Show Us Your Portfolio: Jared Dillian

[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 Carbonneau and Jack Forehand are principals at the Lydia Capital

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

[00:00:13] Lydia 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 of Lydia Capital.

[00:00:19] Hey guys, this is Justin. In this episode of Excess Returns, we do a show-to-report

[00:00:23] portfolio discussion with Jared Dillion, author of the popular investment newsletter,

[00:00:26] The Daily Dirtnap, and author of the new book No Worries Had to Live a Stress-Free Financial Life.

[00:00:31] We talk to Jared about how he invests the importance of diversification and his average portfolio.

[00:00:35] We get his views on debt, housing, leaving money to kids, and much more.

[00:00:38] The episode blends a show-to-report portfolio set of questions with lots of ideas and concepts

[00:00:43] that Jared outlines in his book. As always, thank you for listening. Please enjoy this discussion

[00:00:48] with Jared Dillion. And just one more thing before we start. We're very excited to

[00:00:51] announce our first ever charity podcast day in conjunction with our friends at Spot Gama.

[00:00:55] On April 30th, we will host an all-day live broadcast on our YouTube channel

[00:00:58] to benefit the Susan G. Komen Foundation. We will interview 24 guests from 8am to 8pm Eastern Time.

[00:01:04] The guests will include many of the most popular guests we've had in the podcast,

[00:01:07] plus many other experts from the investing, macro, and options worlds.

[00:01:10] Mandy Constant will be kicking off a live stream as our first guest at 8am.

[00:01:14] To be notified when we go live, go to the Excess Returns channel on YouTube,

[00:01:18] click on the live link, and then click on Notify Me under the P&L for a Purpose Image.

[00:01:23] We hope you'll join us on 30th to support what is a great cause. Thank you so much.

[00:01:29] Jared, how are you? Thank you very much for joining us today.

[00:01:31] Good. Thanks for having me. Appreciate it.

[00:01:34] Earlier in the year, you published your new book, No Worries, Had a Little Bestress,

[00:01:38] Free Financial Lice. And there it is. We've got the book, little product placement. Awesome.

[00:01:45] You know, but I think the book is about, and we're going to talk about this,

[00:01:47] but the tactics and the decisions and the mindset that's needed for people to effectively deal with

[00:01:54] finances and their money and long-term wealth creation, and how I think a few decisions along

[00:02:02] the way can make a big financial impact for a lot of people. But I think what we want to do with

[00:02:09] you is take the opportunity to kind of talk about this in the context of one of the shows

[00:02:14] that we do, which is show us your portfolio, where we talk to people like yourselves that are in

[00:02:19] the market day in and day out about how they go about managing their personal portfolio and their

[00:02:24] philosophy, if you will, on generating wealth for themselves and their families.

[00:02:29] And so that's kind of where we're going to go. It's going to be this combination of concepts

[00:02:33] from the book, but also trying to pull out some things that you might do personally that

[00:02:37] I think you talked about in the book, but sort of maybe beyond that a little bit as well.

[00:02:43] So this is going to be good. And by the way, I just want to say the book is doing very well in

[00:02:48] the first 90 days. I was looking, it's got almost 500 reviews on Amazon and it's a 4.8 star,

[00:02:54] which is pretty amazing. I think that right there is a testament to

[00:02:59] that people are finding value from the book. So congratulations to you on that.

[00:03:04] Thanks. The book has been a big success and I want everybody to read it.

[00:03:12] It's funny, people buy it, but I wish I've sold millions of copies. I think the message is really

[00:03:20] relevant for a lot of people. Hopefully maybe this conversation gets a few more sold.

[00:03:27] So with these conversations, we kind of like to start about asking you about what your

[00:03:34] long-term goals and objectives are with your investments in your portfolio. And so when

[00:03:38] you think about that for yourselves, how would you sort of articulate that?

[00:03:43] Well, nobody should do what I do. I trade pretty aggressively. I have very concentrated positions

[00:03:54] and things at certain points in time, but I also have a portfolio that is truly, when I say

[00:04:01] diversified, I mean it's diversified. There's a lot of uncorrelated bets. And my goal is to

[00:04:08] make 10 to 14% a year in perpetuity. And some years are better, some years are worse.

[00:04:16] I've been off to a pretty good start this year. But like I said, my portfolio is x-rated,

[00:04:23] very concentrated positions, a lot of risk. I've been managing money for...

[00:04:30] Well, if you go back to the Lehman days, I was trading prop in 2007 and 2008. So

[00:04:35] I've been doing it for a while. And are the goals with the portfolio, I mean, do you think about

[00:04:40] things like retirement or leaving money to relatives or just having peace of mind with your

[00:04:50] wealth? Well, my goal is to make infinity. And my goal is to not retire. I have no plans

[00:04:59] of retiring. I've seen a lot of people who have retired badly, who have not taken advantage

[00:05:06] of the time they've had in their retirement. So I plan to work into my 70s, maybe even my 80s,

[00:05:14] and make as much money as possible. I don't have any kids. My wife is probably going to outlive

[00:05:21] me. She's probably going to live to be like 130. She's just in great physical shape.

[00:05:28] So, but it's all going to go to charity when we pass away.

