Show Us of Your Portfolio II: Larry Swedroe on Alternatives and Interval Funds

[00:00:00] Welcome to Exess Returns where we focus on what works over the long term in the markets. Join us as we talk about the strategies and tactics that can help you become a better long term investor.

[00:00:10] Hey guys, this is Justin. In this episode of Exess Returns, Jack and I do round two of shows

[00:00:29] your portfolio with Larry Sweatrow, prolific author of multiple investing books and head

[00:00:32] of financial and economic research at Buckingham's Strategic Wealth. From investing in interval

[00:00:37] funds to a wide array of alternative assets, Larry walks us through his personal portfolio

[00:00:41] and his quest to have a highly diversified source of returns that can power his portfolio

[00:00:45] for the long run and produce desired outcomes in many different market environments. Larry

[00:00:49] takes a disciplined evidence-based and first principles approach that all investors can

[00:00:53] learn from. As always, thank you for listening. Please enjoy this discussion with Buckingham's

[00:00:57] Larry Sweatrow.

[00:00:58] Hi Larry, how are you? Thank you very much for joining us again.

[00:01:02] Great to be back with you, Justin and Jack. We sat down with you earlier this year and

[00:01:09] you were kind enough to join us on one of our Show Is Your Portfolio episodes and we

[00:01:12] were really interested in talking to you about your personal approach to investing. Kind of

[00:01:17] take an evidence-based approach, but then there's a lot of other asset classes. What

[00:01:21] we learned actually during that conversation, there's a lot of other asset classes and return

[00:01:25] streams that are sort of feeding into your portfolio. In that discussion, as we sort of

[00:01:32] uncovered this with the way that you manage your portfolio, it was kind of funny, like

[00:01:36] during the conversation you were like, "Do you guys want to explore that either now or

[00:01:40] in the future? We can do that." Then after we had a great 60-minute conversation, Jack

[00:01:44] and I ended and we're like, "Okay, we got to have Larry back on to talk about all this

[00:01:47] other stuff we weren't able to talk about." That's going to be great and that's what

[00:01:52] we're going to tackle today.

[00:01:53] Okay. That was good.

[00:01:57] Before we get into some of that, though, we wanted to kind of just frame up the discussion

[00:02:01] because I think we're a lot of investors start with their personal portfolios is around stocks

[00:02:08] and bonds. When you think about the performance of equities and the performance of fixed-income

[00:02:16] give more rates are today and you think about the future long-term returns relative to maybe

[00:02:21] what the past 40 years of returns have been, let's say, up until the end of 2021. How do

[00:02:27] you think about that?

[00:02:29] Yeah. Well, first, I want to make clear here that you want to distinguish, I think, and

[00:02:36] you would distinguish between public stocks and public bonds. There are also equities

[00:02:42] and fixed-income investments that can be private. It doesn't mean they're not equities

[00:02:48] or fixed-income, they're just private. So, we want to make that clear.

[00:02:54] One good thing for investors which has changed from when I last wrote my complete guide to

[00:03:01] a successful and secure retirement in 2020 was that rates were at 0 and valuations were

[00:03:09] high so that the expected return to stocks going forward were much lower than the historical

[00:03:18] 10% expected return. A good example that we might look at is the best predictor we have

[00:03:27] of future equity returns, or at least as good as any we have, is the earning yield where

[00:03:34] you take the Cape 1 or the Cape 10 doesn't make too much difference. They both have about

[00:03:40] roughly a 40% explanatory power. So, the Cape 10 was... my memory service was around 30

[00:03:48] or so, and so that gave you a 3% or so or 3.3 expected real return and expected inflation

[00:03:56] was call it roughly two. So, you were expecting five or five and a half, something like that

[00:04:03] for equities which is about half of the historical return and bond yields were in the 1% kind

[00:04:09] of range, one and a half maybe and so versus maybe the four to five that they had gotten

[00:04:16] a star effort. So, investors who were building traditional portfolios really had to make

[00:04:22] a tough adjustment if they were going to be realistic and if they didn't, they were likely

[00:04:28] to underperform and not achieve their financial goals. Today, valuations for bonds certainly

[00:04:36] have come way up and that's helped across the board for any balanced portfolio. Equity

[00:04:43] valuations are kind of bifurcated and by that I mean if you look at the big market cap indices

[00:04:51] which cost their market cap weighted and dominated by a few stocks, the top 10 in the

[00:04:58] S&P today count for 35% that might be a record high. And so, their valuations look

[00:05:07] high. Their market PE is something in the low 20s maybe today versus lower historical amount.

[00:05:19] But if you look at the rest of the market, international stocks are trading more at the

[00:05:24] 12 and 11 for emerging markets and develop and small value stocks around the globe at

[00:05:30] least for the funds of families that get deep factor exposure like a Bantas does. You're

[00:05:38] talking in the 7s and 8s which is like a depression scenario. So, those 7s and 8s are predicting

[00:05:46] much higher expected returns reflecting what the market proceeds as the risk in those areas.

[00:05:55] So you can't broadly make statements about equity valuations. You have to look at the

[00:06:02] various segments and see what your portfolio was exposed to when you forecast the return.

[00:06:09] That's a good point especially up through about a month ago. The market was basically

[00:06:13] being led by that handful of large cap sort of high growth tech stocks that you're talking

[00:06:18] about it's broadened out recently. But I mean that is the one thing that was happening

[00:06:23] for most of this year is large caps doing awesome and everything else kind of being

[00:06:28] left behind.

[00:06:29] And I think it's worth noting that what I'm about to say isn't the forecast because

[00:06:35] my crystal ball is always cloudy. We can learn from history. And there's only been three

[00:06:43] other times that we've seen this kind of concentration and valuations and each time that happened

[00:06:52] the NIFTY 50 was the first case, the .com boom around the end of the 90s and now and the

[00:07:01] other two cases those high valuations crashed while the rest of the market didn't do anywhere

[00:07:08] near as poorly after that.

[00:07:12] So it's at least it's a warning to investors who have their portfolios concentrated and

[00:07:18] making bets usually driven by some story. In this case it's an AI story. They tend not

[00:07:27] to be fulfilled and long term expectation or reality tends to be less than the expectations

[00:07:36] and valuations tend to come crashing down when those earnings don't get realized.

[00:07:43] You gave me a good idea for my YouTube cover image. It's going to be a picture of you looking

[00:07:46] into a cloudy crystal crystal ball. I'm just kidding. I'm just joking.

[00:07:53] I'm always humble about making more good forecasts. The legend in their own mind.

