Episode 4

full
Published on:

13th Apr 2025

Navigating Dynamic Markets and The Importance of The Human Touch: Insights from Torey Pellegrini, CFA

Welcome to EWM INSIGHTS where we celebrate on HUMAN CAPITAL!

In this edition of INSIGHTS we sit down for for a conversation with Torey Pellegrini, CFA, from The London Company, breaking down the basics of market dynamics and investment management.

We talk about the key ideas behind making smart investment decisions and why it’s important to keep a long-term view, especially as the market keeps changing.

Torey explains the different asset classes and how they fit into a portfolio, stressing that having a solid strategy is crucial for managing risk while aiming for growth.

We also touch on the balance between technology and the importance of the human touch in investment management, pointing out that good leadership is key to navigating the tricky financial landscape.

Our goal is to give our listeners the know-how to make smart investment choices in this fast-paced and quickly changing environment.

Join us as we discuss the significance of leadership in finance, the impact of technology on decision-making, and the importance of long-term thinking in investment strategies. Discover how to navigate the complexities of asset classes - and the human touch that remains essential in a rapidly evolving market landscape.

Takeaways:

  • The dynamism of markets necessitates an understanding of foundational investment principles to navigate them effectively.
  • Leadership remains a critical factor in investment strategy, emphasizing the significance of human insight over automation.
  • Investment success relies on long-term thinking, allowing for patience and discipline in portfolio management strategies.
  • Asset allocation requires a careful balance between different asset classes to achieve a desired risk-return profile over time.
  • Investors must recognize the unique characteristics and roles of various asset classes to optimize portfolio performance.
  • Understanding the interplay between emotional biases and investment decisions can significantly enhance long-term outcomes.

Feel free to share this episode with those in your circle who are on a similar path of learning.

We hope our conversations will help you acquire more knowledge, become even more curious about the gifts that are in and all around us, while supporting you to reach new heights as we grow together.

You can subscribe and listen to EWM INSIGHTS on Spotify, Apple Podcasts, Amazon Music, or the Ellis Wealth Management Homepage: https://elliswealthmanagement.net/podcasts/

Above all, through EWM INSIGHTS we want to encourage you to:

INVEST IN WHAT YOU LOVE!®

References mentioned in this episode:

  • The London Company

https://www.tlcadvisory.com/

  • George S. Patton

https://en.wikipedia.org/wiki/George_S._Patton

Transcript
Speaker A:

Well, all right.

Speaker A:

What a great, great day it is in the beautiful Pacific Northwest.

Speaker A:

It is a gorgeous day.

Speaker A:

And summer's right around the corner, so we're getting exc for that time of year as well.

Speaker A:

Well, the markets have been rather dynamic and for those that thought things were going to be very much like Rip Van Winkle, where they could just go to sleep and things would stay the same.

Speaker A:

You may sleep, but there's a lot going on.

Speaker A:

And so today, one of the things that I wanted to do was remind people of why they're doing what they're doing and what are some of the basics that need to be considered in investment management, money management, and in the decision making moving forward.

Speaker A:

So today promises to be a really different and fun experience.

Speaker A:

Today we have with us a very special friend and practice partner, Tory Pellegrini.

Speaker A:

He's a chartered financial analyst with the London Company.

Speaker A:

The London Company is an investment company based out of Richmond, Virginia.

Speaker A:

And they have been practice partners and good friends for a long time.

Speaker A:

Tori, good morning.

Speaker A:

How are you today?

Speaker B:

Good morning.

Speaker B:

I'm great.

Speaker B:

We're heading into the weekend and it's starting to get nice and warm down here in Dallas, so thanks for having me on.

Speaker B:

Although, you know, not as nice as up your way.

Speaker B:

We're looking forward to a nice long summer here.

Speaker A:

The basketball team.

Speaker B:

I came from Boston about four years ago and when I was in Boston, we were the city of champions.

Speaker B:

Recently, not so much.

Speaker B:

And maybe I brought some of that good luck down here.

Speaker A:

I bet you have.

Speaker A:

I believe you have.

Speaker A:

And of course, the weather is a little different in Dallas than it is in Boston, isn't it?

Speaker B:

Yeah, it's a little spicy down here.

Speaker B:

A little spice, especially, you know, in the middle of the summer.

Speaker B:

We're talking July, you know, 110 degrees every day for a few weeks.

Speaker B:

So it was certainly an adjustment.

Speaker A:

Hey, I've got a question for you.

Speaker A:

You know, there's a lot of talk about AI.

Speaker A:

There's been a lot of talk about, you know, quantum computing, and people are really excited about the, the world of robots, the world of AI, how quickly things can be made.

Speaker A:

A lot of people have thought that the world of technology moving forward is that they won't have to do much thinking.

Speaker A:

The robots will be doing the thinking for them.

Speaker A:

And I think you and I really would challenge that and say that leadership really does still matter.

Speaker A:

It matters whether it's in sports, whether it's in finance, anything worth a pursuit.

Speaker A:

Leadership and thought leadership are really important.

Speaker A:

How do you see Technology and leadership as it pertains to the importance of the human touch in the investment world.

Speaker B:

Yeah, we see it as a technology that's going to enable people to be better at their jobs.

Speaker B:

It's not going to replace people.

Speaker B:

It's not going to replace, to your point, good thought, leadership, good instincts and individuals that are very good at their job.

Speaker B:

Instead it's going to make them more efficient.

Speaker B:

It's just another tool, just like the Internet or any other technology that's come about over time to help people perform better at their jobs and to help move the economy forward.

