Investor Q&A | GameStop, Value Spreads, AI Backtesting and the Market as a Casino

[00:00:00] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing in financial planning to help investors achieve the long-term goals

[00:00:05] Join Matt Zeigler, Jack Forehand and me, Justin Carbonneau as we cover a wide range of investing in planning topics that impact all of us and discuss how we can apply them in the real world

[00:00:13] to achieve the best outcomes in our financial lives.

[00:00:15] Justin Carbonneau and Jack Forehand are principles of the DEA Capital Management. Matt Zeigler is managing director at Sunwain Investments.

[00:00:21] He opinions expressed in his podcast do not necessarily reflect the opinions of the DEA Capital or Sunwain Investments.

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

[00:00:28] security's discussed in the podcast, maybe holdings of clients of the DEA Capital or Sunwain Investments.

[00:00:32] Hey Jack, this is fun, this is us hanging out here answering some listener questions.

[00:00:38] Yeah, we haven't done an episode like this in a while and I don't know why listeners have

[00:00:41] won't ask us questions but if they want to ask where we're more than happy to answer them.

[00:00:45] This is what it's all about. People ask questions, we stumble through answers and it's a good time, right?

[00:00:50] So let's dive right in. GameStop. Everybody's favorite means, Stunk. It's back in the headlines.

[00:00:58] It's back in action. Do you want to review just what the heck is going on with GameStop here?

[00:01:02] As two professionals, full disclosure, no degenerate gambling from me in the company.

[00:01:08] Have you been really long-games stopped at our new one? I don't know if I ever owned GameStop

[00:01:13] but it was, it was unfortunately not during the period where it went up a lot and it was part of our quantitative

[00:01:17] models. So, you know, one of the downsides of being a quantitative manager is I don't even know what I own

[00:01:22] most of the time but I do know that I do not currently own GameStop in an Ecapacity.

[00:01:26] I can't say, did years ago own GameStop in in model portfolios that we were running

[00:01:32] discretionary model portfolios for clients but it was based on when they went to butcher this but they like

[00:01:40] they acquired all these former radio-shack properties that like have discounted like the least right?

[00:01:46] I used to love radio-shack by the way. Yeah, it was this crazy value play and there was a brief period of time

[00:01:50] where like GameStop got all these mall locations based on mispriced like radio-shackly suits

[00:01:57] and it did something quirky to the book value and I remember working through this whole thing and spending way too much time

[00:02:02] thinking about it and then it was like one of those things you're in and out in like less than a year because of

[00:02:08] whatever the gap was calculated as closed and that's the last time I thought about Gabe Stop

[00:02:13] which is like 10 years ago until all the COVID-19 arrogance. So it was funny with us, you know we have these

[00:02:18] on Lydia we have these 10 and 20 stock model portfolios and just by luck like a couple of them there's

[00:02:23] a lot of them but a couple of them ended up owning GameStop the first time through and so you have this

[00:02:28] problem where I mean it's great that it would up a lot and everything I don't know what it would up thousands of

[00:02:31] a percent at that point. I'm not sure what it was but you have this problem of like how do I judge

[00:02:37] the historical performance of these models now you know because this one off event is completely

[00:02:42] changed the trajectory of the entire model so you can't read into that is like you know this is

[00:02:46] something that tells me the model is better so it's just an interesting thing that you try to put

[00:02:49] in the right context when people see it because that's luck I mean if if a 10 or 20 stock portfolio

[00:02:54] yes it was following a fundamental system and there was something in the fundamental system that

[00:02:57] like GameStop but still like having that something like that happen is luck and you can't judge

[00:03:03] you know judge the model going forward because it had that so it's always tough to put that in the

[00:03:07] context with people because they see that you know that huge stuff that happened and they're like wow

[00:03:11] that's a great model and in there it may be maybe there will be a great model but you have to

[00:03:15] kind of take out the fact that it had this one position that just went crazy which is a super important

[00:03:19] thing for for us who sit in allocator seats in particular where like looking at stuff and asking

[00:03:26] it's never enough to just look at what they label the portfolio has and what the performance

[00:03:31] has been relative to peers you need to do some type of attribution analysis and in the case like

[00:03:35] this like if I was looking at a concentrated manager with a 20 stock portfolio

[00:03:40] it's almost like the same way you look at venture or angel or even certain private equity

[00:03:46] like more mature private equity companies I want to know if you've had like if you had a grand slam

[00:03:51] or something mixed in there if you had one of these 10 baggers or something more and that

[00:03:56] tilts all your numbers how repeatable is that versus the stuff where you're like oh this kind of

[00:04:01] tilted the portfolio little in this direction or that over time attributions such a huge deal

[00:04:06] yeah there were not all get to your question this second but there were even some fairly

[00:04:09] focused ETFs that held games stop at that right and that's not a negative in any way on the ETF

[00:04:13] but it is something you have to keep in mind like when you judge their long-term performance is

[00:04:18] like this one stock you know if you had 30 even if you had 30 40 stocks like if you sold

[00:04:22] the game stopped at the appropriate time like where you trimmed your position it was as it was going

[00:04:26] up you had a huge huge positive contribution to your performance and like you said it's just a matter

[00:04:31] of asking the question does this tell me does the game stop thing tell me anything about the future

[00:04:36] of that strategy and the answer is no and that doesn't mean the future of that strategy is not

[00:04:39] great it's not a very sound strategy it's just you kind of have to take that out of the equation

[00:04:43] when you think about like that that exact strategy going forward yeah and most of us

[00:04:49] hang granted there's people who do I'm thinking of like the copies of the world and the

[00:04:53] people who do stuff where there's like a vent driven or catalyst driven or people who are screening

[00:04:58] specifically for this stuff there are sub-specialties where people look for this and if you're

[00:05:02] evaluating a manager on those things then you might want to ask the question like how do you

[00:05:06] miss something like a game stop and then there's lots of other people where it's like obviously this is

[00:05:11] going to be outside of your area of expertise I don't know I wasn't at the Berkshire meeting you

[00:05:16] think anybody asked about it about a game stop where there are any things going around about that

[00:05:21] I would say probably not I don't know for sure we just had Adam meet on the podcast to talk about

[00:05:24] the Berkshire meeting that didn't come up but I mean I think they probably would know the answer

[00:05:27] if they asked about the Berkshire meeting stuff I could probably provide you with his answer so

[00:05:31] they probably stayed away from it probably probably stayed away from that in the Q&A but it's one of

[00:05:35] those things if if it's something that falls into your language then you gotta have a way that you

[00:05:41] explain why you did or didn't if it falls out of your language like it falls out of bars but we're

[00:05:46] still gonna talk about it because we got this question recenter us what just happened with the

[00:05:50] game stop how did happen again how are you understanding this yeah so I never thought like in my

[00:05:56] career that I would that I would explain things in this way but this is what happened so

[00:05:59] roaring kitty who most people are probably familiar with from the first time through with game stop

[00:06:04] he put up a what does it a meme is out it's called on the on Twitter basically if someone's

[00:06:09] sitting forward in a chair he didn't put anything else up he hadn't tweeted I think it about

[00:06:14] three years or so three years yeah understanding and that was it it was like an arrow with someone's

[00:06:18] sitting forward in a chair that was it and then game stop not just game stop a MC the meme stocks

[00:06:24] heavily shorted stocks like everything went crazy based on that thing so you know people are starting

[00:06:30] to think well we're back we're all back to where we came you know we're in 2021 this is all going

[00:06:34] to happen again it's sort of falling apart in the last couple days which is what you would have

[00:06:38] expected but I think to up to understand that it's good to take a step back and kind of explain

