Ep12. Rafael Ortega: Using Return Stacking To Build an All-Terrain Portfolio

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This is what I've been looking for.
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Right?
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I can create a portfolio.
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I can finally create a portfolio that is truly
diversified, is using everything that we know
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we can use.
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So that means not only assets, but also
strategies.
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We can try to balance those things out.
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It's going to be a great long term, sharp ratio
portfolio, it's going be stable and it's going
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be all weather.
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And then we can get it to the volatility that
people actually want.
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And if they want an 8% volatility portfolio, we
can do that without balance.
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If you want a 12% volatility portfolio, we can
now do that, and it's not losing balance,
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right?
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Hello and welcome to the Get Stacked Investment
Podcast, where we delve into the exciting new
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world of return stacking.
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Join us as we break down complex financial
concepts into accessible insights, speak with
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leading experts in the space, and analyze real
world applications for return stacking.
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GetStacked is here to help you break out of the
traditional portfolio construction mold and get
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you to start thinking differently about the
path to successful investment.
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Corey Hofstein is the co founder and chief
investment officer of Newfound Research, and
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Rodrigo Gordillo is the president and portfolio
manager of Resolve Asset Management Global.
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Due to industry regulation, we will not discuss
any funds managed or sub advised by these firms
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on the podcast.
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All opinions expressed by podcast participants
are solely their own opinion and do not reflect
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the opinion of neither Newfound Research or
Resolve Asset Management Global.
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This podcast is for information purposes only
and should not be relied upon as a basis for
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investment decisions.
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Clients of these firms may maintain positions
and securities discussed in this podcast.
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For more information, visit returnstack.com.
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Hello, and welcome everybody to another episode
of the Get Stacked Investment Podcast.
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Today, I have a very special guest, a friend of
mine and colleague, Rafael Ortega, which is a
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Spanish investor, not from Latin America, but
from Spain.
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And he is currently a senior investment fund
manager at Anbank Wealth Management, where he
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manages a bunch of portfolios, including
permanent portfolio ideas, all terrain, return
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stacking, and kind of what he calls the off
road investor approach, which are custom built
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portfolios for institutions and high net worth
individuals.
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Yeah, this is a interview that I've been
wanting to have for a while now.
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I'm also been doing his podcast in Spanish
called The Off Road Investor for over a year
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now, right?
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A year and a half, I think.
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Yeah.
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And I struggle a little bit with the
nomenclature in Spanish when it comes to our
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industry, and I'm sure Rafa is gonna go through
the same.
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It's my turn to make him suffer a little bit
and do it in English, but I figured that, yeah,
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I figured that it would be a great time to
bring them on board because I think broadly
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speaking, when we talk about return stacking
and the way that we've really garnered
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attention is how do people stack returns above
a sixty forty portfolio or an eighty twenty
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portfolio or a % equity plus portfolio.
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But, and then you get into, okay, what else can
we do with return stacking?
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Maybe there's a more balanced approach to to
building a portfolio when you get to an ultra
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rain approach.
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But Rafa actually came the other way around.
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He started when I met him anyway, he's gonna
tell us his background.
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But when I met him, he actually had already
started thinking about, you know, the concept
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of a balanced portfolio and then built himself
into all terrain.
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And now he's thinking about in the latest
iterations of doing sixty, forty plus or a
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hundred plus.
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So yes, he is a fantastic partner.
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He, he actually has taken the return stack
portfolio solutions moniker and, and on our
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behalf started creating the brand in Spain.
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So we'll talk a little bit about that.
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But before I get into all of the fun stuff, I
do want the audience to get a bit of a
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background on you and how you started as an
engineer and ended up in return stacking
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portfolio solutions.
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So maybe give us a broad overview of your
history.
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Okay.
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Well, first of all, sorry for my English.
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I I all the investing information I consume is
in English, but then I never speak about
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investing in English.
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So I'm sure some of the words are not gonna
come and maybe Rodillo can can help.
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As I've been helping him in Spanish.
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The thing is I started not as an investor.
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Right?
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I did engineering.
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I thought I was gonna be some sort of
consultant and I actually started in a, you
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know, one of those big consultancy firms as an
analyst.
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But that lasted only a couple of months because
then I was studying and living in Madrid.
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And my family is from Valencia, that's another
city in the East Of Spain.
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And my family used to run, my mother used to
run a small business.
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And then she was sick and went on a sort of a
depression.
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The business was in a crisis.
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And I felt like the prodigal son that had to
come back and do something about that.
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I have a younger brother.
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He was still studying.
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And my father had recently passed away.
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So we were going through a huge family crisis.
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And we solved it eventually, and then at that
point I was looking at, you know, like any
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family and any business.
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What do you do when you make more than you own,
than you consume?
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So, what you, what do we do with those savings?
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But obviously, I was, I was youngish, like 20.
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But I was looking at you know family money.
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I I hadn't really made that.
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Also something that had taken a couple
generations to build.
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I started looking online on like what do you do
when you invest?
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And everything I found was, you know, trading
or oddly enough in Spain, there's a huge value
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investing culture.
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So, I got into, you know, the Warren Buffets
and Benjamin Rathams and all of that.
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I also, had a look at what had been done in the
past and my mother used to work with a local
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bank and I've very, very fast I found that most
commercial banks well, first of all, in Spain,
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until now, most people just relied on their
state pension.
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So, you know, financial literacy is very, very
low.
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And only the newer generations are starting to
see that they will need to have some savings
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right for the future.
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So basically everyone worked with their
commercial bank, which just gives you closet
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indexed funds that are expensive.
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So you know mediocre strategy is expensive, but
it's not going to take you anywhere.
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And I just couldn't find a solution that made
sense for me.
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Right?
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When I looked at a value investor, they would
say they have this great marketing things.
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Value is what you get, but price is just what
you pay.
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That sounds great.
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But if you've just gone through a crisis like I
have just done, and if your savings are 50%
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down, it doesn't matter that you me that the
value isn't down.
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The price is what matters if when you need your
savings.
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People, or at least my understanding of this,
most people need to balance out participating
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and protecting.
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You need both of those.
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And that to me is what makes sense to almost
everyone.
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And I started looking at market history and
other strategies and I just didn't see it.
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I saw those 50% drawdowns and then even if you
have a theoretically balanced portfolio with
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stocks and bonds, those also go through huge
drawdowns when there's inflation.
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And I just looked around and I couldn't see
anything that I I could believe in, right?
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Or that I I I like.
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And I don't know.
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Like I just don't know how.
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I found Harry Brown and the permanent portfolio
at the end.
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And you don't remember?
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I I don't I don't know where I saw it the first
time, right?
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I just I must have read up blog post or
something.
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And that just clicked.
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I read it and I thought, okay, this makes so
much sense to me.
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And for those who don't know, basically the
environment portfolio idea is that we're going
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to have economic cycles.
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We're terribly bad at anticipating the next
step of the cycle, or even if we know what's
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going to happen, we have to also have the
timing right.
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It's just too difficult.
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But at the same time, we do know that different
assets, and then eventually I found that
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different strategies also have this behavior,
they behave in different ways in different
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environments.
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And that is something you can believe in.
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We know that's going to happen eventually.
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It's not in the short term, but in the medium
term that eventually happens.
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So you can map those, and the simplest version
of this would be a portfolio that has something
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that works for growth, something that works for
deflation, something that works for inflation,
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and then something that will work in a
recession.
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Brown basically had stocks, bonds, gold, and
cash or invested cash.
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And so you have three assets that are high
volatility, that's 75% of the portfolio.
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They have low correlation between them.
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And then you have a buffer which essentially is
delevering that portfolio for you.
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So so you have a conservative approach to to
investing.
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That has low volatility, you know, pretty good
returns.
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It works in different market scenarios.
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I think what you're showing here is like, yeah,
the different asset classes and what do we
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expect, right?
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From but not only what do we expect, like, what
do we know is going to happen, right?
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The theory.
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Yeah, yeah, that's the thing, that's a kind of
the key thing here, right?
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So, so what I'm showing here for those that
aren't watching and listening is just the
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performance of some periods where we've seen
inflationary stagnation, inflationary boom,
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deflationary bust and disinflationary boom,
which are just fancy names for when the
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intersection between high or low inflation
shocks and positive or negative inflation
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shocks happen.
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And you can see clearly.
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Right?
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This is, think the big unlock when you get into
this world is okay, everybody wants to just do
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better, you know, Warren Buffett value
investing and throw in a little bonds just to
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reduce risk.
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But the reality is that a lot of retirees in
the last few years that put a % of their money
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in bonds have realized that even bonds have
risk.
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And you can, and you don't have to have a lived
experience that tells you that for them to
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modify your behavior.
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You know, before we saw the 2022 inflation
shocks, you and I had already come to the
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conclusion that high inflation would be bad for
both equities and bonds at the same time.
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But in this chart here just shows, you know,
inflationary stagnation, what you generally saw
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historically was commodities, gold.
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And then in this case, trend following, we'll
get to that.
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But Harry Brown is more traditional assets,
right?
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More gold than anything.
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And then inflationary boom, which is high
inflation accelerating growth, you know,
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everything kind of floats up, but the biggest
winners are commodities and gold,
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disinflationary boom, which is what our lived
experience and most investors lived experience
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has spent most of their time on is high
accelerating growth shocks and falling
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inflation.
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And that means, of course, that equities and
bonds are gonna do well.
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And I think that's why the 6040 has become so
prominent.
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And deflationary bust is when you have a bear
market and and and a negative growth shock and
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slowing growth without inflation, right?
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So that's generally equities down, commodities
down, and then you see bonds really picking up
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the baton trend following and commodities
sorry, and gold bonds and trend following
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getting hurt.
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So that's when you understand that framework,
you're like, oh, okay.
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We need to think about my family's in your
case, right, it was my family's wealth going
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forward.
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And Harry Brown basically from what I
understand it was fairly simple.
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In in the original.
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Yes.
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Yes.
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A
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quarter quarter cash gold.
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Right?
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It seems I mean it's it's kind of so simple
that it looks silly, but if you look at it from
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what I know of now, actually the three assets
are kind of risk parity equalized, because it's
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gold, stocks and long term bonds.
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Those kind of have the same volatility.
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So you're actually doing a risk parity from
those three.
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And then the other one is just a buffer.
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It's just deleveraging the portfolio so we have
the conservative approach because he was trying
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to find a solution that anyone could do and
that it made sense for almost anyone.
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So the conservative approach to that made a lot
of sense.
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Also, can go on to that a little later, right?
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But if you only have stocks, bonds and gold,
there are still some times where those three
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can go down, especially through crisis and And
so we wanted something that would protect you
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even then, right?
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Something that was truly altering.
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And when I found that part-
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Can just pause there for one second?
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One thing that I think few people understand is
when we say bonds, most people think about that
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aggregate bond index, aggregate bond portfolio
that has a, you know, generally speaking has a
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duration of six, seven years, volatility
profile of four or 5%.
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And the key behind balance is making sure that
the maniacs aren't taking over the asylum,
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right?
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That you don't want equities to be four times
the volatility of your bond portfolio.
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And there's two ways of doing that leverage,
which we'll talk about in a sec, but more
225
00:14:21,985 --> 00:14:27,424
importantly here, if you go out the curve and
the longer the duration, the more the
226
00:14:27,424 --> 00:14:31,799
volatility, Therefore, the bigger the impact
when you need it the most and the bigger the
227
00:14:31,799 --> 00:14:33,080
impact when you're getting hurt.
228
00:14:33,080 --> 00:14:36,919
But it's if it's balance and risk across
equities and bonds, that's the way to do it.
229
00:14:36,919 --> 00:14:43,240
So when we talk about bonds here, we're really
talking about luxury.
230
00:14:44,174 --> 00:14:44,575
Thoughts.
231
00:14:44,575 --> 00:14:44,894
Right?
232
00:14:44,894 --> 00:14:46,495
Not Which nobody does.
233
00:14:46,495 --> 00:14:46,735
Right?
234
00:14:46,735 --> 00:14:49,214
Because it's too volatile because bonds are
supposed to be safe.
235
00:14:49,214 --> 00:14:50,735
They're not supposed to be volatile.
236
00:14:50,735 --> 00:14:52,414
And it's so funny because
237
00:14:52,575 --> 00:14:54,495
So I started by whatever you want.
238
00:14:54,495 --> 00:14:54,894
Exactly.
