Latest / Masters in Business / Interview With Louis Navellier: Masters in Business (Audio)

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Interview With Louis Navellier: Masters in Business (Audio) · Masters in Business

• 0:00
  Speaker 1: Out to you by b a SF We create chemistry.
• 0:06
  Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
• 0:11
  Speaker 1: This week on the podcast, I have a very special guest.
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  Speaker 1: His name is Louis Navalier and he is best known
• 0:19
  Speaker 1: as a stock picker and newsletter writer as well as
• 0:23
  Speaker 1: an asset manager running about two and a half billion
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  Speaker 1: dollars at Navalier and Company. If you were a financial
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  Speaker 1: television viewer in the nineties or two thousands, you very
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  Speaker 1: much probably saw Louie on TV discussing the markets, talking
• 0:41
  Speaker 1: about how and why he picks various small cap stocks
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  Speaker 1: and and his approach of using both quantitative and behavioral
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  Speaker 1: uh information in order to make stock selections. UH. No
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  Speaker 1: less an authority than the Hulbert. Hulbert Financial die J
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  Speaker 1: named one of his newsletters as the top performing stock
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  Speaker 1: selecting newsletter of the past twenty years. UH. And although
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  Speaker 1: we all know that past performance is no guarantee of
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  Speaker 1: future returns, what I found so fascinating about my conversation
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  Speaker 1: with Louis was the approach he took to selecting stocks
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  Speaker 1: and how that grew out of a project that he
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  Speaker 1: began in college. What what is so interesting is Navalier
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  Speaker 1: and Company is pretty much the only job he's ever had.
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  Speaker 1: Right out of school. In college, he was working on
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  Speaker 1: a project to try and find a cheaper way to
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  Speaker 1: put together a SMP five hundred UH substitute, in other words,
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  Speaker 1: mashed the performance of the SMP five hundred but using
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  Speaker 1: less stocks in order to keep your costs down. And
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  Speaker 1: unfortunately they were unable to do that. Uh. They ran
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  Speaker 1: into a problem and that the index that they were
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  Speaker 1: putting together kept out before arming the S and P
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  Speaker 1: five and so based on the research that had gone
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  Speaker 1: into that, he launched Navalier and Company. He launched his
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  Speaker 1: own newsletter right at his school, was pretty successful right
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  Speaker 1: off the bat and has grown it into uh quite
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  Speaker 1: a successful business. So, with no further ado, here is
• 2:19
  Speaker 1: my conversation with Louie Navalier. This is Masters in Business
• 2:27
  Speaker 1: with Barry Ridholts on Bloomberg Radio. I have a very
• 2:31
  Speaker 1: special guest. His name is Louie Navalier. He is the
• 2:36
  Speaker 1: founder of Navalier and Associates. And if you have been
• 2:40
  Speaker 1: involved in the markets for any length of time, you
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  Speaker 1: certainly have to be familiar uh with Mr Navalier. He
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  Speaker 1: is well regarded as both a stock picker and a
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  Speaker 1: long term investor. Uh He started a newsletter in night,
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  Speaker 1: which The Hulbert Financial Digest called his Emerging Growth Newsletter
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  Speaker 1: as the number one performer over a twenty year period
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  Speaker 1: looking from nine eighty five to two thousand and five.
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  Speaker 1: In seven, he began managing assets for individuals. They his
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  Speaker 1: office currently runs more than two point five billion dollars.
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  Speaker 1: If you look at the period from five through two
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  Speaker 1: thousand and eight, following the advice of our guest, you
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  Speaker 1: would have seen gains of over two thousand percent versus
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  Speaker 1: the S and P five hundred index, which had an
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  Speaker 1: increase of barely eight hundred and sixty. Louis Navalier, Welcome
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  Speaker 1: to Bloomberg. It's great to be here. So I I'm
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  Speaker 1: familiar with your career for a long time. You you
• 3:44
  Speaker 1: were a fixture on the media, in the media in
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  Speaker 1: the nineteen nineties and beyond. But your career kind of
• 3:54
  Speaker 1: started unusually. You began in nineteen eighty deep into a
• 4:00
  Speaker 1: multi decade bear market. What what made you in nine
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  Speaker 1: eight say I know, let's go buy equities. Well, prior
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  Speaker 1: to actually when I was in college, UM, I was
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  Speaker 1: building them index products and UH I had access to
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  Speaker 1: Wells Fargo's computers, and index funds hadn't taken off then,
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  Speaker 1: but they were they were starting up. So we were
• 4:24
  Speaker 1: trying to figure out how many stocks we needed to
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  Speaker 1: mirror the SMP five hundred and the obvious answer wasn't
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  Speaker 1: five hundred? Can we do it with less and get
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  Speaker 1: the same correct? It's all the tracking correlation. Anyway, I
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  Speaker 1: figured I need three two stocks. So I was very
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  Speaker 1: proud of this three and three two stock portfolio designed
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  Speaker 1: to track the SMP. But I have to meet to you.
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  Speaker 1: I was a failure. It started to beat the market,
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  Speaker 1: which was not the objective. That's tracking error in the
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  Speaker 1: right direct correct. So I learned that I was lied to.
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  Speaker 1: There there are anomalies on Wall Street, U, there are
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  Speaker 1: high off of stocks. So I went out to document
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  Speaker 1: these anomalies. And originally I started in small cap and
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  Speaker 1: I'm still highly ranked there, but I UH predominantly large
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  Speaker 1: cap manager right now because I remember you as a
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  Speaker 1: small cap stock picker from the nineties and really a
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  Speaker 1: quant before we use the term quants, is that is
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  Speaker 1: that a fair statement? That's correct? Um our our QUANDT
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  Speaker 1: is just basically designed to find great risk adjusted performance
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  Speaker 1: and also to lock in on the fundamental nomalies that
• 5:23
  Speaker 1: everybody's trying to identify. So we're a little different than
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  Speaker 1: most quants. Most quants nowadays just want a front run
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  Speaker 1: order flow, whether it's the hedge funds front running the
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  Speaker 1: h f T order flow and just riding. It's kind
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  Speaker 1: of like surfing. Uh. And then there's the quants that
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  Speaker 1: basically front run the rustle rebalancing every year. So uh,
• 5:40
  Speaker 1: you know, at the end of June wrestled as all
• 5:42
  Speaker 1: it's rebalancing. That's a huge deal for all the tracking
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  Speaker 1: managers because they want to be ahead of the rebalancing
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  Speaker 1: and the ETFs come in and pop everything. So my
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  Speaker 1: quand is totally different is I just want great risk
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  Speaker 1: adjusted performance. As things get volto, we tiptoe out and
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  Speaker 1: I have to make sure they're always fundamentally superior. But
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  Speaker 1: what Wall St wants fundamentally is changing and that's the fun.
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  Speaker 1: Part of what we do is UM. What we do
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  Speaker 1: is called behavioral finance. We lock in UM what it's
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  Speaker 1: working on Wall Street, and we score the stocks in
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  Speaker 1: that criteria and then we tweak our models quarterly. So
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  Speaker 1: so let's talk about those fundamental anomalies. What what is
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  Speaker 1: a fundamental anomaly? And then how can investor you profit
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  Speaker 1: from that? Well, we actually put all the research free
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  Speaker 1: on our websites, both on the publishing side and our
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  Speaker 1: our management company site. But we have a dividend grader
• 6:29
  Speaker 1: and a stock grader there. The dividend grader is mostly
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  Speaker 1: about you know, return and equity, cash flow, UH, sustainability,
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  Speaker 1: increasing dividends, while when you get to the stock grader,
• 6:39
  Speaker 1: it's things like sales growth, margin expansion, earning stability, earnings momentum,
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  Speaker 1: cash flow um, retrying equity anserings, revisions are any surprises? Now,
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  Speaker 1: those aren't all the criteria we test. And when you
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  Speaker 1: get too small cap, surprises are a bigger deal, and
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  Speaker 1: so is momentum. When you get to large cap, stability
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  Speaker 1: is a bigger deal. Okay, And that's interesting. So you
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  Speaker 1: have different rules in different neighborhoods and um, those fundamental
• 7:02
  Speaker 1: rules sound somewhat similar, not identical, but somewhat similar to
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  Speaker 1: what the marketers these days are calling smart beta. Is
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  Speaker 1: that A Is that an accurate assessment? Sure? I I
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  Speaker 1: have what I have a smart beta e t F
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  Speaker 1: with Oppenheimer, I've had it for years, and that e
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  Speaker 1: t F happens to be sales weighted rebalance every quarter.
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  Speaker 1: So they basically took our top hundred A rated stocks
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  Speaker 1: and we rebounced quarterly to it. The thing with any
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  Speaker 1: smart beta product is what what does it cost to
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  Speaker 1: you to get in out? Okay? And in the e
• 7:34
  Speaker 1: t F world, you gotta be careful because et F
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  Speaker 1: s can have premiums to get in and discounts to
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  Speaker 1: get out, so you gotta be really careful. The rebalancing
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  Speaker 1: costs um so I think some of the smart beta
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  Speaker 1: products aren't as successful as they should be because of
• 7:47
  Speaker 1: the actual trading costs to get in and out. It's
• 7:50
  Speaker 1: just the traditional drag of taxes, expenses, turnover costs, etcetera.
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  Speaker 1: Is that is that the problem? What do you mean
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  Speaker 1: buying the e t F itself trading at a discount
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  Speaker 1: of premium to its end av that last points Stanford
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  Speaker 1: U C l A and honist in the University came
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  Speaker 1: out with a study last year that said the ETFs
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  Speaker 1: cost more than buying selling stocks. It was scandalous, everybody,
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  Speaker 1: they don't cost anything, They're free. These are nice people. No, no, no, no.
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  Speaker 1: In a tonal expense ratio that reflects all these calls correct.
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  Speaker 1: But the specialists on exchange likes to charge you a
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  Speaker 1: premium and likes when you buy, and likes to charge
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  Speaker 1: you a discount when you sell. And then shortly after
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  Speaker 1: that study came out, we had August and what happened
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  Speaker 1: on in the morning of August one thousand, two hundred
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  Speaker 1: and seventy eight stocks couldn't be priced because they hit
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  Speaker 1: the little circuit breakers on the stock exchange when you
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  Speaker 1: dropped more than five percently solliterating down. And for some reason,
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  Speaker 1: the specialist on exchange kept training ets even though it
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  Speaker 1: couldn't price the stocks. So you had all these big
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  Speaker 1: liquid e t F s being discounted at a shocking level.
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  Speaker 1: And so the et F industry still has to deal
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  Speaker 1: with this. There's a big SEC investigation into this. But
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  Speaker 1: this is a big problem, and um, we're not anti
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  Speaker 1: e t F, but we basically want everybody to know
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  Speaker 1: that when they turn the liquidity off of the market,
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  Speaker 1: don't sell your e t F. I'm Barry Ridholtz. You're
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  Speaker 1: listening to Masters in Business on Bloomberg Radio. My special
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  Speaker 1: guest today is Louis Navalier. He is best known as
• 9:17
  Speaker 1: a small cap stock becker. These days, he's a big
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  Speaker 1: cap manager, a quantitative fundamental analyst, and newsletter writer as
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  Speaker 1: well as running two and a half billion dollars. Let's
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  Speaker 1: start out with a little bit of your academic undergraduate
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  Speaker 1: work and talk about your your brand of quantitative analysis.
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  Speaker 1: So you're at cal State, you're doing this research project
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  Speaker 1: to mimic the SMP five dred. What makes you, as
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  Speaker 1: a young kid say hey, I think I could beat
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  Speaker 1: the market. I didn't. I'm I'm basically from Berkeley, California.
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  Speaker 1: I'm totally trained in socialism. I was taught that we're
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  Speaker 1: all supposed to in the same amount of money because
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  Speaker 1: if we don't, least we share it. Were correct. But
• 10:02
  Speaker 1: but the reason we're all supposed to earn the same
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  Speaker 1: amount of money, we're all supposed to index is because
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  Speaker 1: if we don't, will have create social unrest and so
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  Speaker 1: for you know, peace, love, harmony, we're all supposed to
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  Speaker 1: just blindly follow each other and um, and by this
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  Speaker 1: an index UM. However, Vogel would disagree with you, but
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  Speaker 1: go on. I have no problem debating with Mr Boga.
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  Speaker 1: I respect him highly. The but the real issue is
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  Speaker 1: is that UM indexing evolved because they passed the law
• 10:30
  Speaker 1: called Arissa and Orissa says, we need to match this
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  Speaker 1: benchmark to cover our butt. So basically that's why indexing evolved.
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  Speaker 1: And of course they started with the SMP and they've
• 10:40
  Speaker 1: created monsters. Okay, to be honest with you, if you
• 10:43
  Speaker 1: go back to the go go nineties, the big stocks
• 10:45
  Speaker 1: are getting bigger because of the cap weighting the SMP.
• 10:48
  Speaker 1: UH just before the bubble bursts in March A two
• 10:51
  Speaker 1: thousand SMP was in seven giant tech stocks. The issue
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  Speaker 1: I have with indexing and people that just blindly buy
• 10:59
  Speaker 1: baskets of stock, they have no idea what they're buying fundamentally, Okay,
• 11:02
  Speaker 1: so let me push back on you a little bit.
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  Speaker 1: Didn't we see something similar in the late sixties with
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  Speaker 1: the nifty fifty with the names that everybody knew, they
• 11:10
  Speaker 1: were household names. They were all doing great, and all
• 11:13
  Speaker 1: the managers used that as their benchmark, and everyone piled
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  Speaker 1: in to the same fifty stocks, which ultimately collapsed. You
• 11:20
  Speaker 1: had the fifty seven percent drop from seventy three to
• 11:22
  Speaker 1: seventy four. Is that very different than what took place
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  Speaker 1: UH in the late nineties it's exactly the same thing,
• 11:29
  Speaker 1: except in the go go nineties it was concentrated in
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  Speaker 1: fewer stocks. And then, of course we had the whole
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  Speaker 1: fang issue last year, okay, where the top ten stocks
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  Speaker 1: um in the SMP five hundred better than the other
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  Speaker 1: four nineties. But Facebook, Amazon, Netflix, and Google overpowered it.
• 11:47
  Speaker 1: And actually that was an et F story. You see,
• 11:50
  Speaker 1: the the equally weighted ETFs got hit so hard in
• 11:53
  Speaker 1: August some of the big wirehouses said, get the hell
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  Speaker 1: out of these things, go back to cap weighted. So
• 11:59
  Speaker 1: as they paraded out usually at the time, as they
• 12:02
  Speaker 1: paraded out of equal into cap in the last four
• 12:04
  Speaker 1: months a year, they made the big stocks bigger. As
• 12:07
  Speaker 1: we started this year, I was I'm not anti faying,
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  Speaker 1: but I was especially anti Netflix because it was over
• 12:13
  Speaker 1: four times earnings to beginning of the year. It's rains
• 12:16
  Speaker 1: were forecasts of the slide, so I wrote everybody to
• 12:18
  Speaker 1: stay away, even though it number one performer. I had
• 12:20
  Speaker 1: some issues evaluations issues with Amazon, but I've since then
• 12:24
  Speaker 1: about face because I was very impressed with Amazon's first
• 12:27
  Speaker 1: quarter making money in the cloud, taking on Netflix, and
• 12:29
  Speaker 1: actually they're even taking on Apple. If you buy an
• 12:32
  Speaker 1: Apple TV you can't get Amazon prime because they don't
• 12:34
  Speaker 1: they yeah, yeah, so um. But you know, bubbles are
• 12:41
  Speaker 1: created by these industries. I would respectedly argue that Tesla's
• 12:44
  Speaker 1: valuation was largely caused by the q q Q. When
• 12:47
  Speaker 1: Oracle left the q q Q, they put in Tesla
• 12:49
  Speaker 1: and couldn't handle the money. And so you have to
• 12:52
  Speaker 1: realize getting added to some of these baskets is the
• 12:55
  Speaker 1: greatest thing that ever happens to some of these companies.
• 12:57
  Speaker 1: But the market right now is just too darn narrow
• 13:01
  Speaker 1: to buy the baskets. So you don't think Netflix at
• 13:03
  Speaker 1: four times earnings, you don't think they're gonna grow into
• 13:06
  Speaker 1: that valuation. No, I don't. And Amazon has been overvalued
• 13:12
  Speaker 1: I think forever. Is it? Is that a fair state?
• 13:14
  Speaker 1: That is correct? So let let me just walk you
• 13:15
  Speaker 1: through Amazon, because I didn't about face on it because
• 13:18
  Speaker 1: I'm I guess, slightly bipolar. But by the way, I'm
• 13:20
  Speaker 1: a huge fan of both companies as as a consumer,
• 13:24
  Speaker 1: not necessarily as an arrest. And my family does the same.
• 13:26
  Speaker 1: We both subscribed them. So here's here's my issue with Amazon.
