The Disciplined Investor with Andrew Horowitz: Left Brain Thinking Podcast

Hello again and welcome to this week's Left Brain Thinking podcast. On the podcast, we welcome dynamic thinkers from the worlds of investing and personal finance designed to help you in your journey of building your personal assets. And a few words and a disclaimer: the opinions expressed by our guests are not endorsed by Left Brain and may not reflect the views expressed by other clients or investors. Depending on the facts and circumstances, public commentary made directly by a client about their own experience with or endorsement of an investment advisor, their personal investments, or their approval of Left Brain is considered a testimonial. Testimonials are based on unique experiences from current clients or private fund investors and are not representative of all client experiences. Testimonials are unsolicited and no cash or non-cash compensation is provided. To learn more about Left Brain and our research service, which provides subscribers 8 to 10 full-length stock reports per month and The Chosen, our favorite stock and bond opportunity of each month, head to leftbrainir.com. With that, we'll welcome this week's guest. Hello everyone, and welcome back to the Left Brain Thinking Podcast. I'm your host, Brian Druss. I'm excited to be joined by Andrew Horowitz. He's of the Disciplined Investor Podcast. That's the longest running financial podcast. And he also hosts DH Unplugged. Uh, he's a registered investment advisor out of Fort Lauderdale, Horowitz and Company, and has been doing that since the late '80s. Um, he's also got a couple of books out, The Disciplined Investor: Essential Strategies for Success and The Winning Investor. So Andrew, uh, welcome to the program.

Thanks so much. Makes me sound kind of like an old codger going back to the '80s.

Yeah, Andrew, I just turned 40. So the, uh, the age jokes aren't as funny to me anymore.

I hear you. I get it. I get it. Yeah, yeah. Everything hurts a little bit more. It takes a little bit more to heal.

That's right. Yes, indeed.

Yeah.

Yes. So let's just jump right in. Let's hear a little bit about your background and what got you into the investing business. And we'll start from there.

You know, it's funny because, you know, I've been always interested in finance for a very, very long time. Business, the side of just, you know, business itself ever since I was a kid. And I kind of got into a variety of different areas and my passions early on. But somewhere around the '80s, my dad said to me, hey, why don't you— why don't you try the insurance business? And I said, oh no, that— no, not doing that. And he said, no, no, no, I've been doing it for, you know, 30 years. Your uncle did it for 30 years, 40 years. Very, very good. Look at the great life we lead. I'm like, okay, Dad, I'll try it. Now, there's a lot of stories I could tell you from back in the day in New York. In Long Island, Queens, Bayside, in fact, when I was starting out in that business. But what happened is it evolved, right? So you get your, your base training in this industry a couple of different ways. It's not just right out of school. You either enter into the insurance side of things, finance, or you enter into what I say is more the investment, the wirehouse side, right? So, so depending on where you are is depending on where you get your base. And then I started to just read everything I could possibly read and understand about the world of investing and studied under, I would say, some of the greatest of minds. Not really directly under, but through their teachings and learnings and books and writings and, and papers. And when I got to Florida, I met some really interesting people down here that were doing some cutting-edge things for the time, right? For the time. And then eventually even got involved with some of the, the work that Brinson, B. Bower, and Hood did with mean-variance optimization of portfolios back in the day when it was really hot, back in the days when Ibbotson was creating these models and Harold Evensky and his team. And I really was diving in head deep with the statistical work on that. And that led to obviously creation of a very specific set of, I would say, rules-based investing principles, as well as an understanding of how things fit together. Right. So you have this all these puzzle pieces in front of you, and that doesn't mean you can really finish that puzzle. But if you could see it a little bit differently and understand how it works, it's much easier to put it together and have a much more successful outcome. So, uh, you know, fast forward over the years, uh, I decided to put my own work down in, in a book. And then, uh, to answer probably a question about, you know, how did you start your podcast in '07? My publisher said to me, Andrew, Why don't you think about, you know, a way to market your book would be to do a podcast. And I said, what's a podcast? And it really wasn't a lot going on right back then. I flew out to Cupertino to visit with the Apple iTunes team at the time to understand more about what they were trying to launch. And well, from there, it's quite, quite the, quite the history from there.

Yeah, you're an absolute pioneer in the podcasting industry. I got to really give it to you. 2007. You had to be one of the first handful of podcasts they were putting out over there.

Yeah, it was, it was. I remember the first few. I was so nervous right now. You have to kind of figure out what you know. I think I was using GarageBand on Apple Mac and this really rinky-dink microphone. I don't even know if I was using a microphone at that time. I may have been using one of those handheld recorders, then taking it and pushing it and some really crappy audio sounds. I mean, look at all we got, all this studio stuff here now, these You know, I got a closet full of mics that I've collected over the years depending on what I want to work with, and a full studio where we record now. It's really, uh, become quite a different process. But in the end, I got to be honest with you, in the end it's still the same, which is a, I would say, a, a full-hearted and, uh, very, um, open discussion that is two-way between myself, guests, and listeners in a way that I try to bring it that makes very difficult topics somewhat much more tolerable and easier to understand.

Right.

In a way. But also, you know, to make it so that the people that are listening are just sitting along with us in the conversation. I think that's the most important part of, of the process, because otherwise you can get some very heady discussions in the area of investments, which sometimes we lead into. Right. And people are just blown away by— not in a good way, in a bad way, right? Right. I don't understand what's happening here. You know, this guy's talking about enterprise value to EBITDA, and what does that mean? You know, and people then turn it off. So you have to keep— I think there's not a lesson to you, I'm just, just rethinking all this. But you have to really think about the audience and what they're looking for and what is important to them and bring it to a level that everybody can understand so you can continually learn along the spectrum.

Yeah, for me, Andrew, I, I've been in investments for a while, just got into advisory a couple of years ago, and it's been a challenge, of course, trying to, you know, distill all the thoughts down into something that's digestible. I think that's a good lesson we can take from you. And having done a podcast for all these years, you know, I think you've done successfully is make these topics accessible. And a lot of times people don't want to even think about these topics. You know, as advisors, it's a challenge for us to figure out how to make it so that they do tackle these issues head-on and not just kind of let things happen to them like we see so often. So definitely, definitely.

