Inside the Recent Market Volatility | What You Need to Know to Navigate It

[00:00:00] [SPEAKER_03]: Welcome to Two Quants and a Financial Planner, where we bridge the Worlds of Investing and Financial Planning to help investors achieve the long-term goals.

[00:00:05] [SPEAKER_03]: Join that Ziggler, Jack Forehand and me, Justin Carbonneau as we cover a wide range of investing and planning topics

[00:00:09] [SPEAKER_03]: that impact all of us and discuss how we can plide up in the real world to achieve the best outcomes in our financial life.

[00:00:15] [SPEAKER_00]: Jack Forehand is a principal at the Lydia Capital Management. Matt Zeigler is managing director at Sunpoint Investments.

[00:00:20] [SPEAKER_00]: The opinions expressed in this podcast do not necessarily reflect the opinions of the Lydia Capital or Sunpoint Investments.

[00:00:25] [SPEAKER_00]: No information on this podcast should be construed as investment advice.

[00:00:28] [SPEAKER_00]: Securities discussed in the podcast may be holding some clients of the Lydia Capital for some point investments.

[00:00:33] [SPEAKER_02]: So Matt apparently markets our internal oil from what I'm being told.

[00:00:36] [SPEAKER_01]: Panic, panic, Jack, panic, turmoil!

[00:00:40] [SPEAKER_02]: Zucko!

[00:00:41] [SPEAKER_02]: They did break it out though right? I believe very recently they did break out the markets in turmoil episodes.

[00:00:46] [SPEAKER_01]: It's a ready now!

[00:00:46] [SPEAKER_01]: So right here now!

[00:00:48] [SPEAKER_01]: I guess so.

[00:00:50] [SPEAKER_01]: I mean, it sucks.

[00:00:53] [SPEAKER_01]: This stuff sucks.

[00:00:55] [SPEAKER_01]: This is not the fun time to be in markets. It's not the fun time.

[00:00:58] [SPEAKER_01]: I don't know what's like for you, but it's like I've been on a phone for

[00:01:02] [SPEAKER_01]: what?

[00:01:03] [SPEAKER_01]: We can have at this point two weeks or a recording.

[00:01:05] [SPEAKER_01]: I just live on the phone, talking to client.

[00:01:08] [SPEAKER_01]: Another day my panic came, but it's just like I just live on the phone talking to people.

[00:01:13] [SPEAKER_01]: So this is life. Sometimes the world tries to end and it's our job to help navigate it,

[00:01:20] [SPEAKER_01]: which is I think is what we're here to try to do.

[00:01:22] [SPEAKER_01]: We're going to terrify each other.

[00:01:23] [SPEAKER_01]: Is this what's going on?

[00:01:24] [SPEAKER_02]: Yeah absolutely. I think this is just pirassia.

[00:01:26] [SPEAKER_02]: I know nobody's watching this is just for us, but I want to go back to that thing on the phone too

[00:01:29] [SPEAKER_02]: because later on I want to talk about how you and I do that because those are very interesting

[00:01:33] [SPEAKER_02]: calls like I've been having some myself as well.

[00:01:35] [SPEAKER_02]: Those are very interesting calls to have people and I want to talk about how those go

[00:01:39] [SPEAKER_02]: and what we think about the process.

[00:01:40] [SPEAKER_02]: And I was wondering by the way on the CNBC thing, I'm wondering like who is the person that has the

[00:01:44] [SPEAKER_02]: criteria in terms of when we break out the markets in turmoil episode because it seems like

[00:01:49] [SPEAKER_02]: they're coming out a little sooner than they used to.

[00:01:51] [SPEAKER_02]: It seems like maybe the turmoil is getting stretched a little bit relative to I think our

[00:01:55] [SPEAKER_02]: max decline at least closing was like 8% so far in this decline for the SNP and we've got the

[00:02:01] [SPEAKER_02]: turmoil thing out there. So I'm wondering like who makes that decision?

[00:02:04] [SPEAKER_01]: I'm not going to give, I'm not going to, this was a very eye-opening moment for me.

[00:02:08] [SPEAKER_01]: It was a number of extremely eye-opening moments. This is basically in the thick of the financial

[00:02:13] [SPEAKER_01]: crisis, I'm in a, it's not a conference but it was like a bigger meeting of a bunch of people

[00:02:19] [SPEAKER_01]: at my old company and we had a couple of the CNBC talking heads, guys were there, we were in

[00:02:26] [SPEAKER_01]: Connecticut so they weren't that far some of them occasionally worked where I was located like

[00:02:30] [SPEAKER_01]: in the building, building across. There's not a normal thing for that to be around but they're

[00:02:33] [SPEAKER_01]: around and it's a, you know, small conference room so now like thousands of people like

[00:02:40] [SPEAKER_01]: less than 100 people and we're having this conversation and this person basically started to talk

[00:02:44] [SPEAKER_01]: about how the ratings drive this stuff. They're like our ratings are 100% correlated to the

[00:02:50] [SPEAKER_01]: vix and basically as soon as we see a spike in ratings or a spike in volatility like a spike in

[00:02:55] [SPEAKER_01]: volatility just leads ratings ever so slightly and we lean into it. So this was a global financial

[00:03:01] [SPEAKER_01]: crisis era comment and it was basically like if there's an upward trajectory in the vix we know we

[00:03:07] [SPEAKER_01]: have a rating spike. My hunch is that they've just gotten smarter or got that over the last whatever

[00:03:13] [SPEAKER_01]: 15 years here and it's just like, oh the vix, the vix went up, it has a bit of an

[00:03:17] [SPEAKER_01]: amount of the ratings are coming in throw all the ratings, grabbers that we got down these people's

[00:03:23] [SPEAKER_01]: throats. Let's say I know let's say something crazy like the Dow just had as greatest

[00:03:27] [SPEAKER_01]: you know single point drop day ever in the history of the Dow it's like just no more than

[00:03:33] [SPEAKER_01]: staying math than he wore. Like yeah it's going lowest black mode over. What I like about this

[00:03:39] [SPEAKER_02]: is you might be telling me CMBC or quads because you might be telling me there's some sort of

[00:03:43] [SPEAKER_02]: code behind the scenes that says if vix spikes to this level release markets a turmoil episode. So

[00:03:48] [SPEAKER_01]: maybe they're like me all advertisers all the market is hard quads. I have books from the

[00:03:55] [SPEAKER_01]: sixties about marketing the marketers are quads. You can't talk about markets without talking about

[00:04:01] [SPEAKER_01]: marketing every time somebody is selling your eyeballs. Here's a quote behind the scenes pushing

[00:04:07] [SPEAKER_02]: that by it's amazing. So yeah so we're going to talk about how to navigate this type of stuff

[00:04:12] [SPEAKER_02]: and maybe some of the lessons we've learned but first I want to talk about what's going on because

[00:04:15] [SPEAKER_02]: I think it's important a lot of times people will just like long-term people like me we'll

[00:04:19] [SPEAKER_02]: talk about this a little bit later with the lessons we'll just be like stay the core still worry about it

[00:04:22] [SPEAKER_02]: you know this stuff isn't front of us every day it's interesting I think education is good so

[00:04:26] [SPEAKER_02]: we want to go through and just look at some of the interesting things that happened recently that

[00:04:31] [SPEAKER_02]: you know or sort of outliers and and the first chart here is talking about and this obviously

[00:04:34] [SPEAKER_02]: is no longer true but this idea of how many days we had without a 2% one day loss. So one of the

[00:04:40] [SPEAKER_02]: things we had going into this period is it incredibly low volatility market you think back to like

[00:04:45] [SPEAKER_02]: 2017 I don't think it got that low but it was a similar type situation and you can see in this chart

[00:04:51] [SPEAKER_02]: like you have these the number of days without a 2% loss and then what this is from Brankachuba

[00:04:56] [SPEAKER_02]: um Spockama this is from the podcast I do with him the opx effect and like you can see a lot of

[00:05:02] [SPEAKER_02]: times that breaks eventually and there's some sort of event that breaks it and so you can see like

[00:05:06] [SPEAKER_02]: going back here and he went back all the way to 1995 I mean you basically got in terms of like

[00:05:10] [SPEAKER_02]: the significant spikes here you've got the tech bubble you've got the GFC you've got all the get in

[00:05:16] [SPEAKER_02]: and you've got this um so it's interesting like this was one of the longer periods in history

[00:05:21] [SPEAKER_02]: without a 2% loss prior to what just happened recently. I think about this I think about the old

[00:05:27] [SPEAKER_01]: awesome to love you see this story all the time like forgot which book it was in but that

[00:05:32] [SPEAKER_01]: thing about the California Forest fires you remember this story you know what I'm talking about

[00:05:38] [SPEAKER_01]: lately the metaphor was basically the the forest fire policy was the basically put out every

[00:05:44] [SPEAKER_01]: as soon as it started as soon as there was a spark as soon as there was a smoke we want to get on it

[00:05:49] [SPEAKER_01]: make sure it doesn't spread and what happens is when you put out every single forest fire immediately before

[00:05:55] [SPEAKER_01]: it becomes a forest fire every single mini fire you get this weird little saw two thing that

[00:06:00] [SPEAKER_01]: rolls you into a false sense of confidence because when you do get a spark that spreads faster than you can

[00:06:06] [SPEAKER_01]: put it out you haven't cleared the brush and you get the mother of all forest fires overnight

[00:06:11] [SPEAKER_01]: when I look at these volatility complexes regimes and all the other stuff and brands waste

[00:06:15] [SPEAKER_01]: smarter than me so he's the one to ask its question of basically two but it's like we get these

[00:06:20] [SPEAKER_01]: little bursts and it's I don't want to say it's predictable that we get the burst after a

[00:06:24] [SPEAKER_01]: old period but in a way it kind of is the longer you're in that old state the more likely it's

[00:06:29] [SPEAKER_01]: going to get you're going to get a vicious spike at some point that's going to clear all of that brush

[00:06:33] [SPEAKER_01]: and that I love seeing it pictorally pictorial uh reference this way because it's just shows you

[00:06:40] [SPEAKER_01]: dramatic this is these charts actually I think the vulture shows more about how this actually feels

[00:06:46] [SPEAKER_01]: to have money in the markets when this is happening because all the other numbers in this decline are kind

[00:06:51] [SPEAKER_01]: of all right garden variety a little bit of a price decline don't worry about it but this vulture

[00:06:56] [SPEAKER_01]: tells you what this feels like right now which is a holy crap what was that sound what just blew up

