Episode #309: Andrew Horowitz, Horowitz & Company, “I Think We’re Starting To See A Little Bit Of What Happens When The Tide Goes Out”

Episode #309: Andrew Horowitz, Horowitz & Company, “I Think We’re Starting To See A Little Bit Of What Happens When The Tide Goes Out”

 

 

 

 

 

Guest: Andrew Horowitz is the President and Founder of Horowitz & Company, a Registered Investment Advisor. He has been managing money for individual and corporate clients since the late 1980‘s and has taken his disciplines derived from decades of experience in financial and investment management to create a series of investment strategies. He is also the host of The Disciplined Investor Podcast.

Date Recorded: 4/14/2021

Sponsor: Bitwise – The Bitwise 10 Crypto Index Fund is the world’s largest crypto index fund. It holds a diversified portfolio of cryptoassets, including bitcoin, ethereum, and  DeFi assets. Shares of the fund trade under the ticker “BITW” and are accessible through traditional brokerage accounts. Shares may trade at a premium or discount to net asset value (NAV). For more information: www.bitwiseinvestments.com

Run-Time: 1:12:14

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Summary: In episode 309, we welcome our guest Andrew Horowitz, President and Founder of Horowitz & Company and host of The Disciplined Investor Podcast.

In today’s episode, we start with Andrew’s investment framework. We talk about the tradeoff between active management and ETF’s with both stocks and bonds. Then we discuss the impact of fund flows on stocks and hear what Andrew thinks about current valuations.

As we wind down, we talk about the importance of helping clients have a long-term investment horizon.

All this and more in episode 309 with Horowitz & Company’s Andrew Horowitz.

Links from the Episode:

  • 0:43 – Intro
  • 1:21 – Welcome to our guest, Andrew Horowitz
  • 5:51 – Does a man’s mustache contribute to their asset management performance?
  • 6:30 – The Disciplined Investor
  • 7:38 – Andrew’s investment framework
  • 11:13 – Andrew’s core allocation portfolio construction philosophy
  • 16:04 – Inefficient investment areas relative to fixed income
  • 24:36 – How flows may change the composition of an asset class
    25:28 – Sponsor: Bitwise
  • 26:18 – Andrew’s view of the market in a post-pandemic world
  • 30:36 – Does public sentiment influence Andrew’s decision making?
  • 35:47 – Collectible speculation and the emergence of NFTs
  • 38:01 – Thoughts on the CAPE ratio as a market pulse indicators
  • 41:00 – Short selling and its role in Andrew’s strategy
  • 45:01 – Differentiating between shorting and hedging
  • 46:52 – Andrew’s views on investing that other investors may not share
  • 49:12 – Filtering your portfolio positions by whether or not managers invest in their own funds
  • 51:48 – Democratization and decentralization of trading
  • 54:22 – ARK’s recent explosion of interest and the hype around future sectors
  • 55:42 – People buying what they wish they would have bought
  • 58:02 – Coaching clients around aligning their time horizons and investment goals
  • 1:04:19 – Minimizing the desire to time the market and eliminating emotional reactions
  • 1:05:55 – What’s on Andrew’s mind as he looks to the horizon?
    1:10:13 – His most memorable investment
  • 1:10:39 – Learn more about Andrew; thedisciplinedinvestor.com

Transcript of Episode 309:

Meb: Today’s episode is sponsored by Bitwise. You’ll hear more about them later in the episode.

Welcome Message: Welcome to the “Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Woman: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com.

Meb: Hello, friends. Another great episode for you today. Our guest is the president and founder of Horowitz & Company and host of “The Disciplined Investor” podcast. In today’s show, we start with the best way to cook a steak and then move on to our guest’s investment framework. We talk about the trade-off between active management, ETFs, we talk about stocks and bonds and discuss the impact of fund flows on stocks and what our guest thinks about current market valuations. So we wind down, we talk about the importance of helping clients have a long-term investment horizon and how you can go about doing so. Please enjoy this episode with Horowitz & Company’s Andrew Horowitz. Andrew, welcome to the show.

Andrew: Hey, Meb, thanks for having me. How’s it going?

Meb: Where do we find you here in mid-April? It’s almost tax day or the old tax day…

Andrew: The old.

Meb: …not the May tax day in 2021. Where are you?

Andrew: I’m in sunny South Florida, where we’re open for business it seems and everybody is making the migration from anywhere else in the world to be down in Miami, South Florida, Fort Lauderdale. Business is out of control here in terms of restaurants and the streets are packed. It’s really quite an amazing thing. I talk to a lot of my friends around the country, you, of course, out West, it’s actually mind-boggling the differentials.

Meb: You sound like the mayor of Miami, really stumping for Florida. You better be careful what you ask for. You’re going to be surrounded by a bunch of VCs are all flocking to Miami. So, you better be careful, that may end up being the case.

Andrew: Well, what I’m worried about is all the New Yorkers coming down here. I came down from New York in 1987. I was, you know, a know-it-all, I knew everything about everything. What do these Floridians know? They’re down in the sun and they have their brains fried from too many piña coladas. Right? And I was like that until I realized, “Wait a minute, there’s not much difference besides the weather really.” And back in ’87, it was a lot less of a business-oriented place down in South Florida but we’re seeing a major influx, and what’s happening is that, as you probably know, housing prices are nuts. You put a house on the market and there’s, you know, five overbids on it immediately. And if you don’t overbid, it’s almost insulting. Boat sales are off the charts. You know, you go down the rivers and I’m a big boater and fisherman. We talked about fishing, you and I. You’re going to come down here, right? Actually, I got your reel all ready for you.

Meb: So what does that mean? What’s the style? You guys go trolling for…right offshore? You go deep? What are you catching?

Andrew: So, combination this season right now is sailfish, tunas are running the blackfins out in the Bahamas. You got the yellowfins. Sailfish right now, also the pelagics are going to start coming in. That’s the mahi-mahi. We go about 10 miles out for mahi-mahi, 8 miles out, find some weed patches and do swordfishing about 20 miles out in the 1,800 to 2,000 death area. So, kind of a combo.

Meb: I like your social game because it’s talking about boating, one. What’s your best steak recipe? How do you go about it?

Andrew: So I just finished up a 55-day-old dry-aged bone-in rib eye, which after I cut it up, I took it into the sous vide and then did two things. I put a little bit of smoke on it and then sear it real hot with a torch and then put it into a cast-iron skillet with a little bit of wagyu, which is a high-end steak tallow, which is fat and bacon fat, garlic, and just kind of sear it real quick and just let it sit for a few minutes and let it roll.

Meb: It’s 10:00 a.m. here on the West Coast. You got me hungry already. Sorry to the vegetarians out there listening but, you know. I’ve been trying the sous vide experiments for a long time. I feel like about half come out good, about a quarter is, like, exceptional, the best thing you’ve ever had. And about a quarter for me is, like, a total disaster. Like, it’s just…

Andrew: Really?

Meb: Yeah. Well, I tend to be not a particularly exacting cook. So, I’m a bit by field but I love it. We got an Anova.

Andrew: Oh yeah, that’s what I have, the Anova as well. If you set it at 130 degrees if you like it medium-rare and then dry it off, pat it, and then throw it on a grill for 2 minutes, 3 minutes on a hot grill, you’re just fine. You can’t really…It’s hard to mess up. The thicker the better in the sous vide too.

Meb: We did an old experiment where we hired a data researcher on Upwork to go and scrape all the recipe sites in the world. This guy was all end…

Andrew: Really?

Meb: Well, because, you know, look I’m a quant, and so my thesis was, listeners, if you haven’t heard of this, there’s an old post, we’ll link to in the show notes, it’s called something like the best recipes in the world. Most of these recipe sites, they have a gazillion recipes and they have ratings, but there’s no way to sort them, rank them, and then, of course, not across sites either. So we took the top 10 sites. It was like “New York Times,” food.com, yada, yada, and then we ranked them by, like, is it a 5-star rating and by the number of reviews, with the thesis being, if you have 10,000 reviews and a 5 -star rating, it’s probably a good recipe. And recipes, excluding the top 1%, are probably replicable by most cooks. And then if you have one star, it’s probably garbage, and we ranked them, and there’s a list on the…We cooked a lot of them. It’s a lot of crowd-pleasers, lasagna, mac and cheese, cookies. But anyway, I’ll send it to you.

