A Conversation With Apollo Lepescu, "The Secretary of Explaining Stuff"

In our most recent episode, Natalie Picha, CXO, interviews Apollo Lepescu, Vice President at Dimensional Fund Advisors, one of the world's premier investment managers with close to $900 billion in assets under management. Apollo is known for his ability to simplify complex topics into more digestible concepts, and in this episode he helps listeners understand: 

• What history teaches us about what happens after market highs (hint: it's not a crash)

• Why it's important to use the right measuring stick/benchmark when looking at the performance of your total portfolio

• Why it's difficult to predict who the AI winners and losers will be

We're also sharing a link to the new investing film that Dimensional made and is making available for free on YouTube. The Wall Street Journal calls it "the story of radical ideas that became powerful enough to move trillions of dollars, and the main characters are renegade investors and unlikely titans who created the revolutionary financial products that we have come to depend on." Check out "Tune Out the Noise" and read what the Wall Street Journal had to say about it. 

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https://podcasts.apple.com/us/podcast/rhp-market-talk/id1538051530

Chapters

• 0:09 Introduction: Meet Apollo And Dimensional
• 2:04 How DFA Works With Advisors
• 6:08 The Film: Tune Out The Noise
• 8:03 All-Time Highs And What Follows
• 14:24 Rebalancing Instead Of Retreating
• 17:25 Are AI Valuations A New Bubble?
• 23:50 Diversify Beyond The Hype
• 28:48 Shutdowns, Politics, And Profits
• 35:01 It’s Different, But Markets Adapt
• 39:23 Disclaimer

Transcript

Natalie Picha: 0:09

Hi everyone, I'm Natalie Picha, Chief Experience Officer and Partner at RHP Wealth Management, and this is Market Talk. In this episode, we are thrilled to welcome Apollo Le pescu, Vice President at Dimensional Fund Advisors, one of the premier investment managers in the world, overseeing approximately $850 billion in assets. Apollo is a globally recognized speaker who has delivered hundreds of lectures and seminars to financial professionals and investors on a wide range of topics, from markets and behavioral finance to long-term investing disciplines. Known as the Secretary of Explaining Stuff, he has an exceptional ability to make complex financial concepts clear and relatable. Apollo has been with Dimensional for more than 21 years in Santa Monica before joining the firm he taught at the University of California. He earned his PhD in economics and finance from UC Santa Barbara and holds a BA in economics from Michigan State University, where he also competed and coached water polo. Outside the office, Apollo's latest adventures take him from riding the market waves to riding ocean waves. He's recently taken up surfing. I'm super excited to have this conversation today. Welcome, Apollo, and thank you so much for joining our HP Market Talk today. I'm super excited to have this conversation.

Apollo Lupescu: 1:35

Natalie, thank you so much for having me. I've been looking forward to this conversation as well, so I'm I'm glad to be here. Thank you for the conversation.

Natalie Picha: 1:42

For our listeners, this is a pretty unusual opportunity because we don't typically have guest speakers like you. Before we dive into our main discussion, could we take just a few minutes to introduce Dimensional Fund advisors? Your firm's not necessarily recognized in the general public. So if you could just share a bit about your background and how you guys collaborate with advisory firms like ours.

