Lead-Lag Live

Beyond the Hype: Navigating Market Uncertainty with Seth Cogswell

• Michael A. Gayed, CFA

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The market climbs relentlessly higher while uncertainty looms on every horizon. Is this sustainable? Seth Cogswell of Running Oak draws compelling parallels between today's investment landscape and the bubble of 2000, where a handful of companies drove index returns while numerous others languished in the shadows.

We're living through what historians might call a "Fourth Turning" – a once-in-80-years societal transformation that coincides with major shifts in government, economy, and technology. Add to this the troubling possibility that social media and AI might actually be making us collectively less intelligent, and you have a recipe for market inefficiency that thoughtful investors can exploit.

Cogswell reveals why mid-cap companies occupy a unique sweet spot in this environment – established enough to provide stability but small enough to deliver meaningful growth when they innovate. This segment has been largely overlooked as capital floods into the largest names, creating valuation imbalances that spell opportunity for disciplined investors.

The Running Oak approach focuses on three timeless principles: maximizing earnings growth, maintaining strict valuation discipline, and mitigating downside risk. This rules-based strategy ensures consistency regardless of market conditions, making it an anchor holding for uncertain times.

Perhaps most compelling is Cogswell's insight about "investing where others aren't." When everyone piles into the same popular stocks, prices rise and future returns diminish. Conversely, areas of the market receiving less attention often offer better valuations, higher upside potential, and lower downside risk – exactly the asymmetric opportunity sophisticated investors seek.

As passive flows continue to concentrate in fewer names, the opportunity for disciplined, thoughtful investment approaches grows. Follow Seth Cogswell on LinkedIn and Twitter @SethCogswell or visit RunningOak.com to learn more about navigating these extraordinary market conditions.

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Speaker 1:

In a lot of ways, today's environment is most similar to 2000. There's a lot of differences. That comment occasionally upsets people. There are a whole lot of differences between today and 2000,. But there are also, I think, more similarities than any other time. In 2000, you had a small number of companies go up a whole lot. They became a larger and larger percentage of the index, which drove the index up, and then you had a ton of companies that just sat there. I'd say that today is pretty similar, where you have a small number of companies that have gone up a whole lot, driven the vast majority of the market's returns. Over years. They've become a massive part of the market itself, or the S&P, which has had a significant impact on the returns of the S&P as well.

Speaker 2:

For those that are watching us across all the various platforms. If you have any questions, if you want to engage during this roughly 40-minute conversation, don't hesitate to post on our platform. You're watching this on. I will bring it up. Let's make this as interactive as possible on a topic which I think is pretty relevant, which is how in the world you invest in uncertainty because, if you haven't noticed folks, nobody has a clue what's happening at all and it's hard to kind of figure out what do your money when you're in that kind of environment. So, with that said, my name is Michael Guy, a publisher of the Lead Lag Report. This is a sponsored conversation by my friend and client, mr Seth Cogswell of Running Oak, who's got an ETF R-U-N-N run which you may want to run to after this conversation, but when the market's open, obviously.

Speaker 1:

Don't random walk.

Speaker 2:

No, I said, said no, that's right, he. He says that's been very clever on that, on that tagline um, you know, I actually uh, malkeel, actually speak of the random walk he was. He went to n, he did a class at nyu once, uh, and I didn't realize how big of a deal he was, uh, until many years later. I probably should not have punked him when I went out to do an endeavor. Yeah, exactly, all right. So, so the topic here is investing in uncertainty, okay, so, or, I probably should not have punked him when I was doing it. Yeah, exactly, all right. So the topic here is investing in uncertainty. Okay. So I want to frame this properly, because it feels like there's always uncertainty, right, and it feels like this time is different in terms of the level of uncertainty. Is that true? Like are we in, you think, just kind of big picture wise, in an environment where there's more uncertainty than we've seen before? Or is that just some kind of narrative?

Speaker 1:

This could get really deep, really fast It'd be, but come on, I would say, kind of short term. There is a crazy amount of uncertainty, you know, as far as the Israel Iran conflict, interest rates being up a lot and, you know, somewhat consistently going up. Energy prices are going up a lot, you know. Unemployment will be really interesting to watch. It was, it seemed to have been working its way up. Valuations are crazy. But that's just a snapshot of today.

