

[00:51:33] [SPEAKER_04]: past but in unfortunately in markets as we said it's a non-neogotic system and then we have a

[00:51:37] [SPEAKER_04]: non-stationary of data issue meaning like this is not like a casino game it's the past is not

[00:51:42] [SPEAKER_04]: going to predict the future with perfect accuracy more so likely we have shifts in regime and

[00:51:46] [SPEAKER_04]: the future is going to be very different from the past how do you think about leverage with this

[00:51:50] [SPEAKER_03]: because on one hand this would be these types of total return portfolios that look at all the quadrants

[00:51:54] [SPEAKER_03]: they'd be perfect portfolios to leverage because it's an example where you can add leverage without

[00:51:58] [SPEAKER_03]: adding too much risk to the portfolio but on the other hand we talked about the idea that the

[00:52:02] [SPEAKER_03]: past could be very different or the future could be very different than the past so obviously

[00:52:06] [SPEAKER_03]: you don't want to go crazy with that thinking that something might happen that didn't happen

[00:52:08] [SPEAKER_03]: in the past so like when you think about levering this type of thing up how do

[00:52:11] [SPEAKER_04]: you think about the pros and cons of that? Yeah so going back to the idea of offense and defense

[00:52:16] [SPEAKER_04]: and have an equal measure another way to say offense is short volatility assets and another

[00:52:20] [SPEAKER_04]: way to think of defense is long volatility assets and pretty much every blow-up we've seen

[00:52:24] [SPEAKER_04]: from trades or hedge funds is when they lever up short volatility trades so it's very different

[00:52:29] [SPEAKER_04]: to me when you pair short volatility with long volatility trades or more importantly

[00:52:32] [SPEAKER_04]: you pair linear short volatility trades like stocks and bonds with with conbacks

[00:52:37] [SPEAKER_04]: long volatility trades like tail risk and so if you think about the portfolio level I also brought

[00:52:42] [SPEAKER_04]: the idea is like correlations are conditional and I think that's what can get people in trouble

[00:52:47] [SPEAKER_04]: especially in like risk parity world is they are attenuating the leverage in the portfolio

[00:52:51] [SPEAKER_04]: based on a data set of past correlations and whatever that window is is whatever they use

[00:52:55] [SPEAKER_04]: moving forward to attenuate the size of the portfolio and I think that's very dangerous

[00:52:59] [SPEAKER_04]: and risky because you know like I said there's non-stationary data problem so if you're

[00:53:03] [SPEAKER_04]: looking at you know three years window five years 20 years 40 years window there can be a regime shift

[00:53:08] [SPEAKER_04]: and the future doesn't look like the past and now you've overleavored portions of your portfolio

[00:53:12] [SPEAKER_04]: based on past correlations so we try not to weigh on past correlations and I think that was the

[00:53:16] [SPEAKER_04]: brilliance of harry brown's permanent portfolio it was equal weight in those four quadrants

[00:53:21] [SPEAKER_04]: and so we think about equal weighting those four quadrants and then we use the implicit

[00:53:26] [SPEAKER_04]: leverage we can get the capital efficiency and manage futures and options to then take

[00:53:31] [SPEAKER_04]: those from 25% each to 50% each now like you said you are probably increasing variability or the unknowns

[00:53:40] [SPEAKER_04]: when you use leverage but I think when you're using a truly broadly diversified portfolio of

[00:53:44] [SPEAKER_04]: offensive and defensive assets and pairing those up together you're much safer than using leverage

[00:53:49] [SPEAKER_04]: than what people typically think of it using levering up like a short volatility trade is what

[00:53:54] [SPEAKER_04]: usually blows people up and so that's what gives us that confidence in that approach and then

[00:53:58] [SPEAKER_04]: assuming like you know kelly criterion right like if you could actually use that in markets versus

[00:54:04] [SPEAKER_04]: gambling games which I don't think you can I have plenty of friends that will argue you can but I'm

[00:54:07] [SPEAKER_04]: not sure it's it's certain it's like looking at past windows you could you could probably lever up

[00:54:12] [SPEAKER_04]: a broadly diversified portfolio like the ones we've been talking about like anywhere from 8 to 10x

