0:01

Welcome to the Money Tree

0:03

Investing Podcast. Stock market,

0:05

wealth, personal finance, value

0:07

stocks, invest in your

0:09

life. Hello Smart Money

0:11

Tree podcast listeners. Welcome to this week's show.

0:13

My name is Kirk Chisholm and I'll be

0:15

your host. So today I'm joined with a

0:18

returning guest, Dan Rasmussen. How you doing, Dan?

0:20

Great. Thanks for having me back on, Kirk.

0:22

Glad to have you. Well, lots changed in

0:24

the world since you came on last. And

0:26

you wrote a new book, so tell us. For those

0:28

listeners who didn't listen to the prior interview, tell us a

0:30

bit about your background. It's pretty interesting. I

0:33

run a hedge fund called

0:35

Verdad. I managed about $1

0:37

.1 billion across micro -captive value,

0:39

credit, and then market neutral

0:41

long short. I started at

0:43

Bridgewater and being capital over

0:45

the past few years. I started the firm

0:47

in 2014, and we write a weekly

0:49

research note, which we've been doing since 2015,

0:51

so 10 years now. And that

0:53

forms the basis for the book, The Humble Investor.

0:56

It's all I've learned in the last 10 years.

0:58

And I think it's part of our approach as a firm

1:00

to be constantly studying markets. I think of myself as

1:02

a think tank that makes bets. That's what for

1:04

dad is. All of our research feeds into the things

1:07

that we're making bets on in the market. And

1:09

that's what I love about investing. And it's fun to

1:11

be on this podcast because I know that you

1:13

are also a sort of deep thinker and student of

1:15

markets. And it's fun to talk about it the

1:17

way our research is leading us to different conclusions about

1:19

what's going on. Yeah, that's why

1:21

we like having you. We like having people

1:23

with interesting perspectives that's not just the

1:26

drill that everyone talks about when people are

1:28

really thinking outside the box. So of

1:30

all the things that you're looking at, what's

1:32

the most interesting to you right now? Probably

1:35

the most interesting is navigating the dynamics

1:37

of the macro economy at the moment,

1:39

which are really interesting. I mean, I

1:41

think that you've had a number of

1:43

what could be potentially the start of

1:45

paradigm shifts. If you think about

1:47

what defined, let's call it the

1:49

post -2008 world, there are a few

1:51

things that sort of defined that

1:53

post -2008 world. One was a

1:55

very benign low volatility market

1:58

in which generally equities

2:00

went, especially US equities went up into the

2:02

right, where the dollar went up into the

2:04

right, where Almost all

2:06

the money was being made in

2:08

growth stocks, so the valuation gap

2:10

between growth and value went to

2:12

new heights and large cap in

2:14

particular, where the MAG7, the biggest

2:16

names, were driving the market's returns. And

2:19

this year, we're seeing some very

2:21

different things happening. First of all,

2:23

we've seen a shift where international

2:25

markets have dramatically outperformed the US

2:28

in 2025. And part of

2:30

that is that the dollar has stopped

2:32

its rise and started to fall relative

2:34

to other currencies. And at the same

2:36

time, we've seen a sharp increase in

2:38

volatility. And part of that is this

2:40

self -perpetuating, not self -perpetuating, but this recursive

2:42

thing where the MAG7 names are the

2:44

biggest names, but they're also some of

2:46

those volatile names in the market. So

2:48

as they've gotten to be a bigger

2:50

share of the overall S &P, their volatility

2:53

weight of the S &P is now

2:55

almost 50%. So the huge amount of

2:57

the volatility of the market is driven

2:59

by this very small number of names.

3:01

And that dynamic as the AI revolution,

3:03

which we should talk about, has Doubts have

3:05

started to arise this year about how that's going

3:07

to translate into the financial results. You've seen a

3:09

big sell -off in those names, which has been

3:11

what's driving the market down. And so

3:14

what I've been trying to reflect on is

3:16

what's driven the market up and what's causing

3:18

it to change and how should investors be

3:20

changing their portfolios, if at all? And what

3:22

are the lessons we can learn from the

3:24

study of history for how to evaluate what

3:26

market signals are telling us at the moment?

3:29

I've been doing some reflecting recently on

3:31

the MAG7 making up a large

3:33

portion of the S &P is

3:35

no secret, and certainly it's been

3:37

happening for a while. I did

3:39

see a chart a while ago, which I thought

3:41

was interesting because I hadn't thought about this, is

3:43

that most countries have very concentrated large

3:45

cap stocks. I don't know if

3:47

we're the only country, but we're

3:49

certainly one of the only big

3:51

countries that have a more diversified

3:53

public market. And we

3:56

see more concentration, but now things

3:58

have changed. So what do

4:00

you attribute the change to and

4:02

do you think that just the super

4:04

concentration the mag seven will continue

4:06

concentration is not bad in and of

4:08

itself in some sense it's the

4:10

norm there are power law distributions everywhere

4:13

and there's no reason the market

4:15

caption be the same what sort of

4:17

unique about the mag seven and

4:19

what's been going on is that in

4:21

the past you're in a more

4:23

normal. free the sort of super

4:25

growth enabled by technology where you

4:27

can kind of grow to the moon.

4:29

You could grow globally. You could

4:32

scale without CapEx, which is what these

4:34

Mag7 names have been able to

4:36

do. Generally, the largest names

4:38

were just the companies that have done

4:40

best in the most recent cycle. They

4:42

tended to then over -infest. There

4:44

was too much optimism baked in, and

4:46

so there's this cyclicality. And so if you

4:48

were investing in the largest names by

4:50

market cap, with an exception of sort of

4:52

the nifty 50 era, Generally, you were

4:54

doing worse than being more diversified because you

4:57

were rebalancing into the darlings of the

4:59

market and the darlings of the market just

5:01

would disappoint almost inevitably. Whereas

5:03

what's happened more recently is that these Mag7

5:05

names have just sort of grown

5:07

to the moon. We've never seen

5:09

companies of this size grow at

5:11

this rate. We're talking sort of

5:13

like 99th percentile growth outcomes for

5:15

99th percentile size market cap names.

5:18

It's just kind of this crazy

5:20

outlier in economic history. And so

5:22

there's a reason those names have

5:24

been winning. Now, what's changed? I

5:26

think what's changed recently is that

5:28

investors have come to better understand

5:30

the AI business model. And

5:32

the AI business model is a distinctly

5:34

worse business model than what these companies were

5:36

doing before. And let me explain that. When

5:39

you look at what Meta or

5:41

Google or these other companies were doing,

5:43

it was infinitely scalable, software as

5:45

a service, very limited CapEx, capital light.

5:48

AI is the opposite. It's highly capital

5:50

intensive. If you look at

5:52

the capital intensity now, these AI, big

5:55

AI, hyperscalers. they are spending probably

5:57

triple the cap X as a percent

5:59

of net income as the average

6:01

industrial company in the US, right? So

6:03

they've gone from being capital light,

6:05

not spending any money to massively investing

6:07

in data centers and the electricity

6:10

to provide those data centers and NVIDIA

6:12

chips. The problem with capital

6:14

intensive businesses is that those capital cycles

6:16

They create a lot of volatility. They

6:18

create a lot of competition and neglect.

6:20

There are winners and losers in those

6:22

capex battles. You get stranded assets. You

6:24

get over investment. You find

6:26

out the investment didn't pay off as

6:28

well as it might have. And all

6:30

of those things mean that what's happened is

6:32

that these AI hyperscalers can no longer

6:34

grow for free. Now they have to

6:36

spend to grow. And therefore, worse businesses.

6:38

They're worse ROA businesses. AI is

6:41

not a good business model yet. And even if

6:43

it is a good business model, it's a

6:45

worse business model than software as a service. And

6:47

I think that's the dynamic that people are

6:49

realizing, that they're getting skeptical of this cap expend,

6:52

and they're worried about when AI will pay

6:54

off, if ever. I put a lot

6:56

of thought into this, and I wonder where

6:58

it's actually going to go. I love the

7:00

way you put it was very succinct, probably

7:02

a lot better than I could have put

7:04

it. But I've been hearing a lot. behind

7:06

the scenes, everyone's talking on the surface. So

7:08

AI is great. It's going to do all

7:11

wonders and it's going to make the world

7:13

a better place. Behind the scenes,

7:15

I hear a lot of talk of like, why

7:17

are we doing this? It's kind of like

7:19

ESG. People did it just to be cool, but

7:21

it's not really a great idea. And

7:23

it kind of feels like people feel like

7:25

they need to put money there, but it's

7:27

not really paying off. Big corporations haven't really

7:29

seen the benefit as you kind of suggested.

7:31

So in your mind, where does the AI

7:33

cycle look like? I mean, you look at

7:35

NVIDIA, it's gone through the roof. And

7:37

I don't know how it can continue at

7:39

this pace. But where do you see the development

7:41

of the ice cycle look like over the

7:43

next like five to 10 years? No

7:45

one's smart enough to predict the next five or 10

7:48

years. So I will say what we're observing in real

7:50

time and how to compare that to other industries. I'd

7:52

say, one, think about NVIDIA, right? For

7:54

NVIDIA to continue

7:56

to grow, in

7:58

some sense, the chips it has sold,

8:00

have to depreciate such that the customers

8:02

need to replace those chips, or the

8:04

market as a whole has to grow

8:07

massively. In either of

8:09

those cases, the customers of NVIDIA have

8:11

to be spending a massive amount more

8:13

for NVIDIA to justify its valuation. If

8:15

you add up the total profit

8:17

pool of these hyperscalers, And you

8:20

then look at what NVIDIA's revenue

8:22

needs to grow at. This is

8:24

going to consume all of their

8:26

net income for years if these

8:28

forecasts are anywhere close to being

8:30

reality. And I think that that is

8:32

what's kind of terrifying about this. And I think

8:34

the other thing is to your point, where's

8:37

the revenue model? Like where's the killer

8:39

hyper profitable product that's making a i

8:41

so valuable like yeah i like using

8:43

chat gbt to like do ask it

8:45

like stupid questions like i just looked

8:47

in the fridge and i have a

8:49

chicken and a piece of zucchini like

8:51

what should i make for dinner and

8:53

that search probably costs chat gbt like

8:55

20 bucks to answer like i love

8:58

it it's great but how is that

9:00

profitable i don't know talking to an

9:02

agent. I can probably trick

9:04

you into thinking it's almost as good

9:06

as your standard Filipino call center

9:08

employee, and that's probably cool. But again,

9:10

Filipino call center employees don't cost

9:12

very much. I'm not sure that the

9:15

benefit of using this hyper -expensive, super

9:17

-intelligent robot is really there for the

9:19

type of tasks that we're expecting

9:21

it to automate. I'm not sure the

9:23

math works in terms of the

9:25

cost of running these AI models relative

9:27

to the benefits to the customer. It's

9:30

fine if VCs are willing to subsidize

9:32

it. But if VCs aren't willing to subsidize

9:34

it, the technology needs to get a

9:36

lot cheaper fast for it to be economically

9:38

viable. There's the energy cost,

9:41

right? I mean, we don't have cheap energy.

