After a multi-decade career in investment management, Andrew Parrillo uncovers the psychological and financial strategies essential for growing and protecting your wealth. In this wisdom-packed episode of Speak Up with guest host James Connor, Andrew, the founder of Victory Road Advisors, emphasizes the power of long-term investing, the advantages of dollar cost averaging in equities, and why understanding advisor fees is critical.
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- James Connor00:00Hi, I’m James Connor, and welcome to speak up on wealthion. I am filling in for Anthony Scaramucci.And Anthony is currently in Jackson, hole Wyoming at the salt blockchain symposium, and he will beback here next week. My guest today is Andrew perello. He’s an institutional investor and an author.His most recent book is called beat the wealth management hustle. Andrew, thank you very much forjoining us today. How are things in Virginia?00:32Great, great. Thanks. Pleasure to be here.James Connor00:35You have worked in the wealth management industry for many years, and this industry has gonethrough so many changes just herein the last five years, ever since the pandemic, and a lot of peopleare taking investing into their own hands. And according to a recent study I just read, more than 50% ofAmericans are now self trading or self investing. And you have written a book on this very topic of selfinvesting, and once again, the book is called beat the wealth management hustle. Why don’t we juststart with a brief overview of your book, and what was the catalyst for writing it? Well, the01:07catalyst for writing it was, I was at a holiday party in december 22 and I told to introduce myself people Ididn’t know anybody. I was a guest of somebody at another town, and it was a charitable organization,local charitable organization. And anyway, so I introduced myself, and I had said I retired three sons,three grandchildren, retired from the investment business a few years earlier. And I immediately, andthat was December 22 so the market was down, you know, 15 20% depending on what you were inthat year. And they immediately started asking me what they should do with their portfolio. So I politely,you know, deferred to their advisor. I said, you have an advisor. You should ask your advisor. Andbecause I don’t give casual advice, and I’m not licensed at the time, I was not anyway, and I would notgive casual advice in a party on investing, but anyway, so, and then they persisted with questions. Andyou know, then it occurred to me that, you know, I asked friends of mine after that, a dozen people, you
-2-Transcribed byhttps://otter.aiknow, who had advisors, my new head advisors. I said, Do you know how much you pay your advisor?And every one of them said, No. I said, Well, that’s, you know, maybe you should ask. You should domore than just ask that, you know, so you should ask some other questions, but it’s up to you, and sothat’s really what moved me to write this book, because people it was clear we’re not as an institutionalinvestor. There’s a structured discipline, although fairly simple approach that institutions take, thatgenerally involve a series of pretty common sense due diligence questions and interviews andevaluations. And so it occurred to me that individuals aren’t doing that, and obviously should, becausethey don’t know how much they’re paying in fees. The other thing that I that I found that individualsdidn’t really have an appreciation for it is the is the is compound interest, and what is a what is a fee?What does it amount to? And so they weren’t asking any of the questions. And so they didn’t reallyknow what they were paying on this asset base, and they were all paying on an asset based feearrangement, which, look, I started the business right around ERISA. So that’s really when theinstitutional investment industry started, and that was in 70, early 70s, so, and they’ve had, you know,asset based fees ever since now, they’ve been coming down. And asset managers, so called wealthmanagers, are providing more planning services, I gather, according to studies I’ve read, but theindustry has over a trillion dollars. I mean, $100 trillion andyou know, even if the fee is a half percent,that’s 500 that’s a lot of money. And I’m not sure that people understand what it what value they’rereceiving for the fees that they’re paying. So that really was the that’s really about moving to write thebook.James Connor04:01And when you talk about the fees, I mean, so you’re suggesting that if you pay a half a percent or 1%you’re paying way too much. It really04:10depends, it depends on whether or not the advisor is adding value. And there’s afairly easy way todetermine that retrospectively, of course, prospectively, it’s a little harder. You have to, have to do it on,based on the managers. Do they have structural advantages? What are their competitive advantages?How do they add value? Simple questions that customers should ask but probably don’t. The at least inmy experience, they don’t and but institutions do. So. It’s just saying, you know, yeah, you might begetting value for whatever fees you’re paying. You could be paying more than 