Consistently Not Stupid: The Investing Mistakes That Actually Kill Returns | Seth Cogswell

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Transcript

Welcome And Social Shoutouts

SPEAKER_01 0:04

Seth Codswell of Ronnie Oak. For those that are here, make sure you first word you followed him on X. Codswell underscore Seth, I think is what it is, right? You couldn't get the full first name, last name. I don't know what I'm doing. It was a while ago. You gotta warm them on, man. That's uh you know you should register, we'll talk about not the passively aggressive. Nobody else registered that. I'm just saying Seth should register that on X. Uh if you're watching this, make sure you follow Seth Collinswell, make sure you connect him on LinkedIn. By the way, I am as much as I have a big reach on X uh and I've got you know large number of followers and connections on LinkedIn, Seth freaking kills it on LinkedIn. So you absolutely have to connect to him, Seth Collins on LinkedIn. Phenomenal content, likes to stir the pot, uh, but in a LinkedIn algo friendly way, uh, which is very different than the way I stir the pot on X with certain words that start with F, uh, and I don't mean few. Uh we're gonna have a good conversation talking about uh markets, but it's gonna be more of a conversation, less of a podcast interview, given uh uh how well Seth and I know each other. So uh first thing I'm gonna at least start off with as part of the conversation is uh are you trying to compete with me? Because I feel like you know you you kind of launched your own video series, not so passively aggressive, which by the way is a great title.

SPEAKER_02 1:13

Thank you. Well, it had uh the impetus was first of all, I'm in Minnesota, and Minnesota is kind of known for being Minnesota nice and passively aggressive, and that having lived in New York for 14 years, I'm anything but passively aggressive. So that kind of drives me nuts. The other thing is uh at least at the moment, one of my major concerns is passive investing. So it kind of has it ties into both of those. The you know, I intentionally with not so passively aggressive, I I intentionally went the sort of not podcast route. So I'm actually not competing with you. They're smaller video series. Um, the idea is the goal is to to educate, hopefully get people to thinking. Um that's really that's a major concern of mine right now that keeps me up at night, not necessarily in finance, but just in life in general. Uh finance is sort of a microcosm, and that's where I have a little bit more of an impact. And so, at least right now, I'm focusing on just just trying to trying to promote critical thought. Um, you know, we are inundated with data to an extent never seen in history. And a skill set that we haven't developed yet is really filtering out what gets through to us. We gotta be so much more intentional about what we hear and see, because I don't know about you, but I'm I didn't believe everything. So I have to be really careful. Uh, and then I have to take a step back and really think about is does this actually have merit? And so that is the purpose of not so passively aggressive, is to kind of point out a lot of the data that's out there, the stuff that's being thrown at us. Almost all of it has uh an intent or an incentive that doesn't necessarily align with us and and our well-being. Um and again, at a time when it's really hard to trust everything, you certainly can't trust everything. It's important to trust yourself, right? Because what else, what is more trustworthy than an individual's ability to assess what's right in front of them and think critically? And and that, for some reason, that confidence has been just undermined and almost just disappeared. So that's the purpose of the of not so passively aggressive.

SPEAKER_01 3:49

I uh I saw this post on X maybe like three weeks ago. I I forget who said it, but it's something along the lines of the next billion dollar business is the one that sells trust. Um and it's interesting talking about trust, trusting in passive investing, trusting in uh socks for the long run, uh, trusting in uh NVIDIA and the AI trade. Um in a world of uh digital replication and content which is not human derived.

SPEAKER_00 4:18

Um I don't know how we can trust anything anymore. Yeah, that's so the so then the key is you trust what you can, which is yourself, right?