[00:06:42] what happened the first time um like how the stock could have gone up that much because I think a

[00:06:47] lot of people maybe don't understand that and you know that's kind of a combination of a lot of

[00:06:51] factors but two of the major factors are this idea of the role that option dealers play in the market

[00:06:56] um that options in general play in the market and short sellers and you know generally in the market

[00:07:00] whenever anybody is forced to do something you could have these crazy outcomes and so what happens

[00:07:06] with options is if you and I which we are not uh or out there buying a bunch of call options

[00:07:10] out of the money like and what happened the first time is like a lot of people bought these call

[00:07:14] options that a lot of leverage in them and what happens is the dealer on the other side because

[00:07:18] when you buy an option it's not jack and mat trading it's typically jack trading with an

[00:07:22] options dealer on the other side and the options dealer wants no part of the market risk associated

[00:07:26] with that option so they're gonna hedge it and so what happens is if someone buy they call

[00:07:30] option as the dealer behind the scenes what am I exposed to I'm exposed to that asset going up

[00:07:36] so I need to do something to protect myself from that asset going up and what I do typically is

[00:07:40] I buy the stock the underlying stock because if you think about like hedging game stock

[00:07:44] like how else could you hedge game stock besides using game stock there's really nothing right and

[00:07:49] you what else you're not gonna buy like S&P 500 you know in hedge game stock there's too much

[00:07:53] area of the synthetic risk and game stock and there's no other stock that behaves like

[00:07:57] game stock so the only way you could hedge game stock is with game stock and so what happened

[00:08:01] that previous time is those dealers had to go along the stock because of the option purchases

[00:08:07] and then what happens is as the stock goes up the dealers are now more exposed again they have

[00:08:13] risk again so they gotta buy more to hedge their position and it's just it's just the

[00:08:17] cycle that keeps going and then on the other side of that you've got the short sellers and

[00:08:20] their margin calls and basically the short sellers are getting killed and they've got to buy

[00:08:24] to cover and so they're buying two and so you've got these two four spires on both sides of the equation

[00:08:29] and you can have this crazy outcome where you know that just goes on for way longer than people think

[00:08:33] and the stock goes up a ton now to carry it to this time one of the things you have to understand

[00:08:38] about the market is there's some really really smart people I mean Ken Griffin is a billionaire

[00:08:42] for a reason so everybody took a look at that previous situation and said what what did

[00:08:47] what could I learn from this you know what if I lost money what did I do wrong how can I be better

[00:08:51] the market makers did hedge funds did everybody did and so that's why you're not likely in a situation

[00:08:57] where ever going to see that again now we saw a very very reduced version that i don't know

[00:09:01] of games that i'm double they may be tripled it was not up 20 x or whatever um and so the way it played

[00:09:07] out this time is kind of what you would expect the same thing happened people started buying the

[00:09:11] options you know the dealers have to buy more to protect themselves but everybody had learned from

[00:09:15] the experience and it didn't get out of control this time you didn't have the short sellers with

[00:09:19] huge positions in game stop you know that they're not huge positions but positions beyond

[00:09:23] the positions they should have everybody had thought about risk you know all the risk the

[00:09:26] apartments had looked at this so what you got is a much reduced version of the same thing which is

[00:09:31] kind of what I would have expected you to get you know that this it's not like when people buy a

[00:09:35] ton of ton of call options stocks can't still go up a lot like that could still happen but

[00:09:39] everybody's learned from the previous experience and you were not likely to get you know a hundred

[00:09:42] x or whatever on game stop this time do we know has there been any commentary from from roaring

[00:09:50] kitty Keith Gill I think is this real name has there been anything like like we assume he made

[00:09:55] some money from this but i guess we don't really know yeah we also don't know i mean i haven't

[00:10:02] followed i should follow the closer but net paper tweeted a thing about like was his account hacked

[00:10:06] because it's not just a share thing i mean if you go to his account right now there's these

[00:10:10] things being posted like constantly these memes are either they're constantly being posted over and

[00:10:14] over and over again and none of them have he hasn't put one word in any of these tweets they're

[00:10:18] all just these pictures they have some text going across them they're all like ambiguous you don't

[00:10:22] know what's going on like but they're kind of implying he's back and you know you don't know i mean

[00:10:26] maybe he's a count was hacked maybe he's doing this maybe he sold as account to somebody which

[00:10:30] method said maybe is possible to like who knows what's going on like i don't know it's it's

[00:10:35] an interesting also it's kind of a tangent but it's also interesting from like a security spraud

[00:10:39] standpoint like right what can he can what can what he cannot do like for instance would you

[00:10:46] as someone who tweets someone leaning forward in a chair would you be expected to think that this

[00:10:51] outcome is possible or would he be able to say oh no like obviously i just tweeted somebody's

[00:10:56] sitting for you know moving forward a chair i can expect this but like but then on the other side

[00:11:00] if he bought like out of the money call options the day before and sold them the day after

[00:11:05] then obviously this was you know some sort of thing he orchestrated so i don't know exactly

[00:11:09] how to law works it obviously to use in coats with other people if he was like working with some

[00:11:12] hedge fund or something who position themselves before this then you've got major major problems but

[00:11:16] it's just this weird world we live in like where you know i would assume the security's laws are

[00:11:21] not set up to you know handle somebody leaning forward in a chair um it's just a different thing

[00:11:26] it's it's interesting to think about like you know what is he doing behind the scenes like

[00:11:29] what what are the laws with this there's all kinds of interesting things but it does seem like it's

[00:11:33] calm down at least for now it's fascinating to look at stuff like this story through this lens of

[00:11:38] it's kind of like these it's a smaller powder keg than like the stack of dynamite that he

[00:11:43] proved it to be the first time but it is one of those things whether he legitimately sent the message

[00:11:48] or it's some other nefarious thing or whatever happened it's stop fascinating concept that it's

[00:11:55] there's ways that markets are structured and especially in this ever network world that we live in

[00:12:00] where if people are aware of certain things they can use that to manipulate and make money in a way

[00:12:05] that it's not he's not a professional fund manager he's he's just a guy who figured out how to

[00:12:13] network this thing through this stuff and there's a lot of room on the back end to ask questions

[00:12:19] about what really happened here and uh is it all above board yeah definitely you know that this is

[00:12:26] what leads to in Dave Porto has been out talking about this now like this whole thing that the

[00:12:29] market is raised comes back in or the market is a casino and it's stacked against the individual

[00:12:33] investor and like all this stuff because again like Dave was going after trading halts which are

[00:12:38] you know computerized things that are in there and I think it was nine like there was like nine

[00:12:43] in the day the other day when right stuff went bananas again yeah so it's not like a bunch of guys

[00:12:47] with cigars a Goldman Sachs who were deciding these trading halts like the trading halts are

[00:12:52] built into the system to prevent things from running out of control in any kind of direction so

[00:12:57] there's nothing rigged about the trading halts they are they are what they are they're built

[00:13:00] into the market like you know it's not what people think it is but it brings up that perception again

[00:13:05] because the whole thing with Robin Hood back in the day where all these brokers halted

[00:13:09] trading and games stopped and like the idea that we would have made tens of thousands of more

[00:13:13] percent and you know this was all the the system you know coming after the individual investor

[00:13:17] was finally their chance you know to make their money and it plays into what we've talked about

[00:13:21] in our separate breaking news podcasts this whole idea of gambling that a lot of people are

[00:13:24] getting more involved in now but you know there's there's not I mean Wall Street is you know

[00:13:28] it does horrible to things I mean I'm not the one to defend Wall Street by any strategy

[00:13:31] imagination Wall Street will make a dime you know if there's any way Wall Street can make money