We should talk about investing at some point today. I have a thesis, and let’s see if you can weigh in or correct my thesis that every asset manager, and this applies to male, which is like 95% of asset managers anyway, not enough ladies out there, but the men who have been asset managers in their career have had their best performance, I’m thinking El-Erian, Bill Gross, when they had a moustache. And you had a sick moustache on the cover of your book. Is that true? Is that your peak performance?

Andrew: It was pretty good back then. I was pretty good. Right? I’d still leave a little bit on here just to make sure I don’t take it fully off. But I will tell you that quick thing that book, “The Discipline Investor” that I wrote in ’06, ’07 or so, what happened on that cover was that I had a moustache for years, you know, just a moustache. I didn’t think anything about it. And, kind of, if you ever shave it off, you feel like you have a lip that that’s like this big. Well, I went scuba diving with the kids and I had to shave it off because I wasn’t getting a good seal on my mask. I was down in Curacao actually. And afterwards, they’re like, “Hey, Dad, you know what? You look so much better without the moustache. Leave the moustache off.” I’m like, “Okay, fine.” Well, meanwhile, in the background, the book is getting published and I already did the whole cover for it, and I’m like…didn’t think of it until like two months later when all of a sudden I got all the copy back and all the finals and I’m like, “Should we change it?” They’re like, “Too late.” Okay.

Meb: I love it. I remember there’s a famous story of my family when I was a little toddler and my old man was a long moustache wearing duster supporter. And he had one and he looked down and he said, “Meb, should I shave it or should I keep it?” And I said, “Shave it off.” He shaved it. And I said, “Okay, put it back on. Let me see.” I was trying to compare it, didn’t know that it was something you could just…like, I thought it was like a, you know, rip off, like, out of the comics or something. Anyway, we’ll have to table our performance discussion. Let’s talk about investing. What’s your framework? You know, you are an OG podcaster. We’re kind of the second wave. You’ve been doing this for a lot longer than we have, managing money too. How do you guys think about the world over at Horowitz? What’s your approach, framework?

Andrew: Well, I’ve been doing this since 2007 when the book came out, actually. And, you know, right now, our framework is, kind of, a multi-prong approach. But basically, we stick to, as we call it, a tried and true asset allocation approach. It’s nothing extraordinarily exciting. It just gets the job done. Right? You don’t need a jackhammer when you got maybe a chisel if you don’t need to use it. So, the world has evolved since many years ago. I mean, I’ve been doing this since 1990, before ETFs, before there was real understanding about what mutual funds really were. You can name a mutual fund a growth fund, but it was really a value fund. Remember those days, right? You can say it’s a growth and income fund, then it was really a high yield fund until we finally started breaking down what it all was.

And back then, we were doing a lot of asset allocation. I remember very distinctly using the modern portfolio theory with the Ibbotson software, and it was about a year, I was so caught up with, okay, let’s shift it here, let’s shift it there. Let’s put, you know, 1% more over here and looking at the efficient frontier and trying to come up with what was perfect until I realized, what am I doing? What is the point of all this? You know, if we don’t get it exactly right, it’s going to be within a reasonable range of right, you know, if the efficient frontier is a little bit higher or a little bit lower, that’s historical anyway, so that’s not the point.

We need to combine both the concept of traditional asset allocation, utilizing some of these methodologies of diversification and not diversification for diversification sake, but for the idea of, you know, making I call it my flower garden, where if you have a flower garden in Florida, in New York, wherever it is, you know, you plant certain flowers for the summer or for the winter, but you don’t want to plant those flowers like impatiens that come up and look beautiful in the summertime and then just die off in the wintertime. You want to have evergreens, you want to have roses, heliconia, you want to have tulips, you want to have maybe some of those other various annuals and perennials that come up so that something’s blooming in your garden at any given time. And we don’t know exactly when that’s going to be.

You know, I’ve learned that over decades that we don’t know, is value can outperform all of a sudden out of nowhere and will that actually do that for a long period of time or are we going to have a situation where foreign markets…? And I know you’re a big EM and a foreign markets fan, is that going to be a performer that’s going to really last for a while? And I don’t want to take an outside bet on any particular area. So, as a really good example, last year, as I saw evaluations, before the pandemic, without any knowledge of the pandemic, when I saw evaluations and the spread of value to growth on the large-cap side, in particular, and the mid-cap, I said, “You know what? We want to lean in a little bit on the value side, not giving up our growth orientation.”

Well, that didn’t really work out very well in terms of that lean or that tilt towards value through 2020. But by the end of 2020 into 2021, I mean, we are light years ahead. So, it kind of flipped and flopped, but we didn’t give up on the core because if we did, we would have really been in bad shape when, you know, you had a 20% differential, 25% differential, just in last year with large-cap value versus growth. So, we take that into consideration and then we blend it out with other things like alternative assets, commodities, small, mid, large, domestic, international real estate. So, kind of, make a portfolio dependent on whatever the risk tolerance is and time horizon for our client that is appropriate for them.

Meb: I like the flower garden analogy. Most investors, the seduction is that sort of optimization and certainty is what they think they want and spend a lot of time stressing, fretting, worrying about the optimal allocation when in reality, as we all know, the future is uncertain. And even if you have an idea, you know, that’s coming from a farming background of when harvest maybe the world, nature often has its own say so on the timing and what the path is going to be. Talk to me a little bit about, you mentioned core, what does that actually mean? Is it 60/40? What’s the starting point and muscle movements? And feel free to get deeper into the branches of the various satellites as well, even if that’s how you think about it.

Andrew: So, I mean, in terms of core, we’re looking at as an example, let’s just work on the domestic equity side for a second, core is, you know, the Russell 1000 basic universe. And we’ll split that in half very simply, value versus growth. And that’s not really…you know, you can use factoring and other methodologies. We’ve, kind of, gone back and forth with how to do this. We find that if we can kind of say, “Okay, we want to be core on the large, small, mid-cap, depending on the client,” so there’s no starting point per se that says, “Okay, we’re at 60/40 for all clients.” You have a range of, we’ll just make it easy, one to five, one being conservative, five being aggressive in the genre of asset allocation, diversification, right? So aggressive in an asset allocation format is not 100% equities. Right? That’s not how it works, you know. So we may have 80% or 75% equity exposure consistent of not only domestic and international but also adding in some real estate and looking at some commodities, kind of, as that kind of component versus fixed income.

So, we first start with, okay, where do we want to be in terms of our big allocation right now? Probably I would say about 55% in equities. We see the valuations of things are a little bit poppy right now and a little bit in the euphoria stage. So what do we do from there? First, I think I’ve shared this with you, and I know you’re a really big fan of ETFs for a lot of great reasons. No question about that. However, what we look at is where efficient markets are. And the more efficient market, the more we lean towards ETFs. So, if we can get good pricing, if we know the accounting background, if we understand that there’s not going to be any swings in currency issues, for example. So, we stick to the domestic side of things generally with ETFs. And we look for the lowest cost, but you’re a point or two away on each side from something.

When it comes to other areas around the world for equities, though, like EM to a degree, as well as maybe developed, or even international smid, for example, small mid-cap, we think that there’s an advantage for mutual fund managers, even though there’s a higher cost, and I know people get kind of like, “Oh, my gosh, I’m going to pay more money.” But I say to them, “Listen, if you were to earn, and I was to somehow guarantee that you could earn 25% per year, but the manager is going to charge you 12%, would you say to me, ‘Oh, I’m not paying that 12%?’ No.” So the thing is, you got to look at what net return is, of course, all the different areas, also risk and risk-adjusted return.

But we like, for inefficient markets, utilizing mutual funds. In fact, we did a study that I think I may have sent you a year-and-a-half ago or so, maybe two years ago, looking at the universe of fixed income, in particular, which is a relatively inefficient market fixed income, looked at ETFs in all sorts of different categories, looked at mutual funds in those same categories, did three-year rolling returns, did a variety of different factors of drawdowns, and we kept coming up with time and time again, for most of the sectors, whether they’re things like the area of junk bonds, or below investment grade bonds, high-quality bonds, or government only bonds, corporate bonds, short-duration bonds, almost every single time, we’ve come up with a reason that mutual funds win on a long-term basis and over these various rolling periods. So we prefer that our fixed income, for the most part, is going to be in actively managed mutual funds.