239
00:14:54,894 --> 00:15:00,470
So I started my my, like, own personal
portfolio, like, for for the company, the
240
00:15:00,470 --> 00:15:04,070
business, for the family, and it was a
permanent portfolio.
241
00:15:04,070 --> 00:15:10,710
And I started talking about the permanent
portfolio with different banks because I was
242
00:15:10,710 --> 00:15:14,230
trying to get those long term bonds and that
gold position.
243
00:15:14,230 --> 00:15:15,590
It was almost impossible.
244
00:15:15,695 --> 00:15:16,095
Right?
245
00:15:16,095 --> 00:15:18,575
And everyone let me like, what?
246
00:15:18,575 --> 00:15:20,654
Like, 25% of like, what?
247
00:15:20,894 --> 00:15:23,934
Like, they they couldn't understand.
248
00:15:24,254 --> 00:15:28,014
And I also I I started looking online and
finding more people.
249
00:15:28,014 --> 00:15:34,179
Eventually, I found you guys and I found other
other all weather solutions, or altering
250
00:15:34,179 --> 00:15:34,980
solutions.
251
00:15:35,460 --> 00:15:43,860
But at that point in time, was my first moment
where, as we've said before, once you see it,
252
00:15:43,860 --> 00:15:45,539
you just can't unsee it.
253
00:15:46,745 --> 00:15:56,424
And I noticed that no one in Spain or in the
Spanish internet world was actually talking
254
00:15:56,424 --> 00:15:57,065
about this.
255
00:15:57,065 --> 00:15:58,345
Absolutely no one.
256
00:15:58,345 --> 00:16:00,985
And even in the Anglosphere, as I like to call
it.
257
00:16:01,460 --> 00:16:05,379
You know, though, you can find people talking
about portfolio ideas and all weather.
258
00:16:05,379 --> 00:16:06,980
It's it's there.
259
00:16:06,980 --> 00:16:08,500
There's more people doing it.
260
00:16:08,500 --> 00:16:11,300
And there's obviously like you guys and more
people doing it.
261
00:16:13,139 --> 00:16:16,820
But it's not that, you know, it's not the the
the standard.
262
00:16:16,955 --> 00:16:17,355
Right?
263
00:16:17,355 --> 00:16:19,274
It's more of a niche thing.
264
00:16:21,274 --> 00:16:24,634
In Spain or in Spanish, absolutely no one was
talking about this.
265
00:16:24,634 --> 00:16:28,075
So that sent me through double bath.
266
00:16:28,235 --> 00:16:31,910
One of, okay, there's a business opportunity
here.
267
00:16:32,070 --> 00:16:34,549
So this makes a lot of sense.
268
00:16:34,549 --> 00:16:35,429
It makes sense for me.
269
00:16:35,429 --> 00:16:38,149
There's obviously more people that it makes
sense for.
270
00:16:38,149 --> 00:16:43,509
I need to learn more about this and get my
license and become an advisor and start
271
00:16:43,509 --> 00:16:44,230
preaching this.
272
00:16:45,134 --> 00:16:52,495
And then on the other side, I need to keep
learning more and more about how to implement
273
00:16:52,495 --> 00:16:54,654
these strategies better and better.
274
00:16:54,654 --> 00:16:55,774
And that's how I found you guys.
275
00:16:55,774 --> 00:16:58,610
I found MedFavor with the Trinity approach.
276
00:16:58,610 --> 00:16:59,410
I Corey.
277
00:17:00,289 --> 00:17:07,970
I found Ray Dalio and all of his pupils and all
of those Risperity ideas.
278
00:17:07,970 --> 00:17:15,994
So I spent the last decade and a half breathing
and trying to see what people were doing in
279
00:17:15,994 --> 00:17:23,355
this space, and then trying to get my way
through compliance teams and Spanish
280
00:17:23,355 --> 00:17:31,009
institutions to try to get these things back so
that investors in Spain can actually have a
281
00:17:31,009 --> 00:17:32,369
portfolio that does this.
282
00:17:32,769 --> 00:17:33,170
Yeah.
283
00:17:33,170 --> 00:17:35,650
Being a trailblazer is not always fun.
284
00:17:35,650 --> 00:17:36,210
Yeah.
285
00:17:38,130 --> 00:17:43,875
Along the way, I I built, quite a community of
people that believe in this, right?
286
00:17:43,875 --> 00:17:47,715
So when as you were saying, right?
287
00:17:47,715 --> 00:17:53,394
When you came up with Alder A Vapor or return
stacking, anything I see, I started learning
288
00:17:53,394 --> 00:17:54,275
about trend following.
289
00:17:54,609 --> 00:18:01,250
Anything I see, I just see it from this
structural diversification standpoint.
290
00:18:01,250 --> 00:18:05,009
I just can't see it any other way.
291
00:18:07,785 --> 00:18:08,904
Give you credit.
292
00:18:09,144 --> 00:18:15,305
I mean, you are I I I always tell people that
you're the Corey Hastin of the Spanish
293
00:18:15,305 --> 00:18:20,265
investment space because when you say you build
the community, you really are an incredible
294
00:18:20,265 --> 00:18:22,265
writer and synthesizer of information.
295
00:18:22,309 --> 00:18:22,789
Right.
296
00:18:22,950 --> 00:18:25,990
Even the stuff that we've written that we think
we synthesize.
297
00:18:25,990 --> 00:18:31,029
When when you take your take, you when you have
your take and your go, it is so much easier to
298
00:18:31,029 --> 00:18:31,990
to understand.
299
00:18:31,990 --> 00:18:37,974
So, kudos and credits to you for being able to
do that for a community that has literally
300
00:18:38,054 --> 00:18:39,974
never heard of most of this stuff.
301
00:18:39,974 --> 00:18:45,335
At least in The US, you did it's wide enough in
Canada that you can reach some people.
302
00:18:45,335 --> 00:18:47,014
I mean, you're starting from scratch.
303
00:18:47,015 --> 00:18:50,375
Every single person you're talking to, like,
has never heard about this.
304
00:18:50,369 --> 00:18:50,690
Right?
305
00:18:50,690 --> 00:18:50,930
Never.
306
00:18:50,930 --> 00:18:55,650
And so you I think you must have learned by
slamming your head against the wall how to
307
00:18:55,650 --> 00:18:58,690
communicate with the community and create a a
pretty large one as I see it.
308
00:18:58,690 --> 00:18:58,930
Yeah.
309
00:18:58,930 --> 00:19:05,170
I think whenever I read your stuff, I I feel
like, this is written for someone that knows
310
00:19:05,170 --> 00:19:05,890
what we're talking about.
311
00:19:06,274 --> 00:19:12,835
And I always try to water it down into the
essence of it, because I'm usually talking to
312
00:19:12,835 --> 00:19:13,554
retail.
313
00:19:14,674 --> 00:19:16,834
In Spain, most funds are sold.
314
00:19:17,394 --> 00:19:20,034
People that invest with me buy my funds.
315
00:19:20,250 --> 00:19:24,569
They buy the idea and then they go into the
strategy.
316
00:19:24,569 --> 00:19:27,769
I have no commercial team.
317
00:19:28,089 --> 00:19:32,730
I just do education and people find our stuff.
318
00:19:32,914 --> 00:19:39,794
And if they buy into the idea or the
philosophy, then they eventually invest.
319
00:19:39,794 --> 00:19:43,794
Or they do something similar and then breach it
around and then that gets other people.
320
00:19:43,794 --> 00:19:48,569
But yeah, that's basically what I've been
trying to do.
321
00:19:48,569 --> 00:19:54,250
But always with that focus on that there's many
things I don't know, but I do know that
322
00:19:54,329 --> 00:20:01,690
diversification works and that the true
diversification is what I think think Adam is
323
00:20:01,690 --> 00:20:05,585
the first person I read that said structural
diversification.
324
00:20:05,585 --> 00:20:11,105
And that just again I think one of the things
that all terrain or weather investors don't
325
00:20:11,105 --> 00:20:14,065
have is the same nomenclature.
326
00:20:14,224 --> 00:20:18,640
And I think that's something that value
investors have and other investors have, and
327
00:20:18,640 --> 00:20:23,519
that brings a lot of those people together, and
then that creates a community and that helps
328
00:20:23,519 --> 00:20:24,799
the ideas grow.
329
00:20:25,119 --> 00:20:33,524
So I like how you guys have been interviewing
people that are supposedly your competitors,
330
00:20:33,765 --> 00:20:37,365
but in the way I see it, they're not your
competitor.
331
00:20:37,365 --> 00:20:47,889
Your competitor is someone that's doing an
index fund robo advisor thing, or just like a
332
00:20:48,289 --> 00:20:53,809
highly active in the sense of stock picking
strategy.
333
00:20:53,809 --> 00:21:00,795
We're doing something different, and we need to
speak about it without trying to hide what
334
00:21:00,795 --> 00:21:03,835
we're doing, but with the example of return
stacking, I think it's very clear.
335
00:21:03,835 --> 00:21:08,634
I think the reason people buy return stacking
is that you're actually saying what you're
336
00:21:08,634 --> 00:21:11,355
doing and you're not scared of saying what
you're doing.
337
00:21:12,009 --> 00:21:15,769
And you're not scared of defending the idea
that you're trying to defend.
338
00:21:15,769 --> 00:21:16,569
It's tough.
339
00:21:16,809 --> 00:21:18,009
Because you're saying things like.
340
00:21:18,009 --> 00:21:18,250
Yeah.
341
00:21:18,250 --> 00:21:24,009
You know leverage, manage futures, for me
especially when I every time I bring something
342
00:21:24,009 --> 00:21:26,875
to the table like as you were saying, no one's
heard of it.
343
00:21:26,875 --> 00:21:31,515
Like, would I have to explain arbitrage or
global macro or carry strategies?
344
00:21:31,515 --> 00:21:34,394
Most of the most of the time, people are like,
what?
345
00:21:34,394 --> 00:21:35,275
A new thing?
346
00:21:35,275 --> 00:21:35,914
I get one.
347
00:21:38,460 --> 00:21:40,299
Yeah, we feel your pain for sure.
348
00:21:40,299 --> 00:21:47,099
And so, yeah, I mean, this is why communication
and having the ability to synthesize things, as
349
00:21:47,099 --> 00:21:48,779
well as you do is important here.
350
00:21:49,419 --> 00:21:56,795
But let's go back to, you know, you have this
interesting permanent portfolio approach and
351
00:21:56,795 --> 00:22:03,035
your evolution towards like where you kind of
got stuck and then how return stacking might've
352
00:22:03,035 --> 00:22:04,789
unlocked some value there.
353
00:22:04,789 --> 00:22:07,990
So the thing is when I started with
354
00:22:07,990 --> 00:22:12,789
a permanent portfolio for myself, but when I
got the opportunity, I eventually became a
355
00:22:12,789 --> 00:22:13,670
financial advisor.
356
00:22:13,670 --> 00:22:18,630
That's when I got my first clients and that I
started to grow a pace of investors that were
357
00:22:18,630 --> 00:22:22,134
interested in, you know, adding something
different to their portfolios, right?
358
00:22:22,134 --> 00:22:23,894
That's how I I actually started.
359
00:22:23,974 --> 00:22:27,575
And eventually, I got the opportunity to start
a small fund.
360
00:22:28,134 --> 00:22:32,694
So, so I could build a strategy and people
could go into the strategy instead of me, you
361
00:22:32,694 --> 00:22:35,390
know, managing everyone's little portfolio.
362
00:22:36,589 --> 00:22:44,269
And I thought at the time, this was an error by
the way, but at the time I thought that most
363
00:22:44,269 --> 00:22:47,070
people wanted something that was not as
conservative.
364
00:22:47,265 --> 00:22:49,105
The Brentwood portfolio is a problem.
365
00:22:49,904 --> 00:22:52,144
I don't think it's a problem.
366
00:22:52,144 --> 00:22:56,944
It's on purpose, but it's a pretty conservative
strategy.
367
00:22:57,424 --> 00:22:58,865
It's conservative in many ways.
368
00:22:58,865 --> 00:23:01,105
It's conservative because it has low
volatility.
369
00:23:01,105 --> 00:23:06,609
It's conservative because it's only using the
biggest assets around because Brown was
370
00:23:06,609 --> 00:23:09,089
thinking about something that, you know, was
fail safe.
371
00:23:09,570 --> 00:23:11,409
Wouldn't blow up.
