Lead-Lag Live

Jeff Sarti on Rethinking Diversification, Private Credit Insights, and Behavioral Finance in Investing

• Michael A. Gayed, CFA

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What if everything you thought you knew about diversification was wrong? Join us for a compelling conversation with Michael Gayed, Publisher of The Lead-Lag Report, and Jeff Sarti from Morton Wealth as we challenge the status quo on what it means to truly diversify an investment portfolio. In a world of unpredictable markets, we discuss the vital importance of holding assets that may not always be in vogue but can safeguard against economic downturns. From the shifting reliability of bonds to the necessity of strategic asset weighting, this episode offers a fresh perspective on achieving consistent performance and managing risk in today's financial landscape.

But that's not all. We also shed light on the often-overlooked private credit market, where Jeff shares insights on navigating its complexities and potential pitfalls. With concerns about liquidity and weakened underwriting standards in the spotlight, discover how exploring less crowded markets might just be the key to mitigating risks. Drawing on the work of behavioral finance experts like Daniel Kahneman, we tackle the familiarity bias that can cloud investment judgment, using Apple as a prime example of how brand recognition can lead to overconfidence. It's a reminder to always seek genuine understanding over mere comfort when making investment decisions.

Rounding out our conversation, we scrutinize the speculative excesses and valuation concerns permeating the current market scenario. With an eye toward long-term investment strategies, we emphasize the need for a value-oriented approach amidst macroeconomic challenges. While navigating the pressures and perplexities of fiscal policies, excessive liquidity, and changing trading mentalities, we stress the importance of staying grounded in fundamentals. Don't miss this episode's engaging discourse on behavioral finance and the wisdom of adopting a cautious yet strategic approach to investing.

The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.

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Speaker 1:

If everything in your portfolio is going up at the same time, it feels good while it's happening, but then you know what happens on the downside right. Theoretically, everything will go down at the same time, which is exactly what you're trying to avoid. We believe this is the time to be more conservative and defensive in nature, as opposed to putting your foot on the gas. So, as a byproduct of that, we're going to be more diversified in this environment as compared to other environments. History and finance have proven this time and time again you cannot just print your way into prosperity. You cannot just lower interest rates to zero I mean, those are literally the lowest interest rates in human history and fix a leverage or debt problem which we had in 2008 with more debt my name is Michael Guyette, publisher of the Lead Lagarboard.

Speaker 2:

Joining me here is Sarti Jeff. A lot of people are not familiar with you, but they should be, so introduce yourself to the audience. Who are you? What's your background? What have you done throughout your career? What are you doing?

Speaker 1:

growing Great. Super excited to be here, michael. My background I'm with Morton Wealth. We're a wealth management firm located in Calabasas, california. Actually, just timing-wise, just dealing with the fires surrounding us right now, which is just devastating and surreal but we're managing around that. A long career in wealth management, actually, in my 20s I bounced around in different careers prior to wealth management trying to find my way. Finally sidestepped into wealth management in my mid to late 20s and bounced around a few different places, mainly traditional shops focused on stocks and bonds. I got great training there but was searching for something more. And then finally back now 20 years ago, aging myself in 2004, landed at Morton Wealth where we do a lot of different things across a variety of asset classes that I'm sure we'll talk about.

Speaker 2:

Ah, asset classes. I thought asset classes were supposed to be the way to diversify, by having one asset class blended against another. All right, last few years have been a pretty nasty bear market. You can argue for diversification, or at least traditional ways of thinking about diversification, and I wanted to name this conversation reimagining diversification. First of all, I think we should define what true diversification is. I always joke that diversification means having things in your portfolio that you hate. That that is perhaps the purest definition of diversification. But from a more rigorous way of saying it, how do you define diversification?

Speaker 1:

Listen. I love even some of the things you hit on. We use the word true diversification. We'll talk into what we mean by true diversification, but even your comments of what you hate, I think that's an excellent way to put it. It's counterintuitive, but it's seeking out investments or asset classes that will truly behave differently in different environments.