Speaker A:

I was reading a book regarding Patton and George S.

Speaker A:

Patton, one of the great army generals of the United States and the Allies during World War II is where most people know of his successes.

Speaker A:

And he talked about the difference between leadership and technology tools.

Speaker A:

And so many people would get excited about the new tools and his viewpoint was, remember it's, it's a tool.

Speaker A:

We still need leadership, we still need soldiers, we still need boots on the ground.

Speaker A:

And ultimately it's the human element that decides victory or not.

Speaker A:

I look at that coming from George Patton and I try and apply that to our world today.

Speaker B:

Yeah, that's an interesting point and I think you're 100% right.

Speaker B:

You're not going to get anywhere with technology on its own.

Speaker B:

You need some thought creation behind it.

Speaker B:

It's only as good as the inputs that we can apply to it and it's going to aid us in moving the economy and moving our creativity forward.

Speaker B:

So what I think is really going to be a difference maker with AI and these new technologies is hey, this is going to free up our time to do things that are more complex.

Speaker B:

So you know, we outsource some of the easier day to day items on our list to AI and technology where you know, they can bring some scale to the equation.

Speaker B:

Frees up more of our time to do other things that apply a little bit more thought and a little bit more creativity.

Speaker B:

Where to your point, that's where humans excel.

Speaker B:

So I think it's going to be good for the individual, it's going to be good for the worker and it's good going to be good for the overall economy.

Speaker A:

In the area of investment management, the London company manages a number of different styles, a number of different strategies and portfolios.

Speaker A:

This is where specialization and expertise really get fine tuned, isn't it?

Speaker B:

Yeah, it is.

Speaker B:

And you know, you look at the industry as a whole, I think specializations required if you want to have any sort of success in this industry because it's just so broad when you think about finance, right, it's everything from, you know, banking to venture capital to private equity to wealth management.

Speaker B:

Right.

Speaker B:

What you do, Paul, to investment management, what we do.

Speaker B:

I mean, it's just such a big umbrella that in order to be good at any one of those areas, you really need to specialize.

Speaker B:

So for us, you know, this small niche that we call investment management, right, it's where we've decided to spend all of our time and expertise getting as good as we can at really trying to increase the likelihood of having successful investment outcomes for our clients and reducing the amount of mistakes that are made along the way.

Speaker A:

In regards to mistakes, you know, everyone likes to, everybody likes to brag about the winners and try and write off your losers for sure.

Speaker A:

But one of the things I've always believed that is it's important for portfolios to breathe, in other words, in order to have patience.

Speaker A:

The style of the London company is not one that it is buying a stock or position first thing in the morning and have traded it three times by 1:00 in the afternoon.

Speaker A:

You're tending to think about these things as a position that is going to be held for a period of time, isn't that correct?

Speaker B:

Yeah, exactly.

Speaker B:

That's the way we think about things through a long term lens because we think that's how you win over long periods of time.

Speaker B:

And to an extent, you know, our first job, really, it's, it's to save ourselves from ourselves, right?

Speaker B:

And our own behavioral and emotional biases and our own biology that runs counter to what we know works over long periods of time.

Speaker B:

So you know, things like emotional biases, like recency bias or anchoring bias or confirmation bias, you know, the natural instinct of a human being to project forward what they know to be true in recent history indefinitely into the future.

Speaker B:

Right.

Speaker B:

We know on paper it doesn't make sense to do that, but our biology tells us that it does make sense.

Speaker B:

So really, you know, what we're trying to do as an investment manager is to take some of the emotion out of investment decision making, provide a little bit more discipline that steers us to the things that we know work over long periods of time.

Speaker B:

And then you know, to your point, to maintain approach, so to think about things in terms of decades instead of years and certainly instead of months or quarters.

Speaker B:

So those are really our primary jobs and that's how we think create successful outcomes over long periods.

Speaker A:

So both Dallas and the Pacific Northwest, I say the Pacific Northwest because Seattle and then Vancouver B.C.

Speaker A:

canada, Pacific Northwest have hockey teams and there was a lot of noise this year that one of Wayne Gretzky's records was going to be broken.

Speaker A:

How many goals would, would a person have over a number of, number of games?

Speaker A:

Well, one of the things that Wayne Gretzky is noted for saying, or his father is noted for saying is, you know, skate to where the puck is going to be, not to where the puck is.

Speaker A:

And so when you're looking at an investment or you're looking at a strategy, you're really thinking about where is that puck?

Speaker A:

Where is that investment?

Speaker A:

How is that going to play out in the future?

Speaker A:

Not necessarily.

Speaker A:

Is it the most exciting thing right now?

Speaker A:

Is that correct?

Speaker B:

Yeah, exactly.

Speaker B:

And the good news is we have a really long history to look back on and that is there to help inform our decision making and tell us about, hey, what's likely to work in the future, right over short periods of time.

Speaker B:

Our ability to predict what's going to happen with markets and with the economy is severely limited because as, as you know, you know, markets can remain irrational for longer than you can remain solvent.

Speaker B:

So I mean, you can be right in the long term, but still wrong in the short term in this business.

Speaker B:

So really what we want to do is put our long term thinking caps on, take a look back on history over decades and over centuries and try to figure out what does that tell us about what's likely to happen over the next decade or century.

Speaker B:

So yeah, that's a really good point.

Speaker B:

And I think it just, it all brings it back to that long term perspective.

Speaker A:

So underneath that wealth management banner and that, as you stated, that is a big banner that includes stocks, bonds, cash, but it also can include, you know, cattle, cattle futures, grain, corn futures, all the derivatives.