[00:07:02] [SPEAKER_02]: in my house yeah it's interesting to know i mean you can't do a lot as a long term

[00:07:06] [SPEAKER_02]: necessarily you can't you can't do a lot with this because again you don't know how high that line

[00:07:10] [SPEAKER_02]: was going to go before it broke um and you know how what even you don't know what the

[00:07:14] [SPEAKER_02]: ingredients going to break I mean we've had a decline here we haven't had a massive decline

[00:07:18] [SPEAKER_02]: I mean we certainly have anything in near what happened to GFC so you don't really know

[00:07:22] [SPEAKER_02]: what's going to happen with it the timing of its impossible but it is interesting and it just shows

[00:07:26] [SPEAKER_02]: I think one of the things we are seeing a little bit more markets and I don't know if this is

[00:07:29] [SPEAKER_02]: rising options activity or what it is but we are seeing more of these like extended low volatility periods

[00:07:35] [SPEAKER_02]: followed by pockets of like tight high volatility and so it's an investor I just think that's

[00:07:40] [SPEAKER_02]: something you want to have in mind like so when you see that type of thing you're not saying oh this

[00:07:43] [SPEAKER_02]: is crazy you've never seen this before like this that's what's happening now you know we're

[00:07:47] [SPEAKER_02]: and also you'll get low the sleep by the low volatility to think like this is going to go on forever

[00:07:51] [SPEAKER_02]: we don't know how long it's going to go on but that that seems to be the type of market we're in now

[00:07:56] [SPEAKER_01]: I think what you just said is the key understanding that these are just periods that we seem to

[00:08:00] [SPEAKER_01]: going through right now and having the expectation because and granted this dragged on a

[00:08:06] [SPEAKER_01]: long time but having this expectation of like as that volatility stays low is it's not punctuated

[00:08:12] [SPEAKER_01]: you don't get the big one day declines you don't get any of the bread threats or any of the

[00:08:16] [SPEAKER_01]: technical stuff that a lot of people in our shoes look for you start to go hey one of these is coming

[00:08:21] [SPEAKER_01]: and then you want to understand what it's happening I know we'll talk about this too

[00:08:27] [SPEAKER_01]: in the same way I'm scarred by the global financial crisis and the amount of time for that recovery

[00:08:32] [SPEAKER_01]: to take place and that whole fall into spring period of like the giant swings that we saw

[00:08:38] [SPEAKER_01]: just how nauseating and the stuff getting beaten to the ground I'm also scarred by what happened

[00:08:42] [SPEAKER_01]: in COVID and just how quickly you had to flip the way you were thinking about this thing because

[00:08:50] [SPEAKER_01]: it can turn on a dime too really easy to shoot yourself in the foot when this stuff goes hey

[00:08:55] [SPEAKER_01]: wire while determine investors know this but it doesn't mean you feel it when you're going for it

[00:09:01] [SPEAKER_02]: yes so this gets into kind of what I put next to this chart from charlie ballello

[00:09:04] [SPEAKER_02]: the this big spike we saw on Monday was the second largest big spike in history

[00:09:11] [SPEAKER_02]: so it just puts it in perspective like if you think about some of these other ones in history

[00:09:15] [SPEAKER_02]: you had some and we'll talk about this in a second you had some significant events going on

[00:09:18] [SPEAKER_02]: but this was a very large big spike and then also to get to your point you just made

[00:09:23] [SPEAKER_02]: the largest big decline in history was the next day after the second largest spike in

[00:09:28] [SPEAKER_02]: in history so like if you just think about that that's very interesting especially given

[00:09:33] [SPEAKER_02]: what's going on in the market right now to think about that degree of volatility

[00:09:39] [SPEAKER_01]: these really highly punctuated events are just part of the new normal this is part of markets

[00:09:45] [SPEAKER_01]: moving faster than they've ever moved in history and it's got to be some of the derivative

[00:09:51] [SPEAKER_01]: contracts like what do you know about this aspect it's got to be some of the other vehicles

[00:09:56] [SPEAKER_01]: and other some of the other things that exist in this day and age that can make 2018 2024

[00:10:01] [SPEAKER_01]: and then you know a couple in 2021 right behind it in that top five

[00:10:07] [SPEAKER_02]: yeah and you don't know like especially long-term investors like us we're not we're not

[00:10:11] [SPEAKER_02]: sitting there looking at the plumbing of the market all day like we don't know exactly what happened

[00:10:14] [SPEAKER_02]: you know people talk about the yen carry trade people talk about somebody had to be

[00:10:19] [SPEAKER_02]: given the way it happened somebody blew up behind the scenes and we'll find out later

[00:10:22] [SPEAKER_02]: who it is the blew up and they might still be blowing up but we're not even sure so

[00:10:26] [SPEAKER_02]: like there's mechanics that go on behind the scenes in terms of what drive flows I mean

[00:10:29] [SPEAKER_02]: if a major player is forced to reverse you know massive positions you can have massive knock-on

[00:10:35] [SPEAKER_02]: effects to that so like we know that that could be what happened here we don't know for sure

[00:10:40] [SPEAKER_02]: but it's just interesting like as a long-term investor if you think about it in a long-term context

[00:10:44] [SPEAKER_02]: it doesn't matter but it's interesting just to think about it because when you start seeing these things

[00:10:48] [SPEAKER_02]: that you haven't seen it a long time you start to worry about some systemic problems and sometimes

[00:10:53] [SPEAKER_02]: it's not a systemic problem sometimes it really is just some player got on the wrong side of things

[00:10:57] [SPEAKER_02]: and things blow up and then you return a little bit closer to normal after that yeah it's the

[00:11:02] [SPEAKER_01]: thing where it's like oh this drains used to be going slow in my house and it might mean the roots

[00:11:07] [SPEAKER_01]: of growing into the main line and it's a disaster just waiting to happen or it could just be like oh

[00:11:12] [SPEAKER_01]: the drain got a little slow because you know the hands-up built up over time or something stupid

[00:11:17] [SPEAKER_01]: we don't know based on this stuff we know that the bank of Japan had they've been experiencing

[00:11:21] [SPEAKER_01]: slightly higher inflation than expected or higher than expected I should say the bank of Japan raised

[00:11:26] [SPEAKER_01]: rates and there's all sorts of plumbing stuff that just comes with that that people will tell you

[00:11:32] [SPEAKER_01]: they understand I'm still convinced nobody really understands what happens when these these

[00:11:37] [SPEAKER_01]: these mechanisms move and that's the important takeaway to know nobody really has

[00:11:42] [SPEAKER_01]: there's no model that you can build that perfectly describes the way this thing works so if there's

[00:11:49] [SPEAKER_01]: no perfect model to explain these things we just know weird stuff happens when stuff went stuff

[00:11:54] [SPEAKER_01]: like the bank of Japan raises rates and the feds considering it inflation is going into different

[00:11:58] [SPEAKER_01]: directions and whatever else I take some solace in that unpredictability about what just happened

[00:12:04] [SPEAKER_01]: in the last week that some of this is just there's no way for you to know you only thing you

[00:12:09] [SPEAKER_01]: could do is what you're going to react to this thing and if you're going to take any bigger clues from

[00:12:13] [SPEAKER_02]: it or no yeah and go back to your drain example like there's probably sometimes where you use the

[00:12:17] [SPEAKER_02]: drain oh to get the drain going a little faster and there's maybe sometimes where you got to

[00:12:20] [SPEAKER_02]: get these explosives out and blow the whole tub up or something and like that's that's what you kind of

[00:12:24] [SPEAKER_02]: see with this stuff is like sometimes sometimes like the extreme measures have to happen and there's

[00:12:27] [SPEAKER_02]: not enough you know there's not enough you know they can flow through the drain and you got to

[00:12:31] [SPEAKER_02]: make the drain bigger and you end up with these huge moves in the markets because people are

[00:12:35] [SPEAKER_02]: sellers they have and they have to do whatever it takes to unwind whatever their positions are

[00:12:39] [SPEAKER_01]: and that's when you end up with these problems so much of financial planning boils down to just

[00:12:44] [SPEAKER_01]: this idea of never be forced to sell never have a panic force you to sell build your portfolio

[00:12:49] [SPEAKER_01]: away that you're not forced to sell should always be an active choice to sell when we see a decline

[00:12:54] [SPEAKER_01]: of this magnitude on a given day I try to remind people of that too like the point here is somebody just

[00:13:01] [SPEAKER_01]: got forced to do something they didn't want to do yeah and you would think you know the institutions

[00:13:07] [SPEAKER_02]: will learn that lesson but they don't you always still over time we're always going to have

[00:13:11] [SPEAKER_02]: these major major players in the asset management business that are going to thank you because of

[00:13:15] [SPEAKER_02]: their models you know this this can't move while this in this direction while this other things

[00:13:18] [SPEAKER_02]: moving in this direction and you know their model said there was like you know whatever a one in

[00:13:21] [SPEAKER_02]: one ten billion chance it would happen it happens and then they blow up um it's it always has happened

[00:13:26] [SPEAKER_02]: it's going to continue happening it's just part of what's going on and go on to this next chart

[00:13:30] [SPEAKER_02]: I thought this was really interesting from Brent Donnelly because this gets to what we were talking

[00:13:33] [SPEAKER_02]: about is like it's kind of a funny chart but it just shows what the mix spike to and how it compares

[00:13:39] [SPEAKER_02]: to other things at history and I mean all these other things on this chart are like major major

[00:13:43] [SPEAKER_02]: things in history um that happened and then he's got slightly weak payrolls on the other side so

[00:13:49] [SPEAKER_02]: that tells you there's probably something else going on we don't know about here because getting a

[00:13:54] [SPEAKER_02]: mix spike to 60 on you know slightly weak payrolls is not something you're likely going to see so

[00:14:00] [SPEAKER_02]: I don't know if it's the end carry trade or somebody blew up or what it is or just repricing

[00:14:04] [SPEAKER_02]: expectations really quickly but if that's not typically a spike you would have seen on the type of

[00:14:09] [SPEAKER_02]: payroll report we saw and we didn't see like you know we still added job and we didn't see like the

[00:14:13] [SPEAKER_02]: worst payroll report of all time like there was so far it was slightly weak payrolls and like everything

[00:14:18] [SPEAKER_01]: just blew up no who knows why I don't know first off Brent and the the Friday speed run like

[00:14:25] [SPEAKER_01]: if you're not subscribed to that just just go subscribe to it it's it's so good that's that's