9:44

Apparently Silicon Valley has pushed for this

9:46

in our political halls because nuclear all

9:48

a sudden is on the table, even

9:50

though it hasn't been for decades. All

9:52

of a sudden, now it's on the table, but that takes 10

9:54

to 20 years to build that out. So it

9:56

seems like there's a bit of a pig

9:58

in a Python kind of here where you've

10:01

got this kind of reminds me of our

10:03

demographics, right? The baby boomers and Gen X

10:05

and we had the millennials and to me

10:07

it seems like even if this was the

10:09

cure all solution for everything and AI was

10:11

just perfect in every way, I just don't

10:13

see how it rolls out in the way

10:15

that people expected to in a perfect world,

10:17

but yet they're pricing that in. First question

10:19

is, do you even invest in AI? Do

10:21

you even put that on the table at

10:24

this point, or is it just kind of

10:26

like, let's just wait and see, wait for

10:28

the bodies to come floating down the river? I

10:30

think we tend to be quantitatively

10:32

driven, and when we look from

10:35

a quant perspective at these names,

10:37

there's nothing all that attractive about them

10:39

anymore, other than momentum, but even

10:41

now that's changed. used

10:43

to love the return on assets, but now

10:45

the cap expending has gone up so much,

10:47

or the profit margins are still great, the

10:49

growth is still great, but the capital intensity

10:51

has gone up, the momentum has gone down,

10:53

and the valuations are sky high. There's just

10:55

not a lot to like. And

10:57

I think even beyond that, we

11:00

have entered, regardless of what you

11:02

think of Trump politically, Trump is a

11:04

highly volatile. President he

11:06

loves surprising people and he loves keeping

11:08

his cards close to his chest

11:10

as part of his negotiating strategy and

11:12

when you think of how the

11:14

market reacts to that markets don't like

11:16

surprises markets don't like uncertainty they

11:18

like false certainty they like false sense

11:20

of calm and complacency that's what

11:22

drives valuations up and I think you

11:24

have to understand therefore that a

11:26

lot of people whether the quant models

11:28

are just through instinct. respond

11:30

to volatility by reducing their allocations to

11:32

things. If things become more volatile, people

11:34

reduce their allocations. It's sort of an

11:37

instinct. That's a quantitatively good instinct, by

11:39

the way. And I think what you've

11:41

seen is that the volatility of U .S.

11:43

equity markets is going up, partially because

11:45

the MAG7, partially because of Trump, partially

11:47

because of the dollar. All

11:49

these things are driving U .S. equity vol

11:51

up, and that's caused people to reduce

11:53

their allocations to have more cash. And

11:55

it's caused foreign investors, when foreign markets

11:57

are actually pretty low volatility now, right?

11:59

Like you think about like, what is

12:01

your stereotypical European company? It's like a

12:03

bank or something, right? Like a boring

12:05

sock gen or something. These are the

12:08

European businesses at the top of the

12:10

charts in terms of market cap. And

12:12

they're just lower volatility. They're just boring,

12:14

less exciting, lower growth business, but they're

12:16

a lot less volatile. And so as

12:18

volatility goes up and people move towards

12:20

safer assets, it's logical to shift away

12:22

from the Mag7 and shift away from

12:24

the United States. And I think that's

12:26

what we're seeing happening right now in

12:28

part. I'll come back to the

12:30

tech because I got some other questions, but you

12:32

touched on international and it brings up the interesting

12:34

question. I've been hearing people talk about international for

12:36

the last 10 years. What a great opportunity, what

12:38

a great value Europe is. And yeah, it hasn't

12:40

done squat. And it brings me

12:42

back to, well, our culture

12:45

here is very different economically

12:47

than Europe. Europe does not have

12:49

a innovative culture. It does

12:51

not have a culture where everyone

12:53

wants to be a millionaire. It's

12:55

very different. Seems as though

12:58

if you look at decades past,

13:00

there have been great decades and

13:02

terrible decades, US, international, US, international.

13:04

But the last two decades have been US. So

13:07

one question is, is that paradigm changing?

13:09

Will international investing, especially Europe, be the

13:11

place to be for the next 10

13:13

years? Or is this just kind of

13:15

a short -term blip because there's a lot

13:17

of problems in Europe too? The point

13:19

about saying that international has been good

13:21

for the last ten years that i'm not

13:23

working at it's very close to home

13:25

because it's probably about the length of

13:27

time i've been advocating for international investing

13:29

and basically been wrong. I'm a

13:31

quantitative investor in large part but

13:33

i'm also deeply interested in behavioral economics

13:36

and you think about sort of

13:38

the cycles of credibility or persuasion right

13:40

like. you're running a wealth management

13:42

firm and you tell your client, let's

13:44

be 50 % US and 50 %

13:46

international. And the client says, you

13:48

know what, Kirk, I really think we should be

13:50

100 % US. I don't like foreign markets. They're

13:52

too risky or whatever. And you

13:54

start that in 2018 or 2015

13:56

or 2016. And then the

13:58

next year, the US outperforms. And then

14:00

they're like, well, I think we should

14:02

go all US. I don't know. I

14:04

think some diversification is good. Let's keep

14:06

it. And then the US outperforms. And

14:08

the US outperforms 14 out of the

14:11

last 15 years. You know who's

14:13

going to have won that argument by the

14:15

end. And this is real life. You and I

14:17

know people who have done this, and they're

14:19

80, 90, 100 % US equities. And they gave

14:21

up on international. There are all sorts of reasons

14:23

for why they gave up on international. International

14:26

markets are not diversifying. It's like, well,

14:28

if they're not diversifying, how could they

14:30

have done so much worse in the

14:32

US? They're clearly diversifying. It's just bad.

14:34

Or again, Japan is a nursing home, and

14:36

Europe is a museum, and US management teams

14:38

are just better, and there's no tech outside

14:41

of the US and blah, blah. I've heard

14:43

it. But there's a grain of truth to

14:45

every one of those things, right? I'm not

14:47

arguing. I'm just saying that like those people

14:49

on that side have won the argument completely

14:51

when it comes to asset allocation. And

14:53

passive is added to that because when

14:55

people go passive, they don't go into like

14:57

the Vanguard mid cap Europe index. They

14:59

only go into the S &P 500 and

15:02

the total market index. And so, you know,

15:04

you just have this massive shift towards

15:06

massive overweight in the US among most allocators.

15:08

and most investors as a result of

15:10

US outperformance, even if you just didn't rebalance

15:12

your massively overweight to US. The

15:15

problem with this is investing is not a

15:17

game of analysis. It's a game of meta

15:19

-analysis. It's not what you think. It's what

15:21

you think relative to what everyone else thinks.

15:23

And when everyone else agrees and when all

15:25

beliefs are correlated and everyone thinks the same

15:27

thing, even if that thing is right, the

15:30

market overshoots. And I think that's what we've

15:32

seen with this US international thing. The dollar

15:34

has just gotten way too high. US equity

15:36

market valuations are way too high relative to

15:38

international. And a big part of that

15:40

was international investors putting their money into the

15:42

US. And what you've seen since

15:44

Trump's election is international investors stopping

15:46

the inflows of the US and now

15:48

pulling their money from the US

15:50

in favor of their home country markets.

15:53

And that small shift in perspective

15:55

has caused a relatively substantial

15:57

shift in allocations. And we're at

15:59

a point where Apple is

16:01

probably bigger than the entire Japanese

16:03

stock market. And the

16:06

Mag7 is almost certainly bigger than the

16:08

entire European stock market. And so

16:10

you're almost like a single stock move.

16:12

That's the dynamic we're looking at

16:14

in terms of how these international markets

16:16

are moving. And I think it's

16:18

just no surprise that once we've reached

16:20

complete consensus and complete capitulation. where

16:22

everybody knew that the US was the

16:24

best market and diversification was really

16:27

diversification. That's finally the point at

16:29

which markets flip around because they're prone to

16:31

do this, prone to devalue, and prone

16:33

to take hubris down a notch and had

16:35

this massive shift in Q1. And the

16:37

question is, is a broken clock right twice

16:39

a day? Is basically this is just

16:41

some minor short -term thing and the US

16:43

is going to resume its ascendancy? Or is

16:45

this the start of a paradigm shift?

16:47

And that nobody can tell you. But I

16:49

think the weight of sort of the

16:51

probabilities is on some sort of cycle shift

16:53

in favor of international. Yeah,

16:55

it's funny. You called Europe a museum. I

16:57

was talking to my father -in -law who's not

16:59

in finance. And he made that comment yesterday.

17:01

I just started chuckling. I never heard that.

17:03

But yeah, basically Europe is a museum. You

17:06

know, we're talking about international. And it's funny

17:08

because I had the same thoughts about value stocks.

17:11

I mean, value stocks have been out of favor

17:13

for like the last 25 years. I

17:15

can't even remember. I think it was like the early

17:17

2000s, maybe when they had a good year and

17:19

they outperformed growth. Historically, they've been

17:21

on par with similar performance, but for

17:23

the last 20 -some odd years, value's been

17:25

out of favor, which all my friends

17:27

are value investors just like, I feel for

17:29

them because it's hard to pitch when

17:31

people could just put all their money

17:33

in the Mag7 and just forget about it.

17:36

But one thing I was noting yesterday

17:38

because I was looking at some of

17:40

the Mag7 and realized Apple has a

17:42

PE of 35 and they haven't grown

17:44

their revenue in three years. And

17:46

yet people still justify that. The

17:48

Stesson P, I think, has like

17:50

a 34 PE and the average historical

17:52

PE is 17. You

17:55

know, I scratched my head when I think of

17:57

this. I'm just like, you know, I don't know

17:59

what it's going to take for the bubble to

18:01

pop, but I don't feel like it's a bubble,

18:03

but at the same time, it clearly is. So

18:05

where do you see things going from here? Like

18:07

how does this play out? I know you can't

18:09

tell the future, but being a quant and looking

18:11

at things with that kind of a lens, like

18:13

how would you look at that market in a

18:15

reasonable sense? I've been thinking of this Kirk about,

18:18

I want to write something about it, but it's

18:20

too abstract, maybe you can help me think about

18:22

it. But I was thinking about like return patterns,

18:24

different shapes of different return lines. And

18:26

one sort of thing we know

18:28

as a stylized facts about expensive stocks.

18:31

So you take expensive stocks, generally expensive stocks

18:33

underperform. The market once they've reached a point

18:35

of being very expensive but in order to

18:37

get to being expensive they have to perform

18:39

the market by quite a bit it's just

18:41

like so you have this phenomenon where like

18:43

you take a snapshot in time and like

18:45

the expensive stock you know it's gone up

18:47

and the stock market's gone here. And then

18:49

you snapshot it here and what it looks

18:51

like is like the market goes like this

18:53

and the expensive stock goes down. On the

18:55

other hand, the value stock is in the

18:57

opposite, right? Like it went down and the

19:00

market went up and then you freeze a

19:02

point and it goes up and the market

19:04

goes down. That's sort of the stylized fact.

19:06

It's like, do you want to be right

19:08

in the future or right about the past?

19:10

And this is sort of classic behavioral trap

19:12

because why do you invest in things? Well,

19:14

you invest in them to make money. And

19:16

so isn't the best proof that something's made

19:18

money that's gone up in the past, and

19:20

the best proof that it's not a very

19:22

good investment, that it's gone down in the

19:24

past? There's this utility argument. And that's the

19:26

fundamental behavioral bias that drives this re -rating of

19:28

value in growth stocks. I can imagine the

19:30

great investors of the 2000s, right? Like the

19:32

people that we sort of grew up thinking

19:34

of as heroes were almost all value investors

19:36

like Seth Clariman, Warren Buffett, et cetera. The

19:38

reason that those guys were famous is basically

19:41

they endured years of pain in the 90s,

19:43

almost without exception, years of pain in the

19:45

90s. They underperformed and they warned people and

19:47

they said, don't invest in this mania. It's

19:49

bad. It's dumb. And then they just had

19:51

killer returns in the 2000s. And it's better

19:53

to be right later. You want to be

19:55

right at the end, wrong at the beginning,

19:58

and be proven right in some sense, right?

20:00

Like that's sort of the return pattern

20:02

that makes people famous investors, or at least

20:04

did in the 2000s. I think we're

20:06

seeing a similar phenomenon now, where the right

20:08

trade has been all US tech. And

20:10

anyone who's touched US tech looks like Midas.

20:12

They just do. The more of that

20:14

you did, the better you look. And markets

20:17

just aren't that easy. Nothing outperforms forever.

