Shiller CAPE at 2000 Bubble Levels — Households 30% Over-Allocated to Stocks

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Transcript

Running Oak And The RUNN ETF

SPEAKER_00 0:05

Um, I guess now to the presentation. Um first to provide just a little bit of background, um Running Oak. We we launched an ETF as as Mike mentioned about two and a half years ago. And that ticker is run. Or for those who are running no no no no no, um the ticker is R-U-N-N. Uh we launched with 2 million, and that has grown to, I don't know, let's say about 380 million or so. And the reason why, well, one, I'm told that that's one of the better launches ever for a boutique firm. I don't know if that's true, but it makes me feel really good. So I tell myself that when I go to sleep at night. Um the the real driver of that success or that growth was active ETFs in general are a pretty new vehicle in the market. And and many of the strategies that go with those ETFs are also new, where there's there's nothing new about our strategy. Our strategy has a 12 and a half year audited track record. Um, the the portfolio of the ETF is identical to that SMA that has that 12 and a half year audit track record. And then we actually have about a 36-year, 37-year real-time history of data uh with reports going back to like 1989. So um not many active ETFs have that. And that's that's really what's driven it. Now, uh we'll go into the strategy maybe in a little bit, but actually let me touch on it really quickly.

Three Rules Earnings Price Risk

SPEAKER_00 1:42

Um, the strategy itself, very simple, very common sense. Uh it the goal is to maximize earnings growth because if you invest in an asset and that asset is growing regardless of the price, if if intrinsically it's growing, that is a great tailwind. Uh the second is being very disciplined around price. Uh it's it's almost no one focuses on price these days. It's nuts. Um, largely because we are all, whether an investor, whether an advisor, whether a manager, what we're all trying to achieve is return, either for ourselves or for our clients. That's it. Now that's an oversimplification because the stream of returns or the way that it makes us feel the up and down, the volatility, that does matter. But again, if we're just keeping it simple and focusing on return, the way that you calculate return is the price of what you sell minus the price where you bought divided by the price where you bought. Literally, the only thing, the only input in return is price. And yet, um, you know, let's say index funds, passive portfolios are completely indifferent toward price, right? So it's the one thing that matters as far as returns, and there's no consideration for it for a lot of people. And not only that, but even thematic ETFs, which can be really cool. I can they can, there's some really interesting ones out there, and they can provide um, you know, targeted exposure to certain areas of the market, those also don't take any account uh for price. And so my goal is to really bring buy low, sell high, um, a focus on price back to people's portfolios because there's no more obvious way to generate return and make money than buying low and selling high. That's that's you know, how many of us, when we are feeling a little testy and someone asks us how to make money, we didn't say just buy low, sell high. Um, so again, maximize earnings growth, discipline around valuations, because you don't own an asset that should go down. And then lastly, uh focus on downside risk. The process is rules-based, just like let's say an index fund or passive investing. It's very disciplined. We do the same thing over and over and have for four decades, which means that our clients know exactly what they're getting at all times. We're not, we're not a moving target. We're not, you know, we're not moving around. So that's a quick overview.

A Measured View Of AI Mania

SPEAKER_00 4:11

Um, the purpose of our last letter was there, there's plenty of people out there singing the praises of AI. And and and they have merit, right? I mean, AI is going to change, it will change the world. Now, the question is, what does that ride look like, though? Right, there's there's been plenty of uh transformative technologies throughout the years, maybe not plenty, but there have been some significant ones. And almost every time there was significant loss of capital involved with it. And so, in my opinion, the last thing that people need right now is more cheerleaders, um, talking about AI, talking about the how much everything's gonna go up, talking about all this demand, whatever it is. I people need a measured view. Um, we need to consider both the upside and the downside, right? Because that's what investing is. Investing is taking a risk to achieve a return, ideally, but it's uncertain, right? We don't know. And so it we really need to consider this. Um, and and so there's a lot of similarities to 99, 2000. It's also very different. But again, right now people seem to be scared of even remotely acknowledging the similarities, and I think that's important. So that's my goal. It's not to be bearish, it's not to be whatever. I'm not saying uh the world's not gonna be great, that AI is not gonna do great. What I am saying is that consider, you know, especially if you're retiring in the next like five years, um, if you're going to need any of the cash that's invested in the market within the next, I don't know, one to ten years, you need to think about this. All right, so moving along. Um

Long Track Record And Outperformance

SPEAKER_00 6:05

first, again, our strategy has been run since we've been managing it since the early 80s. And when I say we, I mean actually my father, he actually created it in the 70s, um, ran it over the years in significant assets at larger firms. I started running Oak in 2013 with the goal of really making it more readily available. Before it was only available to uh a particular firm's clients. And the goal was to make this more available to more clients. Um, now this is actually a chart that uh a very similar chart that you could find in the little book of Common Sense Investing written by John Bogle. And this type of chart was kind of the main selling point for passive versus active. Um, unfortunately, he did not include uh our efficient growth strategy in that chart. It would have been nice if he did because we significantly outperformed or our strategy significantly outperformed the SP over the long run. Um, so this chart, you know, it just goes to show that the value, first of all, it is possible to outperform the SP. Uh this idea that's not is ridiculous. Um, it's possible. That's not to say it's easy, but it's possible. This chart illustrates our strategy net of a fee versus the SP, which you can't invest in uh without a fee, which is also conveniently overlooked. Um, but this actually shows net of our fee versus the SP gross. Um and it's just to show that uh we've provided significant value over the years relative to the SP and in in general. Uh and by the way, all the quotes at the top are um are lines from Prince, which I'm in Minneapolis, so why not? Uh and if you haven't read through the lyrics of Little Red Corvette, um man, that was a dirty song. I don't know. It's uh it's pretty pretty crazy. Um, so this this chart just goes to show that there are similarities to 2000.

