Through the Lens of An Optimist

This automated transcript may contain grammatical errors.

Welcome to Wealthy Behavior, talking money and wealth with Heritage Financial, the podcast that digs into the topics, strategies and behaviors that help busy and successful people build and protect their personal wealth. I’m your host, Sammy Azzouz, the president and CEO of Heritage Financial, a Boston based wealth management firm working with high net worth families across the country for longer than 25 years. Now let’s talk about the wealthy behaviors that are key to a rich life.

00:00:06 – 00:05:03
On this episode of the Wealthy Behavior podcast, we have a very special guest, Sam Ro, founder and editor at TKer, one of my absolute favorite finance newsletters. Sam has been writing about the markets and economy for 17 years through widely circulated newsletters for Forbes, Business Insider, Yahoo Finance and Axios, and two years ago started TKer where he writes about the markets his way, which we’ll get into today. I think you’re going to learn a lot and it’ll be a great conversation. So welcome to Wealthy Behavior, Sam.

Thanks for having me.

Yeah. One of the main reasons I love reading your stuff is that you have a clear view of what you want to say backed by data. How did your career get you to this point?

That’s a great question. I mean, I can almost go as far back as before I even got into financial media. For me, it was just a matter of trying to understand how people actually made money in the stock market. My initial exposure was seeing traders making gajillions of dollars with these extremely short -term trades. And when you dabble in the market, it’s very easy to lose a lot of money very quickly. And so I didn’t really quite understand what this was all about. And then as I read more about the market, I learned about diversification and volatility and how things trend in the long term versus the short term. And you start reading up on Warren Buffett and Jack Bogle and all those good things. And then you start to understand that you can talk about the markets and you can talk about news and developments and data in two kinds of ways. You can talk about it in the very present kind of way in terms of how information might move markets in a given day. Or you can try to put it into a bigger picture context and try to make sense of it for someone who might be saving for retirement, which could be many years off. So that’s how my approach to writing and reporting on markets developed. And during my time, especially at Business Insider and Yahoo Finance, I got quite a bit of feedback. And my team would get lots of feedback from readers who sort of appreciated the way we provided context and framed stories, news stories for the readers. And often sometimes they would get a little confused because when you work at a big media company, you’re publishing tons and tons of stuff. I mean, even today, you’ll see 50 different headlines that are very concerning. And maybe they should be concerning. But a lot of times news is not tailored for the long term investor necessarily. And so I took that feedback and recognized that there might be a little bit of a vacuum for that kind of audience that’s looking for a news experience, but with sort of a long term mindset. And so we have TKer.

You have TKer. That’s awesome. How would you describe your view of the market and investing?

Right now or just I guess in general?

Just in general, I saw something on your site. You’re the chief evangelist of how the stock market usually goes up. You’re an optimist long term and cautious optimist short term.

Sure. Yeah. I think generally speaking, I think investing in the stock market is an optimist’s game and it’s something that requires patience and it requires time. I mean, just like with anything else, like whether you’re exercising to get into shape or dieting to lose weight or getting educated to be smarter at something, you’re going to have your ups and downs. But if you stick to a plan and you stick to it, things seem to move your way. And I think especially with the stock market, I’m sort of classically trained as a fundamental analyst. I went through the CFA program and in my early jobs at Forbes, I was doing analysis on individual companies. And in all of those learnings, the one thing that continues to stand out is earnings tend to trend higher. And when earnings trend higher, I believe earnings are the most important long term driver of stock prices. If earnings are trending higher, stocks are going to trend higher. And I think there’s really good fundamental arguments to be made to back all that.

00:05:04 – 00:10:00

Us, the consuming class, individuals, families, whatever. I think generally speaking, people like their goods and services to be better. I think generally speaking, whether you like it or not, whether you like the concept or not, I think generally speaking, people would rather have more stuff than less stuff. A couple extra square footage in your house or being able to take a slightly nicer vacation or being able to have better food or being able to have better Internet connection, whatever it is. And in that process, those are the things driving how capitalism works in a well functioning free market economy. And so because there’s just always going to be a constant demand for better goods and services, whether it’s an established business or a large corporation or if it’s an entrepreneur, they’ll go out and pursue a way to meet those demands and try to offer something that’s either differentiated or better than what’s already out there. And as a result, the economy gets bigger, earnings grow and stock prices go up.