Concentration Risk And The One Exit

Private Credit And The Liquidity Trap

SPEAKER_02 4:34

I mean, common sense. There's a quote that common sense isn't that common, but it look, it's called common sense for a reason. Um, to a certain extent, it is common. We all have it, we all have the ability to think critically in a time like now, now's the time to do that. Um, and so you know, one of the I guess the main topic I wanted to discuss today is um again what we're hearing, um, what we're seeing. There is a there's a there's so many posts recently that undermine or minimize the importance of the concentration risk that's in markets today. And it's so disingenuous and wrong. I can't decide if it if they're just wrong and they're not thinking critically, which wouldn't be surprising. Um you know, one of my issues with the passive narrative is that it's part of the purpose seems to convince people that they're idiots and not to think. And again, that my purpose is is to convince people otherwise, that they should think and that they're not idiots. Um, but there was a post recently that that was talking about how uh how overblown the this any comments on concentration risk is, how it's fear-mongering, how it's whatever. Keep in mind this person that's doing it is uh paid as sort of a journalist to publish stuff for passive investing. Uh so there's a conflict of interest. But there's there's no way anyone could possibly argue that concentration doesn't uh represent risk. No one can argue that. Yet people are arguing it. And it therefore it's it that is not true. So if you hear it immediately, take a step back and think. You know, will concentration risk mean lower returns? Not necessarily. Does it mean the market goes down? Not necessarily, because it's uncertain. But concentration risk, especially 40 per 41% in 10 companies, which is 50% higher than the peak of the tech bubble, matters. It's it's overcrowding, right? So if you imagine a theater and then there's a fire, and you know, everybody has uh has a limited number of exits to rush toward, overcrowding matters. Um, and so you know, I see the stock market or the SP right now in particular as a theater at a thousand X capacity with one exit. That doesn't mean that there'll be a fire. That doesn't mean that there'll be a rush for the exit. Maybe some people it might be a little overcrowded and a little stuffy, but you know, you know, maybe you get to just sit there and eat popcorn. It's fine. But what if it's not? And and so whether it's as an investment manager like myself, whether it's a financial advisor or even an individual, it's our job to think about what could go wrong so that we can plan for it. It may not happen, but you know, if the worst does happen or if something unexpected happens, which just what life help life tends out? I don't know if anyone on here, but my life has not gone perfectly as planned. Uh, I don't think that most people's have. And therefore it's worth planning on things not going according to plan. Um, and and so one of the things that I've thought about recently, and I'm still noodling this, so bear with me. But if you go back to 2008, uh one of the issues was that a lot of the institutional investors had sort of a kind of a record high amount invested in alts, right? So they they weren't liquid, they were illiquid. And then things started going wrong. And what we saw in the stock market, especially at the tail end, was these institutions who had liabilities, they ended up having this massive asset to liability mismatch, and so they had to raise cash. And the way, the only way they could raise cash, or the the easiest way, was to sell stocks. And so you saw stocks going down, down, down, and then basically in the last quarter or near the tail end, it basically hit the vacuum where it just plummeted. And all of the highest quality, all of the all the things that seemed to be perfectly safe and not really at risk, given GFC, just plummeted. And then they bounced right back up. But the reason it did that was because these massive institutions had to raise cash. Cash is king. We hear that all the time. Liquidity matters. So that's what happened in 2008. Now, let's go to today, because it's changed dramatically, but it also rhymes, history rhymes, it doesn't necessarily repeat. And I would say that uh the rhyme is is much, I don't know, louder. I gotta work on this metaphor. Um, you know, there's been a lot of attention recently on private credit. Um private equity now is a is a much larger percentage. So over the years, so in 2008, many institutions had a, I believe, around a 10% target for alts. Many institutions, so CalPers now has a 40% target to alts. Some endowments have a 60% target to alts. And we can see what impact that'll have because very recently a number of Ivy League endowments had to go to the debt market to borrow against their portfolios because they didn't have enough cash. They didn't have enough liquidity because they have so much that's illiquid. So today we've got about 13 trillion or so between private equity and private credit. Um we also have private companies to a magnitude, so they're they're still privately held, so they're not liquid, to a magnitude that we've never seen before. Okay, so private credit, there's a ton of um focus on that right now. With reason, it seems like. Um, there is a an amazing open letter by a gentleman named Nick Nemoth. Hopefully I didn't mess his name up. Um, I posted it or reposted it on my LinkedIn page. It's it is the best read. It is, it is probably the best thing that you can read right now. It is so good. He does such a good job. He's a good writer, but also he does a great job of just sort of laying out what the issue is. The main thing is private credit has gone from nothing to you know$3 trillion or so. And if you look under the hood, it's really alarming. There, there are um the lending practices are concerning. The the way in which these things are marked is really concerning. And and it's worth, it's an it's I don't know if I'd say it's an enjoyable read because it's again, it's concerning, but it's very much worth a read. Um, it's it's very educational. And and the fact is that these firms are paying people to mark these loans. Uh, many of these debtors or that those that borrowed are they went the private credit route because they couldn't go the traditional route. It's risky. But yet, uh, I don't gonna mess up this number. One, and I'm not gonna mention names, but one private credit firm has a sharp ratio that is supposedly 2x Madoff. Madoff could have made up any sharp ratio he wanted. It was literally fake, right? It is he was known for the concerning or sort of the red flags with regard to Madoff were how consistent his returns were because he was making them up. And there are private credit firms who were lending to uh people that couldn't get credit elsewhere that have sharp ratios that are two times Madoff. That madoff, made up at Sharp ratio. It's insane, it's absolutely insane.