372
00:23:12,849 --> 00:23:20,115
But there, you know, he he preached this, you
late seventies, early eighties, and eventually,
373
00:23:20,275 --> 00:23:22,515
there's more things that we can do with our
portfolio.
374
00:23:22,515 --> 00:23:22,674
Right?
375
00:23:22,674 --> 00:23:27,795
There's more stuff going on now that didn't
exist then and that maybe you can bring into
376
00:23:27,795 --> 00:23:29,234
your your strategy.
377
00:23:29,315 --> 00:23:38,889
And I was trying to find something that was
more, I want to say balanced, but really I mean
378
00:23:39,130 --> 00:23:43,609
something that was equivalent to a 64 b at
least in most people's minds, right?
379
00:23:43,609 --> 00:23:45,849
Something that was medium risk.
380
00:23:46,184 --> 00:23:48,664
Let's call it medium risk.
381
00:23:48,664 --> 00:23:51,065
But yes, something that was equivalent to a
sixtyforty.
382
00:23:51,384 --> 00:23:58,904
And every time I tried to build a portfolio or
design a portfolio that was matching sixtyforty
383
00:23:58,904 --> 00:24:01,865
volatility, I was losing the balance.
384
00:24:01,865 --> 00:24:02,025
Right?
385
00:24:02,160 --> 00:24:03,919
Because you have to have more stocks.
386
00:24:04,400 --> 00:24:09,359
If you have to have more stocks, then suddenly
those stocks are running the asylum as we were
387
00:24:09,359 --> 00:24:09,839
saying.
388
00:24:10,000 --> 00:24:15,599
Then if I add diversifiers on the other side, I
get more tracking error and then people are
389
00:24:15,599 --> 00:24:18,875
going to ask questions when those diversifiers
are not working.
390
00:24:19,434 --> 00:24:21,274
It was a tough challenge.
391
00:24:21,674 --> 00:24:26,234
Think I built a portfolio that was it's still
on.
392
00:24:26,234 --> 00:24:30,474
Now it's transitioning to a return stack
version of the portfolio, but it's something
393
00:24:30,474 --> 00:24:38,789
that was, let's say, around 50% equities or 60%
equities, and then the rest was an all terrain
394
00:24:38,789 --> 00:24:39,750
defense.
395
00:24:39,990 --> 00:24:46,295
But if you want more volatility and you don't
use leverage, the only way to do this is to get
396
00:24:46,295 --> 00:24:47,255
more stocks in.
397
00:24:47,255 --> 00:24:56,535
And then when stocks fall, your all terrain
defense is not going to recoup all those
398
00:24:56,535 --> 00:24:57,015
losses.
399
00:24:57,015 --> 00:25:03,309
It's just going to be more you have more trust
on the fact that it's gonna work better than
400
00:25:03,309 --> 00:25:06,269
just bonds because bonds can also fall
sometimes.
401
00:25:06,269 --> 00:25:08,910
An altering defense is gonna work more times.
402
00:25:09,070 --> 00:25:15,595
It's gonna it's gonna work against those stuff,
but it's not really gonna recover the loss that
403
00:25:15,595 --> 00:25:16,394
you got, right?
404
00:25:16,394 --> 00:25:18,875
It's just going to what's the word?
405
00:25:18,875 --> 00:25:21,994
I'm looking for a word that is not covering
Rodrigo but it's like you're like you're like
406
00:25:21,994 --> 00:25:28,715
diluting your risk in a more efficient way but
it's not really you're not really balancing
407
00:25:27,640 --> 00:25:28,759
balancing things out.
408
00:25:28,759 --> 00:25:30,919
That's just not and Tama.
409
00:25:30,919 --> 00:25:31,160
Yeah.
410
00:25:31,160 --> 00:25:35,960
I try to find ways into, okay, so maybe we'll
get defensive equities and maybe we do some,
411
00:25:35,960 --> 00:25:41,879
you know, dual momentum thing on top and I was
just trying lots of things to find balance and
412
00:25:42,440 --> 00:25:47,924
with traditional strategies, it's just now I
think it's just impossible.
413
00:25:47,924 --> 00:25:53,525
You always have to take more risk in the form
of cycle risk.
414
00:25:55,090 --> 00:26:00,369
So let me pause there for a second and just
show an an oldie but a goodie.
415
00:26:01,090 --> 00:26:02,930
You know, we've been talking about this
already, right?
416
00:26:02,930 --> 00:26:07,330
But this one just shows a chart of gold, global
equities, commodities, and and ten year
417
00:26:07,330 --> 00:26:08,049
treasuries, right?
418
00:26:08,695 --> 00:26:13,654
Roughly speaking, I don't know, '19, this is
1990 to 2023, roughly speaking, they all make
419
00:26:13,654 --> 00:26:16,855
the same amount of return, but obviously the
paths are wildly different, right?
420
00:26:16,855 --> 00:26:19,734
So which one do you want to choose is always
the question.
421
00:26:20,375 --> 00:26:24,769
And from the perspective of risk balancing
these, again, we talked about long term
422
00:26:24,769 --> 00:26:26,450
treasuries are using the ten year.
423
00:26:26,930 --> 00:26:32,049
If you run a simple equal risk contribution
analysis to try to make sure that we balance
424
00:26:32,049 --> 00:26:38,654
things off, you're looking at 42% in
treasuries, 29% in trend following here, you
425
00:26:38,654 --> 00:26:43,454
know, 15% in global equities, 12% in
commodities to get a % portfolio.
426
00:26:43,934 --> 00:26:50,015
And of course, the 10,000 foot view of that is
that you get this smoothed out line that kind
427
00:26:50,015 --> 00:26:55,589
of crosses in the middle of everything, but
actually slightly outperforms over the long
428
00:26:55,589 --> 00:27:01,269
term, mainly due to the rebalancing benefit,
That diversification premium.
429
00:27:01,990 --> 00:27:04,644
Now, while this line looks amazing, right?
430
00:27:04,644 --> 00:27:09,204
Like, this is, I was trying to think about a
different way of explaining to people why is it
431
00:27:09,525 --> 00:27:19,045
that an equal risk portfolio is generally going
to not provide the returns that a high risk
432
00:27:19,045 --> 00:27:20,630
portfolio like equities provide.
433
00:27:20,630 --> 00:27:24,309
And the reality is that it's not true over
many, many decades, right?
434
00:27:24,309 --> 00:27:26,630
If you think about the equity risk premium,
right?
435
00:27:26,630 --> 00:27:28,149
What's the equity risk premium?
436
00:27:28,789 --> 00:27:31,029
Depends on, you know, global equity risk
premium.
437
00:27:31,029 --> 00:27:31,429
What is it?
438
00:27:31,429 --> 00:27:34,709
Three and a half percent, 4% above cash, right?
439
00:27:34,789 --> 00:27:38,334
So it's a notional, we're looking at 6%
annualized, right?
440
00:27:38,654 --> 00:27:45,374
Term premium is, you know, two, three You know,
when you actually look at all of these returns,
441
00:27:45,454 --> 00:27:49,214
they all at the end, as we can see from this
graphic, roughly make the same return.
442
00:27:49,214 --> 00:27:55,779
The problem is that by diversifying your,
you're clustering that return around that long
443
00:27:55,779 --> 00:27:57,539
term more often.
444
00:27:58,099 --> 00:28:03,460
And sadly, a sixty, forty investor, an eighty,
twenty investor tends to see more double digit
445
00:28:03,460 --> 00:28:06,434
years than you do when balanced.
446
00:28:06,835 --> 00:28:08,514
And that's painful.
447
00:28:09,315 --> 00:28:13,234
And that reduces risk and reduces, you know,
long term returns.
448
00:28:13,234 --> 00:28:16,034
You have to wait a long time to be able to say,
okay, we did it.
449
00:28:16,034 --> 00:28:19,474
We did the same or better than with lower risk.
450
00:28:20,674 --> 00:28:24,569
And the reality is that it's boring for most
people.
451
00:28:24,650 --> 00:28:30,570
When you create this portfolio and you have a
4% volatility portfolio, you're constantly
452
00:28:30,570 --> 00:28:33,130
apologizing for not putting enough risk on.
453
00:28:33,450 --> 00:28:39,345
And the reality is that you're kind of up until
recently, you were limited as to what you could
454
00:28:39,345 --> 00:28:44,785
do in terms of giving people what they wanted,
which is, look, I'm used to a standard
455
00:28:44,785 --> 00:28:47,424
deviation in my portfolio of 12%, fifteen %.
456
00:28:47,424 --> 00:28:48,705
Like, I'm I'm okay with that.
457
00:28:48,705 --> 00:28:50,384
I'm okay with the drawdowns that I've seen.
458
00:28:50,384 --> 00:28:51,105
Can you give me that?
459
00:28:51,105 --> 00:28:51,904
And the answer was no.
460
00:28:52,759 --> 00:28:53,079
Right?
461
00:28:53,079 --> 00:28:53,799
The answer was no.
462
00:28:53,799 --> 00:28:54,599
This you get this.
463
00:28:54,599 --> 00:28:57,799
This is the maximum balanced portfolio you can
get.
464
00:28:58,599 --> 00:29:01,720
And so, anyway, I thought I kind of paused
there and show people what
465
00:29:01,720 --> 00:29:02,519
they there for a second.
466
00:29:02,519 --> 00:29:10,045
We brought the background because I I love it
because it makes so much sense and then no one
467
00:29:10,045 --> 00:29:11,884
likes it real life.
468
00:29:11,965 --> 00:29:17,805
Because in real life, I like to sometimes show
this and people will always choose that dark
469
00:29:17,805 --> 00:29:22,839
blue line, But then show it starting 02/2010.
470
00:29:23,400 --> 00:29:25,639
And then that just goes flat.
471
00:29:25,880 --> 00:29:26,440
Great.
472
00:29:26,440 --> 00:29:27,960
Like great risk return.
473
00:29:27,960 --> 00:29:30,119
Like great rate shock ratio.
474
00:29:30,279 --> 00:29:31,720
But it's just boring.
475
00:29:31,720 --> 00:29:37,774
It just gets you a couple percentage points
while some of the other strategies in this
476
00:29:38,414 --> 00:29:42,014
exactly that point in time, it's going to be
stocks.
477
00:29:43,054 --> 00:29:48,089
Are giving you those double digit returns and
like incredibly high sharp ratios And it
478
00:29:48,089 --> 00:29:50,730
doesn't matter how many times you show this.
479
00:29:51,049 --> 00:29:54,329
People are gonna be okay when they see it.
480
00:29:54,329 --> 00:29:59,609
And then after a couple of months of of low
volatility, low returns, they're gonna ditch
481
00:29:59,609 --> 00:29:59,849
it.
482
00:29:59,849 --> 00:30:02,845
It's it's just the way it's just the way it is.
483
00:30:02,845 --> 00:30:03,404
And
484
00:30:03,724 --> 00:30:08,684
and and it and to their credit, if they feel
they're leaving money on the table because they
485
00:30:08,684 --> 00:30:10,765
can take more risk, it's it's acting so.
486
00:30:10,765 --> 00:30:13,805
That's exactly the problem I I was running
into, right?
487
00:30:14,089 --> 00:30:17,450
I wanted to add more diversification because I
knew it worked.
488
00:30:17,450 --> 00:30:24,890
I thought the portfolios were going be more
resilient, more all weather, and I was all in
489
00:30:24,890 --> 00:30:25,529
on that.
490
00:30:25,609 --> 00:30:31,515
But the more diversification you add,
diversification works so well that volatility
491
00:30:31,515 --> 00:30:36,394
goes down and if volatility goes down,
eventually returns go down too.
492
00:30:36,394 --> 00:30:36,794
Right?
493
00:30:36,795 --> 00:30:41,515
So then I wanted a bit more volatility and a
bit more return and I needed to have more
494
00:30:41,515 --> 00:30:45,859
stocks there and then I was losing that
balance, and then I was going back and forth
495
00:30:45,940 --> 00:30:47,220
between those two things.
496
00:30:47,220 --> 00:30:47,460
Right?
497
00:30:47,460 --> 00:30:53,059
More volatility always meant that you have to
sacrifice returns.
498
00:30:53,380 --> 00:30:59,164
And then when you had more stocks in, you know,
I was saying that I was all weather, but I
499
00:30:59,164 --> 00:31:03,244
wasn't all weather because I had 50 to 60%
equities in my portfolio.
500
00:31:03,244 --> 00:31:03,644
Right?
