In their latest episode of the VALUE: After Hours Podcast Jake Taylor and Tobias Carlisle are joined by special guest Zach Abraham to discuss:
- Stocks Have Become Pokémon Cards
- Market Setting Up for Lower for Longer
- The Pollyannaish Thinking About the Impact of Rising Interest Rates
- Investor’s Lament: Selling Stocks Too Early
- Blue Apron, Beyond, and Peloton: The World’s Gone Mad for Wild Investments
- Growth is Not the Same as Success: Why Most Fast-Growing Companies Fail
- Please Fed – “Suck Liquidity Out of This Market!”
- Magical Thinking to Support HYG Going Into a Cycle
- Energy Stocks: Generational Value in a Recession?
- The Indexing Impact on Small Caps
- The Fallacy of Composition In Real Estate Prices
- Will the Economy Survive to 2025 Without 0% Rates and Stimulus?
You can find out more about the VALUE: After Hours Podcast here – VALUE: After Hours Podcast. You can also listen to the podcast on your favorite podcast platforms here:
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Transcript
Tobias: This meeting is being livestreamed. Folks, we’re off and racing. It’s Tobias Carlisle. This is Value: After Hours. Joined as always by my cohost, Jake Taylor. And our special guest today is Zach Abraham. He’s the founder, chief investment officer, CEO, the man at Bulwark Capital Management. How are you, Zach?
Zach: Doing good. Yeah, the guy that wears the hat– Well, it depends on how the performance goes, right?
Jake: yeah.
[laughter]Zach: Chief investment officer when we’re winning. When we’re not, it’s the analyst’s fault.
Jake: [laughs] Welcome, Zach.
Zach: Thank you, guys. Thanks. Good to be here.
Tobias: Hey, we finally got our markets in turmoil. We’re probably like down a percent or something.
Jake: yes.
Tobias: There’s been so little volatility.
Zach: Oh, my gosh, man. No kidding.
Jake: Panic.
Tobias: What do you think, Zach? Where are we?
Jake: [laughs]
Zach: Just so people know, I was thinking about the last time we did this– The last time I was on with you, Toby, was when I was still working out of my home office. So, a lot’s changed. If people remember, I’m a value guy at heart. So, that probably uncovers me for being a little bit bearish at the moment.
Jake: [chuckles]
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Stocks Have Become Pokémon Cards
Zach: I don’t want to be hyperbolic at all, but I think in a lot of ways, personally, I started running a portfolio in 2007. I’ve never seen a market that seems more detached from fundamentals than current. When I say that, I don’t mean that everything’s insanely priced. I just don’t see any rhyme or reason to how things are priced. It just seems like things are just floating. Like we keep joking around at the office. It’s like stocks have become Pokémon cards, where somebody thinks it’s worth this much this day, discount rates don’t matter anymore.
You and I were talking about off air. If you would have told me that the Fed funds rate was going to go to five and a half and earnings were going to be down, margins were going to be down pretty much throughout the entire S&P, I think on an inflation adjusted basis, revenues are down year over year. And in that backdrop, you’re looking at a market that’s up 10% plus. Yeah, [chuckles] falling profits and higher rates don’t typically incite me to want to jump in there and buy.
So, I think that one of the things I was looking back at a letter we wrote to our clients in 2021, at the end of 2021, and we said that, “Look, I think we’re at the peak of this cycle, but it’s going to be a knife fight, just because it’s been the longest, biggest bull market of all time and you’ve had 0% rates pretty much the entire time.” And we said, “Look, we think it’s going to take a lot longer to get to “normal.” We’d expect to see massive bear market rallies.” So, so far, that’s the way it’s playing out. And in that light, I guess, this year shouldn’t surprise me. Everything has been bigger and longer and crazier, and this appears to be too, but I don’t think it’s going to change the ultimate resting place. I think we’re going lower. I don’t think we’re on the edge of a morass. I don’t think we’re looking at some big 2008, 2009 black hole.
You know what’s funny, guys? And I’d love to hear your thoughts. I feel like I’ve already been rambling, but I feel like you’re really setting up for a mini-1970s type period where you’re just got to grind sideways for a long time while you digest the current valuations, which seem very stretched. I think peak margins are probably in the rear-view mirror. I’m not a permabear. I don’t think we’re about ready to fall off the face of the Earth. I also don’t think that this is the environment of a new bull market breakout either. I think both bulls and bears are going to get smacked around, and I think sideways chop for a while. It seems like the most logical position at this point, but we’ll see.
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Jake: It’s very interesting to see the bond market versus the stock market and just how differently they’re interpreting the current situation. I don’t remember a time where it’s been this far out of sync.
Zach: No.
Tobias: Yeah. There’s clearly some disconnect bonds– I saw John Hussman, who’s pretty bearish guy most of the time, he said that bonds today– He put them into a zone of reasonableness.
Jake: Oh, yeah.
Tobias: He didn’t think they were particularly out of whack. So, you’ve got bonds that have persuaded one of the more bearish guys around.
Jake: Is he constructive on bonds?
Tobias: I don’t know if he was constructive. He was just like less of–
Jake: I just like that term. It doesn’t make any sense to me. [laughs]
Tobias: I don’t want to put the [unintelligible [00:04:58] [laughs] [laughter]
Zach: You know what amazes me by– This is not a slam at all. The guy’s smarter than I am, which probably isn’t saying a whole lot. [chuckles] I don’t mean it. I just want his clientele base.
Jake: [laughs]
Zach: No, and I mean this. That guy has managed to maintain really significant AUM. For a long time, that performance has looked pretty meagre.
Tobias: To give him credit, he did have very good returns in the 1990s. He was very bullish in the 1990s. He’s had a pretty good run, and he’s been pretty clear about his strategy. People are there because they agree with his thesis.
Zach: Yeah.
Tobias: I have a lot of sympathy for his thesis too. I don’t want to sound critical, because I read his stuff. I enjoy his stuff. I don’t think he’s wrong. I just think that it takes a very long period of time for it to play out.
Zach: Same. I feel the same way. I think that something that I’ve had to absorb over the last 15-year cycle, and it’s probably what’s got him is you can look at what central banks and what governments have done in a lot of different lights. Obviously, again, there’s a ton of different takes out there. But I think one of the easier ways to really understand it is so many macro stories and theses haven’t played out, because central banks are muting that. That’s what their intervention is doing is muting macro plays and macro flows and macro reactions.
If you look at the performance of a lot of macro guys over the last 15 years under that lens, it explains it. There were a lot of macro events that I think got– Think about when– What’s his name? I’m spacing that– Whatever it takes.
Jake: [unintelligible 00:06:44].
Zach: Yeah, [unintelligible 00:06:46].
Tobias: Good joke.
