Show Us Your Portfolio: Wes Gray | Alpha Architect Founder on How He Builds His Personal Portfolio

yeah i mean it goes back to what's what's the underlying first principles in in my portfolio and actually what i recommend to people if they don't have weird behavioral or institutional baggage evidence-based long-term robust to chaos right and then for me in particular i got to have skin in the game just so so yeah that's just part of the deal of being in our business that's not obviously something that other people have to deal with because they may not be an asset manager but it's that simple evidence-based long-term robust to chaos nowhere in there does it say strong relative performance to the s p 500 over the next year right it does say it doesn't say career risk focus it doesn't say tracking error centric it doesn't say you know anything that pretty much everybody focuses on because that's irrelevant to what my first principles are and so that's why this portfolio it's it doesn't look anything like anything that you would ever see in this you know the standard hey buy 60 s p 40 bonds and call it a day um that's just crazy and unfortunately people are learning that you know being long sp 500 60 and long treasuries 40 which was the greatest hedge fund 2.0 sharp ratio strategy over the last 25 years like it's not that easy right and this year you're down 15 to 20 percent and your future looks pretty miserable um just because i think it was a unique period where everyone who did that was you know the best hedge fund manager of all time and i just i can't see that repeating probably ever in the future of investing uh that that seems that's to me welcome to xs 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 carbino and jack forehand are principals at valydia 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 lydia capital hey guys this is justin in this episode of excess returns jack and i talk with wes gray founder and ceo of quantitative investing firm alpha architect and also a etf architect a firm that helps bring new etfs to the market this is our second show as your portfolio interview where we talk with less about his investing objectives how he manages his personal portfolio and what we can learn from his perspectives and positioning this is another episode that might be best watched on youtube since there are a few charts that we reference as always thank you for listening please enjoy this discussion with wes gray of alpha and etf architect wes thank you for joining us today appreciate you guys having me look forward to it this is the second time you're on with us uh the first time i think we were geeking out around the value momentum factor but uh today we're gonna do something different with you something um i think that's gonna be fun and we're to enjoy and we're going to talk about how you go about managing your own personal portfolio and how you think about um your own investment strategy and i think um you know given just your experience in the markets given the the sort of the uniqueness of the business you're in with the etf business as well as other things you're doing in the investment space it makes i think it'll make for an uh interesting discussion as we sort of look under the hood and and talk through with you um how you go about managing your your investment portfolio so i guess to start i'm gonna put my my financial advisor hat on here and wes is my new financial you're my new client i love it so we're going to take the 10 000 foot view question so when you think about your you know your biggest long term long term goals and really what you're trying to achieve with your investments i mean what what are the goals is it a great retirement do you want to leave the money to your kids and your family is it just overall peace of mind i mean what's what's the overarching objective here first off i just want to thank you guys on behalf of uh miss katie jay gray uh because i don't have a financial advisor and she's always trying to tease all these things that you're about to ask me out of my head because i i kind of manage all the investments and everything so this will be great because it forced me to actually write all this stuff down and do what you're supposed to do as a family but you know what i always preach to people but don't actually do myself so i appreciate you guys just at the beginning of being my financial advisor here and forcing me to think through this um so i kind of you'll get the bill after yeah yeah yeah give me the bill uh and you can go argue with rick ferry over whether we should charge on aum or fixed yeah i'm a-u-m a-u-m fee all the way baby okay sounds good sounds good uh we'll have to argue whether alf architect equity values in there or not but um oh good so so i i kind of break it down into like big blue arrow ideas and then what i call tactical goals like things i can actually wrap my head around so for me like the big blue arrows are just not having to stress about money right like i grew up broke i was on the free lunch program didn't have as a kid it just my whole life was just trying to figure out how do i not have to stress out about this so just not having to stress peace of mind is a big thing for me um the other one is is being able to fund our business so you know we're kind of all in on alpha architect and i like my team i like what we've built and you know we're in a business that has a lot of volatility so i just want to have enough capital on the personal side where to the extent you know things get rocky or crazy you know we don't have to fire people like we keep on building and keep on maneuvering uh just because i think it'd be a shame if you know a financial distress event somehow affected alpha architect and then kind of the last one is just you know blocking and tackling like make sure we can retire uh and like pay for the kids college um which is obviously getting more and more expensive those are kind of like the big blue arrow ideas and those could change who knows and then what i call the tactical goals these are things that are tangible to me that i can kind of grab on to um the first one is like not having to cheap out on flights with three kids so you know instead of taking the three connections to go to california maybe i take the one connection and the non-red-eye and i pay an extra 50 or 100 bucks like not having to worry about that is awesome right so i'm not a learjet level uh but i'm at let's not red-eye this thing that's awesome the other thing is like healthy food and nutrition so i want to be able to go to costco and buy whatever the hell i want in bulk even if it's more expensive than like the less healthy version just because you know i value uh you know trying to take care of my body and same with the fam and then the third one kind of related to that is being able to afford uh things that i guess motivate or help encourage activity and exercise for my family as you guys know i don't need that because i don't really need extra motivation to go work out stay in shape but a lot of people do so if i can you know get lessons if i can get special gear whatever it takes to kind of get people motivated i want to be able to spend on that um and then kind of the last one is just the ability to host like cool parties and good community events where no one has to worry about the cost because i can just float it um just because i always think that's fun right like you get to go to a big get together you don't ever have to sweat about like the cost of it i just would rather people just focus on having fun um so those are kind of like my big blue arrows and like my tactical goals of of what i like about you know if i had capital which i do now uh i like i like these things yeah i love that it don't it almost seems like it it it almost seems like there's like military sort of strategy and tactics like embedded in there you have you know your overall strategic objectives and then the tactics to get you there yeah yeah i do because i just was you know i used to be in the military and and you get tired of hearing generals say oh we're gonna we're gonna win in iraq oh well that's