20:19

And I think we've just reached this level

20:21

where this stuff is just so stretched

20:23

and so expensive that, yeah, maybe I've been

20:25

saying this for three or four years

20:27

and been wrong the first two. But at

20:29

some point, it just gets too absurd,

20:31

too extreme. And things happen. Surprising things happen.

20:33

You're up out. performs. Who would have

20:36

thought that? Yeah, I don't know. I mean,

20:38

in Germany, I can see the rest of it. Who

20:40

knows? I mean, Europe's kind of a mess.

20:42

What about that famous Italian work ethic, Kurt? German

20:45

food, Italian work ethic, we're in business. I

20:47

was in Italy when I was in college and

20:49

I was there, I think like pretty much

20:51

July and part of August. Like,

20:53

yeah, there's a lot of work ethic. They take

20:55

half the day off. They work from like

20:57

9 a .m. until like 10 a .m. And then

20:59

they come back for three to four to

21:01

close up. Europe's interesting to me. But one thing

21:03

that I find fascinating, because we're never going

21:05

to solve the valuation game, okay, here's

21:08

a question for you before I get

21:10

in my next one. A lot of people

21:12

do in research on this for a

21:14

while. I assume you're familiar with the concept

21:16

of the relentless bid. of just the

21:18

money piling into index funds and the index

21:20

funds support the existing structure of what's

21:22

in there. And then you've got more people

21:24

putting money in which consistently keeps supporting

21:26

it and keeps buoying up these things. And

21:29

the index money is the dumb money.

21:31

There's no thought put into it. It's just

21:33

we're just going to index because we

21:35

don't know what we're doing, which is fine

21:37

for most people. But is the relentless

21:39

bid strong enough to keep supporting this crazy

21:41

valuations? Or are people, is the smart

21:43

money big enough to be able to move

21:45

the market at all to make those

21:47

reallocations. Well, I think there are two

21:50

dynamics. One, which as you've already seen, which

21:52

is like one portion of that relentless bid has

21:54

come from foreign investors who now comprise a

21:56

large percentage of US equity ownership and aggregate. And

21:59

those investors have stopped adding money

22:01

to the US and are now net

22:03

withdrawers of capital from the US.

22:05

When the facts change, people's investment strategies

22:07

change. And now you've still got

22:09

all the automatic pension fund rebalance defined

22:11

right like all this huge machine

22:13

right which isn't changing. But you have

22:15

to remember that the sort of

22:18

standard of what those programs invest in

22:20

and like the standard of prudent

22:22

investing that changes over time right like

22:24

if the US outperforms for 10

22:26

years then it becomes prudent to put

22:28

a larger share in the US.

22:30

I almost view the shifts. Like people

22:32

are picking indices instead of picking

22:34

stocks now. They're picking allocations instead of

22:37

picking individual securities. I think we

22:39

start to see the shape of the

22:41

change around how people choose their

22:43

allocations, how people choose their indices. and

22:45

you start to see that playing out

22:48

over time and what percent people hold

22:50

in cash or how aggressive they are.

22:52

All of these dynamics are happening. And

22:54

so I don't think that the relentless

22:57

bid is always going to reinforce the

22:59

same structure. I think it will be

23:01

return chasing to some extent. And I

23:03

think you can't forget that there are

23:05

all sorts of marginal players whose decisions

23:07

do matter and therefore shape and reflexive

23:09

way those patterns. So I'm not as

23:11

worried about that even though I think

23:13

it's a great description of the last

23:16

decade. I kind of geek out on

23:18

marketing. So I had a lot of

23:20

friends in marketing and I was talking

23:22

with them yesterday who was telling me

23:24

that Google is testing out in certain

23:26

zip codes a change in the Google

23:28

search. And instead of going from the

23:30

ad model, they're going to the lead

23:32

model where they're charging per lead instead

23:35

of ads per click, which. is interesting

23:37

because I've been wondering with the rollout

23:39

of AI, if you've

23:41

seen their Google search, the first

23:43

result is almost always an AI

23:45

result, which to me means

23:47

that the other search results

23:49

are not getting seen, which

23:52

means the ads are not getting seen, which means

23:54

the revenues are going down. But eventually, I

23:56

had this epiphany about, I don't know, four or

23:58

five months ago, I was looking up

24:00

some health stuff for my son and i

24:02

was just like doing something was like i'll

24:05

put this in jet gbt because i heard

24:07

on a podcast that it's really good at

24:09

diagnosing medical stuff so i'm like i'll just

24:11

play around i put some stuff in there

24:13

and oh my god was it good you

24:15

know if i'm doing research it's going to

24:17

take me hours google searching something because i

24:19

google search this and then i got something

24:21

out over here i'm like oh i gotta

24:23

look into this and i gotta look into

24:25

this hours and hours go by and I'm

24:27

researching and I have to find the right

24:30

website. I have to find a good website.

24:32

I have to discern whether it's real information

24:34

or BS. All that stuff takes

24:36

time. Whereas I could put it into chat

24:38

GBT and it spits out, I have to

24:40

tweak it a little bit with other information.

24:42

But basically, within a really short period

24:44

of time, it spits out a really good

24:46

result. Why would I ever use

24:48

Google ever again? That's the question that hit

24:51

me. Now, the only reason I would

24:53

use it And this is what i do

24:55

today is the only reason i use

24:57

it is if i'm looking up a specific

24:59

company and i need the url i

25:01

will put it in google and it will

25:03

come up that's it i don't google

25:05

anything else now i know i'm one person

25:07

out of three hundred million or however

25:10

we got in this country right now. So

25:12

at what point does google's infrastructure completely

25:14

implode do they come back from that because

25:16

if they're given a result why them

25:18

why not chat you bt or grok or

25:20

whatever so. Some of these big tech

25:22

companies, do you think they're going to get

25:24

decimated in a large way because of

25:27

AI? Let's assume that Gemini, Google's

25:29

AI model is the best in the

25:31

business. Maybe it is, maybe it isn't. But

25:33

let's assume that. And so Google will

25:35

say, hey, if we switch from search to

25:37

AI, we're still the winner here. The

25:39

only problem is that that Gemini search

25:41

cost you so much more, cost Google so

25:43

much more. The gross profit margin on

25:46

that search is so much worse for the

25:48

AI search than for the old search. That's,

25:50

I think, to me, the problem. And then I

25:53

think your point around ad conversion, right? Like,

25:55

you know, if I use JetGBT, there are

25:57

no ads in there. I don't know how they're

25:59

getting, they're not monetizing me in that way. They're

26:01

monetizing me, I'm sure, in other ways, but they're not

26:03

in that way. And so how does the business model have

26:05

to change? I don't know. There's a lot of uncertainty. And

26:08

I think what we've seen in past disruptive

26:10

technological innovations is that there's been sort of

26:12

a winner take all and the winner that

26:14

takes all hasn't always been the person that

26:16

was obvious at the beginning. And I think

26:18

if you look at Metta, Google, Microsoft, et

26:20

cetera, they're all spending as though they're going

26:22

to be the winner. And probably

26:24

not all of them are going to be

26:26

the winner. And the market's probably not going to

26:28

be equally split among them. And I think that

26:31

that's the one great challenge here. I mean, who

26:33

will be the winner? We don't know

26:35

if it's going to be profitable. We don't know what the

26:37

business model is. We don't know who the winners will

26:39

be. This is a very speculative thing. And

26:41

look, speculative investments can be great. But

26:43

speculative investments probably shouldn't be like 35

26:45

% of your portfolio, which is what

26:47

they are right now. Yeah, no,

26:49

I agree with that. And I think most people are

26:51

just, they've been lucky for a while and they're

26:53

just going to keep rolling, keep putting

26:55

it all on black. Hey, we're doing it

26:57

again. So let's get into,

26:59

I don't like talking politics, but obviously,

27:01

Trump is a big figure into the paradigm

27:04

shift you're talking about, based on whatever

27:06

you think is reasonable. But how do you

27:08

see the Trump presidency playing out economically?

27:10

What changes do you see happening? How do

27:12

you Prepare for that because there's a

27:14

lot of disruption. I think we all agree

27:16

there But how do you handicap that

27:18

based on what you've seen so far? Yeah,

27:21

I find it very difficult to be

27:23

honest. I mean, I really don't know I

27:25

mean like if you said hey the

27:27

US is gonna enact a bunch of protectionist

27:29

tariff measures You know wouldn't even said

27:31

I'd buy US stocks over international ones or

27:33

US dollar over international like and yet

27:36

the opposite has occurred and you know, we

27:38

can talk about why but It's very

27:40

tricky to imagine how these things are going

27:42

to happen. It's also very tricky

27:44

to know how much of the US sell

27:46

-off this year is about Mag7 AI capex

27:48

fear and how much is about his tariffs.

27:50

I think it's actually more about the Mag7

27:52

than it is about tariffs. But that

27:54

doesn't mean that this economic certainty isn't

27:56

massive. I think that

27:58

probably the most quantifiable thing that

28:01

we can see is the

28:03

impact of the cuts in government

28:05

spending, because that linearly flows

28:07

into GDP. And if they cut

28:09

as many jobs, they want to cut what's

28:11

the implication on the U .S. housing market,

28:13

you know, the D .C. housing market, for example.

28:16

Think of the percentage of hiring

28:18

during the Biden administration that was

28:20

government funded. Think about all the

28:22

people that are going to get laid off

28:24

in universities and government bureaucracies, right, like in

28:26

the flow through of that to the real

28:28

economy. I think that's probably the

28:31

most definable negative. And I know that

28:33

Trump's team has said, well, we're trying to shift

28:35

from public to private. Like we want those people

28:37

to get rehired into the private sector. The question

28:39

is, will they? If hiring is

28:41

strong and those people leave the EPA and

28:43

quickly get hired by, you know, Monsanto,

28:45

then we're in great. But on

28:47

the other hand, they leave the EPA and

28:49

people are like, well, I don't need someone

28:51

to like internally regulate my business for environmental

28:53

problems or something, right? Then like, I don't

28:55

know. That's a lot of new people that

28:57

are going on unemployment. I just

28:59

don't know how that plays out. And then

29:01

there's the question of, does that unleash some

29:03

massive economic revolution among the businesses that don't

29:06

have to deal with excessive regulation? Or do

29:08

the taxpayers immediately get a benefit? But we've

29:10

had so much fiscal stimulus. We're

29:12

so over our skis fiscal stimulus wise

29:14

over the past few years that as

29:16

that resets, it's almost sure to be

29:18

a negative. And you can think

29:20

about the Keynesian multiplier in reverse, but it's

29:22

not pretty. And it has to

29:24

happen. And I think you compare that to a

29:26

lot of international markets that the governments didn't

29:29

spend like drunken sailors. And you think maybe they're

29:31

in a better position. Yeah, it's

29:33

an interesting perspective. I mean, I know DC

29:35

is obviously not going to do very well.

29:37

It seems like it's probably mostly isolated

29:39

in DC, which is not necessarily the

29:41

same in other parts of the country.

29:43

But we've had such a massive amount

29:46

of government spending as part of the

29:48

GDPs. Your point's great about like what

29:50

happens when you kind of get off

29:52

the crack pipe. This is the

29:54

part that I find interesting. I know a

29:56

lot of people that don't like Trump, a

29:58

lot of people do like Trump, and the

30:00

people who like them, they're like, yeah, this

30:02

is going to be great. And the business

30:04

owners are excited because they're like, great, we

30:06

give it a regulation and it's great for

30:08

all that. But I always find it oddly

30:10

funny. But anytime you think something's going to

30:12

happen, you're almost better off doing the opposite,

30:14

like you said. You know, you think tariffs,

30:16

all this stuff with Trump, US only, US

30:19

going to do great. No, this international is

30:21

clearly outperforming by like 20%, you know, it's

30:23

just not even close, 30 % actually close. I

30:25

almost find like sometimes just better do the

30:27

opposite, even though it's not logical. The

30:29

things I've been hearing about Trump like behind the

30:31

scenes stuff, some of this kind of coming out with

30:33

some interviews and some podcasts, I

30:35

feel like it's there's a lot more

30:37

complexity going on that's not being talked

30:39

about in public. It's not just like

30:42

tariffs. or it's not just like, we're

30:44

going to fight Russia. It's not a

30:46

singular thing. It's, well, we're going to

30:48

do these like 10 things and they're

30:50

all going to somehow work themselves out. And

30:53

the things I've been hearing have been very interesting.