Zach: If it wasn’t for that sentence, I think the macro guys would have made a killing over the next three months to six months there. I see Hussman’s argument is it has to be eventually right, just the timing of it, obviously.
Jake: There’s been lots of little scares of SVB, gilts, and that’s just even in the last 12 months or whatever.
Zach: Yeah.
Jake: But how quickly we just move on from that and just put that all that stuff like, “Ah, those are old problems. We’re past that.”
Zach: [laughs] Again, I don’t want to be hyperbolic but I think it’s probably fair to say you were a week or two away from a complete national bank run on the regionals. Maybe more. Maybe it was a month. Because the problem with those is, they feed on each other. It continues to get [crosstalk] more.
Jake: Yeah, it’s a confidence issue.
Zach: Yeah.
Tobias: To give the Fed credit, that’s what they’re supposed to do. They’re supposed to stop those bank run. I don’t know, if that’s traditionally the way that’s supposed to be. It’s supposed to be people lining up at the door and they just say, “Yeah you’re going to get your money. Just relax.”
Jake: Just sit tight. Yeah.
Tobias: There’s no chance that the bank goes under for liquidity reasons. I don’t know, if they’re supposed to pull the handle, flood the market with capital just because somebody’s having some struggles. But that seems to be what they’ve done. They’ve been bailing out hedge funds and so on.
Zach: Yeah. If you think about it too, it’s really crazy to watch it morph. Because I’m assuming we’re all in that same age range. When did you start in the business, Jake?
Jake: Call it 2007-ish.
Zach: Okay. So, yeah, right around the same time I did.
Jake: Right at the top of value.
[laughter]Zach: Yes. We’re singing the same story.
Jake: Yeah.
Zach: But it’s fascinating to watch. We all remember how crazy it was watching them pass TARP in 2008.
Jake: Yeah.
Zach: If you think about it, that just–
Jake: Tiny numbers.
Zach: Oh yeah, that SVB vehicle was 40% a TARP. You know what I mean?
Jake: Yeah.
Zach: It didn’t even make the news.
Tobias: [laughs]
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Market Setting Up for Lower for Longer
Zach: It’s just wild the way that you watch these things unfold. I just think that’s why I think that this lower for longer thing is coming, because I feel like you couldn’t have set up the market or market participants worse, because you have literally told them, if we take a 23% GDP shock in a single quarter, don’t worry. We got you. And so, I just think you have that Pavlovian response.
You guys know as well as I do, the only way you’ve been wrong over the last 15 years, if you didn’t buy the dip in tech. For 15 years, it’s like a fifth of most people’s lives. That’s why we were prepping clients back in 2021 just saying, “Look, I think this is the right time to make a pivot towards fundamentals and really be disciplined about it. But don’t expect it to look good every quarter, because you’re going to see these reflexive and Pavlovian rips.” That’s how it’s played out. [chuckles] I still can’t believe the NASDAQ is up as much as it is this year, but at the same time, I guess, I’d say it wasn’t surprising given the backdrop.
Tobias: It’s been extraordinary to watch rates rise the way that they have. As you say, to wind it forward 12 months and see the market where it is, I certainly didn’t expect that to happen. But then if you look at every other crash, they do seem to have this very long– The 2000-2002, 2007-2009, they are years long events and they have an early sell-off that spooks everybody and then it rallies back to almost the all-time high. It never quite gets there. Then it’s that back half where all of the action seems to happen.
I think we saw that rally back to almost the all-time high whenever that was recently, but it also didn’t quite get there. And now we’re into that part of the cycle where the Fed has been raising for now– I think they started in May last year. Do you guys know exactly when that started? It’s been a while. Anyway, so, the yield curve inverted in late October last year. Here we are. It’s almost October. The yield curve is now halfway back from where– At its full inversion, it was -1.89. We’re at like -0.96, I think yesterday, or -0.93 yesterday. So, halfway. Say, call it halfway. It’s taken a long time to get there. And so, when you see that the actual crash, like, the real carnage tends to happen after the inversion goes back into normalization.
So, we’re getting pretty close to that event, and maybe that’s what now we’re seeing a little bit of the jitters, a little bit of the shakes. I think the Fed keeps it raised until something break. Why would they not? They’ll be looking at exactly the same data that you and I are looking at, we’re all looking at and saying, “Well, we’ve put rates to 5% and market hasn’t cracked. Stock market hasn’t cracked, it’s fine. Real estate market hasn’t cracked. It’s fine.” There’s just zero incentive to lower rates at this point. There’s plenty of punishment, because inflation is still pretty high. So, I guess, they wait until something cracks. And the moment that it cracks, they start cutting. But we know there’s a long lag, and it takes another two years for that to play through. That’s [crosstalk] rough roadmap.
Zach: I couldn’t agree with everything you said. I think that the lag time is going to take longer this time, because credit– You’re coming out of a period of time where obviously you had historically low rates really across the board. And then on top of that, [chuckles] in an environment that’s unlike any we’ve ever seen with fiscal stimulus. If you– [crosstalk]
Tobias: Massive fiscal stimulus.
Zach: Oh, yeah. So, anybody that wanted to get something financed or refinanced has, you know what I mean, for the most part. One of the things that I keep going back to– Again, I think one of the biggest issues this market is dealing with is one of perception. Meaning, when you look at stimulus– The other thing, people are like, “Well, wages are up a lot.” This is the worst real wage growth over the last two and a half to three years that you’ve had in history, right? So, yeah, they’re up, but up compared to what? I feel like people are missing that– [crosstalk]
Tobias: Purchasing powers down even though wages are up.
Zach: Right, which that matters to the consumer. The thing that I just cannot wrap my head around and we’ve gone round and round about this. Again, you say the word recession, everybody’s like, “Well, you’re a permabear. You get–” Guys, historically recessions happen every six and a half years. It’s not like Independence Day and a recession settles over the top of the White House and just nukes it.
[laughter]===
Will the Economy Survive to 2025 Without 0% Rates and Stimulus?
Zach: But when you remove 0% rates and stimulus, how do you expect things not to go back more similar to trend prior to COVID? People aren’t going to keep purchasing new barbecues every year, because COVID happened, and they’re not going to keep remodeling their living room in their backyard. So, I just think you have all these things lining up. Could we be wrong? Sure. I just don’t see a way out of a technical recession. I just don’t see how it squares.
Jake: I’ve heard from that the phrase right now in private equity real estate, maybe venture too is survive to 25. And it’s like, “Okay, rates will be lower. By 2025, if we just can just survive to there, don’t sell any of your assets, just get through to 2025 and you’ll be back in the driver’s seat.” I feel like it seems like it might be that attitude a little bit like, “Okay, just survive to 2025. I’m not going to sell anything. I’m just going to ride this.”