Speaker 1:

Not everything should go up at the same time. If everything in your portfolio is going up at the same time, it feels good while it's happening, but then you know what happens on the downside right. Theoretically, everything will go down at the same time, which is exactly what you're trying to avoid Philosophically from a high level. At the risk of stating the obvious, it's just not wanting to put all your eggs in one basket, which of course, makes intuitive sense. But the problem with the science and dogma around diversification is the data, the data that most look at. Of course you're looking at historical data. That's all we have. But the problem with historical data is, call it, 70 or 80% of the data is in up markets and the whole point of diversification or the main point I should say it's really about protecting on the downside. So 70 or 80% of the data is meaningless to some degree. It's really something that we should almost throw out or underweight that data and really emphasize the data of what happens in the 20% of down markets and especially in the real nasty down markets that happen call it 5% of the time the 2022, 2008, 1999, 2000 environment, and we all know what happens.

Speaker 1:

Let's just focus on stocks. Its correlations go to one, right, I mean diversification. Data breaks down and so you think you have a diversified portfolio because you have a bunch of things that move in different directions in normal markets. But then, when you really need the diversification, things move together and so that's talking about stocks. But then, even if you look further and look at other asset classes, the same real philosophy applies.

Speaker 1:

The same real philosophy applies Again if you're in a variety of different asset classes let's say stocks, commodities, real estate and we believe you should own all of those, don't get me wrong. But again, the challenge with even owning most of those asset classes is in an economic volatile environment or contagion correlations go to one. So, to your point, you got to seek out asset classes theoretically I'm going to use the word hate that you really theoretically otherwise think you'd want to avoid or not be drawn to, because if they perform well, knock on wood in most environments, but most importantly, in those tougher economic environments. That's how you truly build a resilient portfolio. So when we're looking for asset classes, listen, it's easy to find those that are going to behave well in up markets, but if we can find those that are going to do okay and hold their own in tough or down markets, that's the golden ticket for us, and those are the types of things we really, really strive to look for Are there certain fairly reliable diversifiers?

Speaker 2:

I mean, it used to be the case that long duration treasury is worth that. Obviously not in this cycle. That might change. Of course, and I think that's an important point too. Even if something is reliable in the past, it doesn't mean it's going to be reliable in the small sample which we all live in day to day. But let's talk about sort of the classic diverse fires versus the diverse fires of today.

Speaker 1:

Yeah, no, it's a great question, just even starting with bonds, and listen, this is part of why the next 40 years, we believe, won't look like the last 40 years. We've been so spoiled with the last 40 years of a declining and friendly interest rate environment, which has been a stalwart of a declining and friendly interest rate environment, which has been a stalwart of a 60-40 portfolio, and bonds have generally suited their purpose as a diversifier in downward markets to your point of flight, to safety, if the dynamics change and we've been concerned for a number of years that the dynamics have and will change, namely, I'm sure we'll talk more about it inflationary concerns, currency concerns, you name it. Bonds, specifically treasuries, potentially will not be the stalwart that they were in years past. So, yeah, to your point, you have to look elsewhere and that is why we've looked to bond alternatives in a lot of ways to provide that diversification.

Speaker 2:

Okay, so that's actually a good direction to go, because I've been seeing more of that as a category or bucket of alternatives right, and I haven't found that. The way it's couched is it's a bond alternative because it's equities that use covered calls that generate yield, right. I mean, that's typically kind of like the way that it's code for that right, so but Definitely not that.

Speaker 1:

Sorry to interrupt, because I love that you even mentioned that I was not going to even go there. But this theme around covered call writing and it's not that covered call writing or option strategies I have an options background that they should be avoided. There's a time and place for that, but that's not income, that's stocks and selling upside to generate income as a byproduct of it, but that's not an income strategy at its core, it's a stock strategy at its core. So sorry to interrupt.

Speaker 2:

I just wanted to throw that in. No, no, but that's exactly the point. That's exactly the point. So, first of all, when we say bond alternative, alternative implies it's substantially similar, not necessarily in terms of mechanics, but in terms of performance behavior, to your point about during drawdowns. Okay, so what is a true bond alternative then? In?