[00:08:01] Exactly. Yeah. I wanted to ask you about you talked when we first talked to you about

[00:08:07] your personal portfolio. You had this idea of equally distributing risk and I just thought

[00:08:12] before I handed over to Jack to talk about some of these alternatives sort of if you

[00:08:18] could just explain how you actually think about that or do that in practice.

[00:08:21] This is really good starting point. I have what are basic first principles. The things

[00:08:28] that matter most when you think about building portfolios and they follow some pretty simple

[00:08:35] logic. This is where I think all investors should think. First of all, all of your principles

[00:08:42] should be based upon academic evidence based peer reviewed research. The first thing we

[00:08:50] know is that while the markets are not perfectly efficient there are lots of anomalies that

[00:08:55] go on and explain. Investors are best served by acting as if the market is highly efficient

[00:09:03] using systematic transparent replica strategies like index funds but index funds have some

[00:09:11] negatives which can need to be minimized or eliminated through intelligent design. I use

[00:09:18] all strategies that are systematic, transparent or replica. I don't own a single index fund.

[00:09:26] My starting point is you should be systematic, transparent and replica. Some people use the

[00:09:32] word passive to represent. I don't think that's descriptive enough. I use those three words.

[00:09:40] If you believe markets are highly efficient then it must follow that all risk assets have

[00:09:46] very similar risk adjusted returns. Not similar returns. Riskier assets should have higher

[00:09:55] expected returns to compensate for that risk. Risk is not just volatility. It has to consider

[00:10:02] other things like how fat are the tails? What's the skewness and pertosis using the technical

[00:10:09] terms? In addition you want to also look at things like liquidity. Neither of those things

[00:10:19] are captured in things like sharp ratios. People who need liquidity have to give up and can't

[00:10:27] earn an illiquidity premium but for someone like the Yale Endowment which spends say five

[00:10:34] or six percent of their endowment every year they can load up on illiquid assets and for

[00:10:40] them that illiquidity premium is as close to a free lunch as you can get. I'll take the

[00:10:47] opportunity to point out that I've asked our over a hundred advisors. We manage $26 billion

[00:10:55] ourselves and collectively all the firms in the BAM community, there are over a thousand

[00:11:03] of ours. I've asked them all, I've never heard one yet say it doesn't mean it doesn't

[00:11:08] exist. I've never heard one of our clients say they're taking more than they're RMDs

[00:11:13] from their IRAs which means even at age 90 you're not taking 10%. Most people vastly

[00:11:23] under invest in illiquid assets because they're missing the opportunity for whatever the reason

[00:11:31] they think they need liquidity when the reality is they don't at least for a significant portion

[00:11:37] of their portfolio. If you believe that all risk assets have similar risk adjusted returns

[00:11:44] why would you concentrate your portfolio in any one factor or unique source of risk and

[00:11:52] the typical 60/40 stock and bond portfolio has 85/90% of the risk in market beta when

[00:12:01] we know there are lots of other sources of risk. The And the Hobbids and Yale's of the world

[00:12:07] have been addressing this for decades by building more of what are called risk parity type portfolios

[00:12:16] and while even our clients only typically hold 10 to 15% in alternatives, the Hobbids

[00:12:24] and Yale's on 50/60% and most individuals on close to zero, I think the numbers should

[00:12:32] be more much closer to that of the Hobbids and Yale's especially those clients who actually

[00:12:39] don't need a lot of liquidity. My own portfolio I've been moving over the years up and up.

[00:12:46] I'm in mid 40s now and probably moving a bit higher and I've moved higher as private vehicles

[00:12:55] which are less liquid have become available that are much cheaper if not cheap and still

[00:13:03] but they're much cheaper than the two and 20 fees that typically prevailed up until a

[00:13:08] few years ago and so assets that I would have liked to invest in but the management firms

[00:13:16] with capturing all the value and so I didn't unless you were Yale and Harvard and could

[00:13:22] negotiate much lower fees but today that world has changed and the fees while not low compared

[00:13:29] to index funds or other systematic strategies are now much slower allowing you to capture

[00:13:36] a significant portion of that excess return.

[00:13:41] We're going to talk about a variety of alternatives many of which investors probably may not have

[00:13:45] heard of or may not invest in but first I want to talk about your framework. When you're

[00:13:49] looking at these types of alternatives what are the criteria you use to decide whether

[00:13:53] you might want to invest in it?

[00:13:54] Great question I highly recommend, your listeners pick up a copy of what I think is the seminal

[00:14:02] book on factor investing that Andy Birkin and I wrote, your complete guide to a factor

[00:14:08] based investing and in that book I'm really proud we established five criteria that were

[00:14:15] required in addition to showing evidence of a premium that a factor or an investment strategy

[00:14:23] had to meet all of them before you considered an investment and that can apply to other

[00:14:30] investments not just factor so those criteria were the premium and it had to show evidence

[00:14:37] that it was persistent because very long periods of time so wasn't just a lucky good period

[00:14:45] of good economic time. It had to be pervasive around the globe, of course industry sectors,

[00:14:53] countries, and regions as well as of course asset classes if that was appropriate. It

[00:14:59] had to be robust to various definitions so value works whether you look at price to earnings,

[00:15:06] cash flow, EBITDA, to enterprise value, momentum works whether you use 30, 60, 90, 120 days

[00:15:13] et cetera. It had to have intuitive risk space or behavioral explanations for why you think

[00:15:22] the premium will persist. Now important to recognize I greatly prefer risk-based explanations

[00:15:30] because they cannot be arbitrage the way, can arbitrage away the excess risk of stocks

[00:15:37] versus T bills right? Now the premium to stocks can go up or down depending on how optimistic

[00:15:44] and pessimistic investors are but it should never be odd the way. Behavioral explanations

[00:15:50] can be odd the way but we do know that there are some significant limits to arbitrage including

[00:15:58] a high risk and costs of shorting so if you can recognize these limitations to arbitrage

[00:16:10] then you can consider it. And lastly they have to survive transactions costs so if the

[00:16:18] size premium, for argument's sake looking at microcap stocks was 4 percent but of course

[00:16:24] you're 5 percent to trade it it doesn't do you any good at all. So what I do is one

[00:16:32] any investment much read all those criteria but some I have stronger evidence than others

[00:16:38] so I feel more confident I will not use an equal weighting or risk parity strategy. I

[00:16:45] will put more weight on that factor or strategy and I have more confidence in risk-based strategies

[00:16:55] than behavioral ones so for example I will put more weight and more of my assets in value

[00:17:03] strategies than I will in momentum but every fund I invest in on the equity side incorporates

[00:17:11] some momentum strategies in their structure rules so that's how I think about it. Whether

[00:17:18] it's reinsurance or life settlements it doesn't matter it has to need all that criteria.