Zach: Yeah. The eerie thing about it, and I know I’m not telling you guys anything that you don’t know either, but man, isn’t that the credo going into every single economic contraction, right?
Tobias: Soft landing.
Jake: Soft landing. [unintelligible [00:15:33]
Zach: We’re going to buckle up and ride it out.
Jake: No landing, Toby. Come on.
Tobias: I saw a chat yesterday. The number of articles with soft landing, and it always spikes into the really big recession.
Jake: Right before?
Tobias: Yeah. Big recession only.
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The Fallacy of Composition In Real Estate Prices
Zach: The other thing that I think is interesting about this, and we talked about this on our show recently was– This always happens at the peak, but it seems like it’s just happening en masse now, where it’s like investors are covering their ears and saying, “I don’t want to hear any bad stories.” It reminds me of a little cousin I had. She was three years old. Her parents would be disciplining her. She’d cover ears and go, “I don’t want to hear any of those words.”
It reminds me of that with investors right now, because let’s take real estate, for instance. I saw an article the other day, housing volumes have fallen to a 28-year low or something like that.
Tobias: Is that back?
Zach: Yeah. We all know price follows volume, right? It’s an age-old adage in our industry. And they go, “But median home prices are up 4%.” I started dying laughing looking at that, going, “Look, if you look historically–” These rates probably aren’t perfectly accurate, but about 20% of loans mortgages issued are jumbo loans. So, by definition, about 80% of loans issued are less than that. That’s about correct when you look at the typical mix of real estate. All of your volumes, even throughout the Great Recession, the financial crisis, the disproportionate, good two-thirds of your volumes happen at that lower half of the scale, She’s got more people.
Okay, well, we know that the lower end, this time is very unique. It’s dried up much more than the higher end, which makes sense in this environment. The lower end has to access credit a lot more people at the higher end don’t. So, you got a lot more cash buyers at that higher end. Well, think about that. Okay, so, if you look at a mix, let’s say all housing across the country is down an average of 20%. I’m not saying it is, but I’m just saying for sake of argument. And you change that mix of 80-20 houses below 700,000, 20%, above 700,000. You change that mix to 50-50. It’s somewhere in there now, 50-50, 40-60, somewhere in there, you can easily have a scenario where all houses are down 20%, but the median is up five.
Tobias: Right. yeah, that’s interesting.
Zach: It’s a fallacy of composition. So, when you actually bust into these markets– We’ve looked at Austin. I’ve owned property in Phoenix that I’ve sold in the last two years. So, I know that market well. I know this market up in the Seattle area very well. We’re looking at Bay Area California.
When you start looking across those markets, and you look at all the data that’s available, 12 to 15 seems about where you’ve pulled off from the peak, and yet the median price, everybody’s like, “Oh, houses are hanging in there.”
They’re not. It’s just a fallacy of composition. It’s the way that they’re looking at. People are like, “Oh, it’s a conspiracy.” And I go, “No.” What is it? 70% of the time, economies are expanding, and the metrics that we build are useful in those periods of times. But you get into a period of time like this that is extraordinarily abnormal, and it makes sense that those typical metrics that we use don’t really work. So, I think that there’s just an exorbitant amount of misconception out there.
You just go through those real estate markets, and those people arguing that house prices are up 4% year over year, it’s just not true. It’s just not. Again, it’s just these fallacies of composition. So, yeah.
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Tobias: Let me give a quick shoutout to all that. We got a pretty diverse group of people dialing in. So, we got Lewes Delaware. Nashville, Tennessee. What’s up? Wexford Ireland. Ireland in the house. Toronto. Toronto. Prague. Altamonte Springs, Florida. Savonlinna, Finland. What’s up? Pyongyang, North Korea. Good to hear. I think you might be our first caller from there.
Zach: No way.
Tobias: Santo Domingo, Dominican Republic. I think it’s a joke. Cincinnati. Tallahassee. Glasgow. Shetland Islands. What’s up? San Diego. Norberg, Sweden. Kensington, London.
Jake: It’s German for–
[laughter]Tobias: Durham. Gulf of Mexico. Bucharest, Romania. Raleigh. From the empire, there’s Julius Caesar in house. Santa Monica. Bangalore. Guatemala. Milton Keynes, I think I can’t remember whether I said that correctly or not.
Got a few shoutouts for you, Zach, in the comments here. So, let’s go equities for a little bit because I know that I do took a lot of macro, we do took a lot of macro, but let’s go macro equities.
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The Indexing Impact on Small Caps
Small caps getting absolutely smoked. There was a Royce article out yesterday. They said that, “Small to large using EV/EBIT biggest spread that they’ve got in 28 years of data.” The only time it was a little bit wider was March 2020 at the bottom. How do you feel about–? The thing that they say, so they say small caps, the average PE in small caps is something like twelve and a half at the moment versus a long run average of like 18 and a half. It’s already in an environment where rates have gone up, all of their borrowing costs are up. Small caps are really already in their bear market.
Then some of the criticisms that I saw in the Tweets under that work– Yeah, when I go through that list of whatever it is, 2000 stocks, I find it hard to find things trading at 12 times earnings. What do you think is going on there? Why is the macro data saying it’s cheap, but when people dig through, there’s not much that’s interesting. Is it all energy and real estate that the traditional value guys don’t want touch?
Zach: Yeah, I think that’s part of it. I also think that, [chuckles] again, human psychology and it’s funny because we always want to assume that we’re not part of it and yet– It’s scary, man. We’ve had 15 years of– I was telling some of our younger employees the other day about some of the horror stories I’ve got over the last 10 years to 12 years of holding value picks.
I was telling them the story about PACCAR. We owned PACCAR for five years. Margins went up, the dividend doubled and revenues rose 50%. The only thing that changed was the price to earnings ratio went from 13–
Tobias: [laughs]
Zach: In terms of a business, was that a good investment? It was a great investment as a business. Problem is, the equity didn’t move. So, I think that’s a big part of it. I also think that when you start looking through– I’m not sure where it’s at right now. I haven’t really looked at it very specifically, but there was also one point where I think GameStop was the biggest position in IWM, something like that,-
Tobias: Possible.
Zach: -where you’ve had these crazy moves. So, when you start looking, that same indexing impact that’s happened to the S&P 500, it has certainly had an impact on the small caps too. So, when we were going through that small cap index, you’re looking through small cap value specifically and you’re looking and going, “That’s not value.”
Tobias: Yeah.
Zach: “That’s not value.”
Tobias: That is true.
Zach: Yeah.
Tobias: I have noticed that.
Zach: Yeah. I think that it shouldn’t be a surprise to any of us, especially because we’re all individual guys looking at different individual equities and things of that nature. But it’s really hard to find a corner of this market that does not look like it’s been significantly impacted by passive.