1%many people do. Andso it could be receiving a lot more value than that, and but you get what you pay for, right?James Connor04:55And to your point, you might be paying 1% for this financial advisor to manage. Money, and he’s sittingthere doing nothing, like maybe he makes an investment in ja on January the first, and come Decemberthe 31st he really did nothing, and he still collects 1% regardless of what activity is going on inside theaccount. Is that correct?05:14Yeah, that’s absolutely right.And you know that to me. And again, getting back to the way institutionslook at invest. To me, investing is a, it’s a it’s an assessment of the future. Okay, you’ve made a you’vemade a time preference decision to invest your money, and presumably is fora long enough term to beable to accept the risk that investing involves, depending on the return you want make and that. And we
-3-Transcribed byhttps://otter.aican get into that too. What are you know? How do the advisors, how do the advisors determine aclient’s investment objectives in tolerance for risk, and how will they know when that risk tolerance hasbeen exceeded, and and then, what kind of strategy approach do they do? They set because, let’s faceit, the most important thing advisors can do is evaluate, is let the client tellthem and determine whattheir preferences are for risk and return and do so in a way that, and the way I approach it is based onkahnemans Prospect Theory, which is a series of iterative questions that people answer, so the clientdrives the process. So itdoesn’t be, you know, I don’t make subjective determinations about, well,you’re a growth investor, or you’re an aggressive or you’re the fact is that half the people under 30 arenot aggressive investors, and half the people over 70 are not conservativeinvestors. That’s just a fact.So, you know, doing it on an objective basis is really important. And then, determining a investmentpolicy or strategy is super important because it imposes a discipline on people, and then obviously, Ishouldn’t say obviously, but what I think is the way institutions look at it is they look at projections oflikely future returns based on past returns. And is that viable? Well, we can get into that. But yes, Ibelieve it is, and it’s all to me, behavioral finances that is really the center of the this question. That’s mythat’s my approach to so what do advisors do, for their money, the most important thing they do is toset the advice. Now, do they have to make a lot of changes? Well, look, if they’re traders, yes, yes,they’re making changes on a fairly frequent basis. But most investors that we’re talking about, you knowthat have you know some longer term funds are, you know, setting it and forgetting what’s WarrenBuffett’s favorite holding period forever? And that’s really where I’m coming from. And by the way, at myfirm, I also had a I also had a hedge multi strategy hedge fund to fund. So I did a lot of hedge fundevaluation for both for consulting clients that I had as is that I had endowment clients and wealthy andfamily offices as clients, but yeah, it’s possible to find skillful managers, but it’s not easy, and the onething you can control with certainty is the expenses that you pay for investing, and people shouldunderstand what that really means. And so what I’m advocating is nothing different from what WarrenBuffett and Jack Bogle advocated like Jack Bogle advocated for years, and that is, keep it simple andstay focused on the long term.James Connor08:32So if you don’t think an investor should be payinga percentage of assets under management, whatshould they be paying?08:41Well, I think they should. Here’s, here’s the thing. People know what they pay their lawyer. They knowwhat they play their CPA. But again, ask people with advisors, what do they pay their advisor? Mostpeople are they don’t know. Well, it might be 1% I’m not sure. I’m not really sure. They don’t really knowwhat that amounts to. Oh, it’s 1% you know, that doesn’t really mean. The thing is, they don’tunderstand compounding, and that 1% say, on a half million dollars for 20 years, if the advisorgenerates a gross of seven, which is a typical target return for longer term investors, obviously want tomake more than that, but let’s just say seven and they and they’re charging a point that’s a 6% perannum net return. Well, the difference over 20 years on a half million is $331,000 so they’re basicallybuying their advisor a new boat every 20 years. And do they know that? If they know it great, if theadvisor is adding value, I’m all in,you know, that’s what I did. I charged based on, you know, assetsunder management. But I’m saying that the average person doesn’t need to do that. They need to havea an objectively determined strategy and risk profile and plan, and they don’t need to doanything most
