Fantasy vs Fundamentals: Seth Cogswell on Bubbles, Passive Flows, and What Breaks Next

In this episode of Lead-Lag Live, I sit down with Seth Cogswell, Managing Partner at Running Oak Capital, to unpack the strange market dynamic where low-quality, high-debt companies are outperforming — and why that may be setting up one of the biggest long-term buying opportunities in years.

From zombie stocks to the passive investing paradox, Seth breaks down why common-sense investing has vanished from today’s markets — and how his “buy low, sell high” discipline at Running Oak is bringing it back.

In this episode:
– Why profitable, high-quality companies are lagging speculative names
– What the “buying a Lexus for the price of a Camry” moment means for investors
– How passive flows have hollowed out the core of the market
– Why most portfolios no longer follow the buy-low, sell-high principle
– The mission behind Seth’s new educational series Not So Passively Aggressive

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Chapters

• 1:11 Host Intro And ETF Overview
• 2:47 Performance Context And Market Oddities
• 5:59 Quality Versus High Volatility Surge
• 9:44 Discount Setup After Lagging Speculation
• 11:48 The Mechanics Of Buying High In Indexing
• 15:23 The Hollowed Core And Thematic Drift
• 17:49 Running Oak’s Buy-Low Sell-High Discipline
• 19:42 Mission, Education, And Video Series
• 23:36 Where To Watch And Learn More

Transcript

SPEAKER_00: 0:36

So I took a 99% pay cut to start my own company, which was built around the strategy that my father created. And I did so because I realized that what I thought was my dream job was a little soul sucking at times. It was, you know, I was I did well and and I felt good about, you know, success, but it was largely doing playing a high-stakes video game for a multi-billionaire family. And I didn't feel like I was providing a whole lot of good. You know, this strategy, my the strategy that my father created, running Oaks Efficient Growth Strategy, first of all, just is common sense.

SPEAKER_01: 1:24

I'm your host, Melanie Schaefer. Welcome to Lead Leg Live. Now, today we're talking about Running Oaks ETF run, R-U-N-N, which has been drawing attention. It's a managed mid-cap lend strategy with the aim of long-term growth. The FUD holds roughly 50 to 70 names and maintains a disciplined rules-based process that balances growth and downside risk. This year run is up modestly in line with expectations for a strategy to build built to manage volatility rather than chase every market move. My guest today is Seth Cogswell, managing partner at Running Oak. Seth's been leading the transformation from separately managed accounts to scalable ETF strategy that seeks to deliver consistent returns without excessive drawdowns. Seth, welcome. Thanks for having me, Melanie. So let's begin with the recent performance. When you look back at runs returns over the past year or more, what factors have drove those gains and what do you feel might be holding you back?

SPEAKER_00: 2:22

This year has been kind of a tale of two periods as far as through uh the end of April, particularly through April 8th, we our strategy had outperformed every single peer and every single benchmark year to date. And so that was, it performed especially well when the when the market struggled. So there's a bunch of studies that are uh research that's been coming out recently. BTIG always does a really good job. And I actually received some research from BTIG earlier today that showed that uh a comparison between the Russell 2000, so small cap stocks versus the S P 600, also small cap, uh, is as extreme as it's ever been in history. So Russell 2000 does not have any kind of screens really. It doesn't, it doesn't favor profitability, whereas the S P 600 does. So it's it's kind of comparing apples to apples as far as small caps versus small caps. The big difference is that profitability and the unprofitable leaning Russell 2000 has absolutely destroyed the profitable leaning S P 600, which is just pretty remarkable. Um, anytime you hear something that's never been done before, it's always worth worth noting. Um, you know, another point that BTIG has made in the last week or so is that the Goldman Sachs long short quality index. So it compares high quality, which it there's different definitions for that, but let's say profitable, um, you know, reasonable amounts of debt on the balance sheet. Just you know, what we would consider to be good, well-run companies, high quality has lagged low quality to a degree only seen one time in history, which was late 2020, early 2021, which it was pre-COVID. And and if anybody remembers that, the the market was just going straight up every single day. And when you get that, no one thinks about risk or quality or profitability or anything like that. It's more just a casino. Uh, and so again, the only time in history uh that we've seen this other than that that short period. And then another data point is the Barclays high volatility index, since April 8th, it doubled in six months. So to think of just a large number of stocks doubling is pretty crazy. Um, you know, and high volatility companies, you know, quality kind of companies that go about their day, those are boring. Those are not high volatility. What's high volatility is companies that are borderline bankrupt, zombies, you know, the the ones, the meme stocks, and those are what have doubled. They're up 100% in six months. And so in that regard, I mean, that that is the exact opposite of what we would ever invest in. Uh our strategy, efficient growth, leans toward maximizing earnings growth. So we we value profitability, making money. We feel that making investing in companies that make money is a good thing. Um, it also balances debt. So a lot of the companies that performed especially well are borderline uh you know debt. They're zombie companies, right? They they have so much debt and the interest payments are so high that they can't even generate enough cash to pay them, and yet they're performing extremely well, whereas those companies that have less debt are performing, you know, they're they're just not keeping up because they're not as exciting. Uh so again, I kind of love it. You know, yes, we've lagged in the last uh few months, but frankly, the last thing I want to do is be talking about a strategy or you know a service where people would be chasing and maybe the odds aren't in their favor. Whereas today, the the odds appear by a number of uh you know metrics to be as favorable as maybe ever.