Speaker A:

The portion that you're looking at in our conversation today is really talking about the liquid assets of stocks, bonds and cash and how we can assist and help people manage that section of the overall arching umbrella.

Speaker A:

So the investment managers are really important and being able to select a good manager, understanding their philosophy, their execution, their track record, all of those things are really important.

Speaker A:

Investment advisors are important as well.

Speaker A:

They have a different role.

Speaker A:

Sometimes they can have the same role.

Speaker A:

So if they manage money, that is included, but they also have a different role.

Speaker A:

How do you see that different role for advisors?

Speaker B:

I see the advisor role as being absolutely critical in having any success as an individual that is investing for long term outcomes.

Speaker B:

Because what their job is is really to synthesize everything, to take a few steps back and to look at the big picture and how all of these different things are working together to achieve a client's goals.

Speaker B:

So you know, everything from, hey, let's take a look at what's going on in the US economy these days, let's filter out the noise and try to really build a good understanding of what matters to our long term investment outcomes and to our clients on a day to day basis.

Speaker B:

As you know, there's just so much information out there.

Speaker B:

I think in advisors, one of their most important jobs is trying to sort through all that, to figure out what's fluff and what's important related to an individual's investment outcomes.

Speaker B:

The other thing that I think is absolutely critical is to balance all of those individual asset classes that you mentioned before.

Speaker B:

Right.

Speaker B:

How much of each do I want to own?

Speaker B:

Why do I want to own some of each?

Speaker B:

Right.

Speaker B:

As you know, there's, there's a different purpose for owning cash versus stocks and versus bonds.

Speaker B:

Right.

Speaker B:

Each is designed to do a different thing within a client's portfolio.

Speaker B:

So how much of each do I own?

Speaker B:

When do I own them?

Speaker B:

You know, what is that?

Speaker B:

That perfect mix, I think that really is, is an advisor's job as well.

Speaker B:

And then, you know, finally, how does this all relate to the individual client and their goals and needs?

Speaker B:

What are they trying to accomplish as a human being and as a person with their career, with their family, with their philanthropic aspirations.

Speaker B:

Right.

Speaker B:

And how is that related to their investment portfolio?

Speaker B:

So an advisor is absolutely critical in that equation.

Speaker B:

You know, it's connecting all of those dots and really making an investment portfolio work to accomplish an individual's needs.

Speaker B:

And that's, it's a pretty stiff task.

Speaker A:

Years ago, my, one of my brothers asked me a question that sent me on a research project for the etymology, the beginning, the, the origin of the word advisor.

Speaker A:

And what was fascinating is that the word advisor comes from the French word advisor, which would be similar to an attorney.

Speaker A:

They would stand next to the king or queen and they, after saying, oh, king or queen, may you live forever, they would give the king or queen their summation of their rights and their responsibilities.

Speaker A:

They would tell them the pros and they would tell them the cons of the decisions that they had before them.

Speaker A:

And then of course, it was up to the king or queen to make the proclamation or make the final decision.

Speaker A:

But the advisor's position was one of a conciliary, it was one of a trusted source of understanding what the ramifications could be in addition to the opportunities before them.

Speaker A:

It wasn't an individual telling the king or queen what they had to do and how to do was much more consultative.

Speaker A:

Now, clearly, the king or queen may not have known the law to the same degree, and therefore they leaned on that specialization of that individual.

Speaker A:

But the advisor was not the king or the queen.

Speaker A:

He was serving the king and queen.

Speaker A:

And so that mindset, I think, needs to be front and center.

Speaker B:

Yeah, yeah, 100% agree.

Speaker B:

So if you think about what does a really good advisor do that a not so good one does not?

Speaker B:

And it's really, I think, you know, a couple of things, but first and foremost, helping their clients understand what it is they're trying to accomplish.

Speaker B:

So to your point, like, what are those goals?

Speaker B:

What are you trying to do over the long term?

Speaker B:

And then, you know, secondarily, how do we accomplish it?

Speaker B:

Let's put a plan together that we both agree to and that we think makes sense, and then providing that discipline along the way to check in with that plan, see how are we doing versus those long term goals, try to remind their clients, you know, hey, this is what we're trying to accomplish.

Speaker B:

These are all the things that we talked about to, to help them to understand why it is that we're doing, what we're doing and how we've done towards those goals.

Speaker B:

So, yeah, it's, it's, it's a conversation to your point.

Speaker B:

It's not a prescription.

Speaker B:

It's certainly not a one size fits all.

Speaker B:

It's, you know, something that's constantly worked on together as a partnership between client and advisor.

Speaker B:

I think that's really what differentiates a good one from a bad one.

Speaker A:

So there are these different asset classes.

Speaker A:

Now for some people, I've lost you at the word asset classes.

Speaker A:

That's understandable.

Speaker A:

But in our world of investment management and portfolio management, we've taken a look at the entire landscape or map of stocks and bonds, and we put them in different sections based off of certain characteristics so that we can more easily define where we want to invest, how we can measure these different stocks and bonds against their peers and make selections and choices based off of either performance or different characteristics.

Speaker A:

And we call that framework asset classes.

Speaker A:

The asset asset classes can be thought of a little bit like the Hollywood Squares.

Speaker A:

Years ago, there used to be this TV program called the Hollywood Squares.

Speaker A:

The 70s had a lot of really good TV programs, and the Hollywood Squares was one of them, where you would have celebrities in these boxes.

Speaker A:

And there were nine boxes, three on the top, three in the middle, and three on the bottom.

Speaker A:

And Paul Lynn, I think he was a celebrity at the time.