501
00:31:03,644 --> 00:31:10,285
Is no way that a 50 to 60% equity portfolio is
gonna be all weather because then you would
502
00:31:10,285 --> 00:31:12,210
need a leveraged defense.
503
00:31:12,210 --> 00:31:12,529
Right?
504
00:31:12,529 --> 00:31:18,690
Something that was not just a mix of gold
bonds, bonds, and trend following and other
505
00:31:18,690 --> 00:31:19,970
alternative strategies.
506
00:31:19,970 --> 00:31:23,650
That that was gonna be an all weather defense,
but not an all weather portfolio.
507
00:31:23,650 --> 00:31:24,049
Right?
508
00:31:24,049 --> 00:31:25,195
That was fun.
509
00:31:25,195 --> 00:31:36,795
And then when you came up with the return
stacking paper, that was my second moment where
510
00:31:37,035 --> 00:31:38,075
I saw it.
511
00:31:38,315 --> 00:31:40,100
I couldn't unsee it.
512
00:31:40,100 --> 00:31:45,140
I remember you guys did a live stream or maybe
an episode, I'm not sure.
513
00:31:45,140 --> 00:31:51,140
And I went on the chat and asked, you were
saying how the time stacking will talk about
514
00:31:51,140 --> 00:31:55,134
this now, know, like how it can create some
tracking error, whatever, and I think I said
515
00:31:55,134 --> 00:31:57,775
something like, okay, but what if you don't
care about the tracking error?
516
00:31:57,775 --> 00:31:58,894
Let's still go on up there.
517
00:31:58,894 --> 00:32:03,775
And I think and I think, why don't you like
brush it off a bit, like, okay, maybe.
518
00:32:04,140 --> 00:32:06,539
Yeah, because because 99% of our audience.
519
00:32:06,539 --> 00:32:09,180
99% of the people, I'm not thinking about this,
but I'm.
520
00:32:09,180 --> 00:32:10,539
I think you're lunatics like.
521
00:32:10,539 --> 00:32:11,179
Yeah.
522
00:32:12,140 --> 00:32:14,859
I emailed you like, okay, Roger, we need to
talk to this.
523
00:32:15,099 --> 00:32:18,474
If I can do this, this is what I've been
looking for, right?
524
00:32:18,474 --> 00:32:20,714
I can I can create a portfolio?
525
00:32:21,355 --> 00:32:26,474
I can finally create a portfolio that is truly
diversified, that is using everything that we
526
00:32:26,474 --> 00:32:27,515
know we can use.
527
00:32:27,515 --> 00:32:30,315
So that means not only assets but also
strategies.
528
00:32:30,740 --> 00:32:32,900
We can try to balance those things out.
529
00:32:32,900 --> 00:32:38,099
It's going to be a great long term short ratio
portfolio, it's going to be stable and it's
530
00:32:38,099 --> 00:32:39,140
going to be all weather.
531
00:32:39,299 --> 00:32:44,355
And then we can get it to the volatility people
actually want.
532
00:32:44,595 --> 00:32:49,315
And if they want an 8% volatility portfolio, we
can do that without losing balance.
533
00:32:49,315 --> 00:32:54,275
If you want a 12% volatility portfolio, we can
now do that, and it's not losing balance.
534
00:32:56,440 --> 00:32:59,720
You're getting more risk, you're getting more,
you're getting exposure, which is what you
535
00:32:59,720 --> 00:33:05,799
want, but you're not getting it through a
concentrated cycle risk bet, which is what you
536
00:33:05,799 --> 00:33:15,464
do when you have a 50 to 60% equity portfolio,
And I'd say that I went crazy around idea and
537
00:33:15,464 --> 00:33:21,144
luckily a year and a half or something later,
finally did it and we have portfolios on that
538
00:33:21,144 --> 00:33:27,639
kind of actually implement these these concepts
in Spain.
539
00:33:27,880 --> 00:33:29,720
Very grateful for for And
540
00:33:30,440 --> 00:33:34,679
I mean, most of the battle that I saw you fight
is a battle that we fought originally too in
541
00:33:34,679 --> 00:33:40,335
Canada is you're not just fighting a battle of
ideas, but you're you're you're running into
542
00:33:40,335 --> 00:33:42,974
operational roadblocks.
543
00:33:44,015 --> 00:33:46,654
Compliance teams don't want you to do x y z.
544
00:33:48,000 --> 00:33:52,799
You know, the even platforms don't even have
the capability of providing you what you want
545
00:33:52,799 --> 00:34:00,095
or you being able to invest in US ETFs that you
that use gold and stuff like it's just been a
546
00:34:00,095 --> 00:34:03,375
constant struggle and you've mostly kind of
fought through all that.
547
00:34:03,375 --> 00:34:06,095
So, tell us a little bit about that journey.
548
00:34:06,255 --> 00:34:06,654
Yeah.
549
00:34:06,654 --> 00:34:11,454
So the thing is that, I mean, it's
counterintuitive.
550
00:34:11,454 --> 00:34:11,775
Right?
551
00:34:11,775 --> 00:34:17,140
I'm trying to say that I'm building something
that is leveraged.
552
00:34:17,140 --> 00:34:22,500
It's a % leverage, but it's actually a balanced
allocation.
553
00:34:22,500 --> 00:34:22,900
Right?
554
00:34:22,900 --> 00:34:32,775
And that goes against everything that everyone
has heard in or everyone that's learning about
555
00:34:32,775 --> 00:34:35,574
investing will get that association.
556
00:34:35,574 --> 00:34:39,335
More leverage means more risk.
557
00:34:40,135 --> 00:34:45,480
To be fair, all else equal, yeah, you know,
leverage means more risk.
558
00:34:45,960 --> 00:34:49,079
But it all depends on what we're comparing.
559
00:34:49,079 --> 00:34:55,480
I think also everyone understands that if you
have a very risky thing and a very unrisky
560
00:34:55,480 --> 00:35:01,965
thing and you leverage the unrisky thing and it
will still be less risky than the risky thing.
561
00:35:02,125 --> 00:35:10,285
But the thing here is that I found that the
solution to this problem is how you frame it.
562
00:35:11,059 --> 00:35:14,260
People think more leverage means more risk.
563
00:35:14,260 --> 00:35:17,300
The more leverage means that you're chasing
higher returns.
564
00:35:17,780 --> 00:35:19,940
But that's not what we're doing.
565
00:35:19,940 --> 00:35:22,739
We're using leverage after we're diversifying.
566
00:35:23,364 --> 00:35:27,684
So the right order is you have a certain amount
of risk.
567
00:35:28,325 --> 00:35:33,445
Now we're diversifying and we're adding true
structural diversification to different assets
568
00:35:33,445 --> 00:35:34,724
and different strategies.
569
00:35:34,965 --> 00:35:36,565
So we're bringing volatility down.
570
00:35:37,489 --> 00:35:42,929
And because volatility is down, your returns
are down and we're using leverage to recover
571
00:35:42,929 --> 00:35:46,289
the exposure that you lost through
diversification.
572
00:35:46,289 --> 00:35:48,849
So we're using leverage after we're
diversifying.
573
00:35:49,089 --> 00:35:54,914
And again, this is another of the things that I
think everyone in the world should be using
574
00:35:54,914 --> 00:36:03,510
because if you do the math and match the amount
of added exposure so that it matches the, you
575
00:36:03,510 --> 00:36:06,309
know, the the added risk through added
exposure.
576
00:36:06,550 --> 00:36:13,190
Matches the reduction in risk you get through
diversification, you're doing that thing that
577
00:36:13,190 --> 00:36:14,390
what's what's the phrase?
578
00:36:14,390 --> 00:36:16,150
Eating your cake or what is it?
579
00:36:20,224 --> 00:36:23,105
Cake and eating it.
580
00:36:23,184 --> 00:36:25,505
Having your diversification cake and eating it.
581
00:36:25,505 --> 00:36:25,984
Exactly.
582
00:36:25,984 --> 00:36:29,025
So that is the right order, right?
583
00:36:29,025 --> 00:36:34,099
We're reducing risk and then we're using
leverage to recover the lost risk.
584
00:36:34,420 --> 00:36:41,380
Another way to see it is that you're actually
this is from an all the way point of view.
585
00:36:41,380 --> 00:36:46,184
If you look at this from a traditional
portfolio where you have stocks and bonds, and
586
00:36:46,184 --> 00:36:53,465
then you're adding more diversification through
stacking, that is defensive leverage.
587
00:36:53,465 --> 00:36:56,425
You're adding more defense to your portfolio.
588
00:36:56,505 --> 00:37:01,820
So if you do it right, and if you do that, most
of the times you're not really adding that much
589
00:37:01,820 --> 00:37:02,219
risk.
590
00:37:02,219 --> 00:37:05,500
It does with with with its what's the word?
591
00:37:05,500 --> 00:37:08,539
With its or Yeah,
592
00:37:09,820 --> 00:37:11,260
it's you can say it counterpoints.
593
00:37:11,260 --> 00:37:15,775
It comes with this off with its there's other
offsetting things that happen by when you use
594
00:37:15,775 --> 00:37:17,135
leverage, but not necessarily in the.
595
00:37:17,135 --> 00:37:17,775
Exactly.
596
00:37:17,775 --> 00:37:20,815
So, you know, you will have tracking error,
right?
597
00:37:20,815 --> 00:37:22,414
It comes in the form of tracking error.
598
00:37:22,414 --> 00:37:27,690
It comes in the form of your volatility is
going to be more stable, which sounds good
599
00:37:27,690 --> 00:37:29,530
until you see it live, right?
600
00:37:29,530 --> 00:37:34,329
But you're actually getting hurt more, very
little, but all the time.
601
00:37:35,289 --> 00:37:36,570
Yeah, more often,
602
00:37:36,570 --> 00:37:36,889
but yeah.
603
00:37:36,889 --> 00:37:38,010
So you feel it more.
604
00:37:38,090 --> 00:37:38,650
Yeah.
605
00:37:38,650 --> 00:37:44,994
So that's the thing I wanted to, because we've
chatted about this a lot and this comes from
606
00:37:44,994 --> 00:37:50,114
Corey's saying that risk cannot be eliminated,
it can only be transformed.
607
00:37:50,114 --> 00:37:54,490
And so how do you talk about that?
608
00:37:54,570 --> 00:38:00,890
Again, I think the way to make people
understand this is to do it in the right order,
609
00:38:00,890 --> 00:38:01,130
right?
610
00:38:01,130 --> 00:38:05,930
So the right order should be how much risk are
you willing to take in the form of volatility,
611
00:38:05,930 --> 00:38:08,010
in the form of expected drawdowns, etc.
612
00:38:08,934 --> 00:38:17,175
That is clear, then how do we take that risk
and how do we do it in the most efficient way?
613
00:38:17,494 --> 00:38:22,579
If you build a portfolio again that is just
stocks and bonds, you're taking a lot of market
614
00:38:22,579 --> 00:38:23,059
risk.
615
00:38:23,059 --> 00:38:29,219
I've heard you say many times that when you
look at the S and P 500 and you use an ETF,
616
00:38:29,219 --> 00:38:31,140
that ETF is unleveraged.
617
00:38:31,219 --> 00:38:36,125
But if you look at the companies beneath the
ADF and you look at the leverage within the
618
00:38:36,125 --> 00:38:41,005
companies in that ETF, you're actually using
like three times leverage, right?
619
00:38:41,005 --> 00:38:42,364
If I remember right, something like that.
620
00:38:42,364 --> 00:38:42,684
Yeah.
621
00:38:42,684 --> 00:38:43,644
Three to one, four to one.
622
00:38:43,644 --> 00:38:44,125
Exactly.
623
00:38:44,125 --> 00:38:44,364
Yeah.
624
00:38:44,364 --> 00:38:51,599
So, you're taking market cycle risk and we
don't want to have that market cycle risk.
625
00:38:51,599 --> 00:38:52,320
Forget that.
626
00:38:52,320 --> 00:38:57,440
That tends to crash eventually like once every
whatever years.
627
00:38:57,440 --> 00:39:01,519
It will it will we will get into that part of
the cycle where stocks just don't work and you
628
00:39:01,519 --> 00:39:02,480
get those big drawdowns.
629
00:39:03,125 --> 00:39:07,844
You want to take that risk and that that risk
is the risk that you're diversifying, right?