damn near worthless like how about what are we gonna do on this patrol through the palm groves to go from a to b and like who's got the ammo who's got the you know the you know the guns and the rifles and who's got like the qrp so i just naturally you know i understand you gotta have big blue arrows but i like tactical because it's just much more tangible to me so that's why it's set up like that you know you mentioned retirement and i can't imagine you're like going to be the type of guy like just sitting on the beach somewhere i think the beach will be part of your retirement just given where you are uh where you where you reside and where you live but you know when you what it already either it is my retirement i'm already retired by that measure yeah nice but how do you you know i guess when you think about your retirement i mean do you do do you intend or hope or plan to work for forever for as long as you can or do you kind of envision there being maybe a point in your life where it is you know being more retired and doing whatever retired people do yeah so so i've had the last few years i've kind of thought part about this and like i'm at a stage now where you know my on paper assets and my actual assets you know i probably got more money i ever know what to do with um but but my problem is is i actually kind of like our business and i like our team and actually like what we're doing in the marketplace i mean all day long i get to talk to investors and etf entrepreneurs like that's what i like to do like i would do that for free um so so i i would always like to kind of be involved in the business side of things to the extent that i'm you know i'm actually able to add value i don't want to be like the old guy who's a big waste of time and thinks he's cool but assuming i can still like add value for the business or thing um and i'm not stressed out about life and i still have the opportunity to be flexible be with my family i mean why not right like as long as it's not causing a lot of angst and i got good teammates that and people that can help you know deal with that i don't want to deal with anymore um yeah i kind of like to stay engaged and you know keep the dream alive as long as possible for sure yeah nice how do you how yeah i guess at a high level um how would you classify your approach to investing when you're looking at it from you know a wide angle so so my personal portfolio it i mean it's kind of like ties to like our core beliefs as a firm frankly but basically evidence-based long-term robust to chaos and then what i call skin in the game right so evidence-based in the sense that you know i'm not i don't want to be what i talk trash about every day the maniac behavioral person so everything we do it has got to be based on my best assessment of the overall evidence out there you know for or against like a given approach um the other thing is long term same thing like there's a lot of stuff that's evidence based but it requires horizon and discipline to stick with it so so i just i anchor on that and then the other one is robust to chaos what the heck does that mean well as you guys know we're in the asset management business um and so i'm not here to be a mean variance optimizer i need to kind of focus on hey i have assets that are built to compound and i know they're super risky but so i need to have other assets that mechanically will work on average or most of the time when the you-know-what hits the fan so so i need to really think about tail risk management a lot more than well probably everyone should be but in my case i need to think about even more because so much of our business is tied to what the market does and the kind of final thing which is also somewhat unique to just being an asset manager is it's all about skin in the game where i just believe that if you're charging people you know fees and you're asking someone to put their own money that they work their ass off their whole life to earn you you should probably invest in the same things that you're telling other people to invest in so i'm just even though that's not really commonplace in our business and you can make fancy arguments of why that's stupid because you don't want to invest in your own products because they're correlated to human capital blah blah blah but it's just i just feel like it's bad leadership to to not have a lot of skin in the game because you know that's just what you should probably do so those are kind of ideas evidence-based long-term robust to chaos and having skin in the game i want to start with maybe the major asset classes you invest in and i guess i guess your wife will also be happy with us because i think you've put together a pie chart where you've actually sort of outlined the major different things you are you're currently invested in so um could you maybe just talk about just at a high level the major asset classes you invest in you got it so so i i sent you guys that and uh you're right katie's gonna be quite happy that i actually put this in a nice organized picture um we do have this but it's not in a nice picture it's with like 100 commodity futures contracts running around she's like what the hell is this um so basically cash right real estate which in my case like private my you know my residence um and i'll tell you about why that's unique to puerto rico in particular uh tail risk so like direct tail risk products that just essentially buy puts um try what i call private short term so i do a lot of like weird like distressed deals or lending to people that are short term and opportunistic especially down here in puerto rico what i call trend equity simple there's an etf you know it's like the simple way to like get access to global factors with trend falling i use that and i also have trend complex or trend equity complex it's basically like a levered up version of doing our smas um so that's another asset class they're basically the same and then manage futures which it just really to be clear what does that mean because that could mean a hundred things to me managed futures means trading bonds and commodities long short based on trend period anything else is not managed futures to me so i'm doing trend following across basically the commodity bond complex globally um and then private long-term investments so like private equity or vc what have you and then just my own business uh you know alf architect so those are kind of like the all the buckets kind of from least risky to most risky uh at a high level and how do you think about i didn't see bonds i don't believe on that list um how do you think about bonds i mean do you think given your long-term tie and horizon you really don't have any need for bonds yeah i mean this i know this sounds so crazy uh because so many people are so anchored on bonds and even we sometimes recommend them for behavioral reasons but i i really believe that bonds like commodities like bitcoin like a lot of things they are tactical assets that you should only own with trend i personally think that buying and holding bonds is absolutely crazy because especially right now because they're low return they have terrible taxation it just doesn't make any sense to me right so so i'm all about owning bonds if they're in a trend but why would i want to own like especially high duration bonds if they're not in a positive trend like to me that's just crazy uh like what's the point um and you know obviously a lot of people are learning that the hard way this year but that just seems to be like an evergreen thing like same thing like why would you ever own commodities buy and hold like it's insane to me why you do that like if they're in a trend great own them if not don't own them you know save your capital for like under your pillow or for some wait for a trend to show up and then go go allocate to it so anyways long story short i think bonds are kind of nuts personally unless you had a way to tax manage them then they would get a little bit more interesting but just the fact that you get it got to give up half of the income associated with them right off the bat it just makes them very unattractive to