[00:14:28] [SPEAKER_01]: not my very short list of things and I need to look at constantly Brent some Brent's a brilliant

[00:14:33] [SPEAKER_01]: guy we're going to get him on the intentional investor sometimes too because he's just fascinating

[00:14:39] [SPEAKER_01]: but this point in this chart like again look at the size of that look at the size of the spike

[00:14:45] [SPEAKER_01]: that we just had on this thing and realize how hard it is to attach one of those labels

[00:14:49] [SPEAKER_01]: to it like and it's funny because we could say weak payrolls I'm sure there's a

[00:14:54] [SPEAKER_01]: mainstream media there's a CNBC there's a Fox News there's a MSNBC whatever thing that says like

[00:15:00] [SPEAKER_01]: weak payrolls strike market through a floor there's that headline exists somewhere in the world

[00:15:04] [SPEAKER_01]: but just tagging in slightly weak payrolls to it because

[00:15:07] [SPEAKER_01]: this is the situation we didn't have a singular economic event that's global pandemic

[00:15:13] [SPEAKER_01]: the Chinese Chinese devaluation of the currency and we did have to your point and maybe this is how

[00:15:19] [SPEAKER_01]: the chart gets amended over time that differential between what the B.O.J. policy and what the

[00:15:24] [SPEAKER_01]: Fed policy is and that's really the only thing we can point at and go that's something that a lot

[00:15:30] [SPEAKER_01]: of money responds around somebody probably had a bad model constructed and that goes back to

[00:15:36] [SPEAKER_01]: it you can't model the whole system so we have to deal with some of this stuff when it blows up

[00:15:40] [SPEAKER_01]: and recognize something probably just broke somebody called Rodo Ruther.

[00:15:46] [SPEAKER_02]: So then we'll just do one more chart before we move on to lessons from this but this one is really

[00:15:49] [SPEAKER_02]: good as soon as Smith on Twitter and this kind of gets that why you had your markets and

[00:15:53] [SPEAKER_02]: terminal episode here is there's a there's a relationship over time between how much the S&P

[00:15:58] [SPEAKER_02]: 500 goes down and how much the VIX Bikes it obviously can change a lot over time but

[00:16:03] [SPEAKER_02]: there's something you would expect in terms of what a VIX Bikes you would get given to the

[00:16:07] [SPEAKER_02]: S&P and you can see here what we got on Monday compared to what you've seen in the history

[00:16:12] [SPEAKER_02]: in this chart it's it's all completely off the chart now the stuff in the bottom is more of a

[00:16:17] [SPEAKER_02]: moving average so it is averaged out anyway but still like this is this is an off the chart spike

[00:16:21] [SPEAKER_02]: it was eight or nine X the VIX B2 to the S&P which just shows the degree of whatever it was that happened

[00:16:27] [SPEAKER_02]: then maybe in the course of time we'll find out what happens how rare it was to see something like that

[00:16:33] [SPEAKER_01]: it's important to remember and there's a bunch of math that I'm not entirely straight on

[00:16:39] [SPEAKER_01]: what's in this chart but I'm straight on at least as much beta is just a way to measure slope

[00:16:45] [SPEAKER_01]: and what this says is it's basically like you know I don't know if you never roll the super ball

[00:16:50] [SPEAKER_01]: down a hill I grew up at a valley this is the kind of thing is a student and a tailor self

[00:16:55] [SPEAKER_01]: I definitely remember doing it down a flight of stairs a lot yeah so like the creep like you roll

[00:17:00] [SPEAKER_01]: down a hill and just assume pavement on a hill and we're gonna ignore all the potholes

[00:17:03] [SPEAKER_01]: in the part of the country I grew up in so you roll the super ball down the hill that first

[00:17:07] [SPEAKER_01]: it just rolls like a ball but then inevitably it's gonna catch like a weird pocket or a piece

[00:17:12] [SPEAKER_01]: of gravel or something just the right way and the furlourts gone down the hill slope until it hits

[00:17:18] [SPEAKER_01]: that little thing and then I'll just go rocketing into the air and it was just crazy to watch

[00:17:23] [SPEAKER_01]: and then that rock it means there's going to be another huge balance and then whatever else

[00:17:27] [SPEAKER_01]: something to do it bounce and then drop again and then roll again we're looking at slope

[00:17:32] [SPEAKER_01]: we're looking at something that just blew off of the charts on this thing we have every

[00:17:36] [SPEAKER_01]: expectation of this to converge again at some point in the future we'll see how exactly it

[00:17:40] [SPEAKER_01]: converges and smooths itself out but it's really interesting and again another point of

[00:17:45] [SPEAKER_01]: this is why this is an outlier it doesn't normally do this somebody rolled the super ball

[00:17:49] [SPEAKER_01]: down the hill they thought it was a bowling ball it turned out to be a super ball and it just went

[00:17:53] [SPEAKER_01]: bananas and another indication that call rotor so we're gonna put all this in a long-term

[00:18:00] [SPEAKER_02]: context in a second but I did want to talk a little bit about I mean there's always you know

[00:18:04] [SPEAKER_02]: it's very good to put things in a long-term context and understand you know things

[00:18:07] [SPEAKER_02]: things repeat themselves are at least Ryan historically but there are things that are different

[00:18:11] [SPEAKER_02]: every time and I think it's important to understand those I mean one of the things that's

[00:18:14] [SPEAKER_02]: different this time we've talked about it before is options activity is risen a lot I mean way more

[00:18:18] [SPEAKER_02]: people are using options than were before do I know what that means no um I think that

[00:18:23] [SPEAKER_02]: probably has a lot to do with the muted volatility followed by the spikes but again I'm not an

[00:18:28] [SPEAKER_02]: expert in options you can watch the podcast and Brent to get a better perspective on that but I

[00:18:32] [SPEAKER_02]: think it's good to have to understand that's going on because maybe it helps you explain

[00:18:35] [SPEAKER_02]: what's going on or we've talked to Mike Green a bunch and you and I did an episode about lessons

[00:18:39] [SPEAKER_02]: from Mike Green about the rise of passive investing um you know that also is having impacts you

[00:18:44] [SPEAKER_02]: know that that could make the market more volatile that could increase the chances of these

[00:18:48] [SPEAKER_02]: you know these spikes it passed passive were ever to go negative so that that's important

[00:18:52] [SPEAKER_02]: to think about as well and the other thing is and this is outside of my area of expertise but a

[00:18:57] [SPEAKER_02]: lot of the guys that I do follow are talking about like beneath the surface they're seeing

[00:19:01] [SPEAKER_02]: less liquidity than than they had seen in the past and you know those could that could relate to some

[00:19:05] [SPEAKER_02]: of these other things as well but there are things going on that are different this time now what

[00:19:09] [SPEAKER_02]: what those mean I don't know you know what what the impacts are for long-term investors is probably

[00:19:14] [SPEAKER_02]: but I think it's at least a good to understand what you're seeing and what may might be driving

[00:19:19] [SPEAKER_01]: these types of things we're seeing in the market it's good to know these are trends it's good

[00:19:24] [SPEAKER_01]: to read like the Mike Green stuff it's good to read Dave Nodig had an exceptional piece I don't

[00:19:28] [SPEAKER_01]: know if you saw this but yeah it was great really and why the active passive debate matters

[00:19:33] [SPEAKER_01]: and kind of like looking at the concerns around passive and what this means but these are all

[00:19:40] [SPEAKER_01]: understanding that there's just more passive than there was in prior cycles for something like this there's

[00:19:44] [SPEAKER_01]: more options activity and people trading options and there was in a prior instance of something

[00:19:49] [SPEAKER_01]: like this happening these are all going to change the way we take the next turn in this economy

[00:19:54] [SPEAKER_01]: so reading stuff like Nodig's piece paying attention to stuff like what Mike Green and people

[00:19:59] [SPEAKER_01]: like that are saying they help give color in context to the broader situation we're in because

[00:20:05] [SPEAKER_01]: the world human behavior doesn't change but the world does keep changing and there are some

[00:20:11] [SPEAKER_01]: very very substantial differences in things like passive investing and things like market

[00:20:15] [SPEAKER_01]: plumbing and things like options activity that just worked quite this way before so anybody

[00:20:20] [SPEAKER_01]: you can help us put that color on the situation can be really useful because it's also part of how

[00:20:26] [SPEAKER_01]: we can look at this and make a joke like bread paid about like yeah the payrolls are kind of

[00:20:31] [SPEAKER_02]: just to close us that was a positivity because we have we have talked about some things that are

[00:20:35] [SPEAKER_02]: a little bit weird in the market this is great you pulled this from Charlie Valelo and this is

[00:20:40] [SPEAKER_02]: basically the returns of the S&P 500 following CNBC markets in turmoil episodes now just to put

[00:20:45] [SPEAKER_02]: this in context this is not you know great like my point friends will tell me this data is not you know great

[00:20:50] [SPEAKER_02]: there's a lot of days that are basically one after the other and the one-year period completely overlap

[00:20:55] [SPEAKER_02]: the sample is small that's not the point this is some like perfect test but the idea is

[00:21:01] [SPEAKER_02]: what the average one-year return following a CNBC markets in turmoil episode is 40% and he said

[00:21:06] [SPEAKER_02]: percent positive one year returns always 100% of the time so again there's no statistical significance

[00:21:12] [SPEAKER_02]: of this but it does show like when you see this in the media when people are panicking when

[00:21:16] [SPEAKER_02]: CNBC's breaking out the markets in turmoil episode a lot of times it's not a time to panic even

[00:21:21] [SPEAKER_01]: it seems in the time that it is a time to panic this is the new blood in the streets you know

[00:21:28] [SPEAKER_01]: feeling postpart if anything else and maybe this is just a by the dip mentality of the last

[00:21:33] [SPEAKER_01]: however many years that that's been working as well as it's worked but it's if CNBC or if the

[00:21:38] [SPEAKER_01]: mainstream media is running a markets in turmoil thing that's kind of your blood in the streets lately

[00:21:44] [SPEAKER_01]: and savvy investors it's good to see a chart like this especially as a long-term investor it's

[00:21:49] [SPEAKER_01]: good to see a chart like this because this is a reminder if they're covering it that means

[00:21:53] [SPEAKER_01]: everybody knows and if everybody knows that means there's something else that everybody does

[00:21:58] [SPEAKER_01]: it know and that's really what you want to be paying attention for stuff like this I love this

[00:22:03] [SPEAKER_01]: graphic I hope you update said I hope you continue to update it that's a made-off sea of green right