Tobias: yeah.
Zach: And just that market cap waiting, just feeding on itself. You posted that thing just– It was yesterday, wasn’t it, which said that the medium weight– What is it called?
Tobias: Equal weight. Yeah.
Zach: S&P was now negative on the year.
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Energy Stocks: Generational Value in a Recession?
Tobias: Yeah, that was yesterday. It’s down more today. So, S&P equal weight is definitely negative on the year. I think that if you cut out the Magnificent Seven, I think it’s down. It’s definitely down.
Zach: Yeah, it’s got to be. But what I will say, and this is what I was saying earlier when we first got on is, and this gets overused, in terms of value and in terms of opportunity, I think there’s tons of really target rich stuff out there. I think there’s stuff that looks very tempting long-term. You got stuff that is crazy cheap. It just feels like suicide to buy it. And then you’ve got stuff that’s still insanely expensive.
So, energy is one of those. Look, I’m not the first guy to come on and talk about energy, but when you look at a lot of these companies– One of the things that I think people are missing here, guys, is what has happened in the last two and a half years to these companies has been transformational, right? A lot of these companies have been choking on debt for 15 years or 20 years. A lot of them now. That ain’t a problem. If not, they’ve completely paid it off. They may have the same ticker, but a lot of these names are not structurally the same company. They’re completely different.
I do think it’s going to be a wild ride. I don’t think it’s going to be easy to hold these things, but there is still, in my opinion, generational value to be had in the energy space and even the commodity space.
Tobias: What do you think about– So, Michael Kao, who’s been on the podcast to more traditional like equity structure arbitrage, but he moves a little bit more macro these days. His Substack and his Twitter account is a little bit more macro. He talks about, “Oil just being weak, typically into a recession.” And so, if the recession does play out the way that we’re all assuming that it will, then you’d expect to see energy weak into that and you’d also expect to see energy equities follow suit. I think that the energy equities haven’t followed the oil price so far. Like, the last few months, they’ve disconnected a little bit. Is that fair, JT? You’re shaking your head there a little bit.
Jake: Yeah, I would say that feels kind of fair. I feel like the price of oil has come back up. What is it, back up above 90?
Tobias: I think so, yeah.
Jake: The equity side has, in my experience at least, not seem to have participated as much. I was going to say, do you guys feel like it’s fair to say right now that the crash is here, it’s just not evenly distributed?
Tobias: [laughs]
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The Pollyannaish Thinking About the Impact of Rising Interest Rates
Zach: Yeah. Maybe that’s the way this goes, right? Maybe it’s a wave hits this and a wave hits that. The only problem is because the market cap waiting situation has gotten so extreme, when tech gets hit– This has been our thesis, really the whole way along, which felt dicey, because it really cuts against the grain, but we’re really supposed to get our cues from the S&P 500. It’s the biggest index. It’s the most broadest reaching. We haven’t been doing that since the end of 2021. We’ve been tracking the NASDAQ, and it has worked on a technical level. It has behaved much better in terms of understanding what’s coming at you on a technical basis. It’s adhered to the levels much better.
Tobias: What do you mean you track it? What do you mean?
Zach: Well, so, when we get into an environment like this, we’ve got several different risk management techniques. But if we’re really worried about market downsides, we really pay more attention. When it comes to hedging our positions, we really pay more attention. We’re value oriented. Our value portfolio, that’s how we pick everything. But we really rely on technicals on the hedging side.
We made that decision, which felt a little bit crazy at the time, to use the NASDAQ as our indicator when to hedge and when to manage risk, as opposed to the S&P 500. We made that call at the end of 2021, and it worked much better. There were just several times where you had fake breakouts on the S&P. The NASDAQ was bumping up against the top of the range. It got beat back down. Where if you’d have been tracking the S&P, it would have told you to pull the insurance off.
Tobias: What’s the reason for that? Just more people are playing around on the NASDAQ than in the S&P 500.
Zach: Yeah. We have an interesting, and you know this, Toby, but we deal with all retail investors. So, we look at a lot of positioning. We look at a lot of 401(k)s coming in. And as you’d expect, everybody’s loaded up on these queues. This fund queue, it’s been great for us.
Tobias: It was great crushing it.
Zach: Yeah. So, you look at these people underlying portfolios, and they’re 40% to 50% in the queues, and it’s just that self-reinforcing wheel. It keeps going up and they’re outperforming. And so, we just keep feeding it, feeding it, feeding it. That’s how you get in this crazy situation we’re in. So, it feels to me like that tide is turning. When you look at valuation, all the different stuff that we’ve talked about and macro and all these different things, but I don’t know. I’ll throw it back to both of you guys on this. The risk management side for us, we’re pretty good at that. We’re usually very good at limiting volatility and holding in there. So, I’m not as worried about that. I still think that, at least in my position, I think that money managers are the most afraid of not buying the dip in queues again. I get it. That’s my fear. It’s just been free money. You think about all the research time that guys like us have spent in–
Jake: Wasted.
Zach: Oh, my gosh. Like I said, even when we’ve been right. Company like PACCAR, they double their dividend and increase revenue by 50%, and the stock doesn’t go anywhere, where all you got to do is come out and say, “You’re getting into AI and your stock will double.”
Tobias: [laughs]
Zach: It’s [chuckles] crazy times. So, anyway.
Jake: This too shall pass.
Zach: I think it is. I think we’re getting there, but these things always take longer. I go back to 2008 too, and I remember that.
Jake: Yeah. They take longer and then they happen faster.
Zach: Yeah, it sure seems like that, doesn’t it? You just have this period of denial and then all of a sudden, the dam breaks. The other crazy thing, and we don’t need to go down a macro path because I really don’t even think this is a macro discussion, I just think people are being very pollyannish about the impacts of having 0% interest rates for 15 years, amassing the greatest pile of debt in the lowest rates in human history, and then jacking rates to the roof and not expecting things to break. But they have to. I don’t think you need higher rates. I just think you need more time at these rates.
Tobias: 5% is not a super– Traditionally, it’s not even quite the average. The average is around 6%, I think. That doesn’t mean that the impact is not going to be material because people are planning on the basis of very, very low interest rates. When rates go up like this, obviously, that must change the plans materially. I think my money on deposits. Just my rates gone down to 4.4%, but I think you can find better rates out there. I think that Alpha Architect box, which is a really interesting ETF, has a sort of– They give you something like the Fed market rate using a box.
Zach: Yeah.
Tobias: It’s a little complicated. I don’t fully understand how they actually execute this thing, but they give you basically cash rates. They’re close to like 5.67 with running an ETF. So, there’s no flow through that’s contained inside the price.