SPEAKER_01: 6:29

Yeah. And so a quote uh used that I like buying a Lexus uh for the price of a camera. Can you talk to me specifically about the opportunity that short-term underperformance might actually present uh in the context of your long-term framework, the best of the best solution?

SPEAKER_00: 6:43

Yeah, so our strategy again has a uh 12 over a 12-year audited track record as a 36 years worth of data, like a real-time data history, and then a five-decade history. So it's about as time-tested as it gets. From 89 to 2012, 2013, the portfolio outperformed the SP by roughly 3.5% or so before fees and did so with roughly 50% of the average drawdown. Uh now, those returns prior to me launching Running Oak aren't audited, but I actually helped, I ran the portfolio for a chunk of that. Uh, my father created the strategy, ran it for the rest. And so it's real time, certainly worth paying attention to. And, you know, if you can get something that has provided that significant of value for that long, right? So three and a half decades of outperformance and less than half of the downside, and then you get it, and you can get it at a significant discount. I mean, again, the lowest quality names have have just uh you know skyrocketed in the last six months, right? They're up a hundred percent. Um, and then we've lagged that, thankfully. I if I if we kept up with it, I'd say I tell our clients that if we keep up with that, we should be fired because we're clearly not doing what we say we're going to do. Um, and so that that lagging actually, though, creates a discount, right? It whether the market continues, fine. So then we would expect good companies at some point to catch up to bad companies. And so that would create a nice little tailwind. Or if the market struggles, which is often what happens when you see this kind of speculative fervor that we've seen in the last six months, if that happens where the market struggles, great, that just creates this buffer for us to, you know, to use that word again, buffer client portfolios. And so now is to use your quote, which I guess was my quote, um, it's definitely like buying a Lexus, you know, one of the best performing for the price of a Camry. Uh, it's it's it's a discount and it seems to be an ideal time.

SPEAKER_01: 9:24

Well, another quote you you know that you hear a lot in investing is sell low, buy high. Can you talk a little bit about that sort of narrative and what is actually going on right now uh within the market?

