In this episode of The Market Call Show, I discuss a practical strategy for investors seeking a rising income stream, particularly in the face of inflation and increasing retirement expenses. I outline a dividend growth approach that combines consistent income with long-term capital appreciation, making it a core strategy for retirement portfolios.

I explain how to identify and select a "winning universe" of stocks, emphasizing the importance of companies with strong fundamentals, reliable earnings, and a history of steadily increasing dividends. The process includes filtering stocks based on criteria like liquidity, a 10-year track record, and consistent dividend growth. This narrows the focus to high-quality companies that can provide stable and growing returns.

Portfolio construction is another key element. I share how to build and manage a diversified portfolio by limiting sector and industry concentrations, maintaining balanced position sizes, and setting guidelines for rebalancing. I also discuss how to evaluate stocks continuously, using both fundamental and quantitative rankings to guide investment decisions.

This approach is designed for long-term investors aiming for reliability rather than speculative gains. I highlight the benefits of blending this core strategy with other satellite investments, such as bonds or private real estate, to enhance returns and reduce risks. Whether you're retired or planning for the future, this strategy can serve as a foundation for a resilient and income-generating portfolio.

Listen in for actionable insights and tips to build your financial future.

SHOW HIGHLIGHTS

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

The first is you need to choose winning a winning group of stocks. You need to choose a winning group of stocks that have a successful dividends track record. So you got to get that universe, right? And that's crucial. So what I like to do is I like to start off with the S&P1500. The S&P1500 includes large companies, mid cap companies, as well as small cap companies, and they're all in the United States. And I like to filter out from that group companies that have excessively high yields because companies that have really high yields, it's generally unsustainable. I want to make sure that the dividends that are there are well supported by earnings as well as the company fundamentals and that they have the ability to provide a competitive advantage. So the numbers are basically showing us that these companies have a strong business and a competitive advantage. So I want to explain a little bit more about, like, establishing the universe, if you will.the other thing I like to look at is, I want to look at the daily dollar volume and eliminate those stocks that are really illiquid.

And now it's for the best part of the universe selection.I want to exclude stocks that are not raising their dividends. So I'm looking for companies that are raising their dividends every year and they haven't cut their dividend in the most recent four quarters. So in the last year, they haven't cut their dividend.

So five analysts are covering it. You still have a big universe of companies that are in a smaller market caps. As well as the mid cap and the large cap. So why do you care about whether or not Wall Street is looking at these companies? Well, the first thing is there's a lot of value in actually assessing and analyzing the change in what's happening with analyst expectations because stock returns have high correlation to these changes.

How profitable are they? What is the return on capital? We like companies that are capital efficient. are they growing their sales and their earnings? And to what extent are they really printing good numbers there? the other thing I like to look at is, you know, there's just so many different things, but I mentioned the sentiment aspect about what the analysts are viewing, how they're viewing the company, but also we want to actually look at just the profitability, the quality, the valuation.

So those three things can really help you. to have better returns than sticking your money under the mattress. And, and also, better returns are more likely than you would get in bonds, by a significant margin. Okay, so once we've done that, you know, we've done the fundamental aspects and looked at all the quantitative methods.

You want to own those stocks individually rather than going out and buying some package product. This gives you a lot more ability to home in on exactly what you need. So once you've, you know, invested in these stocks, it's not just set it and forget it, it's an ongoing process. So you want to allow some drift with these stocks.

Are they not improving relative to the whole basket? And typically, if you look at the whole universe, we're typically focusing capital in the top quartile. of companies in there,in the universe. And if the companies fall out, maybe falling into the bottom quartile, typically they're going to be, removed from the portfolio.

So, so those are the main reasons why you pull stocks out.this, you know, and you want to just do this continually. So there's really basically two processes. There's what's called reconstitution, which is basically when we say, okay, what does the universe look like? And then what are the rankings right now?

It's a really simple concept that is very effective. So by adhering to these rules, the portfolio remains robust and avoids over concentration in one sector or industry, right? Because we have those constraints and is providing steady, reliable, Income and returns over time relative to more speculative investment strategies.

Okay. So that's just, you know, something to understand. So, The performance has shown to be very competitive and it's generating what we're looking for, a rising stream of income. So you want to choose the best stocks and let go of the rest. That's really the key on this. So historically this, again, this portfolio shows moderate turnover.

So just overall, this is a big. bedrock. I consider it a bedrock strategy for people who are retired. it adds for stability. and one of the things you can do with this is you can blend in other portfolios around it as satellite positions. For example, you can have high quality municipal bonds to save on taxes and that could give you a different return stream and more conservative. same with corporate bonds if that makes sense for you and your tax bracket or the type of account that you have. private real estate can be very good. in this, and, you know, that is something to really consider, depending on, which areas look the most attractive there, but that can enhance your income and mitigate risk during market downturns.Because again, this is a stock portfolio, so it's going to fluctuate. It generally has historically fluctuated less than the overall market. Most people the S& P 500 type companies, and those stocks have fluctuated more, which makes sense because these are lower duration stocks that are paying you dividends now,And then, you know, owning around 50 stocks offers diversification across those industries and it can help you counter that inflation and the tax problem that people have over time, over retirees lifetime, which could be 20, 30 years.

So, that's pretty much it, that I had for you today. I hope you've gotten some ideas, insights, maybe on how to incorporate a dividend investing strategy. Thank you. for yourself, even for people who aren't retired. A portion of your portfolio in this type of strategy is a great compliment to more aggressive, fast growing type company strategies.

In this episode of the Market Call Show, I dive into the transformative role of artificial intelligence in wealth management. Together, we’ll explore how AI is reshaping portfolio management, moving beyond a mere tool to become a revolutionary force in investment strategies. Drawing on groundbreaking insights from Brooklyn Investment Group’s latest white paper, we’ll uncover how AI enables wealth managers to scale their operations, cut time commitments, and reduce costs, all while enhancing the quality of client service.

AI's ability to automate complex tasks like portfolio rebalancing allows managers to oversee hundreds of accounts more accurately and efficiently. AI can cut a portfolio manager’s time spent on routine tasks by up to 82% and reduce computational costs by as much as 85%.

Join me as we discuss why adopting AI-driven strategies isn’t just beneficial—it’s essential for staying competitive in today’s fast-paced investment world. Whether you're a wealth manager or someone interested in the future of investing, this episode offers practical insights into how AI is setting new standards in wealth management, making it possible to serve clients with precision and speed.

SHOW HIGHLIGHTS

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

This research provides what I consider eye-opening data on how generative artificial intelligence is really able to help wealth managers scale operations, save time and reduce costs and also produce better results for clients. So I wanted to kind of break this down, because this is not an area that is optional anymore. This is something that is actually mandatory now in order to do a very good job for clients. So the first part I want to talk about is just the concept of offering personalized investments, very personalized investment management, more so than could have been done in the past, and being able to do it at scale, doing a lot of it. So one of the biggest takeaways that I've been reading in a lot of different research is that making personalized investments more accessible is really important. Making personalized investments more accessible is really important. So, people you know, historically, separate account management or direct indexing with tax loss harvesting, it was really only reserved for high net worth clients because it was so resource intensive. It took a lot of resources to get the job done, both with technology and with people. But now with AI, wealth managers can really scale personalization to a wider range of clients without there being like a proportional increase in the workload. This is really good news for a lot of investors. So imagine if you're a wealth manager that you can handle hundreds of separate accounts, each with a unique profile. The artificial intelligence can step into that automation and make many of those operational tasks a lot easier to do and much more accurate, freeing up a lot of time for portfolio managers. And this means that, instead of being restricted to a smaller group of clients, wealth managers can actually have more time and they can broaden their significant reach to more people and give you more individual attention. That's a big important takeaway here.

The other thing I took away from my research recently is that the time and the cost efficiency is really going to be improved. So I want to talk a little bit about numbers. According to that research report that Brooklyn Investment Group put out, integrating artificial intelligence into portfolio monitoring and specifically can cut down on the portfolio manager's time by up to 82%. That's not just a little gain in efficiency, it's literally a game changer. And it's not just the time saving, it's also that there's potentially 63 to 85% reduction in the computational costs.

You know, I've been in this business for a long time close to 30 years and actually over 30 years now and you know when we first started rebalancing portfolios, it was very intense and it's just gotten better and better. But now we've really had some breakthroughs on reducing the computational costs, so we're able to get much more precision and speed. So this is achieved by using that artificial intelligence and looking at accounts that need to be rebalancing. So a big part of our job is to make sure that all of our clients have their portfolios rebalanced and we need to know if something needs to be changed. So we're spending our time more on what we should be investing in and why we should be investing in a certain way, but the actual execution of making sure that we're aligned with that strategy is really a portfolio monitoring task, so we can allocate more resources truly on what's more important, which is understanding what we want to be investing and why we want to be investing in certain investments, and more time discussing with clients issues and customizing portfolios, and less time computating. So the other thing that I have taken away is that we've got a smarter portfolio monitoring, really algorithm. So the human brain can do a lot of things and we can really capture exceptions, but we can only do a certain number of things at a time, whereas in the technology world, we can give it guidelines and guardrails and rules to help us make sure that we are being consistent, which is really important in delivering consistent results.

So how does artificial intelligent monitoring work? Well, basically, we have models that can predict when an account needs attention, whether it's deploying access to cash, if it needs more cash or less cash, or if the management of risk is an important element, what's happening with risk and is there some change in the risk relative to how we want it to be to be, whether or not there's an ability and an opportunity to harvest tax losses, to lower the tax bills. The system achieves nearly a perfect recall, meaning that there's almost no important rebalancing opportunity that is missed because these screens are looking at everything. So this predictive accuracy it really ensures that we, as wealth managers, investment managers we can trust our systems and identify the right moments for action without having to sift through every portfolio one by one. That's crucial when you're managing a large number of accounts. So I want to talk about another takeaway that's really important.

Advanced AI techniques now are allowing us to do even more, so the technology is really fascinating. If you use large language models, these abilities really give you a performance that is much more extensive when we train the data, and so we can train the data based on how we trade and what certain things that we really want to be prioritized, and this can help identify even more effectively things that need to be done. And there's different, I guess, methodologies. One is zero-shot or multi-shot learning approaches and, in simple terms, zero shot learning allows artificial intelligence to make decisions with little or no context, which is not always what we want, whereas multi-shot learning allows us to use past examples to further enhance performance, and these techniques ensure that your predictions are more accurate and adaptable to what's happening in the portfolio and in the markets. So, and always, we have decision support. It's always ultimately human-based, but it's just a tool to help us to identify things and then make the ultimate decision as to what needs to happen.

As we all know, even AI, you know it's wise, but you have to trust, but verify every approach. So you want to have the human in the loop, which we do, and we want to ensure that these guardrails are in place to oversee every aspect and to make sure that things are flagged for trading only and when there's certain breaches or certain limits that we are looking at and it's automatically marked for human review. So each one must be reviewed, and that's a really important part of this. So the combination of AI's computational power and human judgment makes for a robust system that's efficient and reliable. That, by the way, is also a big part of how we manage money itself. So there's a lot of human judgment about, for example, the valuation of a stock or what may be happening with interest rates, and that can be overlaid on top of quantitative analysis. That helps to make sure that you're on track and you can use it as guardrails. It gives you much more consistency in your decision making Another, I guess, takeaway that I've gotten from research is that there's challenges and solutions, so let me explain a little bit.

Like any innovation that you have when you use AI and portfolio management, it isn't without challenges. When you use AI and portfolio management, it isn't without challenges. One issue that this paper mentioned, that kind of brings us to light, is that sometimes you can struggle with complex conditions, such as comparing small percentage values, but there are solutions to this. To simplify, you can convert these values into basis points, you can make calculations more straightforward, and simplifying is always a good idea. So I forget who actually said it. It might have been Einstein, but you always want to have the simplest solution that is the most effective. You don't want to have something overly complex, because the more something that is complex, the harder it is, the less reliable it is, the less robust it is complex. The harder it is, the less reliable it is, the less robust it is.

So the research that I've been looking at really is a balance between precision and recall, so you want to note that it's better to have false positives than to risk missing a necessary trade, something that you need to do. So that's why you need human review. So you want to be more stringent and it's better to have something tagged that is a false positive, meaning that it looks like it might be something you need to do, but you don't need to do it, so you can say, no, we don't want to have that, because that makes sure you don't want to miss something that's really important. You don't want to miss training opportunities that could impact the portfolio's performance. So, as I've been looking at this, you know this continuing improvement is really kind of the future and the future steps.

So what's next? I mean, I think there's evaluation of new models, there's new AI type algorithms that are coming out and they're always going to be part of the finance world from here on out. We just have to get used to that because truly, it makes you smarter. Actually, it just makes you more efficient, and the human ingenuity and having that overlay with human touch is so important. But we want to have these algorithms and we want to make sure these algorithms are better and better. That's really all I have. I want to just to wrap it up AI really isn't just a buzzword. It's a really a practical, powerful tool for wealth managers. It allows us to scale our operations, save a lot of time, cut costs, provide better service for you, the client. And, like I said, the future of portfolio management is going to have AI in it, whether you like it or not, but it's always best to be smarter and faster and more efficient with human judgment, because truly nothing will replace human beings in the end, and our clients are not a number, and we want to have that ability to be as customizable and to offer the best solutions that we can at the lowest price and have the best experience we possibly can, and technology and AI really is helping us in that realm.

Okay, so that's it for now. That's the Market Call Show for this round. If you've enjoyed today's episode, don't forget to subscribe. Leave us a review. I'm Louis Llanes. I'll catch up with you next time, where I'll dive into more insights to stay ahead of the investment management world. I hope you have a great day. Talk to you later.

Today, on the Market Call Show, we dive into smarter tech investing, I paint a vivid picture of the current tech sector, likening it to overfished rivers where investors crowd around large-cap stocks, inflating prices and squeezing out value.

We come up with a fresh approach: focusing on smaller tech companies and early-stage private equity to achieve better diversification and risk reduction.

We explore the valuation landscape as of October 22, 2024, shedding light on the significance of return on invested capital for predicting returns. We reveal that only a small fraction of U.S. tech companies achieve over 10% in return on invested capital, while high cash flow ratios make even profitable companies seem overvalued.

SHOW HIGHLIGHTS

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

That's what I'm feeling the tech sector feels like. The tech sector feels real similar, because there's tons of money that has been chasing these tech stocks and in the market where the large cap tech stocks dominate and the IPO market has dried up, it makes more sense to seek opportunities in less obvious places, in my opinion, like select small tech companies and early stage private equity. Instead of putting all your money into well known names that dominate the large portion of the S&P 500 that everybody's talking about, it's more logical to look for less crowded areas. In my opinion, there's way too much money chasing the same indexes and that's also pushing up those tech stocks, because the tech stocks represent almost a third or, depending on how you categorize tech stocks, it represents over a third even of the S&P 500. So here's the valuation picture today, and today is October 22nd 2024.

To put things in perspective, I ran some numbers on the US technology sector using the GIX standards. The GIX is a it's basically it's a standard for categorizing tech stocks, or really all the stocks. Now there's 638 companies that are in the technology sector in the United States, but only 21.2% have a return on invested capital above 10%. So I like to buy companies that are profitable, that have good returns on capital, because that is a big determinant of expected returns. So most companies in the tech sector right now have a negative return on invested capital.

For those with a reasonably good return on invested capital, the median price to cash flow ratio is 25.26 and the median return on invested capital is 19 in just in the tech sector. So these companies trade at a median price to book ratio of 5.11. So, based on using a multi-stage fair value calculation, which a lot of analysts would do for companies that are growing fast and then they start slowing their growth and then go into more of a steady state, if you just use reasonable expectations for companies in the tech sector, you find out that you generally rarely would be in a situation where your price to cash flow ratio is above 20. Yet the median right now is 25. So for even the most profitable tech companies they're very expensive. So, if you know, take a look at them in terms of percentile. You'll see that. You know the vast majority of the tech companies are really below the line and a lot of them are significantly below the line, like at the 10th percentile in return on invested capital. The average return on capital invested capital is like negative 27% negative 27% and even when you go to the most profitable, if you look at the decile, the top 10% of return on invested capital in the tech sector, the average return on capital is 21%. So you know, I mean we're in a situation. My main point, I guess, is that we're expensive right now.

So finding opportunity and better rivers is really what we want to do. We want to look at areas where there's a bigger return potential and maybe smaller companies are a better place to look, companies that have higher returns on capital and strong business models with smaller allocations to maybe early stage private equity, things like that, because in the index world today it's overcrowded, like we talked about. And, to make matters worse, a lot of the brokerage firms and a lot of advisors are indexing right now and a lot of people are offering a lot of like. Investment advisors are offering direct indexing, where you're able to buy the stocks directly in an index, and many RIAs or registered investment advisors they're adopting this. Registered investment advisors, they're adopting this.

I see a lot of advisors who are, you know, maybe not quite as experienced, out there looking at how well indexing has done recently and kind of extrapolating that's how indexes are gonna do in the future and they're making that assumption. So they're choosing to go this way and this is really in their minds makes them feel like, hey, indexing is a no brainer and I'm not anti-indexing and I think a proportion of portfolios could be indexed. In fact, we have strategies that are a core plus, where there's some indexing and then some active. But if I look at things kind of more the investment landscape, more from a rational standpoint in terms of expected return based on fundamentals, I think you have to kind of be prepared for either a melt-up or a melt-down situation, and you hear this a lot. There's certain research firms that will talk about this melt-up concept where you have stocks running up really rapidly because we're printing money and there's money is trying to find a place to go and that's probably gonna go into stocks, and then other people say, hey, this is just the opposite. Inflation's going to get high, interest rates are going to go up and then we can have like a meltdown. So the truth of the matter is we don't know exactly which direction this is going to go, and that the best way to invest really is to have more of a bottom-up approach, where you're looking at individual businesses based on fundamentals and, like I, always talk about the quality, et cetera, et cetera. So I want to be prepared for either scenario and that means just going bottom up. Now this type of environment is kind of more ripe for volatility spikes. In fact, I've heard some analysts are expecting volatility to increase after the election. So, but volatility spikes can catch investors off guard.

In my view, it's prudent to incorporate active equity management with indexes like the core plus year bound that invests in both indexing as well as active strategies that concentrate their holdings in the active strategies. Concentrate their holdings on those stocks that have the best fundamentals and I think if investors do that, it puts you in a better position. If the market heats up, then you'll have a sensible allocation to the indexes and then you also have a fundamental approach and that blend. I would expect to have better risk-adjusted returns over time. This approach is really often what I tend to take with high net worth investors. In the active equity portion of the portfolio, I like to target companies with strong fundamentals, like I mentioned, and a real chance to outperform the index, and you don't want to have too many stocks in there because you want to have some level of concentration in that portion, and it's a great example of diversification. You could go all into one strategy, but why limit yourself? You're better off having a blend, in my opinion.

Now, all the buzz right now in tech has to do with artificial intelligence, and to me that kind of echoes the dot-com bubble, and I know that history rhymes and it's not always exactly the same, but there are some corollaries. Artificial intelligence is heavily and it's clearly going to change the world. That we know. That's an easy conclusion to come to. But what's harder to know is which companies are going to be the ones who are going to be the winners, which will thrive and which will literally disappear. We have to make some educated guesses and apply risk management when dealing with artificial intelligence. So if you kind of look at the dot-com bubble, that's exactly what we saw. We knew the internet was going to be transforming everything, and here we are looking back and we say, yeah, that's exactly what happened. Yet most of those companies that had the huge valuations ended up collapsing over time and a few did very well, but overall the business became more efficient across the economy. So that increase in efficiency using the Internet boosted the entire economy in a lot of different ways and it led to a lot of new industries. And I think that's likely what's going to happen with artificial intelligence. I think AI will follow a similar path.

I have charted what it looks like with the market cap as a percentage of the S&P 500. And if you look at the kind of the graph of that percentage, so basically how much concentration does tech represent in the S&P 500,? And we're near the peaks that we saw at the dot-com era. So we're not quite up there as we were. We pulled back a little bit from there, but we're pretty close. So in history you could make an argument that we're, you know, we have to be somewhat careful, you would think. So small tech companies on the positive side that meet my criteria, I think is a good way to go.

I like to invest in these smaller companies that exhibit certain characteristics and I modify them somewhat for the smaller companies. But I really am looking at three categories and the first category is sentiment, which involves the shift in the brokerage firm's recommendations, the shift in the earnings. You know how well we want to see you know the estimates moving up. The company is doing better. The revenue is moving higher. There's growth in the smaller companies. We're looking for them to be moving up the market cap rank, moving from a smaller company to a larger company.

The second category I like to focus in, obviously, is quality, which includes how profitable they are. What are the returns? What are the return on invested capital and the strength of their balance sheet? And, lastly, I like to look at the valuation assessing the company's metrics compared to free cash flow, asset sales and earnings per share. You know how much are you paying for those metrics of cash flow and assets. So there's a few companies out there right now that we own. Now, in investing in these strategies, it's definitely more dynamic, and so companies can fall in and out depending on how they rank on these issues, because we're trying to focus our capital in those companies that are doing well. So there are a few companies.

I don't want to necessarily mention tickers, because these are smaller companies and I don't really want to have that out there right now, but that is, and so I like to have some money there and another way to fish in kind of less crowded streams is to you know you don't want to, instead of focusing where everybody knows I'm looking for under a great like mid caps and private equity.

So I'm underweighted large cap tech names right now, and these are the names that mostly everybody knows about. They're kind of priced to perfection. So I'd like to think I'd like to hear more about what your thoughts are about this. I am bullish on technology, I'm bullish on a, I'm bullish on the United States and I'm bullish on our overall future. I think it's just a matter of saying what price, or I should say asking ourselves what price are we paying for these investments and does it make sense? So that's all for now. I hope you got some value out of this. Feel free to contact us if you have any questions about any type of investment strategies. I'm Luis Llanos, market Call Show signing out. Have a great day.

Outro Sequence

Today, on the Market Call Show, we're uncovering three powerful yet underutilized strategies that could revolutionize your retirement savings approach.

We dive deep into the world of the mega backdoor Roth IRA, revealing how high-income earners can bypass traditional contribution limits and potentially save thousands in taxes over time.

Next, we explore the often-overlooked realm of self-directed investment options within 401(k) plans. Using examples from industry giants like Fidelity and Charles Schwab, we illustrate how these tools can dramatically expand your investment choices and potentially boost returns.

Drawing from years of experience in wealth management, I share insights on the critical importance of asset location. We discuss how strategic placement of investments across various account types can significantly reduce your tax burden and enhance overall portfolio performance.

As we navigate through these complex strategies, we emphasize the value of holistic financial planning. Whether you're a seasoned investor or just starting to take control of your retirement savings, these techniques offer a roadmap that focuses on wealth accumulation.