• 13:29
  Speaker 1: Last year it hit almost a thousand times trailing earnings,
• 13:32
  Speaker 1: It lost money, the first three quarters. The fourth quarter
• 13:34
  Speaker 1: earnings were disaster, thirty percent below endless estimates. The best
• 13:39
  Speaker 1: thing I could say about Amazon late last year was
• 13:41
  Speaker 1: training at two arentimes forecast earnings. When I saw the
• 13:44
  Speaker 1: first quarter results, I didn't about face first a surprise.
• 13:47
  Speaker 1: They make a lot of money in cloud computing. There
• 13:50
  Speaker 1: are taking on Netflix and programming. You may know they
• 13:53
  Speaker 1: paid those top Gear guys from to leave the BBC.
• 13:57
  Speaker 1: They kind of had left. They were on the way
• 13:59
  Speaker 1: out of the BBC, got fired and they landed at Amazon.
• 14:02
  Speaker 1: But the two and fifty millions pretty good for three guys.
• 14:04
  Speaker 1: I realized, has a production team and a budget. On
• 14:06
  Speaker 1: top of they have a ton of great program and
• 14:09
  Speaker 1: in the High Tower is one and then there's catastrophe.
• 14:12
  Speaker 1: There's a whole run. They've become musty, cor correct and um.
• 14:17
  Speaker 1: And when you buy a Sony TV, you have ah
• 14:20
  Speaker 1: an Amazon Prime app on it and built in. You
• 14:23
  Speaker 1: can't get that app again on the Apple TV. So
• 14:26
  Speaker 1: there and then their devices they think is better than
• 14:28
  Speaker 1: the Apple TV, and I'll let them slug it out
• 14:30
  Speaker 1: with the Apple. But the other thing they got going
• 14:33
  Speaker 1: for rather than taking on Netflix and Apple is again
• 14:36
  Speaker 1: that cloud computing. They are continuing to dominate. Everyone can't
• 14:39
  Speaker 1: wait to have their drone delivery. Um, they're gonna start
• 14:42
  Speaker 1: it first in the UK. You do have to put
• 14:44
  Speaker 1: out a little matt for your drone delivery because we're
• 14:49
  Speaker 1: correct and uh so if the dog gets it or
• 14:52
  Speaker 1: if the sprinkles get it at your fault, okay, so
• 14:54
  Speaker 1: what you have to have a matt. You know, I
• 14:56
  Speaker 1: was reluctant to join Prime until a couple of years ago.
• 14:59
  Speaker 1: I finally joined AMA on Prime. And now I don't
• 15:01
  Speaker 1: even think about something you needed to twitch. You buy it.
• 15:03
  Speaker 1: It's there in two days and half the time, it's
• 15:06
  Speaker 1: not there in two days, it's there in a day.
• 15:07
  Speaker 1: It's it's so they're onto something. If one day they
• 15:10
  Speaker 1: figure out how to make money, they're going to be
• 15:12
  Speaker 1: really big. Well, they finally figured it out, and that's
• 15:15
  Speaker 1: why I've done in about face and now they're surprising
• 15:17
  Speaker 1: their capturing marketing. And you know Wall Street is desperate
• 15:20
  Speaker 1: for sales growth. When the second quarterins come out, it's
• 15:23
  Speaker 1: gonna be the six quarter row of negative sales in
• 15:24
  Speaker 1: the SMP, largely because the multinationals commodity stocked heart by
• 15:28
  Speaker 1: the strong dollars. So anything that has pots of sales
• 15:30
  Speaker 1: growth is an oasis at this moment. So we're no
• 15:33
  Speaker 1: longer going to be able to use weak oil as
• 15:35
  Speaker 1: an excuse for that, because oil is now hovering between
• 15:38
  Speaker 1: forty five and fifty. When it was under thirty dollars,
• 15:41
  Speaker 1: it was easy to say, hey, oil has collapsed, but
• 15:43
  Speaker 1: now it seems to be moving back towards a profitable
• 15:47
  Speaker 1: correct and the and the energy companies are doing well
• 15:49
  Speaker 1: because natural gas prices erupt. This little heat wave we're
• 15:52
  Speaker 1: having is helping, however for electricity generation. Yes, However, I
• 15:56
  Speaker 1: have to say this oil always goes up in the
• 16:00
  Speaker 1: ring and then always goes down the fall. The inventories
• 16:04
  Speaker 1: in America have tightened up. However, they're still higher than
• 16:07
  Speaker 1: they were last year. They're higher they are historically. Rotterdam
• 16:10
  Speaker 1: in Europe is full kept any more oil there. They're
• 16:13
  Speaker 1: still storing oil and tankers were nowhere to go, and
• 16:16
  Speaker 1: so we still have a glut. Oil demands going up globally,
• 16:19
  Speaker 1: but the supply went up faster. Iraq is online, I
• 16:22
  Speaker 1: ran his online, or US fracking is just correct, and um,
• 16:28
  Speaker 1: what's happening is that Iraq is the big player. If
• 16:32
  Speaker 1: I have a chart when I do seminars that shows
• 16:35
  Speaker 1: where all the productions coming from marginal editor to Iraq
• 16:39
  Speaker 1: is much bigger than all the fracking we've got. But
• 16:42
  Speaker 1: now you've got a wrong coming online. Depends on the
• 16:44
  Speaker 1: tankers and everybody's trying out do each other, so we're
• 16:46
  Speaker 1: not gonna know where oil is to the to the
• 16:48
  Speaker 1: to September. I'm Barry Ridhults. You're listening to Masters in
• 16:52
  Speaker 1: Business on Bloomberg Radio. My special guest today is Louis Navalier.
• 16:56
  Speaker 1: He is a quant money manager, picker, newsletter writer. He
• 17:02
  Speaker 1: has been actually running running cash for almost thirty years,
• 17:07
  Speaker 1: and it's been in the business for for longer than that. Um,
• 17:12
  Speaker 1: let's jump right into the whole idea of mutual funds
• 17:15
  Speaker 1: and e t f s. You're you're an advisor to
• 17:18
  Speaker 1: a number of funds and the number of e t
• 17:20
  Speaker 1: f s. What are some of the disadvantages of those
• 17:23
  Speaker 1: two structures and what are some of the advantages. Well,
• 17:28
  Speaker 1: I think I should just tell you why I invest
• 17:30
  Speaker 1: them personally, Okay, Um, I married a Canadian. Uh, she
• 17:36
  Speaker 1: has money in the Caymans and a trust we have
• 17:39
  Speaker 1: to report to. I R s. We're not allowed to
• 17:42
  Speaker 1: buy US funds over there, So I buy my e
• 17:43
  Speaker 1: t F with Oppenheimer over there. Um and uh, I
• 17:47
  Speaker 1: think that ETFs fine if you want to buy and hold. Um,
• 17:50
  Speaker 1: it is not meant to trade. The spreads are still
• 17:51
  Speaker 1: a little bit too wide. As it gets more liquid,
• 17:53
  Speaker 1: maybe that will change. But I think ETFs are better
• 17:56
  Speaker 1: for buy and hold investing than than trading. Because of that,
• 17:59
  Speaker 1: academics that e t f s cost more to buy
• 18:01
  Speaker 1: and sell, and then E t F seemed to have
• 18:03
  Speaker 1: some liquid issues on during flash crashes things like that.
• 18:06
  Speaker 1: So bine hold is fine trading no now over. My
• 18:12
  Speaker 1: personal money is in funds. So why did I Why
• 18:14
  Speaker 1: do I do that? Well? I do it for a
• 18:17
  Speaker 1: very selfish reason. Um, I sold a big chunk of
• 18:21
  Speaker 1: my business a few years ago at a cash event,
• 18:24
  Speaker 1: and so I have a lot of taxable money in
• 18:25
  Speaker 1: the market. When I see it a mutual fund, and
• 18:28
  Speaker 1: then I run around grow it because people like me
• 18:31
  Speaker 1: or whatever. Something happens. What happens is is the assets
• 18:35
  Speaker 1: point in the fund to loot the taxes. So I
• 18:38
  Speaker 1: run the places like New York and Los Angeles, and
• 18:40
  Speaker 1: I tell everybody that you new Yorkers don't have to
• 18:43
  Speaker 1: move to Florida. The people in ll A don't have
• 18:45
  Speaker 1: to move to Nevada. Just invest in one of my
• 18:48
  Speaker 1: growing funds, because you won't pay your fair share of taxes.
• 18:50
  Speaker 1: If I grow a fun tenfold in fiscal year, we
• 18:52
  Speaker 1: will only pay tempers on the taxes we should. If
• 18:55
  Speaker 1: I grow at fivefold, will only pay twenty. So this
• 18:58
  Speaker 1: is a function of mutual fun account me. So I
• 19:00
  Speaker 1: purposes seed funds of my own money, and then I
• 19:03
  Speaker 1: promote them and try to get them to grow. Uh
• 19:06
  Speaker 1: so I can better compound my money and help people
• 19:08
  Speaker 1: stay in Los Angeles, New York. So does that technique
• 19:12
  Speaker 1: only work when you have funds growing rapidly or would
• 19:15
  Speaker 1: that work with any fund that's seated? And subsequently that
• 19:19
  Speaker 1: is correct. I left a fund company that had been
• 19:21
  Speaker 1: with over for seventeen years as a subadvisor, and I
• 19:24
  Speaker 1: left them last year at the end of the first quarter,
• 19:27
  Speaker 1: and I was proud I was top one percent, But
• 19:29
  Speaker 1: the tax time bomb that went off in that fund
• 19:31
  Speaker 1: was just devastating. And uh So, basically when fund shrink,
• 19:35
  Speaker 1: they become tax tigme bonds. When they grow their tax
• 19:37
  Speaker 1: efficient and so that's why I've seeded funds with my
• 19:41
  Speaker 1: own money. And uh, they're all new and they're all
• 19:43
  Speaker 1: not that big. But I'm having a ball, and I
• 19:46
  Speaker 1: hope people don't think bad about me that I'm helping
• 19:49
  Speaker 1: them compound their money faster. But let's just say, for argumisake,
• 19:53
  Speaker 1: Hillary has become president and she gets her way, and
• 19:55
  Speaker 1: we have to wait six years for long term capital
• 19:57
  Speaker 1: gains as opposed to three years. Well one year on stocks,
• 20:01
  Speaker 1: it's twelve months in a day. But the bottom line
• 20:04
  Speaker 1: is um, that will help my business. You know what
• 20:07
  Speaker 1: I mean is there was a proposal that it was
• 20:09
  Speaker 1: a three year wait for long term capital gains versus
• 20:12
  Speaker 1: one year in a day. Today, Well whatever if they
• 20:15
  Speaker 1: lengthen it six years is I haven't heard six years?
• 20:17
  Speaker 1: So you said that my joy drop. This is when
• 20:20
  Speaker 1: she was running against Bernie and was it was the
• 20:23
  Speaker 1: original proposal. But the if she's modified, that's a good sign.
• 20:26
  Speaker 1: Of course, her husband cut capital gain, so maybe they
• 20:29
  Speaker 1: should talk to each other about this. You know, the
• 20:31
  Speaker 1: traditional politics is you run to either extreme and then
• 20:35
  Speaker 1: pivot to the middle. I don't think anybody has mentioned
• 20:38
  Speaker 1: that to the Donald pivot to the middle I assume
• 20:41
  Speaker 1: by the time this airs, he will have begun that
• 20:43
  Speaker 1: pivoting process. She's early stages of that. But six years
• 20:48
  Speaker 1: is a ridiculous period of time for long term That's correct.
• 20:51
  Speaker 1: And and the bottom line is people are stressed over taxes.
• 20:54
  Speaker 1: You know. I'm originally from California, and I just see
• 20:57
  Speaker 1: the stress uh in everybody's face over there, and the
• 21:01
  Speaker 1: steps they go to avoid paying taxes is quite interesting.
• 21:04
  Speaker 1: So let's let's talk about that. You're a multi state
• 21:07
  Speaker 1: sort of guy. Your offices so Navalian Associates listed in Nevada, correct,
• 21:13
  Speaker 1: Correct our ops compliance tradings in Nevada. I still have
• 21:16
  Speaker 1: a home there, all right. And you live in Florida.
• 21:18
  Speaker 1: I live in the Palm Beach area. So you only
• 21:20
  Speaker 1: like sunny places. I can't argue with that. But I
• 21:23
  Speaker 1: do have our private client group in New York City.
• 21:26
  Speaker 1: I have our publishing business in Rockville, Maryland. But basically,
• 21:32
  Speaker 1: tax restates are very interesting places. UM Reno is a
• 21:36
  Speaker 1: fascinating place because Reno has the Schwab office there. The
• 21:41
  Speaker 1: last I saw was the biggest in the world, Shanghai's
• 21:43
  Speaker 1: number two UM and what it is in California barely
• 21:47
  Speaker 1: three thousand people pay half that state's taxes. So what
• 21:50
  Speaker 1: they do is a lot of people like to put
• 21:51
  Speaker 1: their money in Nevada by home in Lake Tahoe or
• 21:53
  Speaker 1: in the hills somewhere and um, and then they drive
• 21:57
  Speaker 1: back to California and as long as they don't spend
• 22:00
  Speaker 1: more than five months there that they can live in California.
• 22:02
  Speaker 1: And I have to pay that thirteen three five months.
• 22:04
  Speaker 1: In New York's it's six months to the day. If
• 22:06
  Speaker 1: you're here six months in a day, you you owe
• 22:08
  Speaker 1: the full ride. Correct. New York will hunt you down
• 22:11
  Speaker 1: the rest of your life. And that's that. But and
• 22:12
  Speaker 1: it was a big case. Someone literally a planeman and
• 22:14
  Speaker 1: unscheduled landing for thirty minutes and then took off after refueled.
• 22:18
  Speaker 1: They counted that as the day they actually lost in
• 22:21
  Speaker 1: the New York lost in court. But that's how much
• 22:24
  Speaker 1: they're going after the six months rule. I'm Barry Hults.
• 22:28
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
• 22:32
  Speaker 1: special guest today is Louis Navalier. He is a quant
• 22:35
  Speaker 1: and stock picker managing about two point five billion dollars
• 22:40
  Speaker 1: across the United States. Let's talk a little bit about
• 22:43
  Speaker 1: modeling and quants. What do you think people misunderstand about
• 22:48
  Speaker 1: the idea of using mathematics to evaluate and manage assets. Well,
• 22:56
  Speaker 1: I think the main thing that people should realize a
• 22:59
  Speaker 1: lot of the quants are are basically doing it on
• 23:02
  Speaker 1: order flow, so they're the nose on the dog versus
• 23:04
  Speaker 1: the hill on the dog. And whether they're trying to
• 23:07
  Speaker 1: trade ahead of the Russell realignment a tracking manager, or
• 23:10
  Speaker 1: whether they're trying to to to serve the h f
• 23:12
  Speaker 1: T systems, the high frequency trading systems in that order flow.
• 23:16
  Speaker 1: That's a lot of hedge funds do that. In my case,
• 23:18
  Speaker 1: it's about getting great risk adjusted performance. My system at
• 23:22
  Speaker 1: this moment says Facebook is safer than Kroger. That may
• 23:25
  Speaker 1: not be intuitive to you, but that's what it is,
• 23:28
  Speaker 1: and if you chartered both, you'd see it. So obviously
• 23:30
  Speaker 1: there's some more buying pressure under Facebook there is Kroger.
• 23:33
  Speaker 1: We know that Kroger's lower pe and all that kind
• 23:37
  Speaker 1: of stuff. So, um, that's the first step of quant
• 23:40
  Speaker 1: But then I basically try to I score my stocks
• 23:44
  Speaker 1: on various fundamental criteria that are very very important because
• 23:48
  Speaker 1: they're influencing all the order flow on Wall Street, and
• 23:52
  Speaker 1: there are quarters and earnings don't work. But I can
• 23:54
  Speaker 1: tell you they're working the last couple of quarters. And
• 23:56
  Speaker 1: I go into every earning season locked and loaded with
• 23:58
  Speaker 1: fund of my spirit stocks. And I really enjoy earning seasons.
• 24:02
  Speaker 1: So I'm a little old school, you know. Um. I
• 24:06
  Speaker 1: do meet a lot of forty year olds that I
• 24:08
  Speaker 1: think I'm nuts for doing fundamentals. Okay, and these are
• 24:11
  Speaker 1: gatekeepers at big firms. Okay. Um. I have a kid
• 24:15
  Speaker 1: that goes to Stanford that's been highly recruited by some
• 24:18
  Speaker 1: of the hedge funds to build the algrimic models to basically,
• 24:22
  Speaker 1: uh trade off the h f T systems and adapt.
• 24:25
  Speaker 1: He thinks he's never taken an accounting class. He wonders
• 24:28
  Speaker 1: why I do fundamentals. Okay, and um, but uh, you know,
• 24:33
  Speaker 1: I'm not one of those quants. I'm a tax efficient quant.