Speaker 1:

There's a really cool book or framework called the Fourth Turning, which posits that basically every eight decades we go through a monumental shift as a country, but also globally. It often coincides. So you think about the Revolutionary War in the 1770s, the Civil War in the 1850s, World War I, world War II, great Depression, let's say the 1930s-ish, and today we're, you know, about 80, 80 years and a little bit further, 80 to 90. And and so we're going through this I think everybody can feel it, whether it's politically, socially, in the market, whatever it is. We are in this period of unsustainability in a long way, which means that that which can't be sustained can't be sustained. It's not that which can't last forever is not going to last forever. And so we're at this, I think, in a lot of ways very wildly uncertain point where we will see very significant uh you know changes in our society, probably in our government.

Speaker 1:

There's another framework by uh forgetting his name at the moment really good, really cool geopoliticist who basically applies a five decade history, so as opposed to eight and the eight and the fourth turning five decade, and it applies to significant changes in the government and how it's structured and how it applies to our lives, significant changes in the government and how it's structured and how it applies to our lives. And this is the first time ever where that, basically, that five decade turning point coincides perfectly with that eight decade turning point. And again, we can all feel it. So it is a an incredibly uncertain time in a whole lot of ways. Meanwhile, the market just keeps going up every day.

Speaker 2:

Until it doesn't, which we'll talk about, and we should always define which market. But I don't know if you saw that study around. The initial research suggests that the proliferation of chat, gpt and AI has societally seemingly made most people less intelligent. And I myself post on X saying what is it about the post-COVID world? That seems like incompetence at an all-time high. I wonder if part of that forked turning, part of those big cycle dynamics is, let's call it, average IQs dropping, because there's a lot of interesting implications about that. If the environment, if people in general are just not being thoughtful the way they used to be.

Speaker 1:

We're really going deep here, oh come on man, you're opening another door for me.

Speaker 1:

There's a really cool book called Power Versus Force and it's somewhat transformed the way that I see life in general, transform the way that I see life in general. But basically the premise is that thought has energy. Right, we can measure it and and the question is that, what energy level are we kind of all operating? And so there's different mindsets that operate at different energy levels and according to this book I can't speak to this personally, but according to this book or this author you can measure those energy levels and it basically it's not surprising if you think of sort of the lowest states of mind operate at the lowest energy levels and it works its way on up right. So you start out with shame as basically the lowest of energy levels. That's when people just sort of feel like they're in the gutter. And then it works its way up until you get to, let's say, rationality, which I think they say is offer it operating at like a level of 200 is the kind of the range that they apply to it, and then it continues to progress until you get to basically sort of loving and kindness. Right, we've all probably met people who just sort of resonate, that kind of all-knowing feel and give us all peace of mind. Either way, it's a really interesting book, and he claims that we are operating at a level that hasn't been seen before, as far as just sort of very slowly improving.

Speaker 1:

Now that all said, rather than, let's say, chad GPT, I think social media in general has created this echo chamber, where few people are challenged anymore and want to be challenged. They're more just looking for something that will just confirm their bias, whatever helps them feel better at the moment or the way they see the world, which does stunt growth, right? I mean, if you're not challenging people to think in different ways, how do you grow? How does your mindset and your perspective evolve? And so it certainly feels like we might be getting dumber. There are one of my favorite movies is Idiocracy, and in a lot of ways, it does sort of seem like we're living through that at the moment. You know there's, there's, there's obviously tons of reasons for optimism. There's, just as we mentioned before, there's a lot of changes that have been going on, even social media and smartphone, which might end up being the bane of our you know, the downfall of our civilization, who knows? It certainly seems like it is, in a lot of ways, that's still relatively new. Right, it wasn't until 08 where social media the iPhone became really mainstream. That's had a horrible negative impact on children and teenagers in particular. It's a crazy moment. But again, ai.

Speaker 1:

The positives of AI is that it will make people more efficient. You know, if there's no doubt that really cool firms will come out with some awesome applications that will better people's lives, now the question is how many people are thinking critically enough to use AI creatively to actually improve their lives, or how much do we have to sort of drag them along with really cool applications? I actually got into a mini argument with a firm the other day. I was on a kind of a conference call with like 50 advisors and they were talking about how, the degree to which AI will improve life and how much of a significant positive impact it'll have.