-4-Transcribed byhttps://otter.aiadvisors, when the market back whatever. A couple weeks ago, you know, we had a big sell off. Sopeople were probably rightly. Concerned what’s going on, and I would almost guarantee that the vastmajority of advisors simply said to their clients not to worry. This tool pass. Don’t make any changesbased on this. One of the fallacies that people unfortunately fall prey to is they think, after a marketdecline, or in the course of a market decline, they want to reduce risk. Well, gosh, I justlost 20% I wantto reduce my risk. I want to sell. Well, that’s your money. You can sell. And we all know that, at least inour lifetimes, the market has recovered, and it probably will, but it certainly has. And so reducing riskafter a 20 or 30% loss actually could be increasing your risk. It could be increasing your risk of notobtaining your objectives in the longer term, because once people sell, it’s unlikely that they’re going tocome back right back in or that they’ll get back in lower value. Maybethey may. But the PROSPERmarket timing is the probability of doing so successfully is really quite low. And it’s not a it’s not aprocess that most people should engage in, and that’s, that’s what I go through with the book, as wellas the market history.James Connor11:21So that’s a very interesting backstory on what caused you to write the book. Mel, why don’t we go intosome of the underlying themes of the book? Yeah,11:31well, the underlying theme is that the best way to protect the purchasing power of money, which hasbeen eroded significantly over almost any apparel, even when inflation was relatively benign for thedecade or so following the great financial crisis, is in equities, and it’s hard. You can’t do it in savingsaccounts after tax and after inflation, you’re not going to be able to preserve your purchasing powerwith any certainty, doing that with savings accounts, there are other ways to invest, certainly, but to me,equities are the highest probability liquid vehicle that people canuse that is a transparent vehicle thatalso, by the way, one of the things that I didn’t say, and I should say, is, I’ve been around the businessfor a long time, and I remember when there were commissions on stock trades that were prettysignificant, andI also remember much higher fees on almost everything. And now people with relativelysmall amounts of money can access services from the major firms for no fees, and they should do so,but just not, not unlike what we’ve experienced with Amazon in the last 20 years or so, or 25 years,where we have a lot of value for you know, we get great value from Amazon, and people use it and it’spopular. Well, we can kind of do the same thing when we invest. We don’t have to pay very muchmoney to get access to perfectly viable vehicles, and you can suit whatever risk profile you may havewith with ETFs and or and now there are some more, you know, fancier programs that some of thefirms have that are tax managed, separate accounts and so forth, that have relativelylow minimums inthe neighborhood of 100,000 or so, and Some are higher, but anyway, and that’s getting more popular,but, but the point is, because taxes matter, which is one of the reasons why you don’t want to be havinghigh turnover in your portfolio, but, and we can get into tax efficiency as well. So really, what I’m what Iwould advocate to people, is to have a broad equity index that is, in proportion to the risk that you arewilling to assume. And that’s done on a six month projection with 95% certainty probability, I shouldsay, and and basically testing people to say, Okay, this is the range of returns that are likely with a 95%probability over the next six months. Can you, can you live with that? And, you know, and it’s donearound the dollar value of their portfolio. So it’s, it’s pretty it’s objectively determined and where, and wecan get a little bit more into the, you know, the analysis itself. But it’s, it’s something that’s a guidepost
-5-Transcribed byhttps://otter.aifor people against which they can, they can measure their you know, their own progress, both both andto avoid and to avoid that which is the biggest risk of investing, and that is making an emotional,emotionally driven response, either either to participate In an up market or to try to avoid a downmarket.James Connor14:45No, that is so true because human emotion drives everything in the financial markets and so manyother aspects of our of our lives. But before we talk or do a deeper dive on emotions, I want to first askyou about some of the traps thatcan be. Down in wealth management, you’ve already laid out a bigone that is excessive fees. But what are some of the other traps that investors should be aware of whenthey deal with a financial advisor?15:09Yeah, I’m not sure that there are any traps.I think that this the book actually just advocates disclosureand transparency. People don’t really people. Now the SEC happens to say that all advisory fees mustbe negotiable. Now, how many advisors have told their clients that their fees are negotiable? They maynot, they may not lower them, but they have to. But the client should know that there’s they cannegotiate the fees and now, and if you ask, you don’t ask, you don’t get but I could almost guaranteeyou that if people knew to ask, they would getlower fees. And they could quantify that lower fee, justask the advisor, what does what does it mean? What’s the difference between, you know, the fee thatyou’re charging me and this lower fee? And let’s see if it’s you