Tech Bubble Rhymes And Diversification

SPEAKER_00 8:11

Um again, there's a lot of differences, but this shows what a focus on risk looks like if the market ever struggles, which I I just don't believe that the market will go up forever. Um, and one of the similarities between today and and '99 was, or the tech bubble was you had a small number of companies go up a whole lot. Um, to a certain extent, a good number of them became a larger and larger part of the index, which pushed the index up. And you had a whole lot of stocks that just sat there and did nothing. And so when those stocks that had gone up a lot came down, the stocks that did nothing, they actually went up. There was no reason for them to go down. So you had small cap, value, um, high quality. R strategy were actually up in 2000, 2001. And and really, this is just a good argument for diversification, which I'll speak on more. But you don't want to have all your eggs in uh in in 10 companies, the tin company basket, the SP basket. Um, and so you know, really consider yes, AI is going to be positive. Yes, it's it's here to stay. But consider that the s the ride isn't all that smooth, like has been the case uh in in Boom's past, right? Or in um, you know, technological advancements in the past, right? There's always there's generally always been some pretty significant downside associated with it and capital destruction. And um, there will be ways to make money, but really consider balancing that out because you know it's not fun to lose money. Um, and we're a really good complement to the SP, to uh the Mag 7, to the AI companies that are all over tech that that aren't yet making any money and and burning cash. We're a good compliment. Um you know, positioning right now is is interesting.

Factor Chaos And Portfolio Discount

SPEAKER_00 10:23

It's again, much like 2000, you've had a handful of companies go up a lot, and then you had a lot that didn't. Um, particularly in the last eight months of 2025. The last eight months of 2025 was arguably the dumbest period in the history of the stock market by a whole lot of measures. Um, you know, a lot of the ways in which we would all say would be a dumb way to invest, such as high volatility, which tends to be invested in uh zombie companies and whatever else, that performed best. And then a lot of the things that performed worst were precisely what we would all say would make sense to invest in, such as profitability, low volatility, because people don't like losing money. Low volatility, which is proven to provide value, was the 230th best performing of 230 factors in the last eight months or so of uh 2025. And and so what that's created. So coming into let's say May through April, um, our strategy had outperformed every benchmark and every peer that we're aware of. Okay, there's a it's a big universe. So I have to provide that disclaimer because there might be a peer we haven't thought of. But to our knowledge, it outperformed every single benchmark and every single peer. It was outperforming the SP by roughly two and a half percent or so. And then over the course of the last eight months of 2025, um, you know, we finished 2025 lagging the SP by 20%. So that's basically a diversified portfolio that's invested in mid-large companies underperformed a what people think of as a diversified portfolio in mid-large companies by 22.5%, which has never in our history going back to 89, nothing like that has happened. The closest thing was 1999. So again, going back to that 1999 theme. And so nothing's changed though, right? We we again we invest in companies that are expected to grow that are high quality because they have um they're profitable, they they have reasonable amounts of debt, um, and and that's lower volatility in all cases. The that approach, those qualities that we invest in didn't all of a sudden stop working. It just means that you can get that approach, you can get those qualities at a 20% discount effectively from where it was um at the end of April in 2025. And so this the purpose of this is really to show where things are positioned right now with regard to our portfolio and the SP. So um usually our PE is going to be a little bit higher because we want to maximize earnings growth. Typically, the earnings growth is higher than the SP. So that's that's our goal. Uh now the forward P is generally lower, and that's the case right now. So you've got a, I don't know, let's say back of the envelope, about a 15% discount on our portfolio versus the SP, looking at forward P's. Now, what's crazy about that is generally uh higher earnings growth result as kind of um shows up as higher Ps. We actually have a lower forward P and we have significantly higher expected earnings growth, at least if you're looking at our the P of our portfolio, uh the companies in our portfolio versus the forward P. Our earnings growth is roughly, I don't know, let's say 70% higher than the S Ps. Um, and our forward P is lower. But again, more importantly, this is a time for diversification. If it is like 99, uh it's it is an uncertain time. I think most people, most people would say they feel that, right? Or uh our society is definitely um a little divided. We're in a war. Uh Mike, Mike is actually focused on a lot of this, what's going on today. And and so that's a time where you don't it's it's uncertain. We don't know how it's going to play out. Maybe AI works out perfectly. Maybe all these AI companies kill it. Maybe they don't, right? And so that's where diversify diversification comes in is so that regardless of the outcome, regardless of how this uncertainty plays out, you're okay. Your clients are okay, you're okay. Um, and so one of the major takeaways on this is first of all, our average beta of 0.84 versus 0.97 for the SP equal weight. SP equal eight does not provide the diversification versus the SP to the degree that most people think. It's you know, a lot of people are investing in the equal weight thinking that they're getting this differentiated portfolio. It's still invested in all those same companies. Yes, the weightings are very different, but the beta is actually not that different. Our beta is. And not only that, but our active share is roughly 95 or so, which means that we are very differentiated from the SP from all the stuff that everybody owns so much of, right? So the Mag 7. Now, uh again, we're gonna we're keeping it going with the the 99 comparison. Um,