me there actually might be an etf idea in there in terms of bonds and trend um you know maybe there's something there for the future in terms of what could be done with that um when you look at equities um i mean are you a big believer in using trend for most of your equity position as well or do you think you want to have a significant sort of long only sleeve that you hold of equities long term yeah and i don't so i do 100 trend falling on all equity exposures personally i don't do any buy and hold um that you know if i didn't if i wasn't in asset management that might change a little bit uh because because i'm so tied obviously through our revenue on on a big part of our business is just tied indirectly or somewhat directly to just what the market does in general globally and so obviously if the stock market as a global uh entity blows up 50 percent you know our revenue doesn't go down 50 but it goes down 20 or 30 percent and we have a lot of fixed costs so that would suck um so so for me in particular i just buy and hold equity is just a little bit too exposed um but that said even if i didn't have our business i still think that i would only own equity probably with trend falling on it just because the i mean as you guys probably know we obviously you know like owning equity outright is a great way to get your face ripped off every so often and losing half your capital it's just not something i feel like doing um so so i i like trend following but it's not for everyone obviously um and do you have do you use valuation at all when you think about equities i mean i know we talked we had you on last time we talked about we were kind of at the you know right after the covet bottom and small cap value had gotten really cheap and you talked about maybe putting some more money in that and do you think about using valuation at extremes or anything like that or do you really just stick with trend so i i have my my i guess i'd call it your my tactical fun bucket like where i can go be an idiot and like make calls and try to feel famous or whatever i only do that with my retirement account which is not a lot of money relative to like most of my portfolio and that's the one area where i'll kind of use my gut instinct um and and my claim to fame well my claim to infamy is i used to be a contrary stock picker and lost my ass but my claim to fame is it march 23rd 2020 i said i'm not doing trend anymore i'm going all in on deep value and i and i literally transitioned my my uh retirement account from trend falling to buy and hold deep value and that was obviously like bottom ticking it and again that was just because hey you know these things are down 50 60 in a month this is crazy the world's not going to blow up that bad but but i can i only do that in my fun money where i know i'm going to screw it up in all my other money where i don't want to screw it up i just use trend falling to tactically time you know allocations and what have you you know i do a little bit myself and i think there's something to be said for kind of doing that in your personal portfolio so you kind of get it out of your system so like you're not you're not attempting to do anything for clients you know you kind of just take your own money a little bit of it on the side and you can do this crazy stuff and if it doesn't work out that's okay but you sort of get it out of your system doing it yeah it's a lot more fun uh as well because it's it's just a lot more fun to be engaged in the day-to-day like you know market commentary the what's going on in the macro what's going on with russia like even though all this stuff matters zero for your strategic allocation and how you should be investing it's just too much fun and like you gotta have something to kind of rub the itch and that's what i do i want to come back to your list and uh the second thing on your list i believe was real estate um and you obviously have your personal residence but beyond that do you do any other investing in real estate so i have in the past and so right now my my real estate situation is a little bit different so down in puerto rico under this thing it's called act 60 which which is like a tax deal that i'm on you have to buy a residence here within two years so so i have to buy a house whether the rents were 10 times cheaper to rent versus buy or not i have to buy so so i i have a house fully paid down here because that's part of my deal i i have done down here in particular uh like some strategic flips but i i wouldn't say it was a it's not something i do it's just because the opportunity presented itself and i was able to move quickly but but if that was just a one-off i in general i hate real estate because it's it's after you include the brain damage um the stress the pain and anguish the audit the complexity it's just not worth it to me um that doesn't mean it can't be great for some people but i just i like financial assets that you know i could get rid of really quickly i could see every day i could understand i could tax manage i keep the fees down uh and they're liquid that's just a benefit to me so real estate i keep to a minimum as best as i can can you explain the act 60 more because i know there's significant uh tax benefits to living in puerto rico but to be honest i don't even know what they are so could you can you sort of explain that yep so so basically the nickel tour on it and it gets pretty complicated fast is a capital gain tax here is zero so there is no capital gains right so so once you come down you get marked you can't like you can't have zero basis in a billion dollar asset and then live here a day sell it not pay any tax there's ways you can kind of do that but it requires a lot of long-term planning that said the minute you're a pr resident from then on out any value you add in equity either private or public is zero so there is no capital gain tax which is obviously a huge benefit um and then the other benefit that's that's kind of a show stopper for me is your income or income that you can source to puerto rico is subject to four percent tax and that's it so it's not it's not even subject to federal taxes so if you're paying 50 marginal taxes between state you know feds you know down here you pay for um so so essentially in my case you know i got paid a lot of money to live in a tropical island that's awesome and it's just a matter of convincing the wife um so so it's it's a i would say it's a step change in one's ability to uh you know build wealth and get closer to retirement a lot faster than if you're a us resident and just on the side have you you've enjoyed it so far yeah i mean i love it man it's like i think it's awesome but i'm not everybody i'm obviously a little odd but i mean i think it's there's nothing perfect but as far as like if i had to put together a package of things i like right like great culture great people uh you know great weather tons of adventure tons of outdoor stuff really cool people and even at the very end of my list like and you you're not gonna charge me uh taxes to live i mean to me it's like the biggest arbitrage no-brainer that ever like walked the face of the planet but you know it's it's not for everybody right like there's there's not a starbucks in every corner costco in every corner there's not you know amazon doesn't deliver same day you know it might take two or three days down here and you might have to speak a little spanish but to the extent you're not offended by just different strokes for different folks um honestly i think it's awesome so highly recommend people check it out i think the only downside probably is going to be the lack of hills for the march for you that's the thing dude there's tons of hills down here is there i wouldn't really oh my gosh yeah there's more there's more hills here if there's a massive mountain range that goes through the middle there's a massive rainforest it's the only rainforest in north america this place is like hill century it's like hawaii like the big island i mean it's that's wow that's that's awesome that's good for you you're gonna be you're gonna be hitting it then yeah i mean it's it's humid