30:55

I don't know if the work or not, because

30:57

some of them are innovative. Like you hear about

30:59

the Mar -a -Lago Accord that they're talking about? We

31:01

will. So I heard this in a podcast interview.

31:03

I thought it was really interesting. So what

31:06

they were talking about was right now

31:08

we require our friends, our international

31:10

friends to buy treasuries. Of course,

31:12

we pay them interest. And

31:14

the conversation was, well, you're getting a free

31:16

ride. We'll protect you. But we're going

31:18

to issue 100 -year paper at 0 % interest.

31:21

So all of a sudden now, our interest

31:23

is no longer our biggest line item, we

31:25

can whack that off and that gives us

31:27

a lot of flexibility. And I was like,

31:30

that's interesting thinking. I don't know if it'll

31:32

go, but you know, it's like,

31:34

okay, that's outside the box thinking. So

31:36

I hear ideas like that and like, well,

31:38

curious how that's going to work. But

31:40

I'm open to the rosy side, but I

31:42

also don't know. So I wonder how

31:44

long do you think, you know, we had

31:46

Trump before, so we kind of know

31:48

what we're going to get a little bit.

31:50

Do we think that International start to

31:53

do well, but do you think that it's

31:55

better to be international even though it's

31:57

possible that the US could really free up

31:59

a lot of no longer have the

32:01

government spending and maybe solidify some of the

32:03

big problems that are going to hit

32:05

us in the early 30s, like Social Security,

32:07

Medicare and pensions all run out of

32:09

money? If you had to bet, where would

32:11

you think is kind of most probable? I

32:14

think at this point, international markets

32:16

are just much cheaper, much less

32:18

volatile, much less risky. than

32:20

the U .S. market. And

32:22

I even think de -emphasize Trump. Trump's

32:24

going to do what Trump's going to

32:26

do. Of course, it's creating policy uncertainty. Of

32:29

course, that has its impact. Of course, it's increasing

32:31

volatility. And that's part of the reason that international

32:33

investors are pulling their money, et cetera. But

32:35

what Trump does pales in comparison to

32:37

the AI question in terms of it's

32:39

important to markets. The market

32:41

is 35 % of the S &P

32:43

weight is in the MAG -7

32:46

and probably 50 % of the volatility

32:48

weight of the S &P 500

32:50

is in the MAG -7. All that

32:52

matters is AI and how that

32:54

plays out. Let's

32:56

say he introduced some draconian tariffs. The

32:58

net impact on prices in the US

33:00

would be like, okay, prices go up

33:02

2 % or 3%. It's just not

33:04

huge. It just isn't. It's in very

33:06

specific places. Who knows what the economic

33:09

impacts are? I think it's going to

33:11

consume a lot of pundit time and

33:13

drive volatility and drive international asset allocation. tech

33:17

question and the sort of outperformance of

33:19

tech and the valuation multiples attached to tech

33:21

that are the key market drivers in

33:23

my mind. And that's why I'm so focused

33:25

on valuations and valuation comparables and the

33:27

question of whether AI is going to be

33:29

profitable. Where do you

33:31

think the best markets are if you

33:33

had to pick internationally? And

33:35

as a side note, if this doesn't come

33:37

up, I'd love to hear your thoughts

33:39

on Japan, which has always been kind of

33:41

my headscratcher of what a great value

33:43

what's going on. I'm very excited

33:45

about what's going on in Japan. You

33:48

know, if you think about what is going

33:50

on in Japan or the typical Japanese company,

33:52

there a few sort of stylized facts you

33:54

should know about the standard Japanese company. One

33:56

is that there are a ton of really

33:58

small Japanese companies. Almost every company is public

34:00

that can be that has some minimum scale

34:02

as public. It's very prestigious to be public.

34:05

So like most of corporate Japan is

34:07

public. Those companies tend to be inefficiently

34:10

run by Western standards, which means

34:12

they have low return on assets

34:14

and low margins. And

34:16

they have huge bloated balance sheets

34:18

from a Western perspective. They've got

34:20

a huge amounts of cash on

34:22

the balance sheet. They've built up

34:24

random investment portfolio, generally these cross

34:26

-share holdings. They have huge real

34:28

estate portfolios. And what that means

34:30

is these companies are very stable

34:32

and safe. That's why they did

34:34

it. They're sort of these

34:36

castles. They've fortress balance sheets. like

34:38

every single company, like your random

34:40

paper and pulp mill or iron

34:42

trader. They've just got like 200 %

34:44

of their market cap in random

34:47

balance sheet assets. And

34:49

I think that that makes these things really

34:51

safe, but it also means that unlocking value

34:53

has to mean balance sheet trench. And

34:55

what we're seeing now in Tokyo is that

34:57

the Tokyo Stock Exchange is putting a lot

34:59

of pressure on companies to get to one times

35:01

price to book. Huge percentage of Japanese companies

35:03

traded below one times price to book. And the

35:05

way they need to do that is by

35:08

rationalizing the balance sheet, converting balance sheets assets and

35:10

dividends or into buybacks. And we've

35:12

seen a first few successful examples of

35:14

companies adopting this new dividend on

35:16

equity approach where they say, we're going

35:18

to pay out a percentage of

35:20

our book value over a year as

35:22

a dividend. And maybe it's

35:24

8 % or 10 % or 5%.

35:26

But when your company is trading

35:28

at half a book value and

35:30

you announce an 8%, of book

35:32

dividend. That's a 16 % dividend

35:34

yield and the median company trades at a

35:36

4 % dividend yield, right? Like these companies

35:38

repriced really quickly and they can all

35:41

fund an 8 % of book dividend yield

35:43

basically into perpetuity just by selling off their

35:45

real estate, selling down their cash and

35:47

selling down their cross holdings. And so I

35:49

think what you're starting to see is

35:51

the first wave of companies sort of figuring

35:53

out how to unlock that and their

35:55

stocks going crazy. and that example

35:57

kind of spreading to other Japanese firms, Q2

36:00

is to be very interesting because they have

36:02

all the annual meetings where the company has

36:04

announced their fiscal year 2026 plans. I

36:06

suspect we're going to see some real fireworks

36:08

in terms of some of these reform proposals getting

36:10

pushed through. The big question that

36:12

kind of comes to mind because I've been hearing

36:14

about Japan for the last 10, 15 years, and

36:17

it's certainly they had their great

36:19

depression for 32 years, whatever it was

36:21

that the markets were negative. The

36:23

big whammy is the currency. A

36:26

lot of people talk about investing in Japan,

36:28

which is great. But you get this currency issue,

36:30

which is this big black mark on the

36:32

whole country. How do you handle that? The

36:35

yen is a light safety asset. It's always

36:37

lower yielding than the dollar. And so if

36:39

you think of sort of carry trade, right,

36:41

you're borrowing in the end to buy dollars.

36:44

And so what you've seen over time is

36:46

that the yen is quite highly correlated

36:48

with US treasuries. So when treasuries are doing

36:50

well, the yen is doing

36:52

well and treasuries do badly. The yen

36:54

does badly. And obviously we've been through

36:57

a period where the Yanis devalued dramatically

36:59

and treacheries have obviously done terribly. But

37:01

the good thing about that is whenever there's

37:03

a crisis, the N rallies and 08, the N

37:05

rallies massively, for example, and COVID, the

37:07

N rallies. So you're getting this sort of

37:09

inverse correlation with the equity market, when the equity

37:11

markets are doing well, you're losing money on

37:13

the end. When the equity markets do badly, you're

37:15

making money on the end. And I think

37:18

from an investor perspective, that's dampening your volatility. And

37:20

it's basically, if you assume that the currency

37:22

is sort of a neutral over the long periods

37:24

of time, in theory, you're just improving your

37:26

sharp ratio by owning it unhatched in the end.

37:28

So I like the N exposure. Yes, it's

37:30

been bad the last few years, but doesn't mean

37:32

it's going to be bad forever. In fact,

37:34

it's being good this year. And I think in

37:36

a crisis, it's going to be very, very

37:38

good to own Yen. I've never actually thought to

37:40

ask the question, why is the Yen a

37:42

flight to safety? Because it's kind of a disaster

37:44

in currency standards. Why do people

37:46

consider it a flight to safety, especially over

37:48

other currencies, which may be, in my opinion,

37:50

a little bit more stable? to

37:52

make the bond analogy. The

37:55

lower yielding the bond, the less

37:57

risky the bond is. The higher

37:59

yielding the bond is, the more

38:01

risky it is. Because inflation is

38:03

the biggest risk to bonds, and

38:06

Japan is a perpetually low inflation

38:08

economy, Japan always has the lowest

38:10

bond yields. The other one is

38:12

Switzerland. But Switzerland and Japan

38:14

are always going to be the lowest

38:16

yielding currencies because they're the least

38:18

at risk from inflation. you

38:20

contrast that with, say, Brazil or Turkey

38:22

or something where the risk of

38:24

inflation or destabilization of the currency is

38:26

massive, and you're going to get

38:29

massive yields. Of course, in a flight to

38:31

safety asset, you're going to move money from

38:33

the Brazils or the turkeys of the world

38:35

into the Swiss francs and the Yens of

38:37

the world, and that's what you see happening.

38:39

And the dollar these days is sort of

38:41

in the middle. you know, higher yielding than,

38:43

say, the Canadian dollar or the euro or

38:45

the Swiss franc or the end. But it's

38:47

obviously not an emerging market currency either. But,

38:49

you know, in a flight to safety world, again,

38:51

you're going to go down the yield spectrum to

38:53

the lowest currencies. All right. One

38:55

more area we want to touch on before

38:57

we, well, actually two more areas before we

38:59

wrap it up. So one is gold. Gold's

39:01

been doing very well. It seems to constantly

39:03

defy expectations. I thought the last

39:06

few years, gold would have been doing great. And

39:08

up until I don't know, the last six months, it

39:10

was pretty much going sideways. So

39:12

what are your thoughts on gold and how do

39:14

you look at gold in an overall kind of allocation?

39:17

In our multi -asset market neutral strategy, we

39:19

have a 35 % weight to gold

39:21

right now. So just to give you

39:23

some context, we're pretty bullish on gold.

39:25

High five. That's

39:27

been a good trade. We've been pretty long

39:29

gold for a while. And I think that if

39:31

you think about why gold? But first of

39:33

all, no one knows how to predict the returns

39:35

in the short term of gold. It's a

39:37

complete mystery, OK? Why it goes up or why

39:39

it goes down? Try to correlate it with

39:41

anything, and you're going to come to, like, I

39:43

have no idea. But there are a few

39:46

things we do know about gold. One

39:48

is that it does maintain its

39:50

purchasing power over time. There's a

39:52

famous paper by Campbell Harvey that shows

39:54

that the price in gold that you

39:56

paid a Roman centurion in, like, zero

39:58

AD is the same price you pay

40:00

a US Army captain in gold today.