How Expensive The Market Really Is

SPEAKER_00 15:54

I thought somebody posted the the chart on the right on LinkedIn, and I immediately, I legitimately laughed out loud. Uh it's just such a funny chart, right? How many times do you see a chart where there's nothing on it? Um and it made such a good point, right? The the percentage of time US equity market has been more expensive uh per a whole bunch of metrics. Now you could argue that, so first of all, trailing P if you have a uh significant growth, maybe trailing P is not quite as important. Um, price the book, you know, we're we're the economy's different, right? So I don't know that price of the book really matters. Price to sales. We're in a, let's say, a tech-driven uh economy, so price of sales is less important too. However, the Schiller Cape, which takes into account earnings, earnings are what matters. Earnings are what come through to investors. We invest, we risk capital to get a return that comes in the form of earnings. Uh the Schiller Cape, notice that there's nothing on there. There's no bar. At no time was it more expensive. And also market cap to GDP. I mean, that those chart, that chart historically has been very mean reverting. And we are just so far beyond. And one of the really interesting things is if you consider how many um companies are still private. So they're those aren't even being baked in. They're being baked into the GDP, they're not being baked into market cap. So that um that market capped GDP chart is actually more extreme than than any realize. And again, it's never been cheaper. Um, and meanwhile, despite all that, uh, very recently flows into equities, uh, you know, largely passive, but certainly some other areas, has uh, I don't think ever been higher, right? So that doesn't make a whole lot of sense.

SPEAKER_02 17:57

Um keeping the the Prince theme going.

SPEAKER_00 18:36

Um it's one of the things to really consider as a risk factor is so first of all, the the forward P of the S P right now, the of the the forward P of the 10 largest holdings in the S P is I mean moves around, but let's say 50 to 60% higher than the forward P of the 10 largest holdings at the peak of the tech bubble. Um and the the 10 largest holdings are also 50% more concentrated than at the peak of the tech bubble. Now, every now and then I'll get pushback and say, well, the you're comparing apples to oranges, the the big tech stocks that really drove the tech bubble were not in the top 10. First of all, that's somewhat accurate. But six, six of the ten companies in the top 10 of the SP at the peak of the tech bubble very much were tech companies, right? It was Microsoft, um, Intel, Lucent, which I don't even think, I don't even know if it exists anymore. It was in the top 10. Um, six of the top 10. Uh, so it is sort of comparing apples to apples, but also um this time's different. Again, it is different from the tech level, right? You had a lot of tech companies that weren't making any money, and because they weren't making money, they weren't in the SP. So they were largely in, let's say, the NASDAQ. But the SP, despite the big tech companies or the or these like the worst transgressors of the tech bubble not being in the SP, the SP was still down 50%, right? So that the SP, particularly the top 10, was not necessarily ground zero for the tech bubble, but it was still down 50%. Today, I would say it's ground zero. You know, you've got 50% more concentration, you've got 50 to 60% higher forward PEs. And it's worth noting that forward Ps bake in AI optimism. Uh, one of the main arguments for why we are not in a bubble is NVIDIA's forward P. And so, and I'm and by looking at forward PE, we're taking that argument that people are making into account. Now, um, this this slide is sort of a two-parter. Right now, this shows the degree to which these big tech companies are are spending on infrastructure. And again, one of the arguments for why this isn't problematic is the free cash flow that these companies have enjoyed. And you can see on the chart on the right that that is uh dropping precipitously now. So keep that in mind, that's dropping precipitously. Um, actually, let's go back for a second. What's really worth considering as a risk factor, because it's common sense and obvious, is Bury, Michael Bury, a a little while

Capex Surge Depreciation Risk Pushback

SPEAKER_00 21:46

back mentioned or observed that many of these tech companies listed are extending their depreciation cycles. Um why that matters is let's say a company spends, I'm gonna mess this up because I'm doing it in my head, but let's say a company spends ninety billion dollars um on tech and they ex and they extend it over six years. All right. So there's fifteen billion dollars in expenses each year for six years.

unknown 22:16

Okay.