yeah oh yeah training down here i my capacity to train down here is 10x what it was in in philadelphia on the burbs like i mean it's on par with like colorado um there's trails and you go crazy around here man um so that you have all that down here it's not flat it's not like uh uh it's not like guam or something where it's just a pancake like puerto rico's actually got massive uh elevation differentiation tons of ecosystems it's really interesting place actually the uh the private short-term bucket you mentioned is really interesting because that's not something i've heard of many people doing can you talk a little bit more about what you do there yes so so again this is something that's very specific to puerto rico um i think because in the states there's too much money chasing too many deals and and it's it's like a well-formed capital market there's tons of transparency there's you know it's it's just too easy to arbitrage we're down here there's a true lack of capital and and the market's like i want to say it's corrupt it's just way less opaque there's way less data involved it's really hard to source deals and so like just for example like down here you can throw a rock and hit a 10 cap rate on residential real estate like in the states that would be absurd you'd have to be in like you know boarded up ghetto that you know you might die if you walk in to get a 10 cap rate on like a residential deal down here you can do that without even like you know could stumble on to it um so there's just it's just the need for capital is so much higher down here and the opportunity to you know you fall into like you know hey i need 10 15 short term loan and it's asset backed and oh by the way it's tax free down here i mean it's not huge scale you know they're like 100 200k little one-off things but if you can make 10-15 after tax asset back lending short term i mean why wouldn't you do it so so you know that's why i started doing that down here again it's not like a big part but it's just an opportunity that happens to exist down here at least right now so so i've been doing a little bit of that yeah that's really cool um in the private long-term part you know we had med favor on the podcast and he does a lot of that but he's kind of done you know a lot of small investments in a lot of different companies and tried to diversify his bets you know and take advantage of the fact that in venture you really don't know what the winners are eventually going to be like what is your approach to that so so my approach is in general to avoid that like the plague however um you know we happen to run in this thing called etf architect where i literally get to see every deal that comes to market it's like it's like the wet dream for a private equity investor right like i get every deal i know everything about this business i run the platform i know where all the bodies are buried and and so to the extent that like an operator needs capital you know i like we're starting this idea of like hey let's start this little syndicate and so we just kind of started one with my buddy ray micheletti um you know he's like princeton phd been in the business for 20 years long game player and he needs some capital because he's not independently wealthy so we kind of put together a little bucket together he actually moved down to puerto rico which made it even better and so i just anticipate in the future doing that more and more just because i am in a unique position to to potentially help our own platform and i kind of have like a lot of edge i would say um so even though i hate private equity i hate the liquidity i hate all the costs i hate everything about it it's just this is a weird circumstance where i'm going to probably start investing a lot more etf operators personally beyond just our i mean our platform already invests a ton in them as well but a lot of times they need like 500k or a million dollars of just you know risk capital to kind of fund their their their life basically so yeah when you kind of have like an inside look at these companies i mean that's a that's a very sensible way to do this versus you know kind of throwing money out there in a lot of different directions yeah i'm not paying 2 and 20 i'm not just hoping and praying someone knows what they're doing like this is a very controlled way of accessing this you know etf basically the etf growth of the etf boutique market essentially yeah by the way given that you're a value guy like me that if you're ever like throwing a ton of money at venture capital i know things have gotten exceptionally cheap and it's probably that's pr that's probably the time to go into it yeah yeah yeah no we're we're a ways away for that um there will be an opportunity though to your point because so much dumb money that got sold a bill of goods is chasing that right now um and uh dan rasmussen always has good stats like talking about like you know public public company uh enterprise multiples versus private company in the old days you know obviously private was way cheaper than public so there was an arbitrage when you kind of went from from private to public on the on the ipo now it's flipped and and on what planet is private equity going to outperform public equity like it doesn't exist there's too much money chasing too few goods and so at some point that thing will blow up and sure enough there'll be opportunity right they'll be distressed there'll be issues there'll be opportunities um and so i'll let you know when we get there but that could be ten years from now for sure yeah it may take a long time for everything to work through the system um the last question on the buckets is how do you think about sort of sizing them i mean are there certain buckets here that you think are more important to you and you want to be the most significant portion of your portfolio do you kind of have a fairly equal waiting across the i mean how do you think about sizing these different things in your portfolio i mean this is not news to a lot of people but i guess would be unique in the sense that when i tell you this you'll think i'm crazy but i think it's actually a lot it makes a lot of sense that i'll explain is so so i have two buckets right i have the one that includes my business but that's that's weird because you know a lot like you know 75 80 plus percent depending on what you value the thing is you know my my net worth so all the rest is kind of doesn't matter but if we just throw that aside because i just i just mark that at a dollar on my personal books and then i just kind of focus on my portfolio that's just the one i can look at every day um it's basically broken down into like exposure-wise i actually have 50 of my portfolio and managed futures on a notional basis a lot of that's like using leverage on top of equity but it's like a global portfolio about 50 is in trend followed commodity and bonds um and that is designed to basically deliver crisis alpha so when hits the fan it's supposed to like go up right and it's supposed to counteract the deep risk that i take in the form of like even though i trend follow the equity i use long-term trend so i'm eating a big chunk of the like equity risk premium there still like i need something that's that's a big enough exposure to actually offset you know a 50 market draw down and and you're not going to get it like so if you if you let's say you're concerned about tail risk hedging like in a 50 market drawdown like how in the heck is a 5 managed futures exposure or at one percent terrorist exposure gonna offset a fifty percent loss in your equity book answer it won't it won't do right so so the idea is like hey i need to balance off my big tail risk in equities which is also known as short volatility bet like you know your short volatility because when volatility spikes to extreme levels that that thing gets destroyed i eat short volatility and then i like to offset that with an equal component of what people geeks call long volatility assets or things that when actually the chaos begins they actually make money and do really well so so i try to balance in my own way the the amount of