40:02

gold maintains its purchasing power where no

40:04

other thing does. You're not

40:06

going to make any money in gold,

40:08

but as a store of value,

40:11

gold is an excellent store of value,

40:13

probably equivalent to or better than

40:15

treasury bonds or treasury bills in terms

40:17

of preserving purchasing power. The

40:19

next thing to know is that when

40:21

inflation spikes and people are looking for

40:23

a flight to safety, asset gold always

40:25

looks good because it's not at risk

40:27

of inflation, whereas bonds are. Then you

40:29

think of like okay people need a

40:31

low risk asset in their portfolio and

40:33

so if there's a demand for low

40:35

risk assets and then people have two

40:37

options really are gold bonds if bonds

40:39

haven't done that well recently because there's

40:41

been high inflation people are gonna go

40:43

to bonds. The other thing that

40:45

happens is this reserve currency purchasing where if

40:47

you're worried about the terms of trade if

40:49

you're worried about getting shut out of the

40:51

US financial system or whatever you're gonna buy

40:53

gold you're diversifier for currency reserves. And I

40:55

think that's what we've seen a lot of

40:57

foreign governments do in the context of this

40:59

political instability. So I think the sort of

41:01

recent rally is probably a large part driven

41:03

by central bank buying outside of the US. But

41:06

the logic of voting gold in the portfolio

41:08

as a low risk asset as a diversifier is

41:10

very strong. So do you think

41:12

that I have to ask because I mean the

41:14

central banks was part of my question is do

41:16

you think most of it's coming from central banks

41:18

because silver has. drastically

41:20

disappointed for quite some time and

41:22

everyone talks about it. The gold

41:24

to silver ratio, it almost feels

41:26

like silver's just a non -issue anymore

41:29

when it comes to inflation hedges

41:31

because it's just, it's not

41:33

only confusing people, but it's doing the exact

41:35

opposite what you'd expect. Gold goes up

41:37

and silver just stays flat. So I

41:39

don't know what your thoughts are on silver. Don't trade

41:41

silver. I don't have a view. Okay. Just curious.

41:43

I mean, it's... Maybe that's the problem. Right. It's

41:45

just not salient enough. You know, people don't think

41:47

about it, don't trade it as a macro instrument

41:49

the way they do gold. All

41:51

right. And then I guess the last question

41:53

I had for you was the most

41:55

important one, small cap. What's going on with

41:57

small cap? It's been off everyone's radar

41:59

forever. I wish I knew it's been a

42:01

disaster. Almost everywhere size is

42:04

underperformed for years, almost regardless of market.

42:06

At least value is done well internationally,

42:08

right? So people talk about value underperforming.

42:10

Value has underperformed in the US, but

42:12

it's outperformed in the international market. And

42:14

so like there's a saving grace to

42:16

value, but size has basically gotten

42:18

shlonged everywhere. No one likes small caps

42:20

anymore. And I just don't know why. And

42:22

the valuation gap between small and large

42:24

has gotten massive. The valuation of micro and

42:26

small has gotten massive. You're in this

42:28

world where there's like a massive number of

42:30

super cheap micro and small caps. And

42:33

no one seems to pay attention and the market

42:35

doesn't correct. I don't know when that's going to change.

42:37

And part of the knock on these small caps

42:39

is that they're very volatile too. So it's like if

42:41

they've underperformed and they've had higher volatility, it's just

42:43

the worst of both worlds. Like when the market's gone

42:45

up, they haven't gone up as much. The market's

42:47

gone down. They've gone down more. I think

42:49

people have been burned. And yet it's sort

42:51

of ironic because at the same time, everyone's

42:53

favorite trade is about 40 % of their

42:55

portfolio and private microcaps. So you're like, if

42:57

any of that money would shift back into

42:59

public small and microcaps, which are probably an

43:01

equivalently sized market, no one's putting 40 % of

43:03

their money in microcap, public microcaps. But if

43:05

that started to happen or if there's even

43:07

a small shift in that direction, I think

43:09

it would be very beneficial. You

43:12

know, it's funny to say I never thought

43:14

of that. I never really equated the microcaps to

43:16

the private equity realm. It just never hit

43:18

me. But that's so true. I

43:20

wonder how much of this is the institutions

43:22

moving the markets around. Because if people

43:24

are putting all their money in indexes,

43:26

they're not picking stocks like you are. And

43:29

I've always thought that's really the problem. If

43:31

you find some great companies and nobody knows

43:33

about it, they're not going anywhere because there's

43:36

not enough money floating in there. So

43:38

the question I would ask you is,

43:40

there's definitely values there. mean, I know

43:42

you're in there and I know some

43:44

people are doing fairly well. But in

43:46

general, do you really need that adrenaline

43:49

shot of institutional money to make

43:51

that asset class work anymore. If

43:53

you sort of went back and said, hey, I have a

43:55

very simple hypothesis, which is that people are going to shift

43:57

towards passive. And as people shift

43:59

towards passive, the money will disproportionately flow to

44:01

the largest stocks. And therefore, my strategy

44:03

should be to own and overweight to the

44:05

largest stocks and underweight anything that's like

44:07

under indexed. You would be a total genius.

44:09

That would have exactly worked as like

44:11

a predictive model for trading the market. and

44:13

so in some sense like i'm tempted

44:15

to just sort of say yes like passive

44:17

is the reason why small cap is

44:19

sucked and yet at the same time like

44:21

i actually proving that is a little

44:23

bit hard i just don't know but i

44:25

think you know in markets as in

44:27

life nothing continues forever the pendulum always shifts

44:29

back things that get under love for

44:31

too long get so cheap they become loved

44:33

again and these things are all cyclical

44:35

i talked to anybody over the age of

44:37

seven to use investing in markets for

44:40

a long time that that's what they'll tell

44:42

you. And we've gotten so caught up

44:44

in a very simple paradigm that everybody is

44:46

overweight. It's too good to be true

44:48

and it won't continue. Awesome.

44:50

Well, Dan, I always appreciate you coming on

44:52

the show, sharing your wisdom. I always enjoy our

44:54

conversations. Any final thoughts on where

44:56

can people find more about you? Yeah, if

44:58

you want to learn more about me, I'm at

45:00

Etford Ed Cap on Axe. And in my bio,

45:02

there's a link to our weekly research right every

45:04

week. You can buy my book, The Humble Investor,

45:06

on Amazon or anywhere books are sold. I'd very

45:08

much appreciate it. If you would buy the book,

45:10

I think you'll enjoy it. This

45:14

is a public service announcement. Hi, my

45:16

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46:15

today. Now

46:18

we're in the panel portion of the show.

46:20

We have our very own Doug Higrin. Hey, Doug.

46:22

Hey, Kirk, threw me off. Normally, when you

46:24

announce the other panelists first, I wasn't

46:26

expecting to speak here, but good to see

46:29

you today. I'm good to see you,

46:31

Megan. Excited to be on again. Thanks.

46:33

Doug just ruined the surprise. We have a

46:35

surprise panelist. We have our very own Megan Gorman

46:37

who's come back. Hi. It's good to see

46:39

you guys. It's nice to be back. It's been

46:41

a while. Megan was on vacation. vacation

46:44

by working. Unfortunately, I've

46:46

been a lot of people. I think

46:48

I'm drowning in caretaking for parents. So

46:50

don't tell the taxing authorities, but I

46:52

think I've spent more time in New

46:55

Jersey than California over the past six

46:57

months. Which has a better tax rate.

46:59

It depends on income level. You could

47:01

argue Jersey, but then Jersey crosses over

47:03

becomes higher than California ultimately. It's sort

47:05

of crazy. I think Jersey's

47:07

top bracket. I want to say it's

47:09

close to 15%. Yeah. I mean,

47:11

it's something Yeah, New

47:13

Jersey's top income bracket, I'm sorry,

47:16

it's 10 .75, it sounds like.

47:18

Oh, it's already lower than Minnesota. I was going

47:20

to say, if it was 15, don't tell

47:22

Minnesota because they want to be California, but they

47:24

might decide to want to be New Jersey.

47:26

But you know, the good news is. is that

47:28

you can take a look at where you're

47:30

going to be, and based on the time you

47:32

spent, you might be able to declare yourself

47:35

a resident of New Jersey that's your state, California.

47:37

And it doesn't matter anyway, because there's no

47:39

IRS agents to it. But the state taxing authorities

47:41

have been hiring from the IRS. So I

47:43

have a feeling the states are going to get

47:45

a little more aggressive. And

47:47

where California is weird is California,

47:49

Jersey has a days in

47:51

requirement, right? 183 days in your

47:53

resident. California is far

47:55

trickier. it's facts and circumstances. So

47:57

I could look like a

47:59

resident of California regardless. Yeah,

48:01

okay. Minnesota has a tax called

48:03

the use tax basically as a catch

48:06

-all. It's like, well, you know,

48:08

you didn't pay sales tax on these things,

48:10

but if you use this, this, this and

48:12

this, we've got this other catch -all. And

48:14

it's like the number one thing that Minnesota

48:16

will catch people and audit them on is

48:18

people not declaring enough use tax and they

48:20

are aggressive. I think they've taken two or

48:22

three people who have, but happens is, you

48:24

know, we got the snowbirds. They moved to

48:26

Florida and they're like, Hey, I'm a Florida

48:29

resident, but they still got their cabins and

48:31

they still got all this. And then, then

48:33

they come back and, you know, take them

48:35

to tax court. And I think they've won

48:37

three national cases. So Jersey, Minnesota,

48:39

California. Yeah. You

48:41

don't want to mess around with those state

48:43

tax authorities. They, they take it very seriously.

48:46

Yes, they do. That's a lesson

48:48

to all of you. Make sure you pay really

48:50

close attention to where you retire or have your homes.

48:52

100%. I mean, we lived right next door to

48:54

New Hampshire. And I know over the years,

48:56

people have been able to get away with stuff. But,

48:59

in Texas, it used to be called, it

49:01

no longer has that moniker because now everyone else

49:03

has a higher tax rate. They

49:05

are pretty rigorous about their collection. Not

49:07

as bad as California, though. When

49:09

we started our firm, just for reference,

49:11

we'll dive into the topic. We started our

49:13

firm within a few weeks. California sent

49:15

us a tax bill of taxes that we

49:17

owed. We had just started the firm.

49:19

We hadn't even made money yet. And they

49:21

already sent us a bill for what

49:23

we owed them. And it was like,

49:25

we don't live here. We're not even licensed in

49:27

your state. We have no clients in your state. We've

49:29

never done business in your state. Like

49:31

they were sending them across the country to everybody.

49:34

that they could find just sending bills wrong.

49:36

What were they sending you a tax? That's wild.

49:38

Here's the thing. So I just ignored it.

49:40

And I was just like, whatever, if it's really

49:42

a problem, they'll send me about 50 more

49:44

notices. So I just ignored it because I know

49:46

we hadn't done any business at all in

49:48

that state. But here's the thing. So Massachusetts, about

49:50

15 years ago, I think it was somewhere

49:53

around there, they had this issue. I was talking

49:55

to my accountant, I was doing my taxes,

49:57

and I was just sitting there just having a

49:59

chat with him. And he was telling me

50:01

a story. He's like, I just went to a

50:03

seminar, and we had the head of the

50:05

master you are speaking. And it was a bunch

50:07

of accountants all sitting there. And the guy

50:09

speaks at the end. He's like, all right, any

50:12

questions? One guy raises his hand. He's like,

50:14

I don't know. I got a question. I've been

50:16

getting a lot of tax notices from my

50:18

clients for taxes they don't know. And he's like,

50:20

Okay, yeah, we know what you're talking about.

50:22

Sorry about that. We're aware of the error. The

50:24

only reason we haven't fixed it is because

50:26

we're generating too much revenue from it. So basically

50:28

what he was saying is, yes, we know

50:30

that people are erroneously being noticed for taxes they

50:33

don't owe, but we haven't fixed it because

50:35

we're making a lot of money from that, from

50:37

basically screwing people over. I was

50:39

like, are you kidding me? He told us to a

50:41

room full of accountants. It wasn't a secret. happy

50:43

to share it. How is that different than

50:45

phishing emails? Hey, we got enough people to

50:47

respond. But that's the thing. It's like big

50:49

corporations. They never make errors in your favor.

50:51

It's always in theirs. You ever have that

50:53

problem? Like Verizon, Comcast, all these big companies,

50:55

like there's never an error in your favor.