Yeah, we don't want anybody being an ostrich where they just put their head in the sand when things aren't good and the markets aren't, or their stock or their fund isn't going in their direction and their way. And they say, I'm not looking. How many people say that, right? You know, a lot of your people are saying like, I'm not looking. I'm not gonna look till sometime in the future. Meanwhile, when things are good, they're looking every 5 minutes, right? You know, they got the phone going on at the desk and trading and doing stuff. And now it's like, no, I'm just gonna wait till it comes back. And one of the problems you have right now is that it's very difficult for individuals to separate their emotions from their, their, their money. And I don't think, you know, my first book I wrote, one of the first pages of one of the chapters I wrote regarding investing is that you need to check your emotions at the door. And I got to tell you, over the years I've had to modify that because I think there is some place in emotions, or maybe I don't call it intuition to make it sound like I'm going from the gut, but there is sometimes a, a need for not a bit of emotion so you can check yourself in the process. And one of the things that I've learned over the years is that, um, there is a very important part of the idea of my own investments versus, um, being objective with, with them. So the idea of I'm really worried, I'm going to sell everything today, call my broker, um, or, uh, you know, just not taking any advice. And what I talk to people about is the idea of getting yourself a haircut. I have a haircut, uh, Actually, um, today. Now, I don't know about you, Brian, you got some hair, nice head of hair there, you know, in your 40s. Uh, do you do your own haircut? Do you do it?

I don't.

You don't? But let me ask you a question. You can, you can handle scissors. I mean, if I give you scissors, you can cut something, right?

Yeah, I have scissors. I could definitely do it.

If I give you shears, you can probably shear a dog or something, something, whatever. You could use it, you could turn it on, you could do it. But why don't we actually cut our own hair? Is it because we love hanging out with the barber, having a beer or something, and talking about whatever's going on in the neighborhood, maybe. But the reality is it's a matter of perspective. We don't have the ability to see behind us without a, a, a mirror. And if you ever tried to do something with a mirror behind you, like, wait, let's go— am I going this, this way or, or this way? You know, how am I supposed to do it? And it's very difficult. The idea of utilizing some other outside source— a coach, an investment advisor, I'm not trying to pitch services here, but it's all about not giving yourself your own haircut and why you wouldn't do it. And it's only for one reason. It's a matter of perspective where you could ask somebody to help you along with the process. So I think that's a pretty good visual to think about when a lot of people are trying to go with this alone because they're scared the advisor may not, you know, take the small amount of money that I have in your thinking and their thinking, or the fees are out of control or In fact, a lot of times advisors can save you costs overall because they're getting into a different class of funds or ETFs or equities that maybe the commission transaction fees are less than you would have actually paid if you did it on your own. So again, a matter of perspective, no DIY haircuts anymore.

I like it. I think, like you said, you sort of alluded to in the bull market, uh, everyone feels like they can kind of handle things, but Now we're in sort of a bear market, and I think we can really see how professional help can be really helpful and important in a time like this.

Even if it only saves you a few percent here or there, the fact of the matter is that there's really no place to hide right now. But I will share with you that I see some 401(k)s coming through my door from either clients who said they're going to handle that on their own and they were going to handle other parts of the of the investments. And they're starting to all of a sudden say, hey, can you do us a favor and take a look at this 401(k) now? Because— and we looked at it, a few of them recently, and they're not doing so well. The fact is they really never rebalanced, changed their investment plan from 2016 or '17 because things were just fine. And in 2020, there was no need to change. Well, there was a need to change. However, it happened so quickly it was impossible to change. So, right, the good news is if you didn't change, you were fine, and it was by sheer luck that you didn't have the time to do it, uh, either in or out or change anything. It just like, like nothing ever happened. But on this side where everything is being sold, whether it's bonds, metals to a degree, cryptocurrencies, um, clearly the growth stocks which everybody loved, the names that you know, you know, the Peter Lynch mentality— if I'm gonna buy Apple, I'm gonna buy Nike, I'm gonna buy Starbucks Oh no, no, no, no, that's not looking so good. So, you know, it's again, there is a partnership that you can work on. And even though you're probably not going to be, I would say, able to avoid all of this, maybe just a few percent here or there, or hold your hand through it and make sure you don't do things that you are upset that you did sometime in the future.

As you said, Andrew, just a couple of percent here or there, um, over the long run, 20 or 30 years can, um, mean a world of difference what you end up with when retirement finally comes around. So it's that power of compounding. I think we don't really think too much of 2% over the next year, but, um, you know, over the long run it really does make a huge difference.

Yeah.

Um, before we go any further, I want to hear a little bit about your investment philosophy and how you sort of, um, allocate funds and things along those lines.