assets that are long volatility against short volatility as opposed to being effectively 90 percent stocks and then 10 noise that doesn't really do anything like really i'm just i'm just short chaos right like i'll do well most people portfolios are structured that do pretty well if nothing really bad's happening but if something really bad's happening they're screwed and i obviously don't want to do that so so that's why again i think uh like basically the easiest thing about is 50 of my portfolio is in long volatility kind of tail risk management structures and then the other 50 is in trend trend fall equity so basically our funds so global value momentum with trend falling overlays on them to protect against the beta component yeah and this gets back to something we talked about favor about as well which is you know all of us are in the asset management business so you know and we have a significant amount of our wealth in these you know companies we own and so we have significant beta to the market i mean if the market starts tanking we're gonna have all kinds of problems and so it's very sensible like in our personal portfolios to have these things you know with convexity they're going to do really well on the other side if things are falling apart you know and maybe in the asset management business in general yeah for sure but but to be frank even even if i sold alfa architect for some reason if someone just gave me some huge pot of gold or i don't even know what it would take it'd probably take more than that i would still run the portfolio like i do now i would i might take off some some of the trend falling on the equity component but i would always regardless of the business i would still maintain probably 50 exposure to bond commodity trend follow managed futures um just because i feel like it's a it's the ultimate diversifier basically you have a lot of things in there to probably do well in this type of environment you know as is but i have to ask about it because it's probably the most popular topic on our podcast recently and this is the idea of inflation so do you think about your portfolio any differently in a world of inflation i mean have you made any changes to to try to deal with potential inflation in the future or do you just sort of set up a robust strategy for all the different economic environments and kind of leave it yeah so i mean it's kind of a silly question right like if you're if you've built out a solid strategic investment plan under the guys that you don't know what the future will hold like when the future unfolds itself you'll continue to not know what the future hold so why would you change the plan right like you you might that means you didn't have a good plan to start off with so my portfolio is obviously designed structurally to be all weather right like it is designed and i will not change anything there's nothing that i can even foresee in in the macro landscape anything that would change how i manage my portfolio because it's already designed to deal with all the potential chaos and uncertainty of the future um so yeah i don't i don't do anything different because that's why i built it like it's built in the first place it's you know it's heavily based on trend falling a lot of it getting short bonds your long commodity complex you just been riding that trade making money every day and you know while the market you know stocks and bonds have totally the bet so i mean i'm not changing anything uh why would you i'd be crazy you're going you're going more you're allocating more administration yeah i just yeah i'll just go yeah i'm just i'm just doubling down on what i already knew worked uh why would you change anything it's just it's weird to me when people are like oh now i need to get this trend following stuff i'm like dude like you need a trend falling like six months or a year ago but we wouldn't have known it was going to work six months a year ago from now you need you need it all the time that's the point like like you can't be chasing your tail after every big event or every big scare you know it's just crazy to me that people operate like that but i don't know that's just how set up by the way and just to be a and just to be clear this is an internal managed future strategy or are you actually placing money with other managers yes no no so sorry so yeah so so we do it internally so we have tried to figure out how to deliver so we've been running futures products for i don't even know like we've been audited by the nfa three times and it's it's probably been eight nine years at this point the the issue with futures is they have a different regulatory body um and there's also a bunch of limitations within the 40 act and to be able to leverage their capital efficiency so i can't with the straight face like we would have done it already right if i thought there was a way to deliver affordable exposure via 40ac product to the public in managed futures it would already been done but i can't so we do that internally via smas for like ultra high work type people and just for our own account um because that that's really the the most efficient way to deliver that that exposure affordably uh and with the the appropriate capital efficiency that come with managed futures and that's just unfortunate like it'd be really nice if they you know updated laws and made a little bit easier to you know to deliver these products because made its futures as you guys probably know like our ctas more broadly you know most the fortiac products they're okay but they suck right they're not they don't have enough volatility in them you can't leverage them for capital efficiency because you got to be fully paid it's just everything about them is just not great so so that your your options are basically lps or hedge funds which charge 2 and 20 or you got to do smas you know we don't charge that much on sma but the problem is we have to run your own futures so you have to have a huge account right you got to be super rich so it's it's it's unfortunate one of the best exposures to have as an individual or an investor but it's also the the hardest one to get access to you know after fees after tax after brain damage so you know it's one of those throw your hands up in the air problems yeah and to to your point about like you know the money flooding into like these sort of trend strategies after the fact i mean that this is the hardest thing and we were just talking we just had adam butler on and we were talking about risk parity and you know this is the hardest thing for your average investor in running these types of strategies you have to be able to go to the cocktail party during the periods where you're underperforming where you look very different than something like the s p 500 and you got to be able to stick with it you know and and that that's sort of one of the more challenging things of these you know these strategies work really really well over the long term but you have to be willing to be different you know in order to run it you know that's that's something i've definitely noticed about your portfolio is you you definitely have a willingness here to look very different to sort of achieve your goals yeah i mean it goes back to what's what's the underlying first principles in in my portfolio and actually what i recommend to people if they don't have weird behavioral or institutional baggage evidence-based long-term robust to chaos right and then for me in particular i gotta have skin in the game just so so yeah that's just part of the deal of being in our business that's not obviously something that other people have to deal with because they may not be an asset manager but it's that simple evidence-based long-term robust to chaos nowhere in there does it say strong relative performance to the s p 500 over the next year right it does say it doesn't say career risk focus it doesn't say tracking error centric it doesn't say you know anything that pretty much everybody focuses on because that's irrelevant to what my first principles are and so that's why this portfolio it's it doesn't look anything like anything that you would