Apollo Lupescu: 2:04

Yeah, uh so dimensional, you're you're absolutely right. It is not a household name, and it's a little bit by design, uh, because we got started back in uh uh the early 80s. So we've been around for over 40 years. Uh at the current moment, we manage roughly around $900 billion in assets. So we're one of the largest uh um institutional money managers in the US and the world for that matter. Uh but as you said, we're not a household name. And and and part of the reason we're not a household name is because Demential has never ever uh uh decided to work directly with individual investors. For the first 10 years of the firm, the only clients were large institutions, pension funds, endowments, and so forth. Uh, and then since the early 90s, we have started to work with a select uh number of uh fee-only financial advisors. And basically, what it means is that we will not compensate them for distributing dimensional funds because we believe that an advisor should work uh for their clients and they should not be motivated by alternative reasons like getting paid uh for selling a product. Uh and because of that, uh we have chosen just a very select uh number of advisors who from early days they uh really wanted to put the client first. Uh and and what I think what's important is that that in your case, Natalie, you believe the dimensional is the right fit uh for certain of your clients. But if one day you decide that maybe another fund family came along and might be a better fit, you can switch in those funds without missing a beat because you're not getting paid from the fund families. And that level of uh fiduciary standard is something that we really value in in a relationship with an advisor. Uh alternatively, the other the other thing that's important is because we never worked with uh uh individual investors, we don't have marketing campaigns. And what it means, you're not gonna see our names in good housekeeping magazine, uh, but also that allows us to keep the fees, uh, the fees low. And the other two quick things that I I think are really interesting in the way that we work with the uh the investment public is number one is that we are the firm that is probably the most successful uh cross-fertilization between the rigorous scientific approach of investing uh that is coming from the academic community and the practical world of investing. And since the early days, we have been very, very associated with great academic minds uh who have brought a level of rigor to the investment process uh unlike any other investment manager in the world. Uh and over the years, we have worked with five different Nobel winners in in economics and finance. And we worked with these folks before they got the prize. We didn't pay them to attach the name once they had it. Uh so I think it's really unique this idea that we can apply a scientific uh uh database and a data and evidence approach to investing rather than uh how somebody feels or certain opinions that somebody might have. And the last thing, uh Natalie, is that that if you look at the actual strategies, uh what's really interesting about Dimensional is that they don't fit in the traditional uh patterns, which is one is what's called the traditional active management, which is around stock picking and perhaps trying to forecast the market. Uh, and we don't believe that that uh in in 2025 that is state of the art. Uh the alternative that emerged is called indexing, and there's just simply replicating a list provided by uh a provider of of uh a benchmark uh like the SP or you name it, uh, and we don't believe that's very efficient either. Uh so what we're trying to do is outperform, uh, but using something that's a lot more systematic and have uh really uh distinct features to the way that we uh manage portfolios and we trade.

Natalie Picha: 5:42

Well, and I what I can say about that is we have begun to partner with Dimensional. What we understand is that your philosophy very much fits with our philosophy, and we just believe in making the best decisions for our clients that we can, and we don't sell them things. And so that's a big part of who RHP is, and so it's wonderful to hear you kind of bring that all back around because that is really why it is a fit for what we do with what you guys do. Um, I want to just uh throw in and and make a quick reference to a very interesting thing that Dimensional did recently, which was produce a movie, Tune Out the Noise. Uh so for our listeners, this is very interesting. It's not something uh you see a Wall Street firm do very often. Uh tell us a little bit about Tune Out the Noise.

Apollo Lupescu: 6:30

Yeah, it's so interesting because that the idea of the movie came from uh looking at the evolution that is taking place in the world, whether it's in chemistry or medicine. Uh well, that evolution has taken place in investing as well. And there's no place that that was documented. How did uh we used to invest in the good old days, and then how did the uh scientific academic approach advance the whole profession? And I think this this whole movie is a really interesting uh look at how we got here, how we got to where we are today. Uh, and it did not come out of nowhere, it came out of the work of a lot of academics, a lot of rigorous scientific uh data analysis. Um, and and that is what this uh documentary is trying to do. And and to do it in a more the more engaging way, because sometimes this can be dry. Uh we actually worked with a Nobel winner, not Nobel Award winner, uh, in fact, uh, an Oscar winner, not Nobel uh winner director.

Natalie Picha: 7:27

Oh, Academy Award winning, yeah, Academy Award winner producer.

Apollo Lupescu: 7:31

And uh and and he actually did a tremendous job uh trying to uh describe this evolution in an entertaining and yet educational way. So I would encourage all of you to go uh check it out. It is on YouTube, it's free, and uh I think that it got a lot of attention after the Wall Street Journal published a very flattering piece about the movie and how much the the reporters add that financial institutions enjoyed uh watching it.

Natalie Picha: 7:54

Well, I'm just encouraging our listeners to to go check it out because it is unusual to have something like that as a resource, and so pretty awesome that you guys did that. So let's dive right into the heavy stuff and talk a little bit about the recent market rally. I know we saw a little bit of a pullback last week, but these all-time highs, I mean, raising some concerns among investors about a potential decline ahead. What does history tell us about market performance after such peaks? And how do investors protect themselves if a downturn does occur?