[00:13:35] Wall Street's going to do it but I also don't think games stop as the greatest example to use

[00:13:39] if you want to talk about like the markets rigged against your average investor yeah and you have to

[00:13:43] ask the question too and I did not watch the day we day trader was any other such a stuff this time

[00:13:51] I stayed away from that that motive consumption but although now really curious it's like getting

[00:13:57] executed there's lots of stuff that if you've traded professionally at all that are like you

[00:14:02] got to understand how you implement this stuff in real time and how to trade around trading

[00:14:07] halts how to deal with you know putting an order in that doesn't get filled and I don't know what

[00:14:12] the volume looked like on some of these things but I also would guess I know the volume was very

[00:14:16] different than it was in this go around I understand it to be very different in this go around

[00:14:21] then it was the original time game stop blew up is that fair have you heard much about that

[00:14:26] yeah was it's different this time yeah it was it was definitely it was definitely different this time

[00:14:29] but you still saw like I was talking to Brent Kachub and we did the options podcast you saw

[00:14:33] like these implied volatility which is the idea of the implied volatility is just basically as

[00:14:38] as the implied volatility goes up on an option the price of the option goes up and you get to a point

[00:14:42] where like if you're buying a call option the positive return you need on game stop is so extreme

[00:14:48] that you're never gonna get it and that's how it would help to break these things eventually

[00:14:53] and it didn't be implied volatility didn't get up anywhere near where it did last time but it did

[00:14:57] it did spike again so you saw the same type of thing just on a much reduced scale which is again

[00:15:01] what I would have bet would have happened this time so let's take let's take the casino question

[00:15:07] because I think this is important too we had a question about this our markets rigged and I think

[00:15:12] something that's important to recognize in stuff like this is the question with markets is

[00:15:18] just like with a casino you should always be asking yourself what's the advantage I have what is the

[00:15:23] edge that I possess entering into this thing if I know that there's some let's assume or let's just

[00:15:31] suggest if if roaring kitty the day before put like a trade on and then decided his edge was to send out

[00:15:38] this this image and then I'm gonna sell into the wake of people who are coming rushing into

[00:15:43] this trade on the other side of it then that's a known edge going into a situation if I think

[00:15:50] that a company is going to have higher earnings or higher revenue or whatever else it's going

[00:15:54] to make other people buy it in the future 10 years down the road or a year down the road or whatever

[00:15:59] my time horizon is that can be an edge that I put on the table when we engage in something if I go

[00:16:06] if I see game stop moving and I run into by stuff tell me what the edge is in buying stuff

[00:16:12] because it's are you gonna sell to the person who's coming in right behind you and that's the

[00:16:17] way you're going to get out are you going to wait a day you're going to wait 10 minutes

[00:16:20] no you have to have some type of strategy around this that's not just like blind chasing the market

[00:16:26] is rigged the market is a casino when you're ignorant of the edges or you are distinctly

[00:16:30] disadvantage and you don't know you are but you don't care because you're just having fun

[00:16:35] that's what it's like yeah how do you so much is it's time frame so like flip passes had a great

[00:16:40] response to this market is rigging and he basically just put up I don't know what it was like a 50

[00:16:44] year chart of the S&P 500 so the thing if you bought the S&P 500 they held it for 50 years you have

[00:16:50] a lot more money than you did before like give me a chart of the average person participating in a

[00:16:56] Vegas casino over time and show me that compared to the S&P 500 that is going nowhere but down

[00:17:02] so for a long term investor is the stock market rig definitely not a hundred percent is not rigged

[00:17:07] I mean you can't have something this rigged where you're going to produce that kind of return

[00:17:10] now the problem is when you get into the short term stuff and particularly when you get into the

[00:17:14] options because if ever you want to get into trading options now there are some really smart

[00:17:20] people I know were very successful trading options but they have learned for they've trained

[00:17:24] they've learned for long periods of time they're incredibly smart they they're the the minority of it

[00:17:29] but if you want to think about like trading options the one thing I always like to do is

[00:17:32] Google can grip and net worth and if you Google can grip and net worth can is on the other side of

[00:17:38] all those options trade so can make money in a lot of different ways but that's one of the

[00:17:42] way ways can make money and do you think if you're going to be buying options and you've got someone

[00:17:46] like that who's got the most sophisticated algorithms of all time running like on his side you think

[00:17:50] you're going to be him so if you're doing that you're probably pretty close to a casino it's

[00:17:55] not that different you know it's not that different than going playing crap or something like that

[00:17:58] you know you're you're going to lose your money over time I mean you it adangers because

[00:18:02] you can get it right once just like you you can win crap once and you think you're great but

[00:18:07] eventually the odds catch up to you that that's how they make their money they make small

[00:18:11] amounts of money over very very long periods of time so I think the casino thing really comes

[00:18:15] down to if you're using the stock market the way you're supposed to which is it doesn't mean you

[00:18:19] have to buy the S&P 500 but if you're buying and holding something understanding that you are

[00:18:23] owning a piece of a business over the over the long period of time or even like if we

[00:18:27] buying the S&P 500 you're owning a small piece of a lot of different businesses and those businesses

[00:18:31] are going to have earnings that go up over time if you're doing that that's not a casino now

[00:18:35] if you're getting into the day trading and the options and stuff like that then yeah I mean

[00:18:38] you're you're highly likely to lose just like you are to casino but like why are you doing

[00:18:42] that in the first place going back to your point like you have to have a defined edge and you

[00:18:47] have to think about that edge relative to some of the smartest people in the world that are

[00:18:51] out there trying to get edges to and and think about like how do I have an edge and game stop

[00:18:56] that your average person does not have or that you're doing some of these smart hedge funds don't

[00:19:00] have or admit you're there for entertainment like there's nothing wrong I don't condemn somebody

[00:19:06] with discretionary money going to a casino and having fun and play in the slots or playing

[00:19:11] crap or whatever else if you know you're going for entertainment that's okay if you want to

[00:19:17] day trade some options on your on your lunch break or whatever there's nothing wrong with that

[00:19:23] have a little fun maybe even learn something from the act of doing it but with investing and I think

[00:19:30] might the fault setting when I think about investing and I think about long-term investing

[00:19:34] approach it like a business owner approach it not just is something that's fun but something you take

[00:19:38] seriously and inside of that approach think about what is the advantage I have against the other

[00:19:44] people I am competing in this space with not unlike if I was going to go like if I'm going to go

[00:19:49] open a restaurant I have some idea about I think people really want to buy this type of food

[00:19:54] if I want to be a musician I have some idea that I think people are going to want to hear me play

[00:19:58] this type of music while I want to go start a construction company I have a pretty good idea that

[00:20:02] I think somebody is going to show up and have made a build this thing for them if I just go into

[00:20:08] trading stocks and go like oh I lost money and the whole system is rigged against me

[00:20:13] did you really think this through in the first place that's or a differentiates I agree with you

[00:20:18] on the time rising thing especially here yeah it's hard I mean if you look at the track record

[00:20:22] of visual fund managers and we talked about this before I mean a large percentage of them

[00:20:25] underperform the market you know on a gross basis they do about the same as the market but

[00:20:29] because if these they underperform the market like over the long term so you have to ask yourself

[00:20:33] as an individual investor if these guys are making this their full-time job and trying to analyze

[00:20:37] these companies if they can't do it can I do it and I don't think it's bad like like you said I mean

[00:20:42] I think and this sort of gets into our next question which has the best question is relates exactly

[00:20:48] yeah so we've had a lot of people a lot of people have come into the market

[00:20:51] in the wake of covid and you know some of them have probably exited now I'd assume

