Q4 Insights Transcript
investment, investors, markets, inflation, graph, investing, fed, global financial markets, happen, year, stocks, interest rates, largely, growth, line, layers, built, outperformed, curve, earnings
Good afternoon, and welcome. My name is Bill Woodruff. This is the
quarterly insights call for wealth factors review of global financial markets and investing. Before I get too far end two things, I want to clear out some compliance language first. This call is for informational purposes only and may be reported statements made during this call or the opinion of the speaker and are subject to the risk and uncertainties, some of which are significant in scope. And by their very nature outside and beyond the control of wealth factor. There can be no assurance that such statements may prove to be accurate in actual results and future events could differ in a material way from said statements. Historical results are not necessarily indicative of future results or performance.
I appreciate everybody tuning in. And let me jump right in with some quick background and introduction. So I've been focused pretty narrowly in investing for about 20 years now, a very broad experience set that includes building trading systems for a hedge fund manager research and due diligence across most investment categories and types, including private equity, private credit, private real estate,
equity strategies, and a fair amount of debt and fixed income investing. I in my professional background, I've launched and been responsible for the investment activity of a mutual fund. I started well factor in 2017, largely for the purpose for of removing what I believe are a variety of unnecessary layers, as well as complexity in the average investment service that's provided to most investors.
So WealthFactor is a firm focused on building in tools and technology specifically designed for the end investor. It's my belief, there's a lot of technology and innovation going on right now. However, it's largely focused for the benefit of the investment professional. And really, the industry has been built that way for a long time. And I think because of that, it's why we're seeing some of the polar opposite services come out whether it's the Robin Hood's where it's really built for consumers. You know, I think that the tough part about that polar opposite, consumer driven, technology driven product is they aren't being designed in ways that are likely to lead to long term and sustainable positive outcomes from an investment perspective. They in Robin Hood is the poster child of this
encourage activities that probably aren't consistent with the types of investment tenants that have led to sustainable and long term investment success.
So, to just briefly to share a little bit about how we think about the world from an investing and global financial market perspective, well factors investment philosophy is called Risk smart. And it's it draws from a variety of
large global asset management firms, investment techniques, but would generally be categorized as evidence based, and largely passive or buy and hold oriented. And risk smart has three different focal points. The first is being portfolio smart. And so some of the key elements there are keeping it simple. Avoiding complexity is a, I think, a critical element in investment, investing success. And when there are a lot of layers when you hire a financial advisor who has a firm that he works for, and then they use it outside mutual funds and potentially other types of funds, really quickly the layers and then therefore the complexity start to compound layers are expensive, in addition to being complex. So avoiding layers is a key element of being risk smart. Additionally, and this tilts more to evidence based and passive investing. We think it makes sense to generally try to avoid picking and or timing when it comes to the execution of the actual investing. The second component part is fee smart. So getting having the fees that one pays
make sense relative to the services being provided. getting exposure to a diverse portfolio of stocks is easy to do with ETFs and very cheap. And so I think it gone, the day's should be gone where somebody pays 1% to an advisor who's largely investment oriented, and then goes out and puts money in other funds. You know, granted in the last several years, the industry's really shifted to a focus on selling financial planners and financial planning services, as as an attempt to justify and maintain high margins and high fees. And there's some there's definitely some validity and value to those sorts of fees. But being fee smart is really understanding the the layers of fees that are oftentimes in the industry, and really making sure that there's a value for the services that are being provided. The last element is in being smart is tax smart tax should not be an afterthought, but oftentimes is in a focus on selling performance, which I think is a is part of what the industry, what a lot of people assume the industry should be doing is trying to sell performance or provide some sort of outperformance. And I think a lot of the things that a lot of the activities that one might do, including picking or timing, are pretty tax inefficient generally, and aren't all that tax smart. And so here at well factor, we've built systems and tools, where we take indices, and then utilize our tools to do things like gains avoidance on a personalized level, as well as tax loss harvesting. So let me transition into some of the prepared comments for what's going on out in the markets. So I like to start things off kind of at the highest level, and then dig in. And as if you've participated in any my calls before, I never really dig in too, too close into what happened in a prior quarter. I think those sorts of there's there's so much information that's constantly hitting investors from all angles, whether it's salesman, aka financial advisors trying to pitch a product, or a service, or the media. And I don't see any value to spending a whole lot of time on what happened last month, or what happened last quarter specifically, I don't look at it as useful or predictive in helping us going forward. So with that, the first page here, I'm going to focus in on the stock part of this. And basically what I'm showing here is the one year, one year of dispersion for stocks, and so you can see a high of this go only goes back to 1950. So if you actually went back into the Great Depression, you'd see slightly greater extremes, but not by a whole lot. So up 47 In the best one year and down 39% In the worst one year.