Speaker 1:

that sense. So, from a high level, I think, of asset classes in two very simplistic forms equity and debt. Right, you really have two choices Equity is, of course, stocks, and then it can be private equity in various forms, whether owning companies or real estate, and then you have debt. Typically, most people invest in debt in the public markets, but then there's a variety of bond alternatives. Specifically, I'm speaking to the private market. So when I talk about bond alternatives, I'm mainly talking about the private credit landscape which, as you know, has really grown tremendously in recent years. And as a result of that growth and there are a lot of good reasons for that growth that we can potentially talk about, but for a lot of reasons around that growth the standards around private credit have deteriorated.

Speaker 1:

Talking about that plain vanilla, traditional private credit space which is really just a high-yield bond proxy more than anything else. Again, I'm not saying you avoid it completely, but it looks and feels more like high-yield bonds than anything else, that standard private credit asset class. So I'm looking in other areas of private credit. Specifically, it's two main areas of focus. The first primary area of focus is lending on assets as opposed to cash flow. So what I mean by that is again the lion's share of private credit. When you lend to corporate America, you're lending to a company based on its cash flow or earnings. All well and good. But again, going back to that diversification argument, it's sort of an equity substitute to some degree. We all know what will happen in a recession those earnings will deteriorate and now you're left holding a bond where that might not be performing Very different than if you lend to a company based on its assets.

Speaker 1:

It could be its inventory, it could be its intellectual property, it could be its critical, necessary manufacturing equipment, trucking fleets, you name it and the key is being senior in the capital structure. And it's all loan to value. You value these assets and as long as you have a healthy enough cushion in terms of the loan to value what you're lending as compared to the actual market value, liquidation value of those assets, you should be fine, even in a tough economic environment. The point of that asset-based lending is to be truly agnostic agnostic to the health and future of the company. When we lend, we want to take our crystal ball and, in all honesty, throw it in the trash. Sure, we'd love the companies we lend to to be healthy and continue to grow their earnings, but the key is what if they don't right?

Speaker 1:

This again goes back to that true diversification what if either their fundamentals deteriorate or things outside of their control? Macroeconomic fundamentals can deteriorate. We hit a recession that is more broad, sweeping in nature and takes their industry down with it. We want to be able to grab those assets and be resilient. So that's the first bucket, and then the second bucket is more lending to strategies, industries that we define as necessity-based, so things that we believe will be more resilient in recessionary type environments. Mainly talking about the food industry People need to put food on their table and their health care industry People are fighting a medically necessary, critical issue. They're going to continue to take their drug or medication even if they hit a recession. So that's the second subset of industries Asset-backed, on the one hand, and then necessity-based industries, on the other hand.

Speaker 2:

You mentioned kind of quality on the private credit side. I put out a post on X. It just kind of came to me randomly. I said private credit is this cycle's subprime, yeah, and I got a lot of engagement when I put that post out. Am I off on that? I mean, obviously the systemic risk potential is not anywhere near right like 08. Is there some risk that private credit you know in private credit people are not seeing or talking about? I mean, we know about liquidity risk, we know about the quality largely you know not being as good as it proclaims to be, but can that cause a system-wide issue?

Speaker 1:

I mean listen? The short answer is yes, it's. It's hard, I mean, I read a lot of reports. It's hard for me to wrap my head exactly around the data, the true scope and size of the private credit market, but without a doubt it's large and growing to some degree exponentially, and that's with any asset class. When you see that type of growth, that raises concerns and alarm bells, and those alarm bells are valid.

Speaker 1:

Again, it goes back to the previous point I made around underwriting standards and covenants. There is no doubt that they have weakened. So in the private credit space you have to be much more selective and diligent. But again, the challenge, the pushback I would have to the comment is I wouldn't pay all of private credit with a broad brush. All private credit means. It just means debt. It just means debt.

Speaker 1:

That's not in the public markets. You can say the same about private equity. Yes, private equity is expensive, but that doesn't mean that there's not opportunities within private equity where you can find a company and buy it on the cheap. So private credit is an enormous universe. It's just private loans and we tend to focus on areas that are less efficient, less crowded, because if they're less crowded you're not going to run into those issues that we're currently facing Again. When it becomes more crowded, that's where covenants start to weaken, underwriting standards start to weaken. If you're in less crowded spaces, theoretically spaces that are a little bit more complicated will have a little bit more hair on them. Then for that reason, lenders don't enter into those areas, and that suits us well, because we partner with lenders that are willing to enter into those areas. They have less competition and, as a result of that lower competition, they don't have to lower their underwriting or covenant standards.