Meb: We’d like to think or say we’re structure-agnostic. You know, there are so many different structures out there. And in many cases, there are structures that are totally inappropriate for certain asset classes and strategies. Like, you’ll never see catastrophe bonds in an ETF for good reason, or you shouldn’t. But also you see areas where they’re appropriate but it causes other problems being the wrong word but things to be aware of. You know, the massive amount of inflows into ARK would be a good example, in a structure where, perhaps if they were running a mutual fund, they might close it with an ETF, that’s problematic.

You mentioned an interesting comment, which I think…And fixed income, by the way, good example of being honest about this is there’s much less of a tax benefit and fixed income in the ETF structure for fixed income than there is for equities. And so, you don’t have as much of a lever there. But you made an interesting comment on the inefficiency of fixed income. I feel like most participants would consider fixed income to be fairly efficient. But what areas do you think are more inefficient? Is it the credit and corporate side? Is it junk? Is it certain approaches?

Andrew: It’s not just ETF, it’s also passive. So the passive side of things, right? And generally speaking, when we talk about ETFs, we’re talking about passive investing. So here’s an example, and I can tell you this because I’ve talked to a lot of managers out there specifically during times when there is a massive decay in valuations of bonds due to some outside event. So, for example, look at what happened back in March or so. Well, everybody’s selling, and when they sell an ETF, the ETF isn’t saying, “Hmm, which bonds am I going to sell?” They have to sell according to the percentage of the value that needs to be sold according to what the index is, right? So they’re just selling, and some of those bonds may be less liquid.

And so what’s happening is the other side, the mutual fund managers are, like, licking their chops and they’re like, “Wait a second, this is a below value, significant opportunity for me here. I can buy that because I can, kind of, bob and weave a little bit more with the way that we’re structured. Let’s get that because there’s an upside opportunity there.” Whereas ETFs, they have more of a forced requirement to sell according to index lines versus a mutual fund manager. So I think there’s a real good opportunity. So it’s really the pricing inefficiency potential right there. When there’s inflows into an ETF in the bond side, they just have to buy. They’re just buying, especially if they have a certain amount of cash that by mandate they can hold.

So they just have to keep on buying and buying and buying. It’s kind of like the Fed, just arbitrarily buying $120 billion of bonds. Do we really need to be buying more Apple bonds and IBM bonds and all that? That’s what is kind of happening with many of the corporate bond funds. And I think there’s an advantage, however slight, that slight advantage, particularly in times when there’s doubt. I mean, we’ve had some kind of, I would call mini crashes but we’ve had some interesting moves on bonds this year that I think the mutual funds have really been able to capitalize on.

Meb: You know, when you talk about passive indexing, there’s certainly…we’ve been discussing it at length as far as the drawbacks, the methodology, you know, there’s good parts about it. And the big muscle movement from 50 years ago was it pushed a lot of the industry to lower fees, in general. And as you mentioned, all that really matters is net returns including, you know, risk and everything, after all fees and taxes. But in general, that was the big push, which has been a positive for investors. But the challenge with indexing, what we like to call the dirty secret of indexing, and it doesn’t even just apply to market cap, it could be an index on Brazilian small caps or whatever rules-based approach where it’s disclosed, is they often get front-run. And you see this where it’s a very real cost. In the S&P, it’s probably only a couple of basis points, but in some commodity indices and others, you have academics that say it could be in the hundreds of basis points.

And the old Russell rebound is, like, the classic example. It’s like, you know what’s probably going in and what’s probably coming out. And the hedge funds and high-frequency traders used to trade that all day long. So we like to say, being a quant or rules-based person, it’s great if you have some rules or an index. And all the funds with GameStop was a great example this past year. You can see the drawbacks of having to add here to some of these things where the sharks are going to circle, and it causes some of the problems you mentioned.

Andrew: So the same thing happens I think with hedge funds, you know, with their quarterly 13 filings with regard to everybody’s like, “Oh, look at this guy, he bought all this stock during the period,” which we don’t know if he sold it all, “but he supposedly bought all these stocks, I’m going to buy it too.” That’s on a quarterly basis and it’s looking backward. Now you have the ARK investors, and Cathie Wood, and all that’s going on there with her transparency. And I’m thinking to myself, “Is this transparency?” In the beginning, it was probably a draw for a lot of people to understand, and to educate, and all the wonderful things that were, you know, to make sure that there was communication, and the beautiful thing behind that to make it a more level playing field for the individual investor.

However, when you get to the size that we’re at now and you start seeing all the trades on a regular basis daily, how many people are just using that to either front-run or to look to the opportunity knowing that, for example, let’s say Tesla moves up, and it’s above the 10% threshold that they put on for that portfolio that they announced, and now let’s just say it’s 11%, and you say, “Wait a second, is she going to have to sell that and now try to really move in on that action?” And I wonder if the transparency is really such a great thing sometimes because it could, in fact, invite a lot of behaviors that may not be good and the potential to attack either side, right, the long or the short, either way you want to look at it. And what’s the point of that? I just don’t really understand what’s happening.

This ARK situation, I think, is a really good wake up call where you have concentrated positions, people piling in, I think there’s really no difference between what happened here, what happened with SoftBank, by the way. They figured you know what, we can keep on investing privately in the company, like a WeWork, and keep on moving the valuations just by the sheer inflow of money from ourselves. So what they did was they started buying and they kept on buying at higher prices. And then the hope was to IPO this thing at ridiculous valuations where everybody’s like, “Wow, look at all that.” But they were the ones that were pushing the valuations for themselves. And we see this that’s happening, whether it’s utilized massive coal buying, what happened with GameStop where the other side had to buy the positions to offset their risk, right, and it just pumped it and, of course, not to mention the short interest and all that. And what happened here is that we’re starting to see very openly what’s going on and the recent downfall of…what was the name, Hwang, the tiger guy?

Meb: Archegos. Yeah, it was a family office.

Andrew: I think it was Archegos, by the way. That’s what I’m calling them. Okay? Big egos guys. They basically utilized the power they had to just pump up the valuations. Unfortunately, they got caught because they weren’t able to gracefully exit after that $3 billion secondary from Viacom that shot everything to crap, and not to mention Morgan Stanley’s positioning in that and what Goldman did ahead of the selling. Point is, though, I wonder what impact some of the indexing is happening with valuations and how the basic button-pushing that we have on the opportunity to push it on your phone just to buy, buy, buy, buy, and not looking at anything more than, okay, it’s moving up, I think that’s a good thing to do. Not looking at valuations, how that’s impacting the market and the indexing universe, especially with the transparency that’s happening right now, getting everybody all giddy about companies like a Tesla, and I don’t want to see any hate mail about this, but let’s all be honest, that valuations are a little questionable on that stock.

Meb: What a weird story that family office was. You know, I’m consistently…For a student of history, I feel like there’s nothing that is going to surprise me in markets at this point, but it doesn’t mean I don’t read something and just shake my head and just question, like, what in the world are some people thinking or doing? And it goes back…There’s an old Ed Seykota quote and I’m paraphrasing, but it’s like, “Everyone gets what they want out of markets.” And they play out their own dramas, where some people actually enjoy losing money for some reasons and do just really odd behaviors. Like, the biggest only rule of this game is don’t lose all your chips because then you can’t play anymore. And what a strange story that was. I don’t know.

Andrew: Very strange. And like I said, he created his own valuation bubble by himself. And you have to wonder where that’s occurring otherwise, in bigger places, in bigger areas, or even small areas of that, and what is the consequence for all those companies providing all that credit to him without doing any due diligence, aside from the fact that the Credit Suisse guys just get fired?

Meb: Yeah, I mean, this plays out on such a micro-level with big implications but also plays out on a pretty macro-level too, which is this concept of flows, changing the composition of an asset class and huge asset classes. It takes a lot more flows, but in something tiny, like an industry, whether it’s space stocks or a specific stock or a tiny area, it could be Brazilian small-cap tech. Like, there is some certain amount of money that will cause it to go haywire. And trying to be mindful of that, you know, I think is or at least aware that the flows have a big impact. And when they reverse, the opposite happens. And it can happen as we’ve seen with the Archegos pretty quickly. You know, it’s not something that necessarily has to play out over five years. Like, it can happen almost overnight.

