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![The Fear and Greed Index-Discussion with Jason Meshnick | Ep90](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
11 hours ago
11 hours ago
In this episode of the Market Call show, I sit down with Jason Meshnick, a market maker turned fintech pioneer whose intriguing career journey has taken him from the bustling trading floors of the early 2000s to the cutting edge of AI in finance.
Jason recounts his winding path from a philosophy major in small-town Poughkeepsie, New York, to becoming a Wall Street trader and, later, a leader in tech for trading. We explore his transition to automated trading as floors shifted online trader jobs contracted and his move into roles in finance education and media.
Jason offers a captivating look into the evolution of markets and trading strategies, from the dynamics of floor versus electronic exchanges to analyzing sentiment shifts through media platforms and tools like CNN’s iconic Fear and Greed Index, which he helped develop.
Across various sectors of finance, Jason’s experiences highlight the human element alongside technical progress.
SHOW HIGHLIGHTS
- Jason Meshnick talks about his transition from being a market maker on Wall Street to becoming a fintech expert.
- We discuss the changes in trading desks from the early 2000s to the present, emphasizing the shift towards automation and a reduced number of traders.
- Jason describes his unconventional career path, moving from a philosophy major to a Wall Street trader, and his eventual move into fintech.
- Jason shares insights into the development of CNN's Fear and Greed Index, including the collaborative efforts and practical constraints faced during its creation.
- We explore the shift from floor trading to electronic markets and how enduring principles of market trading continue to influence career paths in finance.
- Jason recounts his personal and professional journey, including his move to Boulder, Colorado, and his involvement with the CFA Society.
- We dive into the intricacies of building decision trees for financial data analysis, comparing their transparency and reliability to large language models.
- Jason reflects on his editorial role at TheStreet.com and the importance of market sentiment analysis in shaping financial media platforms.
- We discuss the role of experience and a deep understanding of market nuances in successful investment strategies.
- Jason explains the seven indicators used in CNN's Fear and Greed Index and how this tool helps both sophisticated and retail investors make informed decisions.
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TRANSCRIPT
(AI transcript provided as supporting material and may contain errors)
Louis: Jason Meshnick how are you?
Jason: I'm doing great, Lewis. It's so great to see you.
Louis: I know I'm so glad to finally have you on the podcast. You know, just knowing you for so many years and you know, knowing that you have so much knowledge out there with regard to investing and just your overall creativity, I had to have you on and I'm so glad that you came on.
Jason: Well, and one thing as you know from from our relationship, I've always gotten so much out of talking to you and I always learn something just through our conversations, and I feel like by the time this podcast is over, I will have five new ideas to to go after and try to figure out what to do, how to make them all reality oh god, I hope so, I hope so.
Louis: it's all about the ideas you know exactly. It was funny. I asked you to send me a send me your bio and I've known you for a long time and we met years and years ago at a CFA meeting I think we were both on a board for the CFA Colorado or Denver chapter and and since then we've worked together in many capacities. But I didn't know a lot of things about you that I should have known just reading your bio. I knew that you spent 20 years in the fintech world and I didn't know that you were also working on some AI investment analysis, which I'd like to learn more about, and that you really have a lot of passion for educating. And I guess your coworkers asked you to write a newsletter. I had no idea about that and you know now what is this about. Vampires are rich. Why are vampires so rich?
Jason: That was one of my favorite things that I wrote. Yeah, if you want to cover that now, we can, or we can talk later.
Louis: I think we'll circle back to that, but I was a little what's that about.
But yeah, and now you're doing some teaching at CU Boulder, teaching finance. We've done a little bit of lecturing together at the university level DU and things like that and I've always enjoyed watching you teach because you seem to captivate the kids. Well, they're not kids, they're young adults with your style. So I'd like to learn a little bit more about what you're doing there. And you are a Wall Street trader and market maker and there's a lot of things that you know about microstructure and investor psychology that I want to kind of touch on too. So, but the big thing is understanding that you were involved with the CNN, that popular feed and fear and greed index back in 2012, I guess that was put together. So I don't know. Maybe what we could do is talk a little bit about your background. I mean, I kind of covered it a little bit, but just maybe you can tell me a little bit about you know, share with the audience, your you know how you got in this business and kind of what's been your progression in this business.
Jason: Yeah, so my guess is that everybody says this, but I came to it from a slightly different path, not that not that, you know, I didn't get out of college and immediately go to Wall Street, that's. That's a pretty normal path, right? But I was a philosophy major and I'm far from a philosopher. But I think what I took away from my undergrad as a philosophy major was just sort of a way of thinking, right, as opposed to being sort of a business person thinking only about money, it's more about thinking about other kinds of things and things that drive people and being able to draw from communication and trying to understand what people think and how they think and why they think, and I think it was one of the things that really fascinated me. Also, being a child of the 80s, you know Wall Street was so important. There's so many movies about it, right from from the Wall Street movie to I don't know. It seemed like every other movie that came out was about how to make millions of dollars on Wall Street, and so, of course, I wanted to be part of that.
Having grown up in sort of a backwater, poughkeepsie, new York, I always wanted to go live in the big city, yeah, so that was sort of my start, was coming at it from kind of a weird direction and I ended up immediately going to work for well, a firm that no longer exists for a couple of reasons, but it was the trading arm of a New York specialist firm. So the specialists were downstairs on the floor of the New York Stock Exchange and my boss was one of their customers and he just worked upstairs in their clearing division and he was trading his own money. He had been a floor broker for 20 years, owned two seats, sold his seats, did pretty well on them, and then decided that he was just going to live the rest of his life as a trader. He brought his son in and then eventually I was working as a runner so you know fourteen thousand dollars a year and just wanted exposure, just wanted to be part of the action. Right, I love the action. I was so excited about just being there, the history I love the history of things.
Um, I probably should have been a history major and so, just being in that environment, I ended up getting picked up because I was. I was pretty cheap, right, so they didn't have to pay me much and I ended up working and really falling in love with being a trader and learning about how the market worked and how floor brokers could help make these trades. We had a network of 20 floor brokers across the New York Stock Exchange and what was then called the Amex, and some of the regional exchanges too, so that we could trade and we'd strategize every morning and then make our buy and sell decisions and then, throughout the day, update them as needed. I'd like to say that we were the high frequency traders of the time, even though our frequency wasn't that fast, but we were sitting on both sides of the bid and the offer.
Louis: Boy.
Jason: times have changed, huh offer Boy times have changed huh yeah, I mean that's yeah, I like to say. When I, when I started in the business, there were people there who'd been on the floor in 1929. And so much of the floor of the New York Stock Exchange looked the same as it did in 19,. You know, if you, if you were to go, take Jesse Livermore and drop him, you know from 1929 and just drop him on the floor in 1992 when I started, he'd have been like I don't know what these TV things are that are all around. He wouldn't have even had that word, but otherwise he'd have been able to run into a crowd and know exactly what to do. And by the time I left in 2002, well, there wasn't even a crowd, right? I mean, everything was different about the floor of the exchange. I was a market maker on a fully electronic stock exchange, so the principles were all the same, but everything else had changed. It was so different.
Louis: Oh, that's a big part of what I wanted to talk to you about that the principles are all the same. So, because I was just listening back to some of our, or looking back at some of our conversations just to prepare for this, and we've had a lot of conversations in the past where you were really outlining like I want to capture what I saw, those principles that I saw on the floor, and I want to capture them today and that's kind of driven a lot of things that you've done. So maybe maybe you can tell me like just a handful of what those principles are that you've noticed are like still the same now that probably will never change.
Jason: Well, so I'll caveat this by saying I've been out of the markets for a number of years, right, so I left, I left trading in 2002. And then I was still, you know, still kind of a pretty active trader, investor for the next 10 years or so. But then life gets in the way and I'm just very busy, and so I've sort of shifted my focus in a number of ways and I'm honestly really interested in analysis now and thinking about market sentiment and what investors are doing and how investors think about the market. And I now, when I trade, it's opportunistically right, I'm not in there every day, I'm not trying to make eighths or even pennies.
Louis: I guess we should probably. Oh, I'm sorry to interrupt you there.
Jason: Go ahead.
Louis: I was just gonna say I guess we should probably back up a little bit and talk a little bit about, like more about your career progression, because you moved into from trading into fintech and, and from fintech now to working at the streetcom for and as an editor, so, and which to me makes a hundred percent sense. Um, just from what I know from your talent, your talent stack, so maybe you can kind of finish that progression a little bit. So, to where you are now, yeah, sorry, yeah, totally.
Jason: So my progression is really. I mean, there's there's a couple things that run through the entire thing and I think a big part of it is analysis and being excited about, about thinking about the markets right, about being being in some ways just part of the culture of it right. So that's been the big thing that's run through my entire career. But in 2002, my wife and I we weren't married at the time we were thinking about you know where will we end up, and we decided that we either end up in New Jersey or we could move somewhere that we wanted to live. So we did a search all around the country and decided we just sort of threw a dart at the at the wall and said Colorado seems pretty nice. So we ended up here in Colorado and it's been the best move.
Louis: Man, that was a lucky dart throw. If you ask me, it's a lucky dart throw, I think.
Jason: I think it was guided by my wife's hand. She may have said I'll take that dart and I'm going to place it right here just at the foot of the Rocky Mountains. So she'd been out here and visited and said Boulder is going to be the place where Jason will be happy and we'll make this happen. And so we moved out here without jobs. I quit my job as a market maker in June of 2002. And the market was changing so much at that time it was definitely becoming harder to make money, and so I was ready for a change. I was ready to do something different. You know, when I left, there were 10 traders on my desk and probably another 30, 20, 30 on our over-the-counter desk.
And when I went back, seven or eight years later and I'll get to this, but when, when I was working in FinTech and I went back, visited my old trading desk, there were three people and a really large computer and, rather than taking directional bets on the market, they were doing arbitrage. And they were. They were, they were working the order flow and they were figuring out, based on the order flow, how long or short they were going to be. You know, sort of using quantitative methods to understand. If they felt the market was going up and they were going to end up being more short and more short, they would have to think about the Delta to the market and try to get long ahead of those people so they could be selling to them.
So it became in some ways probably a much more intellectually engaging thing than just sitting saying, oh someone just sold me 1,000 shares, I have to get out of it now. You were thinking ahead of the market. In many ways it was really cool. I probably would have liked it a lot, but it just became a really different animal. It was much more arbitrage as opposed to directional trading, which is really what I knew. So we moved to Colorado without jobs and in doing that that's when I met you, lewis is. I was pretty engaged with the CFA Society despite not having a CFA I'll throw that out there. I'd also just finished my MBA at NYU. That counts.
So, I think they let me in, but that was about it, and they let me even onto the board.
Louis: Yeah, yeah, you're a very likable guy, so it was a pretty easy decision. They're like he doesn't have a CFA, but he's a pretty cool guy. We'll let him in anyway.
Jason: I think he also said this is a guy that we can make do all the all the programming. We can make him call all the all the people that we don't want to call and try to organize meetings. And they thought I was an event planner, which it turns out I'm not. I'm just not a good event planner. My wife can tell you that Actually, lois, you did kind of the same. We were organizing all the CMT meetings.
Louis: Oh yeah.
Jason: Like, yeah, yeah, yeah, let's, let's go call some people, um, yeah, but so so it took a while and I ended up finding this job here in boulder, uh, for a company called wall street on demand and for those who are not familiar with wall street on demand, it has a new name um, it became market, uh, no, became wall street on. It was wall street on demand. Then it became market on demand once I, once market bought us and then eventually it became market on demand once market bought us, and then eventually it became market digital, when they decided that it was really time to think more broadly than just web and think broadly across all digital formats video, et cetera, and advertising. And I stayed there for 19 years. Where, louis, you touched on the AI side of what I did and so this is one of my big jokes is that I like to say that I was the world's most widely read analyst, if not the best, and the reason why I say that is because over the 19 years that I was at that company, I built something like I don't know 200 different. I call them only because of today's terminology and the way that people talk about markets now, about technology now. I call these AI related, and they really are simple. They're very much rules-based AI, so sort of traditional AI, not these large language models that we have now that are in some ways more sophisticated but really not as good.
So what I was building were these big decision trees, and these decision trees were things where you would, using your financial knowledge, you would say, okay, I'm looking at some financial data around a company. What do we need to know? Well, let's start with the valuation. Is the stock what's the PE ratio? Is it a high PE ratio or a low PE ratio? How do you define a high PE ratio? Is a high PE compared to its average for the last five years, or is it the highest in its industry? Right, you can look at things cross-sectionally or historically, right, but both ways time-based or versus peers, and so we would do things like that and we would chop up the market and try to understand. You know which stocks were good or bad, but it wasn't necessarily for an investment perspective, right? This was because what we were doing was for the Schwab's and TD Ameritrade's and all those companies. We were building the news and research portions of their website, and so I and my team were providing that research, and so a lot of the texts that you would see on that site was completely dynamically generated.
So, very simple, rules-based AI. And I say it's better than large language models for AI, because large language models you never really know what you're going to get. It's a bit of a black box, right. So what we could do is I would create text that was locked down. I knew exactly what it was going to say. I didn't know what the data was that was going into it, right, I didn't know if Apple had a high PE ratio or a low PE ratio, but I had rules around defining what was high and low.
And so when I would go to the compliance departments at Schwab or TD Ameritrade or Fidelity, et cetera we worked with all the US brokers, many of the Canadian brokers, australia, others I would go to the compliance departments and they would say, well, how do I know that you're not going to say something silly or that's incorrect?
And I said, well, I'm going to give you the entire decision tree and you're going to be able to look at the decision tree and understand what it says.
So the only way that my model can be wrong is if I have a bug and there are bugs all over the internet, so I'm as fallible as anybody else, but we're going to do our best not to have those. And then, secondly, if the data is wrong and if the data is wrong, well it's wrong all over the website too, and we're going to fix that. But generally, 99.9% of the time, for 99.9% of the stocks, what we say is going to be accurate. It's going to be correct, it is going to be as unbiased as possible, because I'm not trying to tell you, as a value investor or growth investor or whatever, what you should do. I'm just trying to describe the various aspects of the stock. I wasn't there to give you a buy, sell hold recommendation. I was purely there to help you, as a self-directed investor, understand more about the stock, about the company. You know you brought up something that's really interesting about that.
Louis: I mean, I have to. You know you're talking about large language models and it's a little bit of a black box. We don't really quite know, and you're dealing with these big decision trees, or you were at that time and it was traceable, like you could trace the logic which made me think, okay, we have data and the data can be right or wrong, and then you have the logic, and the logic can be right or wrong. And I think that's one of the things that I always have a little.
I'm having a little bit of an issue with with some of the AI is the logic element of it, because you like how much of it is curve, fitting what is real behind it, so we could use it. I had a tech executive tell me one time that the big thing with AI is it can help us with speed and it can help us with accuracy if we use it correctly. But it's not necessarily like you still need human thought. You still need that ultimate human element to it. That's my personal opinion on that. But the fact that you were using decision trees early on, you know that and just to get information, that way you were speeding the process for the investor, basically.