• 24:37
  Speaker 1: I hold stocks for over five quarters on average. I
• 24:40
  Speaker 1: get predominantly long term gains. Um. The interesting thing about
• 24:43
  Speaker 1: our models nowadays is dividend growth has invaded all our models.
• 24:48
  Speaker 1: Because the SMP yields more than treasuries. The dividends were
• 24:53
  Speaker 1: cut in the first quarter eight four percenthre in the
• 24:55
  Speaker 1: energy sector, and the companies are still boosting the dividends
• 24:58
  Speaker 1: when others are cutting. Are an oasis. And of course
• 25:02
  Speaker 1: we've had this huge bond rally and so dividends look
• 25:05
  Speaker 1: a lot better nowadays. And of course they are attacks
• 25:07
  Speaker 1: efficient by and large. So when we look at the
• 25:10
  Speaker 1: world of dividend stocks, how impactful has the FEDS policy
• 25:15
  Speaker 1: of of zero interest rates been to that sector of
• 25:18
  Speaker 1: the universe. The FED is caused this. The FED is
• 25:22
  Speaker 1: not driving the bus anymore. I am extremely frustrated by
• 25:26
  Speaker 1: the Fed. I don't know why they have to. Like
• 25:28
  Speaker 1: in December they told us inflation is coming back, the
• 25:31
  Speaker 1: economy is gonna be strong, so we're gonna four rate increases.
• 25:33
  Speaker 1: Then in in March they said, oh, economy is not
• 25:36
  Speaker 1: as strong as we thought. Inflace isn't here yet, we
• 25:39
  Speaker 1: only have two rate increases, and of course Janet Yelling
• 25:41
  Speaker 1: made it very clear we're gonna have one or no
• 25:44
  Speaker 1: rate increases. Uh. The other week after the FOMC minutes,
• 25:48
  Speaker 1: um are FED. I personally think they're mannipulated by Goldwin. Okay,
• 25:54
  Speaker 1: there's a lot of Golden economists that are chummy with
• 25:56
  Speaker 1: the FED economists, and maybe by getting the feller of well,
• 26:00
  Speaker 1: obviously the FED economists will like to work a Goldman okay,
• 26:04
  Speaker 1: And you have the you have the New York FED
• 26:06
  Speaker 1: chief or or the head of research of former absolutely.
• 26:10
  Speaker 1: Oh and by the way, Janet Janet Yell in front
• 26:12
  Speaker 1: of a congressional testimony the other day, pointed out that
• 26:16
  Speaker 1: the private economists say this, okay, so actually stunt quoting
• 26:19
  Speaker 1: the private economis. The truth is there's a lot of
• 26:21
  Speaker 1: money around the world, and uh, with negative yields in Germany, Japan, Switzerland,
• 26:28
  Speaker 1: money's gonna keep pouring the United States as long as
• 26:30
  Speaker 1: we have higher rates in the rest of the world,
• 26:32
  Speaker 1: as long as our currency is relatively stable, and as
• 26:35
  Speaker 1: long as our economy is will be decent. And I
• 26:36
  Speaker 1: would make an argument that this strong dollar environment that
• 26:39
  Speaker 1: has been haunting the United States and crushing corporate profits
• 26:44
  Speaker 1: for the multinationals commodity stocks is going to continue unto
• 26:47
  Speaker 1: our rates as low as everybody else, and our FED
• 26:49
  Speaker 1: is not driving the bus. You know, under Bernankie was incredible.
• 26:53
  Speaker 1: He spoke the London School of Economics with Mervin King
• 26:56
  Speaker 1: and the audience and Draggy and he said, I didn't
• 26:59
  Speaker 1: just save the world. I didn't say the U s
• 27:01
  Speaker 1: I say of the world, but he Draggingmrvin King all
• 27:03
  Speaker 1: went to m T together. But now we have Mr Carry,
• 27:07
  Speaker 1: a Canadian running the Bank of England. Uh uh King
• 27:09
  Speaker 1: retired uh yell and replaced bernand Key. She went to Yale.
• 27:14
  Speaker 1: And there's no coordination with the central bank activity anymore.
• 27:18
  Speaker 1: And so the market forces are really driving this. And
• 27:21
  Speaker 1: of course the low interest rate environments causing buy backs explode.
• 27:24
  Speaker 1: My average cheap borrowing go out and buy all this
• 27:26
  Speaker 1: absolutely now it's exploding or nationally because the rates taping
• 27:29
  Speaker 1: lower're there. My average large cap stock retires six point
• 27:32
  Speaker 1: two percent of its float a year. That's amazing. You know,
• 27:35
  Speaker 1: when you look at that what you described as coordinated,
• 27:38
  Speaker 1: it's a little out of phase because you had the
• 27:40
  Speaker 1: US start and finished their qui and just as Japan
• 27:46
  Speaker 1: was was starting their qui and there are a couple
• 27:49
  Speaker 1: of years into it and finally Europe is catching Oh
• 27:52
  Speaker 1: maybe this kewi thing is is a thing. So the
• 27:56
  Speaker 1: conditions that have existed for the past five years, you're
• 27:58
  Speaker 1: suggesting this is going to continue to go on. I
• 28:02
  Speaker 1: don't know how the ECB, the European central banks gets
• 28:04
  Speaker 1: out of this mass. They're not only a minus forty
• 28:07
  Speaker 1: basis points. When they boost their quantitative easy and by
• 28:09
  Speaker 1: twenty billion euros a month, they all the big thing
• 28:13
  Speaker 1: wasn't the money. It says, oh, now you can buy
• 28:14
  Speaker 1: corporate death. Yeah, they moved beyond just driving rates lower.
• 28:17
  Speaker 1: And Japan has always put their quantitative easy and all
• 28:20
  Speaker 1: kinds of funny places at least as well Coy real
• 28:24
  Speaker 1: estate that by everything and it's it's it's amazing it
• 28:26
  Speaker 1: of course it's in like a read over there, but
• 28:29
  Speaker 1: um it's it's this worldwide limbo contest. And uh I
• 28:33
  Speaker 1: would respectively argue that our rates are going to be
• 28:36
  Speaker 1: driven lower by all the fourth Where I live in Florida,
• 28:39
  Speaker 1: I'm the only American on my street. It's all Russians
• 28:42
  Speaker 1: and Europeans now, and they've all but they've all bought
• 28:45
  Speaker 1: homes in Florida and they based to move money out
• 28:48
  Speaker 1: of the country. Or the Russians are up six in
• 28:51
  Speaker 1: the last few years because there the ruble went to
• 28:53
  Speaker 1: pot and then the Europeans are probably up twenty plus percent.
• 28:56
  Speaker 1: This has nothing to real soon. That's just currency. If
• 28:59
  Speaker 1: you look at the West Coast, if you look at Seattle,
• 29:02
  Speaker 1: Portland's Vancouver especially, it's a lot of China money trying
• 29:07
  Speaker 1: to get out of the country. There are these brand
• 29:09
  Speaker 1: new office buildings in Vancouver completely sold and still mostly empty.
• 29:14
  Speaker 1: The opposite of the remember the sea through office towers
• 29:16
  Speaker 1: in Dallas during the oil collapse in the eighties. This
• 29:19
  Speaker 1: is see through residential towers in Vancouver due to Chinese
• 29:23
  Speaker 1: money fleeing. Well, my my son who's at Stanford has
• 29:26
  Speaker 1: a lot of Chinese friends and uh, he's met all
• 29:29
  Speaker 1: their parents because when they their kids went to school here,
• 29:31
  Speaker 1: they happen to come here. Apparently it's not a problem
• 29:34
  Speaker 1: in the United States if you bring some assets. And um,
• 29:38
  Speaker 1: I know, I know, we're an election, heear. I'm not
• 29:40
  Speaker 1: running for anything, but if I was, I would recommend
• 29:43
  Speaker 1: we invite a hundred million new foreigners with about two
• 29:46
  Speaker 1: million each, okay, to come to America. And sounds like
• 29:49
  Speaker 1: a plan. And that's that's what happened to Canada. Canada
• 29:51
  Speaker 1: was broke thirty years ago. They double the size of
• 29:54
  Speaker 1: their country by letting in people with money. Okay. So
• 29:57
  Speaker 1: one thing you can say about America is at least
• 29:59
  Speaker 1: we have our immigration is controversial, but we are letting
• 30:03
  Speaker 1: a lot of very talented people in with money. And
• 30:05
  Speaker 1: of course there is this corruption crackdown in China that
• 30:07
  Speaker 1: seems to be expediting it interesting the corruption crackdown isn't
• 30:11
  Speaker 1: in the province where the president China is from. Not
• 30:14
  Speaker 1: not not a not a terrible, terrible coincidence. So um,
• 30:20
  Speaker 1: what So as a quant do you look at other quants?
• 30:23
  Speaker 1: Do you do you see what other people are doing?
• 30:25
  Speaker 1: You mentioned the h F T things. I look at
• 30:28
  Speaker 1: someone like, um, let's use Cliff Fastness as an example.
• 30:32
  Speaker 1: Who who publishes white Paper. And he's a pretty big
• 30:36
  Speaker 1: factor um model sort of guy. He likes value and momentum.
• 30:40
  Speaker 1: What what other quants do you pay attention to or
• 30:43
  Speaker 1: at least find it interesting to read. I think the
• 30:47
  Speaker 1: most readable people now from a publishing point of view
• 30:49
  Speaker 1: are the folks that bespoke. I think they do the
• 30:52
  Speaker 1: most in your face graphically shocking research, compelling images that
• 30:58
  Speaker 1: really tell us stoy uh. And I think they do
• 31:01
  Speaker 1: a wonderful job. Are they the pure quants like me
• 31:04
  Speaker 1: with their database online? No? But they are very academic. Uh.
• 31:09
  Speaker 1: They like to talk about what's working on Wall Street.
• 31:12
  Speaker 1: They love to put a historical perspective on stuff. Um.
• 31:15
  Speaker 1: You know, we we had our management to have a
• 31:17
  Speaker 1: weekly freething called market Mail, and we have a historian
• 31:20
  Speaker 1: there because it's just fascinating to always look back and
• 31:23
  Speaker 1: see where we're at. But no, you know, you never
• 31:26
  Speaker 1: stop learning, and that's the fun part of our business.
• 31:29
  Speaker 1: I will admit that the new quants are trade a
• 31:31
  Speaker 1: lot more than I do, okay, but but that's an
• 31:34
  Speaker 1: orderflow thing. I'm still kind of an old school behavioral finance,
• 31:38
  Speaker 1: fundamental guy, and um, but I I respect anything that works.
• 31:43
  Speaker 1: You know. The bespoke guys very much remind me of
• 31:46
  Speaker 1: Jim O'Shaughnessy and the what works on Wall Street. It's
• 31:49
  Speaker 1: the same. Let's just look at the numbers and see
• 31:51
  Speaker 1: if there's something that's changing that's worth figuring out, well,
• 31:56
  Speaker 1: whether it's whether it's fundamental valuation or what have you. Uh.
• 32:00
  Speaker 1: That book was really seminal for that approach. Sure, and
• 32:04
  Speaker 1: but I think what everybody has to realize is the
• 32:07
  Speaker 1: market mutates. And I think the way I like to
• 32:09
  Speaker 1: explain it is Bill Walsh used to be a good
• 32:12
  Speaker 1: football coach because he had a system that no one had,
• 32:14
  Speaker 1: and then it stopped working because it went all over
• 32:16
  Speaker 1: the league, you know, I mean, everybody figured out that
• 32:18
  Speaker 1: West Coast offense. And that's how Wall Street is. Whether
• 32:21
  Speaker 1: it's cash low prices, sales or needs, momentum surprises, whatever
• 32:26
  Speaker 1: the factors are, people are locking in on it will
• 32:28
  Speaker 1: only work to everybody does it. So what we do
• 32:30
  Speaker 1: is we we figure out what's working and and as
• 32:33
  Speaker 1: the factors start to break down and get more volatile,
• 32:36
  Speaker 1: they get trimmed from our models and then we suttress
• 32:38
  Speaker 1: test everything. This is the fun part of what Navlier does.
• 32:41
  Speaker 1: At the end of each coreterier earning season, we step in,
• 32:44
  Speaker 1: we update the models, and we tweak them to locking
• 32:47
  Speaker 1: on what's working. So how often are those models trading,
• 32:50
  Speaker 1: how often do you rebalancing, and how often you making
• 32:53
  Speaker 1: major shifts in the holdings. Well, the models are stress
• 32:56
  Speaker 1: tested on a one in three year basis at the
• 32:58
  Speaker 1: end of each earning season. Okay, so they're being upgraded
• 33:01
  Speaker 1: right now because we're about going to other any season.
• 33:03
  Speaker 1: Then the models are run every weekend. Okay, we actually
• 33:05
  Speaker 1: do our research on weekends and uh, and then are
• 33:08
  Speaker 1: our managers have what the models recommend for the next week,
• 33:12
  Speaker 1: and we pretty much follow the model, so the only
• 33:14
  Speaker 1: time will override them if there's merger news or something
• 33:17
  Speaker 1: like that or liquidity events. But we fly on instruments
• 33:20
  Speaker 1: and then of course we have optimization models to to
• 33:22
  Speaker 1: wait everything to get it as smooth as possible. One
• 33:26
  Speaker 1: of the great things about the modeling nowadays is because
• 33:30
  Speaker 1: dividend stock zig one grows stock zag you can mix
• 33:34
  Speaker 1: dividend growth with real real growth stocks and really reduce
• 33:38
  Speaker 1: the volatility. So our trademark has become really as a
• 33:40
  Speaker 1: good risk adjusted manager, lower beta, lower max draw down,
• 33:44
  Speaker 1: lower stanerindiviation, and we're mensely proud of that. And and
• 33:48
  Speaker 1: then you can further do that by putting a tactical
• 33:50
  Speaker 1: overlay on and if you want. But but again we're
• 33:53
  Speaker 1: obsessive risk control that starts with a quant We always
• 33:56
  Speaker 1: have fund and many superior stocks. I don't have to
• 33:58
  Speaker 1: worry when things are line around because I know I
• 34:00
  Speaker 1: got good earnings the next quarter and then but as
• 34:04
  Speaker 1: as individual stocks have become increasingly risky, I will trim
• 34:06
  Speaker 1: them or replace them with safer stocks. And so that's
• 34:09
  Speaker 1: the main reason we're selling well. Most of the stuff
• 34:12
  Speaker 1: we sell is actually pretty good. We just gotta sell
• 34:14
  Speaker 1: with something that's better, they'll have less volatility and add
• 34:16
  Speaker 1: the portfolio. So we're running the portfolios like you'd run
• 34:19
  Speaker 1: a sports team. So if you're on my team and
• 34:21
  Speaker 1: you lose a step because you know you're getting old
• 34:23
  Speaker 1: and you know, I'll throw you off the team. Or
• 34:25
  Speaker 1: if you're young, your party too hard and you lose
• 34:26
  Speaker 1: stuff for that, and I'll throw you off the team
• 34:28
  Speaker 1: for that. Usually i'll catch your minutes or I throw
• 34:30
  Speaker 1: you off the team. So that's how optimization works. We're
• 34:33
  Speaker 1: always trying to build get the smoothest Stadius ride out there,
• 34:36
  Speaker 1: and we're mentally proud of that. So if people want
• 34:39
  Speaker 1: to find out more about Navalier or read any of
• 34:42
  Speaker 1: your research, where's the best place for them to go. Well,
• 34:45
  Speaker 1: there's two sites I'd recommend Navalier dot com the management company.
• 34:48
  Speaker 1: Sign up for something called market mail, which is our
• 34:50
  Speaker 1: free commentary comes out every Tuesday. My newsletter uh is
• 34:55
  Speaker 1: Navali Growth dot com. We keep those business separate, but
• 34:58
  Speaker 1: we have free databases on sites and start playing around
• 35:01
  Speaker 1: with their free databases. And of course you're welcome to
• 35:03
  Speaker 1: call us anytime you'd like more information. Louis, thank you
• 35:06
  Speaker 1: so much for doing this. Can you stick around a
• 35:08
  Speaker 1: little bit, We'll keep we'll keep planning through some of
• 35:10
  Speaker 1: these questions. Uh. If you have enjoyed this conversation, be
• 35:14
  Speaker 1: sure and stick around for our podcast extras, where we
• 35:17
  Speaker 1: keep the tape rolling and continue chatting about all things
• 35:20
  Speaker 1: quant modeling and stock selections. Be sure and check out
• 35:24
  Speaker 1: my daily column on Bloomberg dot com. Follow me on
• 35:27
  Speaker 1: Twitter at Rid Halts. I'm Barry Rihults. You've been listening
• 35:32
  Speaker 1: to Masters in Business on Bloomberg Radio, brought to you
• 35:36
  Speaker 1: by b A SF we create Chemistry. I'm Barry Rihults.