Speaker A:

He was always in the middle.

Speaker A:

He was always in the middle, square chirping off little sarcastic comments.

Speaker A:

In the world of investments, in the world of stocks, many times we'll use that kind of framework, like a Hollywood wares type of framework to classify stocks and bonds.

Speaker A:

Can you share a little bit from your perspective the differences between asset classes between those boxes?

Speaker B:

Yeah, absolutely.

Speaker B:

So I think really, you know, it's a seemingly complex idea, asset allocation and asset classes, but really it's very simple.

Speaker B:

It's a trade off between risk and return.

Speaker B:

So when you think about those main asset classes that you mentioned before, and we'll get a little bit more into the three by three grid and in stocks in particular, but really you look at your cash, your stocks and your bonds, right, as your three main asset classes.

Speaker B:

You know, what, what is the point of owning each?

Speaker B:

Right?

Speaker B:

Cash.

Speaker B:

That's your liquidity bucket, right?

Speaker B:

It's what you use to buy things.

Speaker B:

So, you know, it's pretty important because at the end of the day, you know, we do want our money to work for us, but we also want to use it to buy the things that we need.

Speaker B:

Stocks and bonds, what are those used for?

Speaker B:

It's to grow and preserve your capital.

Speaker B:

So when we're not spending it, we want it to work for us to some degree, want to grow over time, and we don't want to lose it, right?

Speaker B:

So really our job when we're thinking about all three of those asset classes is how do we balance them in the right amounts so that we have some money to spend, we have some money that's working for us and growing, and then we have some money that's protecting our capital and preventing us from losing any money over time.

Speaker B:

So that's the way I think about those three different buckets.

Speaker B:

And an all asset allocation is it's really just making sure we have the proper balance between those three.

Speaker B:

And it, you know, will all depend on your life stage, your goals, your objectives, your tolerance for risk, how much you want to own of each.

Speaker B:

But the way I think of it is cash, right?

Speaker B:

No return, really for cash, no risk.

Speaker B:

Bonds, low return, low risk.

Speaker B:

And stocks, high return, high risk, right?

Speaker B:

So between the three, you've got a little bit of everything.

Speaker B:

And to meet those goals, right, you need a little bit of everything in the right amounts that are going to get you to where you want to get.

Speaker B:

So that's the way I think about asset allocation.

Speaker B:

It's really quite simple when you're Talking about stocks in particular, right, that three by three Hollywood Squares approach, I really like that analogy because it just shows how different stocks can be from each other.

Speaker B:

And when you look at the 3 by 3 grid.

Speaker B:

So if you're thinking about stocks as the Hollywood Squares, right, You've got three rows down, three rows left and right.

Speaker B:

If you work from top to bottom, the way we organize stocks is into different boxes depending on how large the company is to how small they are at the very bottom.

Speaker B:

And then if you're working from left to right, you're thinking and sorting about stocks into these buckets of how cheap they are on the left hand side to how expensive they are on the right.

Speaker B:

So it's, that's the way we think about stocks as you go top to bottom.

Speaker B:

You know, on that top row you've got companies like Apple, 2.9 trillion dollar market cap, gigantic company, right?

Speaker B:

That's 2,900 billion dollars in market cap, right?

Speaker B:

That's a huge company.

Speaker B:

These big multinational brands with huge products that everybody would recognize, right?

Speaker B:

The iPhone and franchises that are worth a lot of money on the bottom rung, right?

Speaker B:

Those small companies, you've got companies like Revolve, right?

Speaker B:

Many of you have probably never heard of a really niche women's apparel company.

Speaker B:

$1.3 billion market cap.

Speaker B:

So huge multiples, smaller than a company like Apple, certainly not a household name, but different in some very important ways.

Speaker B:

So large companies like Apple, right, You can think of those as the most stable franchises.

Speaker B:

Probably your best bets, right, in terms of is this company going to be around in 10 years and how big is it going to be?

Speaker B:

Those companies move very, very slowly, right?

Speaker B:

It's like an aircraft carrier.

Speaker B:

You can think of your evolves as, you know, a little bit smaller, a little bit more nimble, a little bit riskier, but a lot more potential to grow over time into an Apple, right?

Speaker B:

So they're not there quite yet.

Speaker B:

Could they possibly be 10 years or 20 years from now?

Speaker B:

You know, that's really what you're taking a bet on with owning some of those smaller names.

Speaker B:

So a little bit less stable, a little bit more uncertainty, but potentially a little bit more upside for taking on that risk.

Speaker B:

And then as you work left to right again, you know, value quote, unquote, companies on the left, growth companies on the right.

Speaker B:

Really all it is is how expensive is it to own this company's stock.

Speaker B:

And stocks, just like everything else, right, have a price tag.

Speaker B:

What determines price is what investors believe that stock is worth.

Speaker B:

Just like anything else, you can buy or sell in today's economy.

Speaker B:

Right.

Speaker B:

So if you think about value and growth, the growth companies which are all the way on the right, it's companies that are growing at the quickest rate.

Speaker B:

They generally have the highest price tag because what people think they will be worth in the future is a lot higher than what they're worth now.

Speaker B:

So they're willing to pay more for that company because they think it's going to grow quickly.

Speaker B:

On the left hand side, right, your value companies, it's a slower growing company, trades at a lower price tag for that reason.

Speaker B:

But at the same time you're getting more stability, just like we are with the bigger companies.

Speaker B:

Right.

Speaker B:

These companies are a little bit more mature.

Speaker B:

Maybe they've been around the block a few times.

Speaker B:

Right.