So we have designed two, I would say two clear and distinct different strategies. One is a, we call it the global allocations, and that spans a couple of different styles that we work with. And we have a robo-esque advisory that we have called Envestology with an E, Envestology, where, you know, we do a bit of a different process. It's advisor crafted and technology enhanced. So basically what we do is we utilize a risk management profile and come up with a strategy. Now, just hold that thought for a second. Let's pin that. Let's go over to our global allocations. Global allocations are, as they would sound, a well-diversified approach to investing. So I look at investing like a flower garden. I like to use these visuals because I think they're very helpful. You know, in a flower garden in Florida or in New York or wherever you're listening, we have different flowers that come up during different times of the year. In Florida, if you want to plant impatiens, you do it in the— we'll call it November through March. March period. They look beautiful. In New York, you do that through the summertime. However, impatiens come up— if you put that into your entire garden in Florida, in April, May, June, they're all going to look like the stems. By August, all you're going to have is rotting flowers and just dirt. Now, that's not what you want your portfolio to look like, right? You don't want to have it all of a sudden doing really well and then just destroyed. And what you can do is, instead of doing that like a flower garden and tend to it, is You plant your impatiens, that's fine. You also plant annuals, perennials, you plant evergreens that are green at all times, in all situations, in all seasons. You plant roses and heliconia, so something is blooming at any given time of the year. And there'll be those times of year where it's not so great. There may be a little bit of a drought and things, the flowers aren't coming up, and maybe during the summertime you lose the impatiens for a while, but maybe Again, the evergreens are sitting up real strong, looking great. And the only thing you have to worry about is a tornado coming through, right? That's, that's a problem. But right, aside from those freak incidents or those black swan events, the fact is that we try to design a portfolio like a flower garden where we have domestic equity in a large, small, and mid-cap, maybe lean it like we are doing right now towards value, starting to think about bringing it back towards growth, by the way. Because the differential in the performance is astounding this year when energy and financials and utilities and to a degree staples are outpacing the technology and biotechs and healthcare and consumer discretionary by 15%, or as they say in the business, 1,500 basis points, 1,500 basis points or bips if you want to get really fancy on it. So we do that. We have domestic, we have international. Now what we've done is we balance it according to risk. So international investments are more aggressive than domestic. Small cap is more aggressive usually than large cap. Um, value is usually, I mean, over the long haul, less aggressive than growth. But again, what's aggressive? What's risk adjusted? We model that with things like what else can be an area of the market, uh, an investment that we could utilize that would be less correlated. So we have alternative managers that we utilize for alt assets that maybe do things like, um, some very sophisticated commodity trading strategies with very defined stop and downside risk parameters, or maybe credit arbitrage, or maybe looking at, um, alt option, uh, trading strategies with maybe covered calls. We utilize that as a component. Um, add to that maybe gold and silver or other metals or, or commodities, and then On top of it, inflation protection instruments that we've been adding dramatically over the last couple of years. Then that's just a part of it, right? Domestic, large cap, small cap, our duration or maturities on the bond are on the short term. We try to keep duration right now under 6 years, probably 5 years in total if you average the whole entire portfolio bonds, which, by the way, is helping, but not as much as it should. Right. So we design these portfolios for, for a wide variety of clients that have two things that we look at as a really important issue. One is what's their risk metric, right? You know, what is their sleep at night factor for a client and what's their time horizon? We combine both those and then create a portfolio around that utilizing this diversification process. So this flower garden mentality, and then we rebalance on a regular basis when appropriate. We don't just do this, this whole automatic rebalancing all the time, once a month. It doesn't float my boat, I'll be honest with you. It doesn't make any sense. You rebalance when you need to rebalance, when there is an outsized position, if it gets to that point. If in fact you want to change something, you want to say, hey, you know, uh, I'm looking at where the dollar is right now. What I'm thinking is that if we know historically that the dollar is at these levels right now, probably not gonna be able to stay there, what could do well in a declining dollar environment. Maybe it's commodities, maybe it's small caps here in the US, uh, you know, maybe it's, uh, um, if, if we have that, does that go hand in hand with rates somehow that we're starting to see the recessionary mindset start to build in and then go for growth? So that's how we build that. I'm going to give you 15 seconds on the other side. We also have an aggressive, um, I would call it equity strategy, which we can go long and short We have a core positioning of equities that are built on a growth— I don't want to call it a GARP, a growth at a reasonable price, but growth that has consistency, consistency of earnings and consistency of margin expansion, uh, good management, looking at ROEs and other factors. And then on top of it, looking at earnings and consistency. So combining all that, we have a quantitative screen, we go through the fundamentals, and then on the top that we have a technical side of it. That can utilize for opportunistic investing opportunities within the portfolio. So you asked and there it is.

I like what you said about auto rebalancing. I think we're similar. We like to concentrate on the best ideas. And if you're auto rebalancing every month or some time period, it seems to me that you're going to take off your winners a lot of the time and not let them run. Yeah, you know, the cycle— the market cycles are longer than that, than a month or 3 months.

Exactly.

So yeah, if you want to really take advantage of the best ideas, that seems like the worst possible approach. I would agree.

I would agree. I mean, there's some— there's some benefits in it to keep things at that same even keel of risk. I get that. But again, sometimes the— as you would talk, as you mentioned, I think is really important. Point you bring out is that market cycles are a little bit longer than that, and therefore we're really not getting a really good, uh, read on things by being so short-term minded in that setup, right? You know, in the fact that, you know, how much you're gonna scrape off the top? A quarter of a percent?

You know, exactly.

What does that— what does that even translate to with dollars, right? I mean, it doesn't make any sense.

Exactly. So, um, What, what's first, first level and second level thinking, Andrew, and, and kind of how do we use them and how does that fit into an investment investing framework?

So we talked about this at length on the last podcast. Uh, I think it was episode, I think it was 770 of The Disciplined Investor. By the way, uh, coming up this week is Danielle DiMartino Booth, a Fed insider. We've had her on and one of the, probably one of the first podcasts she ever did, I think probably was us way back when. Um, it was right after her book came out, I believe, and, uh, called Fed Up. She was a Fed insider, so she talks about that. But, uh, first level thinking is, uh, something like this. Uh, there's a headline that comes out that says that, um, you know, we're putting sanctions on Russia, and everybody hears that continually, that the sanctions are building and building. And what they would do theoretically is say, wow, that's really going to hurt the Russian economy. And wow, that's really going to kill their currency, right? Okay, well, all right, what they do is they'll go out and short the ruble somehow, or they'll do something that maybe, uh, is just very basic in line. Or, you know, you may say that, uh, there's going to be a war and, um, you know, that could be really good for X, and that's it. You know, you stop right there. You know, whatever the reactionary move is on a headline or a delve into the data and research, but yeah, 2 paragraphs in.

Okay, okay.

Second level is, okay, same, same setup, right? Same setup. There's, there's sanctions on Russia, uh, but what could Russia do in the face of all this to actually strengthen their situation by causing, for example, the, uh, requirement for all oil payments to be in rubles. Therefore, massive amount of money being transacted, and the ruble now at a 7-year high, right? First level thinking was all on the short side. Second level thinking was going behind and trying to understand. Another example: company— this is a really interesting example, very basic— company comes out with earnings and they, uh, miss earnings by 10 cents. Okay, uh, that's all you know. Company, uh, ABC Company misses our earnings, uh, by 10 cents and a little bit light on revenue, uh, as, uh, as compared to, to expectations. Okay, and, uh, they come out with, uh, guidance that's, let's say, is, um, even for what they expected, right? So the guidance for the year is the same. A little bit like, oh my God, they missed their earnings. Oh, this is terrible. First level thinking is let's sell it, let's get out of it. Second level thinking would be, you know, wait a minute, hold on a second, they missed a little bit and there's probably a lot going on with some headwinds with currencies right now. Where's the currency? What's happening? However, they did state that they are in fact going to make earnings for the year, at least in their estimation, which means that there may be some back half benefit to what's going on here and they think they'll pick this up. And actually what happens is the stock moves up 5%. So, and you can reverse this and again, very basic examples. But first level thinking is just, oh, there's a wall. Second level is, hey, there's a wall, but wow, there's a great opportunity for that wall to do this or that. It's kind of next level thinking through the process.