Apollo Lupescu: 8:27

Yeah, that's a that's a fantastic, fantastic question because the media almost not daily, but quite often you you hear about all-time highs. And I think there is a mentality that the mindset that what goes up must come down. So why are we not doing something about this seemingly obvious uh uh downturn about to come? And to begin with, I have to say that the idea of being an investor in the market should be based on a financial plan. In other words, I cannot tell you you should be invested in the market at all, uh or not, uh, unless you have a financial plan. And that's exactly what RHP does. That's why I think it's so important to work with a financial advisor because I do believe it's the most important decision that he can make. What is my financial plan? Because that plan, in a way, uh dictates what is the right asset allocation. And for some of you folks who might be getting close to retirement, that financial plan might say, well, you might need to have a significant amount of your assets in bonds, which don't really move in lockstep with the stock market. Uh, and you might need to have maybe some international stocks, some maybe emerging market stocks, some real estate investment trust stocks. Uh, so they're all different moving parts of this portfolio. And one of them is this SP 500 or the Dow Jones that we see on the news. So to begin with, I want to take a step back and say when you hear all-time highs, it is not reflective of your portfolio. It is reflective of a component of your portfolio, but not the entire thing. So you might not even have as much as you think invest in the market. Secondly, uh, when something like this happens, there are two uh decisions that an advisor makes. So when you look at that piece that might be running high, like the D SMP. And one is to look at it and just say, well, when I look at the entire uh the uh the entire history of the markets, what tends to happen once you reach an all-time high? And at some point that the advisor might look and say, if the data suggests that we ought to maybe step out of the market because this is gonna be a bloodbath coming up, uh then perhaps it you know you want to do that. So I think that that's what uh advisors do, and that's what RHP does because they work on your behalf. But here's what's interesting when we looked at data and analyzed what happens to the SP 500 once it hits an all-time high, and then you fast forward, for example, one year. Uh this is fascinating. The long-term average in the US market is about 10% per year. So that's what you expect on average over the long run, roughly. Right. Right. 12 months after the market goes up uh to an all-time high, if you go back to the entire history of the market or about 100 years, what you see is that over the next 12 months, after we reach that all-time high, in fact, the market doesn't drop on average. But what's remarkable, Natalie, is it actually goes up significantly more by about 13% on average after it hits an all-time high. So it's really remarkable because you'd expect that it's going to tank, but it continues to go up. And if you say, well, what if I invest in any other month? Uh, and I don't, you know, I just avoid the all-time month, all-time high. Well, it turns out that if you invest in any other month, it's actually uh up, but not 13%, but rather about 12%. So it's so interesting because when you look at the data, it suggests exactly the opposite of the conventional wisdom. When the market hits an all-time high, that is statistically better for investors. You're more likely to go up than even the long-term historical average. So, certainly, no obvious trend that the market drops after an all-time high. Even though that's what we want to believe, that's not data. And that happens roughly about 80% of the time. So, about 80% of the time, uh, you see that the index is higher one year later. So, it is it is quite interesting that we don't see that. And because of that, we don't recommend to investors that, hey, let's just get out of the market because uh something is ominous is coming. Not at all. When you look at all-time highs, it tends to actually be a uh almost like a positive. But then if you look by three years and five years, they even up. It does not make a difference if you invest at any other month or if you invest an all-time high, it just reverts back to about the 10% average. Yeah, so uh it is it is good news. So the first option is this. So the first thing is have a financial plan, acknowledge that the SP is one component, it might run high, but you have a lot of moving parts. The second one, when the SP goes up, statistically speaking, you are actually better off statistically than you are uh at least in expectation, uh you have a higher average than uh over the next 12 months than in investing in any other month. But the third element here, which is important to note, is that when you have an advisor with that financial plan, it's paying attention. I mean, you are paying attention to the market. And when the SP climbs and gets a new high and a new high and a new high, that doesn't mean that the advisor does nothing. Not at all. We're saying don't sell the entire position. But what the advisor might do is say, well, because it's been going up on a relative basis to the other moving parts of the portfolio, perhaps this might be a good time to trim some of the gains, take some chips off the table, and then go buy something with a better valuation. And do this in a very systematic way, which in fact has a name called rebalancing, and uh and do it when it makes the most sense for an investor. So ultimately, when the market hits an all-time high, again, it is quite possible that you might want to trim some of these gains. And that's what the advisor does on your behalf uh whenever it's a trade-off of a cost of doing so versus a benefit pays off.

