Discipline vs Mania: Seth Cogswell on 1999 Parallels, AI Excess, and Why Risk Is Being Ignored

In this episode of Lead-Lag Live, I sit down with Seth Cogswell, Managing Partner at Running Oak Capital, to break down why today’s market feels increasingly speculative and why disciplined investing is being left behind.

From meme-style factor leadership and zombie-company outperformance to extreme concentration and AI spending risk, Cogswell explains why chasing returns tends to end the same way and how investors can position for when the cycle turns.

In this episode:
– Why the last eight months looked like a speculative outlier
– How high volatility and low quality leadership distorts portfolios
– How AI spending can flip from narrative to accountability
– Where discipline fits when clients still want growth exposure

Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.

#stockmarket #MarketBubble #AI #RiskManagement #PortfolioConstruction #Macro #Investing

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Transcript

An Unnatural, Elongated Cycle

SPEAKER_01 0:00

The cycle has been artificially elongated. It's not normal. The economy is not operating in the way that it's intended to be and has historically, and in a way that has provided uh, you know, a historical growth and standard of living. It's not working in that manner. Um now the key, the question is how long will that what's been going on last? I don't know. Uh that's the whole thing about investing because it's it's uncertain. And therefore, that's where diversification comes in.

SPEAKER_00 0:48

I'm your host, Melanie Schaefer. Welcome to Lead Leg Live, where today we're looking at how discipline is coming back into focus as the markets grow increasingly concentrated. For now, at least, speculation continues to be rewarded and investors assume risk management can wait, a setup that looks uncomfortably familiar to anyone who lived through 1999 and uh the years that followed. My guest today is Seth Cogswell, managing partner at Running Oak Capital. Seth, it's great to have you back.

SPEAKER_01 1:16

Love it. Thanks for having me, Melanie.

Host Intro And Theme: Discipline

SPEAKER_00 1:18

So, Seth, the market has basically gone straight up for 17 years with big tech consistently dominating and zombie companies growing by the day. Why should people make a change right this second?