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What else is going on in 2021? You chat with a lot of people, a lot of investors, what’s the lay of the land look like? You see everything look normal and copacetic post-pandemic or is the world looking a little odd in places?

Andrew: It’s interesting because I mean, clearly, we know about this bifurcated market. We see this uneven recovery. And I don’t want to talk like one of the talking heads here but the fact of the matter is that what is really going on is that we have trillions of dollars of stimulus and we have low interest rates. And we have people that are saying, “You know what? I want to take things in my own hands right now because I don’t want to be in a situation where I have to be reliant on anybody in the future.” I will share with you that the money that I see that starting to pour in from stimulus checks, PPP programs are still…people are getting massive amounts of money from PPP still. And, you know, people like my barber, he just got like 20 grand. I’m like, “How did you do that?” “I don’t know. I went on some website and clicked a few buttons and three days later, they sent me a check.” I said, “Well, that’s pretty good. And, you know, what will you do with that money?” Well, I’ll invest a little bit in the company, but I’ll more so also look, you know, investment opportunities.

So I think a lot of people are throwing in the towel in the idea that does valuation even matter, which makes me a little nervous. And I do see that we are starting to see a little bit more with three hedge funds blowing up this year alone, right? I think we’re starting to see a little bit of what happens when the tide goes out, right? When the tide is up, water looks great, go in for a swim, everything is fine. That tide goes out though, we got broken beer bottles on the bottom, and cans, and junk, and all sorts of crap at the bottom of the sea. And the thing is that we’re, kind of, starting to see a little bit of that start to perk up a little bit as we’re getting stretched with valuations. Right now expectations are for the continuation of massive earnings opportunities. You have to wonder whether or not there’s going to be some regulations that come in. Break up the tech is a big theme that’s going on right now.

And how much more stimulus can we really take without breaking the bank? You know, we’re up to another $2.2 trillion on top of $1.9 trillion on top of $500 billion. I remember, I think it was, I don’t know what year it was, but when George Bush came out with, like, a $200 million stimulus package, we were like, “Yeah, that’s awesome.” You know, and now we’re at numbers that are mind-boggling and the Fed, I don’t know what’s with the Fed. I don’t know if Powell just loves to be in front of a microphone, repeating his story time and time again about transitory inflation and we’re going to allow for this to happen. But if you know anything about the Fed, they’ll change their narrative in this story as they require to keep on pumping. And that is a big mover in markets right now is the fact that we have low interest rates because, as you know, you capitalize a pricing model and you look at discounted valuation modeling, the risk-free rate of return is a big component in that process, right?

So, where are we have interest rates go to 1.8%, 2%, 2.2% on the 10-year, the 2-year starts ramping higher? You know what’s going to happen? Well, they’re going to start to look at fixing the yield curve or possibly fixing the top end rates. And then we are in a situation where I, kind of, start to feel like we’re Japan all over again from the ’80s, ’90s. So, I think the valuations are very stretched. They probably can keep on moving a bit more. The excitement over EVs, I think warranted to a point. But a lot of companies involved in that and we start to see the SPAC universe really pop like they did and this Coinbase is coming out at ridiculous valuations because of the last six months with the revenue. Smart for them to do the direct listing right now. There’s areas around the world that you have to wonder how they’re hitting all-time highs with an economic backdrop that’s pretty lousy.

But short duration on the bonds we’re seeing because we don’t want to be long, limited maturities, little bit maybe in the intermediate, but really sticking to the shorter side. I will share with you that I’ve been hearing a lot of people wonder, “Hey, is this the end of the cycle and is this as good as it’s going to get?” While that’s the average investor, while everybody on TV is like, “Hey, this is only the third inning of all of this.” And, you know, I think there’s better valuations probably outside, as you’ve noticed, in areas outside the U.S. than in the U.S. right now, excluding some of maybe the cash-flow-heavy tech names that just continue to dominate.

Meb: Talking about big numbers is such a challenge because you mentioned trillions, I had a fun…I don’t know if it was a Twitter poll or just a tweet where I said, “Be honest,” I was like, “listeners, readers,” I was like, “do you know what comes after trillions?” Like, that’s the territory we’re getting in is you’re starting to get into quadrillions and whatever comes next. It’s like, the numbers are so large, it’s hard to…Our brains aren’t equipped to deal with that sort of scale. But yeah, you mentioned we’re certainly uncharted territory and many of those policy ideas, politicians are going to be politicians, who knows what they’ll come up with next. We talk about things like SPACs and what’s going on. You mentioned, kind of, these pockets of whether it’s excess or just symptomatic or concurrent. How do you think about, like, sort of, the sentiment indicators? You mentioned the old-school barber shoeshine thing from the ’20s where people are talking stocks. And it seems like everyone’s talking stock and maybe…

Andrew: Everybody’s talking stocks.

Meb: How does that work its way in? Is that more just like color or does it actually get into your process at all?

Andrew: I mean, you got to be careful these days when you have such a loose policy by the fiscal side of the stimulus and loose policy and dovish by the Fed to really start thinking about, I’m going to be able to call where a particular area is…I mean, I’ve done it before. I’ve come up with things that you’re like, “Hey, you know what, there’s a problem” but usually, you’re wrong for a year or two. And then it’s like, “Okay, there it goes.” I remember very distinctly, I was getting my car in 2015. All the valets were, kind of, huddled around the valet desk with their phones and they’re doing their thing. I’m like, “Hey, guys, what’s going on?” “We’re trading Bitcoin.” I’m like, “Uh-oh. I’m done. Taking my profits on this deal.” And for the most part, kind of, moved out, kept a little bit.

But, you know, we’re starting to see that I don’t think it’s as much people are necessarily both-handed buying, I just think the opposite has been true, and that’s what’s happening. Nobody’s selling. And I think a lot of people are saying, “You know what, if we can make it through this…” And while there was a blip and it came back, and back in 2007, ’08, ’09, we saw the housing bubble and a blip, and it came back. And 2000 and 2001, we saw this major drop in the markets, but it all came back. And then kind of go back…I think people have been very much, I don’t know if it’s brainwashed or conditioned to believe that you know what, it’s time to buy in now, and the momentum continues to move. And I think that it’s very difficult to stop that train when there’s so much excess cash out there and the opportunity for the world to reopen. And that, you know, while we have this PVSD, which is the post-virus stress disorder…I don’t know about you, so I just got my second shot yesterday.

Meb: You’re looking good for that. Usually, that’s a haymaker for the next day.

Andrew: Yeah, I wasn’t good last night and I’m a little bit hot right now.

Meb: If you keel over halfway through this interview, we’ll table it until later.

Andrew: And I had COVID also back on Father’s Day, not a bad one. And don’t even ask why I took the shot if I had it. It’s a whole thing. But, you know, about travelling, get the card, and be done with it. But I will share with you to this day, even though I had it, and I had the antibody, even though I have the shot, and I’m going to have…You know, people come up to me somewhere, wherever it is, and they come over to hug me and I got the COVID blocker up. You know what I mean? I’m like, eh, you know, “Are we going out? Where are we going? We sitting outside? We sitting inside?” I’m a little more active, to be honest with you, than probably a lot of people out there. You know, I go to the club, and I have some drinks, and there’s people. But, you know, you have a couple of drinks, and all of a sudden, everybody gets a little bit closer. But generally speaking, I know other people, like, in other areas of the country that are, like, “You know what? Let’s stay away.”

So this post-virus stress disorder, I think is very real, but it also…Because I know the other side, I know once I had the antibodies, I’m like, “Let’s go. Let’s go do something. Let’s eat. Let’s drink. Let’s have a party.” And I think there’s a lot of that that is bottled up truly with a lot of people with some hesitancy but yet they need to do something. We saw that in them redesigning, refinishing their homes, buying cars. I mean, the F-150, you ever see the chart of the F-150 sales? Straight up. And we’re seeing that with the potential for boats. Down here, you can’t get a boat. And if you want to sell your boat, lickety-split, it’s I’m going to get…If I sold my boat right now, I’ll profit off of my boat that I bought a few years ago.