know what? What is that? What Isthatworth? And so it’s just, here’s one of the people I met in the course of my research, before I wrote thebook, or in the process of writing a book, was a very successful residential real estate broker and afairly high end market and and I asked her,you know how much she paid? I don’t know how much I paymy advisor. He’s really good though. I said, that’s great. I said, Well, you know, do you ever think aboutasking him how? Oh no, it would be confrontational to ask him how much he charged in fees. Now, thisis a real estate broker whose business depends on negotiating prices, but her mindset was that, oh no,I don’t want to confront my advisor with a question like, how much is he charging me, which is andbecause I don’t go any further than that withanybody. Yes, okay, that’s, you know, your choice. But dopeople realize that when they’re paying an advisor, they’re paying the advisor to take risk with theirmoney? What but that’s what’s happening. And I’m not sure the industry has done a really good job,and I don’t, I’m not sure they’re setting a trap for anybody, but they’re very persuasive. And people, theydon’t really say how they add value, and, oh, by the way, if they did add value over an index return overa you know, what? What professional might conceive, might view as a naive portfolio of a broad equitymarket index. If they could do that, they’d probably be advertising that. And I’m not sure that any do.Some may. I mean, I know in the institutional world, that happens. You know, regularly people have netperformance, you know, and analyze it all different ways, but, you know, but the typical retail so called,and that’s another thing, a trap, okay, the SEC distinguishes between retail and institutional investors,you know. And that I think institutional investors have 50 million or more. But the reality is that mostindividuals with not very much money at all can invest at the same expenses, expense ratios asinstitutions. That’s what competition has done. So we have, you know, Amazon has been very hard atwork in the investment in the mutual fund world for the last 10 or 15 years in particular, lowering feesand competing with each other, but the Wealth Advisors kind of lowered their fees. Now, maybe they’veadded some bells and whistles to their services. We’re going to do some financial planning and taxplanning, and that’s good and legacy planning, and maybe we’ll refer you to a insurance you know,
-6-Transcribed byhttps://otter.aibroker, or, you know, something for your for your succession planning in a business. And youcertainlyshould be talking to a lawyer, you know. I mean, they’re all the basic, the basic things, but once you getbeyond the basics, they really should just be giving investment advice. And you know, that’s where thevalue, if they add value, that’s where the value would be. So I’m not sure, I’m not sure that they do, butthey don’t. It’s almost like it’s a, it’s, it’s something you don’t talk about. It’s the it’s, it’s the elephant inthe room that people don’t talk about, the wealth managers don’t talkabout,James Connor19:12no, you raise a very good point, because it is all about managing risk, and that’s why you pay thismanagement fee. But the other element that comes with that too is performance. And if you take a yearlike 2023 if you remembereverybody we started the year off, everybody in the world said we weregoing into a severe recession, and 2023 came and went, and we never saw a recession. The S P wasup 25% the NASDAQ was up 50% and I would dare say there was not one money manager in theworld who came anywhere close to beating the S P? Never mind the NASDAQ. Well,19:45you know, look, we know how the S P has skewed over the last decade plus, okay, where five, five ofthe issues represent something like over, well over a third of the value of upper market capitalization ofthe S P. So it’s been the big, young, Magnificent Seven, so called big tech companies, and. Cap techcode, you know, who, by the way, their earnings have justified the performance. Now, where does thatleave us? And we don’t, I don’t want to get into the, you know, the go down the rabbit hole of what’s thevaluation, how does it compare to the history and so forth. But, you know, one interesting point that I tryto make throughout the book is to keep things in contextand historical context. So recently, we had anunemployment report. A couple weeks ago that was that concerned people, the market sold offbecause the unemployment rate ticked above 4% Well, guess what? For 50 years, the averageunemployment rate’s been 6.2% there were, most of my career, a 4% unemployment rate would havebeen full employment in Nirvana, okay, and as you point out, since, since 22 at least, people have beencalling for a recession. Well, is one going to happen? Yeah, a household survey of employment isgetting a little soft. It’s getting a little squishy. But you know, most people, they they have to get awayfrom the financial headlines. And you know, just concentrate on the longer term. Is somethingfundamentally changing. Do we have excesses in the economy that would cause, you know, aseptember 2008 type failure of a system? Do