[00:22:08] [SPEAKER_01]: there you know you wouldn't believe those numbers under the normal circumstances what's crazy

[00:22:13] [SPEAKER_02]: about this in this place in what I was saying before about the numbers maybe not be something

[00:22:16] [SPEAKER_02]: you should rely on but also like once CNBC breaks out this markets in turmoil episode they keep it out

[00:22:21] [SPEAKER_02]: like they don't play games here like this is like if you look at 2020 like starting in February of 2020

[00:22:25] [SPEAKER_02]: they were like running this they every day for months it kept running it over and over again so

[00:22:30] [SPEAKER_01]: I guess when they see the ratings they're ready to go with this thing pay fear cells

[00:22:34] [SPEAKER_01]: fear cells really really well it goes all the way back to all the daily kind of stuff and

[00:22:38] [SPEAKER_01]: putting your hand on the stove is way way more memorable than you know having a good thing happen to you

[00:22:44] [SPEAKER_01]: your Tuesday morning so if they know that people are concerned they know the best way you get

[00:22:50] [SPEAKER_01]: to get you to turn that TV on again to log into that website or whatever the next day

[00:22:54] [SPEAKER_01]: the best way they can do that is just a pre-on something you're scared of so

[00:22:59] [SPEAKER_01]: being an educated consumer not just becoming hugely de sensitized the humanity which

[00:23:04] [SPEAKER_01]: tourists go out there things but certainly feels man are you I'm just so much more jaded and

[00:23:09] [SPEAKER_01]: cynical with so much of this stuff than I was 10 15 years ago it's crazy the callis I felt

[00:23:14] [SPEAKER_01]: I feel like I've built up as a professional dealing with this I'm you experience the same thing

[00:23:18] [SPEAKER_01]: yeah I've been as gentle as I do it yeah I haven't had this level of jaded synthesis since

[00:23:23] [SPEAKER_01]: I was like it am not just like 14 year old atheist or something but he's what they said this

[00:23:31] [SPEAKER_02]: yeah well so that's something we could maybe talk about in a future episode like how to deal with that

[00:23:36] [SPEAKER_02]: you're right I see the same thing but pivoting to our lesson so

[00:23:40] [SPEAKER_02]: I think the first thing I want to talk about here is I think a lot of people might look at what we've

[00:23:44] [SPEAKER_02]: talked about here in the first 22 minutes of this podcast and be like why are you even talking

[00:23:47] [SPEAKER_02]: about this stuff like you're a long-term investor nobody cares about this like if for long-term

[00:23:51] [SPEAKER_02]: investors you they shouldn't even pay attention to this and I think I've learned over my career because

[00:23:54] [SPEAKER_02]: that was me at the beginning I think I've learned over my career that that's the wrong way to look at it

[00:23:58] [SPEAKER_02]: I think when people who are your clients are paying attention to this stuff like you have to

[00:24:02] [SPEAKER_02]: dress it at least you can't pretend it doesn't exist and be like oh what are you doing looking at a

[00:24:07] [SPEAKER_02]: vix chart like that they relevant to anything that's a part of your long-term plan that's true

[00:24:12] [SPEAKER_02]: that it's irrelevant to anything in your long-term plan but it's also true that it

[00:24:15] [SPEAKER_02]: wrinkles kind of talked about this like when they're when their clients used to call and talk

[00:24:18] [SPEAKER_02]: about individual stocks and stuff I think Josh Brown talked about this a long time ago like they

[00:24:22] [SPEAKER_02]: would just dismiss it at the beginning but it's like your clients want to talk about this

[00:24:25] [SPEAKER_02]: stuff they're thinking about these things so what I said is education is better than ignorance and

[00:24:29] [SPEAKER_02]: what I mean by that is I think it is important if you're looking at this stuff I think it's

[00:24:34] [SPEAKER_02]: better for people to understand what's going on here rather than just to dismiss it than as if it

[00:24:38] [SPEAKER_01]: doesn't exist. I talk a lot about in my away from the stuff that I do away from work for myself

[00:24:48] [SPEAKER_01]: I talk a lot about basically how your curiosity drives where you're creative that drives your habits

[00:24:53] [SPEAKER_01]: and your habits have to point back to like noticing what's going on in the world this is connected

[00:24:58] [SPEAKER_01]: clients want to talk about an individual stock clients want to talk about that levered triple

[00:25:04] [SPEAKER_01]: reverse you know VIX ETF or whatever he is they want to talk about this stuff and don't dismiss it

[00:25:12] [SPEAKER_01]: as a professional I believe it's our job not to be dismissive of that it's I think and this is

[00:25:18] [SPEAKER_01]: something like again I bring in from like the cultist creative stuff that I do too where it's

[00:25:23] [SPEAKER_01]: I want to notice where your curiosity is getting stoked I want to notice what's grabbing your

[00:25:28] [SPEAKER_01]: attention and why you want to do that because I know just like me in like fourth grade math the

[00:25:33] [SPEAKER_01]: first time I stumbled on fractions it was like I think I'm done with this I want to know that if

[00:25:38] [SPEAKER_01]: I have something that's forcing me away I'm not going to miss out on something I need to learn later

[00:25:43] [SPEAKER_01]: and likewise if I have something that's super super engaging to a person there's probably a

[00:25:48] [SPEAKER_01]: way to explain some other stuff that actually matters that's inside of this thing so if what just

[00:25:54] [SPEAKER_01]: happened in Nvidia has a client's attention I want to jump all over that curiosity because I know

[00:26:00] [SPEAKER_01]: curiosity is just the beginning of the conversation why are you curious in this thing what can we do

[00:26:05] [SPEAKER_01]: create creatively with this what can we process this messaging to do which education that might mean

[00:26:12] [SPEAKER_01]: talking to somebody who has no care or concern about the end carry trade what this is why this

[00:26:17] [SPEAKER_01]: matters and why that it means it might be okay that we don't know exactly what's going on now

[00:26:21] [SPEAKER_01]: but I'd rather have it be that than unemployment just tripled for no reason overnight because we

[00:26:26] [SPEAKER_01]: just you know bankrupted a bunch of banks or construction companies or something and then the habit

[00:26:30] [SPEAKER_01]: of like okay what do we can do with this that's constructive you might have come to me with a very

[00:26:35] [SPEAKER_01]: old idiosyncratic thing that I might have very little to do with in your financial life but by the end

[00:26:40] [SPEAKER_01]: I would bring that back around to something that's informed that's educational and that's interesting

[00:26:46] [SPEAKER_01]: to you the client to the person is reaching out because anything that's

[00:26:50] [SPEAKER_01]: stokes your curiosity is valid if we work through that cycle together that's part of building

[00:26:54] [SPEAKER_01]: a relationship that's part of where trust comes from and so much of this is different for different

[00:26:58] [SPEAKER_02]: people like you also don't want to be on the other side of the coin if you have a client doesn't

[00:27:02] [SPEAKER_02]: even know what's going on who you know just basically doesn't pay that much attention to investments

[00:27:05] [SPEAKER_02]: you want to be like call them up and be like did you see this yet in carry trade like you don't

[00:27:09] [SPEAKER_02]: want to do that either because it's but for people who are interested in that stuff like I think it's

[00:27:13] [SPEAKER_01]: important to talk about it rather than dismiss it would my fourth grade math teacher was like

[00:27:17] [SPEAKER_01]: your bad at fractions and now in the snow day I want to make you watch Shirley Temple piece

[00:27:21] [SPEAKER_01]: but it's like I'm double uninterested in this just letting go on my way it's just better for

[00:27:27] [SPEAKER_01]: all of us if you just dismiss me from the class right now no good it's coming of this and yeah

[00:27:32] [SPEAKER_01]: for the long-term investors were like this is what markets do and I've had a bunch of those calls

[00:27:36] [SPEAKER_01]: too hey everything okay you worried about any of this like Matt you you know me like this is done

[00:27:42] [SPEAKER_01]: this is the walk in the park oh it went down for a couple days just tell me your rebalancing

[00:27:46] [SPEAKER_01]: or we bought something like that's what I want to know and for every one of those are some

[00:27:50] [SPEAKER_01]: of the else who wants to get into the weeds on it that's why you build relationships with people

[00:27:54] [SPEAKER_01]: you can trust that people you can talk to and that's why for us and this seat of working with people

[00:27:58] [SPEAKER_01]: it's just if you're curious I want to go deeper if you're not curious let's figure out what you

[00:28:05] [SPEAKER_01]: are curious about for the next conversation or the next thing we actually have to talk that are

[00:28:10] [SPEAKER_02]: good study and this is a while back where they they tested all kinds of ways to reaching out

[00:28:14] [SPEAKER_02]: the clients during market turmoil and they found like what I was saying before was not the right

[00:28:17] [SPEAKER_02]: way to do it like you don't want to basically reach out to people and say the yet and carry trade is

[00:28:21] [SPEAKER_02]: blowing up like if you have any questions reach out to us because a lot of people don't care in our

[00:28:25] [SPEAKER_02]: paying attention that you're still paying panic whether there's no need to still panic whereas

[00:28:28] [SPEAKER_02]: the people that are a little bit more concerned you can either identify them in advance or you

[00:28:33] [SPEAKER_02]: couldn't they can reach out to you and then you can address these types of things I like thinking of it

[00:28:38] [SPEAKER_01]: it's not our job we're really picking on CNBC I don't know if I mean it doesn't matter is it

[00:28:43] [SPEAKER_01]: or we just okay picking on CNBC and we're fine yeah we're fine picking on CNBC okay so

[00:28:48] [SPEAKER_01]: that's the wrong approach like the wrong approach is me to pick up the thought it would be like

[00:28:53] [SPEAKER_01]: because people pick up their phone put your AirPods in call the first and it'd be like

[00:28:57] [SPEAKER_01]: markets are a total of the government is it really first that is not a good approach

[00:29:04] [SPEAKER_01]: you can call and you can react to that you could say I don't have to say the news today

[00:29:08] [SPEAKER_01]: stuff's bumpy out there we're okay are you okay there's a million other empathetic ways to do this but just

[00:29:14] [SPEAKER_01]: yeah don't as better than show like don't run into the theater screaming like fire and then be like no

[00:29:20] [SPEAKER_01]: no on on the movie there's premier thesis there it's okay like what yeah so anyway my next

[00:29:27] [SPEAKER_02]: one is also um i think if the core related Larry to this thing so we're talking about all this

[00:29:31] [SPEAKER_02]: information we're educating ourselves about it but you always have to ask yourself the question