Meb: Said no boat owner ever.

Andrew: Right. Right. Exactly. Right. It’s like I bought a boat and it’s now worth less money. No, it’s worth a lot more money, my boat. So, I think there is this pent-up demand, whether it is going to be this Roaring ’20s and people are going to be reckless because they can. Like, hey, we had this near-death experience and we want to go out and do. So you look at what’s going on and people don’t really care about valuations right now. I don’t know what it’s going to take to change that but right now, I think people are all about, you know what, really, what’s the worst that can happen from here and what would that really look like in the future? And they’re just willing to put it all in on Bitcoin, or on small caps, or ride the Tesla wave, or pick up the SPACs and just say, “You know what? This is a great idea. Let’s, kind of, throw a couple thousand dollars in five or eight of these, in the EV space, or whatever else may be out there.” What about NFTs? Is that a signal?

Meb: I had a thesis that…And I’m a quant, so this doesn’t really make it into our process. Sentiment, to me, is always often a lot of color more than anything, but I said, you know, I think we have a very real chance of taking out the all-time high valuations on the CAPE ratio, which happened in the late ’90s, which were only about, I think, 15%, 20% away from now, at this point, as this sugar high, sort of, rush occurs. But I said the way that I would be more interested in playing it is I said, the U.S. has, sort of, led the reopening of the world and I, of course, have been trumpeting this for a long time but the foreign stocks in emerging, which have lagged, are also breaking out. So this big value move we’ve seen in the U.S., I think, with the rest of the world, 6, 12 months behind as far as vaccinations, I think you could see that rotation happen. But again, that’s just me talking.

NFTs, you know, there’s so much in this world where I characterize myself as a sideline cheerleader or uninvolved, interested observer. So the NFTs, I put in that category and often, you know, someone who grew up during the big card and comic boom of the ’80s, and got to see Cabbage Patch Kids and everything else go bananas during my generation, you know, I have a soft spot for collectables and ideas there. And so, I’ll dabble just to keep my thumb on the pulse. There’s no question in my mind you’re seeing plenty of euphoria, mania, speculation, right, when you can sell a red pixel for $100,000 or the 3rd-highest art sale for a living artist in history, you know, $68 million, whatever it was. But I also don’t want to sound like a hater to the people that made all the money. God bless them, you know, hey, you guys, good for you is, sort of, my take. But it’s not necessarily really what I’m attracted to when it comes to investments. So, I don’t know. I feel like in investing and commentators, they want you to have an extreme opinion on either way, and I just fall somewhere in the middle on those.

Andrew: Yeah. Can you back up to the CAPE ratio for a second?

Meb: Yeah. Yeah.

Andrew: So I’m paraphrasing this. Our mutual friend, Dan Crosby, today on Twitter, he said something…I believe it was him. So, if I’m giving credit to him and it was somebody else, I apologize, but something about, “Hey, now that you got both your vaccinations and you’re beyond the time period when you have to wait and all that, you’re ready to go out, you still can’t time the market tops based on the CAPE ratio,” you know. So, I think there’s nothing to be said about that that it’s very interesting. One of the things about the CAPE ratio is, you know, it’s a really long-term, a 10-year period. I mean, that’s a long time. And it’s average averaged, right? So you’re looking at this and you’re saying, “Okay, well, hey, the CAPE ratio, I think it’s a good tool.”

However, I think it’s just one of those things you have to look at and it’s like, okay, this thing is above this level, or the PEG ratio is, you know, at four times and, like, what does that mean? Or the P/E ratio is, you know, historically high. We’re looking at 22, 23 times forward right now, and that’s the pricing, you know, if we have about $180 of S&P earnings coming out, you know, that’s great, but what else is going on here? And we can make all the excuses in the world for why the market is overvalued. People are very lazy right now. There’s no reason to look because if you look at valuations…I’ll give you a great example. Stock that we’ve shorted many times with some luck but not a lot, you know, made a couple of bucks here, kind of broke even, Planet Fitness.

Planet Fitness, this is a company that obviously franchise and owns all these different workout studios and we’re at a basic…close to, we recently were at an all-time high in Planet Fitness in a time when they’re losing to Pelotons, to Tonal, to the Mirror, to work out at home, and while it’s only $10 to join or $0 plus $10, something, I mean, you got to think about the space that they have, the amount of excess, forever, cost they’re going to have for decontamination and sterilization, etc. And the people that are just never going to want to go back to gyms because, I don’t know about you, but it seems like a pretty good place to spread some germs. So, you got to wonder with stock like that, that is close to an all-time high, how is that even possible?

And again, the cruise lines, which is great to pick up these cruise lines at such low prices, you know, you have to wonder what is going on with that whole area. And even oil, oil is what, 62 bucks a barrel, let’s say, that recently was what, a year ago, negative $40 because of the potential for them not having the demand. But yet we have a world that is convincingly and absolutely, from everything I can see, turning over to the EV space, which means to me that there’ll be less oil, right, from cars, I think that’s the number one use, or maybe airlines. But you’re not going to have that need anymore. So, how are we sitting here at $62 on oil? So valuations are clearly, right now, subjective. And I think we have to go along with that. And some of these other indicators are, at this moment, important to keep abreast of but can’t be used as absolute models for where we’re going.

Meb: The thing is, we live in a world of infinite choice and we talk about valuations, you know, think back to ’99. Yes, the stock market was expensive, highest it had ever been, but it’s a market of stocks, but there was plenty of areas that were totally fine, didn’t even really have a bear market, small-cap value, did okay, dividend stocks, real estate, in particular, and even bonds. Bonds yielded, what, 4%, 5% back then?

Andrew: Ah, the good old days.

Meb: I think the challenge a lot of allocators have right now, particularly in the 60/40 world, is they look around and even if they say stocks are expensive, their initial reaction is well, look at bonds and bonds are no better. My takeaway, of course, or opinion, there’s plenty of other places to look within the U.S. stock market, but more particularly abroad. You mentioned shorting. How central of a role does that play? Is that something you do, kind of, sparingly? Is it tactical? Is it you’re consistently…like, do you screen for companies? I have no interest in ever getting a gym membership again, certainly to a big box. Maybe a local Cross Fit or something but the traditional gym has zero appeal. So, I get that one. But what’s your approach to shorting? Because it’s tough, it’s a tough game. I don’t know if there’s any short-sellers left. If you look at the charts, they’re, like, all extinct.

Andrew: There’s going to be like a museum dedicated to the short-sellers and we’re going to put Chanos in there and our friend, Muddy Waters, and Carson Block, and a few of these other guys. So, when it comes to shorting, the difficulty during times of very low interest rate environment and when you have all this fiscal stimulus is that everything just goes up. It’s a giant wave. I think somewhere around, what is it, 80%, 85% of a stock’s directional performance is based on the underlying markets themselves. So what happens is that when things are up, things are up, when things are down, things are down. However, you can find, on a fundamental basis, the idea that there are companies that are fundamentally flawed and really shouldn’t be at that price. That may or may not do anything for you.

What I did over the last number of years, many years ago, is I developed a structure for technical analysis that I built. It’s based on what’s called market profile. And I’m looking at volume and price, combining that every single tick. So, I wrote some algorithms that look at every single tick. And it’s like, “Okay, we’re at this price, we’re at that price. What’s the volume? What was traded?” And what I do is I bring all that information together to provide me for where is that line in the sand that people are either buying and selling? And when I chart that and I use some colors to make it easy for me, I can kind of just look, red, yellow, green. I can look at what’s going on with the stock, where the breakdown points are, where there’s no interest, in terms of volume, historically, I kind of look across the chart from right to left, instead of left to right. And I can see where there are breakdown points and where those vulnerabilities are.

And when I use that, visually when we see a rollover, a momentum, and there is a gap, if you will, not just a traditional gap, but a volume gap. So instead of looking at volume on a vertical line that doesn’t tell us anything, my volumes go horizontally. It shows me where the volumes are on the chart for every price that’s on there. And I use that to find my short positioning, if it’s appropriate. Lately, it’s been very like, okay, you know, what’s the point? So, while you can find that needle in a haystack and find those great opportunities, you have to be pretty exacting. So, very difficult to short right now and kind of staying away from that.

