Show Us Your Portfolio: Rob Arnott | How the Research Affiliates Founder Builds His Portfolio

welcome to excess returns where we focus on what works over the long term in the markets join us as we talk about the strategies and tactics that can help you become a better long-term investor Justin carbonneau and Jack forhand are principals at the Lydia Capital Management the opinions expressed in this podcast do not necessarily reflect the opinions of the Lydia Capital no information on this podcast should be construed as investment advice Securities discussed in the podcast may be Holdings of clients of holiday Capital hey guys this is Justin in this show us your portfolio episode Jack and I sit down with research Affiliates founder Rob arnott to discuss his personal portfolio and investment strategy this is a wide-ranging discussion on how Rob approaches long-term investing and we get insight into how he is currently positioned where he's finding value and the areas of the market that he is avoiding we round out the discussion with Rob's view on philanthropic investing leaving money to kids and other Financial topics outside of his portfolio that I think investors will enjoy learning about as always thank you for listening please enjoy this discussion with research Affiliates Rob Arna hi Rob thank you for joining us today it's a privilege thank you for the invitation today we wanted to talk to you about something a little different than um maybe you talked to a lot of people about and that's um about how you go about managing your own personal portfolio and your Investments and how you think about your you know overall investment strategy and your goals um and I think you know we're very appreciative to have someone like you with your level of knowledge and experience in the markets to come on and sort of share the details because I think um investors are going to learn a lot from you um with that being said you know your portfolio is specific to you um and everyone's um you know appetite for risk and their return and their goals are different so this isn't you know investors shouldn't watch this and walk away and start implementing the Rob arnott strategy and their own personal portfolio but I think that you know what we're going to hear today is is going to be very valuable but again it's specific to you and how you view your own personal Investments so with that um let's just talk about like what is the overarching long-term goal with your Investment Portfolio well um part of it is lifestyle part of it is uh bequest part of it is charitable giving um um part of it is just the satisfaction of uh uh uh finding out whether I know what I'm doing and um uh that can be gratifying and at times uh humbling what is your personal Benchmark not the S P 500 I'm guessing no I don't have an explicit Benchmark um uh kind of the the classic Benchmark that people want is the best of uh the return of a half dozen different markets and that's obviously unachievable but you know if if if I'm doing better than most markets um uh in a broad spectrum of Marcus this year for instance has been a take no Christmas crash uh almost all asset classes other than Commodities and cash without a negative return um uh MLPs are another outlier with modest positive returns but bottom line is this has been a horrible year for multi-asset strategies the worst arguably the worst in history um so are my personal Investments um uh up or down they're kind of flat and I view that as a a very big win I view that as a remarkably Good Year how do you how do you think about your time frame you mentioned charitable giving I know a lot of times when people focus on charitable giving they sort of focus on like maybe like an infinite time frame you know you're not really concerned about that how do you think about the time frame with your personal portfolio well my time frame basically is how long do I expect to be alive I'm in my late 60s so probably got a 20-year Horizon and um that shapes my safety I'm going to be a patient investor I'm not going to be particularly concerned over how am I doing this year although there's um as I said some satisfaction and occasional uh humbling uh in looking at short-term results and I do the you one year as a very short term result um but it's all in a context of much longer Verizon results and if I believe I am well positioned on a 20-year Horizon I'll take whatever ups and downs come a long way um you know as I was thinking like for those people that retired you know last year beginning of this year you know a lot of those folks were in maybe your traditional 60 40 stock Bond portfolio and this is a it's a great you know it's it's an unfortunate I shouldn't say grace and a good example but an unfortunate set of circumstances how things have performed and it it just brings to the surface like the importance of thinking about sequence risk in retirement not just sequence risk but an awareness of um uh what is wealth I wrote about this in the Wall Street uh in the uh financial analyst Journal way back in 2004 I think it was um what is wealth is it the dollar value of your portfolio of course not the dollar's worth a lot less than it used to be so a million dollar portfolio today isn't the same as a million dollar portfolio 40 years ago is it um the real inflation-adjusted dollar or not no no it it's the sustainable spending over the time Horizon that matters to you so if my Horizon is 20 years uh how much could I safely spend from my portfolio per year in real terms over that 20-year Horizon uh when you