Natalie Picha: 14:03

So that's that's interesting. Um, the way that I put it very simply to clients is I say, don't jump off the roller coaster in the middle of the ride. So, you know, just don't jump off the roller coaster in the middle of the ride. And on our end, what we're doing is that constant review of where are we in the market and where do we maybe need to reposition, but not necessarily get completely out of the market. So let me ask you, Apollo, about market valuation metrics, like the price to earnings ratio. We're well above the historical averages, prompting some investors to wonder if stocks are overvalued. Are we possibly witnessing a repeat of the 1990s tech bubble? Should investors be concerned about a correction? And if they should be, what steps would they take to protect their portfolio?

Apollo Lupescu: 14:48

Yeah, and it is interesting because back in the 90s, uh, we had what was a seemingly revolutionary technology. And he was, you know, you know, and at least in all honesty, the internet was a revolutionary technology. And today we have uh maybe that parallel of what happened in the 90s with this artificial intelligence technology that is emerging right now. Uh so I think that's in my sense, my sense is that that's why some folks are looking at these two periods and and trying to draw some lessons. Uh and if you go back to the 90s, I think uh, I mean, first of all, let's just talk about artificial intelligence. It is an amazing technology. There's no doubt in my mind that that it will impact a lot of jobs, a lot of businesses, a lot of uh even the society at large in a way, because of uh uh how we're gonna deal with deep fakes and other things. Uh so there's no doubt that that AI will have an impact on the economy and so forth. Uh, the same way that the internet had that. Uh and what's interesting is that that when you have a revolutionary technology like this, uh, it is not obvious who the winners will be. Because if you go back to the 90s, you had a uh a website selling books, you had a website selling pet food, and you had a website, you know, selling toys. And was it obvious which one will be uh the one uh retail giant that will uh emerge years down the road? No. So, in a way, the first thing that I have to sell uh tell folks is that when there is a revolutionary technology like this, uh I think a lot of people are competing, but it's not obvious who the ultimate winners might be. Uh, but what we do see is that whoever emerges is gonna be uh just uh is gonna have a tremendous uh return for investors to make up maybe for the companies uh that don't make it. So, in order for you to have Amazon, you have to admit to yourself that I might need to own some, you know, pets.com. That's that's perfectly reasonable. Uh so that's the first thing that I that I would say. Not every company that is in AI today is gonna make it. Not the same way that not uh every company in the 90s made it. That doesn't mean that technology is not there uh where it might not be valuable, you're not gonna make money. It's just that that you have to acknowledge that that you have to diversify enough uh because you nobody at the moment knows exactly who will be the the last uh company standing when it comes to AI. That's uh quote unquote. The thing the second thing about the uh these uh AI's valuations right now, they are reflecting for a lot of these companies the expectation that they might be the winner. And when you look at these estimates, you talked about price earnings. Well, last I checked, Tesla was over $400 in a price of one share for a price of one share. And you know, if you had the $400 to uh buy a share of Tesla, then he can partake in into the earnings of Tesla, pretty much like Elon Musk. Not as much as Elon Musk, but but certainly you can conceptually partake in the earnings of that company. And it turns out that the earnings of the company were roughly about a buck fifty. So you spent $400 and Tesla at the current level of earnings is gonna come and put a buck fifty in your piggy bank every year. Well, it's a very long payback period. That's what the price earnings tend to tell you how long before you get your money back, and it's gonna be like over 250 years. Uh, so it's a very long time. Uh, so you know you know, you want to own Tesla just in case they emerge as the future of AI and they're gonna make robotaxes and maybe robo cops, you never know. But you know, it's you want to own a piece of that. But one way that you can mitigate whatever might happen to AI is not to put all the money in AI. I think that's a very legitimate way to do it. And if you look at Toyota, Toyota has made no secret. We're not into AI, we're gonna make electric uh to some degree, but it's mostly gas and hybrid. And if you look at the price per share, when Tesla was selling for over 400, they're roughly at about 200, so half that, and their earnings were about $20 a share, not a buck fifty. So, from a valuation perspective, what I'm here to tell you folks is that not all companies are hyped up. Not all companies are hyped up. The average for the Magnificent 7 in terms of price earnings uh is about 68. 68, which is a which is you know quite high. The average in the SP is about 20 or so, 1820. So 68 is above, but when you look at the remaining stocks in the SP, the price earnings is about 23, so much closer to the long-term average. If you look at small companies, it's less than 18. If you look at small value, it's about 1314. So the point that I'm making is that when you think about these valuation valuations, it's not that every company is very, very, you know, uh high priced relative to some accounting fundamental. Not at all. You gotta be careful now. And I think this speaks to a really important part of what Natalie and I talked about earlier, which is the importance of a financial plan.