Speaker 1:

One of the specific references was you know, no longer having to drive right, how much time does that free up? And my counterpoint was we have more free time today than we've ever had in history and the average American reads zero books. So if we read zero books on average when we have more free time than any time in history, and then we have more free time. Does that necessarily mean that we're going to start reading again, so we go from reading in the past to not reading at all? When we have tons of free time, we're having more free time. I don't know. There's positives and negatives. It'll be interesting to see how it all plays out.

Speaker 2:

There's a comment from Johnny on YouTube. A school report when I was a kid consists of searching a library for books. I remember libraries, I'm of that age, yeah right, Reading those books front to back for information, forming your own thoughts to create summary analysis. I remember the old Monarch Notes CD where, like you, would actually get like the Cliff Notes equivalent another brand, but it is interesting.

Speaker 2:

So where I'm going with this as far as the uncertainty dynamic is, if the environment and the societal IQ is dropping because we're not being challenged the way thoughtfully, intellectually, we used to be, then that obviously has implications on where people put their money. To your point about the market going up and up and up, the market's going up and up and up almost because of that lack of thoughtfulness and lack of intelligence. It's just going to passive S&P and that's it. But it can't be the case that if that's a let's call it in quotes a dumb way of allocating right, Because everything has cycles, including passive right and S&P large cap exposure, At some point you've got to imagine that the market punishes lack of intelligence.

Speaker 1:

Now, I certainly hope so. If we really are living in idiocracy, if the people are using their brains the least are rewarded, while those who are thinking are punished. And certainly over the last 10 to 15 years, I'd say that a rock would have probably been the best portfolio manager, which, to a certain extent, you could say the S&P, is basically a rock, since there's yes, there's a committee that's making decisions, so it's actually more active than most people think, but there's also very little actually going on as far as decision making goes. But there's also very little actually going on as far as decision making goes.

Speaker 2:

Yeah, let's hope that the intelligence and thinking is rewarded and not the opposite, which is a good transition. To run RUNM, because that's an ETF which I think is very thoughtfully put together and look, I mean to the extent that the pendulum has swung so far in the direction of just flows into passive vehicles. One would think that there must be many more anomalies and opportunities for more kind of dynamic, active type of strategies, unique types of approaches, to really outperform right. And it's been a hard go for the last decade plus for most strategies not yours necessarily, but let's talk about run, because I saw there was a comment about what Running Oak is. Let's talk about Running Oak and the ETF, yeah, so Running Oak.

Speaker 1:

We have a very simple, obvious investment philosophy that's built upon three economic principles. Let's say philosophy that's built upon three economic principles. Let's say those are maximize earnings growth, because nothing drives performance or the growth of investment like earnings growth. You invest in a company. You want that. You know you get a share of that company. You want that growing in value. You want that producing more and more profits Great, there's no arguing that that is not beneficial.

Speaker 1:

The second piece of our philosophy is being very disciplined around valuations. Everybody talks about investing in undervalued companies, which certainly we seek to do, but for us, the most important thing over the long run and I think, in the very near future, is avoiding overvalued companies. You do not want to hold assets that should go down, let alone go down a whole lot. We haven't seen a bear market, arguably, since 2008, 2009. But even in 2022, which I would say was a little bit of a baby bear market, you saw Amazon and Netflix drop roughly 50% in just a few months because they had some tiny hiccups in valuation, and so if you're investing in wildly overvalued companies, you have very little margin of error. Those companies had better perform perfectly into perpetuity, because the moment they slip. That's when people wake up and you see a significant decline. The other aspect that we focus on is some simple ways to, we'll say, mitigate downside risk, for the very obvious reason that nothing destroys exponential growth like large drawdowns. Obvious example is you drop 50%, you have to double your money to get back to flat. On the other hand, if you drop 30% which is still unfortunate, not fun you only need a 40% return to be making new highs. So that 20% difference between 30 and 50 results in a difference between a 40% return versus 100 that is required to get back to new highs. So again, very simple, obvious philosophy of maximizing earnings growth, avoiding overvalued companies, mitigating large drawdowns. And then our process is rules-based, so it's very disciplined and ensures that we do the same thing over and over so that you get that consistency. Why that matters today is we've discussed how uncertain the current environment is and actually I think someone that you introduced me to, someone recently made the comment that when they invest with a manager, they just want them to do their job. They want them to do the job they were hired to do, and I love that metaphor because it applies perfectly to portfolio construction.