Speaker B:

They're not growing at the same rate that a company all the way on the right is, but at the same time their business a lot more stable, they're returning a lot more cash to shareholders.

Speaker B:

You kind of know what you're going to get.

Speaker B:

So, you know, I think you've got this huge diverse group of companies in this three by three grid, right?

Speaker B:

Really, how do we navigate that?

Speaker B:

That's the question.

Speaker A:

Well, that's therein is the importance of strategies.

Speaker A:

And we'll talk about that strategies in just a second.

Speaker A:

You use the term risk and when you're mentioning the word risk, what's risky for some person might not be considered risky for another.

Speaker A:

You know, I know people who, they're terrific at what they do.

Speaker A:

They're absolutely, absolutely the world's best number one.

Speaker A:

And number two in the world at jumping out of airplanes and landing via parachute in a particular spot.

Speaker A:

And they get points.

Speaker A:

I mean, and they, they win.

Speaker A:

They, they just win is what they do.

Speaker A:

Their level of risk is a little different than my mother's level of risk by a long shot.

Speaker B:

I hope so.

Speaker A:

So, so when we talk about risk in the marketplace, it could be different for different people.

Speaker A:

But as you were talking is about it, is there a benchmark, isn't there a benchmark for what we consider risk?

Speaker A:

As far as the starting point?

Speaker B:

Yeah.

Speaker B:

To your point, it's subjective and it's going to depend on how tolerant an individual is for taking on risk.

Speaker B:

Some are going to take on, be more comfortable with taking on more risk than others and that's okay.

Speaker B:

But the way we measure risk, really there's two ways.

Speaker B:

One is the risk of losing your money.

Speaker B:

So you know, that's capital preservation risk.

Speaker B:

Right.

Speaker B:

You never want to lose any money.

Speaker B:

So that's that's a big risk that you take in investing in anything, right?

Speaker B:

The second is how big are the ups and downs going to be along the way, right?

Speaker B:

So you think about the ride from point a today to 30 years from now.

Speaker B:

Point B, how do you get there?

Speaker B:

Right?

Speaker B:

Are, is it a bumpy ride or is it just a steady and slow trend up and to the right?

Speaker B:

Right.

Speaker B:

That's what we want to explain by that second type of risk.

Speaker B:

So you can think of that second type really as volatility, which you'll hear some people call it beta.

Speaker B:

That's all they're talking about is how bumpy is that ride along the way, how volatile is it?

Speaker B:

How big are those ups and downs?

Speaker B:

So a beta of one, that's going to be the market, right?

Speaker B:

That's your average ups and downs.

Speaker B:

Anything higher than one is going to be a bumpier ride.

Speaker B:

Anything lower than one is going to be less bumpy.

Speaker B:

So if you've got a beta of two, it means you've got double, double the potholes, right?

Speaker B:

So you've got this, these crazy ups and downs.

Speaker B:

You could be up 50 one day, down 20 the next day.

Speaker B:

It's all over the place.

Speaker B:

Place, right?

Speaker B:

So for somebody that's not comfortable taking risks, I'd say that's probably inappropriate.

Speaker B:

You might want to look at something with a beta of 0.5, right?

Speaker B:

Half, half the bumps, a little bit smoother ride, nice, nice newly paved roads, right?

Speaker B:

Like, you might not win as big in the up years, but you're not going to lose as big in the down years.

Speaker A:

And it's interesting, I was reading a report that prior to this latest market correction, the average advisor in the, let's call it the bank of America, Merrill lynch world was comfortable with a beta to the 1.7 based off of, off of a poll.

Speaker A:

1.7.

Speaker A:

So volatility, as long as you're going straight up at a, at a particular clip, you feel great.

Speaker A:

But as that deviates from that mean of what others are doing, it's great on the upside, but you don't want to be coming almost two times the, the risk of the market feeling that velocity on the downside, that that's not where people are feeling very comfortable in a plane or in anything.

Speaker A:

That volatility of almost double the market, that's not for everyone.

Speaker B:

Yeah, yeah, I agree.

Speaker B:

And I think there's probably a lot of people that are invested in stocks and strategies that have a higher volatility than maybe they actually realize right now.

Speaker B:

Because to Your point?

Speaker B:

We've had very few down market periods.

Speaker B:

And when the only volatility you're experience experiencing is on the upside, right.

Speaker B:

It's really, it's really not that painful.

Speaker B:

It's those down market periods where all of a sudden they say, whoa, this is a lot more volatile than maybe I was expecting.

Speaker B:

So, you know, periods like we've had over the past month and a half to two months, that can be a wake up call for some people to say, hey, you know, maybe I didn't realize I was taking as much risk as, as I was.

Speaker B:

Let's go back and revisit that and make sure that it's appropriate and where it's not, will take some of that risk off the table.

Speaker A:

And that leads us into the discussion of the importance of strategies.

Speaker A:

You know, strategies are meant to utilize these Hollywood squares, if you will, and placing portfolios of stocks and bonds and cash in an environment where they are going to work best.

Speaker A:

However, if you're not desiring that kind of volatility, that kind of risk, it doesn't mean that you don't want to succeed.

Speaker A:

It doesn't mean that you don't want your portfolio to grow.

Speaker A:

You just might not want to experience the route to get there.

Speaker A:

Years ago, I was in Denver and I was catching a flight to someplace else.

Speaker A:

And I don't know how it happened, I don't know how it happened, but I got on a plane, you know, I ran, I made the plane, I get in, I sit down and I'm in my seat.