Jason: Right.
Louis: Like they would spend a lot of time looking for all those things. But you systematically sped it up, which is a a big thing for and we and we all have that now that's and it's, there's just like different flavors of it, um, so, uh, it's, it's that whole. It's a whole. Nother topic we can get into a little bit later. But I, I, uh, I remember you talking about that when you were doing working on those projects, um, wondering where it would go next. Um, you know, as far as that goes, but getting back to your, getting back to your, your story, let's get back to your story. Yeah, sorry, keep getting off track.
Yeah, that's okay, yeah.
Jason: So while I was at that job I did, I did a number of things. I mean it was really, it was really an exciting job in so many ways. But the two big things that I did were really this you know, running the natural language generation product right. This thing we called it smart text, um, and so that's that ai thing. But then the other thing that I was so excited about was doing education right and and our. So this started back in 2006 or 7, um, I started doing brown bag lunches where I would just put together a presentation and teach our developers and designers and engineers all about everything they needed to know about investing, not so they could go out and make a million dollars, but rather so that when they were building the tools that we were all using, they understood their subject matter right, that they could be engaged with the topic and identify with the end user and really understand why a PE ratio mattered or why a chart mattered. Simple thing, like in design, you'll notice that there's a lot of white space on many pages and they talk about that as being good design. It's actually a really bad design for investors and the reason is well, depending on the type of investors, but for slightly more active investors, engaged investors, what they want is information dense things, and so I would help steer our design team to create things that were a little bit more information dense, an example being a chart, a price chart. You don't want to have to scroll up and down too much to be able to read your price chart on your Schwab account. You want to be able to type in NVIDIA and load up a couple of indicators that you want to see. Put your MACD on and then MACD is a lower indicator, maybe an RSI, maybe whatever Put those things on there and be able to, in one view, understand the trend, momentum, volume and volatility from that stock right. That was another thing that we did when we rebuilt Schwab's charts. I'm kind of proud to say that Yahoo actually stole this, but we broke the indicators out.
Previous big charts started this. They said indicators are either separated out as upper indicators or lower indicators, and that doesn't tell you anything, and I'll credit John Bollinger. I learned all this from him is really you know, people should understand what goes into the indicators. They should understand as much of the calculation as possible, right, what the inputs are and what it's giving, what information it's giving you, right, and then separate those out into different sort of you know I'm using the term factors very loosely but into the different factors of technical analysis. So, is it trend, is it momentum-based, is it volume, volatility you can come up with others as well but, right, where does it fit? And if you're looking, if you put a bunch of indicators on a chart and it turns out that they're all trend indicators, well, you really have one indicator and so you're not getting a full picture. So go put some momentum indicators on there to understand the speed and whether the trend is about to be exhausted or not.
So it's things like that that I really wanted to help both the end user of our products as well as the the, the person who was building the products, understand so. So I ended up writing for about three or four years. So we started that in 2007, but it was. They asked me to put it on hold after a while cause it was taking away from a lot of my work. And then, in 2018, our CEO came to me and she said you know, you used to do this, these brown bag lunches. I would really like it if you would just write. Just write a newsletter for the whole company.
The question of the week, so Fridays. I'd ask the question, and it might be how many? How many stocks are there in the S&P 500? And I haven't looked at the number recently, but I think the number is still 501, right, it might even be higher, but there's only 500 companies in the S&P 500. And so that's the distinction. There's 500 companies, but some companies have multiple classes of stock that may be in the S&P. It might be 505 now I can't remember. I have not looked in a long time, but that was effectively the answer, and so it became just a really fun thing to write the answer, and so it became just a really fun thing to write.
Yeah, so teaching people about vampires right, became a way of telling them. Why are vampires so rich? It's simple They've been investing for hundreds of years and so they've had time to let their money compound. Assuming that Vlad the Impaler, the first vampire, he was a prince. Let's just put a number on that $10,000 in today's money. What does $10,000 grow to over 500 years? It grows to trillions of dollars. And then, if you spend 1% of that every year, how much money are vampires spending? Today, vampires are spending billions of dollars. Vampires are probably supporting our economy.
Louis: They've got to be the richest people in the world. It's like puts vampires, yeah yeah, it puts elon musk to shame, I mean really so maybe elon's a vampire yeah, you never know, maybe a little similar, I don't know. That's that's wild. Well, um, so you have this creative side to you. That's that's driven that. And then how did you get um, like, was it just a natural progression for you to do what you're doing now?
Jason: or maybe you should tell us a little bit about what you're doing now yeah, so so let's get to what I'm doing now, because that's important and I know that, um, they'll be watching this and they'll they'll kill me if I don't talk about what I'm doing now, because they also really like it. Um, I'm having a lot of fun. So, you know, you go through ups and downs in your career and I definitely there were times when I absolutely loved trading and absolutely hated, and that might be the same day. I might love and hate trading.
Louis: In.
Jason: FinTech it was. I might love a year and hate the next year and, you know, love the next year for that. It was project to project and here you know right now what we're doing. So I work for I'm currently the managing editor of the street pro and so so you are probably familiar with the street. Jim Cramer founded it back in I don't know 1997 or 1998. It was really the first, the first and best of its type where you could come and get financial news and information. And then, not long after they started the street, they brought, they created something called real money where they brought in people like Helene Meisler and and Doug Cass and they would create something that was more of a subscription product but more of a newsletter, newsletter product where Helene would write top stocks is what it became and Helene would write her brand of you know market sentiment analysis and it was really great.
And Jim Cramer left about two years ago and I've never met Cramer. I've heard him speak before but I don't know Cramer, don't know a lot about him. But I'll say this is a business that was 25 years old or is 25 years old now, and it's going through a lot of change. So we're trying to figure out what will it look like in the future. And one of the big things I love this I quote it all the time but Barry Ritholtz was one of our. I believe he was a street contributor at one point. Barry Ritholtz has gone on to become a Bloomberg contributor and have his own money management firm, but earlier in his career, I'd say, he made his name at the street, as did a lot of people, and so he calls the street the Motown of Finance and he says that the Jim Cramer was sort of this I think the name is Barry Gordy character who you know sort of larger than life in many ways, and he brought people in, brought people in and he made them stars right, and so we did the same thing, or he did that at the street, and so we're in the process now of trying to do that again.
We have great contributors. They're all wonderful and they provide really great perspectives on the market, and sometimes they disagree and sometimes they agree. I asked a few of them to write about GameStop recently and it was really great to see the kinds of things that I got. But we want to get back and we want to make these people, we want to make our contributors, who are such great analysts, stars again, right. So we're trying to change a lot of things that we do in the business. In the past it was really Jim Cramer. The last five years, I'd say, jim Cramer became our number one star. I want Helene and Doug and Sarge and Rev Shark and I could go through the whole list Chris Versace I want them all to be stars too, and they want to be stars and they are because they're so good. So we're working at how we can do that, how we can elevate the content, not just to make the contributor stars, but really to showcase how good they are as we go and help more investors to be self-directed investors, be more successful in their trading and investing. And I say we have two different types of products, really Our value add.
If you are a trader, a self-directed trader, you might spend your time on Doug Cass's community, right? So Doug has his daily diary. Doug's a hedge fund manager. He's out there from three o'clock in the morning. He's sending us stuff. It's crazy. The editors have to be there editing and putting it up from. They start at 5.30. So the editors are in there at 5.30 in the morning putting Doug's ideas up all the way through the end of the trading day, and then in the lower half of that page is a community where we have many, many people from the community, some of which I won't say any of their names, but some of which are fairly big names in finance and investing. We know who they are.
On the site they really the community ends up feeding on itself and providing great ideas just among each other. There's one guy who talks a lot about cryptocurrencies. We don't have a lot of cryptocurrency content on the site. We're working, we're going to be adding some, but this one person alone actually provides some of the best crypto content I've ever written, and he's paying us right now, at least for now us right now, at least for now.
And so the other products that we have. We have where you can get trading ideas or investing ideas. We have some people who are a little bit more technical focused, some who are more fundamental focused. We have one person who does really well providing dividend ideas. Another person is really great at more fundamental, value-based ideas, but then we have a whole portfolio.
You can come to us and we have Chris Versace runs our pro portfolio, where we help investors understand not only how to put together a portfolio and they can just copy this entire portfolio but, the thing I love about it most, every week Chris writes a weekly update talking about what he sees in the market, what's coming up, economic things that are happening. But then he goes through all 30 holdings. He tells you the investment thesis you know I'm big on the investment thesis, lewis right, you should have a thesis, you should know why you're investing something and you should update it frequently. Right, chris updates the investment thesis every week. And then he tells you what his target price is and his panic point, his stop right, where he's going to realize that his thesis is incorrect and he's going to re-evaluate, probably sell the position. And then he just goes through and gives you sort of a weekly update and says, yeah, here's what happened in NVIDIA. Jensen Wan was out doing whatever he did. He spoke to these people.
So that's what we're doing and the product is great and we're, you know, really excited. Now we have a lot of energy around what we're doing and how we're, how we're rebuilding, um, building I keep saying rebuilding like really we're taking what we had, which was a solid product, and we're just building off of it. We have, uh, later this month this will be the first time I've kind of mentioned this Um month this will be the first time I've kind of mentioned this Our marketing team doesn't even know but later this month we're doing a roundup, or we're actually calling it the quarterly call. So this will be the end of every quarter. Now we're going to have four of our contributors come on and really just talk about what they see in the market and have kind of a little panel discussion, and so that'll be really exciting, but it's things like that that we want to do.
Louis: Yeah, it's good to hear the actual real time discussion, you know, because you get more color about it. But I love what you said about the Motown or the. Who is it? Who said a Barry Ritholtz?
Jason: Barry Ritholtz.
Louis: Yeah, I said that. I mean I thought I had so many like visions in my head because, you know, I'm a musician too and I I'm thinking about motown. I fell in love with motown as a young kid. My parents listened to it and the first thing that I thought about was that these, a lot of these people that were, uh, involved in motown, they were, they were completely isolated from the music industry. So so you know, you can find a lot of talent outside of, people that are like right in the mainstream of the music and of the Wall Street, kind of normative Wall Street. I mean you have to do something different really to be unique like that.
And sometimes I think groupthink hurts Wall Street. In fact, I was just telling my wife this morning. I got out of the shower and I said you know what, in a way, wall Street is kind of like not even a thing anymore. Like you know, it's like I don't even think of Wall Street anymore as Wall Street. I mean last time I was there it didn't even seem like Wall Street to me. I mean it's still, it's still a thing mentally, but it's not. It's like I really think it's time for Motown.
Jason: I think you guys are right in the thick of what we should be doing, because there's so many great thinkers that I run into who are not anywhere near the center of Wall Street, quote, unquote. So that's, yeah, one of the things I really want to steal comes from Chicago. So Morningstar in their quant reports. So if you have a Schwab account or any of these, they pretty much all have Morningstar's reports. These aren't the quant reports, I'm sorry, it's actually the ones that are handwritten by analysts, but on page I don't know two or three they have a module that says bulls say and bears say and they go through the bullish case of a stock and the bearish case of a stock, and that's something that I want to institute everywhere.
Everybody should be with everything right. You talk politics, you should have a. You know what are the positives, what are the negatives. Whoever your candidate is doesn't matter. They have positive, they have negatives, that's right. You know your friends have positive, negatives. Like everything has a positive and a negative, and you have to look at both sides of the story, especially they say you shouldn't marry your investments Right. Know what the downsides are, Know what the risks are with everything you do.
Louis: Wow, there's a lot there we could go into.
Jason: I know yeah, as far as the no, no, not politics. Believe me, I mean we're staying away from politics.
Louis: Yeah, we're staying away from that. You know, it's more like the I keep thinking of the narrative versus the numbers debate. I always say that I'm more interested in the numbers than the narrative. Like I start with the numbers and then go for the narrative and I think the older I get and the more I've seen, the more I realize that it's not the narrative necessarily, it's just understanding as much as you possibly can about what is true.
It's hard to do and so much of investing is qualitative. You know, I mean you know my background. I do a lot of quant factor stuff and all that and that's really helpful in kind of keeping you honest. But at the end of the day, when I look at the stocks that have done really, really well for me, or macro trades like futures type oriented trades, it's been because I had some piece of knowledge and understanding about something that I just knew with a high conviction that was true and I stayed with it and it made a lot of money. So that is really hard. I don't think the quant sometimes leads you there, but it may not necessarily. It's not usually the end, like the end all be all, and a lot of times if you look at the best quantitative stuff it tends to turn over a ton. Right, it's like like momentum. Well, you know, you could say like, okay, I'm going to run momentum screens on stocks and the best parameter set is going to be me like turning over quite a bit. But then after tax and reality in the real world, you're really not making that as much as you would think, whereas you might find something that's gaining momentum that no one's talking about, like I bought not to talk about.
I shouldn't talk about specific names right now, but there's a particular stock that I bought where I understood what was happening. It did come up in a momentum screen. It was a very small company at the time and then it just went ballistic. That now did I know it was going to ballistic? No, not to that degree. You know, I didn't think it was going to go up. You know 500% in, you know three months. But it's one of those things where you, if you know something, there's so much more to the narrative, so you go into the Motown aspect of things. There's value in that. We, we numbers are becoming a commodity, almost right. Everybody can get all these numbers and we can, we can move things around. Anybody can go on chat, gpt and, you know, pull, you know I get certain things. So I, you know, I don't know I'm becoming more of a qualitative guy the older I get. Is that that's weird?
Jason: I have a theory on that. Let me know what you think. But I think that you are able to become a qualitative guy now because you have been a quantitative guy for so long and so because everything that you do there's, you know, there's a famous saying, it comes from consulting. I think you can't manage what you can't measure, and so everything that you've done as a quantitative person has been to measure, even when you run that quant screen and you get a list of stocks and you know that this list of stocks is going to turn over at the same time. You probably know well, this is going to turn over. But let's pick on NVIDIA. Nvidia is on the list right now and, because of these other things that I know through my experience, nvidia may come off in two weeks, but it's probably going to come back on in a month. I should just hold it Right, yeah, and so I think that you've spent so much time in the markets and it comes down to the word is experience.
Right and that's why you hire a financial advisor. Or you hire, or you take a subscription to the Street Pro, or you want to get the experience of other people, especially as you're learning.
Louis: Yeah, yeah.
Jason: So now you can be. I was just going to say one thing. One thing is you can be sort of a core satellite where you can take your core investing, and maybe you want to be self-directed and buy a portfolio of ETFs, or you want to give that money to your financial advisor, give it to you, lewis, and then, with sort of the satellite funds, play money or whatever. You use your own experience Maybe it's in your own industry or whatever it is. You're trying to add that extra bit of alpha right and have fun maybe, but but keep yourself intellectually engaged. You have, you know, sort of the core of your portfolio over here and then kind of the rest of it where you can do things with as well.