Speaker 1:

Building a portfolio is very similar to building a company. When you build a company, you're hiring different people, ideally really good employees that are really good at different skill sets, and then they complement each other, that address every aspect of the business so that the whole is as good as it can be. It's the same with a portfolio. You invest in different strategies, ideally best in class, and they all do different things, and in the long run, class and they all do different things, and in the long run, the goal is to maximize returns so they're as effective as possible. But also by kind of investing in different strategies or employees, you've got this diversification so that no matter what's going on, no matter what aspect of your business is being challenged, you have an employee there that's contributing and doing their job, and that describes us perfectly.

Speaker 1:

That rules-based aspect of our strategy means that we've basically been doing the same thing for four decades. We do the same thing over and over, and so that leads to reliability. We, more than I'd say most, because that rules based nature means that we do our job. You know what Running Oak is doing at all times and we sit right in the middle of your portfolio, from kind of mid to large, again looking to maximize earnings growth, but that discipline around valuations of risk brings it back to the middle, so that our clients advisors largely, but certainly individuals know what we're doing and it makes it easy to build around us because you know what other employees or portfolios you need. You might want something that's a little more growthy, value SMID, but we're in the middle doing our thing, ideally being sort of that foundational holding in your portfolio at all times, doing our job.

Speaker 1:

One of the reasons why that really matters is if you go back to 2022 again, I was at a conference let's say this is in 2023, with some CIOs running very significant companies, and one of them mentioned that when they look back on 2022, they were shocked at how horrible their performance was, or just how disappointing I wouldn't say horrible, but disappointing and they couldn't understand why.

Speaker 1:

So they went back, they dug into all the different aspects of their portfolio and what they discovered was that many of their managers were given a job or they were hired to do a particular job and as time went along, as it became apparent that it was very hard to keep up with the S&P if you didn't have a ton of large cap growth, a lot of these managers started investing or leaning toward large cap growth because, again, that was the only way they could keep up. And the problem is, when large cap growth really struggled, you didn't have those people doing their job and their whole portfolio really struggled. So, again, the key is when you're building a portfolio, look at managers, or hire managers that do a particular job that fits a certain role in your portfolio, and if you do so, you'll do well.

Speaker 2:

I think the valuation point you can argue is where there is a degree of certainty, like we know that the S&P is overvalued, we know that mid cap, mid cap, that that's been largely underinvested because it's been a large cap only type of environment. What do you say to those that say that, listen with uncertainty, I don't want any equities at all. You know, yeah, sure, sounds like a better environment, maybe for what you're doing with RON, but what about concerns around just stocks as an asset class?

Speaker 1:

I mean uncertainty implies that things are uncertain. I don't. Yes, valuations sort of across the board on equities are high, certainly in particular pockets, but again, it's uncertain just because we feel that that's the case. We don't know what, and that's where diversification comes in. So if you get out of stocks completely, that's making a bet, that's behaving in a way that implies certainty, but yet we're doing so because it's uncertain. So I would just say that's contrary to the initial intent.

Speaker 1:

In a lot of ways today's environment is most similar to 2000. There's a lot of differences. That comment occasionally upsets people. There are a whole lot of differences between today and 2000,. But there are also, I think, more similarities than any other time. In 2000, you had a small number of companies go up a whole lot. They became a larger and larger percentage of the index, which drove the index up, and then you had a ton of companies that just sat there. I'd say that today is pretty similar, where you have small number of companies that have gone up a whole lot, driven the vast majority of the market's returns. Over years It'd become a massive part of the market itself, or the S&P, which has had a significant impact on the returns of the S&P as well. Now, in 2001, when things reversed and you had those very popular overcrowded companies come back to reality, the S&P did as well. But there were a bunch of companies that did not participate that actually did well. So in 2001, you had the S&P, the NASDAQ, down quite a bit. But I believe value, small cap, high quality probably, even to a certain extent mid cap, were up, high quality probably, even to a certain extent mid cap we're up Now.

Speaker 1:

Markets are correlated. So I wouldn't say that people should count on that happening again as far as that big discrepancy between up and down. But again, a small number of companies have have driven the vast majority of the return and there's a lot of companies that have just sat there, majority of the return, and there's a lot of companies that have just sat there, particularly mid-cap companies. And so it doesn't make sense to expect mid-cap to even remotely participate in the downside if we see a pullback in the s&p in the biggest companies because they're such mid-cap is such a small part of the indexes. So so again, yes, they're correlated. But the other thing is, if we're just looking at that, let's say to one degree and we'd say, all right if people sell Apple and Amazon and Meta and Tesla or whatever, it'll take the indexes down and that'll take everything else down fine.