Speaker A:

Flight attendants helped me put up my stuff, looked at my ticket, we're all sitting down.

Speaker A:

And then the pilot said, this plane is going to like New Orleans.

Speaker A:

And, and I'm glad he said that because I wasn't going to New Orleans.

Speaker A:

And if I were to stay on that plane, I would have been going home via New Orleans.

Speaker A:

But that's not the flight I wanted, so, so I quickly hopped up, gathered my items, excused myself and departed the plane.

Speaker A:

And I again, I don't know how they let me on because I had a ticket that was to come to Seattle, not to New Orleans.

Speaker A:

But it was a lifelong lesson.

Speaker A:

Hey, you can get to where you need to go, but that strategy that you're taking might be taking you in a different direction.

Speaker A:

There's different strokes for different folks, as they say.

Speaker A:

But aligning strategies with your direction, I think also, also makes sense.

Speaker A:

There's another thing that I found fascinating about strategies, and I'd love you to explain or share this as well.

Speaker A:

A Stock can actually be in a couple of different strategies.

Speaker A:

So for example, Microsoft, it's a tech stock.

Speaker A:

It's also a gaming stock.

Speaker A:

It's also a big blue chip stock.

Speaker A:

It also pays a dividend.

Speaker A:

And so depending upon the strategy, that stock, you know, Microsoft might be in your portfolio because it might be the leader in gaming, and that strategy might be arts and entertainment, and that might be something that you're really interested in.

Speaker A:

If you're looking for a stock to provide huge dividends, that might not be the stock, although it does pay a dividend.

Speaker A:

When you're looking at a stock and you're looking at strategies, what are some of the things that you think about in regards to the importance of strategies for some of those same, same name stocks?

Speaker B:

Yeah, yeah, that's a really good point.

Speaker B:

And I think stocks, just like anything else in life, they don't really fall neatly into, into buckets.

Speaker B:

You know, as much as we like to say, hey, you know, you've got large cap up here, small cap down here, value and growth all in these neat buckets, you know, that's not necessarily the way the cards fall.

Speaker B:

So to your point, you can have stocks that fall into many different strategies.

Speaker B:

And when you think about, right, what is a strategy really, all it is is it's a way of identifying stocks that a manager thinks are going to outperform the broader market and their peers.

Speaker B:

So each manager, to your point, is going to have a different way of evaluating stocks and a different set of criteria that they think leads to outperformance.

Speaker B:

So for some managers, maybe it's the fact that a stock pays a dividend.

Speaker B:

Maybe it's, hey, they increase their dividend every year by x percent.

Speaker B:

Maybe it's, oh, it's a growth stock, right.

Speaker B:

With these characteristics that we really like and we think leads to outperformance.

Speaker B:

Others may say, no, no, no, you're wrong.

Speaker B:

Growth stocks don't outperform.

Speaker B:

It's value stocks over here that you have to identify.

Speaker B:

Really cheap companies, they outperform over long periods of time.

Speaker B:

Right?

Speaker B:

So to your point, there's different ways of thinking about what works.

Speaker B:

And there's stocks that may meet multiple different criteria.

Speaker B:

Whether it's a growth criteria, value criteria, something like momentum.

Speaker B:

How is the stock price performed recently?

Speaker B:

If it's done really well, it could be considered a quote unquote momentum stock.

Speaker B:

Is it a quality stock?

Speaker B:

Right.

Speaker B:

How strong is the balance sheet?

Speaker B:

How higher the returns, how wide is the moat versus competitors coming in and stealing business?

Speaker B:

Does it pay a dividend Right.

Speaker B:

So there's all sorts of different styles, really.

Speaker B:

You know, our job at the end of the day as investment managers is to provide some discipline and some predictability around the type of company that we own and some evidence of a portfolio of companies that in aggregate has performed better than its peers over long periods of time.

Speaker B:

So that's.

Speaker B:

It's really more of an art than a science, although there's some aspects of both that I think are absolutely essential to having any success in this business.

Speaker B:

But, you know, really it's.

Speaker B:

It's about applying things with a certain discipline that's going to create a process around the types of names that you own and some repeatability that leads to long term consistent success.

Speaker A:

Understanding what you have and why you have it goes a long way to smoothing out that ride, doesn't it?

Speaker B:

Yeah, absolutely.

Speaker A:

You also mentioned different asset classes or different strategies working at different times.

Speaker A:

Years ago, I had the opportunity to hear Dr.

Speaker A:

Benoit Mandelbrot speak, and he was at a conference.

Speaker A:

Dr.

Speaker A:

Mandelbrot is a mathematical genius, or was a mathematical genius.

Speaker A:

And, and he was talking about the markets.

Speaker A:

And he's known for being the father of a geometrical math structure called fractals.

Speaker A:

Basically, if you think of models, big ships and little ships, you can make a little ship that is a model of a big ship.

Speaker A:

And how in nature we see things that on a big scale, on a small scale, mirror each other.

Speaker A:

In part of his discussion, he was sharing that he had researched the price of cotton that went back 5,000 years.

Speaker A:

What was fascinating as I was synthesizing his information, which was quite literally almost mind blowing at one point, he basically said that the market is like a big tree, that when you cut it down and you see the rings, you know, if you cut down a tree, you see the rings, you can see whether or not how old was the tree, what was the temperature like, what was the weather patterns of the tree, and all of these rings have different dispensations and some may have small gaps and some may have big gaps, which may mean, you know, the weather changed.

Speaker A:

He said that is like the market.

Speaker A:

There are times where a certain strategy works for a very long time, and then there are times where multiple strategies work.