SPEAKER_00 22:16

What if, on the other hand, the depreciation the depreciation cycle is actually three years? Instead of fifteen billion, instead of reducing earnings by fifteen billion, you're reducing earnings by thirty billion. And the issue is you can see what they're already spending. On the bottom left. What if it's twice that? And the issue that many are missing is that it appears that it very much is, right? So the I don't know that anybody would argue that the world isn't changing faster than any time in history. Tech certainly is changing faster than any time in history. Nvidia, their chip cycle used to be every two years. Now it's less than a year. So to think that everything is changing faster, but yet uh these this investment in infrastructure is lasting longer is completely contrary to I don't know, anything that makes sense. And so if you think of that as a possibility and you look at this chart on the right, it could be 2x that decline, right? Like it's it's a more precipitous drop. And you can kind of see it internally in companies, right? So this is a poll of uh chief investment officers within these companies. Um I think CIO stands for chief investment officer. Uh I'm in the financial industry, that's what I think of. But these are the individuals that are making the decisions on what to invest in within these companies, and they're starting to push back on all of this capex. They're pushing back on the capex because of this chart on the right. That's why. And if this chart's twice as steep, then they're really pushing back, right? So you can see that this is this moment in history is significant. It hasn't, nothing like this has happened since basically the tech bubble, as far as this level of pushback on CapEx, which isn't surprising, right? Because there's there's a lot of CapEx. Now, one of the things I haven't heard anyone talk about, which again it's obvious, and it it somewhat blows my mind that no one's talking about this, is um so Nvidia announced not that long ago the release of their new, let's say, chip system. So right now they have Blackwell and they announced that they're gonna they're releasing Vera Rubin. I might be pronouncing that incorrectly, but um, what they say is that it's 10 times more efficient than the current system. Now, again, one of the arguments for why we're not in a bubble is the demand for NVIDIA's chips. That's one of the that's you know, we keep hearing, oh, there's just this unlimited demand. We can't we can't service our clients. Um, but supposedly, according to some sources, now there's other sources that probably say something different, but according

Nvidia Demand Deflation And Unused Chips

SPEAKER_00 25:29

to some sources, roughly $100 billion worth of chips that Nvidia sold last year, um, which is a pretty high percentage of their total sales, aren't being used yet. Right? They're sitting somewhere collecting dust. Um, and the reason is they need data centers to put them in, right? And so maybe those data centers don't yet exist, whatever, whatever the issue is. And you are seeing a little more pushback on data centers. So it's also worth acknowledging that that maybe there won't be the places to put these chips that that right now we're hearing there are. But again, $100 billion of chips were sold last year that supposedly aren't being sold or aren't being used. Now, the forward P of NVIDIA currently, let's it's moving around. Let's say it's like 25 or so. What that what that assumes is that NVIDIA will sell uh quite a bit more. I'm trying to think of the exact number off the top of my head right now. Let's say, let's say 2x. I think it's more than that, but let's say that PE, that forward a PE, assumes that NVIDIA will sell 2x the chips that it sold last year that aren't being used, right? So we've got all these chips not being used, and we're gonna sell 2x that this year. That is what this Ford PE that they're currently um expecting is taking into account. So now we've got a whole lot more chips that it doesn't appear has have a home yet, right? They don't have a place to be used. And the issue is uh Vera Rubin's going to be 10 times more efficient than the chips that are sitting around not being used yet. So every person, everyone that bought those chips is now really regretting it, right? If they had waited a year, they could have gotten chips that were 10x more efficient. That is deflationary, right? If you can wait a few months to get a product or to get something that's much better, why wouldn't you do it? What if you can wait? What if you could wait a few months to get something that's gonna be much better, but you even in a few months you had nowhere to nothing to do with it, right? You were gonna buy it and then you're just gonna set it aside because there's so much demand. But what if you can then wait a few more months and you can get something that's twice as good? Why would anybody spend money right now? It and again, and maybe people there will be reasons for people to spend money now because maybe they need it right now. Fine. But there are going to be people um that are like, or companies that are like, why why why do this now if I can do it a year from now and get something a whole lot better? It's simple and obvious, it's deflation. And and the issue is that starts to really call into question the viability of NVIDIA's the expectations around NVIDIA and that forward P. So let's say, just as a hypothetical, um again, NVIDIA sold a hundred billion dollars in chips last year that aren't being used, supposedly. Let's say NVIDIA does the same, and that's a monster year, right? That's that's these numbers are like nothing ever seen before. Okay. So we're not we're not saying um we're not being wildly conservative. We're literally saying, let's say NVIDIA has the second best, you know, they they have the equivalent of one of the best years ever in the history of the world. Um that makes their PE let's roughly 80, not 25. 80. So now you've got the largest company in the world, by far the largest company in the SP, with now slowing growth, which again isn't saying much. Their growth has been crazy, right? So we're not saying, oh, NVIDIA's struggling. No, we're saying they've absolutely killed it and are still killing it, but their P is 80 with slowing growth. A very large company with slowing growth generally is gonna fetch a P if let's let's be generous and say 20. That would imply a 75% decline. I'm not saying that's gonna happen, but again, our job, you know, whether it's as an individual investor, whether it's as an advisor or as a manager, is to think about the risk, think about what could go wrong, because the goal is to have for our clients to have that money when they need it. Just something to think about. The other thing to think about, again, and you hear a lot about it, is the circular deals that are going on. We saw that in '99. Again, coming back to 99. I don't remember circular deals other than 99. There were a lot of circular deals in 99. And the question is um, if Nvidia is handing cash to customers to then buy chips, um, yes, maybe they're getting equity for it. But you know, NVIDIA has a has margins, right? So those chips cost money, these systems cost money, right? So let's say NVIDIA hands someone $10 billion, and this company buys $10 billion worth of chips.