SPEAKER_01 13:02

Um sharp ratio is a risk adjusted return matter for the people that are not familiar with that uh dynamic. And when it comes to uh why that matters, folks, is um it it's in theory it means that you're you're getting all this return for almost no variability. Now, you can very easily gain that from a private credit perspective because you're not marked to market, you're what's called mark to model. Uh, and what goes into the model, while in theory it should be based on public markets, in reality can be anything that means that what's being shown probably isn't real.

Own What Others Do Not

SPEAKER_02 14:13

Yeah, it's also worth keeping in mind. You uh always follow the incentives, and the those who are marking these things are paid for by the private credit herbs. Uh there's also a a fuzzy line between private credit and private equity. And the main thing is if you add those up, we're at suppose roughly$13 trillion in these in private credit, private equity, and they are illiquid. So it's it's it's significantly higher percentage than 2008. Then we've got um, I think it's around$3 trillion in privately held in 10 privately held companies. That's like nothing heard of in history. So SpaceX was recently valued around, I think,$850 billion or so. Uh OpenAI is around$800 billion. Anthropic, I believe, is around$700. I actually have these notes and we'll check. Um regardless, you've got almost$2 trillion invested in three worth of value in three companies that are privately held. They can't be traded. You can't if if we ever need cash, it can't be pulled out of this. So you add that to the private equity private credit. And again, it's like nothing, it's so far beyond 2008. Okay, so again, 2008, one of the big problems in the public equity market was you had this illiquid basket or or you know, this illiquid group of uh holdings, and then you had the liquid. Because cash needed to be raised, the private basket couldn't be touched. There is no, you couldn't raise money there. So therefore, it was raised in the public, and it had a huge impact on the stock market. Today, that private basket is much bigger, which means if anything happens, again, as a manager, as an advisor, even as an individual, it's our responsibility to consider what could go wrong, to plan ahead, so that we can address it if it does happen. If it doesn't happen, awesome. That means it was a good surprise. Great. But again, there the the illiquid basket is now massive. Now, go to the public basket. 10 companies, this goes back to overcrowding. 10 companies are now make up 41% of the SP 500. The average household now has roughly 30% more of their net worth invested in the stock market than at the peak of the tech bubble. The supposedly there's roughly, you know, this could be measured in different ways, there's roughly 60% of the U.S. equity market is now in passive portfolios. Now that can be given defined in different ways. Let's keep it simple, partially because it makes a stronger argument for me, but let's just say to keep it simple, a large part of that's in the SP or in something that's cap weighted, which generally speaking was the definition of passive. So cap weighted means that there's no um act of thought as far as how you weight it. It's just the amount that you invest in a company is based upon the size of that company or the market cap. So whether it's Russell 3,000, Russell 1000, uh S P 500, whatever it is, these are all cap weighted, they all own the same stuff. And again, uh, so 60% of the entire US equity market is in that. Um, and then 41% of that, which is 50% more than the the 10 holdings at the peak of the tech bubble, 41% of that is in just 10 companies. Now, the vast majority of that 41%, I think let's say 36%, is in like seven companies. Those seven companies, yes, they're technically in some different sectors, they're big tech companies. They're related, they're all very similar, and they all are pumping cash in one way or another into AI. Now, what if, again, if we're in a theater that's a thousand X capacity with one exit, what if there's a spark? What if there, what if people need to exit? Unlike 2008, that didn't have that concentration, and unlike 2008, which had a lower percentage in illiquid investments, we now have more invested in illiquid investments, and there's more concentration. So that means that if cash has to be raised at all, it is largely coming from we could say 10 companies, it's largely coming from seven. It's oh eight was crazy. Now it was crazy for other reasons too. Um, but this is a risk. If you ever hear someone posting something about concentration risks not mattering, immediately, if you're not gonna call them out on it, at least immediately ignore it. And also immediately never listen to them again because they're either wrong or they are intentionally misleading you because they're trying to sell something. There is there is no arguing that there isn't significant risk in the concentration that we're seeing today. And again, if you go back away, that that uh that larger percentage, much larger percentage in illiquid companies is going to only exacerbate the risk of overcrowding.