Jake: Tax advantage [crosstalk] real.
Tobias: Yeah, tax advantage. There’s no income flow either. So, it’s all capital gains. They’re transmuted into capital gains, which is ideal. You have the tax impact at the time, you sell it.
Zach: Yeah.
Tobias: But that’s 5.67. You start looking around at equities that give you more than reliably think will give you more than 5.67 are enough to justify the–
Jake: The risk.
Tobias: Yeah, the risk of being in those equities. There’s not a lot that gets over that hurdle at the moment in my world, anyway. I don’t know what everybody else is looking at. What do you guys think about that? Is it time to just jump into cash and write out the volatility?
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Magical Thinking to Support HYG Going Into a Cycle
Zach: So, it’s funny you asked that question, because an ongoing debate that we have had all year long, and the only reason we haven’t done it is because of the value that we see in some of the stuff that we’re holding, because of the dividends it’s paying, because of the cash flow it’s paying. But we have been very, very tempted to put anywhere from 50% to 65% of the value portfolio into your Treasuries. What is the earnings yield on the S&P right now? If you’re trading at 25, 24 times earnings, you got–?
Jake: 3% or 4%.
Zach: Yeah, 3% or 4%. Right. So, if I’m going to get 5.2% to 5.5% holding two-year Treasuries in this environment, here’s another tell for a value discussion you can make that 5.2%, 5.6% like you were talking about owning Treasury type funds, short-term Treasury rates, all that kind of stuff. HYG is paying 5.7%.
Jake: Yeah. Where’s the spread right now?
Zach: Holy smokes. You want to talk about return-free risk? Why are you buying high yield?
Tobias: It has been softening through the year a little bit. But then so is TLT. But TLT is the 10-year getting absolutely smoked today. So, I saw somebody– [crosstalk]
Zach: It’s the 20-year, actually. It’s the 20-year.
Jake: 20 plus.
Tobias: 20 plus. I’m sorry.
Jake: I think it’s down 50%.
Tobias: I think it [crosstalk] 2007? Yeah, something crazy.
Zach: I think the number is down– Don’t quote me, but I think I looked at it this morning, I think it’s 53% from January 1 of last year.
Tobias: Wow.
Jake: How many years of interest payments did you give back in price loss there?
Zach: Oh, man. Go look at PIMCO total return funds for the last 14 years. Last time, we looked. I think it’s like 1.6 total return. It’s brutal. That gets back to what we were saying. These things have to know– [crosstalk]
Tobias: What’s the reason for HYG not getting whacked so far? Why is it yielding what it is?
Zach: Well, I think people–
Tobias: It’s got a little bit of an equity kind of gamble in it. It’s got people who think that it’s– What do you think? What do you think? I’m speculating 100%.
Zach: Honestly, there really is no explanation for it other than people just being blind to risk. Like I said, I think that’s one of the riskiest things here is just it’s been good for so long. There’s been no real pain that’s lasted for any extended period of time. I think people just get blind to risk. The other thing we are looking at is that you’ve got as of a week and a half ago, perhaps, it’s changed. It doesn’t seem like it has. You got retail investors the most bullishly positioned they’ve ever been on record. I think that–
Tobias: Was it possible?
Jake: Whoa.
Zach: Yeah. No, and guys, we need–
Tobias: Is that a backwards looking measure too, like to what? What are they in? Magnificent Seven.
Zach: Queues in HYG.
Tobias: Yeah, queues.
Jake: HYG.
Zach: Yeah. You’ll hear people support it and they’ll go, “Well, the duration on HYG is pretty small.” You’re like, “Are you familiar with the historical default rate and junked at?” Going into a cycle, it’s magical thinking. I just think risk has been gone for too long. It’s just crazy. There is no logical answer to why HYG is holding in there. There it just isn’t. It just flows. It’s not price sensitive. It makes no sense. Why would you buy junk debt paying 5.7% when you can get 30-day Treasury funds paying 5.5%, 5.6%? It just doesn’t make any sense.
Tobias: Maybe it’s an equity type thesis that it bounces back. It’s a dip that you can buy. I don’t know. [crosstalk]
Zach: Yeah. Just to watch the way Treasuries have been pounded in relationship to the way HYG is holding in there. I just think we’ve been talking about it for so long. I don’t want to beat a dead horse here, because if we’re going to talk passive, guy like Mike Green would be a lot better off talking about it than I am. But I just think that passive has run amok and it’s just turned a lot of things upside down. The funny thing is, we all know this, but I see rates going up as the parents coming home from vacation.
Tobias: Yeah.
Jake: [laughs] There was a big party that happened.
Zach: Yeah.
Jake: [crosstalk] went on a bender.
Zach: Yeah, because one thing I’ve been really impressed and I’ve learned a lot about over the last this cycle is that, when you’ve got free money and you’ve got interest rates at zero and you’ve got central banks actively trying to keeping a very– It’s not just that we’ve got rates at zero, but making sure liquidity is ample all the time. There’s no gravity. There’s no limit. Time is on your side as an investor. You might be going through a rough spot, but if rates are at zero– For the most part, time is on your side, things get better with time. You throw rates back on at a meaningful level, and now the cost is growing on a daily basis, the clock is ticking. I just don’t think people have adjusted to that.
Jake: How’s that 100-year Austrian bond holding up?
Zach: [laughs] Wasn’t it Argentine? I think it was Argentinian.
Tobias: I think there’s a few. I don’t know why the US wasn’t out there pumping them– [crosstalk]
Jake: Oh, what a missed opportunity.
Zach: No.
Tobias: And now the US has got this huge wall of debt that’s got to roll.
Jake: Debt cliff. Yeah.
Tobias: So, of corporates next year, it’s all going to happen at the same time.
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Please Fed – “Suck Liquidity Out of This Market!”
Zach: So, that’s what we’ve been talking about too. I think this is a perfect indicator of the leg effect. Like, you’ve been basically bailed out this year just by the way the ball bounced. So, you had an unusual amount of corporate refinances this year. You go back into next year, there’s a ton of them. The same is true on the commercial real estate side, which I think that the issues in commercial real estate are overstated. I don’t think that they’re overstated as it relates to office space, but I think a lot of commercial real estate is going to be fine.
But you look at all this, all of these things, that’s what always scares me, man, is when you see not one thing, because usually the market can deal with one thing. But when you see this convergence of these things coming together, student loan repayments getting kicked back on, the commercial real estate and corporate debt refinancings next year, all of this stuff. You’re seeing signs of consumer spending starting to roll over. All of these things coming together at one time.