use that metric then a bear Market year like this is not a big deal because the prices went down but the income distributed from a 60 40 portfolio hasn't changed in fact it's edged higher so your sustainable spending is fine it's diminished in real terms but only because of the inflation the bursts of inflation has exceeded the increases in income from a 60 40 portfolio but when you view things in that context then all of a sudden the ups and downs of Bull and Bear markets are um not only less daunting but also can lead to a a slightly inverted uh perspective I wrote a paper back in I think 1993 with Peter Bernstein I believe the title was bull market bear Market who cares and in that paper I pointed out that if you are retired and spending your money now and not setting aside new money you're going to be rooting for a bull market so you can sell out at a good price if you are pre-retirement and setting aside more money than you expect us than your spending um then he should hope for a bear Market nobody does but my goodness would you rather have every thousand dollars of new investment you put into the market buying more in the way of stocks or bonds uh buying more in in the form of future um sustainable spending uh people should root for a bear Market unless they are in the diss savings stage of life where they're spending down their assets and uh people don't think that way but they should I was um I was on your site earlier and I didn't realize research Affiliates earlier this year celebrated it's it's 20th year anniversary um and you mentioned you know you're in your 60s now and um I mean at some point I I think we're we're in a business where as long as we're kind of healthy and our mind is there we can kind of continue to work for hopefully a long time although it's I I am at a standing desk now because being hunched over in my chair for like 10 hours a day you know it might be healthier to stand but um how do you think about your uh retirement and what you want to do and I mean do you do you envision being even if you sort of start to peel off and spend less time at the firm you'll sort of always be in hopefully always be involved or do you want to kind of exit and go to Hawaii and vacation and play golf well um I have a dear friend from high school uh who spent a lifetime as a doctor who has retired this year he worked part-time for a couple years and then retired completely this year and is Overjoyed about it he is doing this uh Scotch whiskey Trail in Scotland he has visited Greenland and Iceland and he's just having a blast um that's not for me I I do that kind of traveling anyway I kind of weave it into my life I spend a half dozen or more weeks a year uh doing fun travel junkets huh so for me if you love your job why on Earth would you want to retire um I can't imagine not working um I can imagine and in fact do diminish the number of hours I commit to work I moved myself to non-executive Chairman status at research Affiliates four years ago which doesn't mean I'm not involved it means that I don't make management decisions about the company um uh I get involved in anything I find fun and in nothing that I find not fun and uh I I like to joke that I've I've moved to a part-time job I'm only working 40 hours a week uh and I'm having a blast so I don't intend to retire as long as my body and my mind allow me to work I think that's that's a really important point because you see that a lot with retirees like a lot of people underestimate how much their purpose that comes from their work plays a role in their life and so you go from this working full time to zero and people like after a while you're like how much golf can I play you know I need something to stimulate myself and Isn't it nice to be out playing golf um when you're physically able to my dad retired at age 68. and at age 72 his his body was starting to uh he had cancer and his body was starting to um cause problems so he initially couldn't have the settle for nine holes and then he would sit on the golf cart with his friends um playing the first three or four goals and you know do that sort of stuff weave that sort of stuff into your life while you are able uh it doesn't make sense to me to wait until retirement to do the fun stuff because by the time you retire you've got a limited number of years of healthy life so people talk about life expectancy what's not talked about is healthy life expectancy without chronic ailments and that tends to be um three to five years sure so at my age my remaining life expectancy is about 18 years I'm in good health so maybe it's 20. um but my healthy life expectancy is probably 16 years I want and you have fun during those 15 years and I wouldn't want to wait to retire to do that yeah are you familiar with Peter attia have you heard of him no not no you should look at him it's very interesting he's he's a he's a doctor but he does a lot of work around this idea of Health span instead of lifespan so he's talking about like what should you do to make it so you can be a functional person for a longer period versus just being alive for a longer period so you know he has people doing things like you know what what muscles in your body would you need to work if you want to be able to lift your grandkids you know it's things like that you know I think it's really interesting because I think it plays to your point of you know you want to be functional as well it's not just you know not just alive for me for me I use yoga um I do yoga about five times a week roughly on average yeah I I hate