[00:20:54] you know after that initial spike probably because it didn't work out as well as they hoped

[00:20:59] but like this idea of is it good and it's something you see debated a lot um because a lot of

[00:21:04] investors did come into the market post-cove it in the market is a great way to build wealth over time

[00:21:09] but a reasonable percentage of those people came in maybe in the wrong way in that they thought

[00:21:14] about you know they were using options or they were making risky bets on you know things like game

[00:21:19] stop like is it good or is it bad that these people came into the market considering you know

[00:21:24] on one side it's great to be in the market but on the other side you know maybe maybe they

[00:21:27] had to learn some harsh lessons at the beginning so I don't really have any thoughts about that

[00:21:31] when I hear a question like this and this is just the word nerd inside of me is like

[00:21:36] it's the fact that more investors are buying individual stocks in the wake of covid good

[00:21:40] it's like okay first off let's not cast a moral judgment onto this thing

[00:21:45] what is good is people being interested in owning small fractional pieces of businesses

[00:21:51] full stop people doing something that's not just not just consumption without purpose

[00:21:57] but actually saying like this is for future consumption or this is an investment in my future

[00:22:02] and whatever else and even if it's buying a share of some stock that you think you understand

[00:22:07] or whatever else you never read a k-want like our 10k whatever like no problem no problem

[00:22:12] but just thinking about a making an investment in an individual security because I believe it'll

[00:22:16] be more worth more in the future and I've even thought like a minute about it that is a net positive

[00:22:21] you could even learn to lessen if you bought one of these things and it didn't work out

[00:22:27] more people buying more individual stocks is more people thinking about business ownership

[00:22:31] or at least potentially having conversations about business ownership even in a fractional way

[00:22:37] that is a net positive for society for humanity talk to any person in a country that can't

[00:22:43] go out and buy a stock or that can't go out and do these things you probably don't even have access

[00:22:48] to these people so but just think about it through that lens the ability to actually participate

[00:22:54] in markets and invest in things for the future is a really really interesting angle that we can

[00:23:00] now think through and say more people want to have a conversation about investing in their future

[00:23:05] and trusting companies with a little piece of their wealth whether they have a billion dollars

[00:23:10] or whether they have a hundred dollars and just bought a fractional share of apple or something

[00:23:14] so cast the shorter moral judgment on like people doing stuff they should be doing aside playing

[00:23:20] it like casino if you bought stocks and it's part of an individual stocks this part of a long-term

[00:23:27] investment thing I don't see how there's any downside to that from a greater social good perspective

[00:23:34] yeah and especially if you're not trading the individual stocks you know if you actually bought

[00:23:37] businesses that you intend or you have some sort of strategy that you intend to hold over the long-term

[00:23:41] and this doesn't even get into the whole index fund argument the idea is even if even

[00:23:45] of index funds outperform the stocks you picked like you're still likely to if you do something

[00:23:50] this for the long term you're still likely to grow your wealth over time now you could argue well

[00:23:54] you're better off in the S&P 500 and you know that's probably right but still you're growing your

[00:23:58] wealth over time relative to what you might otherwise have been doing with the money so if you're

[00:24:02] investing in your buying companies and you believe in it you know even if you're underperforming the S&P by

[00:24:06] 2% a year or something that that's still a positive thing I think I can't stress enough how many

[00:24:13] millionaires multi millionaires and higher in that worth I have met over the years especially second

[00:24:18] generation so like the parents are getting on in years or the parents passed away and the kids

[00:24:22] and inherit the money and in a pre mutual fund era at way higher commissions and chargeups and markups

[00:24:29] on fees and everything else you know mom or dad had some point in the post world war two era

[00:24:36] took a paycheck went down to the corner, Maryland office or whatever it was and bought their

[00:24:42] one or ten or a hundred shares of McDonald's or their one or ten or a hundred shares of Walmart

[00:24:48] or their whatever it is ensure there's a bunch of things that got zeroed over time but those

[00:24:55] little investments in like this company makes sense to me and then it just ballooned over time.

[00:25:02] That act of having a long-term approach to stuff that you even if you haven't done any deep analysis

[00:25:08] or don't understand your edge but you take the trading thing off and say I'm not going to be right

[00:25:12] about running in and out of this thing but I'm going to be right about I think this is a good idea

[00:25:18] it seems to make sense now let's see what time does with it that's a really powerful thing

[00:25:23] I've seen some really really big accounts with a really big embedded capital gains but some really

[00:25:28] really big accounts because somebody just took part of that paycheck and walked into that broker's

[00:25:33] office in 1962 that's an amazing thing to see. Yeah that's you know the behavioral thing is really

[00:25:41] the issue for individual investors and that's why the activities is mostly bad so to your point like if

[00:25:46] you had to if you held co-co-co-co whatever for like a huge period of time like there were

[00:25:51] if you were paying attention to it there were going to be a bunch of behavioral issues along the way

[00:25:54] there were huge drawdowns I mean Amazon's an example people give all the time which is at multiple 90%

[00:25:58] drawdowns in the midst of its tens of hundreds of thousands of percent or whatever the return has been.

[00:26:03] So yeah putting away those great businesses is great and it's just it's hard I mean I think investing is great

[00:26:09] and I think it's people like us don't want to sit here and judge people who are getting into investing

[00:26:14] and you know criticize their approach now but I do think you want to point out to them things that

[00:26:19] are stacked against them so the options approach is probably not going to work out over time.

[00:26:24] You know the day trading approach is probably not going to work out over time you know if you're

[00:26:28] you're going to get in here and you're going to pick individual stocks it's a tough game

[00:26:32] you may you may underperform the S&P but you may also still grow your wealth but it's

[00:26:35] probably better to be thinking about like some sort of longer-term holding period or

[00:26:40] or something like we do with factors something where you have if you are getting in and out of

[00:26:44] stocks there's like a reason there's some sort of strategy behind it like it's just important to say

[00:26:48] that and I don't want to take away from what anyone's doing I think it's great that anybody

[00:26:52] gets into the market but it's also important to point out that you know this this is a very

[00:26:55] tough thing to do I mean we exist and Wall Street is a tough place to exist and really if you

[00:27:00] are doing short-term stuff it probably is a casino and your odds probably aren't that much better

[00:27:04] than they are going down to the casino. So it's another good question but I want to give

[00:27:09] the next question here and I want your take on this first is having a small trading account good

[00:27:15] I want to emphasize small trading account which sounds like the person meant smaller relative

[00:27:21] to something else and again good like positive or healthy not necessarily a moral judgment.