Natalie Picha: 19:41

Right.

Apollo Lupescu: 19:41

Own that financial plan, you're gonna own AI. And and some of these high valuations might pan out, others might pan, might not. And it's something that we need to acknowledge. At the same time, if you do have some smaller companies, some value, some international like a Toyota, some emerging markets like TSMC, uh, at that point you're not overly exposed to this AI. Because it's not just that it's better not to be overly exposed, it's also an acknowledgement that quite often the beneficiaries of a new technology are not the creators, but the users. If you look at a supermarket, there's a scanner. Well, who benefits more from that scanning technology, the company making the scanner or the supermarket itself? In that respect, I think AI would be hugely beneficial to logistics companies, to retailers, to you name it, everybody in society. And uh, and because it's so competitive in that AI space right now, it's quite possible that they might be the bigger beneficiaries. And because of that, what we suggest is that you need to be diversified. Have AI in your portfolio, just don't overdo it. Uh, have these high valuation companies because some of them are going to become the next Amazon, the next ghoul, and it's important to have them. Or maybe, you know, Google might be the next ghoul. You never know. Have exposure to those. It's just don't limit yourself to these high price earnings or high price to book companies. Just keep it diversified, keep it global in nature, and acknowledge that some companies might not make it. Uh, and that's totally fine because you need to have pets.com in order to make sure that you get Amazon.

Natalie Picha: 21:14

Right, right. Absolutely. No, that was a great point. I think it again it comes all the way back around to having a good solid financial plan, following the financial plan, and a good diversification. And that's why you work with an advisor like RHP. So we're in the middle of, and hopefully we're seeing the end of a US government shutdown, one of the longest in history. You know, I'm I'm watching all of the the news today trying to figure out are we gonna are we fixing to end this shutdown? What impact does a prolonged shutdown have on markets? And more broadly, how do you feel about the dysfunctional political dynamics and how they affect investments?

Apollo Lupescu: 21:52

Yeah, and and and it's it's for certain. It's uh I mean, starting with just the obvious, a lot of people are suffering. And uh if you don't get a paycheck and you still have to buy food for your kids and and and clothing and uh all this stuff, it it it must be really tough. So there's a a category of of people in society who are really hurting, and I and I want to acknowledge their pain because I uh I do know a lot of them. I uh at some point I had uh some contracts with the government and I get to know a lot of government employees, and and they're you know, a lot of them are great people and uh and they're suffering in in many cases. So I want to acknowledge that pain. Um and at the same time, I want to kind of draw attention to the stock market in a but if it perhaps a different way. When you think about the stock market, it is not a gambling casino. You're not betting your money and maybe you win, maybe you lose. That's not what you do in the stock market. What you do is you actually buy ownership into a company. That's exactly what the stock market allows you to do, buy ownership into a company. Uh so when you buy a share of Delta Airlines or United or Facebook, Google, uh, McDonald's, Coca-Cola, you just buy a share of ownership into a company. And what the market's trying to do every single day is assess how much is it worth to pay for that share of ownership? And that's what we ever every investor does every second. How much is it worth to own that particular company? And that fluctuates. And the question that the market's trying to answer is what do I expect the future earnings, the future profits of that company to be? Because if you own a piece of a business, the value of that ownership depends on what do I expect to make if I'm a part owner. Uh so every single day the market's trying to answer the question, what do I expect the earnings of a company to be for years to come? Because you're going to have that ownership uh for years to come. And in that respect, with relation to the shutdown, the question is how is the shutdown impacting the earnings of companies like Facebook and Nvidia and Google and Amazon and Tesla and so forth? And the answer that the market has been giving us so far is that not as much as it hurts us emotionally and it hurts uh the subset of the population who is hurt by not getting paychecks, uh, but it's not really impacting the market so much because there are too many other variables that also make a uh uh make a make a difference for the earnings of a company. Think of NVIDIA, how much is the government shutdown really impacting their sales of chips? Uh or if you think of McDonald's, Coca-Cola, I mean, it's not as much as we think. And when you look at the data, uh, this is the longest shutdown. The next longest shutdown uh was uh a few years ago when President Trump was in the office. And at the time, it was 35 days. And during those 35 days, the market actually went up about 10%. During the shutdown, it reached all-time highs, all-time highs, all-time highs. And that's not to say the market's uh uh you know not paying attention to shutdown, it is. But the context that I want you to think about this is how is this impacting the profits? And by and large, it's not really impacting the profits of companies, not just in the US, but around the world. And because of that, the market's not really reflecting a huge negative impact from the shutdown because, again, it is much more emotional uh than bottom line for companies. Uh folks are you know all expected to get a good deal of their paychecks back and and and uh they might have dipped into the savings for a minute. But again, when you look at the economics of the situation of the companies, uh the market has this, you know, very pragmatic question. How is this impacting the potential earnings of companies for years to come? And the answer is probably not that much in the great state of things. Right. By the way, politics. Absolutely, right, absolutely because again, if you think of Apple, what's gonna matter more to Apple? Uh, you know, what the government does, in some ways it does, and in some things it doesn't. And when you have tariffs and it's gonna impact the the profits, well, the market, the Apple stock, for example, tanked on expectation that Apple might not make as much money. When the tariffs were alleviated, well, it went back up. So the market is very, very quick to react to these announcements. Uh, but uh with particularly with shutdown, it just does not seem to uh have had a new uh a negative impact.