[00:29:35] [SPEAKER_02]: what can I do with it because that's what it falls down so we could talk about the spikes and we

[00:29:39] [SPEAKER_02]: could talk about the end carry trading we could talk about all that stuff but as an average investor

[00:29:43] [SPEAKER_02]: what am I going to do with that the answer 99% of the time is absolutely nothing i'm going to

[00:29:48] [SPEAKER_02]: educate myself about it on the understand what's going on in the market so when I see these CNBC headlines

[00:29:53] [SPEAKER_02]: I maybe have a better view on what actually is happening but like what I that next step is so important

[00:29:59] [SPEAKER_02]: not to take it which is I'm going to take this information and now i'm going to start thinking

[00:30:02] [SPEAKER_02]: I got to make changes because that's when you get yourself in trouble what can I do with this

[00:30:10] [SPEAKER_01]: that's helpful to my future circumstances this is where this is where I love having the

[00:30:17] [SPEAKER_01]: written financial play with clients I love knowing the calendar events I love knowing the expected

[00:30:21] [SPEAKER_01]: cash flows I know love knowing the balance sheet I love having the balance sheet segmented into at

[00:30:26] [SPEAKER_01]: these three components of our short media of a long term money so we can say what can I do with this

[00:30:33] [SPEAKER_01]: we know the market just went down we know that that creates buying opportunities over the long term

[00:30:39] [SPEAKER_01]: how much do I have in short short term money relative to my short term cash flow needs

[00:30:44] [SPEAKER_01]: relative to what's on the calendar and whatever else is going on if I can use this to be opportunistic

[00:30:50] [SPEAKER_01]: declines in the times to be opportunistic just like what two or three months ago when we were

[00:30:55] [SPEAKER_01]: basically on back to back double digit S and P your turns you know at a minimum where it was like

[00:31:00] [SPEAKER_01]: yeah it worked in the other way too when markets are giving you consecutive above average results

[00:31:06] [SPEAKER_01]: press you balance take the risk at least back down to your target waiting or whatever it is

[00:31:11] [SPEAKER_01]: across those three buckets in the context of your broader financial plan because that's how

[00:31:15] [SPEAKER_01]: you answer the what can I do with this information critical critical critical critical critical

[00:31:19] [SPEAKER_01]: just don't be forced to do anything the minute you let somebody else force you into how to decide

[00:31:25] [SPEAKER_01]: how to react is the minute you're getting into trouble so having that long term plan knowing how to

[00:31:30] [SPEAKER_01]: stick to it also informs what you can do about market events like this talking to a lot of people

[00:31:36] [SPEAKER_01]: in the last you know week where it's just like yeah we don't need as much money in the short

[00:31:41] [SPEAKER_01]: term or the medium term bucket can we do something proactive about this and that's not saying like

[00:31:45] [SPEAKER_01]: go out and buy the dip but it is saying if you rebalanced two months ago when the market was

[00:31:50] [SPEAKER_01]: ripping you might want to rebalance again now because this moves this moves the balance out of

[00:31:56] [SPEAKER_02]: whack that's why we rebalance and unless you were somebody who had delivered a yen carry trade on

[00:32:02] [SPEAKER_02]: which I assume you probably did but unless those people probably had to head for the exit very

[00:32:06] [SPEAKER_02]: very quickly they probably have a dignity action on this but your average investor probably doesn't

[00:32:10] [SPEAKER_01]: have to worry about it too much I only borrow yet as you can do that so why yeah it's Kyle Bassok

[00:32:18] [SPEAKER_01]: well that is true he may borrow you in the short hours he was

[00:32:23] [SPEAKER_02]: not always confusing to me so my next one and this is just this is sort of

[00:32:28] [SPEAKER_02]: sort of in contrast to what we talked about before but the next one is we've usually seen

[00:32:32] [SPEAKER_02]: something similar before and we did highlight some of the differences now in terms of what we've

[00:32:36] [SPEAKER_02]: seen in history but we asked about favor on this podcast we was released today about this

[00:32:39] [SPEAKER_02]: we were asking about all this stuff I talked about like rising options activity and in all of

[00:32:43] [SPEAKER_02]: other stuff and he was and unlike does it change anything for you he's like absolutely not and it

[00:32:46] [SPEAKER_02]: makes no difference like if you go back in history you'll see similar types of things you'll see

[00:32:51] [SPEAKER_02]: things that happen to nobody expected like this is all kind of part for the course of investing and

[00:32:55] [SPEAKER_02]: I think that's true like it's good to look at history and maybe find something that rhymes

[00:33:00] [SPEAKER_02]: because at least gives you some context in terms of what happened after and how things played out

[00:33:04] [SPEAKER_02]: it wasn't the end of the world and so I think it is good for us to educate ourselves about history

[00:33:09] [SPEAKER_02]: even if things might be a little bit different this time and they were at previous times

[00:33:13] [SPEAKER_01]: I try to remind people on this one with the something similar similar is not same those are two

[00:33:19] [SPEAKER_01]: different words and a good way to think about this is think about if you're a sports person thinking

[00:33:26] [SPEAKER_01]: about think about the evolution in sports think about in baseball adding the pitch clock

[00:33:30] [SPEAKER_01]: think about all the other little like tweaks if you're a you know a soccer world cup person or

[00:33:36] [SPEAKER_01]: whatever else you think about the substitutions and the things like that if you're a music person

[00:33:40] [SPEAKER_01]: you think about the evolution in styles so the things that are callback to pass periods but totally

[00:33:45] [SPEAKER_01]: updated for modern times nothing culturally stays exactly the same because different generations

[00:33:51] [SPEAKER_01]: grow up with different experiences this is the great part of all like the fourth turning in

[00:33:54] [SPEAKER_01]: the old house stuff like the really great part is that different generations different people process

[00:33:59] [SPEAKER_01]: information in different ways and then they they get older on average and that means stuff keeps

[00:34:04] [SPEAKER_01]: getting moved forward in a different way so you can see stuff that's similar it's not going to be the

[00:34:10] [SPEAKER_01]: game into mebs point we want to step back and go what about this actually informs the decisions on

[00:34:15] [SPEAKER_01]: making unless there's something really major that I see that's going to inform those decisions a lot of

[00:34:20] [SPEAKER_01]: this I should just expect let's like at other times things acted similarly to what's happening

[00:34:25] [SPEAKER_01]: now to take our biggest cues so my next one here is stocks always climb a wall of worry and I think

[00:34:31] [SPEAKER_02]: this is important because to me the times to be worried in markets is where nobody else is worried

[00:34:36] [SPEAKER_02]: like 1999 for example there may not have been a wall of worry I mean there probably wasn't the

[00:34:40] [SPEAKER_02]: way up but eventually it went away and eventually it was the internet's going to change everything and

[00:34:43] [SPEAKER_02]: you know maybe we get to that with AI at some point I don't think we've got to that yet but maybe

[00:34:47] [SPEAKER_02]: we because there's been tons of things to worry about recently but maybe we get there with AI

[00:34:50] [SPEAKER_02]: or everybody's like AI is going to change the world in every way possible so to me like the

[00:34:55] [SPEAKER_02]: wall the worry is something that's good you want it to be there you want people to be doubting the

[00:34:59] [SPEAKER_02]: rally you want all that to be going on it's like so it's just I think it's important to understand

[00:35:04] [SPEAKER_02]: this is part for the course in investing and so if you see these things to be worried about whether it's

[00:35:08] [SPEAKER_02]: the end carry trader anything else just understand there's always something to be worried about and

[00:35:12] [SPEAKER_02]: one of the things I've found for myself is I try to write these things down sometimes in like

[00:35:16] [SPEAKER_02]: I put them in like a word document because it helps me to go back three years later and be like

[00:35:20] [SPEAKER_02]: oh I was worried about this and I was worried about this and I was worried about this and usually they

[00:35:24] [SPEAKER_02]: resolved in a positive way and usually there wasn't a reason to be worried about it so this this worry

[00:35:28] [SPEAKER_02]: thing is normal and most of the time the thing you're worried about the market ends up overcoming

[00:35:33] [SPEAKER_01]: I believe it was a Josh Brown thing or one of the people I saw put it this way the first time is

[00:35:39] [SPEAKER_01]: a long time ago we climb a wall of worry if you didn't climb a wall of worry then stocks should

[00:35:43] [SPEAKER_01]: basically trade that in returns are commensurate with you know t-bills or treasury bonds like the

[00:35:49] [SPEAKER_01]: 30 year bond return should match up with the treasury bond because there's no point in taking risk

[00:35:53] [SPEAKER_01]: if there's no risk if that's truly what we believe that there's no wall of worry there then

[00:35:58] [SPEAKER_01]: the valuation should be through the moon and stocks should be priced like there's no risk

[00:36:03] [SPEAKER_01]: if we're not seeing that there's gonna be some variance in what the path is and that's where

[00:36:07] [SPEAKER_01]: risk premium and all the other stuff comes from so the wall of worry is a feature not a bug

[00:36:15] [SPEAKER_01]: we have to anticipate stuff like this over the long haul that's what gives us our opportunity

[00:36:20] [SPEAKER_01]: set that's what gives us these trade-offs and that's why for anybody who has like needs for that

[00:36:25] [SPEAKER_01]: if they're not gonna be just invested in stocks and for people who are doing it in some

[00:36:29] [SPEAKER_01]: deliberate way they're gonna figure out what part of my life can I risk on my favorite example

[00:36:35] [SPEAKER_01]: like what part of my money am I gonna risk on the McDonald's of the world figure out how to price to

[00:36:40] [SPEAKER_01]: chicken nugget of the apples of the world figure out how to price the iPad of the in videos of

[00:36:45] [SPEAKER_01]: the world pricing out whatever the name of the fancy chip is like the reality is we're betting on

[00:36:50] [SPEAKER_01]: companies to make these decisions to try to figure out how to be profitable and give a return higher

[00:36:54] [SPEAKER_01]: than the risk free rate it's the wall of worry it's a beautiful beautiful wall of worry

[00:37:00] [SPEAKER_02]: this next one I really love because in this is this is from Aaron Stan Hope with a

[00:37:04] [SPEAKER_02]: Seanuss he asked an management who I would recommend anybody follow on Twitter he doesn't tweet a lot

[00:37:07] [SPEAKER_02]: but when he does it's always really really good stuff so this gets what we've talked about a lot

[00:37:11] [SPEAKER_02]: in the podcast which is his idea that fundamentals don't matter and he throw them out the window