Louis: Yeah, I totally, I totally agree with that. So you know, this is just kind of getting me into this the fear and greed concept. You know you got involved with the fear and greed. I'm not, I'd like to hear the story about how you got involved in and what you, what you did in that. But when I think about the fear and greed index, I always think about that fish that's in the bowl and doesn't realize that he's in water and but you know, but if he steps outside and looks at he's like wow, I'm in water, right. That's kind of what sentiment is to me. It's like we're part of the sentiment, like we are, we're the observer. It's like the Heisenberg principle, like what we look at, we change, right, and that's sentiment, and fear and greed is kind of like a great overall, you know, easy to understand way of looking at that. But I guess I want to let's start off with your story, like how did you get into the fear and?
Jason: greed project and what, what. What was your progression through that? So yeah, I mean, after coming from Wall Street, I'll tell a really quick story because I think this it's in it's in the article that I wrote too. But this story is a story from business school and I can't remember if the numbers are correct, but they're approximately correct and the timing is approximately correct.
I was in business school, part-time, at night. I was working as a market maker during the day and then at night I was at NYU taking a class and this class was a valuation class and they asked us we had to come up with, we had to do a discounted cashflow analysis of a stock, and each group got to select whatever stock they wanted and I proposed to my group let's pick JDS Uniphase, because it was one of. It was the NVIDIA of its day. Oh yeah, hopefully NVIDIA will have a better future than JDSU did. But my group was all they said absolutely, let's do that one. And the stock was trading at I don't remember exactly, but probably about $165. Okay, and so we sit down and we do our analysis and we're doing discounted cashflow analysis and one of the big inputs to DCF is understanding the growth metrics right and forecasting growth. And forecasting growth means looking back historically, figuring out how fast the company has been growing and just saying you know, is it going to speed up or is it going to slow down? Eventually they all slow down. It will slow down, but you have to figure out how long that's going to take. So we did the analysis and we figured out it would slow down, I don't know, over 10 years or something. Something pretty reasonable, probably pretty generous as well, and we came up with a value Again.
Remember the stock's trading at $165. We came up with a value of $2.25. And we looked at it and we said can't be, can't be. We learned in our last class the market's efficient, this is all wrong. I don't know. We did something wrong and so we went back and we now this time we went crazy. We're like this stock's going to speed up its growth. It's going to, instead of growing at 50% per year like it has been, it's going to grow at 100% forever. And we came up with a value of $225, right, and so the stock gets added to the S&P or maybe it was when they confirmed that it would be and the stock jumps to $225. It jumps to $235, I think was the high I sell my stock at like $225.
Louis: And so we were right, that was a good trade.
Jason: Good trade. And then we go and we present our research to our professor. And this is where it's really funny. The professor, who was so outrageously smart, could do any math problem in his head. But he's looking at us, he's laughing at us. He's like really, you think this thing is worth $2.20? We're like, yeah, here's the research, here's what we did. And he's just laughing at us. And then he says how could this company possibly be worth more than Apple? And Apple at the time was trading at $19, which, split adjusted, is probably something like negative 10 cents. And he said Apple has $16 in cash on its books and, whatever he's like, Apple is definitely worth more than JDS, Unipay. And, of course, this guy's probably retired on a private island somewhere.
But what I took away from this whole story oh, and the other thing is we were right on both sides. We were right with $225 call because the stock traded to $235. And within two years the stock was trading at something like $2. So we were right on both ends. And so what I took from that was I'm not a great analyst and I'm not a great forecaster. I'm especially not a good forecaster. Okay, but what I can do is I can look at data and I can back into things and I can understand well, if I look at, if I calculate, if I back into, how do I get to $165 or $200 for JDS Uniphase? I look and I say, well, the market has really high expectations of this company and those expectations are nothing but sentiment. Nobody knows.
Louis: I think that's all you need, though, jason, I actually don't think you need to be a great forecast Like that's really all you need. So, cause, if you know those extremes, you avoid mistakes, because the more I do this, the more I realize that's what it's about. You know, if you're going to put X number of units, and risk units if you will, in your portfolio, if you don't make a lot of mistakes and you compound reasonably, you're going to do great. It's just like reading. You know Warren Buffett always talks about read chapter eight and chapter 20 of the intelligent investor, which everyone should do, by the way. In fact, I'm set I send that book to clients and just say read this.
You know that's what all it is about. I mean, that's basically what it's about what you just talked about right there. You don't really need to be a great forecaster. You just need to avoid a lot of mistakes and have a reasonable amount of diversification, not too much. And yeah, I mean you hear about people that have made like great calls consistently, and then the more you learn about them, the more you realize that there was something else part of the story. You know what I'm saying. There was another part of the story that you didn't really hear about, and a lot of it boils down to not avoiding mistakes, having discipline, risk management, things like that, but anyway, I got you off your topic.
Jason: It's all risk.
Yeah no, yeah, no, no, yeah, and it's. It's important to cut me off too, because I can. I can talk about certain things for too long, but I'll just. I'll just cut right to your question, which was fear and greed, yeah, yeah. And so how did I get to that? Literally, I, from that point in about 2000,.
You know, I got much more interested in technical analysis and and, and I started thinking I'm not so much like a stock picker and I'm not so much into, you know, the MACD and the RSI. I'm much more quantitative. That's my interest in technicals. Technicals really helped me become more quantitative and more interested in looking at the big picture, understanding how to measure the big picture, and so I started looking at indicators and things that people like Ned Davis was doing. Right, I, I a big fan of Ned Davis, ned Davis's work. There's some other providers that were like that, sentiment traders Another one. I like all those, I like what they do and I started trying to replicate. You know, you don't know what their secret sauce is, although actually Ned Davis has a really good book. I'm looking at my bookshelf somewhere out there when Ned Davis's book is being right or making money. But then his chief strategist wrote another book where they actually go in and they tell you how to build a, build their, one of their sentiment indicators that has nine components to it. I was messing around with that, trying to figure out, trying to understand these indicators and understand the signals that they gave. And I hadn't around.
That same time, cnn was one of our clients at what was then Wall Street On Demand and our CEO was out talking to them and he was talking to Lex Harris, who was their editor in chief, and Lex said you know, I don't know what this is, but I want to build something called the Fear and Greed Index. Can you help me? And Jim, our CEO, came back and he came to my team and he said so CNN has this kind of crazy idea. They want to build something called the Fear and Greed Index. What do you think has this kind of crazy idea? They want to build something called the fear and greed index? What do you think? And everyone on the team pushed away from the table. They're like what a bad idea. And I was left sitting there going they thought it was a bad idea.
Yeah, they just you know they didn't get it. It wasn't what they do. I thought you were going to say mic drop.
Louis: I literally thought you were going to say mic drop. Everybody said that's a great idea, let's jump on it. That surprises me. They looked at it.
Jason: Yeah, they were like well, and they didn't know how to do it right. It wasn't what they were interested in. The team all had very different kinds of backgrounds, and I was the only one that had that more market-related background. The others were really more analysts Smart guys, great guys, but much more like. They could probably pick a stock better than I can, but they cannot tell you if we're in a bull market or a bear market. So I'm sitting there saying this is the greatest opportunity ever. And so they got me on the phone with CNN, with Lex, a day or two later, and we just started putting together ideas and Lex basically said look, I don't know what this thing is. You kind of know what I want to do. I just want something that really represents that quote that Warren Buffett says, which is you should be fearful when others are greedy and greedy when others are fearful. So what, what is that? What does that look like? And so I just went and built it. Luckily, they gave me Jim.
Our CEO's son was also a statistics major at Yale, and so for his summer internship that year, he sat with me and we went through and took all the indicators that I had put together and we did a principal component analysis, which is really important because you want to make sure, just like we said earlier, when you're looking at a stock chart, you want to make sure that your indicators aren't all trend indicators or all momentum indicators. The same thing, we want to make sure that each of the indicators, within fear and greed, didn't step on one another right, that they weren't saying the same thing, or really just that they worked well together, that they were each complementary, right? There were a couple indicators that I wanted to include that just didn't make it for budget reasons. Cnn is a media company. Media companies don't have huge budgets these days, so I couldn't do things like market valuation, s&p 500 valuation, or we wanted to use the, because by this point, market had bought us, and so I wanted to use the credit default swap index and I could only get end of day CVS data, not intraday, and so it just didn't fit with what we were doing. Um, so there were, there were some indicators that we left out that really would have been perfect and, um, you know, later on I got I got to use for other purposes, but not for the fear and greed index. But I got to use for other purposes, but not for the fear and greed index. But yeah, right now you know the fear and greed index, the seven indicators that are there, we selected one that is purely just the S&P 500, right, normalized. So we understand if it's sort of fear, you know, fearful or greedy.
But then we have two that are breadth indicators. So how broad is the advance or decline? And is that moving in concert with the market or against the market? Then we have two that are options related the put-call ratio and the VIX. And then we have two that are bond market related One that compares the spread and yields between low-quality junk bonds and high-quality investment-grade bonds, as that spread is tightening. You see that investors are, you know they're more, they're seeking out risk because they think that they can get better returns. And then the last one is where we compare the returns on stocks to the return on bonds over a 20-day rolling period, total return as well. So for all these underlying indicators we're using ETFs. So this is actually something that can be replicated by anybody, but there are a lot of mechanics and calculations that go into it on the back end which make it. You know, if you are going to calculate it yourself, you got to be pretty sophisticated and be and have a pretty decent data feed. Yeah.
Louis: Well, I love that. You know that was put in a scale that made sense and a categorization that made sense. It almost kind of makes sense the way that you did. It is like extreme fear, fear, neutral greed, extreme greed. These are things that we can understand and this is, I think, one of your biggest talents, actually. I think one of your biggest talents actually. You know, like you had said, we were looking for, we did principal component analysis, but we were looking for things that worked well together and complementary.
As a quant geek, I would have just said non-correlated, you know or not. I would have used like big, long names of there's some statistical names that are you know to describe, that are like really long and stupid, sounding like to make no sense. I love the fact that you like that, you, you that's the. That is a great skill and I think to be able to take something that is complicated and make it accessible was one of the biggest, I guess, wins from this and it also helps people understand themselves, in my opinion, like if somebody goes and they look at this and they say, okay, right now I'm looking at the website. It says I'm on cnncom markets, fear and greed. It says it's got a number 48 and it says we're neutral but kind of tilting towards fear. So tell me a little bit about, like, how you would interpret this.
I'm an investor right now. Let's say I have a reasonably good sized portfolio. I want to grow my wealth, but I also want to manage my risk. How would I? What would I use this for? How would I think about this? For like, really, like practically, how would I use this?
Jason: Okay. So what does neutral mean? And neutral is really that center zone of I don't know what it is right. So the first thing I'll ask you to do and I know users or people who are watching or listening can't see this, but in the upper right corner you can see where it says overview and timeline. So the first thing I want you to do is click on timeline, okay, and what you'll see is a chart of the fear and greed index for the last two years.
And especially when we are in this neutral area and we don't really know what the overarching sentiment is, it's important to look back over historically, just like we said with the PE ratio. Right, you can look back and compare to peers, or you can say how is it versus history, and so what we see is this 48 is an increase over where it has been. But, more importantly, we're sort of in this weird consolidation period. Fear and greed is just kind of ticking up and down, up and down. It's not really doing much of anything. So, however, we have dropped from a level of greed right Back before April and I'm going to pat myself on the back.
I don't write much about fear and greed. I'm going to start, but I don't write much about fear and greed on our site. I did post in one of our little communities. I said, look, hey, just so you guys know. You don't really know me, but I built the Fear and Greed Index and here's what I've been watching Fear and Greed. It has just broken down. I think the market's going to break down with it, and you know my timing was amazing and the next day the market broke down. So, yeah, good for me, blind squirrel. But so what I like to do is I like to look and see and look for patterns and try to understand what is it doing and how does it compare to the market.
So a few things, all right. What really matters is fear tends to be good. What happens when the indicator goes into fear or extreme fear? What we see is that standard deviation of returns. So the volatility of the market increases, and I think we're talking about forward volatility too, not like a month out, but days out if you want to measure it each day and sort of see what's happening.
Volatility is just high when we are in extreme fear and fear because investors are nervous. What happens when investors are nervous? Good time to buy, right. The other thing is greed happens a lot. Okay, and greed is not necessarily a bad thing. Extreme greed is oftentimes a good thing. Okay, extreme greed tends to have.
There's two times that extreme greed happens and one time is a great time and the other time is a high risk time. Okay, the great time is when we have been at extreme fear. The market has fallen maybe the market fell by 10% or something and we're starting to see a rebound and what you'll see oftentimes is the components of the fear and greed index spike and everything spikes, everything jumps up and we get to extreme greed because we've gone from a low level and all of a sudden, investors are committing new capital to the money. Investors are getting excited and we see extreme greed.
Extreme greed is almost always good, except when, if we were in some kind of an uptrend okay, we've been, we're in an established uptrend, something good happens, the market kind of spikes. We don't. It's rare that we really see extreme greed during an uptrend, but let's say it happens. Well, that tends to be a period where probably just don't want to commit new capital right now. I probably want to take a breather, wait, because risk is higher. You know it's extreme fear to extreme greed, but really it's low risk to high risk.
Louis: But sometimes, as you know, sometimes that greed can be really good too. The other thing yeah, go ahead, sorry, no, no, I was just going to say that reminds me of like the traditional technical interpretation of momentum is after you've had a bear market, you always get to an overbought situation. That doesn't mean the trend's over, it just means the trend's beginning, and it's almost the same concept. It seems like to me to some degree like you're looking for the extremes, but sometimes you have to interpret it the opposite way after a certain condition, after a bear market or after you've had really a lot of fear, and then it pops back up to greed, well, that doesn't mean the trend's over, that means we're just starting to go up again.
Exactly yeah, and you have a continuation of the trend.
Jason: Right, yeah, yeah, completely. And so with anything, with any indicator, you have to look at it in context right.
Everything from an economic indicator, cpi, et cetera. Everything has to be looked at within context. And with that, I think you have to look at the context within the fear and greed index, and that's why there are the seven components, and I actually feel that the seven components are more valuable than that headline number, than the speed dial, right. So we start with and CNN came up with these names and I love it that they did that, because they are so much better at explaining things than I am and they really they said well, you know, here's who our user base is. We want this to be something that is a sophisticated trader can use it. And, as you know, as we heard Katie Stockton tell us several years ago, lots of hedge funds use the fear and greed index, right, they use it as one of their marks to understand what investors are doing. But they want it to be understandable by retail investors, by my dad hundred versus 125 day moving average just to see how far like what is the momentum right. Use that word, it's completely accurate.