SPEAKER_00 20:29

And that folks, I think, is why Beth is saying that he's concerned about uh passive.

SPEAKER_01 20:33

Um which argues that um the biggest bigger make should be uh the real problem uh on the concentration side. Let's talk about um if you're gonna still construct an equity portfolio, because here's the thing, right? Like these concerns are out there, people talk about it. Yes, they can there can be a trapdoor, but you still need to have exposure to equities in some way, shape, or form, right? Because you don't know when, and let's face it, maybe you know the big bad move doesn't take place, uh, you can still benefit, right, from from that future. Um, so with that said, let's talk about your ETF run a little bit, uh, which I'm a fan of uh and know that's not an endorsement. I just really do think actually we constructed it is thoughtful, and a lot of advisors have gotten in front of have said the same thing. Um how does Ron uh does it present possibly a solution to that concentration?

SPEAKER_02 21:22

I love that because I've gotten a little off track for a second. I got a little excited about the uh concentration.

SPEAKER_01 21:27

Just bring it right back.

SPEAKER_02 21:28

Just bring it right back. I love it. I appreciate you keeping me on track. Um there's a very simple concept that that no one is thinking about. It touches on this overcrowding or this concentration risk, and it is the idea of owning what others don't. It's a very simple idea. And you know, it's a contrarian idea, and there's a lot of value to a contrarian approach. Uh, Warren Buffett has that comment: be greedy when others are fearful, be fearful when others are greedy. Um it's worth considering zigging when others are zagging, especially if they're doing it uh you know for faulty reasons. And so our portfolio is actually designed to go where others aren't.

SPEAKER_00 22:20

Uh what many seem to forget about uh is you have companies operating in the world that are worth revenue and

SPEAKER_02 22:34

The real world, they're generating a profit. And then the stock market is a derivative is driven the price, but it's not driven by the real world. Now, the real world hopefully um is what many are basing their decisions on when they are either selling or buying. But the price of a stock is dependent on supply and demand. Large cap right now, uh, particularly let's say the top 10 holdings in the S P 500 right now are 50 to 60 percent. The the 4P is 50 to 60 percent higher than the top 10 at the peak of the tech bubble. And that is because of demand. Demand has pushed those prices higher. Even small cap, even though it's really struggled, at least the last numbers I saw, small cap was marginally overvalued relative to its long-term cape ratio. Mid cap, because no one invests in it. Literally, people invest in large and then they invest in small because it's the opposite. They just skip over mid. And it's just uh, you know, whatever. It's this extra step that they're just not gonna take. Mid cap over the long run has provided more return. It's actually outperformed large over the last 33, 34 years. It's outperformed small, but it's also uh cheap relative to its long-term history. And so there's a reason why we end up in this upper, mid, lower, large cap space is because, particularly on the valuation side, um, our strategy is created to maximize earnings growth. So we you know, we want to invest in companies where their value is growing intrinsically. Never mind the stock price. We want companies in the real world that are growing in value. Then we go to the stock market and we say, all right, we want to get an attractive price. Now, again, supply and demand drive that price. So if um, if people are piling into a company, which means that you have a great deal of demand, it's gonna push prices up. So what we're looking for is companies with significant earnings growth that are less risky in certain ways that are attractively valued, the reason they're attractively valued is because they're garnering less interest. There's less money flowing into them and pushing them up. And therefore, by definition, we're actually buying what others don't own or what they own less of. And so, right now, particularly you know, going back to that GFC uh comparison, going back to that sort of overcrowding and that concentration risk, it's really important to not be piled into the exact same things that everybody else is piled into. Again, we saw it, no, wait, when people sold, it went market went down. Uh those stocks went down. The if everybody has to pull money out of the exact same seven companies, those are that's a lot of selling pressure and everybody's me rushing for the exit. Whereas if you invest in something that's very different. So our portfolio has 95 to 97% active share, meaning, which is a measure of just sort of how different our portfolio is from the SP. It's very different. Uh, it's a great complement. Um, one other thing I want to talk about is just again, uh, going back to the idea of being uh fearful when others are being greedy, being greedy when others are fearful, is everybody knows that chasing returns doesn't work out well. And the reason is, again, demand pushes prices up. So if you're chasing returns, you're chasing demand already coming into something. Now, what I've like, what I'm attempting to get people to think about, and it's you know, it's it's hard, it's a hard idea to wrap your head around, if chasing returns is bad, wouldn't the opposite be the opposite? So wouldn't investing in uh something that has lagged, therefore, you know, it hasn't, you're not chasing, uh, wouldn't that therefore probably be a good idea? Now there's a caveat. Sometimes you just don't want to, there's some investments that you just don't want to invest in. They're just not good. But if there's a strategy that over a long period of time has done really well, if the strategy makes sense and then it's pulled back or it hasn't participated, you can get it as a discount. Right? I get another great quote that's attributed to a bunch of people, but I've also seen it attributed to Warren Buffett. And actually, I'll probably mess it up, so I'm gonna write it down. I'm gonna read it. Only in the stock market do people run out of the store when things go on sale. It's it's insane. Uh I was talking to an advisor earlier today, and he was he had a very thoughtful approach to um how he selected his managers, and then, you know, if he very with discipline, if he made a change to move on. And one of the things he was looking at was a a performance screen, which makes sense, right? Performance matters, that's why we're doing it. But the problem is if you are selling because a manager has underperformed over a short term, you're doing the opposite of chasing. If you invested in that manager for a good reason, because you like the strategy, if you invested because that strategy that makes sense has delivered good results, but then it's out of favor for a little bit, you're actually getting a discount. But you're selling at a discount. So again, it's the opposite of if you're in a store and something's going on sale, it's the opposite of buying things that are on sale. You're literally selling at the same discounted price. It's it's it's completely convoluted.

