Show Us Your Portfolio: Andrew Beer

[00:00:00] Welcome to excess returns where we focus on what works over the long term in the markets.

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

[00:00:07] long term investor.

[00:00:08] Justin Carbon, now in Jack Forehand, are principles at the Lydia Capital Management?

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

[00:00:13] ability of capital. No information on this podcast should be construed as investment advice.

[00:00:16] Securities discussed in the podcast may be holdings of clients at the Lydia Capital.

[00:00:19] Hey guys, this is Justin. In this show's portfolio episode, Jack and I sit down with Andrew Beer,

[00:00:23] co-founder of Dynamic Beta Investments and co you think about your own strategies at the personal level and what investors can hopefully learn from that. You know, very much appreciate your time. Welcome back to Connecticut, by the way.

[00:01:40] Thank you very much.

[00:01:41] Great to be back.

[00:01:42] So we always like to start out like kind of economics be damned. But I think more broadly, I've also been, for 25 years, always had my own businesses. And they've always been startups. And so a lot of the capital that I've had has gone into what I do every day. My current business, DVI, I funded it for 10 years.

[00:03:02] I paid myself and everybody else to come to work for 10 years.

[00:03:05] And probably at the end of year four, a know, maybe I know there were a long way away from that. But, you know, thinking about retirement and what you want your retirement to look like, I guess it's being happy and fulfilled and whatever you're doing. But what do you ever do you ever think of that far out? Or are you not really just thinking that way? I don't think I better know how to retire. I think like it's, it's, you know, my dad is 89 and he's an, he's an architect.

[00:04:25] You know, when he was 84, he was still traveling all over the world.

[00:05:23] 10 years out or 20 years out. I want, you know enough to be able to

[00:05:29] Support myself comfortably if I if I can't work or I want to do something very different than what I'm doing

[00:05:35] I want to make sure there's enough for my wife if I pass away suddenly I want to make sure there's enough for my

[00:05:37] Son and daughters that they're taken care of

[00:05:44] But again not to the point where where I would want them to be in a position where they don't have to work for their whole lives

[00:07:00] Yeah, with with Ken Griffin in there And, you know, I've had this long running debate about equities, bonds, asset allocation, all the different tools that people try to maximize returns over time. For me personally, I'm not sure it's worth the effort to, I mean, years ago I used to do a used to have a much more complicated personal portfolio.

[00:07:04] I didn't find that it added asset class that I think Warren Buffett got right. When he said, you know, the S&P 500 is not a... There's nothing passive about the S&P 500

[00:08:22] because you've got 500 really smart, really hungry,

[00:09:24] a decent argument today that bonds are useless from a diversification perspective.

[00:09:31] Here's the argument. And by the way, I apologize for my throat. We've been playing viral pingong in my house. So I'm at the last stages of this. So I put something up on our website called,

[00:09:40] our website is www.dbi.co. And I put something up called the Great 60-40 Headfake.

[00:10:45] really well, which didn't appear risky. And then if you put them together, they were moving against each other. They were inversely correlated, remote the decade. So the result was, if you

[00:10:51] look at a two year rolling basis, the volatility of a 60 40 portfolio got down to 4% at one point.

[00:10:58] Some of the lowest in history, I think, right?

[00:11:00] Exactly, right? It's I mean, it looks perfect. So, and by the way, so we we had a great volatility. And so when you look at diversification, most of the 80, I guess 80% of the diversification in a multi-asset portfolio was driven by the inverse correlation between stocks and bonds. Because if you say, I'm gonna diversify from equity from the S&P of 100 into international stocks,

[00:12:22] high correlation, emerging marketsiatures was going up. By the way, commodities, it's commodities and miniatures of the past two years. And if you look at these charts that I posted, it's basically to shows this. In 2022, commodities and miniatures go up, everything goes down. 2023, commodities and miniatures are down a little bit,

[00:13:42] everything else is up.

[00:13:43] But if you look at that two-year period,

[00:13:46] miniatures and commodities did much better. It's amazing because made his futures are going up when other stuff's going down. And because they're fairly consistent, you know, it adds in a lot. It has in a lot of ways to even something like the permanent portfolio, which is much more diversified than stocks and bonds. If you if you have a statistical bone in your body, it's obvious. Right. The challenge with managed futures is

[00:15:01] is messaging.

[00:15:03] Why is it there?

[00:15:05] How do you explain it when it's down?