Meb: All my short-seller friends, I characterize them as pleasantly eccentric. I say you have to have that screw loose to do it. It’s one thing to do it in a, like, managed futures context where you’re trading 100 markets and systematically, but the fundamental side, it’s so tough, but worth its weight in gold when you do have particularly a long bear market, which we really haven’t had since the financial crisis or back to 2000. But we may never have one again. I don’t know, the last one last year, only quickest ever, all-time high to bear market and vice versa. So, one day.

Andrew: So there something to be said about hedging. There’s a differential between shorting and hedging. So right now we run a long-short strategy as well, consistent of individual equities, a component of it that’s hedging, a component called alpha generation for trading quickly in and out of something. When I say quickly, it could be a swing trade, a few days, a few, you know, weeks. And we use a fundamental quant screen that we built to come up with the names in the portfolio. You’ll be interested in this. What we do is we take the universe of stocks that meet certain criteria and then look at things like consistency of earnings, consistency of revenue growth, high ROE at a particular level. We’re looking at margin growth and expansion. We’re looking at certain volume characteristics. Okay.

So let’s say that we get, I’m just going to pick a number here, 30 stocks that come out of that universe, okay? While we have a multiplying factor, we may only have a 40% allocation to equities in that portfolio for that particular quarter. We do this every quarter. However, let’s say next quarter…It doesn’t usually happen this fast. But next quarter, there’s 60 stocks that come through that. We may have a 70% or a 75%, or upwards of top end of 80% equity allocation in the portfolio because we find that when we have more stocks that meet the criteria, it’s telling us something about the backdrop.

For example, came into 2020, fortunately, light on equities because valuations just were not there. Companies weren’t able to meet consistency of earnings for one reason or the other. So we were really light on the equity side during that whole downslope. Took us a couple of quarters to get back in line with a higher level. But what’s interesting is that we use the other part of the portfolio, possibly to do some blanket and broad-based hedging to protect the remainder of the portfolio. But again, right now, that shorting side, that hedging side, we’re using the cash as a buffer. Right now, it’s working better than trying to bet against the market that does not seem to want to go down.

Meb: As you look at your approach, you’ve been doing this for a while, hundreds of conversations, what are some things that you believe that the majority of your investment professional peers don’t believe or said differently, what do they believe that you don’t? So is there anything that comes to mind where you say, “Look, I have a totally different view relative to most of our contemporaries?”

Andrew: I think my mutual fund discussion from earlier on, a lot of people are on this ETF bandwagon, totally 100%. I know you’re a big believer in ETFs, and I am as well. But I say that there’s still room for active management and through mutual fund, that whole area, until we get enough ETFs that are active management, that are truly active management, right, that we can have that. So that’s a big differential because everybody, I think, loves talking about the low cost, low cost, low cost. And I’m like, “Well, it’s not all about cost.” You know, and it’s hard sometimes to relay that to a client. But once they get it, they’re like, “Oh, yeah, that makes sense.” I think that’s first of all.

I think the other idea is that at this point in the game right now that anybody has a real edge, the whole idea of, oh, it’s a stock-pickers market. Oh, it’s a shorters marketer that…you know, this whole ridiculous thing about watching the news and watching the options action, the unusual option action that’s going on, and this whole game about, oh, this stock is going to do well and you watch it on TV, it’s bunk. You know, the fact of the matter is, it’s a lot of pump and dump right now, or a lot of pump right now. And I think the downfall of investing right now has been, to a degree, social media, which I embrace to a degree, but I think a lot of it is all about just talking to your book, trying to get it all spiked up.

You know, you look at it from I think your neck of the woods is Chamath. Love that guy, right? But he’s a carnival barker. I mean, he’s the SPAC barker, he’s the SPAC priestess, the high priest is what he is. And he drags a lot of people into this on the hopes and not disclosing all the pieces that he had. He was, like, first in at nothing, and just tried to drive this all up. And the SEC is useless in this particular circumstance. So, I think that, you know, when we’re looking at markets right now, you know, the high tide’s going to lift all ships, there is no real advantage right now, per se, no absolute. I mean, some little areas here and there. But I think a lot of people think they have a better mousetrap right now. But right now is not the time. I think that’s a big difference.

Meb: Yeah, you certainly mentioned people talk in their book. And one of the biggest takeaways, particularly younger investors, but really it applies to anyone, is understanding incentives and people’s angle. So everyone that comes on CNBC, everyone that comes on every podcast, what are they pushing and why? And the sad realization is that most fund managers, public fund managers, don’t have a dime invested in their own fund. And to me, that was a realization that when I first saw that I was like, first of all, that can’t be right. And then I looked at the stat and I said, “Oh, okay, well, everything makes sense now. You have to look at the world through that prism, that magnifying glass and say, “Well, if this guy’s not going to buy his own fund, why in the world is he promoting it in on CNBC? And why in the world should I buy it?” And so this is a great question, listeners, to always ask your advisor or someone when they try to sell you something and say, “How much do you own? How much of your portfolio do you have in this?” And if they deflect or say, “I am not comfortable answering that,” then say, “Well, pound sand, I’ll move on because if it’s not good enough for you, why are you selling it?” is a great filter.

Andrew: Also, if I may qualify that a little bit more, depending on the strategy, you know, there may be some reasons why some of the fund managers don’t have their money…I don’t know, I’m just speculating here because they don’t have an emotional tie to the actual investment. So they can be a little bit more clear-headed. I don’t know, maybe that’s something with some of the firms out there. I’m not sure. But I agree with you that, generally speaking, you know, everybody should be eating their own steaks as we’ve been talking about, right?

Meb: Yeah, I certainly believe there’s exceptions. I believe there’s an argument for people who have their entire human capital tied to their fund, and particularly if it’s a single strategy that they shouldn’t quadruple leverage by investing all their money, and I get that. But on average, I think the better reason most of these people don’t invest in their funds is because they realize their offering is either garbage or too expensive. But that’s the pessimist in me. So, listeners, the whole point, do your own homework. Buyer beware and do your own homework.

Andrew: I tend to agree with you. I mean, the other thing that’s interesting is, you remember a number of years ago, the only mousetrap, the only place to go, the only quality information ever was Bloomberg. So expensive, great information, 90% of it I never used, and 90% of it I will never use, by the way, right? So, you know, over the years, we have this democratization. There are a lot of fancy words right now. Right? We got the DeFi, we got the decentralization, we got the democratization. We have all this happening in the world of investing. And it’s so much easier just to, “Hey, what do I need to do that for? I could just buy that on Robinhood, listen to this guy on TV and just buy it on Robinhood, and I’m not paying a dime for it.”

I think one of the worst things that happened, and maybe not the worst things, but it’s pretty bad, the free trading, which is not free, by the way, you know, this free stock trading, I think it allows people just to buy on will and not even think about the consequences of what they’re doing. We saw volumes increase dramatically. There was a study by, I think, Bank of America last week that showed that there was more inflows in the last 5 months into equity funds than was over the last 12 years. That seems unbelievable. So, you know, what’s happening is there’s an all-out just buying spree that’s going on, which is great. You know, that’s fine. And that’s why we’re seeing some of the things happen.

But I agree with you that there is a need to differentiate between the idea of investing for the long haul or just trying to do unicorn hunting, right, where you have the desire that I bought this stock today, wait a minute, it’s not up 12% in the next 2 days after I bought it, I’m selling it. We used to be happy with 8% a year. That wasn’t so long ago, right? Now we want 8% like a week or a month. And if we don’t get that, we’ll be happy to invest in Dogecoin or we’ll be happy to say, “You know what? The hell with it,” put our money in ARK.

Now I’m going to tell you a story. I have a client, a recent client, called me up and he says, “Hey, I want you to handle some more of my money.” We were handing some of it. I said, “Okay.” He said, “Listen, I got all this money in ARK funds, and my wife’s money’s in a variety of place. I want you to take it over.” I’m like, “Okay. Let me take a look at what you had.” He was all these ARK funds. he was selling puts against these ARK funds. He was doing all sorts of crazy leverage stuff with these ARK funds. So we never really got around to…He said, “You know, they’re moving down a little bit and it’s maybe not time right now to move the money.” I’m like, “Oh, well, how is that?” “Well, it’s going to pick back up. We’re going to wait until they come back.”