Speaker A:

During the 50s, a particular style worked in the marketplace.

Speaker A:

And if you speak to people that invested in the 50s for most of their investment life, they would swear that this is the only way you make money in the market, because that's what they're used to.

Speaker A:

Very similar to people who like music, people who grew up around the Elvis era, is there anybody better than Elvis?

Speaker A:

No.

Speaker A:

You know, one of my grandmothers would say, no, absolutely not.

Speaker A:

You know, well, maybe the Temptations, but okay, those of us that grew up in the 80s, hey, is there anything better than the 80s?

Speaker A:

I don't know.

Speaker A:

I don't know.

Speaker A:

You could really argue that.

Speaker A:

I'm going to say it's one of the greatest generations, the latchkey kids, Generation X.

Speaker A:

Terrific.

Speaker A:

Still, still working, still working today.

Speaker A:

But strategies change, therefore what works, changes.

Speaker A:

And understanding that there may be a time for a strategy, there may be a time not to use that strategy, there may be ways of layering strategies so you cut down on that risk.

Speaker A:

If everything is going at Mach 10, then when Mach 10 stops, there's a level of volatility someone's going to feel that is not what they had anticipated.

Speaker A:

And what you were sharing, I understand, is the importance of the strategies is really every bit as important as the investment selection.

Speaker A:

Because if you have everything doing the same thing the same way, it's going to be more challenging when markets change.

Speaker A:

Is that, is that correct?

Speaker B:

Yeah, I definitely agree.

Speaker B:

It's interesting because to your point, I think everything is time period dependent, right?

Speaker B:

So you give me a strategy, I'll give you a five year period where it outperformed, right?

Speaker B:

Because there's been so many different types of periods.

Speaker B:

That's the beauty of markets, right?

Speaker B:

And you know, really what is the market?

Speaker B:

If we, we think about fundamentally, you know, what is driving prices of stocks up and down, all it is is really a yes or no vote from market participants, right?

Speaker B:

Like do they want to buy this stock at this price?

Speaker B:

If yes, they buy it.

Speaker B:

If no, they're selling.

Speaker B:

Right.

Speaker B:

Are there more buyers than sellers?

Speaker B:

The stock's going up.

Speaker B:

If there are more sellers than buyers, it's going down.

Speaker B:

Right?

Speaker B:

So really, at the end of the day, all those stock prices are, it's, it's a reflection of human behavior and the patterns that drive them, which we can see, you know, repeat themselves over time.

Speaker B:

So you're talking things in nature, fractals, right.

Speaker B:

But people biologically, I think, tend to react in the same way over time as people say.

Speaker B:

Right.

Speaker B:

History tends to repeat itself.

Speaker B:

Right.

Speaker B:

That's because at the end of the day, human beings tend to act in the same way over and over and over again.

Speaker B:

Because biologically, that's how we're programmed.

Speaker B:

So when I think of strategies, really I think of two main types of strategies.

Speaker B:

You know, one is a strategy that really tries to identify what are those behavioral patterns and how do they express themselves in markets?

Speaker B:

So the way we think about that is that's more of a technical or trading strategy, right?

Speaker B:

So it identifies patterns and it tries to identify where we are at in those patterns today and what's likely to happen in the future and to trade around that.

Speaker B:

Right.

Speaker B:

The other type of strategy, and this is more where London Company Falls, is I'd like to think of us as more of a fundamental strategy.

Speaker B:

So for us we're a little bit less concerned about what's happening in the day to day.

Speaker B:

We know people act the way they do, markets act the way they do.

Speaker B:

Over time we're going to get these boom and bust cycles.

Speaker B:

That's how economies and that's how civilizations make progress in a two steps forward, one step back fashion.

Speaker B:

Our job as a fundamental investor is to try to take some steps back from that and try to really say, hey, you know, how can we outperform knowing that the market is kind of going to do what it does?

Speaker B:

Really what we want to do is identify companies that we think are more likely to outperform over long periods of time.

Speaker B:

So we look at each individual stock as a business, right?

Speaker B:

And we try to identify what are some things, some characteristics that businesses that tend to outperform other businesses over long periods of time have in common.

Speaker B:

And we want to invest in those businesses.

Speaker B:

So for us, really what we've identified is companies that tend to perform better are companies with a strong quality profile.

Speaker B:

So companies that have high returns, wide moats around their business that insulate them from competition and allow them to capitalize on those high returns for long periods of time.

Speaker B:

Companies that are well capitalized so they're in good financial condition, strong balance sheets, not a whole lot of debt, you know, just like individuals, right?

Speaker B:

It's not good to have a ton of credit card debt, right?

Speaker B:

Same thing with companies, right?

Speaker B:

We don't like companies that are extremely levered, right?

Speaker B:

We think that's going to hinder their financial performance in the future.

Speaker B:

The other thing we look for is a reasonable price, right?

Speaker B:

We don't want to pay any price to own that company over time because that's where you can get yourself into trouble when you know the market's down.

Speaker B:

And companies that are trading really expensive sell off harder than the rest, right?

Speaker B:

We talked about the beta of two, right?

Speaker B:

If we want to do well over long periods of time, we want to go for that smoother ride.

Speaker B:

Not the bumpy ride, not the ride where people are going to get thrown out of the car.

Speaker B:

You know, or off the tracks.

Speaker B:

Right?

Speaker B:

We want to, we want to stay inside the car with the windows up for the long run.

Speaker B:

And then finally we look for companies that have a history of returning capital to shareholders.

Speaker B:

You mentioned dividends briefly before.