SPEAKER_01 28:51

But but it but it's very human, also, right? It's like you go to Vegas and people uh circle the table that's got the hot hand, right? Which is, you know, maybe randomness, right? But it's like people always gravitate towards the thing that's always winning or seemingly always winning in that short term. And I wonder if there's any way real way to sort of get people to not act like that. And goes to your earlier point, it's it's it's hard to get people to think. Everyone's just reacting, and and we're kind of going back to our reptilian sides of our brains uh when we take actions.

What Breaks First Private Or Public

SPEAKER_02 29:27

Yeah, it's our our process is rules-based for exactly that reason. Um I have a lot of confidence in my intelligence. I've studied a lot, read a lot, I have a fair amount of experience. I still do dumb things on a regular basis. Um, I'm still a person. I still have emotions. I still might wake up and be a little bitchy. Uh, you don't want me selling something because I woke up in a bad mood. Um, and that's what that's one of the things that makes investing so hard is our emotions. They get in the way. Uh, and and again, that's a big part of our process, is it's rules-based. So it's designed to remove emotion from the process. It makes it more repeatable, more dependable, so that our clients know exactly what we're doing at all times. Emotions will never be a part of it. Uh, but then, you know, again to your question, it's one of the purposes of not so passively aggressive, the video series, is to try to get people playing a more active role and thinking a little more objectively. It's hard, but that I mean, is that an excuse to not do something? Um, we will all be better off. Well, every decision that we make, if when if we take a deep breath and kind of center ourselves and get our bearings, we're gonna make a better decision. And it's the same with the stock market. Now, the issue is that money is very emotional. So a lot of people really have a hard time doing that. But again, is that an excuse not to? Is that an excuse not to try? Right? I mean, that's that's one of the issues with that I have with passive investing, is it's it has merit. Um, being cheaper makes a ton of sense. Or it doesn't make a ton of sense. It adds value. Being cheaper, there's there's no arguing that that's not a good thing. So passive investing offers one major positive is also emotional. It does the same thing over and over. Now, I would argue by constant with the cap waiting, you actually you will never invest more in an underweight in an undervalued company in cap waiting, and you will never invest less in an overvalued company in cap waiting. So it's inherently stupid. I mean, it's the opposite of buy low, sell high. But it's a momentum portfolio. Sometimes momentum do really well. So if you want momentum, awesome. It's cheap, awesome. Um, and again, that consistency of discipline takes the emotions out for the portfolio at least. So that's that's great. But it's nonsensical. Uh and so I again back to your point. The because cap waiting or the SP is a momentum portfolio or momentum construction, it is going to be the recipient or the beneficiary of emotions and people piling in and people following each other, and you know, wanting that kind of um what is it? That uh I don't know. Let's say the it it provides a certain amount of comfort to be a part of the group and to be going with the flow. Well, to pick us in booths.