• 35:41
  Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
• 35:44
  Speaker 1: special guest today is Louis Navalier. He is a quant
• 35:48
  Speaker 1: and stock picker managing about two point five billion dollars
• 35:52
  Speaker 1: across the United States. Let's talk a little bit about
• 35:56
  Speaker 1: modeling and quants. What do you think people miss understand
• 36:00
  Speaker 1: about the idea of using mathematics to evaluate and manage assets. Well,
• 36:09
  Speaker 1: I think the main thing that people should realize a
• 36:12
  Speaker 1: lot of the quants are are basically doing it on
• 36:14
  Speaker 1: order flow, so they're nose on the dog versus the
• 36:17
  Speaker 1: tail on the dog. And whether they're trying to trade
• 36:19
  Speaker 1: ahead of the Russell realignment, a tracking manager, or whether
• 36:22
  Speaker 1: they're trying to to to serve the h f T systems,
• 36:26
  Speaker 1: the high frequency trading systems in that order flow. That's
• 36:28
  Speaker 1: a lot of hedge funds do that. In my case,
• 36:31
  Speaker 1: it's about getting great risk adjuster performance. My system at
• 36:34
  Speaker 1: this moment says Facebook is safer than Kroger. That may
• 36:37
  Speaker 1: not be intuitive to you, but that's what it is.
• 36:40
  Speaker 1: And if you charted both, you'd see it. So obviously
• 36:43
  Speaker 1: there's some more buying pressure and your Facebook there is Kroger.
• 36:46
  Speaker 1: We know that Kroger's lower pe and all that kind
• 36:49
  Speaker 1: of stuff. So, um, that's the first step of quant
• 36:53
  Speaker 1: But then I basically try to I score my stocks
• 36:56
  Speaker 1: on various fundamental criteria that are very very portant because
• 37:00
  Speaker 1: they're influencing all the older flow on Wall Street. And
• 37:04
  Speaker 1: there are quarters when earnings don't work that I can
• 37:06
  Speaker 1: tell you they're working in the last couple of quarters.
• 37:08
  Speaker 1: And I go into every earning season locked and loaded
• 37:10
  Speaker 1: with fund of my spirit stocks. And I really enjoy
• 37:13
  Speaker 1: earning seasons. So I'm a little old school, you know. Um,
• 37:18
  Speaker 1: I do meet a lot of forty year olds that
• 37:20
  Speaker 1: I think I'm nuts for doing fundamentals. Okay, and these
• 37:23
  Speaker 1: are gatekeepers at big firms. Okay. Um. I have a
• 37:27
  Speaker 1: kid that goes to Stanford that's been highly recruited by
• 37:30
  Speaker 1: some of the hedge funds to build the agrithmic models
• 37:33
  Speaker 1: to basically, uh trade off the h f T systems
• 37:37
  Speaker 1: and adapt. He thinks he's never taken an accounting class.
• 37:40
  Speaker 1: He wonders why I do fundamentals. Okay, and um, but uh,
• 37:45
  Speaker 1: you know, I'm not one of those quants. I'm a
• 37:47
  Speaker 1: tax efficient quant. I hold stocks for over five quarters
• 37:51
  Speaker 1: on average. I get predominantly long term gains. Um. The
• 37:55
  Speaker 1: interesting thing about our models nowadays is dividend growth has
• 37:59
  Speaker 1: invade aid at all our models. Because the SMP yields
• 38:02
  Speaker 1: more than treasuries. The dividends were cut in the first
• 38:06
  Speaker 1: quarter eighty four percent whre in the energy sector. And
• 38:09
  Speaker 1: the companies that are still boosting the dividends when others
• 38:11
  Speaker 1: are cutting our an oasis. And of course we've had
• 38:14
  Speaker 1: this huge bond rally, and so dividends look a lot
• 38:18
  Speaker 1: better nowadays. And of course they are attacks efficient by
• 38:20
  Speaker 1: and large. So when we look at the world of dividends, stuffs.
• 38:24
  Speaker 1: How impactful has the FEDS policy of of zero interest
• 38:29
  Speaker 1: rates been to that sector of the universe. The FED
• 38:32
  Speaker 1: is caused this. The FED is not driving the bus anymore.
• 38:36
  Speaker 1: I am extremely frustrated by the Fed. I don't know
• 38:39
  Speaker 1: why they have to. Like in December they told us
• 38:41
  Speaker 1: inflation is coming back, the colonomy is gonna be strong,
• 38:44
  Speaker 1: so we're gonna four rate increases. Then in in March
• 38:47
  Speaker 1: they said, oh, economy is not as strong as we thought.
• 38:50
  Speaker 1: Inflace isn't here yet. We only have two rate increases.
• 38:52
  Speaker 1: And of course Janet yelemated very clear, we're gonna have
• 38:55
  Speaker 1: one or no rate increases. Uh. The other week after
• 38:59
  Speaker 1: the FOAM ce minutes, um are FED. I personally think
• 39:04
  Speaker 1: they're inniplated by Goldman. Okay. There's a lot of Goldman
• 39:07
  Speaker 1: economists that are chummy with a FED economists and maybe
• 39:10
  Speaker 1: by getting well obviously the FED economists would like to
• 39:14
  Speaker 1: work at Goldman. Okay. And you have the you have
• 39:17
  Speaker 1: the New York FED chief or or the head of
• 39:20
  Speaker 1: research of former absolutely. Oh. And by the way, Janet
• 39:24
  Speaker 1: Janet Yell in front of a congressional testimony the other
• 39:26
  Speaker 1: day pointed out that the private economists say this, Okay,
• 39:30
  Speaker 1: so I actually sound quoting the private economis. The truth
• 39:33
  Speaker 1: is there's a lot of money around the world, and UH,
• 39:37
  Speaker 1: with negative yields in Germany, Japan, Switzerland, money's gonna keep
• 39:41
  Speaker 1: pouring the United States as long as we have higher
• 39:43
  Speaker 1: rates in the rest of the world, as long as
• 39:44
  Speaker 1: our currency is relatively stable, and as long as our
• 39:47
  Speaker 1: economies will be decent. And I would make an argument
• 39:50
  Speaker 1: that this strong dollar environment that has been haunting the
• 39:52
  Speaker 1: United States and crushing corporate profits for the multinationals commodity
• 39:57
  Speaker 1: stocks is going to continue into our rates as it
• 40:00
  Speaker 1: was everybody else, and our FED is not driving the bus.
• 40:03
  Speaker 1: You know under Bernankee it was incredible. So if people
• 40:06
  Speaker 1: want to find out more about Navalier or read any
• 40:09
  Speaker 1: of your research, where's the best place for them to go. Well,
• 40:13
  Speaker 1: there's two sites. I'd recommend Navalier dot com the management company.
• 40:16
  Speaker 1: Sign up for something called market Mail, which is our
• 40:18
  Speaker 1: free commentary comes out every Tuesday. My newsletter UH is
• 40:22
  Speaker 1: naval Growth dot Com. We keep those business separate, but
• 40:26
  Speaker 1: we have free databases on both sites and start playing
• 40:28
  Speaker 1: around with their free databases. And of course you're welcome
• 40:30
  Speaker 1: to call us anytime you'd like more information. Louis, thank
• 40:33
  Speaker 1: you so much for doing this. Can you stick around
• 40:35
  Speaker 1: a little bit keep We'll keep planning through some of
• 40:37
  Speaker 1: these questions. Uh. If you have enjoyed this conversation, be
• 40:41
  Speaker 1: should stick around for our podcast extras, where we keep
• 40:45
  Speaker 1: the tape rolling and continue chatting about all things quant
• 40:48
  Speaker 1: modeling and stock selections. Be sure and check out my
• 40:51
  Speaker 1: daily column on Bloomberg dot com. Follow me on Twitter
• 40:56
  Speaker 1: at Rid Halts. I'm Barry Ridhults. You've been listening to
• 41:00
  Speaker 1: Masters in Business on Bloomberg Radio. Welcome to the podcast. Louis,
• 41:04
  Speaker 1: Thank you so much for for doing this, h I
• 41:07
  Speaker 1: said earlier, and I really didn't get a chance to
• 41:10
  Speaker 1: to elaborate on this in the intro. I've been following
• 41:14
  Speaker 1: you and your methodology and how you approach looking at
• 41:19
  Speaker 1: stocks for a long time. It's funny. I'm the old
• 41:22
  Speaker 1: man in my office and we have a lot of
• 41:24
  Speaker 1: young guys twenties something thirty something. So who's the guest
• 41:27
  Speaker 1: this week? And I knew it was coming, I said,
• 41:30
  Speaker 1: Louie Navalier, and they looked at me and said, who
• 41:33
  Speaker 1: I go go back look at some old barons go
• 41:36
  Speaker 1: pull some of So did you have do ruck Keiser?
• 41:39
  Speaker 1: And I might remember I did it. Frank Campiello was
• 41:42
  Speaker 1: the it was late late in the uh in the cycle.
• 41:46
  Speaker 1: But you you were a fixture on financial television for
• 41:51
  Speaker 1: for many, many years. And I'm always astonished when the
• 41:56
  Speaker 1: kids don't know who came before them. It's just search
• 42:00
  Speaker 1: navalier slash stock picking and you'll you'll find out all
• 42:03
  Speaker 1: you need to know. So, so, before we get to
• 42:06
  Speaker 1: our standard questions, is so much stuff here that I
• 42:10
  Speaker 1: didn't get through last time. Let's let's let's plow through
• 42:14
  Speaker 1: some of this. I'm fascinated by the idea that undergraduate
• 42:19
  Speaker 1: or graduate in I graduated from college and then I
• 42:24
  Speaker 1: got my m b N seventy nine. Then I started
• 42:27
  Speaker 1: the newsletter in June of So I'm fascinated that here's
• 42:31
  Speaker 1: a guy with an NBA two years from college, deep
• 42:36
  Speaker 1: into one of the worst bear markets and generations, and
• 42:40
  Speaker 1: you say, I know, let's let's go into the stock market.
• 42:43
  Speaker 1: That's where the fun is. What what motivated that it? Had?
• 42:48
  Speaker 1: You had to have some inkling, You were onto something
• 42:51
  Speaker 1: before saying here's a terrible industry, let's join that. Well,
• 42:56
  Speaker 1: first of all I had been building databases behind the scenes.
• 42:59
  Speaker 1: I was fortunate to get access to mainframe computers. Um
• 43:04
  Speaker 1: in college from Wellsford was Kevist cal State Hayward, which
• 43:07
  Speaker 1: was not called cal St D. S. Bay. But we
• 43:09
  Speaker 1: were fortunate to get access to wells Fargo's computer. So
• 43:13
  Speaker 1: I'm old. You know, I had a slide role. We
• 43:15
  Speaker 1: used to punch cards anyway, so we I figured out
• 43:18
  Speaker 1: what was working, and then I built my own databases.
• 43:21
  Speaker 1: And every stock was a card going through a t
• 43:23
  Speaker 1: I programmal calculator. So every week and I would get
• 43:26
  Speaker 1: Barrens and I update everything and key it in, and
• 43:29
  Speaker 1: I had my own database. But in seventy seventy nine,
• 43:32
  Speaker 1: and in the first few months you had a big
• 43:35
  Speaker 1: small cap rally and then that bubble burst. But I
• 43:38
  Speaker 1: knew there were an omblies on Wall Street. I could
• 43:40
  Speaker 1: see him in small cap, and so I started in
• 43:43
  Speaker 1: small cap, assuming that was the least effect efficient place.
• 43:48
  Speaker 1: In fact, that's that's how I first came to know
• 43:50
  Speaker 1: you as your rep was, hey, this is a great
• 43:52
  Speaker 1: small cap stock picker. Correct, And then my first letter
• 43:55
  Speaker 1: was O T. C Insight later renamed MPT Review. It's
• 43:58
  Speaker 1: not called emerging growth. The publishers like to rename us,
• 44:01
  Speaker 1: but the that's how it all evolved. And then this
• 44:04
  Speaker 1: guy Holbert picked me up and said nice things about me,
• 44:07
  Speaker 1: and that helped my career. And uh, and so I
• 44:10
  Speaker 1: publishing still a big thing. You know, we're very popular
• 44:12
  Speaker 1: in the in the brokerage world. Um, the way it
• 44:14
  Speaker 1: works is, um, if a stock goes up, it's their idea,
• 44:17
  Speaker 1: of it goes down to my idea. So there's a
• 44:19
  Speaker 1: lot of folks out there that are are trading off
• 44:22
  Speaker 1: our portfolios. And it's somewhat stressful because we have a
• 44:26
  Speaker 1: bit of a wake nowadays. So when we make a recommendation,
• 44:28
  Speaker 1: there's a little blip on the stock. And I'll be
• 44:30
  Speaker 1: honest with his ax has picked me up eighty five
• 44:32
  Speaker 1: percent times, so there's another blow. So this becomes an issue.
• 44:37
  Speaker 1: But you know, we do influence markets, but markets are
• 44:41
  Speaker 1: also very fragile. So it's funny. I spent the first
• 44:44
  Speaker 1: half of my career on the cell side, and what
• 44:46
  Speaker 1: you described right out of the broker handbook. Hey, you know,
• 44:50
  Speaker 1: anything anybody else suggests, if it doesn't work out, it's
• 44:54
  Speaker 1: that guy. But if it does work out, I'm the
• 44:57
  Speaker 1: genius who brought it to you, so that that is
• 44:59
  Speaker 1: I think paid to one. That's correct. And I meet
• 45:01
  Speaker 1: a lot of I meet clients that think I'm running
• 45:04
  Speaker 1: their money and then I can't find them on our
• 45:06
  Speaker 1: system because their brokers running it. But they're the broker
• 45:09
  Speaker 1: pace run newsletter. So I don't argue. Okay, and uh so,
• 45:14
  Speaker 1: but different how many different You have a run of
• 45:17
  Speaker 1: different newsletters? Oh gosh, I think we have six now,
• 45:20
  Speaker 1: But um, what do they typically close for a year? Well,
• 45:23
  Speaker 1: we start everybody in blue chip Growth, which is our flagship,
• 45:26
  Speaker 1: and um, I think that's two forty nine a year,
• 45:28
  Speaker 1: and then Emerging Growth is a little bit more. That's
• 45:31
  Speaker 1: more small cap. Uh. Then we have something called Ultimate Growth,
• 45:35
  Speaker 1: wheref you we trade socks a whole about four to
• 45:37
  Speaker 1: five months more for the pensions, um, and then if
• 45:40
  Speaker 1: you get all three, you get Ultimate Growth. And now
• 45:42
  Speaker 1: we have a family trust service which follows my wife's
• 45:45
  Speaker 1: my mother in law's money a little more conservative blue
• 45:47
  Speaker 1: chip hire dividend yield buying, dip selling the strength that's
• 45:51
  Speaker 1: kind of plays the range of the stocks. And then
• 45:54
  Speaker 1: we have a new dividend service. You know I should
• 45:58
  Speaker 1: talked to you about mentions them know, we have our
• 46:01
  Speaker 1: stock Grader we're mensely proud of. We wrote a book
• 46:04
  Speaker 1: on this. What's the name of the book, The Little
• 46:06
  Speaker 1: Book that Makes You Rich with John Walling? Yeah, and um,
• 46:10
  Speaker 1: that introduced our stock grader, and that's all freeing the
• 46:12
  Speaker 1: public domain. We haven't a Dividend Greater service up there,
• 46:16
  Speaker 1: and they are Dividend Greater, believe or not, has actually
• 46:18
  Speaker 1: beaten our stock greater in the last ten years, but
• 46:20
  Speaker 1: barely now that this locks in a dividend growth, not
• 46:23
  Speaker 1: high dividen and dividend growth. And when we merge the
• 46:27
  Speaker 1: A rated stocks and Dividend Greater with A rated stocks
• 46:30
  Speaker 1: and stock Grader, the rich results are incredible. But I
• 46:34
  Speaker 1: only can find three to four stocks a month, So
• 46:37
  Speaker 1: I'm actually at the stage of my life where I'm
• 46:39
  Speaker 1: running out of capacity. I'm running all places to put
• 46:42
  Speaker 1: the money. And so we have very concentrated portfolios nowadays,
• 46:46
  Speaker 1: and I can find that, you know, I can do
• 46:49
  Speaker 1: better with an eighteen stock profolion. I can with a
• 46:51
  Speaker 1: thirty seven stock profolio the market but better before the
• 46:55
  Speaker 1: market is shockingly narrow right now, well, insisting you say risk,
• 46:59
  Speaker 1: But my eighteen stock profo is safe in the thirty
• 47:01
  Speaker 1: seven because it's the putting the dividend versus the growth stocks.
• 47:05
  Speaker 1: And they're all lower stocks, but they move differently, so
• 47:08
  Speaker 1: as long as we optimize them properly. But you're ready,
• 47:10
  Speaker 1: You're right. If I had an extraordinary event, if I
• 47:11
  Speaker 1: laid an egg in one of them, I I probably
• 47:14
  Speaker 1: Literification implies lower potential expect returns, more draw downs. People.