[00:17:25] Many of the things we're going to talk about today or at least some of them are going to

[00:17:28] earn to be available through what's called an interval fund which I think is a pretty

[00:17:31] new vehicle in terms of being available to investors so before we talk about them I just

[00:17:35] want to talk about that structure in general like what is an interval fund and how does

[00:17:38] it work? Yeah that's an important question because

[00:17:41] that innovation when the SEC allowed interval funds really opened up asset classes that

[00:17:51] would not be available to investors otherwise. First of all an interval fund just to set

[00:17:57] the record straight cannot be owned in 401K retirement plans those types of things. You

[00:18:03] have to have daily liquid investments like stocks and treasuries and corporate bonds

[00:18:10] publicly available securities that are highly liquid of course. So an interval fund what

[00:18:16] it does is it holds assets that are not perfectly liquid but the SEC requires them to be able

[00:18:27] to make a minimum of 5% withdrawals every quarter so that could get to 20% a year. So

[00:18:37] they to keep that liquidity they typically will own some portion of highly liquid assets

[00:18:44] whether it's treasury bills or or even high yield corporate bonds if it's a private credit

[00:18:51] fund they could do that they can use credit lines to help meet those requirements. And

[00:18:59] so just so investors could understand let's say you put a million dollars into an interval

[00:19:05] fund and it's got a billion dollars. Okay of assets 5% would be 50 million if you're the

[00:19:14] only one who requests your a million dollar redemption you want entirely out no one else

[00:19:21] requests out you get your full million. If more than 50 million was requested you would

[00:19:28] get a pro-ratter share as would everybody else unless the fund decided it could meet

[00:19:35] and was willing to as Stone Ridge did with its reinsurance fund it paid out more than

[00:19:43] it was required to. So though by enabling funds to hold assets that weren't liquid and enabled

[00:19:52] investors to invest in these less liquid asset classes like private credit like reinsurance

[00:20:00] like life settlements other things so I'll give you one good example to help people think

[00:20:07] so this is just a concept idea. So Jack let's say you have an opportunity to invest in one

[00:20:15] of two assets okay so think of you know city co-op let's just use them as a bank and it's

[00:20:21] got a big credit card business. The credit cards are yielding 20% they expect 9% losses

[00:20:30] not guaranteed of course it could be much worse or much better and it costs them 1% to service

[00:20:37] it so their expected return is 10%. Now let's say in theory you could buy that asset.

[00:20:45] Alternatively now Justin comes along and he says I want to take a new credit card out

[00:20:52] and a bar out but the chief financial office says we don't have any more capital to set

[00:20:59] aside we can't do that business with Justin now Justin's going to pull his corporate business

[00:21:05] and everything else they want to service him. So what do they do they take a portion of

[00:21:10] their assets go to the capital markets securitize it and turn it into what's called an asset

[00:21:17] back security or ABS it gets rated by Moody's and portions of it will be AAA and you know

[00:21:25] etc and sliced and bison you know and now it's daily liquid. Now because it's daily

[00:21:32] liquid the market says we only require a 7.5% yield. Now you're sitting with your money

[00:21:40] and you're not near your retirement date you have absolutely no plans to take money

[00:21:45] out of your IRA and you have other liquid assets you could get reach in an emergency

[00:21:51] some safe bonds in your portfolio. Would you rather hold the 7.5% illiquid investment

[00:22:01] with exactly the same interest rate risk and credit risk with the 10% you'd probably

[00:22:07] want to know the 10% I would guess not probably no brainer now you have to meet that criteria

[00:22:14] OK, so that's great. Another good example is reinsurance. You can't have reinsurance in the daily liquid fund

[00:22:24] at least in what are called photo shares, where you're buying a book of the insurer's business or reinsurers, because you've signed the contract to take that risk for a full year.

[00:22:37] So you can say three months after you invested in it, you want your money back. Well, too bad that contract is out there. So you give up that liquidity for you.

[00:22:48] But Stone Ridge as I will buy these contracts and will hold say 5% or 10% in either cash,

[00:23:03] borrowing credit lines from banks, or might even hold on a cash bond, which is daily liquid, but that's highly concentrated in U.S. hurricane risk.

[00:23:14] With a quota share, it's going to have global risk and earthquake, hurricane, wind, all kinds of other risks, much more diversified.

[00:23:23] Guess which one yields more? Well, the one that's illiquid because people like liquidity.

[00:23:30] So if you need liquidity, you own the daily liquid asset, you don't need it, you can capture those large illiquidity premiums, which tend to be in the range of 1.5% or more, depending upon how well liquid it is.

[00:23:48] So like a rubber plantation in Indonesia is going to be highly illiquid and should have a huge premium there. And that's why the harvits and yells of the world invest in those kinds of things.

[00:24:01] So the idea in terms of preventing like a cascade where, you know, everybody pulls their money and suddenly the illiquid assets have to be sold is that 5% limit you were talking about before.

[00:24:09] So you can't everybody can't run for the door at the same time. It's got to be spread out over periods of time.

[00:24:15] Yeah, so you have to have conviction and a faith and a belief that the premium will last for a long time, the strategy is good. You have to really do you do diligence on the fund manager to make sure they trust where the long record of performance.

[00:24:32] All of those things, because it's possible, you may need five years to get out entirely of your investment. And that's what scares a lot of people.

[00:24:43] But my opinion, it should not if you're either able to do that to diligence on your own or you have a trusted advisor, who could do that for you. But you have to make sure that that investment meets all of those criteria.

[00:25:00] That I laid out to give you the confidence to make that investment. And then you need the discipline to stay the course.

[00:25:08] So, I want to work through some of these individually because these are all really interesting and many people may not have heard of these. So, when I list each one, can you just talk about like what the return profile is, what you think the investment case is for each one of these and the first one is private credit.

[00:25:20] Right. Okay. So, you have public credits, investment grade assets. Okay. And then you have private credits, which tended to be a relatively smaller part of the market up until the great financial crisis.

[00:25:35] Mostly smaller, maybe midsize companies and the bank service, you know, even those markets very well.

[00:25:43] But a great financial crisis, cause banks go needed to desperately raise capital, hold back, and private credits stepped in. Now, private credit raises capital from investments like you and I in the Harvard's and Wales of the world.

[00:26:02] And they make loans directly to those companies. And they can act much faster, typically, and banks, which go through big committees, it could take months and months to get approval.