exercise um uh I've heard that every minute you exercise adds a minute to your lifespan and I I think do I want to spend that extra minute doing exercise uh that doesn't make sense so my form of exercises so uh when I'm traveling I I walk a lot and and uh um I do yoga regularly uh my wife and I are in two weeks are going to Northwestern Italy to go truffle hunting okay well that'll mean putting on the boots and slugging through the woods for several hours a day um shifting shifting to your portfolio I just want to ask you to as we sort of start to dig into it what asset classes do you invest in I mean are you a stock and bond investor do you things do things beyond that what are the major asset classes that we would find in your portfolio the main asset class is ideal in our liquid stocks and bonds I I invest in things that I think I understand where I think I have a competitive advantage and um uh venture capital I leave that to others um uh with venture capital and private Equity uh it's all about the individual deal and the deal makers uh are the deal makers good at what they do and are they driven by helping their investors profit from their choices are they driven by helping themselves Prosper so it's um it's not really for me I've I've invested in private businesses when friends came asking and my track record on that is moderately abysmal so now I've warn people that if I invest with them it guarantees that their uh their company is going to go to zero it's not quite that bad but um other than investing with very close friends and with my own family um where the goal is not entirely to make money uh I stay away from illiquid markets again focus on things that you think you understand and how do you think about bonds you know there's sort of two schools of thought on bonds you know one people some people see bonds as sort of this fixed thing in your portfolio you always have them other people say it at the time of the owning bonds and there's a time not to be owning bonds and you know coming into this year was one that people said maybe it was a time not to be owning bonds with yields very low so how do you think about that are you tackling with that at all or do you just own bonds all the time how do you think about that it used to be that buns were called fixed income um well when the yield is zero that's fixed non-income and so it seems to me that if you view it as a fixed income asset that reshapes the way you think about it uh if the income is zero or negative and why would you want that if it's negative in real terms below the rate of inflation why would you want that um and so today contrary to a year ago uh the 10 10 and 20 year tips have reasonably nice yields uh one point seven percent today for uh the 10-year 1.8 for the 20 year um backed by full face and credit of the U.S treasury that's not a bad real return um where a year ago it was negative for 10 years and slightly positive for 20. upon uh High ones is not a bad rate of return but you don't dare use it in your taxable portfolio because you're taxed not only on that income but also on the inflation component uh why would you want to do that so uh to me um uh if you think about bonds as fixed income they're one your risk off asset place to put money that when you want to go risk off uh and to a source of fixed income and it better be positive in real terms even as a risk-off asset you want positive and do you just take broad exposure to the bond market or do you have areas do you try to pick areas within the bond market do you think are particularly attractive at any given time I I have a big picture Focus I I don't drill down to individual assets and markets so um uh I'll look at conflation link bonds distinct from treasuries distinct from uh investment grade distinct from ideal bonds but I don't pretend to have the time to drill down to individual uh issues I want to get the Strategic decisions right and a year ago I had zero interest in any bonds other than um uh Emerging Market stat which then as now had yields that were slightly higher than U.S junk bonds um well that's been sort of a safe haven in the last year in the sense that it's Dale less than many asset classes but it is down um in uh today in contrast I think I think tips are actually mildly interesting um uh I have a personal allocation uh um five ten percent of my personal liquid net worth in inflation link bonds and that's not because I relish the idea of a two percent real return is because guess that yield goes back down to zero if you've got a 20-year inflation linked Bond it's got a 20-year duration roughly 16 or 18 actually so every one percent change in yield is worth 16 or 18 appreciation uh it seems to me that the yield has been pushed artificially High by a combination of Central Bank intervention pushing up rates to try to deal with inflation and the markets on Embrace of the view that this is going to work and then inflation will come down in a hurry and therefore Break Even inflation rates the gap between treasury yields and inflation link bond yields hasn't increased it's the same as it was a year ago it's actually even a little lower than it was a year ago and so to my way of thinking this is a tactical opportunity to lock in a decent real return in tax deferred assets and to earn capital gains if that yield turns out to be unsustainably high you haven't seen real yields this high in a long time one of the things that equities had in common with bonds is coming into this year they also look pretty terrible unexpected return basis how do you think