SHOW HIGHLIGHTS

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

Hi there and welcome to the Market Call Show. This is Louis Llanes. Today, I'm going to ask you a question: Are you leaving money on the table? Are you leaving money on the table when it comes to your retirement accounts? This is one of the things that I've found to be very common. A lot of people don't understand some of the strategies they could be doing that could increase their wealth, lower their tax bill and, overall, make their financial plans much better, in particular, for those people who have high income and are really in a situation where they're trying to maximize their retirement accounts.

So let me just kind of set the stage about what I'm talking about here. There's really three less known strategies with your retirement accounts that can significantly help you build more wealth, create more income for longer and save on taxes. And basically what's happening is most people who have built capital in their 401k and now it's grown to a significant amount of their net worth, they really become to rely and will need to rely on these funds for future income.

So typically these people are high income earners and they have high income taxes, and one of the things that's concerning now is many people are concerned that taxes could increase, especially since the sunset rules may be ending, you know, so that we may see that the tax rates will be bumped up automatically. And also inflation has been raising income brackets for a lot of people. So this is not talked a lot about, but it's really happening and I see it every day when we're working with clients where their incomes are going higher because of inflation.

Just to stay even, incomes have to go up, but the tax rate brackets stay the same, so the cutoffs, the amount of income that you need for each tax bracket, doesn't really change. So in essence, everybody's tax rates go up because as you make more income, the tax rates go up, so that that creep in an income tax rate increase is also affecting many people. We have a lot of uncertainty in capital gains tax and income taxes. Next year there's a lot of election uncertainty and that's also leading me to want to get this out there and hopefully this can help you.

You know, when you have money in your retirement account, one of the basic things that I'm sure you understand. Most people do understand that all of the money that you take out from your retirement accounts when you retire is taxable as income. It's taxed to your income tax bracket. That bracket may be higher than the capital gains tax rate, depending on how things turn out.

So I want to talk about these three strategies. You may have heard of them, you may not have, but I want to make sure that we cover them because they can mean a lot of money in your pocket.

The first one some people call it the mega backdoor Roth IRA. This is an advanced retirement strategy. It allows you, as an income earner, to contribute substantial amount of after-tax dollars into a Roth IRA, even if you exceed the typical income limits for a Roth contribution. So here's a breakdown of how this concept works and its pros and cons.

The first thing is a 401k contribution has different types. You can contribute into a 401k into three different ways. First is pre-tax or traditional contributions. The second is going to be a Roth or after-tax contribution. And then there's after-tax. It's different from Roth. It's not common in all plans, so you have to check to see if in your plan you can do an after-tax contribution as well. Most big plans that we see, or sizable plans, do allow for this, so you'll have to check to see if that is available to you.

So the second thing is the mega backdoor. Roth has a few steps that you have to take in order to maximize your contributions and get the most tax benefit. The first step is you max out your regular 401k contributions. So, for example, in 2024, this is $23,000 per year if you're under 50. If you're over 50, it's $30,000. And your employee contributions, whether pre-tax or Roth, that is your maximum contribution you can put in.

But the second step is really important. You can contribute additional after-tax dollars in your plan. So some employers allow for after-tax contributions above that standard $23,000 or $30,000 limit. The overall 401k contribution limit in 2024 is $66,000. That's if you sum them up and that's if you're under 50. If you're over 50, it's $73,500 in 2024. So this includes all sources your employee contribution, your employer match and any after-tax contributions.

So a lot of people think that limit is only $23,000 to $30,000. For many plans, if you add it up to the total contribution limit, including after-tax contributions, you could get that number to be significantly more. In fact it's over double the amount. So that's important to understand and over time you can significantly increase your tax savings.

So now here's the other thing. The third step here that I want to talk about really is the kicker. If you perform an in-plan Roth conversion or roll the after-tax contributions into your Roth IRA, this allows these contributions and their earnings to grow tax-free.

So let's just use an example: Assume in 2024, you contributed the maximum $23,000 in pre-tax contributions to your 401k and then your employer contributed another, let's say, $10,000 in a match. That leaves you with room to contribute another $33,000 in after-tax dollars and that would give you that total of $66,000. You can then convert these after-tax contribution to a Roth or a Roth 401k and if you do that immediately, you will not have a gain problem. It's very important to understand that.

So let's talk about who can do this. First of all, the employer plan must be compatible. Not all 401k plans allow after-tax contributions but I must say many, many do. So it's important to check. Some don't offer in-plan Roth conversions, so you'll need to check with your plan to make sure they have these features. But if they do, that could be a goldmine for you.

Second is the income limit income limits. The backdoor strategy bypasses those income limits that normally restrict Roth IRA contributions. Anyone can use this strategy, regardless of your income level, as long as your 401k plan permits it. So that's a big boon because there's many high income earners who can't put money in a Roth IRA. This will allow you to get more money in a Roth IRA which is tax-free, and tax-free is a big deal, especially if tax rates go up.

So let's talk about what the advantages are. Obviously, high Roth contributions. It allows contributions far above that regular Roth IRA limit, which is only $6,500 in 2024 and $7,500 if you're over 50. So that's the first advantage. Second is it's tax-free growth. So once you convert that money to your Roth IRA, both of the contributions and future earnings growth are tax-free, and that can compound significantly over time.

Number three you bypass income restrictions, so high income earners who normally can't contribute to a Roth IRA due to income limits can use this mega backdoor Roth strategy to fund Roth accounts. Fourth, your Roth IRA advantages. Roth IRAs do not have required minimum distributions, also known as RMDs. This gives you flexibility for retirement withdrawals. Many people are stuck and they have to take those withdrawals. I look at our clients that are retired and you know, when we pull that plan up, we just know we're going to be paying taxes on those RMDs no matter what, and this gives you some flexibility so that you don't have to take those RMDs out.

So there are, however, disadvantages: First, plan limitations. Not all 401ks allow for you to have that tax contribution. You know you may not be able to use this strategy if it doesn't offer it. And second is there's tax complexity on after-tax contributions before conversion which may be subject to tax. So it's important that you do these conversions at the right time, the right amounts, so that you can avoid paying extra taxes.

Also, you have the contribution limits. You still may be limited to your overall amounts and you have to make sure that that includes your employer match. So the strategy only works for those who can afford to contribute significant amounts of after-tax dollars. So this is for high-income earners typically.

So fourth, immediate taxes on gains. Any gains on that after-tax contribution before you convert may be taxable when you roll those funds into that Roth IRA. So it's important to roll it quickly so that you don't have those gains. If you wait a long time and you have a big move up in your value, then that could be taxed. That's not good, so you want to avoid that.

So now we talked about the 2024 limits on the employer-employee. We've also talked about that. You can get a lot more money in, so this is a significant strategy. This is the first strategy I wanted to mention. If you're not doing this and you qualify for it, your plan qualifies. I'd check it out and see if that's something you want to do. So in summary, that's great for high earners and to get more money tax free.

Now I want to talk about the second strategy. This is one that we bump into a lot, so a lot of the larger plans. They allow you to do what's called a self-directed investment strategy in your 401k money. So typically, when you put money into your 401k or your retirement account, they give you a list of funds that you could choose from and they're many times rather limited and they generally are invested in just your core type of investments like large cap, mid cap, small cap, all United States stock. There might be like a Barclays global bond or maybe just a domestic Barclays bond index, and typically there's money funds or other types of secure, guaranteed return type investments that pay lower yields but have no ability and have stability in the value. In fact, a lot of times they're called stable value funds.

You might have some international developed and a lot of times you're seeing them being indexed. You might have emerging markets in there and if you're lucky you might have some real estate and gold and things like that, but that's typically not in many plans, so you have some limitations with most 401K plans. So you have some limitations with most 401k plans, but if you check in the fine print, you might have the ability to do a self-directed IRA.

Now I'm just going to mention two of the major brokerage firms that you typically see with these. Typically, if your retirement plan is at Fidelity, they have what's called a brokerage link and with a brokerage link account you basically are opening up a regular brokerage account that you can invest in a broad range of mutual funds stocks, bonds, ETFs you know, really like a brokerage account, because it is a brokerage account but it's still linked to your 401k. So it is a 401k account but you have self-control to be able to, or self-direction to be able to invest those funds in a much better way.

Now you can also use investment advisors, like we managed PCRA accounts or brokerage link accounts as well. So Charles Schwab's version of this is called a PCRA. They have some differences in how they're put together, but they're basically the same thing.

So let me tell you a little bit about how this works. In a self-directed account, when you opt into that brokerage link, for example, a portion or all of your retirement assets are moved into a self-directed brokerage account within Fidelity or Schwab, if it's a PCRA, and then you get expanded investment choices so you can now invest in, like I said, stocks, bonds, ETFs across the board. You can get much more diversification and, on the account management side, you can manage this account yourself or you can have an investment advisor or a money manager help you manage that and that you know that would really take a load off of you for the buying and selling decisions, decisions, rebalancing, and you can get your account more suitable for your particular situation.

Because, depending on what your assets are outside of the 401k you might it might be better for you to have a different allocation than is available to you. If you just did a normal 401k, if you didn't have self-directed, you wouldn't have the ability to customize and make that allocation excuse me, make that allocation right for you. So that's the big advantage. You have greater investment flexibility. You have potentially higher returns, especially if you have expertise or if you have advisors who have the expertise to help you construct a better portfolio for you. And you get better diversification because your asset classes that you can invest in the sectors the security selection is much wider.

So what's the downside to this? Well, there's more complexity. You know self-directed investments add complexity. You have to monitor and manage these investments. That's why using an investment advisor or money manager to help you can be very helpful. If you like to do it yourself, then it could be good for you as well, but it could be time consuming and require a strong understanding of the financial markets.

So if you don't have the time or inclination to do that, obviously you could use an advisor to help you with that, but it also can increase your risk. If you do it on your own and maybe you're not up to speed about what the risks are of all these investments, there's the danger that you don't do well with it because your portfolio is not managed in a way that's sound. So it's important that when you invest in individual stocks or sectors or other funds, that you know how to construct a good portfolio and it's cohesive with your financial plan.

There could be some additional fees. Some investments may have trading fees or they may have management fees that are associated with them. So you have to see what those fees are. Now when you look at the brokerage for the two I mentioned, Fidelity and Schwab, they tend to have very reasonable fees and if you do security selection correctly, you know typically there's not a commission per se on the like an explicit commission on buying stocks and bonds, and many of the exchange traded funds don't have commissions and they have very low fees. So you can really get around a lot of the fee issues.

So who should use a brokerage link? I would say it's either experienced investors who are more suitable for it. If it represents a big part of your portfolio, like if you've been putting a lot of money there away, there that becomes an important part of your plan. That could also really give you a strong case to use a brokerage link because you want to take better care of those assets. And it's also good if you have advisors that can help you seek customization so you can build a tailored portfolio that your standard employer plan just can't give you and the benefits and features are much more broad.

So how would you access a brokerage link? The first thing you'd need to do is you need to or PCRA, by the way. First thing you need to do is you need to check your plan eligibility right. Not all employers offer it. Then you would open up a brokerage link account and then you would fund, you would transfer those money and you would fund it over and then you could invest it. So that's a good way to go. Look at, look for the see if your plan has those self-directed plans, particularly with Fidelity Brokerage Link or Personal Choice Retirement Account, PCRA for Charles Schwab. Those are, those are a good thing and not underutilized benefit that you may benefit significantly from.

Okay, so now let's move on to the last strategy that I wanted to mention to you and that actually has to do with wait for it Asset location, all right. So one of the most important things to understand is that and you probably already understand this, I'm beating a dead horse, but I have to say it taxes are so important to your returns. There's lots of studies out there trying to estimate how much of your return is dragged down, pulled down by taxes, and on average, you see the number estimated to be anywhere from one to 3% of your returns. So it could be a lot and some people go well, that's not that big of a deal. Well, over time, that adds up to a lot of money.

So managing taxes is really important and in doing that, it's important to be able to have strategies. There's many different ways for managing taxes and this is not a tax strategy only podcast, so I want to talk about it in particular, with the 401k, and we've already talked about conversions, right, converting to the Roth. Now I want to talk more about asset location.

So there are certain investments that are better suited to be in a tax deferred account or tax free account, and that has to do with how much taxation those investments spin up. So if you have. You know when you look at your total portfolio, if you have a balanced portfolio that is invested properly, with good diversification, you're going to have some investments that spin off more taxes than others. For example, high dividend yield paying stocks tend to spin off more taxes because those dividends are taxed. Taxable bonds that generate interest, that will be more taxable, that will cause more taxes. Or if you have investments like, say, private credit, which is a good asset class to consider, where you can get higher yields than traditional bonds, and then you can access those in the private markets, have them in your investments and then you could put those tax free so that you're not paying taxes on all that interest. So those are just a few examples of the types of investments that you would want to or consider having located in your retirement accounts.

Now one of the most powerful things that you can do is there is technology now where you can analyze your total picture, including your investments inside your retirement accounts and outside, and make some asset allocation decisions to optimize your taxes and optimize your returns. So typically, if you combined this type of technology which allows you to look inside. For example, we as investment managers, we have access to these tools we can look inside any of these plans and see what are the options that are available. You have a list of options. Okay, what are those options? And we can look at the holdings-based analysis down to the holdings level. What does that portfolio look like if we structured it in different ways?

And if you look at that, you can really tailor your investment portfolio of your retirement accounts to your whole picture. So instead of just isolating each investment, it's better and more sound to look at the whole picture. So it gives you better tax management, gives you better integration into your total financial plan and gives you a comprehensive look. So this is probably the biggest advantage of using technology to look at that. And also, with this technology, you can also get the advisory expertise. You can also get fund selection that's more detailed and you get portfolio rebalancing.

So one of the biggest advantages to having a well-run strategy is having a system on how you're going to rebalance your investments. There are different ways to rebalance. You have time-based, where you just do it based on the calendar. You know every quarter, for example, or every year, you you know if stocks went up versus bonds and you sell off some stocks and buy some bonds or vice versa. You can do it based on time or the calendar, or you can do it based on volatility. So if you have a target allocation and it moves a certain percentage above or below what your target is, then that would be a triggering event that would cause a rebalance. There's some studies that show that that can be advantageous relative to calendar based, because it's based more on, you know, changes in the risk return profile of the overall portfolio. So having that rebalancing capability is really important.

Maybe you should take it from your tax-deferred account first as a default that's not the best way to go usually. Or it may be better for you to take a ratio income that's prorated over certain accounts and that requires full financial planning to understand what's optimal for you because everybody's different. But getting that tax and investment efficiency, getting the ongoing monitoring and rebalancing, improving your risk management that is the biggest benefit of using these types of technologies.

So I want to summarize here. These are three of the what I would consider least utilized, most important things that a lot of people can do where you're leaving money on the table with your retirement accounts. First is the contribution and conversion strategies that I mentioned. That allows you to put more money away. Perhaps that makes sense for you. The other would be self-directed either a PCRA, a brokerage link or anything like that, and utilizing expertise to get that done correctly. And then also tax location, using a holistic investment allocation that can lower your tax bill and give you longer term investment results.

So that is pretty much it for this podcast today. I guess my suggestion to you is to check these things out and see if they can work for you and if you want any assistance on that. As always, you can always reach out to us and we'd be happy to answer any questions for you as to how you can best get this done for your situation. That's all for now. Thanks for tuning in and we'll talk to you later.

Today, on the Market Call Show, we're discussing the importance of authenticity in financial planning.

Using a great Rush analogy, we look at how sequencing returns impacts the longevity of your portfolio , and we talk about strategies to navigate varied markets.

Most of us are concerned with peace of mind in retirement, and having enough to do everything we want to do, so taking a personalized approach to planning that considers both flexibility and fixed income is key to achieving the retirement we want.

SHOW HIGHLIGHTS

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

For those of you who may not know much about me, I'm Luis Llanos. I'm a Senior Vice President, wealth Management for Farther Wealth Management, so my company, wealth and Investments, recently merged with Farther, and so I'm now a shareholder of Farther and I'm the investment management committee. We managed just under $3 billion right now, and we have a wide variety of different types of clients. I'm a charter financial analyst charter smart market condition been managing money for over 25 years Gosh, it's actually close to 30 years now and so that's really a little bit about me. So I really want to dive in.

Since we're running late on time, so let me share my screen and we can go from there. Sure, let's see. All right, you should be able to see my presentation. Can you see my presentation? Anybody Not hearing from anybody? Yes, you can see my presentation. Okay, perfect, all right.

So let me just start off with a little bit of a kind of a question for you or a little story. So I was thinking about what is the biggest thing that I guess determines people's success when they are preparing for retirement and they actually do retire and they start living off their portfolio. And it got me thinking about just a common success factor that most people have, and I thought about some people that I have followed. On the right there that's a band called Rush, one of my favorite bands. They started out, you know, trying to do what all the producers told them they should do. They, you know, the producers said they should try to sound like Led Zeppelin or they should do certain things and be make your song short. And they just decided that you know, that wasn't us. And they did their own thing and they had a. They had an initial flop, trying to do what everybody else told them to do, and then they just said look, we're just going to be who we are. They made an album called 2112 and they exploded because they knew who they were and they, they were authentic as to who they are, and, of course, you know some of these other people and since we don't have a lot of time.

I won't go into all the stories, but each one of these famous people. One of the things that they determined was I'm going to be myself, I'm going to understand myself and I'm going to. I know I'm going to be making trade offs, like there's no perfect answer, but if I'm true to myself, I can live with the trade-offs and I can have a successful outcome, and that's really the you know what I wanted to talk about, because that is about the same situation that people have with retirement planning or investing in general. There's always a trade-off, trade-off between one ideal objective that you may have off, between one ideal objective that you may have and then something else may, you know, be affected because of that. You know, carl Jung said that he who looks outside dreams, but he who looks inside awakens, and that's very, very true. So I know Tom Basso is on this call and I've learned from him as a successful investor that he talks a lot about.

Hey, I need to be understanding what my situation is and I need to do what's right for me. What is right for me may not necessarily be what's right for somebody else, and every time you do that, there's going to be a trade-off, and the biggest trade-off when it comes to preparing your portfolio for retirement tends to be this desire for certainty. In other words, I want to know exactly what my income is going to be, what my return is going to be versus what my lifetime total retirement income could be and my terminating estate wealth. So the more certainty you have you know what you're going to get the less return you're going to make and therefore you're probably going to have less lifetime income and you'll probably pass on less wealth to your heirs. So that's just one example of the types of trade-offs that you have.

So I want to talk first about understanding yourself, because everything goes from goes from there. It starts with that, and I'm going to just talk about some a series of trade-offs that everybody faces when they're doing their portfolio for retirement. And then I'm going to stop for questions, and you can, you can answer. You know I can hopefully answer some of your questions, and then we'll move on to the next topic. Okay, the first one is probability-based versus safety first. So probability-based means that I'm investing in a way and taking my income from a portfolio that's diversified across a lot of different investments stocks, bonds, real estate, alternatives knowing that I'm going to have some ups and downs in that portfolio, but I'm okay doing that and my I know my return is more variable, but I'm likely to have a higher rate of return over the long run. On the other end of the spectrum is the safety first, which is I want to know contractually what I'm going to have as an income level.

That would be like pensions, annuities, lifetime income protection, holding government bonds to maturity. Basically, you are not affected by capital gains fluctuations. So those are the extremes. Most people fall somewhere in between there. So that would be your first trade off. And then the next trade off has to do with your desire for optionality or having the ability to be flexible. Like, if you really value being flexible, you want to have the ability to make changes for favorable economic conditions or any change in your situation. Then that would be one type of mindset and I tend to be more of an optionality mindset person. Other people are not that way. They like more of a commitment, a desire for some dedicated source of income. There you're really looking for some kind of a specified long-term solution and a lot of people feel more satisfaction with that because there's less decision-making, there's more you know, maybe their family members would have less burden as well, and you tend to kind of set it and forget it. Those are two extremes. So those two trade-offs that I mentioned, those tend to be the biggest, most important trade-offs.

Now I'm going to talk about a couple more trade-offs that I want you to think about that may affect you. One would have to do with accumulation versus distribution, and I'm not talking about, I'm talking about during retirement. So some people they would opt out to have more stable of an income stream, knowing that they're going to have a lower rate of return and they're probably going to distribute less money to their heirs, so they're willing to change their standard of living for that predictability. The other would be somebody who says you know, I want potential variability, I'm okay with variability, and then I'm okay giving more to my heirs. So, as you can see, these are all related. Like, how important is it for you for that money to be for your benefit versus your heirs? And people are different. So this next trade-off has to do with with time. So some people they want to have some earmarked assets that are designed for perpetuity, meaning the rest of your life, and other people feel more comfortable having some kind of reserve, whether it be cash reserve or dedicated bond funding for a specific amount of time Some people prefer to have.

Some form of their mind is just designed that I want to have things in buckets. There are some mental problems with that way of thinking, but some people are just naturally wired Now with each one of these ways of thinking. There are some potential pitfalls to them, but it's important for you to know as a human being where you fit naturally in these types of way of thinking. So the other is front-loading versus back-loading. So if you're worried about longevity risk which is basically saying I'm a little bit afraid that I might outlive my money that's a big concern for many people Then you're probably going to have a different way of spending than somebody who's not so much worried about that. So if you have a low concern for longevity risk, then you're more inclined to front load spend in the early years. So you're early in retirement you're going to spend more and then maybe later you'll spend less. That's usually what people think, but we tend to spend more throughout retirement because of inflation. But that's another issue. The other is high concern over longevity risk. That means that you're going to spend less, you're probably going to want to conserve more so that you have more in later years.

So now what I want to do is bring this to something that's practical, that you can actually use and at the end, stick around, because at the end I'm going to give you a way that you could actually make an assessment for yourself to understand where you fit. Okay, so this what I did is I took those first two trade-offs and put them in a little matrix here and so if you're that investor who is a safety first investor, that you want that knowable income and you're okay with commitment, then that's kind of like an income protection type strategy. And on the other side, if you're kind of a probability investor and you want that high optionality, then you're more of a total return type of investor. If you look at this matrix here, I come about right here Mostly a total return investor and mostly optional. But I'm not super aggressive on it like some people are. But you have your own place that you will naturally set, and sometimes you have to get out of your comfort zone to do what's right for you, to be a little bit out of your natural state, which which can be difficult at times, but it's important to do so.

The other two are a little bit less intuitive. If you are high optionality, meaning you want a lot of flexibility, but you also are a safety first person, then you're more of a time segmented investor, which would mean I'm going to put some buckets together, I'm going to maybe cash match a percentage of my portfolio bond laddering, or I might put an annuity for something. I'm going to bucket things out for my early years, et cetera, et cetera, and that's one way of going about it. That can be suboptimal as well, you know so that, but but it can fit your psychological needs and it's important to do that so that you don't like bail at the wrong time, which is worse than not getting your your, your own psychological profile down.