[00:26:15] Private credit tends to react much quicker. And private credit, if done properly, actually has a fossil period of credit history to public credits of similar backgrounds or midsize companies.

[00:26:31] 150, 200 million EBITDA. If you look at, for example, van God's high year fund. Last time I looked at was yielding about eight and a half percent.

[00:26:44] It's got something like a six or seven year maturity.

[00:26:48] Now, the cliff water interval fund there, private credit fund, which is CCL of X. It's all floating rate debt.

[00:26:58] And that's something I wanted to avoid was maturity risk when yields were so low, because I just thought the risks were, you know, asymmetric rates were not likely to go down much, but they could go up a lot.

[00:27:13] And cliff water fund is much safer than van God's high year of fund and credit, because it's very specific to the debt is all senior secured.

[00:27:26] There is no light covenants that are often there in public credits.

[00:27:32] And it's sponsored by leading public, sorry, private equity firms, who will often step in if there's problems, because if they don't step in to provide more equity and renegotiate a deal, guess what? They get wiped out.

[00:27:49] Totally. So it's not a guarantee, of course, they'll step in if something's in dire need and they can't see a way out.

[00:27:57] But these are and companies that typically make longer investment so cliff water has an index of these types of credits that are senior and secured.

[00:28:10] So to go back to I think now 20 years, historical default so 1% losses, 1% cliff water and that it also has to be backed by private equity that database isn't quite as long, but it does have a better credit history, as you would expect,

[00:28:34] as the private equity firms have done their due diligence too, and are prepared to they know it's possible like it have to put more their credit experiences 25 basis points.

[00:28:46] Now today, that fun as a net yield of about 11 and a half, or about 3% more, with no term risk which you should be compensated for, right, for taking superior credit profile.

[00:29:05] In March of 2020, the fund lost 3% were high yield that got slaughtered.

[00:29:12] Why would you own the Vanguard high yield fund which has tens of billions over this fund.

[00:29:20] It's because it's illiquid it carries that much larger premium. There are other well run vehicles firms with 20 year, you know, 15 20 year track records of, you know, strong performance as well.

[00:29:37] So that's one example where you can access private credit. Now, I will say these are not generally available interval funds to the general public.

[00:29:50] These firms know that this is a limited capacity area. They don't want to deal with the general public directly, because of all the education about interval funds, and the flights that naive retail investors tend to engage in.

[00:30:07] So they tend to work with, in some cases, even a relatively small number of advisors, in Stone Ridge, for example, I think it's less than 100, flip forward or somewhere, maybe in that range.

[00:30:20] So you have to work with an advisor who does have access.

[00:30:24] This next one's really interesting because I know absolutely nothing about it. Can you talk about structured life settlements?

[00:30:29] Yeah, this is, in the is natural, simple explanation as there is. Right. We know that life insurance companies. Right. They make investments in policies with an expected return on their capital.

[00:30:47] Right. So now, Jack, let's say, you know, just using as an example, you bought a policy, you've been paying premiums for 30 years, and something unfortunate happens bad health wise to you.

[00:31:03] You can't make your premiums anymore. The insurance companies love you because what happens is now you're going to take your policy, cancel it so you can, because you can't pay the premiums anymore and use it to pay your medical bills.

[00:31:19] A very, very small percentage of life insurance policies ever pay off. Many of them don't pay off for reasons that I just gave you. Now, if you're able to pay the premiums, great, then you get paid off.

[00:31:33] And they insurance companies didn't probably get their expected return, you died earlier. But that wasn't the case until fairly recently. Now, the regulations and I think almost all states, if not all require the insurance company to tell you that you can sell that policy.

[00:31:54] Now you see ads on TV all the time from firms like Coventry and others that they're willing to buy your policy from you, giving you the cash, you now get to pay your medical bills, you know, maybe live in your home and dig with dignity

[00:32:11] and those things. And there's obviously going to be an expected return. The buyer of the policy is buying an illiquid asset.

[00:32:20] They don't know when you're going to die. They can only estimate it based upon a doctor's report, which is what a good firm will do, though, have a doctor specializes in that disease to estimate, look at the x-rays or MRI's or whatever, and say the expected life expectancy is three years.

[00:32:40] And then you can make a price based on that. The expected returns to these go up and down.

[00:32:48] They were in the low, the high single digits before the great financial crisis. Then liquidity became a big issue. They jumped into the high teens and the big hedge funds, many of them played there.

[00:33:02] And now they come down into the high or side of the low double digits in the 10 to 12 percent range. And it's like the perfect asset, because it's obviously totally uncorrelated to stocks and bonds and anything else has a high relatively high expected return.

[00:33:22] And you're actually know you're helping people, because you're enabling them to get the cash they need.

[00:33:29] And otherwise they'd have to let the policy expire. The same thing applies to other structured settlements. Say, Jack, your parents if they're alive, someone gets injured in a car accident, and they get a settlement as an annuity of a hundred thousand a year.

[00:33:51] But they want the cash now. Okay, I'll step in and buy that's new at a discount rate. And I don't know how long you're going to lift to get that either. So I'm going to provide a risk premium over that.

[00:34:04] And so firms can not only combine life settlements, but other structure of settlements. And similarly, there are other assets.

[00:34:13] Same things can apply. Things like drug oil, these music royalties. You can invest the nose and clipboard or has a fund that is called their extended credit fund that invest in things like that as well.

[00:34:28] I'm just curious, before we get to the next one, I mean, do you think this is something you mentioned, this is only available through select advisors, a lot of this stuff.

[00:34:34] Do you think this is something you mentioned, this is only available through select advisors, a lot of this stuff. Do you think this is something that could become available like to the investing public at some point or there are too many issues like behaviorally with people panicking and stuff that they just wouldn't want to do that.

[00:34:48] So I'm not responsible, as we said my crystal balls always cloudy, but these are really limited capacity areas.

[00:34:58] And so the big guys like vanguard one are almost certainly not going to play in that space, but we can make it available. Maybe they've got to staff when we do, we do it.

[00:35:10] These companies don't want to have big staff to accommodate working with the public 800 lines and things like that. And the expense and marketing to them. So that's one, and they don't want the behavioral issues as well.

[00:35:27] So the next one's another one I know very little about and that's a drug royalties can you talk about that. Yeah, so you're now an inventor, and you've invented a new drug spent decades of being poor while you try to, you know, develop the product.

[00:35:45] And now, along comes Pfizer and says we'll buy your drug and we'll pay you, you know, 6% royalties on this, for the next 30 years or whatever, you know, probably, you know, the life of the patent, whatever.