The world wants growth, right?

The world wants growth. Whether they recognize it or not, everyone wants something that’s a little bit better. And it just so happens to be the case that that desire or that need fuels growth.

I think that’s one of the things the pessimists miss coming out of the great financial crisis. And there was a lot of things wrong, but policymakers, business leaders, individuals, they want things to get better. They want growth and they’re going to throw things against the wall to get that.

Yeah, absolutely. And I think another thing that the pessimists often get wrong sort of fundamentally is a lot of times they operate based off of snapshots in data. Like if you look at, I mean, in any given point, there may be a time when consumer debt delinquencies are very high, or it looks like maybe there are businesses that are over levered or there is an earnings downturn or something that’s happening. And when you think of things in terms of snapshots in time, then yeah, things may look dire. But the thing is the economy is going to look very different, even at the end of this discussion, than it was at the beginning of this discussion. And so sure, you can be kind of pessimistic or bearish about the state of things at any given time. But I think it was Keynes, whether he was like misattributed or not, but it’s the old saying of the markets will be irrational longer than you can stay solvent, right? Maybe today things aren’t looking great, but if you are investing or trading in the market and if you do have the ability to put in some time, then history tells us that no matter how bad things are, we all seem to figure out how to move past it because we all have the same we all have the same goals or intentions in mind and that we like things to be fixed. And on the other end of even the most difficult times, things tend to be a lot better than they were before any sort of challenging moment of adversity.

Yeah, absolutely. One of the cornerstone pieces on TKer that you have is 10 truths about the stock market, which I think is a must read for individual investors. What’s the core message of that piece?

The core message is that the market is complicated. Because if it were if it really were that simple, it would be one truth. And it might have been just that first bullet that I have there. So you know, the first bullet is the long game is undefeated. And I quote an op-ed that Warren Buffett wrote in October of 2008, when things were really spiraling during the financial crisis. And, you know, it wasn’t until six months later that the market actually bottomed. But in Buffett’s op-ed in October of 2008, you know, he goes back into 100 years of US history, and he lists all the things, everything from, you know, World War One and World War Two to, you know, the assassination of a president, or the president gets impeached and resigns. All kinds, I mean, even the financial, like in retrospect, you know, you look at the financial crisis.

00:10:00 – 00:15:01

And even today, you know, we look at where we were three years ago with the onset of the pandemic, and where the economy is today. You know, his message is that, you know, there is empirical evidence to show that, you know, there is a long track record of the markets, at least, for the long -term investor, that there’s a lot of evidence saying that, you know, we figure out ways to get out of things. And so that’s sort of the overarching concept. But the second truth, and I won’t go through all ten of them, but I do think that the first two matter. The first one being that, you know, this long game is undefeated. And two is, you can get smoked in the short term. I think it’s incredibly important for even, you know, people who are bullish and optimistic to really be cognizant of the fact that markets will be incredibly volatile in short -term periods. You know, on average, the market will see, the S &P 500 at least, sees an average max drawdown in a given year of about 14 percent. And in a given year, you’ll see on average three drawdowns of five percent or more. I mean, like we’re currently in a drawdown of about, or we had been in a drawdown of about, seven or eight percent, which is not only pretty typical, but it’s probably even milder than average. But in the moment, you know, it’s incredibly stressful and incredibly, you know, worrisome and unsettling. And it might tempt us to sell. But I think if you do recognize the history that, you know, market volatility is normal, you know, part of that understanding is knowing that even in years when the market is up, you do have that kind of volatility. That’s not to downplay the concerns and the risks that are out there. But, you know, I do think it’s important to be able to acknowledge that and recognize and accept that, you know, volatility is part of investing.

Why did you feel like you had to write that piece? What is it that individual investors aren’t seeing in these truths?