So the last category is one that is actually less common, a little bit harder to understand, but basically you want to have a lot of you're into the probability base. In other words, you believe that maybe the markets are going to go up over the longterm, so you want exposure to that, but you also want some. You know you're able to make a commitment. You're okay making a longterm commitment. So there, you'll probably want to make some kind of a contractual agreement where you are, or some type of a strategy where you're managing your risk on the downside, but in a contractual way, not like with stop losses and things like that, but in a contractual way, knowing that you're not going to have as much upside. So this is a smaller representation of the population, at least that I have run into but there is a certain percentage of the population that really values that. So the question is is what's your preferred strategy? Well, there's a, there's a test that you could take. It's called a RISA R-I-S-A is it is the name of it and I can help you guys and I'll show you how I can help you guys actually take one for free and that you can kind of know who you are right there, all right, so I'm going to dive into the investment management side more, who you are right there, all right. So I'm going to dive into the investment management side more.

So the biggest question a lot of people ask is how long will my money last? I think, and it doesn't matter how rich you are. I mean, I had a conversation with a client of ours that has $40 million in asset center management and he's wondering about how long his money is going to last. So it's a very interesting problem, but it's a very serious problem and I think one of the things that people forget and this is one of the things that I've noticed just with individual investors you might have a portfolio, say, you have a couple million dollars put away. You're like I don't know if that's enough. I don't know, should I retire now? Should I retire later?

One of the first things that you need to think about is the fact that the order of your returns matter when you have good years, bad years, et cetera, matters If you have bad years earlier in your retirement career. If you will, then your money won't last as long than if you have, you know, bad years later. So it's important to know that you could have the exact same return stream and simply shuffle the timing around of that return stream, and how long your money lasts will be affected by it. So there's ways that you can mitigate this problem and I'm going to talk a little bit about that, but I just want to do a quick illustration to show this. So let's say investor A and investor B both have the same return year by year in terms of not in the order of the sequence, but the actual returns that they have every year is the same. It's just different orders. So investor one he has a big decline early down 15% in the portfolio in those first two years and then the rest of the years. You can see he runs out of money a lot faster than investor B, who had that same 15% return loss. But it was later on and that makes a big difference into how long your money lasts, I should say so.

The next point on this has to do with your withdrawal rate. Let me just define what the withdrawal rate is. The withdrawal rate is the percentage of your portfolio that you're going to be spending from each year on average. So let's say, if you have a million dollars and you spend $50,000 of it, that's a 5% withdrawal rate from your portfolio, 50,000 divided by a million dollars. So the point on that is that if you have a lower withdrawal rate, naturally you have more resilience in your portfolio, because one of the problems with the sequence of return risk once you start taking money out of your portfolio. You have what's called reverse dollar cost averaging. The math is reversed. So volatility in the portfolio the more volatility you have in your portfolio, the less long your portfolio will last, even if you have the same average return. So you can have the same average return with less volatility and your money will last longer. So the key is lower your volatility overall or have some other strategy that you're dealing with so that you're not having to pull money out of your portfolio your total return portfolio, when your returns are not as strong as they, when you're going through a lower return period, which everybody has.

So what are the strategies to deal with this? Well, there's a bunch of different strategies that you can deal with. This is a little table you can't read. I did that on purpose just to make the point that there's a lot of ways that you could deal with it, and it really requires a detailed analysis of your specific situation, of what the appropriate strategy is, and it starts off with knowing yourself. So, but one strategy could be you could just simply have higher cash reserves and you rely on those higher cash reserves. Maybe you have two or three years worth of your expenses set aside in T-bills or short-term bond ladder for three years short-term bond ladder, something like that and then you just let your you try to maximize your return per unit of risk.

That's how I like to invest. I like to have, you know, some, a cushion, a buffer, if you will, and then really try to maximize my return per unit of risk. But not everybody feels comfortable with that. Some people want to just have some kind of a, some kind of annuity payment or set up something like that that they can deal with those earlier years. Or they may want to bucket, you know, set up a strategy where they have the knowable rate of return in the first five years of their retirement and then the rest of that portfolio is earmarked for total return. There's different ways that you could deal with that, but it's important to have a strategy and have a mechanism that you're going to use to deal with this risk. The simplest one is bigger cash buffer, dedicated funding in your earlier years. And then the second part of the strategy has all to do with how you construct your total return portfolio, which is your portfolio that you're trying to maximize your return per unit of risk. So hopefully that makes sense and I'm going to move in. I'm going to go through this next section here and then I'll stop for questions again.

So let's talk about how you put together your total return portfolio. It's really important that you have different environments really accounted for in your portfolio. In order to do that, there's really two main things that affect the capital markets. One would be the inflation rate and the other would be the growth pattern in the market. So this is a table that I got from Ray Dalio, who is a brilliant hedge fund manager. It's a variation of some stuff that he's put together, but when you look at scenarios and asset class returns, the best way to kind of overcome and have an all-weather portfolio which is a term that Tom Basso uses, that Ray Dalio uses it is a way of having different return streams that are non-correlated, and that's the best solution for that. You may have 10 to 15 different return streams that may not be asset classes, it could be just different return streams or strategies. So in order to do that, you have to understand why you're doing that and then also look at what types of assets do well in different environments.

So now, before I get into this table, I also want to make a caveat or point here that some people don't believe in prediction. They say let's just follow what the markets are saying. Whatever the markets are saying, they're right, we're going to follow that and that's a great heuristic on average, because predicting is very difficult. Other people say I'm going to be running non-diversified strategies and I'm going to be running them all the time, but I'm going to construct them in a way where they can deal with the environment, all these different types of environments, and there's less decision-making on the timing part of it. I'm just going to do as best as possible in each type of strategy, if that makes sense. So just to break this down, just give you some examples If you have low growth in the economy GDP growth is not doing very well but you have a lot of inflation, that's not a great scenario.

But if you're in that scenario low growth, high inflation then gold, commodities tips, real assets tend to do well and a lot of people avoid commodities. A lot of people avoid those types of assets, but they actually do really well during these periods of time or they can do well. So if you have high growth, for example, and low inflation, that's what we've experienced for a pretty good amount of time and people have gotten used to that. But the truth of the matter is we don't get that all the time and we need to prepare for any of these environments. But if you have high growth, low inflation, stocks are going to do well, real estate's going to do well, corporate bonds do well, private equity does well. There's, you know, lots of things.

Do well your traditional asset classes. Now, during these periods of time, this is when people get lulled into believing that that's the way it always is and that's when people get hurt. So twice in my career I can remember, and I think we're kind of in a period right now where everybody, when you start hearing everybody say it's better to just index, just buy the S&P 500 and you're going to be fine, that's usually a sign of some really rough times coming ahead. The last time I remember, during the dot-com bubble, we had the same environment. Everybody's like, hey, I'm just going to call Vanguard or whoever I'm going to call up and buy the index fund S&P 500. And then we had a massive decline in the market and people truthfully, people don't stick with that, and so it's important to understand that. But when we're thinking about diversification, I like to think of it in terms of a hierarchy.

You have asset classes that you need to be sure that they're non-correlated, and then you also have strategy or your approach that you're dealing with. You know what is it. Is it a value approach? Is it a momentum approach? Is it a breakout approach? Is it what is it? Is it a counter trend approach? The reason why that's important is because they tend to perform it. You can have the exact same asset class, but if you have a different approach, it will have a different return pattern. The other has to do with security selection. Is it bottom up, is it top down? What is the method that you're using and how you're constructing your securities within the asset classes? So you know you want to diversify all of those and you know we can get into we don't have time since we're running a little bit late but there's a lot of different asset classes you could be looking at.

One thing I would point out that is really a lot of people are not participating in which they might should be, would be all of the private asset classes, like private debt, private equity. Those strategies have a lower correlation and a lot of people are ignoring them and if you are an accredited investor, a qualified purchaser, they could be a good addition to your portfolio. So now getting into this diversification, there's like remember we talked about trade-offs. We've been talking about trade-offs this whole time. Here you have to come up with the trade-offs that you could live with.

But one of the things with about a diversified portfolio that really I've noticed over the years it's interesting is that people will always have a little bit of angst with a diversified portfolio. So, for example, in 2000, 2002, dot-com bubble blows up. Like I told you we were just talking about how everybody was feeling good just before this period and said you should buy the S&P 500. Those investors went down 40% in the following you know, following period. Right that, those two years, a diversified portfolio. If you were not you know, I'm just using a relatively passive diversified portfolio for illustration here they were down 15% and pretty much everybody says I lost money. The people who were indexing really lost a lot of money. Or if you were buying those growth stocks that everybody was in love with and you just held on to them and didn't have a risk management protocol, you really got hurt. And then that's you know. But you were a winner in the diversified portfolio there.

The next period I wanted to highlight was 2003 to 2007. S&p was up, strong up 82%. Diversification worked very well during that period of time. Diversified stock bond portfolio was up 87% during that time and it actually outperformed, and partially because bonds did very well and everything was just lockstep working well. And then we had the financial crisis and the stock market went down and everything went down. Diversification type strategies you know these are not hedged and they're not, you know, long short. This is just a long, lonely, diversified portfolio to show you, for example, and you know. Then you feel like, for example, and then you feel like, oh well, I lost money. Then we had a big, rip-roaring bull market.

I'd like to point out that in 2009, when most people should have been buying equities, nobody wanted to buy equities. That's typical of how things work and that's why having some part of your portfolio in a value-oriented strategy is really important, in my view, because that really does help in periods of time when there's a lot of excessive fear or when people are getting too overly optimistic about the market. Value keeps you more level-headed and will help you not get killed when those growth stocks, or whatever those stocks that are doing well, do collapse. Growth stocks, or whatever those stocks that are doing well, do collapse. So, but to make a point, there is you make, you made money, but this is the thing. This is probably the like the, the biggest devil of diversification. That hurts people, I think, when you make money but you don't make as much money.

So during this period of time, 09 to 2019, the S&P 500 was up 351%. Diversified portfolio was up only 220%. Right, and you're like I didn't make as much money. And then you're thinking, well, maybe I should be just putting more money in the S&P 500. Maybe I should be getting more aggressive with my strategy, and people get outsider their comfort zone and their risk profile and they don't recognize that and then they get hurt and that's exactly what happened in 2020. Then it's I don't, then I lost money.

So you have to be careful with your emotions and I'm going to bring up Tom Basso again. I'm glad he's on this call, because one of the things that Tom really has mentioned is like staying level-headed is really important and have you know. If you're feeling over exuberant, bring yourself down. If you're feeling like like you know, really in the down in the gutter, you need to bring yourself up and have discipline in your strategy, knowing that your strategy over the longterm works and being adaptive to what, what you need to be doing, being aware, but you know, just to bottom line this, during all of this period of time, if you had put all your money in the S&P 500, you made just about the same amount of money as a diversified portfolio, but you had a smoother ride and you could even smooth this out even more. I'm using this just with a traditional. I'm making this illustration just with a traditional stock bond diversified portfolio long only. So I guess my point here is that when you're thinking about preparing your retirement portfolio, remind yourself you have to have a way to remind yourself that diversification always has a little bit of angst to it, but it's important because you need to keep your volatility down so that you could have a good outcome over the long run.

All right, I'm going to talk a little bit about alternatives. I really touched on this already, but you know private equity. You know I would consider some of the stuff that Tom Basso does to be alternative type strategies trend following long short stocks, bonds, commodities, currencies that would be one type of alternative, asset class private debt and there's other types of hedge funds, those non correlated assets. When you put them together in a portfolio, really can help your, your diversification and your give you. You're not really sacrificing return, but you're definitely lowering your risk. So that's, that's where that's that sits and there's. You know a lot of people will tell you like 90% of your variation in your portfolio is due to your overall asset allocation and your strategy. That's generally two. It doesn't tell you what your direction is going to be, whether it's up or down, but your asset allocation is going to determine to a high degree as to how much variability you're going to have in your portfolio. So it's important to get that metric right for you so that you're comfortable with your overall volatility of your portfolio.

Okay, so one of the biggest things that is an issue in the real world is taxes. I would say and I've kind of put this presentation in the order of importance in my mind First you want to make sure you understand yourself and what type of strategy you tend towards. Then you want to go into and you want to make sure that you have the right diversification for your total return portfolio, whatever type of portfolio you are going to fall into, and then you're going to want to make sure that you're doing this in a way with taxes right. You want to make sure your taxes are not going to be killing you alive and it's it's such a big part of it.

In the real world, what we see is people get eaten alive by taxes, especially if they followed what certified financial planners had been telling them to do for years and years. You know, I remember when I first got in this business, you know the last 30 years or so, that the kind of the common thought was max out your 401k plan, max out all your tax deferred money. You know, do certain things and then you get this big bucket of qualified money which is you know that every dollar you pull out of that is going to be taxed when you take that income. And they don't have enough money in other types of things, and a lot of people wind up retiring in that scenario. And then there's a big problem with taxes after that. And then you find out that that money does not last as long, so your withdrawal rate has to increase if your taxes are going to be higher. So it's important and there's a lot of different things you could do for taxes, but it's important to have a tax management strategy.

So when you're preparing for retirement so I'm talking about getting ready to do it you know it's good to say, okay, what steps do I need to make right now so that I'm going to be in an ideal situation, or as ideal as possible, so that taxes are not going to hurt so bad? But if you look at third party research, it looks like about 2% of people's return is taken out by taxes. Well, a lot of people think, well, 2% is not that big of a deal. But when you compound that over 30 years it is a big deal. And especially if you have your withdrawal rate increases because of taxes, then you have that sequence of returns problem which actually exacerbates that. So, because you don't invest in a straight line unless you buy CDs or T-bills. So that's important to know. So Maybe you need to do some Roth conversions. Maybe you need to put more money away, not in your 401ks and IRAs before you retire. Maybe you should be putting money away in other tax managed strategies where there's replacement strategies, tax lost, harvard sting and things like that that you're doing.

So there's a trade-off a lot of times between maximizing your total return on a nominal basis, not considering taxes, versus after-tax. So, like, for example, some of the stuff that Tom is talking about sometimes could be, you might actually have a suboptimal after-tax rate of return. If it's in a taxable account, you might have to adjust that. But if you're taking losses judiciously, sometimes it can work itself out, because you're letting your winners run, you hold them longer and then you're taking more shorter-term losses and then they kind of work themselves out. But that's not always the case. So maximizing after-tax rate of return is an art, and the more money you have, the more moving parts there are.

If you have, for example, stock that you got from your company, that could be a big determinant of what you should do. There's a lot of different types of stock you could get. You can get incentive options. You could get an NSO, non-qualified stock or restricted stock units. All of these have different tax rules and there's different. You know there's alternative minimum tax. So there's these types of things need to be looked at the more complex your situation is, because the goal is to maximize your after-tax return per unit of risk and to also to have you in a situation where your investment style is right for you. So right now I'm kind of focusing just on the total return portion of your portfolio. So it's a little bit complicated, but I wanted to bring this up because it is such an important part of your situation.

Now I'm going to go into an area that nobody really likes to talk about, but I really want to talk about. That's healthcare costs. Because I wrote an article, because I was talking to a friend of mine and he was saying you know, he's an author, a very successful author, and he said you know, I want you to just think about all the common things that your clients have been experiencing that were surprises or things that they could have avoided, and what are the most common. And so I wrote a white paper called the 10 Most Common Avoidable Surprises that Derail Executives Planning for Retirement. They could have fixed this, but they didn't. They were surprised by it and I would say the number one thing would be the healthcare Healthcare.

People are surprised with how much they're going to need for healthcare. So I'm just going to kind of get away from the investments for a minute and talk a little bit about healthcare, because that's going to determine how much money you're really going to need and what kind of withdrawal rate you can take. So most people know you have Medicare and you have Medicaid. So Medicare covers people who are 65 years or older. Generally, if you've worked for 10 years you're covered. And what does it cover? It covers hospital insurance, medical insurance. You could buy supplemental insurance that will cover prescriptions, et cetera. So that cost is going to be there. So it should be explicit in your planning, knowing that it's going to be there, and I'm going to talk about what some of the average costs have been. Then you have Medicaid. Medicaid is really an income-based strategy Basically, if you are doing really well, if you're considered quote-unquote wealthy, generally, medicaid is not going to be available to you. So it's really for people in financial need for the most part, and it's also related to the state-by-state criteria. So depending on what state you're in, you're going to have different rules.

So we don't have time to go into all the intricacies of this, but part of your planning should be what is my health care situation going to be and what does that mean for my withdrawal rate? So when you're establishing your strategy, having that in place. So let's just talk about what are the costs these days? So Fidelity has a study they do every year where they go and they call it the retiree health care cost estimate study. They just did one, august 8th of this year, and what they do is they try to estimate what the average person is likely to spend when they retire at age 65 in today's dollars. And right now, per person, a 65-year-old will spend $165,000 just on ancillary healthcare costs in today's dollars. So it goes up with inflation. And it's important to note that that's for one person. So if you're a married couple, that usually equates to about $330,000 for a married couple, for a married couple. So that should be explicit into your plan and you should understand that. You know what. What is it, by the way, these costs are covering? It's like your out-of-pocket prescription drug costs, medicare part B premiums, if you have them, or part D, and then all of your like co-payments, co-insurance. So even if you have insurance, obviously you have these costs. So that's not even you know considering.

You know other things that could be come down the pike and, and actually the biggest thing that people forget that they could avoid is they don't think about long-term care is also not in this. So a lot of people do need long-term care and long-term care, you know, is there's a few different types of long-term care, but basically there's. You know, there's assisted living. Let me see if I can grab that slide here. We don't have time to go to that other slide, yeah, you have assisted living, you have home healthcare, you have nursing home and you know I've watched clients go through various stages of life and what their costs have been, and it can put burdens on your family, things like that. So you really need to kind of think that through. If you, if you have adequate resources, if you have, if you're doing really well, you know, with your net worth and you could just self fund all of this and it's not an issue. But if you don't, then it's something that you should consider. You know how? How am I going to deal with that?

So the average length of time a man needs long-term care is 2.7 years. So the average length of time a woman needs it is 3.7 years. So women live longer. They tend to need long-term care for a longer period of time. Their healthcare costs are generally more expensive for long-term care. So what are the daily costs? So I looked at like where our clients are mostly and what the daily costs are and just made an average of it. So most of our clients are in Colorado, texas, california, wyoming, new Jersey, florida and their average assisted living daily cost is $170 per day for assisted living. So that's someone helping you For home healthcare, it's $168. Somebody helping you in your home and if you have a nursing home, it's $334 a day. So if you multiply that out times, you know two or three years, whatever that number you want to assume. If you could take the average 2.7 years and 3.7, then that should be a contingent that you have in there and there's different ways that you could deal with it. We don't sell insurance or anything like that, but it's something that should be a contingent that you have in there and there's different ways that you could deal with it. We don't sell insurance or anything like that, but it's something that should be taken care of if insurance is appropriate.

If you're self-funding, you don't need insurance. Insurance could be an option. You don't need insurance, but the other people might need insurance. If you need insurance, there's like four or five different main types. They could be traditional insurance and you know, basically you pay a premium. If you don't use it, you lose your premiums, so that would be the negative. But you get more care, you get more comprehensive coverage If you do use it. There's hybrid types. There's different types of hybrid where you have a life insurance policy where, if you don't use. If you don't need long-term care, that life insurance policy will pay the entire death benefit to your heirs tax-free. If you do need it, they give you an accelerated death benefit while you're alive and you can use that money for long-term care. And that works really well for people who have resources and they want to pass money to their heirs, but they also want to have something set aside for long-term care. Just in case there's other different things that you could look at, those are the two main ones that are used.

Main point here is to make sure you have that in your plan. Don't get derailed by that. And in order to do all this, you really need a retirement needs analysis. Really, basically, what you need is to go through the details of each one of those. So how much do you need to retire to become financially independent?

Basically, a 3% withdrawal rate is appropriate as a starting point. Some people say it's overly conservative, but for the average person who has a 30-year retirement, then a 3% withdrawal rate will generally be safe for your portfolio and then, going up with inflation, it'll take care of inflation for you. It gives you some room for volatility and things like that. That's a good place to start. So if you wanted to just use a rule of thumb, you could take the income amount that you think you're going to need today, total spending including paying for taxes and everything else, and then you divide that by 0.03. And that should be the amount of money that you have. That's really a rough figure because it doesn't have all the taxes and other things put in place, whatever's particular to you.

But in order to get a real analysis of it, there's a lot of considerations that you need to go through, like, for example, your asset, your tax planning, your estate planning, all that stuff. To get it right for you, do a retirement needs analysis and do a forecast, and we have certified financial planners that do that work for us. I'm in the investment side and the wealth management side of the business, but this is something I highly recommend doing so that you can get the right picture for you, get an idea about what type of investor you are, you know, and go through a process where you know you, you know what we do is, we meet one-on-one with you and then we'll talk about your situation, your goals. I'd help you identify and prioritize those goals, get systematic about it and do an inside analysis so that we can look at the details of what it is that you are in a situation now, what your situation is now, what your strengths are, what your gaps are, and evaluate different scenarios for you to see which scenario is better for you. And a design advantage to say, okay, now you've got a design that's right for you. And then the ongoing management of your assets in the plan and then to do regular reviews to make sure that you're on track. So that is a general service that my firm does. So if you have any need for that, you just let us know.

But I wanted to give you tools so that you can start thinking about what it is that you should do to prepare your portfolio. We could literally each section, we could dive so deep into it, but I wanted to just give you an overview of everything. So now I want to give you some resources as we start wrapping up. I want to give you guys each and one of you an opportunity to get a copy a free copy of my Financial Freedom Blueprint book and, along with a white paper, the 10 Avoidable Surprises that Derail Executives Planning for Retirement. And then also I'll send you an email right where you can give us your address and we can mail that book out to you a signed copy, and then also we'll give you a link on how you could take that risk assessment to figure out what type of investor you are, if that's something you want to do. And then we'll also give you a scheduling link. If you want to have a retirement needs analysis, you could schedule a Zoom call with us and do that. And I also want to invite you to listen to my podcast, the Market Call Show. You could go to pathtorealwealthcom and get information about that.

So that's basically all I have today. I apologize for the delay that we had earlier and hopefully we'll get it right. I'm going to be doing these various types of topics every month, once a month, mainly so that I can answer as many questions as I can to people the most common questions that we've been getting. So thank you very much for joining and hopefully, if you would like to come to some of the other webinars I'm doing, you could do that and we will send you out an email. And, tom Basso, I want to thank you for all of your input too. I appreciate the. You know your perspective on things and you've been a great mentor and learner for me as well.