Valuation And Concentration Alarms

Depreciation Games And Forward PEs

Crowding, Households, And One Exit

SPEAKER_01 1:29

It's an interesting time in a whole lot of ways. First of all, uh, the longer a trend perpetuates or goes on, the more extreme the negatives grow or the the the you know, really the way to think of a recession or a um you know a drawdown is really that's where the the excesses are addressed. And that hasn't happened, basically, since 2008. And so what you've seen as far as the excesses is pretty easy to quantify at this point. Uh the top 10 holdings of the SP 500 are now roughly, let's say 55% more overvalued than the uh top 10 at the peak of the tech bubble. So the the forward P of the top 10 holdings in the SP at this moment is 38, 39-ish. Um, I didn't check that today. But the the peak at the tech bubble is 25. So that's actually more than 50%, right? So 55 to 60% higher than the peak of the tech bubble. Um now many people will argue there were all these other companies that are in the tech bubble that weren't making money and people were piling in. They weren't part of the S P 500. Uh so this is literally comparing apples to apples. This is comparing the forward P of the SP today versus the forward P of the S P then. The SP was down 50%. And then, so it can happen. Um, and again, we're talking about the SP, right? So the problem is in the SP. The problem is in the top 10 holdings. 55 to 60% higher valuation. And if you then magnify that with the concentration risk, uh, the I believe the uh percentage of the SP of the top 10 during the tech bubble was 27%, whereas today it's roughly 41%. That's also 50% higher. Uh so we're picking up on a little bit of a theme here. The other thing that we talked about last time was uh Michael Burry's observations, which are very common sense, seem very obvious to me, which is that um some of the big tech companies that are in that top 10 are extending their depreciation cycles when, by all observations, there's there's nothing that we could possibly look at that would even remotely argue for extending the depreciation cycle. Um argues for uh lowering or shortening the depreciation cycle. And so then the question is why would companies, when it seems blatantly obvious that they should shorten the depreciation cycle, extend it? The answer is it makes their earnings look better. It makes their forward um, well, it brings down their PEs. Um and so again, if you apply just a small buffer to the current forward expectations, now you're looking at maybe 94% higher valuation than the peak of the tech bubble. Um adding on to that to sort of give a sense of the overcrowding that I'm trying to get people to like really appreciate. Uh, people now have the average investor, the average household now is 30% of their net worth, 30% more of their net worth invested in stocks than they did at the peak of the tech bubble. This is the only the second time in history, I believe, where household uh net worth is in stocks is higher than their net worth in real estate. Only the second time ever. Um, and and the first time, the other time was a notable time just before things went back to normal. Um, and and so well, that's to say that today feels to me the top 10 holdings in the SP feel like a uh theater at 1,000 X capacity with one exit. It maybe everybody goes to that theater and they sit back, eat popcorn, watch the movie, and it's fine. But what if there's a spark? What if anything sets that off? And and that's where it that's where um you know what's going on in AI really matters. Nvidia is the linchpin in the argument for why there's all this demand and it's not a bubble. Nvidia's forward P right now is, I believe, 26. And so a forward P of 26, current P of 40, maybe it's that's current P might be 46 and it's current and it's forward P is 24. Regardless, it reflects basically 100% earnings growth. Uh if you have 100% earnings growth, 24 P is not bad. But according to some sources, 83% of the chips that NVIDIA sold last year aren't being used. They, that's, I don't remember the number. Let's say 140 billion, I believe. I think it's roughly 100 to 140 billion of chips are sitting around collecting dust. And that 24 forward PE assumes that 250% of what was sold last year that's not being used is going to be sold on top of that. And NVIDIA just announced they're going to be releasing new chips. So the chips that were bought and aren't being used are very shortly no longer gonna be state of the art. I'm sure they're still fine, uh, but they're not gonna be the best. And so we are gonna expect, even though people can't even figure out how to use the majority of the chips they used last year, they're gonna buy 250% of that amount this coming year. Maybe they do. I have no idea. But the whole point is if that doesn't come to fruition, that linchpin or that cornerstone of the uh we're not in a bubble argument, despite all these numbers, is pulled out. Um, and so it's just a time right now, the the risk, given all of these, given all of this overcrowding and and where we are, it's a time to act today and protect clients just in case. That doesn't mean sell everything, doesn't mean short, just means diversify. The last thing I'll just say is um it's an uncertain time. This is maybe, I don't know. I think it's probably the most uncertain time that I've ever experienced in my life. I live in Minnesota. Uh to a certain extent, you know, the governor called in the National Guard. The um president of the United States is potentially maybe gonna call in the U.S. military. There, yeah, so I guess the National Guard is going to potentially go to war with the U.S. military. I have no idea, probably not. But literally, that is nothing like this has happened maybe in the 70s, but I wasn't alive then. Otherwise, you got to basically go back to the Civil War to where a dynamic like this was even remotely close. Um, and then you've got, you know, the stuff that's happening with Greenland. Um, maybe that ends up being nothing and just bluster, but just about every European country is now opposed to the U.S. So like we could literally, and we're talking soldiers, right? Soldiers of other countries are being um mobilized against soldiers of the U.S. Um that hasn't been seen since World War II. And it's not like China and Russia are our allies, right? So maybe the friend of our um or the enemy of our enemy is our friend. So right, I I can't think quite as clearly when I'm on video. Uh, regardless, all of a sudden China and Russia might even be uh aligned with Europe, and everybody's against the US. I think there's a very low chance of that happening. All of this is to say it's not a good time to be complacent. It is a good time to think of clients, to think of risk, um, and pump the brakes a tiny bit. I guarantee almost everybody is ahead of their financial plans. Pump the brakes, take some cash off the table, diversify in strategies that are disciplined and thoughtful and concerned about risk and concerned about valuations.

SPEAKER_00 10:02

Yeah, so just I talking about investment strategies and volatility and low volatility, and then the relating uh that back to 1999 and 2000. Do you think then that this is a structural problem that we're going to see again, or is this just a feature of the cycle?

SPEAKER_01 10:16

I think it's just a feature of the cycle. I mean we still have cycles, we just haven't really it's been elongated because of the Federal Reserve's actions over the last, I don't know, ever since beginning with the Greenspan put in the 90s, the market has been artificially propped up. Then we have uh government intervention, you know, the different QEs and whatever else. Uh it's just there's there's still going right now, there's a reason why of a historically high percentage of the Russell 2000 is zombie companies. It's just the walking dead. And at some point, what we should all sort of be begging for is a recession. It won't be fun. I'm not saying recessions are fun, people will lose jobs, and and for those individuals, uh, I empathize or feel for. But uh capitalism does not work at its best if there is no creative destruction and there's no competition. And and that's where we are right now, is just this perpetuation of this kind of garbage. Um it's it's not gonna last. It's just simply politicians kicking the can, and at some point there's an end of the road.