You know, it’s funny, like, I think, you know, before I actually launched TKer, so that was actually the first piece that went out. Before I launched TKer, you know, I was talking to an old editor, a colleague of mine that I was working with. And, you know, he was telling me that, you know, you can’t just announce the launch of a newsletter but not have any content to have published. You know, you have to have something out there. And so we kicked around a couple of things. And, you know, there was a piece I wrote, it was actually the last piece I wrote at Business Insider where I actually had, you know, a slide show of all these charts showing, you know, how markets function over long -term periods of time. So I felt this is important because, you know, as someone who entered this industry with very little understanding of how investing in markets worked, you know, the one thing I did know coming into this was that the stock market will, on average, return somewhere between 8 -10 % a year. And if that’s the only thing you know, then everything you see in the news will conflict with that and it becomes incredibly confusing. So it was important for me to be able to outline things like, you know, markets are volatile in short term. Another one of the truths is average rarely happens. While the long -term average annual return is 8 -10%, there are actually very few instances in history where you’ll get an annual return of 8 -10%. It’s usually, you know, a much larger number and then every once in a while you have very poor years and then it evens out to that. And then, you know, for folks who are a little bit more advanced, who are following things like valuation metrics, like PE ratios, I have a truth about that where valuation metrics tell you very little about where the market is going to go in the short run. And so, you know, this idea that if you do have a little bit of sophistication when it comes to investing, you don’t, you know how to calculate a PE ratio or something. While you can make a case that the stock market is expensive or cheap, just because the stock market is expensive doesn’t mean it’s going to move to some sort of average, you know, over a very short period of time. So, I wanted to sort of have like at least a sort of a quick outline of how to think about, you know, investing so that, you know, people understand that there’s going to be a lot of things that they confront that seems very counterintuitive.

I particularly like number eight, the most destabilizing risks are the ones people aren’t talking about, which is important to investors who see negative news all the time and worry that their portfolios will be impacted. Can you touch on that one just a little bit?

Yeah, sure.

00:15:02 – 00:20:20

You know, I think I first really started thinking about that one probably in, you know, around 2008, I think. So 2008, you know, I was still at Forbes. I was writing up stock picks for an investment newsletter and I was contributing to a column on Forbes .com and that actually overlapped with me studying for the CFA program. And, you know, one thing that you, when you really spend a lot of time training in the financial services business or any kind of finance, you know, you get exposed to a lot of Excel spreadsheets and financial modeling and statistics, you know, a lot of things that happen in the world happens very gradually, except when you have these sort of, you know, major destabilizing events that seemingly come out of nowhere, you know, these so -called black swan type of events, right? What happens is no matter how much you’re willing to tweak a financial model with these new developments, most financial models are not really capable of dealing with stuff like, you know, 50 percent of the economy cannot shop tomorrow because the economy has been shut down. That stuff just does not work and no one’s prepared for that. So I think the main distinction, you know, especially with that rule is like, for instance, you know, we’ve been talking about an inverted yield curve for, you know, many months now. We’ve been talking about instability, you know, a couple of, you know, many, many months now. We’re talking about stuff like, you know, debt to GDP ratios and, you know, any number of risks that we talk about over and over and over again. The market has a tendency to price these in the form of some kind of uncertainty premium, right? These risks that we talk about every day on a prolonged basis, you know, essentially are the reason why returns in the stock market tend to be kind of high because you’re taking on risk. But what doesn’t get priced in is,, it’s February of 2020, everything’s going right. And then, in a week we learn about a pandemic and we don’t really quite learn about the scale for a couple of weeks, at which point, you know, you’re dealing with something in March of 2020 that no one was talking about in February 2020. And so all that information has to be priced in very quickly at a very short period of time and then you see a big sell -off. So yeah, that’s what number eight is about. It’s not so much, you know, whether a risk is a big deal or not, but if no one’s talking about it and if it’s not coming up on surveys, then it’s not likely to be priced in.

And conversely, if it is being talked about, you have to have an accurate differentiated opinion that it’s going to be worse off than what everybody’s thinking.

Right, exactly. And I think that’s something that comes out during, you know, periods of intense volatility and these unprecedented events. It’s like when you were, like, even in, you know, February and March of 2020, you go back and read the articles and, you know, I hang on to a lot of research notes and commentary. You see sort of the trajectory of how that event unfolded and, you know, it took a couple of weeks before people started to really accept how, like, the scale of this. The curve at which the infections were increasing was showing no sign of plateauing. Right. So unless you knew and you had a really great sense of what that trajectory was going to look like, it was going to be very difficult to generate any kind of alpha in that kind of market.