SPEAKER_00: 9:35

Yeah, so I I've kind of been using the the term very recently um themes, memes, and dreams, because I I feel like that describes the typical client portfolio better than anything else at this point. Uh, you know, not that long ago, if you asked someone how to make money in in the markets and they wanted to be a little bit of a jerk, they'd say buy low, sell high because it was so obvious. Yet there's little to n little to none of most clients' portfolios are actually buy low, sell high these days. Uh the part of that is due to the popularity of index fund investing. And one of the things that many don't realize is you know, index funds have had a very positive impact on the investing universe as far as bringing fees down. And it's it's had, you know, it's it's made it more efficient. However, it's not uh you know a panacea, right? It's it's not necessarily a perfect investment. It has its own characteristics. And if you really look at how passive portfolios are built in their simplest form. So if we look at it from a stock by stock basis, we'll use Apple because everybody knows it and it makes sense. So let's say you know you've got a company and then you've got a stock. They're they're connected. Let's say at some point the market is efficient and the value of the stock reflects the value of the company. Uh now, let's say Apple. Someone bought a MacBook or an iPhone and says, man, this is the greatest. Therefore, they turn around and buy Apple. Now, nothing changed with Apple as a company because they had already bought the MacBook or the iPhone, right? So nothing changed fundamentally, but that demand for that stock is going to push the price up. That's what demand does. It pushes prices up. Now, because that price is higher, it it now, Apple now comprises a larger percentage of the index. So now anybody else that invests in the index buys more Apple because Apple is now overvalued. So now let's say, let's take it one step further. Let's say a momentum manager or or even somebody just chasing uh performance says, oh, Apple's flying. And so they buy Apple because it's up. Now that demand pushes Apple up more. Because Apple's price is higher. Again, nothing's changed with the company. Company is just doing its thing. Because the price of the stock is higher, it's now a bigger percentage of the S P 500, which means that the next person that invests invests an even higher percentage in Apple because it's more overvalued. So you're buying more and more and more, the more and more overvalued a company gets because it's overvalued. It's the opposite of buying low. It's buying high and then buying higher and buying higher. Now, on the flip side, if a company, let's say somebody's MacBook crashes and they're like, you know what, I hate Apple, then they're gonna sell the stock. Now, even though they'd already bought the, I mean, I guess they could return the MacBook and maybe the value of Apple would drop. But let's say they haven't done that yet. So Apple's still sitting here as a company, but now the stock is a little bit lower because somebody sold. Now anybody that invests in Nindex is going to invest less in Apple because it's undervalued. And now let's say something I've been thinking about a lot is all these um, you know, these uh uh, you know, these these uh tax loss harvesting strategies, right? So now because Apple's down, people are gonna sell it because they're like, oh, we can realize a loss. That's going to push Apple down more because people are selling. Now, Apple, even though nothing changed with the company whatsoever, now that it's more and more undervalued, SP investors are investing less and less and less. So it's the opposite of buy low. So again, it's buy high, buy less if it's undervalued, and then there's no selling. It just goes up and up and up and up and up until maybe at some point it hits a you know a spot where it's just top heavy and can't continue, and then it comes down. The only time the SP 500 will ever sell is if the committee that runs the SP says, you know what, this no longer, we don't think this should be part of it anymore, so we're gonna kick it out. So again, it's not buy low, sell high. It's buy high, buy higher, buy even higher, buy more and more higher, never buy low, or buy less low, and then never sell. Um, and that has become a very large percentage of most people's portfolios. Um I'm currently reading the Bogle effect, which is the most recent biography on Jack Bogle. And one of the comments that's mentioned multiple times is the hollowing out of core. So core is kind of the central or sort of foundational part of someone's portfolio. So hearing the hollowing out, that doesn't sound good if your core is being hollowed out. Now, they don't necessarily imply it in that way. The way that they're using it is the fact that uh index funds have basically wiped out all mutual funds or active manager in that core space, which means that it's basically that core space, the foundation of portfolios has been replaced with index funds, which as we just described, buys higher and higher and higher and higher, never sells until maybe they sell at the very, very, very, very bottom. Um and so the core's been hollowed out, to quote them. Um, because the core has been hollowed out and because of the dominance of passive investing, many investors have now, on whether the active side or allocators have now invested around the periphery, often in themes. So you've got thematic investing in ETFs, many of which are really cool. Um, although I don't know how I feel about the 5x ETFs. I don't know if those count as themes or not, but that's those are pretty nuts. Regardless, you know, whether it's robotics, whether it's AI, um, playing themes can be really interesting. It can be a really way to complement, but most of these have no valuation component. There is no buy low, sell high component for the majority of these thematic ETFs. So now you now we know the the core, the majority is buy high, buy higher, buy higher, buy higher, never sell. And then the themes are you know, investing in pockets or you know, certain um parts of the market that you want more exposure to, but there's no buy low, sell high there. And so it's evolved into this scenario today where the majority of people's portfolios have no buy low, sell high aspect to it. Keep in mind, again, that's the most common sense, most obvious way to make money investing. We've all said, we've all kind of made fun of people by saying just buy low, sell high. People don't do it anymore. And they, and that's not because it doesn't make any more sense, because this still makes just as much sense as it ever did. They've just stopped doing it. Um, and it and they've stopped doing it because we've focused on fees over common sense and numbers and valuations and companies. Uh, you know, fees dominate everything, and then we've got the themes to sort of try to compensate on that. To wrap all of that up, running Oak is buy low, sell high. Uh, we are very focused on valuations. We intentionally invest in companies that, according to our numbers, are attractively valued. We want to buy low. And then what really differentiates us versus the majority of managers is we have a very disciplined um sell signal when a company hits a certain point beyond where we feel is fair value and we feel that it should go down, we sell. We don't own companies that should go down. Um, so again, it's buy low, sell high. And it's it's just such an obvious common sense uh way to invest that everybody knows and no one is doing now. And we are running oak as a return to buying low and selling high. At least, at least use it for like a part of your portfolio because doing the opposite just doesn't make sense. And that's precisely how everybody's portfolio is now constructed. It's it's wildly alarming.

SPEAKER_01: 18:09

Yeah, well, that was a great description and also a good reminder of back's the you know main point of the philosophy of uh investing. Um I just want to pivot now uh before we we start to wrap up, but you've been building a new video series called Not So Passively Aggressive. I aimed at education. How does that tie into your funds philosophy? And and what are you hoping viewers will take away when they watch it?