Speaker 2:

You sent me a note via email which I think is worth teasing, which is that investors confuse familiarity with true knowledge. Yeah, I love that. I don't think it's just investors, I think people in general. Let's talk about that. How does that create problems for a portfolio?

Speaker 1:

Yeah, this is a really, really fascinating topic. We think a lot about behavioral finance when we talk and educate and work with our clients. Familiarity in particular is a really interesting one where, as you said, most investors and it's human nature to you associate familiarity with something that you trust and then have a true understanding of and that suits us well in many aspects of our life. But with investing, we believe that has those biases have detrimental effects and just even backing up a little bit, a lot of this comes from, if you're familiar with Daniel Kahneman's work who I believe just passed away last year, he wrote the book Thinking Fast and Slow and he talks about familiarity and how it's really so. Many of these biases are rooted in our survival instincts and they make sense. Safe, if something looks unfamiliar out in the wild, you're going to be cautious and stay away from it and again, that makes all the sense in the world. But when it comes to investing or other aspects of life, those survival instincts might not suit you so well and just even as a quick example, he cited some studies which are just fascinating. Just shows how the human mind naturally works. What he has is yet two different test cases One group of people who over the course of a day, they were shown a lot of different stimulus and pictures, but specifically they were shown a symbol, a symbol that they never recognized, and they were shown that symbol only a couple of times and, let's say, it just was flashed on the screen very quickly. And then the other group of people, the other half of the people in this study, were shown this same symbol literally dozens and dozens of times and it flashed on the screen for a lot longer time period for them as opposed to the first test case group. And so at the end of the day, these groups, they were brought in room, they were asked a bunch of questions, but the only question that mattered was tied to the meaning of this symbol, and each group was asked a multiple choice question of what does this symbol mean? And those in the first group that were really unfamiliar with this symbol typically associated the symbol with some sort of negative meaning or nefarious meaning, versus that other group that was much more familiar with that symbol and with that familiarity they felt like there was trust involved. They associated with some sort of good omen or something positive, and that symbol was. It was a meaningless symbol, and these types of studies. They did the same studies with a foreign word, same results, a word that you didn't know, similar to the symbol example. And it's just again really humbling that it shows how the human mind works, that you're naturally drawn to what's familiar as opposed to what's familiar. So I just give that background because it's an interesting case study.

Speaker 1:

But now tying it to investments, so many are drawn to investments that they're familiar with because it gives a sense of comfort and therefore knowledge, even if that knowledge isn't real or not. I mean, just a simple example is name the brand or stock that we're all familiar with. It could be a company like Apple. We're all tremendously familiar with Apple right, I have an iPhone right here. We all are so familiar with the product. But to actually say we have a true understanding of the company, the dynamics of its balance sheet, competitors, supply dynamics, I mean even just its P ratio, I'd say the lion's share of investors have no idea of what price to earnings ratio Apple is trading at and, by the way, it's trading at a very expensive price to earnings ratio. Apple is trading at and, by the way, it's trading at a very expensive price to earnings ratio, but they're drawn to it because they're familiar to it and then they have a false sense of what I would say of knowledge or understanding Very different than even the previous examples I gave you of in the private credit or private lending space.

Speaker 1:

Because you're unfamiliar, most investors avoid it. We like that because it's less crowded. But if you think about lending just on a piece of real estate really not rocket science, right you could get a sense for the price of that real estate. Figure out a loan to value, have a nice cushion in terms of that loan to value ratio, loan as compared to equity or market value, and underwrite that loan. I'm not saying it doesn't take work, but it's not rocket science as compared to reading through the 10K or financial statements of a complex multi-global company like Apple.