SPEAKER_00 11:33

And taking that into an account, Seth, how then should investors and advisors utilize running oak in particular, and where should that fit into their portfolios?

Nvidia, AI Demand, And Idle Chips

SPEAKER_01 11:42

Running oak with an active share of 94 to 97% uh provides diversification or a complement to all the things we've just talked about. All the all the you know, the 10 largest holdings, everything that everybody owns so much of. Um so you know, again, supposedly 60% of the market is now on passive, um, which means of and 41% of that is in 10 companies. If people own individual stocks, they're probably in those 10 companies. Large cap growth managers are in those 10 companies. That's the only way they could keep up. They're massively in those top 10 companies. We are a really good way to balance that out. Um, you know, very focused on valuations, very focused on risk. And so it's it's a way to sort of pump the brakes and uh and you know, potentially just sort of hedge your bets. Um, you know, we had a client not too long ago describe us as their portfolio designated driver. Right now, the market is is a bit of a rager. It has been for years. Um, all you gotta do is look at the historic number of zombie companies in the market. And you know, you think of zombies as people walking around with no idea what's going on. Pretty similar to uh the late stages of a of a rager of a big party. Um, and so our clients, because it's uncertain, are using, let's say, the cues or large cap uh momentum strategies, maybe the SP even, as a way to kind of be um to really concentrate on what's going on in AI and technology, but then using us as a way to, you know, when the party ends. Um we have a history, 37 years of getting clients home safely with 50% of the average drawdown of the SPA. Uh, and so we're there when clients need us, and and there's a chance that clients are gonna need us very soon.

SPEAKER_00 13:44

Yeah, but you you talked about how investors want to see continued growth for for those investors and for advisors um who have these types of investors, thinking about portfolio construction today. How should a disciplined approach fit alongside growth uh without relying on concentration or long-duration bets?

Protecting Clients Through Diversification

SPEAKER_01 14:04

Aaron Powell This is an interesting time, right? Again, the the cycle has been artificially elongated. It's it's not normal. The economy is not operating in the way that it's intended to be and has historically, and in a way that has provided uh you know a historical growth in standard of living. It's not working in that manner. Um now the key, the question is how long will that what's been going on last? I don't know. Uh that's the whole thing about investing, is it's it's uncertain. And therefore, that's where diversification comes in. Uh and so I had a client a little while back who mentioned who shared that he's using us, our strategy, as the designated driver for his portfolio. Uh he said that you know he can't tell his clients that they can't participate in this party that's going on. Uh but at the same time, we know that this doesn't last. Every party ends at some point, especially the worse the behavior gets, usually the sooner the end of the party comes, and it's it's generally not uh it's generally not very fun and somewhat abrupt. So he's using this as his designated driver. You know, his clients want to be at the party. His clients' mothers are at the party, neighbors are at the party, Uber driver, hairstylist, they're all at the party. And and so he can't tell his clients, you can't go. Uh, and so therefore, he's invested his clients in whether it's the QQQ, which is kind of a concentrated bet on the party continuing, or um, I personally favor uh uh large cap growth momentum strategies as a good compliment because that actually has a strategy to it versus the QQQ or the SP. And then we're there when that party comes to an end. When when everybody's ready to go home, maybe not in a position to drive. We've been drinking club soda for a few years now, uh, still at the party, still participating, still, you know, still having a good time. But it's when it's time to go home, we're we're ready to do so.

SPEAKER_00 16:20

Where does speculation fit into that? Then it's not necessarily and I know we talked about last time the memes, um themes, memes, and dreams, I think it was, but where does speculation fit in and how does speculation relate to uh being grounded in fundamentals?