And so I think it's always important to think about investing as investing, to the extent that you're worried about what happened in a quarter or trying to predict what might happen in the next quarter or next one year, I would argue that's not really investing that speculating, it's a very different animal and should be thought of very differently. And in all my experience, it doesn't offer it isn't often sustainable, anyways, and probably isn't a good use of time.
So the what I would highlight here is that is really that investment element in that if you're buying and holding a diverse portfolio of stocks, and this particular is for stocks as the s&p 500, which is generically used, the longer you hold those, the smaller the dispersion of historical outcomes has been and so just let's just start out with thinking about things with the long term time horizon.
This is one of my favorite studies. And the orange bar is the average investor. And it's it's a study, it's based on a study by a company called dowel bar where they take the net aggregate mutual fund sales, or purchases and redemptions and exchanges each month as a measure of investor behavior. And and then we then compare that to what do indices do. And what this study suggests is that because of us being humans and thinking we ought to, and probably the industry and the media conditioning us to think we should be picking and timing or trying to find the next best manager or whatever that might be. This study suggests that because of those activities and human behavior in general, the average investor or most investors underperform.
Properly diverse buy and hold portfolios. And it's my belief it's largely because of those activities or the idea that they ought to be trying to be a benchmark, but the practical reality is analyzing six or more percent per year is is oftentimes more than enough to meet
people's goals and objectives or whatever their positive outcome might be. And it's far less, it's far simpler, and far less risky in terms of the negative potential outcomes.
It last quarter, I spent a little bit time looking at earnings. And how the markets have done after hitting all time highs. And we've generally seen, you know, markets continue to do well,
since the last quarter, and I wanted to add a little part to that, you know, it's I hear a lot of people say, well, the Dow is at 30,000, it's an all time high. And really price is not hugely useful as you think about it, it's really, you have to think about price change over time as relative to the earnings of the underlying businesses. And so, in this graph, I think it's if you're thinking about the Dow as being an all time high of 30,000, or wherever it is 36,000. It's,
that's not really useful information. And this graph, I think, does a nice job as to explaining why so we look back and you know, all the way back into the late 80s, we have earnings per share, on average for the s&p 500 at 25. Well, we fast forward to, you know, potentially in 2122, it's approaching 10 times as high. So if you 10, if you took the Dow at 3000. And took it times 10 10x return that takes it to 30,000. So I think it's important to acknowledge that the there's a link between earnings and earnings growth and the prices of markets over time, certainly in this what this is what makes investing so challenging is the market global, publicly traded global financial markets tend to be a voting machine, and will fluctuate very dramatically based on changes in recent near term news. So So oftentimes, discipline isn't as easy as it sounds. Another thing I've spent time on last quarter was growth versus value over time. And I found this graph since then, that looks much further back. So if you look at the last 10 to 20 years, you see kind of an oscillation between value outperforming growth after the tech bubble bursting, and then growth outperforming value sense and really specifically, in the last five years. And I see a lot of investors leaning very heavily to growth stocks today. And it's really, I think it's human nature to see investors
gravitate to what did well yesterday. But generally, generally, with long term time horizons, those sorts of tendencies haven't proven to be useful. And then this graph, what this graph indicates is,
not only this, should one probably be at best balanced, in my opinion between this is a little bit of my opinion, and a little bit what this graph shares, but be balanced in their allocation between value and growth, but long term historics actually tilt to value overgrowth. So for investors that are tilting very heavily to growth oriented investments today, I think that's I would strongly encourage them to reconsider those decisions in favor of something that's more neutral. For two reasons. One, growth has had an incredible run in markets, all types of markets tend to have cycles, and to the law in over very long periods of time. Value has tended to outperform growth.
So growth in value is an interesting thing to kind of pay attention to us and non US as another thing, and law. And there's long term cycles for both of them that I think are very interesting. And it's easy, especially during very strong periods for particular, especially for what's what's easiest for us to understand, which would be large US companies that are growth and exciting, growth oriented and exciting stories. But the this graph here is the purple are periods where non US stocks outperformed US stocks and the gray is when US stocks outperformed non US stocks in the last several years. And then as you can see in this graph, you know, the over the last 10 years plus, it's been us has largely outperformed non US. But I think this graph helps illustrate that that's not always the case. And I think it builds a case for the inclusion not just for the diversification benefit but probably for more reasons than that. Inclusion of non us in a in a properly diversified portfolio.
Shifting gears over to fixed income or debt. And I'm going to, I'm going to take a pit stop in with inflation. So inflation was a really hot topic in 2021.