Today, on the Market Call Show, we examine strategies for navigating volatile market conditions. Recent turbulence, driven by factors like the global sell-off, tech declines, and yen carry trade unwinding, has intensified volatility. We dissect the economic and geopolitical influences intensifying volatility.

We illustrate the multifaceted challenges facing investors through examples such as NVIDIA's production issues and looming stagflation fears. Additionally, we consider election-year uncertainties and their impacts on sentiment.

Yet amidst shifting seas, opportunity remains—with prudent planning. Given overvaluation concerns, we stress diversifying beyond tech and maintaining awareness of indicators and policy shifts.

For those nearing retirement, tailored strategies emphasize balancing risk through diversified equity allocation over heavy bonds. Well-informed risk management and acknowledging market cycles also feature prominently.

SHOW HIGHLIGHTS

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

Louis: Hello, this is Louis Llanes for the Market Call Show. I want to talk a little bit about the headlines recently. A lot of people are asking me questions about what do you think about all this craziness in the market? In fact, I've had several people email me or text me or even as I'm walking down the hallway at the office, saying, how are you holding up with this market? And I had a conversation with a client who once was a stockbroker back in the day, a very sophisticated client and we were talking about the markets and we were talking about ups and downs and the difference between certain investors and how they deal with ups and downs. So I wanted to spend a little bit of time just talking about the major headlines that we've seen recently, that's affecting the stock market. And once I kind of get through that, I want to kind of give you my take on it and then just talk about what I think are kind of the lessons to get from the recent headlines and then also, in particular for people who are nearing retirement which is a lot of people who are watching this podcast or are already retired what this means. And it's just some reminders of some basic things to think about. When these headlines come about, they really bring certain aspects of fundamental investing to light. So first of all, let's talk a little bit about the recent headlines.

So we had a global market sell-off. So, like on August 5th, the S&P 500 experienced a big drop. It was down like 3% and it was marking like the worst day we saw since December 2022. And that was part of a broader global market sell-off and the Japanese market had suffered the biggest one-day drop that it saw since 1987. The biggest one-day drop that it saw since 1987. In fact, it brings back.

I remember the day that the market crash happened. Actually, I went into a small brokerage firm that day. I was in college at that time and I was studying finance and I walked in and I remember the branch manager of this brokerage firm was kind of in a panic and he grabbed all the brokers and they had a big open floor and he said do you realize what happened in the Japanese market? It had a massive sell-off. Today is going to be an ugly day and I just remember how everybody was running around.

But what's interesting is our stock market did not follow through on the downside to the same extent as 1987. So a lot of people are making kind of a correlation between 1987 and today and really they're very different scenarios. So anyway, so there was a lot of concerns about economic growth and overvaluation of tech stocks, which I have been talking about for a long time. In fact, my last podcast that just was released last week I was talking about navigating in emotional markets. I actually recorded that podcast three weeks ago, so it was meant to go out sooner but we had a little bit of delay in launching getting it out. But I've been mourning about these problems for quite a while. So anyway, so that was the first thing.

That's kind of the major headline the global market sell-off. And we also had a lot of headlines related to the unwinding of the yen carry trade. The yen carry trade is when investors borrow in the yen at low interest rates and they invest that money at higher yield, yielding assets, mostly stocks and other assets as well. But stocks were also a big part of the allocation that came from borrowing money. Like hedge funds and certain types of asset managers were doing more speculative leverage trades, where they're borrowing money in yen and buying stocks. Well, that unwound because we saw that there was a rise in interest rates in Japan and that caused a lot of margin calls in interest rates in Japan and that caused a lot of margin calls and that forced some selling in stocks globally and added to the market volatility that we saw. So that was more of what I would consider to be kind of a structural thing, and this is something that happens at market extremes. You tend to have those investors or traders that were over levered have to unwind leverage and it creates stress in the market. So I think that was a that was part of the headline.

The other thing was the tech sector sell off. We talked a little bit about this, but the tech sector, particularly the so-called magnificent seven stocks, have been hit hard. You know, nvidia, tesla and other major tech companies have had significant declines recently. That contributed to the overall broad market sell-off. So NVIDIA, for instance, it faced a production issue with its next generation AI chips and that further exacerbated and caused investor sentiment to go sour. You saw the headlines in Financial Times, in Market, business Insider and other Wall Street Journal and that was kind of part of the concerns there.

And to make things a little bit more concerning, we had a lot of talk about stagflation. There was particular analysts that were talking about maybe there could be potential stagflation where high inflation and the sluggish economy could prevent the Federal Reserve from cutting interest rates as much as they need to, because the market had been anticipating interest rates to be going down. And if there's stagflation then maybe the Fed will not be able to drop rates as much as the market is anticipating. So that scenario led to forecast of a possible 10% decline in the S&P 500 over the next quarter. Take that for what it's worth, but you kind of put those things together. It caused more angst.

And then there's also the political and economic uncertainty Politicians have been. As you know, the election is coming up and it's playing a role. It's definitely playing a role. The recent market turmoil has been described by some people as the Kamala crash, or Kamala crash by critics. That's highlighting the political risks really that are associated with the election and potential economic instability.

On this phone call that I had earlier today with a particular client, one of the things we talked about was how, really, for the most part, if you look at it historically, politics generally or I should say the election of the president generally affects certain sectors and industries more than it affects the overall economy. There is some effect there. But if you look at it statistically and you just kind of graph out the market and then you kind of overlay whether it was a Democrat or a Republican, there's really statistically not that much difference in the capital market outcomes. But there is definitely big differences between how certain sectors respond and how certain industries respond. For example, if Trump were to become the president, maybe certain energy stocks would do well if it's related to increasing production and others might do poorly if they're tied to a lower oil price. You know, it just depends on what you're looking at. So these factors created to a volatile environment. It significantly infected investor sentiment and market performance recently. So what's crazy is that since that happened we had a big jump up in the market so that initial you know how you feel about this market. You know, and now it's moving up. You have to really now I want to get into my thoughts about this you have to really not think about the headlines so much, because the headlines really are not going to, in the end, have a lot to do with your results.

So, given this market volatility, there's some lessons really. The first one I would say is that diversification is crucial. The significance of a sell-off in a specific sector or particularly technology. That just leads you to understand and just basic blocking and tackling that you need to have some diversification across industries and asset classes. Diversification can help you mitigate the risk associated with sector-specific downturns. So in a lot of, if you look at the sector concentration in the S&P 500 or the overall market, it's pretty high. It's over 30% in tech. There's also more economic growth there, but it's pretty highly concentrated right now. So being diversified is important. So the other thing is staying informed is really important, because if you've been informed about market developments and economic developments and valuations and the quality in the market, you would have already been aware that this type of thing could happen. So you're not surprised. It shouldn't be surprising for you.

So markets are influenced by a myriad of factors, like we just talked about, and these unexpected global outcomes that sometimes they seem like out of the blue. They're really not so much out of the blue if you're kind of aware of what's happening in the market, like what's happening with the unwinding of the yen trade. I mean this has actually happened before. The whole thing about risk on versus risk off and borrowing in yen and buying other assets, that's been an excuse for exacerbated volatility in the past and it does have some effect. But it shouldn't come as a surprise that headline. So understanding economic indicators, I think is helpful because when you understand that these inflation rates or unemployment data, central bank policies, et cetera, et cetera, this helps you kind of understand that these policies could affect the market longer term and these policies tend to move slow and so you know it's not like things just turn around on a dime. They generally happen over time. So if you're watching those trends, that could help you invest as a long-term investor, which is really the way to think about this.

I think the other lesson would be risk management. Unwinding of the end carry trade, like I had mentioned before, that's just normal volatility. That can happen. So your portfolio should already be really constructed in a way where it makes sense for you to hold on to a longer term strategy. And that leads to really the lesson always to be prepared for market cycles. So it's just like if you were a sailor. If you were a sailor, a professional sailor if the winds change their direction, you shouldn't be surprised. You should be in a position where you understand, like, if the winds are changing, this is how I'm going to change my sales and these are the specific actions I'm going to do so. Having your portfolio managed in a way especially, you know, if you're a long-term investor which I believe everybody really should be for the most part then you know you really want to be thinking hey, I'm prepared for the market cycles. Here's my plan on how I'm doing that, or here's my advisor's plan. This is our strategy. So if you don't feel like you have a plan for market cycles, then it's time to get one. It's time to get an investment policy and work with professionals to put one together, if you don't feel like you could do that on your own.

So I would say the other lesson would be political and economic policy does matter. Like we talked about it, those developments do matter. In the long run they can have significant impacts. They tend to move slower, you know. Monetary and fiscal policy do have an impact. Some of the you know the election issues can have a short-term impact. I would argue that long-term they have. They don't have much effect on the overall returns on stocks, but they definitely have impact on returns in sectors and interest rates. Regulatory shifts can also have some impact. So understanding what those are and how they affect your investment portfolio is important. So by incorporating these lessons into your investment strategy, long-term investors can better, you know, navigate market volatility. But the you know, if you're somebody who is near retirement and I'm getting ready to do a webinar actually on preparing your portfolio for retirement, that's going to be actually next week, but in fact I guess by the time this is published I'll probably already have done it but so, as I was thinking about that particular webinar, I thought about well, what does all this kind of volatility mean for those people, those investors, those people that are going to be on that webinar?

And the first thing is, you know, you have to have a plan for moving towards retirement, right, like, like, what is your portfolio. How does it need to be readjusted as you get closer to retirement? A lot of people feel like you should be 100% in bonds or really high in bonds Once you get to retirement. The data actually shows that's not a good strategy, primarily because inflation eats up at your value After taxes and inflation, bonds generally don't do very well. You know it could be negative returns or slightly positive, and if your withdrawal rate is, you know, 4% or so or 3%, you're not going to be able to sufficiently have that last for a long period of time over retirement horizon, which typically lasts somewhere about 30 years or so. Being 100% invested in bonds is not a good idea. So having a long-term strategy generally requires and some of the data shows that your stock allocation or equity allocation should be somewhere between 50% and 75% going into retirement on an optimal basis, looking over a wide variety of economic conditions.

So in terms of how people who are getting close to retirement should think about this, it's important that you're dealing with your withdrawal rates, like you understand what your withdrawal strategy is likely to be going forward and in the future, and that you have a plan for dealing with ups and downs. So in order to deal with that. It's important to strategically have some considerations like how you're diversifying your portfolio right now and what kind of funds emergency funds are you going to have. So you don't want to be in a position where you're having a negative impact on your portfolio because you're pulling money out of growth assets at the wrong time. So it's really important to have an emergency fund that can help you through those downturns and even have there's been some great studies out there I know Charles Schwab did one even also having an emergency fund plus. It's kind of a basket of shorter term bonds and more intermediate term bonds too, so that you are prepared for these types of things and you can let the growth of your portfolio work over time. And that's been a strategy I've really worked with clients for years, decades, and it has worked very well over the longterm. So these ups and downs and in fact, if you look at a longterm chart, this recent decline is but a blip on the radar. So even the 1987 crash is a blip on the radar.

So you know, some people might even think, oh my gosh, I'm going to delay retirement or I'm going to adjust my spending. I would say the thing to do is there are some spending. If you're already retired, there's a lot of different ways that you can think about how you take withdrawals out. But I would not be withdrawing money out of the market the growth assets, stock market type things or even real estate things like that for the average person just because of a decline. But delaying some spending might make some sense, depending on how you're structured. But really taking a look at your overall structure right now makes a lot of sense your overall asset allocation so that it's aligned with your goals.

I think the biggest consideration right now is psychological, and staying informed is important, but being able to stay informed and remain calm is crucial. So you want to be able to not panic because of various headlines and so consulting with people that you trust your financial advisors or family members or colleagues that you know are level-headed during periods of uncertainty, that's the best way to deal with things and to get your psychology level headed. So it's important to think about these things from a long-term perspective. It's important to look at them from. You know high quality investments would be another focus that we've talked about a lot. You want to be focused on high quality. So I think, when these recent headlines, although there are some things that could have longer term implications that are embedded in them, like, for example, the high debt ratios, the likelihood of higher tax rates, things like that. Those can affect long term planning horizons and valuations being overbought in certain areas. That can affect long term investment decisions. And if you didn't listen to that podcast I did last week on navigating in emotional markets, I highly recommend listening to that because I talk more in detail about those aspects of investment security selection and how to be psychologically dealing with these types of scenarios.

All right, well, that's all I have for you today. I hope you find this useful. If you like this, please like and subscribe. Share it with your colleagues, friends, people who may benefit from this. That's all for now, luis Llanos signing off. Talk to you next time.

In this episode of the Market Call Show, we're discussing mastering long-term investing and balancing risk and return through strategies like adjusting asset allocation over time.

With large-cap sell offs recently, we highlight opportunities in small-cap stocks and look at the fundamental analysis of these businesses. 

Drawing my experience as a portfolio manager, I'll share some of the tools I've used, like quantitative analysis that can help safeguard your hard-earned capital before uncovering economic sectors with untapped potential, such as property and casualty insurance. 

Wrapping up, we dive into way you can optimize outcomes by staying grounded in market turbulence, making increment adjustments, and embracing diversification across sectors and investment styles for stability. 

SHOW HIGHLIGHTS

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

Intro Sequence

Louis

Good, sound investing requires for you to compound over time and to think rational, long term, and I think we're in a position right now where many investors have just been indexing, which is something I've been talking about, kind of ad nauseum indexing, which is something I've been talking about, kind of ad nauseum, and whenever you have a situation where indexing seems to be the best and only thing to do, inevitably it is not the best thing to do in my opinion. Now, I have nothing against indexing. I think indexing has its place and should be part of a strategy. But, on the other hand, if you want to have above average rate of returns or if you want to have returns that on a risk adjusted basis that can weather a lot of different environments, it's better to have a fundamental approach where you're really looking at the economics and the cash flow to the economics and the cash flow. So I wanted to talk a little bit about stuff that's been on my desk and how it relates to, I think, what many high net worth investors are dealing with right now in terms of just making decisions for capital that are coming in from various sources and being in a position to protect your money.

So in my book, the Financial Freedom Blueprint, in chapter four, I wrote a chapter called Protecting your Money and one of the things I say on there and I just kind of quoted Benjamin Graham who says Wall Street has a few prudent principles. The trouble is that they are always forgotten when they are most needed. That is probably one of the reminders I think that we need right now is what's most needed right now in terms of a principle is that the value of an investment is the present value of its future cash flows over time, and if you get too far away from that, then you will tend to have problems, and we've lost sight of that, I think, as investors you know because of for many different reasons. So, in the world of finance, risk management separates the winners from the losers, and it's more important to really, now more than ever, that you select your investments based on the fundamentals, and risk management requires you to have rules to size your investments. So I'm going to talk a little bit about sizing investments for high net worth investors and what that means to you, and thinking about your positioning. The most important thing is that your exits when you exit an investment or reduce your positions, your exits when you exit investment or reduce your positions and when you actually are attempted to break rules how to get your mind in a position where you can really work for the long run and be focused on the long run and redirecting your attention, and you know, we all want to say that we're rational, we all want to believe that we are rational creatures, but we really are emotional creatures, no matter who you are. So the biggest challenge is to stay rational.

One of the ways that you can look at risk is volatility, which is just basically how much movement up and down various investments have. That is a it's a useful way of thinking about risk when you're coming from a fundamental standpoint. It's really not the risk that is the most important. The most important risk would be the chance of losing money based on the difference between where the market is pricing an investment now versus where its intrinsic value is its underlying value based on cash flows. The problem with the concept of intrinsic value is it's not a science, it's not something that you know with 100% certainty, so it's really something that you have to estimate within range and within reasonableness. So it's really more about reasoning, and when you have something that is obvious, or more obvious, that there's a difference between price and value, that's when you should be concerned, and so that's one of the things that I wanted to talk out.

So the question is does buy and hold make sense? Well, I think buy and hold does make sense as long as you're owning investments where the quality is such that there's a strong competitive advantage. So for most importantly with stocks. So if you have a company that has a strong competitive advantage with their competitors high return on capital then obviously that buy and hold is a good thing to do. It can get ahead of itself and be above intrinsic value and maybe you wanna not invest as much future capital into it. And then times when they come down in value those high quality investments that have good competitor advantage then you want to add to those and it takes discipline to do that.

So one of the things that a gentleman by the name of Jim Rogers you may have heard of him. He used to work for George Soros. He worked in the George Soros' fund as an analyst. He was a very solid analyst. He said do not buy the hype from Wall Street and the press that stocks always go up. There are long periods of time when stocks do nothing and other investments are better.

So there is no perfect asset class. I had a conversation with another friend of mine who really likes real estate and I always say that when I'm talking to her because I hear about how great real estate is, and I'm just thinking about all the times that certain real estate projects can be problematic and so there is no perfect asset class. It goes down to valuation. So protecting your resources, I think, is really important right now. Making up a loss that is big, it's harder to recoup because percentage losses you have to gain more on a percent basis to make up a certain loss. So, for example, if you're down 50% on an investment, then you have to go up 100% just to break even. So part of the idea of long-term compounding is having investments that have more steadiness to them over the long term. Or, if you have investments that are more volatile, to have them sized in a way to their impact, so their impact is smaller to the portfolio.

So in my book, one of the things that I say is that there's a few risk principles that I found to be very true. Number one is never take more risk than your finances can withstand. And the second rule is never to take more risk than you cannot psychologically endure. In other words, if you're going to capitulate when an investment is not doing well because you've taken an investment that you psychologically whatever your makeup is you just can't deal with it, then you're gonna surely lose money because you'll sell out at the wrong time. And my third rule is always to match your goals to your risk tolerance. In other words, whatever goal that you've set for yourself, make sure that it incorporates what your risk tolerance really is and match that.

So when I look at a risk profile, it's kind of like a triangle, where at the top of the triangle there's your tolerance for risk that's really psychology and then on one side you have your risk requirements. So you might have a minimum amount of risk that you have to take in order to get a return that you need to make, and that's something that is just about rock bottom minimum risk that you must take. And a lot of people sometimes get in a situation where the minimum risk that they need to take in order to achieve a certain return you know they're not unwilling to take. And what I mean by the risk in this context is just short-term movements, temporary movements. You know you have to be able to think long-term in terms of that. And then you on the other side of this triangle is risk capacity, and that is kind of the maximum risk that your finances can actually withstand. So you know, having some kind of a sense about those three things can really help you when you're exploring your risk profile and protecting your capital.

So step one is to perform a risk assessment really and look at what kind of risk profile you really truly have. And once you've done that, your risk capacity rule is never to take more risks than your finances can withstand. And then your risk tolerance rule number two is to never take more risks than your finances can withstand. And then your risk tolerance rule number two is to never take more risks than you could psychologically endure, which I had talked about. And then your risk requirement mismatch rule is if your risk tolerance is lower than your risk requirement, you should consider adjusting your goals to be more realistic. So once you've kind of assessed your risk, then I really think about really determining your key metrics that you want to look at in terms of risk.

And for me as an investor, when I'm thinking long term, I'm thinking about the types of investments that I want to hold that are likely to have the risk characteristics that I'm willing to hold on to and in order to achieve a good return. And to me, a good return is where you're able to return above the inflation rate and you're able to be compensated for the amount of risk that you're taking, but also to have more of an understanding about the economics of the business, makes sense, and so when all of those things are together, well then you can feel more comfortable in what you're doing. So there's all sorts of statistical things that you could do with risk analysis if you will, and there's all sorts of programs that people will show and all that, but when you really look at it from a long-term perspective, you cannot untie the economics of the underlying investment cash flows. You can't untie that from your risk profile. Really. That's really how it's really related to so when you construct portfolios.

And so why am I talking about all this stuff? Mainly because I think we have lost sight of the long-term fundamental analysis and we're starting to see that correction happen, where investments are moving into more industrial companies, into some of the tech companies that are more solid, or some of the companies that are in other financial industries that make some sense, even international companies. We're starting to see that happening. So it all boils down to the economics of these investments. So I was just thinking about how that ties into various stock strategies. So one of the things we do for high net worth clients is we invest in a wide variety of investments, but in the smaller cap realm that has been of more interest lately because of the valuations and there are a lot of small companies that are not making profits right now, so you have to avoid those. So buying the small cap indexes are not quite as attractive then as being selective, in my opinion, and that's really basically always the case. But in particular, there's a lot of opportunity in smaller companies.

One of the things that I do is I do quantitative analysis, where, through powerful software packages, we could look at the various ways to construct portfolios using fundamental analysis and we can look at a lot of different factors and look at different ways and simulate different portfolio strategies to see the impact on portfolio results. And one of the things that we see consistently is when you apply fundamental metrics on more inefficient areas in the market, like smaller and mid-cap companies, you tend to have outsized returns. You tend to have returns over the longer term that are better than buying kind of the tried and true that everybody knows and so you know over the long run. That is something to keep in mind and in fact, if you want to have outsized returns, I think it's really important to be able to not always be looking where everybody else is looking. You have to be looking in places where they're not, where most people are not looking, and I was just looking at various factors in the smaller cap area that have been doing well.

I always take a lot of notes when I'm doing these things and because my goal is for our clients to compound over time and not to stick our neck out right, there's always movement in stocks, but when you look at the factors that make the most sense, one of the things that always comes up has to do with earnings. Basically, you know what are earnings doing and you know. One of the areas that I like to look at because it really, you know, historically has contributed a lot to returns is what's happening with the revisions of earnings. So companies that are tending to do better right now the earnings are being revised upwards, and so we have ways that we can actually scorecard and do what's called factor analysis and look at ways to actually identify companies where their earnings are being revised up and also that we're seeing that there's a surprise in the earnings. So the earnings were expected to be, say, $1 a share, but they're coming at $1.20 a share. That would be an upward surprise. But they're coming at $1.20 a share. That would be an upward surprise. A revision would be the analysts are saying, okay, well, we thought they were going to earn $1, but now we think they're going to earn $1.20. So they're starting to move them up.

So those factors can help as well. As the variation in the earnings estimates is a valuable indicator. So if too many analysts are all over the map, somebody thinks a company is going to earn a dollar a share, no one thinks it's going to earn 10 cents a share and there's a lot of variation. You know that is actually, should be, actually. You should actually, I guess, handicap for that if there's a lot of variation there. So somebody's calling me right now, so I'm not going to answer it obviously, because I'm doing a podcast right now. So those factors tend to have a lot of value when you're looking at developing strategies.