Do you think we're in kind of a first level thinking market right now? I mean, it seems like anything that happens, any news, the reaction is sell. We're seeing that in a lot of a lot of earnings reports, um, you know, they might guide down slightly, and it's just— there have been 40% down moves off a lot of these earnings reports. So is that what's going on there or something else at play?

Yeah, no, no, I think that everybody is all about right now that, oh my God, first of all, a lot of people, uh, you said just— you're just 40 here, so you really haven't seen the hellacious, right, impact of inflation. I was there. It's ugly, right? It leads to all sorts of other problems. And, uh, when you have a Fed that's being as aggressive as they are— and by the way, the Fed, here's first-level thinking: oh, oh, the Fed says that, uh, things are fine, that inflation is transitory. They change their mind. Okay, let's follow along. Now they say there's a little bit of inflation. Oh, wait a minute, inflation is entrenched and they're going to raise forever. 'Ah, okay, we're selling.' Now, first of all, the Fed was wrong twice, at least that we know, in that process. And if we actually look back at the Fed's history of moves, or I would say expectations, their history of analysis and, uh, predictions is god-awful. It's terrible. But yet we still believe them. Why do we believe that? Well, because we know they hold the purse strings, so that's something. To be said about that, right? So even if they're wrong about inflation being entrenched and they have to raise 75 basis points again, then another 50 basis points again, the fact is that's what they're doing, right? Whether they're wrong or not and they cause problems, or they're, you know, inflation is going to come down, is not the point. They are tightening financial conditions, right? First level thinking is that everything is bad, it's always going to be bad, it's linear, it's just— that's it. Second level thinking is, you know what, I got to be honest, the Target numbers that we saw and the Walmart numbers we saw and the Gap numbers that we saw recently with $40 billion of excess inventory, you know what that tells me? That's deflationary, right? And that looks— that's just only one, one little, one little $45 billion part of a deflationary. But we're going to see that sales are coming in. And then when we have a situation where the financial conditions are coming down, and then maybe, maybe more people are, are pinching their wallets a little bit more and holding on to their money a little bit more, those incentives or sales, as we call them, as we walk into the store, uh, with Walmart at something, $2.88, of course, because they're 88 cents, you know.

Yeah.

But what you're going to have is that they're going to have to be aggressive to clear that inventory because they made a big mistake for a lot of different reasons and very good reasons. They made a mistake. But they need to clear that. That is deflationary. They're also not going to make that mistake again twice. So now what's going to happen is they're going to buy less, and when they buy less, there's going to be a glut of excess that's being manufactured, therefore pushing down prices. First level thinking: oh my gosh, you know, Walmart, Target, very bad situation. Okay, uh, let's sell it. And Target is never going to come back from this, down 24%. Second level thing is, you know, it's a deflationary for the economy. Now I'm not talking about even about Target anymore, right? This is deflationary for the economy, uh, and let's see how this all plays out with other things down the road. So, you know, it's— it takes time to make itself known in the CPI numbers, the PPI numbers, and in the PCE numbers, but it will be known that this is happening.

So it sounds to me— correct me if I'm wrong— but it sounds to me that you're optimistic about the tide turning here in inflation, uh, in the near distant, not too distant future.

I think that the idea that the Fed is being as aggressive as they are, I think they're being overly aggressive. It's very rare that I've seen— and I don't know what the logic here is behind this— that we see a Fed that is actually tightening into a generic slowdown of stimulus, a war, a pandemic that continues on, and supply chain issues. I don't get it. I think they feel that they screwed up so badly they need to somehow save themselves because credibility, you know, at the end of the day, what is the market, right? The market is all about credibility. It's all about confidence. It's confidence. People losing confidence. They don't know what to do because the Fed seems to be so wrong. The current administration's a bunch of buffoons. They don't know how, you know, they think a 90-day gas tax, why are they doing, here's first-level thinking, okay? Wow, we're gonna get a 90-day gas tax holiday, huh? 15, 16 cents off our gas tax bill, that's gonna be great. Second-level thinking, you know what? 90 days butts up right against into the midterms, okay? So people are gonna get a tax break there possibly, but that does nothing for inflation because the fact is that people will continue to buy, thereby keeping demand up. If we have higher prices— nothing fix higher prices like higher prices, right? Higher prices bring down prices because people don't spend. So the fact is that when we look at this, it's a temporary stopgap, just like what they did with the Strategic Petroleum Reserves, which is the biggest stupidity I've ever seen. They released billions— millions of barrels trying to bring down fuel prices But wait a second, now they're going to buy 60 million barrels and they just made the announcement. And if I ever heard, hey, the government is going to be buying my product, what do you do? What is the first thing that companies do? They juice their prices.

Yeah, it's true.

Stupid thinking.

Um, yeah, it's interesting what you said about the Fed because it seems to me they don't, they don't have that much control over the inflation problem because as you said, there are so many other factors— supply chain, being one of them. And lack of refinery capacity has a lot to do with what's going on with oil— with gas prices. So to a certain degree, they have some control over the housing market and the stock market, which obviously there's been inflation in those— in those areas. Clearly they don't have—

but that's not what you want to bring down. You don't want to bring down stock prices. You don't want— well, you shouldn't want to. You shouldn't want to bring down— now, if they're excessive Fine, they need to— the frothing to come off. You want to bring down chicken prices, right?

Sure.

But you can't if there's a bird flu over that. If there's a bird flu that's culling millions of chickens, how does the Fed's increasing rates by 3% give you a better price on your chicken breast from Publix, right? It makes no sense. And these guys are trying to convince you that what they're doing is going to bring down inflation. What they need to do is hit hard at the core factors that are responsible for all this. And what they need to do is cut the Chinese tariffs. That was just Sure. Stupidity that they can't make a decision on this, and they need to stop spending. You can't spend to try to bring down inflation. Look at Turkey. Erdogan said, you know what, inflation can be solved by lowering rates. Have you seen Turkey's inflation lately? It's not even something you can, you can even imagine how high it is. It's ridiculous.