Thank you. Yeah, I agree. That description, optimist long -term, cautious optimist short -term resonates with me. Obviously, I’ve mentioned it a couple of times, but there’s maybe something left out that I’d love to get your perspective on. Long -term trends that could be concerning, perhaps it’s an aging population or even more concerning now, debt levels in the US. I don’t know that they’re actionable investing themes, but how should investors process those things, if at all?

Yeah, that’s a really great question. And, you know, people like you and your business are going to be better at answering this kind of thing. But the way I think of it as sort of a general matter, and, you know, I’m also very much a Jack Bogle disciple, right? I do think that there are merits in, you know, taking an approach, or at least, you know, having a significant allocation to something like an S &P 500 index fund, not because it is passive and whatever passive investing might sound like, but there is quite a bit of turnover in the S &P 500.

00:20:21 – 00:25:10

And so I think there are really two things, two really incredibly important sort of underrated things about having an allocation to like an S &P 500 fund. The first thing being that there tends to be a lot of turnover. And with that turnover, you have industries that are shrinking and businesses that are failing will eventually get swapped out for something for an up-and-coming business or an up -and -coming industry. You know, all of the big tech stocks we’re talking about today did not exist in that index, you know, 20, 25 years ago. Maybe, you know, Apple and some of these other companies had some legacy brands, but a lot of the big drivers today weren’t there forever. So that’s one thing. There’s a bit of turnover and the activity that doesn’t occur during that turnover happens to capture companies that are going to be able to find that earnings growth. And so that speaks to the second very important point about, you know, when you invest in companies like publicly traded companies, you know, the most important driver of performance for these companies to get that earnings growth and all the executives all have their compensation tied to long -term trends, whether it’s an aging population, it could be a shrinking population, it could be climate change, it could be the emergence of AI, it could be, you know, industries being disrupted. There are a lot of things that I think are going to drive fluctuations in, you know, industries as well as the economy in general. But at the end of the day corporations, publicly traded companies, they only have one job and that’s trying to figure out how to generate earnings growth. And this is why you’ll see, you know, there are times when the economy will go into a recession and there might not be an earnings recession and maybe there’s earnings recessions, but, you know, that occur outside of economic recessions. I think that it’s sometimes companies make incredibly questionable and challenging decisions in order to maintain that profit growth. Like, for instance, over the past, over the last year or so, we’ve seen all these layoffs at these incredibly big tech companies, right? And it’s incredibly sad and challenging. It’s not like these companies are going to become unprofitable if they keep these employees on, but they’re incentivized to generate earnings growth perpetually. And whether you like it or not, you know, it’s one thing to put on your business strategy hat on or your economist hat on, but if you have your investing hat on, you start to realize that, you know, companies, because they have this strong incentive to pursue earnings growth, then they will evolve. They will change their business strategy. They’ll move into other categories and figure out a way to operate in an economy that’s changing. You know, like for instance, Berkshire Hathaway is the classic example of this, you know, Warren Buffett’s company. He acquires a textile mill based out of Massachusetts and talk about an industry that just is completely changed and completely disrupted and just doesn’t exist in Massachusetts or the United States. But it’s also a recognition that a company that was once in textiles is now in insurance and investing in other companies. So I think as an investor, you absolutely want to be kind of active with your investments. You can’t just sit on the same stocks that you had 20 years ago and expect that to generate all of your wealth. You definitely want to keep an eye on, you know, the trends you’re talking about, how that’s evolving and you want to try to get in front of those companies who are making those changes. Or you can be anchored in an S &P 500 index fund and let the index committee make those decisions for you.

Yeah, and that’s a really insightful observation that, you know, essentially maybe you can figure out what’s going to happen with these long -term trends, probably not as an individual investor. So instead, just be very broadly diversified. So you end up owning a basket of companies that does well and maybe de -emphasizing the basket of companies that that doesn’t do as well, whether it’s S &P, another index, something just very broad market diversification should help you, you know, through navigating some of those trends.

00:25:10 – 00:30:13

Do you think long -term with, sorry, with long -term money, do you feel like people are under allocated to stocks? You know, you see a portfolio like a 60 -40 portfolio being very popular with retirees, pre -retirees. You kind of talk about the power of long -term stock market returns and trends. Do you think people are too conservative with their portfolios?