And another, it just has to do with the quality of companies, you know, and there's various angles that you can look at. One angle you can look at would have to do with the profitability of a company. You know. Are their gross margins strong compared to their assets? Are their gross margins strong compared to their peers? Are your capital efficiency ratios strong? In other words, for every dollar of capital that we invest in this company, that the company invests, how much revenue or profits are they able to generate? So if it's a highly capital intensive company, you know you'd want to handicap that company versus another company. So having high capital efficiency, high profit margins and then having those a solid growth plan or growth profile like I had mentioned, the revisions and the upgrades and the low variability and estimates things like that that tends to help companies. In particular, if you compare how companies that have these characteristics do with larger companies compared to smaller companies, there is a spread historically that you've seen between the performance of these types of investments. So you know how many positions you own and how you construct a portfolio is a huge part of your success as well. But it all starts out with what are you going to invest in.

So one of the things that I like to look at are companies that have this competitive advantage that we talk about and you know it's kind of a cliche, but it is a very real, important part of stock investing and company investing. But the idea of competitive advantages is are they earning above average returns on capital compared to their peers? Do they have some moat around their business that is going to allow them to maintain that? Or there's some preferential client or customer preference that is allowing them to keep that? Or do they have some other barrier to entry or something like that that's going to keep their margins solid? No company has an infinite competitive advantage.

But recently I've been thinking about companies in the property and casualty insurance. They're able to raise their prices in an environment like now and it's been a very good investment as of late, and there's times when people just kind of forget about them, but then you know they all of a sudden. It's like wow, okay, yeah, these are. That's a great business, you know being in the property and casualty insurance business, but anyhow. So the reason why I'm bringing this up is because when you're focused on these types of factors and not just indexing per se, I think you have an advantage and if you have a definite way, one of the things I like to do is to have a kind of a ranking or scoring methodology based on these factors, and the more attractive these factors are the more you invest in a particular investment are the more you invest in a particular investment. And there's various ways that you could do this.

But having more investment in those more attractive companies and making your weights more related to the fundamentals, in other words, having more or less based on the fundamentals, you know, allocating more or less capital based on that versus just a market cap weight. Just, you know, market cap weight is very efficient because it's kind of the collective wisdom of the entire marketplace moving the relative weights. And that's one of the beautiful things about indexing. And whenever you have a very rip roaring bull market, it's very difficult to beat an index mathematically, just because of the efficiency of the way it's calculated. So I have no problem with that. There's a time and place for that, I think, when you have more challenging times.

Being selective is more important and you can in my way of investing, and what I usually recommend as a reasonable way to think about it is to have an active component to your investment strategy as well as a passive component, but not to get overly enamored with passive investing or active investing. If you're going to err on being over enamored, I think it's better to be overly enamored with diversification and strategy. Diversification in a way that is kind of all weather, so that you can invest across various styles. So you know it's interesting because when I was thinking about another conversation I was having with a client and you know there are always many people want to have this definite kind of view. They want you to have a definite view about a specific outcome and I think probabilistic thinking is hard for some people. But I think that is the right way to think about investing and saying it's like handicapping, it's like handicapping horses or if you're into handicapping football teams or baseball players, it's the same kind of concept. It's like money ball. So you basically are working at the probabilities and when you have something that is a fat pitch and that really makes a lot of sense right now, it's important to really allocate priced for perfection right now.

But getting back to these factors, and the reason why I'm bringing this up again is because this is about protecting capital and one of the ways you can protect capital is not by being super defensive with all of your money and throwing it all under the mattress, but you want to keep your money compounding right and accept the fact that you're going to have variability in investments. It's really important because if ever, if you always want to lower your variability right after something has gone down, you're definitely going to be losing and you're not going to do as well as you should. But having more of a steady pace and then to think, make your investment decisions not based upon the vicissitudes of up and down, but more about the fundamentals, then you wind up doing a lot better. And sometimes it doesn't feel good when you're doing that, because there's a difference between what everybody is saying in the media versus what you have to do as a solid investor for the long run. So, as I'm looking at these various strategies, the thing I wanted to bring up was the smaller companies tends to do well. So, as I'm looking at these various strategies, the thing I wanted to bring up was the smaller companies tends to do well.

So many investors are all in the same stuff. They're in the NVIDIAs of the world and all that, and maybe not enough in some of the smaller names that make more economic sense. And then also many people are in large companies that don't have enough competitive advantage. These companies, maybe they're on a tear right now, but they have no competitive advantage. There's other entrants that are coming in, and it's a commoditized business. It's just a business that right now is doing well for some reason, but it's likely to be cyclical and to likely not do well in an economic downturn. And so many.

I think it's important to emphasize more large, larger, medium-sized companies that have a wide boat around their business that you can take reasonable investments in rather than just owning the indexes. And then the other thing I would point out is that there's other investments that are really not related in the fixed income market I think that you can take advantage of, and having some dry powder does make some sense. And just because when you're making these strategy adjustments, it's good to do things incrementally, not to just make massive, drastic changes. So obviously it depends on where you are, but if you are in a situation where you know maybe you just need to do some tweaking to the portfolio so that you could have a better outcome in the long run, and I've been telling people that right now it's time for us to you know, financial planning is important, but right now is a good time to be thinking just about your investments. Get down, roll up your sleeves and get in deep with the investments, not just kind of precursory. You know this. Here's my little pie chart and I'm going to have this.

No, I'm saying what makes economic sense and think bottom up and think diversification and think about, not defense. You want to be on offense all the time but you want to manage the risk as you play offense in a market really always because the key is to keep money compounded, because it's very difficult for you to time a bottom and one of the biggest parts of the returns happen after you've had a drop. The acceleration after a drop is usually much higher than as you're kind of easing your way up and most people miss out on those accelerations because they are trying to time things or they get too aggressive after a move has already been up. So we've had a big move in the equity markets recently, and it wasn't that long ago when we had a little bit of a downdraft and there was nervousness everywhere.

So my challenge for investors today is to stay level-headed and stay focused on allocating your capital based on the economics of what's going on with your investments, and staying with that and not being really about it and thinking more like Benjamin Graham talks about Mr Market. Mr Market is sometimes going to be your friend and it's going to hand you an investment on a platter with a great price and it's a good company. And then other times, and usually when everybody is super excited, mr Mark is going to be over exuberant and be just bidding up stocks and you should be trimming back from those companies and putting them into other things. And that's really the message that I have today, and I really think it's a timely message because, you know, based on not only today's market action but the fact that we've been seeing these trends, you know getting fairly frothy for a while, so it's time to really get back to basics, and so I guess that would be really the title of this presentation here, this podcast, is to get back to basics and to make economic rational decisions for your allocation of capital and not be in a position where you're chasing anything.

All right, that's it for today. I'm in Texas right now and I'll be here for a while just wrapping up some things here, but be back in Denver soon. This is Louis Llanes signing out for the Market Call Show and we'll talk to you later, take care.

For the latest episode of the Market Call Show. Make sure to like, subscribe and follow us on X, formerly- known as Twitter and YouTube.

In this episode of the Market Call show, I sit down with Jason Meshnick, a market maker turned fintech pioneer whose intriguing career journey has taken him from the bustling trading floors of the early 2000s to the cutting edge of AI in finance.

Jason recounts his winding path from a philosophy major in small-town Poughkeepsie, New York, to becoming a Wall Street trader and, later, a leader in tech for trading. We explore his transition to automated trading as floors shifted online trader jobs contracted and his move into roles in finance education and media.

Jason offers a captivating look into the evolution of markets and trading strategies, from the dynamics of floor versus electronic exchanges to analyzing sentiment shifts through media platforms and tools like CNN’s iconic Fear and Greed Index, which he helped develop.

Across various sectors of finance, Jason’s experiences highlight the human element alongside technical progress.

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

(AI transcript provided as supporting material and may contain errors)

Jason: I'm doing great, Lewis. It's so great to see you.

Louis: I know I'm so glad to finally have you on the podcast. You know, just knowing you for so many years and you know, knowing that you have so much knowledge out there with regard to investing and just your overall creativity, I had to have you on and I'm so glad that you came on.

Jason: Well, and one thing as you know from from our relationship, I've always gotten so much out of talking to you and I always learn something just through our conversations, and I feel like by the time this podcast is over, I will have five new ideas to to go after and try to figure out what to do, how to make them all reality oh god, I hope so, I hope so.

Louis: it's all about the ideas you know exactly. It was funny. I asked you to send me a send me your bio and I've known you for a long time and we met years and years ago at a CFA meeting I think we were both on a board for the CFA Colorado or Denver chapter and and since then we've worked together in many capacities. But I didn't know a lot of things about you that I should have known just reading your bio. I knew that you spent 20 years in the fintech world and I didn't know that you were also working on some AI investment analysis, which I'd like to learn more about, and that you really have a lot of passion for educating. And I guess your coworkers asked you to write a newsletter. I had no idea about that and you know now what is this about. Vampires are rich. Why are vampires so rich?

Jason: That was one of my favorite things that I wrote. Yeah, if you want to cover that now, we can, or we can talk later.

Louis: I think we'll circle back to that, but I was a little what's that about.

But yeah, and now you're doing some teaching at CU Boulder, teaching finance. We've done a little bit of lecturing together at the university level DU and things like that and I've always enjoyed watching you teach because you seem to captivate the kids. Well, they're not kids, they're young adults with your style. So I'd like to learn a little bit more about what you're doing there. And you are a Wall Street trader and market maker and there's a lot of things that you know about microstructure and investor psychology that I want to kind of touch on too. So, but the big thing is understanding that you were involved with the CNN, that popular feed and fear and greed index back in 2012, I guess that was put together. So I don't know. Maybe what we could do is talk a little bit about your background. I mean, I kind of covered it a little bit, but just maybe you can tell me a little bit about you know, share with the audience, your you know how you got in this business and kind of what's been your progression in this business.

Jason: Yeah, so my guess is that everybody says this, but I came to it from a slightly different path, not that not that, you know, I didn't get out of college and immediately go to Wall Street, that's. That's a pretty normal path, right? But I was a philosophy major and I'm far from a philosopher. But I think what I took away from my undergrad as a philosophy major was just sort of a way of thinking, right, as opposed to being sort of a business person thinking only about money, it's more about thinking about other kinds of things and things that drive people and being able to draw from communication and trying to understand what people think and how they think and why they think, and I think it was one of the things that really fascinated me. Also, being a child of the 80s, you know Wall Street was so important. There's so many movies about it, right from from the Wall Street movie to I don't know. It seemed like every other movie that came out was about how to make millions of dollars on Wall Street, and so, of course, I wanted to be part of that.

Having grown up in sort of a backwater, poughkeepsie, new York, I always wanted to go live in the big city, yeah, so that was sort of my start, was coming at it from kind of a weird direction and I ended up immediately going to work for well, a firm that no longer exists for a couple of reasons, but it was the trading arm of a New York specialist firm. So the specialists were downstairs on the floor of the New York Stock Exchange and my boss was one of their customers and he just worked upstairs in their clearing division and he was trading his own money. He had been a floor broker for 20 years, owned two seats, sold his seats, did pretty well on them, and then decided that he was just going to live the rest of his life as a trader. He brought his son in and then eventually I was working as a runner so you know fourteen thousand dollars a year and just wanted exposure, just wanted to be part of the action. Right, I love the action. I was so excited about just being there, the history I love the history of things.

Um, I probably should have been a history major and so, just being in that environment, I ended up getting picked up because I was. I was pretty cheap, right, so they didn't have to pay me much and I ended up working and really falling in love with being a trader and learning about how the market worked and how floor brokers could help make these trades. We had a network of 20 floor brokers across the New York Stock Exchange and what was then called the Amex, and some of the regional exchanges too, so that we could trade and we'd strategize every morning and then make our buy and sell decisions and then, throughout the day, update them as needed. I'd like to say that we were the high frequency traders of the time, even though our frequency wasn't that fast, but we were sitting on both sides of the bid and the offer.

Louis: Boy.

Jason: times have changed, huh offer Boy times have changed huh yeah, I mean that's yeah, I like to say. When I, when I started in the business, there were people there who'd been on the floor in 1929. And so much of the floor of the New York Stock Exchange looked the same as it did in 19,. You know, if you, if you were to go, take Jesse Livermore and drop him, you know from 1929 and just drop him on the floor in 1992 when I started, he'd have been like I don't know what these TV things are that are all around. He wouldn't have even had that word, but otherwise he'd have been able to run into a crowd and know exactly what to do. And by the time I left in 2002, well, there wasn't even a crowd, right? I mean, everything was different about the floor of the exchange. I was a market maker on a fully electronic stock exchange, so the principles were all the same, but everything else had changed. It was so different.

Louis: Oh, that's a big part of what I wanted to talk to you about that the principles are all the same. So, because I was just listening back to some of our, or looking back at some of our conversations just to prepare for this, and we've had a lot of conversations in the past where you were really outlining like I want to capture what I saw, those principles that I saw on the floor, and I want to capture them today and that's kind of driven a lot of things that you've done. So maybe maybe you can tell me like just a handful of what those principles are that you've noticed are like still the same now that probably will never change.

Jason: Well, so I'll caveat this by saying I've been out of the markets for a number of years, right, so I left, I left trading in 2002. And then I was still, you know, still kind of a pretty active trader, investor for the next 10 years or so. But then life gets in the way and I'm just very busy, and so I've sort of shifted my focus in a number of ways and I'm honestly really interested in analysis now and thinking about market sentiment and what investors are doing and how investors think about the market. And I now, when I trade, it's opportunistically right, I'm not in there every day, I'm not trying to make eighths or even pennies.

Louis: I guess we should probably. Oh, I'm sorry to interrupt you there.

Jason: Go ahead.

Louis: I was just gonna say I guess we should probably back up a little bit and talk a little bit about, like more about your career progression, because you moved into from trading into fintech and, and from fintech now to working at the streetcom for and as an editor, so, and which to me makes a hundred percent sense. Um, just from what I know from your talent, your talent stack, so maybe you can kind of finish that progression a little bit. So, to where you are now, yeah, sorry, yeah, totally.

Jason: So my progression is really. I mean, there's there's a couple things that run through the entire thing and I think a big part of it is analysis and being excited about, about thinking about the markets right, about being being in some ways just part of the culture of it right. So that's been the big thing that's run through my entire career. But in 2002, my wife and I we weren't married at the time we were thinking about you know where will we end up, and we decided that we either end up in New Jersey or we could move somewhere that we wanted to live. So we did a search all around the country and decided we just sort of threw a dart at the at the wall and said Colorado seems pretty nice. So we ended up here in Colorado and it's been the best move.

Louis: Man, that was a lucky dart throw. If you ask me, it's a lucky dart throw, I think.

Jason: I think it was guided by my wife's hand. She may have said I'll take that dart and I'm going to place it right here just at the foot of the Rocky Mountains. So she'd been out here and visited and said Boulder is going to be the place where Jason will be happy and we'll make this happen. And so we moved out here without jobs. I quit my job as a market maker in June of 2002. And the market was changing so much at that time it was definitely becoming harder to make money, and so I was ready for a change. I was ready to do something different. You know, when I left, there were 10 traders on my desk and probably another 30, 20, 30 on our over-the-counter desk.

And when I went back, seven or eight years later and I'll get to this, but when, when I was working in FinTech and I went back, visited my old trading desk, there were three people and a really large computer and, rather than taking directional bets on the market, they were doing arbitrage. And they were. They were, they were working the order flow and they were figuring out, based on the order flow, how long or short they were going to be. You know, sort of using quantitative methods to understand. If they felt the market was going up and they were going to end up being more short and more short, they would have to think about the Delta to the market and try to get long ahead of those people so they could be selling to them.

So it became in some ways probably a much more intellectually engaging thing than just sitting saying, oh someone just sold me 1,000 shares, I have to get out of it now. You were thinking ahead of the market. In many ways it was really cool. I probably would have liked it a lot, but it just became a really different animal. It was much more arbitrage as opposed to directional trading, which is really what I knew. So we moved to Colorado without jobs and in doing that that's when I met you, lewis is. I was pretty engaged with the CFA Society despite not having a CFA I'll throw that out there. I'd also just finished my MBA at NYU. That counts.

So, I think they let me in, but that was about it, and they let me even onto the board.

Louis: Yeah, yeah, you're a very likable guy, so it was a pretty easy decision. They're like he doesn't have a CFA, but he's a pretty cool guy. We'll let him in anyway.

Jason: I think he also said this is a guy that we can make do all the all the programming. We can make him call all the all the people that we don't want to call and try to organize meetings. And they thought I was an event planner, which it turns out I'm not. I'm just not a good event planner. My wife can tell you that Actually, lois, you did kind of the same. We were organizing all the CMT meetings.

Louis: Oh yeah.

Jason: Like, yeah, yeah, yeah, let's, let's go call some people, um, yeah, but so so it took a while and I ended up finding this job here in boulder, uh, for a company called wall street on demand and for those who are not familiar with wall street on demand, it has a new name um, it became market, uh, no, became wall street on. It was wall street on demand. Then it became market on demand once I, once market bought us and then eventually it became market on demand once market bought us, and then eventually it became market digital, when they decided that it was really time to think more broadly than just web and think broadly across all digital formats video, et cetera, and advertising. And I stayed there for 19 years. Where, louis, you touched on the AI side of what I did and so this is one of my big jokes is that I like to say that I was the world's most widely read analyst, if not the best, and the reason why I say that is because over the 19 years that I was at that company, I built something like I don't know 200 different. I call them only because of today's terminology and the way that people talk about markets now, about technology now. I call these AI related, and they really are simple. They're very much rules-based AI, so sort of traditional AI, not these large language models that we have now that are in some ways more sophisticated but really not as good.

So what I was building were these big decision trees, and these decision trees were things where you would, using your financial knowledge, you would say, okay, I'm looking at some financial data around a company. What do we need to know? Well, let's start with the valuation. Is the stock what's the PE ratio? Is it a high PE ratio or a low PE ratio? How do you define a high PE ratio? Is a high PE compared to its average for the last five years, or is it the highest in its industry? Right, you can look at things cross-sectionally or historically, right, but both ways time-based or versus peers, and so we would do things like that and we would chop up the market and try to understand. You know which stocks were good or bad, but it wasn't necessarily for an investment perspective, right? This was because what we were doing was for the Schwab's and TD Ameritrade's and all those companies. We were building the news and research portions of their website, and so I and my team were providing that research, and so a lot of the texts that you would see on that site was completely dynamically generated.

So, very simple, rules-based AI. And I say it's better than large language models for AI, because large language models you never really know what you're going to get. It's a bit of a black box, right. So what we could do is I would create text that was locked down. I knew exactly what it was going to say. I didn't know what the data was that was going into it, right, I didn't know if Apple had a high PE ratio or a low PE ratio, but I had rules around defining what was high and low.

And so when I would go to the compliance departments at Schwab or TD Ameritrade or Fidelity, et cetera we worked with all the US brokers, many of the Canadian brokers, australia, others I would go to the compliance departments and they would say, well, how do I know that you're not going to say something silly or that's incorrect?

And I said, well, I'm going to give you the entire decision tree and you're going to be able to look at the decision tree and understand what it says.

So the only way that my model can be wrong is if I have a bug and there are bugs all over the internet, so I'm as fallible as anybody else, but we're going to do our best not to have those. And then, secondly, if the data is wrong and if the data is wrong, well it's wrong all over the website too, and we're going to fix that. But generally, 99.9% of the time, for 99.9% of the stocks, what we say is going to be accurate. It's going to be correct, it is going to be as unbiased as possible, because I'm not trying to tell you, as a value investor or growth investor or whatever, what you should do. I'm just trying to describe the various aspects of the stock. I wasn't there to give you a buy, sell hold recommendation. I was purely there to help you, as a self-directed investor, understand more about the stock, about the company. You know you brought up something that's really interesting about that.

Louis: I mean, I have to. You know you're talking about large language models and it's a little bit of a black box. We don't really quite know, and you're dealing with these big decision trees, or you were at that time and it was traceable, like you could trace the logic which made me think, okay, we have data and the data can be right or wrong, and then you have the logic, and the logic can be right or wrong. And I think that's one of the things that I always have a little.

I'm having a little bit of an issue with with some of the AI is the logic element of it, because you like how much of it is curve, fitting what is real behind it, so we could use it. I had a tech executive tell me one time that the big thing with AI is it can help us with speed and it can help us with accuracy if we use it correctly. But it's not necessarily like you still need human thought. You still need that ultimate human element to it. That's my personal opinion on that. But the fact that you were using decision trees early on, you know that and just to get information, that way you were speeding the process for the investor, basically.

Jason: Right.

Louis: Like they would spend a lot of time looking for all those things. But you systematically sped it up, which is a a big thing for and we and we all have that now that's and it's, there's just like different flavors of it, um, so, uh, it's, it's that whole. It's a whole. Nother topic we can get into a little bit later. But I, I, uh, I remember you talking about that when you were doing working on those projects, um, wondering where it would go next. Um, you know, as far as that goes, but getting back to your, getting back to your, your story, let's get back to your story. Yeah, sorry, keep getting off track.

Yeah, that's okay, yeah.

Jason: So while I was at that job I did, I did a number of things. I mean it was really, it was really an exciting job in so many ways. But the two big things that I did were really this you know, running the natural language generation product right. This thing we called it smart text, um, and so that's that ai thing. But then the other thing that I was so excited about was doing education right and and our. So this started back in 2006 or 7, um, I started doing brown bag lunches where I would just put together a presentation and teach our developers and designers and engineers all about everything they needed to know about investing, not so they could go out and make a million dollars, but rather so that when they were building the tools that we were all using, they understood their subject matter right, that they could be engaged with the topic and identify with the end user and really understand why a PE ratio mattered or why a chart mattered. Simple thing, like in design, you'll notice that there's a lot of white space on many pages and they talk about that as being good design. It's actually a really bad design for investors and the reason is well, depending on the type of investors, but for slightly more active investors, engaged investors, what they want is information dense things, and so I would help steer our design team to create things that were a little bit more information dense, an example being a chart, a price chart. You don't want to have to scroll up and down too much to be able to read your price chart on your Schwab account. You want to be able to type in NVIDIA and load up a couple of indicators that you want to see. Put your MACD on and then MACD is a lower indicator, maybe an RSI, maybe whatever Put those things on there and be able to, in one view, understand the trend, momentum, volume and volatility from that stock right. That was another thing that we did when we rebuilt Schwab's charts. I'm kind of proud to say that Yahoo actually stole this, but we broke the indicators out.