What is the momentum Is it? Is it so high that it's potentially exhaustive right now? It's so high that it's potentially exhaustive right when we and we normalize it both over the last six months. But then we also go back and we normalize it again over two years to say is that six month number that higher, low that we have? How does that compare where we've really been over a longer period of time? And then we look at, as I mentioned, two measures of stock price strength and stock price breadth. So market breadth we're looking at both 52 week highs and lows on the New York Stock Exchange and then the McClellan Volume Summation Index. So really is money flowing into stocks going up or money flowing into stocks going down?
Louis: And what we see is both of those numbers are sitting at extreme fear.
Because, those are great indicators. They're such great indicators. Yeah, I mean, I remember back in the day doing a ton of backtesting and those were some of the most robust indicators, all three of them, especially on the new highs it's actually new lows is actually more valuable, in my opinion, based on the research years ago, than the new highs, but just because it showed that extreme capitulation. But those are great and they are complimentary. One is like the number of stocks hitting highs or lows, and then the other one is more. The McClellan summation is also very valuable and it can be manipulated in so many different ways.
So and I love that you have three dimensions to that and while you were telling me about this, what struck me is I always try to put things in perspective for the individual investor and for the. You know how they can think about these things and make it useful for them. And I think one of the things that could be useful with this, or is useful for this, is understanding how you're feeling. Like you know, if you've just gone through a period of angst with your portfolio and then you notice that this thing is at fear, right, well, everybody's being fearful and like it's like what are you going to do in your portfolio during that period, right? Well, everybody's being fearful and like it's like what. What are you going to do in your portfolio during that period of time?
Jason: Exactly.
Louis: You know what how?
are just you know how you're feeling, like if you can step away like that fish in the fishbowl with in the water, you know and say, yeah, I'm in the water and you know, and, and this is what's happening, and what am I going to do? And stay level headed. I always talk about like staying level headed is the most important thing as an investor. It's like if I'm overly optimistic, I need to bring myself down and if I'm overly pessimistic, I need to bring myself up. Tom Basso mentioned that to me years ago, who was one of the market wizards.
Jason: Right.
Louis: Talking about doing that, and I've really that's been probably one of the market wizards, right, talking about doing that, and I've really that's been probably one of the most helpful things for me personally and for advising clients as well and managing money. Just it's. It's it sounds so simple. It's like oh yeah, I know that, but yeah, but do you do it?
Jason: Exactly, and that's where it's important to have something that's quantitative and unbiased, right, and I'll tell you a story about that that confirms what you just said. But when we first, a few years after we launched Fear and Greed, I was talking with a financial advisor and he said, oh, I use this thing all the time with my clients and I love it. He said how do you use it? And he said, well, I introduced them all to it. And then, when they call me, when the market is down, wanting to sell their positions, wanting to reduce risk the market's already fallen by 10% or 20% and now they want to reduce risk he says, ok, hang on a sec, go to CNN Markets, fear and Greed. What do you see? And they say extreme fear. And he says, ok, what does that mean? And the client always says, okay, what does that mean? And and the client always says, oh, yeah, everybody's afraid right now. Yes, and what does that mean? That means I shouldn't panic. And hey, let me write you a check because this is a good time to invest.
Louis: There you go. So one thing I noticed that's not on here is valuation, which is so hard to time valuation. So this is, you know, valuation. So if you put this in context with valuation, then I think you have a powerhouse, really, because absolutely yeah.
Yeah, because then you have that long-term valuation metric, like right now. I was just on a, I had just updated my factor. I have this correlation matrix of factors like quality, value, growth, technical, et cetera, et cetera, volatility, and I sent our CIO that correlation matrix to show. Hey look within the market, like finding a value right now in the market is very difficult, like you're not being rewarded for valuation metrics at all, or low volatility or strong dividends and you've got all the.
You know growth is kind of being helpful. Momentum is explaining everything and most of the performance is coming, you know, in a small amount of stocks. So that is a context that you can add on top of this that says, okay, well, within this current environment, like we know, small, smaller companies have much more value longer term. So do international stocks, you know. You know that can give you a mosaic, and I have to say a mosaic is really what works in my experience as an investor, meaning a mosaic, meaning that you've got these pieces of a puzzle and they're all kind of pointing towards something and like not everybody is talking about it. You know, and, and you know everybody's talking about nvidia and all that.
But I've also had conversations where people are saying, hey, all I need to do is buy costco and nvidia. I literally had a doctor tell me that, like a really smart person yeah, I'm just gonna buy, you know. I mean these are the things I remember hearing during the dot-com bubble and, frankly, it's a little bit scary for me hearing these things. Um, yeah, and that's one of the reasons why I wanted to bring you on is, first of all, I've wanted to have you on for a long time. Uh, we just life didn't allow that for for both of us. But and I'm glad that you're on now, because this topic, I think, is very, very timely the fear and greed thing.
You know even though right now it's giving us a neutral reading. You know, if you put this in the context of a mosaic, this is very powerful stuff and I'm glad that you know that you did this kind of work and you know, and I can see a lot of value in doing that when you, when you put.
Jason: I'll just say. I'll just say one thing really quickly about you know, as we're looking at the indicators and what it says, you know why. Why is it giving us neutral right now? Because I think that's the key. If we look at the indicators, that are at different ends of the spectrum and it used to be organized or ordered from most greedy to most fearful we see the S&P 500, right, so that's extremely greedy. Put in call options, so investors are still buying lots of call options, right, they're not really hedging their portfolio.
And when we look at the difference in stock and bond returns, right now stocks are just doing really well, right, so those are really telling you sort of what's happening. Yeah, I know the stock market's up. Okay, what else is happening? We see that the spread between junk bonds and investment grade is rising, right, so people are starting to de-risk that side of their portfolio, the bond side of their portfolio. And then, as we were talking about, why is the S&P going up? Nvidia, right, so of course those indicators are going to be strong, but meanwhile breadth is really weak. So we get a much clearer picture of what's happening in the marketplace. So that's the thing I wanted to add about how to read it and really understand it and dig into it.
Louis: Yeah, that's a great addition. That makes total sense. It reminds me earlier this morning I was talking to a quant analyst in Europe and we were looking at certain factors, fundamental factors, and almost all the fundamental factors that are very robust. Solid predictors of stock returns are underperforming because you always look at them on an equal weighted basis. So the equal weight factor relative to the market cap factor, that variance is at like this massive extreme. In other words, the average stock is underperforming.
That's another way of saying breadth right as a technician you would say a breadth, a quant would say something differently, but it's basically the same thing, which means that most stocks are not doing so well. And then you look at the smaller companies. A lot of the smaller companies are losing money, and so what is that telling you? There's some underlying things. It's not a fear thing. It's really what this does. Is it informs you that you need to be selective. In my opinion, right now, and not to you know, I want to make this an evergreen piece of content, but based on what we're reading here, just the tea leaves. It just says be careful, be selective, look for quality, you know, be diversified.
Jason: Exactly, yeah, yeah, exactly. It's really just a way of understanding the level of risk within the marketplace at a given time.
Louis: Yeah, so you've told me a lot about the components and risk management. We talked a little bit about risk management Historically. On the performance of this indicator, what would be like like what? Where's its strongest points? Would it be on the picking bottoms, or or or would it be forewarning a top?
Jason: Well, I think there's a couple of things. So I mentioned that I posted in one of our message boards back a couple of months ago that the indicator was giving us kind of a warning signal, right, and so one of the ways that I really like to look at it is I like to look for divergences. Okay, so what that means is that the S&P is going up and fear and greed is starting to decline and, in the spirit of making it as evergreen as possible, let's go back to 2015. The market in August I can't remember the exact numbers. Did it fall by? You may remember 20% or something? Over the course of a few days, the market really just fell out of bed.
Louis: Yeah, absolutely yeah. I don't know what the percentage is, but it was a lot.
Jason: Well, fear and greed had been declining while the S&P was rising and rising and rising and people were saying the syndicator is broken. And I'd even get into not Twitter wars with people, but just saying look, here's what it's saying and here's why it's saying what it's saying. And it really came down to a lot of market breath and the breath was weakening at the same time that the market was going up and becoming more and more narrow. And one day, right so the fear and greed index was setting lower highs and lower lows. It was just consistently declining right as the market was going up and it was just saying more and more and more risk and one day the market caught up with it. Right, and that's what I noticed again in January, december, january, february, march into early April. What I noticed is that fear and greed had stopped going up while the market was going up and it was just saying something has changed here. And I don't feel like. I don't love the word prediction, I love measuring, right, and so what it's saying here is, from a measuring perspective, something has changed in the market and risk is increasing was happening, but at tops, what I've noticed in general is that fear and greed starts to decline as breadth narrows, as people start to maybe buy the VIX or buy puts. Puts are what's going to influence the VIX as bonds start to perform a little bit better than stocks. These are all things that are saying investors are pulling back. Maybe the S&P is still going to highs, but investors are starting to pull back. Right? We're looking, we're measuring what investors are doing so that we can figure out what to do with our portfolios. So that's at tops. That tends to be what I see In uptrends.
Sure, sometimes you see the market the market, you know rip higher. The fear and greed index goes to extreme greed and you might get a short-term decline in that too, but probably not a long-term decline and then bottoms. It actually does a really good job. So this statistic is probably wrong because when I left my last job several years ago, all the data stayed there. As you'd imagine, it's not my data. So I left my last job several years ago, all the data stayed there. As you'd imagine, it's not my data, so I left the data there with them. But what I recall, at least through 20, probably 2018, 19, when fear and greed index had dropped below 10, there had not been a single one month forward period where you didn't make money right. So fear and greed drops below 10, one month out you're probably gonna make money. Okay, it doesn't mean going forward. We could be in a major bear market and that not happen.
But, even going back to like testing data that I use. We launched in 2012, but I use data back to like 2002 or three, something like that. So I had the financial crisis in there. I think even during the financial crisis, when fear and greed dropped enough, you still got enough of a spike back in the S&P that you made money in that little trade. So again, just like an RSI, it's like a momentum indicator. So the fear and greed may roll over again in a major bear market generally, if economic conditions and other things are are healthy enough that this is going to be sort of a short lived decline. It's probably, you know, it has been a strong time to consider increasing risk in your portfolio. I'll put it that way.
Louis: Yeah, Well, that's that's helpful. I think that was that makes sense to me, that the mark market bottoms could be really useful with this as well. Now, just to kind of switch gears a little bit a while back, I mean, you've had some, you know, real world experience with the microstructures in the market. No, you have not been trading on the floor for a long time or been a trader for a long time, but there were some things that you kind of evergreen things that you learned there, and in particular with volume and kind of you kind of listening to the crowd.
I mean, we kind of worked a little bit on some volume stuff a little bit, and I remember that you had some very useful insights into the microstructure of volume. And so if you were, what are some of the things you've gleaned from volume itself? That just kind of basic things that you've gleaned.
Jason: Yes, and basic things. So everyone talks about the NVIDIAs of the world or the stocks that are getting all the press right. I've looked at this two different ways. One was, as you mentioned, lewis. You and I did a lot of work on this together and you were, you know, a hundred percent a partner on this and you did all the all the really hard work of backtesting. I showed up with some ideas and some words, and, but this came from two different places. So one was one was that where we analyzed a volume algorithm that I had developed which really just says, you know, relative to, we just normalize volume just to understand for a particular stock.
I want to put all stocks on sort of the same footing. So a company that doesn't get a lot of volume if it sort of spikes in volume, how do I see that through? You know, the NVIDIAs of the world and the mega cap stocks that get all the attention, all the volume, when do I know that some smaller stock is getting attention, right? So how do I measure those spikes? And what I did is, I just said, let's just compare them both to their own history and to their history relative to the market. So it's sort of a complex calculation. I won't get into it too much here, but what I learned from that was that the stocks that were actually getting the most attention had you know, they still might be good bets, but they probably weren't as good a bet as the stocks that were being completely ignored. That is so counterintuitive. It's so counterintuitive.
Louis: When I mentioned that to a technician who works for a very large firm that's on CNBC all the time, he didn't believe it.
Jason: Yeah, so sometimes people don't get it.
Louis: Yeah, sometimes what you, what you think is true, is not true when you look at the data. So anyway, go ahead.
Jason: Yeah Well, and I'll tell you another anecdote. That's, that's kind of that proves it also. We did the same thing. So we were looking at working with the New York Times, and so I had quarters worth of data of the New York Times and what I did is I said, let's just figure out mentions, right, which stocks were mentioned, which stocks had articles written about them in the Times.
And we did this on a quarterly basis and we went back over I can't remember how many years, and the data wasn't super great, but it was good enough because it agrees with what I just told you with this other, this volume algorithm. So that's why I sort of like it is. We created an index and what we found was that the stocks that were having fewer mentions what was going to happen is they're going to have more mentions in the future, right, relatively more mentions, and they were going to get, you know, relatively better performance because of that. And maybe and I haven't done the research to figure it out, but you know at least with the volume data stocks announce earnings how often Every quarter, right?
Louis: Yeah.
Jason: So one month out of every three is going to be a high volume, relatively high volume month. Two months have the potential to be relatively low volume, and the market tends to have an upward drift over time because corporate earnings tend to grow over time. So therefore, we can kind of assume that maybe the reason why this algorithm works like this is just that companies are quiet. Now they're in a period where they're not announcing news, and maybe that month when. So they're in a period where they're not announcing news, and maybe that month when, you know?
Louis: so we're just picking stocks that are going to announce interesting news next month, but there could be lots of other things that are happening there that's a, really it does seem to be interesting at bottoms yeah, that's a really good point because we have the upward bias of equities, or at least we have in the united states historically, uh, for a long time and that that makes a whole lot of sense just that that would be the case.
But things tend to pause when you have a lot of activity afterwards. One way or the other whether it's a lot of activity, the downside, whatever that primary trend was or that trend beforehand you get this kind of this spike of emotion and then that might reverse or or at least pause. And then so and after we had done that work, I remember calling you up and saying you know, I really like buying things when it's quiet. It's just so much you have time to get in and you're not, you're not emotionally driven, and you've done your homework. And you know, and this, what not only applies to stocks, it also applies to other things, commodities, I mean.
Most recently, you know, when gold was really, really quiet, that was part of my, you know, it's like wow, it's time to start like adding to gold. No one's talking about it. People are kind of disillusioned with gold, you know. And right now I think emerging markets are kind of in that category. Small caps are kind of in that category. Some of the Europe is, you know, european stocks are in that category and they also have the valuations behind them too. They don't have the sexiness of the growth of AI and all of that. So it's a great forward-looking thing and I thought that work that you did, in that your concept was valuable and useful for people who are following the markets more closely. And also you could use it long-term too, like longer-term.
Hey, maybe buy gold because it is so quiet, maybe you know you have so you have a setup based on fundamentals and then the that that is a confirmation from the investor psychology standpoint. You know.