This is one of the reasons were pounding on the desk a year and a half ago telling the Fed that, “Look, quit focusing so much just on rates. Suck liquidity out of this market.” Rates certainly play a role, but it’s the constant liquidity injections over the last 15 years that I think have had even a bigger role. Together, it’s been a pretty powerful cocktail.
Tobias: Well, I agree. I wondered if the little AI rally that– It got called an AI rally, but I wondered if that was the consequences of the SVB bailout. But they have– [crosstalk]
Jake: Well, Fed’s balance sheet was starting to get lowered a little bit and then went back up, but not quite all the way to all-time highs.
Tobias: Got halfway back.
Jake: And then now, it’s been drifting back down again a little bit.
Tobias: Now they’re back below. I think they’re back below where they were before SVB happened. But there’s also a little bit of a lag. Was that October last year?
Jake: January, I think.
Tobias: January. Okay.
Zach: Yeah, and then it hit the fan. It was March 10th.
Tobias: Okay. So, it’s much more recent.
===
Zach: The reason I know that, and again, it’s not 2008, 2009. I just think it’s really fascinating the way it played out. Yeah, Bear Stearns failed on March 16th of 2008.
Tobias: [crosstalk] close.
Zach: You saw that rally, and, oh, we’re through the worst of it.
Jake: Just October came from.
Zach: Yeah. September. Funny story, actually, Jake. My first day, I worked at Russell Investments before that, but took a job in the financial crisis right before it really got acute as an advisor, because I was 26 years old. If you’re looking for a finance job, if you didn’t have a PhD or something like that, which I don’t, obviously. But if you were looking for a job in finance back then, the only job you get was an advisor. So, I took an advisor job, and my first day on the job was a day limit folded.
Jake: [laughs]
Zach: September 15th, 2008.
Tobias: [crosstalk] the jungle.
Jake: Yeah.
Zach: Oh, my God. Man, the guys in the office are looking at me like I’m Jonah. Like they got to throw me over– [crosstalk]
Tobias: Yeah, you are– [crosstalk]
Jake: Yeah, sacrifice you.
Zach: Yeah, exactly. Let the big fish eat him, man. He’s bad luck.
Tobias: We got to do Jake’s veggies. Jake, he renders some scientific or philosophical learnings unto us and makes benefit glorious nation of Value: After Hours.
Jake: [laughs]
Tobias: He’s got an unbroken streak, so he can’t break his streak.
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Growth is Not the Same as Success: Why Most Fast-Growing Companies Fail
Jake: All right. Yeah, this is going to be like a barely get you over kind of fastball. I happened to come across this little article that was from the Kaufman Foundation and Inc Magazine. It’s actually from 2016 of all things, but it looked at the 5,000 fastest growing companies that Inc had identified. They do these surveys. But this then went and looked backwards at how did these companies do then over the next three years, I think it was. It turned out that two-thirds of the companies that they had surveyed had either shrunk in size, gone out of business, or been disadvantageously sold.
Tobias: [laughs]
Jake: So, you have this like, “Oh, here’s the all-star list of these top 5,000 fastest growing companies, and two-thirds of them were worse off than they were when they were identified.”
Tobias: Is it just self-reported? How do they know that you’re fastest growing?
Jake: I don’t know, Toby. Let’s not get too– [crosstalk]
Tobias: Coming off a low base.
Jake: Yeah.
Tobias: How’d you go last year?
Jake: Yeah. [laughs] Well, in fairness, a lot of them are off of a very low base. A lot of them are early companies. Inc then identified these four stages of growth. So, stage one is the startup finds a real customer for their idea. I think maybe you would call that like product market fit. Stage two is that they establish processes to deliver their product and find new customers. And so, that’s like the scaling part of it once you find product market fit. Stage three is the enterprise must create more processes, no longer depending upon a special talent of one person, let’s say. So, it’s a little bit more institutionalizing the business. And then stage four is creating processes for developing entirely new products for new customers and having a system for that. So, it’s not just like one man’s genius, maybe.
Many of them get stuck between stage three and stage four. It requires this continual reinvention of the company. I’ve read before and I like this idea that, if the pace of change inside of your company is slower than the pace of change outside of your company, then you’re in serious trouble. And so, I think that winds up happening to a lot of these companies is that they get bogged down in one of these stages, and then the world changes around them, and they’re in trouble. And long-term survival then requires leaders who can craft a culture that rewards both those who bring efficiencies, but also those who can innovate.
And so, on top of that, then we had Michael Mauboussin released a white paper here, I think last week or recently, and he’s talking actually about the five stages of the lifecycle of a company. So, I thought it might be interesting to tie that in with Michael’s work as well. And he has then his five stages Introduction, Growth, Maturity, Shakeout, and Decline. He references then this accounting researcher’s work, this woman named Victoria Dickinson. She places companies into these different stages based on basically their cash flow statements. The operating cash flow, is it plus or minus. The investing, plus or minus. And then the financing, plus or minus.
You can actually map out each company depending on where their stage is based on, is it flowing in or out from operations from financing and from investing? It maps as you would expect, like, early introduction company, a lot of outflows in operating as they’re getting spun up, they’re finding their product. The growth companies, they actually start to see some inflows. Obviously, maturity, you see inflows in the operating. Shakeout can go either way. And then declining, you start to get negative outflows in the operating part of the cash flow statement. Of course, whenever Mauboussin is talking about cash flow statements, you should be making these adjustments on stock-based comp and a couple other accounting things that he references.
Then on the investing part of it, we can skip through that. It’s what you would expect. You can read the white paper. But what then is interesting is you look at the ROIC of the companies at these different stages. As you’d expect, the early introduction part of the business has a negative return on invested capital as it’s growing. Growth is actually lower than maturity, and then shakeout is a little bit lower than that, and then of course, decline, you’re back into the negative again. But now, this is where it really starts to get interesting is then he looked at the three-year annualized total shareholder return based on where that company was at the beginning of that measurement period.
So, we’ll put you into a bucket and then we’ll measure three years, like, how did you do as an investor in this company? And so, companies in the– This is annualized TSR for the next three years. The introduction side, you’re at about -10%. So, this probably speaks to the power law nature of VC, and the average being not very good, but if you can get into that upper decile, you probably do better. It probably drags up the total. The growth side of thing, which this is where you should really be paying attention because this is interesting for everyone who’s betting on AI and growth and all of this. TSR on that is like 2%. So, if you’re early in a company that’s growing a bunch and really– I feel like emblematic of what probably 2021 most represented. That doesn’t match the rest of the data historically.
Then maturity is the best one, and you’re upwards of 9% or 10% then in TSR. Shakeout comes in around 6%, and then decline actually comes in at a slightly positive, call ot like 1%. This, to me, tells you to perhaps focus on companies that are a little bit more mature than what I think the average market participant is looking for these days. Everyone’s been chasing growth, but that historically has not really been the way to bet. But yeah, that’s it. That’s a little bit of not the best veggie segment I’ve ever done, but just a couple of little interesting tidbits that I came across last week and threw it out there.