[00:27:26] What do you think? Yeah this is a this is a madzico planning question but I will answer first

[00:27:30] uh yeah I think 100% but again going back to what you said so the thing is we all have this belief

[00:27:37] even if the data doesn't back it up that we can beat the market or we can pick the next

[00:27:41] Amazon or whatever it is and let's assume it's that you've got to get that out of your system

[00:27:45] and so if somebody takes you know this is just a random number it's not any sort of

[00:27:48] advice or anything but if somebody takes 5% of their money and they put it in an account where

[00:27:53] they try to pick the next Amazon or they they try to pick stocks or whatever they're going to do

[00:27:57] they're not going to blow themselves up if that's wrong and so getting that behavioral stuff out

[00:28:01] of your system I think can be more of a positive than whatever you might lose with a very,

[00:28:06] very small percentage of your network in that account and I know Dino Crosby's talking about this

[00:28:10] like he's he's kind of a favor of this as well. I think this can be a good thing but you got to be

[00:28:14] careful about it and also you don't want to just throw your money in the trash so you don't want

[00:28:18] to be like I'm going to go you know take 5% of my money and I'm going to specifically buy

[00:28:22] game stop options or something like something that has no chance of succeeding you probably

[00:28:26] want to do that you probably want to within reason have some belief that this might work even if

[00:28:30] the odds are against you when you when you go crazy then you're just throwing your money in the

[00:28:33] garbage but in general I'm in favor of this I don't know what you think. Totally okay 5 10%

[00:28:39] let's let's zero in on these words like small so it should be small relative to something

[00:28:45] else you're doing it should be in this case the question was specifically about trading so

[00:28:50] can have a small investing account too you don't need turnover in it but if it's small enough

[00:28:55] like a little turnover again if it's small it's a relative bet takes a money buy a scratchy lot of

[00:29:03] ticket like knock yourself out if you have the money and you're going to afford to do it like

[00:29:08] go ahead and take the shot if that makes you happy if it doesn't make you happy it's a bad idea but

[00:29:14] to have a small account 5 to maybe 10% tops of like your broader net worth so long as you understand

[00:29:21] what your net worth is is not a bad thing usually to understand it relative to the other

[00:29:27] concentrated versus diversified bets you take so if I'm an employee at a Amazon or pick some

[00:29:34] giant company a little employee at Nvidia and my entire net worth is tied up in Nvidia stock

[00:29:40] should then I have nothing but Nvidia and a small trading account like that's the kind of

[00:29:45] stuff where it's like you're you're really holding on to some very singular outcomes in your

[00:29:50] future you want to think about diversifying these things to make sure you're not all tied to one risk

[00:29:56] but if I work for a whatever I work for the local hospital and I have the local 403B retirement plan

[00:30:03] with a bunch of diversified mutual funds and a pension and a social security and whatever else

[00:30:07] and I go now I want to have 5% on the side where I scratch some of these itches.

[00:30:12] I do a little degenerate gambling for fun. I have my crypto allocation. I do whatever else.

[00:30:18] 5% you're probably not blowing the thing up. Talk to a planner they can give you more specific

[00:30:24] numbers about this stuff but especially especially especially for the people who use it

[00:30:31] not as a casino not just for entertainment but as a learning tool I don't want to say

[00:30:37] everybody should have a small trading account but I think it is a tremendously valuable learning tool.

[00:30:43] I would never want to take that away again back to more investors buying individual stocks

[00:30:49] net net this is a this is a really good thing. I love that 10 years ago post financial crisis

[00:30:56] or in that like in the wake of it. Do you remember this? I feel like I didn't know anybody my age

[00:31:02] in particular who was really investing in stocks. Everybody had a bad taste in the mouth. This

[00:31:06] was not cocktail party conversation with people my age. I had to talk to people 20 years older than

[00:31:11] me that somebody want to talk about this thing. Did you do you remember this at all? Was this an

[00:31:15] extra? Yeah yeah it's definitely changed. Yeah and now I can get together with some family

[00:31:21] members that are like in their 20s and they want to talk about this stuff and some of them are

[00:31:25] doing the team stop to generate stuff and that's fun too. I love hearing about how they're

[00:31:30] like they're telling me about stuff they see on Reddit now they make these decisions. I am

[00:31:35] fascinated by this but over time builds a wealth do some fun stuff on the side. You can get

[00:31:41] trapped in like people like me can get trapped in theory versus practice and in theory obviously

[00:31:46] if like I do an expected return framework like there's no way like you're trading account

[00:31:51] is going to add to the expected return of your overall account. Now when you bring behavior into it

[00:31:55] it might because now if I'm getting that out of my system in the 5% of my money and my 95

[00:32:01] is going to do better because I'm not going to do that kind of stuff. Well now my behavior included

[00:32:05] expected return probably is better and so that's the kind of stuff you just learn dealing with

[00:32:09] people in practice is like nobody the perfect behavioral person doesn't exist. Like there's no

[00:32:14] so everybody has their problems and you have to do things that maybe aren't like optimal and

[00:32:19] a spreadsheet to deal with those problems and you end up with a better outcome even if it's

[00:32:22] not the perfect outcome in theory. What's fascinating to inside of this and this comes out of

[00:32:28] having a financial planning driven practice for a lot of years is that move the needle piece

[00:32:35] is what so when I say something like you could have 5 or 10% in something like this and not

[00:32:40] really have to worry about it it's because if I have 5% of my money and something and I basically

[00:32:48] double it. I have like a lot of winning results. I was in game stop the thing shot up I sold it.

[00:32:54] I doubled it. Well guess what my whole portfolio my whole net worth increased by 5%

[00:33:00] conversation that I'm having literally later today and it's we've got the client has a

[00:33:04] pot of money that they're spending down it's effectively in like a money market in treasuries

[00:33:09] but it's one of those things like how fast should we let treasuries roll off versus put it in the

[00:33:13] money market versus having the savings account that only earns like 1% or the checking account

[00:33:18] that earns zero or whatever it is and it's like okay these are all important questions

[00:33:23] we're spending down a cash account in a transition period that we knew was going to get spent down

[00:33:28] but don't get obsessed with what it leaves the 5% yielding account and goes into the 1% account

[00:33:34] that you've lost that differential over a short period of time and doing the math on it earlier this

[00:33:39] morning and literally saying like this action of like going from here to here is worth like

[00:33:45] $25 to you there's millions of dollars on the table I'm not saying that $25 doesn't matter

[00:33:54] but there's not a good solution for once the treasuries or the money market gets redeemed and it

[00:33:59] gets this other place when you're just for day count and you'll smell the other stuff

[00:34:03] and it's just some of that small stuff if you size this right back to the should I have a small

[00:34:08] trading account those these little words they matter so much because they tell you

[00:34:13] step back and do some math about it again 5% trading account congratulations you doubled your money

[00:34:19] you've contributed 5% to the portfolio you know what else does that not doing any of this crap

[00:34:24] I put it in a money market for the next year right now there's a lot of ways to get to those numbers

[00:34:29] I think I think Cory Hoffstein would appreciate this other angle on return stacking right now

[00:34:35] yeah thank you would so our next what is our next question so we're going to talk about how to

[00:34:39] thank them for you to ask me oh yeah no I'm definitely asking you this because I am next in

[00:34:44] Oakland you get asked me and I'll ask you and chat GPT how to think about generative AI and

[00:34:51] back testing and is it even needed I have some thoughts this is a very in the weeds question but

[00:34:57] if it's something that comes up we need actually done some episodes and excess returns about this

[00:35:01] so the idea is you know in general someone like me if I'm trying to run a strategy you know

[00:35:06] and what I want to do is test it over as long of a period of time as I can

[00:35:10] that doesn't mean the future is going to look like the past we know it might not but at least I have

[00:35:14] like a large sample of data to back up whatever it is I'm doing whether it's value or momentum

[00:35:19] or whatever it is and those things have been tested or really long period of time

[00:35:22] generative AI kind of changes things though and you you have a lot of people who are out there right now

[00:35:26] running these generative AI portfolios so basically you ask these whether it's clawed or GPT or whoever

[00:35:34] you ask these things to build you a portfolio to take in all this information they have and tell

[00:35:40] me whatever you can you can do it in intricate detail so it's not like you say like give me the top

[00:35:45] 10 stocks to buy now or something that's not what you do like you give it extensive information

[00:35:50] about exactly what you want it to do how you want it to run the portfolio you give it basically

[00:35:54] all the rules you would give someone like me and then say generate a portfolio for me and then

[00:36:00] you track that portfolio over time so what someone like me is an issue reaction to that would be

[00:36:04] well you know you the guys that are doing this may have you know they might have a year of results or