Cycles, Fed Support, And Zombies

SPEAKER_01 16:36

Speculation. Howard Marx said uh his most recent letter was awesome, talking about um different bubbles. And it touches on speculation because that's bubbles and speculation certainly are very related. Speculation is not grounded necessarily in reality or um whatever's existing today, right? You're speculating into the future, and especially right now, it makes sense to speculate in the future because it is a we're in this significant transition with regard to AI. Now the issue is there's a uh a give and take with regard to speculation and risk and uncertainty. Because again, it's not grounded. And and so right now, in particular, if if we're talking about AI, uh it's the the AI uh narrative is operating on a razor's edge. If these companies grow to a point, and by grow, I mean grow earnings, actually deliver some sort of return, which right now is a seems very far away. If they are able to produce a return on the capital that they're kind of that they're consistently pumping into this, awesome. Then the the AI bubble becomes not a bubble, right? Like it it basically the market grows into that bubble and then no longer a bubble. Now the problem is there is a I don't know what the odds are that these companies in the economy are able to pull that off, but I feel it's really low. Yeah, let's say 10%, just because it's so big. You know, it companies are expected to spend, I think, one trillion in the next year or so on infrastructure. I think I saw three trillion over the next few years. That's a lot of money that's being invested with speculatively, again, with no sense of what the demand will look like, with no, at this point, no roadmap of profits. Nobody's making any money at this point. And not only that, a lot of these companies have negative gross margins. So we're hearing about all this revenue growth. The problem is if if a company has negative gross margins and revenues grow, that means they're losing more and more money. It's not necessarily, it's it's not a good thing, right? Like growth is great, but you don't hope the cancer grows. Uh and to a certain extent, that's kind of what it is right now. I'm not saying it's it's negative like cancer, as much as just growth and it's actually costing money or hurting is not a good thing. Um, if anything, slower growth, if it's hurting, is probably better. Um, and and you know, again, so there's this race. And that's why you see the CEO of NVIDIA, uh Jensen Wong, kind of out on this um campaign to, you know, shaking Musk's hands, shaking everybody's hands, kind of like constantly doing these uh, you know, uh these different deals that are that are a little concerned. Concerning. And you've really seen no revenue come into these companies from all these deals, right? So there's been all these circular deals between AMD and NVIDIA and all these different companies, and none of it broadcom, and none of it has resulted, or very little of it's resulted in revenue. There's no numbers yet. So at some point, markets hold people accountable. You don't have to go that far back in 2022. Meta did something similar where they were, they invested very heavily into the metaverse. And then everybody was sold on the metaverse. And it didn't deliver returns soon enough. And Meta was down 85% in a short period of time. That is a possibility. I'm not saying it's going to happen. But again, that's where diversification comes in, right? You're hedging your bets. And that's, and again, that's where our strategy really comes in, is because we are always focused on where we are today in reality. Yes, we're we're trying to maximize earnings growth, but it's based upon current business operations and reasonable expectations and trends from the past. So it's it's grounded. Um, and and so that's it helps to balance that out. You know, I don't know what happens, but having diversification and and setting your portfolios so that regardless of what happens, your clients will be good. That's the way to do it.

SPEAKER_00 22:10

And Seth, uh, a little getting a little more into that, you've launched a new educational video series focused entirely on helping investors think more critically. What gap are you specifically trying to fill? And why do you think that kind of education matters so much right now?