Natalie Picha: 26:10

And it's interesting because I think there's a sense of anxiety among investors who look at the current political environment and they they consider it an unprecedented uh you know event. It feels different this time. Um but how should investors really approach those concerns? Because we've gone through and historically said, you know what, it doesn't the politics don't matter that much. But are there any portfolio adjustments that truly need to be done in response to today's conditions?

Apollo Lupescu: 26:41

Yeah, and that's uh that that question that he asked, is it different this time? I think legitimately it is different this time because we have never been through a confluence of events that that we see today. Uh we have the shutdown, we have it's still a war in Europe and so forth. So you can look at the situation and say, is it different this time? Absolutely. Absolutely. The same way that Natalie, five years ago, it was different in the way they were all stuck at home. Nobody could leave their house. And uh and it was a global pandemic that uh shut down the entire economy, uh, most economies around the world. Uh so it is different this time, and it the same way that it was different five years ago. Uh, and back then you can point out look how dark uh the sky works because all the all the trouble that we see ahead. And uh, and uh, how do you think about as an investor? From my perspective, uh, back in those days, I don't know if you remember there was a show called uh the Queen's Gambit. Yes, it was Netflix and it was like the pandemic show everybody watched. Well, I watched it myself, and uh uh one of the things that came out of that was that I started to play chess. You know, I'm not good at it, but I still persevere. And as I played more and more chess, what I realized that in all the games that I played, I have never ended up in exactly the same position. The games don't end up in exactly the same situation, it is always different. Invariably I expect it to be different. Right. And, you know, it made me think that perhaps this situation that we find ourselves in uh is different the same way that a game of chess ends up in a different position. But in chess, there's a fundamental premise that stays the same. Uh you have a chessboard, you have 64 squares, 16 pieces on each side. And that premise doesn't change. So that's what got me thinking, well, is there something like a um a chessboard of investing, a fundamental premise that stays the same, even as this situation is different than anything else. Uh and that what came to mind, what I do believe strongly, is the chessboard of investing, the premise that has not changed and gives me confidence looking ahead, is the fact that companies in which we buy ownership, which is what you get in the market, they still operate in a free market. And as long as companies operate in free markets, they will find a way uh to navigate whatever markets, whatever economic circumstance is put in front of them. In the pandemic, you had the cruise lines uh basically, well, we're gonna lay off a bunch of people because you don't need them. Airlines starting to ship uh cargo instead of passengers. So they adapted. We all started using Zoom. Right. You know, you distilleries are not doing you know alcohol, but they're doing hand sanitizer because that's what's sold. Uh, you know, we we learned to take a mark uh you know martini in the cup and take it home. That is something that is really, really valuable in some ways to have these uh these negative periods because it does help companies, but they help it also uh navigating those times is what uh companies do because people are resilient, companies are resilient, and in that respect, the economy and the stock market are resilient. Uh so that is the the way I think about it. It is different this time, yet that fundamental premise of operating in free markets and and companies being allowed to pursue their self interest that has not changed. And I strongly believe that has. Not changed. Uh, and as long as we operate in that premise, even as the situation is different, I'm confident in the ingenuity of companies and um and the resilience of people.