about equities in your portfolio I mean will you move them up and down based on valuations depending on what you think or do you have a pretty consistent allocation to equities uh I rarely am out of equities uh because there is an equity risk premium most of the time um but I would say that I really want to look at what the risk premium is and uh today we're looking at U.S stocks uh after a bear Market still at a shower p e ratio of 27 times now what's the Shiller PE ratio it's price relative to 10-year average earnings so it Smooths the earnings so that when you're looking at Peak earnings you up don't have the illusion that it's a low p e ratio and when you're looking at trough earnings you don't have the illusion that it's at a high p e ratio uh it I think of it as price relative to sustainable long-term earnings and that ratio was 27 times uh the 10-year average earnings at the market peak in October of 2007 before the global financial crisis is it 27 times it's taken a bear Market to get it back down to what used to be a peak level long way of saying U.S stocks are far from cheap now U.S value stocks are not bad they're sensibly priced but uh International stocks um ether stocks in Europe and Japan they're relatively cheap by historical standards emerging market stocks cheap by historical standards and people will say yeah but but what about um uh the Ukraine war and what it's going what it's doing to energy supplies across Europe and isn't that going to bankrupt a lot of businesses and so forth um there is no such thing as a cheap Market where there isn't a narrative for why it's cheap it doesn't exist so you have to ask the question is that narrative going to be relevant in five years that's my Occam's racer um is the Ukraine war still going to be going on in five years I sure hope not but um I suspect not um I think one of two things happens over the next five years uh either Putin gets his Corridor to Crimea in uh things settle down in a um what might be viewed as a mild wind for Russia or um Putin's dad and his successors say enough of this we're getting out of there and uh either way the energy supplies to Europe are resumed either way the impact on the European economies begins to dissipate um covet is covet still going to be an issue in five years no of course not it'll still be here it'll still be taking lies but it'll be just part of the landscape-like clue um and so as you go through these narratives uh these finds that it's often fairly easy to answer the question is this still going to be a big deal in five years is soaring debt as a consequence of coveted lockdowns and fiscal stimulus still going to be an issue in five years of course it will that debt's here forever uh or at least forever in terms of um secular Horizon That Matters to most people um and so it helps to identify it helps us to identify what issues to focus on uh Charles gov is a dear friend and he's uh he's that oxymoron known as a a really insightful French Economist I shouldn't exist but he's what uh and he he's fond of saying um uh with regard to media and politicians what are these bastards trying to distract me from because the narrative that's out there today is out there today because they want it to be out there today and what are they trying to distract you from and that's also a useful Paradigm for uh gauging where the opportunities lie um so long answer to a short question but uh I think emerging market stocks and international stocks are cheap I've been called a Perma bear I'm not a bear when things are cheap um I think that value stocks the low PE low-priced Book low-pressed Sales stocks in emerging markets and international markets are cheap uh in fact quite cheap The Narrative that makes that happen is yes but these economies are troubled and across Europe yes but um restricted energy supplies are going to push a lot of these value companies into bankruptcy um the time to buy is a at a time peaks here when everyone's afraid and the narrative is overwhelmingly bearish the opportunity for that narrative to turn out to be too pessimistic is very real yeah I like that idea of thinking forward five years and Willis to be an issue you know that probably works with companies too in terms of thinking if they're dealing with problems will those problems be fixed and you know in many cases you'll find that probably they'll be okay in five years but then you have your outlier situations like Russia where the market no longer existing is not going to be fine in five years so you know in those cases it doesn't work out so but I think that's a good way to kind of put those in the in the right context actually mentioning Russia uh and Russian stocks is an interesting observation um I've been a bull on Russia because the stocks were very very cheap and um we had outsize allocations to Russia in our various Equity strategies the market was down around three percent of the emerging markets and we were up around six or eight percent all right so with the stroke of a pen in March of this year uh Russian stocks got revalued to Zero by um braiding agencies by uh by custodians of uh assets by the index companies that create the Emerging Markets index for instance um how do we do well we beat the Emerging Markets the msci and ftse Emerging Markets indexes in March while six to eight percent of our portfolio is written down to zero we beat it in the first quarter we beat it year to date through now um which means that we were able to absorb a write-off of six to eight percent of our assets uh and have room to spare