[00:36:01] And so you say great but I want to move on and do my next drug. And I don't have the cash I can't wait so I'll go and sell that to an investment firm, and they'll pay you up front.

[00:36:16] I also want to do a specific amount based upon their estimates of what the sales et cetera will be. So it's exactly why a settlement in a lawsuit where someone was heard in a car crash. Only here you're now having to make estimates instead of known amount.

[00:36:34] So that's an example litigation finance.

[00:36:38] And you want to pursue a case, but you don't have the money to fund it. People will come in and say, all right, we'll fund that in return for X percent of those proceeds.

[00:36:51] So you could do things like that obviously that cannot be a daily liquid fund, which would make it available to the general public and trying to explain all the complexity to the average person.

[00:37:05] I just don't see it as likely.

[00:37:09] The next one's interesting because pretty much everybody pursues factor investing on a long only basis, or, you know, that's where the vast majority of the assets are, but you do it in a different way here, at least for this portfolio.

[00:37:19] You invest these long short factor funds.

[00:37:21] So can you talk about why you do it that way and how you think about that in the context of your portfolio?

[00:37:25] Yeah, here is an example one that is a daily liquid, so you don't need an interval fund. I invest in AQR's style premium fund. The symbol is QSP IX for tax tax advantage accounts and QSP RX for tax advantage taxable accounts.

[00:37:48] You just avoid commodities, which would make it more tax inefficient.

[00:37:54] So most people invest in factors like value and size and profitability by stocks that have those characteristics, but they don't go short the other side of the trade.

[00:38:10] So it's not a market neutral. You're also long market beta.

[00:38:15] So in order to diversify the portfolio more, you can go long short, and now you have a pure 100% exposure to the factor.

[00:38:25] And not only that, but in AQR's case, for example, value, it's long short, so it's long value short growth, or long cheat and short expensive, depending on the asset class, starts bonds commodities and currencies.

[00:38:44] So I'm picking up unique exposures that have often nothing to do that are uncorrelated with what's going on with market beta, which dominates most portfolios.

[00:38:56] So that fund is long short value momentum, defensive, or you could think of it as quality and carry factors that meet all of those criteria.

[00:39:08] They're ones that Andy Birkin and I put out a book out of the hundreds of factors in the factors, we identified only eight that we thought investors should consider.

[00:39:20] And those are four of the eight. And so I like that fun because it's totally uncorrelated.

[00:39:29] How about just one more before we move on to some other questions I want to ask you about reinsurance. How do you think about that?

[00:39:34] Yeah, to me, this is another obvious no brainer type of investment. We know the reinsurance business has been around for about 170 years.

[00:39:46] And, you know, obviously it's generated a good profits return on equity for the reinsurers who buy risks from other insurers who don't want too much risk in one particular area.

[00:40:03] Well, they have the same problem, they want to service their insurance clients, and they don't have an unlimited supply of capital. So, how when, you know, state farm for example goes to Swiss Re and says, I want to pass on some more hurricane risk in Florida.

[00:40:23] They don't want to turn them down because they may already have enough of that risk, or they don't have any more capital. They want to keep that relationship. So they raise capital and sell off some of that risk.

[00:40:36] That's what cap bonds do, they're daily liquid, but they're concentrated in hurricane risk. They tend to have premiums over the risk free rate.

[00:40:46] Depending upon how much risk they've been, and how the losses have turned out recently. So obviously, stocks going up or down have nothing to do with the risk of hurricanes or earthquakes, or tornadoes or wind storms, or all this other stuff.

[00:41:02] They win storms don't cause bear markets, etc. So it's a great asset in that it has no correlation to either stocks or bonds. And it's got a big risk premium that's persistent, pervasive, etc.

[00:41:16] You're just buying in Stoneridge's case, it might be example, they go to let's just use the name Swiss reinsurance, and we'll say, so you can cherry pick. I want to be your strategic partner. I'm going to buy 5% of all of your risks.

[00:41:33] So we know they Swiss raised been in business 107 years, great track record long term. They like everything else there go through periods of poor performance. That's the nature of the wouldn't be risk premiums that would be large right.

[00:41:53] With that risk, but those losses should be uncarrelated with the other loss, and you partner with them. And now you've got a portion of their book of business.

[00:42:03] And you should earn very similar returns to what they are on those risks. Now the reinsurance companies, I don't want to own their stocks.

[00:42:14] But you know I like that risk because why don't I want to own their stocks, because what are the risks that are on their balance sheet. They take those premiums and invested in stocks and bonds and real estate, which are already have on my balance sheet.

[00:42:29] So that's not duplicated. So in 2022, for example, when reinsurance at a decent year.

[00:42:38] Rein Shur on stocks got crushed, because their stocks and bonds and real estate assets got crushed. Right.

[00:42:47] So I can isolate that risk by buying these quota shares or cat bonds.

[00:42:53] So that's why I like it. I will tell a very brief story. Reinsurance, the first few years that storage came out with the product had good returns.

[00:43:05] And then the next three years were pretty bad.

[00:43:08] Double digits are close to that. Not, you know, 20% or more, but, you know, minus 12 minus 17 minus five.

[00:43:17] Of which at its peak had five billion of assets. So are the typical naive, even with advisors out holding their hands drop down to 1 billion.

[00:43:29] Some of that of course was caused by a roughly down draft of like 20%. Obviously, but much of it was caused by people withdrawing.

[00:43:40] If the first year of the fund was up about 6%. And this year, it's up 43.

[00:43:48] So, you know, unfortunately, 80% of those investors or seven didn't earn those returns. But they didn't out.

[00:43:56] Those, the same type of people, maybe that bail out of stocks after two or three bad years, but we see this pattern.

[00:44:05] They may not bail out of stocks because they understand it more. Okay, or think they do.

[00:44:11] They will bail out of reinsurance or drug royalties or private credit. They just chase returns and think it was a bad idea when the logic is perfectly there.

[00:44:23] For example, Warren Buffett loaded up on reinsurance at the start of 2023.

[00:44:35] Because he saw, guess what? After bad years, the premiums go way up, the underwriting standards go way up.

[00:44:37] So if you want hurricane insurance in Florida, it better be steel reinforced concrete not, you know, wood-based house.

[00:44:47] And if you want fire insurance in California, you can have a tree within 30 feet of the house, and 30 feet of the next tree and 30 more feet of brush that's cleared.

[00:44:58] And by the way, the deductibles went way up.

[00:45:01] So the risk is actually down, the premiums are way up, and yet people flee.

[00:45:08] That's partly why a lot of these firms will not take retail investment.