50:58

It's never like, you know, the monopoly card,

51:00

hey, bank error, $10 in your favor. No,

51:02

never got one of those. It's always money

51:04

you owe them. And then you got to

51:06

fight them for $10. So anyway, that's

51:08

the world we live in. Onto the important

51:10

stuff. So, Doug, what are some of

51:12

your thoughts from the interview with Dan? We've

51:14

talked about this before. mean, there's a

51:16

difference to technical trading fundamentals, and you can

51:18

wait a long time for fundamentals to

51:20

come around. mean, value has been underperforming for

51:22

a long time. And if you're a

51:24

fundamentals investor, you would have thought

51:26

buy low, sell high, right? And

51:29

get in there a long time

51:31

ago, and that should have turned

51:33

around. But yet, things can last

51:35

extremely long. I mean, international. One

51:37

of the things that's doing much

51:39

better now is he talked about

51:41

the forgotten trade, international rotation. I

51:43

mean, you know, USP is near

51:45

35. You've got Europe and Japan

51:47

sub 15. You've got

51:49

currency tailwinds for the yen and

51:51

lower inflation. But yet how

51:53

long have they been saying international

51:55

is the place you should be investing

51:57

because opportunities are really cheap there

51:59

compared to US. But I mean, you

52:02

could be sitting in international for

52:04

10 years now and never get anywhere.

52:06

there is a tremendous opportunity

52:08

in diversifying and looking at

52:10

things that are lower value. Talk

52:13

about today's MAG7 is

52:15

tomorrow's Cisco Intel of

52:18

the 2000s. But unfortunately,

52:20

there's got to be a lot

52:22

of patience. And what's going on

52:25

with investing, we're talking about

52:27

how long does it take? We've

52:29

talked about this, a paradigm shift.

52:31

How long does it take for

52:33

a paradigm shift to actually rotate?

52:35

We've been sitting here in just

52:37

basically the Mag7 driving everything for

52:39

a decade. Maybe not the Mag7

52:41

in its current form, but it's

52:43

really been a tech -driven world for

52:45

a long time. And it's an

52:48

entire generation that has not seen

52:50

anything, but technology drive all of

52:52

these market returns. One of my

52:54

takeaways, and again, I know he's

52:56

a big, small, and micro -cap,

52:58

it's something, you know, it's very

53:00

mispriced, but again, how long has

53:02

small cap values continued to underperform.

53:04

And when will they actually be

53:06

something that is going to turn

53:08

out to be a better opportunity

53:11

in the portfolio? It's been very

53:13

hard to be diversified in this

53:15

market for the last decade. And

53:17

I think we're finally starting to

53:19

see it. mean, gold obviously is

53:21

doing really well right now. International

53:23

has done better. Small

53:25

caps, buying high quality small

53:27

caps is kind of like paying for community

53:30

college instead of Harvard. You're going to get similar

53:32

results in a fraction the price. But you've

53:34

got to look past prestige. You've got to do

53:36

a lot of work to get there as

53:38

a whole as an index. If you

53:40

just buy the small cap index, it

53:43

hasn't done anything for a

53:45

long, long time. It takes

53:47

a lot of emotional fortitude

53:49

to invest, especially as a

53:51

fundamental investor in these markets

53:53

over the last decade, because

53:55

unfortunately, time and time again,

53:57

what has historically been the

53:59

prudent way of investing has

54:01

unfortunately been a value trap or

54:03

has been a trap for a long, long

54:05

time. You talk about it. How long have we

54:07

been waiting for Japan to come back? It's

54:10

really, really difficult to be

54:12

an investor. I think those

54:14

are some of the things that I look

54:16

at all over the place is really coming down

54:18

to a challenge of diversification. And you want

54:20

to still be there because of risk, but it's

54:22

proven people wrong time and time again. Megan,

54:25

what are some of your thoughts? So first of

54:27

all, I thought the interview with Dan, he's

54:29

a very thoughtful person about the markets. I do

54:31

like listening to him and I appreciate at

54:33

times when he's very honest about how he feels

54:35

when he doesn't have a point of view

54:37

on something or he doesn't feel comfortable giving a

54:39

point of view. But in listening

54:41

to the interview and then going to my experiences

54:43

in client meetings over the past few months, and

54:46

I say this at the beginning of April

54:48

so everything could change, a lot

54:50

of what I'm finding in the market right

54:52

now is dependent on your political affiliation. You

54:54

go into meetings with people who

54:56

are Trump supporters, they feel very optimistic

54:59

about the economy. They see it

55:01

that there's going to be changes, but

55:03

they're willing to ride the volatility

55:05

to get to those changes. You

55:07

go to meetings with people who

55:09

are not Trump supporters, they are

55:11

very panicked about the markets and

55:13

the economy. And so I

55:16

spring this up because we talk a

55:18

lot about behavioral finance, but this is one

55:20

of these moments where being very grounded

55:22

in data is going to be important. And

55:24

Doug hit on a lot of the

55:26

big points there. And what I've been talking

55:28

a lot with clients is, regardless of

55:30

how you feel about the politics of the

55:32

country, when we are in uncertainty and

55:34

uncertainty that we're not sure is going to

55:36

be short -lived or long -lived, we really

55:38

have to go back to strategy. And that

55:40

goes back to diversification. And so

55:42

as we sit here at the very beginning of April, because a

55:44

lot can change, As I've been in

55:46

client meetings showing clients where their portfolio

55:49

is, people have been pleasantly surprised that

55:51

they are flat or maybe up a

55:53

little or even just down a little.

55:55

And again, to Doug's point, it

55:57

has to do with. the

55:59

international markets and how much international

56:01

exposure people have in their

56:03

portfolio. And I agree

56:06

with Doug. This past decade has

56:08

been very difficult to keep clients

56:10

in international. I mean, you

56:12

think about the last big time that

56:14

international was a market people were dying to

56:16

get into. I think we're going to

56:18

go back before the 2008 crisis. I think

56:20

it was like 2006. So

56:22

what was shocking, like through the

56:24

end of March, I think through

56:27

end of March 28th, the MSCI

56:29

EFA was up 9 .2%. The

56:31

MSCI emerging markets end up 4 .8%.

56:33

And so a lot of people

56:35

have been able to use that

56:37

performance to mitigate some of the

56:39

risks in other areas of the

56:41

portfolio. So what Dan talked

56:43

about really resonated with me, with a

56:45

lot of the things he's talking about, because

56:47

he talked about the rise of international

56:49

holdings. And he said, look, they're cheaper. And

56:51

at this point, they're less volatile. And

56:54

if you think about some of the things

56:56

that the Trump administration is doing, it's forcing

56:58

certain countries to take action that will stimulate

57:00

their economies. And I think we saw that

57:02

with Germany. So this has

57:04

been a year so far. Things

57:06

can change on a dime where

57:09

diversification is a huge argument. And

57:11

so I'm having a lot of

57:13

clients just focus on getting back

57:15

to target, sticking on target, and

57:17

at moments doing the right tactical

57:19

tilt, whether it's to commodities and

57:21

gold to infrastructure, those key elements

57:23

that can really help a portfolio over

57:25

the long term. You mentioned

57:28

the international part, Megan. So Doug, when

57:30

you're working with clients, I mean, the

57:32

issue that always comes up is We

57:34

all experience this. We try

57:36

to diversify. And as Dan said, stuff

57:38

just doesn't work. Value hasn't

57:40

worked for 20 years. International hasn't worked

57:42

for like 15 or 20 years. All these

57:45

asset classes like small cap, their times are

57:47

just out of favor and people still want

57:49

to diversify. How do you handle those conversations

57:51

with clients, Doug, when you're trying to

57:53

express diversification? And yet they're just looking at,

57:55

well, why don't I just put all my

57:57

money in mag seven? You're like, how do

57:59

you handle that? One of the ways

58:01

that I'm able to kind of get around

58:03

that is I try to get the conversations

58:05

away from the individual return of the investments

58:07

in general and get back to the

58:09

why. And this gets back to

58:11

Megan's point about behavioral finance. When

58:14

I look at conversations with clients, I come from

58:16

a different approach. There's three buckets of money.

58:18

The first bucket of money is what you've already

58:20

saved. This is what we're talking about here,

58:22

your investments. I would say that 95

58:24

% of the people in this business, they focus

58:26

100 % on that. It's like, hey, you move that

58:28

to me. I can get you a better rate

58:31

of return, or I can reduce your risk. And

58:33

we'll just work on that, manage that, whatever. That's

58:35

really important. You need to manage that

58:37

appropriately. But generally, what that's

58:39

going to do is it's either going

58:41

to road your return by being more conservative.

58:44

In theory, because as we saw in

58:46

2022, 2023, more conservative meant

58:48

bonds. Well, that wasn't actually

58:50

safer. And those have been

58:52

really hurt. Those conservative portfolios have been hurt by

58:54

interest rates. But the other end of the spectrum,

58:56

What do they do? They say, well, I'll get

58:58

you more return. Well, that generally takes more risk.

59:00

It's like, okay, you want to focus on there? Let's

59:03

go take a look at the second bucket. That's

59:05

lifestyle. This is a Dave Ramsey

59:07

concept, right? Ah, you know, just spend less.

59:09

You know, why drink that high quality

59:11

coffee? Just if you have a bucket of

59:13

swill, you can solve all your problems.

59:16

Well, nobody wants to reduce their lifestyle. Let's

59:18

face it. They want a better lifestyle.

59:20

So where we try to focus is let's

59:22

get back to the perspective. What's your

59:24

why? What do you want? And where are

59:26

you being less efficient with money in

59:28

other areas? Because you can't, if you need

59:30

a 15 % rate return every year to

59:32

achieve your goals, good luck with that.

59:35

But if you can be more efficient, I

59:37

think that's the key. And what I'm

59:39

finding is if we get the conversation back

59:41

to your lifestyle and lifestyle conversations and

59:43

income, and what do you need? That can

59:45

change the conversation. It's like, well, what's

59:47

the market's doing? Well, guess what? That market

59:49

dropped by 20%. It freaks

59:51

me out. And again, a lot of planning is

59:54

probability success, which can change quickly on that.

59:56

But if you can show them, it's like, look,

59:58

your income just changed by that by 250

1:00:00

a month. So what? Temporarily,

1:00:02

we can get through this. That's behavioral

1:00:04

psychology. We spend way too much time

1:00:06

trying to overanalyze the parts of what

1:00:08

we have instead of thinking about being

1:00:10

more efficient of what we want to

1:00:12

do in general and keeping the conversation

1:00:14

there. No, I appreciate that, Doug. Megan,

1:00:16

what about you? How do you go

1:00:18

through those conversations with people? Maybe it's

1:00:20

easier for you. I don't know. No,

1:00:22

not at all. Everybody worries about money.

1:00:25

But I think Doug is bringing up. that

1:00:27

great point. And I talked to a

1:00:29

lot of clients about this, particularly my clients

1:00:31

as we go into this time period

1:00:33

who are about to retire or have recently

1:00:35

retired, which is control the controllables. The

1:00:38

market is going to do what the market

1:00:40

is going to do. You cannot outthink it. I

1:00:42

think it is best to stick with

1:00:44

strategy, stick with your asset allocation, because if

1:00:47

you've been running long -term cash flow models

1:00:49

for people to retire, Those

1:00:51

models also have been stress tested

1:00:53

in down markets. But what

1:00:55

I talked to a lot of clients about, and

1:00:57

I'm in the same boat as Doug, which is

1:00:59

the things you control is how much you spend

1:01:01

or the things we can cut out. Or I've

1:01:03

also had clients that are right on that edge

1:01:05

of being about ready to retire. I had two

1:01:07

clients retire this week. And what

1:01:09

I talked to them about was, well, look,

1:01:12

either do you want to stay longer

1:01:14

or You know, maybe you glide retire out.