And this graph sort of shows why we saw a pretty material spike to levels that we haven't seen since the 80s. In the measures, inflation inflationary measures, which is material, the thing that I I would caution people against is drawing the assumption that that line will continue in its path. I mean, if you go back through multiple decades of spikes and inflation, every single one of them ended in inflation falling. And so we don't have no one has a crystal ball, no one knows what's going to happen with inflation tomorrow. And I think it's a mistake to assume that we should try to know, and base investment decisions on that.
So there's global financial markets are incredibly complicated. What drives asset prices and inflation is, is there's too much too many variables that we cannot predict that would be that will drive where inflation might go. And I think, again, to let this have this
be a reason to deviate from an investment plan is likely a mistake. Okay, so transitioning over a little bit more into the interest rate side or fixed income side of what's going on in financial markets. So the Fed gets a lot of attention, rightfully so. But it's important to note that the Fed really influences interest rates only at the very short end of the curve, minus perhaps our asset purchasing programs, which can which they're unwinding currently, or at least indicating they're going to accelerate unwinding of some of those. But just keep the focus simple just on them setting short term interest rates. And so this is the graph of short term interest rates going back to 2000. We can see the long period after the financial crisis where they're zero, and then they came back to the zero following the the onset of the pandemic.
The dotted lines, the first one is the blue one is the expat what the Fed is indicating. They've the Fed meets, they share information in that meeting, and then they share their their minutes. And so the blue line is, represents the their, what they've shared with with global financial markets, and investors and the green line represents what the market actually believes is going to happen. And the reason why I think this is important is because markets, global financial markets are incredibly efficient. And as soon as the Fed minutes release, gets released, within hours, or potentially even faster, the information is digested. And after time, there's a ton of volatility on that one day. But for most investors, minus those that are, you know, built businesses around trying to anticipate what's going to happen and pick and time investments.
For most investors, this information isn't useful at all, in my opinion. And that's because of how fast this information is already getting priced into markets. And so when we think about bonds, which is where we're going next is and not wanting to own a bond, because of the concern of inflation or rising interest rates. Well, we don't have any information that everybody else doesn't have. And that's largely priced into markets already. And again, I think it's a mistake to be trying to be predictive around what's going to happen. So I think that one ought to better focus on what's the right amount of risk for each individual and their situation or each entity in its situation.
And not spend their energy trying to predict what might happen with inflation and or interest rates. So this is another graph that I think is informative, and probably builds a little bit of a case as to why investors may want to maintain or considered maintaining exposure to fixed income, if that is a good fit for them. So the purple line on the bottom is August of 2020. And the the x axis is taught as length of maturity. So on the far left, it's three months and so effectively what the Fed can control and then all the way up to 30 years on the right. And so the second line, the blue line is the year end December 31 2021. And so we can see visually what happened to the shape of the yield curve. So as inflation picked up as the Fed indicated, they're gonna raise short term interest rates. We saw market interest
rates start to move in anticipation of those, those increases in the short term rate. And so we saw, you know, were in August, in 2023 months to seven years, there was no yield 36 basis points, that's a fair amount of interest rate risk and getting very little to no compensation beyond what you can get in cash and taking no interest rate risk. Well, fast forward, you know, just barely over a year later, that seven year yield is now up to 1.44%. And so if you think about that, in terms of interest I'm receiving it's fairly material in terms of the difference between 36 basis points, point three 6% and 1.44%. And so, you know, I, again, I'm not trying to make a case that I believe interest rates are going to fall or injury, interest rates are not going to rise, simply reflection that the I'm getting far better compensated today for taking a bit more interest rate risk than I was in August of 2020.
It's interesting to see that the you know, if we go look all the way back to December 13, when the Fed had rates at zero following the financial crisis still,
it just exactly how steep the shape of the curve was, at that time, relative to now, I think you could also conclude that, you know, with the Fed likely, or at least indicating next year that they're going to raise short term interest rates, the most of the rest of the curve is probably factored that in already, what's like this, you know, granted, so many things can change, but let's pretend for a second other things, markets don't change. But so the Fed and the feds, the only thing that acts from here on out the curve will actually flatten assuming no other changes and all the things that will likely change in terms of the direction of the stock market and inflation etc that will drive all the this entire curve between now and then again re emphasizing exactly how complex this is and how impractical it is to try to base investment decisions on predicting
so that concludes the prepared comments. I am if there if there's I have a chat setup. And so I should have mentioned on the front end apologies. But if there are any comments or questions, please feel free to post them I'll hang on the line for a little bit and would welcome those comments but if if you've but appreciate your attendance and hope you have a great day if if you don't want to stick around