[00:37:15] [SPEAKER_02]: and whatever but like this chart is basically fundamentals which is earnings for share against the

[00:37:20] [SPEAKER_02]: one thousand total return and you can see over a long long periods of time it deviates at times

[00:37:26] [SPEAKER_02]: and it's deviating a little bit right now but in general it always comes back and so for people like

[00:37:32] [SPEAKER_02]: me who were worried about you know is the market not responding to fundamentals as much as it

[00:37:36] [SPEAKER_02]: didn't the past like I think this is a really cool chart to look at just just to give you put it

[00:37:40] [SPEAKER_02]: in context and realize we are buying shares of companies and we would expect to do over time

[00:37:45] [SPEAKER_02]: that the shares of the companies would do something similar to what the fundamentals of the

[00:37:49] [SPEAKER_01]: companies do. Aaron area such a thoughtful guy is such a great reminder this is a big part about

[00:37:55] [SPEAKER_01]: things we go over with clients on a regular basis too so clients who have stock allocations

[00:37:59] [SPEAKER_01]: we want to remind them of yeah it's concerning when company fundamentals all flatline or when

[00:38:06] [SPEAKER_01]: they're declining and stock prices are still up or trending higher seeing the reminder of this

[00:38:11] [SPEAKER_01]: of just going like okay like fundamentals haven't rolled over hard this is just where we are

[00:38:16] [SPEAKER_01]: the trajectory of things going up back to i know i said it kind of as a joke like the biggest

[00:38:21] [SPEAKER_01]: dow single point drop in a single day well yeah that happens because the value of the dow

[00:38:26] [SPEAKER_01]: the points by the talent is way way higher than it was a few years ago let alone 10 years ago

[00:38:31] [SPEAKER_01]: or whatever the last statistic came out. The same thing here like the rate of change and the absolute

[00:38:37] [SPEAKER_01]: value of free cash flow earnings of revenues of all this stuff we look at broad market indices

[00:38:43] [SPEAKER_01]: it's going in the right direction it's going in the right direction it's working and that's

[00:38:48] [SPEAKER_01]: a beautiful fantastic thing to focus on that's not a headline and the the big and four

[00:38:53] [SPEAKER_02]: question is why am i buying stocks and i think this gets it that because what i'm doing is so

[00:38:58] [SPEAKER_02]: if i ask myself the question do i expect the fundamentals of the US companies to continue going up

[00:39:03] [SPEAKER_02]: over time as they have historically if the answer to that is yes then the second question becomes

[00:39:08] [SPEAKER_02]: do i expect the stock prices to actually track those fundamentals and that second question is where

[00:39:12] [SPEAKER_02]: people have been doubting it recently but this chart kind of puts it in context yes over time i

[00:39:17] [SPEAKER_02]: would expect if the fundamentals continue to go up the stock prices will continue to go up and inside

[00:39:21] [SPEAKER_02]: of that we can debate whether small caps are you know tracking fundamentals as well as large caps

[00:39:25] [SPEAKER_02]: certain videos deriving all of it but for people who were just invested in the market in general

[00:39:29] [SPEAKER_02]: this is a good reminder that fundamentals do track you know price does track fundamentals over time

[00:39:34] [SPEAKER_01]: it may be a wall of worry but fundamentals are fun and this the second one for him is also

[00:39:41] [SPEAKER_02]: really really interesting because this gets at a lot of what we've been talking about

[00:39:45] [SPEAKER_02]: that some people have been saying is not true and this this is talking about

[00:39:49] [SPEAKER_02]: the total return for the Russell 1000 index and then looking at it in terms of like relative

[00:39:55] [SPEAKER_02]: to fundamentals so in comparing it to the tech bubble because a lot of people have been saying

[00:39:59] [SPEAKER_02]: we're in the next tech bubble and in this chart really contrast that to show in this

[00:40:03] [SPEAKER_02]: remaren sandal again this chart really gets at the idea that that is not backed up by the data

[00:40:08] [SPEAKER_02]: this tweet i put up he said since the pandemic svx is returned 13.3% free cash flow is

[00:40:14] [SPEAKER_02]: grown right at the same pace far cry from returns outstripping fundamentals i.e. dramatic

[00:40:17] [SPEAKER_02]: multiple expansion in the tech bubble and along's are in precise but provide good perspective

[00:40:22] [SPEAKER_02]: and so that's the idea that we are seeing something very very different than the tech bubble here

[00:40:27] [SPEAKER_02]: we're seeing most of this being driven by earnings being driven by fundamentals and a lot less

[00:40:32] [SPEAKER_02]: of this being driven by multiple expansion than we did in 1999 that doesn't mean it will continue

[00:40:36] [SPEAKER_02]: we may have the AI bubble coming in the next five years and some of the guests we've had

[00:40:40] [SPEAKER_02]: in the podcast that suggested that might happen where this gets completely out of whack but at

[00:40:44] [SPEAKER_02]: least for right now most of this has been driven by fundamentals and it's important to do what he

[00:40:50] [SPEAKER_01]: does here too actually i really loved that because i don't see i'll see a version of earnings

[00:40:55] [SPEAKER_01]: with this chart you see a number of people who publish the earnings version of this

[00:40:58] [SPEAKER_01]: and see a number of people who publish a revenue version of this seeing free cash flow anybody

[00:41:02] [SPEAKER_01]: who normalizes for things just besides market cap it helps to that he's using the Russell 1.000

[00:41:07] [SPEAKER_01]: these are all just little tweaks to the data set that kind of just help remind us

[00:41:11] [SPEAKER_01]: are we kind of on track or are we you know way way out of whack i think you you want to pair a

[00:41:17] [SPEAKER_01]: chart like this with a chart of like the Russell 1.000 valuation bands with one two and three

[00:41:24] [SPEAKER_01]: standard deviations or one or two and then more away from like the averages over time this is a

[00:41:29] [SPEAKER_01]: good centering exercise to put next to a chart like that and go yeah on average large cap valuations

[00:41:34] [SPEAKER_01]: a little bit stretched not nearly as stretched as they as they've been in the past and critically

[00:41:40] [SPEAKER_01]: they've been stretching a little bit up until very recently because things like free cash flow

[00:41:44] [SPEAKER_01]: of actually stayed right there stocks in longer at least so the this next one is also

[00:41:51] [SPEAKER_02]: this is what i like to pull up whenever i see any sort of problems in the market because i think

[00:41:55] [SPEAKER_02]: it puts everything in context and this is basically looking at the number the percentage of days

[00:41:59] [SPEAKER_02]: in the s&p 500 that are positive and as we move forward percentage of months percent of quarters

[00:42:03] [SPEAKER_02]: years one year ten years twenty years and you can see i mean basically on any given day it's

[00:42:08] [SPEAKER_02]: almost a coin flip um as you get to weeks and months you know it's still the same thing um you can

[00:42:12] [SPEAKER_02]: have a lot of periods that are negative but as you hold longer and longer and longer there's never

[00:42:17] [SPEAKER_02]: been a twenty year period where at least nominal returns in the s&p 500 were negative

[00:42:21] [SPEAKER_02]: and it's just important to keep that in mind because you can get trapped in this daily returns

[00:42:25] [SPEAKER_02]: only being up 53% of the time and you could if you think about it in that time frame you can get

[00:42:30] [SPEAKER_02]: you know stuck a little bit but as you move forward and think oh you know when i get out the

[00:42:33] [SPEAKER_02]: ten years i've got a really really high percentage i'm going to be making money and then when i get

[00:42:36] [SPEAKER_02]: to twenty i've got a hundred percent at least historically i think that's a good way to look at it

[00:42:41] [SPEAKER_01]: yeah this is the this is the antithesis to the markets in turmoil like run the story on the

[00:42:49] [SPEAKER_01]: on cmbc on a daily basis when you have this stuff happening is a great time to run markets in

[00:42:53] [SPEAKER_01]: turmoil there's no twenty five year like average and certainly they're not pulling out the

[00:42:59] [SPEAKER_01]: twenty five year anniversary of the time we ran markets in turmoil and we're wrong like your

[00:43:03] [SPEAKER_01]: number getting a lot in that that thing so if you want to sell ads you sell them on the daily

[00:43:08] [SPEAKER_01]: returns you know it sell along the twenty five year anniversary of the time you screwed up 25 years

[00:43:13] [SPEAKER_01]: ago so help me got a factory visit the states made twenty five years ago those are dark and i

[00:43:18] [SPEAKER_02]: could be a long episode we ever did that um well skip that one the only other thing i'll point

[00:43:22] [SPEAKER_02]: out about this is it is important and this is sort of a corollary but it is important to remember

[00:43:25] [SPEAKER_02]: the types of returns you're seeing so this is this is nominal returns but there's other things you see

[00:43:30] [SPEAKER_02]: it reported which is you know real returns so how did stocks outpace inflation you see the risk

[00:43:35] [SPEAKER_02]: premium that stocks outpace treasury bills and so when you when you see charts like this a lot of

[00:43:39] [SPEAKER_02]: times depending on what they're done how they're done you can see different results like i think

[00:43:44] [SPEAKER_02]: that twenty year result is different um when you look at the other ways like i don't think stocks

[00:43:48] [SPEAKER_02]: have all past inflation in every twenty year period i don't think there's been a positive risk

[00:43:50] [SPEAKER_02]: premium in every twenty year period so it's just important to think about this because you will

[00:43:55] [SPEAKER_02]: see people who are trying to make a point with these charts maybe shift them a little bit it's just

[00:43:59] [SPEAKER_02]: you have to ask yourself what am I seeing here none of her the wrong way to do it it's just you have

[00:44:04] [SPEAKER_02]: to ask yourself what am I seeing here when i see a chart like this back to the why am i reading

[00:44:08] [SPEAKER_01]: this now question and back to the chart we just talked about before with the free cash flow

[00:44:13] [SPEAKER_01]: and the valuation metrics over time you really want to read what the chart is showing you

[00:44:18] [SPEAKER_01]: spent a lot of time when clients see something either in another report or somewhere else some

[00:44:23] [SPEAKER_01]: business journal or something of interest and look all like hey what does this mean and you got

[00:44:28] [SPEAKER_01]: to kind of unpack and this is where you just need those critical learning skills critical analysis

[00:44:32] [SPEAKER_01]: skills to be able to dive into something like this because yeah if i adjust this if i do

[00:44:37] [SPEAKER_01]: if i don't use nominal returns if i add enough inflation it's going to look different if i look at