and beat those markets well that's kind of cool if you take your single worst investment Choice With the blessings of hindsight um and find that it didn't hurt you that much uh was it a disastrous error um if one thought Putin was going to invade Ukraine in one's thought that Russian stocks would be potentially revalued to zero of course it was a mistake if one sought alternatively that Putin is Mercurial and dangerous and that therefore uh you should haircut expectations and then all of a sudden a modest allocation to Russia is a calculated risk that that um made sense at the time it's interesting the mutual funds that are based on our fundamental index uh held some Russian stocks of the Emerging Market strategies held six to eight percent which were marked down to zero the stocks are still in the portfolio are they worth zero no are they worth more than zero yes who knows how much maybe 20 cents on the dollar maybe 50 cents on the dollar if patient may be 70 cents on the dollar or maybe five cents on the dollar I don't know but it's not zero and um the notion of selling it at zero because that's what the custodian says it's worth strikes me is a little bizarre you're getting something that I think about a lot too because we had a couple in our International portfolios we had a couple Russian stocks as well and you know you always want to I think Annie Duke called it resulting you always want to look back at what actually happened and say oh I should have known that was going to happen but you know when you look at the facts at that time it's much easier to say now you know well this is what happened so that's what I should have done but you know knowing what everybody knew at the time and there's a lot of big money managers that held Russian stocks so maybe it wasn't as obvious as I'm thinking like looking back in history sure that's exactly right yeah put hindsight is 20 20. and it's very useful to uh reframe that in terms of uh at the time was this a reasonable view of the world and my my view at the time was it Putin doesn't do anything too Reckless these stocks are cheap and it'll be hard for them not to produce pretty good returns um but he is reckless so allocation should be modest getting back to your portfolio you mentioned value stocks and you mentioned emerging markets and I think when you came on with us about a year ago you said you had the vast majority of your Equity position in Emerging Markets so is that the same now are you still heavily weighted towards value and heavily weighted towards Emerging Markets still heavily waiting towards Valley and still heavily awaited towards Emerging Markets I I do have envelope is um uh uh I do have real estate and um those have done well year over year the real estate is a question mark because who knows what Rising uh fed funds rates are going to do to real estate prices but they're falling yet um how do you think about the idea of with something like Emerging Markets how much is too much you know I'm sort of similar to you and that I'm really not too affected by the ups and downs of the markets on a day-to-day basis so I can take aggressive positions in certain areas but I often think about like when am I going too far so I mean how do you think about like what's a comfortable amount of your portfolio to put in Emerging Markets let me reframe that in a slightly different way uh if you buy the Vanguard index fund um seven percent of your money is in Apple stock if you're an equity investor and that's all of your Investments are in U.S stocks which hardly anyone would say that's not prudent that's too dangerous you got seven percent in a single stock why on Earth would an allocation at least that large in Emerging Markets which collectively are less volatile than Apple stock um why would that be viewed as a large allocation um viewed relative to a peer group relative to your next door neighbor relative to your competitor if you're an asset manager for um maybe seven percent in Emerging Markets is a big allocation viewed objectively in terms of absolute exposure and absolute contribution to your portfolio risk I don't think a 20 allocation is all that big a deal um having uh half of my liquid assets in Emerging Markets is um perfectly reasonable in terms of its contribution to my aggregate portfolios but you have to be willing to set aside what I call Maverick risk the Divergence between your results and somebody else's so um I uh if if put Putin invades Ukraine I will look pretty stupid in that year but isn't it interesting to note that emerging market stocks are down only a couple percent more than U.S stocks even with uh an entire country's Holdings uh marked down to zero so people think that Emerging Markets are going to magnify U.S stocks on the downside because they have in the past well they have in the past because the starting point was rich pricing the starting point now is cheap pricing and in fact they haven't magnified the downside relative to the US they will in my view handsomely magnify the upside um so whenever we see the market rebound I would expect a stark uh uh and much larger Rebound in Emerging Markets so I'm fine with the exposure the point you made is really important for individuals sort of listening to this thinking about building their own portfolio which is a lot of this has to be measured relative to your own tolerance not to bail in the strategy you know if if you can do what you and I can do and you can't you're not going to bail in the strategy during the underperforming years then you can have a larger you