Circular Deals Margin Debt And Fragility

SPEAKER_00 30:48

NVIDIA's probably making, let's say the chips are cost, you know, their profit margins are crazy, but let's say they they cost a billion, right? So NVIDIA handed them $10 billion, now they get $9 billion in gross profit, but what if, you know, there's shipping charges, there's all these other things, maybe taxes. Um, now NVIDIA handed them $10 billion and now they're getting $8 billion, right? So then they're potentially torching $2 billion. When would that ever make sense? It only makes sense if we if a company sees the writing on the wall and feels the need to prop demand up, right? This isn't organic demand. Companies don't hand money to companies to buy their stuff. That is not a common thing. It doesn't, it doesn't happen regularly. And so the question is, why is it happening now? And again, maybe AI, maybe this all plays out. I'm not saying it won't, but it's worth considering what if. That is our job is to consider all of the possibilities so that we can plan ahead for our clients. Uh this chart's crazy. Um, this this chart just illustrates companies that spend very heavily on CapEx and what their performances look like. Right. So think about the uh historic degree to which companies are the big tech companies are currently dumping money into CapEx. Think about their valuations, and then look at history. Um I don't know. It does not seem to be a great investment. Again, I don't know how this plays out. Maybe AI uh is such a moneymaker for these companies that it's the one, it's it is the time in history where this works out. But um, you know, we gotta play the odds. And and at the very least, again, this is just another argument to not have a historic amount of money in a tiny number of companies that are doing things that historically have not paid off. Um you know, really quickly, it's worth noting that uh again, like 99, investors are very, you can see in 99 uh margin really exploded, and you can see it's happening right now again. Uh debt is a double-edged sword, right? Like it it can push things up, but you know, it's still just like a sword. Uh, it can cut the other way. And and you can, I mean, you all you have to do is look at this chart and you can see what's happened each time that we've had a massive run-up in margin. And again, similar to 99. Um, I'll skip through that other chart because we've already talked about it a bit. Again, this is such a great illustration of the last eight months of um 25. What you can see is that high volatility, again, that's that's largely where zombie companies live. And we have more zombie companies than any time in history right now, thanks to 0% interest rates and stimulus and whatever else. High volatility is a terrible way to invest, but it killed it. It was up a hundred percent in six months. A basket of companies. You almost never see a basket of companies move like that. Meme stocks were the effectively the second best performing um factor. You know, I don't know

Why Quality Lagged And What It Means

SPEAKER_00 34:27

about you, but generally speaking, investing off of uh Reddit posts is not really, I wouldn't recommend it. Momentum can go either way, but you know, momentum again, it's it's basically buying that which is up a bunch uh and then hoping it goes higher. Um momentum's fine if it's driven by a company consistently delivering results. It's not fine if it's driven by high volatility and and zombie companies up 100% in six months. On the flip side, low volatility, which is proven to provide value, that was number 230 out of 230. Keep in mind that is what people, that is what clients want, right? Like they want, I get that right now everybody's caught up in in you know the excitement. But in the long run, um clients want to not be stressed. But that's that's probably the number one thing we're providing is the ability to sleep soundly. Low volatility is is the ability to sleep soundly. Uh high quality. So companies that are just well run, reasonable amounts of debt, high quality lag low quality to an extent never seen in history other than 2021. Profitability, or you know, in my effort to talk um to be a little sarcastic, I said making money. Profitability lagged unprofitability to an extent never seen in history other than 99. And then forward Ps. Now, all of this, these bottom four, describe what we do perfectly. So again, we want to maximize earnings growth. So that forward P. Um, to have earnings, you have to make money, you have to be profitable. High quality, we're very focused on debt and making money. And then lastly, all else being equal, we lean toward low volatility. And so these bottom four describe us perfectly. That is why that led to us lagging considerably over the last eight months, but you gotta consider the fact that, like, um, you know, we all we all know that chasing performance is a bad idea. So wouldn't the opposite potentially be a good idea, right? You can you can arguably get our strategy for a 20% discount to where it was eight months ago because we invest with discipline in companies that make money that are less volatile and that are growing. Um lastly, and then I see there's a bunch of questions. Uh this is how it park, how it kind of fits within a portfolio. Um almost everybody builds portfolios the same way. There's some exceptions, but let's say almost everybody. They start out with large cap growth because if you didn't have large cap growth, uh you got fired over the last decade. And then they compliment small because small is the opposite of large, and then you got the value. Now, the funny thing is, first of all, mid over the last 33, 34 years has outperformed large by a decent margin, and it's absolutely smoke small, right? So you've got the area that has provided the most return