[00:05:35] Let me just... You kind of took the... We always have a question about retirement,

[00:05:39] which you already answered. But I'm curious with your wife, do you... I mean, you're in

[00:05:43] the markets, you do this for a living with multiple different businesses related to

[00:05:48] the stock market and educating and people subscribing and paying you for your wisdom

[00:05:54] and knowledge. But is she interested in this stuff or not? Or is it mostly like 95% you?

[00:06:02] And then she's just there, kind of knows generally what's going on. I'm just curious.

[00:06:05] Well, she's absorbed a lot of it over the years. I've been working in finance since

[00:06:13] 99. So it's been 25 years. She's picked up on a lot of it. We actually... Like I said,

[00:06:20] in the book, we actually keep our money separate. So I have my pile of money. She has her pile of money.

[00:06:28] You know, she generally follows my advice on what to do with it. But we actually keep

[00:06:34] our money completely separate. So... What do you think the advantages of doing it that way are?

[00:06:39] Because you see people do it both ways. You know, you see some people integrate

[00:06:42] everything together and you see some people separate it out. Like,

[00:06:45] what do you think at a high level like the advantages and disadvantages of that are?

[00:06:48] Well, I think that we are all responsible for our own financial education. And you see a lot of

[00:06:55] relationships where you have a husband and a wife. And typically it's the wife who says,

[00:07:00] I don't know anything about money. And she throws up her hands. And she says,

[00:07:04] I'm just going to let my husband take care of it. And then the marriage goes sideways and

[00:07:08] the husband becomes abusive. And she tries to leave but she can't because she doesn't

[00:07:13] know where the accounts are. They're not in her name. And it just turns into a big mess.

[00:07:18] That's one reason you do it that way. The other reason you have, you keep your money separate

[00:07:25] is because it cuts down or eliminates fights about money, right? So if you have a joint account and

[00:07:32] everybody's contributing to the joint account, if one person is spending a lot of money out

[00:07:38] of the joint account, then there's this mental accounting that goes on. Like, even though

[00:07:45] the money is commingled, people keep track of what they put in. And then it turns into

[00:07:51] he's spending my money or she's spending my money. And then they get into fights about it.

[00:07:56] So keeping it separate just makes it a lot easier. Having said that, I know a lot of couples,

[00:08:02] most couples have joint accounts, most couples pool their money and it works out fine.

[00:08:08] So if it works for you, then keep on doing it. But if it's not working, then maybe try it my way.

[00:08:16] Yeah, that's such an important point. Like this whole idea of works for you is like

[00:08:19] so important in personal finance, investing everywhere. Like, what works best for people

[00:08:25] is often the thing that they believe in, the thing they can stick with,

[00:08:28] what works in their specific situation versus anybody else saying this is the exact way you

[00:08:32] have to do it. Yeah, I mean, you know, nothing in this book is really prescriptive. There's no rules.

[00:08:40] Like one thing you'll notice about no worries is that I don't have like 10 rules to do this or

[00:08:45] seven rules to do this. It's really more of a philosophical book. It's more about principles,

[00:08:50] you know? So and like you said, like if it works, then keep doing it.

[00:08:56] You mentioned two sources of worry in the book that you're helping people to deal with,

[00:09:01] debt and risk. And I want to take those on one at a time. First of all, in your life,

[00:09:05] how do you think about debt? Like what is the role of debt in your personal finances?

[00:09:12] I hate debt personally, and I hate paying interest, right? The concept of paying interest. Just for

[00:09:19] example, let's say you have a $3,000 mortgage payment and $2,000 is interest and $1,000 is

[00:09:26] principal, right? So really, you have a $2,000 a month mortgage payment because $1,000 is going to

[00:09:33] principal. And that's being allocated to the real estate portion of your portfolio. But you're paying

[00:09:39] $2,000 in interest. Are you getting any benefit or utility out of paying that interest? Is it

[00:09:47] fun to pay that interest? Right? Like, is that something that you enjoy doing? Like really,

[00:09:52] when you pay interest, philosophically, you're contributing to bank profits, right? And I'm not

[00:09:59] one of these anti-bank people. I don't dislike banks, banks can help you achieve a lot of goals.

[00:10:05] But I don't want to make banks any more profitable than they already are.

[00:10:09] My last, the last mortgage I had, the house, I'm actually moving very soon. But on the house

[00:10:15] that I'm living in, I paid off the mortgage in three and a half years. And in the three and a

[00:10:21] half years that I had the mortgage, I paid $70,000 in interest. And I said to myself like,

[00:10:28] what could I have done with that $70,000? You know, I hate paying interest. But your original

[00:10:35] question was about stress. Debt is a source of stress. If you have a lot of debt,

[00:10:40] whether it's credit card debt or student loans or car loans or mortgages,

[00:10:45] it hangs over your head and it causes you lots of stress.

[00:10:50] Yeah. And I think this is a big time where you have to separate sort of the numbers

[00:10:53] from your personal situation. Like I know a couple of people who've paid off their mortgage

[00:10:55] and just what was lifted off their shoulders was huge. You know, you can get the finance

[00:10:59] types like me, it'll be like, well, you know, you have a 3% mortgage and you can earn 5%

[00:11:03] short term. Why would you possibly pay off the mortgage? But you can't quantify that

[00:11:07] part of the equation. No, and you know, there's been a couple times in my life where

[00:11:12] I've owned my house free and clear without a mortgage. It is the best thing in the world.

[00:11:17] Owning your house free and clear, you own it like there's nothing bad that can happen.