[00:36:08] something like that well year results are meanings like in the long term so I can't judge anything

[00:36:13] based on those year results and I think that's probably right but then you also have to understand

[00:36:17] like what generative AI is first of all like could I even produce a back test of results on that

[00:36:22] and the answer to that is probably no you know can I so if you think about like this thing

[00:36:27] that's being trained on everything that exists like can I go back to 1982 or something and like

[00:36:31] look at what it would have known in 1982 and then like test it for you can't really and it's so

[00:36:37] like if a generative AI system is able to like take Warren Buffett for example if it's able to take

[00:36:42] in everything that exists and like become like a computerized Warren Buffett is that's something

[00:36:47] I need to back test or is the fact that it's taken in all that information like something that

[00:36:52] tells me maybe a back test is not needed now because it becomes like a human intelligence

[00:36:57] that can figure this stuff out I mean I don't know the answer to this at all like you have to

[00:37:01] ask smarter people than me but I think it's a really interesting thing to think about because we're

[00:37:05] going to see a lot more of this you're seeing more and more people who are using this generative

[00:37:09] AI to actually build investment strategies and you're seeing these things out publicly so

[00:37:14] it's just something that's interesting to think through and we've thought about it for validity as

[00:37:17] well like should we do in or on the fence about it like should we do these types of strategies

[00:37:22] and put them up there I mean we won't be able to have historic results which is what we've

[00:37:25] always wanted to have for anything we do but on the other side it is a new thing and it's

[00:37:29] something you could at least argue maybe doesn't require the historical results of some of this

[00:37:34] other stuff does so I don't know if you have any thoughts it's kind of a complex topic but it

[00:37:37] it is something to think about because we're going to be seeing a lot of it. It is a super super

[00:37:42] complex topic anybody we a lot of talk internally at some point on the investment committee

[00:37:49] about like just black box strategies and things like that like even if you know what the prompts are

[00:37:54] even if you know what the data set is even if you know all this stuff is being crunched

[00:37:59] certain people are able to do stuff that's a version of you know don't think in a like

[00:38:05] Tony starts with Jarvis or something great like there's certain things you can do where this

[00:38:09] can be really handy and it's better than a person doing all the number crunching and whatever

[00:38:13] themselves you got to be really smart to train and write these things to do it the consumer available

[00:38:18] stuff right now is limited in its approach and if somebody says they know how to do it you're

[00:38:22] ability to understand what they're saying they're actually doing this is like the black box and

[00:38:27] some of the CTA stuff that we run into like sometimes you're just not smart enough to actually like

[00:38:32] vet if this thing has any merits or any worth that you can actually understand the way that

[00:38:37] you're going to feel comfortable with using so really cool really really freaking interesting but

[00:38:44] I don't know or understand what to do with this yet yeah I agree I think your average person

[00:38:49] needs to be skeptical of this and also it's not like if not a traditional thing like I would do

[00:38:54] like these AI systems that are picking stocks are not like using exclusively using the

[00:38:57] computer status or whatever exactly all kinds of different things and as an end user you don't really

[00:39:03] know like why it owns Google or something like if not it's not something that can be completely

[00:39:07] explained so it's just a tough it like you said it is kind of a black box type thing

[00:39:12] I think there's going to be tons and tons of innovation in the use of this stuff in the investing

[00:39:17] in a lot of places and picking stocks is just one of those places and picking stocks is a place where

[00:39:21] we just don't know yet whether there's going to be value added I mean I know like when we had

[00:39:25] Doug Clinton on the podcast he's very optimistic about what this is going to be able to do

[00:39:30] like on the individual stock side you know I just think your average person you know is not

[00:39:34] going to be nearly as smart as he is and you kind of have to see how this plays out but it's

[00:39:38] an interesting thing for me because it's a different paradigm than like what I would normally think of

[00:39:42] in terms of what I would want to see from a strategy in terms of testing to be able to implement

[00:39:47] that strategy in the real world that testing doesn't exist and in a lot of ways is not even really

[00:39:51] possible with this stuff so it's like if you think about it as a data thing like I do then you would

[00:39:57] ever use this stuff if you think about it as like some sort of intelligence that maybe is able

[00:40:01] to think like I would think then you can think about it more positively but I don't know of the answer

[00:40:05] I think it's just interesting it's something people ask us about and then I think it's something

[00:40:08] interesting to keep pay attention to going forward it'll be really cool as we figure out more ways

[00:40:13] to train data on very specific points and questions and I think extra like Jarvis without the

[00:40:20] ability to run like super super complicated things some of the stuff you said like how to

[00:40:24] think about a versus just data analysis versus intelligence there's so many applications of this

[00:40:30] that we know are coming and that is exciting it is exciting to think that instead of the way I

[00:40:35] have to dummy my way through like tax loss harvesting and a rebalanced understand what it does

[00:40:39] to a portfolio for a client with all the consequences that come with it that are just the

[00:40:44] known consequences not even though flat play this forward for six years until we would happen

[00:40:49] but just like the known stuff shorten those steps first that's interesting that's easy to

[00:40:55] understand the longer stuff the bigger back tests I think you said it best most people should

[00:41:01] stay skeptical that's not anti skeptical is not anti it's not saying that this isn't very

[00:41:07] interesting and we don't want to keep our finger on this pulse it's just saying don't expect

[00:41:12] it to be a panacea usually when people come along and say something's as giant like revelation

[00:41:18] it can immediately understand how skepticism is a good way to stay alive I think that's right

[00:41:23] and the other thing I would say is just with respect to the actual technology like all of us in

[00:41:27] it and I'm in my 40s now so I'm kind of like be somewhat the older generation like

[00:41:31] have this tendency to be like skeptical or like shake your fists at these new things like

[00:41:35] this is a world changing technology like period like this is something whether a pick stocks

[00:41:40] or not is not relevant to that like anybody who's not like if you use a computer if you're

[00:41:44] capable of using your computer and you're not paying attention to this I mean this is going to

[00:41:48] change the world in crazy ways this is going to change people's jobs and crazy ways like

[00:41:52] it's something Rob Arnots said when he came in the podcast he was like he told all his people

[00:41:56] generative AI is not going to replace you but if you don't learn how to use it somebody who knows

[00:42:01] how to use generative AI is going to replace you and that's kind of the way to look at it

[00:42:05] is like this is something that everybody should be paying attention to and the good news is

[00:42:08] like the interfaces here are pretty easy this is not like we're telling people to go out and learn

[00:42:11] Python or something like you can learn you could just play with these things and you can see what they do

[00:42:16] like and everybody should be paying attention to it but none of us understand in the investing world or

[00:42:21] anywhere else like what it's going to mean I don't think yet well said so speaking of things

[00:42:26] nobody knows what it'll mean should investors care about the presidential election

[00:42:32] well this is an easy one this is kind of a slam dunk but it is something you start to get

[00:42:36] dunk that a little bit now and dunk that right get a little yeah you probably get a little bit

[00:42:39] of it too but as we get closer here you know you particularly get in the contested elections because

[00:42:43] people have very strong political views and they kind of carry that into well whatever I think

[00:42:48] politically that might mean you know if the other side wins the market might be falling apart and

[00:42:52] you know I think the most important thing to understand here is like the long-term data which by the

[00:42:56] way we can't rely that much on because we always talk as quance we always talk about the end

[00:43:00] and there haven't been that many presidential elections to the point where you can really judge it

[00:43:04] but what it tells you is basically it doesn't matter I mean there's a I think there's a light favorite

[00:43:09] like Democrat administrations have slightly better returns which is the opposite of what

[00:43:13] me people might think but it's not statistically insignificant it doesn't matter um so in general