[00:15:07] You know, how do you explain?

[00:16:06] Basically, if this is something, it's for it to be useful for a typical advisor, it's not just about maximizing sharp ratio.

[00:16:08] Because I like to joke that I've never met anybody who hugged their financial advisor

[00:16:11] for raising their sharp ratio.

[00:16:15] You hug them because they protect your capital when you need it protected and they make you

[00:16:18] more money over the time and they do better than you would do for yourself.

[00:16:24] What I think is though that I think a lot of different managed future strategy. So, you know, but, you know, but like sort of the baseline managed future strategy, what would be like the long-term cagger and risk statistics, would you say? Well, the last time I ran at, which was before a couple of months ago, if you looked at the long-term return, so the date on managed,

[00:17:43] date on any hedge fund strategy starts to get really bad before you,

[00:17:46] before you go through your early 2000s.

[00:18:41] and they had positive correlation. So, and the other thing is that it's not

[00:18:45] a very risky strategy, right?

[00:18:46] So to get that return for stocks,

[00:18:50] you have to endure these 40% drawdown.

[00:18:52] Then you come, you know, then you hold onto it

[00:18:54] with a white knuckle grip and you come climbing back.

[00:18:56] And then at 20% drawdown, you come back.

[00:18:58] Managed Futures has a series of annoying 10% drawdowns,

[00:19:02] but not much more than that.

[00:19:04] And it's basically%, the world is going to hell, equity is going to drop again from here. If it goes down another 20%, it has a really material impact on their lives. So selling at that point, I think people like to characterize it as international decision. They just don't have a long-term focus. I'm always a little skeptical of these kinds of discussions of heuristic bias. I think they can

[00:20:21] get condescending very quickly. I think the reason some of these people do it is because

[00:21:25] They're not built to change it other than at the margin. They may sell some bonds, they may cut some duration here, but most guys, it's, you know,

[00:21:31] instead of being done 19%, they're trying to be done 18%.

[00:21:35] And so the thing about bandit futures and strategy, the reason it has this, you know,

[00:21:40] incredible source of alpha, these punctuated periods when it does so much better, is because

[00:21:45] it becomes theistic macro. You know, it's that they get there through futures contracts, they get there through quantitative models, but the core underlying idea is every now and then nimbleness is really valued.

[00:23:00] And so the strength of the wealth management industry by design is to be steady and move 20, okay? With that 20% allocation, you're down 12, right? You're not up, right? You're not it's it's it's it's it's lowering your drawdowns. The bounce back comes there. September of this year, well, not September, but December 31, you're having the same cocktail party.

[00:24:21] And he's talking about these windfall profits that he made in the last eight weeks of the You're it doesn't make that much of a difference to their portfolio. They're still down, but they're down less. You point to it and you can say, we brought something of value that you wouldn't have otherwise found. It has helped you to weatherstorm. Yes, the guys at Vanguard did, you know, and, and robo advisors did worse than we did. But, um, have a very clear competitive advantage, I aim for average. So I start with an terribly run companies. Right, why was the value factor a thing? Because there were sleepy companies with lots of assets,

[00:28:23] terrible management teams, sleepy boards, and a bunch of middle-wing companies. This was a period of time when you point to like, wait, they built another factory. They haven't made money on the other four factories that they have. Oh, I'm sorry, it's in the hometown of one of the board members, right? It was a different one. Since then, what the LBO business kicked off was ever greed is good in Wall Street.

[00:29:43] Green, corn deco.

[00:29:44] Corn deco.

[00:29:45] You know, like, oh my God, you were the one making the capital allocation decisions. You know, either you're a value guy saying this terrible company can't get any worse, they're going to come back. You know, you're a hedge fund who says, ah, this terrible company brought it a new CEO. He's going to clean up and change it. Okay. Now we're, that's an event driven situation. Um, you know, or, um, you know, the market's got ahead of this, this

[00:31:01] company, it's going to, it's going to fall back down to earth.

[00:31:03] It's going to revert to the mean.

[00:32:05] the same thing happening, the wind is at your back to make money over time. And you're entrusting that the people who are running these companies

[00:32:09] were the right people and they're going to figure out the right decisions to make over time.

[00:32:13] And they've just like a fund manager was all of his money tied up in his own fund.

[00:32:18] These guys have an equally strong incentive to get it right.

[00:32:21] And that's what Warren Buffett said.