Natalie Picha: 30:10

Absolutely. I you definitely see during this time right now that the the challenges that companies are are being faced with is bringing out a lot of uh creativity in how they they navigate and they deal with things. And so that's not gonna go away. So uh you know, often questions that we'll hear is well, how is the market doing, or how did the market do, or okay, we're we're coming, it's it's hard to believe, but we're we're nearing the end of 2025 already, right? And everyone kind of came into the year, I think, with a lot of anxiety around where are we gonna end up? And so that's just very, very common questions. I think you've already touched on this a little bit about what is the market, because the media has various measures and there's always this yardstick that they're throwing out for investors. Why are they so different? How should how should investors think about measuring their own results? Because, you know, just because you hear the SP 500 hit an all-time high, or this is where we are in the Nasdaq, we've got the magnificent seven. Really, what what should investor be thinking when it comes to their own personal results?

Apollo Lupescu: 31:20

I I love that he asked that question because it is so important to understand what do you hear on the news and how it compares to your own portfolio and and manager expectations in that respect. Uh so let's start with the most commonly used metrics. The first one is the Dow Jones Industrial Average. That's what you see on the news all the time. And the background of that goes back to the 1890s when Charles Dow uh wanted to see not how each individual stock does, but some things that he considered more like a market metric. But because those those days didn't in those days there were no computers or calculators, uh, the only way to do it is do it by hand. So what he kind of said, well, I'm gonna take 12 stocks because he don't want to do too much math. Uh, I'm gonna add them up, uh, they're add up their price and divide uh by 12, and that's gonna give me some sort of an index. And that is the Dow Jones Industrial Index, which is simply looking at the price per share and you divide by initially it was 12, but then over time the divisor had to be adjusted for splits and so forth. But the the principle is that it's really driven by the price per share. Uh and this is where it gets interesting because if you have two companies and one company has they're both uh valued at 100, let's just say a unit of a hundred, a hundred million or a hundred, whatever it is. So let's just say a hundred. And one decides that they're only gonna split the uh the company into two shares, so each share is worth fifty dollars. That's that's a completely uh under the this the the prerogative of the company, how many shares of ownership. So think of a pizza pie. You can either slice it in two or you can slice it in ten slices, it's completely up to you. See if you slice it in two, then it's gonna have fifty dollars for one share. Uh and then you have another company that decides to slice it in ten. Uh, and at that point it's ten dollars per share. Well, it turns out that obviously if you're gonna look at these two companies, which are identical in size, they're not gonna have the same impact on the market metric. Because if the uh $50 one, uh $50 share goes up by 10%, well, it goes from 10 to 50 to 55, whereas the other one goes up by 10%, it's only 10 to 11. Uh so it's a very flawed way to construct a market indicator because it is not reflective of the value of the company as a whole, but arbitrarily uh to the price that the company itself decides to set for the share in terms of how many shares uh do I split. Uh so what came along later was uh an improvement, and that's what Standards uh Statistics and Porus Publishing did when they merged. Uh, they formed this idea of the SP five uh SP. Initially it was less than 500, eventually came to 500. But the big improvement that they made is that they said instead of 12 and subsequently 30 companies, we're gonna use more companies. But instead of looking at the price per share, what we're gonna look at is their value of ownership. How big is that company? How meaningful is it in the in the stock market? Uh, because I might not assign to uh a smaller company uh as much uh emphasis as I would on an NVIDIA or an Apple or Microsoft. Uh so that is called market capitalization. Uh, and that's what the SP does. So the Dow Jones is 30 stocks out of about 3,000 that he can buy in the US market, and it's based on their price, which is a very flawed way of doing it. Uh and yet the market still reports, uh, the the news city reports the Dow because it is the oldest. And the SP is a different metric that is broader. It has 500 stocks instead of 30, as in the Dow, uh, and the matter, the size of the company matters. Uh so in that respect, it is very important to know that that uh uh the SP typically tends to be a better metric. So if you watch the news, at least look at the SP or listen for the SP. But here's where it gets interesting. Know what you're measuring. If you're gonna say, I'm gonna look at the uh the larger the company and and the more emphasis, the more weight I'm gonna put on it. Well, it turns out there is a uh a fascinating fact about the SP at the moment. If you look at the largest stocks and what we call the magnificent seven, and that is Apple, Nvidia, Microsoft, Google, Amazon, Tesla, and Facebook, these seven companies combined amount to about 35% out of the value of the entire SP.