Previous big charts started this. They said indicators are either separated out as upper indicators or lower indicators, and that doesn't tell you anything, and I'll credit John Bollinger. I learned all this from him is really you know, people should understand what goes into the indicators. They should understand as much of the calculation as possible, right, what the inputs are and what it's giving, what information it's giving you, right, and then separate those out into different sort of you know I'm using the term factors very loosely but into the different factors of technical analysis. So, is it trend, is it momentum-based, is it volume, volatility you can come up with others as well but, right, where does it fit? And if you're looking, if you put a bunch of indicators on a chart and it turns out that they're all trend indicators, well, you really have one indicator and so you're not getting a full picture. So go put some momentum indicators on there to understand the speed and whether the trend is about to be exhausted or not.

So it's things like that that I really wanted to help both the end user of our products as well as the the, the person who was building the products, understand so. So I ended up writing for about three or four years. So we started that in 2007, but it was. They asked me to put it on hold after a while cause it was taking away from a lot of my work. And then, in 2018, our CEO came to me and she said you know, you used to do this, these brown bag lunches. I would really like it if you would just write. Just write a newsletter for the whole company.

The question of the week, so Fridays. I'd ask the question, and it might be how many? How many stocks are there in the S&P 500? And I haven't looked at the number recently, but I think the number is still 501, right, it might even be higher, but there's only 500 companies in the S&P 500. And so that's the distinction. There's 500 companies, but some companies have multiple classes of stock that may be in the S&P. It might be 505 now I can't remember. I have not looked in a long time, but that was effectively the answer, and so it became just a really fun thing to write the answer, and so it became just a really fun thing to write.

Yeah, so teaching people about vampires right, became a way of telling them. Why are vampires so rich? It's simple They've been investing for hundreds of years and so they've had time to let their money compound. Assuming that Vlad the Impaler, the first vampire, he was a prince. Let's just put a number on that $10,000 in today's money. What does $10,000 grow to over 500 years? It grows to trillions of dollars. And then, if you spend 1% of that every year, how much money are vampires spending? Today, vampires are spending billions of dollars. Vampires are probably supporting our economy.

Louis: They've got to be the richest people in the world. It's like puts vampires, yeah yeah, it puts elon musk to shame, I mean really so maybe elon's a vampire yeah, you never know, maybe a little similar, I don't know. That's that's wild. Well, um, so you have this creative side to you. That's that's driven that. And then how did you get um, like, was it just a natural progression for you to do what you're doing now?

Jason: or maybe you should tell us a little bit about what you're doing now yeah, so so let's get to what I'm doing now, because that's important and I know that, um, they'll be watching this and they'll they'll kill me if I don't talk about what I'm doing now, because they also really like it. Um, I'm having a lot of fun. So, you know, you go through ups and downs in your career and I definitely there were times when I absolutely loved trading and absolutely hated, and that might be the same day. I might love and hate trading.

Louis: In.

Jason: FinTech it was. I might love a year and hate the next year and, you know, love the next year for that. It was project to project and here you know right now what we're doing. So I work for I'm currently the managing editor of the street pro and so so you are probably familiar with the street. Jim Cramer founded it back in I don't know 1997 or 1998. It was really the first, the first and best of its type where you could come and get financial news and information. And then, not long after they started the street, they brought, they created something called real money where they brought in people like Helene Meisler and and Doug Cass and they would create something that was more of a subscription product but more of a newsletter, newsletter product where Helene would write top stocks is what it became and Helene would write her brand of you know market sentiment analysis and it was really great.

And Jim Cramer left about two years ago and I've never met Cramer. I've heard him speak before but I don't know Cramer, don't know a lot about him. But I'll say this is a business that was 25 years old or is 25 years old now, and it's going through a lot of change. So we're trying to figure out what will it look like in the future. And one of the big things I love this I quote it all the time but Barry Ritholtz was one of our. I believe he was a street contributor at one point. Barry Ritholtz has gone on to become a Bloomberg contributor and have his own money management firm, but earlier in his career, I'd say, he made his name at the street, as did a lot of people, and so he calls the street the Motown of Finance and he says that the Jim Cramer was sort of this I think the name is Barry Gordy character who you know sort of larger than life in many ways, and he brought people in, brought people in and he made them stars right, and so we did the same thing, or he did that at the street, and so we're in the process now of trying to do that again.

We have great contributors. They're all wonderful and they provide really great perspectives on the market, and sometimes they disagree and sometimes they agree. I asked a few of them to write about GameStop recently and it was really great to see the kinds of things that I got. But we want to get back and we want to make these people, we want to make our contributors, who are such great analysts, stars again, right. So we're trying to change a lot of things that we do in the business. In the past it was really Jim Cramer. The last five years, I'd say, jim Cramer became our number one star. I want Helene and Doug and Sarge and Rev Shark and I could go through the whole list Chris Versace I want them all to be stars too, and they want to be stars and they are because they're so good. So we're working at how we can do that, how we can elevate the content, not just to make the contributor stars, but really to showcase how good they are as we go and help more investors to be self-directed investors, be more successful in their trading and investing. And I say we have two different types of products, really Our value add.

If you are a trader, a self-directed trader, you might spend your time on Doug Cass's community, right? So Doug has his daily diary. Doug's a hedge fund manager. He's out there from three o'clock in the morning. He's sending us stuff. It's crazy. The editors have to be there editing and putting it up from. They start at 5.30. So the editors are in there at 5.30 in the morning putting Doug's ideas up all the way through the end of the trading day, and then in the lower half of that page is a community where we have many, many people from the community, some of which I won't say any of their names, but some of which are fairly big names in finance and investing. We know who they are.

On the site they really the community ends up feeding on itself and providing great ideas just among each other. There's one guy who talks a lot about cryptocurrencies. We don't have a lot of cryptocurrency content on the site. We're working, we're going to be adding some, but this one person alone actually provides some of the best crypto content I've ever written, and he's paying us right now, at least for now us right now, at least for now.

And so the other products that we have. We have where you can get trading ideas or investing ideas. We have some people who are a little bit more technical focused, some who are more fundamental focused. We have one person who does really well providing dividend ideas. Another person is really great at more fundamental, value-based ideas, but then we have a whole portfolio.

You can come to us and we have Chris Versace runs our pro portfolio, where we help investors understand not only how to put together a portfolio and they can just copy this entire portfolio but, the thing I love about it most, every week Chris writes a weekly update talking about what he sees in the market, what's coming up, economic things that are happening. But then he goes through all 30 holdings. He tells you the investment thesis you know I'm big on the investment thesis, lewis right, you should have a thesis, you should know why you're investing something and you should update it frequently. Right, chris updates the investment thesis every week. And then he tells you what his target price is and his panic point, his stop right, where he's going to realize that his thesis is incorrect and he's going to re-evaluate, probably sell the position. And then he just goes through and gives you sort of a weekly update and says, yeah, here's what happened in NVIDIA. Jensen Wan was out doing whatever he did. He spoke to these people.

So that's what we're doing and the product is great and we're, you know, really excited. Now we have a lot of energy around what we're doing and how we're, how we're rebuilding, um, building I keep saying rebuilding like really we're taking what we had, which was a solid product, and we're just building off of it. We have, uh, later this month this will be the first time I've kind of mentioned this Um month this will be the first time I've kind of mentioned this Our marketing team doesn't even know but later this month we're doing a roundup, or we're actually calling it the quarterly call. So this will be the end of every quarter. Now we're going to have four of our contributors come on and really just talk about what they see in the market and have kind of a little panel discussion, and so that'll be really exciting, but it's things like that that we want to do.

Louis: Yeah, it's good to hear the actual real time discussion, you know, because you get more color about it. But I love what you said about the Motown or the. Who is it? Who said a Barry Ritholtz?

Jason: Barry Ritholtz.

Louis: Yeah, I said that. I mean I thought I had so many like visions in my head because, you know, I'm a musician too and I I'm thinking about motown. I fell in love with motown as a young kid. My parents listened to it and the first thing that I thought about was that these, a lot of these people that were, uh, involved in motown, they were, they were completely isolated from the music industry. So so you know, you can find a lot of talent outside of, people that are like right in the mainstream of the music and of the Wall Street, kind of normative Wall Street. I mean you have to do something different really to be unique like that.

And sometimes I think groupthink hurts Wall Street. In fact, I was just telling my wife this morning. I got out of the shower and I said you know what, in a way, wall Street is kind of like not even a thing anymore. Like you know, it's like I don't even think of Wall Street anymore as Wall Street. I mean last time I was there it didn't even seem like Wall Street to me. I mean it's still, it's still a thing mentally, but it's not. It's like I really think it's time for Motown.

Jason: I think you guys are right in the thick of what we should be doing, because there's so many great thinkers that I run into who are not anywhere near the center of Wall Street, quote, unquote. So that's, yeah, one of the things I really want to steal comes from Chicago. So Morningstar in their quant reports. So if you have a Schwab account or any of these, they pretty much all have Morningstar's reports. These aren't the quant reports, I'm sorry, it's actually the ones that are handwritten by analysts, but on page I don't know two or three they have a module that says bulls say and bears say and they go through the bullish case of a stock and the bearish case of a stock, and that's something that I want to institute everywhere.

Everybody should be with everything right. You talk politics, you should have a. You know what are the positives, what are the negatives. Whoever your candidate is doesn't matter. They have positive, they have negatives, that's right. You know your friends have positive, negatives. Like everything has a positive and a negative, and you have to look at both sides of the story, especially they say you shouldn't marry your investments Right. Know what the downsides are, Know what the risks are with everything you do.

Louis: Wow, there's a lot there we could go into.

Jason: I know yeah, as far as the no, no, not politics. Believe me, I mean we're staying away from politics.

Louis: Yeah, we're staying away from that. You know, it's more like the I keep thinking of the narrative versus the numbers debate. I always say that I'm more interested in the numbers than the narrative. Like I start with the numbers and then go for the narrative and I think the older I get and the more I've seen, the more I realize that it's not the narrative necessarily, it's just understanding as much as you possibly can about what is true.

It's hard to do and so much of investing is qualitative. You know, I mean you know my background. I do a lot of quant factor stuff and all that and that's really helpful in kind of keeping you honest. But at the end of the day, when I look at the stocks that have done really, really well for me, or macro trades like futures type oriented trades, it's been because I had some piece of knowledge and understanding about something that I just knew with a high conviction that was true and I stayed with it and it made a lot of money. So that is really hard. I don't think the quant sometimes leads you there, but it may not necessarily. It's not usually the end, like the end all be all, and a lot of times if you look at the best quantitative stuff it tends to turn over a ton. Right, it's like like momentum. Well, you know, you could say like, okay, I'm going to run momentum screens on stocks and the best parameter set is going to be me like turning over quite a bit. But then after tax and reality in the real world, you're really not making that as much as you would think, whereas you might find something that's gaining momentum that no one's talking about, like I bought not to talk about.

I shouldn't talk about specific names right now, but there's a particular stock that I bought where I understood what was happening. It did come up in a momentum screen. It was a very small company at the time and then it just went ballistic. That now did I know it was going to ballistic? No, not to that degree. You know, I didn't think it was going to go up. You know 500% in, you know three months. But it's one of those things where you, if you know something, there's so much more to the narrative, so you go into the Motown aspect of things. There's value in that. We, we numbers are becoming a commodity, almost right. Everybody can get all these numbers and we can, we can move things around. Anybody can go on chat, gpt and, you know, pull, you know I get certain things. So I, you know, I don't know I'm becoming more of a qualitative guy the older I get. Is that that's weird?

Jason: I have a theory on that. Let me know what you think. But I think that you are able to become a qualitative guy now because you have been a quantitative guy for so long and so because everything that you do there's, you know, there's a famous saying, it comes from consulting. I think you can't manage what you can't measure, and so everything that you've done as a quantitative person has been to measure, even when you run that quant screen and you get a list of stocks and you know that this list of stocks is going to turn over at the same time. You probably know well, this is going to turn over. But let's pick on NVIDIA. Nvidia is on the list right now and, because of these other things that I know through my experience, nvidia may come off in two weeks, but it's probably going to come back on in a month. I should just hold it Right, yeah, and so I think that you've spent so much time in the markets and it comes down to the word is experience.

Right and that's why you hire a financial advisor. Or you hire, or you take a subscription to the Street Pro, or you want to get the experience of other people, especially as you're learning.

Louis: Yeah, yeah.

Jason: So now you can be. I was just going to say one thing. One thing is you can be sort of a core satellite where you can take your core investing, and maybe you want to be self-directed and buy a portfolio of ETFs, or you want to give that money to your financial advisor, give it to you, lewis, and then, with sort of the satellite funds, play money or whatever. You use your own experience Maybe it's in your own industry or whatever it is. You're trying to add that extra bit of alpha right and have fun maybe, but but keep yourself intellectually engaged. You have, you know, sort of the core of your portfolio over here and then kind of the rest of it where you can do things with as well.

Louis: Yeah, I totally, I totally agree with that. So you know, this is just kind of getting me into this the fear and greed concept. You know you got involved with the fear and greed. I'm not, I'd like to hear the story about how you got involved in and what you, what you did in that. But when I think about the fear and greed index, I always think about that fish that's in the bowl and doesn't realize that he's in water and but you know, but if he steps outside and looks at he's like wow, I'm in water, right. That's kind of what sentiment is to me. It's like we're part of the sentiment, like we are, we're the observer. It's like the Heisenberg principle, like what we look at, we change, right, and that's sentiment, and fear and greed is kind of like a great overall, you know, easy to understand way of looking at that. But I guess I want to let's start off with your story, like how did you get into the fear and?

Jason: greed project and what, what. What was your progression through that? So yeah, I mean, after coming from Wall Street, I'll tell a really quick story because I think this it's in it's in the article that I wrote too. But this story is a story from business school and I can't remember if the numbers are correct, but they're approximately correct and the timing is approximately correct.

I was in business school, part-time, at night. I was working as a market maker during the day and then at night I was at NYU taking a class and this class was a valuation class and they asked us we had to come up with, we had to do a discounted cashflow analysis of a stock, and each group got to select whatever stock they wanted and I proposed to my group let's pick JDS Uniphase, because it was one of. It was the NVIDIA of its day. Oh yeah, hopefully NVIDIA will have a better future than JDSU did. But my group was all they said absolutely, let's do that one. And the stock was trading at I don't remember exactly, but probably about $165. Okay, and so we sit down and we do our analysis and we're doing discounted cashflow analysis and one of the big inputs to DCF is understanding the growth metrics right and forecasting growth. And forecasting growth means looking back historically, figuring out how fast the company has been growing and just saying you know, is it going to speed up or is it going to slow down? Eventually they all slow down. It will slow down, but you have to figure out how long that's going to take. So we did the analysis and we figured out it would slow down, I don't know, over 10 years or something. Something pretty reasonable, probably pretty generous as well, and we came up with a value Again.

Remember the stock's trading at $165. We came up with a value of $2.25. And we looked at it and we said can't be, can't be. We learned in our last class the market's efficient, this is all wrong. I don't know. We did something wrong and so we went back and we now this time we went crazy. We're like this stock's going to speed up its growth. It's going to, instead of growing at 50% per year like it has been, it's going to grow at 100% forever. And we came up with a value of $225, right, and so the stock gets added to the S&P or maybe it was when they confirmed that it would be and the stock jumps to $225. It jumps to $235, I think was the high I sell my stock at like $225.

Louis: And so we were right, that was a good trade.

Jason: Good trade. And then we go and we present our research to our professor. And this is where it's really funny. The professor, who was so outrageously smart, could do any math problem in his head. But he's looking at us, he's laughing at us. He's like really, you think this thing is worth $2.20? We're like, yeah, here's the research, here's what we did. And he's just laughing at us. And then he says how could this company possibly be worth more than Apple? And Apple at the time was trading at $19, which, split adjusted, is probably something like negative 10 cents. And he said Apple has $16 in cash on its books and, whatever he's like, Apple is definitely worth more than JDS, Unipay. And, of course, this guy's probably retired on a private island somewhere.

But what I took away from this whole story oh, and the other thing is we were right on both sides. We were right with $225 call because the stock traded to $235. And within two years the stock was trading at something like $2. So we were right on both ends. And so what I took from that was I'm not a great analyst and I'm not a great forecaster. I'm especially not a good forecaster. Okay, but what I can do is I can look at data and I can back into things and I can understand well, if I look at, if I calculate, if I back into, how do I get to $165 or $200 for JDS Uniphase? I look and I say, well, the market has really high expectations of this company and those expectations are nothing but sentiment. Nobody knows.

Louis: I think that's all you need, though, jason, I actually don't think you need to be a great forecast Like that's really all you need. So, cause, if you know those extremes, you avoid mistakes, because the more I do this, the more I realize that's what it's about. You know, if you're going to put X number of units, and risk units if you will, in your portfolio, if you don't make a lot of mistakes and you compound reasonably, you're going to do great. It's just like reading. You know Warren Buffett always talks about read chapter eight and chapter 20 of the intelligent investor, which everyone should do, by the way. In fact, I'm set I send that book to clients and just say read this.

You know that's what all it is about. I mean, that's basically what it's about what you just talked about right there. You don't really need to be a great forecaster. You just need to avoid a lot of mistakes and have a reasonable amount of diversification, not too much. And yeah, I mean you hear about people that have made like great calls consistently, and then the more you learn about them, the more you realize that there was something else part of the story. You know what I'm saying. There was another part of the story that you didn't really hear about, and a lot of it boils down to not avoiding mistakes, having discipline, risk management, things like that, but anyway, I got you off your topic.

Jason: It's all risk.

Yeah no, yeah, no, no, yeah, and it's. It's important to cut me off too, because I can. I can talk about certain things for too long, but I'll just. I'll just cut right to your question, which was fear and greed, yeah, yeah. And so how did I get to that? Literally, I, from that point in about 2000,.

You know, I got much more interested in technical analysis and and, and I started thinking I'm not so much like a stock picker and I'm not so much into, you know, the MACD and the RSI. I'm much more quantitative. That's my interest in technicals. Technicals really helped me become more quantitative and more interested in looking at the big picture, understanding how to measure the big picture, and so I started looking at indicators and things that people like Ned Davis was doing. Right, I, I a big fan of Ned Davis, ned Davis's work. There's some other providers that were like that, sentiment traders Another one. I like all those, I like what they do and I started trying to replicate. You know, you don't know what their secret sauce is, although actually Ned Davis has a really good book. I'm looking at my bookshelf somewhere out there when Ned Davis's book is being right or making money. But then his chief strategist wrote another book where they actually go in and they tell you how to build a, build their, one of their sentiment indicators that has nine components to it. I was messing around with that, trying to figure out, trying to understand these indicators and understand the signals that they gave. And I hadn't around.

That same time, cnn was one of our clients at what was then Wall Street On Demand and our CEO was out talking to them and he was talking to Lex Harris, who was their editor in chief, and Lex said you know, I don't know what this is, but I want to build something called the Fear and Greed Index. Can you help me? And Jim, our CEO, came back and he came to my team and he said so CNN has this kind of crazy idea. They want to build something called the Fear and Greed Index. What do you think has this kind of crazy idea? They want to build something called the fear and greed index? What do you think? And everyone on the team pushed away from the table. They're like what a bad idea. And I was left sitting there going they thought it was a bad idea.

Yeah, they just you know they didn't get it. It wasn't what they do. I thought you were going to say mic drop.

Louis: I literally thought you were going to say mic drop. Everybody said that's a great idea, let's jump on it. That surprises me. They looked at it.

Jason: Yeah, they were like well, and they didn't know how to do it right. It wasn't what they were interested in. The team all had very different kinds of backgrounds, and I was the only one that had that more market-related background. The others were really more analysts Smart guys, great guys, but much more like. They could probably pick a stock better than I can, but they cannot tell you if we're in a bull market or a bear market. So I'm sitting there saying this is the greatest opportunity ever. And so they got me on the phone with CNN, with Lex, a day or two later, and we just started putting together ideas and Lex basically said look, I don't know what this thing is. You kind of know what I want to do. I just want something that really represents that quote that Warren Buffett says, which is you should be fearful when others are greedy and greedy when others are fearful. So what, what is that? What does that look like? And so I just went and built it. Luckily, they gave me Jim.

Our CEO's son was also a statistics major at Yale, and so for his summer internship that year, he sat with me and we went through and took all the indicators that I had put together and we did a principal component analysis, which is really important because you want to make sure, just like we said earlier, when you're looking at a stock chart, you want to make sure that your indicators aren't all trend indicators or all momentum indicators. The same thing, we want to make sure that each of the indicators, within fear and greed, didn't step on one another right, that they weren't saying the same thing, or really just that they worked well together, that they were each complementary, right? There were a couple indicators that I wanted to include that just didn't make it for budget reasons. Cnn is a media company. Media companies don't have huge budgets these days, so I couldn't do things like market valuation, s&p 500 valuation, or we wanted to use the, because by this point, market had bought us, and so I wanted to use the credit default swap index and I could only get end of day CVS data, not intraday, and so it just didn't fit with what we were doing. Um, so there were, there were some indicators that we left out that really would have been perfect and, um, you know, later on I got I got to use for other purposes, but not for the fear and greed index. But I got to use for other purposes, but not for the fear and greed index. But yeah, right now you know the fear and greed index, the seven indicators that are there, we selected one that is purely just the S&P 500, right, normalized. So we understand if it's sort of fear, you know, fearful or greedy.

But then we have two that are breadth indicators. So how broad is the advance or decline? And is that moving in concert with the market or against the market? Then we have two that are options related the put-call ratio and the VIX. And then we have two that are bond market related One that compares the spread and yields between low-quality junk bonds and high-quality investment-grade bonds, as that spread is tightening. You see that investors are, you know they're more, they're seeking out risk because they think that they can get better returns. And then the last one is where we compare the returns on stocks to the return on bonds over a 20-day rolling period, total return as well. So for all these underlying indicators we're using ETFs. So this is actually something that can be replicated by anybody, but there are a lot of mechanics and calculations that go into it on the back end which make it. You know, if you are going to calculate it yourself, you got to be pretty sophisticated and be and have a pretty decent data feed. Yeah.

Louis: Well, I love that. You know that was put in a scale that made sense and a categorization that made sense. It almost kind of makes sense the way that you did. It is like extreme fear, fear, neutral greed, extreme greed. These are things that we can understand and this is, I think, one of your biggest talents, actually. I think one of your biggest talents actually. You know, like you had said, we were looking for, we did principal component analysis, but we were looking for things that worked well together and complementary.

As a quant geek, I would have just said non-correlated, you know or not. I would have used like big, long names of there's some statistical names that are you know to describe, that are like really long and stupid, sounding like to make no sense. I love the fact that you like that, you, you that's the. That is a great skill and I think to be able to take something that is complicated and make it accessible was one of the biggest, I guess, wins from this and it also helps people understand themselves, in my opinion, like if somebody goes and they look at this and they say, okay, right now I'm looking at the website. It says I'm on cnncom markets, fear and greed. It says it's got a number 48 and it says we're neutral but kind of tilting towards fear. So tell me a little bit about, like, how you would interpret this.