[00:32:23] But they asked because Warren Buffett said, what was your money? investment banking. Guess where the smart people are now? And not investment banking. No, they are. I mean, the brains in a place like Google, you know, is just and they're hungry, rapacious capitalists. So again, so my, you know, my sort of big, big uber view is that, um, is that in general, being invested equities is it's,'s a, there's a, a perfect, if I tweet, that something is bad, buy it. Okay. It's like, um, no, look, I, you know, I grew up in a world in the hedge fund industry where people were really humble. I mean, it's, it's people, the best guys that I talked to in the

[00:35:03] hedge fund, the private equity industry spend much more time talking about things where they forward and still get slammed. And so my general view is that I've got no edge. And there are people who I think are great on the asset allocation side. They have a little bit of an edge. But but my time is really spent. My time is best spent trying to grow my private business. You know, eight, an hour spent trying to grow my private business is going to be much

[00:36:21] more valuable incrementally than an hour trying to figure out whether international

[00:36:25] stocks are going to outperform US stocks over the next 10 years because I won't, I won't get.

[00:37:29] as low as they did. It became pretty clear to me. Again, I don't mind making, I will make market calls, but it's got to be at a point of extremes. When I see people buying

[00:37:37] 10-year double-a rated corporate bonds, and when I read the'm saying it out loud means, you know, correlations are probably going to infer tomorrow. But, um, but the, my belief is that stock and bond correlations are likely to remain positive for the next decade. Um, how do I support that? It, it's nothing more complicated than if you look at stocks and bonds over very, very long periods

[00:39:00] of time. Most of the time they're positively this. But from a diversification perspective, if they're moving in tandem, I'm going from something where I'm getting a dollar of risk, and I'm adding, and I'm taking where I can get a dollar of risk and a dollar of return,

[00:40:23] and I'm adding it to something where I'm much as it has. But my reasoning around it is kind of simple. I think spending is addictive. It's much easier when you get checks coming in for the government during COVID to decide you want to add an extra vacation than it is to make the decision to cut the vacation

[00:41:45] next year. One true free law, a diversification or in finance diversification is the one true free lunch or something, right? If you have the magic of having two things that are non-correlated is your risk goes down more than your returns going down. Going back to the kind of humility arguments,

[00:43:02] we could have gold soaring for the next five years

[00:43:06] and miniatures not doing much or vice versa. bad either way. Private equity and private credit are almost like the Frankenstein monsters of the allocation world. These have become institutional asset about unlevers returns They started leveraging those returns to get them back up. So, you know in general, I think when you're evaluating any of these things

[00:45:46] You have to have you should, these institutional investors and pension plans. It's not a trick. Nobody wants it more than the pension plans. And I've talked to my friends in the private equity space, I'm like,

[00:47:04] guys, do you really think you weren't down enough money into. And so, you know, I was the guy who would spend like six months looking at something and then claim victory because we could put a few million dollars into it. But, but I think that is where the value, if you can invest in space, that is what the value is, but as an advisor or as fiduciary, it can be very hard to do that because if something goes wrong,

[00:49:27] and retained an equity interest. At some point, they'd gotten big enough that one of them ended up selling. The other one had a great 2008, but we had, we candid investors like Swiss private banks

[00:49:35] and family offices and others who were desperate to get money for any of the whether they could.

[00:49:43] So we waived all of our redemption provisions to allow people to get their money because we're up into first time. Like someone's never seen that type of, I mean, maybe you reinvested it right into the next business, I don't know, but I'm wondering like how you sort of approached that and handled that and what you learned from going through that experience. So I did, I'm a terrible example because money has never been

[00:51:02] nearly as important to me as it should be.

[00:51:04] I started a school.

[00:52:05] tomorrow. I wasn't like, I wasn't one of these guys who was designed to go into the investment management industry like at age 12 thinking about where I was going to get

[00:52:08] a summer job. I mean, I just I sort of fell into it as I was graduating from college

[00:52:15] because I thought I knew a lot of smart, interesting people who were doing it. And then

[00:52:19] I got very excited about it and I've been Cut it in half because you're taking to something doing something stupid

[00:53:42] like starting a school.

[00:53:43] Like those long-term effects on compound over time. life decision that it affects how they spend, how they think about things, becomes their overall philosophy of life. For whatever reasons, I didn't have that wiring. Yeah, well, I think it's it, but it's a very cool and amazing thing that, you know, it wasn't like you had the liquidity event, you gave them a $100,000 donation and then walked away.