Sure, sure. Um, okay, let's shift gears a little bit. And, um, you know, fundamentals, it seems to be a big consideration for you, obviously, as you make investment decisions. And Let's talk a little bit about valuations. I think that's been a big topic of concern for investors out there. Valuations did get pretty high, especially in tech and a few other areas, retail being one. Sure. What's your take on valuations in this market? You know, is it looking favorable or are we still too high?

So the big question is if we're going to have an earnings recession right now, expectations, you know, we could talk about the big picture, right? Because every company has a different discussion. Every single company is a different discussion about, is this a fair valuation? So a lot of times you hear the talking heads talking about valuations and they look at, you know, forward multiples, what came from, you know, 23, 24 down to 15, 16, you know, and in a recession what happens is the expectations for earnings to go down is great. So therefore the multiples paid is lower. You could be down to 12, 13, 14. Well, you know, if you take the numbers right now, 2022, we're looking at $225 on the S&P 500, expecting 2023 at $2,244. That's down a little bit. It hasn't been taken down a lot. If you look at a 15x multiple, right in the right spot right now, if you take it down a little bit, um, to maybe a 15x, 14x, $3,200, $3,300 on the S&P. Um, if you go to, uh, the idea of this 17x, of course You play with these numbers all day long. Sure, we could play with these and start to— should be 17.25173. Ah, the number's right. Um, the problem is that everybody's expecting it to come down. We're talking ourselves into recession. We're talking ourselves into this because now is— everybody's talking about it. Everybody's taking every opportunity for every rally to start selling. Uh, from what I can see, companies still have a lot of strength. And yes, there are companies that were moving too fast, too quickly, too, too crazily without earnings, right? The idea of, oh, let's just keep expanding, who needs earnings, we'll make it one day, right? A Lyft or an Uber— talk about a bad business model.

Yeah, just earning cash, right?

I don't mind— listen, I don't mind you having no earnings for a couple of few years 2, 3 years in the incubation process of your business, right? You're building it. But once you get that product built, once you get the product built, you should start seeing at least some reasonable amounts of, of goal towards profitability. The line that should have scared the hell— that was talked about for a couple of years, uh, scared the hell out of people was, we have a path to profitability. You got to watch these, these catchphrases.

Right.

You know, the idea of transitory, uh, you know, or, um, inflation averaging, or any of the things they talk about. You know, like one of the most insane things right now is the Fed has a range of what their interest rates are, 1% to 1.25%. Who gets 1%? Who gets 1.25%? Just make it 1% or 1.25%. Just do away with it, right? So you have right now is a situation where, uh, I think earnings are a big question. There are companies that have come down dramatically. We talked about Target a moment ago. Look at the earnings multiple on that. It's like 11, whereas a Walmart and a Costco are in the 30s. You know, you look at other companies that have great earnings power, great balance sheets. No, they cannot necessarily go out and borrow as cheaply to do significant buybacks. They've done a tremendous amount of buybacks already. But the fact remains that I'm seeing companies left and right still to right now that haven't really seen a tremendous amount of breaks. And if in fact we can get over this hump and don't go into a necessarily recession, people don't start panicking, which is what will happen with housing prices. The first line is they put— they think, ah, I'm going to wait as long as possible. Wow, look at my house, it's worth $2 million. It was worth like $800,000 a week ago or something, you know, crazy, right? Uh, and they say, you know, I'm not gonna sell, I'm not gonna sell. Then like, wait, well, my neighbor just put their house up. Okay. I'm going to put my house up higher and wait. The neighbor drops their price by $50,000, panic sets in, I'm dropping my price by $150,000. And then all of a sudden the neighbor says, wait a second, he dropped his price too, I'm going to drop my price. And then we get the snowball effect. That's what happens. The cycle is not dead, it will never be dead. The economic cycle, the earnings cycle, the housing cycle, the emotional roller coaster is just well-impacted. Intact. But be aware that there's opportunities that come from all this. We got to get rid of the crap, those companies that would never make any money. They got to be just thrown out. A lot of the metaverse companies and these crazy tech companies, they're going to be hit. Stay with some of the companies that are making money, that have earnings consistency. And while you'll probably have a rocky road, I think valuations are getting to a point that's a little more intriguing. We've already gotten to the point mentally, I think, and a lot of analysts have already, and everybody it seems on TV, everybody, that oh my God, we're going into another hell and damnation, 40% drop on the S&P because that's the average what we did in the past, you know. But sure, at the same time, what if, what if we get inflation somewhat under control due to the fact that maybe oil prices come down, maybe there's more availability and refining that's going on. Or maybe the current administration gets wizened up a little bit and will open up some areas for that. Takes some time. Or maybe alternate fuels really do start working. We start, you know, thinking about lightening up some nuclear or going back to some coal just temporarily till we get through this stage. What if the war in Ukraine— I don't know, we thought it was going to last for 30 days. It's lasted this long now. Everybody thinks it's going to last forever like Afghanistan. Maybe it ends tomorrow. What happens with corn and wheat? Already, did you see the prices of soft ags dropping dramatically recently?

Sure.

Copper is going down sharply. So lumber has been cut in half. There's some things happening that are under the surface that you need to pay attention to.

Yeah, in a way we're sort of—

I'm optimistic but worried.

In a way we're sort of priced in for the ultimate highest inflation in a lot of these sectors.

[Speaker:TREY_LOCKERBIE] I agree. I agree with that.

[Speaker:BRAD_STONE] Like you said, if any of them improve, things could certainly get better. You alluded to this and something that we rail against at times as well as the financial press, how they make things difficult for investors. I think I understand their business model, you know, the more sensationalist they can be, the more negative they can be, the more eyeballs they're going to get. And so we understand that. How does it make things difficult for you as you work with, with investors? And, you know, how do you, how do you combat that?