Where RUNN Fits In Portfolios

SPEAKER_00 37:33

isn't invested in at all, basically. Not only that, because it's not invested in, that means there's less demand, which means you get it from more attractive valuations. So the part of the market that has provided the most return is also the most attractively valued. How often do you ever see that? And that's the case. Um, and again, well, actually, I'll I'll add one more part. So many don't really look under the hood. When they invest in a large cap strategy and they're like, all right, I'm getting a diversified large cap growth strategy. I'm getting exposure to all of large cap. If you look under the hood, let's use SCHG because it's a very common, commonly held portfolio. Um, last I checked, 60% almost was invested in eight companies. Those eight companies are at the very, very, very peak of the um market cap scale, and they're highly correlated. So you've got eight fairly similar companies that leaves 40% of that entire portfolio to cover that almost that whole, maybe it's not the whole white space, but all of large cap. So people own, I'm not saying people don't own microcap. Many, most people own no uh, let's say lower half of large cap, not to mention the upper half or maybe even all of mid-cap. Why that really, really matters is again this concept of investing where others aren't. If you invest where others are, or if you invest where everybody else has already piled in, demand pushes prices up. So you pay a higher price, which means you get higher valuations. Higher valuations imply that you have less upside, but in particular, it implies that you have more downside. If you invest where others aren't, you get lower prices because that demand did not push it up. You get more attractive valuations, therefore, potentially more upside. And most importantly, right now, especially if you want to complement the stuff that everybody owns so much of, you get uh conceivably quite a bit less downside risk. And so really considering, really consider going where others aren't, investing where others aren't. Um, especially as far as diversification in this very uncertain time. Um all right. So there are questions. I don't know. I've never actually answered questions on uh on a zoom call.

SPEAKER_03 40:11

That's because you always uh get ahead of them with the fabulous content that well thank you. Um let me pull these up here. Why don't you why don't you run through it? Should I uh sharing run run through it? Is that was that purposeful?

SPEAKER_01 40:25

Is that the run?

SPEAKER_03 40:26

Um does running oak from Robert Robe, does running oak goals from invest in gold in gold miner stocks or ETFs when you see a risk offset? Uh let's let's get into uh sort of the the idea of tactical versus active uh witness framework.

SPEAKER_00 40:38

Yeah. Um so one, I'm gonna say that's a good question, even though I get really annoyed when people say, oh, that's a good question.

Q&A Why They Stay Fully Invested

SPEAKER_00 40:46

It seems very condescending, but I'm gonna say that was a good question. Um so running our strategy, I could answer this in a few ways. Um, the inefficiency that we look to capitalize on is to find really good, really well-run companies that are growing fast, that for whatever reason nobody really cares about, and therefore that lack of demand creates an attractive valuation or whatever. That is the efficiency. In order to capitalize on that efficiency, we need to be fully invested. Um, I was a trader and managed the hedge fund before launching Running Oak. I was really good at uh timing stocks. I was horrible at timing the market. You you do not want me timing the market. I am terrible at it. And so that's not our that's not the inefficiency we capitalize on, and I'm not good at it. So we don't do it. We are fully invested. Um, now while our exposure is fairly broad, we're gonna be um, let's say mid-large, and uh it's growth y, but the discipline around valuation and risk brings it back into that middle. So if you go back to that marge chart I just shared, it's it's in the middle, and it's meant to be sort of this rock in the center of your portfolio. Um, and again, that rules-based nature makes it rock-like, right? We're we're doing the same thing over and over. It's steady, it just sits there. Now, miners and other things are gonna be around that, they're not gonna be in that space. Usually miners are pretty small companies, so they're probably gonna be a little more small cappy potentially. Historically, they've had a lot more debt. They're definitely more volatile, and we lean toward low, lower volatility. And so, all that's to say that there's certain areas where I'd recommend complimenting us, right? So uh because profitability is a requirement, we're not gonna be in the most innovative of tech. So taking a more innovative approach to complement us for a sliver, right? So that could just be a large cap growth or mid-cap, large mid uh momentum strategy right now could be an awesome compliment. Or something that's just focused more on innovation. There's one manager I'm not going to mention because um historically she's destroyed more value than anyone in history. But we're gonna just say that there are innovative strategies that uh are more focused on the future than we are. Gold miners, or let's say energy, things of that nature, real estate, utilities, all those things violate our rules. Um, value tends to be a little more kind of bottom-picking, or maybe even dividend or income related. We don't want income. We want to maximize earnings growth. So we want companies investing in themselves. So what you the way to think of us is as that central piece, it's growth-y. You can complement us with higher growth or more innovative, a little risk riskier and more speculative values, or more income. And then more nuanced approaches like miners, like oil and gas, things of that nature.

SPEAKER_03 43:56

All right, let's see what else we got here. And again, folks, if you want to ask questions, put in the QA uh and have to bring it up. Uh, I like this one from uh Andre Payne. Hi, Seth Michael. I was a commodity broker back then, and I remember that old saying it's different this time, until it's not. It's not really a question, more of a comment.