[00:54:16] [SPEAKER_04]: so but people you know use you know some humility to use half kelly you know that's 4 to 5x and

[00:54:21] [SPEAKER_04]: if we're using like 2x leverage I'm less than a quarter kelly so I'm pretty you know I think it's a

[00:54:26] [SPEAKER_03]: robust way of looking at the portfolio yeah people no matter how much you talk about leverage people

[00:54:31] [SPEAKER_03]: always tend to have this you know problem associated with it they always think like when you're adding

[00:54:35] [SPEAKER_03]: leverage you're at you know no matter what you're adding along with it in terms of diversifying

[00:54:39] [SPEAKER_03]: asset classes it's always making the portfolio riskier and that's something I try to talk to

[00:54:43] [SPEAKER_03]: people a lot about is like it depends on not it depends on what you're levering up and what

[00:54:46] [SPEAKER_03]: you're adding to your portfolio with the leverage you know in terms of what the

[00:54:49] [SPEAKER_03]: leverage actually means to the total risk of the portfolio month so it's it's crazy because

[00:54:53] [SPEAKER_04]: like there's a couple examples of that it's like 6040 portfolio it's wild to me I don't you know

[00:54:58] [SPEAKER_04]: everybody's trying to dig out where did 6040 actually come from and nobody's really certain

[00:55:01] [SPEAKER_04]: but if you actually look at like as you know that 60 percent in stocks means like 90 percent

[00:55:06] [SPEAKER_04]: of your portfolio variants of volatilities in stocks so that's where all your risk is

[00:55:09] [SPEAKER_04]: so historically you should actually only be running like 35 to 40 percent in stock so it

[00:55:13] [SPEAKER_04]: really should be a 40 60 portfolio but we don't think about that that way and that's essentially

[00:55:17] [SPEAKER_04]: leverage right like those individual equities are essentially giving you leverage in a way

[00:55:20] [SPEAKER_04]: but if you look at like spitz and engels work and at Universo with like Nasim Taleb is like they're

[00:55:26] [SPEAKER_04]: talking about like if you're 100 long s and p beta but you spend two to three percent a year on that

[00:55:31] [SPEAKER_04]: insurance you know people would say well now more leverage long but like that insurance is offsetting

[00:55:36] [SPEAKER_04]: a lot of that product right so like the question is now am I 2x leverage or am I or am I market

[00:55:41] [SPEAKER_04]: neutral and that's the debatable thing is like how close are you to market neutral even though

[00:55:45] [SPEAKER_04]: you may be using leverage so you actually may be much safer by using prudent leverage but it

[00:55:50] [SPEAKER_04]: really is based on your portfolio construction and what happens to conditional correlations

[00:55:55] [SPEAKER_03]: so we've always had a standard closing question which is if you can teach one lesson to the

[00:55:58] [SPEAKER_03]: average investor what would it be but I just put up a mashup of that the other day and there were

[00:56:01] [SPEAKER_03]: 119 answers in it and so I've decided I need a new closing question because we've asked basically

[00:56:06] [SPEAKER_03]: anybody we can think of the closing question so you've already answered this and you were in

[00:56:09] [SPEAKER_03]: the mashup so uh I'm not going to ask you that but I thought to come up with a new one

[00:56:13] [SPEAKER_03]: I thought I'd test it out here and I thought I'd steal this from meb favor and meb if you're

[00:56:20] [SPEAKER_03]: meb on a podcast where we talked about this idea of things he believes that the majority of his peers

[00:56:25] [SPEAKER_03]: would disagree with and I think you're a perfect person to ask this because I think there's a lot

[00:56:28] [SPEAKER_03]: of things you believe that the majority of your peers would disagree with so if you could come up

[00:56:32] [SPEAKER_03]: with one thing that you believe do you think the majority of your peers would disagree with

[00:56:35] [SPEAKER_04]: about investing what would it be wow you know what just hit me I think why I sound different

[00:56:42] [SPEAKER_04]: is yeah if we just use the word believe and that's what I think the problem is I think in