know allocation for people who are going to do that and it's something we've learned managing money over the years then they need a smaller allocation just because that behavior is such an important part of this it's interesting I um uh in the market crash in 1987 and in the tech bubble bursting in 2000 to 2002 uh and in the global financial crisis of 0.809 within uh weeks of the bottom uh in every case I was sitting next to somebody on a plane who said what do you do and I say I'm an Investments and they'd say oh can't believe the stock market I I'm never going to invest in stocks again as long as I live um uh I've had almost The Identical conversation uh in three separate Major Market declines um within weeks of the bottom nobody's bet my ear on that topic uh this go around so uh based on the highly statistically significant sample of three conversations were probably not at the bottom yet but but people when I hear something like that that just tells me and you exceeded your risk tolerance at the High the problem isn't that you have too much in stocks now the problem is you had too much in stocks coming into this and people need to gauge their risk tolerance um it is almost impossible to gauge your risk tolerance with any Precision but you can safely assume that your tolerance for downside risk is considerably less than you think it is picking up on the on the idea of downside risk you know one of the things a lot of people have learned this year is this idea that stocks and bonds can go down together I mean I think the 60 40 is in one of its if not the worst drawdown it's ever seen and I'm wondering how do you think about you know we usually ask right now about like alternative Investments you know a lot of people are thinking about Commodities or people think about managed Futures I mean do you think with your personal portfolio do you put any of that stuff in there to fight inflation or do you keep your portfolio disorder the same way it was because it was sort of built to withstand these inflationary environments anyway well I do use Commodities um uh when I said I primarily use a mainstream stocks bonds um I'm happy to use commodity funds as part of my allocation uh Pimco has a commodity real return fund that uh I'm happy to use for commodity exposure and there are others out there of course um uh so I will depart from mainstream stocks and bonds but the inflation inflation sensitive assets there's more of them than most people realize um Rising inflation is bad for mainstream stocks and worse for mainstream bonds that's a given what's not widely known is that it's good for emerging markets stocks and bonds because Rising U.S inflation tends to be good for emerging markets economies it's good for high yield bonds for a peculiar reason and that is that the real value of a jump Bond issuers debt is going down because of inflation so they can actually wind up with some ratings upgrades and with those uh a diminishing spread between their yield and the treasury Cur and as a result of that mitigate the downside or even go up in a down Market um MLPs tend to be contraceyclical in inflationary environments so there are segments of the market that are interesting I view them as very valuable very useful diversifiers to protect against inflation um but that said you are absolutely right that this year is an incredible outline this is uh since the launch of the uh uh Nell Barclays aggregate it was it was originally the Lehman aggregate um since the launch of that index in 1973 uh there's never been a year that's even one-third as bad as this year this is three times as bad as the worst year ever and that that span includes the 1980s women Guild soared to on mid-teens uh that includes every difficult environment of the last half centuries and yet this is three times as bad as the worst year ever uh for stocks it's an outlier year it's bottom five percent of the years uh in the last century and for other asset classes we we track 16 asset classes we did a simple assumption what if you put all of your money equally in the 16 markets and asked how did that perform year by year going back as far as we can get the data in the worst single year um was um uh 1974 down four percent that's all down four because some markets were up somewhere down this year that Blended portfolio is down 70. I assume that portfolio that's up as Commodities it's interesting too because you know we track and through our website we track the permanent portfolio you know which usually is pretty good about limiting drawdowns and it's been better than the 60 40 this year but because the inflation fighting part of it the gold has performed poorly as well I mean I think the permanent portfolio is also in its biggest drawdown ever so it's been a very hard year to find something that's working yeah absolutely and it drives home the point of diversification um uh I prefer to use silver rather than gold because um a kind of concentrated targeted inflation hinge and silver Futures have been catastrophically awful this year all right so that's uh part of my portfolio but um uh so what you're going to have some things that are way down some things that are way out I want to I I would usually ask you now about your private your private investing but you sort of said you don't do too much of that or maybe it hasn't worked out as well as you would you would hope but I want to ask you about a specific one you've done because uh you you invested in our friend for a tolls company uh life and Liberty indexes I believe and and I think that's a