1:01:16

Maybe you don't come full stock. Maybe

1:01:18

you consult for a period of time to

1:01:20

have some income coming in to keep

1:01:22

you relaxed and not get caught up in

1:01:24

market anxiety. Because the one thing we

1:01:26

know about Trump is we're going to be

1:01:28

whipsawed around with data, with chaos, with

1:01:30

flipping points of view, whether you like it

1:01:33

or not. And so it's really

1:01:35

important to just not get caught up

1:01:37

on that and focus on the things

1:01:39

you can control in this type of

1:01:41

marketplace. These are good

1:01:43

moments to really think about other things

1:01:45

that should be layered into the

1:01:47

portfolio. So I think a big news

1:01:49

headline this week was Larry Fink

1:01:51

came out with his annual letter from

1:01:53

BlackRock. And it was interesting because

1:01:55

he was sort of saying the private markets

1:01:57

should be accessible for all. I

1:01:59

got to think about that concept for a

1:02:01

while before I think it's great because my

1:02:03

challenge with everyone having access to the private

1:02:06

markets is it's very expensive to get access

1:02:08

to on a smaller level. But

1:02:10

he brought up things in his discussion

1:02:12

that I think we should all think about

1:02:14

for portfolios. So one of the things

1:02:16

I've been adding to portfolios for the past

1:02:18

two years now is just a small

1:02:20

tilt to infrastructure. And

1:02:22

you look at infrastructure funds,

1:02:24

bridges, roads, airports, things like

1:02:26

that that tend to be steady eddy

1:02:28

and really boring in a portfolio. A

1:02:31

lot of those funds tend to throw off

1:02:33

a pretty consistent dividend yield. Those are

1:02:35

the things that I think in these moments you

1:02:37

can also look at to try to sort of ground

1:02:39

yourself. Because I think when I say, look, the

1:02:41

bridges in this country are a hot mess and they

1:02:43

need to be fixed, I think we're all in

1:02:45

agreement. And so I think those types

1:02:47

of investments are also making a lot of sense

1:02:49

in this marketplace. And they hedge against

1:02:52

inflation. Yeah, I actually wanted to

1:02:54

follow up with you, Megan. I had a

1:02:56

question because one thing that came up in the

1:02:58

conversations we talked about, he mentioned like basically

1:03:00

private equity being the same as smaller microcap. And

1:03:02

I hadn't really thought of it in that

1:03:04

frame. But let me ask you, because I know

1:03:06

you do a lot of private equity and

1:03:08

it's certainly a big deal. Now, a lot of

1:03:11

people want access to it. But what's really

1:03:13

the difference? Why would you buy private equity and

1:03:15

your stuff's locked up and you've got all

1:03:17

these overvaluation problems when you could just buy a

1:03:19

smaller microcap? Why would people do that? So

1:03:21

private equity tends to go through cycles. So what

1:03:23

we're seeing more right now is not buying

1:03:25

in the microcap space, but more leveraged buyouts in

1:03:27

the middle market space. A

1:03:30

lot of our clients, I think

1:03:32

what they're hoping is that the illiquidity

1:03:34

premium makes it worth staying in

1:03:36

these investments. But again, it's

1:03:38

whatever you feel more comfortable with. I

1:03:40

could see someone deciding to do microcaps

1:03:42

versus private equity. Private equity comes down

1:03:44

to the manager. and who you're getting

1:03:46

access to. And I would tell you

1:03:48

80 % of private equity funds out there

1:03:50

are absolute crap. And you'd be better

1:03:52

off staying in the public markets in

1:03:54

microcaps and in small caps versus going

1:03:57

into private equity. So I would tell

1:03:59

people when it comes to the private

1:04:01

markets, you have to be even more

1:04:03

selective than ever before. And Doug brought

1:04:05

up this great point about the small

1:04:07

cap market. I find the small

1:04:09

cap market a hard market to index in, right?

1:04:11

I think it's what 44 % of all companies

1:04:13

in the small cap market are not profitable.

1:04:15

That doesn't make me excited to go invest in

1:04:17

it. So I think where people have

1:04:19

to think about it is things like large cap,

1:04:21

S &P 500, you can't get

1:04:23

better exposure than that. But where

1:04:26

you need more thought and more

1:04:28

focus on is in asset classes

1:04:30

like small cap, international developed, emerging

1:04:32

markets, real estate, like REITs.

1:04:34

Active management can make a

1:04:36

lot of sense and understanding

1:04:38

what pockets they're investing in

1:04:40

is really important. You

1:04:42

know, I had last year a

1:04:44

lot of my clients do pretty well

1:04:46

because our emerging markets manager avoided

1:04:48

China. It had China, but they were

1:04:50

not heavy on China and the

1:04:52

index is over 25 % China. So

1:04:54

being thoughtful about exposures and actually paying

1:04:56

for managers to me is worth

1:04:58

it, especially in a market like this.

1:05:00

Can I add something on that?

1:05:02

Yeah, please do. It just spills huge

1:05:04

myth. So we know there's

1:05:06

a company out there not to name names,

1:05:09

but everybody knows who they are. And they're

1:05:11

all about indexing only, cheap indexing. Do your

1:05:13

own thoughts on this. So everybody basically

1:05:15

loves to tout. It's kind of like the

1:05:17

book. There was a book about dads that might

1:05:19

be wealthier and less wealthy. You might know

1:05:21

that book too. I don't know if you, okay.

1:05:23

Everybody's like, ah, just invest in real estate.

1:05:25

That's not what he said in the book. He

1:05:27

said, If you actually read

1:05:29

the book, he said, this work for

1:05:31

me, but for you, it might be

1:05:33

something different. Very similar to what we're

1:05:35

talking about today, that the next opportunity

1:05:38

or valuation might be somewhere else in

1:05:40

the future. It's like, you know, don't

1:05:42

ask what's worked, ask what's underappreciated, has

1:05:44

more upside than downside. Going back to

1:05:46

this behemoth index company, everybody

1:05:48

tells me, you should just index everything. That

1:05:50

is actually not what they have said.

1:05:52

They have put out white papers. essentially

1:05:55

reflecting exactly what you just said,

1:05:57

Megan. It says, look, yeah, we're talking

1:05:59

like the big stuff. There's 500

1:06:01

companies in the S &P. Good luck

1:06:03

with that. And it's a momentum and

1:06:06

market cap driven index. So you're

1:06:08

going to always be at a momentum

1:06:10

play of winning what's working. But

1:06:12

they very clearly have said in other

1:06:14

areas that could include but may

1:06:16

not include things like fixed income, international,

1:06:19

small caps, where you have

1:06:21

thousands and thousands of different

1:06:23

investment choices, that that's an

1:06:25

area where active management, which

1:06:27

this company does have active

1:06:29

managed portfolios that they run,

1:06:32

active management may be your better play.

1:06:34

So the other thing is you need

1:06:36

to know what you need to know,

1:06:39

but how many times you go out

1:06:41

on FinTwit and this and that's like

1:06:43

passive everything, index everything. Really? Cause your

1:06:45

deities, your priests of that world are

1:06:47

saying that is not true, but people

1:06:49

love soundbites. going back to the sound

1:06:51

bites that are causing our volatility right

1:06:54

now. Where's Barb when we need her?

1:06:56

Right? Oh, no, I love, absolutely. We've

1:06:58

had few conversations like this. But I

1:07:00

also think this is also a good time

1:07:03

to consider. If you need

1:07:05

help from a third -party advisor, it is

1:07:07

a really good time to seek help

1:07:09

because so many of us are living

1:07:11

this day -to -day, but we're also known

1:07:13

to be more unemotional and grounded about

1:07:15

it. I don't know about the

1:07:17

two of you, but I feel like

1:07:20

we've been through COVID crisis, oh, 809,

1:07:22

you know, 2000, like so many different

1:07:24

crises. Everybody feels it's different

1:07:26

this time. But I mean, it's

1:07:28

different, but it's still the same in

1:07:30

a lot of ways. And that's

1:07:32

why I think asset allocation, diversification, and

1:07:34

at times, active management are really

1:07:36

key to a portfolio. I almost

1:07:38

said that to Dan just out of, we get off

1:07:40

on another topic, but I was thinking, I was

1:07:42

like, is this time different? We

1:07:45

live in interesting times. I'm very curious, though,

1:07:47

what you guys think, because, I mean, the market

1:07:50

has been overvalued for a long time. It's

1:07:52

technically, I guess, it's liberation day today. It's

1:07:54

April 2nd. We're recording this. And

1:07:56

I think this will come out in like two weeks. But

1:07:59

tariffs haven't been implemented yet. But what

1:08:01

does everybody think about this? Not politically, but

1:08:03

just like, if you had to handicap

1:08:05

this, like, where do you think this is

1:08:07

going? How do you manage

1:08:10

expectations and portfolios in a time where nobody

1:08:12

can predict Trump. I mean, I don't even

1:08:14

think he can. He's playing a game. It's

1:08:16

not a bluff because he'll go through with

1:08:18

it. But in a sense, it's also kind

1:08:20

of like, all right, here's what we're going

1:08:22

to do. You know what he's going to

1:08:24

do. You just don't know how it's going

1:08:26

to end up or how we get there.

1:08:28

Like we may know where it ends up,

1:08:30

but we don't know how we're going to

1:08:32

get there. How do you handle this with

1:08:34

portfolios? Some of it is just managing client

1:08:36

expectations. I don't think Trump is wrong in

1:08:38

saying that tariffs are a negotiating tool, but

1:08:41

they tend to be more about

1:08:43

sort of short -term tactical and

1:08:45

acting quickly where I think that

1:08:47

clients, all of us who are.

1:08:49

in this economy have to be

1:08:51

aware is we're raising the U .S.

1:08:53

effective tariff rate quite high. Back

1:08:55

to really where it was back

1:08:57

in the 40s is ultimately where

1:09:00

they see it going. And

1:09:02

so when you think about this and you look at

1:09:04

the data coming out from places like Yale Budget Labs,

1:09:07

the bigger concern is tariffs are going

1:09:09

to impact all of us. For

1:09:11

low -income Americans, you're going to see

1:09:13

them spending probably $1 ,000 to $1 ,200

1:09:15

more. due to the tariffs.

1:09:17

High -income households, $3 ,400 to $5 ,000

1:09:19

more. Now, I bring this up because

1:09:21

the Fed is very focused on

1:09:23

the consumer. How is the consumer doing

1:09:25

with both the hard and soft

1:09:28

data? And I think what

1:09:30

the Fed is concerned about is we're

1:09:32

starting to see defaults on auto loans.

1:09:34

We're starting to see challenges in credit

1:09:36

cards. And now we're going to layer

1:09:38

in the tariffs. And so this feeds

1:09:40

into this idea that, unfortunately, it may

1:09:42

slow the GDP, slow growth down.

1:09:45

in the near term, and we may

1:09:47

have an increase in inflation by 1

1:09:49

% to 1 .25%. So setting expectations for

1:09:51

people I think is really important. And

1:09:53

I think for our listeners, that just

1:09:55

means also keeping in mind your cash

1:09:57

reserves. I think having a good cash

1:10:00

reserve, sitting in a high yield savings

1:10:02

account, earning your 4 % is great

1:10:04

as we sort of let this play

1:10:06

out. But I'm curious, Doug, what your

1:10:08

thoughts are. Real similar to

1:10:10

that. There's a reason. We've talked

1:10:12

about this before. Kirk and I,

1:10:14

Warren Buffett is sitting on what,

1:10:16

$600, $800 billion in T -bills and

1:10:18

cash when markets are doing this.

1:10:21

Now, if you want to be an options trader, it's

1:10:23

a great time to be an options trader.