[00:44:42] [SPEAKER_01]: relative returns if i look at if i change the benchmark from s and p 500 to something else these are

[00:44:47] [SPEAKER_01]: going to look different understand what data is being presented with you and yeah guess what large companies

[00:44:53] [SPEAKER_01]: in the united states they've also had a pretty good run since nineteen twenty eight right side of

[00:44:59] [SPEAKER_01]: a couple of wars right side of a couple others to two a cents these numbers are looking pretty good

[00:45:03] [SPEAKER_02]: but there's a lot of stuff baked into this cake and we'll see this in this idea of like making sure

[00:45:07] [SPEAKER_02]: you look at charts and context a lot during periods like this because we have some clients who

[00:45:12] [SPEAKER_02]: you know do read the doom and gloom newsletters and so you will see like them come up with this macro chart

[00:45:16] [SPEAKER_02]: of like whatever this is only happened twice in history in the market went to hell and like all

[00:45:20] [SPEAKER_02]: those other stuff so it is important to just kind of take a step back with that and say like who's

[00:45:24] [SPEAKER_02]: presenting me this chart what is there what are they trying to accomplish why am i reading this now

[00:45:29] [SPEAKER_02]: all that stuff's important to ask when you get those charts because a lot of these doom and gloom type

[00:45:33] [SPEAKER_02]: things are always doom and gloom and basically in the long term they're guaranteed to be wrong

[00:45:37] [SPEAKER_02]: but in the short term they're guaranteed to be right in a big way in you know certain times

[00:45:41] [SPEAKER_02]: and so it's just important to keep all that in context when you see it i think i kind of want to

[00:45:45] [SPEAKER_01]: start my own this is a tangent that we're going to go the next one i kind of want to start my own

[00:45:49] [SPEAKER_01]: kind of doomer newsletter and having so taken by the the quality of work that doom bird puts out

[00:45:55] [SPEAKER_01]: is next level like there's some next level of research and analysis going on there

[00:46:00] [SPEAKER_01]: but i really feel like my my response that could be i want to do gloom bird and i just want to

[00:46:05] [SPEAKER_01]: like quote you know in goth bands like it's by the actual dad i'll just throw like a more asy quote

[00:46:10] [SPEAKER_01]: against like a CNBC story picture or something i think gloom bird could really take off

[00:46:14] [SPEAKER_01]: it's like instead of the doomerism of being panicked it's just like things that feel a little bit

[00:46:19] [SPEAKER_01]: sad about maybe get a sunburner study day two i can do some good youtube covers for you for that

[00:46:24] [SPEAKER_02]: i can get you a lot of clicks i'm very good at doing the i don't do them for our stuff because

[00:46:28] [SPEAKER_02]: i don't like them but i i can make some really good doom and gloom type of youtube covers if i have to

[00:46:32] [SPEAKER_01]: all right my gloom bird idea might get the green light what's sick if this market continues to be

[00:46:38] [SPEAKER_01]: in turmoil i might go full gloom bird on you watch out so just a few more as we wrap up and

[00:46:43] [SPEAKER_02]: this is something that i think is really important as we think about clients calling us and stuff

[00:46:46] [SPEAKER_02]: and i was just talking to a client about this the other day and this idea that you know conviction is so

[00:46:51] [SPEAKER_02]: important in investing and it's really important that we don't look at this in a spreadsheet

[00:46:55] [SPEAKER_02]: it's really important that we look at this as what do you the client believe and have we aligned your

[00:47:00] [SPEAKER_02]: portfolio with that because when you have these periods where the market goes down you're much less

[00:47:06] [SPEAKER_02]: likely to question that you're much more likely to stick with it if it's whatever you believe even

[00:47:10] [SPEAKER_02]: if it's not the perfect thing that i put together you know in my quantum modeling software that

[00:47:14] [SPEAKER_02]: says you know this is the optimal portfolio like even if it's you know far from that if it's a reasonably

[00:47:20] [SPEAKER_02]: intelligent investment strategy and if you believe in it this is the type of period where that conviction

[00:47:25] [SPEAKER_02]: gets tested and you know i i even that's probably a little extreme for me to say that because this

[00:47:28] [SPEAKER_02]: is not even that much of a decline i mean you could have way bigger periods work it's tested but

[00:47:33] [SPEAKER_02]: this is like a small example of that getting tested and as i always say to clients like the most

[00:47:38] [SPEAKER_02]: important thing is that you understand why we're doing this that you believe in this thing and that

[00:47:43] [SPEAKER_02]: during periods like this you're not going to make changes because of it and if you feel like you

[00:47:46] [SPEAKER_02]: have to make changes then we probably should have you in something different even if this thing

[00:47:50] [SPEAKER_01]: looks better on a spreadsheet conviction is always a function of confidence confidence is always

[00:47:57] [SPEAKER_01]: a function of your trust and the people you're doing this with and the people you're around

[00:48:02] [SPEAKER_01]: and the data that you have your disposal when we look at conviction as being essential what we're

[00:48:09] [SPEAKER_01]: really talking about is we're looking at our conviction in is this going to work over the

[00:48:15] [SPEAKER_01]: horizon i needed to and how do i know this is the time horizon i think i needed to there's nothing

[00:48:20] [SPEAKER_01]: better i love the i love the reality of a situation where a client wants to do something we go

[00:48:30] [SPEAKER_01]: maybe why don't we will show you the numbers you know it's your money it's your decision ultimately

[00:48:35] [SPEAKER_01]: we're not necessarily recommending that or pointing that out is something that seems obvious

[00:48:40] [SPEAKER_01]: but we're happy to work through with you and then one of the greatest feelings in the world is

[00:48:44] [SPEAKER_01]: working it through with the client the client going like oh this kind of seems like this just

[00:48:49] [SPEAKER_01]: this is a more complicated way to get to the same place you're like yeah that's how we came at

[00:48:53] [SPEAKER_01]: it too and then realizing like again conviction is a function of confidence so it's okay to test

[00:49:00] [SPEAKER_01]: your convictions it's okay to have stuff like this remind you of why your confidence is in place

[00:49:06] [SPEAKER_01]: in the first place that can be one of the gifts of living through a bunch of these bumps in

[00:49:11] [SPEAKER_01]: you know giant vix spikes and terrifying new cycles and i think that's important too because

[00:49:16] [SPEAKER_02]: your conviction has to be in something that makes some degree of sense like if i have a client who

[00:49:20] [SPEAKER_02]: has conviction in buying companies with the highest debt there are the verge of bankruptcy or something

[00:49:24] [SPEAKER_02]: like i probably should be guiding in a way for you investor or sex and value investor i should

[00:49:30] [SPEAKER_02]: probably be guiding them away from that and saying you know that that's a strategy that a long-term

[00:49:34] [SPEAKER_02]: doesn't work but if you've got two strategies that are close to each other or two strategies that

[00:49:39] [SPEAKER_02]: you have a you know reason to believe they will work the one that you believe in is usually

[00:49:43] [SPEAKER_02]: going to be better than the other one even if the other one might show better returns on a spreadsheet

[00:49:47] [SPEAKER_01]: or something like that yeah and as you can see by my crypto fundamentals and that analysis check

[00:49:53] [SPEAKER_01]: all i can take this by these memegoids until uh so my next one i'm going to steal from you actually

[00:50:00] [SPEAKER_02]: um from our last episode with with jackshwaker because the way you put this i really like the idea

[00:50:05] [SPEAKER_02]: because you you have people in these types of periods that want to make binary changes and the

[00:50:09] [SPEAKER_02]: temptation both as a person and as an someone who advises those people is to say you know that's

[00:50:14] [SPEAKER_02]: just stupid you shouldn't make those binary changes that's ridiculous but the reality is sometimes

[00:50:19] [SPEAKER_02]: making a small change during a volatile period is better than the binary choice of going all in or

[00:50:25] [SPEAKER_02]: all out and even if it the right choice is to do nothing sometimes a small choice can prevent the

[00:50:31] [SPEAKER_02]: wrong choice and so i think i like the way you put that and i think it's really important to think about

[00:50:35] [SPEAKER_02]: that like even if you're somebody who doesn't use an advisor who manages your own money

[00:50:38] [SPEAKER_02]: and you're just feeling this temptation to make some major change a lot of times the best thing to

[00:50:43] [SPEAKER_02]: do is take a step back and say well if i make this small change i feel like i did something in response

[00:50:48] [SPEAKER_02]: to this i'll feel better about it all of wood making the large change i think that can be a better

[00:50:52] [SPEAKER_01]: way a lot of the time and you can make a small change in a back to the conviction confidence thing

[00:50:58] [SPEAKER_01]: you can make a small change in something where you still have a high level of confidence in the

[00:51:02] [SPEAKER_01]: thing it's it's probably okay if you added to an index fund or to a large cap text stock or

[00:51:10] [SPEAKER_01]: something else in the wave of this market volatility it's okay to do that little thing that is

[00:51:14] [SPEAKER_01]: directly oriented in the direction you're going with two on a big market decline if somebody wants to

[00:51:20] [SPEAKER_01]: add to a single position or add to something it's like are you still buying something that the

[00:51:25] [SPEAKER_01]: expected returns with a below average result is done caught up again like these are okay that's a tiny

[00:51:31] [SPEAKER_01]: way to rebalance something exact way to rebalance it's not the mathematically optimal way to do it

[00:51:36] [SPEAKER_01]: but emotionally it might have a very small impact on the long-term results but it may have a very

[00:51:41] [SPEAKER_01]: big impact on reminding of you of why you have the conviction of the confidence and the strategy

[00:51:46] [SPEAKER_01]: that you're laying out that is tremendously important i think it's if you know this inside

[00:51:52] [SPEAKER_01]: yourself you can definitely you can definitely do this if you're if you're managing your own money

[00:51:58] [SPEAKER_01]: you don't need another person to do this for you i think it's helpful even if you're managing

[00:52:03] [SPEAKER_01]: your own money this is where it's good to have a community of people with similar thought processes

[00:52:08] [SPEAKER_01]: around to balance us off the bogell heads are probably doing a lot better in volatile market

[00:52:13] [SPEAKER_01]: environments than you know the yacht who message boards or whatever the equivalent of that is today

[00:52:18] [SPEAKER_01]: and i think that's the other thing to like the benefit of if you're doing yourself

[00:52:22] [SPEAKER_01]: the other colleagues that you like respecting trust who have similar things are trying to accomplish

[00:52:27] [SPEAKER_01]: great if you don't have that there's a real value in working with a professional or advisor somebody