we have systemic pressures? I would say the biggestpressure we have is there is government debt and the then the diminishing value of the dollar, but it’snot likeit’s going to crash the market tomorrow over time. The only way to keep pole is, as I’ve alreadysaid, is to take some risk, and that’s primarily with equities. Yes. Could you do it with gold? Yes, youcould do it with gold. ESCO. Could you do it with Bitcoin? Well, that’s something about which I actuallyknow a great deal, and I will just say, just briefly on that subject, it is the only commodity that has aprogrammed fixed rate of inflation, and ultimately a fixed supply, the only commodity. And so is therevalue in that? Well, a lot of people think there is is it speculative? Yes, it is speculative, but it’s alsobeen an amazingly productive, asymmetrical allocation at a very small level for clients for years now.And will it be in the future? I don’t know. Would I recommend it to anybody? Really depend upon a totalportfolio approach, but, but it’s, it’s not some, it’s not some fraudulent thing, okay, but, and, oh, by theway, you know, if one put one or 2% in it, that would not be speculative to me. But, and that’s notnecessarily advice to put one or 2% into anything, but, but if you think about it, the market, the stock
-7-Transcribed byhttps://otter.aimarket, could fluctuate, you know, on a daily basis, a point or more every day. Does that make itspeculative? Well, maybe to some people, it is, but I think not, if you look at it over a longer haul,regardlessJames Connor22:59of what you think of cryptocurrencies or Bitcoin specifically, nobody can deny the massiveoutperformance of it in recent years, and I only wish that I gotinvolved a few years ago. But anyhow, sothere’s one other thing, one thing I do want to ask you about. When it comes to managing your ownmoney, there’s a number of risks, and one of which is volatility. And you touched on this earlier. We hadthat pullback in the first week of August for whatever reason. Maybe it was the higher unemploymentnumber which rose to 4.3% but what would you suggest to investors who are managing their ownmoney, and how do they deal with these with these pullbacks in the market?Because the one we sawin the first week of August was mild. You know, when you look at, say, the covid crash of 2020, or thegreat recession that we saw in oh 809, those are significant pullbacks. What would you tell investorswho are managing23:52their own money? Yeah, let’s just think about the the covid Scare, okay, in 30 I mean, in a month, inroughly 30 days, the market went down 35% peak to drop. Of course, we know what happened. It didcome snap right back on the what was the right thing to do then? Well, to me, it would just be to holdand that would be what was so what and by the way, that sell off back, you know, a few weeks ago.Now, I guess three weeks ago was in part, because of the Japanese central bank and so forth and that.So that’s that that ignited some concerns about carry trays and such, which the average person couldn’tpossibly make sense of. Okay, and even professionals have how to carry making sense of that one. Butyou know, is that worth? Like, is that worth really taking yourassets out of a strategy because ofsomething that happens that you don’t even understand? And I would say, probably not. I wouldn’t. Andso what would I do during intervals like that is, I would just say that people focus on the long term, andunless there’s something that’s structurally changing in our in our system, whether. It’s, you know,taxation or monetary policy. And by the way, a monetary policy, to me, the Fed has been verytransparent. They’ve said exactly what they’re going to do since March of22 almost every week ago.Well, back in 2223 the governors were coming out almost every week saying, you know, kind ofreinforcing their message. And they did exactly what they said, What will they do in the next couplemonths? I don’t know. You know, there’s some softening. Inflation has come down. Are, you know, butagain, inflation, yeah, it spiked because of supply chain problems during covid. But I remember wheninflation was in the teens and where interest rates were in the teens, back in 19 late 70s, early 80s, andthey peaked in 1981 that’s 15% on 20 year treasuries, almost 16% or 10 year treasuries, and alsolonger treasuries. But you know, so kind of put things in context, things are it’s hard to find excessesnow. So there are there systemic problems? Well, yeah, the government debt, the government debt isback to a level relative to GDP where it was in World War Two. And you know, people recognize that,and we see that, as long as the as long as people have confidence in our government and in oureconomy and in our monetary policy, then they don’t have to be making changes in their portfolio, itseemsJames Connor26:21