[00:45:15] No, that makes a lot of sense.

[00:45:16] What I really like about these is, you know, going back to your criteria at the beginning, I always like to ask myself when I'm investing in anything, why am I getting paid to do this?

[00:45:22] And like, all of these, as you've gone through them, they have compelling reasons why you should get paid to do it.

[00:45:28] And so if you expect it to persist in the future, I mean, that's a good reason for it to persist in the future, is there's a good explanation in all these cases why you should make money by doing these things?

[00:45:36] Yeah, and exactly.

[00:45:37] And by the way, that's why you don't overweight anything.

[00:45:41] I mean, to me, the expected return to the reinsurance fund this year, this fund, S-R-R-I-X, was in the low to mid-20s.

[00:45:51] It turned out to be a much better year than expected. We didn't have any big hurricane or earthquake losses. There were some losses, but not a lot.

[00:46:00] So the losses were less.

[00:46:02] And last year, the fund reinsurance vastly overestimated the losses from one of the hurricanes.

[00:46:10] So the fund reported losses of minus five and a half, but this year, big gains, about 10% were related to reversing last year's estimated losses.

[00:46:23] But when you get a hurricane in October, you don't know what the payout will be till maybe the following year at the end of the year, like now, or maybe even a bit longer, so you make estimates.

[00:46:36] Now, randomly, it'll be higher or lower than you expect.

[00:46:39] It turned out to be estimated too conservatively.

[00:46:44] And so the last year was about minus five and a half this year, up about 43 and a half.

[00:46:52] If they guessed right, last year would have been up about 16 in this year of 33.

[00:46:58] Now, I saw that high expected return.

[00:47:01] So I added significantly to my portfolio exposure to the fund, but I still only own like three to five percent.

[00:47:11] I don't remember the exact number.

[00:47:13] I spread my risk out, of course, many different assets.

[00:47:17] Just one more for me before I hand it back to Justin.

[00:47:19] I want to ask you about something that a lot of people are starting to invest more in now as particularly as it becomes accessible through ETFs and more readily available for your average investor, which is managed futures.

[00:47:28] What are your views on managed futures? Do you use them in your portfolio?

[00:47:31] And then what do you think about them in general?

[00:47:34] Yeah, so here's the thing, managed futures, which generally you think of as trend following, right?

[00:47:41] So momentum, but specifically time series momentum or trend following.

[00:47:46] You buy what's going up and you sell what's going down, right?

[00:47:51] That was one of the factors that Andy Birkin and I and our book on factor investing identified met all the criteria.

[00:47:58] However, as I said earlier, there is no risk based possible explanation, although people have tried to concoct them after the fact.

[00:48:10] But it is purely behavioral based, but the evidence is strong, so I don't ignore it.

[00:48:16] And as I said, every one of the equity funds that I invest in includes exposure to momentum.

[00:48:24] So for example, value fund often will buy stocks that is falling in price.

[00:48:29] It was a growth stock, now got cheap and is now value, we'll buy it.

[00:48:34] Well, the funds I own won't buy it even though it meets the criteria if it has negative momentum.

[00:48:40] It'll stop buying or wait until that negative momentum ceases.

[00:48:45] And when it starts to go up and is no longer maybe to have a cap at PE, I'll make this up to 15.

[00:48:52] The PE goes above 15 they may hold it for a while longer until they see that negative momentum decline, at least maybe until the P gets to 17.

[00:49:02] I'm just making up examples there.

[00:49:07] And the fund I own I mentioned earlier, ACOR style premium is in momentum also as well.

[00:49:16] I did at one point in my life cycle of investing have a trend following fun.

[00:49:24] AQRs fund, which meets all the criteria.

[00:49:28] But then over the years, there started to become available funds that met my criteria.

[00:49:36] The much stronger risk based explanations.

[00:49:39] So the alloy and I think a much higher expected future with there.

[00:49:46] Okay.

[00:49:47] And therefore, I dropped that and added exposure to these other asset classes,

[00:49:54] which I believe provide some good tail risk protection as well.

[00:50:00] And have more logical risk based explanations and higher expected returns.

[00:50:07] So I have no problem with someone including a trend following strategy in their portfolio,

[00:50:13] but they should recognize they should never be buying it to enhance returns.

[00:50:18] It should be bought to protect tail risk, because it tends to do best when it's needed most in long periods of under performance.

[00:50:28] Like 73, 4, 2000, 0, 2, 0, 8, you know, last quite a while.

[00:50:37] But most of the time, because markets go up, you're going to be trailing, right?

[00:50:42] So don't expect it to do well.

[00:50:44] In fact, it could go a decade as it has done when it does poorly.

[00:50:50] And then in one year, it makes up for that, you're thankful you owned it.

[00:50:55] And only if you state the decade through four returns, most individual investors can't do that,

[00:51:01] sadly, and so they miss out on herself.

[00:51:04] If you can't do that, then you should never buy it in the first place.

[00:51:09] Just one personal story for me, and then there's a question on the backside of this.

[00:51:13] But I was always one of those people that like highly value liquidity.

[00:51:17] So that's just how I kind of manage my investments.

[00:51:21] And then I, Jack and I both have a good friend, who are done really well in real estate outside

[00:51:27] of the area where we live.

[00:51:29] We live in Connecticut, he had done really well with commercial real estate and private

[00:51:33] real estate and multifamily in Texas.

[00:51:35] But then they came up here and they identified a pretty decent size commercial deal that

[00:51:44] I ended up investing in.

[00:51:45] But the only way I was able to get comfortable with that illiquidity was I had to kind of

[00:51:52] see the asset, like I had to sort of know what I was investing in, because I knew the

[00:51:56] money was going to be locked up.

[00:51:58] And they were honest with me and they said, hey, listen, this is going to be a five to

[00:52:02] 10 year investment distributions might not start right away.

[00:52:07] And so, you know, I eermarked whatever portion of my portfolio, you know, portion of my portfolio

[00:52:12] and invested in that and that has probably been, I'd say, the most successful investment

[00:52:17] I've ever made.

[00:52:18] But might.

[00:52:19] So that's the story.

[00:52:20] But the question is, how do you advise advisors or how do you think investors should think

[00:52:26] about getting over this illiquidity thing?

[00:52:30] Because I was able to see the asset.

[00:52:32] I was able to go and touch it and know what I was investing in when a lot of investors

[00:52:35] sort of might not be able to do that.

[00:52:37] So what would be some strategies that you would advise people do for that?

[00:52:41] Well, the first thing you should never invest in something you don't understand the nature

[00:52:46] of the risk unless you just have blind faith in your advisor that, hey, I've worked with

[00:52:51] them for 20 years.