[00:43:18] like investors should not care about the presidential election I mean that doesn't mean there's

[00:43:21] not going to be volatility associated with the presidential election or something could go wrong

[00:43:25] or whatever but I mean a good example of that to think about is always the contested one um

[00:43:30] you know everybody thought going into Trump Biden we were going to get a disputed election

[00:43:34] we got a disputed election and it really in in terms of the market it really didn't matter

[00:43:39] because every two are point before all the options everybody was preparing for a disputed election

[00:43:44] people were hedging and you know when they're doing that you know when you have a known thing

[00:43:48] that people are hedging for usually when you get the thing it doesn't really matter that much and

[00:43:51] so my general answer to anybody is you know it doesn't it doesn't it take your political views

[00:43:56] and put them aside it doesn't really matter in terms of where the market's going to go who

[00:44:00] wins the presidential election. The data says it doesn't really matter who's in the White House

[00:44:05] both of similar results and so from a planning perspective something we're talking about a lot

[00:44:12] is volatility can come with this thing and so there are scenarios we get a layout that are

[00:44:17] plans for volatility but every plan for volatility is always a plan for things people might need

[00:44:25] so for example like if you're retiring on July 1st and you need money for consumption to spend

[00:44:33] because you don't have an income for the next six months or six years then regardless of the

[00:44:39] presidential election you should be going well the markets are at all-time highs here's what I need

[00:44:44] here's the path of me getting from here to there hey there's these 2026 things that are going

[00:44:49] on with the tax code that are going to change good odds that if nothing changes on this trajectory

[00:44:54] I'm going to owe more taxes in a few years what do I need to do now that I don't have to worry about

[00:44:59] later this is kind of the practical reality to understanding that whoever's in office

[00:45:05] so long as we don't shut markets down stuff is probably needing a continued work if you have

[00:45:10] shorter run things that you need to address those should be addressed and they should be addressed

[00:45:16] away from however you feel about either political party that's not going to help you here

[00:45:22] the other thing I love reminding people of in the lead up to every presidential election I've been

[00:45:27] in through my career like nobody campaigns on a terrible future the other guy is going to give

[00:45:35] you a terrible future the other guy is going to give you a terrible future but nobody comes in saying

[00:45:39] like I'm probably going to mess this up I have to do kind of a bad job so both parties their job

[00:45:46] they're marketing job right now tell everybody how wonderful the world is going to be in their hands

[00:45:53] and yes unfortunately they're also saying how terrible it will be in the other person's hands

[00:45:57] that's the part where they're lying the part that they genuinely believe to some degree is they're

[00:46:01] going to make things wonderful and that means the democrats want to spend money on their form of

[00:46:05] stimulus and the republicans want to spend their money on that type of stimulus and everybody likes

[00:46:10] hearing about how wonderful things are going to be when the person they like gives them the kind of

[00:46:15] stimulus they're after why is the market at all time highs I can't say that's exactly the

[00:46:19] reason right now is a recording this but it probably has a little something to do with it

[00:46:25] fun for the casino not so good for our long term investment strategies yeah which you pointed out

[00:46:29] is really important because the answer of should investors care about the presidential election

[00:46:33] is kind of there's kind of two parts that answer part one is what I answered which is should they

[00:46:37] care in terms of what the SNP 500 is going to do and the answer that is probably no the second part

[00:46:41] though is should they care in terms of like changes to taxes and regulation and you know things

[00:46:45] like that the answer that is probably yes but I would assume like sitting in your seat that

[00:46:49] that's a tough thing to figure out you know we've got potential Trump expiring tax cuts right now

[00:46:54] what's going to happen it's going to probably be different in the different administrations

[00:46:57] but like as you know like there's always constantly things that are proposed in terms of

[00:47:02] legislation that never actually happened so like thinking about preparing clients for

[00:47:06] based on you have to really almost think about probabilities probably in terms of like what might

[00:47:10] happen and then how painful it will be if it does happen is probably an interesting balance to

[00:47:15] where you do have to care to some extent about like who might end up in the White House.

[00:47:19] Oh, probably politically waiting these things and understanding what are the outcomes we're trying

[00:47:24] to avoid even when they're not purely rational because we're talking about an unknown future here

[00:47:29] but if you know you have a particularly big income or capital gains inducing

[00:47:36] event in the next several years if you have any control over the timing of that

[00:47:41] and whether that's pulling money out of like inherited IRAs because the 10 year old I got set up a

[00:47:45] few years back of it whatever it is if you're like I can't under this policy change in this

[00:47:52] future year on the tax code this is what it's going to do we do a lot of modeling out of this

[00:47:56] stuff with clients just to say we don't know what's going to happen there but we know if it goes

[00:48:02] down this path it's going to cost you more in taxes so maybe thinking about doing some of that stuff

[00:48:07] in this year with numbers that we know that's actually useful and it's a much more productive way to

[00:48:13] say instead of wondering about which candidates going to win and what the policy decisions are

[00:48:18] stick to what you know this is also huge for long-term planning anybody who owns a business

[00:48:22] and you're thinking about this stuff this is one theory why what parties in is in power or what

[00:48:29] mix of president in congress and blah, blah, blah matters is because this is why stalemates are good

[00:48:35] at least nothing changes when stuff is at risk of major sweeping changes and overhauls

[00:48:39] it's much harder to plan around because you have these big unknown events in front of you

[00:48:45] that is one of the things that we have to contend with over the next year or two right now

[00:48:49] with not more because we don't know what that mixes so making decisions in times when you

[00:48:55] roughly know or totally know what the outcomes you can control are can control the S&P 500 returns

[00:49:03] I can't control to a degree or at least know what my tax rate is on certain things

[00:49:08] that's actually valuable information and it's also again this is like the recurrent lesson of

[00:49:13] this thing like take the casino thing off the table as much as you can don't take bets for

[00:49:19] games that you don't think are fun all right so jack i want to ask you another question now

[00:49:25] this this this keeps coming up this is for the fact that nerds out there the idea of what can

[00:49:29] investors do with value spreads being where they are now yeah it's interesting well first of all

[00:49:35] we should just explain you know for people who don't know what value spreads are which is the idea is like how

[00:49:39] expensive our value stocks relative to growth stocks so growth stocks are always more expensive than

[00:49:44] value stocks because they're better companies so they should be more expensive but over time that gap

[00:49:48] can come can close and widen and so the idea is like if you think about it like what what can i do

[00:49:55] as an investor with that information and this is something value guys like me have been talking

[00:49:58] about for a long long period of time because value stocks were very very cheap like almost historically

[00:50:03] cheap at different times relative to growth stocks for a really long period of time so the question

[00:50:07] is as an investor what do i do with that information and that that becomes the more challenging part

[00:50:13] like obviously if i'm an index fund investor which you know both of us have said like most people

[00:50:17] should probably be what i'm going to do that information is absolutely nothing i might enjoy talking

[00:50:21] about it i might enjoy hearing that jack talk about it but i'm not going to actually do anything with

[00:50:25] that information but if i am someone who's in a you know strategy where maybe i have exposure to

[00:50:30] different factors what i want to add exposure to value because of these spreads and i think when

[00:50:35] you did your episode of core hosting which i would on excess returns which i would highly recommend

[00:50:40] anybody listen to i think he said it best which is some signals are only good at extremes

[00:50:45] and this is one of those signals that's only good at extremes um so you know value stocks are

[00:50:50] slightly cheap relative to growth stocks are even value stocks are in the 20th percentile historically

[00:50:55] of cheap like not of that really matters that much this is the single is worked best when it's like

[00:51:00] it's in the one you know the first percentile or something like that and even at that it's not