really cool story about how you got in touch with her and how you did that so I was just wondering if you could maybe talk about that and how you met first oh sure um apparently she had been trying to reach me uh uh for some time and um my Gatekeepers uh at my company helpfully uh said go away uh and so um she found out I was attending uh uh David kotox um uh fishing retreat in northern Maine one year and uh she was trying to get from uh whatever word is that I think it's Portland Maine to the fishing site um uh and was planning to drive but decided it was too far asked about a plane and they said well you're in luck um uh Rob arnott has a plane and there's a seat available in it uh we can ask him if you can join so she jumped at it and so she bet my ear for the uh flight up and I loved her premise uh I'm a Libertarian I am a believer in Freedom and uh I'm a Believer in limited government I think government does almost everything that it does it does badly and so you want it to focus on things where nobody else will do it and so defense yeah sloppy money wasting defense is better than no defense uh police roast you name it um it has a place but um interfering with people's freedom as happened in an unprecedented way during covid uh did it save lives that's not clear at all and so um I'm a Believer in limited government she decided to launch an ETF that would invest in Emerging Markets economies proportional to their economic freedom and I thought what a great idea and uh so I was a seed investor in the fund uh and um early part of this year it of course excluded Russia it of course excluded China and those are two of the worst performing uh emerging economies in the world this year so what a wonderful way to add value well doing the right thing not creating financial support for people with um uh not very enlightened intent it's an awesome story of persistence too I mean finding you on that plane I mean you know we launching ATF ourselves so we know I mean building an ETF is exceptionally hard you know you sit there with without assets for a while you've got to really pound the ground you know to find people and you know to see the success she's had with that it is it's really really cool it is it has been wonderful to watch I I hope it continues to gain traction it crossed 200 million AUM a little earlier this year uh before the bear Market uh took it below that but um 200 million is not a lot of money um it's for an ETF uh but it's got critical mass sufficient to to stay the course and the viability of the strategy is no longer in question if it's 20 million you can't run an ETF on 20 million assets and uh which means a hundred thousand gross revenues um for long but at 200 million uh assets and um 100 and 1 million uh revenues you've got staying power which is wonderful to see Jack and I both have young children and you know we like to get perspective we know you have um children as well you may even have grandchildren I don't I don't know if I don't still getting patiently for that one nice well that'll be awesome when when they finally come um what's your you know some I guess some people have the perspective with their children that they wanna put away money for them whether it's in a custodial account 529 plan and they they sort of are saving you know hopefully for themselves in retirement but they're also sort of want their kids to have something maybe a down payment for a house or to pay for a wedding or or but then there's other people that have money that say you know what my kids are gonna have to figure it out themselves I mean I don't want to give them money because it's gonna you know make them not want to work as hard so where do you sort of fall on that Spectrum um we all want the best for our kids um how you get there uh is the matter of debate uh the people who say no I'm not going to give my kids money let them figure it out for themselves um frankly I think the outcome for the kids is often better that way um I set up trust accounts for my kids and I'm often wondering was are they better off for that or not um I I saw a presentation by uh a somebody who specialized in advising on family trusts and they their opening line was every time you give something to your kids you take something away think about what you're taking away and it may be initiative it may be a need to work it may be um uh a lot of things so bottom line is my kids have trusts they're irrevocable and um uh I hope that they use those resources wisely uh it is not clear to me that it wasn't an enabler for um getting launched in life later than they could have uh uh they don't have to work but they not that they would earn a large income without working but they could they could get by without working and I think that part of it is a mistake um if I could do it over again I I'd make the um uh distributions contingent on uh uh working in earning a living but um uh anyway I love my kids and um I have a range of optimism from a little optimism to a lot of optimism about uh uh the trajectory they're on but I think the transition from young adult into adulthood was actually made more difficult not less difficult by having resources how do you think about your philanthropic um financial decision making and you know do you how do you assess where you give and how you give what are your sort of criteria number one Criterion would be will the money be used well now and the reason I say now is because I have no way of knowing if it'll be used well in 10 years so um uh a friend of mine perhaps coined the expression