ever see in this you know the standard hey buy 60 s p 40 bonds and call it a day um that's just crazy and unfortunately people are learning that you know being long sp 500 60 in long treasuries 40 which was the greatest hedge fund 2.0 sharp ratio strategy over the last 25 years like it's not that easy right and this year you're down 15 to 20 percent and your future looks pretty miserable um just because i think it was a unique period where everyone who did that was you know the best hedge fund manager of all time and i just i can't see that repeating probably ever uh in the future of investing uh that that seems that's to me you you did mention um that of your investments you know the bulk of the investments are in non-retirement accounts and i'm just wondering is there when you think about kind of from from this point going forward getting more money into retirement accounts is that something you sort of strategically think about whether it's through a company 401k plan or how do you kind of view that so remember i so my retirement plan is solved it's called puerto rico right i have zero percent capital gains and four percent income tax and so i have zero incentive actually if i have an old roth ira on a convert but i don't want to do any of that stuff right like why would i like in the big risk with retirement accounts that people never talk about is i think roths are probably maybe a little bit less at risk at this but it's easy for me to envision a world 20 years from now because all you gotta do is look at our budget you know how much money do we spend how much money do we take in and we all know that you know in the end if too many people are voting for handouts it doesn't end well there's gonna have to be a point i could see this politically where people say oh you have over 3 million dollars in your traditional ira we're going to start taxing that because you're too rich and we need to pay for all these damn bills so i think the assumptions of a retirement account are fundamentally flawed because i think there's a huge tail risk that it's going to be retroactively pulled so i'm much more fan of clean money and getting out of government structures because i just don't trust them and and to give you evidence on that that was on california's uh chopping block a few years ago where they were gonna literally charge you pulling out of your your income california state tax if you had over like two million dollars squirreled away and that's you know uh and that sucks not for rich people that sucks for the little guy because he's usually the garbage can guy that you know did saving did all the right things and just through compounding he's going to be a millionaire in 30 40 years and those are type of people they're going to be like oh the rich people you got to take the money from them like guess what the rich people already figured out how to go around that you know we're not that stupid um and so i just personally i don't think it's a good idea i think it's a good idea because it's the best weapon you got um i think insurance is pretty good mainly because they're hugely corrupt and and i believe in the corruption of the government so so i feel like that lobby will be around a lot longer and be the last one to ever get taken down so there's a lot of like if you get the fees down there's a lot of interesting tax games you could play with insurance rappers like annuities uh life insurance so what have you those i think could be more interesting you know retirement because i feel like they're more insulated from government you know renegotiations than a lot of other tax deals point that you made earlier about like you know you immediately gave yourself like a huge raise by moving to puerto rico really resonated with me and then i didn't even think about the implications of that effectively is like a you know without any capital gains it's you know equivalent to like a roth yeah it's on on steroids it's basically a roth for all your assets um yeah and then the other one the the four percent deal is like it's like a traditional 401k for like 90 of your income because you just you go from 50 to 4 so it's equivalent to like deducting like 90 of your income right so i mean it it is like the retirement plans like 10x um not not to mention you get a compound and on all that too so it's if you do if you pull up a spreadsheet and you have specific financial goals like a lot of people don't realize this but like taxes are such a big cost it's unbelievable like it's not even like you know rick ferry you know he's a marine so i can talk about him but he's a great guy but you know he's always arguing about like a bip here or bip there but let's talk about the 500 bips or you know or yeah you know let's talk about that like like the u.s government is the biggest fee you will ever pay by magnitudes beyond anything else in your portfolio you could pay two and twenty all day and that's cheap compared to what the us government carry cost is right so that that is fundamentally something that you have to solve and that's something i learned from just hanging around a lot of rich people being broke is they're all rich because they figured out how to compound tax deferred and keep the actual money they make but but if you're just hitting w-2 and you're working your ass off and then you finally make it and now you're paying 50 percent of it back to the system you're you're net you're in the hamster wheel forever you're never going to be able to you're never going to be able to get wealth right it's it's not going to happen um and so you if you want to ever exit that path you got to figure out a way to minimize your tax burden and and that's a business is a great way right because that's basically tax deferred long-term capital gains compounding uh which is awesome so you gotta either start a business you have to do a structural move to like a you know a place like i got um really those are your two answers start a business compound tax deferred or move to a tax haven otherwise you're screwed or be rich but being born rich is also the best way to get rich but unfortunately you know most of us aren't in the lucky sperm club uh so we've got to go fast away it's so we got to think about other techniques to get there uh because we just you know we're not being we're not blessed with uh you know being born into the into the family i guess you'd say is there anything you can think of with your portfolio that you're you know you're doing the way that you're managing that you wouldn't recommend to the average investor and i'll give you like one thing that you may or may not agree with so tell me like you know like the trend following like with trend following there's there's like the there's two failure points and we talked about this with jim o'shaughnessy um just and this was more with active investing but you know there's the failure point of the strategy underperforming and the investor making the wrong decision when the strategy is underperforming and then there's also just what can happen with the overall market the market can go down and then the investor can make a bad decision just because of the the losses i mean hopefully trend following helps avoid the worst of those losses but then you know a lot of trend following signals they actually aren't right and they get whipsawed and you end up you know if someone's looking at it that closely they're thinking well what could i have done if i would have just stayed invested so like you know with trend falling is that something you think i mean i know you run trend following strategies within an etf wrapper so obviously you strongly believe in that but you know do you think most average investors should be be doing this so uh i do but it's all about the assumptions right so my first principles on this thing is evidence-based long-term robust to chaos all those basically imply discipline and understanding what the heck you're buying and why right and it's evidence-based so if you go look we actually did a post it's called like trend falling the epitome of like pain or something like that right and we already know that if you trend follow 