I'm an investor right now. Let's say I have a reasonably good sized portfolio. I want to grow my wealth, but I also want to manage my risk. How would I? What would I use this for? How would I think about this? For like, really, like practically, how would I use this?

Jason: Okay. So what does neutral mean? And neutral is really that center zone of I don't know what it is right. So the first thing I'll ask you to do and I know users or people who are watching or listening can't see this, but in the upper right corner you can see where it says overview and timeline. So the first thing I want you to do is click on timeline, okay, and what you'll see is a chart of the fear and greed index for the last two years.

And especially when we are in this neutral area and we don't really know what the overarching sentiment is, it's important to look back over historically, just like we said with the PE ratio. Right, you can look back and compare to peers, or you can say how is it versus history, and so what we see is this 48 is an increase over where it has been. But, more importantly, we're sort of in this weird consolidation period. Fear and greed is just kind of ticking up and down, up and down. It's not really doing much of anything. So, however, we have dropped from a level of greed right Back before April and I'm going to pat myself on the back.

I don't write much about fear and greed. I'm going to start, but I don't write much about fear and greed on our site. I did post in one of our little communities. I said, look, hey, just so you guys know. You don't really know me, but I built the Fear and Greed Index and here's what I've been watching Fear and Greed. It has just broken down. I think the market's going to break down with it, and you know my timing was amazing and the next day the market broke down. So, yeah, good for me, blind squirrel. But so what I like to do is I like to look and see and look for patterns and try to understand what is it doing and how does it compare to the market.

So a few things, all right. What really matters is fear tends to be good. What happens when the indicator goes into fear or extreme fear? What we see is that standard deviation of returns. So the volatility of the market increases, and I think we're talking about forward volatility too, not like a month out, but days out if you want to measure it each day and sort of see what's happening.

Volatility is just high when we are in extreme fear and fear because investors are nervous. What happens when investors are nervous? Good time to buy, right. The other thing is greed happens a lot. Okay, and greed is not necessarily a bad thing. Extreme greed is oftentimes a good thing. Okay, extreme greed tends to have.

There's two times that extreme greed happens and one time is a great time and the other time is a high risk time. Okay, the great time is when we have been at extreme fear. The market has fallen maybe the market fell by 10% or something and we're starting to see a rebound and what you'll see oftentimes is the components of the fear and greed index spike and everything spikes, everything jumps up and we get to extreme greed because we've gone from a low level and all of a sudden, investors are committing new capital to the money. Investors are getting excited and we see extreme greed.

Extreme greed is almost always good, except when, if we were in some kind of an uptrend okay, we've been, we're in an established uptrend, something good happens, the market kind of spikes. We don't. It's rare that we really see extreme greed during an uptrend, but let's say it happens. Well, that tends to be a period where probably just don't want to commit new capital right now. I probably want to take a breather, wait, because risk is higher. You know it's extreme fear to extreme greed, but really it's low risk to high risk.

Louis: But sometimes, as you know, sometimes that greed can be really good too. The other thing yeah, go ahead, sorry, no, no, I was just going to say that reminds me of like the traditional technical interpretation of momentum is after you've had a bear market, you always get to an overbought situation. That doesn't mean the trend's over, it just means the trend's beginning, and it's almost the same concept. It seems like to me to some degree like you're looking for the extremes, but sometimes you have to interpret it the opposite way after a certain condition, after a bear market or after you've had really a lot of fear, and then it pops back up to greed, well, that doesn't mean the trend's over, that means we're just starting to go up again.

Exactly yeah, and you have a continuation of the trend.

Jason: Right, yeah, yeah, completely. And so with anything, with any indicator, you have to look at it in context right.

Everything from an economic indicator, cpi, et cetera. Everything has to be looked at within context. And with that, I think you have to look at the context within the fear and greed index, and that's why there are the seven components, and I actually feel that the seven components are more valuable than that headline number, than the speed dial, right. So we start with and CNN came up with these names and I love it that they did that, because they are so much better at explaining things than I am and they really they said well, you know, here's who our user base is. We want this to be something that is a sophisticated trader can use it. And, as you know, as we heard Katie Stockton tell us several years ago, lots of hedge funds use the fear and greed index, right, they use it as one of their marks to understand what investors are doing. But they want it to be understandable by retail investors, by my dad hundred versus 125 day moving average just to see how far like what is the momentum right. Use that word, it's completely accurate.

What is the momentum Is it? Is it so high that it's potentially exhaustive right now? It's so high that it's potentially exhaustive right when we and we normalize it both over the last six months. But then we also go back and we normalize it again over two years to say is that six month number that higher, low that we have? How does that compare where we've really been over a longer period of time? And then we look at, as I mentioned, two measures of stock price strength and stock price breadth. So market breadth we're looking at both 52 week highs and lows on the New York Stock Exchange and then the McClellan Volume Summation Index. So really is money flowing into stocks going up or money flowing into stocks going down?

Louis: And what we see is both of those numbers are sitting at extreme fear.

Because, those are great indicators. They're such great indicators. Yeah, I mean, I remember back in the day doing a ton of backtesting and those were some of the most robust indicators, all three of them, especially on the new highs it's actually new lows is actually more valuable, in my opinion, based on the research years ago, than the new highs, but just because it showed that extreme capitulation. But those are great and they are complimentary. One is like the number of stocks hitting highs or lows, and then the other one is more. The McClellan summation is also very valuable and it can be manipulated in so many different ways.

So and I love that you have three dimensions to that and while you were telling me about this, what struck me is I always try to put things in perspective for the individual investor and for the. You know how they can think about these things and make it useful for them. And I think one of the things that could be useful with this, or is useful for this, is understanding how you're feeling. Like you know, if you've just gone through a period of angst with your portfolio and then you notice that this thing is at fear, right, well, everybody's being fearful and like it's like what are you going to do in your portfolio during that period, right? Well, everybody's being fearful and like it's like what. What are you going to do in your portfolio during that period of time?

Jason: Exactly.

Louis: You know what how?

are just you know how you're feeling, like if you can step away like that fish in the fishbowl with in the water, you know and say, yeah, I'm in the water and you know, and, and this is what's happening, and what am I going to do? And stay level headed. I always talk about like staying level headed is the most important thing as an investor. It's like if I'm overly optimistic, I need to bring myself down and if I'm overly pessimistic, I need to bring myself up. Tom Basso mentioned that to me years ago, who was one of the market wizards.

Jason: Right.

Louis: Talking about doing that, and I've really that's been probably one of the market wizards, right, talking about doing that, and I've really that's been probably one of the most helpful things for me personally and for advising clients as well and managing money. Just it's. It's it sounds so simple. It's like oh yeah, I know that, but yeah, but do you do it?

Jason: Exactly, and that's where it's important to have something that's quantitative and unbiased, right, and I'll tell you a story about that that confirms what you just said. But when we first, a few years after we launched Fear and Greed, I was talking with a financial advisor and he said, oh, I use this thing all the time with my clients and I love it. He said how do you use it? And he said, well, I introduced them all to it. And then, when they call me, when the market is down, wanting to sell their positions, wanting to reduce risk the market's already fallen by 10% or 20% and now they want to reduce risk he says, ok, hang on a sec, go to CNN Markets, fear and Greed. What do you see? And they say extreme fear. And he says, ok, what does that mean? And the client always says, okay, what does that mean? And and the client always says, oh, yeah, everybody's afraid right now. Yes, and what does that mean? That means I shouldn't panic. And hey, let me write you a check because this is a good time to invest.

Louis: There you go. So one thing I noticed that's not on here is valuation, which is so hard to time valuation. So this is, you know, valuation. So if you put this in context with valuation, then I think you have a powerhouse, really, because absolutely yeah.

Yeah, because then you have that long-term valuation metric, like right now. I was just on a, I had just updated my factor. I have this correlation matrix of factors like quality, value, growth, technical, et cetera, et cetera, volatility, and I sent our CIO that correlation matrix to show. Hey look within the market, like finding a value right now in the market is very difficult, like you're not being rewarded for valuation metrics at all, or low volatility or strong dividends and you've got all the.

You know growth is kind of being helpful. Momentum is explaining everything and most of the performance is coming, you know, in a small amount of stocks. So that is a context that you can add on top of this that says, okay, well, within this current environment, like we know, small, smaller companies have much more value longer term. So do international stocks, you know. You know that can give you a mosaic, and I have to say a mosaic is really what works in my experience as an investor, meaning a mosaic, meaning that you've got these pieces of a puzzle and they're all kind of pointing towards something and like not everybody is talking about it. You know, and, and you know everybody's talking about nvidia and all that.

But I've also had conversations where people are saying, hey, all I need to do is buy costco and nvidia. I literally had a doctor tell me that, like a really smart person yeah, I'm just gonna buy, you know. I mean these are the things I remember hearing during the dot-com bubble and, frankly, it's a little bit scary for me hearing these things. Um, yeah, and that's one of the reasons why I wanted to bring you on is, first of all, I've wanted to have you on for a long time. Uh, we just life didn't allow that for for both of us. But and I'm glad that you're on now, because this topic, I think, is very, very timely the fear and greed thing.

You know even though right now it's giving us a neutral reading. You know, if you put this in the context of a mosaic, this is very powerful stuff and I'm glad that you know that you did this kind of work and you know, and I can see a lot of value in doing that when you, when you put.

Jason: I'll just say. I'll just say one thing really quickly about you know, as we're looking at the indicators and what it says, you know why. Why is it giving us neutral right now? Because I think that's the key. If we look at the indicators, that are at different ends of the spectrum and it used to be organized or ordered from most greedy to most fearful we see the S&P 500, right, so that's extremely greedy. Put in call options, so investors are still buying lots of call options, right, they're not really hedging their portfolio.

And when we look at the difference in stock and bond returns, right now stocks are just doing really well, right, so those are really telling you sort of what's happening. Yeah, I know the stock market's up. Okay, what else is happening? We see that the spread between junk bonds and investment grade is rising, right, so people are starting to de-risk that side of their portfolio, the bond side of their portfolio. And then, as we were talking about, why is the S&P going up? Nvidia, right, so of course those indicators are going to be strong, but meanwhile breadth is really weak. So we get a much clearer picture of what's happening in the marketplace. So that's the thing I wanted to add about how to read it and really understand it and dig into it.

Louis: Yeah, that's a great addition. That makes total sense. It reminds me earlier this morning I was talking to a quant analyst in Europe and we were looking at certain factors, fundamental factors, and almost all the fundamental factors that are very robust. Solid predictors of stock returns are underperforming because you always look at them on an equal weighted basis. So the equal weight factor relative to the market cap factor, that variance is at like this massive extreme. In other words, the average stock is underperforming.

That's another way of saying breadth right as a technician you would say a breadth, a quant would say something differently, but it's basically the same thing, which means that most stocks are not doing so well. And then you look at the smaller companies. A lot of the smaller companies are losing money, and so what is that telling you? There's some underlying things. It's not a fear thing. It's really what this does. Is it informs you that you need to be selective. In my opinion, right now, and not to you know, I want to make this an evergreen piece of content, but based on what we're reading here, just the tea leaves. It just says be careful, be selective, look for quality, you know, be diversified.

Jason: Exactly, yeah, yeah, exactly. It's really just a way of understanding the level of risk within the marketplace at a given time.

Louis: Yeah, so you've told me a lot about the components and risk management. We talked a little bit about risk management Historically. On the performance of this indicator, what would be like like what? Where's its strongest points? Would it be on the picking bottoms, or or or would it be forewarning a top?

Jason: Well, I think there's a couple of things. So I mentioned that I posted in one of our message boards back a couple of months ago that the indicator was giving us kind of a warning signal, right, and so one of the ways that I really like to look at it is I like to look for divergences. Okay, so what that means is that the S&P is going up and fear and greed is starting to decline and, in the spirit of making it as evergreen as possible, let's go back to 2015. The market in August I can't remember the exact numbers. Did it fall by? You may remember 20% or something? Over the course of a few days, the market really just fell out of bed.

Louis: Yeah, absolutely yeah. I don't know what the percentage is, but it was a lot.

Jason: Well, fear and greed had been declining while the S&P was rising and rising and rising and people were saying the syndicator is broken. And I'd even get into not Twitter wars with people, but just saying look, here's what it's saying and here's why it's saying what it's saying. And it really came down to a lot of market breath and the breath was weakening at the same time that the market was going up and becoming more and more narrow. And one day, right so the fear and greed index was setting lower highs and lower lows. It was just consistently declining right as the market was going up and it was just saying more and more and more risk and one day the market caught up with it. Right, and that's what I noticed again in January, december, january, february, march into early April. What I noticed is that fear and greed had stopped going up while the market was going up and it was just saying something has changed here. And I don't feel like. I don't love the word prediction, I love measuring, right, and so what it's saying here is, from a measuring perspective, something has changed in the market and risk is increasing was happening, but at tops, what I've noticed in general is that fear and greed starts to decline as breadth narrows, as people start to maybe buy the VIX or buy puts. Puts are what's going to influence the VIX as bonds start to perform a little bit better than stocks. These are all things that are saying investors are pulling back. Maybe the S&P is still going to highs, but investors are starting to pull back. Right? We're looking, we're measuring what investors are doing so that we can figure out what to do with our portfolios. So that's at tops. That tends to be what I see In uptrends.

Sure, sometimes you see the market the market, you know rip higher. The fear and greed index goes to extreme greed and you might get a short-term decline in that too, but probably not a long-term decline and then bottoms. It actually does a really good job. So this statistic is probably wrong because when I left my last job several years ago, all the data stayed there. As you'd imagine, it's not my data. So I left my last job several years ago, all the data stayed there. As you'd imagine, it's not my data, so I left the data there with them. But what I recall, at least through 20, probably 2018, 19, when fear and greed index had dropped below 10, there had not been a single one month forward period where you didn't make money right. So fear and greed drops below 10, one month out you're probably gonna make money. Okay, it doesn't mean going forward. We could be in a major bear market and that not happen.

But, even going back to like testing data that I use. We launched in 2012, but I use data back to like 2002 or three, something like that. So I had the financial crisis in there. I think even during the financial crisis, when fear and greed dropped enough, you still got enough of a spike back in the S&P that you made money in that little trade. So again, just like an RSI, it's like a momentum indicator. So the fear and greed may roll over again in a major bear market generally, if economic conditions and other things are are healthy enough that this is going to be sort of a short lived decline. It's probably, you know, it has been a strong time to consider increasing risk in your portfolio. I'll put it that way.

Louis: Yeah, Well, that's that's helpful. I think that was that makes sense to me, that the mark market bottoms could be really useful with this as well. Now, just to kind of switch gears a little bit a while back, I mean, you've had some, you know, real world experience with the microstructures in the market. No, you have not been trading on the floor for a long time or been a trader for a long time, but there were some things that you kind of evergreen things that you learned there, and in particular with volume and kind of you kind of listening to the crowd.

I mean, we kind of worked a little bit on some volume stuff a little bit, and I remember that you had some very useful insights into the microstructure of volume. And so if you were, what are some of the things you've gleaned from volume itself? That just kind of basic things that you've gleaned.

Jason: Yes, and basic things. So everyone talks about the NVIDIAs of the world or the stocks that are getting all the press right. I've looked at this two different ways. One was, as you mentioned, lewis. You and I did a lot of work on this together and you were, you know, a hundred percent a partner on this and you did all the all the really hard work of backtesting. I showed up with some ideas and some words, and, but this came from two different places. So one was one was that where we analyzed a volume algorithm that I had developed which really just says, you know, relative to, we just normalize volume just to understand for a particular stock.

I want to put all stocks on sort of the same footing. So a company that doesn't get a lot of volume if it sort of spikes in volume, how do I see that through? You know, the NVIDIAs of the world and the mega cap stocks that get all the attention, all the volume, when do I know that some smaller stock is getting attention, right? So how do I measure those spikes? And what I did is, I just said, let's just compare them both to their own history and to their history relative to the market. So it's sort of a complex calculation. I won't get into it too much here, but what I learned from that was that the stocks that were actually getting the most attention had you know, they still might be good bets, but they probably weren't as good a bet as the stocks that were being completely ignored. That is so counterintuitive. It's so counterintuitive.

Louis: When I mentioned that to a technician who works for a very large firm that's on CNBC all the time, he didn't believe it.

Jason: Yeah, so sometimes people don't get it.

Louis: Yeah, sometimes what you, what you think is true, is not true when you look at the data. So anyway, go ahead.

Jason: Yeah Well, and I'll tell you another anecdote. That's, that's kind of that proves it also. We did the same thing. So we were looking at working with the New York Times, and so I had quarters worth of data of the New York Times and what I did is I said, let's just figure out mentions, right, which stocks were mentioned, which stocks had articles written about them in the Times.

And we did this on a quarterly basis and we went back over I can't remember how many years, and the data wasn't super great, but it was good enough because it agrees with what I just told you with this other, this volume algorithm. So that's why I sort of like it is. We created an index and what we found was that the stocks that were having fewer mentions what was going to happen is they're going to have more mentions in the future, right, relatively more mentions, and they were going to get, you know, relatively better performance because of that. And maybe and I haven't done the research to figure it out, but you know at least with the volume data stocks announce earnings how often Every quarter, right?

Louis: Yeah.

Jason: So one month out of every three is going to be a high volume, relatively high volume month. Two months have the potential to be relatively low volume, and the market tends to have an upward drift over time because corporate earnings tend to grow over time. So therefore, we can kind of assume that maybe the reason why this algorithm works like this is just that companies are quiet. Now they're in a period where they're not announcing news, and maybe that month when. So they're in a period where they're not announcing news, and maybe that month when, you know?

Louis: so we're just picking stocks that are going to announce interesting news next month, but there could be lots of other things that are happening there that's a, really it does seem to be interesting at bottoms yeah, that's a really good point because we have the upward bias of equities, or at least we have in the united states historically, uh, for a long time and that that makes a whole lot of sense just that that would be the case.

But things tend to pause when you have a lot of activity afterwards. One way or the other whether it's a lot of activity, the downside, whatever that primary trend was or that trend beforehand you get this kind of this spike of emotion and then that might reverse or or at least pause. And then so and after we had done that work, I remember calling you up and saying you know, I really like buying things when it's quiet. It's just so much you have time to get in and you're not, you're not emotionally driven, and you've done your homework. And you know, and this, what not only applies to stocks, it also applies to other things, commodities, I mean.

Most recently, you know, when gold was really, really quiet, that was part of my, you know, it's like wow, it's time to start like adding to gold. No one's talking about it. People are kind of disillusioned with gold, you know. And right now I think emerging markets are kind of in that category. Small caps are kind of in that category. Some of the Europe is, you know, european stocks are in that category and they also have the valuations behind them too. They don't have the sexiness of the growth of AI and all of that. So it's a great forward-looking thing and I thought that work that you did, in that your concept was valuable and useful for people who are following the markets more closely. And also you could use it long-term too, like longer-term.

Hey, maybe buy gold because it is so quiet, maybe you know you have so you have a setup based on fundamentals and then the that that is a confirmation from the investor psychology standpoint. You know.

Jason: Well, and if you remember Lewis too, from from the paper that I wrote there were, I looked at it three different ways. Right, so there was, there was today's volume, and that's when people talk about volume they mostly look at today's volume. But then I said, all right, let's aggregate it over a week and figure out what happens over a week. And I created a sector portfolio using sector spiders. That at the time I think it still has. I have not been tracking it, but it tended to add some level of alpha. It'd even be equal weighted.

Right, we were waiting, simply waiting the portfolio towards the lower volume ETFs from the prior week and under emphasizing the higher, last week's higher volume ETFs. And then we did the same thing. This was where you were so helpful is we did the same thing with the S&P 500 constituents, but it wasn't daily data or weekly data. We actually did a rolling 2021 day, so a full month, and we just said, okay, how does the volume for this month compare to the last? I can't remember if it was six months or one year.

Louis: I'd have to go back and look at it.

Jason: Yeah. So we just said yeah, if it's quiet for the last month, that's really interesting, right? If it's really high for the last month, that's not as interesting. And it does turn out that those underperform. And then, in looking at it more recently and this is a little bit more qualitative but one thing I've noticed is that low normalized relative volume, so down to, like you know, 75 of normal um, we tend to get like an inflection point. Stock can go up or the stock can go down um.

However, below below that, the quietest stocks have tended to be the ones that have big rebounds, that tend to go up the most, and so that's sort of what I'm looking at right now to try to figure out if that could become an interesting option, strategy or something. But I think there's something there and again, I need to do a little bit more research. The problem with this one, unlike fear and greed, is, you know, you've got 1000s of stocks to analyze and so, as you know, I'm not a great programmer, so that's that's where I rely on the help of others.

Louis: Yeah and well, and then plus. You know, the volume data itself is has changed over time. So I think John Bollinger mentioned something to me about that, or you did too. Actually, there was quite a few changes in the volume, or how to look at volume. People that have been in the markets a long time said, hey, interpreting volume is harder now, which? I think, that's true, but the extremes, I think, are still in existence. You know that are still valid interpretations.

Jason: And when you normalize the data, then then a lot of those, a lot of those differences go away, right, because you're putting everybody on the same footing. So you can't just compare NVIDIA to NVIDIA. You have to compare NVIDIA to NVIDIA's relationship to the, to the entire market.

Louis: Yeah, so we've talked a lot about investor psychology and I want to change gears a little bit, if we can, and you know you've been. When you first told me that you were teaching at CU, I thought, okay, he's going to do it for one semester and he's going to bail. I don't know why I thought that that's I shouldn't say that. I guess I don't know why I thought that I shouldn't say that. I guess I don't know.

Jason: I'm not sure why, but you've actually been very consistent, and so you must really like Well, consistent until this year.

Louis: Oh, is that right? And I?

Jason: have not bailed, but I am taking a break. They actually asked me last year to come up with my own class, my own syllabus in trading and markets, which is really intimidating to do because it means coming up with 18 or 16 three hour lectures. And so I was in the process of doing that and luckily they called me last October and they said we're going to hold off on that for right now we're just we overextended too many classes, so we're going to hold off. And they've asked me if I want to come back next spring and just teach some regular classes and I actually I've said hang on, my job's really busy, so I'm just holding off now, but maybe in two years I'll go back and do it Okay.

Louis: Regardless, you've been doing a lot of teaching and I do go and I lecture there. And you lecture. So I guess I guess what I wanted to know from you was what are you seeing students like? I mean because I know when I the little bit of teaching that I've done, I saw some changes happening with students' interest in finance in general. So what are you seeing with younger people in terms of their interest in finance? What parts of finance are they interested in?