Well, you know, what happened with the ARK funds and all that, that big drop, and now his puts are being called, and out of the money, on the other side of him, right, in the money but out of the money for him, and he’s on the wrong side of these puts having to come up. He writes me, he says, “You know, I’m not moving my money.” And I said, “Why is that?” He says, “Because I have to wait for this to come back. As a matter of fact, I’m taking a take a loan so I can buy these puts and put the money up because I think this is all going to come back.” Now, this is going on daily, you know, this being upset about the losses and massive swings. And I think people are getting themselves over their head because what they’re doing is they’re going after the ARK 1 fund, 2 fund, 3 fund, 4 fund, 5 fund because Cathie Wood is some kind of miracle worker, which if you look at her history in her firms prior, not such a miracle worker, by the way, okay?

And now she got on this train of “Hey, I am the all-knowing. I have the crystal ball. I know what’s in the future. It’s going to be cryptocurrency. It’s going to be EVs. It’s going to be CRISPR technologies. I’m going to see all the space stocks.” And that’s great as long as it’s good, as long as it really plays out. But when all of a sudden you start opening up now space only, I mean, how many companies are really involved in space? Six, maybe. How many of…you know, space travel with Virgin Galactic, which I kind of like, you got Blue Origin, but that’s behind, that’s with Amazon. You got the SpaceX, which is Tesla. So it’s all, kind of, bumped up inside of there. Then you’ve got a few other companies that are making the parts and doing the stuff and, you know, all the names we know, maybe a Boeing.

Meb: You’re saying Netflix isn’t a space company? That was in the portfolio.

Andrew: How weird was that? Maybe they have space movies?

Meb: Yeah, well, what else is there to do in space? If you’re a tourist, you get tired of looking at the stars only so long, do a little Netflix and chill in space.

Andrew: Good point. Very good point. You got a long ride ahead of you. Everyone’s going to have their own personal Netflix accounts on the ship.

Meb: There’s a great quote that’s along the lines of, you know, people buy what they wish they would have bought. And so, you’ve seen this so many times with public fund managers where they have an impressive run. And we have a tweet that looked at…Bogle originally did this with a mutual fund performance over trailing, I forget it was 5 or 10 years and how they performed after, and not surprisingly, mean reversion is all over the place. And we did it with the Morningstar fund managers of the decade. The last time we did it was I think 2010. I’m sure it’ll say the same thing in 2020 is how many of them outperformed in the coming decade? And the answer was zero. Not only was it zero, they vastly underperformed but that’s just because styles, and strategies, and asset classes, and industries, and active managers, and the timing of it’s tough too. Like, my favorite example is the … CGM where the time-weighted…

Andrew: That was something.

Meb: …versus dollar-weighted returns. And so all the money flooding into ARK now, look, God bless you if you were there five years ago, great.

Andrew: A lot of games being played in the markets. But listen, at the end of the day, it is still the single best place, well, maybe not the single, but it’s a great place to invest your money for the long haul, for your retirement. I’ve had to re-educate some of my clients over the last year or so about really, what’s your time horizon here? If we’re dealing with 30 days, you’re probably not an ideal client, right? If you’re dealing with, I’m just picking a number, 5 years, 10 years, but really, people think in terms of when am I going to retire? It’s all about the time horizon. The more you stretch it, the less volatility you have. If you don’t look at the one day chart of the S&P 500 and see a couple of big drops in March but do weekly or monthly, it’s a whole different animal, it’s all from bottom left to top right. And you have to be able to live through all of that to understand the outcome which you want from your investments.

And it’s simply that you will keep pace plus of inflation, the cost factors, and have enough one day not only to live on for the rest of your life but maybe pass them on to the next generation. It’s pretty simple. It doesn’t have to be more complicated than that. But the refocus on the time horizon, not risk, the refocus on time horizon, I think has been a major component of what we’ve been trying to impart to our clients this year.

Meb: You know, you talk about time horizon alignment with investor goals. And I think that’s a really important but very often mismatched expectation, you know, having discussions, clients think in terms of days, months, quarters, couple years when in reality, you look at their goals and they’re talking about something that’s 10 years, 20 years away. How do you have that discussion with clients? Any good war story, hacks, or suggestions, or even people who don’t have an advisor, how to think about it and not dynamite or nuke your portfolio, resist the temptation to do the wrong thing? Any general suggestions from the experience?

Andrew: So it’s interesting because you mentioned, you know, how to not nuke your portfolio. You start thinking time horizon, buying a crappy stock, and you’ll hold it forever, even though it’s a crappy stock, right? A bad name, no fundamentals, losing money. That’s not a good thing, either. So you got to be careful with the holding period for some things, but realize in a diversified approach, in a truly diversified approach, when you’re thinking about what are my goals here? If you want to play and you want to piddle, and you want to have the opportunity to trade GameStop, or Coinbase, or maybe some Bitcoin, that’s over here. Put that over here, play with it, do what you got to do. The core of what you’re doing, you want to think about long-term. And you want to think about, you know, 6% to 10% annual rate of return, that’s a wide range, but that’s a reasonable long-term, achievable goal, net of fees, net of tech. That’s what you want to look for in a portfolio.

And, you know, that’s why we were taught the rule of 72 back in the day and looking at how fast money doubles. And I know we’re in a different time right now but remember, the worst thing you can say is, “This time is different.” I don’t think it’s much different. It’s just a snapshot when things are really doing well and, like you talked about, reversion to the mean. So, I think about the idea of time horizon and I think it’s important to write things down and look at what your goals are. And if you have a goal of 25 years, you know, you don’t have to worry about some of those intermediate ups and downs, particularly when you’re putting money into your portfolio. One of the biggest issues we had last year with clients coming in was, “I don’t want to invest. I’m afraid of the markets. I pulled out in March or April. I don’t want to go back in. I’m scared,” right? You heard that, didn’t you?

So what we did is we created just a little one foot in, one foot out, a dollar-cost averaging that process that combined the idea of a systematic time-based dollar-cost average into the portfolio plus an opportunistic dollar-cost averaging. In other words, tactical, if you will. So what we did was we said, “You know what? If we cannot find a reasonable day during the month that there was time to invest because maybe there was a drop that we want to take advantage of, we’re going to say the 15th is your day every month, no matter what, to invest a portion of the portfolio. And when we find other opportunities arise where there is going to be a significant drop or discount in a particular sector, we’re going to actually put money to work there. So over time, and whether it’s 12 months, 6 months, we’re going to start getting you into the portfolio, one foot in, one foot out so that you’re comfortable with all this.”

And I can’t tell you how many people in the last year have thanked us for aggressively talking them through that process because otherwise, they were just going to wait for a market drop, and how many market drops have there been in the last year of substance that would have forced people to get in? And the other problem you have is when you’re trying to do this, you start getting into a situation that, oh, the market’s dropping. Yeah, I know I should invest, but I think it’s going to go down more, right? And then you never get invested. You never get to where you’re going to be.

Meb: So many problems are started with the phrase, “I’m just going to wait until…You know, I’m going to wait until the market corrects or I’m going to wait until the market goes back up.” I mean, I spoke to plenty of investors that invested and, “I got out in 2009, never to invest again.” And, you know, the conversation we have where the question where you mentioned, I think it’s very thoughtful, people always ask me, “Hey, I have this chunk of money, or I’m going to do this, I’m going to switch, like, when should I do it?” I’m like, “Look, the correct answer is you should invest at all, now, today. Like, that’s the mathematically correct answer.” Psychologically speaking, that’s not necessarily the best for you. And people, they don’t love dollar-cost averaging because it’s like the blend of all possible outcomes. I feel like people like to gamble, and wager, and bet, have something to cheer for. But it’s totally sensible.