SPEAKER_01 32:55

Right. And and it's it's um it's it's built in our DNA because if you you were more like I was using now, you were more likely to survive the woolly man that's coming after the group, right, than if you were buying your s by yourself. I want to I want to get some I'd see some comments and questions. I want to bring this up from Liz who's watching this on LinkedIn. Uh and I think it's actually kind of a nuanced question, uh, based on your private uh uh credit uh equity conversations. What breaks first, private markets or public markets? Now, I would argue uh the answer is yes. Okay. I'll tell you why I'm saying that because it's it's actually really interesting in terms of what's happening right here, right now, right? I mean you're hearing the stories of the redemptions um and the gating on the private credit side. You look at the stock prices of the BDCs, they've gotten absolutely destroyed in this. Um so the the stocks of the private credit plays have gotten wrecked as more of these uh redemptions are are taking place. But broader public markets haven't really, I mean, we're not that far off from the prior high, even with this Iran war. So uh it seems like i i it it it's it's almost coinciding, but also not I mean, first of all, they're all interconnected.

Tech Bubble Rhymes With 2000

SPEAKER_02 34:05

Yeah. Right? I mean, um there's there are plenty of reasons to think that we are in a technology bubble with AI, in that um all of our expectations, everything that we're kind of projecting forward isn't based on anything today, really, right? It's we don't know anything. We literally have no idea what AI is gonna look like. We have no idea what impact that's gonna have. I mean, yes, will it will have an impact? Yes. Will it make things more efficient? Yes. Um, will it be beneficial in a whole lot of ways? Yes. Is there a chance that we have like 30% unemployment and you know, maybe massive unrest? Yes. Is that a good thing? Hell no. So it's it's nuanced. I and and so whether it's the public or the private market, you know, so we've got the Mag 7 pumping cash into um, you know, sort of this AI infrastructure. You have one of the things I'm curious to see is NVIDIA in particular, NVIDIA is the linchpin on the public market side for why we're not in a bubble, right? It's you know, the you keep hearing this narrative that there's unlimited demand, and and there might be. I don't know. Um, but I will say that when you start seeing circular deals where a company is paying another company to be a customer of your company, that's really concerning because that's not how business works, right? You just want somebody to pay you money to be your customer. You don't pay other people to be your customer. That that doesn't, for the most part, make any sense unless you're trying to manipulate things a little bit. Um the other thing is that the NVIDIA chips need data centers. Data centers take forever to build. I mean, I'm not a data center expert, but I've I've tried to read a lot and and learn. And these construction projects are massive and they seem to be moving at a glacial pace compared to what the media is putting out there. Not only that, a lot of them that are being talked about aren't even happening at the moment. Uh from what I read, you know, every three months, let's say three months of sales of NVIDIA chips takes six months to potentially actually put to work. How does that work? If if NVIDIA is selling more and more and more, then that means that you have the stockpile of chips that were really expensive that are that is growing more and more and more. And not only that, one of the things that nobody's talking about, which blows my mind, is um so we go back to what I said about that stockpile of chips. So last year, um some people pushed back on numbers, but supposedly a good percentage of the chips that NVIDIA sold last year are currently being used, which isn't a huge leap, right? Because it's it takes a long time to build data centers are very expensive. Meanwhile, NVIDIA recently announced, not not too long ago, that they're releasing their new chip. And it will be 10x more efficient or more powerful. So all the chips that everybody bought last year that are just sitting there, waiting to be put to use in a data center, which may not even happen for a few years, is now one-tenth as powerful as what's coming out in a few months. NVIDIA's chip cycle is has sped up a lot. And so that's that is massive deflation. These chips everybody's buying today are worth far less. Not that far from now. So why