[00:55:00] I mean, you were involved in that school and maybe you still are.

[00:55:03] I'm not sure. work with a financial institution to accelerate supplies to places in the world that needed the most. You know, the first guy that I worked for was guy like Jim Wolfenson, who was ended up becoming chairman of the World Bank. He was this incredible guy, this renaissance man in the business world. And one of the pieces of Vice EKB was like, don't wait to get involved.

[00:56:25] Don't wait to be chair. And, but she was also a radical, like the last 20 years of her life. She was working in AIDS and methadone clinics in the South Bronx in area. And she was living in a tiny apartment. That's where she drew value. And so I do have part of that in me. It's, it's not, you know, and I, I'm remarried now.

[00:57:40] And my wife is somebody who is, as both feet on the ground and, and I think if,

[00:57:46] but you know, that's, that's, that's a non get to charity, but people tend to wait to do things they want to do in their lives and then they get to be retired when they can't do any of it and they've got all this money to do it. So it's like people get it a little bit wrong sometimes in life in terms of not doing the things now and in what we're like always saving for the future. Oh, so what I'm what my friends is mocking is I have a friend who's a billionaire. He said you did it. You did it wrong. Don't give away your money till you're a billionaire.

[01:00:02] is you don't have Bill Gates's. You know, that's not where a Bill Gates at age 18 or 19 or 20

[01:00:06] is thinking, I'm going to go run a nonprofit.

[01:00:09] It's...

[01:00:10] But the fact that he's doing it now,

[01:00:12] the fact that the Buffett says,

[01:00:14] you know, this is the...

[01:00:16] this, the goat of charitable giving.

[01:00:19] Like, I remember on the education side,

[01:00:22] after I started the school,

[01:00:24] I kept getting asked to, you know,

[01:00:26] participate in these panels and stuff in education and... Arnold in Texas who we had the pleasure of investing in in one of the businesses. One of the greatest traders you could possibly come across was worth a couple billion dollars, you know, probably by the time he was 35. Um, you know, that guy is turning his attention to trying to solve real societal problems. So whether they give it away or they hold the foundation or how they do it, it's, it's,

[01:01:43] I think that charitable ethos is something that we will be, we'll really change America

[01:01:48] in the next 20 years. find a terrible investment in two ways. One is, is it bad economically? And is it bad in terms of my time? Right, so one of the lessons I took away, I've had businesses that didn't succeed as well as the ones that I have, but with all of them, I tried to kill them fast because I would see these family offices who would invest in something,

[01:03:01] small investment, 2% of their portfolio,

[01:03:04] and it's 30% of their time.

[01:03:06] Try to figure out what to do with it. super, right? And so, so, um, so to me, a decision that I've made to try to be smarter over time, just in terms of time and everything else is, um, for the foreseeable future, I'll rent. I'm perfectly happy renting. It's more flexible. It may not be economically as sensible

[01:04:20] as buying a home that's going to appreciate and value really like. I want to be in for 10 years because every time I would buy and sell houses, I would always think like I'm going to be there for 10 years or 20 years.

[01:05:42] And most of the time I'd be selling them and I'm paying drives great comfort from that. I look at it and think it's an old house that requires a lot of work. It's a constant headache. And so it's just a difference. I'll tell you a funny story without funny, but a nice anecdote about Eisenhower. Incredibly organized. And he would sit down every morning very, very methodically and write down

[01:07:03] a list of things he had to do. And he of those decisions for yourself, which doesn't apply to a lot of people, but it's I've learned to try to think really hard about priorities and making them all fit together. Now I know I'm going to tell my wife that I'm taking the Eisenhower approach to the home improvement project. We're going to pick up the top five or get everything else. It's not going to go well, but I may take a shot at it. So as we wrap up, we always have a

[01:08:23] standard closing question on these, which is if you way. Because I started in a different place, my job has been very different the business that I've ended up pursuing. But I think that's

[01:09:44] at some point you're going to be 55 or 65 or retire in. And'm easy to find. I post a lot of stuff in LinkedIn. He made this find interesting. I'm also on Twitter if you're still bouncing around that area, but I'm not on as much because it was giving me a headache. But also, we have a website called it's www.evi.co.noam. And we publish our research and other stuff on it. So if you're interested in the stuff

[01:11:03] that we're doing, that's where you can find it.

[01:11:05] Well, thank you, Andrew. Really appreciate it.