70 80 of the time you're gonna get whipsawed so 70 of the time you're gonna hate yourself but the trade-off is you pro you're robust to chaos right and so for me i think it's just a matter of can you answer these questions are you an evidence-based investor are you long-term focused or are you a benchmark hugger right do you want to build a portfolio that's robust to chaos or a portfolio that just you know is sounds like what everyone else has at the cocktail party right if you can answer those questions definitively yes i'm evidence-based yes i don't care what the benchmarks are doing and yes i care about a portfolio that's 20-year worthwhile not two-year worthwhile then i do think everyone should have portfolios like that that include trend falling however as you guys know and like that's fantasy world because it says that oh we're all like nice disciplined people that don't eat donuts and work out all day um yeah right that doesn't happen that's why you know 80 of americans are like obese so the reality is if you can't conform to my assumptions of being disciplined to the process being evidence-based etc then yeah that's probably not a good idea you should probably just go buy 60 40 vanguard funds and call it a day and you'll never feel bad about it because when it's blowing up well everyone's blowing up when it's making money you're going to say you're smarter than all the active investors right so um that that one i say it depends on the assumption the only one that i would say even with those assumptions that's just not a good idea and i'm just uniquely in a position to do it would be that private equity component like i would not recommend anybody do private equity uh at all even if you are evidence-based long-term thinking and robust to chaos because i think in general in most circumstances the fees the illiquidity the complexity the taxes all the the baggage that comes with it it's it's basically never a good idea except again in the unique case that i have where you know in small quantities with direct access to the deals unique perspective on the business it might make sense for me to do it arguably that could be considered my worst investment idea too but trend falling i actually think is a great idea for most people the problem is they just need to kind of learn and understand and get educated in the in the dark arts of trend falling unfortunately to your point i mean you guys do as good a job of that as anyone you know one of the things you'll see with a lot of investment managers is they they'll kind of sweep under the rug the bad things that can happen with the strategy you guys are very up front about like here are all the horrible awful things that are going to happen to you if you were to follow this strategy and if you can't stick through it you're not going to make it um it's you've done a really good job of flipping that around i think and really educating people about what your strategies are yes and and that's and that to me is just common sense because ever it's not hard like anyone with half a brain an excel spreadsheet can go do back tests on trend falling on every asset class that's ever walked the plan and be like holy cow i basically get most return with half the drawdown i should do that um it's like a duh right the the problem is that's not the hard part the hard part is sticking to it in the behavior and so that requires like a deep understanding a deep endowment effect and a deep appreciation for just how bad and just how ugly and painful this whole like relative performance and like careerist thing can be like people discount that too much and so well if you want to solve that just run towards the fire right like let's just let's just directly address the elephant in the room this sucks like you know buckle up buttercup uh that's just how life is and we're just gonna tell you how it is and if you're cool with that you understand it well guess what this is the greatest idea that you'll probably ever run across and welcome to the team um but if you can't get your head wrapped around it like it's just it's not going to be a good fit even if it's the best idea on the planet for certain people it's probably the worst idea on the planet that's cool you know all good you had uh mentioned that you started when you started investing you were you know scouring the raging bull message boards looking for the hot micro cap stock probably and picking stocks and you know learning learning the hard way about uh you know trying to pick stocks qualitatively but you know when you think back to what maybe some of your biggest mistakes have been but maybe more importantly what you've learned from them what would you sort of point to well that's easy i mean basically just overconfidence so concentrating my big downfall like one of the reasons i got so excited about investing uh is you know i made a lot of money with huge returns way early on basically betting on like essentially what maps to penny stocks like deep values small micro cap value deals it killed it right that's after 2000 the bubble breaks and i didn't know this after the fact i was just living through like the greatest small mark or small value factor run of all time i just was in the middle of that thinking i was a genius and it kept compounding on itself and i and i kept getting more concentrated i was 100 in like a handful of like less than 50 mil you know small cap ponzi scheme stocks like bitcoin investors today like i lived like a bitcoin crypto person and so i've seen that how that rodeo plays out and that that's what happens right like you have great success you think you're a genius you double down this is the only thing that makes money now i'm all in on this one trade and now i'm super concentrating this one trade and then you end up with like what is your portfolio well it's bitcoin ethereum and a few coins any and you look at people like i don't look at people and say god they're crazy i look at those people and think i feel sorry for you bro because that i did that like i i unfortunately can i did the exact same thing i understand psychologically how you end up in that position but unfortunately that same psychology of how you end up in that position is also how you end up not doing that in the future and why your portfolio will look a lot more like mine right like very diversified tons of weird things everywhere you know tail risk or balance like you know it's just the nature of investing though so yeah and i'm not really sure you can tell people they just gotta unfortunately you know get burnt by the fire and learn it the hard way like i did yeah i had my i certainly had my share of those as well early in my in my career um yeah i wanted to um as we wrap up we wanted to sort of discuss when we do these we always want to cover the idea of you know investments are not just necessarily things that produce great financial returns and so we wanted to talk about like as an example um you know i bought a racing sailboat a long time ago and you know that's about the worst investment you possibly could make from a financial perspective i mean i think that thing you know i pretty much just have to dump money into that thing on a regular basis but i've gotten a lot of benefit from it in my life in terms of having my friends out there and you're having a beer with them and doing those types of things and i'm wondering if there's anything like that in your life and anything where maybe it wasn't the greatest financial investment but you feel like the benefits were well worth it yeah i mean so the problem with me is i i kind of grew up like a depression baby and so so like i was just cultured to not want to spend money because that always equalize pain and not and i have to worry about it even more right so and i can't change my wiring so even today like i you know i could i spend money on on everything that i could possibly want but the problem is i just and i don't know maybe i just got a hard wiring issue but i just don't want a lot of stuff that is expensive right like like what i like is i like i like sports and adventures i like good food i like good gear but you know