July 5, 2025 • 44 mins
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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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
In a lot of ways, today's environment is most
similar to 2000.
There's a lot of differences.
That comment occasionallyupsets people.
There are a whole lot ofdifferences between today and
2000,.
But there are also, I think,more similarities than any other
time.
In 2000, you had a small numberof companies go up a whole lot.
(00:21):
They became a larger and largerpercentage of the index, which
drove the index up, and then youhad a ton of companies that
just sat there.
I'd say that today is prettysimilar, where you have a small
number of companies that havegone up a whole lot, driven the
vast majority of the market'sreturns.
Over years.
They've become a massive partof the market itself, or the S&P
(00:46):
, which has had a significantimpact on the returns of the S&P
as well.
Speaker 2 (00:59):
For those that are watching us across all the
various platforms.
If you have any questions, ifyou 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 interactiveas possible on a topic which I
think is pretty relevant, whichis how in the world you invest
in uncertainty because, if youhaven't noticed folks, nobody
has a clue what's happening atall and it's hard to kind of
(01:21):
figure out what do your moneywhen you're in that kind of
environment.
So, with that said, my name isMichael Guy, a publisher of the
Lead Lag Report.
This is a sponsoredconversation by my friend and
client, mr Seth Cogswell ofRunning Oak, who's got an ETF
R-U-N-N run which you may wantto run to after this
conversation, but when themarket's open, obviously.
Speaker 1 (01:41):
Don't random walk.
Speaker 2 (01:46):
No, I said, said no, that's right, he.
He says that's been very cleveron 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 atnyu once, uh, and I didn't
realize how big of a deal he was, uh, until many years later.
I probably should not havepunked him when I went out to do
an endeavor.
Yeah, exactly, all right.
So, so the topic here isinvesting in uncertainty, okay,
so, or, I probably should nothave punked him when I was doing
it.
Yeah, exactly, all right.
(02:06):
So the topic here is investingin uncertainty.
Okay.
So I want to frame thisproperly, because it feels like
there's always uncertainty,right, and it feels like this
time is different in terms ofthe level of uncertainty.
Is that true?
Like are we in, you think, justkind of big picture wise, in an
(02:26):
environment where there's moreuncertainty than we've seen
before?
Or is that just some kind ofnarrative?
Speaker 1 (02:32):
This could get really deep, really fast It'd be, but
come on, I would say, kind ofshort term.
There is a crazy amount ofuncertainty, you know, as far as
the Israel Iran conflict,interest rates being up a lot
(02:52):
and, you know, somewhatconsistently going up.
Energy prices are going up alot, you know.
Unemployment will be reallyinteresting to watch.
It was, it seemed to have beenworking its way up.
Valuations are crazy.
But that's just a snapshot oftoday.
(03:13):
There's a really cool book orframework called the Fourth
Turning, which posits thatbasically every eight decades we
go through a monumental shiftas a country, but also globally.
It often coincides.
So you think about theRevolutionary War in the 1770s,
the Civil War in the 1850s,World War I, world War II, great
(03:38):
Depression, let's say the1930s-ish, and today we're, you
know, about 80, 80 years and alittle bit further, 80 to 90.
And and so we're going throughthis I think everybody can feel
it, whether it's politically,socially, in the market,
whatever it is.
We are in this period ofunsustainability in a long way,
(04:03):
which means that that whichcan't be sustained can't be
sustained.
It's not that which can't lastforever 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 willsee very significant uh you know
changes in our society,probably in our government.
(04:24):
There's another framework by uhforgetting his name at the
moment really good, really coolgeopoliticist who basically
applies a five decade history,so as opposed to eight and the
eight and the fourth turningfive decade, and it applies to
significant changes in thegovernment and how it's
structured and how it applies toour lives, significant changes
(04:45):
in the government and how it'sstructured and how it applies to
our lives.
And this is the first time everwhere that, basically, that
five decade turning pointcoincides perfectly with that
eight decade turning point.
And again, we can all feel it.
So it is a an incrediblyuncertain time in a whole lot of
ways.
Meanwhile, the market justkeeps going up every day.
Speaker 2 (05:06):
Until it doesn't, which we'll talk about, and we
should always define whichmarket.
But I don't know if you sawthat study around.
The initial research suggeststhat the proliferation of chat,
gpt and AI has societallyseemingly made most people less
intelligent.
And I myself post on X sayingwhat is it about the post-COVID
(05:29):
world?
That seems like incompetence atan all-time high.
I wonder if part of that forkedturning, part of those big
cycle dynamics is, let's call it, average IQs dropping, because
there's a lot of interestingimplications about that.
If the environment, if peoplein general are just not being
thoughtful the way they used tobe.
Speaker 1 (05:48):
We're really going deep here, oh come on man,
you're opening another door forme.
There's a really cool bookcalled Power Versus Force and
it's somewhat transformed theway that I see life in general,
transform the way that I seelife in general.
But basically the premise isthat thought has energy.
(06:09):
Right, we can measure it andand the question is that, what
energy level are we kind of alloperating?
And so there's differentmindsets that operate at
different energy levels andaccording to this book I can't
speak to this personally, butaccording to this book or this
author you can measure thoseenergy levels and it basically
(06:30):
it's not surprising if you thinkof sort of the lowest states of
mind operate at the lowestenergy levels and it works its
way on up right.
So you start out with shame asbasically the lowest of energy
levels.
That's when people just sort offeel like they're in the gutter
.
And then it works its way upuntil you get to, let's say,
(06:51):
rationality, which I think theysay is offer it operating at
like a level of 200 is the kindof the range that they apply to
it, and then it continues toprogress until you get to
basically sort of loving andkindness.
Right, we've all probably metpeople who just sort of resonate
, that kind of all-knowing feeland give us all peace of mind.
(07:14):
Either way, it's a reallyinteresting book, and he claims
that we are operating at a levelthat hasn't been seen before,
as far as just sort of veryslowly improving.
Now that all said, rather than,let's say, chad GPT, I think
(07:37):
social media in general hascreated this echo chamber, where
few people are challengedanymore and want to be
challenged.
They're more just looking forsomething that will just confirm
their bias, whatever helps themfeel better at the moment or
the way they see the world,which does stunt growth, right?
(08:00):
I mean, if you're notchallenging people to think in
different ways, how do you grow?
How does your mindset and yourperspective evolve?
And so it certainly feels likewe might be getting dumber.
There are one of my favoritemovies is Idiocracy, and in a
lot of ways, it does sort ofseem like we're living through
(08:23):
that at the moment.
You know there's, there's,there's obviously tons of
reasons for optimism.
There's, just as we mentionedbefore, there's a lot of changes
that have been going on, evensocial media and smartphone,
which might end up being thebane of our you know, the
downfall of our civilization,who knows?
(08:43):
It certainly seems like it is,in a lot of ways, that's still
relatively new.
Right, it wasn't until 08 wheresocial media the iPhone became
really mainstream.
That's had a horrible negativeimpact on children and teenagers
in particular.
It's a crazy moment.
(09:05):
But again, ai.
The positives of AI is that itwill make people more efficient.
You know, if there's no doubtthat really cool firms will come
out with some awesomeapplications that will better
people's lives, now the questionis how many people are thinking
(09:26):
critically enough to use AIcreatively to actually improve
their lives, or how much do wehave to sort of drag them along
with really cool applications?
I actually got into a miniargument with a firm the other
day.
I was on a kind of a conferencecall with like 50 advisors and
they were talking about how, thedegree to which AI will improve
(09:49):
life and how much of asignificant positive impact
it'll have.
One of the specific referenceswas you know, no longer having
to drive right, how much timedoes that free up?