630
00:39:07,844 --> 00:39:12,484
So, you want to add other things that are going
to move in different ways, ebb and flow in
631
00:39:12,484 --> 00:39:19,590
different moments, and it's the same amount of
risk, but if you take the risk in smaller
632
00:39:19,590 --> 00:39:26,070
doses, the same amount of risk, it is much
better than just feeling like there's no risk
633
00:39:26,070 --> 00:39:31,155
which is how a $60.40 portfolio feels when
everything is going your way And then one day,
634
00:39:31,155 --> 00:39:37,474
you don't know when it's going to come and it's
going to hurt you and there's a there's a how
635
00:39:37,474 --> 00:39:38,515
do you say this in English?
636
00:39:38,515 --> 00:39:43,315
There's a asymmetry in the in the way returns
come.
637
00:39:43,315 --> 00:39:43,474
Right.
638
00:39:43,739 --> 00:39:50,219
If that idea that everyone understands where
10% draw down, you're back at zero with 11%,
639
00:39:50,219 --> 00:39:53,019
but a 50% draw down needs one hundred percent.
640
00:39:53,659 --> 00:39:59,234
So the same amount of risk, the efficient way
to take that risk is to try and do it in
641
00:39:59,234 --> 00:40:01,074
smaller doses.
642
00:40:01,234 --> 00:40:07,474
Smaller doses makes a lot of sense until you
feel it when the other person is not feeling
643
00:40:07,474 --> 00:40:08,194
it, right?
644
00:40:08,194 --> 00:40:09,394
And that's what happened.
645
00:40:09,394 --> 00:40:10,275
So, know what?
646
00:40:10,275 --> 00:40:14,530
Corey and I, yesterday, we're having kind of
we're kind of looking at how to tell the story
647
00:40:14,530 --> 00:40:15,170
about this.
648
00:40:15,170 --> 00:40:15,409
Right?
649
00:40:15,409 --> 00:40:21,409
This idea that there's an there's there's risk
in equities and there's risk in all terrain or
650
00:40:21,409 --> 00:40:24,130
equal we're looking at an equal risk portfolio
of assets.
651
00:40:25,034 --> 00:40:32,875
And so what I what I wanted to see is how often
you're in drawdown in in the S and P 500 on a
652
00:40:32,875 --> 00:40:33,835
daily basis.
653
00:40:33,835 --> 00:40:34,394
Right?
654
00:40:34,394 --> 00:40:38,809
So how often are you hit a new high and started
losing money versus how often you're in
655
00:40:38,809 --> 00:40:39,210
drawdown?
656
00:40:39,210 --> 00:40:40,329
I think we did trend following.
657
00:40:40,329 --> 00:40:41,289
We did cold.
658
00:40:41,849 --> 00:40:45,450
What's fascinating, there's a drawdown and
recovery chart that we often use.
659
00:40:45,530 --> 00:40:50,250
I'll see if I can find it here later, but which
is like you start losing money and then you
660
00:40:50,250 --> 00:40:50,730
recover.
661
00:40:50,730 --> 00:40:54,045
And and if it's it's zero, it means you're
making new highs all the time.
662
00:40:54,045 --> 00:40:57,644
So the top of the chart is flat as long as
you're making new highs.
663
00:40:58,125 --> 00:41:01,885
You know, when you we're looking at trend
following and trend following is could you
664
00:41:01,885 --> 00:41:07,244
guess how often on a daily basis the Softgen
trend index is making new highs?
665
00:41:07,244 --> 00:41:09,380
I would say very little, right?
666
00:41:09,380 --> 00:41:13,460
This feeling is like you're losing all the time
and then suddenly you get that big whack.
667
00:41:13,539 --> 00:41:16,019
I think that's what I would like.
668
00:41:16,019 --> 00:41:19,059
It's around 12% on a daily scale.
669
00:41:19,059 --> 00:41:20,659
It's around a third on a monthly scale.
670
00:41:21,005 --> 00:41:25,965
When you look at the chart, when you actually
look at the S and P 500, it is like making new
671
00:41:25,965 --> 00:41:26,445
highs.
672
00:41:26,445 --> 00:41:30,844
It feels haven't done the actual numbers, but
it just it's flat that that chart of drawdown
673
00:41:30,844 --> 00:41:32,605
and recovery is flat most of the time.
674
00:41:33,090 --> 00:41:38,769
And then you have 02/2008 and you just lose and
lose and lose and lose and it's a massive drop,
675
00:41:38,769 --> 00:41:41,650
but you never see that in the history of the
stock index.
676
00:41:41,650 --> 00:41:43,250
You never see that lose and lose and lose.
677
00:41:43,250 --> 00:41:46,930
You'll see drawdowns and recoveries, drawdowns
and recoveries, drawdowns and recoveries.
678
00:41:47,489 --> 00:41:50,025
And so I think that tracking error-
679
00:41:50,025 --> 00:41:55,864
So I was asking, even if you get it to the same
level of volatility, so it's like structurally
680
00:41:55,945 --> 00:41:56,664
different?
681
00:41:57,065 --> 00:41:59,065
It's structurally different.
682
00:41:59,065 --> 00:42:04,109
There's some You're just getting more, it's
look, it's the skewness of the S and P 500.
683
00:42:04,109 --> 00:42:04,510
Right.
684
00:42:04,589 --> 00:42:06,190
And then you have the big fat tail.
685
00:42:06,190 --> 00:42:09,469
The moment you start adding diversification,
you add bonds and equal risks.
686
00:42:09,469 --> 00:42:10,829
You add gold and equal risks.
687
00:42:10,829 --> 00:42:12,110
You add some diversifiers.
688
00:42:12,429 --> 00:42:17,984
You now have a more consistent, like series of
drawdowns every year.
689
00:42:17,984 --> 00:42:18,224
Right?
690
00:42:18,224 --> 00:42:23,585
So you'll see your, you're like the area under
the curve for those that remember statistics,
691
00:42:23,984 --> 00:42:29,585
you know, is, is roughly the same between a
diversified portfolio and the S and P 500.
692
00:42:29,585 --> 00:42:32,000
It's actually less, but roughly the same.
693
00:42:32,000 --> 00:42:38,159
The difference is that that area under the
curve is showing up every year more often, and
694
00:42:38,320 --> 00:42:42,880
most of the area under the curve happens in big
abrupt losses for the S and P 500.
695
00:42:42,880 --> 00:42:46,295
And so the experience here is is something that
is important.
696
00:42:46,295 --> 00:42:46,614
Right?
697
00:42:46,614 --> 00:42:51,414
The experience is how often do you feel like
you're winning versus your alternative
698
00:42:51,414 --> 00:42:51,974
portfolio.
699
00:42:51,974 --> 00:42:57,960
I think I think I'm kinda lucky here in being
able to communicate this, because I've been
700
00:42:57,960 --> 00:43:02,920
talking about the permanent portfolio for so
long, and that is something that most people, I
701
00:43:02,920 --> 00:43:07,719
would say, in the investing community in Spain
at least know about.
702
00:43:07,719 --> 00:43:11,784
Even if they don't believe in it, or they don't
use it, they kind of know about it because
703
00:43:11,784 --> 00:43:14,505
we've been talking, like, for a very long time.
704
00:43:14,824 --> 00:43:22,105
And and sort of everyone knows that this is,
like, an all terrain solution, and they they've
705
00:43:22,105 --> 00:43:24,824
seen how it be behaves just behaves
differently.
706
00:43:24,824 --> 00:43:24,985
Right?
707
00:43:25,469 --> 00:43:32,510
Sometimes it's in a draw down when the SMB or
or in in Europe most people use the MSCI world
708
00:43:32,510 --> 00:43:39,230
as the reference but you know stocks are going
up and this might be flat or going down because
709
00:43:38,204 --> 00:43:41,724
bonds are down or gold is down or something
else is going on.
710
00:43:41,965 --> 00:43:50,204
So they are kind of used to this idea and then
from the permanent portfolio to a return stack
711
00:43:50,285 --> 00:43:56,079
off road portfolio, which would be like our
most Now I never say risky.
712
00:43:56,079 --> 00:43:58,240
I say it's just the most efficient portfolio.
713
00:43:58,559 --> 00:44:05,519
But our most efficient offering would be like a
12% volatility portfolio that is a mix of
714
00:44:05,519 --> 00:44:12,644
stocks, bonds, gold, and then trend carry and
other diversifiers that would be smaller
715
00:44:12,644 --> 00:44:15,765
positions like Bitcoin or arbitrage or whatnot.
716
00:44:16,804 --> 00:44:23,059
And so they're kind of used to seeing that this
thing is its own thing.
717
00:44:24,579 --> 00:44:30,260
Difficulty now is explaining what trend
following is, which again, I've been talking
718
00:44:30,260 --> 00:44:33,940
about this for longer, but maybe carry is
something that people haven't been introduced
719
00:44:33,940 --> 00:44:38,875
to lately and starting with a draw down is
never never great.
720
00:44:38,875 --> 00:44:39,914
It's always tough.
721
00:44:40,235 --> 00:44:46,155
But they've seen, you know, draw downs in gold
and they've seen draw downs in long term bonds
722
00:44:46,155 --> 00:44:50,960
which is something that everyone was saying,
you know, like, why do you have long term bonds
723
00:44:50,960 --> 00:44:52,000
in the permanent portfolio?
724
00:44:52,000 --> 00:44:53,119
Why do you have gold?
725
00:44:53,119 --> 00:45:00,320
So we're used to explaining having odd things
in the portfolio that everyone knows that you
726
00:45:00,320 --> 00:45:00,880
shouldn't have.
727
00:45:01,235 --> 00:45:02,675
But Yeah.
728
00:45:03,074 --> 00:45:03,235
Right.
729
00:45:03,235 --> 00:45:05,235
Everybody knows that you shouldn't have right
now.
730
00:45:05,235 --> 00:45:06,275
Everybody.
731
00:45:06,275 --> 00:45:09,074
I've I've learned that one two things.
732
00:45:09,074 --> 00:45:09,315
Right?
733
00:45:09,315 --> 00:45:10,755
Diversification works.
734
00:45:11,315 --> 00:45:15,795
And the second would be that things happen and
then the experts show up.
735
00:45:16,114 --> 00:45:16,355
Right?
736
00:45:16,355 --> 00:45:18,409
It's always that way around.
737
00:45:18,809 --> 00:45:21,849
So, yeah, never trust the experts.
738
00:45:21,929 --> 00:45:22,570
Yeah.
739
00:45:22,809 --> 00:45:25,369
I don't understand why you you own gold.
740
00:45:25,369 --> 00:45:26,409
It's lost nothing.
741
00:45:26,409 --> 00:45:27,369
It's lost money.
742
00:45:27,690 --> 00:45:29,130
Like, well, you should have known.
743
00:45:29,130 --> 00:45:30,170
We should let's get out.
744
00:45:30,170 --> 00:45:32,969
Also, now now it's getting the other way
around.
745
00:45:33,105 --> 00:45:33,585
Right?
746
00:45:33,585 --> 00:45:35,425
Like, gold is all time highs.
747
00:45:35,425 --> 00:45:37,025
Why don't we buy more gold?
748
00:45:37,025 --> 00:45:45,744
Why would you own 25% gold on your portfolio or
or 20% out of 200 in a in a in a Obviously, you
749
00:45:45,744 --> 00:45:46,385
have to sell it.
750
00:45:47,460 --> 00:45:48,340
Yeah.
751
00:45:48,980 --> 00:45:52,579
And I have see if I can share this one here.
752
00:45:54,739 --> 00:45:55,219
Yeah.
753
00:45:55,219 --> 00:45:59,859
This is kind of from a brochure, the all
terrain portfolio.
754
00:45:59,859 --> 00:46:04,344
So we run a couple of model portfolios
ourselves in the Returnstack website,
755
00:46:04,344 --> 00:46:05,464
returnstack.com website.
756
00:46:05,464 --> 00:46:09,304
But this is just an excerpt of the simplest all
terrain portfolio.
757
00:46:09,944 --> 00:46:12,025
I think it's levered 150%.
758
00:46:12,025 --> 00:46:18,949
It's basically all all world, seven to ten year
treasuries, gold, and the like some commodities
759
00:46:18,949 --> 00:46:20,390
and a CTA index.
760
00:46:21,030 --> 00:46:30,150
And this is another thing that I I think we get
trapped into is I think the nomenclature is
761
00:46:28,625 --> 00:46:30,944
clearly appealing, this idea of all terrain.