[00:11:24] You could get into a car accident, you can have $2 million in medical bills,

[00:11:29] you own your house free and clear. Nobody can take it away from you. It's the best

[00:11:33] feeling in the world. How do you think about debt as it relates to cars?

[00:11:39] That's something there's a lot of debate about as well. You know, some people will say there should

[00:11:42] never be any debt related to a car. It's a rapidly depreciating asset. You should just

[00:11:46] buy cars you can pay for. Other people will say, you know, I enjoy having a car,

[00:11:49] like I'm willing to have a pain in like how do you think about that?

[00:11:52] Well, there's a saying that you should never have debt on something that can rust.

[00:11:57] I never heard that. It's a depreciating asset, as you said. I mean, the problem is,

[00:12:08] is that the average new car in the United States is $46,000 and 90% of cars are financed

[00:12:16] in the US. Only 10 are paid with cash. It's very hard to pay cash for a car,

[00:12:21] especially if you're starting out, you're in your 20s, you're in your early 30s.

[00:12:25] Maybe you can afford a car that's $15,000 or $20,000. Then you're looking at used cars

[00:12:33] and then you're getting into the hell of mechanical problems and cars that smell like

[00:12:39] cigarette smoke and stuff like that. So, you know, I'm look like the reality is,

[00:12:46] is that you're probably going to have to have some debt on a car. And the goal is to get

[00:12:52] a five-year loan, not an eight-year loan, but a five-year loan and pay it off as quickly as possible.

[00:13:00] Yeah. And you mentioned in the book, you know, you're kind of like me. Like I tend to be a very

[00:13:04] like frugal person, but you evolved over time, right? You're not saying like people shouldn't

[00:13:08] have a nice car. I think you evolved to have a nice car over time. You know,

[00:13:12] you're just saying like to do it in such a financially smart way.

[00:13:15] Yeah, there is actually, I didn't write about this in the book, but there's a rule of thumb

[00:13:20] that says that you can buy a car and this is kind of a draconian rule, but you can buy a car

[00:13:27] that costs 10% of your income. Okay? So if you make $800,000 a year, you can buy an $80,000 car.

[00:13:35] I think that's a little strict. I think 15 or 20% is probably a better number. But that just

[00:13:41] gives you a general guideline of the kind of car that you can get. And look, if you're making

[00:13:46] seven figures, then you can buy a super car. You know, for sure, you can afford it.

[00:13:54] I want to ask you about this idea of getting the big decisions right because one of the things

[00:13:57] I hate that you see on Twitter all the time is like the person that says, you know, well,

[00:14:00] your coffee's $4.43. Oh my God. If you didn't buy the coffee and it compounded over 30 years,

[00:14:05] you would have $200,000 or something. Like, and I think that sort of just loses track about

[00:14:10] what's important in life. So how do you think about this idea of like these small decisions

[00:14:14] versus the bigger decisions? I mean, the big stuff, you know, Americans, we have this

[00:14:21] perverse obsession with like little stuff that doesn't matter. You know, like making your bed.

[00:14:28] I don't make my bed in the morning. I know it doesn't matter. What's the point? I'm just

[00:14:32] going to get in at night and it's like five minutes out of the day that I could be spending

[00:14:36] doing something else is more productive. Like I don't I'm not a person that believes

[00:14:41] that we are the accumulation of millions of small habits, right? So when you talk about the coffee,

[00:14:48] the coffee costs $4 a day. If you buy coffee 225 days a year, which is how many days you're going

[00:14:55] to work. That's $900 a year. That's if you work for 40 years, that's $36,000. If you invest it,

[00:15:04] maybe you have $100,000. So great. If you don't drink coffee for the rest of your life,

[00:15:11] then you can have $100,000. So the math, the math works like the math checks out. The problem is

[00:15:18] it's a small luxury and we cannot give up small luxuries. We can give up big luxuries,

[00:15:26] but we can't give up small luxuries. So the obverse of that is if you get a house that's

[00:15:32] 500 square feet smaller costs $100,000 less maybe more, you spend $200,000 less in interest over the

[00:15:42] life of the loan. You just saved a couple hundred thousand dollars on one decision versus $100,000

[00:15:50] on millions of decisions, right? And we can give up large luxuries if you get a slightly

[00:15:57] smaller house. You're not in the house saying this house sucks, I hate it, I can't wait to move

[00:16:03] out of here. No, you're sitting in the living room, you're watching TV, it's fine. So it's not a million

[00:16:11] small decisions that determine whether we have money. It's a few big decisions. It's the house,

[00:16:17] the car and the student loans. And the other thing you touch on in the book is a lot of

[00:16:21] times people focus too much on the expense side of things. Like most people have probably more

[00:16:25] opportunity to improve their financial future on the income side of things than on the expense side

[00:16:30] of things. Yeah, I mean that is, that's the personal finance world that we live in. You know,

[00:16:38] I'll beat up on Dave Ramsey a little bit and I'll beat up on Suzy Orman and all these other

[00:16:43] people, the fire people like they're really focused on expenses. Like when I was 25 years

[00:16:53] old, I was making $45,000 a year. And it was it was a little tight. I had a mortgage and I was

[00:17:00] paying for grad school. And I said look, like if I really went full austerity, and I ate ramen noodles

[00:17:08] and did stuff like that, I could save 2000 bucks a year, right? But if I go get a job that pays

[00:17:17] more money, then I can make much more than $2,000 a year. So I ended up I went to grad school,

[00:17:26] and I got a job on Wall Street. And in five years, I was making $850,000 a year, which was a much

[00:17:33] better use of my time than trying to figure out these ways to cut tiny expenses. It's called

[00:17:40] the revenue side. There's a whole chapter in the book called the revenue side. You know,

[00:17:44] there's all kinds of things that people can do to make more money. They can get a raise,

[00:17:48] they can work longer hours, they can get a second job, they can start a business,

[00:17:53] they can do passive income. And these things have a much bigger impact than cutting tiny expenses.