And my counterpoint was we havemore free time today than we've
ever had in history and theaverage American reads zero
(10:12):
books.
So if we read zero books onaverage when we have more free
time than any time in history,and then we have more free time.
Does that necessarily mean thatwe're going to start reading
again, so we go from reading inthe past to not reading at all?
When we have tons of free time,we're having more free time.
I don't know.
(10:33):
There's positives and negatives.
It'll be interesting to see howit all plays out.
Speaker 2 (10:38):
There's a comment from Johnny on YouTube.
A school report when I was akid consists of searching a
library for books.
I remember libraries, I'm ofthat age, yeah right, Reading
those books front to back forinformation, forming your own
thoughts to create summaryanalysis.
I remember the old MonarchNotes CD where, like you, would
actually get like the CliffNotes equivalent another brand,
(10:59):
but it is interesting.
So where I'm going with this asfar as the uncertainty dynamic
is, if the environment and thesocietal IQ is dropping because
we're not being challenged theway thoughtfully, intellectually
, we used to be, then thatobviously has implications on
where people put their money.
To your point about the marketgoing up and up and up, the
(11:25):
market's going up and up and upalmost because of that lack of
thoughtfulness and lack ofintelligence.
It's just going to passive S&Pand that's it.
But it can't be the case thatif that's a let's call it in
quotes a dumb way of allocatingright, Because everything has
cycles, including passive rightand S&P large cap exposure, At
some point you've got to imaginethat the market punishes lack
(11:48):
of intelligence.
Speaker 1 (11:48):
Now, I certainly hope so.
If we really are living inidiocracy, if the people are
using their brains the least arerewarded, while those who are
thinking are punished.
And certainly over the last 10to 15 years, I'd say that a rock
would have probably been thebest portfolio manager, which,
(12:10):
to a certain extent, you couldsay the S&P, is basically a rock
, since there's yes, there's acommittee that's making
decisions, so it's actually moreactive than most people think,
but there's also very littleactually going on as far as
decision making goes.
But there's also very littleactually going on as far as
decision making goes.
Speaker 2 (12:34):
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 anETF which I think is very
thoughtfully put together andlook, I mean to the extent that
the pendulum has swung so far inthe direction of just flows
into passive vehicles.
One would think that there mustbe many more anomalies and
opportunities for more kind ofdynamic, active type of
(12:56):
strategies, unique types ofapproaches, to really outperform
right.
And it's been a hard go for thelast decade plus for most
strategies not yours necessarily, but let's talk about run,
because I saw there was acomment about what Running Oak
is.
Let's talk about Running Oakand the ETF, yeah, so Running
Oak.
Speaker 1 (13:14):
We have a very simple , obvious investment philosophy
that's built upon three economicprinciples.
Let's say philosophy that'sbuilt upon three economic
principles.
Let's say those are maximizeearnings growth, because nothing
drives performance or thegrowth of investment like
earnings growth.
You invest in a company.
(13:34):
You want that.
You know you get a share ofthat company.
You want that growing in value.
You want that producing moreand more profits Great, there's
no arguing that that is notbeneficial.
The second piece of ourphilosophy is being very
disciplined around valuations.
Everybody talks about investingin undervalued companies, which
(13:56):
certainly we seek to do, butfor 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 assetsthat should go down, let alone
go down a whole lot.
We haven't seen a bear market,arguably, since 2008, 2009.
(14:18):
But even in 2022, which I wouldsay was a little bit of a baby
bear market, you saw Amazon andNetflix drop roughly 50% in just
a few months because they hadsome tiny hiccups in valuation,
and so if you're investing inwildly overvalued companies, you
have very little margin oferror.
Those companies had betterperform perfectly into
(14:41):
perpetuity, because the momentthey slip.
That's when people wake up andyou see a significant decline.
The other aspect that we focuson is some simple ways to, we'll
say, mitigate downside risk,for the very obvious reason that
nothing destroys exponentialgrowth like large drawdowns.
(15:04):
Obvious example is you drop 50%, you have to double your money
to get back to flat.
On the other hand, if you drop30% which is still unfortunate,
not fun you only need a 40%return to be making new highs.
So that 20% difference between30 and 50 results in a
difference between a 40% returnversus 100 that is required to
(15:28):
get back to new highs.
So again, very simple, obviousphilosophy of maximizing
earnings growth, avoidingovervalued companies, mitigating
large drawdowns.
And then our process isrules-based, so it's very
disciplined and ensures that wedo the same thing over and over
so that you get that consistency.
Why that matters today is we'vediscussed how uncertain the
(15:52):
current environment is andactually I think someone that
you introduced me to, someonerecently made the comment that
when they invest with a manager,they just want them to do their
job.
They want them to do the jobthey were hired to do, and I
love that metaphor because itapplies perfectly to portfolio
(16:13):
construction.
Building a portfolio is verysimilar to building a company.
When you build a company,you're hiring different people,
ideally really good employeesthat are really good at
different skill sets, and thenthey complement each other, that
address every aspect of thebusiness so that the whole is as
good as it can be.
It's the same with a portfolio.
(16:34):
You invest in differentstrategies, ideally best in
class, and they all do differentthings, and in the long run,
class and they all do differentthings, and in the long run, the
goal is to maximize returns sothey're as effective as possible
.
But also by kind of investingin different strategies or
employees, you've got thisdiversification so that no
(16:57):
matter what's going on, nomatter what aspect of your
business is being challenged,you have an employee there
that's contributing and doingtheir job, and that describes us
perfectly.
That rules-based aspect of ourstrategy means that we've
basically been doing the samething for four decades.
We do the same thing over andover, and so that leads to
(17:19):
reliability.
We, more than I'd say most,because that rules based nature
means that we do our job.
You know what Running Oak isdoing at all times and we sit
right in the middle of yourportfolio, from kind of mid to
large, again looking to maximizeearnings growth, but that
discipline around valuations ofrisk brings it back to the
(17:42):
middle, so that our clientsadvisors largely, but certainly
individuals know what we'redoing and it makes it easy to
build around us because you knowwhat other employees or
portfolios you need.
You might want something that'sa little more growthy, value
SMID, but we're in the middledoing our thing, ideally being
(18:04):
sort of that foundationalholding in your portfolio at all
times, doing our job.
One of the reasons why thatreally matters is if you go back
to 2022 again, I was at aconference let's say this is in
2023, with some CIOs runningvery significant companies, and
one of them mentioned that whenthey look back on 2022, they
(18:27):
were shocked at how horribletheir performance was, or just
how disappointing I wouldn't sayhorrible, but disappointing and
they couldn't understand why.
So they went back, they dug intoall the different aspects of
their portfolio and what theydiscovered was that many of
their managers were given a jobor they were hired to do a
(18:50):
particular job and as time wentalong, as it became apparent
that it was very hard to keep upwith the S&P if you didn't have
a ton of large cap growth, alot of these managers started
investing or leaning towardlarge cap growth because, again,
that was the only way theycould keep up.
And the problem is, when largecap growth really struggled, you
(19:10):
didn't have those people doingtheir job and their whole
portfolio really struggled.
So, again, the key is whenyou're building a portfolio,
look at managers, or hiremanagers that do a particular
job that fits a certain role inyour portfolio, and if you do so
(19:32):
, you'll do well.
Speaker 2 (19:34):
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 becauseit's been a large cap only type
of environment.
What do you say to those thatsay that, listen with
uncertainty, I don't want anyequities at all.
(19:56):
You know, yeah, sure, soundslike a better environment, maybe
for what you're doing with RON,but what about concerns around
just stocks as an asset class?
Speaker 1 (20:05):
I mean uncertainty implies that things are
uncertain.
I don't.