You know, once we, once we start working with somebody, they, I think they understand because we do a lot of communication, whether through the podcast, daily writings. I think they understand where they get the information from. And we try to be very objective. Not. I mean, I still watch CNBC and I find it, uh, interesting just for the headlines and information that passes by, right? You got to wonder, those people that are on the— what they call the Power Lunch, right? The Power Lunch. They're on for hours. They're in prep time too. They're on for hours a day. How do they do any business? Like, how does that happen? How does that work? How does one of the guys— we'll go unnamed— who does a lot of options, who's on TV all the time, how is he trading options? And by the way, how does he have every single stock that's going up all the time?

He's always right somehow.

Always, always right. Very interesting. And buying options that expire in 3 days— who does that? I mean, it may work from time to time, I guess, you know.

I think it works because you buy the options and then you get the other people on TV to buy the options, right?

Exactly. So what you're doing is you're talking your book, and it's a great model just to juice your own stuff, right? That's what it's all about. Truth be known that many of the topics that we talk about on the various podcasts, you know, we try to really dig down onto the raw news and understand it and look at it from a different way than it's usually looked at. But, you know, right now a lot of the news people watching, it's, you know, you'll find if there's 10 pieces of information, 2 of them about Elon Musk, one of them is about the Fed, one of them is about the war in Ukraine, and a mishmash of other stuff. Not a lot of really good information flowing right now, so you have to look at the raw information, you know, look at what companies are doing, look what companies are saying. If they are, uh, financial media, they've had their day. Uh, Bloomberg is still a very good channel to watch in terms of news, and Reuters, if you get the app, it's a great app. I think they're, they're, they have really good piece, good information there. But other than that, I don't really have a lot of time for them. I find it to be more You know, you have guys on there that talk stocks all day long, but the real business is mutual funds. How does that work?

Right.

I don't understand. I agree.

Yeah, they put all their, they put all their clients in ETFs, but then they're talking stocks. Doesn't make a lot of sense to me.

Doesn't make any sense.

Um, wow, interesting. Um, kind of related to that, I, we talked yesterday, um, The word capitulation came up. And capitulation, capitulation.

You gotta say it like Sebastian Montesquieu, I think his name is, you know, the comedian. Yeah, like he's an Italian, a New York Italian. You'd say, gotta talk to you about capitulation. Let's talk about capitulation here, shall we?

Um, what's your take on capitulation? Um, do we have to have it before we can, uh, move higher, or, or is it just kind of another buzzword?

They say we do. We have to capitulate, don't we? We have to capitulate, right? We have to have a capitulatory situation in order to make sure that we hit a bottom. We gotta have the VIX at above 38. I don't know who says that, but okay. We gotta have everybody saying, the hell with it, I'm done. We gotta get rid of all the sellers. There's some truth to that a little bit, but did we do that already? I mean, Have you seen Zoom, Peloton? Have you seen some of these names? Just because we're not totally destroying and throwing out Apple because we really— people realize that maybe there's some opportunity. Maybe in yesteryear where people got their information a day late because they'd have to read the newspapers, either nightly news or, you know, 10:10 news in New York on the tens. You got your, uh, you know, it was a— let me see, it was 20, 20 and, and It was 20 minutes after the hour and 10 minutes to the hour on the half hour. You'd get your ding, ding, ding, ding, ding, ding, ding, hey, and it's the headline news of business and 10/10 Winds news. And what would happen is that you'd get your news foreign and not very informational, but you get it the next day. And people would be like, oh my God, the hell with this. I'm calling my broker in the morning because you can't sleep all night. I'm calling my broker in the morning. I'm telling him to sell everything. Well, now information flows 24/7. It's right there all the time for anybody, uh, very easily without any boundaries, borders, or, you know, it's just, it's there, right?

It's there.

So maybe they can make better decisions. And this whole idea of capitulation where people are just, you know, freaking out isn't necessarily going to happen because they have better understanding. Maybe the financial and, uh, maybe we've done a really good job of education. Maybe financial literacy that has been a real goal in, in, in a lot of areas of the education, uh, foundations have, has really kicked in here. And people understanding that, you know what, maybe I don't want to throw out everything, but I'm getting rid of the crap. Maybe that's happened because you can't get a bid in a lot of these names. There may be a great opportunity in Zoom or in DocuSign or in Peloton. Maybe somebody's going to buy Peloton. Maybe, right? Maybe not. I'm not saying it's good. I'm not saying I'm bullish on any of these necessarily, but I'm just saying that maybe we've gotten to a point that we did throw out a lot of stuff and we got a VIX at 35. But okay, maybe some modern-day VIX, we don't need to see an 82. Listen, the world was ending, we're all dying in 3 to 5 days in March of 2020, and the VIX went to 82. So that's your high watermark for the end of the world as we know it, as sung by REM, right?

Right.

82 is the end of the world. So if we don't have an end of the world and we're still now feeling like, hey, you know what, we're still feeling the, the getting out of underneath the pandemic. I don't know how long you were locked up for, and I'm in Florida, so that's not very long.

Yeah, not very long.

Uh, so where are you at? Where are you located?

I'm in Illinois, so a long time.

Yeah, a long time. I was, you know, it was people like, uh, you know, we're locked up, I'm like, wow, we were, we had 3 weeks, it was rough. You know? So, but yeah, so you look at people still of, I need to get out, I want to do, or I had a near-death experience, or I was locked down, never again. Oh my God, all the things I waited for in life, what the hell am I waiting for? I mean, that's going to last. That's like what happened in the Roaring '20s, right?

Exactly.

I think that mindset is very pervasive, and a lot of people are going to continue on with that. And think, you know what, if I have the opportunity to do it, I don't know what's going to happen tomorrow. Is all of a sudden this monkeypox thing going to all of a sudden start attacking? I don't know. So you know what, in between the idea that at least that week I'm free, I'm going. That's what I think a lot of people are doing. And I think that, you know, when you look at, um, the current environment, it's much different. And, and and maybe we don't have to capitulate. Maybe we do, I don't know. But the idea that they come up with this and all of a sudden they all start— everybody's talking about it now, right? Everybody's talking about the capitulation. I don't see it. It's been very orderly. I don't know, a drop of 35% is not the most orderly thing I've ever heard of on the NASDAQ.

And what you're kind of alluding to is, is this concept— is it a stock market or is it a market of stocks, right? You mentioned a number of the names, Zoom, DocuSign, Roku. There's a lot of them that have gone down 70% and 80%. So we've been saying for 6 months, this has been a bear market. I think a lot of people are just realizing it now because they may have been index investing or what have you, and they're finally realizing it. But we've seen bear markets in quite a few of these names for a long time now.