[00:51:05] it's not a timing mechanism so it's like you might we're in the first percentile so you might want

[00:51:10] to add a small amount of exposure with a long-term time horizon associated with it it's not like

[00:51:16] spreads hit the you know the first percentile so you know in the next year a value is going to

[00:51:19] have this massive rally and you know if you didn't believe that you learned it one with what we just

[00:51:23] went through because it got value got exceptionally cheap relative to history and stayed there

[00:51:28] for a very long time but it's finally it's still very very cheap today so this is one of those things

[00:51:33] that it's like for your average investor it would be it would be referred to technically

[00:51:36] back their timing and for your average investor doing anything with these spreads is probably something

[00:51:40] you shouldn't be doing but if you are gonna do something with them it's always the best thing to

[00:51:45] do is always small moves with a long-term horizon knowing that you're going to be wrong for a while

[00:51:50] and you're going to suffer some pain because of that you know going back to your thing with West

[00:51:54] Grey with the value juice you know if you're gonna if you're gonna trick a little bit more of the

[00:51:57] of the value juice you have to understand it's gonna it could be a little lovely for a while

[00:52:01] you know before it works it and you don't know for sure it's going to work over the long-term so

[00:52:05] yeah for most people they should probably be staying away with it I mean I think there is some signal

[00:52:08] in these spreads it extremes like Corey said but I think for your average person it's tough to figure out

[00:52:13] what to do with that with these things I always think of it two in terms of there's a rebalancing

[00:52:19] component versus let's just go get like crazy long this thing so understanding that when you see

[00:52:25] these spreads especially as they are at extremes think about in a portfolio we always think about

[00:52:30] the portfolio as as a whole so it's if I'm not adding new money to it it's got to add up to 100

[00:52:37] I got to take away from one thing if I'm gonna add to another so when I see like value spreads the

[00:52:43] question then becomes okay is this part of the indication that I should be rebalancing a little bit

[00:52:48] away from my growth oriented stuff in towards my value stuff thinking in terms of spreads it

[00:52:53] is an insanely useful financial concept but it's usually most useful for most of us in a

[00:52:59] diversified portfolio to think about how that informs my rebalancing decisions so like right now

[00:53:06] if I'm just talking about large cap US stocks going a little bit taking some profits off the

[00:53:11] growth side and putting them on the value side where it's underperformed probably not a bad bet

[00:53:15] I can think about that too it might be coming a little bit from large cap growth and going a

[00:53:19] little bit into like smaller mid-cap value or something like that in the last year is another place

[00:53:25] we haven't seen it in a minute but we see the same thing play out in bonds we see the same thing play

[00:53:29] out right now in like like reats for whatever reason our strangely cheap public reats again

[00:53:36] probably because nobody has anything nice to say about them anywhere but stuff like this happens

[00:53:43] spreads are a great way to notice it's happening and it doesn't have to be a let's go get

[00:53:48] crazy levered long on this thing it can be what is this spread telling me about how I might want

[00:53:53] to consider rebalancing in the context of my broader portfolio and that is that's useful

[00:53:59] that's so important because it you really want to think about where you are today because you don't

[00:54:03] have to like make an overweight bet on value necessarily to maybe use this information around the edges

[00:54:08] so if I look if if I've held value over a long period of time value is likely gone significantly

[00:54:14] below my target weight so ideally if I want to hold 20% value I might hold 15 you know because

[00:54:19] of these values because as as these values spreads are widening part of the reason but that is value

[00:54:23] stocks are underperforming so one thing you can do like you said is think about like not well

[00:54:27] my target I want to be at 20% well do I want to with this air the situation where spreads are very

[00:54:32] wide do I want to be underweight because the spreads are very wide maybe I don't want to be

[00:54:36] overweight because the spreads are very wide because it's a bad timing mechanism but do I want

[00:54:40] to be underweight and if the answer is well I don't want to be underweight then maybe the answer is

[00:54:43] not you know go above my target weight and value maybe the answer is just get back to where I want

[00:54:47] to be in the first place in value and then yeah are you making you know a better list of some

[00:54:51] degree yes but really what you're doing is just getting your portfolio back to where you wanted

[00:54:55] to be in the first place part of especially what we do with designing and building policy portfolios

[00:55:01] to start from that markets are messy you're going to deviate but this becomes the point everything

[00:55:07] every rebalance decision is is ultimately like a long short decision I'm adding to something

[00:55:12] I'm taking away from something else or owning something therefore choosing not to own something else

[00:55:17] it's such a useful exercise to go through and in a case like this if value has gotten knocked

[00:55:23] down in my policy portfolio however I define or express that thing the rebalance might just be

[00:55:29] bringing you back up the policy portfolio weight it might be I want to actually take growth

[00:55:34] out extra and emphasize value and take a tilt there's a reason we have these words there's a

[00:55:39] reason we have these languages there's a reason we have ways to understand them in the portfolio

[00:55:44] to try to do what we want it to do and it's so important to talk about this way we get I think

[00:55:51] some names lost and like the hey look at this crazy thing that's happening look at what's

[00:55:54] happening with game stop look at what's happening with value spreads there's still a broader

[00:55:59] context to fit this back into it's part of why I love questions like this so much because I don't

[00:56:06] unless you're a professional in doing this and even if you are you might be a professional just

[00:56:10] in one lane doing one thing it doesn't mean you're normally thinking about it in the total

[00:56:14] context of a whole portfolio let alone a whole life so interesting yeah this is a good thing to wrap

[00:56:20] on with the one thing I'd say as we close out to is like if anybody enjoyed these let us know

[00:56:24] you know what we're doing here is there's no answers to a lot of these questions and you know

[00:56:27] for for us it's just really helpful to be able to talk them through and you know we didn't give

[00:56:31] probably clear answers to a lot of this stuff but that's because there aren't clear answers to a lot

[00:56:34] of this stuff that's because a lot of this stuff exists in the gray area of the world but like thinking

[00:56:38] through these things for us and hopefully for people who listen is really important because you learn

[00:56:43] something in the thinking through process even if the answer is not a clear answer so if anybody likes

[00:56:47] these or doesn't like these you know let us know you know we love doing these because it just

[00:56:51] it just helps us kind of think about stuff that we would otherwise we're talking about anyway

[00:56:55] yeah this is a version of any of these questions or stuff that comes up in regular conversations

[00:57:00] both with friends clients and you name it so it's really cool to put a list of these together

[00:57:05] from stuff that's come in from you all listening out there we appreciate it it's fun to do

[00:57:09] and hey 15 years ago I wish I could have heard conversation with this nuance don't give me the

[00:57:16] silver bullet show me all the lead bullets that get fired at this problem that's how we get

[00:57:21] better as investors and as thinkers and with that we should probably wrap up because I gotta go check

[00:57:25] my game stop call option position because it's probably moved a lot during the they're in the

[00:57:28] talk here I'm not just kidding obviously I don't know are you even tell to hedge jack I know I got

[00:57:33] to think through all that all my Greeks now I got to think through but thank you for everybody for joining

[00:57:37] us we'll see you next week hi guys this is Justin again thanks so much for tuning into this episode

[00:57:43] you can follow jack on twitter at app practical quant you can follow me on twitter at jj carbonym

[00:57:49] and follow Matt on twitter at at cultish creative if you found this discussion interesting and valuable

[00:57:54] please subscribe and either iTunes or on youtube or leave a review or a comment also if you have any

[00:58:00] ideas for topics you'd like us to cover in the future please email us at access returns pod at gmail.com

[00:58:06] we would like this to be a listener driven podcast and would appreciate any suggestions thank you

[00:58:12] you