Yes, valuations sort of acrossthe board on equities are high,
certainly in particular pockets,but again, it's uncertain just
because we feel that that's thecase.
We don't know what, and that'swhere diversification comes in.
(20:25):
So if you get out of stockscompletely, that's making a bet,
that's behaving in a way thatimplies certainty, but yet we're
doing so because it's uncertain.
So I would just say that'scontrary to the initial intent.
In a lot of ways today'senvironment is most similar to
(20:48):
2000.
There's a lot of differences.
That comment occasionallyupsets people.
There are a whole lot ofdifferences between today and
2000,.
But there are also, I think,more similarities than any other
time.
In 2000, you had a small numberof companies go up a whole lot.
They became a larger and largerpercentage of the index, which
(21:08):
drove the index up, and then youhad a ton of companies that
just sat there.
I'd say that today is prettysimilar, where you have small
number of companies that havegone up a whole lot, driven the
vast majority of the market'sreturns.
Over years It'd become amassive part of the market
(21:28):
itself, or the S&P, which hashad a significant impact on the
returns of the S&P as well.
Now, in 2001, when thingsreversed and you had those very
popular overcrowded companiescome back to reality, the S&P
did as well.
But there were a bunch ofcompanies that did not
(21:50):
participate that actually didwell.
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, wereup, high quality probably, even
to a certain extent mid capwe're up Now.
Markets are correlated.
(22:11):
So I wouldn't say that peopleshould count on that happening
again as far as that bigdiscrepancy between up and down.
But again, a small number ofcompanies have have driven the
vast majority of the return andthere's a lot of companies that
have just sat there, majority ofthe return, and there's a lot
of companies that have just satthere, particularly mid-cap
companies.
And so it doesn't make sense toexpect mid-cap to even remotely
(22:33):
participate in the downside ifwe see a pullback in the s&p in
the biggest companies becausethey're such mid-cap is such a
small part of the indexes.
So so again, yes, they'recorrelated.
But the other thing is, ifwe're just looking at that,
let's say to one degree and we'dsay, all right if people sell
(22:58):
Apple and Amazon and Meta andTesla or whatever, it'll take
the indexes down and that'lltake everything else down fine.
But the other issue is we're notoperating in a vacuum.
That's where the people havebeen sitting on cash.
They've been a little moredisciplined, start looking for
bargains.
That's where they start lookingfor good investments and all it
(23:19):
takes is a little bit of moneygoing into mid cap companies,
let's say for good reasons,because mid cap has outperformed
and is far cheaper then thatcan.
You could end up in a scenariowhere mid is flat up whatever,
while large is down a lot in theindexes.
(23:39):
Again, I wouldn't say guaranteeit, but I do think it would be
a mistake to just get entirelyout of equities.
But that implies certainty atan uncertain time, which is the
opposite of what we're trying tokind of.
You know, if you're uncertainyou don't want to go go all in
on one thing Well, actually, Ithink it actually relates also
(24:00):
to geopolitical concerns, right?
Speaker 2 (24:02):
So if there's a concern that things are going to
get even more dangerous withthe Middle East and oil prices
continue to spike, the firstthing 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 capswould go down, but they could go
(24:24):
down a lot less or, to yourpoint, maybe even diverge and
actually make money In terms oflet's talk about sort of index
construction when it comes tomid caps overall.
How do we define mid caps?
How do you define it relativeto the industry?
(24:46):
Define mid caps how do youdefine it relative to the
industry?
And take me through a littlebit sort of the construction,
meaning the number of holdings,the weightings, type of the
portfolio.
Speaker 1 (24:52):
So mid cap.
The problem is, what a lot ofpeople miss is that the line
between small and mid and midand large is just a made up line
.
That's you know.
You know, and a lot of thedifferent firms or you know
platforms that create thoselines don't even agree.
(25:13):
Really, mid cap is just, it's,it's companies that are, for the
most part, if we want to kindof broadly define them, they're.
They're companies that havegraduated from small cap.
Small cap companies are justthey're less proven for the most
part.
There are some older small capcompanies, but for the most part
(25:35):
they're less proven.
Their businesses or they have aproduct that's less significant
and so mid cap has graduated.
They have probably nailed aproduct, they've gotten to the
next level and then to get tolarge cap, you know it's one
degree further.
The great thing about MidCap isit's in the sweet spot of.
(25:58):
You've got that extra margin oferror because you're investing
in a company that is established, more established than small
cap.
That is established, moreestablished than small cap, but
it's not so large that it's easyenough to potentially provide
outsized returns, whereas youknow let's think of Apple,
because it's the obvious exampleit's such a big company it's
(26:19):
hard to imagine what they couldpossibly do to really move the
needle, whereas a mid capcompany, let's say they got
there on one product, all they'dhave to do is create one more
great product and next thing youknow, they've doubled.
So it really in.
When we're talking aboutinvesting, we're always talking
about return versus risk andmid-cap kind of provides that
(26:40):
sweet spot with regard to returnversus risk.
Now, as far as our portfolioand how we construct it, we
begin with companies above $5billion.
So it's you know, when youconstrain your options, you
limit your opportunity.
Now, there's no arguing that asyou get smaller, it doesn't add
(27:04):
risk, because those, either thestocks are less liquid, the
companies are smaller.
Whatever it is, there's morerisk as you work your way down.
There's there's definitely notan increase in risk as you work
your way up, so we don'tconstrain it to the upside.
So again, $5 billion and up.
Now we do end up usually beingin that mid large space, because
(27:26):
we are seeking companies thatare growing at a significant
pace, which, again, is generallyhistorically hard to do.
The bigger the company gets andthat's attractively valued, and
what we've seen today is theperfect example.
If we're looking for attractivevaluations.
It's usually companies thatpeople are all hot and bothered
about, usually the largestcompanies, particularly in the
(27:51):
indexes.
Part of what's driven that isjust simply popularity.
Right, everybody knows aboutApple, amazon, nvidia, tesla and
it gets certain people excitedso they buy, for reasons that
are not driven based on data.
They didn't look at the numbersand they said this is
undervalued.
They said, hey, I like my car,so they bought Tesla.
(28:12):
Or I believe in robots, so theybought Tesla.
And so where we end up isusually not in those largest
companies, because that's oftendriven by sentiment and our goal
is to sort of invest away fromsentiment.
So we end up in that mid-largespace, usually around 50-50.
Right now we've got about 60%invested in MidCap, 40% in large
(28:34):
, and that's been the case foryears and largely driven by,
according to our numbers.
The largest companies have beenquite overvalued for a while
and so that's kind of driven ustoward, you know, more into mid
cap.
Why that's, why that's a huge,why that is particularly
noteworthy for us right now islooking at the average portfolio
(28:59):
, the typical portfolio thatclients have.
There is a huge gap right inthe middle of it that most
people are entirely unaware of.
So most people, when they buildportfolios, they start out with
a large gap or they might evenstart with the S&P, which at
this point is basicallyaggressive large gap growth.
But if you didn't start with alarge gap you probably got fired
(29:20):
over the last decade.
So you start out with a bunchof large gap.
You complement it with SMIDbecause that's sort of a
one-stop shop fordiversification and then value.
But the issue is many, or reallymost from what I've seen most
large cap diversified portfoliosaren't diversified.
(29:40):
So people are investing inthese portfolios thinking
they're getting thisdiversification through large
cap, whether it's growth anddecor, but if you actually look
under the hood they're gettingvery little.
So if you think of SCSG as theexample I use a lot only because
I see it so often, I see itmore than many SCSG at least
(30:02):
recently had 60% of itsportfolio invested in just eight
companies.