Speaker 2:

It's funny because the familiarity point takes me back to technical analysis and charting and that's what people are familiar with and they think that means they're a knowledgeable trader, investor, and create all kinds of problems. Familiarity and knowledge also impacts perception of risk To the extent that and it's tied to recency bias obviously to the extent that people say thoughts only go up, seemingly they forget that there are plenty of decade-long lost periods where they don't. Recency bias obviously, to the extent that people say stocks only go up, seemingly they forget that there are plenty of decade-long loss periods where they don't. Let's talk about that. And let's talk about, as you mentioned, valuation and sort of a longer-term outlook for you, for the firm, in terms of expensive assets. We know one of them is US equity.

Speaker 1:

Yeah, without a doubt, and to your point, recency bias. Again, this is just human nature. It does tie to your point with regards to familiarity. What has happened recently is very front and center in terms of our mindset, the typical investor mindset, and so what happens in the recent past you think is going to continue in the future. That being said, what we tend to look at is longer term cycles and valuations associated with those cycles, and when we think of stocks as a part of the portfolio. Yes, of course we're going to own stocks, um, as a part of the portfolio, but we own less than most, and one of the reasons is valuations, and we'll come back to that, but the the other, as you alluded to, is the long-term risk and potential drawdown that we think is wildly misunderstood when it comes to stocks. So, just looking back at simple data, looking back, let's say, the last 100 years, if you break those last 100 years down to three 30-ish year groupings, what you find is, within each of those 30-year groupings, roughly 10 years of the 30 years stock returns are roughly flat to down, and then the other 20 years, stocks are up and up meaningfully. So simple example 1929 to 1943, it actually took 14 years for stocks to break even after the 1929 stock crash.

Speaker 1:

And then you had a tremendous run from World War II on through the mid-1960s. But then what happened? Stocks became expensive and, starting in 1966, they started to go sideways. So how long did that sideways market last? It lasted from 1966 to 1974. So that was actually only an eight-year period. But, as you know, inflation was running rampant. So on an inflation-adjusted basis, stocks did very poorly. It actually took till 1982, 16 years to break even with inflation. And then what happened? P ratios were very low when no one wanted to touch stocks in 1982. That was a time to go all in right. So then stocks had another 20-year run. And then what happened? We all know the dot-com moment of 1999-2000 where PE ratios got to basically their all-time high. And then we had again a lost decade of 10 years where stocks were basically flat over a 10-year period.

Speaker 1:

So just really interesting to look at these long-term cycles. Everyone thinks it's sort of your God-given right to make high single digits or 10-ish percent on stocks. And listen, maybe that's true, but that's over the long-term. And I guess, my point being everyone's definition of long-term is different and our definition of long-term is more than 10 years. I think if you ask most investors they would say oh yeah, as long as you own stocks for five, seven, maybe upwards of 10 years, that's long-term. I would counter that and say no, not true. You actually have to really think of stocks as a 15 or even 20-year holding to ride out those longer-term cycles.

Speaker 1:

And one of the concerns is listen, we have no crystal ball on what the next 10, 15 years hold, but valuations matter more than anything else. The most reliable predictor of future long-term returns are valuations. I mean period. That's just the most reliable indicator. And valuations are not cheap, to your point, especially with regards to US stocks, by any measure you look at. Of course, that's talking broadly. I mean, there's got to be and valuations are not cheap, by to your point, especially with regards to us stocks by by any measure you look at of course that's talking broadly.

Speaker 2:

I mean, there's got to be parts of the equity landscape that are pretty relatively inexpensive, without a doubt. Yeah, right, so let's, let's talk about those, because there's always gonna be some of these gems. Now, yes, in a real correction bear market lost decade everything's gonna come to your point about correlations going one right but um. But there's got to be some interesting sectors or industries where, like, there's a good valuation question there.

Speaker 1:

No, there are listen, I, I there are definitely aspects of the market that are cheaper than others. There's nothing that we would say is an absolute screaming buy. But, yes, are certain sectors or industries trading at reasonable valuations, without a doubt I. I'd separate it simplistically, kind of like going back even to language of the late 90s or 2000s, sort of new economy versus old economy. New economy everything that's hot Again, these are wonderful companies, don't get me wrong, but they're expensive. Anything with a tech or future-oriented tilt, yeah.