Jason: Well, and if you remember Lewis too, from from the paper that I wrote there were, I looked at it three different ways. Right, so there was, there was today's volume, and that's when people talk about volume they mostly look at today's volume. But then I said, all right, let's aggregate it over a week and figure out what happens over a week. And I created a sector portfolio using sector spiders. That at the time I think it still has. I have not been tracking it, but it tended to add some level of alpha. It'd even be equal weighted.
Right, we were waiting, simply waiting the portfolio towards the lower volume ETFs from the prior week and under emphasizing the higher, last week's higher volume ETFs. And then we did the same thing. This was where you were so helpful is we did the same thing with the S&P 500 constituents, but it wasn't daily data or weekly data. We actually did a rolling 2021 day, so a full month, and we just said, okay, how does the volume for this month compare to the last? I can't remember if it was six months or one year.
Louis: I'd have to go back and look at it.
Jason: Yeah. So we just said yeah, if it's quiet for the last month, that's really interesting, right? If it's really high for the last month, that's not as interesting. And it does turn out that those underperform. And then, in looking at it more recently and this is a little bit more qualitative but one thing I've noticed is that low normalized relative volume, so down to, like you know, 75 of normal um, we tend to get like an inflection point. Stock can go up or the stock can go down um.
However, below below that, the quietest stocks have tended to be the ones that have big rebounds, that tend to go up the most, and so that's sort of what I'm looking at right now to try to figure out if that could become an interesting option, strategy or something. But I think there's something there and again, I need to do a little bit more research. The problem with this one, unlike fear and greed, is, you know, you've got 1000s of stocks to analyze and so, as you know, I'm not a great programmer, so that's that's where I rely on the help of others.
Louis: Yeah and well, and then plus. You know, the volume data itself is has changed over time. So I think John Bollinger mentioned something to me about that, or you did too. Actually, there was quite a few changes in the volume, or how to look at volume. People that have been in the markets a long time said, hey, interpreting volume is harder now, which? I think, that's true, but the extremes, I think, are still in existence. You know that are still valid interpretations.
Jason: And when you normalize the data, then then a lot of those, a lot of those differences go away, right, because you're putting everybody on the same footing. So you can't just compare NVIDIA to NVIDIA. You have to compare NVIDIA to NVIDIA's relationship to the, to the entire market.
Louis: Yeah, so we've talked a lot about investor psychology and I want to change gears a little bit, if we can, and you know you've been. When you first told me that you were teaching at CU, I thought, okay, he's going to do it for one semester and he's going to bail. I don't know why I thought that that's I shouldn't say that. I guess I don't know why I thought that I shouldn't say that. I guess I don't know.
Jason: I'm not sure why, but you've actually been very consistent, and so you must really like Well, consistent until this year.
Louis: Oh, is that right? And I?
Jason: have not bailed, but I am taking a break. They actually asked me last year to come up with my own class, my own syllabus in trading and markets, which is really intimidating to do because it means coming up with 18 or 16 three hour lectures. And so I was in the process of doing that and luckily they called me last October and they said we're going to hold off on that for right now we're just we overextended too many classes, so we're going to hold off. And they've asked me if I want to come back next spring and just teach some regular classes and I actually I've said hang on, my job's really busy, so I'm just holding off now, but maybe in two years I'll go back and do it Okay.
Louis: Regardless, you've been doing a lot of teaching and I do go and I lecture there. And you lecture. So I guess I guess what I wanted to know from you was what are you seeing students like? I mean because I know when I the little bit of teaching that I've done, I saw some changes happening with students' interest in finance in general. So what are you seeing with younger people in terms of their interest in finance? What parts of finance are they interested in?
Jason: terms of their interest in finance. What parts of finance are they interested in? Well, one thing about I hear you know I'm hugely into cars and you hear people say kids these days they have no interest in cars. Kids love cars. Kids love everything that we loved when we were younger, and my students are all really engaged. They really are interested. Now I teach a lot of core classes, so that means that not every kid that comes through my finance class cares about finance at all, and they shouldn't, right? They're interested in marketing or you know whatever similar percentage of the kids in those classes to when I was in those classes, even versus my MBA, when I would take a core class, it was NYU, so I don't know. Half the class was finance majors, but the other half of the class were marketing and whatever else and they didn't care about finance, and so I would say that the percentages are probably really similar to what they were back in 2000,. Using that as a guide, I was a philosophy major in undergrad, so that doesn't count, but the students get it, they're interested.
A lot of them are trading. They're not trading NVIDIA, but they are trading GameStop and they are trading crypto and they are trading on Robinhood, and they get that Robinhood is not a good value because Robinhood, yeah, it's free, but so is Fidelity. Robinhood, you have to pay for research, fidelity, you don't. And they get all those things. But they are really excited about it because they're driven. They want to become, you know, they want to be financially independent, they want to be able to buy nice things and take trips. You know there are a lot of other different things. They may or may not want to have kids, right, but they feel stress around buying a house right, and they know that their career is not necessarily going to be the thing that allows them to buy a house right. Their salary may not keep up with inflation or it may not be enough to live in the place where they want to live. So they look for other ways and they think about other things that they can do. They're side hustles, right, and side hustle may be doing some trading in the market. So they're also some of them.
I think it's some of the older people who are a little bit disillusioned with the markets, some of the people who got in in the GameStop era. Some of them are leaving. You know, we see that.
I was on the phone with another provider recently, and they were talking about some of their active traders, people just saying, wow, this stuff is hard. But what I love about that, though, is when people say this is hard if they liked it. So if they didn't like it, they weren't really a client anyway. They weren't, or you know, for they weren't really a self-directed investor anyway. They were going to leave, no matter what. If they do like it and say this is hard, they're going to pivot. They're going to go away from being some kind of a short-term trader to being a self-directed investor who's really engaged in building a portfolio. Or they may even come to someone like you, lewis, and say I want to build a portfolio with you, but I'm going to be really engaged. We're going to talk a lot, we're going to talk every couple of weeks, and you and I are going to strategize about the market, and they'll be really good, good customers in that way.
Louis: If you see that as a good customer, right, but but like they're engaged yeah, yeah, I've noticed both, like you know, um, I've, there seems to be like a little bit of a cycle, like I'm just thinking of real, real clients that come in and it's like, okay, well, I have this robin hood account and I really want to dive in and I jumped in and I did a lot of stuff and I may have even done a you know pretty well, but now I'm married and now I have a child and now I'm, I've got all these other obligations and I don't really want to spend time with it, and then they roll that over to something else.
And I've also seen people where and I I encourage this to be engaged where it's like okay, like you said, here's your core stuff, here's, here's what we're going to speculate in or do some other types of strategies in.
we're going to allocate a certain amount and go, go for it, you know yeah and and I strongly encourage that you you know to be engaged, and so you know, I think it just depends on the person. I'm very much for. I love the fact that you can be self-directed and that there's so many resources that are available, and what you guys are doing allows people to do that, and I don't think it's an either, or, In fact, many people I would say most people have a bit of both. Now, High net worth investors do. They have some money where they're using advisors, wealth managers, and then they have this. It's like they know something, a lot about a certain industry or something like that. Certain percentage of their money is allocated a certain way, because there is a big difference between making money and keeping money, and how you manage your money is different. You know the strategies you use are different. You know you need concentration when you're making money.
You need you know you need and that would be typically in your business or your profession or whatever, and that concentration is what allows you to really make money when you get into the keeping money realm. It's about having reasonable diversification and having being able to be bulletproof right, not only from an investment standpoint, but you know asset protection and all these other things that you need to do keep your money. So and I'm kind of in both worlds, you know, in my, in my profession but I think the speculation and being involved, even not in speculation, but just being self directed, is a great thing, and the fact that we have individual investors that can do that now more easy than ever is a good thing absolutely yeah, yeah, so um I I mean sorry, this has been a great conversation.
I mean, so what are you working on now, that um that you'd like to share? You know, anything got you excited, or jazz these days?
Jason: well, I'm just so excited to be working with our 18 contributors. Um, you know, every one of them is such a professional. They work so hard, you know. Also shout out to continue everything that we're doing now, but then to add to it. Right, like I mentioned before, we're doing our markets. I keep wanting to call it a quarterly roundup. I think we're calling it a quarterly market call and working to put together a panel right, a panel that's really interesting and engaging to different types of investors. So we'll have Helene Meisler, who is a great technical analyst. We'll have.
Chris Versace, who is running a full portfolio, and then we have Peter Cher, who has a great geopolitical look at the markets and is a bond guy, and then Malia Bengali, who has a really wonderful global perspective, a global macro perspective. So just an all-star panel of people who can come and give us really great thoughts on the market and where it's going and what they see. So I'm just excited to be able to not have to write all my own content, not have to build these things dynamically and actually have humans who know what they're doing to go and work with and, just, you know, take ideas from them and have them take my ideas and all of us just work together to build something that's, you know, better than it is now and something that's going to be great for the next 25 years. The other thing that I'll throw out there is we are in the process of, like I said, we're really strategizing.
We just relaunched the street, so it used to be called Real Money is the division that I run, and so we used to call it. It used to be Real Money, real Money Pro. We collapsed all of the products into one, so now all of our subscription products are one and that is called the Street Pro. Okay, there's the street, which is the free side, and we are one of the top 10 business sites in the country, and then we are the Street Pro and that is the subscription side, where we give you actionable research and portfolio ideas, education, et cetera, research and portfolio ideas, education, et cetera. And so, as I said, we just we just relaunched about two months ago and so you know, I'm happy to offer people who are listening three months free right now. So our we charge I think it's $982 is an annual subscription or $99 a month. So this is a, you know, free three month subscription. I don't have a code or anything.
Louis: So maybe, louis, the best way is if people reach out to you and then you forward them to me or is there a way that you can get a link to us and then we could put it in the show notes? Or is there?
Jason: I'm working. I'll tell you what um. We just decided this last week. So I'm working on getting a code. It'll be something like you know, subscriptions, the street basin, so they'll know, they'll know who it is, um, uh, and and so I'll be able to get you that pretty soon. Okay, hopefully, hopefully in the next week or two. I hope that's um that'll work?
Louis: yeah, because we're we're about three weeks out right now. Yeah, so I've got three episodes before this one. So that'll great, that'll, that would be perfect, and that's thank you for doing that.
Jason: Excellent, excellent stuff, and I probably should have told you that before, but that's okay, that's the power of editing.
Louis: You know we can always edit stuff out, so we'll just make it. We'll get it to sound right, but this has been great and I'm glad you came on. You know, and is there any you know, if somebody wanted to reach out to you or anything like that, any way that you would, what's the best way for people to look you up?
Jason: So the best way. So LinkedIn is always great. I like LinkedIn because then I know exactly who everybody is, and otherwise I don't go to X or Twitter very often. I spend a lot of time on Instagram, though mostly car related. My other passion we didn't even touch on cars.
Louis: So, you know what we have to touch on cars. I'm sorry we're going to need to edit this and put it back somewhere, so so now I, I, I know you're a huge car fan and you joke about your racing capabilities and that you're like, maybe the slowest guy out there racing, but I have to, I have to know. Could you just give me your analogy on how racing cars is like investing and what you should glean from race the skills needed to be a good car racer versus a good investor?
Jason: Yeah, absolutely so. As you know, I wrote an article last year on the street so it's completely free titled what Car Racing Can Teach you About Investing, and it goes through the story of Sterling Moss in the 1955 Mille Miglia, which was this crazy, dangerous race through the streets of Italy, banned in 1957. The Ferrari movie that came out Christmas of last year was actually centered around the million million the 1957 million million. So people have seen the movie, know how dangerous that was. But in 1955, this guy, sterling Moss, went and set the all time record, averaged right around a hundred miles an hour for nine, almost a thousand miles of driving country roads across Italy. You know we live in Colorado. This would be like driving a thousand miles up in the mountains right behind me and averaging a hundred, hitting 175 miles an hour, and still able to win the award for being not only the fastest car but also for the most efficient driver in the race. And so that kind of is the cornerstone of what investors can learn about car, or what car racing has to teach investors about investing is. It all came down to a couple of things Risk management, being in the right frame of mind, right To understand what was going on having a plan right. That plan puts you in the right frame of mind so that when something bad happens as it always will, right?
Sterling Moss hit hay bales while he was driving. He drove off into a ditch. These things didn't fluster him, because he knew what he was doing, he understood, he used technology right. He basically had a plan and was able to set targets, goals, risk management for the entire race so that when he finished, not only did he set the record, not only was he the most efficient driver, but he also beat the number two finishing car in an identical car by 30 minutes, and that guy was a five-time world champion, right? So you're going to have mistakes. You're not always going to be the best or the fastest or whatever, but if you have a plan and stick to that plan, and if your plan isn't working, have other plans that you can go after that are well thought out, right. You're not just moving from plan to plan. Have a process right and you will be successful in the end. That's that's really the big thing. That's what it comes down to.
Louis: Yeah, that's great. That's good stuff. All right, Jason, thanks a lot. I appreciate you coming on.
Jason: Thanks, lewis, it's a lot of fun.
Louis: I'll look forward to see what you have coming next.
Jason: Yeah, we'll see. We'll see, At some point maybe I'll write this book. But it's slow going right now.
![Unlocking Long-Term Gains in Tech Investments | Ep 89](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Thursday Jul 18, 2024
Unlocking Long-Term Gains in Tech Investments | Ep 89
Thursday Jul 18, 2024
Thursday Jul 18, 2024
In this week's show, we talk about some of the secrets to tax-efficient investing strategies specifically tailored for tech stock portfolios.
As someone working in the tech industry, you may have significant shares tied up in your employer's stock—with great potential for appreciation, but also significant risks. Listen as I break down the potential volatility and tax implications of concentrated stock holdings, and walk you through a real-world case study of a high-income client and discover the ways we evaluate the quality, valuation, and technical conditions of your current holdings, strategically plan for long-term growth, and diversify your portfolio to mitigate risk.
Efficiently managing your investment returns is crucial, especially when balancing a diversified portfolio. In this episode, we delve into advanced tax management techniques like tax loss analysis and harvesting. I'll reveal how to prioritize long-term gains for favorable tax treatment and share the advantages of donating highly appreciated stocks to charity.
Discover the importance of selecting high-quality businesses with strong competitive advantages for long-term investment, and why working with a financial advisor can help you stay disciplined and aligned with your financial goals.
Don't miss out on this wealth of practical advice designed to make your investment journey smoother and more tax-efficient.
Highlights
In this week's show we discuss:
- Acknowledging the significant gains in tech stocks over the past five years and a caution about current overvaluation.
- Strategies for diversifying tech stock portfolios to find good opportunities.
- Discussion on the challenges associated with concentrated stock portfolios.
- Evaluation criteria including quality, value, and technical conditions to determine stock attractiveness for long-term holding.
- Ranking stocks based on percentage gain from cost basis to minimize tax impact.
- Emphasis on prioritizing long-term gains over short-term gains for favorable tax treatment.
- Maximizing after-tax rate of return, particularly for high-income individuals.