1:10:25

But you better know what you're doing. And the

1:10:27

one thing they'll tell people that anybody that's

1:10:29

good at options trading will tell people is you

1:10:31

better have a plan. You don't just go

1:10:33

into it buying options because options can be extremely

1:10:35

expensive and they can blow you out. And

1:10:38

the other thing is a lot of options when

1:10:40

you trade these, they're going to create short

1:10:42

term. interest and income and then you know, how

1:10:44

much work do you have to do? If

1:10:46

you're going to minimize your risk on it, you

1:10:48

have to actually have less return opportunity, which

1:10:50

means you got to spread out a lot of

1:10:52

different options. And then how many of those

1:10:54

do you have to place to make a decent

1:10:56

return at the end of the day, get

1:10:58

50 % of a tax? It's a great grocery

1:11:00

store model, really. It's like, I got to sell

1:11:02

billions in volume to make it. Here's

1:11:04

what I think. I like what Warren Buffett

1:11:06

says, like, what does cash do? It gives me

1:11:08

options tomorrow. I think there's a big misconception

1:11:10

between buying the dip and being

1:11:12

able to take opportunistic advantage or dollar,

1:11:14

I'm sorry, dollar cost averaging. A lot

1:11:16

of people confuse that too. It's like,

1:11:19

well, I'm buying the dip. No, you're

1:11:21

dollar cost averaging. Buying the dip is

1:11:23

actually having accessible liquidity that you can

1:11:25

take and move in in a seismic

1:11:27

move when there's an opportunity to buy.

1:11:29

Most people don't have that. And they

1:11:31

never will. But they say, well, buy

1:11:33

the dip. No, you're just, that's not

1:11:36

the same as dollar cost averaging. You've

1:11:38

got to be able to know when to have

1:11:40

something off the table so that you can have

1:11:42

those. And there's two different tanks. People don't want

1:11:44

safety because it doesn't pay you enough because they

1:11:46

look at what returns. And I see this all

1:11:48

the time. It's like, hey, I can make this

1:11:50

interest in the market. That's not interest. That's

1:11:53

rate of return and actual return

1:11:55

and average returns will be very different,

1:11:57

secrets returns, all these complexities people

1:11:59

don't understand. I do believe

1:12:01

in the diversification, but it's a little bit

1:12:03

different. I like adding in cash, but

1:12:05

I like adding in cash with upside. I

1:12:08

like things that have indexed opportunities. So

1:12:10

it's a cash equivalent, something that might be

1:12:12

structured, but you can get market rate

1:12:14

return. So if the market goes down, you

1:12:16

don't lose, but if you do, you

1:12:18

could have 100 % potentially of the upside

1:12:20

of the market. There's given takes

1:12:22

on all that, but there are so many things

1:12:24

out there. You see this is bad. This is

1:12:26

good. No, there's no such thing as

1:12:28

good. There's no such thing as bad unless

1:12:30

it's fraudulent. That's a different story. Having

1:12:33

more of different things that could

1:12:35

get exposed to different things. Most people

1:12:37

have all their money in basically

1:12:39

three things. Equity investments, whether they're tradable

1:12:41

or not, or private equity. Fixed

1:12:44

income and cash. That

1:12:46

is not the only place to play. Some

1:12:48

of the calmest people in this world

1:12:50

have pensions. It's controversial. There's annuity. There's

1:12:53

life insurance. There's structured products. There's private equity.

1:12:55

There's cash. There's investments. And all of

1:12:57

those things are like clubs you can

1:12:59

take off the rack to play your golf

1:13:01

game. I don't play with just a

1:13:03

driver. I don't play with just a

1:13:05

putter. I don't play with just a pitching

1:13:07

wedge. There may be a club in

1:13:09

there I use once every summer when

1:13:12

I'm playing golf. But when I need it,

1:13:14

when I'm in that really tight lie, I'm

1:13:16

glad I've got it in the bag.

1:13:19

And that's where you've got to figure

1:13:21

out on the driving range what the

1:13:23

appropriate swing for you is. then

1:13:25

go to the club rack and add those things

1:13:27

in. One final question for each of you, and

1:13:29

then we'll wrap it up here. And the final

1:13:31

question, we'll keep it short and sweet. If

1:13:33

you had to put all your money in one

1:13:35

asset allocation bucket right now, given what's going on in

1:13:38

the world, where would it be? What do you

1:13:40

think, Megan? Oh, God. You

1:13:42

came back. You see what all the things you missed? I'm

1:13:45

so, I so love

1:13:47

real estate, but I

1:13:49

would probably say, international

1:13:51

right now. I mean, most of

1:13:53

my portfolios between emerging and developed

1:13:55

are about 20 % international. But

1:13:57

I really like the managers that

1:13:59

we're invested in. And I do

1:14:01

think as the world shifts, I

1:14:04

think we want to see other economies do well.

1:14:06

So that's where I would say right now, that

1:14:08

or cash. Okay. Yeah, I like

1:14:10

cash too. Go ahead, Doug. What's your speed

1:14:12

round decision? Play in the fifth. There

1:14:14

is no one thing. Honestly,

1:14:17

if I were to look at What are

1:14:19

the benefits? If I want return, but

1:14:22

I want safety, but you

1:14:24

know, you like real estate, I

1:14:26

like real estate, but it's illiquid. I

1:14:28

mean, I know people have gone

1:14:30

bankrupt multiple times investing in real estate.

1:14:32

If I had to say, and

1:14:34

this is a real controversial take, one

1:14:36

place to put my money where

1:14:38

I could get tax efficiency, liquidity upside

1:14:40

down, it'd probably be a properly

1:14:42

funded cash value life insurance policy. And

1:14:44

I know people like, no. Well,

1:14:47

yeah, well, 95 % of them aren't properly funded,

1:14:49

and that's the problem, and they're not the

1:14:51

right people. But if I'm gonna look at, okay,

1:14:53

you give me one place to put it,

1:14:55

I wanna be able to get to the money

1:14:57

if I need it, I want tax efficiency,

1:14:59

I wanna road that, I want upside not downside

1:15:01

indexing, and if something happens to me, my

1:15:03

family's taken care of, it'd probably be

1:15:05

that. But again, you're telling me to pick

1:15:07

one thing. I like it, it's not what

1:15:09

I would do if you were sitting down

1:15:11

with me and say, we should do that

1:15:13

as the one stop solution, because we're talking

1:15:15

about go to the driving range, then go

1:15:17

to the club rack. But

1:15:19

the problem is there's pros and cons of every

1:15:21

club you put in your bag. So which

1:15:24

one has all of the most benefits on that?

1:15:26

Probably that if it's funded right, which is

1:15:28

why bank owned life insurance. That's where banks put

1:15:30

their money. They get it. They want liquidity,

1:15:32

want to be able to lend it out. But

1:15:35

as I said, there's a controversial take there

1:15:37

because you're asking a question that I would

1:15:39

never respond to and there is no perfect

1:15:41

choice. Well that's why we're asking it because

1:15:43

we know there's context around everything and there's

1:15:45

disclaimers around everything and we have a bunch

1:15:47

of two handed economists on the show today

1:15:49

so you know on the one hand on

1:15:51

the other hand i get it like that's

1:15:53

what we do for a living but i

1:15:55

just ask the question because i just want

1:15:57

to get people's my answer is just what

1:16:00

makes a cash short term treasuries. I love

1:16:02

gold, but gold's kind of taken a little

1:16:04

bit of a ride. You know, I love

1:16:06

international value, but if we go down, it's

1:16:08

going to take them down. So I'm sitting

1:16:10

on the fence here too, but there's nothing

1:16:12

wrong with getting four and a quarter a

1:16:14

year with virtually no risk, but you know,

1:16:16

you miss out on opportunities. So what's the

1:16:18

agreement on all that? They're all cash equivalents.

1:16:20

That's the key. I put it in cash

1:16:22

equivalents with the most flexibility. All

1:16:24

right. Well, Megan, let's wrap it up here. Final thoughts, where

1:16:26

can people find more about you? Diversification

1:16:29

has been very, very helpful through

1:16:31

2025 so far, so stick to

1:16:33

your allocation targets and let the

1:16:35

uncertainty play out. You can find

1:16:37

me and my book, All the

1:16:39

President's Money at allthepresidentsmoney.com and check

1:16:42

me out on C -SPAN. You

1:16:44

can see me on The Presidency,

1:16:46

which is my lecture at the

1:16:48

Gerald Ford Presidential Museum from back

1:16:50

in February. Kirk, thanks for having me on.

1:16:53

Yeah, thanks for coming on, Megan. Doug, final thoughts

1:16:55

from you. My final thoughts are flexibility. That's

1:16:57

the key thing you've got to be right now.

1:16:59

Nobody has a crystal ball. And

1:17:01

if they did have the crystal ball,

1:17:03

using the crystal ball would be the

1:17:05

worst thing they could do. Selling it

1:17:07

would be better. That's it. If you

1:17:09

could sell that, I'd replicate it. So

1:17:11

you need the flexibility. And therefore, having

1:17:13

something that Warren Buffett says gives you

1:17:15

the opportunity to make choices tomorrow is

1:17:17

the best place for you to be

1:17:20

right now. And that's going to mean

1:17:22

having a full bag of options, clubs.

1:17:24

all different clubs. Think outside the box.

1:17:26

Don't just follow the canned advice out

1:17:28

there. Most of the people listening don't

1:17:30

have ordinary income. Don't follow ordinary advice.

1:17:32

You need something for you. And

1:17:34

that, by the way, is going to be a

1:17:36

translation for me on what we do. I

1:17:38

am a president and founder of Mergent

1:17:41

College Advisors. We don't just do

1:17:43

college planning. We are financial wealth

1:17:45

planning first. I've done a number of

1:17:47

webinars recently. And you know what's been the take

1:17:49

on all of this? The messaging that's been well received.

1:17:52

what we're talking about is different than

1:17:54

everybody else. Why? Because we're talking about

1:17:56

the people who are trying to pay

1:17:58

for college who have money, who have

1:18:00

assets. Guess who's forgotten out there? There

1:18:02

are systems for people that can't afford

1:18:04

college, there are colleges that'll pay for

1:18:06

everything. And there is certainly, the

1:18:08

billionaires out there that they would never pay,

1:18:10

but most of the people that make a great

1:18:13

income, people that make several hundred

1:18:15

thousand dollars up to a couple million,

1:18:17

they are getting screwed. And

1:18:19

the reality is, When you start talking

1:18:21

two to three kids looking for

1:18:23

an expensive and nice college to go

1:18:25

to, you're talking the potential of

1:18:27

fleecing yourself of millions of dollars long

1:18:29

-term in wealth. That hurts because if

1:18:32

you make a good income, you

1:18:34

probably have a higher lifestyle, you've

1:18:36

got a lot of impact, and you've

1:18:38

probably got kids that are probably high achievers

1:18:40

that are looking at places that are

1:18:42

going to cost more than you would like

1:18:44

to pay. And it's going to be

1:18:46

more than you'd like to pay. So figure

1:18:48

out how to protect yourself. go to

1:18:51

MergentCollegeAdvisors.com, M -E -R -G -E -N -T, M -E -R -G -E

1:18:53

-N -T, CollegeAdvisors.com and start getting yourself educated

1:18:55

on how you can have a plan that

1:18:57

benefits the position you're in. Well, thanks,

1:18:59

Doug. Thank you both for joining us, and

1:19:01

that's the show for this week. Thank

1:19:03

you again for joining us on the Money

1:19:05

Tree Investing Podcast. My name is Kirk

1:19:07

Chisholm, Wealth Manager of Innovative Advisory Group. We

1:19:10

don't just manage your wealth, we make

1:19:12

your life better. You can find more about

1:19:14

me at InnovativeWealth.com, and of course, you

1:19:16

can find me every week or in the

1:19:18

show. Please remember to subscribe to the

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1:19:27

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1:19:42

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1:19:48

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1:19:54

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1:19:57

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1:19:59

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1:20:01

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1:20:03

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1:20:05

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1:20:08

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1:20:10

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1:20:12

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