Those eight companies are verysimilar, they're highly
correlated and they're at thevery, very top of sort of the
market spectrum, market capspectrum, and so at least 40% of
that large cap seeminglydiversified large cap portfolio
(30:22):
for the whole rest of large capinto both growth and value.
And so there's this massive gapand that's where we sit.
Speaker 2 (30:30):
And I think you're certainly doing better than the
passive, mid-cap side of things,right?
I think people would naturallythink all right, I'm down with
the mid-cap argument, but let mejust go passive and that's it.
There is a lot more activeopportunity with what you're
doing.
Speaker 1 (30:43):
Yeah, I believe.
So the last two days haveactually been an interesting
experience where, uh, last nightI received a very nice email,
uh, from a firm saying that theyhad just we, we saw a pretty
big um, you know, block go offin our, in our etf um, and, and
(31:05):
so this firm followed up andsaid, hey, we just bought, which
is awesome, I love gettingthose emails.
But then I got an email thismorning that said, hey, you have
lagged VO, which is theVanguard passive mid-cap, and
said that we are going to sell,which I've actually never
experienced before.
I think in 12 years since welaunched the firm, to my
(31:28):
knowledge we haven't lost asingle advisory relationship.
So this is the very first time,and initially I was taken aback
because, again, first time in12 years.
But as I kind of dug into thenumbers and looked, we have
outperformed VO over everysingle period of time other than
(31:51):
, you know, let's say, year todate, and that's solely been
driven by the last month and ahalf.
In the last month and a half youhave had this crazy move and
high beta names, semiconductorshave absolutely exploded, and so
(32:11):
, again going back to doing yourjob, 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 tooutperform when everything,
especially Argu of the worstcompanies, are skyrocketing
(32:32):
Right Like there's so manycompanies that are the very best
performers in the month and ahalf that we would never touch.
They don't meet our rules.
They're either wildlyovervalued or they don't have
the earning growth and theprofitability that we require,
or they don't have the earninggrowth and the profitability
that we require.
And so there are certain timeswhere we will lag, there's
certain, and then most of thetime, historically, we've
outperformed.
We just happen to be seeing oneof these really weird periods
(32:58):
which happens from time to time.
We hold the average company forfour to five years, so anything
under a year is, for us, isbasically noise.
We, we are completelyindifferent toward a couple of
months worth of performance.
That doesn't mean I wouldn'tlove to outperform every single
day, but, uh, particularly thelast month and a half, again, it
has been wild.
Uh, think of all theuncertainty and the risk factors
(33:21):
that are going on right nowwith, uh you know, interest
rates going up quite a bit,energy prices going up, the you
know, again, the Iran-Israelconflict.
There's so many things going onand the market just keeps going
up.
If we are outperforming whenthe garbage is cooking, that
(33:43):
means that we're invested in abunch of garbage and you don't
want it.
So you know.
Going back to your question asfar as passive versus active,
certainly, as you get down intomid cap small cap it's a lot
more nuanced.
First of all, you have a lot ofcompanies and small in
particular, but even mid thatare unprofitable In the long
(34:04):
term.
Investing in even mid that areunprofitable In the long term,
investing in companies that areconsistently unprofitable,
meaning they're losing money, isnot good, like it's hard to.
Yes, there's some that areinnovative and for a short
period of time, as they grow,they can be very compelling in
the long run, but for the mostpart long run, but for the most
(34:28):
part in the mid small space.
That's where you really wantsomeone investing on your behalf
with discipline.
That's where you can find somereally cool, really innovative
companies or very well-runcompanies that nobody knows
about, and that's sort of oursweet spot is looking for
well-run, fast-growing companiesthat people are unaware of you
had mentioned energy prices andI have to think the energy
(34:51):
sector is probably due foranother big run.
Speaker 2 (34:54):
When you look at all the studies around allocation of
energy in the S&P, it's nearits historic lows.
Talk me through a little bitenergy as an allocation in run.
Speaker 1 (35:04):
Talk me through a little bit energy as an
allocation in Ron.
So energy is?
I would love to say that ifyou're right, we would kill it,
but energy does not fit ourrules.
So our rules or our let's say,our investment philosophy of
maximizing earnings growthwithin the constraints of being
very disciplined aroundvaluations and lower downside
risk, energy does not fit whatwe're looking for for a number
(35:28):
of reasons.
One, usually they employ a lotof leverage and one of the
things that one of the ways thatwe look to protect to the
downside for clients isinvesting away from companies
that have a whole lot of debt.
Energy companies usually use aton of debt.
But two, their prices arelargely driven by a commodity
(35:49):
and we don't believe that we'reexperts in that commodity.
There are a ton of people outthere that are really good at
that.
I'd say invest with them.
They will provide moreexpertise than we could
certainly provide in that area.
And why that matters again isgoing back to doing your job.
We do what we do and then andyou know, someone that's very
(36:11):
good in the energy space couldbe an excellent compliment to us
Somebody who's really good inthe energy space can't do what
we do.
They are not going to be nearlyas good at investing in a
diversified portfolio in themiddle of mid-large and growth
and value.
That's our sweet spot.
We're kind of meant to again bethat sort of rock in your
(36:31):
portfolio.
Energy is more of an importantpart of the economy, but it's a
little bit of a kind of anoutlier.
It's a little different.
So that's actually an excellentcompliment to us that you can
pair with us.
Speaker 2 (36:47):
For you yourself.
I mean, when you look at theallocations, understanding it's
rules-based, are there certainparts about RUN that get you
more excited?
Like you must have a view ondifferent sectors and the
market's role or maybeindividual positions that don't
necessarily go into thedecision-making.
But is there anythingparticularly in RUN necessarily
go into the decision making?
But is there anything inparticular in run that it's like
okay, that that could be a bigcontributor of?
Speaker 1 (37:07):
returns going forward .
The big thing is this is morehigh level.
The big thing is investingwhere others aren't.
This is a theme that I've beenfocusing on a little bit more
lately.
Um, it's obvious, it's simple,but yet no one talks about it.
So, if you think about the ideaof investing where others aren't
(37:28):
, uh, when you invest whereothers are, or where they've
invested a ton and they'recurrently piling in so let's say
, the S and P 500 or the bignames that we all know if you're
piling into those witheverybody else and everybody
else has been doing it foralmost a decade you are
(37:50):
guaranteed to get higher pricesbecause there's demand.
So you're going to get higherprices, which means you're
paying higher valuations, whichmeans that your upside is
arguably limited and you havequite a bit more downside risk.
So, less upside, more risk.
That is not how I think anybodywould ever say that's how I
(38:12):
want to invest, but that's whatyou're getting.
If you're piling into the samestuff that everybody else is
piling into, you're playing themomentum game, which works.
There's some value to themomentum, but you're basically
riding a wave and just prayingthat that wave doesn't crash
while you're still on it.
Now, if you invest where othersaren't, there's less demand for
(38:33):
for those holdings or thoseassets and so there's less
demand for those prices drivingthe ups, driving them up.
So you get lower prices, lowervaluations, which implies higher
upside and lower downside, soyou're getting higher potential
upside and a margin of errorwhich is asymmetric risk and
(38:55):
return.
That is exactly what you want.
We want to take as little riskas possible for the biggest
payoff possible.
Ideally and if you think of ourstrategy, that is what it's
designed to do that is theinefficiency that we capitalize
on.
That focus on relative valuationseeks out companies that are
(39:16):
growing at a considerable pace,historically quite a bit higher
than the S&P that we're able toget at a value, and we usually
get them at a value becausepeople are not investing in that
moment, they're not popular,they're not piling in, so we get
again that lower price, lowervaluation, which implies higher
(39:37):
upside, lower downside risk.