Speaker 1:

But on the flip side, if you're thinking about industries that are more tried and true, slow and steady, old economy, in general, those are out of favor. They don't have the momentum associated with them over the last several years. As a result, they're not trading as expensively sector oil and gas, et cetera. Healthcare is an interesting space, not necessarily cheap, but a lot of areas of healthcare we think are reasonable. Listen, international broadly is, we think, pretty fairly priced. So we're going to have exposure to all asset classes. We're not going to be completely out of tech if you will, but everything is you're going to be overweight those things that are cheap and underweight those things that are expensive. So it's definitely much more of a value versus growth tilt and tilted more towards those industries that I mentioned.

Speaker 2:

I often say that what you own matters a lot less than how much you own of it, the sort of weighting aspect of it. Yeah, and that's hard for a lot of people to kind of wrap their heads around, because if they have high conviction, they want to go aggressive which can work right. Real wealth is made from conviction. That's also where real losses and real bankruptcies come from. So talk to me about how you think about risk controls. How do you weight different asset classes? How do you weight individual securities?

Speaker 1:

Yeah, it's a good question. We were very biased. I mean going back to the original part of our conversation, obviously we think a lot about diversification. Diversification is a starting point of our portfolio construction. So, more than most, because we're searching for so many asset classes that behave differently, we're going to be, if anything, overly diversified, and we're fine with that. I forget who said the quote, but diversification is the one free lunch in finance, theoretically, where you don't have to sacrifice return but you can reduce risk.

Speaker 1:

We believe in that strongly and so, especially in this environment, we have a lot of concerns around this environment. We've hit on some of them uh, talking about valuations, other topics around monetary, fiscal policy, imbalances, you name it. We think, from a long-term point of view, there there are real imbalances and so, as a result, we we believe this is the time to be more conservative and defensive in nature, as opposed to putting your foot on the gas. So, as a byproduct of that, we're going to be more conservative and defensive in nature as opposed to putting your foot on the gas. So, as a byproduct of that, we're going to be more diversified in this environment as compared to other environments.

Speaker 1:

Listen, if stocks were trading at a low double digit or high single digit P multiple, we'd be backing up the truck and much more heavily in stocks and, theoretically, much more concentrated in high conviction sectors or individual stock picks, if you will. But that's just not the environment we find ourselves in. That doesn't mean the stocks can't run. They can continue to run. Again, we have no short-term crystal ball, but is this a from a long-term point of view again a time where you think super attractive, you should back up the truck and really overweight and take big bets? No Again. We think people have made a tremendous amount of wealth over the last several years and decades and this is a time again to be more conservative and protect that wealth and build resilient portfolios, as opposed to reaching for the next big win.

Speaker 2:

I think a lot of people would say that protecting wealth is maybe automatic and it's because we have this little thing called the Federal Reserve. I want to get into that, because there is this belief out there that the Fed's going to always swoop in and save the day, yeah, which means they are the ultimate risk manager, not the portfolio manager. Is that wrong? I mean it seemed, because there's a lot of evidence that suggests that's. There's a degree of truth to that.

Speaker 1:

Listen. I mean, this is something we talk and think about all the time, so I guess I'm going to talk out of both sides of my mouth. It is both incredibly right and incredibly wrong at the same time, ultimately. So listen, the proof's in the pudding. To your point, the Fed has, especially post-2008, they've taken on a different and more enhanced role where they have provided a put or downside protection to the market, and they've done exactly that, and the evidence is there to your point, they've done it successfully.

Speaker 1:

That being said, we think that is creating tremendous imbalances and we don't know when the imbalances as a result of those policies are going to rear their head, rear their ugly head, uh, but we think at a certain point, it's just math. Um, history and finance have proven this time and time again you cannot just print your way into prosperity. You cannot just, uh, lower interest rates to zero I mean, those are literally the lowest interest rates in human history and fix a leverage or debt problem, which we had in 2008 with more debt, and that's just where we are Again. I know it seems too long term to think about this, but we're here in 2025, 17 years after 2008. And we believe this is still a long path or extension of the 2008 crisis. We all know what happened in the 2008, 2009 crisis the imbalances associated with that. Things were going to be very nasty if the Fed did not come in and save the day, but the challenge with them saving the day to the degree that they did, is the system was not cleansed as I believe in many ways it needed to be and, as a result, the imbalances are still there and, in many ways, even worse than they were back then. It's just been shifted from the private sector to the public sector and so, yeah, we believe the ramifications, ultimately, are still there.