Yeah, well, I mean, you know, of course you have to qualify that answer with, it depends on, you know, the time horizon. And so I would answer it in two kinds of ways. I think there’s probably a lot of folks who might be a little bit too aggressive, a little late with their investing time horizons. But, you know, what I do think about folks who are, you know, who probably have, you know, retirement 20 years away or whatever, I get the sense that people are under invested, whether it’s a, you know, whether it’s concern over, you know, very short -term risks or just not having the sort of the financial education to be thinking about asset allocation. I generally believe people are under, a little underexposed to equities, especially folks who are a little bit younger. And it’s unfortunate because, you know, you are competing with things that are in the headline, you know. It’s not very difficult to find someone who will try to tell you that the stock market is rigged for Wall Street fat cats and all this kind of stuff. But, you know, a lot of times the way those stories are framed, you know, kind of misses that well, if you’re trying to make, you know, if you’re trying to get an edge of 0 .001 % in some incredibly short -term trade, then yeah, maybe the markets won’t work for you. And maybe there are people who do have an advantage, but it’s that same market that people will, you know, allocate some money toward that, you know, when you give it a little bit of time, it tends to move up. So, yeah, I hope that whether it’s me or some other newsletter writer or maybe there will be some new emerging platforms that are better at getting this information out to younger folks that again, short -term things can go really bad, but long -term, listen, you know, in the same sense that we are all like, listen, the reason why you get into the stock market is to build wealth over time. And it’s, you know, why do you want to build wealth over time? Because you want to have a better life sometime in the future than now. And that just so happens to be interests that are aligned with every single person in the economy, as well as everyone who runs a business in this economy. So hopefully that education and that message gets out to people that the stock market is a pretty good place to be.

You wrote a piece in December of last year titled, there’s more to the story than high interest rates are bad for stocks. Rates are up a lot more since then. Why do you think that is and does it concern you?

Yeah, it absolutely concerns me. It absolutely concerns me. And as someone who, you know, every once in a while thinks about buying a house, you know, that everything has changed in, you know, the last couple of months in those regards. And listen, anyone who is in the market in terms of having to borrow or having to finance their expenses with credit card debt, or if for whatever reason they need to go out and, you know, borrow money or refinance existing debts this is a big headache. And this is going to be a big issue because it does take away from the disposable income that they have. That said, we’re not quite seeing that, you know, have a material impact in either the economy or the financial markets quite yet, you know, for two reasons. It turns out that the home buyer, home mortgage borrower demographic, of that demographic, and I recognize this because, you know, 80 % of my friends who were, you know, ever thought about buying a home, bought homes in the last two or three years or sometime before that when mortgage rates were a lot lower. So while I may be screwed in the near term, I know a whole lot of people who are doing really well and the value of their homes are up and, you know, they follow the markets and everything, but they’re doing really well and they’re glad of the decision that they made. It’s the same thing with a lot of corporations that, you know, who do employ leverage in their capital structure, which is every company, but many, many, many, many companies spent the last two or three years refinancing their debt at what were very low interest rates.

00:30:14 – 00:35:05

So while at the margin, you know, higher interest rates are having a negative impact on, you know, businesses and consumers, many, many businesses and consumers have locked in low rates on their debt. And so that’s great in that their interest costs haven’t been rising much. But then on the other hand, you also have the fact that, you know, a lot of these people and a lot of these entities also have some cash on their books, which is now earning increasing amounts of interest because short -term rates are up. And so, you know, as much as costs are rising, income is also rising. But the other point that I was making in that peice last December was, you know, there were two points to be made. One was when interest costs rise, it’s not as simple as interest expenses will rise for companies. You know, they have CFOs and, you know, finance departments in there that aren’t saying, well, if 40 percent of our capitalization is, you know, debt, if it looks like we’re moving into a regime where interest rates are higher, then maybe we should cut back and scale back and de -lever a little bit and so you can balance things out. Or, you know, they find other ways to cut costs and figure out a way to make things manageable. You know, things don’t happen in vacuums and things don’t, it’s not, I think one thing I mentioned in that piece was that, you know, everything is always qualified ceteris paribus, right? You know, Latin for all things equal. When interest rates rise, all things equal, my debt costs are rising. If I have credit card debt and interest short -term rates rise, then my interest costs are rising. Well, OK, but unfortunately, things aren’t ceteris paribus. Maybe because of that, you know, I might be able to figure out a way to take on a little bit less leverage. Maybe I cut expenses in a way where I’m rolling less debt and, you know, maybe my interest expense goes sideways or whatever so that companies of all people, of all behaviors change. And then one last thing I’ll add to that is a trend that we’ve seen in, you know, maybe the last two or three decades is profit margins have been trending higher for, you know, at least a couple of years. And so at the very least, if interest expenses start to rise for businesses, well, they at least have some, you know, profit margin to absorb some of those costs. So, yes, you know, rising interest rates is a headwind. It’s a challenge. It’s going to be, but it’s also going to lead people to change behaviors so that the way it impacts many businesses and consumers will not have as big an effect as you might think if people weren’t changing behaviors.