That's what I'm really excitedabout is, you know, there are
people that say the market'sbroken because so many people
and so much money is going intopassive, and I hope to God
that's not true, because if themarket's broken, that implies
that the US economy is broken,so let's all hope that passive
(39:59):
investing is not indicative of,or doesn't become indicative of,
how the US economy works whichright now it seems like it is
but that there's so much moneygoing into just a small number
of things that that creates verysignificant opportunity.
Again, we saw no one how thatplayed out, and I think that'll
(40:21):
play out again.
Speaker 2 (40:23):
Seth.
I want to learn more about Ronand track more of your thoughts.
Where would you point them to?
Speaker 1 (40:29):
Feel free to reach out Seth at RunningOakcom.
I am on X, you can just searchfor Seth Cogswell.
Same with LinkedIn, a littlemore active on LinkedIn.
Speaker 2 (40:38):
So, seth Cogswell, you can also check out our brand
new shiny website at runningoakcom or running oak etfscom I
love me some mid caps and I loveme 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 watchthis on uh juneteenth, happy
juneteenth, should we say.
(40:58):
I don't know, I think sayinghappy juneteenth, I don't know,
it's a holiday, uh, federal, but, um, appreciate those that
watch this.
Hopefully we'll see you all onthe next episode of Lead Lag
Live.
By the way, folks got some bigsurprises coming up in the next
month and some new faces, so Imay not be the only one that's
doing these interviews with Sethgoing forward.
Appreciate it, seth.
Thank you, cheers everybody.
In a lot of ways, today's environment is most
similar to 2000.
There's a lot of differences.
That comment occasionallyupsets people.
There are a whole lot ofdifferences between today and
2000,.
But there are also, I think,more similarities than any other
time.
In 2000, you had a small numberof companies go up a whole lot.
(00:21):
They became a larger and largerpercentage of the index, which
drove the index up, and then youhad a ton of companies that
just sat there.
I'd say that today is prettysimilar, where you have a small
number of companies that havegone up a whole lot, driven the
vast majority of the market'sreturns.
Over years.
They've become a massive partof the market itself, or the S&P
(00:46):
, which has had a significantimpact on the returns of the S&P
as well.
Speaker 2 (00:59):
For those that are watching us across all the
various platforms.
If you have any questions, ifyou 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 interactiveas possible on a topic which I
think is pretty relevant, whichis how in the world you invest
in uncertainty because, if youhaven't noticed folks, nobody
has a clue what's happening atall and it's hard to kind of
(01:21):
figure out what do your moneywhen you're in that kind of
environment.
So, with that said, my name isMichael Guy, a publisher of the
Lead Lag Report.
This is a sponsoredconversation by my friend and
client, mr Seth Cogswell ofRunning Oak, who's got an ETF
R-U-N-N run which you may wantto run to after this
conversation, but when themarket's open, obviously.
Speaker 1 (01:41):
Don't random walk.
Speaker 2 (01:46):
No, I said, said no, that's right, he.
He says that's been very cleveron 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 atnyu once, uh, and I didn't
realize how big of a deal he was, uh, until many years later.
I probably should not havepunked him when I went out to do
an endeavor.
Yeah, exactly, all right.
So, so the topic here isinvesting in uncertainty, okay,
so, or, I probably should nothave punked him when I was doing
it.
Yeah, exactly, all right.
(02:06):
So the topic here is investingin uncertainty.
Okay.
So I want to frame thisproperly, because it feels like
there's always uncertainty,right, and it feels like this
time is different in terms ofthe level of uncertainty.
Is that true?
Like are we in, you think, justkind of big picture wise, in an
(02:26):
environment where there's moreuncertainty than we've seen
before?
Or is that just some kind ofnarrative?
Speaker 1 (02:32):
This could get really deep, really fast It'd be, but
come on, I would say, kind ofshort term.
There is a crazy amount ofuncertainty, you know, as far as
the Israel Iran conflict,interest rates being up a lot
(02:52):
and, you know, somewhatconsistently going up.
Energy prices are going up alot, you know.
Unemployment will be reallyinteresting to watch.
It was, it seemed to have beenworking its way up.
Valuations are crazy.
But that's just a snapshot oftoday.
(03:13):
There's a really cool book orframework called the Fourth
Turning, which posits thatbasically every eight decades we
go through a monumental shiftas a country, but also globally.
It often coincides.
So you think about theRevolutionary War in the 1770s,
the Civil War in the 1850s,World War I, world War II, great
(03:38):
Depression, let's say the1930s-ish, and today we're, you
know, about 80, 80 years and alittle bit further, 80 to 90.
And and so we're going throughthis I think everybody can feel
it, whether it's politically,socially, in the market,
whatever it is.
We are in this period ofunsustainability in a long way,
(04:03):
which means that that whichcan't be sustained can't be
sustained.
It's not that which can't lastforever 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 willsee very significant uh you know
changes in our society,probably in our government.
(04:24):
There's another framework by uhforgetting his name at the
moment really good, really coolgeopoliticist who basically
applies a five decade history,so as opposed to eight and the
eight and the fourth turningfive decade, and it applies to
significant changes in thegovernment and how it's
structured and how it applies toour lives, significant changes
(04:45):
in the government and how it'sstructured and how it applies to
our lives.
And this is the first time everwhere that, basically, that
five decade turning pointcoincides perfectly with that
eight decade turning point.
And again, we can all feel it.
So it is a an incrediblyuncertain time in a whole lot of
ways.
Meanwhile, the market justkeeps going up every day.
Speaker 2 (05:06):
Until it doesn't, which we'll talk about, and we
should always define whichmarket.
But I don't know if you sawthat study around.
The initial research suggeststhat the proliferation of chat,
gpt and AI has societallyseemingly made most people less
intelligent.
And I myself post on X sayingwhat is it about the post-COVID
(05:29):
world?
That seems like incompetence atan all-time high.
I wonder if part of that forkedturning, part of those big
cycle dynamics is, let's call it, average IQs dropping, because
there's a lot of interestingimplications about that.
If the environment, if peoplein general are just not being
thoughtful the way they used tobe.
Speaker 1 (05:48):
We're really going deep here, oh come on man,
you're opening another door forme.
There's a really cool bookcalled Power Versus Force and
it's somewhat transformed theway that I see life in general,
transform the way that I seelife in general.
But basically the premise isthat thought has energy.
(06:09):
Right, we can measure it andand the question is that, what
energy level are we kind of alloperating?
And so there's differentmindsets that operate at
different energy levels andaccording to this book I can't
speak to this personally, butaccording to this book or this
author you can measure thoseenergy levels and it basically
(06:30):
it's not surprising if you thinkof sort of the lowest states of
mind operate at the lowestenergy levels and it works its
way on up right.
So you start out with shame asbasically the lowest of energy
levels.
That's when people just sort offeel like they're in the gutter
.
And then it works its way upuntil you get to, let's say,
(06:51):
rationality, which I think theysay is offer it operating at
like a level of 200 is the kindof the range that they apply to
it, and then it continues toprogress until you get to
basically sort of loving andkindness.
Right, we've all probably metpeople who just sort of resonate
, that kind of all-knowing feeland give us all peace of mind.
(07:14):
Either way, it's a reallyinteresting book, and he claims
that we are operating at a levelthat hasn't been seen before,
as far as just sort of veryslowly improving.
Now that all said, rather than,let's say, chad GPT, I think
(07:37):
social media in general hascreated this echo chamber, where
few people are challengedanymore and want to be
challenged.
They're more just looking forsomething that will just confirm
their bias, whatever helps themfeel better at the moment or
the way they see the world,which does stunt growth, right?
(08:00):
I mean, if you're notchallenging people to think in
different ways, how do you grow?