-8-Transcribed byhttps://otter.aito me. So you’re not concerned about these debt levels, even though it’s at 125% of GDP, I26:29am concerned about it, yes, and I think we should do something about because it’s their structuralimbalances that are not being addressed in our democracy. And that’s one of the problems is, youknow, the politicians pretty obviously want to make people happy, and so they want to dothings thatare not fiscally sound, frankly. And, and there should be, there can be longer term solutions to thatproblem. And, but, you know, but are the pilot to me, I have not seen a program yet that politicianstoday are talking about that will solve the structural deficit problem. And so what do I discount that?Well, one of the ways I discount it, quite frankly, is by having a position in Bitcoin.James Connor27:19And what about gold?27:21You know, I’ve never my experience with gold is back inthe late 70s, I had a client at the bank whosefamily owned one of the two precious metals for finding they were licensed to deal with precious metalsback in the 70s, when it was, you know, it wasn’t gold was not trading freely back then. But and thisowner, he sold his entire inventory of gold and silver in January of 1980 when people were lined upselling their flatware at silversmiths, you know, jewelry stores around the country. And gold was, I think,at 850 in real dollars at that time. I don’t know what I mean. I don’t know what the inflation adjustedprice of gold is right now. It’s loaded at 2400 2500 so it has gone up recently. But the performance ofgold hasn’t been great. And you know, it’s it could be part of a portfolio, for sure. I understandtheattachment, the emotional attachment, to gold. I get that, but from a performance standpoint, it’s kindof, you know, okay, it’s okay. I’m not going to argue against a small allocation of gold, but, you know,it’s not something going to be advocating.Andrew,James Connor28:33I want to get your thoughts on where the wealth management industry is going in the next five plusyears. And I mentioned at the onset that 50% of Americans have do it yourself, trading account, orthey’re looking after their own investments. And do you think that number is going to keep growing?And when I ask about this, I guess I’m looking at especially during covid, and I’m thinking about RobinHood, and the number of people that got on Robin Hood and just started day trading. And I know thatwas a lot of fast money, a lot of people just sitting at home, but I think the last thing I read, Robin Hoodhas 25 million accounts and $130 billion in aum. Do you think this trend is going to keep going, wherepeople are managing theirown financial affairs, and less money is going to be allocated towardfinancial advisors?29:26Yeah, I do now you know how what’s their what’s the risk profile? Will it be day traders? Will they be,you know, buying into Google, security, individualsecurities, or will they be buying, you know, just abroader, diversified ETFs? I think that the latter is probably what they’re going to do. Yes, there’s acohort that wants to take the risk and that, you know, is excited by the the opportunity to make lots ofmoney really fast, that’s, that’s, that’s a that’s a process that is hard to sustain and is fraught with
-9-Transcribed byhttps://otter.aidanger because people get. Little over their skis on that stuff. But now that’s But look, if you, if you, ifyou, if you allocate the right proportion of your portfolio to the riskier strategies, that’s fine. Yeah, sure.Do I think it’s going to continue where people do their own money measure? Yes, I do. And you know,what can I say? I just think the so called wealth management. It’s, to me, health is wealth. It’s notmoney. But anyway, they want to call it wealth management. To me, it’s investment management, butanyway, and I talk about that in the book, but yes, people will continue to do it. And why will they do it?Because they can control theexpenses. And they’ve, they’ve seen enough studies, and they’ve listenedto, you know, Warren Buffett enough and Vanguard enough and so forth, to realize that fees matter,and they can save fees for sure. They don’t know what the outcome of their portfolio is going to be, butthey know the outcome of their fee account will be. It’ll be that they won’t pay any fees to speak up andyou know, and who doesn’t want to have lower fees?James Connor31:00No, definitely. And that’s one of the reasons why so many people gravitated toward the Robin Hoodapp, right? And even when you look at that, the other thing that really stands out to me too, when I lookat that app, it’s like, gamification of trading, and even with the short, dated options that people aretrading now, like, that’s just exploded in the last five years, it’s, it’s like everything’s a game now it’s nolonger investing. Well,31:25you know, that’s interesting. You say that because I’ve been around for a while and I’ve seen differentfacts in Investing. Investing, there are fashions in investing. Okay, it’s really a fashion industry.Something will be in and out of fashion. And yes, there will be intervals where people want to get makemoney really fast, and that’s one way to do it, when it’s goingin their direction, as long as the one thingI would caution people on, though, is be really careful with short trading, short sales, because there’san infinite that the risk, the profile on that is asymmetrical. You can, you know, in a long, you can onlygo to zero. In a short, you can go to infinite losses, theoretically. And