prequest instead of bequest instead of giving in your will uh giving while you're alive and so um I give a lot uh two organizations that I think are doing good work rather than putting them in my will because who knows if 20 years from now they'll still be doing good work um and I have the same attitude about the idea of setting up a foundation firstly and I'm not Bill Gates so I'm not gonna uh have a huge Foundation uh even if I wanted to but um the notion of expecting future generations of managers of a foundation to have the same values that I do and to distribute the money to organizations that have those same values uh strikes me as a little nuts why not give away the money well you can have some influence on whether it's being used in ways that you think are appropriate um so I give to some educational organizations but that one I find really really tricky because the university uh Community has gone so woke um and finding universities that believe that the kids who attend the University should be exposed to all ideas and should have the experience of hearing ideas that they might find offensive um rather than being protected from the uh injury of hearing something that they don't like um there's not a lot of educational entities these days that don't have that old mindset so that's that's a big challenge for me um uh medical research uh I like I think that's interesting but you want to make sure that it's um uh actually able to do something able to move the needle um uh case in point you remember the um uh ALS uh challenge where you would be dunked with water and ice challenge yeah yes yes uh that raised 200 million dollars um out of that 200 million they did come up with a uh a new treatment for uh ALS that adds about three months to your lifespan um does that move the needle a little but adding three months to the worst quality part of your life doesn't strike me as uh particularly Grand use of money so uh anyway it's uh long answer to a short question but I also get to political organizations that uh uh support libertarian principles they're not particularly popular these days the notion of freedom and free speech um how dare you support Free Speech if I have to listen to something I disagree with as we get to the end of all these we always like to ask a question around this idea that not all Investments that are good Investments necessarily make money and so I always give the example I own a racing sailboat and my racing sailboat is a horrendous investment it just you know a constant maintenance and upkeep and but you know I can go out every Wednesday night I do a race with my friends we can have a couple beers like you know that's sort of invaluable to me that that impact on my life and I'm wondering if there's anything like that you mentioned travel before is there anything like that in your life that maybe you spend money on that might not be the greatest Financial investment but it's been really great for your life um I'm a collector of a few things uh I I collect vintage motorcycles fastest of their era um people like to describe the classic cars or Classic Bikes as an investment no an investment is something you plan to resell at a profit um have I resold motorcycles at a profit hun yeah but I'd buy them for that I bought them because I love motorcycles um I also uh collect Vintage Wines and that's a liquid asset um but I don't plan to resell them um and travel experiences um uh so these are investments in yourself in your passions and things you love not Investments that you expect to make money on just don't be going down the road on your vintage motorcycle with a vintage y bottle in your hand oh absolutely but I don't think that's one of those bottles in a backpack with this oh there you go so our standard closing question when we do these show us your portfolio episodes is if you could impart one lesson that you've learned from building your own personal portfolio to your average investor what would that be don't chase performance um it's endemic it's in Aiden in the human uh uh psyche the notion of um something's hurt me get me out of here something's been good for me giving me profit giving me great joy I want more of that this is all very much human nature it's a horrible way to invest the notion of buying when you're at Peaks here um goes totally against human nature it's a great rule of thumb and a lot of it all is just different manifestations of don't chase performance even the thought Community chases performance put together a bunch of factors in a multi-factor portfolio based on using the factors that had the best historical track record well that doesn't mean they will have a good future track record and so it's a form of backdoor form of performance chasing in a group that uh thinks they don't chase performance great well Rob thank you very much for coming on for being um honest with us sharing your your knowledge um sharing how you're investing your portfolio I think uh investors are going to learn a lot from this so we appreciate it thank you thank you all right all the best thank you hi guys this is Justin again thanks so much for tuning in to this episode of excess returns you can follow Jack on Twitter at practicalquat and follow me on Twitter at JJ carbonneau you found this discussion interesting and valuable Please Subscribe in either iTunes or on YouTube or leave a review or a comment we appreciate it

Channel: Excess Returns

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Id: EKr6buvJNeM

Length: 54min 47sec (3287 seconds)

Published: Thu Oct 27 2022