SPEAKER_00: 18:33

So I took a 99% pay cut to start my own company, which was built around the strategy that my father created. And I did so because I realized that what I thought was my dream job was a little soul-sucking at times. It was, you know, I was I did well and and I felt good about you know success, but it was largely doing playing a high-stakes video game for a multi-billionaire family. And I didn't feel like I was providing a whole lot of good. Uh, you know, this strategy, my the strategy that my father created, running a sufficient growth strategy, first of all, just is common sense. And I feel like the world has gotten away from common sense. Um, as I just described, I mean, we've gotten a away from buy low, sell high, which is such a simple and obvious way to invest. And people just aren't thinking about it anymore. And there's good reasons why people aren't thinking about it anymore. Uh there are, you know, we're in an industry built around money, and people are gonna do things for to make more money. And, you know, a lot of this, while I think that uh the more and more I learn about John Bogle, I love what he created and I love the value of Vanguard. But there are other companies that are kind of, you know, uh competing with Vanguard that have a little bit of a history of maybe not looking out for the client's best interest. And one of the things that to recognize about passive investing is that it is not a free gift from the gods. Um, everything has a give and take, everything has a cost. And these companies, whether it's standard poor's, BlackRock, Fidelity, these companies are making a lot of money. Uh, they're not just giving you this free passive portfolio out of the goodness of their hearts. They're making a ton of money. And and they make money based on selling. Uh, and I feel like there's been a lot of sales efforts that have misled people to believe things that aren't true. One of the things that really unsettles me is this belief that people should not think about investing. If you really think about the amount of effort and time and maybe even misery that goes into saving money to retire, right? So, like a person might work 40, 50 hours a week, um, will hope 50 weeks a year and they get two weeks of vacation for three to four decades to try to save a certain amount of money so they can provide this high quality of life for their children, to retire, whatever. They're working so hard. And most people are not working jobs that they love, right? And they're doing it to squirrel away this small amount of money. And then to think that they've worked so hard to over a long period of time amass this amount of money, to then not think at all about what they're doing with it, to listen to people who are selling them stuff and telling them don't think, just put it with us. There's no major decision in life where you'd say, don't think. Somehow this is the only decision where you're like, ah, don't think about it. Now, there's reasons that led to us being here, which is uh, you know, for a long period of time, when investors chased returns, when investors did certain things, yes, it destroyed value. But that doesn't mean we shouldn't try to learn and try to better ourselves and try to have a better grasp of the decisions that we're making and the impacts that they're gonna have on our future, your ability to retire. So that's that was a long-winded way to say that the whole point of not so passively aggressive is to educate, to try to just um help people think a little bit more of the risks that they are taking. For instance, again, what I described about passive investing, it's it's it's great for certain things. It's cheap, awesome. Like paying less fees if you're get if you can get the same thing elsewhere, awesome. But just know that it is a momentum portfolio. It does really well when momentum is hot. It's not an all-day, all-weather portfolio. There are gonna be periods where it does really poorly. And we've just been through the hottest period in history of momentum, which has led people to think, you know what, we don't have to think about this. We're just gonna make money every single day. And that's just not the case. Um, and that's called not so passively aggressive to coin a few friends who I ran up by, they're like, yeah, that fits you perfectly. You're very far from passive aggressive. So um, you know, uh ideally, if anyone watching this happens to see uh a not so passively aggressive video and you feel it's of merit and could help people, please like it. Um pass it along because the goal is to help as many people as possible, and I'd appreciate your help in doing so. Same with this video. Hopefully this video helps as well.

SPEAKER_01: 23:37

Where can our viewers go to find the video series that you're uh releasing? And also where can people go if they want to dig deeper into run and your philosophy or connect with you?

SPEAKER_00: 23:47

Um to find not so passively aggressive. I am very begrudgingly and uncomfortably going to be posting it everywhere I can because again, the goal is to help as many people as possible. And if people don't see it, then I'm not really helping anybody. Um and I'm not selling anything on it, so I'm not even helping myself by doing it. Uh so it'll be available on you know Apple, anywhere you can see a podcast, Apple, Spotify, YouTube. I've never posted a video on Instagram or TikTok, but I I might do it. Uh we'll see. So please keep an eye out for it. And then as far as me personally or Running Oak, um, you can find our we got a shiny new website, runningoak.com or runningoaketfs.com. Um, I'm also begrudgingly doing a lot more on LinkedIn, so hit me up on there. Uh, I'd love to talk, love to help however I can.

SPEAKER_01: 24:43

Thank you uh so much for joining me. Thank you to everybody for watching. Be sure to like, share, and subscribe for more episodes of Lead Leg Live.

SPEAKER_00: 24:51

Thank you for having me.