[00:18:00] And the other thing about this is cutting expenses sucks. Like it's the worst like austerity

[00:18:07] is the worst, but making more money is actually fun. Like that's fun to do.

[00:18:15] I'm curious how do you think and I think you may have figured this out like as you move forward

[00:18:19] in your life, how do you think about the balance between making money and doing something you

[00:18:22] love to do? Because you did the whole Wall Street thing, which is many people say is not

[00:18:26] the most enjoyable thing, you know, you have nothing, there's nothing in your life other

[00:18:29] than that. And now it seems like you're doing something a lot more flexible on your own

[00:18:32] that you enjoy doing and probably making a good amount of money doing it. So how do you

[00:18:35] think about that balance between doing something you love and also making money?

[00:18:39] I mean, I'm the luckiest person in the world because I am doing something that I love. By the

[00:18:45] way, I make more money now than I did on Wall Street, which is crazy, you know, like I've built

[00:18:51] a successful newsletter business. I've been doing it for 16 years. And I'm doing what I love,

[00:18:58] I write, you know, I am a writer. So I'm probably one of the highest paid writers in the

[00:19:04] world. It is the greatest thing of all time. I wish everybody could have what I have. So

[00:19:11] So shifting to your portfolio, before I ask you about the awesome portfolio and what's in it,

[00:19:16] I want to ask you first about an emergency fund. You know, everybody needs to have some degree

[00:19:20] of cash in case something goes wrong. Like before you start investing money, how do you think

[00:19:24] about that idea of an emergency fund? How much should be in it? Like how do you think about

[00:19:27] that in the context of your life? Yeah, I actually I'm really big on emergency funds. And

[00:19:32] it's my opinion that they should be larger than what most people think.

[00:19:36] A lot of people say you should have emergency fund of about 3000 bucks or something like that.

[00:19:41] I think it should be much bigger. It should be 10,000 or six months worth of expenses,

[00:19:48] whichever is greater. That's my philosophy on emergency funds. I call it the sick pet fund.

[00:19:55] Right. This is I'm an animal lover. I have six cats. I love my cats and I would pay anything to

[00:20:03] save my cats if something happened to them. And there's a lot of people, their dog or their cat

[00:20:07] gets sick. And they take it to the vet and it's going to be 600 bucks. And they don't have the

[00:20:13] money. And it's called economic euthanasia. They actually have to euthanize the animal

[00:20:17] because they don't have they don't have the money to pay for medical treatment. That's

[00:20:22] what you have an emergency fund for. If everybody in the country had an emergency fund of even three,

[00:20:29] four or $5,000, do you know how many animals would be saved in this country just by having an

[00:20:36] emergency fund? It that's it I mean, it's just absolutely incredible. Yeah, you know,

[00:20:41] we went through that with our dog where we had a big expense and yeah, if you don't have

[00:20:44] me these can be 10,000 plus dollars, you know, these types of things. And if you don't

[00:20:47] have the money, yeah, no, that's that's not a great situation. I want to ask you about before

[00:20:53] I ask you about your portfolio, I want to ask you about the way most people stay for retirement.

[00:20:58] You know, we've had this traditional approach of I've got my stocks, I've got my bonds,

[00:21:01] I've probably got some sort of glide path where the percentage between them is changing over time.

[00:21:05] But that's basically all I own. I mean, most people are using something along those lines.

[00:21:10] How do you think about that as a retirement portfolio?

[00:21:13] Yeah, I think that the very fragile portfolio. Because if you own stocks and bonds,

[00:21:20] you own a very specific kind of asset you own financial assets, stocks and bonds are financial

[00:21:26] assets. A lot of people they have target date funds, they have 6040 portfolios. And they say look

[00:21:32] like I have stocks and I have a mutual fund which has 500 stocks and it's home diversified.

[00:21:39] And then I have this mutual fund that has 500 bonds in it so I'm diversified. So I have stocks and bonds

[00:21:45] so I'm diversified, you're absolutely not diversified, you need to have hard assets as well.

[00:21:50] So one of those is real estate. And the good news is, is that a lot of people do own real

[00:21:55] estate in some form if they own a house. So you need to be invested in real estate.

[00:22:00] And the other part of it is commodities. And I use gold as a proxy for commodities,

[00:22:06] you can pretty much just own gold and get away with it in terms of owning commodities.

[00:22:11] But you need to have exposure to these hard assets because what it does is you're introducing things

[00:22:18] into your portfolio that are either less correlated or negatively correlated, which reduces the

[00:22:25] volatility. Okay, so even a 6040 portfolio, you're going to take drawdowns of 2025%.

[00:22:34] Just like we did in 2022, you're going to take a 20 to 25% drawdown and it's 6040 portfolio.

