Show Us Your Portfolio: Bob Elliott

[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. Justin Carbone and Jack Forehand are principles of

[00:00:10] the Lydia Capital Management. The opinions expressed in this podcast do not necessarily

[00:00:13] reflect the opinions of the Lydia Capital. No information on this podcast should be construed

[00:00:15] as investment advice. Securities discussed in the podcast may be holdings of clients of the

[00:00:19] Lydia Capital. Hey guys, this is Justin. In this episode of excess returns, Jack and I welcome back

[00:00:22] Bob Elliott, co-founder, CEO, and for our audience and also us to sort of learn about how you view and manage your personal portfolio. And I think the conversation today, it's going to be closely aligned with what you guys do over there at Unlimited Funds in terms of running and building investment strategies.

[00:01:41] And so I think this is going to be to each other because in a lot of ways, being in the asset management business, both originally being at a hedge fund and now running my own business means that I have

[00:03:01] significant, highly concentrated,

[00:03:03] and somewhat volatile exposure to what happens

[00:03:07] in the financial decisions at the very worst time. So I love this idea of trying to construct a portfolio that can grow, but you don't have to be overly worried about, for sure. Yeah, I mean, I think there's,

[00:04:21] I don't know if you read that work

[00:04:23] by some academics who are suggesting

[00:04:24] that you should just be like long-only stocks,

[00:04:26] and that's it. in limiting or moderating downside risks. And particularly if you have a volatile income, you don't want to be taking a lot of chances on your savings. One thing you want to know is that the savings will basically be there when you want it to be there, regardless of what exactly is going on in the financial markets. And this also, I think, ties in to some extent

[00:05:40] to this next question, which is about retirement.

[00:05:42] Because I would think that in retirement,

[00:05:44] this type of strategy that we in terms of building a savings portfolio for that retirement point, is more about, you don't know when retirement is gonna happen. And the reality is you don't really know when any big life events are gonna happen.

[00:07:01] I mean, you could guess that your kids are gonna, you know,

[00:07:04] become 18 and then go to college

[00:07:05] and you don't have to pay for it.

[00:07:07] But what you can't predict necessarily that uncertainty, you know, consistency matters a lot more than end return. I love by the way, the word the fact that you're using the word savings, because it just makes you you know, when you talk about a savings portfolio versus an investing portfolio, you think about it differently. You think about like, I want to protect my savings, I don't want to lose the money. So I like that reframing in terms of how people think of their

[00:08:20] portfolios.

[00:08:22] Yeah, if you're gonna, if you're gonna, I think all of us who

[00:08:25] are in the investment management stuff, you know, in something that you can stick with over the long-term that has the potential to produce a good return for you. Yeah, and it's almost, you know,

[00:09:41] it's almost better to just,

[00:09:43] to have the two sets of accounts

[00:09:47] in totally different platforms. So do whatever you want to do with your long-term savings account. You have to sit there and have it checked on your behavior, frankly, to limit or slow the amount of times that you're engaging with that. Because the best managed portfolios on the savings side are ones where you have a clear game plan that you can stick to, and one in which you actually stick to that game plan.

[00:11:00] And don't divert from it meaningfully, given the flavor of the day or the macroeconomic

[00:11:06] environment. following inflation, which are stocks and bonds, have done the best and make up the core portfolio that most investors are holding at any point in time. And so the 60-40 portfolio is, there's nothing magic about the 60-40 portfolio. It's in a lot of ways just the optimized portfolio for the recent experience, and when

[00:12:23] I say recent, I mean like the last% and below 0% across the developed world. If you look across the developed world, across the last 100 years for all the major developed world economies, it happens about 35% of the time, that you have either extreme inflation

[00:13:43] or extreme deflation. And start to think about a wider range of different outcomes than just the ones in the last couple of decades. Before we talk about the details of the portfolio, I want to ask you about Bridgewater because you had the opportunity to work there. And they're very well known for a very thoughtful process in terms of how they construct portfolios. And I was wondering, what are the biggest takeaways you took from that in terms of how

[00:15:00] you think about building your personal portfolio? you know, parabolic move and are like, God, I wish I put 100% of my portfolio into Bitcoin. But like that, but maybe Bitcoin succeeds and maybe Bitcoin fails. Maybe goes up, maybe goes down. The point is that you want to be in a position where whether you're right or you're wrong, you're still here to. The biggest risk to any investor is an inflationary environment. And the reason why that is, particularly any 60-40 investor, and the reason why that is it's a period of time where your long-term costs are going up and where those assets