nowadays because of technology and efficiency with china and like there's so much you know variety out there you could buy the best food the best gear the best exercise stuff the best everything it what is it it's an extra 10 grand a year or so you know it's just the problem is i ca i haven't found myself engaged in an activity that's super expensive uh i guess fortunately like and i would i would love to find one i just by nature don't have any man like i you know i like golfing but you know i live on a golf course i pay my annual dues it's just it's expensive but it's not crazy it's like five grand a year um and i get unlimited golf right okay great i go golfing that's the only habit i have that's kind of a outreach uh yeah i just i don't have expensive taste unfortunately it's like i can't even find a way to spend the money and light it on fire i would love to i just it's just not my personality i don't have anything i like to do that costs a lot of money which is you know this is what it is well you're probably probably better off that way you know they always say you want to be the guy that knows the guy that owns the boat not the guy that owns the boat so uh your situation is probably the better one than mine you can go out anyway yeah yeah and i love boats i love fishing but but the problem is i hate working right and i hate the brain damage of owning assets so so for example like fish right like like i i've always thought like man i look because i actually love fishing right like i used to want to be a professional bass fisherman way back in the day my uncle was a sport fisher and cabo san lucas for 40 years love obsessed with it if i had if i had more time that's one thing if i had more time i might i might do a little bit more but like i went out with a guy here and yeah he charges like for everything like it was like end up being like 400 bucks a person but he does all the boat all the cleanup it like everything you just show up drink beer drink water you know fish for dorado marlin and have fun and it's 400 bucks and i'm thinking like for four hundred dollars even if it was a thousand dollars why would i want to ever do this myself like i would pay someone two thousand dollars to not have to take care of a boat not have to clean the fish like not have to deal with like getting the government licenses that you know i go stand aligned for ten hours like it's just i'd rather just rent it i think i saw the pictures of that that day that that catch you guys had it was all the fish on the like on the table oh yeah yeah we had uh i mean i call them the yeah i call them dorado but because that's just what uh what mexicans call them and i'm used to that from fish with my uncle down there all the time but but you know a lot of people call it mayamahi i think that's hawaiian or something but it's you know the big the big green fish and what it is they got uh big like seaweed patches out here it's called sargazzo it's actually a major problem with like the beaches and like the general the caribbean right now trying to figure it out but what you do is you go find these sargasso patches like out you know 5-10 miles out and you literally just start trolling bait around them and dorado are like heavily they're really into schooling and so once you catch one on the troll like you reel it up to the boat and then all the other ones will start schooling on you and so literally you take bait like right like they're right off the boat you put it on the hook throw it over and you'll see them like go screaming by bite it and like start ripping out lying like and like i mean it's crazy dude like we we literally had three of us in the boat and at one point i was double fisting rods because like the captain's like dude i gotta go gaff this one hold this line so i'm like double fisting like pen pen internationals here like like trying to hold on to these damn dorado it was just it was epic man and we just had to stop because we limited out we're just like hey we don't want to fish the thing out it was crazy uh so there's good fishing yeah those and those fish like getting those on the boat it's a it's tough it gives you a really good arm workout and it's like physical you're sweating oh yeah yeah i mean big game is i mean those are dorado they're pretty small here but if you're ripping like a 50 60 pound wahoo or if you hook into a marlin i mean they literally have chairs and like specialized belts it's hours dude like like my uncle's forearms like if you see his his forearm muscle he looks like popeye because he's you know from cranking the reels over 40 years i mean i mean it's a serious workout it's not like bass fishing or you know trout fishing it's you know use a bass for bait when you're out big game fishing we used to drop uh you know five ten pound tuna uh you know as the bait for marlin and you're like that's that used to be the biggest fish i ever caught now i'm gonna use it as bait like this is good to go i could get into this but i like it's you know big gig fish is awesome i love it so if you guys come down here we'll hit it i'll take you out so we have one um closing question i'm gonna ask it um wes and then um so if you had to impart and we didn't get a chance to ask you this when you were when you first came on the podcast uh so this is our like our new standard closing question and you can go anywhere you want to go with it so if you can impart one lesson that you that you have learned you know from building your portfolio to the average investor what would that be that one's actually pretty easy i would just say know what you own even if it's like delegated through an investment advisor like i think it's always a bad idea when the client's just like oh you're the investment guy deal with it i think fundamentally you have to know what you own period and then the second one is do whatever you can to keep the fees and the taxes to a minimum right if you just do those two things know what you actually own and why let's pray at that and then keep your fees and taxes to a minimum it's all good um and as far as investment philosophy it's also simple buy cheap stuff buy trunks strong stuff and follow trends like you know i could do it in one sentence um so investing is frankly pretty simple it's just people always you know they don't follow the basic rules for some reason it's it's crazy to me but uh in theory it's easy right doesn't have to be over complicated a lot of times simple is obviously uh you know can be better no no no no exactly simple is beautiful and and that's why that's why there is beauty in like vanguard in a sense that at least people can understand what they know the fees are very low the tax is very low through the etf wrapper so it's it frankly it abides my by my basic guidance there because it's because they can check those two boxes which is probably the most important boxes most people should have all right wes well listen thank you very much for joining us this has been great um we appreciate you opening up your your personal books um the financial advisory bill tell katie that you know won't be too bad when i send it across yeah yeah fired on over the problem is it's not it's not tax deductible man you have to charge me as a consulting fee or something uh yeah i yeah i mean let's see i'm always thinking about taxes man i haven't i haven't added any value here so uh but if people want to learn more about uh alpha architect and you know follow you on twitter um you can always where can they go you can tell the audience here yeah just just alpha architect.com uh or you know twitter at twitter.com alfarcatech and then if you wanna launch etfs you go to etf architect those are the kind of three main places you can you can reach out to us all right wes thank you very much we really appreciate it thank you you got it appreciate it guys hi guys this is justin again thanks so much for tuning in to this episode of xs returns you can follow jack on twitter at practical quant and follow me on twitter at jj carbano if 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: AttY51Nb-8o

Length: 66min 19sec (3979 seconds)

Published: Tue Jun 14 2022