- Suggestion to donate highly appreciated stocks to charity to reduce taxable gains.
- Importance of working with a financial advisor for managing complex decisions and aligning them with personal financial goals.
- Encouragement for listeners to delve deeper into the conversation for detailed strategies on tech stock investments and tax efficiency.
PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:
1. Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life. I share this on my podcast the Market Call Show. To watch on Youtube – Click here
2. Read the Financial Freedom Blueprint: 7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here
3. Work with me one-on-one
If you would like to talk with me about planning and investing for your future. – Click here
Transcript
(Generated for reference - May contain errors)
Hi, I'm Louis Llanes and this is the Market Call Show.
Today I'm going to be talking about something that I ran into, and I run into quite a bit lately, you may be in this position, but I'm going to be talking about smart tax moves for a stock portfolio, basically, tax tips for people who have tech stocks. A lot of people have been making money in tech stocks over the last five years or even more, and they're highly appreciated, and if you work for a tech company, you may have quite a bit of that tech stock because the company has been granting you shares and you've been getting more and more tax lots over time at various prices, and maybe you even started investing in other stocks and those stocks have gone up in value. Maybe you've been emphasizing tech stocks in general, which has been a very smart move, but a lot of people would argue that a lot of tech stocks are overpriced today compared to their fundamentals. Things that savvy investors are thinking about today is how do I get a good, solid portfolio when I have a concentration in tech stocks, in particular, maybe your company stock? So I'm going to kind of just use a case study of an actual client, an actual person that we have been working with in helping them solve this issue working with in helping them solve this issue and this particular person works for a large tech company and has been acquiring the stock over time and he wants to get a tax-efficient portfolio because he makes high income and he doesn't want to pay a lot in taxes. None of us really want to pay a lot of taxes. That makes total sense. So what we're looking at is how do we take these tech stocks that he owns and he owns a lot of different ones Apple, anet, micron and others how do we take those stocks and then diversify them in a way that makes sense into good opportunities? So what I want to do is just first talk about the challenges of concentrated stock portfolios and then work our way methodically into how would you go about thinking, solving this problem and what is the best way, in my opinion, to deal with it.
So, first of all, the risk of concentration is pretty self-explanatory. You have overexposure to a single sector or a single company and that could potentially lead to high volatility and risk in your portfolio because any one of those stocks could have a bad scenario. Something can come out of the blue that you don't expect and, as you know, tech stocks can be very volatile and you could have a very large loss. I was actually thinking about a client, another client who we advised to sell a stock I won't mention the name of the stock, but she had quite a bit of concentration and we repeatedly advised them to do this type of strategy, to get a portfolio that was sound to deal with the ups and downs of the markets and the economy. And because of the tax bill, she did not want to do it and instead of having a seven-figure portfolio, now they have a six-figure portfolio, a significantly less literally 10% of the value of what they would have had had they followed the advice. So this is very important information for a lot of people and if you are in this position, hopefully this can help you. So, talked a little bit about the risk of concentration.
Once you kind of just understand the situation, the first thing to do is to do an initial assessment, and that starts off with a portfolio evaluation. So you want to evaluate the quality, the valuation and the technical conditions of your current holdings. That's generally the process that I like to take. So, basically, when we're talking about quality, we're talking about how certain or how much confidence do we have in this business, in the business of each stock, each company, to generate cash flows over the long term and to have solid growth. Also, we want to look at in terms of quality how strong is the balance sheet? How much debt do they have? How much cash do they have? What types of return on capital are they getting? What types of profit margins are they getting? Do they have a long-term competitive advantage that can last for a long time? Because when you have a large position like that, you can't just make big moves all at once. You know you definitely want to think about the longer-term implications and longer-term expected returns.
So we also want to look at the current price, which is getting into the valuation. So what is the price per share now? What is its market capitalization and how is that compared to fundamental metrics of value? So it's always good to have an idea about, you know, based on sound economic principles, what is the valuation or reasonable valuation range for the company. So that would be really based upon the after-tax net cash flows to equity shareholders as well as the business risks that are involved and you want to discount that back to get some form of valuation. Or you want to look at the you know the multiples that you're paying for, kind of the earnings power of the company on average. You don't want to take any one point in time, but like on average, you know, given a reasonable growth rate, that you would expect for the company, given its average earnings. Based on that, what is the multiple? And if those are really out of whack, then that tells you that, meaning that it's very overpriced compared to its fundamental valuation. That is another reason to want to sell.
So, basically, when you're looking at these conditions, these three conditions quality, value and technical the purpose of doing that is to get an attractiveness kind of score. So how much do I really want to hold this longer term? So let me just back up and talk a little bit about the technicals. The technicals is an analysis of the supply and demand for the shares right now. Because you want to understand is the stock under pressure right now or are people still very optimistic in the stock and still bidding it up? Because, depending on what type of conditions you're in there, that would influence your strategy for how you would exit. Okay.
So after the first evaluation, you want to you know you've looked at the quality and the value and the technicals. Then you want to look at the highly appreciated stocks and then you also want to you know you've looked at the quality and the value and the technicals. Then you want to look at the highly appreciated stocks and then you also want to look at the stocks that you may have in your portfolio with a loss. So, basically, what you want to do is you want to rank based on the percentage gain from your cost basis, what you know. How highly appreciated are they? How highly appreciated are they? And the reason why this is important is because for every dollar that you raise in cash to reinvest somewhere else, you'll have more gain. If it's highly appreciated, the higher the appreciation is. So what your goal is is to minimize the tax impact and get as close as you can to your target allocation. Okay, so when you're doing this, it's really a good idea to have a tax budget for the year. So you're saying, okay, based on my tax situation, my income levels, where the tax brackets are now, this is how much capital gain is reasonable that I'm willing to have in this year so that I can manage my taxes, all right.
So we've done the portfolio analysis, evaluating the quality, value and technical conditions of the holdings. Then we want to look at kind of the diversification strategy and what your target portfolio construction looks like. So that's really looking at. You know, if you're heavy in tech, for example I'm just using tech as an example you could be heavy in financials or industrials, anything like that. You want to look at what are the attractive stocks in other sectors and in other businesses that are not correlated to what I have a big exposure to, and what is my target allocation that I want to shoot for. So you create a diversified portfolio that you're shooting for and the whole objective there is to balance return and risk. So you're focusing in on high-quality companies with strong fundamentals and the companies that you want to buy as well, because in this type of a portfolio you're dealing with a taxable portfolio. It's a good idea to be focused on not short-term trading, because that generates higher taxation, more costs. It's generally best overall to be focused on long-term capital appreciation where your after-tax rate of return is the strongest. So you want to have companies that are high quality and have those strong fundamentals that you can hold for a long period of time and buy them at attractive prices or reasonable prices. So your aim there is to get the sector diversification beyond the industry that you have a concentration in. For example, if you're heavy in tech, you want to go more into health care, more into financials, more into materials industrials. That's pretty self-explanatory. Or it could be within tech, but with less correlation. Okay, so you may just broaden out your tech exposure as well as going into other sectors. All right, so that's kind of your diversification strategy.
Then you want to go into tax management techniques to actually get to where you want to go. And that starts off with that tax lot analysis that I had mentioned, where you identify which stocks that you want to sell first to minimize the tax impact, which stocks that you want to sell first to minimize the tax impact. And as you're doing this, you want to sell any of your losing positions first, any positions that you have that are at a loss, that are also not attractive, that you want to own. That would be tax loss harvesting. You want to go ahead and harvest those losses and then you kind of know what you're working with with your losses. And then the next step is you want to work towards prioritizing long-term gains versus short-term gains, so that gives you more favorable tax treatment. As I mentioned, long-term capital gains may be at a lower rate for you especially if you're high income than short-term capital gains. So you want to prioritize those long-term capital gains. That doesn't mean you shouldn't have short-term capital gains and I'll get into that a little bit here in a second but you want to prioritize the long-term capital gains.
Okay, now you want to get to kind of your implementation steps and you want to start by first reducing those concentrations and you want to sell the least appreciated long-term capital gains first. So you're starting off with the least attractive stocks, right, that have the highest appreciation, and you have a long-term or the lowest appreciation, I should say, and you have a long-term gain. That's what you want to sell first. And then you want to gradually sell higher appreciated stock lots, while considering the tax implications of that, and then you want to reinvest those proceeds into your target allocation sector. So you may be in a position where you're going to be selling some short-term, some stocks at a short-term gain, and the reason why is because a lot of times the most recent stock you got are the least appreciated and you still need to reduce your concentration in a particular stock. So some of those gains may be short-term and that would be optimal for you so that you can get that concentration down, all right.
So another thing to consider is if you're in a position where you want to give charity and you want to donate stock, it's a good idea to use stock that's highly appreciated. So if you're going to make any donations in a given year, look at those stocks that have the highest appreciation and that are least attractive. You know in that order really. And if you have a concentration so it's kind of again a balancing act so don't donate that stock first and that'll reduce your taxable gains there, all right. So you want to select the least attractive stocks from a fundamental perspective for your donation, if you can, because because you know you want to hold on to your winners and you want to let go of your losers, right. But if you are trying to avoid taxes, sometimes your winners are extended and it's time to. When I say least attractive, I mean least attractive of the current price relative to the economic fundamental value.
So it's so interesting talking about this topic because it can be confusing for some people because it almost sounds like you're talking out of each side of your mouth and you are in one way, because you're balancing. You're balancing expected future after-tax rates of return with how much pain I'm going to have to take in taxes right now, and, like I had mentioned with that client who you know, lost a ton of money that could have been avoided, and the sole reason why she lost a lot more than her tax bill would have been let's put it that way Okay, so my purpose in doing this is to help people and I hope to help people actually benefit from this if you're in this situation, because right now the markets have had a big run-up and a lot of people are holding a lot of tech stocks right now. So, again, we're talking about a balancing act between your taxes and your returns. So you want to optimize that after tax rate of return and you focus on maximizing that after the return potential that you have over the long term, not just the current gains. So what you want to do is you want to actually give yourself a budget and that's helpful so that you can give yourself an uncle points like I don't want to have more than this amount of taxes, all right, so you want to align your portfolio with your long-term investment goals as well. So you know, if you're going to be retiring soon, you might be needing to make some of these adjustments ahead of time. If you're an executive working for a company, you might want to start this process sooner rather than later. The other point I wanted to reemphasize is that you want to consider high quality businesses with a strong competitive advantage because, again, you want a long-term approach with this.
In general, it's not a good idea to do short-term trading in these types of accounts because of the tax impact and the costs involved. All right, so I just want to kind of bring this like my final thoughts here together on this, and hopefully this can summarize for you some key takeaways. It's important to have a disciplined approach to tax management and diversification when you're in this position, and you know it's a good idea. If you don't have like the software or you know the understanding about the valuations or the time to deal with all of these types of decisions, it's a good idea to work with a financial advisor or an investment manager that is very, very experienced in this and understands the nuances between after-tax rate of return, as well as your particular situation and how to get you to where you want to go. They can help you with the decisions, and I encourage you to review and adjust your portfolios regularly to make sure that you're aligned with your financial goals. So just to summarize those main points maximize your after-tax rate of return.
Don't let big concentrations derail your retirement plans or other plans that you have. Be sure to use a disciplined approach based on strong fundamentals for the long term and not based on short-term considerations. Don't overemphasize taxes. Look at the overall result that's coming to your benefit over the long run and look past the current year. Well, that's it for now.
I really want to encourage you to listen to my podcast. I'm going to be having a lot of new guests coming on and we're really going to be focusing in on investments and what's happening now. I'll be introducing a market metrics really kind of summary of what's happening right now prior to getting into our topics, so that will also help you. You know, just get of summary of what's happening right now prior to getting into our topics, so that will also help you. You know, just get some perspective of what's coming across my desk talking to various professionals in the business that could be helpful to your wealth, and I encourage you to subscribe to the podcast, if you have not done already and if you like this type of information, you know, feel free to share it with your friends, colleagues, professional people you know, and I invite any of your questions.
So if you want to, you know, get more information, you can go to path to real wealthcom and you can learn more information there about me. They'll also be. You can subscribe, you can get to the podcast there and there's also going to be more information that we're posting there that should be of value for you. That will allow you to get various publications that I might put out, and you could also, if you want, to read my book, the Financial Freedom Blueprint. It's available there. You can also get it on Amazon or anywhere else. That's all for now. Thank you for joining me and we'll talk to you soon. Have a great day.
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Monday Jul 08, 2024
Maximizing Your Real Estate Returns | Ep88
Monday Jul 08, 2024
Monday Jul 08, 2024
Unlock the secrets to smart real estate investing and learn how to maximize your returns while minimizing your tax burden. In this episode of the Market Call Show, we uncover the essential strategies for achieving a balanced portfolio by diversifying your assets into business ventures, real estate holdings, and secure reserves like cash or gold. We'll reveal how to strategically rebalance your investments without the heavy tax implications, even if a large portion of your net worth is anchored in real estate. Plus, we analyze the effects of inflation and interest rates on property values and rental income, underscoring the significance of after-tax, inflation-adjusted returns.
Navigate the complexities of capital gains and depreciation recapture taxes with our expert insights on 1031 and 721 exchanges. Discover the advantages and potential drawbacks of these powerful tax deferral tools, which can help you transfer property into like-kind assets or Real Estate Investment Trusts (REITs). These strategies offer not just tax benefits, but also avenues for diversification, liquidity, and improved estate planning. However, be prepared to give up some control over your properties. Listen in to gain a comprehensive understanding of how these tactics can aid in managing tax liabilities and diversifying your real estate investments in today's dynamic market.
Show Highlights
In this episode we'll talk about:
- Diversifying your assets into business ventures, real estate holdings, and secure reserves like cash or gold.
- How achieving a balanced portfolio can help mitigate risks associated with market fluctuations and economic changes.
- Learn strategies to rebalance your real estate investments without incurring heavy tax implications.
- Understand the complexities of capital gains and depreciation recapture taxes and how they affect your net worth.
- Analyze how inflation and interest rates influence property values and rental income.
- Focus on after-tax, inflation-adjusted returns to better gauge the true performance of your investments.
- Explore the benefits and drawbacks of 1031 exchanges to defer taxes by transferring property into like-kind assets.
- Discover how 721 exchanges allow for moving assets into Real Estate Investment Trusts (REITs) for diversification and liquidity.
- Understand that while these tools offer tax deferral and estate planning benefits, they may require giving up some control over your properties.
- Consider how REITs can provide quarterly liquidity and simplify estate planning through unit-based ownership.
- REITs offer a diversified portfolio that may include sectors like multifamily housing, storage, and healthcare, which are more recession-resistant.
- Evaluate opportunities to reduce real estate concentration and invest in other areas like businesses and reserves.
- Implement a low-turnover investment strategy to maximize your after-tax rate of return and minimize costs associated with frequent exchanges.