[00:17:42] that perform poorly in a higher inflation of assets, like stocks and bonds and commodities and gold, and balances that allocation based upon whether or not, based upon the macroeconomic environment. So you're not particularly exposed to one macroeconomic environment versus another. So if inflation is high or low or growth is strong or weak, you're balanced to all those

[00:19:04] different outcomes. percent track record of adding additional return that is diversifying to your overall portfolio. So you take those four building blocks, risk parity, inflation tilts, trend following and diversified alpha, and you put that together. And the basic idea is returns that are similar to what you'd get in the 60-40, which is your

[00:20:20] baseline, but ones that have about half the monthly volatility and meaningfully lower

[00:20:25] dry. bond index. Well, stocks have a lot more volatility than the bond ag. And as a result, essentially, the typical 60-40 portfolio is like 98% correlated to the stock market. So who cares? You're not getting anything out of your bonds. That's the problem with capital allocating is because the bonds just don't matter in

[00:21:45] the context of, you know, having

[00:23:00] these types of assets in a portfolio? It really does not matter that much over a 30 or 40 year time frame. It doesn't make any difference. So in terms of what's underneath the hood of the different asset classes, how do you think about that? In terms of you're talking about not wanting to pay attention to it that much. So do you just buy like index mostly stuff on the equity side? How do you think about that idea? Like are you factors or what's underneath on the equity side?

[00:24:24] Well, I mean on the equity side, just index features is fine.

[00:25:22] is domestic and all sorts of different things. And over a 40-year time frame, it doesn't matter.

[00:25:25] That is a lot more that you're balanced

[00:25:27] and that you behave consistently with it

[00:25:30] than it does whether you're getting

[00:25:33] into the details of these factors or those factors.

[00:25:36] Can you also dig a little bit more

[00:25:38] into the diversified alpha thing?

[00:25:39] One of the things people always say about alpha

[00:25:41] is it's very hard to find.

[00:25:42] And people who have it lose it over time.

[00:25:44] So how do you think about finding consistent sources

[00:25:47] of alpha that they're generating is meaningful relative to just a plain index fund. So you're not going to spend much time looking for little pieces of alpha or basis points of alpha.

[00:27:00] You want something that's meaningful.

[00:27:02] And so the good thing is there's key, you know, not getting overweight on any particular strategy or manager. Yeah. And to your point, like if you were trying to build this portfolio 10 years ago, it would have been much harder. You know, there's so many great things that have been done, like what you're doing, what other people are doing in the ETF space to allow these types of things to be available to your average investor. Yeah, yeah. And I think there's,

[00:28:21] you know, you go out and you can, you You know the reason you're doing what you're doing, and you understand that some of the assets will be a drag during a period where the 60-40 is doing really well. But how do you think about that from the perspective of the average investor? Because that's something, we talked earlier about how they panic when their portfolio goes down. The other time they panic is when they're at the cocktail party, and their friends are

[00:29:40] all running with their stocks and bonds, and they're not.

[00:29:43] So I'm just wondering if you have any in an advisor seat and concerned about how much you're tracking relative to the 6040, one of the things you can do is start to think about how can you tilt your

[00:31:01] portfolio to get in this direction or clients portfolios to get in this direction, use the lessons that this type of allocation shows to incrementally improve your client's portfolio while not introducing too much business risk. Can you talk a little bit more about how you think about the trend following bucket, like what goes on under the hood there? Yeah, for this work that I did here, the trend following is a very slow moving, it's just

[00:32:23] a 12 month that trend following

[00:33:42] diversification.

[00:33:43] So lots of great stuff that's out there.

[00:33:44] I mean, there's been a proliferation of these products

[00:33:47] is probably a dozen or so that are out there much lower taxes and much lower fees, you take 80% or 90% good all day long. Because what you care about is not the perfection of the gross of fees, gross of taxes, return. What you care about as an individual is the net of fees, net of taxes, outcome.

[00:35:00] That's what you care about.

[00:35:02] And not having to worry so much about how good does it test in

[00:36:20] the back history.