Natalie Picha: 35:43

Yes.

Apollo Lupescu: 35:43

In other words, 35% of the performance of the SP is driven by these seven stocks. So it's quite a bit that is coming from these seven stocks. And if you think that's a lot, uh, NASDAQ is a different metric that just looks at the companies that have chosen that as a trading venue, nothing more than that. The same Magnificent Seven are also uh in the Nasdaq, but instead of 35, they are at 55%, 55%. So if you're gonna look at the Nasdaq, realize that more than half of its performance is driven by seven stocks. And when they fly high, boy, is Nasdaq gonna fly high. When they tank, boy, is a NASDAQ gonna tank. And the way that we think about investing and the way that we talked about it is in a global perspective, well, in that respect, you are not gonna miss out on these magnificent seven. They're gonna be part of your portfolio, but instead of 35 or 55, it's gonna be somewhere in the neighborhood of about maybe 20%, less than 20% or so. So uh that point, if you're gonna look at NASDAQ and look at your own portfolio and see that they have different values. Oops, NASDAQ went so high. What am I missing here? You're not missing anything. It's by design that you do not necessarily want to get the NASDAQ performance if it takes uh investing more than half your money in seven stocks. That's right. So uh, because of that, I think it's really important to know what are you measuring. Uh the Dow Jones that does not even include, you know, a lot of the Amazons or or or Google. Uh how can he possibly say how did the market do without including Amazon or Google? And that's what a Dow does. Uh so it's a very shallow matter uh metric, it's flawed. So a lot of professionals don't use it. Uh and when you look at the SP, Nasdaq, and your own allocation, realize there will be differences almost by design. That nothing went wrong, but you should expect that your portfolio is different because you do have some smaller companies in the US, you have some international stocks, you have emerging markets. Uh, and by the time you also put bonds, boy, they could be totally different than that than the Nasdaq.

Natalie Picha: 37:45

That's right. So we've we've come full circle because it comes back to your financial plan. It comes back to your allocation because your goal is what we're measuring for, not necessarily where the SP, the Nasdaq, and all these things are. We're looking at our clients and we're talking about where do you want to go? And that's the numbers we're trying to follow.

Apollo Lupescu: 38:07

And I think Natalie, that is such an important distinction you just made. There are two ways to measure the success of your investment portfolio. One is to have a yardstick and compare my portfolio with this yardstick. And I think that's not necessarily a good way. It's a very short-term way to do it, but also it's flawed because uh your portfolio might be very different than the yardstick. The alternative is what you just mentioned is that I instead of looking quarter by quarter, how did I do relative to this market metric that I hear on the news? How am I on target to meet my financial goals? I think that to me is the metric of success that most investors should use. And because that acknowledges that there are times when you're gonna look better uh and worse, but the portfolio is gonna fluctuate as long as you're on target to meet your goals. That to me is the definition of uh of an investment, a successful investment experience.

Natalie Picha: 38:58

Absolutely. Well, I am so grateful. I'm just so grateful, Apollo, to have you as guest today. Your thoughts and just all of your experience here is gonna be so good for our listeners. So I just want to say a big thank you for joining us. And I hope we get to do this again sometime. Well, be careful what you wish for. I'd love to. It was great fun talking to you. Thank you. This has been wonderful. Um, and so to our listeners, thank you so much for tuning in to this episode of Market Talk. Please take a moment to subscribe, leave us a rating and review. Sharing this podcast helps us reach more people who want to make confident, informed financial decisions. You can find us on LinkedIn, Facebook, and Instagram for additional insights. To book a consultation or learn more, please visit us at Royal HarborPartners.com. Whether you're beginning your financial journey or you're refining your long-term plan, we're here to guide you. Experience the difference of working with a firm that empowers your life. A firm that focuses on what matters most? You.

Disclosure: 40:02

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