Speaker 1:

We have a lot of concerns about, again, when those ramifications will appear, and that's what we're protecting against. We do acknowledge we have no crystal ball. Again, this is extended for so long. I don't know if those ramifications will happen in the next year, five years or even 10 years, but that doesn't mean we're just going to put our head in the sand and just be a status quo investor because the 60-40 portfolio is work. We're going to do that. Going forward, again, we think there's ways to build resilient portfolios where you can still do well, you can still make an attractive return, but if things turn knock on wood, with a more resilient portfolio you'll be able to survive that event with a more resilient portfolio, you'll be able to survive that event.

Speaker 2:

It seems like with every single round of monetary intervention, the leveraging gets worse, or the re-leveraging, I should say, and I'm personally blown away by just how much popularity some of these levered funds have grown by the last couple of years, and I'm sure as an advisor advisor.

Speaker 2:

That's got to be frustrating because hopefully you don't have this dilemma. But I think a lot of advisors probably are now competing against, uh, these levered funds and their clients are saying, why should I just go and get a 20 annualized return when I get 40 by going to x right? Um, I'm curious to get your take on sort of where we are cycle wise, sort of these are the kinds of things you typically see in blow-off mania tops.

Speaker 1:

Without a doubt, some of these signs. You alluded to the levered ETFs, the single stock ETFs options, the amount of volume in options and specifically weekly or even daily options. These are not healthy signs. With regards to the market, market concentration, we all know the MAG-7 are the top 10 stocks and the concentration, especially in December, really interesting data. Again, we tend not to really focus too much on short-term data, but some of it was just staring us in the face. I forget the exact data, but the Dow you might know this, michael, didn't the face. I forget the exact data, but the Dow, you might know this, michael didn't the Dow have like 13 down days in a row or something in December?

Speaker 2:

I think it was a lot. When I had a bad feeling about December, which I got you know, people were attacking me for saying that November and in general value Dow, it was like small caps. There's a lot of weird behavior that goes against seasonality.

Speaker 1:

Yeah, I mean, listen, there are a lot of unhealthy signs, a lot of unhealthy signs that give us concern and pause Again. The flip side of the challenge of the crystal ball is we've seen moments like this before in the last five, six, seven years, where we've had moments where it's like, oh, things feel speculative, things feel toppy you know the meme stock mania, gamestop, amc, other things of that nature that felt very toppy and frothy. I will say the counter to that is, you know, the word bubble gets thrown around a lot. I, without a doubt, think valuations are extremely stretched, but I think it's so hard to call what a bubble actually looks like. But I think it's so hard to call what a bubble actually looks like. I mean, the only real bubble, at least in the markets, that I've experienced was the 1999-2000 bubble, which was earlier in my career, and that did feel more speculative than this. I mean, everyone, every friend, neighbor, person you talk to, was day trading on the side. We're not experiencing that, but still the signs of speculative excess are, without a doubt, alive and well. And one last point I'll make, just regards that surreal concern, more from a long-term point of view, going back to valuations, especially again with these larger name brand mega stocks. I mean these valuations are really getting untethered for reality.

Speaker 1:

I'll pick on Apple again, which is a perfect example. And again, don't get me wrong, apple best company in the world. I love their products, but it's trading at I don't even know anymore. I think it's a high 30, 37, 38 price to earnings ratio. This is a company that literally has not grown its revenue in the last two, two and a half years. It's basically a stagnant company. It's an incredible company but this is not a growth story. And yet its valuation, its P ratio, has basically doubled over the last three-ish years. I mean that's just a sign of speculative excess P multiples expanding for not for fundamental reasons, but just because there's too much money chasing these names.