[00:52:33] [SPEAKER_01]: who can also just say like i have your long-term interest in buying to let's try to find the

[00:52:38] [SPEAKER_01]: smallest way we can keep moving towards that track and just rebuild that confidence in that conviction

[00:52:43] [SPEAKER_02]: and the right direction so it was a good example is like i had a client recently who is very

[00:52:47] [SPEAKER_02]: panic that was going on and wanted to make some significant changes and like after talking about it

[00:52:50] [SPEAKER_02]: for a while what we settled on is the client has like a higher risk strategy they're in and they have

[00:52:55] [SPEAKER_02]: a lower risk strategy well and they're taking withdrawals from the account what we said is we're going

[00:52:58] [SPEAKER_02]: to sell the higher risk strategy for a little bit for a short period of time we're going to start

[00:53:02] [SPEAKER_02]: taking all the withdrawals out of the higher risk strategy now you can argue that's not the right thing to

[00:53:05] [SPEAKER_02]: do because in declines you probably want to be selling the other thing but if it makes you feel comfortable

[00:53:09] [SPEAKER_02]: that's a good way to make that's a very small change in their allocation around the edges it's not going

[00:53:13] [SPEAKER_02]: to make some huge difference in their long-term returns but they feel better about it now they feel like

[00:53:17] [SPEAKER_02]: all right you know i'm taking risk when i take my withdrawals every month i'm taking a little bit of

[00:53:21] [SPEAKER_02]: risk off the table by selling the higher risk strategy that's the way but even if even if it's not

[00:53:24] [SPEAKER_02]: the right thing on a spreadsheet if the right thing to do for that person they'll do better that way

[00:53:28] [SPEAKER_01]: than they would have if they'd made some major change and functionally this is this is the overlap

[00:53:33] [SPEAKER_01]: between financial planning and investment management because effectively what you're doing is you're

[00:53:37] [SPEAKER_01]: balancing for sink of consumption away from the higher risk one than the lower risk one but

[00:53:44] [SPEAKER_01]: i mean i would have i would also venture to gas the higher risk one does up higher expected returns

[00:53:48] [SPEAKER_01]: over the long long run oh definitely yeah but but i'm sure like over a medium term period or

[00:53:53] [SPEAKER_01]: other periods i bet there's plenty of times where they overlap or ones leading in ones lagging

[00:53:58] [SPEAKER_02]: and it probably flips right yeah and we're talking about like single percentage points in terms

[00:54:02] [SPEAKER_02]: of the total allocation change that this will do right it's not it's not enough to really matter

[00:54:06] [SPEAKER_02]: but what does matter a lot is how the person feels about that this is happening right now

[00:54:10] [SPEAKER_02]: they feel like something is being done about this market volatility and it and if that's what you

[00:54:14] [SPEAKER_02]: need in order to avoid the big change then that's what you should do it's not like they're coffee

[00:54:19] [SPEAKER_01]: canning the money in the backyard all alone so there's just like let's just go from here to here

[00:54:26] [SPEAKER_01]: versus yeah coffee canning the network would just don't do that so as as we close out we

[00:54:31] [SPEAKER_02]: had one more here and then this is just something i think about a lot because we try to do

[00:54:34] [SPEAKER_02]: with education upfront but i think it's really important to ask with any strategy you're in

[00:54:39] [SPEAKER_02]: like on the downside of what are my expectations in terms of what that downside might look like so

[00:54:44] [SPEAKER_02]: to give you an example like if somebody's at 100% equity strategy they probably should expect

[00:54:48] [SPEAKER_02]: they're gonna lose 50% of your money at some point um if somebody's in the permanent portfolio

[00:54:52] [SPEAKER_02]: you know if you look historically the permanent portfolio the max drawdown made you know 1015

[00:54:57] [SPEAKER_02]: percent it's i think they it's set the new max drawdown in 2022 but it hit something like that so

[00:55:02] [SPEAKER_02]: at least that gives you some context when you're seeing something like this and you're seeing

[00:55:05] [SPEAKER_02]: what's going on like what do i expect was a bad scenario and what's actually happening and that

[00:55:11] [SPEAKER_02]: works in fact are investing too like you want to know when is my strategy do poorly

[00:55:15] [SPEAKER_02]: and how poorly do i expect it to do not that history can't you know be the future can't be

[00:55:20] [SPEAKER_02]: completely different than the past but at least give you some context if you have context about how

[00:55:25] [SPEAKER_02]: this portfolio behaves in different scenarios what the bad scenarios look like you do a lot

[00:55:30] [SPEAKER_01]: that education up front you do a lot better i'm gonna add to that explanation so i think

[00:55:36] [SPEAKER_01]: knowing the downsides of your strategy itself are really important and then you have to map those

[00:55:41] [SPEAKER_01]: over the stage or phase of life you're in and i think it's the wedding of these two things it's an

[00:55:46] [SPEAKER_01]: incredibly important concept there's one of the things where it's like i'm incredibly grateful

[00:55:51] [SPEAKER_01]: to the experience of like the career that i've had so far to live through this with so many different

[00:55:56] [SPEAKER_01]: it's the big difference of you know just go into your life your kid you fall you break your arm

[00:56:03] [SPEAKER_01]: you have a cast but your kid you're still growing like my wrists still works broke a twice

[00:56:09] [SPEAKER_01]: still works had the cast could easily just you know off the top turn buckle to you know my brother

[00:56:14] [SPEAKER_01]: hit that cast like it was a bonus in so many ways after the initial healing was done

[00:56:20] [SPEAKER_01]: when you're growing that's okay but if you're 80 years old and you fall at home and you

[00:56:25] [SPEAKER_01]: break that risk it's a different calculation it's the same downside it's still the same broken

[00:56:30] [SPEAKER_01]: risk but the recovery period all the different things have different ramifications it's the same thing

[00:56:35] [SPEAKER_01]: if you're if you're saving for retirement you get a decline each incremental dollar you add is

[00:56:40] [SPEAKER_01]: going to go further but if you're in retirement you're spending that money if you're thinking about

[00:56:44] [SPEAKER_01]: shifting between strategies and you're on the consumption path this means something different

[00:56:49] [SPEAKER_01]: so you want to know the downsides of the strategies that you're implementing and then you want to

[00:56:55] [SPEAKER_01]: back against the life that you're living at that point in time and just say is this the kind of

[00:56:59] [SPEAKER_01]: thing I can recover from what safety measures do I need to put around it to give me often just the time

[00:57:06] [SPEAKER_01]: to recover but what what other questions do I need to build into my plan into my broader strategy

[00:57:12] [SPEAKER_01]: because to your point if you're a stock investor you're probably expecting at some point

[00:57:17] [SPEAKER_01]: to deal with a 50% drawdown if you're a permanent portfolio or a diversified investor you're still

[00:57:22] [SPEAKER_01]: thinking how do I survive a 20% drawdown you gotta give that context and you gotta think about where

[00:57:28] [SPEAKER_01]: am I journey my way on up the mountain accumulating my on my way back down the mountain to

[00:57:34] [SPEAKER_01]: accumulating in my role in that super ball down for the top of the hill or go Bing Bing Bing Boom

[00:57:39] [SPEAKER_01]: and see what happens know the downsides but map it with contacts on where you are in life

[00:57:45] [SPEAKER_01]: and know that life changes in evolves you got your own wall or where you're a Clive Jack yeah

[00:57:49] [SPEAKER_02]: that's so important to because marrying those two things like for instance if I'm someone who's

[00:57:54] [SPEAKER_02]: like just retiring I have a pretty high withdrawal rate sequence risk is it is absolute highest and I

[00:57:58] [SPEAKER_02]: own 100% equities well just knowing that I have a 50% downside is not doing me the good

[00:58:02] [SPEAKER_02]: it's great that I know that but I obviously things can go really really against me with that

[00:58:07] [SPEAKER_02]: and I probably shouldn't be in that in the first place like portfolio visualized you said this thing called

[00:58:11] [SPEAKER_02]: uh it was like drawdown plus cash flow or whatever so in addition to just looking at you know the

[00:58:16] [SPEAKER_02]: drawdown of the portfolio it was looking at what would your drawdown have been including your

[00:58:20] [SPEAKER_02]: withdrawal rate and I thought that was eye-opening because you could see and in a lot of cases

[00:58:24] [SPEAKER_02]: you know in financial plans when you run those it can be 100% because you get the drawdown

[00:58:27] [SPEAKER_02]: at the wrong time you're pulling out your money the max drawdown plus cash flow becomes 100%

[00:58:31] [SPEAKER_02]: you ran out of money so I thought that was an interesting like stat that I think sort of gets

[00:58:35] [SPEAKER_01]: that way you're talking about yeah super important if you want to deep dive in this the interview

[00:58:40] [SPEAKER_01]: we just put up with Wade Fal we get into a lot of the academic studies on this stuff it's super

[00:58:45] [SPEAKER_01]: super useful to know I can stress it enough it's just this is investment management in the real world

[00:58:52] [SPEAKER_01]: we talk a lot about the academic theories and the numbers on how this stuff works this statistics behind them

[00:58:57] [SPEAKER_01]: but you're still a real person messing with this thing you know late off all the fireworks you want

[00:59:02] [SPEAKER_01]: uh you know I'm getting old I'm gonna try to think areas much yet as I used to

[00:59:06] [SPEAKER_01]: it's probably a good idea well we read a little bit let's yet in my own

[00:59:10] [SPEAKER_02]: we actually got this thing in a no-one hour mat which we never do so I'm gonna go ahead and wrap it up

[00:59:15] [SPEAKER_02]: so we can actually see this before the hour mark turns um but thank you everybody for joining us

[00:59:19] [SPEAKER_03]: and we'll see you next week hi guys this is Justin again thanks so much for tuning into this episode

[00:59:25] [SPEAKER_03]: you can follow Jack on Twitter at app practical quatt you can follow me on Twitter at

[00:59:30] [SPEAKER_03]: JJ Carbano and follow Matt on Twitter at at Coltish Creative if you found this discussion

[00:59:35] [SPEAKER_03]: interesting and valuable please subscribe and either iTunes or on YouTube or leave a review or

[00:59:41] [SPEAKER_03]: a comment also if you have any ideas for topics you'd like us to cover in the future please email us

[00:59:46] [SPEAKER_03]: at access returns pod at gmail.com we would like this to be a listener driven podcast

[00:59:51] [SPEAKER_03]: and would appreciate any suggestions thank you