- Recognize the challenges in commercial real estate post-COVID, such as high vacancy rates.
- Identify resilient sectors like self-storage, healthcare, and education that offer more stability and growth potential- Be mindful of not letting real estate become too dominant in your portfolio.
- Diversify across different asset classes to protect against market volatility and economic downturns.
- Stay informed about quality investment opportunities in both real estate and the stock market.
PLUS: Whenever you're ready... here are three ways I can help you prepare for retirement:
1. Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life. I share this on my podcast the Market Call Show. To watch on Youtube – Click here
2. Read the Financial Freedom Blueprint: 7 Steps to Accelerate Your Path to Prosperity
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3. Work with me one-on-one
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Transcript
00:00 - Louis Llanes (Host)
Now I want to talk a little bit about the challenge that we get with capital gains. So now you've got this real estate, maybe you're lopsided and you have a lot of real estate. Maybe you want to retire soon and you want to have, or you just want to get more balance in your situation, or you want to diversify. Maybe you have too much concentration in one piece of real estate, or you might just be tired of renting it out and dealing with all of the issues of being a landlord and you want to have more of a passive approach.
00:30 - Intro/Outro (Announcement)
Welcome to the Market Call Show where we discuss investing wisely and living well. Tune in every Thursday to Apple Podcasts, spotify, google Play or subscribe on YouTube.
00:46 - Louis Llanes (Host)
Hi, I'm Louis Llanes. This is the Market Call Show. Today I'm going to be talking about real estate, mainly because people are talking about real estate all the time and many people are in a particular situation, so I thought I would address that situation. So I was thinking about what the name of this podcast would be. One idea was navigating real estate investments and capital gains tax, but really this is all about maximizing your after-tax rate of return on your real estate and then really meeting your objectives.
01:17
I heard about an old sage saying that is thousands of years old, and the gist of the saying was that every man should split their assets into three categories. One would be business, and then the other one would be land or real estate, and the other one would be reserves, which could be many different things, like cash or money market or CDs or gold things that are more reserve oriented. And I was having a conversation with somebody about this, and I've actually been lately seeing this same conversation over and over again. So I thought it might be something helpful for you or somebody listening to this podcast. And the situation is like this so I've been investing in real estate for a long time and over the years, my real estate has appreciated in value and maybe I put money in my 401k and other investments as well. But my real estate is worth a lot more than my other stocks and stuff because I put most of my wealth there and it is compounded and maybe I had debt on it and been paying the debt off over time. So now I've got this real estate and now if I look at my net worth, I'm kind of unbalanced. Unlike that sage advice that's thousands of years old that said you need you should have balance, I'm unbalanced right now because I've got all this money in real estate. Then maybe the real estate is paying income, but maybe it's not enough or maybe there's other reasons that you want to have less of it. So the question becomes how do I do that without paying an enormous amount of taxes? So that's what I'm going to be talking about today is some strategies on dealing with that can be very effective for you.
02:51
So the real issue that comes to play here is the balance right. Why should you have the balance? Well, it's kind of self-explanatory, but back thousands of years ago the sages were basically saying you should be prepared for any type of situation that is going to happen around you and you know nothing has changed. You know you have booms and busts and you have changes in government regimes. You have all sorts of crazy things that can happen, and that's why having reserve makes sense.
03:22
You know, if you want to have some gold, some hard assets, some assets that are, you know, really sound and steady, but you also want to be in business too, because business has the growth aspect and you know business can adapt to whatever is happening in the world. So you know, like, for example, right now in artificial intelligence, there's some businesses that are making a tremendous amount of profits. It's not just and that's just one example, but it could be many different businesses. It could be a private business, your own business, or an investment in private businesses, a portfolio of private businesses, which I'm also a proponent of doing as well, because then you can take advantage of other businesses that are doing well, that are in the private markets. It could also mean public businesses, and so that would be stuff on the stock exchanges, where there's tremendous amount of opportunities that come to play there. So you've got your business, you've got your real estate.
04:13
The beautiful thing about real estate is that you have rental income, hopefully from your properties, and then that rental income can hopefully go up over time. One of the challenges that happens, though, is that if inflation goes up, interest rates go up faster and inflation can go up faster than your rents, and the actual value of that real estate cannot be as attractive as it seems, and this is something that I've been noticing happening a lot, in fact. This morning, there was an article in the Wall Street Journal talking about how the average rental increase has been much lower than the inflation rate, and so you're really seeing that keeping up with inflation isn't always there. So, and typically, when you look at the valuation formulas for any asset, it's the present value of the cash flows of that investment, and that present value has a discount rate which is tied to interest rates, so if interest rates go up, then your hurdle rate goes up. That means that you need to have a higher rate of return to justify owning that asset at a particular price, so that could actually hurt asset values, and I know that sounds counterintuitive to some people, but that is kind of how it works. So what really matters is what happens after tax, right? What is your net worth increase after tax and inflation, which is kind of the silent wealth killer that is really affecting everybody right now due to many different factors which we won't go into right now.
05:37
So the other stool on that right, we talked about the reserve, gold, cash, things like that, and then we talked about real estate and we talked about business. Actually, I covered all three, so that's good. So so we wanted to. I want to talk a little bit about why you want to have balance there. Now I want to talk a little bit about the challenge that we get with capital gains. So now you've got this real estate. Maybe you're lopsided and you have a lot of real estate. Maybe you want to retire soon and you want to have, or you just want to get more balance in your situation, or you want to diversify. Maybe you have too much concentration in one piece of real estate, or you might just be tired of renting it out and dealing with all of the issues of being a landlord and you want to have more of a passive approach with real estate and maybe bring down the amount of real estate that you have, maybe increase the reserve or increase the stock or business orientation of your portfolio.
06:30
Okay, so capital gains is the big issue. There's really two main parts of that tax situation. Again, it's capital gains, and you probably have a long-term capital gain in your real estate, but you also have this nasty little thing called recapture of depreciation that comes into play. So recapture depreciation is just simply, you know, as you've been depreciating that asset over time, you've been getting a tax break on it, most likely, and now when you sell it, you have to kind of re undo that basically, and so there's a reversal of that. You recapture that depreciation and that generally hits income taxes rate, income tax rates. That can be ugly.
07:11
So many people know about what's called a 1031 exchange. A 1031 exchange allows you to go from one piece of property to another piece of property. They call it a like-kind exchange. They don't have to be exactly alike, it doesn't have to be like an apartment building to an apartment building or residential real estate to residential real estate. It just needs to be like-kind. There's some definitions and I'm not going to get into the details of all the definitions, but you basically go from one property to another and you defer that tax.
07:41
And there's some things that you have to avoid. You have to avoid what's called boot, which is, you know, if you have debt on it after you've sold it. You have to, you know, look at the total value of that real estate. You cannot benefit tax-wise from the leverage. You have to make sure that those values are in line. So, anyhow, that's a great way to do it, but the problem is that you're just going from one piece of real estate to another single piece of real estate most of the time. So what a lot of people like to do is to one great strategy is to actually put yourself in a situation where you can take the real estate that you have right now 1031 exchanges into another property, but that property then gets contributed into through a 721 exchange, an up REIT or a REIT, and this is a great way for you to transfer that property into a diversified portfolio of real estate. That may be more attractive, and this is in today's environment that is probably advisable for a lot of people actually. So you know, obviously everybody's situation is different, but it could make some sense to do that, because here's the benefit to this If you 1031 exchange into a single property and then that property is actually being put into this REIT, if the REIT has a sound investment strategy for the environment, then now you have access to a larger portfolio, that is, you're diversifying that across different types of assets multifamily home, maybe storage or medical and other types of areas that are doing well or maybe are more recession resistant.
09:19
A lot of the commercial real estate property. As you well know, after COVID and after all the changes that have happened there, they're not as attractive and a lot of people are avoiding that. There's a big shift happening there in that area, in the commercial real estate. But there's other areas where they're actually more recession resistant and they have steady rents that can go up. For example, recently in Arizona there's a student housing off-campus student housing where the students that go to universities they need to have a place to stay and they stay off campus. Typically the parents who are the ones who take these rents out are very well capitalized. Their average income is high somewhere around the range of $300,000, very low defaults and you have reasonably good yields and safety there. Storage could be another area Medical facilities obviously medical is stronger. So, having those alternative areas and diversifying a single property most people I've been running into either they have residential real estate or maybe they owned a business. They're selling their business and they need to sell some land or some other things and they just really need to get into income producing property because they have a big part of their network tied up into that.
10:32
There's many situations that can happen, but the concept is exploring that option to go from a 1031 exchange of your existing property, selling it 1031, exchange it into another property that is slated to go into a REIT and the REIT is in a solid situation to benefit over time and is more conservative. That could be a good way for you to do that, and here's the other kicker with doing that is you can also generally get more liquidity Once you're in that REIT. Oftentimes there's quarterly liquidity, so that you can basically peel some of your money out of real estate in general and maybe get less lopsided and invest in other things, in business and in reserves and other things that you need to do, still generating an income stream with that portion of your capital, but slowly moving your way out, and then thus you are paying less in taxes longer term because you're spreading it out. There's other strategies, too, that you could do, where you're doing a deferred sale and basically you're realizing that gain and recapture over time. That's another way to do this, but I do like this concept of 721 exchanging into an upread.
11:42
It is a difference. There is a difference from that than a 1031 exchange, and there's pros and cons there. The pros are you get the tax deferral. The pros of 721, you get the tax deferral. You get the diversification. You also get liquidity. There are some estate planning benefits. You could more easily parse that out in units, because you're basically getting units of this REIT. When you do this, you can, you know, in an estate planning scenario, you could easily divide that across your heirs, rather than having a situation where you have this asset and it's not easily divisible.
12:19
Some of the cons, though, is you do lose some control over the property. So if you really feel like you have to have total control over a particular property or something like that, or all of your property, then you will not like this strategy, because you're basically delegating some of the management. So it's really important to have good, vetted out REITs that you're dealing with, but these you know. If you're, if you understand that you maybe you don't know everything. If you're in a situation where you're not that savvy or you don't feel like you have the time to do all the research and all the everything else. This is a good way for you to actually, through using professional managers who this is all that they do that allows you to get their expertise as well. So, but that is a downside if you have to have a lot of control.
13:02
I mean, I'm thinking of one person. I know, a friend of mine, and I just feel like she wants control so much that at least at this stage in her game she's younger that maybe this wouldn't work for her. But you know, as you age, you know you may not have as less of a desire to do this, or you may just realize that, hey, I need to be smart and delegate some of my money to other people that know what they're doing and diversify, and maybe I need to use this as a way for me to diversify into more businesses, especially if we have more opportunities developing. You want to have, which I believe is going to happen. It just, you know, the probabilities of opportunities in business being higher is, in my mind, always great, even with all the stuff that's going on in the global economy. But then again, you know, if you have reserves too, you can also put money there. You just want to be prepared Anyhow.
13:51
So we talked a little bit about pros and cons and I want to address some of the liquidity and income needs issues. So when you go into a REIT, typically there's quarterly liquidity, like I said, and when you're moving that real estate in there, you're going to have more, more liquidity that you could take from it and you also have an income stream that you're getting. Typically, that income stream comes in monthly, which is nice, and the structure is different in terms of how it's taxed. And we're not going to go into all the differences, but suffice it to say that it may be a situation where you could save a lot in taxes, maybe even millions of dollars. I mean, I had a little conversation recently and it became clear to me that this literally means at least a million dollars in tax savings for this person over time.
14:32
So the current real estate opportunities that I wanted to discuss is you know, I kind of touched on it a little bit, but you know, given the current state of the commercial real estate, you know, vacancy rates is an issue post COVID and alternative real estate sectors show more resilience, like self-storage, because that's driven by life events such as downsizing and relocation or dislocation, and we're likely to have more relocation, dislocation, given technology, ai, differences in demographics and where people are moving in the economics of real estate in general being expensive in other areas. So you're likely to see a strong demand there. Healthcare is the other area we have growing demand due to the aging of population and that gives you much more stability. If you're doing your homework, potentially you could have better, more stable returns in the healthcare sector. And then on the education side, it's stable demand.
15:27
It's supported by increased college enrollments. We've literally been seeing, even though you know a lot, you hear a lot of people talking about how you know you shouldn't go to college. College isn't worth it. It's not a good investment. You know colleges are adapting. Right now. You're seeing new colleges that are coming up to adapt, to change and you know, just to make kind of highlight, that I've got 17 year old twins and they just recently went to a particular meeting of a university, the University of Austin actually, which is they're not accredited yet but they have some really sound, smart people there and they have an incredible program that they're developing there. You're just seeing a lot of adaptation and the other more traditional schools are going to need to adapt because you know, we know there's some needs that are going to be changing there. So we are seeing increasing enrollments and education is always important and you know the parents that are paying for this are usually good credit quality.
16:19
Now recession resilience sectors. You know I kind of explained why self-storage healthcare and education are more recession resistant. There are REITs that specialize in that and they have opportunities sometimes where you can invest in a particular property that is slated to go into those REITs and that allows you to do what I'm talking about here 1031 to 721 and help you get less lopsided, get more diversified, better return risk profile for your overall wealth, save a lot of taxes. That's a good thing to do. Speaking of taxes, I want to talk a little bit about compounding returns over your costs. So one of the things that you see some advisory firms do is they tend to 1031 exchange properties and then they roll them over and roll them over and if you look at all the fees and costs of doing these types of things the 1031s it actually hurts your compounded rate of returns because the costs really impact you. So a lower turnover investment strategy can maximize your after-tax rate of return estate component of your portfolio and then, you know, going into the stock world, which is always, in my opinion, equities are.
17:32
You know, I teed on stocks and in business, so I have a little bit of a affinity to that relative to real estate. But I recognize that real estate has benefits as well, and I've often tell people there is no perfect asset class. That's why we diversify, so we want to have diversification in strategies and asset classes and, given the current environment right now, where people have made a lot of money in real estate and they're basically in a situation where they need to, or it's advisable for them to, get more balanced and to save on taxes, this is a great way to think about doing that, and we have ways that we help our clients do that. So I want to just recap the key point here. You know, don't let real estate become too out of whack in your portfolio. You know there is no perfect asset class and there are some significant downsides to real estate.
18:24
Real estate does not always do good in an inflationary, rising interest rate environment. Only certain types of real estates do does, and you may or may not have that type of real estate. So if that's the case, maybe it might make sense to think about a change. And then don't forget stocks. A lot of people are down on stocks, but you know what business it's about. Businesses. Don't think about the stock market. Think about companies within the stock market. So I always talk about focusing your attention on the quality, valuation and sentiment or technical conditions of a particular each company, and you can find opportunity out there, especially for long-term investment and getting your income needs done if you're about to retire. So, anyhow, I thought this might be interesting because it just seems like I'm running into a lot of people right now who are in this situation. I hope you find this valuable and thank you for joining me and we'll talk to you later.