Speaker 2:

Again, looking at some of the notes, I love this one too that you sent me. You said illiquidity actually reinforces healthier long-term investment mindsets. There's no arguments being made which I think is valid that the reason fundamentals haven't seemingly mattered in this cycle is because of just there's too much damn liquidity out there, which is unhealthy, because too much liquidity results in leverage. Going back to that point, leverage I always go back to is the precursor to every crash in history. What is a crash? It's a forced speed set up correction, which happens because margin calls. It's, of course, leverage with the precursor, or speed up correction, which happens because of margin calls, so of course, leverage with the pre-curve. So can we ever get back to a point where we actually have illiquidity? I mean, I thought the fastest rate hike cycle in history was supposed to spark that. I was dead wrong.

Speaker 1:

Yeah, man, listen, I'm part of your club. I would not have thought that rates could have gotten to the 5% range. I thought things would have really started. Rates could have gotten to the 5% range. I thought things would really started. We would have felt pain in more of the 3.5% range. So I was wrong on that. But then we asked ourselves why were we wrong?

Speaker 1:

And I think the answer that I've continued to kind of lean on is it's fiscal. Fiscal came in to the rescue. We were so focused on monetary policy. But what happened on the fiscal side with COVID and post-COVID and these deficits we're facing? I mean, it's just a whole other ballgame of liquidity that has been thrown into the pot that can therefore make these imbalances last longer than what historical norms would otherwise tell you how long they can last. And so that is where we're in this new paradigm.

Speaker 1:

But to your point, it's been frustrating, especially on the stock side, public side. We believe fundamentals should matter and they haven't otherwise mattered for quite some time. It's hard to separate. I mean, you see, active managers really have just generally underperformed for quite some time. That should not be the case. I mean active management, you know, should smart analysis, should win out over time, yet it doesn't even matter. Literally throwing a dart at the dartboard and randomly picking stocks beats thoughtful, active management Over time, time. We believe that's not sustainable. But when that'll ultimately change, who knows? But back to you, in just the onset of your question, what this ultra liquid market reinforces.

Speaker 1:

I believe it's just short-term a short-term mindset when you buy stocks everything with the again, the daily options. A short-term mindset when you buy stocks everything with the again, the daily options, the short-term trading. When you're buying something, you don't have an ownership mentality anymore. It's much more of a renting mentality. Everyone has a price target and that's so counterintuitive to long-term investing principles. If you think about making a true investment in your business, your home, anything else, when you buy your home or go into a business venture, you're not thinking about the price target six months out. That would be such an utter distraction and waste of energy, misplace energy. Yet that is how investing dogma 101 works right Everyone buys a stock with a stock price target in mind. I think that's counter to long-term, sound investing principles. It distracts you from what you should truly be focused on, which, again, is more of a long-term ownership mindset when you invest in opportunities and so again, all these things I think are really long-term detrimental to sound long-term investing.

Speaker 2:

Jeff, for those who are listening to you here watching this podcast and they want to learn more about the firm and, just in general, chat track more of your thoughts. What would you point them to?

Speaker 1:

Yeah, our website. We have a lot of good information there. It's mortonwealthcom. I'm on LinkedIn easy to find on LinkedIn Again, jeff Sardi S-A-R-T-I. And then I'm on LinkedIn Again, jeff Sardi S-A-R-T-I. And then I'm on X. I'm not quite as active on X, but starting to be. I'm inspired by your stuff, michael, so going to be more active on X going forward.

Speaker 2:

You got to have some thick skin if you're going to do the way that I do. I mean, it's amazing to me how it goes back to familiarity versus true knowledge. Yeah Right, If you're familiar with stocks, you immediately think you understand the industry of managing money, the industry of being a fiduciary, being a product developer of a fund, an SMA strategy, whatever it is. And that's where X gets to be messy. From experience, as I've seen repeatedly, I'm only heartened by the fact that the average reading comprehension level of an American is sixth grade level. So whenever I get the haters I always go back to they probably don't even know what they're talking about.

Speaker 1:

That's what you remind yourself of. That's my own solace in the list.

Speaker 2:

So, anyway, I appreciate those who watch this live. Make sure you check out Jeff Sarty's different work and his firm. I was a fan of this conversation, obviously Love Behavioral Finance Tilt and I'll see you all in the next two episodes. Today that I'm filming and streaming. Going to be a long, several hours here. Thank you, jeff.

Speaker 1:

Appreciate it. Thanks, michael, really enjoyed it.

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Michael A. Gayed, CFA

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