Right. Well, a bear market, by the way, is another financial media moniker.

Sure.

What is it? Well, it's defined as a 20% drop. Okay, hold on a second. My definition: you don't need that 20% drop when you're seeing 3% drops and 4% ups in a day and that kind of volatility, and then elevated VIX and things of that nature, and stocks just like all of a sudden like, what happened to that one? That one's bad. And Oh man, they're taking that one to the woodshed. That's a bear market. That's what it is. You know, it doesn't have to be this named thing right now. Correction, I'll go with that. You know, it's kind of, hey, we're in corrective territory, you know, 10%, whatever. You kind of— that's something. Uh, but this whole other idea that, okay, well, it's a bear market now, and that means, right, once you cross that 20% threshold, then yeah, this is gonna happen.

Finally can declare it, right?

Yeah. Oh, what's gonna happen now? Well, it's a bear market now and you need to really lighten up. I'm like, What now? I need to lighten up, you know? So, right, again, you got to pay less attention to, uh, Michael Cavall would talk to you about this, you know, trend following. Pay less attention to the words, the media, and pay more attention to price.

Exactly. I like it.

And fundamentals for that matter, if you're on the other side.

Sure. Yeah. And the, uh, relationship between the two is what we're really after, right? Between price and fundamentals.

Yep.

And then finally, I wanted to talk to you a little bit about fixed income. I think this is something that, especially for folks that are near retirement or in retirement, this has been one of the most distressing parts of all this in the market kind of correction here is that, you know, we expect our fixed income investments to hold up strong, especially when, when stocks fall, we expect fixed income to perform, but it has not been that at all. I think it's been only like 4 out of 100 years or something like that where stocks and bonds have fallen. So unfortunately we're in one of those, one of those moments. So how are you looking at fixed income right now and how can investors respond to the market as it is?

So you remember we had, we had a dozen years, well, lots of years, a dozen at least of stocks and bonds working in unison also, but in the direction that we like if you're bullish, right? So rates were coming down, rates were coming down, stocks were going up, rates were coming down, coming down. Now we have the opposite. Again, a lot of people don't even know what that looks like. The fact is that the, the problem has been a skew event that we've seen, which is the, the, the velocity of the change has been dramatic. That's what's been the problem. The, the absolute change, if you would have done it over a longer period of time, it's like the frog boiling in the pot versus jumping out. You know, you put a frog in a warm bath, turn up the heat, kind of sits there, and eventually you have frog soup, right? So things are okay. You have— not okay, not okay for the frog, by the way. But if you take a frog and throw them in a pot of boiling water, it jumps right out. And that's what's happened to investors. You crank up the volume on rates and investors are like, I'm out of here. And now that just does a big number. And the Fed is very happy that investors did a lot of the work for them. However, the problem you have right now is that there was no really good place to hide. Short duration, fine. Maybe floating rate did okay. Cash, that was good. That was a good one. That was fine. Wasn't yielding anything. Just, we actually moved a very large chunk of money of our cash positioning to a money market, purchase money market. We do business through Schwab and TD Ameritrade and others, but we moved a chunk of it for clients above a certain threshold to a 1% yielding money market. 1%! Now you may say, what the hell is 1%? Well, it's better than 0.01%.

It's unheard of for, in the last 10 years.

Yeah, and that's a Treasury-backed money market. So I'll take that, you know, and, you know, looking for areas to continually shorten duration and at the same time, you know, milk as much as we can with higher quality as best as possible. But again, there was really no place to hide in the area of fixed income. However, now is a time when we're actually thinking about, you know, wow, it makes a lot of sense if we can maybe a little bit further down the road from here to actually increase the fixed income again to a position that maybe looks to— from our cash position, right? From a position that we can get a better yield if in fact we see a stabilization. Still not there yet. You know, this 3.2 to 2.8 range is a wide range, by the way, for the 10-year and for bonds.

Sure.

But it's something that, you know, is not— we don't really trade fixed income. We like it for certain components and areas. The bigger issue is what's happening with emerging markets, with the dollar. That's something that you need to really be aware of in the area of fixed income and how that's going to impact things. I still am a believer that we want to probably roll into some of the, to a degree, emerging markets bonds. I think that if the dollar does start to roll down from multi-year highs against the yen, against the— against anything, pretty much. You have an opportunity in emerging market bonds to make some money.

I think it's interesting because as you sort of mentioned earlier, the Fed is happy that investors have done a lot of the work for them. I guess a lot of that is selling bonds and we've gotten to 3.5% on the 10-year, I think last week at some point. I do think investors are starting to see opportunity there, especially with all the volatility. 3.5% guaranteed seems a lot more attractive.

Sure.

That's on the 10-year volatility.

Yeah, I mean, don't get much more by going out the yield curve. Um, but yeah, that, that there is opportunity. That's why that's brought down. But I think what's really happening is the reality is hitting in. They were seeing PMI soften. We're seeing inflation definitely peaking. That will bring down things. We're seeing the reality of the, the fiscal, uh, financial conditions really tightening very dramatically, and the Fed going to do more. And then even with the Fed talking about a recession, now you start talking about that and you're like, well, well What's going to happen there? Well, probably through 2022, the Fed is going to raise just because they're committed to do so. And they got to experiment because they experimented before. They'll see what happens. Worst comes to worst, they'll pull it back a little bit. I think 2023 is going to be a no-touch for rate hikes and possibly even looking to start talking up the idea of moderating interest rate hikes.

Yeah, it's interesting. Or maybe follow the eurodollars, but there's been an inversion now. The Dec '22 is higher than the Jan '23, so I guess that implies some cuts in 2023. So that's interesting.

Is that the TED spread you're talking about?

Yeah, just the Eurodollar spreads, like the calendar spread on Eurodollars.

Right. Yeah.

So it's interesting. I think the market expects this tightening cycle not to go on forever.

I don't think it can. Again, you have a war, you have a supply chain, you have China locking down Macau now. Beijing. And right, who knows where this all goes. And, uh, you know, again, monkeypox, you have that as well. It's just a lot of problems, you know. You're going to hit a lot of recessionary issues. Look what's going on with inflation in Europe. Germany is in a— is an emergency situation with their power as Russia is cutting them off. They restart the coal, and the LNG plant that we were shipping liquefied natural gas over is— was on fire. I mean, of course, I mean, yeah, you can't— you can't have a smooth operation, it seems, right?