[00:56:46] [SPEAKER_04]: our industry people believe a lot of things that aren't true and it's based on like insecurity right

[00:56:52] [SPEAKER_04]: like we we're so desperate to manage our clients wealth that we're looking at these historical

[00:56:55] [SPEAKER_04]: representations and drawing inferences of them and then that provides a belief system that then

[00:57:00] [SPEAKER_04]: we think through but so I think about like things there's so many things I don't even know

[00:57:03] [SPEAKER_04]: how to pick one is like I don't believe alpha exists over the long term I believe you can

[00:57:07] [SPEAKER_04]: combine interesting betas obviously I'm actually with meb too like I think the fed does a decent

[00:57:11] [SPEAKER_04]: job I don't know everybody else I think that argues like the fed's doing a terrible job I

[00:57:15] [SPEAKER_04]: know two things one if they're hedge fund manager it means their P&L's down and I'm like you know

[00:57:19] [SPEAKER_04]: you could trade with whichever direction you think they're going even if you think they're wrong

[00:57:23] [SPEAKER_04]: and then I also think rates don't matter it's just a hurdle rate and everybody like entrepreneurs

[00:57:28] [SPEAKER_04]: are going to be entrepreneurs no matter what the rates are they can't help themselves

[00:57:32] [SPEAKER_04]: trying to think I try and give you a broad sample but what it boils down to is essentially

[00:57:36] [SPEAKER_04]: I think it's really difficult what we do and I think that if we're truly honest

[00:57:40] [SPEAKER_04]: nobody knows the future nobody has a crystal ball and so I just think if I can hold most of

[00:57:44] [SPEAKER_04]: the world's asset classes and rebalance I should muddle along okay and that's what I think the biggest

[00:57:50] [SPEAKER_04]: lack of belief I think it's more of a lack of belief that I have versus I'm always shocked by the things

[00:57:55] [SPEAKER_04]: that people say in our industry because I'm like how do you believe that what's what's

[00:58:00] [SPEAKER_04]: how are you determined that what's the base truth and what you're saying and if you find if

[00:58:03] [SPEAKER_04]: you if you have to like I'm a I'm a six-year-old sometimes at some of these conferences

[00:58:07] [SPEAKER_04]: if you ask why three times you know they tend to fall apart and and it's very interesting

[00:58:12] [SPEAKER_04]: that you know the emperor has no clothes and you know what it's it's a really weird thing that like

[00:58:17] [SPEAKER_04]: you know the ultra wealthy and the and the the aged just love to think they have a crystal ball

[00:58:22] [SPEAKER_04]: to predict the future and it's always kind of shocking to me and I just find myself out

[00:58:26] [SPEAKER_04]: of kilter in that way I don't know if that answered your question in a way that's viable

[00:58:31] [SPEAKER_03]: yeah I was thinking is a podcast internet technique I should try this ask why three

[00:58:34] [SPEAKER_03]: times I should just keep asking why does somebody can see don't see where it goes

[00:58:39] [SPEAKER_04]: no you can't because that's it's a weird thing too with podcasting right that like

[00:58:42] [SPEAKER_04]: we're fairly amenable as podcasters right like I don't I'm sure you're you're uh when I'm on the

[00:58:47] [SPEAKER_04]: other side like you are you know you're just everybody wants you to debate them but that's

[00:58:51] [SPEAKER_04]: not the point you're supposed to help draw the questions out of the person and you're just

[00:58:54] [SPEAKER_04]: supposed to be like there is a as a guide or a sherpa and so it's uh yeah if you asked

[00:58:59] [SPEAKER_04]: why three times your guests are never going to come back because they don't know that's

[00:59:02] [SPEAKER_03]: true actually it's funny because I was talking about somebody about this recently and like the

[00:59:05] [SPEAKER_03]: criticism of us is like well you're not digging in and challenging all this person's beliefs and

[00:59:09] [SPEAKER_03]: I'm like that's not what this is for this is for us taking somebody who knows a lot about a certain

[00:59:13] [SPEAKER_03]: topic and imparting that knowledge to our audience like that's the goal and if I sit here and