Yeah, no, thank you for that detailed overview. I mean, two years ago, you were really busy launching a killer newsletter, so you just didn’t have time to go house hunting with all your friends, right?

That’s exactly why. Hey, listen, you know, we think holistically about our finances, right? I have, you know, God bless them, you know, they all went out and bought houses, but I’m financing my own business here.

Yeah, and I’m glad that you did. I love the content. I’ll get you out of here on this because I know we have a limited amount of time. If there’s one investor alive today that you’d love to have consistent access to pick their brain whenever you want on any investment topic, who would that be?

Oh, I think without question, it’s going to be Warren Buffett. And I think there’s kind of a curveball reason for this. You know, I’ve read up on and, you know, all of the transcripts and his letters and stuff about long -term investing and diversification. It’s like, I don’t need more information on that. I am really curious as to learning more about his insights as to how he finds companies that have good management. This is something that, you know, having worked at a couple of big companies and speaking to a lot of people who work at big companies at senior levels, it is very clear to me that there’s a distinction between companies that have good management and companies who have management where, you know, their goals and incentives might not quite be in line with, you know, what might be longer term thinking, bigger picture. So that’s someone who I’d like to talk to as someone who probably has access to every management on the planet, really understanding the nuances of that, because I think that’s where a big investor can really have an edge is being able to have a conversation with someone and really be able to see if they will be execute on whatever the strategy is that they’re looking to deliver on.

00:35:06 – 00:37:35

That’s really interesting. We had Greg Zuckerman on earlier and he was talking about how Jim Simons is perhaps the greatest manager he’s ever known of. And you don’t think of that in an investing story. And so you’ve kind of connected to that theme too.

Yeah.

Sam, how can people find you and your content?

The easiest way to find my content is to go to my website. It’s ticker.co. That’s T K E R dot C O. And, you know, I have a free version of the newsletter and I, and for paid subscribers, paid subscribers will get two or three more pieces during the week. But for anyone who’s listening, and if they’re interested in seeing what the paid content looks like, you know, go ahead and just download it. And I’m happy to get to if you say you’ve heard me on Sammy’s podcast you can get a three free months.

Oh, that’s great. I am a paid subscriber. I really thank you for the content that you put out and your generosity with your time today. Thanks a lot, Sam.

Thanks for having me.

How to build your next million. Heritage Financial’s ebook teaches investors about the tools and strategies that can help them save, keep, grow, and protect their assets. This free ebook can be accessed in this episode show notes and on our website at heritagefinancial .net. Thank you for listening to Wealthy Behavior. If you found the conversation useful, please leave a review wherever you listen to your podcasts and share this episode so those around you can live a rich life too. We appreciate your feedback and questions. Please email us at wealthybehavior@heritagefinancial .net. For more insights, subscribe to our weekly blog at heritagefinancial.net and follow us on Facebook, Twitter, and LinkedIn. Check out my personal finance blog at thebostonadvisor.com. Wealthy Behavior is produced by Kristin Castner and Michele Caccamise.
This educational podcast is brought to you by Heritage Financial Services, LLC, located in the greater Boston area. The views and opinions expressed in this podcast are that of the speaker, are subject to change, and do not constitute investment advice or recommendation regarding any specific product or security. There is no guarantee that any investment or strategy discussed will be successful or will achieve any particular level of results. Investing involves risks, including the potential loss of principal.