Everything, everything all at once, right?

All at once. All at once.

Well, when you reach peak negativity, that's probably the best opportunity.

That's correct. Blood in the streets to a thing. And of course, you got to watch for that capitulation.

So as we, as we wrap it up here, Andrew, really enjoyed the conversation. Kind of where do you, where do you see things going for '22, '23, '24 and beyond? What, what do you like and, you know, what should investors avoid?

So, you know, we talk about first, first level thinking, second level thinking. Uh, current administration is at a fifth level of thinking. Uh, they're not thinking at all. They're, they're, they're just in survival mode. They just do things to try to be nice, which is fine. I'm all in favor of being nice. And by the way, for all of you out there that are throwing like oranges and tomatoes at the screen, I'm an equal opportunity hater. Uh, and commenter on stupidity in any administration, Republican or Democrat or whatever, it doesn't matter. But these guys are, from the get-go, they did some things that sounded okay, but they're doing some things that are really stupid right now. What that is going to do is cost them the midterms, probably. And that's actually good for markets, because when we have a House divided, it's actually a good thing. When we have the inability to get anything done, which is kind of where we are anyway right now because of the stupidity factor, but the true inability because we have, uh, You know, the not a lock on one side or the other. The fact is that that's actually much better for markets. It's even better when the Congress is out of session, by the way, when they're not doing anything. It's really good. There is some studies on that. But in— with lack of that, with just the ability to have a situation where we have a House divided, that's actually good. So I think that's going to be a big driver of opportunity. Again, I'm not trying to be too bullish here, but I just think it's going to be a driver. It's going to change the format. I think there's a lack of confidence right now because of what's going on. And that will bring back at least— well, it may not bring back confidence, but it may remove the lack of confidence, if that makes sense.

Sure.

Back to neutral.

Okay. And are there any particular sectors that you like or asset classes that you really like?

I think that we need to start thinking about some of the overdone areas in retail to a degree. Don't shoot the messenger here. Real estate, I think, has a ways to come down. Technology, I think you need to be picky and find the ones that are making good money and have good balance sheets.

Sure.

Um, you know, uh, I, I'm not really going to pinpoint right now, to be honest with you.

I—

it's so messy right now that it's more of, you know, I have some names that I like. You know, when I start looking at a company like Crocs again, maybe, that has just been obliterated with the rising cost of materials and Maybe the consumer spending issues. Interesting. Would I start looking at, you know, a company like maybe the one of the survivors of this whole metaverse thing, like a Roblox, maybe? You know, start thumbing around that. Some of the, even though the heavily debt-laden cruise lines that have just recently, as of last week, hit pandemic-level lows. Did you know that? The cruise ships were down to the pandemic-level lows.

Right.

Wow. And supposedly they're booked. Now diesel fuel is not helping the cost. You have diesel fuel come down. So if you think fuel is coming down, you got the airlines who may have hedged, you got the, the, um, uh, and what about some of the casinos? You know, Wynn is getting killed, uh, Las Vegas Sands as well when they close down Macau. What if that all resolves itself? I mean, you're looking for resolution right now. Car companies, you know, Ford, interesting, has a good dividend going to the electric, just has a massive pension obligation. Big problem there. Um, you know, so there's a lot of one-offs out there. I still think, uh, maintaining a decent diversification right now. We're actually thinking about— I know I talked earlier about increasing our fixed income, um, positioning, but just, uh, that's with the cash and that will be a second stage. But we're actually looking to increase our equity exposure now because we've been really light for our global allocations.

Yeah, I heard, I heard from David Tepper last week. He said right now is the time not to lose money and that's not the time to make money. So I think there's some truth to that. Um, I, I'm with you. I think there's some, uh, green shoots on the horizon here and, um, clouds parting. It's, it may be not tomorrow, but it may be in a few months. So from my point of view, it's time to sort of make that shopping list and, um, It's funny you mentioned Crocs. That's one I was caught up in, unfortunately, on the downside. But yeah, I do. I agree. I think it's a really interesting company. But yeah, I think it's time to make a shopping list of those type of businesses and hopefully take advantage when the selling does finally stop. I think we're in the later, later innings, not the earlier innings.

So watch for the basing. Watch the stocks for their basing pattern, even in the face of a bad market. You know, a few percent here or there, it's going to happen. But look for those basing patterns and, and try to figure out who has actually got to the point where they're just not selling it off anymore. It doesn't mean it's not possible that it won't sell off anymore, but those— you, you could tell, right? You got the mountains that come in on a chart to come down, and then all of a sudden maybe you have a little bit of basing. It goes up a little bit, comes back down, but then you start seeing just like less and less movement in a range, right? So you get this consolidation. That's a basing pattern. That's something to watch for. In the reverse. Because what you first have is, uh, like we've seen recently, short squeezes. That'll be the first sign that something is changing the markets, right? And then the question is, when the short squeeze become a reality of a rally, we're looking for consolidation, not capitulation. Not the capitulation, we want the consolidation. That's correct.

I like it. I, I've— we have— I keep a book of about 50 or 60 charts every week that we, uh, we, we, uh, update each week and Those sideways patterns are looking really good right now.

Yeah, that's good. Yeah, I'll take it. I'll take it. Give me sideways. Excellent. Yeah.

All right, Andrew. Well, we really enjoyed the conversation. Where can folks find you and your podcast?

So you can go over to, well, any podcast repository or app. You can find it on Spotify, on Amazon Podcasts. You can find it on, of course, Apple or anywhere, anywhere that's out there. You can also go over to thedisciplinedinvestor.com. There's links there to get the access to the various shows, of course, and all the show notes, which has a lot of good information, as well as the various strategies that we manage and how it works and understanding about looking at the iceberg, not only at the tip, but underneath the water as well to understand what your investments are doing. So thedisciplinedinvestor.com.

All right, everyone, check it, check that out, thedisciplinedinvestor.com. Andrew, thank you so much for being with us. And, uh, you know, happy investing.

All right, Brian, great going. Keep it up. Thank you.

Thank you.