[00:22:41] The portfolio I talk about in the book, which is the awesome portfolio,

[00:22:45] in 2008 during the financial crisis, it was only down 9%. And that's because of that

[00:22:51] diversification across asset classes. Yeah, it's really interesting how when you have a 40

[00:22:58] year period like we had where stocks and bonds do as well as they do. It's so hard,

[00:23:03] we're big believers in what you're saying and we try to explain this to our clients too,

[00:23:07] but it was very hard to explain for a long period of time because the stocks and bonds

[00:23:10] were doing so well. So people would say, why do I need anything else? And then you have

[00:23:14] something like 2022 and it becomes clear, but it could be really difficult when that type

[00:23:18] of long period goes on where that type of strategy works. Yeah, I think 2022 was kind

[00:23:23] of a wake up call. And also, hard assets, first of all real estate is done really well,

[00:23:30] but commodities kind of bottomed about seven months ago and are now starting to rally.

[00:23:36] And there's some evidence that we're entering into another period of inflation.

[00:23:41] So you really need to have this stuff in order to be fully diversified.

[00:23:46] You mentioned the awesome portfolio, can you just talk about what the five

[00:23:48] components of it are? Yes, so it's 20% stocks, bonds, cash, gold and real estate.

[00:23:55] And you can do it with four ETFs and you have to have the cash 20% cash in the portfolio.

[00:24:01] And when I came up with the awesome portfolio in 2019, a lot of people said I was nuts because

[00:24:07] cash was yielding zero, but now you're actually getting 5% on your cash. But the

[00:24:11] cash is important as a risk reduction tool. But I also talk about in the book about

[00:24:17] the option value of cash and why it's important to have a lot of cash around

[00:24:22] to take advantage of opportunities. But the awesome portfolio has returned 8.1% a year

[00:24:29] for the last 53 years with half the volatility of an 80-20 portfolio. And the biggest drawdown

[00:24:37] in any year was in 2022, it was down 12%. That's the worst year that the awesome

[00:24:44] portfolio had. In 53 years it was down 12%. So when you talk about you have in your

[00:24:50] personal portfolio, you have your very risky side and then you have your more conservative,

[00:24:54] protective side. Is the awesome portfolio what fills that need?

[00:24:57] Yep. Yep. Okay. And how do you think about the balancing of the two? I mean,

[00:25:01] I know you said no one should follow what you're doing personally, but how do you think

[00:25:05] about the balancing between like the money you're putting in higher risk things and the money

[00:25:08] you have safe in the awesome portfolio? You know what's mental accounting. You know,

[00:25:13] money is fungible, right? So what I'm doing is actually irrational. And people do this, they

[00:25:21] have 90% in safe stuff and 10% in risky stuff. They might have crypto or something like that.

[00:25:29] And it doesn't like a behavioral economist would say this is totally irrational because

[00:25:35] money is fungible. But I think for mental accounting purposes, it works because you

[00:25:40] do need to have 80 to 90% of your portfolio in quote unquote safe things. Otherwise, you'll go nuts.

[00:25:49] So how do you think about the whole index investing versus active thing? I mean,

[00:25:54] in the awesome portfolio, you just have a total market portfolio, which I think for most people

[00:25:57] makes makes a ton of sense. How do you think about the idea of, you know, well,

[00:26:00] active management I should put in there some or I should have some factors in there or

[00:26:03] things like that?

[00:26:10] I am not a big fan of passive investing for a bunch of reasons. When you invest in an index,

[00:26:17] you get the returns of the index which are superior, but you also get the volatility

[00:26:23] of the index, right? S&P 500 is a pretty volatile index and any given year it's going to move

[00:26:30] around 15 to 20%. And what we do in the United States is very unique and weird, because the whole

[00:26:38] country invests their life savings in the stock market. Why? Because historically over the last

[00:26:45] 100 years it is worth it is returned about 9% a year, 9.5% a year. Nobody does this in any

[00:26:53] other country in the world. They don't do it in Japan. They don't do it in Europe

[00:26:57] because they haven't seen those kinds of returns, right? So when I look at these people,

[00:27:02] they invest in the S&P and they say, I'm just going to hold this for 40 years.

[00:27:06] There's a couple things that are going on. One, over a 40-year period, you're going to take a 50%

[00:27:13] drawdown. That's going to happen, right? And I forgot what number two is.

[00:27:22] Well, maybe number two is there could be long periods where it doesn't, you know,

[00:27:25] think of 2000 to 2009 because of that drawdown and didn't go anywhere for 10 years.

[00:27:30] Yeah, you do have long periods of underperformance. Yeah.

[00:27:34] But in the context of the Austin portfolio, because the good thing about the Austin

[00:27:37] portfolio is it does deal with that to some degree because you've got all these other

[00:27:40] uncorrelated asset classes. Something is always working. Something is always working.

[00:27:44] Yeah. So do you think from that perspective like an index

[00:27:47] frode makes sense for the stock portion of that versus more active approach?

[00:27:51] Yeah. I mean, you, I think you kind of have to use an index for the stock portion. I mean,

[00:27:58] you could get queued about it. You can say, well, I think small caps are undervalued and I'm going

[00:28:03] to invest in small caps, but you could be dumb or unlucky and have a 20-year period of time where

[00:28:10] small caps are underperformed and it's going to kill your return. So I do think you have

[00:28:14] to have the broad market in the Austin portfolio. So I'm just curious because I don't know

[00:28:19] the answer to this. You mentioned that in Japan and in Europe, they do very different things to

[00:28:23] save for retirement. Like what does that look like relative to what we do?