Speaker 1:

But the other issue is we're not operating in a vacuum. That's where the people have been sitting on cash. They've been a little more disciplined, start looking for bargains. That's where they start looking for good investments and all it takes is a little bit of money going into mid cap companies, let's say for good reasons, because mid cap has outperformed and is far cheaper then that can. You could end up in a scenario where mid is flat up whatever, while large is down a lot in the indexes. Again, I wouldn't say guarantee it, but I do think it would be a mistake to just get entirely out of equities. But that implies certainty at an uncertain time, which is the opposite of what we're trying to kind of. You know, if you're uncertain you don't want to go go all in on one thing Well, actually, I think it actually relates also to geopolitical concerns, right?

Speaker 2:

So if there's a concern that things are going to get even more dangerous with the Middle East and oil prices continue to spike, the first thing that people are going to sell is their large cap holdings, just because there's a potential of those freakouts. Right, volatility spikes. Sure, mid caps and small caps would go down, but they could go down a lot less or, to your point, maybe even diverge and actually make money In terms of let's talk about sort of index construction when it comes to mid caps overall. How do we define mid caps? How do you define it relative to the industry? Define mid caps how do you define it relative to the industry? And take me through a little bit sort of the construction, meaning the number of holdings, the weightings, type of the portfolio.

Speaker 1:

So mid cap. The problem is, what a lot of people miss is that the line between small and mid and mid and large is just a made up line. That's you know. You know, and a lot of the different firms or you know platforms that create those lines don't even agree. Really, mid cap is just, it's, it's companies that are, for the most part, if we want to kind of broadly define them, they're. They're companies that have graduated from small cap. Small cap companies are just they're less proven for the most part. There are some older small cap companies, but for the most part they're less proven. Their businesses or they have a product that's less significant and so mid cap has graduated. They have probably nailed a product, they've gotten to the next level and then to get to large cap, you know it's one degree further.

Speaker 1:

The great thing about MidCap is it's in the sweet spot of. You've got that extra margin of error because you're investing in a company that is established, more established than small cap. That is established, more established than small cap, but it's not so large that it's easy enough to potentially provide outsized returns, whereas you know let's think of Apple, because it's the obvious example it's such a big company it's hard to imagine what they could possibly do to really move the needle, whereas a mid cap company, let's say they got there on one product, all they'd have to do is create one more great product and next thing you know, they've doubled. So it really in. When we're talking about investing, we're always talking about return versus risk and mid-cap kind of provides that sweet spot with regard to return versus risk. Now, as far as our portfolio and how we construct it, we begin with companies above $5 billion. So it's you know, when you constrain your options, you limit your opportunity. Now, there's no arguing that as you get smaller, it doesn't add risk, because those, either the stocks are less liquid, the companies are smaller. Whatever it is, there's more risk as you work your way down. There's there's definitely not an increase in risk as you work your way up, so we don't constrain it to the upside. So again, $5 billion and up.

Speaker 1:

Now we do end up usually being in that mid large space, because we are seeking companies that are growing at a significant pace, which, again, is generally historically hard to do. The bigger the company gets and that's attractively valued, and what we've seen today is the perfect example. If we're looking for attractive valuations. It's usually companies that people are all hot and bothered about, usually the largest companies, particularly in the indexes. Part of what's driven that is just simply popularity. Right, everybody knows about Apple, amazon, nvidia, tesla and it gets certain people excited so they buy, for reasons that are not driven based on data. They didn't look at the numbers and they said this is undervalued. They said, hey, I like my car, so they bought Tesla. Or I believe in robots, so they bought Tesla. And so where we end up is usually not in those largest companies, because that's often driven by sentiment and our goal is to sort of invest away from sentiment. So we end up in that mid-large space, usually around 50-50. Right now we've got about 60% invested in MidCap, 40% in large, and that's been the case for years and largely driven by, according to our numbers. The largest companies have been quite overvalued for a while and so that's kind of driven us toward, you know, more into mid cap.

Speaker 1:

Why that's, why that's a huge, why that is particularly noteworthy for us right now is looking at the average portfolio, the typical portfolio that clients have. There is a huge gap right in the middle of it that most people are entirely unaware of. So most people, when they build portfolios, they start out with a large gap or they might even start with the S&P, which at this point is basically aggressive large gap growth. But if you didn't start with a large gap you probably got fired over the last decade. So you start out with a bunch of large gap. You complement it with SMID because that's sort of a one-stop shop for diversification and then value.