762
00:46:30,944 --> 00:46:35,105
But I think what the what what it projects is
never lose, and this is an important
763
00:46:35,105 --> 00:46:35,824
distinction.
764
00:46:36,385 --> 00:46:40,224
I think you I think the idea of saying all
terrain is just a more efficient portfolio.
765
00:46:40,224 --> 00:46:43,344
You're still in a four by four going through
some rough terrain, and you will fall.
766
00:46:43,969 --> 00:46:47,489
The issue is, the issue is, are you going to
get stuck in the ditch?
767
00:46:47,489 --> 00:46:47,889
Right.
768
00:46:48,289 --> 00:46:54,289
And we've used a lot of imagery here on you and
me when talking about the off road investor and
769
00:46:54,289 --> 00:46:55,170
all terrain.
770
00:46:55,809 --> 00:46:57,969
And I think the important thing is it is a four
by four.
771
00:46:57,969 --> 00:46:59,650
I think we can get out of most ditches.
772
00:46:59,925 --> 00:47:02,405
You don't wanna be driving a Ferrari in this
environment.
773
00:47:02,485 --> 00:47:03,045
Right?
774
00:47:03,684 --> 00:47:04,805
And this
775
00:47:04,805 --> 00:47:07,125
just kinda goes You're driving through the pot
coals.
776
00:47:07,125 --> 00:47:07,285
Right?
777
00:47:07,285 --> 00:47:09,605
And when you drive through those, you gotta
feel it.
778
00:47:09,605 --> 00:47:16,400
Like, if you've ever been in a a four by four
going through a an an an off road path, It's
779
00:47:16,400 --> 00:47:20,480
not driving a Tesla to the superhot.
780
00:47:23,680 --> 00:47:24,240
That's right.
781
00:47:26,640 --> 00:47:32,905
When you look at the year over year, you see
that the all terrain does experience shallower
782
00:47:33,704 --> 00:47:36,824
annualized losses and less of them.
783
00:47:38,664 --> 00:47:47,989
You're getting the sharp ratio of this simple
portfolio here is around 25, 20 four, sharp
784
00:47:47,989 --> 00:47:49,190
points higher.
785
00:47:49,190 --> 00:47:52,070
So more efficient for every unit of risk,
you're getting more units of return.
786
00:47:52,070 --> 00:47:57,590
But in this case, the example here is to to
lever it up to the point where it has the same
787
00:47:57,590 --> 00:47:59,510
risk as a traditional sixty forty portfolio.
788
00:48:00,364 --> 00:48:00,844
Right?
789
00:48:00,844 --> 00:48:05,964
So the thing about this small edge is that over
over time, you see the value, drawdowns are
790
00:48:05,964 --> 00:48:07,005
lower and so on.
791
00:48:07,405 --> 00:48:11,405
But in any given year, you know, you're like,
why are we doing this again?
792
00:48:11,405 --> 00:48:14,605
Like, it seems like we're getting the same
returns, but it's a lot more complex to
793
00:48:14,605 --> 00:48:14,925
understand.
794
00:48:15,449 --> 00:48:25,050
And what I've found is that where this really
becomes abundantly clear is when an asset class
795
00:48:25,050 --> 00:48:30,925
that people are overexposed to really goes
through a, not a two month or three month, but
796
00:48:30,925 --> 00:48:36,445
a significant series of years, whether they're
flat or down, where you see the value of all
797
00:48:36,445 --> 00:48:39,644
the other pistons in the motor doing well.
798
00:48:39,644 --> 00:48:41,809
And it doesn't always happen that way, Right?
799
00:48:41,809 --> 00:48:46,369
Like, tends to happen is you have these shallow
losses in gold and recovery, shallow losses in
800
00:48:46,369 --> 00:48:48,929
bonds and recovery, shallow losses in equities
and recovery.
801
00:48:48,929 --> 00:48:51,170
And it just kinda chugs along and adds a little
bit of value.
802
00:48:51,170 --> 00:48:51,809
It's super different.
803
00:48:51,809 --> 00:48:57,905
And then and then there will be a prolonged
bear market in equities where you see the alter
804
00:48:57,905 --> 00:49:01,265
rain, especially something like this, just kind
of chug along positively.
805
00:49:01,505 --> 00:49:02,864
And that's when you see the value.
806
00:49:03,585 --> 00:49:10,784
So, it does take time to see the long term
value here and it requires a lot of faith,
807
00:49:10,784 --> 00:49:11,105
right?
808
00:49:11,105 --> 00:49:12,144
And so a lot of education.
809
00:49:12,144 --> 00:49:18,849
And also you have to be careful with the way
you frame that too, because if we say that I
810
00:49:19,170 --> 00:49:26,575
think I've said sometimes that the off road
portfolio kind of needs a crisis in order for
811
00:49:26,575 --> 00:49:30,094
you to see a big difference.
812
00:49:30,094 --> 00:49:30,575
Right?
813
00:49:30,894 --> 00:49:37,855
You have But when you say a crisis, people are
gonna think a 10% drawdown is a crisis or a
814
00:49:38,679 --> 00:49:39,079
drawdown.
815
00:49:39,880 --> 00:49:48,280
A really, really tough scenario to see that
huge difference to appear.
816
00:49:48,280 --> 00:49:48,440
Right?
817
00:49:48,440 --> 00:49:54,944
Because if not, you just see that it shuffles
along at that level of volatility and it can be
818
00:49:54,944 --> 00:49:57,025
doing that for a fact run the backtest.
819
00:49:57,025 --> 00:49:58,464
So so so I can see you.
820
00:49:58,464 --> 00:50:05,264
You can get maybe four or five years where it
does kind of the same thing that a equally
821
00:50:05,264 --> 00:50:07,744
equally volatile stock and bond portfolio.
822
00:50:08,449 --> 00:50:16,210
And so the question there is why am I using
this expensive solution that is so complex when
823
00:50:16,210 --> 00:50:20,369
a very simple one can give you the same
returns, right?
824
00:50:20,864 --> 00:50:24,465
And it's because you're you're you're in your
backpack.
825
00:50:24,465 --> 00:50:27,585
You have a lot of things there that you just
didn't need.
826
00:50:28,144 --> 00:50:30,625
That doesn't mean that you're not going to need
them in the future.
827
00:50:30,625 --> 00:50:33,905
Like the sensible thing is always to be
prepared.
828
00:50:34,320 --> 00:50:36,320
You need to be prepared always.
829
00:50:36,320 --> 00:50:43,520
And, you know, if we don't get a terrible
market, I mean, I hope we don't get a terrible
830
00:50:43,599 --> 00:50:45,119
carbon market, right?
831
00:50:45,119 --> 00:50:46,400
We're going to do okay too.
832
00:50:48,414 --> 00:50:50,335
It's not that bad.
833
00:50:51,375 --> 00:50:58,574
But yeah, sometimes I find myself thinking
like, do I want a terrible bear market for
834
00:50:58,574 --> 00:50:59,375
equities?
835
00:51:00,655 --> 00:51:03,270
That people see the value of this.
836
00:51:03,829 --> 00:51:04,630
But yeah, everyone's
837
00:51:04,950 --> 00:51:05,190
Yeah.
838
00:51:05,190 --> 00:51:06,630
Well, that's that yeah.
839
00:51:06,630 --> 00:51:14,390
Don't we all you know, anecdote to that is that
I I was doing this stuff in o eight, and I
840
00:51:14,390 --> 00:51:16,309
remember the phases of emotions.
841
00:51:16,309 --> 00:51:21,405
Know, phase one, September, like Lehman goes
down September, October.
842
00:51:21,565 --> 00:51:22,925
I'm feeling so good.
843
00:51:22,925 --> 00:51:23,244
Right?
844
00:51:23,244 --> 00:51:25,244
I've been talking about it for a few years.
845
00:51:25,324 --> 00:51:27,164
Portfolios are doing great.
846
00:51:28,125 --> 00:51:30,444
You know, everybody's losing their minds.
847
00:51:30,444 --> 00:51:33,170
Clients don't even know what's my clients
didn't know.
848
00:51:33,170 --> 00:51:34,449
Why is everybody so worried?
849
00:51:34,449 --> 00:51:37,250
Because they weren't looking at portfolios in
different light.
850
00:51:37,730 --> 00:51:41,569
And and so the first was relief and
satisfaction.
851
00:51:41,569 --> 00:51:42,210
We want that.
852
00:51:42,210 --> 00:51:47,409
And then you you have January, February, and
advisers aren't showing up to their desks.
853
00:51:47,945 --> 00:51:51,224
Associates are having to talk to clients that
are crying on the phone.
854
00:51:51,784 --> 00:51:53,625
Family and friends are losing their jobs.
855
00:51:53,625 --> 00:51:57,864
And then you're like, crap, I really need this
to turn around right now.
856
00:51:58,105 --> 00:51:58,344
Right?
857
00:52:00,150 --> 00:52:04,710
It is a double edged sword to kinda I wanna
show the value of this, and this is important,
858
00:52:04,710 --> 00:52:07,109
but also I don't want to ever have to use those
tools.
859
00:52:07,190 --> 00:52:10,389
And I hope I never have to show you what how
important those tools were.
860
00:52:10,389 --> 00:52:12,469
I just need you to trust me so that when it
does happen.
861
00:52:12,549 --> 00:52:16,034
And so by the end of it, I was just begging for
things things to change.
862
00:52:16,034 --> 00:52:22,275
And then when things changed, then the markets
roared 80% and you're still making 9% a year,
863
00:52:22,434 --> 00:52:23,715
especially when it was non levered.
864
00:52:23,715 --> 00:52:24,114
Right?
865
00:52:24,275 --> 00:52:30,010
So it is, you you know, as an all terrain
provider and investor, you go through these
866
00:52:30,010 --> 00:52:36,889
emotions at the end of the day, comes down to,
does it, is it a sound philosophical
867
00:52:36,889 --> 00:52:39,849
fundamental investment strategy that works over
time?
868
00:52:41,054 --> 00:52:45,295
And I think it's tough to once you take the red
pill, tough to say no.
869
00:52:45,295 --> 00:52:45,775
No, it doesn't.
870
00:52:45,775 --> 00:52:52,094
And even this year, I'm looking at just
eyeballing the kind of the off road portfolio
871
00:52:52,094 --> 00:52:54,014
versus an 8020, right?
872
00:52:54,530 --> 00:52:57,969
Eighty twenty year to date is up again.
873
00:52:58,130 --> 00:53:04,690
Another drawdown, around 13% drawdown and in a
recovery.
874
00:53:04,690 --> 00:53:10,744
And I'm looking at an, you know, an iteration
in off road roughly around the same risk.
875
00:53:10,744 --> 00:53:17,065
Actually, lower risk, but, you know, down, less
peak to trough and flat for the year, and they
876
00:53:17,065 --> 00:53:17,864
seem identical.
877
00:53:17,864 --> 00:53:20,744
But the reality is that one is a levered
portfolio and the other one is.
878
00:53:20,744 --> 00:53:21,065
Right?
879
00:53:21,065 --> 00:53:23,305
And the risk of, hey.
880
00:53:23,305 --> 00:53:26,269
It's a levered portfolio that's risky.
881
00:53:26,349 --> 00:53:29,469
Again, if you're using defensive leverage, not
so much.
882
00:53:29,469 --> 00:53:32,109
You know, it had a shallower drawdown.
883
00:53:32,109 --> 00:53:34,030
It's now back to breakeven.
884
00:53:34,109 --> 00:53:41,634
And and there were there were tools in there
that the 6040 didn't have, like gold, right,
885
00:53:41,634 --> 00:53:47,554
that really helped offset a lot of the losses
on the on the Liebert side.
886
00:53:47,554 --> 00:53:54,674
And so the question is, what would have
happened if this continued to go down twenty,
887
00:53:54,674 --> 00:53:55,989
thirty, 40, 50 percent?
888
00:53:55,989 --> 00:53:59,510
Would they continue to be in tandem like we saw
in this shallow loss?
889
00:53:59,510 --> 00:53:59,990
No.
890
00:54:00,070 --> 00:54:01,750
And history has shown us that no.
891
00:54:01,750 --> 00:54:06,390
It's it's very it becomes a very different
portfolio in a continuation.
892
00:54:06,950 --> 00:54:08,789
But, hopefully, we'll never see that.
893
00:54:08,789 --> 00:54:10,315
Hopefully, we'll just compete.
894
00:54:10,315 --> 00:54:12,394
Like, hopefully, the all terrain is able to
compete.