• 47:19
  Speaker 1: People seem to misuse the term volatility for risk. What
• 47:23
  Speaker 1: I mean is, hey, we know what you expected returns
• 47:26
  Speaker 1: are based on these qualify these characteristics of the holdings.
• 47:30
  Speaker 1: What are the odds that we're not gonna get those
• 47:31
  Speaker 1: returns in anyone year? What are the odds that we're
• 47:33
  Speaker 1: gonna have an outsize draw down? That's the loose definition
• 47:37
  Speaker 1: of of of risk. I like to eat and we can.
• 47:40
  Speaker 1: You know, we know we have beatam extra out downstair innoviation,
• 47:43
  Speaker 1: we have unsus, we have all kinds of different ways
• 47:45
  Speaker 1: to slice it. But the bottom line is I'm actually
• 47:48
  Speaker 1: safer today on eighteen stocks and I'm on about thirty
• 47:50
  Speaker 1: seven and uh and uh. But that's the function of
• 47:54
  Speaker 1: the optimization models blending the dividend growth with the growth stocks.
• 47:58
  Speaker 1: But I we really enjoy we do. We see in
• 48:00
  Speaker 1: our own products. We're one of the few managers that
• 48:02
  Speaker 1: are willing to work for tempercent and profits build by annually,
• 48:05
  Speaker 1: no fixed fee. Uh, and say that again. Let's let's
• 48:08
  Speaker 1: go over that. So it's not two and twenty and
• 48:10
  Speaker 1: it's not a straight one percent, it's we won't charge
• 48:13
  Speaker 1: anything and we'll just take ten percent of the profit
• 48:15
  Speaker 1: that of all costs, advisor, brokerage, firm, everything, it's sec
• 48:19
  Speaker 1: real two or five dash three that the client must
• 48:21
  Speaker 1: say they have a two million liquid net worth. As
• 48:23
  Speaker 1: long as they say they have that, we're willing to
• 48:26
  Speaker 1: run their money for temper cent and profits build by
• 48:28
  Speaker 1: annually or a reasonable fixed fee. We have either or
• 48:31
  Speaker 1: so we really enjoy what we do. Our firm is
• 48:34
  Speaker 1: increasingly we run more and more like a family office
• 48:36
  Speaker 1: because we're very fortunate and I think I'm married well,
• 48:39
  Speaker 1: and I sold some business at the right time. But
• 48:41
  Speaker 1: the bottom line, we love what we do. We heavily
• 48:44
  Speaker 1: invest in what we do. We're not as big as
• 48:46
  Speaker 1: a rom baron or anybody like that, but we really
• 48:48
  Speaker 1: enjoy what we do and that gets reflected in the business.
• 48:52
  Speaker 1: So so let's go back to you launching a newsletter
• 48:57
  Speaker 1: right out of grad school. What was a mood likene
• 49:00
  Speaker 1: on Wall Street and in the early nineteen eighties that
• 49:03
  Speaker 1: that had to be you know, we we just had
• 49:06
  Speaker 1: a double deep precition eighty and eighty two. Inflation was
• 49:11
  Speaker 1: teenage numbers. The tenure bond I think was yielding sixteen
• 49:16
  Speaker 1: Who the hell once stopped? Well, that was interesting. I
• 49:20
  Speaker 1: was in San Francisco at the time, and San Francisco
• 49:23
  Speaker 1: was much less stressed out than um, New York, New
• 49:26
  Speaker 1: York because you know, they're it's kind of all land
• 49:29
  Speaker 1: out there, and it's it's any more. I think San
• 49:30
  Speaker 1: Francisco is more stressed out than New York these days.
• 49:34
  Speaker 1: Fights over Google buses, apartment rents, everything's gone very stressful,
• 49:38
  Speaker 1: stepping over homeless people everywhere. But the the uh. But
• 49:44
  Speaker 1: did to make a long story short, the um this
• 49:47
  Speaker 1: is at the end of the vocal era. But by
• 49:49
  Speaker 1: the way, the homeless in California was Giuliani's gift from
• 49:52
  Speaker 1: New York to call that was that was our gift.
• 49:57
  Speaker 1: They mean, well, but it is there. There's a a
• 50:00
  Speaker 1: few of them out there. Um l A San Diego,
• 50:02
  Speaker 1: the whole West coast old California's as a New Yorker
• 50:06
  Speaker 1: who has seen the number of homeless tick up recently.
• 50:10
  Speaker 1: You know, if you remember in the seventies and eighties,
• 50:12
  Speaker 1: homelessness in New York was terrible. That all changed once
• 50:17
  Speaker 1: we started treating it like a a mental health issue
• 50:21
  Speaker 1: and not um as a you have the right to
• 50:24
  Speaker 1: sleep in the park. And it's ticked up since Bloomberg
• 50:28
  Speaker 1: left the mayoralty, it's ticked up a little bit. And
• 50:32
  Speaker 1: I'm shocked every time I go to California. By the
• 50:34
  Speaker 1: sheer note, I have a good friend, Bruce peccable dresser,
• 50:38
  Speaker 1: beautiful wife, UM, very successful gentleman. UM. In the eighties,
• 50:45
  Speaker 1: he had a slight crack cocaine problem. We always wondered
• 50:48
  Speaker 1: what was wrong with Bruce. He was sitting in the
• 50:49
  Speaker 1: tenderloin and somebody bit his finger off. Human h Yeah,
• 50:54
  Speaker 1: it's I'm from the Bay Area. It's it's shocking to
• 50:56
  Speaker 1: see people eat pigeons and things. So it's uh something
• 50:59
  Speaker 1: I don't want to see ever again, do you know
• 51:01
  Speaker 1: what I mean? It's and yet California is not responding
• 51:04
  Speaker 1: to this. California is a fasciname place of Californias don't
• 51:07
  Speaker 1: have bank accounts. There's this huge cash economy there. So
• 51:11
  Speaker 1: well the other the drivers out there don't have insurance.
• 51:15
  Speaker 1: Well it might be the same group. You know, it's funny.
• 51:19
  Speaker 1: It's uh. If you went to California d m V,
• 51:22
  Speaker 1: they would say, don't blame us. They had Schwarzenegger's picture
• 51:25
  Speaker 1: there because of the budget cuts. But the ski resorts
• 51:27
  Speaker 1: got extra traffic because they had the mandatory layoffs. You know,
• 51:32
  Speaker 1: I have the mandatory leave in California and the budget problems.
• 51:36
  Speaker 1: I have California employees because I'm on I have some
• 51:40
  Speaker 1: people who live in truck you to work from you
• 51:42
  Speaker 1: right near the border. And I remember a few years ago,
• 51:44
  Speaker 1: I said, I'm sorry about your paycheck, and this is
• 51:47
  Speaker 1: what happened because they got less money. Well, California was broke,
• 51:50
  Speaker 1: so they had more withholding. They just with held more.
• 51:53
  Speaker 1: Figure will borrow it from the future, and of course
• 51:55
  Speaker 1: you can fire tax returned in time. You gotta iou
• 51:58
  Speaker 1: but they are benefiting from the Then they attack Boom
• 52:00
  Speaker 1: now and I think they're okay. But going back to
• 52:03
  Speaker 1: the cash economy that dominates a Silicon Valley and a
• 52:06
  Speaker 1: lot of other places, in Los Angeles. You know, there
• 52:09
  Speaker 1: is a theory that maybe the check cashing stores are
• 52:11
  Speaker 1: more efficient than the banks. But the truth matter is
• 52:13
  Speaker 1: there's there is a cash economy there and they're very innovative.
• 52:18
  Speaker 1: And it is what it is that that has to
• 52:20
  Speaker 1: be a large chunk of legal immigrants, housekeepers, gardeners, whatever,
• 52:24
  Speaker 1: who are getting paid in cash and don't show up
• 52:26
  Speaker 1: on the balance sheets anywhere. And that's a part of
• 52:29
  Speaker 1: the country. It's a great country. And uh, what what
• 52:32
  Speaker 1: can I say? And um, you know, and you know,
• 52:34
  Speaker 1: I'm really from Berkeley, and you know, when you're in
• 52:36
  Speaker 1: the pot business in Berkeley, you have to be nonprofit
• 52:39
  Speaker 1: because you're doing this for the good of mankind. Okay,
• 52:41
  Speaker 1: And they did arrest one of the Berkeley pot growers
• 52:44
  Speaker 1: because he made too much money one year they rested
• 52:46
  Speaker 1: for capitalism. That's pretty hilarious. It's so now that we
• 52:50
  Speaker 1: have states like Colorado and Oregon and another two dozen
• 52:55
  Speaker 1: states about to make marijuana not just medical marijuana, but
• 53:00
  Speaker 1: recreational marijuana fully legal. Is that going to become an
• 53:04
  Speaker 1: investible thesis anytime soon? No, because you can't you can't
• 53:08
  Speaker 1: can't cash the money, can't bank. So anytime you see
• 53:12
  Speaker 1: a marijuana investment, unless it's an LED lighting to make
• 53:16
  Speaker 1: the plants grow faster, or hydroponics or some mechanical thing
• 53:20
  Speaker 1: behind the scenes, I wouldn't invest in it, Okay, And
• 53:23
  Speaker 1: that's because of the federal law on on banking doesn't
• 53:25
  Speaker 1: allow them to, uh to actually put money in bank. Correct.
• 53:29
  Speaker 1: And what's happened in Vegas because unfortunately, uh, there are
• 53:33
  Speaker 1: some people in Nevada they're slightly stoned. Okay, Um, in Vegas,
• 53:37
  Speaker 1: it's all gone to the East Cigarettes because they can't
• 53:41
  Speaker 1: trace it. Uh So what do you mean the money
• 53:44
  Speaker 1: has gone to East Cigarettes? In other words, they're selling
• 53:47
  Speaker 1: East siggs as well as they're they're they're getting their
• 53:49
  Speaker 1: marijuana through the East cigarettes and they can't trace it. Well,
• 53:53
  Speaker 1: if you smoked it or ate it, they could apparently
• 53:56
  Speaker 1: trace it better. So the marijuana industry in they guess
• 54:00
  Speaker 1: has collapsed. Now Vegas is a big LDS area. Is
• 54:03
  Speaker 1: it is it legal? Is marijuana? Is it recreational or medical?
• 54:06
  Speaker 1: And you know that's a good question, but it's at everything.
• 54:09
  Speaker 1: Everything is legal. It's Vegas, It's it's it's at every
• 54:13
  Speaker 1: ski slope I've ever been to, even in Utah, so
• 54:17
  Speaker 1: it is a performance enhancing drug. Apparently, though, Utah had
• 54:21
  Speaker 1: an interesting solution to the their homeless problem is they said,
• 54:27
  Speaker 1: we're spending x hours a year on each individual homeless person.
• 54:31
  Speaker 1: If we can spend less and solve the problem, will
• 54:34
  Speaker 1: entertain any solution. And the solution someone came up with
• 54:38
  Speaker 1: was give them an expensive apartments pay for it. This
• 54:40
  Speaker 1: way they get their meds, they have access to their whatever.
• 54:43
  Speaker 1: And so far Utah seems to have come up with
• 54:46
  Speaker 1: the only um solution that seems to be working. California
• 54:50
  Speaker 1: should should take a look at what they're what they're
• 54:53
  Speaker 1: doing and maybe even save some money along the way. Yeah,
• 54:55
  Speaker 1: you know, I go to some states that are very
• 54:59
  Speaker 1: interest saying, like Alabama's very church oring and you have
• 55:02
  Speaker 1: to you know, Wednesday night's church night. You better better
• 55:04
  Speaker 1: not catch you out going for dinner on Wednesday. Uh,
• 55:07
  Speaker 1: for some reason in Alabama a lot obviously, Utah's very LDS,
• 55:11
  Speaker 1: Nevada's very LDS as as well, um so as the
• 55:17
  Speaker 1: Latter Day Saints. Okay, it's suggesting liberal Democrats, and I'm like,
• 55:22
  Speaker 1: I would think that's more California than so uh Mormons LDS.
• 55:27
  Speaker 1: I suspect there's a bit of a church influence going
• 55:29
  Speaker 1: on in Utah too. I would be shocked if there isn't.
• 55:33
  Speaker 1: Um so we probably you know that. I don't know
• 55:36
  Speaker 1: if that model will work everywhere, but we have to
• 55:38
  Speaker 1: see how it's strong. It's coming from the church versus
• 55:40
  Speaker 1: somebody else. But kudas to them for you know, being
• 55:44
  Speaker 1: a little creative and thinking outside the box and not
• 55:47
  Speaker 1: just spending them. You can't just throw money at problems
• 55:50
  Speaker 1: that doesn't solve them. One thing I can tell you
• 55:52
  Speaker 1: is in South Florida where I happen to live, we
• 55:55
  Speaker 1: have all the rehab places and we have a lot
• 55:57
  Speaker 1: of the second steps and you go there and it
• 56:00
  Speaker 1: it's funny when I fly back to Florida and there
• 56:02
  Speaker 1: are a lot of them were flying with front of
• 56:04
  Speaker 1: the front of the plane because it's very expensive rehaf
• 56:09
  Speaker 1: and you know they're all, you know, getting all their
• 56:11
  Speaker 1: little drinks and they have one last hit. You know.
• 56:13
  Speaker 1: Most of them are opiates, you know, perkose dad and
• 56:16
  Speaker 1: an oxy cotton and all the legal drugs or whatever.
• 56:19
  Speaker 1: El Chapa was something I don't think you could get
• 56:21
  Speaker 1: perkeo Dan. Yeah, I guess you could get percoset. I
• 56:24
  Speaker 1: had my wisdom teeth out between college and grad school,
• 56:28
  Speaker 1: and um uh, they gave me a prescription of Perka Dana.
• 56:32
  Speaker 1: I call that the best month of my life. Yeah,
• 56:35
  Speaker 1: but at the end of the month, you're done. You're done.
• 56:37
  Speaker 1: There was no that seems to have changed these days. Yeah,
• 56:41
  Speaker 1: and it's a serious problem. We have a good friend
• 56:43
  Speaker 1: going names who had a problem for four years with this.
• 56:46
  Speaker 1: He had he thought he had teeth problems, but he
• 56:49
  Speaker 1: had a little aneurism in his head and they had
• 56:51
  Speaker 1: opened his head. In fact, Ben Carson almost cut on him.
• 56:54
  Speaker 1: Ben was his second choice, and so they got they
• 56:58
  Speaker 1: deal with his aneurism. But he apparently like doxicon for
• 57:01
  Speaker 1: a while. And so he's back. He's fine. We're all
• 57:03
  Speaker 1: reaching out to him to help him, and he's fine.
• 57:05
  Speaker 1: He's mentally he's sharpest can be. But it's it's uh,
• 57:09
  Speaker 1: it's a happy place apparently apparently. You know, I don't
• 57:13
  Speaker 1: mind the occasional mood altering drink or what have you,
• 57:17
  Speaker 1: but it's not it's a place to visit for vacation.
• 57:20
  Speaker 1: It's not a place to live in on a permanent basis.
• 57:22
  Speaker 1: But uh, that's why we have to watch all our
• 57:24
  Speaker 1: trading deaths. Okay, because that's a place to visit and
• 57:28
  Speaker 1: not a place to uh So, so let's go back
• 57:31
  Speaker 1: to when you're coming out of grad school and launching
• 57:34
  Speaker 1: the newsletters. Were you working in New York where you
• 57:38
  Speaker 1: were aware of the mood of wool Street or did that? So? So,
• 57:42
  Speaker 1: how did that affect the way you looked at the
• 57:45
  Speaker 1: decision to let's launch your business right into the teeth? Well,
• 57:48
  Speaker 1: I was thinking of moving here and I prayed around
• 57:52
  Speaker 1: here and then uh, of course I had to get
• 57:54
  Speaker 1: used to the weather. It was pretty hot when I
• 57:55
  Speaker 1: was running around here. But the I decided to to
• 57:58
  Speaker 1: work for myself and um. I was originally sponsored by
• 58:02
  Speaker 1: a little firm called Van Casper in San Francisco, which
• 58:05
  Speaker 1: is part of Wells far Ago, and it's all my
• 58:08
  Speaker 1: manage accounts were going through there. And then uh then
• 58:11
  Speaker 1: I went in and started to work with other people
• 58:13
  Speaker 1: and platforms and we just want to take care of
• 58:17
  Speaker 1: people and treat everybody like we treat ourselves. And you know,
• 58:20
  Speaker 1: in fact, I just had my sec d O l
• 58:22
  Speaker 1: audit Um departmently brought it and uh I they walk
• 58:26
  Speaker 1: into a growth shop and they saw how much dividend
• 58:28
  Speaker 1: management a lot of our clients had. And uh so
• 58:31
  Speaker 1: I think they even I can't say this, he was happy,
• 58:33
  Speaker 1: but I was happy with with it. With the audit
• 58:35
  Speaker 1: was not as long as I thought. And uh and
• 58:38
  Speaker 1: they brought the deal lawyer there on loan to make
• 58:41
  Speaker 1: sure that we do suitability and we put you know,
• 58:44
  Speaker 1: we put everybody gets a mix that's suitable for them
• 58:47
  Speaker 1: versus some can mix. You know. I think if they
• 58:49
  Speaker 1: caught any of us, you know, treating everybody, you know,
• 58:53
  Speaker 1: putting the round client in the round slot and square,
• 58:55
  Speaker 1: they don't like that. You have to literally listen to
• 58:57
  Speaker 1: people do what they want and to dial it in
• 59:01
  Speaker 1: and change it as their needs change. So we're we're
• 59:04
  Speaker 1: pretty proud of what we've done. And our private client
• 59:06
  Speaker 1: group here in New York is growing rapidly because we're
• 59:08
  Speaker 1: trying to taking care of people. So what was your
• 59:11
  Speaker 1: take on the whole um suitability versus fiduciary standard that
• 59:16
  Speaker 1: the d o L rules changed. Did you have any
• 59:18
  Speaker 1: thoughts on that or I have no problem with it.