Speaker B:

Basically what a dividend is, is it's a cash payment to the owner of the business.

Speaker B:

Over time you think about, hey, why do I want to own a business?

Speaker B:

You want to own that business because you want it to make money for you, right?

Speaker B:

So you know, a dividend is, hey, this is exactly what I want from this company.

Speaker B:

It's the company's done well.

Speaker B:

They have money that they made within the year.

Speaker B:

They're going to take some of that money, reinvest it in the business to make sure it continues to grow.

Speaker B:

But at the end of the day, you know, we want them to, to pay us.

Speaker B:

Right, for owning it.

Speaker B:

So the dividend is the return of money over time, which we think is a really key indicator of that company's success.

Speaker B:

And at the end of the day, that's why you want to own companies.

Speaker B:

So that's the way we think about things.

Speaker B:

Again, you know, more fundamentally driven strategy versus a technical strategy.

Speaker B:

And we think fundamentals make a lot of sense over long periods of time.

Speaker A:

And this highlights the importance of the human touch.

Speaker A:

This highlights the ability of a manager to make decisions based off of criteria that is looking longer term, there's different strategies, there's different managers, but the importance of the human touch.

Speaker A:

In a world of AI and robots, being able to have someone who understands the same philosophy, the same beliefs that you do and then making and executing on that makes all the difference in the long run.

Speaker B:

Yeah, exactly.

Speaker B:

You know, it's the difference between having a AI robot read a company's financial statements and make a buy to set, buy, sell decision based on just the facts.

Speaker B:

And getting into a room with a management team and asking them tough questions about how they plan to grow their business, what their biggest competitors look like, are they, they losing market share in certain areas?

Speaker B:

How are they defending the business?

Speaker B:

How do they think about capital allocation and growing the business?

Speaker B:

Are they returning capital to shareholders?

Speaker B:

Are they on a 10 year plan or are they just trying to outperform and produce good results over the next quarter?

Speaker B:

Right.

Speaker B:

Like those are all of the things that we want to understand as a fundamental investor in that business, that a company's 10k or their financial statements aren't necessarily going to tell us.

Speaker B:

So, you know, again, that's, that's the value that we can bring as as people.

Speaker B:

Right.

Speaker B:

That have the ability to think independently and ask those tough questions.

Speaker A:

Well, and at the end of the day, leadership matters, landscape matters.

Speaker A:

But it's the leadership that will help guide the course over the landscape.

Speaker A:

Well, Tori, thank you very much.

Speaker A:

You know, when many of the things that you highlighted today were so important, they're getting back to basics and highlighting the importance of the human touch and leadership.

Speaker A:

World's changing.

Speaker A:

Things can be really dynamic, and it's terrific to know that you can work with people who understand, who can explain, who can mirror and whose leadership can help you navigate the dynamic natures of the market and the world we live in today.

Speaker A:

I want to thank you for your time and I look forward to speaking with you again soon.

Speaker B:

Yeah, likewise.

Speaker B:

And it's always a two way street here, too.

Speaker B:

So thank you for your partnership and what you do for the clients, too, because, you know, we couldn't do without you.

Speaker B:

So great talking to you, Paul.

Speaker B:

Thanks for having me.

Speaker A:

All right, my friend, thank you for listening.

Speaker A:

And until next time, this is Paul Ellis reminding you to invest in what you love.

Show artwork for EWM INSIGHTS

About the Podcast

EWM INSIGHTS
Ellis Wealth Management, LLC presents EWM INSIGHTS, a content-rich lifestyle podcast that goes beyond the checklists, to-do lists, and mere financial markets to celebrate HUMAN CAPITAL.
Throughout INSIGHTS we’ll talk to a variety of professionals, coaches, experts, artists, and every day people as we explore the riches that come from our collective journey.

We hope that as you listen to INSIGHTS our conversations will help you acquire more knowledge and become even more curious of the gifts that are in and all around us, while we support you to reach new heights as we grow together.

Most of all, through EWM INSIGHTS we want to encourage you to:

INVEST IN WHAT YOU LOVE!®




Ellis Wealth Management, LLC
Securities offered through Cambridge Investment Research, Inc. Member FINRA/SIPC
Reposts & Links ≠ endorsements
elliswealthmanagement.net

Ellis Wealth Management, LLC - “Invest in What You Love!"®

About your host

Profile picture for Paul Bertrand Ellis,  CIMA®

Paul Bertrand Ellis, CIMA®

Paul Bertrand Ellis, CIMA® is the Managing Director of Ellis Wealth Management, LLC

Paul is an accomplished 25 year financial industry veteran. In addition to various investment and insurance licenses, he holds certification as a Certified Investment Management Analyst (CIMA®) through Investments & Wealth Institute and the Wharton School of the University of Pennsylvania.

In his practice, Paul provides a values-based approach focusing on high net worth wealth management. Professional service and open communication make Paul a personal advocate and passionate client portfolio director.

Paul is an active member of the Investments & Wealth Institute, and member of the Mukilteo Chamber of Commerce.

His volunteer activities have included serving as Chair of the Mukilteo Chamber of Commerce, Co- Chair of the U.W Foster School of Business’ Center for Entrepreneurship and Business Development, and Past -President of the Office of Minority Affairs Friends of the Educational Opportunity Program at the University of Washington.

Paul also participates in various local community projects and initiatives.

As a graduate of the University of Washington, Paul strives to help students achieve their potential through learning and growth opportunities, and is a known engaging guest speaker.

Seattle Magazine has consistently named Paul to The Best Wealth Managers List and he has been named among America’s Most Honored Professionals by American Registry.