[00:36:21] What you really care about is how't have any edge in terms of figuring it out. And so more diversification is better than less diversification. And just because the US has outperformed over the course of the last 10 years, or 15 years doesn't mean that it will

[00:37:42] outperform in the future. I've been curious, before I hand it back to Justin, outside of your public portfolio, is there anything else major you do, like, you know, whether it be venture capital, private equity, real estate, is there anything like that you do outside of your public portfolio? Not really. And And here's the dark reality is, those managers don't have magic. Right, they're constrained by the same constraints that exist in the public markets. And so, if you wanna talk about something that's gonna be easy to deal with,

[00:40:21] and also help deal with that question of,

[00:40:23] you don't know the day in which you need your savings,

[00:40:27] constraining yourself or keeping yourself a small slice given the magnitude of the adoption that has existed, but it's certainly not something that would likely be a meaningful component of a portfolio anytime soon, in part because its volatility is so extreme. So on a cash basis, so as not to take on too much risk, you'd be talking about tenths of

[00:41:40] basis points of allocation to cryptocurrency or Bitcoin in order to keep the same sort

[00:41:48] of balance in the specific, I know there's tales of Vanguard,

[00:43:02] being very proactive in excluding the Bitcoin products, Coinbase, while they're a beneficiary on

[00:44:21] the custodian side, with all these ETFs, and I don't that's strictly good for the consumer. There's no question about that. How do you view home ownership in the context of your overall net worth and personal portfolio? Home ownership, you know, I think you gotta live in a place and it's not a savings asset, it's a consumption asset.

[00:45:43] And so, you know, you live in a home

[00:45:47] and you should be prepared for it to go up to do much for you. So, you know, I think about it like with an house and that's where I live and I don't think too much about it. Too much more about it. The one point that I sort of that I've been thinking about in the last like year or so is, you know, like when I bought and then refi'd, I don't know, like I have like a 3% mortgage or something like that.

[00:47:03] And you know, where rates are today,

[00:47:05] it's like the idea of buying leverage is necessarily what you want to do in order to create long-term wealth. And more often than not, leads to buying houses that are too big relative to what you can afford.

[00:48:20] And so I think in a lot of ways,

[00:48:23] most savers would be better off buying a house

[00:48:26] that is considerably smaller We ask this question and a lot of times we get just very different answers. So when you think about your kids and your legacy and leaving them something or nothing, how do you kind of think about that? Well, I think long term what builds, you know, long term life satisfaction is to

[00:50:44] children to drive their own success. And that structurally leads them to actually,

[00:50:48] over the long term, lead less fulfilling lives

[00:50:50] rather than more fulfilling lives,

[00:50:52] even though in the moment it might feel

[00:50:54] like it's better for them.

[00:50:57] And so in that context, I think operating in a way

[00:51:01] that says it's up to you to create the life

[00:51:06] you wanna create, predominantly. yourself, the motivation may not be there. So it's an interesting balance and there's no answer to this probably, no matter how you look at it, people just try to figure out where they are in the spectrum, but there's really no correct answer to this. Yeah, I mean, I think the key thing is there's always that challenge of the immediate relative to the long term, because the thing

[00:52:20] that's going to matter when your child is at 60 or once read this book. It was called the $64 Tomato which is a guy basically took all the all-in costs, this person who's lived on a sort

[00:53:40] of hobby farm in Hudson Valley. He said he took the all-in costs cost of land and the financing for growing things is something that tastes totally different and much better grown out of the garden than out of the supermarket. And so it's an odd collection of things. Tomatoes are obvious, but also things like potatoes, which you wouldn't realize are radically different, homegrown rather than out of the grocery store.

[00:55:03] And then for a long time, even as a little kid,

[00:55:06] I've always enjoyed growing pumpkins.

[00:55:08] So that's another thing. and why it's on your table is a big part of it, particularly around how the composition of the fruit, so to speak, is very different. So like, you have starch decay and sugar decay in potatoes as they get stored. Or tomatoes, interestingly enough,

[00:56:20] if you look at the composition of tomato

[00:56:24] in terms of its scent and doing that at Thanksgiving is that, you know, family's there to see whether or not

[00:57:40] it's succeeded or failed.

[00:57:42] Ah, nice.

[00:57:45] Are they kind to the fails?

[00:58:45] like to ask all of our guests sort of a standard closing question and for the Show Us Your Portfolio episodes. And I think, you know, you've probably hit this and hit this many times throughout the

[00:58:50] discussion. But if you could impart one lesson to your average investor around your personal

[00:58:56] approach to investing, your simple investment game plan, what would that be?

[00:59:01] I think the main thing is just have the humility to recognize that you don't know what's going to