wouldn't you, if you want chips, why wouldn't you wait six months if you if it seems highly likely that you can get chips that are better? Why wouldn't you maybe wait 18 months? Because you're like, oh well, it's gonna take a long time to build this data center. I should just buy these chips right when I need them, because they are evolving so fast. Um that's such an obvious, it's such an obvious dynamic dynamic. And nobody's talking about blind. Now back to your question. Um the thing about the private markets and the public markets is the public markets. I love quote quoting Warren Buffett and Jarlamonger because uh they certainly live longer than I am and they're very wise. Um in the short term, the stock market is a voting machine, in the long term, it's a weighing machine. So in the short term, it can move around, right? So um, you know, depending on how things play out, these concerns with regard to AI or these or whatever concerns are, you could probably see it in the public market sooner because there's more liquidity. The private markets are illiquid. Again, a lot of these marks, so whatever the returns supposedly are, they are being determined by uh service providers that are being paid by those firms. So they're incentivized to make those firms happy. I'm not saying that they are that they don't have integrity, but just simply that, you know, they feel the need to make these other firms happy or they'll get fired. You won't really see the cracks in the private market until people really start to lose faith and start to pull money out, which we're already seeing, right? So maybe we actually see it in the private markets faster. Or maybe this is a blip right now. It's really hard to say, but they are all interconnected, right? So the public market right now, since February 5th, we've had the SaaS pocalypse where all these software companies are just getting slaughtered despite how asinine it is to believe that one programmer can basically recreate these complex systems. And even if they can, one of the major services these SaaS providers provide is service. It's people. So one programmer, maybe they can program something that'll be a little cheaper that's, or maybe a lot cheaper, that's almost comparable. But they can't provide service, they're one person. The SaaS pocalypse is asinine, but the SaaS pocalypse is related to private credit. Private credit and private equity, because these SaaS companies, it was it was believed that there was just infinite growth with these SaaS companies. They didn't even need because it was believed there was infinite growth, these companies didn't even need to be profitable for private equity, private credit to hand them crazy amounts of money. And now what they're realizing is uh that infinite growth belief was actually faulty, uh not true. And and so you're starting to see both the SAS pocalypse in the public equity market, and then you're seeing these cracks in the private credit market, and then AI is really is you know, obviously a heavy, a significant piece in the public market. Um, according to one manager, almost 50% of the SP is basically in one way or another tied to AI and AI infrastructure. And then the private credit market, you know, first of all, again, the the private um company market. So whether it's anthropic, open AI, a lot of these companies, they're massive, right? They're bigger than anything we've seen in industry. But they're not profitable. They don't make money. Their revenue is growing, which we hear about all the time. But a lot, some of them, maybe all of them, have negative gross margins, which means the more that they grow revenue, the more money they lose. So the more money, so it's a it's basically a bathtub with the with the um you know the drain open, right? You need cash to constantly be pouring into these, into open AI, into um anthropic, in order to just even remotely try to uh keep things going. And that's on the private market. So it's all interconnected. I don't know how it how it all plays out. The ill liquid liquidity matters, though, right? So um you could see the pri the public equity market go down, but that doesn't necessarily mean it cracked. You could see the private um credit or PE market crack because there's no liquidity.

SPEAKER_00 42:55

You could see you know significant issues there.

SPEAKER_01 43:01

I like this uh this comment from Donald, uh, who's got uh gray hairs on him, it looks like on YouTube. Uh I love getting 6% interest back in 2000, you know, and the tech bubble burst. Uh some some parallels there, no?