• 59:20
  Speaker 1: I think uh, I think the real problem is the
• 59:26
  Speaker 1: conflicts we have out there. So I don't have a
• 59:28
  Speaker 1: conflict because we have either a low and stitutional figure
• 59:31
  Speaker 1: that incentaphie. But what's happened to our business? And I'll
• 59:35
  Speaker 1: pick on my I guess I'll pick on my daughter.
• 59:37
  Speaker 1: So my daughter is a mutual fund wholesaler. She has
• 59:40
  Speaker 1: a four thousand dollar month budget. The guy she married
• 59:43
  Speaker 1: used to give her fund business because he was wanted
• 59:47
  Speaker 1: show he loved her. Okay, now that he's her husband,
• 59:50
  Speaker 1: he just as I shares because at his firm he
• 59:53
  Speaker 1: gets an extra fifty basis points to I shares over funds.
• 59:57
  Speaker 1: One of the conflicts we that's emerged in our business
• 1:00:00
  Speaker 1: is the E t F hold salers have more money
• 1:00:03
  Speaker 1: than the phone hole salers. And so there are what
• 1:00:07
  Speaker 1: we call a pay to play system out there, um uh,
• 1:00:12
  Speaker 1: and a lot of it's mass with intelligence that the
• 1:00:14
  Speaker 1: firms say, well and exchange this money will will make
• 1:00:17
  Speaker 1: you work more efficiently and tell you where you should go. Okay,
• 1:00:20
  Speaker 1: So I don't pay to play anywhere. So this isn't
• 1:00:24
  Speaker 1: my problem. But this is what the industry is dealing with.
• 1:00:27
  Speaker 1: And that's a lot of people don't realize that, um
• 1:00:30
  Speaker 1: when the E t F s a rebalance every ninety days,
• 1:00:34
  Speaker 1: that it's that that if that e t F controls
• 1:00:37
  Speaker 1: the specialists, the e t F might actually profit on it.
• 1:00:40
  Speaker 1: So it's kind of like the bond business. So in
• 1:00:43
  Speaker 1: the bond world, everybody will always give you everything without
• 1:00:45
  Speaker 1: no fees, no transactions because all the money's in the spread.
• 1:00:49
  Speaker 1: People don't realize how big the spreads are ants or
• 1:00:52
  Speaker 1: or it's already a householding and the charging the markup.
• 1:00:55
  Speaker 1: I used to have this discussion with people who would say,
• 1:00:59
  Speaker 1: I don't understand who paying bond managers. My guy at
• 1:01:02
  Speaker 1: filling the blank wirehouse doesn't charge me for bonds. And
• 1:01:05
  Speaker 1: I would always laugh and say, let me explain to you.
• 1:01:08
  Speaker 1: There is no free lunch. Of course you're being charged.
• 1:01:11
  Speaker 1: It's just not transparent or disclosed. You're not seeing either
• 1:01:14
  Speaker 1: it's stuff, it's house inventory that they're selling to you
• 1:01:17
  Speaker 1: as a markup, in which case they don't have to
• 1:01:19
  Speaker 1: show it, or there's you could drive a truck through
• 1:01:21
  Speaker 1: that spread and they own it on one side and
• 1:01:23
  Speaker 1: they're selling it to you on the other. That's correct,
• 1:01:25
  Speaker 1: and so what's happened is the asset gatherers on Wall Street,
• 1:01:29
  Speaker 1: which dominate our business, are a very good gathering assets,
• 1:01:32
  Speaker 1: convincing where they have low fees. But they people may
• 1:01:34
  Speaker 1: not realize they make money in securities lending with legit.
• 1:01:37
  Speaker 1: They make money on can make money on market making
• 1:01:41
  Speaker 1: for the e t F through their special suffiliate, which
• 1:01:44
  Speaker 1: is legit if they don't hose them too much. But
• 1:01:47
  Speaker 1: that's just a little bit of hosy goes. Well, this
• 1:01:50
  Speaker 1: is what let's take some of the big robo programs.
• 1:01:53
  Speaker 1: The robot programs, there are no managing fees, that's correct.
• 1:01:55
  Speaker 1: But if you read like page fourteen of the disclosure,
• 1:01:57
  Speaker 1: one of them, each et F pays a quarter million
• 1:02:00
  Speaker 1: to be in there. Well, why would you pay a
• 1:02:01
  Speaker 1: quarter million year if you're hardly get any feast? Well,
• 1:02:02
  Speaker 1: because your e t F is free balanced every ninety
• 1:02:05
  Speaker 1: days and the specialist affiliate could make a lot of money,
• 1:02:07
  Speaker 1: especially sincludit ETF and there's an internal expense ratio built in.
• 1:02:11
  Speaker 1: We don't have to pay a fee to buy it.
• 1:02:13
  Speaker 1: It's not like the old days of c shares there
• 1:02:16
  Speaker 1: the fee is is built in. You know, if you
• 1:02:20
  Speaker 1: if you look at a number of custodians, there's a
• 1:02:23
  Speaker 1: one of ETFs that they'll allow you to trade at
• 1:02:26
  Speaker 1: no charge. It's like, well, why is that? Because they
• 1:02:29
  Speaker 1: have relationships. When they're either constructing or deconstructing the individual
• 1:02:34
  Speaker 1: shares and and there's oney to be made, they're happy
• 1:02:37
  Speaker 1: just to have it there in house. And you know
• 1:02:39
  Speaker 1: it's funny. I go to Europe and they do not
• 1:02:42
  Speaker 1: like ETFs. The Bank of eng Until not to do it.
• 1:02:45
  Speaker 1: I have a friend that used to arbitrage between London
• 1:02:48
  Speaker 1: and New York, went to jail for three years, Mr
• 1:02:50
  Speaker 1: Spister Gottam, And they're still are being in in Europe
• 1:02:53
  Speaker 1: right now. Okay, because there's a difference between the e
• 1:02:57
  Speaker 1: T F and and it's holdings. So when the U
• 1:03:00
  Speaker 1: s what's supposed to keep those arbit treasures are supposed
• 1:03:03
  Speaker 1: to keep the price between the N A V and
• 1:03:05
  Speaker 1: e TF identical. In the way they do it is, hey,
• 1:03:08
  Speaker 1: here's a market solution to not allowing these things to
• 1:03:11
  Speaker 1: get out of black. The financial incentive allows people to
• 1:03:15
  Speaker 1: trade that and and bring them into SINC. And I
• 1:03:18
  Speaker 1: don't mean to be too negative, but I unfortunately the
• 1:03:20
  Speaker 1: SEC is behind I can tell you what the SEC
• 1:03:23
  Speaker 1: did wrong when we had first off, when they got
• 1:03:26
  Speaker 1: rid of the twelve one fees on mutual funds. Okay,
• 1:03:28
  Speaker 1: the firms figure out how to get paid even more. Okay,
• 1:03:31
  Speaker 1: so actually the SEC caused this conundrum to exist. And
• 1:03:35
  Speaker 1: when we had the flash crash in two thousand and ten,
• 1:03:38
  Speaker 1: at five minute period, the SEC came in and broke
• 1:03:41
  Speaker 1: every trade where somebody lost more than so they basically
• 1:03:46
  Speaker 1: tell every specialist you can steal money until hit. And
• 1:03:50
  Speaker 1: that's exactly what you saw in August two fifteen. Okay,
• 1:03:54
  Speaker 1: the circuit breakers hit. They couldn't price the stocks, being
• 1:03:57
  Speaker 1: why Melon had a little pricing issue and and uh,
• 1:04:01
  Speaker 1: but there were E t F orders out there, and
• 1:04:03
  Speaker 1: everybody looked at each other and they dropped a bid
• 1:04:05
  Speaker 1: and picked everybody off. But they didn't pick off anybody.
• 1:04:09
  Speaker 1: They picked off d v Y that I shares five
• 1:04:11
  Speaker 1: star e t s, They picked off googleheim SMP equal,
• 1:04:14
  Speaker 1: they picked off a bunch of Vanguard equally E t
• 1:04:16
  Speaker 1: F s. And that's why the SEC to the scathing report,
• 1:04:19
  Speaker 1: like what the hell is going on? And if I
• 1:04:22
  Speaker 1: was the SEC and implementing this d O L thing
• 1:04:24
  Speaker 1: I put, I would probably tell the E t F world, uh,
• 1:04:28
  Speaker 1: you better behave okay, uh, because there's just the spreads
• 1:04:33
  Speaker 1: are two wide. People E t s do not trade
• 1:04:36
  Speaker 1: in an asset value. Okay, and this is a huge problem.
• 1:04:39
  Speaker 1: And I have my own issues with morning Star. Morning
• 1:04:41
  Speaker 1: Star will show in August a two thousand, um uh
• 1:04:46
  Speaker 1: fifteen aug that that month that the d v Y
• 1:04:50
  Speaker 1: only had a one basis point trade risk, but for
• 1:04:54
  Speaker 1: some reason I had a fifty three point three percent
• 1:04:56
  Speaker 1: range intra day. Okay. So I would argue that when
• 1:05:00
  Speaker 1: he starts not doing their math right, okay, because you
• 1:05:02
  Speaker 1: can look at a chart like on Bloomberg and you
• 1:05:04
  Speaker 1: see the risk, and then look, morning Start wears the risk.
• 1:05:08
  Speaker 1: So there's a lot of things that need to be
• 1:05:10
  Speaker 1: cleaned up. And um, this is gonna be fixed really fast.
• 1:05:13
  Speaker 1: But right now those folks that run the exchanges are
• 1:05:18
  Speaker 1: are laughing at us, and every time there's an extraordinary event,
• 1:05:21
  Speaker 1: they're gonna make a lot of money. That that that's really,
• 1:05:24
  Speaker 1: um an interesting take. I can't say I disagree with
• 1:05:28
  Speaker 1: the whole a lot of that. So I want to
• 1:05:30
  Speaker 1: get to our favorite few questions before they kick us
• 1:05:33
  Speaker 1: out of here. But there are so many things I
• 1:05:38
  Speaker 1: skip through before. Let's let's talk about geopolitical risk, Brexit,
• 1:05:43
  Speaker 1: US elections. Does any of that stuff matter to you?
• 1:05:46
  Speaker 1: I'm sure? I mean model for that sort of stuff. Well,
• 1:05:50
  Speaker 1: we've already seen this incredible rally in Europe because they
• 1:05:54
  Speaker 1: briefly thought that Britain might stay, okay, because the tragic
• 1:05:58
  Speaker 1: assassination the Member of Are went that kind of swung
• 1:06:01
  Speaker 1: the polls. Now the polls are are going the other way,
• 1:06:04
  Speaker 1: and there are on pins and needles. So there's a
• 1:06:06
  Speaker 1: lot of cash on the sidelines ready to pour in
• 1:06:08
  Speaker 1: if Britain stays. If Britain leaves, UH, the dollar will
• 1:06:13
  Speaker 1: have this incredible rally. It will pinch uh SMP earnings
• 1:06:17
  Speaker 1: for the multinationals commodities even more. It has profound ramifications.
• 1:06:21
  Speaker 1: But if you look at the electric around the world,
• 1:06:23
  Speaker 1: people seem to be a little ticked off. Nationalism is
• 1:06:26
  Speaker 1: on its way back. And we've even here, even here,
• 1:06:30
  Speaker 1: so we'll see what happens. I have Brits that work
• 1:06:34
  Speaker 1: for me, and UH, they've told me they all they
• 1:06:36
  Speaker 1: that people know are voting to leave. But you know
• 1:06:39
  Speaker 1: it's it's um, Well, we'll see what happens. You know,
• 1:06:42
  Speaker 1: this this office happened Canada and then they told the
• 1:06:45
  Speaker 1: Quebeckers how much they love love each other. So maybe
• 1:06:48
  Speaker 1: the folks in Brussels need to tell Britain how much
• 1:06:50
  Speaker 1: they love them, you know. So speaking of overseas, you
• 1:06:54
  Speaker 1: run models both US and international. When we look at
• 1:06:58
  Speaker 1: the world of their value or small cap we see
• 1:07:04
  Speaker 1: those factors outperform even more overseas than they do in
• 1:07:08
  Speaker 1: the U S at least developed x US. When you
• 1:07:11
  Speaker 1: create a model for overseas stocks, do you do anything
• 1:07:14
  Speaker 1: differently or is it the same factors that you're applying,
• 1:07:17
  Speaker 1: just tweaking them somewhat in a different balance. Well, first
• 1:07:20
  Speaker 1: of all, we have our hottest product this year is
• 1:07:22
  Speaker 1: an emerging market product and we're getting a lot of
• 1:07:24
  Speaker 1: money in it. But I have to tell you, um,
• 1:07:28
  Speaker 1: we've been pretty good on currencies. And the key is
• 1:07:31
  Speaker 1: when you invest internationally, you better not get the currency wrong.
• 1:07:35
  Speaker 1: And to demonstrate it, I'll give you an example where
• 1:07:38
  Speaker 1: I'm made a mistake. Many years ago. I had the
• 1:07:41
  Speaker 1: Coca Cola bottler of Mexico because the the Co Cola
• 1:07:45
  Speaker 1: bottler is well, the average Mexican drinks sixty gallons of
• 1:07:48
  Speaker 1: soft drink a year. By the way, it's better down
• 1:07:50
  Speaker 1: there is here, It's exactly. And the time I go
• 1:07:54
  Speaker 1: to the Islands, I picked up Coca Cola. It's delicious,
• 1:07:58
  Speaker 1: So it's a it was a booming busines this and
• 1:08:00
  Speaker 1: I think the bottle of the district before I forget,
• 1:08:03
  Speaker 1: I'm starting before I forget. If you go into certain
• 1:08:05
  Speaker 1: gourmet supermarkets in New York, like Whole Foods, you can
• 1:08:10
  Speaker 1: buy a four pack of ten ounce glass bottle Mexican coke,
• 1:08:16
  Speaker 1: which is made with cane sugar, not high fruit excellent.
• 1:08:20
  Speaker 1: Sorry but no anyway, so booming business. And um, but
• 1:08:24
  Speaker 1: if you drink sixty gallons of soft drink a year,
• 1:08:26
  Speaker 1: as the average Mexican does, you might get diabetes. So
• 1:08:29
  Speaker 1: I at that time I had no venordis a diabetes company.
• 1:08:33
  Speaker 1: So I said, I am a great portfolio manager. I
• 1:08:35
  Speaker 1: have this great bottler, and I have the diabetes company,
• 1:08:38
  Speaker 1: and I have eliminated risk. Okay, onnesigs one perfectly hedge
• 1:08:41
  Speaker 1: for diabetes until the Mexican paco went the wrong way
• 1:08:45
  Speaker 1: and my trade came. And so the moral of stories
• 1:08:48
  Speaker 1: when you invest internationally, don't get the currency wrong. And um,
• 1:08:53
  Speaker 1: you know hedge uh currency when we don't and uh
• 1:08:57
  Speaker 1: and you can see how wild it is right now. Um.
• 1:09:01
  Speaker 1: Obviously there are countries that that are more commodity oriented.
• 1:09:05
  Speaker 1: New Zealand and Australia, Canada that get hurt when their
• 1:09:08
  Speaker 1: commodities go down. There's political risk like there was in
• 1:09:11
  Speaker 1: Russia when they invaded Ukraine. And Venezuela I have, well,
• 1:09:16
  Speaker 1: first of all, a lot of the middle class Venezuela
• 1:09:19
  Speaker 1: live with me in Florida. Now they they live in Weston.