so people should know that. So ifthey’re going to be shorting, they’d have to be, they have to be very disciplined about covering theirshorts. But that’s about all I can say on that short term trading stuff, because I am not. I’ve never beeninterested in having and looking at hedge funds, the most successful hedge funds that I’ve seen. Andthere are some savants who are really good traders, but they’re limited, and they access tothose, tothose pools of capital is fairly limited, or indeed it’s closed in a lot of cases. But fundamental investingon the long side has made a ton of money for people, and that’s where hedge funds really have madetheir money on the long side, not somuch shorting. And what can I say? Now, there are somestrategies in hedging, you know, the capital structure, arbitrage and so forth, that are interesting. But,you know, the risk profile is very different, and it’s not for everybody. But I think the theaverage I couldthe so called retail client, I don’t like to, I like to think of individuals as individuals, right? They really caninvest like institutions. They don’t have to pay a lot of fee. They can take the same approachesinstitutions take, they have access to most of the same things. I mean, for example, private equity hasbeen a big buzzword, you know, and I don’t know where it stands right now. It’s, it’s, I know that there’snot as much money going into it, but, but there are publicly traded major corporations that whosebusiness is private debt and private equity investing and the performance, and that’s not a bad proxyfor private debt or private equity, it turns out, so you don’t really have to tie your money up in a privatein a fund and be subject to capital calls and, you know, uncertain, uncertain distribution times and so
-10-Transcribed byhttps://otter.aiforth. You know, you can buy these publicly traded companies that do that as a business, and they do itrather well, and it’s reflected in their at least so far it reflected in their stock price. Will that always be thecase? Maybe not, but there are, again, there are fashions in the industry that come and go, and I justthink people have to yes, there are opportunities to access that are especially ripe at certain points intime with at the margin, but not for the whole portfolio. WhenJames Connor34:28you talked about the dangers of short selling, I couldn’t help but think of GameStop. Did you see thatmovie called dumb money? No, I would highly suggest you check it. Okay, it’s all about Keith Gill orroaring kitty and the Gamestop story. And it just, it’s so interesting because it’s, it’s all about onemoment in time from, I guess, 2020 to 2022 and what happened to a couple of these hedge funds thattried to short GameStop? They got their faces ripped off. Well. Well, yeah, but yeah.35:02But people’s perception is not, it’s not always. In fact, it’s often not connected to facts. And, you know,fundamental facts and reality. It’s just, isn’t, you know, it’s like, Oh,yeah. And so look Wall Street. AndAnthony’s fond of saying this, look, Wall Street is a magnificent Sales Machine, Wall Street and WallStreet. And I guess what I would say to anybody, if Wall Street’s selling it, should I be buying it? I mean,that sounds perhaps, perhaps cynical, but I think it’s to me, it’s just being circumspect.James Connor35:40So Andrew, we have a number of questions some of our viewers have submitted, and we’re going to gothrough some of those questions right now. Why don’t wejust go through the first one, it’s going tocome up on the screen. So the first question, do you have any tips for staying informed about markettrends without getting overwhelmed by too much information? And I think that’s a great question fromStephanie, because we are just inundated with so much free information, how do you make sense of itall?36:06Well, I will say, and I don’t know if I can use firm names, but there is a major firm, and there areprobably several I happen to look at, one that publishes a monthly chart book guide to markets that hasa variety of statistics that go back over longer intervals, like back 50 years or sometimes more,sometimes only 20. But usually it’s longer, like 50 year averages. And you can put these various itemsand variables, whether it’s employment, inflation, profits, stock returns, how does in one interestingchart in this one of these books, and it’s in a major firm. I probably shouldn’t say the name, but if youjust Google guide to markets, you might find it and but it has a really interesting chart that showssentiment and subsequent 12 month returns on the S, p5, 100. And perhaps it wouldn’t be surprising toyou, but when sentiment has been negative. The subsequent 12 month returns have been way morethan average. So and 23 and we saw it in March of 2009 I mean that the news in early March of 2009was getting worse by the day and and when did the market of the market turn around on March 9, 2009and it never looked back. And that the S, P was like 660, years,and it’s got to over five. I mean, so, Imean, so try to try to stay away from being influenced by short term data points. Look at those datapoints relative to a longer term horizon context.