[00:28:27] A lot of it is banks. I mean, a lot of it is keeping money in a bank or bonds. There's

[00:28:32] in Europe people invest in bonds. It's low return, but the European stock markets have really

[00:28:41] gone nowhere for the last 20 years. I mean, this is a much longer discussion about why

[00:28:47] the US has outperformed and all that stuff. Yeah. How about, because that sort of gets into my next

[00:28:55] question, how about international exposure? Because you'll have some people who say,

[00:28:59] based on the numbers behind the scenes, you need to have international exposure

[00:29:04] in your portfolio. You want to get rid of that home country bias. And other people will say,

[00:29:07] well, the US has a bunch of diversified companies. You're perfectly fine just owning

[00:29:10] the US. You don't need that. Where do you come down on that argument?

[00:29:17] I actually tend to agree with that. The US, I would say in the last 25 years, has basically turned

[00:29:25] into a tech index. And one of the reasons that the US market has outperformed for so long

[00:29:32] is because we have tech and nobody else does. And tech has grown the fastest.

[00:29:38] Europe doesn't really have any tech companies. Japan doesn't really have any tech companies.

[00:29:43] You're not seeing any tech companies in emerging markets. So that's why we've seen this out

[00:29:47] performance in the US. But it is good to be diversified internationally because there will

[00:29:53] be periods of time when Europe or emerging markets are something else outperforms and the US

[00:29:59] lacks. Now, that hasn't happened in a long time. I actually have a little bit of exposure

[00:30:05] to emerging markets in a couple specific circumstances. So I do believe in that diversification.

[00:30:12] I want to go back to the real estate portion you talked about because one of the things you'll

[00:30:15] see a lot of experts say is you should not consider your house in terms of your portfolio.

[00:30:19] But in the book, you said if you do own a house, that should be considered as the real

[00:30:24] estate portion of your portfolio. How do you think about that idea of including your

[00:30:27] house in your portfolio or not including your house in your portfolio?

[00:30:30] Yeah, I think it should be because basically, if you're going to achieve this asset allocation,

[00:30:37] 20% stocks, 20% bonds, 20% cash, 20% gold and 20% real estate, most people are overallocated

[00:30:45] to real estate. They have a $700,000 house and they have $400,000 in equity and then they

[00:30:52] have $200,000 in a 401k. So they're massively overweight real estate relative to financial

[00:30:59] assets. Right? So what they should do is increase their allocation to financial assets

[00:31:06] relative to real estate. So I think about everything in terms of like me right now,

[00:31:11] I am 50% real estate and it makes me really nervous. I was actually talking to my wife

[00:31:17] on the couch last night. I said, look, like I have a desire to pay off the mortgage,

[00:31:23] but right now I'm massively overinvesting in real estate and I need to basically need to have

[00:31:28] more in stocks and bonds. On the stuff you do outside of the Austin portfolio,

[00:31:33] I mean, we don't want you to name risky things you're doing, but how do you think about that?

[00:31:36] Is it like one-off opportunities you see where you're willing to bet big because

[00:31:40] you know you have the conservative money behind that? How do you think about what you're

[00:31:44] doing in that other portion of your portfolio? Yeah, I mean just for example, like, you know,

[00:31:49] I can name one thing. This was about six months ago. You know, two-year interest rates were up

[00:31:56] over 5% and at the time inflation was about 2.5% and Fed funds was 5.5 and I said look, like,

[00:32:07] you know, real rates are 3% and monetary policy is pretty restrictive and I think the

[00:32:12] Fed is going to get more dovish and I think we might get some rate cuts. It sounded absurd at the time,

[00:32:18] but I took a large position in two-year no futures and that was one of the best trades in my career.

[00:32:28] So like you said, it's very opportunistic. You know, if I see something like that then

[00:32:33] I'll trade off of it. And you use sort of the conservative portion of your portfolio to

[00:32:38] allow you to do that, right? So the fact that you know you have this safe money,

[00:32:41] you know if these trades go against you, you're still in good shape. Yep.

[00:32:45] Just one more before I hand it back to Justin. I want to ask you about this idea of looking

[00:32:49] different in the market because this is something we see, you know, when we run these types of

[00:32:52] portfolios for clients, we see this a lot, which is this idea that at the cocktail party,

[00:32:56] you know, you're talking to the guy that's in the S&P 500 or in the stock and bond portfolio

[00:33:00] and when you have these portfolios that are more diversified, they have better risk-adjusted

[00:33:04] numbers over time, but they also in individual years can look very different than everybody

[00:33:08] else. And it tends to make investors tend to abandon them during periods like we just went

[00:33:13] through where stocks and bonds are just beating that type of thing. What do you think about that?

[00:33:16] Do you have any tips for anybody to manage this idea of looking different in the market

[00:33:20] and looking different than your neighbor? So I've actually done some research on that,

[00:33:24] right? So the awesome portfolio, 42% of the time it will lag the S&P by 10% or more.