How does your mindset and yourperspective evolve?
And so it certainly feels likewe might be getting dumber.
There are one of my favoritemovies is Idiocracy, and in a
lot of ways, it does sort ofseem like we're living through
(08:23):
that at the moment.
You know there's, there's,there's obviously tons of
reasons for optimism.
There's, just as we mentionedbefore, there's a lot of changes
that have been going on, evensocial media and smartphone,
which might end up being thebane of our you know, the
downfall of our civilization,who knows?
(08:43):
It certainly seems like it is,in a lot of ways, that's still
relatively new.
Right, it wasn't until 08 wheresocial media the iPhone became
really mainstream.
That's had a horrible negativeimpact on children and teenagers
in particular.
It's a crazy moment.
(09:05):
But again, ai.
The positives of AI is that itwill make people more efficient.
You know, if there's no doubtthat really cool firms will come
out with some awesomeapplications that will better
people's lives, now the questionis how many people are thinking
(09:26):
critically enough to use AIcreatively to actually improve
their lives, or how much do wehave to sort of drag them along
with really cool applications?
I actually got into a miniargument with a firm the other
day.
I was on a kind of a conferencecall with like 50 advisors and
they were talking about how, thedegree to which AI will improve
(09:49):
life and how much of asignificant positive impact
it'll have.
One of the specific referenceswas you know, no longer having
to drive right, how much timedoes that free up?
And my counterpoint was we havemore free time today than we've
ever had in history and theaverage American reads zero
(10:12):
books.
So if we read zero books onaverage when we have more free
time than any time in history,and then we have more free time.
Does that necessarily mean thatwe're going to start reading
again, so we go from reading inthe past to not reading at all?
When we have tons of free time,we're having more free time.
I don't know.
(10:33):
There's positives and negatives.
It'll be interesting to see howit all plays out.
Speaker 2 (10:38):
There's a comment from Johnny on YouTube.
A school report when I was akid consists of searching a
library for books.
I remember libraries, I'm ofthat age, yeah right, Reading
those books front to back forinformation, forming your own
thoughts to create summaryanalysis.
I remember the old MonarchNotes CD where, like you, would
actually get like the CliffNotes equivalent another brand,
(10:59):
but it is interesting.
So where I'm going with this asfar as the uncertainty dynamic
is, if the environment and thesocietal IQ is dropping because
we're not being challenged theway thoughtfully, intellectually
, we used to be, then thatobviously has implications on
where people put their money.
To your point about the marketgoing up and up and up, the
(11:25):
market's going up and up and upalmost because of that lack of
thoughtfulness and lack ofintelligence.
It's just going to passive S&Pand that's it.
But it can't be the case thatif that's a let's call it in
quotes a dumb way of allocatingright, Because everything has
cycles, including passive rightand S&P large cap exposure, At
some point you've got to imaginethat the market punishes lack
(11:48):
of intelligence.
Speaker 1 (11:48):
Now, I certainly hope so.
If we really are living inidiocracy, if the people are
using their brains the least arerewarded, while those who are
thinking are punished.
And certainly over the last 10to 15 years, I'd say that a rock
would have probably been thebest portfolio manager, which,
(12:10):
to a certain extent, you couldsay the S&P, is basically a rock
, since there's yes, there's acommittee that's making
decisions, so it's actually moreactive than most people think,
but there's also very littleactually going on as far as
decision making goes.
But there's also very littleactually going on as far as
decision making goes.
Speaker 2 (12:34):
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 anETF which I think is very
thoughtfully put together andlook, I mean to the extent that
the pendulum has swung so far inthe direction of just flows
into passive vehicles.
One would think that there mustbe many more anomalies and
opportunities for more kind ofdynamic, active type of
(12:56):
strategies, unique types ofapproaches, to really outperform
right.
And it's been a hard go for thelast decade plus for most
strategies not yours necessarily, but let's talk about run,
because I saw there was acomment about what Running Oak
is.
Let's talk about Running Oakand the ETF, yeah, so Running
Oak.
Speaker 1 (13:14):
We have a very simple , obvious investment philosophy
that's built upon three economicprinciples.
Let's say philosophy that'sbuilt upon three economic
principles.
Let's say those are maximizeearnings growth, because nothing
drives performance or thegrowth of investment like
earnings growth.
You invest in a company.
(13:34):
You want that.
You know you get a share ofthat company.
You want that growing in value.
You want that producing moreand more profits Great, there's
no arguing that that is notbeneficial.
The second piece of ourphilosophy is being very
disciplined around valuations.
Everybody talks about investingin undervalued companies, which
(13:56):
certainly we seek to do, butfor 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 assetsthat should go down, let alone
go down a whole lot.
We haven't seen a bear market,arguably, since 2008, 2009.
(14:18):
But even in 2022, which I wouldsay was a little bit of a baby
bear market, you saw Amazon andNetflix drop roughly 50% in just
a few months because they hadsome tiny hiccups in valuation,
and so if you're investing inwildly overvalued companies, you
have very little margin oferror.
Those companies had betterperform perfectly into
(14:41):
perpetuity, because the momentthey slip.
That's when people wake up andyou see a significant decline.
The other aspect that we focuson is some simple ways to, we'll
say, mitigate downside risk,for the very obvious reason that
nothing destroys exponentialgrowth like large drawdowns.
(15:04):
Obvious example is you drop 50%, you have to double your money
to get back to flat.
On the other hand, if you drop30% which is still unfortunate,
not fun you only need a 40%return to be making new highs.
So that 20% difference between30 and 50 results in a
difference between a 40% returnversus 100 that is required to
(15:28):
get back to new highs.
So again, very simple, obviousphilosophy of maximizing
earnings growth, avoidingovervalued companies, mitigating
large drawdowns.
And then our process isrules-based, so it's very
disciplined and ensures that wedo the same thing over and over
so that you get that consistency.
Why that matters today is we'vediscussed how uncertain the
(15:52):
current environment is andactually I think someone that
you introduced me to, someonerecently made the comment that
when they invest with a manager,they just want them to do their
job.
They want them to do the jobthey were hired to do, and I
love that metaphor because itapplies perfectly to portfolio
(16:13):
construction.
Building a portfolio is verysimilar to building a company.
When you build a company,you're hiring different people,
ideally really good employeesthat are really good at
different skill sets, and thenthey complement each other, that
address every aspect of thebusiness so that the whole is as
good as it can be.
It's the same with a portfolio.
(16:34):
You invest in differentstrategies, ideally best in
class, and they all do differentthings, and in the long run,
class and they all do differentthings, and in the long run, the
goal is to maximize returns sothey're as effective as possible
.
But also by kind of investingin different strategies or
employees, you've got thisdiversification so that no
(16:57):
matter what's going on, nomatter what aspect of your
business is being challenged,you have an employee there
that's contributing and doingtheir job, and that describes us
perfectly.
That rules-based aspect of ourstrategy means that we've
basically been doing the samething for four decades.
We do the same thing over andover, and so that leads to
(17:19):
reliability.
We, more than I'd say most,because that rules based nature
means that we do our job.
You know what Running Oak isdoing at all times and we sit
right in the middle of yourportfolio, from kind of mid to
large, again looking to maximizeearnings growth, but that
discipline around valuations ofrisk brings it back to the
(17:42):
middle, so that our clientsadvisors largely, but certainly
individuals know what we'redoing and it makes it easy to
build around us because you knowwhat other employees or
portfolios you need.
You might want something that'sa little more growthy, value
SMID, but we're in the middledoing our thing, ideally being
(18:04):
sort of that foundationalholding in your portfolio at all
times, doing our job.