• 1:09:21
  Speaker 1: But the UH no to say it's a tragedy. There's
• 1:09:24
  Speaker 1: got to be a revolt there. It's it's coming, it's
• 1:09:27
  Speaker 1: got to be. But it's on this broadcast. It'll probably
• 1:09:30
  Speaker 1: be over. Yeah, but it's you know, no electricity, it's
• 1:09:33
  Speaker 1: it's just no food rating, the school cafeterias for food
• 1:09:36
  Speaker 1: with people, the schools. Everything's breaking down, it's truly. And
• 1:09:40
  Speaker 1: then of course the oil is pronominally heavy sour crew
• 1:09:42
  Speaker 1: No one wants the refinery blew up, and the only
• 1:09:45
  Speaker 1: way they can sell that stuff is to refine it.
• 1:09:47
  Speaker 1: You know. That's that's why Sawdi and Kuwait have their
• 1:09:49
  Speaker 1: own refineries, because no one wants their heavy sour stuff
• 1:09:52
  Speaker 1: unless they refine it. Anyway. It's just you've got to
• 1:09:55
  Speaker 1: get the currency right. And UH. Emerging markets, going back
• 1:10:00
  Speaker 1: to risk, UH do balance out a big diverse five
• 1:10:04
  Speaker 1: portfolio and are getting a bigger share because they're zigging
• 1:10:07
  Speaker 1: one other thing zag So they're the models are are
• 1:10:10
  Speaker 1: calling for more of that right now. So let's um
• 1:10:14
  Speaker 1: that that's really interesting. Let's let's go with the last
• 1:10:18
  Speaker 1: question before I get to my favorites, which is how
• 1:10:22
  Speaker 1: different is managing other people's money from writing a newsletter.
• 1:10:28
  Speaker 1: It's not that different, you know. It's funny. The SEC
• 1:10:30
  Speaker 1: will never let us clone a newsletter for management, so
• 1:10:34
  Speaker 1: they never quite match. Okay, why is that? You can't
• 1:10:38
  Speaker 1: you can't just turn it into a an E T
• 1:10:41
  Speaker 1: F or something like that. Correct. Um, well, there's it's
• 1:10:45
  Speaker 1: it's obviously regulatory rulings. But um there was a manager
• 1:10:49
  Speaker 1: near me in Jupiter, Florida that was cloning his newsletter
• 1:10:52
  Speaker 1: and he got fined two point three millions. So we
• 1:10:54
  Speaker 1: just noticed that. Okay, So what I do even though
• 1:10:56
  Speaker 1: there was such a rule, because you're not the new
• 1:11:00
  Speaker 1: newsletters not not not um uh permitted marketing material. So
• 1:11:05
  Speaker 1: if I ever have a newsletter touching my management material,
• 1:11:10
  Speaker 1: I'm really bad. Okay. So that is why the management
• 1:11:14
  Speaker 1: is headquartered Marina, Nevada, and publishings in Rockville, Maryland. We're
• 1:11:17
  Speaker 1: trying to separate the correct and so, but the truth
• 1:11:23
  Speaker 1: of matter is there's obviously a tremendous overlap. We don't
• 1:11:27
  Speaker 1: have We have different names, So large cap might overlap
• 1:11:29
  Speaker 1: my blue chip letter, but it might have a overlap.
• 1:11:33
  Speaker 1: But they don't match and they have different names. I'm
• 1:11:36
  Speaker 1: a different managers on it, and so we try to
• 1:11:40
  Speaker 1: we do try to differentiate it. But in the end,
• 1:11:42
  Speaker 1: the clients come to us for that good risk adjuster performance.
• 1:11:46
  Speaker 1: What the way our system really works is we keep
• 1:11:48
  Speaker 1: six conservative stocks modetly aggressive ten percent aggressive, and as
• 1:11:53
  Speaker 1: things get more volatile, we start to trim or sell
• 1:11:55
  Speaker 1: out right. And a lot of people will take the
• 1:11:57
  Speaker 1: newsletters and they'll try it, and they forget to trim,
• 1:12:00
  Speaker 1: and they come to us when markets are narrow. So
• 1:12:03
  Speaker 1: this is a great time for our business because the
• 1:12:05
  Speaker 1: markets aren't easy and it is very narrow, and they
• 1:12:09
  Speaker 1: really want our help with the risk controls. And then
• 1:12:11
  Speaker 1: we have to dial in on taxes. If it's a pension,
• 1:12:14
  Speaker 1: we might chase more of our A rated stocks, if
• 1:12:16
  Speaker 1: it's a if it's a tax efficient account, we might
• 1:12:18
  Speaker 1: buy A's or Bees, or if they're in a high
• 1:12:20
  Speaker 1: tech state, we might put them in a growing fun
• 1:12:22
  Speaker 1: but we always have to blend in the dividend management
• 1:12:24
  Speaker 1: because it zigs and other stuff zags um, the gross
• 1:12:28
  Speaker 1: stock zag and and it's really about dialing in and
• 1:12:31
  Speaker 1: getting everybody as smooth as possible. And of course as
• 1:12:34
  Speaker 1: people get older, they want more income and we can
• 1:12:36
  Speaker 1: make that transition very easily. So we were really proud
• 1:12:41
  Speaker 1: of our private private client group, and we enjoy working
• 1:12:44
  Speaker 1: with people and and we treat everybody like family. That's
• 1:12:47
  Speaker 1: what we try to do, all right, So let's jump
• 1:12:49
  Speaker 1: into our our standard questions we ask all our guests,
• 1:12:52
  Speaker 1: and let's start right with the mentors. Who are some
• 1:12:55
  Speaker 1: of the early mentors who influenced your thought process about investment.
• 1:13:00
  Speaker 1: Professor Sharp at Stanford wrote a little book that was
• 1:13:03
  Speaker 1: religious reading to me very short. Um, what was the
• 1:13:05
  Speaker 1: name of book? I have no idea. It was red
• 1:13:08
  Speaker 1: and it had all the formulas in there I needed.
• 1:13:11
  Speaker 1: And no Bill Laureate, yes he's in his nineties now,
• 1:13:16
  Speaker 1: who was the advisor for Financial Engines which is now
• 1:13:19
  Speaker 1: running about a hundred and fifty billions. Financial Engines very
• 1:13:22
  Speaker 1: very successful. I had honor meeting Harry Mark at Wits
• 1:13:25
  Speaker 1: and Tahoe once, and Harry's a great guy. One of
• 1:13:28
  Speaker 1: my professor's Arnold Lankson, who's in his nineties now, his
• 1:13:32
  Speaker 1: buddies with Harry and likes to call Bill Sharp every
• 1:13:35
  Speaker 1: now and then. But you know, those were the people
• 1:13:38
  Speaker 1: that gave me the formulas, and I just set out
• 1:13:41
  Speaker 1: the document. It um there are efficiently priced talks out there,
• 1:13:45
  Speaker 1: and then there are things they're not officially priced. So
• 1:13:48
  Speaker 1: what I don't care how how many anomalies are. I
• 1:13:51
  Speaker 1: just want to find them. And basically I'm saying a
• 1:13:53
  Speaker 1: lot of the market is efficient now, whether that's E
• 1:13:55
  Speaker 1: T F S or indexing, but I just care about
• 1:13:59
  Speaker 1: the inefficient one. And those are the ones that Russell's
• 1:14:01
  Speaker 1: gonna be adding their industries poppy. Those are the ones
• 1:14:03
  Speaker 1: that are reacting positive, their earnings are growing dividends. But
• 1:14:07
  Speaker 1: it is shocked, Lynarrow, our dividen greater. You gotta be
• 1:14:09
  Speaker 1: the top of leven cent our stockarate, you gota the
• 1:14:11
  Speaker 1: top nine percent. That's how tight the markets are at
• 1:14:13
  Speaker 1: this time. So those are those are academic mentwers. How
• 1:14:18
  Speaker 1: about investors? What specific investors have affected the way you
• 1:14:22
  Speaker 1: think James Stoward is at at American Centry was obviously
• 1:14:27
  Speaker 1: very influential. He was one of the original James Stalwart
• 1:14:30
  Speaker 1: Stours Stowers. He was one of the original um Ernie's
• 1:14:34
  Speaker 1: Momentum guys. He was American Centry in Kansas City. He
• 1:14:38
  Speaker 1: was buying research from B. J. Young and San Francisco.
• 1:14:41
  Speaker 1: I remember meeting those guys. See, I did all this
• 1:14:44
  Speaker 1: pre computers. Okay, I did on calculators, and then obviously
• 1:14:48
  Speaker 1: I tried to stay on the head of automation and
• 1:14:51
  Speaker 1: the those guys were we watched, well, we also watched
• 1:14:55
  Speaker 1: the Peter Lynches of the world. Um, I think Peter Lynch, uh,
• 1:14:59
  Speaker 1: you know, I know it all the story and all
• 1:15:00
  Speaker 1: that stuff, but there was there was a lot of math.
• 1:15:03
  Speaker 1: In fact, I did when I was pretty young, I
• 1:15:06
  Speaker 1: did a report for Fidelity on my quant stuff. So
• 1:15:11
  Speaker 1: so Peter Lynch is a closet quants another life. Well,
• 1:15:14
  Speaker 1: he had some other people there that there was a
• 1:15:15
  Speaker 1: guy named rich Fetton that seemed to be more of
• 1:15:17
  Speaker 1: a quant and um but that he was a good
• 1:15:20
  Speaker 1: mentor for that whole team of Fidelity and Um. But
• 1:15:24
  Speaker 1: you know, it's you get to a size where you
• 1:15:26
  Speaker 1: can only manage so much money and Fideli's at that size,
• 1:15:28
  Speaker 1: but remember it has been for a long time. Remember
• 1:15:30
  Speaker 1: Ned Uh, the ram Fidel, he was a pretty good man.
• 1:15:35
  Speaker 1: It was a pretty good manager. Abigail Johnson is his
• 1:15:38
  Speaker 1: daughter's running it. Ned Johnson was running a fund back
• 1:15:41
  Speaker 1: in the air. Yeah, prety Peter Lynch. It was pretty
• 1:15:43
  Speaker 1: successful too. So you mentioned Bill Sharp's book. What other
• 1:15:46
  Speaker 1: books have been influential after that? It was just ib
• 1:15:50
  Speaker 1: D and UH staying on the cutting edge. I don't
• 1:15:53
  Speaker 1: agree with how to exit like ib D says. I
• 1:15:57
  Speaker 1: wouldn't set a stop at seven percent or anything, but uh,
• 1:16:00
  Speaker 1: you're guaranteed to get taken out of stocks that are going.
• 1:16:03
  Speaker 1: Of course, in fact, you know because of our volatility
• 1:16:06
  Speaker 1: last August, you know, the New York stocks change man
• 1:16:08
  Speaker 1: physical stops and gtcs for two months and that's how
• 1:16:11
  Speaker 1: bad it was. But yeah, you never show anybody order.
• 1:16:13
  Speaker 1: You never show me your cards. But I learned that
• 1:16:15
  Speaker 1: early in my career. If you put a stop out there,
• 1:16:18
  Speaker 1: somehow a specialist will get the price they're take it
• 1:16:21
  Speaker 1: and then move it away. Correct. And Uh, I have
• 1:16:23
  Speaker 1: three good extrators that work for me. They aren't trading now.
• 1:16:26
  Speaker 1: They try to educate everybody. But but the truth of
• 1:16:30
  Speaker 1: the matter is is the markets are always mutating and
• 1:16:34
  Speaker 1: just got to stay on top of it. And I
• 1:16:35
  Speaker 1: don't like any theme that doesn't make money. I do
• 1:16:39
  Speaker 1: like them when they make the transition from negative positive
• 1:16:42
  Speaker 1: rains if I can time at that quarter, I like
• 1:16:44
  Speaker 1: that because it's explosive, But most of the time might
• 1:16:48
  Speaker 1: change from negative to positive. I like that, But most
• 1:16:52
  Speaker 1: of my stocks are Most of my stocks are go
• 1:16:55
  Speaker 1: up in a very smooth, steady manner. There's relentless buying
• 1:16:57
  Speaker 1: pressure and buy backs into the surface. There's growing evidends,
• 1:17:01
  Speaker 1: and so I jump on him as long as I
• 1:17:02
  Speaker 1: can ride them and they're safe. And then eventually they
• 1:17:05
  Speaker 1: get more erradic for whatever reason margins are under compression,
• 1:17:08
  Speaker 1: or buy backs are slowing down, or the sectors going
• 1:17:11
  Speaker 1: out of favor. I had this experience last year. You know,
• 1:17:14
  Speaker 1: I had gillyad um, which is uh the hepatitis cpill.
• 1:17:19
  Speaker 1: I would get grief on that because Hillary said the
• 1:17:21
  Speaker 1: pill is too expensive, and I would argue, it's a
• 1:17:23
  Speaker 1: cure for hepatitis is cheaper than dying to people death
• 1:17:26
  Speaker 1: in the hospital to leave Gilly alone, to say, just
• 1:17:30
  Speaker 1: to just to clarify, this is cheaper than dying a long, slow,
• 1:17:34
  Speaker 1: painful death. And yes, yes, and so check that, okay,
• 1:17:37
  Speaker 1: and then uh but but you know, they start to
• 1:17:40
  Speaker 1: hit the biotech funds. They started at the farmer funds
• 1:17:43
  Speaker 1: because Hillary was specking on the healthcare stocks. You know,
• 1:17:45
  Speaker 1: I had to sell Allergen. I said, Hillary is not
• 1:17:47
  Speaker 1: gonna mess with Alligien's bow talks. Okay, you know, and
• 1:17:50
  Speaker 1: we're very familiar bowt talks in South Florida. You can
• 1:17:52
  Speaker 1: see who has it because they're they're they're drooling at
• 1:17:55
  Speaker 1: the cocktail parties. That the dentist to bow talks in
• 1:17:58
  Speaker 1: South Florida mandatory at least, I think the thing you
• 1:18:00
  Speaker 1: have to tell him not to do bow talks, okay
• 1:18:02
  Speaker 1: if you don't want to, yes, yes, but the anyway,
• 1:18:08
  Speaker 1: to make a long story short, you know, there are
• 1:18:10
  Speaker 1: sectors that get hit because they're in a big basket.
• 1:18:12
  Speaker 1: You know, they do throw the baby out with the
• 1:18:14
  Speaker 1: bathwater when we have the big energy meltdown. You know.
• 1:18:17
  Speaker 1: He said, well, I don't know, I don't know if
• 1:18:18
  Speaker 1: they'll hit the terminals, the pipelines in the front. Yeah. Yeah,
• 1:18:23
  Speaker 1: well then their knees would come out and one side
• 1:18:26
  Speaker 1: would have her any other, but then it was just
• 1:18:27
  Speaker 1: too long, and then they took everything out. I remember
• 1:18:30
  Speaker 1: there was one LED lighting company that was in an
• 1:18:32
  Speaker 1: energy et F, so they took it out because it
• 1:18:34
  Speaker 1: was in the wrong ETF. Okay, because it made LED lighting.
• 1:18:38
  Speaker 1: We see all sorts of people confuse symbols. News comes
• 1:18:42
  Speaker 1: out and a similar symbol gets whacked. I mean the
• 1:18:45
  Speaker 1: behavioral side of which is really what what I like
• 1:18:49
  Speaker 1: how is no one can read the second sentence, okay,
• 1:18:52
  Speaker 1: which everybody just reads the headline, and you trade off
• 1:18:56
  Speaker 1: the headline and and then you can have a correction
• 1:18:58
  Speaker 1: and no one cares that one's programmed a trade off corrections.
• 1:19:02
  Speaker 1: To my knowledge, yet, that's amazing. So you mentioned a
• 1:19:05
  Speaker 1: lot of the things that have changed since you're joined
• 1:19:08
  Speaker 1: the industry. What do you think is the most significant changes?
• 1:19:12
  Speaker 1: What if you had to pick one thing, what what
• 1:19:14
  Speaker 1: has had the greatest impact on investment? Decimalization? Really, so
• 1:19:20
  Speaker 1: going from teenas and quotas and eighths to decimalization, that
• 1:19:24
  Speaker 1: that changed the research equation, didn't it? Yes, I missed
• 1:19:28
  Speaker 1: the old system. I preferred the old system. I preferred
• 1:19:32
  Speaker 1: getting on NASTAC level three. Collin Markin started colleague market
• 1:19:36
  Speaker 1: makers cleaning out their inventory, accumuli in stocks, never moving them.
• 1:19:41
  Speaker 1: Today I deal with an algorithm. I deal with an
• 1:19:43
  Speaker 1: anonymous high frequency trading system, and I don't like it.
• 1:19:48
  Speaker 1: We calculate something called unsystematic risk. The risk we can't
• 1:19:51
  Speaker 1: diversify way in large cap stocks is about point six
• 1:19:55
  Speaker 1: percent of trade. In mid cap stocks and small cap
• 1:20:00
  Speaker 1: it's still running almost six d bases points of trade.
• 1:20:03
  Speaker 1: Et f s last August were four fifties, four fifty eight.