[00:52:52] They know far more than me.

[00:52:53] I don't know anything about this stuff.

[00:52:55] But I know, you know, tell me the story and if it makes logical sense, anyone can understand

[00:53:02] the example Jack I gave you on the credit card debt, for example, or private credit.

[00:53:07] Here's the data.

[00:53:08] I've written 15 page papers on reinsurance and private credit.

[00:53:13] Look at the evidence.

[00:53:14] You should demand to see the empirical research, the evidence, the data.

[00:53:20] You should do your due diligence.

[00:53:22] See if the story makes intuitive, common sense, which Jack, you said, yeah, all these things

[00:53:28] do.

[00:53:29] Right?

[00:53:30] You don't have to see something.

[00:53:31] In fact, Justin that's actually, to some degree, a bad idea.

[00:53:37] What?

[00:53:38] Yeah.

[00:53:39] And here's the reason why, because if you become familiar with something, you think it's safer.

[00:53:45] So, a great example I'll give you is guess what stock people in Atlanta own a disproportionate

[00:53:54] Europe.

[00:53:55] Probably Home Depot or maybe Coke, Coke, right?

[00:53:58] Okay.

[00:53:59] Okay.

[00:54:00] Yeah.

[00:54:01] To own Coke, Justin, and if you live where you live or if you live in Atlanta.

[00:54:06] Yeah, no, no.

[00:54:09] We all have that bias of, right?

[00:54:10] Right.

[00:54:11] Right.

[00:54:12] There are a lot of people employed there.

[00:54:13] They live there, they work there.

[00:54:15] Now what if you worked at Enron and you lived in Houston?

[00:54:17] You know, you'll live off.

[00:54:20] Yeah.

[00:54:21] You're familiar.

[00:54:22] I work at the guy.

[00:54:23] I know all this.

[00:54:24] Right?

[00:54:25] Familiarity breeds over confidence.

[00:54:28] That should not be a criteria.

[00:54:30] And now all it's doing is checking out to make sure that that building exists.

[00:54:35] These guys are real.

[00:54:36] Yeah, you can look at it, but it's much more important to understand the story there.

[00:54:42] And in every case that I've told you, and this is really important, I'm glad we got

[00:54:47] to this story actually, whenever I invest, I avoid idiosyncratic risk.

[00:54:53] I only want to own the beta of that asset class.

[00:54:57] So Stone Ridge doesn't unlike some hedge funds in reinsurance hedge funds are going to say,

[00:55:03] now I like Florida hurricane risk, because the premiums went way up.

[00:55:07] I don't like California earthquake risk.

[00:55:10] I like this.

[00:55:11] Not that.

[00:55:12] Stone Ridge says, I want the beta of the asset class.

[00:55:15] They go to eight or 10 or whatever number of highly regarded institutional players, and

[00:55:23] they buy these quota shares.

[00:55:25] I own thousands of different red or hundreds of different risks across broad regions of

[00:55:31] the world, different carols.

[00:55:33] The same thing is true of cliff order.

[00:55:35] They buy from 10 different industries, the best managers who have long track records credit,

[00:55:42] and when they make a $200 million loan, cliff order takes two million of it.

[00:55:48] They've got 15 billion and 15,000 loans.

[00:55:52] One loan goes bad.

[00:55:54] It's not, you know, there's no impact on them.

[00:55:57] You never want to make that one single building investment, in my opinion.

[00:56:04] That's taking huge idiosyncratic risk.

[00:56:07] If I want to invest in private credit, I do it through Black Stomp, which has a B REIT

[00:56:13] product, which is outperformed the public markets by about 3% a year since inception,

[00:56:20] because you're getting an illiquidity premium.

[00:56:23] Pretty simple.

[00:56:25] But it's highly diversified.

[00:56:27] So key, understand, do your due diligence, re-learn, make sure it makes intuitive sense.

[00:56:35] Geez, I'm going to have to have you on speed dial the next time I'm presented with one

[00:56:39] of those deals.

[00:56:40] Make sure I don't do anything bad.

[00:56:41] That one worked out.

[00:56:42] But I think those are all, you know, fair points, and absolutely.

[00:56:45] That's the problem.

[00:56:46] That's the problem.

[00:56:47] Now it works out.

[00:56:48] Maybe I think the next one will work out.

[00:56:50] Right, exactly, with smart strategy, right?

[00:56:55] I guess, it's not really along the same lines, but when investors incorporate some of these

[00:57:01] alternative investments, inevitably they'll be years where some of these will really be

[00:57:05] doing what they're supposed to be doing.

[00:57:07] There'll be years where maybe they'll be a little bit lackluster.

[00:57:10] And then, you know, many investors will turn around and compare their portfolios to 60-40,

[00:57:16] or maybe just along only S&P 500 and say, "Wait a minute.

[00:57:20] These things have detractors from returns, and there's that behavioral tendency to want

[00:57:25] to, you know, abandon ship and go where everyone else is making money."

[00:57:30] So I mean, how do you just think that investors should give themselves the best chance for

[00:57:34] success and investing in these types of things?

[00:57:37] That's unfortunately a completely illogical way of thinking about it, although it's done

[00:57:43] by most investors.

[00:57:45] They don't know it's illogical.

[00:57:47] But let's start with the premise.

[00:57:49] Why are we buying these assets?

[00:57:52] What's the reason to consider them, either Jack or Justin, you want to answer that?

[00:57:57] Yeah, I mean, they're totally different return streams.

[00:58:00] I think they're going to diversify you.

[00:58:01] They're going to hopefully help limit risk when those assets come up.

[00:58:05] Exactly right.

[00:58:06] If they're totally unique, then you can't and shouldn't ever compare.

[00:58:10] You're buying it because you fully expect that they will look different, and you actually

[00:58:15] hope that's the case.

[00:58:17] Now that means you have to accept that will be some years may be the end period where

[00:58:23] that particular one will be fully, but the S&P has underperformed people for as long as

[00:58:29] 17 years.

[00:58:31] Do you not buy stocks because of that?

[00:58:34] You know, from 29 to 43, 66 to 83, and 2012, that's 45 years.

[00:58:45] That's almost half of the life of the markets.

[00:58:48] The other times it greatly outperforms and it's earned the big premium.

[00:58:52] Well the same thing must be true of all these other out where you wouldn't get the premium.

[00:58:57] So the key is what that means is you want to diversify.

[00:59:02] You must accept this tracking variance to reduce the volatility of your portfolio, which

[00:59:08] is the objective.