19:23 - Intro/Outro (Announcement)
For the latest episode of the Market Call Show. Make sure to like, subscribe and follow us on X, formerly- known as Twitter, and youtube, go to marketcallshowcom for all our past episodes and sign up to get alerts.
19:37
If you enjoy the content of this episode, please share it and comment. The information in this podcast is general in nature and does not take into consideration the listener's personal circumstances. Therefore, it is not intended to be a substitute for specific, individualized financial, legal or tax advice. To determine which strategies or investments may be suitable for you, consult the appropriately qualified professional prior to making a final decision.
![Roadmap to Fueling Your Best Life | Ep 87](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Tuesday Feb 06, 2024
Roadmap to Fueling Your Best Life | Ep 87
Tuesday Feb 06, 2024
Tuesday Feb 06, 2024
A living well focus on this week’s podcast leads me to a great interview with Paris Heinen. If you’ve struggled to make lasting changes, Paris Heinen gets it. After regaining lost weight herself, she shifted her approach and dropped 65 pounds. Best part? She’s kept it off for 24+ years.
Now Paris distills decades of wisdom into bite-sized nuggets. Get simple tracking tips to decode habits. Discover her “Power of 13” formula for sustainable change. Pick up thoughts on handling kids’ nutrition, balancing boundaries, and more.
Paris delivers an empowering dose of “you’ve got this” in this passionate chat. Let her practical inspiration propel your own progress, not perfection. Hit play now for achievable motivation from someone who has walked the walk.
Email Us! Is there a financial question or market problem you would like to hear Louis work through on The Market Call Show? Email us at hello@louisllanes.com and you may see it answered on a future episode! When you are ready, here are some ways we can help YOU with your investing and financial planning: 1. Try the new RISK NUMBER SCORECARD Everyone has a risk number. Let’s find yours. This tool can help you find YOUR personal risk number to have a peaceful investment journey ➡ https://bit.ly/3KJmpwv 2. Read the Financial Freedom Blueprint: 7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. ➡https://www.pathtorealwealth.com/ You can also get a personalize signed hard cover copy ➡ https://www.pathtorealwealth.com/the-... 3. Work with me one-on-one If you would like to talk about planning and investing for your future. ➡https://calendly.com/wealthnet
![Monte Carlo Simulations and Financial Planning | Ep 86](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Thursday Jan 11, 2024
Monte Carlo Simulations and Financial Planning | Ep 86
Thursday Jan 11, 2024
Thursday Jan 11, 2024
Podcast Mentions:
FREE Portfolio Review, www.wealthnetinvest.com
Wealth Beyond Numbers, www.lblmedia.net/workshop
Welcome to the Market Call Show!
This latest episode of the Market Call Show explains the best way to use Monte Carlo simulation, model different scenarios and make decisions with greater wisdom. The key is constructing the right asset blend, with stability, growth potential, and tax efficiency. This episode has insights on how to find your own "Moneyball" retirement strategy.
In this week's episode, host Louis Llanes discusses:
- Why financial security & peace of mind are most people's biggest investment goals
- How Monte Carlo simulation is used to model investment plans, and its pros and cons
- Limitations of Monte Carlo: Doesn't fully capture complex cash flows, equal failures
- Disconnect between Monte Carlo projections & client definitions of success
- Having portfolio "players" with different roles: stability, growth, liquidity
Social Media Links:
Twitter: /LouisLlanes
Linkedin: /LouisLlanes
Facebook: /MarketCallShow or/WealthnetInvestments
FREE Download chapter one of the Financial Freedom Blueprint to learn how to stay ahead of the herd. Visit www.pathtorealwealth.com
Schedule a call and free portfolio review www.wealthnetinvestments.com
1. Try the new RISK NUMBER SCORECARD Everyone has a risk number. Let’s find yours. This tool can help you find YOUR personal risk number to have a peaceful investment journey – Click here
2. Read the Financial Freedom Blueprint: 7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. – Click here
You can also get a personalize signed hard cover copy – Click here
3. Work with me one-on-one
If you would like to talk about planning and investing for your future. – Click here
![Use ”Mr. Market” to Your Advantage | Ep 85](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Thursday Dec 21, 2023
Use ”Mr. Market” to Your Advantage | Ep 85
Thursday Dec 21, 2023
Thursday Dec 21, 2023
Welcome back to another episode of The Market Call Show! I'm Louis Llanes, and I'm excited to share some valuable insights with you today. In this episode, we'll be diving into the dynamic world of market fluctuations, economic implications, and uncovering key principles from one of the greatest investment minds, Benjamin Graham. I recently heard a fascinating strategist call with industry experts, including Schwab's Liz Ann Sonders and fixed income analyst Kathy Jones. We'll dissect the discussions on political uncertainties, economic indicators, and the potential impact on investors.
But that's not all – we'll also explore the concept of a compass in investing. Think of it as your north star, guiding you through the complexities of today's financial landscape. How can you steer clear of poor decisions in times of uncertainty? I'll draw on timeless principles from Graham and Warren Buffett, discussing the importance of margin of safety, diversification, and separating speculation from sound investment.
Stay tuned for a thought-provoking episode that aims to empower you with knowledge and strategies for navigating the markets. Let's jump right in!
![Navigating Uncertainty | Ep 82](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Thursday Aug 24, 2023
Navigating Uncertainty | Ep 82
Thursday Aug 24, 2023
Thursday Aug 24, 2023
In this episode, Louis talks about the conflicting emotions surrounding current investment landscapes. With the economy appearing uncertain and news causing unease, we explore the principles of stability through two renowned investment books: "The Intelligent Investor" and "The Rule." Join us as we dive into Louis' concepts of quality, valuation, and sentiment, and examine how these principles can help investors find their footing amid market noise and market trends. Whether you're a seasoned professional or a curious learner, this episode offers valuable insights to help you weather market storms and make informed investment decisions.
I’m Louis Llanes. I’ve got a wealth advisory firm that gives comprehensive investment advice and financial planning. Our clients get structure guidance and investment management to preserve and grow wealth over the long term. To schedule a free call, go to wealthnetinvest.com.
Whenever you’re ready… here are 3 ways I can help you with YOUR investing and wealth planning advice:
1. Listen to the Market Call Show Podcast or Watch on Youtube
One of my favorite things to do is to talk with smart people about investing, financial planning, and how to live a full life. I share this on my podcast the Market Call Show. To watch on Youtube – Click here
2. Read the Financial Freedom Blueprint: 7 Steps to Accelerate Your Path to Prosperity
If you’re ready to accelerate your path to prosperity, the Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. You can get a personalized signed hardcover copy – Click here
3. Work with me one-on-one
If you would like talk with me about planning and investing for your future. – Click here
Also please check these out:
Wealthnet Investments
Media Appearances & Interviews with Louis
Speaking
![Clients We Refuse to Work With | Ep 81](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Thursday Jul 27, 2023
Clients We Refuse to Work With | Ep 81
Thursday Jul 27, 2023
Thursday Jul 27, 2023
Revealed: The Clients We Refuse to Work With - Unmasking the Traits of Terrible Investors • Introduction: • Podcast announcer introduces the show, its purpose, and availability on various platforms. • Louis Llanes of Wealth Net Investments introduces himself and expresses his desire to help people become better investors. • Reflects on his career and the realization that some clients unknowingly engage in poor investment practices. • Personal Journey: • Shares his background in economics and finance, highlighting his passion for finding patterns and trends in the economy and investment markets. • Describes the serendipitous discovery of a book that changed his life and led him to pursue an economics degree. • Discusses his professional experiences in the financial industry and the importance of financial planning. • The Role of Probabilistic Thinking: • Emphasizes the significance of thinking in probabilistic terms for successful investing. • Explains the concept of expected value and the importance of considering different scenarios. • Provides examples of how to evaluate investments based on probabilities and expected values. • Argues against the desire for 100% certainty and the need to accept the unknown in investing. • Managing Emotions and Avoiding Impulsive Decisions: • Discusses the detrimental effects of letting emotions guide investment decisions. • Advises listeners to control their emotions and think rationally, focusing on long-term investment goals. • Highlights the importance of risk management and cutting losses to maximize returns. • Shares the pitfalls of being a rearview mirror investor and the need to avoid emotional reactions to short-term market fluctuations. • The Balance of Diversification: • Stresses the importance of diversification in investment portfolios. • Warns against over-diversification that dilutes potential returns and the concentration risk of investing too heavily in a single investment. • Encourages finding the right balance between diversification and concentration based on individual risk profiles and investment goals. • Understanding Investment Cycles and Styles: • Discusses the existence of cycles in both the economy and investment styles. • Cautions against changing investment strategies solely based on short-term trends or being out of favor with a particular investment style. • Highlights the importance of choosing investment approaches with long-term success and robustness. • Conclusion: • Reiterates the importance of probabilistic thinking, diversification, managing emotions, and understanding investment cycles. • Acknowledges the challenges of human nature in investing and the need to resist emotional impulses. • Expresses the intention to provide more timely discussions on current trends and patterns in the investment world. • Encourages listeners to ask questions and engage with the podcast for personalized advice and information. • Outro: • Podcast announcer reminds listeners to subscribe, follow on social media, and visit the website for past episodes. • Encourages leaving reviews and ratings to support the podcast. • Disclaimer about the general nature of the information provided and the importance of seeking personalized advice from qualified professionals.
When you are ready, here are some ways we can help YOU with your investing and financial planning:
1. Try the new RISK NUMBER SCORECARD Everyone has a risk number. Let’s find yours. This tool can help you find YOUR personal risk number to have a peaceful investment journey ➡ https://bit.ly/3KJmpwv
2. Read the Financial Freedom Blueprint: 7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. ➡https://www.pathtorealwealth.com/ You can also get a personalize signed hard cover copy ➡ https://www.pathtorealwealth.com/the-book/p/financial-freedom-blueprint
3. Work with me one-on-one If you would like to talk about planning and investing for your future. ➡https://calendly.com/wealthnet-make-an-appointment/introzoom
![Top 5 Questions: Your Advisor’s Critical Role in Spousal Support | Episode 80](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Thursday Jun 15, 2023
Top 5 Questions: Your Advisor’s Critical Role in Spousal Support | Episode 80
Thursday Jun 15, 2023
Thursday Jun 15, 2023
Title: Top 5 Questions: Your Advisor’s Critical Role in Spousal Support | Ep 80
Keywords: spouse, advisors, people, wealth, cpa, titling, feed, podcast, investments, wealth advisor, coordinate, nest, question, passes, involved, call, accounts, situation, calls, Wealthnet Investments, Louis Llanes, death, spouse, planning, will, attorney, trust
Podcast Mentions:
10-Point Checklist for Worry Free Retirement, https://www.retireready.live
Social Media Links:
Twitter: /louisllanes
Facebook: /louisllanes
/marketcallshow
LinkedIn: @louisllanes
YouTube Channel: https://www.youtube.com/channel/UCZZBFVZq3wIkZtToH-StTYw
Schedule a call and free portfolio review http://www.wealthnetinvestments.com
Shownotes
On this week's latest episode of the Market Call Show with Louis Llanes--well actually, this is our first episode from our new playlist called Ask Wealthnet-a periodic podcast that answers your questions on financial strategies, retirement planning, and proven best practices that will empower you to make informed decisions about your wealth management.
In this episode, we discuss five essential questions that come from our own clients and felt it imperative to share.
- The importance of all parties being active with the financial discussions
- How to prepare yourself financially before the passing of a spouse
- The essentials of having an estate plan
- What your CPA and attorney has to do with being ready
- Knowing your financial team is imperative for a successful financial future.
Join us on this special episode of Ask Wealthnet to gain valuable knowledge and guidance on the importance of being actively engaged in your household finances. By taking control of your financial well-being, you can secure a brighter future for yourself and your loved ones.
We’ll be answering your questions—please feel free to email your questions to hello@louisllanes.com.
When you are ready, here are some ways we can help YOU with your investing and financial planning:
1. Try the new RISK NUMBER SCORECARD Everyone has a risk number. Let’s find yours. This tool can help you find YOUR personal risk number to have a peaceful investment journey ➡ https://bit.ly/3KJmpwv
2. Read the Financial Freedom Blueprint: 7 Steps to Accelerate Your Path to Prosperity If you’re ready to accelerate your path to prosperity, Financial Freedom Blueprint lays out a proven system for planning and investing to secure your financial independence. ➡https://www.pathtorealwealth.com/ You can also get a personalize signed hard cover copy ➡ https://www.pathtorealwealth.com/the-book/p/financial-freedom-blueprint
3. Work with me one-on-one If you would like to talk about planning and investing for your future. ➡https://calendly.com/wealthnet-make-an-appointment/introzoom
![Avoid These 5 Mistakes Before You Retire | Ep 79](https://pbcdn1.podbean.com/imglogo/image-logo/12435163/Retire-Ready-18_2__fnvzks_300x300.jpg)
Thursday Jun 01, 2023
Avoid These 5 Mistakes Before You Retire | Ep 79
Thursday Jun 01, 2023
Thursday Jun 01, 2023
Title: Avoid These 5 Mistakes Before You Retire | Episode 79
Welcome back to our Podbean channel, where we provide valuable insights on financial planning and retirement. In today's episode, we're diving into the fascinating world of pre-retirement planning and discussing common mistakes to avoid. Stay tuned as we cover a range of crucial topics that will set you on the path to a worry-free retirement.
[0:00] Segment 1: Exploring the risk profile of a pre-retirement window.
[2:16] Segment 2: Maximizing Retirement Benefits - An in-depth look at your company's retirement package.
[4:20] Segment 3: Rolling over into an IRA - The pros and cons of rolling over a 401k.
[7:07] Segment 4: Mastering the Pre-Retirement Budget and Taxes - Insights on budgeting and tax considerations.
[9:53] Segment 5: Stress Testing Your Portfolio - Preparing for a secure retirement through portfolio analysis.
[12:41] Segment 6: Determining Your Risk Profile - Avoiding the five worst mistakes near retirees make.
[15:08] Segment 7: Accurately Calculating Income in Retirement - Tips for avoiding pitfalls in income calculations.
[16:51] Segment 8: Carving High Debt into Your Retirement Plan - Strategies for managing debt and costs.
Host: That wraps up today's episode on pre-retirement planning and the crucial steps you need to take for a worry-free retirement. We hope you found the insights and strategies shared here valuable. Don't forget to like, subscribe, and hit the notification bell to stay updated with our future episodes.
Podcast Mentions:
Free Download of A 10-Point Checklist for a Worry-Free Retirement: http://www.Retireready.live
FREE Download chapter one of the Financial Freedom Blueprint to learn how to stay ahead of the herd. Visit http://www.pathtorealwealth.com
Schedule a call and free portfolio review http://www.wealthnetinvestments.com
Social Media Links:
Facebook: /Louisllanes
Twitter: @LouisLlanes
LinkedIn: /LouisLlanes