• 1:20:06
  Speaker 1: Now they're three fifty seven basis points of this is
• 1:20:11
  Speaker 1: unsystematic risk, the static, the fudge factor, how much they
• 1:20:14
  Speaker 1: might pick you off if you're careless with your order,
• 1:20:17
  Speaker 1: and so not. So when we optimize the portfolio, we
• 1:20:21
  Speaker 1: have to get the lowest beta possible. We have to
• 1:20:26
  Speaker 1: get the unsystematic risk down, and we get the office
• 1:20:29
  Speaker 1: high as possible. And there's ways optimized, but the unsystematic
• 1:20:33
  Speaker 1: risk exploded when they decimalize the market. I like the
• 1:20:36
  Speaker 1: old system. The fact that Europe, Europe is gone in August,
• 1:20:40
  Speaker 1: the fact that most of my friends here in New
• 1:20:42
  Speaker 1: York are gone the second half of August. I hate August.
• 1:20:46
  Speaker 1: I just hate it. Okay, Now, in the presidential election year.
• 1:20:49
  Speaker 1: Often it's better because we're all being distracted by the
• 1:20:52
  Speaker 1: conventions apparently correct, but the I think the rhetoric will
• 1:20:57
  Speaker 1: be pretty hot and heavy the summer, I personally is
• 1:21:01
  Speaker 1: as long as Trump and Hillary are sucking up to people,
• 1:21:05
  Speaker 1: that's good. I'm waiting for them to start sucking up
• 1:21:07
  Speaker 1: to people. Okay, normally we rally going to presidential electioneer
• 1:21:11
  Speaker 1: because of the sucker factor. It lifts consumer confidence, rubs
• 1:21:14
  Speaker 1: off investor confidence. But I know this is not a
• 1:21:18
  Speaker 1: conventional election er, but I would hope that they would
• 1:21:20
  Speaker 1: make August a little smooth at this time. I know
• 1:21:22
  Speaker 1: it'll be entertainings as can be, but it's uh. I
• 1:21:25
  Speaker 1: would like to see a little suck up with the
• 1:21:27
  Speaker 1: with the attacks. I love that um our. Last two questions, So,
• 1:21:32
  Speaker 1: if a millennium or millennial or some recent college graduate
• 1:21:36
  Speaker 1: came to you and said, Louism thinking about a career
• 1:21:39
  Speaker 1: in finance, what sort of advice would you give them? Well,
• 1:21:43
  Speaker 1: I'll tell you something. I told my son, you better
• 1:21:45
  Speaker 1: take a psychology class because the market is a mant
• 1:21:48
  Speaker 1: of crowd and um and uh, that is what behavior finances.
• 1:21:55
  Speaker 1: We're studying crowds and we're locking in on what they like.
• 1:21:58
  Speaker 1: And the crowd movement will last for several months, and
• 1:22:02
  Speaker 1: so we want to lock in on it, if not years.
• 1:22:05
  Speaker 1: The second thing is better taken an accounting class. If
• 1:22:09
  Speaker 1: you have any criticism of all the CFAs out there,
• 1:22:11
  Speaker 1: they're all trained to track, they're all trained to uh
• 1:22:15
  Speaker 1: you know, hug these benchmarks throughout a few dogs if
• 1:22:17
  Speaker 1: they want to try to beat it. And everybody's forgotten
• 1:22:20
  Speaker 1: about accounting, okay, and they better learn finance. Um I.
• 1:22:25
  Speaker 1: There's the number of investors out there that have no
• 1:22:28
  Speaker 1: idea what a p ratio is or you know, it's incredible,
• 1:22:31
  Speaker 1: you don't we deal with this because we have Tesla
• 1:22:34
  Speaker 1: and Reno. You know, they're building the battery plant and
• 1:22:36
  Speaker 1: uh I deal with in California and they're all they're
• 1:22:40
  Speaker 1: all in La La land. They I don't think they
• 1:22:42
  Speaker 1: have any idea of the risk they're incurring with that
• 1:22:44
  Speaker 1: stock right now. Quite fascinating. And the last question, what
• 1:22:49
  Speaker 1: is it that you know about investing today that you
• 1:22:52
  Speaker 1: wish you knew when you started out in Well, that's
• 1:22:57
  Speaker 1: a that's a very good point. You know, you have
• 1:23:00
  Speaker 1: to read the credit markets because the credit markets influenced
• 1:23:02
  Speaker 1: the stock market, but I think it's the credit market
• 1:23:06
  Speaker 1: meltdown in two thousand and eight that's the most profound. Um,
• 1:23:12
  Speaker 1: what happened on wall streets started to leverage debt And
• 1:23:16
  Speaker 1: this is a goods closing point. I obviously live in
• 1:23:18
  Speaker 1: South Florida. Bernie was up the street six home south
• 1:23:22
  Speaker 1: to me was a guy named Tom Petters, still three
• 1:23:23
  Speaker 1: point a billion fake and commercial paper my neighbors. Bernie
• 1:23:27
  Speaker 1: isn't Bernie made off? Bernie was up the street. I
• 1:23:29
  Speaker 1: thought we were talking Bernie uh Sanders. Bernie Madoff was
• 1:23:34
  Speaker 1: up up the street, and then um, Tom Petters was
• 1:23:38
  Speaker 1: six home south and me still three point billion fake
• 1:23:39
  Speaker 1: in commercial play for eighteen years. I blog to golf
• 1:23:41
  Speaker 1: club where the founder of this big fancy fund of
• 1:23:44
  Speaker 1: funds only recommended Bernie and Petters. Well, he has no
• 1:23:48
  Speaker 1: stereviation because everybody's lost their money and there is some
• 1:23:51
  Speaker 1: upside as attorney generals are cover. But my neighbors got
• 1:23:54
  Speaker 1: wiped out more by leverage debt then, more than the
• 1:23:59
  Speaker 1: maide offs of the UH. Well, it might be the
• 1:24:02
  Speaker 1: club I bunked, but the bottom line is the UH
• 1:24:06
  Speaker 1: they were leverage and double A rating munis eight to
• 1:24:09
  Speaker 1: one the Falcon Funds and uh, they lost ninety percent
• 1:24:13
  Speaker 1: their money. This is part of the credit to false
• 1:24:15
  Speaker 1: swap problem and uh collapsing and um. So anytime I
• 1:24:20
  Speaker 1: see leverage debt, I freak out. Okay, and I see
• 1:24:23
  Speaker 1: a response, I see a little now two to one.
• 1:24:26
  Speaker 1: Obviously we had the s i V problem. That was
• 1:24:28
  Speaker 1: tender one, that was our bet in the yield curve.
• 1:24:30
  Speaker 1: That's what sunk bear Sterns and Lehman. But the thing
• 1:24:34
  Speaker 1: that shocks me to this day is the guy that
• 1:24:36
  Speaker 1: led the Falcon Funds who lost twenty one point one
• 1:24:39
  Speaker 1: billion dollars for City Bank. He obviously got fired over
• 1:24:43
  Speaker 1: this whole mess, and he finally got a new job
• 1:24:47
  Speaker 1: and um and uh, and he's a very controversial guy anyway.
• 1:24:51
  Speaker 1: His his name is is Jack Luke, and he is
• 1:24:55
  Speaker 1: our Treasure Sasuary Secretary, United States. So that si V
• 1:25:00
  Speaker 1: grouping lost how much money for City back the the well,
• 1:25:04
  Speaker 1: the si vs was a big fiasco, and that was
• 1:25:06
  Speaker 1: a whole another matter. But Jack lou to my knowledge,
• 1:25:09
  Speaker 1: was doing the leveraged munis with leverage correct and that
• 1:25:13
  Speaker 1: got Sally Crotchack fired and then he lost his job too.
• 1:25:16
  Speaker 1: Because his little division lost twenty one point one billion.
• 1:25:18
  Speaker 1: Plus you had the SIV lost on top of it. Obviously,
• 1:25:21
  Speaker 1: somebody at City called Robert Reuben and City was deemed
• 1:25:24
  Speaker 1: too big to fail and got built out. But but
• 1:25:27
  Speaker 1: but it's it's shocked. It's shocking to me how you
• 1:25:30
  Speaker 1: can blow up people and then become get a New
• 1:25:33
  Speaker 1: Jersey secretary. That that that's amazing. I knew that City
• 1:25:37
  Speaker 1: Group was toast long before they actually hit the floor,
• 1:25:42
  Speaker 1: but I had no idea. The losses on leverage munis
• 1:25:45
  Speaker 1: were twenty one billion dollars. That was that's a huge,
• 1:25:47
  Speaker 1: huge number. That was the Falcon funds. That was a
• 1:25:50
  Speaker 1: muni's leverage eight to one. Everybody loved him. In fact,
• 1:25:54
  Speaker 1: I still remember I went to a party in Palm Beach.
• 1:25:55
  Speaker 1: Everbody's bragging how much money they're making funds. Yeah, you
• 1:25:59
  Speaker 1: can look at one. Well, leverage is great as long
• 1:26:01
  Speaker 1: as it's going in a direction. As soon as the
• 1:26:03
  Speaker 1: market goes the other direction, you're completely And I do.
• 1:26:06
  Speaker 1: I do have a bond business. And my bond guy
• 1:26:09
  Speaker 1: worked at a I G. And he tells a funny
• 1:26:11
  Speaker 1: story that that when they kicked Hank Greenberg out of
• 1:26:14
  Speaker 1: his own firm because he liked Hank, and they put
• 1:26:18
  Speaker 1: in this auto insurance guide to run a I G.
• 1:26:20
  Speaker 1: They wrote all these credit to fault swaps at bogus
• 1:26:22
  Speaker 1: rates because they already wanted a bonus. So my bond
• 1:26:26
  Speaker 1: guy actually blames the government for blowing up a I G.
• 1:26:29
  Speaker 1: Okay and uh and the collapse of the credit to
• 1:26:31
  Speaker 1: fault swap market. But you know, the bond markets wild.
• 1:26:34
  Speaker 1: It's been wild this year, whether you've seen in high yield,
• 1:26:36
  Speaker 1: and so I wish I knew a little bit more
• 1:26:38
  Speaker 1: about the bond market. Uh. You know, I have I
• 1:26:41
  Speaker 1: keep friends in the bond market. I talked to him
• 1:26:43
  Speaker 1: all the time. They're just a wreck most of the time.
• 1:26:45
  Speaker 1: I'll be honest with you. I mean they're a wreck.
• 1:26:47
  Speaker 1: I mean it's this is not an easy job. So
• 1:26:49
  Speaker 1: a stock guys, I think I have a lot of
• 1:26:51
  Speaker 1: easier job than these credit guys. See, I look at
• 1:26:54
  Speaker 1: the bond side as what's the big deal. Here's your duration,
• 1:26:57
  Speaker 1: here's your your coupon, here's your risk. That stuff practically runs.
• 1:27:01
  Speaker 1: I once had a conversation with Paul McCulley. Hey, that
• 1:27:03
  Speaker 1: stuff practically runs itself. What do you guys having so
• 1:27:05
  Speaker 1: much angst out in PIMCO. I have about we have
• 1:27:08
  Speaker 1: a bond business. We play in the triple ber and
• 1:27:12
  Speaker 1: and so but so, our neighborhoods a lot safer than
• 1:27:15
  Speaker 1: the other neighborhoods. But it's uh, you know, the distress
• 1:27:18
  Speaker 1: debt world is fascinating and that's where I get all
• 1:27:20
  Speaker 1: the good Trump stories. Okay, because Trump would beat you
• 1:27:24
  Speaker 1: up to get forty cents on the dollars and he's
• 1:27:26
  Speaker 1: your best friend. Okay. So the theory is if he
• 1:27:29
  Speaker 1: did become president, I realized it's not. We don't know yet,
• 1:27:33
  Speaker 1: but if he did become president, I'm sure he's going
• 1:27:36
  Speaker 1: to cut deals with everybody. I mean, that's what That's
• 1:27:38
  Speaker 1: what he didn't business well, but I know I can't
• 1:27:39
  Speaker 1: imagine him cutting a deal saying, Okay, everybody who's holding
• 1:27:43
  Speaker 1: US treasuries, we're gonna give you sixty cents on the dollar,
• 1:27:46
  Speaker 1: and that's how we're gonna solve our our deficit. That comment,
• 1:27:50
  Speaker 1: I think isn't good to fly. But we do have
• 1:27:53
  Speaker 1: a joke, and this is a joke, I want to
• 1:27:54
  Speaker 1: be clear, And we used to joke that it's easy
• 1:27:59
  Speaker 1: to get rid of our deficit. All we have to
• 1:28:01
  Speaker 1: do is refinancing and negative yielding tips and our problem
• 1:28:04
  Speaker 1: went away. Can I tell you something, I don't think
• 1:28:06
  Speaker 1: that's so much of a joke. I think you look
• 1:28:08
  Speaker 1: too not too far off in the future. That's a
• 1:28:11
  Speaker 1: real possibility. Certainly, fifty year bonds when when the US
• 1:28:15
  Speaker 1: goes to zero eight um are not unthinkable. That's one
• 1:28:18
  Speaker 1: way to think. By the way, I think the government
• 1:28:21
  Speaker 1: did help cause A I G. To blow up, but
• 1:28:24
  Speaker 1: in a different way than you realize. Uh and Ron
• 1:28:28
  Speaker 1: had been agitating for the Commodity Futures Modernization Act to
• 1:28:31
  Speaker 1: get past, which basically took all those derivatives out of
• 1:28:35
  Speaker 1: the normal. No reserve requirements, no exchange listings, no counterparty disclosures,
• 1:28:42
  Speaker 1: no just transparency. And A I G wrote three trillion
• 1:28:46
  Speaker 1: dollars worth of them. It was just a nons that
• 1:28:49
  Speaker 1: started when Hank was there with g FP. UH. There
• 1:28:53
  Speaker 1: should be some reasonable amount of regulation to prevent us
• 1:28:58
  Speaker 1: from our own worst knee. Men's not an excessive amount
• 1:29:02
  Speaker 1: of regulation that hamstrings us and prevents us from opening
• 1:29:05
  Speaker 1: new businesses. That is the never ending battle. UM. A
• 1:29:09
  Speaker 1: I G ended up seeing an opening and they said
• 1:29:12
  Speaker 1: the quote from a I G. FPS president was it's
• 1:29:16
  Speaker 1: free money. You just write premiums and countercast running in.
• 1:29:19
  Speaker 1: You know, that's what we say about cover call writing.
• 1:29:21
  Speaker 1: Don't you want the free money? And it makes sense
• 1:29:24
  Speaker 1: in a choppy washing machine market, but getting a strong
• 1:29:27
  Speaker 1: RiPP oring bullmarket, everything we get called away. So there
• 1:29:30
  Speaker 1: are these windows out there, but as people extrapolate them
• 1:29:34
  Speaker 1: to infinity as opposed to saying this is a temporary
• 1:29:37
  Speaker 1: cycle and eventually, and as as a stock guy, you
• 1:29:40
  Speaker 1: I have I want to have friends on the credit side.
• 1:29:42
  Speaker 1: I understand what's going on out there because I need
• 1:29:45
  Speaker 1: to see what's happening. And I respect those guys because
• 1:29:48
  Speaker 1: I think that's a very very stressful business. And uh
• 1:29:51
  Speaker 1: all the best stock guys always come with a some
• 1:29:54
  Speaker 1: form of a credit background. But as we close here,
• 1:29:57
  Speaker 1: here's the ultimate irony. The winner in the low interest
• 1:30:00
  Speaker 1: environment are stocks because everybody's barring in the bond market
• 1:30:04
  Speaker 1: buying their stock back. The multinationals can borrow in Europe
• 1:30:09
  Speaker 1: and other places even cheaper than can borrow here. And
• 1:30:12
  Speaker 1: this is the stock market is actually dying on it.
• 1:30:14
  Speaker 1: So my average stock is going to be gone fourteen
• 1:30:17
  Speaker 1: years from buy backs and the SMP at the current
• 1:30:20
  Speaker 1: buy back pace might be gone in years, so obviously
• 1:30:23
  Speaker 1: that can't go on forever. That's why the market's melting up.
• 1:30:27
  Speaker 1: It's melting up on order and balances, it's going up
• 1:30:30
  Speaker 1: on light volume. It's really really eerie. But as long
• 1:30:33
  Speaker 1: as the dividends are higher than the treasuries, I think
• 1:30:37
  Speaker 1: people should go. Because you're not Louis. This has been fantastic.
• 1:30:39
  Speaker 1: Thank you for being so generous with your time. And
• 1:30:43
  Speaker 1: I would be remiss if I did not say. Vonnie
• 1:30:46
  Speaker 1: Quinn said to say hello, I know you guys know
• 1:30:48
  Speaker 1: each other from way back when. UM let me thank
• 1:30:51
  Speaker 1: my recording engineer, Reggie, my producer, Charlie Vollmar. Taylor Riggs
• 1:30:56
  Speaker 1: is our booker. Mike Batnick is the head of research.
• 1:31:00
  Speaker 1: If you have enjoyed this conversation, be sure I'm looked
• 1:31:03
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• 1:31:06
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• 1:31:09
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• 1:31:13
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