One of the reasons why thatreally matters is if you go back
to 2022 again, I was at aconference let's say this is in
2023, with some CIOs runningvery significant companies, and
one of them mentioned that whenthey look back on 2022, they
(18:27):
were shocked at how horribletheir performance was, or just
how disappointing I wouldn't sayhorrible, but disappointing and
they couldn't understand why.
So they went back, they dug intoall the different aspects of
their portfolio and what theydiscovered was that many of
their managers were given a jobor they were hired to do a
(18:50):
particular job and as time wentalong, as it became apparent
that it was very hard to keep upwith the S&P if you didn't have
a ton of large cap growth, alot of these managers started
investing or leaning towardlarge cap growth because, again,
that was the only way theycould keep up.
And the problem is, when largecap growth really struggled, you
(19:10):
didn't have those people doingtheir job and their whole
portfolio really struggled.
So, again, the key is whenyou're building a portfolio,
look at managers, or hiremanagers that do a particular
job that fits a certain role inyour portfolio, and if you do so
(19:32):
, you'll do well.
Speaker 2 (19:34):
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 becauseit's been a large cap only type
of environment.
What do you say to those thatsay that, listen with
uncertainty, I don't want anyequities at all.
(19:56):
You know, yeah, sure, soundslike a better environment, maybe
for what you're doing with RON,but what about concerns around
just stocks as an asset class?
Speaker 1 (20:05):
I mean uncertainty implies that things are
uncertain.
I don't.
Yes, valuations sort of acrossthe board on equities are high,
certainly in particular pockets,but again, it's uncertain just
because we feel that that's thecase.
We don't know what, and that'swhere diversification comes in.
(20:25):
So if you get out of stockscompletely, that's making a bet,
that's behaving in a way thatimplies certainty, but yet we're
doing so because it's uncertain.
So I would just say that'scontrary to the initial intent.
In a lot of ways today'senvironment is most similar to
(20:48):
2000.
There's a lot of differences.
That comment occasionallyupsets people.
There are a whole lot ofdifferences between today and
2000,.
But there are also, I think,more similarities than any other
time.
In 2000, you had a small numberof companies go up a whole lot.
They became a larger and largerpercentage of the index, which
(21:08):
drove the index up, and then youhad a ton of companies that
just sat there.
I'd say that today is prettysimilar, where you have small
number of companies that havegone up a whole lot, driven the
vast majority of the market'sreturns.
Over years It'd become amassive part of the market
(21:28):
itself, or the S&P, which hashad a significant impact on the
returns of the S&P as well.
Now, in 2001, when thingsreversed and you had those very
popular overcrowded companiescome back to reality, the S&P
did as well.
But there were a bunch ofcompanies that did not
(21:50):
participate that actually didwell.
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, wereup, high quality probably, even
to a certain extent mid capwe're up Now.
Markets are correlated.
(22:11):
So I wouldn't say that peopleshould count on that happening
again as far as that bigdiscrepancy between up and down.
But again, a small number ofcompanies have have driven the
vast majority of the return andthere's a lot of companies that
have just sat there, majority ofthe return, and there's a lot
of companies that have just satthere, particularly mid-cap
companies.
And so it doesn't make sense toexpect mid-cap to even remotely
(22:33):
participate in the downside ifwe see a pullback in the s&p in
the biggest companies becausethey're such mid-cap is such a
small part of the indexes.
So so again, yes, they'recorrelated.
But the other thing is, ifwe're just looking at that,
let's say to one degree and we'dsay, all right if people sell
(22:58):
Apple and Amazon and Meta andTesla or whatever, it'll take
the indexes down and that'lltake everything else down fine.
But the other issue is we're notoperating in a vacuum.
That's where the people havebeen sitting on cash.
They've been a little moredisciplined, start looking for
bargains.
That's where they start lookingfor good investments and all it
(23:19):
takes is a little bit of moneygoing into mid cap companies,
let's say for good reasons,because mid cap has outperformed
and is far cheaper then thatcan.
You could end up in a scenariowhere mid is flat up whatever,
while large is down a lot in theindexes.
(23:39):
Again, I wouldn't say guaranteeit, but I do think it would be
a mistake to just get entirelyout of equities.
But that implies certainty atan uncertain time, which is the
opposite of what we're trying tokind of.
You know, if you're uncertainyou don't want to go go all in
on one thing Well, actually, Ithink it actually relates also
(24:00):
to geopolitical concerns, right?
Speaker 2 (24:02):
So if there's a concern that things are going to
get even more dangerous withthe Middle East and oil prices
continue to spike, the firstthing 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 capswould go down, but they could go
(24:24):
down a lot less or, to yourpoint, maybe even diverge and
actually make money In terms oflet's talk about sort of index
construction when it comes tomid caps overall.
How do we define mid caps?
How do you define it relativeto the industry?
(24:46):
Define mid caps how do youdefine it relative to the
industry?
And take me through a littlebit sort of the construction,
meaning the number of holdings,the weightings, type of the
portfolio.
Speaker 1 (24:52):
So mid cap.
The problem is, what a lot ofpeople miss is that the line
between small and mid and midand large is just a made up line
.
That's you know.
You know, and a lot of thedifferent firms or you know
platforms that create thoselines don't even agree.
(25:13):
Really, mid cap is just, it's,it's companies that are, for the
most part, if we want to kindof broadly define them, they're.
They're companies that havegraduated from small cap.
Small cap companies are justthey're less proven for the most
part.
There are some older small capcompanies, but for the most part
(25:35):
they're less proven.
Their businesses or they have aproduct that's less significant
and so mid cap has graduated.
They have probably nailed aproduct, they've gotten to the
next level and then to get tolarge cap, you know it's one
degree further.
The great thing about MidCap isit's in the sweet spot of.
(25:58):
You've got that extra margin oferror because you're investing
in a company that is established, more established than small
cap.
That is established, moreestablished than small cap, but
it's not so large that it's easyenough to potentially provide
outsized returns, whereas youknow let's think of Apple,
because it's the obvious exampleit's such a big company it's
(26:19):
hard to imagine what they couldpossibly do to really move the
needle, whereas a mid capcompany, let's say they got
there on one product, all they'dhave to do is create one more
great product and next thing youknow, they've doubled.
So it really in.
When we're talking aboutinvesting, we're always talking
about return versus risk andmid-cap kind of provides that
(26:40):
sweet spot with regard to returnversus risk.
Now, as far as our portfolioand how we construct it, we
begin with companies above $5billion.
So it's you know, when youconstrain your options, you
limit your opportunity.
Now, there's no arguing that asyou get smaller, it doesn't add
(27:04):
risk, because those, either thestocks are less liquid, the
companies are smaller.
Whatever it is, there's morerisk as you work your way down.
There's there's definitely notan increase in risk as you work
your way up, so we don'tconstrain it to the upside.
So again, $5 billion and up.
Now we do end up usually beingin that mid large space, because
(27:26):
we are seeking companies thatare growing at a significant
pace, which, again, is generallyhistorically hard to do.
The bigger the company gets andthat's attractively valued, and
what we've seen today is theperfect example.
If we're looking for attractivevaluations.
It's usually companies thatpeople are all hot and bothered
about, usually the largestcompanies, particularly in the
(27:51):
indexes.
Part of what's driven that isjust simply popularity.
Right, everybody knows aboutApple, amazon, nvidia, tesla and
it gets certain people excitedso they buy, for reasons that
are not driven based on data.
They didn't look at the numbersand they said this is
undervalued.
They said, hey, I like my car,so they bought Tesla.
(28:12):
Or I believe in robots, so theybought Tesla.
And so where we end up isusually not in those largest
companies, because that's oftendriven by sentiment and our goal
is to sort of invest away fromsentiment.