[00:33:34] 21% of the time it will beat the S&P by 10% or more. So basically 42% of the time you're experiencing

[00:33:45] FOMO, right? Like you are going to cocktail parties, everybody's talking about how rich

[00:33:50] they're getting in the stock market, you have this slow boring awesome portfolio and it's tough,

[00:33:57] you know, because it seems like you're underperforming, but where it saves you is in

[00:34:02] the bad years. You know, like I said in 2008, the awesome portfolio returned negative 9%,

[00:34:08] the S&P was down 38, right? So you're suppressing the volatility on the downside.

[00:34:16] So yeah, like psychologically it can be difficult to hold on to that over a period of time,

[00:34:22] but look, you are trading away a little bit in the way of returns,

[00:34:27] you're trading away about a percent to a percent and a half. So you are going to get

[00:34:32] slightly lower returns than you are on the stock market, but you're going to be able to sleep at

[00:34:37] night and that's the price that you pay. Do you do anything in just sticking like startups,

[00:34:44] private equity, any alternatives, assets? I have in the past, but I'm not right now.

[00:34:51] And what about crypto? How do you view that?

[00:34:57] I've on balance, I've traded a little bit of crypto on balance. I've made money, but

[00:35:04] I'm not a believer, I'm more of an opportunistic trader. Look like there's a big discussion

[00:35:09] right now about whether crypto is a store of value like gold is, Bitcoin in particular.

[00:35:18] And I think what's interesting is that Bitcoin really behaves more like a risk asset.

[00:35:25] During times of crisis or strife, Bitcoin actually goes down when gold goes up. I don't

[00:35:31] think it's really a safe haven asset at all. I think it's a risk asset. I think if we had

[00:35:35] a big bear market in stocks, we would probably also have a big bear market in crypto.

[00:35:40] So I don't think it does a lot in the way of diversification.

[00:35:43] It's interesting, today they were talking about like, I don't know,

[00:35:45] Bitcoin is down like 8% and they're attributing it to the Iran attack on Israel.

[00:35:51] So I'm trying to square those two things. I'm like, well, wait a minute, what is driving that?

[00:35:56] Is it like, are West Israelis buying Bitcoin or I don't know, just it seems weird to me.

[00:36:02] I think what happened in that particular instance was the attack happened over the weekend

[00:36:07] and the financial markets was closed. And the only thing that people could sell was Bitcoin

[00:36:13] because it was, it's open 24-7. So they had something.

[00:36:18] Just on the point about alternatives, I'm curious about you're seeing a lot of

[00:36:22] alternative hedge fund type strategies that used to be only available

[00:36:25] to richer investors come down to everybody now. Like something like Managed Futures.

[00:36:28] There are a lot of Managed Futures ETFs now, whereas before you couldn't access that

[00:36:32] type of thing. What do you think about those types of strategies for investors?

[00:36:37] I generally think it's good. I think that also gives you diversification.

[00:36:43] I mean, I don't, I think personally I would rather, I don't know. It's funny,

[00:36:50] I haven't put a lot of thought into it. What I was about to say was I think I would rather

[00:36:56] have a commodity index than some allocation to Managed Futures. But I don't know, that might

[00:37:02] work as well too. So even though you don't have kids, you have cats and maybe the cats

[00:37:11] will be in the, in the will. But you know, do you have any feeling, do you have any thoughts on

[00:37:19] leaving money to children and sort of where you fall? Like we've had some guests on that say,

[00:37:24] you know what, I just want to get my kids through college, then they're on their own.

[00:37:27] We've actually had other guests on that have kind of said, you know what, I think I

[00:37:30] actually have made a little bit of a mistake in giving my kids a little bit too much.

[00:37:36] And so I'm just curious as when you sort of, if you've given that any thought,

[00:37:40] where you sort of follow on that? Well, like you said, I don't have kids,

[00:37:44] but I have all kinds of opinions on how other people raise their kids.

[00:37:50] So no, I mean, look, like I think, I think leaving money to kids is, you know,

[00:37:57] I've seen it work out and I've seen it not work out. I've seen kids that have inherited a

[00:38:03] lot of money turn out to be stinkers. And I've seen kids that have inherited a lot of money

[00:38:10] go on to be productive and do great things with the money. And they're terrific. I've seen both

[00:38:15] instances. And I really think it comes down to how you teach your kids about money when they're

[00:38:23] younger, you know what I mean? Like I really think that's what it comes down to. So

[00:38:29] It's interesting too, like these days when you because people are living so much older,

[00:38:32] like if you're not giving your kids money till you die, and a lot of times you're giving

[00:38:35] your kids money like in their sixties or something. So they're not even really kids anymore.

[00:38:38] So that sort of plays into it as well. Yeah. When you think back on your sort of

[00:38:45] investing experience, the things that you've gotten right, but specifically the things that have gotten

[00:38:51] wrong, what do you think is the biggest mistake you made with your investing portfolio? And what

[00:38:58] would you say you've learned from that? The biggest mistake that I made was in 2017.

[00:39:07] I was trading Canadian short term interest rate futures. And I put on a big bet that the Bank of

[00:39:16] Canada would cut rates and they actually did the opposite. They hiked rates, they hiked rates

[00:39:22] five times. And I didn't close out the position and I didn't double down on it because that's

[00:39:32] a trading no-no, but I held on to that position until the pandemic and then rates went to zero

[00:39:40] and I ended up making money. But for really 2017 and 2018, I was miserable. I lost like 20% of my

[00:39:49] net worth. Oh wow. It was a really big hit. And that actually kind of informed my thoughts on

[00:39:59] stress around risk, right? Because for a period of about a year and a half or two years,

[00:40:06] I was really, really stressed out about this trade because I didn't know how bad it could get.