Jason: terms of their interest in finance. What parts of finance are they interested in? Well, one thing about I hear you know I'm hugely into cars and you hear people say kids these days they have no interest in cars. Kids love cars. Kids love everything that we loved when we were younger, and my students are all really engaged. They really are interested. Now I teach a lot of core classes, so that means that not every kid that comes through my finance class cares about finance at all, and they shouldn't, right? They're interested in marketing or you know whatever similar percentage of the kids in those classes to when I was in those classes, even versus my MBA, when I would take a core class, it was NYU, so I don't know. Half the class was finance majors, but the other half of the class were marketing and whatever else and they didn't care about finance, and so I would say that the percentages are probably really similar to what they were back in 2000,. Using that as a guide, I was a philosophy major in undergrad, so that doesn't count, but the students get it, they're interested.

A lot of them are trading. They're not trading NVIDIA, but they are trading GameStop and they are trading crypto and they are trading on Robinhood, and they get that Robinhood is not a good value because Robinhood, yeah, it's free, but so is Fidelity. Robinhood, you have to pay for research, fidelity, you don't. And they get all those things. But they are really excited about it because they're driven. They want to become, you know, they want to be financially independent, they want to be able to buy nice things and take trips. You know there are a lot of other different things. They may or may not want to have kids, right, but they feel stress around buying a house right, and they know that their career is not necessarily going to be the thing that allows them to buy a house right. Their salary may not keep up with inflation or it may not be enough to live in the place where they want to live. So they look for other ways and they think about other things that they can do. They're side hustles, right, and side hustle may be doing some trading in the market. So they're also some of them.

I think it's some of the older people who are a little bit disillusioned with the markets, some of the people who got in in the GameStop era. Some of them are leaving. You know, we see that.

I was on the phone with another provider recently, and they were talking about some of their active traders, people just saying, wow, this stuff is hard. But what I love about that, though, is when people say this is hard if they liked it. So if they didn't like it, they weren't really a client anyway. They weren't, or you know, for they weren't really a self-directed investor anyway. They were going to leave, no matter what. If they do like it and say this is hard, they're going to pivot. They're going to go away from being some kind of a short-term trader to being a self-directed investor who's really engaged in building a portfolio. Or they may even come to someone like you, lewis, and say I want to build a portfolio with you, but I'm going to be really engaged. We're going to talk a lot, we're going to talk every couple of weeks, and you and I are going to strategize about the market, and they'll be really good, good customers in that way.

Louis: If you see that as a good customer, right, but but like they're engaged yeah, yeah, I've noticed both, like you know, um, I've, there seems to be like a little bit of a cycle, like I'm just thinking of real, real clients that come in and it's like, okay, well, I have this robin hood account and I really want to dive in and I jumped in and I did a lot of stuff and I may have even done a you know pretty well, but now I'm married and now I have a child and now I'm, I've got all these other obligations and I don't really want to spend time with it, and then they roll that over to something else.

And I've also seen people where and I I encourage this to be engaged where it's like okay, like you said, here's your core stuff, here's, here's what we're going to speculate in or do some other types of strategies in.

we're going to allocate a certain amount and go, go for it, you know yeah and and I strongly encourage that you you know to be engaged, and so you know, I think it just depends on the person. I'm very much for. I love the fact that you can be self-directed and that there's so many resources that are available, and what you guys are doing allows people to do that, and I don't think it's an either, or, In fact, many people I would say most people have a bit of both. Now, High net worth investors do. They have some money where they're using advisors, wealth managers, and then they have this. It's like they know something, a lot about a certain industry or something like that. Certain percentage of their money is allocated a certain way, because there is a big difference between making money and keeping money, and how you manage your money is different. You know the strategies you use are different. You know you need concentration when you're making money.

You need you know you need and that would be typically in your business or your profession or whatever, and that concentration is what allows you to really make money when you get into the keeping money realm. It's about having reasonable diversification and having being able to be bulletproof right, not only from an investment standpoint, but you know asset protection and all these other things that you need to do keep your money. So and I'm kind of in both worlds, you know, in my, in my profession but I think the speculation and being involved, even not in speculation, but just being self directed, is a great thing, and the fact that we have individual investors that can do that now more easy than ever is a good thing absolutely yeah, yeah, so um I I mean sorry, this has been a great conversation.

I mean, so what are you working on now, that um that you'd like to share? You know, anything got you excited, or jazz these days?

Jason: well, I'm just so excited to be working with our 18 contributors. Um, you know, every one of them is such a professional. They work so hard, you know. Also shout out to continue everything that we're doing now, but then to add to it. Right, like I mentioned before, we're doing our markets. I keep wanting to call it a quarterly roundup. I think we're calling it a quarterly market call and working to put together a panel right, a panel that's really interesting and engaging to different types of investors. So we'll have Helene Meisler, who is a great technical analyst. We'll have.

Chris Versace, who is running a full portfolio, and then we have Peter Cher, who has a great geopolitical look at the markets and is a bond guy, and then Malia Bengali, who has a really wonderful global perspective, a global macro perspective. So just an all-star panel of people who can come and give us really great thoughts on the market and where it's going and what they see. So I'm just excited to be able to not have to write all my own content, not have to build these things dynamically and actually have humans who know what they're doing to go and work with and, just, you know, take ideas from them and have them take my ideas and all of us just work together to build something that's, you know, better than it is now and something that's going to be great for the next 25 years. The other thing that I'll throw out there is we are in the process of, like I said, we're really strategizing.

We just relaunched the street, so it used to be called Real Money is the division that I run, and so we used to call it. It used to be Real Money, real Money Pro. We collapsed all of the products into one, so now all of our subscription products are one and that is called the Street Pro. Okay, there's the street, which is the free side, and we are one of the top 10 business sites in the country, and then we are the Street Pro and that is the subscription side, where we give you actionable research and portfolio ideas, education, et cetera, research and portfolio ideas, education, et cetera. And so, as I said, we just we just relaunched about two months ago and so you know, I'm happy to offer people who are listening three months free right now. So our we charge I think it's $982 is an annual subscription or $99 a month. So this is a, you know, free three month subscription. I don't have a code or anything.

Louis: So maybe, louis, the best way is if people reach out to you and then you forward them to me or is there a way that you can get a link to us and then we could put it in the show notes? Or is there?

Jason: I'm working. I'll tell you what um. We just decided this last week. So I'm working on getting a code. It'll be something like you know, subscriptions, the street basin, so they'll know, they'll know who it is, um, uh, and and so I'll be able to get you that pretty soon. Okay, hopefully, hopefully in the next week or two. I hope that's um that'll work?

Louis: yeah, because we're we're about three weeks out right now. Yeah, so I've got three episodes before this one. So that'll great, that'll, that would be perfect, and that's thank you for doing that.

Jason: Excellent, excellent stuff, and I probably should have told you that before, but that's okay, that's the power of editing.

Louis: You know we can always edit stuff out, so we'll just make it. We'll get it to sound right, but this has been great and I'm glad you came on. You know, and is there any you know, if somebody wanted to reach out to you or anything like that, any way that you would, what's the best way for people to look you up?

Jason: So the best way. So LinkedIn is always great. I like LinkedIn because then I know exactly who everybody is, and otherwise I don't go to X or Twitter very often. I spend a lot of time on Instagram, though mostly car related. My other passion we didn't even touch on cars.

Louis: So, you know what we have to touch on cars. I'm sorry we're going to need to edit this and put it back somewhere, so so now I, I, I know you're a huge car fan and you joke about your racing capabilities and that you're like, maybe the slowest guy out there racing, but I have to, I have to know. Could you just give me your analogy on how racing cars is like investing and what you should glean from race the skills needed to be a good car racer versus a good investor?

Jason: Yeah, absolutely so. As you know, I wrote an article last year on the street so it's completely free titled what Car Racing Can Teach you About Investing, and it goes through the story of Sterling Moss in the 1955 Mille Miglia, which was this crazy, dangerous race through the streets of Italy, banned in 1957. The Ferrari movie that came out Christmas of last year was actually centered around the million million the 1957 million million. So people have seen the movie, know how dangerous that was. But in 1955, this guy, sterling Moss, went and set the all time record, averaged right around a hundred miles an hour for nine, almost a thousand miles of driving country roads across Italy. You know we live in Colorado. This would be like driving a thousand miles up in the mountains right behind me and averaging a hundred, hitting 175 miles an hour, and still able to win the award for being not only the fastest car but also for the most efficient driver in the race. And so that kind of is the cornerstone of what investors can learn about car, or what car racing has to teach investors about investing is. It all came down to a couple of things Risk management, being in the right frame of mind, right To understand what was going on having a plan right. That plan puts you in the right frame of mind so that when something bad happens as it always will, right?

Sterling Moss hit hay bales while he was driving. He drove off into a ditch. These things didn't fluster him, because he knew what he was doing, he understood, he used technology right. He basically had a plan and was able to set targets, goals, risk management for the entire race so that when he finished, not only did he set the record, not only was he the most efficient driver, but he also beat the number two finishing car in an identical car by 30 minutes, and that guy was a five-time world champion, right? So you're going to have mistakes. You're not always going to be the best or the fastest or whatever, but if you have a plan and stick to that plan, and if your plan isn't working, have other plans that you can go after that are well thought out, right. You're not just moving from plan to plan. Have a process right and you will be successful in the end. That's that's really the big thing. That's what it comes down to.

Louis: Yeah, that's great. That's good stuff. All right, Jason, thanks a lot. I appreciate you coming on.

Jason: Thanks, lewis, it's a lot of fun.

Louis: I'll look forward to see what you have coming next.

Jason: Yeah, we'll see. We'll see, At some point maybe I'll write this book. But it's slow going right now.

In this week's show, we talk about some of the secrets to tax-efficient investing strategies specifically tailored for tech stock portfolios.

Highlights

In this week's show we discuss:

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

Transcript

(Generated for reference - May contain errors)

Hi, I'm Louis Llanes and this is the Market Call Show.

Today I'm going to be talking about something that I ran into, and I run into quite a bit lately, you may be in this position, but I'm going to be talking about smart tax moves for a stock portfolio, basically, tax tips for people who have tech stocks. A lot of people have been making money in tech stocks over the last five years or even more, and they're highly appreciated, and if you work for a tech company, you may have quite a bit of that tech stock because the company has been granting you shares and you've been getting more and more tax lots over time at various prices, and maybe you even started investing in other stocks and those stocks have gone up in value. Maybe you've been emphasizing tech stocks in general, which has been a very smart move, but a lot of people would argue that a lot of tech stocks are overpriced today compared to their fundamentals. Things that savvy investors are thinking about today is how do I get a good, solid portfolio when I have a concentration in tech stocks, in particular, maybe your company stock? So I'm going to kind of just use a case study of an actual client, an actual person that we have been working with in helping them solve this issue working with in helping them solve this issue and this particular person works for a large tech company and has been acquiring the stock over time and he wants to get a tax-efficient portfolio because he makes high income and he doesn't want to pay a lot in taxes. None of us really want to pay a lot of taxes. That makes total sense. So what we're looking at is how do we take these tech stocks that he owns and he owns a lot of different ones Apple, anet, micron and others how do we take those stocks and then diversify them in a way that makes sense into good opportunities? So what I want to do is just first talk about the challenges of concentrated stock portfolios and then work our way methodically into how would you go about thinking, solving this problem and what is the best way, in my opinion, to deal with it. 

So, first of all, the risk of concentration is pretty self-explanatory. You have overexposure to a single sector or a single company and that could potentially lead to high volatility and risk in your portfolio because any one of those stocks could have a bad scenario. Something can come out of the blue that you don't expect and, as you know, tech stocks can be very volatile and you could have a very large loss. I was actually thinking about a client, another client who we advised to sell a stock I won't mention the name of the stock, but she had quite a bit of concentration and we repeatedly advised them to do this type of strategy, to get a portfolio that was sound to deal with the ups and downs of the markets and the economy. And because of the tax bill, she did not want to do it and instead of having a seven-figure portfolio, now they have a six-figure portfolio, a significantly less literally 10% of the value of what they would have had had they followed the advice. So this is very important information for a lot of people and if you are in this position, hopefully this can help you. So, talked a little bit about the risk of concentration. 

Once you kind of just understand the situation, the first thing to do is to do an initial assessment, and that starts off with a portfolio evaluation. So you want to evaluate the quality, the valuation and the technical conditions of your current holdings. That's generally the process that I like to take. So, basically, when we're talking about quality, we're talking about how certain or how much confidence do we have in this business, in the business of each stock, each company, to generate cash flows over the long term and to have solid growth. Also, we want to look at in terms of quality how strong is the balance sheet? How much debt do they have? How much cash do they have? What types of return on capital are they getting? What types of profit margins are they getting? Do they have a long-term competitive advantage that can last for a long time? Because when you have a large position like that, you can't just make big moves all at once. You know you definitely want to think about the longer-term implications and longer-term expected returns. 

So we also want to look at the current price, which is getting into the valuation. So what is the price per share now? What is its market capitalization and how is that compared to fundamental metrics of value? So it's always good to have an idea about, you know, based on sound economic principles, what is the valuation or reasonable valuation range for the company. So that would be really based upon the after-tax net cash flows to equity shareholders as well as the business risks that are involved and you want to discount that back to get some form of valuation. Or you want to look at the you know the multiples that you're paying for, kind of the earnings power of the company on average. You don't want to take any one point in time, but like on average, you know, given a reasonable growth rate, that you would expect for the company, given its average earnings. Based on that, what is the multiple? And if those are really out of whack, then that tells you that, meaning that it's very overpriced compared to its fundamental valuation. That is another reason to want to sell. 

So, basically, when you're looking at these conditions, these three conditions quality, value and technical the purpose of doing that is to get an attractiveness kind of score. So how much do I really want to hold this longer term? So let me just back up and talk a little bit about the technicals. The technicals is an analysis of the supply and demand for the shares right now. Because you want to understand is the stock under pressure right now or are people still very optimistic in the stock and still bidding it up? Because, depending on what type of conditions you're in there, that would influence your strategy for how you would exit. Okay. 

So after the first evaluation, you want to you know you've looked at the quality and the value and the technicals. Then you want to look at the highly appreciated stocks and then you also want to you know you've looked at the quality and the value and the technicals. Then you want to look at the highly appreciated stocks and then you also want to look at the stocks that you may have in your portfolio with a loss. So, basically, what you want to do is you want to rank based on the percentage gain from your cost basis, what you know. How highly appreciated are they? How highly appreciated are they? And the reason why this is important is because for every dollar that you raise in cash to reinvest somewhere else, you'll have more gain. If it's highly appreciated, the higher the appreciation is. So what your goal is is to minimize the tax impact and get as close as you can to your target allocation. Okay, so when you're doing this, it's really a good idea to have a tax budget for the year. So you're saying, okay, based on my tax situation, my income levels, where the tax brackets are now, this is how much capital gain is reasonable that I'm willing to have in this year so that I can manage my taxes, all right. 

So we've done the portfolio analysis, evaluating the quality, value and technical conditions of the holdings. Then we want to look at kind of the diversification strategy and what your target portfolio construction looks like. So that's really looking at. You know, if you're heavy in tech, for example I'm just using tech as an example you could be heavy in financials or industrials, anything like that. You want to look at what are the attractive stocks in other sectors and in other businesses that are not correlated to what I have a big exposure to, and what is my target allocation that I want to shoot for. So you create a diversified portfolio that you're shooting for and the whole objective there is to balance return and risk. So you're focusing in on high-quality companies with strong fundamentals and the companies that you want to buy as well, because in this type of a portfolio you're dealing with a taxable portfolio. It's a good idea to be focused on not short-term trading, because that generates higher taxation, more costs. It's generally best overall to be focused on long-term capital appreciation where your after-tax rate of return is the strongest. So you want to have companies that are high quality and have those strong fundamentals that you can hold for a long period of time and buy them at attractive prices or reasonable prices. So your aim there is to get the sector diversification beyond the industry that you have a concentration in. For example, if you're heavy in tech, you want to go more into health care, more into financials, more into materials industrials. That's pretty self-explanatory. Or it could be within tech, but with less correlation. Okay, so you may just broaden out your tech exposure as well as going into other sectors. All right, so that's kind of your diversification strategy. 

Then you want to go into tax management techniques to actually get to where you want to go. And that starts off with that tax lot analysis that I had mentioned, where you identify which stocks that you want to sell first to minimize the tax impact, which stocks that you want to sell first to minimize the tax impact. And as you're doing this, you want to sell any of your losing positions first, any positions that you have that are at a loss, that are also not attractive, that you want to own. That would be tax loss harvesting. You want to go ahead and harvest those losses and then you kind of know what you're working with with your losses. And then the next step is you want to work towards prioritizing long-term gains versus short-term gains, so that gives you more favorable tax treatment. As I mentioned, long-term capital gains may be at a lower rate for you especially if you're high income than short-term capital gains. So you want to prioritize those long-term capital gains. That doesn't mean you shouldn't have short-term capital gains and I'll get into that a little bit here in a second but you want to prioritize the long-term capital gains. 

Okay, now you want to get to kind of your implementation steps and you want to start by first reducing those concentrations and you want to sell the least appreciated long-term capital gains first. So you're starting off with the least attractive stocks, right, that have the highest appreciation, and you have a long-term or the lowest appreciation, I should say, and you have a long-term gain. That's what you want to sell first. And then you want to gradually sell higher appreciated stock lots, while considering the tax implications of that, and then you want to reinvest those proceeds into your target allocation sector. So you may be in a position where you're going to be selling some short-term, some stocks at a short-term gain, and the reason why is because a lot of times the most recent stock you got are the least appreciated and you still need to reduce your concentration in a particular stock. So some of those gains may be short-term and that would be optimal for you so that you can get that concentration down, all right. 

So another thing to consider is if you're in a position where you want to give charity and you want to donate stock, it's a good idea to use stock that's highly appreciated. So if you're going to make any donations in a given year, look at those stocks that have the highest appreciation and that are least attractive. You know in that order really. And if you have a concentration so it's kind of again a balancing act so don't donate that stock first and that'll reduce your taxable gains there, all right. So you want to select the least attractive stocks from a fundamental perspective for your donation, if you can, because because you know you want to hold on to your winners and you want to let go of your losers, right. But if you are trying to avoid taxes, sometimes your winners are extended and it's time to. When I say least attractive, I mean least attractive of the current price relative to the economic fundamental value. 

So it's so interesting talking about this topic because it can be confusing for some people because it almost sounds like you're talking out of each side of your mouth and you are in one way, because you're balancing. You're balancing expected future after-tax rates of return with how much pain I'm going to have to take in taxes right now, and, like I had mentioned with that client who you know, lost a ton of money that could have been avoided, and the sole reason why she lost a lot more than her tax bill would have been let's put it that way Okay, so my purpose in doing this is to help people and I hope to help people actually benefit from this if you're in this situation, because right now the markets have had a big run-up and a lot of people are holding a lot of tech stocks right now. So, again, we're talking about a balancing act between your taxes and your returns. So you want to optimize that after tax rate of return and you focus on maximizing that after the return potential that you have over the long term, not just the current gains. So what you want to do is you want to actually give yourself a budget and that's helpful so that you can give yourself an uncle points like I don't want to have more than this amount of taxes, all right, so you want to align your portfolio with your long-term investment goals as well. So you know, if you're going to be retiring soon, you might be needing to make some of these adjustments ahead of time. If you're an executive working for a company, you might want to start this process sooner rather than later. The other point I wanted to reemphasize is that you want to consider high quality businesses with a strong competitive advantage because, again, you want a long-term approach with this. 

In general, it's not a good idea to do short-term trading in these types of accounts because of the tax impact and the costs involved. All right, so I just want to kind of bring this like my final thoughts here together on this, and hopefully this can summarize for you some key takeaways. It's important to have a disciplined approach to tax management and diversification when you're in this position, and you know it's a good idea. If you don't have like the software or you know the understanding about the valuations or the time to deal with all of these types of decisions, it's a good idea to work with a financial advisor or an investment manager that is very, very experienced in this and understands the nuances between after-tax rate of return, as well as your particular situation and how to get you to where you want to go. They can help you with the decisions, and I encourage you to review and adjust your portfolios regularly to make sure that you're aligned with your financial goals. So just to summarize those main points maximize your after-tax rate of return. 

Don't let big concentrations derail your retirement plans or other plans that you have. Be sure to use a disciplined approach based on strong fundamentals for the long term and not based on short-term considerations. Don't overemphasize taxes. Look at the overall result that's coming to your benefit over the long run and look past the current year. Well, that's it for now. 

I really want to encourage you to listen to my podcast. I'm going to be having a lot of new guests coming on and we're really going to be focusing in on investments and what's happening now. I'll be introducing a market metrics really kind of summary of what's happening right now prior to getting into our topics, so that will also help you. You know, just get of summary of what's happening right now prior to getting into our topics, so that will also help you. You know, just get some perspective of what's coming across my desk talking to various professionals in the business that could be helpful to your wealth, and I encourage you to subscribe to the podcast, if you have not done already and if you like this type of information, you know, feel free to share it with your friends, colleagues, professional people you know, and I invite any of your questions. 

So if you want to, you know, get more information, you can go to path to real wealthcom and you can learn more information there about me. They'll also be. You can subscribe, you can get to the podcast there and there's also going to be more information that we're posting there that should be of value for you. That will allow you to get various publications that I might put out, and you could also, if you want, to read my book, the Financial Freedom Blueprint. It's available there. You can also get it on Amazon or anywhere else. That's all for now. Thank you for joining me and we'll talk to you soon. Have a great day. 

Unlock the secrets to smart real estate investing and learn how to maximize your returns while minimizing your tax burden. In this episode of the Market Call Show, we uncover the essential strategies for achieving a balanced portfolio by diversifying your assets into business ventures, real estate holdings, and secure reserves like cash or gold. We'll reveal how to strategically rebalance your investments without the heavy tax implications, even if a large portion of your net worth is anchored in real estate. Plus, we analyze the effects of inflation and interest rates on property values and rental income, underscoring the significance of after-tax, inflation-adjusted returns.

Show Highlights

In this episode we'll talk about:

PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement: 

1.  Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life.  I share this on my podcast the Market Call Show.  To watch on Youtube  – Click here  

2.  Read the Financial Freedom Blueprint:  7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here

3.  Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here

Transcript

00:00 - Louis Llanes (Host)

00:30 - Intro/Outro (Announcement)

00:46 - Louis Llanes (Host)

01:17

02:51

03:22

04:13

05:37

06:30

07:11

07:41

09:19

10:32

11:42

12:19

13:02

13:51

14:32

15:27

16:19

17:32

18:24

19:23 - Intro/Outro (Announcement)

19:37