895
00:54:12,474 --> 00:54:16,315
Hopefully, all terrain gives what people need
in terms of what they care about, which is am I
896
00:54:16,315 --> 00:54:20,795
gonna have enough returns to make, you know, my
to pay my bills when I retire or, you know,
897
00:54:20,795 --> 00:54:22,635
grow to get a good retirement nest egg.
898
00:54:23,090 --> 00:54:27,570
But again, if it does happen, it's important to
understand the moving parts and the value that
899
00:54:27,570 --> 00:54:30,369
they add if God forbid anything really bad
happens.
900
00:54:30,369 --> 00:54:36,450
It's funny because I was thinking that that's
exactly what's taken me now full circle to,
901
00:54:36,690 --> 00:54:42,825
okay, can't convince everyone to be an all
weather investor because some people are just
902
00:54:42,825 --> 00:54:45,385
not built in their mind for that.
903
00:54:45,385 --> 00:54:46,905
They like taking risks.
904
00:54:47,305 --> 00:54:53,510
They believe in stocks and they're value
investors or they're whatever.
905
00:54:53,510 --> 00:54:53,989
I don't know.
906
00:54:53,989 --> 00:55:00,309
They they want stocks and they want businesses
and they believe in the markets and they're
907
00:55:00,309 --> 00:55:03,910
capitalists or whatever they they have in their
mind.
908
00:55:04,550 --> 00:55:10,525
You still use diversification without
sacrificing your tax.
909
00:55:10,605 --> 00:55:13,565
You couldn't do it before, you can do it now.
910
00:55:14,525 --> 00:55:15,724
That's what I was saying.
911
00:55:15,724 --> 00:55:22,444
You can add to a 100% portfolio, 100% stocks,
whatever kind of thing you're doing.
912
00:55:22,869 --> 00:55:30,230
100% stocks, you can add some diversifiers on
top of that, and if you do the right amount,
913
00:55:30,710 --> 00:55:34,949
you're not going to feel the difference and
you're just going to get that extra return from
914
00:55:34,949 --> 00:55:35,670
the stacking.
915
00:55:35,670 --> 00:55:39,704
So even if you're just looking at returns,
return stacking makes sense.
916
00:55:39,704 --> 00:55:45,784
If you're looking at, you know, maybe you want
a little less risk and not concentrate your
917
00:55:45,784 --> 00:55:51,144
defense on bonds, then you can use return
stacking to have a a more diversified defense,
918
00:55:51,269 --> 00:55:54,630
which is what I was trying to do before, but
now I think I'm doing it more efficiently
919
00:55:54,630 --> 00:55:55,269
again.
920
00:55:55,429 --> 00:55:59,829
We can add more defense to that defense that we
didn't do that before with stacking.
921
00:55:59,829 --> 00:56:06,150
There's so many ways you can use stacking that
when I put myself in other band of investors
922
00:56:05,655 --> 00:56:14,614
boots, my mind is exploding because I just
can't understand if you know about it, why
923
00:56:14,614 --> 00:56:15,494
wouldn't you do it?
924
00:56:15,494 --> 00:56:22,989
I just don't see a world where in a couple of
decades, this is the norm.
925
00:56:23,150 --> 00:56:24,429
Everyone will use it.
926
00:56:24,429 --> 00:56:24,829
Right.
927
00:56:24,829 --> 00:56:26,829
Where not standard of care
928
00:56:26,829 --> 00:56:27,309
for Exactly.
929
00:56:27,710 --> 00:56:34,775
Everyone will be using see that you know if you
have a a any version of a sixty forty, right?
930
00:56:34,775 --> 00:56:37,175
Like your index stock in one portfolio.
931
00:56:37,175 --> 00:56:44,934
You can easily add 15% stack on that without
affecting your overall risk and just get some
932
00:56:44,934 --> 00:56:45,734
extra returns.
933
00:56:45,734 --> 00:56:49,369
Not like It will happen eventually.
934
00:56:49,369 --> 00:56:52,489
You're adding things that make money over time.
935
00:56:52,809 --> 00:56:54,889
We know that not all the time.
936
00:56:54,889 --> 00:56:58,809
But now you can get a diversified set of things
that make money over time.
937
00:56:59,125 --> 00:57:03,204
You put them on top of your traditional
portfolio, tracking error is going to be
938
00:57:03,204 --> 00:57:07,364
minimal, volatility wise it's going to be
almost the same, and you're just going to get
939
00:57:07,364 --> 00:57:08,805
some extra returns.
940
00:57:08,805 --> 00:57:09,364
Why?
941
00:57:09,364 --> 00:57:09,844
What?
942
00:57:09,844 --> 00:57:11,684
And the thing is
943
00:57:11,684 --> 00:57:16,349
that the caveat to all that is that, you know,
we're saying it will, but the reality is that,
944
00:57:16,750 --> 00:57:18,510
you know, you look at some diversifiers.
945
00:57:18,510 --> 00:57:22,909
AQR went through a three year period where
their their alpha sleeve just kinda lost money
946
00:57:22,909 --> 00:57:23,949
and now it's killing it again.
947
00:57:23,949 --> 00:57:25,710
Like, it's it depends on time frame.
948
00:57:25,710 --> 00:57:26,510
There will be losses.
949
00:57:27,025 --> 00:57:31,105
There's no guarantees, but, you know, again,
these are sound a lot of these are very sound
950
00:57:31,105 --> 00:57:31,905
ideas.
951
00:57:32,385 --> 00:57:35,985
Even if you're a % equity investor and you
decide to stack some bonds.
952
00:57:35,985 --> 00:57:39,585
I mean, the question is, is term premium going
to exist in the future?
953
00:57:39,630 --> 00:57:44,829
If you're able to stack an extra 1% just by
doing 100% equities, 20% bonds.
954
00:57:44,989 --> 00:57:46,510
Alright, you're adding diversification.
955
00:57:46,670 --> 00:57:48,109
Do you believe in term premium?
956
00:57:48,109 --> 00:57:51,150
Do you believe that bonds are going to make
returns above cash especially if you're taking
957
00:57:51,150 --> 00:57:52,029
duration risk?
958
00:57:52,029 --> 00:57:53,869
You know, it seems like a reasonable thing.
959
00:57:54,109 --> 00:57:56,135
I mean, any one of those can fix.
960
00:57:56,135 --> 00:57:58,295
Mean, I know we have to-
961
00:58:00,135 --> 00:58:01,494
We have to, yeah.
962
00:58:01,974 --> 00:58:03,015
Temper expectations.
963
00:58:03,175 --> 00:58:03,894
Temper expectations.
964
00:58:03,894 --> 00:58:04,135
Yeah.
965
00:58:04,135 --> 00:58:07,655
I feel like that stock investors never do this,
but okay, let's separate.
966
00:58:09,210 --> 00:58:10,010
Let us.
967
00:58:10,010 --> 00:58:15,449
We will separate the locations, but you know, I
can see a world where one of those diversifiers
968
00:58:15,449 --> 00:58:17,849
can fail on you even in the long term.
969
00:58:17,849 --> 00:58:24,135
But the more of that new add on, you know, the
more probable it is than, you know, than than a
970
00:58:24,135 --> 00:58:28,375
series of things that have made money over time
in the long term.
971
00:58:28,695 --> 00:58:33,974
If you add them together and you have a
diversified set of them, will eventually, very
972
00:58:33,974 --> 00:58:39,719
probably make some money and that will be
something that will be on top of what you are
973
00:58:39,719 --> 00:58:42,840
doing right now and it won't affect your
portfolio.
974
00:58:42,840 --> 00:58:44,039
Makes so much sense.
975
00:58:44,039 --> 00:58:46,360
And I think you're right.
976
00:58:46,360 --> 00:58:52,704
I think the big unlock for guys like you and me
who both started on the all terrain camp and
977
00:58:52,704 --> 00:58:54,144
were like, this is the only way.
978
00:58:55,105 --> 00:58:59,744
When you take that away for a second and you
see, okay, investing is a religion.
979
00:59:00,144 --> 00:59:01,744
Everybody has their own religion.
980
00:59:01,824 --> 00:59:05,184
And and they're they're all they're value
investors, but there's a bunch of there's a
981
00:59:05,184 --> 00:59:08,630
bunch of, like, sects within value investors
too, right?
982
00:59:09,670 --> 00:59:12,630
And there's all terrain investors and there's a
bunch of sex.
983
00:59:12,630 --> 00:59:14,309
So everybody has their own point of view.
984
00:59:14,309 --> 00:59:21,105
The big unlock here is saying, okay, let's not
try to shove all terrain down the throat to be
985
00:59:21,105 --> 00:59:26,704
down people's throats, but rather the
realization that, oh, this is just a tool.
986
00:59:26,864 --> 00:59:33,344
If we can provide tools for advisors and
investors to apply their own religion in a much
987
00:59:33,344 --> 00:59:36,579
more efficient manner, then we should help them
do that.
988
00:59:36,579 --> 00:59:41,860
And I think we're we both later in our careers,
are have been like, okay.
989
00:59:41,860 --> 00:59:42,420
You know what?
990
00:59:42,420 --> 00:59:45,699
Let's empower the world's population.
991
00:59:45,699 --> 00:59:47,140
You're gonna tackle Europe.
992
00:59:47,300 --> 00:59:52,454
We'll tackle the, Anglosphere to just do a
little bit better.
993
00:59:52,695 --> 00:59:56,695
And I think that's you're you're coming at it
now.
994
00:59:56,934 --> 01:00:01,655
That's what you're gonna start offering soon,
and, it makes total sense to me.
995
01:00:01,590 --> 01:00:06,070
And I'm actually quite quite pumped about it
from this how it's gonna work in in Europe from
996
01:00:06,070 --> 01:00:06,950
your perspective.
997
01:00:07,269 --> 01:00:07,910
Yep.
998
01:00:08,550 --> 01:00:09,269
Alright.
999
01:00:09,269 --> 01:00:10,469
Well, we covered a lot.
1000
01:00:10,469 --> 01:00:13,750
Is there anything that I that you think would
be useful?
1001
01:00:13,750 --> 01:00:14,789
Any parting words?
1002
01:00:15,394 --> 01:00:17,875
Let me I had some notes from here.
1003
01:00:18,355 --> 01:00:19,074
Yeah.
1004
01:00:20,594 --> 01:00:24,515
Well, maybe it's of a question that I'm asking
you.
1005
01:00:25,155 --> 01:00:30,910
I'm seeing more interest in return stacking,
Portable Alpha.
1006
01:00:31,550 --> 01:00:39,070
The last couple of months have been pretty
crazy with lots of shops opening up new ideas.
1007
01:00:40,349 --> 01:00:46,585
Understand one of the reasons why this hadn't
happened before had to do with the regulation
1008
01:00:46,585 --> 01:00:47,625
in The States.
1009
01:00:49,144 --> 01:00:55,464
We're looking at how this is evolving in
Europe, but how do you see, first of all, the
1010
01:00:55,464 --> 01:00:58,025
landscape in The States or in the rest of the
world?
1011
01:00:58,409 --> 01:01:00,889
You're doing some things in Canada too.
1012
01:01:00,969 --> 01:01:05,130
How do you how do you see this evolving in The
States market?
1013
01:01:05,130 --> 01:01:05,690
Yeah.
1014
01:01:05,849 --> 01:01:07,210
I mean, like,
1015
01:01:07,210 --> 01:01:12,425
the transition to other markets like like
Europe where you know, I've started, as you
1016
01:01:12,425 --> 01:01:17,785
were saying before, we we found a way to
operate, but, we've had to go through many
1017
01:01:17,785 --> 01:01:18,905
loops to actually
1018
01:01:19,465 --> 01:01:23,625
We're going through loopholes right now to get
you the exposure with your bank.
1019
01:01:23,625 --> 01:01:23,864
Right?
1020
01:01:24,410 --> 01:01:31,050
So it's, I think, you know, it's like anything
new, it's been around for forty years.
1021
01:01:31,050 --> 01:01:31,369
Right.
1022
01:01:31,369 --> 01:01:33,210
I think I've, I've used this analogy before.
1023
01:01:33,210 --> 01:01:37,130
There's a bunch of people who don't want to die
of a heart attack.