[00:40:12] And it really ruined the whole year of my life. So I vowed never to do that again.

[00:40:22] So do you think the mistake was in the sizing of the position rather than what you did?

[00:40:27] It was the sizing and the lack of discipline for sure.

[00:40:30] So as we get to the end of these, we like to get this idea that not everything in someone's

[00:40:34] portfolio is about making money. I always give the example I own a racing sailboat

[00:40:38] and a racing sailboat is a horrible investment. It loses money, it needs to be maintained,

[00:40:43] but I get a lot of joy out of it. I love going out with my friends and doing races and having a beer

[00:40:47] and it gives me a lot of value in my life even though it's not the greatest investment.

[00:40:50] And I'm wondering if you could talk about some things you have in your life,

[00:40:52] if you have anything like that that is maybe not the greatest financial investment,

[00:40:55] but you get a lot of joy out of? Well, it's actually my new house.

[00:41:01] Like I just built a humongous way too big that I need new house on nine acres of land

[00:41:09] here in South Carolina. And it's way more house than I need, but

[00:41:17] it is going to bring me a lot of joy. It's almost done. And we go to the house every weekend

[00:41:22] and we see the progress, we see how it's being built. And it's absolutely phenomenal.

[00:41:28] And this is the house that I'm really going to spend the rest of my life in.

[00:41:32] We're not moving after this. Like I'm going to spend the next 30 years in this house.

[00:41:38] And it's not the best financial decision in the world.

[00:41:44] It is that the money I have put towards the house has crowded out

[00:41:50] money that I could have invested in other things. I have had opportunities

[00:41:55] that I've had to pass up, which were really good opportunities because I put the money in the house

[00:42:01] instead. But it's for my own personal enjoyment. I'm curious, I really enjoyed the renovation

[00:42:09] process too. I found when I renovated the house, I got a lot of fun out of picking out the stuff

[00:42:14] and just seeing it constructed. I really enjoyed that as well. Yeah, it's been terrific.

[00:42:20] It's almost done. We're going to be moving in on May 6th.

[00:42:26] That's great. Just two more questions. You might have hit on this a little bit at the beginning,

[00:42:32] but it's going to be different for every reader. But you were to try to

[00:42:38] sum up the main takeaway that you hope someone gets from reading the book

[00:42:43] from your perspective. What would that be?

[00:42:48] The main takeaway is to focus on the big things, the big things like the house,

[00:42:56] buying a house is the most important and riskiest financial decision you will ever make.

[00:43:03] And most people when they go into the closing and they sign the loan documents,

[00:43:08] they are not nervous. They should be nervous, but they're not nervous. It's an incredible

[00:43:14] amount of debt. It's an incredible amount of risk. It's only been 16 years since the financial

[00:43:19] crisis and people have forgotten about the risk inherent in buying a house. It's a huge amount

[00:43:25] of risk. But if you get that decision right, one decision, it can set you up for life.

[00:43:33] Quick story. I bought my first house when I was 24 years old. Okay, I bought a condo in Walnut Creek,

[00:43:40] California for $175,000, took all my savings about $35,000, $40,000 used it as a down payment,

[00:43:50] sold that place in two years for $300,000. So at age 27, I was debt free and had $200,000

[00:44:01] in the bank. Compared to all my 27-year-old friends that were loaded up on student loans and

[00:44:07] they didn't have any savings, I was in an unassailable financial position. So that was one

[00:44:14] decision and I got it right. And that's really what set me up for the rest of my life.

[00:44:21] And this might relate to the standard closing question we have, which we always like to

[00:44:25] ask our guests if you could impart one lesson that you learned on building your portfolio to the

[00:44:32] average investor, what would that be? You have to avoid the cemetery. You have to avoid it.

[00:44:45] Really like investing is, there's two parts of this. A lot of people focus on the one big win

[00:44:59] that will set them up for life. So let's say you go, this is a dumb example, but let's say you get

[00:45:05] a job in NVIDIA and you get stock options and now you're worth $20 million. So that one decision

[00:45:12] sets you up for life. Most people are focused on the positive aspect of that. You also have to be

[00:45:19] focused on the negative aspect of that. You have to avoid the catastrophic losses, right? Because

[00:45:26] that can set you back years if you have a catastrophic loss. So that would really be my piece of advice.

[00:45:35] Good stuff, Jared. Thank you very much. This has been a very sort of straightforward

[00:45:39] conversation. I think our audience is going to get a lot from it and we wish you all the best of the

[00:45:43] book. Thanks. Thanks for having me on. This is Justin again. Thanks so much for tuning into this

[00:45:48] episode of Access Returns. You can follow Jack on Twitter at atpracticalquant and follow me on

[00:45:54] Twitter at atjjcarbono. If you found this discussion interesting and valuable, please

[00:45:59] subscribe in either iTunes or on YouTube or leave a review or a comment. We appreciate it.

[00:46:04] Justin Carboneau and Jack Forehand are principals at Bolivia Capital Management.

[00:46:08] The opinions expressed in this podcast do not necessarily reflect the opinions of Bolivia Capital.

[00:46:12] No information on this podcast should be construed as investment advice.

[00:46:15] Securities discussed in the podcast may be holdings of clients of Bolivia Capital.