Tobias: Just swimming along behind there along the growth as it turns into mature. Just picking them up there.
Zach: Yeah. Well, all of those numbers make perfect sense. I feel like that you may not think that’s the best veggie segment, but I feel like that’s going to be one, particularly, that’s going to be studied a lot in hindsight. Meaning, I think that investors have forgotten at some point that revenue growth is not what pays you. It’s profitability. If you’re not worried about profitability, revenue growth becomes a lot easier. If you’ve got a VC environment that’s pumping cash into your system, 0% rates, all that kind– Look how many of these companies that we’ve already seen mature. None of them have hit their target with what people were expecting out of earnings on it, right?
Jake: Yeah. Where are these margins? Where’s the economies of scale?
Zach: Yeah.
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Blue Apron, Beyond, and Peloton: The World’s Gone Mad for Wild Investments
Tobias: Blue Apron got sold last week. Or, it’s caught a bid and it listed at a $2 billion market cap and it got sold at $100 million.
Jake: How much total capital do you think went into that company over its lifetime to end with a $100 million exit for some of those people?
Tobias: I’m guessing it’s chewed up money at that point. I’m guessing it’s down cash on cash.
Zach: Man, if it got up to a $2 billion market cap, I would be shocked. Don’t quote me because I could be off, but I would be shocked if less than $250 million to $350 million had gone into that thing.
Jake: Oh, I bet it’s over a billion.
Zach: I would think so too–
Tobias: I just don’t know. Yeah, I’ll be surprised.
Jake: Hive mind, get on that please. Tell us, what’s the answer.
Tobias: [laughs]
Zach: Yeah, there’s somebody out there that knows.
Tobias: They had two share recombinations, whatever you call that. Not a share split. What’s the opposite of a share split? Share merger.
Zach: Reverse split.
Tobias: Reverse split. There we go. Reverse split. They had two reverse splits. So, when you look at the share price, it’s doesn’t quite– If you look at the listing price and the sale price, it doesn’t quite do justice to the true carnage that happened on the way through. And there were big reverse splits that were like 15 for one that kind of number.
Jake: Just to stay listed, probably sometimes.
Tobias: Yeah, I think that’s right.
Jake: Yeah.
Zach: yeah. This gets back to what we were talking about earlier too about it not just being– When I look at this market, I see things that remind me of 2000, but not everything. For instance, if you look at a company like Google, and go compare it to Netflix, the same basic buyers, those are both crowd favorites, more so Netflix. But put those things side by side and tell me if you would pay almost double for Netflix what you’re paying for Google. It just doesn’t make any sense. If you were looking at the cash flow statements and balance sheets and all that kind of stuff, nobody would pay that premium for Netflix. This is what I was saying is, I don’t think it’s as simple as saying that everything’s so overpriced. Generally speaking, I think things are. But there’s also just these discrepancies that just don’t wash.
Maybe you’re right. Maybe Netflix is going to be the better investment over the next 10 years, because we never know how these things play out. But if you understand basic accounting, no one’s buying Netflix at this price when you’ve got a Google. That’s the thing that’s, I don’t know, that’s interesting or to me is unique about this market, because as much stuff out there is snake poison that I wouldn’t touch with my worst enemy’s cash. On the flip side, there are great opportunities. At least that’s what they appear for longer-term investors.
Tobias: [crosstalk] retained earnings and share sales on Blue Apron, $1.6 billion.
Jake: Oof.
Tobias: I don’t think there are many retained earnings there, but I could be wrong. I thought it was loss making the whole way through, but $1.6 billion, that’s big. That’s a big number. [crosstalk]
Jake: Well, it might be negative $1.6 billion of retained earnings, which would give you the total–
Tobias: And share sales. Negative $1.6 billion that is. Yeah.
Jake: Ouch.
Zach: You know what’s been wild to watch about this though, especially the last two years– I want to hear what you guys have to say about it. What’s been wild to watch is to watch– There are so many of these companies where you’re like, “I know where that thing’s going.” But having seen the amount of money people made on those, watching how high they went, holy smokes. You see that rocket go up, you know it’s coming back down at some point, but I’m not going to lie to you. I really underestimated how crazy it could get.
Tobias: It was unbelievable. I said it about Beyond. When Beyond had run up a bit– I put out a tweet about Beyond just saying you’ve lost your mind at this price. Just the hate mail that I got underneath that one–
Jake: Is that right?
Tobias: Yeah. I thought Beyond was one of the more– Peloton too.
Zach: Oh, yeah.
Tobias: Peloton was just that combination of everybody being locked at home and not being able to exercise, and it being like red hot and right into. I’ve never seen anything like that, given the history of anybody who’s spent any feature of exercise equipment is that it folds up and goes under your bed for when you never, ever use it– [laughs]
Jake: I thought it was like, “How many clothes can you store on top of it as a rack?”
Zach: [laughs]
Tobias: That’s it. This is our net connected interactive clothes hanger.
Jake: Yeah. [laughs]
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Investor’s Lament: Selling Stocks Too Early
Jake: Yeah. I’ve heard you guys have a lot of conversations about this one, especially when it went down. This is an extreme example, but it really is a good microcosm. We had GameStop on our screens going back to 2015.
Tobias: It was the cheapest thing in my screen for a long time.
Zach: Oh, yeah. And just sitting there going, “Look, this thing’s probably dead catalyst.”
Jake: Melting ice cube.
Tobias: Off sheet liabilities in the leases too. That was always a little bit nerve wracking. Yeah. Sorry, keep going.
Zach: Yeah. No, man, it was a dog with fleas, to say the least. But when it got crushed, we took a position out at about $9.50 cents I want to say. We had a very tight stop on it. I’m not going to come back here and say, I just knew– [crosstalk]
Jake: Wrote it to 300. [laughs]
Zach: Yeah. This is a perfect example of what I’m talking about. So, we got in when co and took a spot on the board, because at that point, they had 120% short interest. You looked how cheap it was and I was like, “Hey, there’s a really good chance you could get a short run.” We thought the short run could take it at 35 bucks or 40 bucks. That was our outlook. So, we bought it between $9 and $10 somewhere in there, and we wrote it up. I went to dump it at $38. By the time the trade went through, it executed at $43. That’s how fast it was moving.
Jake: [laughs] Yeah.
Zach: I walk out of the office that day with my chest sticking out going–
Jake: Feeling great.
Tobias: [laughs]
Jake: 10X.
Zach: 10X in the next seven trading days.
Jake: Oh.