Andrew: But what happens, Meb, is let’s say you have that person in 2009 was out of the market and finally, they’re like, “Hey, okay, I give in,” right? They’re not really feeling it. Trust me, they’re not feeling it. And what’s going to happen is you get them in. They’re okay for a month or two and there’s a drop in the market. I don’t know whether it’s large, small, their portfolios down 4%, they panic, they pull, then they’re doubly never going back in the market. So this idea of…I mean, this is not earth-shattering. This is not new information for you. This dollar-cost average, it gives them a little bit of feeling that okay, I’m in but I’m not totally taken over. It’s the frog in the pan. You know that story, right? You kind of boil them slowly. And I say this sincerely because otherwise, clients will never get in. And you’ll never reach your financial goal of whether it’s college planning, independence, security, retirement, whatever it is, you’re never going to get there by staying out.

And you probably heard a lot of great speakers talk about you have to be in the game to score points. You’re sitting on the sideline, in the stands, you’re doing great by cheering. You’re never getting the goal, the basket, the homerun, got to get in there. That doesn’t mean you need to be head deep. That doesn’t mean you need to stand at the goal and front bear and wait for the puck to come at you. No, no, no. It means you need to do the right thing. But if you’re not playing, what is the point of even talking about any of this and, kind of, this mental process of wishing, hoping, and then being miserable, by the way, when you see everybody else making some reasonable money on an annual basis, and you’re sitting on the sideline, where your money is going backwards?

Meb: The phrase we like to use involving the DCA and anytime people love stressing out and having a binary approach to anything, like, should I sell the stock? Should I keep the stock? Should I get the market? Should I get out? And in this, sort of, dollar-cost averaging mindset, we say, “Just go halvesies.” And it totally destroys the emotions of should I be in or out? Should I sell? Timing of it. And you can extrapolate that to going quarters or 1/10ths, 1/12ths, all that stuff.

Andrew: The other thing is that’s really interesting of what we’ve also done for people is actually shift their models. So we do possibly an all-in concept, right? But let’s say we have a model that is a one risk and a five risk just from a range. We say, “You what? Let’s just get in on the one or two risk right now.” You’re probably more like a four long-term, but let’s just get on a one or two and then we’ll rotate you in as you get more comfortable. Again, at least you’re playing. You may not be scoring a lot of baskets but at least you got the opportunity for something to happen here.” And a lot of that what we do as advisors is the psychological betterment of people revolving around their money because it’s an important thing. You know, when people are worried about their money, they make really poor decisions, or when they’re not worried about money, sometimes they make poor decisions also in terms of what they’re doing with their money.

But I have clients who…I talked to yesterday…I talked to a woman, she said, “You know, my gut is telling me…” I’m like, “What does that have to do with anything?” “Because I will tell you something,” I said to her, “my gut’s probably a lot better at this than you are, and my gut’s not telling me anything. Research, looking at statistics, how are we making decisions for your portfolio? Why are you using me if your gut tells you to pull out or push in?” What’s the point of that?

Meb: So, I want to hear what your gut says so we can do the opposite. As you look to the horizon, what’s got you excited, interested, worried? Anything come to mind?

Andrew: I mean, I think the debt pile that we have outstanding right now, I don’t want to sound like an old geezer here but, you know, because right now with MMT, it was like, who cares about the debt, you know, and who cares about the fact that we have a trillion dollars outstanding because we’ll just somehow extinguish it through other policy or we’ll just have China buy it or something. I mean, I think that the idea of us having debt and then unwilling to increase taxes is absurd. I don’t want to pay higher taxes. I know you don’t want to pay higher taxes. I know corporations don’t want to pay higher taxes. And this whole switcheroo of trying to make us believe that if we increase corporate taxes, we become less competitive with the rest of the world, it’s a red herring.

And without going through all details about this, the bottom line is we need to repay. Companies have made a lot of money from the low taxes and the graciousness. Look at the airline industry. Look at the banks, how much money have they gotten over the years that the taxpayer has footed the bill for, right? It’s time to pay some of that back. As an individual, if I was to go to a bank in really hard times, and I was to borrow money, don’t you think I got to pay that back one day? So companies want a free ride. Again, I don’t want too much of a tax increase because that will hurt valuations but okay, increase. Individuals, especially high-income earners, we need to pay a higher tax to pay back for what we had. And the wealth effect and all that, that’s great but, you know, there’s a lot of people still hurting. We’ve got to fund back the cost of what happened during this pandemic, which you know, I have to say for the record, no fault of anybody’s. And with the amount of cash that was laid out, we can’t just let it sit because the debt overhang, even at low interest rates, is going to be a stymie for growth over time. We know this. We’ve seen it.

We know Japan, what’s happened there with an aging population with massive debt negative interest rates. And I don’t want to get to a time, maybe I should say I do, but I don’t want to get to a time that we have the central bank actively involved in the ETF market on the stock exchange like we have with Japan. I just don’t want that. And if we do have that, that’s the ultimate rigging of the game. Just put it all in and be done with it. So, I’m worried about that. I’m worried about higher interest rates. I’m worried about if we get above 2%, which I don’t think the Fed will allow. And I’m worried about some of the potential for where we are with the massive stimulus and the fraud that’s attached to it and the inability for the government, if they put out a $2 trillion infrastructure bill, the shovel-ready plan that anybody’s been hoping for, for all these years, to actually do it on an efficient basis because they won’t. It probably should be some kind of private partnership involved in all this.

But right now, the idea that government is going to do all, be all, and be the safety net in all this, I find to be a very tough spot to be in right now. And I think that they’re really starting to overstep, utilizing, as many have said, that any catastrophe is a great opportunity to spend and to do this, and I think we’re a little bit ahead of our skis on this whole spending. So that’s a big issue. And then finally, I think the speculation bubble, where we’re seeing a balloon, but not the balloon popping, but areas that are expanding, you know, kind of, like, think of it like a doctor’s glove, you know, a latex glove where you blow up, and it’s not just blowing up but boop, boop, you know, we’re seeing little pieces blow out. And that’s what’s happening with some of these hedge funds right now. Risk-taking is exceptional.

And you talked about how, to a degree, sentiment indicators are, “Hey, it’s always going to be this way.” And we have a new group of investors, the young people that are also involved and interested in the markets, they are until things crap out, not crap out and pick back up. I mean, you know, when they see that they lose some serious money on whether it’s, I don’t know, you know, some crypto or the NFT market, which is down substantially recently. So, kind of, some of the speculation that I think has been created and enhanced by the safety net that the government is trying to put on, I think that’s really a wrong place for them to be and I think it’s going to actually stifle long-term entrepreneurialism, unfortunately.

Meb: As you look back, what’s been your most memorable investment?

Andrew: You know, some of the stocks that we had over the last year or so have been, like, what’s happening? I mean, like, names that I would never have bought, probably. William Sonoma, I would have never bought William Sonoma. If it didn’t pop up on my screen and I was mandated to buy it, which is another way of also investing where you have a certain mandate that you can prove long-term that works, William Sonoma up a ridiculous amount since we bought it

Meb: Andrew, where do people go if they want to find more information about you, your pod, your biz, your boat that’s for sale soon, where do they go?

Andrew: So go over to the Disciplined Investor. If you want my book, well, I could paint the moustache on, “Disciplined Investor: Central Strategies for Success,” that’s available still somewhere around. The audiobook is available. Thedisciplinedinvestor.com, look me up and you can find the podcast running since 2007, 700-plus episodes, also the “DH Unplugged Live” on Tuesday nights is something we do as well. So, great stuff. Meb, you’re doing a great job. You’ve been also a major leader in the area. Although I don’t like when you call it pods. I have an issue with that. You know that. I call it podcasts and it’s kind of too California nuanced for me the pod thing, but I don’t get it. I don’t know why they don’t call it a cast. It seems a lot more like a cast.

Meb: A cast, it sounds like you broke something.

Andrew: I don’t know. What’s a pod? It’s like an escape from a spaceship, a pod or some kind of…

Meb: As a skier, that’s a little too close to home for me. So…

Andrew: But you’ve been a leader in this area too, so you should be congratulated, and great content, great guests. And, you know, it’s not easy to do this all the time, week in and week out. So I congratulate you for all that you do.

Meb: Easy for me. You got to do all the talking. I just get to listen. It’s hard for me not to butt in. Andrew, thanks so much for joining us today. It was a blast.

Andrew: Hey, thanks so much, Meb. See ya.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.