Positioning Running Oak As A Counterweight

Growth Participation With A Safety Plan

SPEAKER_01 22:25

I'm a weird person. I think I've been weird since I was probably eight years old. Um, I think when I was 10, I had a poster up in my room that just said think. I used to get, even when I couldn't drive, I would get mad watching people do really dumb things on the road. So I mean, first of all, I'm I'm a little neurotic. So let's just go ahead and admit it. Um, but one of the things that's really bothered me over the last, let's say, decade or so. Um, and you can see it in politics as just people are thinking less and less critically, less and less for themselves. And social media is a big driver of that, right? Because it it creates, whether we want it or not, it creates echo chambers for us. And so we're just sort of fed stuff that resonates. And so we just accept it. And the the same can be said for uh investing in the stock market. Um, you know, you go back to the 70s, the the financial industry has a history of kind of convincing people that they're experts and that they should abdicate their critical thought. Right. So if you go back to the 70s, active managers were charging, I don't know, two, three percent, and then they'd closet benchmark. They'd buy 200 companies and sort of guarantee that they'd perform in line with the index, and then they'd take two to three percent. And really, as long as they didn't mess up, because most investors' options were limited, and because you know, at that point in particular, people, there wasn't a whole lot of say financial literacy, they were able to just collect a ton of money and provide no value whatsoever. And that's where passive grew out of. That was that was really passive was a much needed solution to that. Um, so if you're gonna get the market, you might as well pay nothing for it. So it was a lot better than a lot of uh what was available prior to that. Now, my major concern with passive investing, I got a few. One, as I mentioned, I'm neurotic, and uh part of that is being a perfectionist. So the idea of not thinking, and and again, passive by definition means not doing anything. It means not thinking. That bothers me, right? So allocating capital simply based on size just has always seemed really dumb to me. Uh, in addition, the way I'm not gonna go into it too much right now because it I all get carried away, but the way that passive portfolios are allocated, or the way in which particularly cap-weighted index are allocated, the more overvalued a company gets, or let's say if a company is overvalued, it gets more capital. If it's undervalued, it gets less capital than it would if it were fairly valued. And so it's the exact opposite of buy, low, sell, high. It's the opposite of how every single person would say is the simplest and most obvious way to invest. It's it's idiotic. Now, first of all, there's that, right? I I it's passes provide a lot of value, but I people, at least from what I've seen, haven't thought about the actual fundamental actions, right? If you're doing something that is the opposite of what makes sense, eventually it's probably not going to work out well. Luckily, it has worked out so far because it's gone from 0% or a small percent of the market, yeah, let's say two decades ago, and it's grown to, according to some numbers, 60%. So it's been this massive tsunami of cash that's been pushing it up. Fine, that's worked out well. Can that continue? Can it go to 100? Let's hope not. Um, because markets would cease to function. Capitalism would cease to function if passive go grows too big. But really, to answer your question more directly, after I needed to provide a little color, my big concern is that um in the passive narrative, people focus on returns, right? Returns have been good the last 20 years or so. But they don't talk about risk. And as an investment manager, and it's probably the same for financial advisors when you're laying out plans, there's two major topics: returns and risk. The passive narrative, the people that sell passive. Passive is something that is sold. There's a lot of people making a lot of money off passive. It has conveniently omitted risk from the conversation. I couldn't get away with that. But somehow, uh the, you know, those who sell passive have gotten away with omitting risk. The way that they touch on it ever, if it ever comes up, is eh, the market's up on average, be fine. And that has led to people somewhat believing or being under the impression that they can't lose money by. I mean, that's literally sort of this unconscious feeling that so many have investing in passive. And it's just not true, especially if your time horizon is three years, especially where valuations are. So long-winded way to say that I'm I have been increasingly concerned over the years that um many are unwittingly complacent because I feel that they have been intentionally misled. And my goal is to, with not so passively aggressive, that's the name of the video series. Uh, it's I actually just released the very first one on LinkedIn and and um and the first five or six are now on YouTube. The goal is just simply to empower anyone that cares the lesson, to help people be more engaged in their financial future. Uh, our financial futures matter. It's you know, it's the difference between being really stressed and being fairly relaxed, right? And and and the world is better, the more people are relaxed. Um, and also even for advisors, it's just better if you have people that are engaged and understand. Because when actions occur based on understanding, they're more sustainable. They have a uh, let's say a better foundation. If actions are taken and it's simply based on trust, and that trust is shaken, which can happen right now. Advisors are experiencing it simply because the market's going up. Uh, clients' trust is being shaken because they're not keeping up with the SP. Imagine if it goes down, people's trust is going to be shaken. And so the key is to have um active buy-in from clients for them to understand and to be more engaged. And that's my goal is just to empower, empower anyone that cares to listen to think just a little bit more critically about markets and serve as many as I can, however, I can.

SPEAKER_00 29:27

Seth, before we wrap up, where uh can the audience go to find or to view uh the these episodes on YouTube? And also for anyone watching who wants to follow you in your work uh more closely, where is the best place uh for them to contact you?

SPEAKER_01 29:41

So not so passively aggressive, um, which is aptly named because I'm anything but passive aggressive, definitely more aggressive. I'm also uh based in Minnesota, which is known for being um Minnesota nice and a little more passive aggressive. That's definitely not me. And right now, again, the biggest, my biggest concern is passive investing and the risk that uh many are taking and don't realize. So not so passively aggressive. You can find that on YouTube. Um otherwise, I have very begrudgingly over the last year been much more active on LinkedIn and X, doing more interviews with with you. Uh thank you for holding my hand as I learn and and hopefully improve a little bit with us. Um, but so definitely check me out on LinkedIn. Um my email is out there somewhere, SethrunningOak.com. I always welcome engaging however I can and and serving in any way, in any way that'll help.

SPEAKER_00 30:40

Well, it is always great to have you on. And as always, I appreciate the conversation. And thanks to everyone for watching. Be sure to like, follow, and subscribe for more episodes of League Like Live.