Speaker 1:

But the issue is many, or really most from what I've seen most large cap diversified portfolios aren't diversified. So people are investing in these portfolios thinking they're getting this diversification through large cap, whether it's growth and decor, but if you actually look under the hood they're getting very little. So if you think of SCSG as the example I use a lot only because I see it so often, I see it more than many SCSG at least recently had 60% of its portfolio invested in just eight companies. Those eight companies are very similar, they're highly correlated and they're at the very, very top of sort of the market spectrum, market cap spectrum, and so at least 40% of that large cap seemingly diversified large cap portfolio for the whole rest of large cap into both growth and value. And so there's this massive gap and that's where we sit.

Speaker 2:

And I think you're certainly doing better than the passive, mid-cap side of things, right? I think people would naturally think all right, I'm down with the mid-cap argument, but let me just go passive and that's it. There is a lot more active opportunity with what you're doing.

Speaker 1:

Yeah, I believe. So the last two days have actually been an interesting experience where, uh, last night I received a very nice email, uh, from a firm saying that they had just we, we saw a pretty big um, you know, block go off in our, in our etf um, and, and so this firm followed up and said, hey, we just bought, which is awesome, I love getting those emails. But then I got an email this morning that said, hey, you have lagged VO, which is the Vanguard passive mid-cap, and said that we are going to sell, which I've actually never experienced before. I think in 12 years since we launched the firm, to my knowledge we haven't lost a single advisory relationship. So this is the very first time, and initially I was taken aback because, again, first time in 12 years. But as I kind of dug into the numbers and looked, we have outperformed VO over every single period of time other than, you know, let's say, year to date, and that's solely been driven by the last month and a half.

Speaker 1:

In the last month and a half you have had this crazy move and high beta names, semiconductors have absolutely exploded, and so, again going back to doing your job, if we had outperformed over the last month and a half, I would tell people to fire us. You didn't. You didn't hire us to outperform when everything, especially Argu of the worst companies, are skyrocketing Right Like there's so many companies that are the very best performers in the month and a half that we would never touch. They don't meet our rules. They're either wildly overvalued or they don't have the earning growth and the profitability that we require, or they don't have the earning growth and the profitability that we require. And so there are certain times where we will lag, there's certain, and then most of the time, historically, we've outperformed. We just happen to be seeing one of these really weird periods which happens from time to time. We hold the average company for four to five years, so anything under a year is, for us, is basically noise. We, we are completely indifferent toward a couple of months worth of performance. That doesn't mean I wouldn't love to outperform every single day, but, uh, particularly the last month and a half, again, it has been wild. Uh, think of all the uncertainty and the risk factors that are going on right now with, uh you know, interest rates going up quite a bit, energy prices going up, the you know, again, the Iran-Israel conflict. There's so many things going on and the market just keeps going up. If we are outperforming when the garbage is cooking, that means that we're invested in a bunch of garbage and you don't want it. So you know.

Speaker 1:

Going back to your question as far as passive versus active, certainly, as you get down into mid cap small cap it's a lot more nuanced. First of all, you have a lot of companies and small in particular, but even mid that are unprofitable In the long term. Investing in even mid that are unprofitable In the long term, investing in companies that are consistently unprofitable, meaning they're losing money, is not good, like it's hard to. Yes, there's some that are innovative and for a short period of time, as they grow, they can be very compelling in the long run, but for the most part long run, but for the most part in the mid small space. That's where you really want someone investing on your behalf with discipline. That's where you can find some really cool, really innovative companies or very well-run companies that nobody knows about, and that's sort of our sweet spot is looking for well-run, fast-growing companies that people are unaware of you had mentioned energy prices and I have to think the energy sector is probably due for another big run.

Speaker 2:

When you look at all the studies around allocation of energy in the S&P, it's near its historic lows. Talk me through a little bit energy as an allocation in run.

Speaker 1:

Talk me through a little bit energy as an allocation in Ron. So energy is? I would love to say that if you're right, we would kill it, but energy does not fit our rules. So our rules or our let's say, our investment philosophy of maximizing earnings growth within the constraints of being very disciplined around valuations and lower downside risk, energy does not fit what we're looking for for a number of reasons. One, usually they employ a lot of leverage and one of the things that one of the ways that we look to protect to the downside for clients is investing away from companies that have a whole lot of debt. Energy companies usually use a ton of debt. But two, their prices are largely driven by a commodity and we don't believe that we're experts in that commodity.