[00:59:10] And the only way to do that is to add these low correlating assets.

[00:59:14] So you then can't compare it and complain when you got exactly what you wanted.

[00:59:20] These funds are always doing what they're supposed to be doing.

[00:59:24] It's just that sometimes you like the results, sometimes you know, and the worst mistake

[00:59:29] that people make is they engage in what's called resulting.

[00:59:33] They judge the performance of a strategy by the outcome and not by the quality of the

[00:59:39] decision before you know the outcome, which you shouldn't do because we don't have clear

[00:59:45] crystal balls.

[00:59:46] It's like after Russell Wilson threw that interception for the Seattle Seahawks when

[00:59:54] everyone thought they should have been running the ball, they said that was a bad decision.

[00:59:58] Well the saber maticians went and looked at it and analyzed it and found it was exactly

[01:00:03] the right call to make from a statistical perspective because Lynch Marsha on Lynch,

[01:00:09] the great running back, had fumbled three times of my memory serves in that situation

[01:00:15] during the season and Russell Wilson had never thrown an interception in that zone area the

[01:00:21] entire year.

[01:00:22] So it was much more likely to be successful.

[01:00:25] The other team just made a great play, but people said it was a dumb decision.

[01:00:30] He was the fans try to get him fired.

[01:00:35] The same thing is true here.

[01:00:37] You cannot judge things by the outcome, but only by the quality of your decisions or you

[01:00:43] will be always chasing returns.

[01:00:46] You'll buy after periods of good performance when returns expected a low because prices

[01:00:53] are high and therefore premiums are low and you want to not sell after bad periods because

[01:00:59] markets are self healing.

[01:01:02] When bear markets happen, valuations come crashing down and expected returns are now

[01:01:07] higher, that's when like Warren Buffett said, you know, don't find the market but buy when

[01:01:13] everyone else is panicked and sell when everyone else is free.

[01:01:17] Same thing was true with reinsurance which had three bad years, big deal, right?

[01:01:23] Now it's had great years and you're gone and you never earn those returns.

[01:01:27] You have to be able to stay the course and the only way to do that is to understand why

[01:01:33] you did it in the first place, write it down and sign it and say I'm going to stick with

[01:01:40] it.

[01:01:41] Sign it in blood.

[01:01:42] One last question here and it's kind of a hard pivot off of the core of this discussion,

[01:01:49] but we wanted to ask you this and I think you know because you've seen many different

[01:01:53] markets, a lot of different innovation in the investment industry over time and I'm just

[01:01:58] curious from your vantage point, where do you think a lot of the innovation is going

[01:02:06] to come from in the future?

[01:02:07] We talked about the crystal ball and not asking for any hardcore predictions, but I'm thinking

[01:02:10] things like direct indexing, you know, you're seeing more platforms that are getting investors

[01:02:15] access to private investing opportunities, sort of decentralization of real estate,

[01:02:22] slices of assets, you have like masterworks and investing in arts art now and so you're

[01:02:27] seeing technology is sort of, you know, bringing a lot of these opportunities to investors,

[01:02:32] but I'm just interested from your viewpoint.

[01:02:36] Where do you think things are going to get very interesting here?

[01:02:38] I think exactly what you said, the interval fund structure has changed the nature of

[01:02:45] the game also the big private equity firms have recognized that private equity with the

[01:02:53] capital call structure.

[01:02:55] So you commit a million dollars and then you don't know when they're going to call 50,000

[01:03:00] or 200.

[01:03:01] So you've got to keep liquid really doesn't work well.

[01:03:04] And so they're moving to create something similar to an interval fund, although it won't

[01:03:09] be public, it'll be an evergreen fund and you put your money in any time once a month,

[01:03:17] you can make an investment, maybe it's on between the 20th and 25th of the month.

[01:03:23] And then they have a redemption feature like monthly, you can get out 2% a month or 5%

[01:03:31] a quarter, whichever is the lower of those numbers.

[01:03:36] Like the REIT has today, that's Blackstone's real estate fund.

[01:03:42] You're going to see many more illiquid assets being liquidized at least partially for these

[01:03:49] interval fund structures to allow individual investors to invest in the same vehicles that

[01:03:56] the big institutional players and hedge funds have been doing for decades.

[01:04:00] And that's bringing prices down.

[01:04:02] So I think you're going to continue to see prices coming way down relative.

[01:04:08] I would never invest in any transaction that had a 2 in 20 kind of structure.

[01:04:17] Today you're seeing deals I've done some recently that were 1% and 10%, a 10% carry.

[01:04:26] And I've seen some deals that were even less than that.

[01:04:31] Full funds with fees as low as roughly 1% as well without any hurdles.

[01:04:39] And no incentive fees.

[01:04:41] So I think you're going to see a lot more of that as well.

[01:04:46] Larry, oh, he's super solid, always objective, thoughtful, and we really appreciate you coming

[01:04:51] on with us and sharing your wisdom with our audience and happy holidays to you and your

[01:04:55] family.

[01:04:56] Thank you.

[01:04:57] Thanks very much, Justin and Jack.

[01:04:58] Glad to be here.

[01:04:59] Hopefully we can help get investors more comfortable so they can add these other assets to the

[01:05:05] portfolio.

[01:05:06] And in my book, Reducing the Risk of Black Swans, which I heard them all to read, we

[01:05:12] show how adding these alternatives greatly improves your odds of success.

[01:05:18] You run money, call those simulations.

[01:05:20] You'll see the odds of not running out of money go way up because of those low correlations.

[01:05:27] It reduces the potential dispersion of outcome.

[01:05:30] Best example I can give you in 2022, every single one of my alternatives was up while

[01:05:37] stocks and bonds both got crushed and doubled into losses.

[01:05:41] So my portfolio, net was only down or it was about flat as actually it was up slightly

[01:05:48] where most people had severe losses and maybe many of that caused many of them to panic

[01:05:55] and sell because they were afraid that the market could get a lot worse.

[01:05:59] I think it actually helps you stay the cost because your portfolio volatility will go

[01:06:05] down and that's key to avoiding sequence risk.

[01:06:09] Thank you, Larry.

[01:06:10] Take care.

[01:06:12] This is Justin again.

[01:06:13] Thanks so much for tuning into this episode of XS Returns.

[01:06:16] You can follow Jack on Twitter @PracticalQuant and follow me on Twitter @JJCarbono.

[01:06:22] If you found this discussion interesting and valuable, please subscribe in either iTunes

[01:06:27] or on YouTube, or leave a review or a comment.

[01:06:30] We appreciate it.