-11-Transcribed byhttps://otter.aiJames Connor37:46So in other words, adopt a warren buffett like strategy get long and just stay long. Yeah,37:52yeah. Now interest rates, we haven’t talked about that. Interest rates are super important to everything,and but again, it’s really hard to we say interest rates are fundamental to the prices of financial assets.And I would just say, you know, I shouldn’t, I shouldn’t be making predictions here about them, but wehave to basically, fundamentally make some decision about them. How will they affect stock prices?Well, if you look back at the long term history of stock prices, yes, you can look at interest rateincreases and what happened to the market, and you can look at what how interest rates affectvaluations of equities, which is significant. But we also had kind of a trick that got played on everybodyafter the great financial crisis, crisis where interest rates essentially went to zero. So there was financialrepression, and in some countries, interest rates were negative, which is hard to get your head around,really. But so what it forced peoplein to take risk? Well, what happened? We all know what happenedto the stock market since that time, it’s with the exception of that 30% decline in a month during covid,has done pretty well. Will it continue? No, we’re going to have corrections in the market, so the mostimportant thing you can do as an investor is understand your tolerance for risk before it is exceeded.GreatJames Connor39:08points. Okay, how about another question? And the question is, any thoughts on the role of alternativeinvestments like real estate or cryptocurrencies in a self managed portfolio? You touched on thisearlier, but why don’t you just say a few more words on it? Yeah? Well,39:24I think that, I think that you know to the extent that the fundamentals of analternative investment areattractive, yeah, sure, one of the alternative investments, yeah, that’s a pretty broad subject, actually,because it encompasses private equity, private debt, hedge funds of all stripes, commodities for sure,real estate for certain. What else might be leaving something out. But so you can access opportunitiesin those sectors through publicly traded ETFs. You might remember a few years ago, REITs were allthe rage. You know, and then they weren’t, but people were chasing yield and, you know, and so, yeah,just have to be aware of the part of the cycle that a sector may be in by looking at the long term historyof that particular sector and trying to avoid buying it, you know, at the top and speaking of that, just ingeneral, there are studies that show that buying at market peaks has actually been relativelyproductive, but it for for five year intervals of holding period. But if you’re, if you’re, if your holding periodis less than five years, or probably, more, frankly, 10. Youprobably shouldn’t be owning stocks.James Connor40:44Okay, how about another question, please. How can one stay disciplined during market downturns,when it’s so tempting to sell? And that’s a great question. Well,40:54again, I’d go, I’d go, justagain, try to look at history and know what’s happened historically, and that,you know what? What is Warren Buffett says, Be be greedy when other people are fearful and fearful
-12-Transcribed byhttps://otter.aiwhen other people agree. Just try to keep that in mind. And that’s, that’s a that’s pretty solid advice. It’stempting to one, as I said earlier, to say, I want to reduce my risk after the market goes down 1020more percent, I want to reduce my risk, so I’m going to sell something, and what you’re probably doingis you’re probably increasing your risk of not a term, not achieving your longer term objectives, becausethe money that you use to sell now maybe you’re going to put it into something that is that goes counterto the equity market, which generally has been the bond market, but not always, as we saw in 22bonds, since they crashed. And look, we had a 40 year bull market in bonds until August of 2020 andthe 10 year was trading at 75 basis points. But, you know, so, yeah, I would just say, try to avoidemotional reactions. Because you will, you will get emotional. There’s a there’s a familiar temptation tochase winners and to try to avoid, to try to avoid declines. But I would just say, chill out.James Connor42:12Okay, the great comments. How about another question, please. If you could give one piece of adviceto your younger self when you first started investing, what would it be that’s a great question from John.Thank you. Dollar cost42:23average, every month. I think the simplest, the most competitive returns relateto some of the simplest,not simplistic, but simple solutions, which is buy a broader market index. Do so dollar cost average. Dosome math, $1 cost averaging, and see what happens. It’s really quite amazing. You’re buying moreshares of stock at lower prices. You know, when the market goes down, it’s cool. So when it goes up,you know, the shirt, I mean, it’s, you should do the math on that, because it’s just, and you can do thatpretty easily. There’s, I mean, we thank goodness. I mean, Google is the internet is great, lots ofcalculators, but I would just say dollar cost average, that was the advice, that was the would be theadvice, and people would be astonished at the compounding factor.James Connor43:13Yeah, so true. Sometimes it’s easier said than done. And I think one of the issues, though, is, and thisis kind of relating to what you said earlier, but we’re bombarded with so much negativity on a dailybasis. You know when the market pulled back a couple of weeks ago? Excuse me, when the marketpulled back a couple of weeks ago? If you watch the news, you think that’s it. The world’s coming to anend. You gotta sell everything, right? But these are always opportunities. And I think the other thing,interesting point too, about Warren Buffett, he’s, of course, he’s in Omaha, Nebraska, you know, heprobably watches very little TV. Doesn’t get caught up in all the hype. And when he does see a bigbreak in the market, he sees it as an opportunity. Well, he’s,43:54he’s done fundamental analysis oncompanies that interest him because of the characteristics that heseeks, which may not be the characteristics that other successful investors seek, frankly. I mean, hemissed the entire tech boom. Well, he owns an apple long you know, is that a technologycompany orconsumer product? I mean, I don’t, you know, you tell me, but so, I mean, he’s a fabulous guy. I thinkhe’s a really wonderful investor, a great investor, and somebody who you should pay attention to forsure, you know. But can I say Right? He’s he’s ready to when the price is right, he’ll buy, you know,when the value is there. Now, if you look at the difference between value, so called Value equities, and