Speaker 1:

There are a ton of people out there that are really good at that. I'd say invest with them. They will provide more expertise than we could certainly provide in that area. And why that matters again is going back to doing your job. We do what we do and then and you know, someone that's very good in the energy space could be an excellent compliment to us Somebody who's really good in the energy space can't do what we do. They are not going to be nearly as good at investing in a diversified portfolio in the middle of mid-large and growth and value. That's our sweet spot. We're kind of meant to again be that sort of rock in your portfolio. Energy is more of an important part of the economy, but it's a little bit of a kind of an outlier. It's a little different. So that's actually an excellent compliment to us that you can pair with us.

Speaker 2:

For you yourself. I mean, when you look at the allocations, understanding it's rules-based, are there certain parts about RUN that get you more excited? Like you must have a view on different sectors and the market's role or maybe individual positions that don't necessarily go into the decision-making. But is there anything particularly in RUN necessarily go into the decision making? But is there anything in particular in run that it's like okay, that that could be a big contributor of?

Speaker 1:

returns going forward. The big thing is this is more high level. The big thing is investing where others aren't. This is a theme that I've been focusing on a little bit more lately. Um, it's obvious, it's simple, but yet no one talks about it.

Speaker 1:

So, if you think about the idea of investing where others aren't, uh, when you invest where others are, or where they've invested a ton and they're currently piling in so let's say, the S and P 500 or the big names that we all know if you're piling into those with everybody else and everybody else has been doing it for almost a decade you are guaranteed to get higher prices because there's demand. So you're going to get higher prices, which means you're paying higher valuations, which means that your upside is arguably limited and you have quite a bit more downside risk. So, less upside, more risk. That is not how I think anybody would ever say that's how I want to invest, but that's what you're getting. If you're piling into the same stuff that everybody else is piling into, you're playing the momentum game, which works. There's some value to the momentum, but you're basically riding a wave and just praying that that wave doesn't crash while you're still on it. Now, if you invest where others aren't, there's less demand for for those holdings or those assets and so there's less demand for those prices driving the ups, driving them up. So you get lower prices, lower valuations, which implies higher upside and lower downside, so you're getting higher potential upside and a margin of error which is asymmetric risk and return. That is exactly what you want. We want to take as little risk as possible for the biggest payoff possible.

Speaker 1:

Ideally and if you think of our strategy, that is what it's designed to do that is the inefficiency that we capitalize on.

Speaker 1:

That focus on relative valuation seeks out companies that are growing at a considerable pace, historically quite a bit higher than the S&P that we're able to get at a value, and we usually get them at a value because people are not investing in that moment, they're not popular, they're not piling in, so we get again that lower price, lower valuation, which implies higher upside, lower downside risk. That's what I'm really excited about is, you know, there are people that say the market's broken because so many people and so much money is going into passive, and I hope to God that's not true, because if the market's broken, that implies that the US economy is broken, so let's all hope that passive investing is not indicative of, or doesn't become indicative of, how the US economy works which right now it seems like it is but that there's so much money going into just a small number of things that that creates very significant opportunity. Again, we saw no one how that played out, and I think that'll play out again.

Speaker 2:

Seth. I want to learn more about Ron and track more of your thoughts. Where would you point them to?

Speaker 1:

Feel free to reach out Seth at RunningOakcom. I am on X, you can just search for Seth Cogswell. Same with LinkedIn, a little more active on LinkedIn.

Speaker 2:

So, seth Cogswell, you can also check out our brand new shiny website at running oakcom or running oak etfscom I love me some mid caps and I love me some run, uh, and given that I've got back-to-back meetings, we're gonna run and uh, end this podcast here. Appreciate those that watch this on uh juneteenth, happy juneteenth, should we say. I don't know, I think saying happy juneteenth, I don't know, it's a holiday, uh, federal, but, um, appreciate those that watch this. Hopefully we'll see you all on the next episode of Lead Lag Live. By the way, folks got some big surprises coming up in the next month and some new faces, so I may not be the only one that's doing these interviews with Seth going forward. Appreciate it, seth. Thank you, cheers everybody.

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Michael A. Gayed, CFA

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