Zach: People are like, “Why didn’t you hold it?” And we’re like, “Because we knew it.”
Jake: [laughs]
Zach: We knew it was a joke at $35 or $40. And this stuff, and everybody always tells you that. “Man, it taught me a lesson.” I feel like at the peak of the next cycle, I’ve written it down, but I need to find a young guy.
Tobias: Yeah.
Zach: Who was that?
Jake: Drunken Miller.
Zach: Yeah. Because should I have sold the whole position there? No, I probably should have let 100 to 150 basis points ride and stop loss it. But you’re looking at it and going, “This is just insane.” I know what this thing’s worth. It’s not worth anywhere that near that. And then it 10Xs
Tobias: But having said that, we’re going to go through a regime now. It’ll be like the early 2000s, where you buy something and it runs up a little bit. If you don’t sell it, it runs back down again. That’s what I remember value being like through, whatever it was, 2002 to 2007. You buy something cheaply, but it’s not that great. And so, when it hits value, if you haven’t moved on from it, it just goes back to where you bought it from. They do that loop to loop for years and years and years without going anywhere. And then you’ll be never selling that environment, feel like, “Where have all my returns gone?”
Jake: Yeah.
Zach: Go ahead, Jake.
Jake: I was going to say, I try to take a little bit of a stoic approach to this, and that there’s a certain amount of the return that I deserve for the work that I’ve done. And then there’s other parts of the return that I don’t deserve because it doesn’t fit with how I want to do things. If someone else gets that portion of the return profile, then good for them. But that wasn’t mine. I’m going to get my safe version that I want to get, and they can have that part.
Zach: Yeah. That’s very similar to the philosophy that we’ve deployed. I wouldn’t change the way that we did it or the way that we managed, and we haven’t, because you’re right. You have to accept the irrational part of this job. It’s going to happen at times, but man, just real money–
Jake: So fun to watch.
Zach: Oh, and it’s hard to miss out on. It reminds me that– I’m forgetting what his name was. I’m sure you guys know him. The guy on CNBC that comes out, and he’s talking about this stock, and then they ask him what the company does.
Tobias: Oh, yeah.
Jake: Oh, I’m smart.
Tobias: [unintelligible [00:58:01], something like that.
Zach: Yeah. [laughs]
Tobias: He should have just said, “That’s not what I do. I don’t know them that deeply I’m like a– I look at the trends. I don’t care what they do,” which is probably true. That’s probably what he does.
Zach: Yeah. And just you get into those environments.
Tobias: It’s stressful being on TV. I get it. You say silly things.
Jake: Your brain just shuts down. [laughs]
Tobias: It does. You get that full-on fugue.
Jake: Yeah.
Zach: I know, but you never forgot what a company did, right?
Tobias: I just didn’t know in the first place.
Jake: Yeah.
[laughter]Zach: Yeah, because that’s you getting long without understanding a company. That’s your MO.
Tobias: I have a slightly different perspective to Jake’s that Jake gets the return that he thinks he deserves. I just think whatever you do is going to be the wrong thing. If you sell it, it’s going to run. If you hold on to it, it’s going to fall back down. So, just do what you think you should do and just never look at it again. Or, don’t look at it until it comes back into the screen and you get to buy it long again.
Zach: Yeah. Man, the Costanza portfolio.
Tobias: I don’t Costanza myself. I still try to do what I think I should be doing. I know that, at every single point, whatever I do will be the wrong thing because I have done it. It’s like that shrouding is whatever you do is just the wrong thing. So, don’t worry about it. Just do it and expect it to be the wrong thing and move on.
Zach: Yeah, The man in the machine that’s constantly taking the counter side of every trade, right?
Tobias: That would be smart.
Zach: Yeah. Again, I’ve just learned that lesson though that I think– You know what’s really hard for me is finding that line of being especially managing other people’s money as a fiduciary. Finding that proper line of doing the right thing, managing risk properly, but also taking enough. That balance to me is very, very difficult, especially in this environment. You know what I mean? I would love to hear how you guys’ balance that, because that’s something that we constantly wrestle with. Where are we being too conservative? I battle with that. I feel like it’s like talking about position sizing. I don’t feel like there is a right answer.
Tobias: Size up the ones that don’t work and you size down the ones that do. You never buy enough of the ones that do work.
Zach: [laughs]
Jake: My similar lament is that, you want to be in the market generally, right? Owning American, especially in the last century, but owning global businesses has been a good way to build wealth for a long period of time. The timing of these things is incredibly difficult. I don’t think it’s hard to time markets, it’s hard to time factors. However, there are opportunities that occasionally are thrown up that are just so blindingly obvious. You want to have some dry powder, some part of your capital that’s available to jump on those rainy-day opportunities.
And that then means that capital has to sit there for a long period of time. So, how much of it to have in base load? Like I’m just going to own a lot of businesses, and I’m going to do pretty well on average as a base. How much do I keep carved out for just the super no brainers and really being opportunistic? That balance to me is like an interesting is difficult to thread the needle on.
Tobias: Yeah, perfectly spurted. Nothing to add.
Zach: Yeah. I don’t really have anything to add either, but I’ll lament with you because– Watching that whole stuff go off in 2020 and 2021, I understood why those stocks were going up. We made a few trades here and there. We had a nice 2021. But looking back on it, we saw what was going on. We should have capitalized on it more–
Tobias: Stole some equity.
Zach: Yeah, we should have been more aggressive.
Jake: Borrowed a billion dollars at 0%?
Tobias: Raised a SPAC.
Jake: [laughs]
Zach: I probably wouldn’t have gone that far. No zero days to option expiry in the client’s portfolio. Yeah, it feels reckless at times, but knowing when insanity is ruling the day and getting on and riding it, because as long as I’m really managing my risk and really defining my exposure and things like that, one of the things we tell our clients is that, really, you can own anything in a portfolio. The question is, how much do you own? It’s the sizing that kills you. It doesn’t mean everything should belong in a portfolio, but you guys get my drift.
Tobias: I do. We’re banging up on time here.
Zach: Oh, yeah.
Tobias: If folks want get in contact with you, what’s the best way to get in contact with you and follow along?
Zach: Yeah. Best way to do is follow me on Twitter, @kyrradio.
Tobias: Know You Risk Radio.
Zach: Yeah. Yeah, Know Your Risk Radio. And then just google, Know Your Risk Radio podcast. We need to have Jake on. I haven’t had him on before, but we have guys. We’ve had Toby on several times, and do our own little once a week show, and hopefully, we bring some value. Folks seem to like it. So, as long as they’re not booing us off stage, we’ll keep doing it.
Jake: [laughs]
Tobias: Thanks, Zach. Thanks, Jake. Zach Abraham, Bulwark Capital Management. Thank you very much.
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