SPEAKER_02 43:19

There's a lot of parallels. Um, you know, I I always go back to uh history doesn't repeat, but it rhymes. There's a lot of parallels to 2000. In 2000, you had a small number of companies go up a whole lot. They became a larger part of the indexes, not necessarily the SP, which is an important point that I'll touch on in a second. And then, but then you had a lot of companies that just sat there or didn't really participate. So in 2000, 2001, 2002, when the market came off, the companies that didn't participate to the upside didn't participate to the downside because it wouldn't have made sense to do so. You have uh particularly recently over the last since April last year, um if you Bloomberg breaks the market up into 218 different factors, which are basically just characteristics of companies or holdings. Um, so the the factors, the characteristics that make the most sense as far as I'm concerned. So low volatility, which has been proven to provide value. Uh it's just less volatile. People don't like losing money. There's it it pays to invest in low volatility. Uh, that was number 218 out of 218. On the flip side, high volatility, which is Largely going to be that's going to be where the um zombie companies live, the companies that are the walking dead. They don't make enough cash to make their interest payments. Uh that was up a hundred percent in six months at the tail end of last year. Um again on the on the flip side, qual high quality, which is basically just profitable growing companies with reasonable debt, that had its worst run in history other than 2021, certainly relative to low quality. Profitability had its worst run in history relative to unprofitability uh other than 1999. So again, that parallel to 1999. Um, and then even Ford P is, which is companies that are expected to make more money, which you'd think would be a good thing, that also got smoked. Um, and and that just so happens for run, going back to run or or running over, that's that's what we invest in. We invest in companies that are growing at a high rate, uh, that are profitable, therefore, they're attractively valued, that have reasonable amounts of debt, and that are uh lower risk in a number of ways or less volatile. Um again, it's just 99 was the only time where certain of these uh characteristics perform this way. And and so uh it's a great, it's a great parallel. There's also differences, right? But um one of the things I get pushback on when I talk about the SP is that the tech companies were much more overvalued, right? There were a lot of tech companies that weren't making any money. They were more speculative. Those companies weren't in the SP. So you're actually not comparing apples to apples by pointing toward that. Now, if you say the forward PE of the top 10 holdings today is 50 to 60 percent higher than the forward PE of the top 10 holdings in the SP then, that is comparing apples to apples. Um yes, some of the companies then were like Exxon and trying to remember some of the other the big ones, but six of the six or seven of the top 10 were tech companies. So Cisco, Microsoft, they were profitable. Um, and the and the SP dropped 50%, even though that wasn't ground zero for the issues of the tech bubble. I would say today the SP, especially the top 10, is very much ground zero for what I'm most worried about, which is that concentration risk. Um now a forward P of the top 10, I think it's maybe, let's say it's 35 or so. That doesn't compare to the tech bubble as far as how crazy a lot of valuations were. So I I kind of shy away from using the term bubble. Instead, for anyone who has seen So I Married an Axe Murder, it's classic. It's uh you know, right up there with Gone with the Wind. Um, Mike Myers makes fun of his grandson, who has a big head, uh, which isn't very nice, but he he refers to him as an orange on top of a toothpick. That's how I see the market right now is you've got this tiny, tiny, tiny body, right? So almost every single company at this point is tiny relative to the 10 largest. You got this orange on top of the toothpick. And again, everybody is going to be squeezing that orange if they need cash. Which actually, so the toothpick though, you know, if if smaller means negative returns and bigger means larger returns, the toothpick, it doesn't take much to make a toothpick a little bit bigger. And that's what we saw in 2000. In 2000, the uh you know, the the non-tech stocks, so like value, small cap, quality, our portfolio, they were all up in 2000, 2001, 2002. Um because we as an orus today and looking forward, if uh liquidity needs to be found, it's going to be squeezed out of one thing mostly.

Final Takeaways And How To Connect

SPEAKER_01 48:46

Uh I feel like I should get all my movie recognitions on uh because clearly you've got a real handle on the stuff that's most relevant to today as far as the movies that are being created pre-AI. Uh which by the way, I that's a whole nother business idea I think you and I should talk about. I feel like we're gonna enter a stage where uh vintage VHSs are gonna actually have value. Uh, because everything's gonna be digital, digital, and some of that old school type of stuff is gonna be uh worth something.

SPEAKER_02 49:10

Uh Seth, one her just bought a record there uh and has now has like 15 records um and she only listens to 80s music, a nine-year-old.

SPEAKER_01 49:21

So, you know, it's Apple doesn't hold more from the tree, I guess, is what it is. Uh Seth, for those who want to uh learn more about run and in general track you follow you, we're quite doing.

SPEAKER_02 49:32

As you mentioned, I'm definitely much more um active on LinkedIn. Uh it just seems to fit my personality a little bit more. Uh, but I begrudgingly done many more of these podcasts, many more videos, and I'm I'm attempting to put a lot more content out there to again try to support critical thought, not necessarily to sell, just critical thought. Uh, and that includes uh the video series I recently created, which we talked about called uh not so passively aggressive. Those can be seen on LinkedIn as well as YouTube. And and you know, if I can answer any questions, hit me up.

SPEAKER_01 50:13

Always love talking to Seth. Uh appreciate those that uh watch this. Thanks for the comments, by the way, folks, that uh watch the live stream. This will be an unedited podcast as always, and I'll see you all on the next episode of Lead Lag Live. Thank you, Seth.

SPEAKER_00 50:25

Thank you.