[00:59:18] [SPEAKER_03]: challenge them the entire time it's not going to accomplish that goal and plus like you said

[00:59:21] [SPEAKER_03]: I mean the podcast is going to be me talking to myself at a certain point because there's

[00:59:24] [SPEAKER_04]: going to be no one left who wants to come on yeah that's why I love what you guys

[00:59:28] [SPEAKER_04]: and do and a lot of our friends that we brought up that have podcasts I love it because it

[00:59:32] [SPEAKER_04]: reminds me of my favorite books coming up with the market wizards books right and what you learn

[00:59:36] [SPEAKER_04]: from that is a lot of people have very different viewpoints and a lot of people can make money

[00:59:39] [SPEAKER_04]: over the long term in the markets but what you find is they have very different styles

[00:59:43] [SPEAKER_04]: and beliefs and so you just need to find the one that works for you to hold over the long run I

[00:59:47] [SPEAKER_04]: mean that's really what Buffett's done and there's just nobody in history for six or seven

[00:59:51] [SPEAKER_04]: decades that is stuck with one style pretty much and and that's what it's about and so

[00:59:55] [SPEAKER_04]: like when you have people come on you just want to you want them to show you how they think

[00:59:59] [SPEAKER_04]: and then the audience can argue with them internally or publicly or figure out what works

[01:00:03] [SPEAKER_04]: for them and what doesn't work for them that's definitely not your job or else like you said

[01:00:07] [SPEAKER_03]: you'd be out of a podcast soon so but anyway I want to have you uh we really get to all of

[01:00:12] [SPEAKER_03]: Meb's ideas that he disagrees with most people on so I think we need to have you and Meb together

[01:00:15] [SPEAKER_03]: next time because you do a lot that you got in there so maybe we need to have both of you

[01:00:18] [SPEAKER_03]: on next time and we'll challenge some conventional investing beliefs yeah maybe for Meb it's uh

[01:00:24] [SPEAKER_04]: Southern California is a short volatility trade and he's out of his mind but like

[01:00:27] [SPEAKER_04]: but I can't help it is a beautiful place most of the time thank you so much for doing this

[01:00:31] [SPEAKER_03]: this is awesome I really appreciate your time if people want to find out more about you or Mutiny

[01:00:35] [SPEAKER_04]: Fund where can they go you can find us at mutinyfund.com that's singular and then on twitter x i'm at

[01:00:42] [SPEAKER_04]: Jason Seabuck and that's the best way to find us and then like a lot of the papers we talked

[01:00:46] [SPEAKER_04]: about or a lot of the concepts uh we write a lot of that our insights on on mutinyfund.com

[01:00:51] [SPEAKER_04]: and we actually just put out an 80 plus page white paper for free that really delves into all

[01:00:56] [SPEAKER_04]: of our philosophy around cockroach strategies and the way we think about portfolio construction

[01:01:00] [SPEAKER_04]: and I think that's I applaud you for having me on too especially because and you guys talk about

[01:01:04] [SPEAKER_04]: this often in your podcast I think portfolio construction is the least talked about thing

[01:01:07] [SPEAKER_04]: in finance and investing and it's the most important thing and so until we get that right

[01:01:10] [SPEAKER_04]: first none of the individual you know strategies asset classes or individual trades

[01:01:16] [SPEAKER_04]: actually matter unless you have an overarching portfolio philosophy yeah and I would definitely

[01:01:20] [SPEAKER_03]: recommend your website as well you've got a great blog there a lot of the topics we

[01:01:23] [SPEAKER_03]: talked about today are on there you've got the mutiny podcast which is great as well so I've

[01:01:26] [SPEAKER_03]: recommended people check all that out thank you Jason I appreciate it thanks jack this is

[01:01:31] [SPEAKER_01]: Justin again thanks so much for tuning in to this episode of excess returns you can follow jack

[01:01:36] [SPEAKER_01]: on twitter at at practical quant and follow me on twitter at at JJ carbono if you found this

[01:01:42] [SPEAKER_01]: discussion interesting and valuable please subscribe in either iTunes or on youtube or leave a review

[01:01:48] [SPEAKER_01]: or a comment we appreciate you