SPEAKER_00 44:13

Yeah, it's not. But I, you know, I like the I I I've thought about this a lot, you know, where it's um history doesn't repeat itself, but it rhymes. And I highly recommend because it's so good. Um uh Howard Marks' I think it's his most recent. Letter and he he provides such a good thorough history of kind of technology bubbles, and by

2008 Liquidity Lessons Private Market Risk

SPEAKER_00 44:40

that I mean like you know uh trains and radio and all these things that we don't necessarily think of uh as technology at this point, but um it's so one, he provides a lot of context, which is worth looking at. Now, I was beginning to be involved in markups during the tech bubble, and so I think of that, I think of 08 because I was very involved. Um, and it rhymes in a in a lot of ways. One of the things I've really been thinking about a lot, which I want to I need to dig into more, but it's an interesting um thread to pull, is in 08, what you saw is a lot of the largest investors or allocators, let's say endowments and pensions, they had this huge private portfolio, and then they had a public portfolio. And and so when 08, when the meltdown started to occur, the only thing that was liquid was the public portfolio. And so they had to sell that. And what we saw in our portfolio when we were run, you know, at that time I was managing our strategy, so it's the same strategy we're talking about at that time. It outperformed, it smoked the market for the majority of it. And then at the very, very end, uh, clearly the you know, big allocators threw the baby out with the bathwater, and you saw the highest quality companies just plummet, right? And so at our max drawdown, we were down, I think 37% versus like 52 for the SP. Now you saw that rocket back up, but it's illustrative of how they had no choice, right? They needed liquidity, so they sold everything and then you know went back up. Now compare that. That was driven by all this private stuff that was illiquid. Think about today. We've now, this will touch on something that Mike's gonna talk about. Um people already, people have private equity, obviously. Think of the the private companies today, such as SpaceX and Anthropic and OpenAI. There's more money in private illiquid companies than any time in history. You've also got VC, that's interconnected with VC. But now let's think about private credit. Private credit's massive, right? And a lot of people, I didn't know this. A friend of mine who was a CIO at a treasury, state treasury, was telling me that many are actually classifying private credit credit as fixed income, right? And so fixed income ideally is liquid. I mean, you know, nobody wants to sell bonds, but it's there's a market. Private private credit, there's no market, right? So now you've got this very large, I don't know what percentage, of the market that's highly illiquid. And then on the public side, it's more overcrowded than any time in history, right? So you've got, again, 50% more invested in 10 companies than at the peak of the tech bubble. You have valuations that are more elevated. Any large cap growth manager, in order to keep up with the SP, has to be all in on those 10 companies. Those 10 companies are big names, so individuals are all in on those 10 companies. It is um the average household has 30% more invested in uh equities than any time in history, or then the peak of the tech bubble, which I think was the most in history. So you've got so this is all to say that it rhymes. I don't, I'm reluctant to say that this is a bubble that we're in right now. I actually really like for anyone that's ever watched Sorry Married Nax Murder, which is a classic, right? I mean, it's you know, I don't know how many Academy Awards or Oscars it won, but I mean it just killed it. Um but there's a phrase where uh Mike Myers, his grandfather, is making fun of this kid, which is not nice. But either way, he describes this kid as a big head and he describes this kid. He's like, it looks like an orange on top of a toothpick. That's how I think of this market right now is an orange on top of a toothpick. And again, if you think of all this private stuff that's out there that's illiquid, what if people need to raise money? It's all going to come out of the orange, right? Not the toothpick. And the toothpick is so small, right? Like this, let's say the hundredth biggest holding in the SP is maybe I don't know, 0.2%, 0.15%, right? It takes so little for that toothpick to make that to make a difference. And so you could see what you saw in 2000, 2001, 2002, where the most overcrowded trades were down a lot, the index is down a lot, but um, you know, good companies are actually up because again, they lagged by 20% just in the last few months. That is a massive um potential tailwind.

SPEAKER_03 49:31

It's a uh an interesting question that's relevant to the now from Allison Tomlinson. Um, how did the war now look for oil prices, impact markets, and names you discussed today? Because you should talk about energy in the context of your portfolio.

SPEAKER_00 49:46

I think you could probably talk about this more than I can, but um, you know, I saw an interesting article today on Yahoo Finance about it was Bank of America, Gentlemen Bank of America mentioned the similarities to 08. Um eight, 07, 08, you had oil spike um when things were already frothy and fragile. Things are fragile right now, right? If if

War Oil Gold And Uncertainty Signals

SPEAKER_00 50:13

if you have wild overcrowding in 10 companies, again, maybe it works out fine. But I look at it as a theater at a thousand X capacity with one exit, right? It's fine. You maybe, maybe everybody goes to the movie, the other popcorn, maybe it's a little crowded. But you know, you watch the movie and you leave. But what if there's a fire? Or what if like something happens? What if someone throws up and everybody needs their right? Um it's oil is a spark. Um now does it set off fire? I don't know, but it's a spark, and there's a lot of fragility. So it's something to like really think about.