1024
01:01:37,450 --> 01:01:42,684
There's a bunch of tests that have been
approved and been recommended for doctors to
1025
01:01:42,684 --> 01:01:49,085
give their patients for years in order to
assess whether you're a high risk for heart
1026
01:01:49,085 --> 01:01:52,765
attack or not, that are not being done by the
vast majority of doctors, even though they've
1027
01:01:52,765 --> 01:01:53,644
been around for twenty years.
1028
01:01:54,039 --> 01:02:00,599
And so it requires, in this case, some experts
to kind of bang down the door and say, no,
1029
01:02:00,599 --> 01:02:08,144
everybody needs to get their APO B numbers and
everybody needs to get their Lp, sorry, LP
1030
01:02:08,144 --> 01:02:09,505
little a numbers checked.
1031
01:02:09,505 --> 01:02:13,184
And these are things that nobody really knows
about today.
1032
01:02:13,184 --> 01:02:16,304
They just care about cholesterol, total
cholesterol, even though it's a good indicator,
1033
01:02:16,304 --> 01:02:19,184
but our maximum indicator, it takes decades,
right?
1034
01:02:19,184 --> 01:02:25,690
And Portal Alpha has been around for forty
years And it's taken a few people, you know,
1035
01:02:25,690 --> 01:02:29,849
trying to say the same thing in different ways
and communicate.
1036
01:02:29,849 --> 01:02:33,369
And then when it becomes important, there's a
groundswell right now.
1037
01:02:33,369 --> 01:02:37,864
If you look at how many times the word Portable
Alpha has been searched, it's gone from nothing
1038
01:02:37,864 --> 01:02:40,985
to, you know, an insane amount in the last two
years, especially.
1039
01:02:41,304 --> 01:02:43,545
Probably, we helped in a little bit in that.
1040
01:02:43,945 --> 01:02:46,505
And now institutions have to pay attention.
1041
01:02:46,744 --> 01:02:51,784
Like, we know for a fact that Morningstar is
having to think about a new category that's
1042
01:02:51,784 --> 01:02:55,349
going to put all portable alpha people in
there.
1043
01:02:55,349 --> 01:02:58,630
And then the next question is, who's behind the
curve?
1044
01:02:58,630 --> 01:03:01,349
And I think the usage structure is behind the
curve.
1045
01:03:01,670 --> 01:03:08,914
They have these weird rules about, how one can
invest in derivatives, And it makes it really
1046
01:03:08,914 --> 01:03:14,914
difficult and really expensive to provide the
best possible stack because of that.
1047
01:03:14,914 --> 01:03:21,199
And I'm sure that'll slowly start to change
because there's going to be too many people
1048
01:03:21,199 --> 01:03:25,440
that matter to them, forcing them to kind of
lighten up a little bit.
1049
01:03:25,440 --> 01:03:25,920
Right?
1050
01:03:26,320 --> 01:03:27,519
So that ground's also coming.
1051
01:03:27,519 --> 01:03:29,599
People are asking more and more about it.
1052
01:03:29,760 --> 01:03:35,644
Once a category in Morningstar exists and other
platforms will have to think about it as well
1053
01:03:35,644 --> 01:03:43,244
and categorize, there's reticence from existing
funds that have been using Portable Alpha from
1054
01:03:43,244 --> 01:03:44,525
ever to saying the word leverage.
1055
01:03:44,525 --> 01:03:45,085
Exactly.
1056
01:03:45,085 --> 01:03:46,285
That's what I was gonna say.
1057
01:03:46,204 --> 01:03:54,230
Think see it everywhere and now I go through
this.
1058
01:03:54,230 --> 01:03:57,589
But before I and people were not saying it,
right?
1059
01:03:57,589 --> 01:04:00,515
You can find it, right?
1060
01:04:00,515 --> 01:04:02,755
That you you'll eventually find, you know, this
And
1061
01:04:03,155 --> 01:04:04,515
and and and the goal here
1062
01:04:04,515 --> 01:04:05,635
is to be stigmatized.
1063
01:04:05,635 --> 01:04:09,795
And you you end up finding out that it's doing
stocks plus something.
1064
01:04:09,795 --> 01:04:12,914
And and that's why they're getting those
returns, right?
1065
01:04:12,914 --> 01:04:18,880
So now that I see it, I see it everywhere, but
I see people using it and not saying they're
1066
01:04:18,880 --> 01:04:25,359
using it, and again, that going back to what I
said before about being very transparent on,
1067
01:04:25,359 --> 01:04:27,965
okay, this is what we're doing, and we explain
it.
1068
01:04:27,965 --> 01:04:28,204
Yeah.
1069
01:04:28,204 --> 01:04:34,844
So that you don't get scared and and you see
it's okay and it works and this is exactly how
1070
01:04:34,844 --> 01:04:35,485
it works.
1071
01:04:35,485 --> 01:04:37,005
I think we're missing.
1072
01:04:37,005 --> 01:04:37,244
Yeah.
1073
01:04:37,244 --> 01:04:41,400
And I think a bigger unlock is also like like
anything, you know, portfolio construction can
1074
01:04:41,400 --> 01:04:41,960
be anything.
1075
01:04:41,960 --> 01:04:44,840
Portable Alpha can be any sort of iteration.
1076
01:04:45,079 --> 01:04:49,880
Keeping it as simple as possible with the one
plus one that that we've really focused on,
1077
01:04:50,119 --> 01:04:51,400
talking about Lego blocks.
1078
01:04:51,400 --> 01:04:56,554
I think, again, bringing it down to a level
where people can understand it, understand what
1079
01:04:56,554 --> 01:05:02,954
they can put in and what they can take out, and
being upfront about what the stacks are are is
1080
01:05:02,954 --> 01:05:06,530
the big unlock versus we just how do we
outperform?
1081
01:05:06,530 --> 01:05:07,890
We do we just do overlay stuff.
1082
01:05:07,890 --> 01:05:08,929
Just trust us.
1083
01:05:08,929 --> 01:05:13,650
We're gonna we're gonna just do our own thing
and you just need to, you know, batten down the
1084
01:05:13,650 --> 01:05:15,890
hatches and and and invest in it long term.
1085
01:05:16,369 --> 01:05:18,449
We're trying to be like open kimono.
1086
01:05:18,449 --> 01:05:19,809
Here's exactly how it works.
1087
01:05:19,809 --> 01:05:20,289
You should know.
1088
01:05:20,744 --> 01:05:26,424
And let's really understand what the risks that
you're taking by using portable alpha return
1089
01:05:26,424 --> 01:05:30,824
stacking leverage are and dispel some of the
myths and understand some of the risks.
1090
01:05:30,824 --> 01:05:35,309
So it's gonna be a long journey to get brought
at auction.
1091
01:05:35,309 --> 01:05:39,950
But I, like I said, forty years from now, I'd
be shocked if everybody's portfolio doesn't
1092
01:05:39,950 --> 01:05:41,390
have at least a little bit of this.
1093
01:05:41,390 --> 01:05:42,269
That's how I see it.
1094
01:05:42,269 --> 01:05:49,230
So hopefully Europe moves a little faster and I
can introduce things because right now I'm
1095
01:05:49,230 --> 01:05:55,835
seeing that always the first person to ask or
the first person in anything that is portable,
1096
01:05:55,835 --> 01:05:59,355
alphasque in Europe, now in Canada.
1097
01:05:59,355 --> 01:06:02,074
So I think I'm one of the biggest Yeah.
1098
01:06:02,074 --> 01:06:07,840
I'm trying to be there at the forefront of of
it, but I'm I'm really enjoying it because I
1099
01:06:07,840 --> 01:06:10,000
think we're very, very early.
1100
01:06:11,200 --> 01:06:11,760
Very early.
1101
01:06:11,760 --> 01:06:12,960
And it's exciting.
1102
01:06:12,960 --> 01:06:16,480
And you see that, like, when you put these you
put things together, you know, like, oh my god.
1103
01:06:16,480 --> 01:06:17,119
This is so good.
1104
01:06:17,119 --> 01:06:21,204
We just need to give us like, we just need show
it out and and give it some And it's always
1105
01:06:21,204 --> 01:06:25,925
like it always because of the operational
burden of doing something new.
1106
01:06:25,925 --> 01:06:29,045
It's always you're putting things out two years
later than what you wanted to.
1107
01:06:29,045 --> 01:06:32,724
Like, we wrote the paper in 2021 and we wanted
to launch something at the end of twenty twenty
1108
01:06:32,724 --> 01:06:32,885
one.
1109
01:06:33,519 --> 01:06:39,200
Had we done that, you know, the visual obvious
story would immerse or would emerge.
1110
01:06:39,200 --> 01:06:43,840
And what's happened is it took everybody two
years to to let us do what we needed to do.
1111
01:06:43,840 --> 01:06:47,519
And we launched at the teeth of a of a drawdown
in some of these stacks.
1112
01:06:47,555 --> 01:06:47,875
Right?
1113
01:06:47,875 --> 01:06:51,875
So, you know, we're just gonna have to muddle
through and keep on telling the story.
1114
01:06:52,355 --> 01:06:54,595
And you're you're a good partner to have in
Europe.
1115
01:06:54,755 --> 01:06:55,315
Let's see.
1116
01:06:55,315 --> 01:06:56,195
Let's see how it goes.
1117
01:06:56,195 --> 01:06:57,795
We'll keep pushing it.
1118
01:06:57,795 --> 01:07:00,914
Rapha, this has been awesome.
1119
01:07:01,075 --> 01:07:02,355
We should do this more often.
1120
01:07:02,355 --> 01:07:08,599
Your English is much better than my Spanish,
which is which is incredible for somebody that
1121
01:07:08,599 --> 01:07:10,519
hasn't done this in English.
1122
01:07:11,000 --> 01:07:11,960
Thanks again.
1123
01:07:11,960 --> 01:07:17,065
We will if anybody wants to find you, where can
they find you on social media?
1124
01:07:17,144 --> 01:07:27,945
Well, I'm on I'm on Twitter mostly at at River
Patrimorio, which is r I v e r p a t r I m o n
1125
01:07:27,945 --> 01:07:28,425
I o.
1126
01:07:29,750 --> 01:07:33,030
We'll have it down there in the in the links I
guess.
1127
01:07:33,030 --> 01:07:33,750
Michelle.
1128
01:07:33,989 --> 01:07:38,789
And then if you want to read about return
stacking in Spanish, you can actually find me
1129
01:07:38,789 --> 01:07:43,085
if you if you look for returns
taggedportfolios.es.
1130
01:07:43,085 --> 01:07:45,324
That's the Spanish webpage.
1131
01:07:45,484 --> 01:07:52,764
There we're basically talking about return
stacking and doing covering all the on the on
1132
01:07:52,764 --> 01:07:54,125
the stuff that you guys are doing.
1133
01:07:54,460 --> 01:07:56,059
Trying to bring it again.
1134
01:07:56,380 --> 01:07:59,660
I think the main difference is that we're
looking at retail investors instead of
1135
01:07:59,660 --> 01:08:05,260
advisors, so that's why I twist some of the
ideas.
1136
01:08:05,579 --> 01:08:10,554
Yeah, I would definitely encourage people to go
to the site and there's a little button on your
1137
01:08:10,554 --> 01:08:17,354
Chrome that says translate and does a pretty
good job of just try to read a few and read it
1138
01:08:17,354 --> 01:08:21,194
from a different angle that Rafa is really good
at.
1139
01:08:21,194 --> 01:08:25,250
So definitely visit the site, read some of the
blog articles.
1140
01:08:25,250 --> 01:08:26,530
We'll have you on more often.
1141
01:08:26,530 --> 01:08:27,090
Cool.
1142
01:08:27,810 --> 01:08:29,890
And keep doing what you're doing, man.
1143
01:08:29,890 --> 01:08:30,770
You're doing God's work.
1144
01:08:30,770 --> 01:08:31,250
Great.
1145
01:08:31,250 --> 01:08:31,489
Thanks,
1146
01:08:31,489 --> 01:08:31,810
Rob.
1147
01:08:31,810 --> 01:08:33,170
Thanks for joining today.
1148
01:08:34,610 --> 01:08:39,895
If you're enjoying the podcast, please consider
heading over to your favorite podcast platform
1149
01:08:39,895 --> 01:08:44,135
and leaving us a rating or review and sharing
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1150
01:08:44,454 --> 01:08:47,094
It helps new people find us and helps us grow.
1151
01:08:47,335 --> 01:08:52,215
Finally, if you'd like to learn more about our
extensive research on the concept of return
1152
01:08:52,215 --> 01:08:55,920
stacking, please do head over to
returnstack.com.