SPEAKER_03 50:53

I think that's very well said, Sim. I didn't realize I had my unmuted. I should have muted myself. Uh let's see. Uh okay, I assume uh blah blah blah. It's also, you know, if you have a recession, then anything that's value till it will lightly up from growth anyway. So it's probably not a bad thing. Uh if the oil spike does precede some kind of major um uh dislocation. Uh from Brian, I assume that you think gold's another crowded trade that we will be sold to. Uh, right. I know, yeah. Uh it's it isn't good though, right? Because it's like every fund manager to some extent is competing against uh assets that are just going up and to the right faster than they are, even though it's not the right comp. Uh so I'd argue that if gold's weakness uh does at some point come in, uh that might result in some flows to everything else.

SPEAKER_01 51:34

But any thoughts on that? You know, sure.

SPEAKER_00 51:42

Let's say I mean, you know, it's still dollars that would be moving, right? But I would say look at gold more as an indicator of the uncertainty in the world. Um, I'm in Minneapolis, right? So regardless of political views, you know, I was at the epicenter of things going down in the US that have not happened maybe ever. I think some people died maybe protesting during the civil rights. But otherwise, I mean, there was a point where it looked like we were gonna have a civil war in my backyard, right? Like where um our governor called in, was calling in the National Guard, and our president was calling in the the like military to potentially attack the National Guard or something like that. It was wild, and that's just to go just goes to show that it is a crazy time. Um, you know, we've got a war going on elsewhere, um, there's a lot going on. And I don't know that anybody feels comfortable, right? And so it's it is uncertain, and that's why people are buying gold. It's it's uncertain. And I'm uh I'm inherently uh a neurotic perfectionist. I've been working on my neuroses, but you know, um, I'm a little less neurotic than I was. But the so the idea of diversification for a long time, I was very against. I'm like, why would I diversify? I just want the best. And and it took me failing miserably um tons of times. Like if I'm gonna describe if I describe myself with one word, it's failure. Uh and it's and I'm very proud of it because that's that's how you learn, right? Like uh anybody that hasn't failed, they haven't learned. I I don't want to invest with anybody that hasn't failed miserably because they haven't, because they're probably gonna do the same dumb thing that I've done in the past or something. Um and so I've learned that I'm very capable of being wrong. I've learned that um life doesn't go according to plan always, right? And so given arguably historic uncertainty right now, our job as fiduciaries, you know, maybe you're managing your own your own portfolio, fine. You're kind of the fiduciary of your own portfolio. Maybe you're the fiduciary for your kids, but for the rest of us who are uh investment manager, um, an investment advisor, our job is to consider all possibilities. Being blindsided is not, there's no excuse for ignorance, right? Like we need to consider all eventualities so that we can try to at least, let's say, maximize the odds that our clients, our collective clients, are able to live the life that they have paid us, right? They've paid us fees. They've paid us to help them um, you know, realize the life that they want. And so we have to take into account the uncertainty. We have to take into account um all the different things that could happen, right? Maybe AI works out perfectly, maybe it doesn't. Maybe this oil, maybe this war and what's going on in oil is significant, or maybe it's not. Um, and that's where diversification comes in because we aren't perfect. It's uncertain. We can't predict the future. Um, and so, you know, uh play both sides. And and the the problem is diversification, another important point is diversification is insurance. It's a form of insurance. Insurance costs money, right? Like, who is happy when they pay their insurance premium when their house didn't burn down, right? Like everybody's annoyed that they paid their insurance premium. But if you really think about it, it's pretty sweet that your house didn't burn down. But if your house does burn down, you're gonna be pretty happy that you paid that insurance. And so insurance has a cost. So to think that we can have build-in insurance and yet keep up with something that's not insured at all, right? So the SP is a pure momentum portfolio. That's all it does, right? It's it's the opposite of buy low, sell high. It has very low fees. So I'm not talking trash about it. Like it's good and bad, it has its purpose, but like the SP is all in on momentum. Momentum's been hotter than any time in history, which has led to, at least in in large part, this concentration. Um, and there's no insurance. Of course, uh, diversifying is not going to keep up with that because diversifying has a cost. That cost is the insurance.

SPEAKER_03 56:18

I'll I'll I'll wrap this up with uh two lines I said over the years. Uh, one is based on what you just said about predicting the future. Uh no amount of intelligence can increase the clarity of one's crystal ball. And on diversification, diversification means you have to have parts of your portfolio that you hate. Because if you hate it, it's probably not performing in that moment in time. And if everything's performing the same way, you're correlated because you love it uh for that moment in time. So, with that said, everybody learn more about uh run. Uh, make sure you connect to Seth on LinkedIn and engage with his posts because I'm not kidding, he's actually a total rock star on LinkedIn. I'm trying to learn from him. Um, he's not trying to learn from me when it comes to X because it's

Diversification As Insurance Closing Remarks

SPEAKER_03 57:00

a very different act on X. Uh, but appreciate those that are here. And again, check out Run and thank you, Seth, as always.

SPEAKER_00 57:06

Thank you. This is awesome. I appreciate everyone for participating. Thank you for the questions. Um, definitely hit me up. I'm happy to help in any way I can.

SPEAKER_01 57:15

Have a good weekend, folks. Cheers.