So we end up in that mid-largespace, usually around 50-50.
Right now we've got about 60%invested in MidCap, 40% in large
(28:34):
, and that's been the case foryears and largely driven by,
according to our numbers.
The largest companies have beenquite overvalued for a while
and so that's kind of driven ustoward, you know, more into mid
cap.
Why that's, why that's a huge,why that is particularly
noteworthy for us right now islooking at the average portfolio
(28:59):
, the typical portfolio thatclients have.
There is a huge gap right inthe middle of it that most
people are entirely unaware of.
So most people, when they buildportfolios, they start out with
a large gap or they might evenstart with the S&P, which at
this point is basicallyaggressive large gap growth.
But if you didn't start with alarge gap you probably got fired
(29:20):
over the last decade.
So you start out with a bunchof large gap.
You complement it with SMIDbecause that's sort of a
one-stop shop fordiversification and then value.
But the issue is many, or reallymost from what I've seen most
large cap diversified portfoliosaren't diversified.
(29:40):
So people are investing inthese portfolios thinking
they're getting thisdiversification through large
cap, whether it's growth anddecor, but if you actually look
under the hood they're gettingvery little.
So if you think of SCSG as theexample I use a lot only because
I see it so often, I see itmore than many SCSG at least
(30:02):
recently had 60% of itsportfolio invested in just eight
companies.
Those eight companies are verysimilar, they're highly
correlated and they're at thevery, very top of sort of the
market spectrum, market capspectrum, and so at least 40% of
that large cap seeminglydiversified large cap portfolio
(30:22):
for the whole rest of large capinto both growth and value.
And so there's this massive gapand that's where we sit.
Speaker 2 (30:30):
And I think you're certainly doing better than the
passive, mid-cap side of things,right?
I think people would naturallythink all right, I'm down with
the mid-cap argument, but let mejust go passive and that's it.
There is a lot more activeopportunity with what you're
doing.
Speaker 1 (30:43):
Yeah, I believe.
So the last two days haveactually been an interesting
experience where, uh, last nightI received a very nice email,
uh, from a firm saying that theyhad just we, we saw a pretty
big um, you know, block go offin our, in our etf um, and, and
(31:05):
so this firm followed up andsaid, hey, we just bought, which
is awesome, I love gettingthose emails.
But then I got an email thismorning that said, hey, you have
lagged VO, which is theVanguard passive mid-cap, and
said that we are going to sell,which I've actually never
experienced before.
I think in 12 years since welaunched the firm, to my
(31:28):
knowledge we haven't lost asingle advisory relationship.
So this is the very first time,and initially I was taken aback
because, again, first time in12 years.
But as I kind of dug into thenumbers and looked, we have
outperformed VO over everysingle period of time other than
(31:51):
, you know, let's say, year todate, and that's solely been
driven by the last month and ahalf.
In the last month and a half youhave had this crazy move and
high beta names, semiconductorshave absolutely exploded, and so
(32:11):
, again going back to doing yourjob, 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 tooutperform when everything,
especially Argu of the worstcompanies, are skyrocketing
(32:32):
Right Like there's so manycompanies that are the very best
performers in the month and ahalf that we would never touch.
They don't meet our rules.
They're either wildlyovervalued or they don't have
the earning growth and theprofitability that we require,
or they don't have the earninggrowth and the profitability
that we require.
And so there are certain timeswhere we will lag, there's
certain, and then most of thetime, historically, we've
outperformed.
We just happen to be seeing oneof these really weird periods
(32:58):
which happens from time to time.
We hold the average company forfour to five years, so anything
under a year is, for us, isbasically noise.
We, we are completelyindifferent toward a couple of
months worth of performance.
That doesn't mean I wouldn'tlove to outperform every single
day, but, uh, particularly thelast month and a half, again, it
has been wild.
Uh, think of all theuncertainty and the risk factors
(33:21):
that are going on right nowwith, uh you know, interest
rates going up quite a bit,energy prices going up, the you
know, again, the Iran-Israelconflict.
There's so many things going onand the market just keeps going
up.
If we are outperforming whenthe garbage is cooking, that
(33:43):
means that we're invested in abunch of garbage and you don't
want it.
So you know.
Going back to your question asfar as passive versus active,
certainly, as you get down intomid cap small cap it's a lot
more nuanced.
First of all, you have a lot ofcompanies and small in
particular, but even mid thatare unprofitable In the long
(34:04):
term.
Investing in even mid that areunprofitable In the long term,
investing in companies that areconsistently unprofitable,
meaning they're losing money, isnot good, like it's hard to.
Yes, there's some that areinnovative and for a short
period of time, as they grow,they can be very compelling in
the long run, but for the mostpart long run, but for the most
(34:28):
part in the mid small space.
That's where you really wantsomeone investing on your behalf
with discipline.
That's where you can find somereally cool, really innovative
companies or very well-runcompanies that nobody knows
about, and that's sort of oursweet spot is looking for
well-run, fast-growing companiesthat people are unaware of you
had mentioned energy prices andI have to think the energy
(34:51):
sector is probably due foranother big run.
Speaker 2 (34:54):
When you look at all the studies around allocation of
energy in the S&P, it's nearits historic lows.
Talk me through a little bitenergy as an allocation in run.
Speaker 1 (35:04):
Talk me through a little bit energy as an
allocation in Ron.
So energy is?
I would love to say that ifyou're right, we would kill it,
but energy does not fit ourrules.
So our rules or our let's say,our investment philosophy of
maximizing earnings growthwithin the constraints of being
very disciplined aroundvaluations and lower downside
risk, energy does not fit whatwe're looking for for a number
(35:28):
of reasons.
One, usually they employ a lotof leverage and one of the
things that one of the ways thatwe look to protect to the
downside for clients isinvesting away from companies
that have a whole lot of debt.
Energy companies usually use aton of debt.
But two, their prices arelargely driven by a commodity
(35:49):
and we don't believe that we'reexperts in that commodity.
There are a ton of people outthere that are really good at
that.
I'd say invest with them.
They will provide moreexpertise than we could
certainly provide in that area.
And why that matters again isgoing back to doing your job.
We do what we do and then andyou know, someone that's very
(36:11):
good in the energy space couldbe an excellent compliment to us
Somebody who's really good inthe energy space can't do what
we do.
They are not going to be nearlyas good at investing in a
diversified portfolio in themiddle of mid-large and growth
and value.
That's our sweet spot.
We're kind of meant to again bethat sort of rock in your
(36:31):
portfolio.
Energy is more of an importantpart of the economy, but it's a
little bit of a kind of anoutlier.
It's a little different.
So that's actually an excellentcompliment to us that you can
pair with us.
Speaker 2 (36:47):
For you yourself.
I mean, when you look at theallocations, understanding it's
rules-based, are there certainparts about RUN that get you
more excited?
Like you must have a view ondifferent sectors and the
market's role or maybeindividual positions that don't
necessarily go into thedecision-making.
But is there anythingparticularly in RUN necessarily
go into the decision making?
But is there anything inparticular in run that it's like
okay, that that could be a bigcontributor of?
Speaker 1 (37:07):
returns going forward .
The big thing is this is morehigh level.
The big thing is investingwhere others aren't.
This is a theme that I've beenfocusing on a little bit more
lately.
Um, it's obvious, it's simple,but yet no one talks about it.
So, if you think about the ideaof investing where others aren't
(37:28):
, uh, when you invest whereothers are, or where they've
invested a ton and they'recurrently piling in so let's say
, the S and P 500 or the bignames that we all know if you're
piling into those witheverybody else and everybody
else has been doing it foralmost a decade you are
(37:50):
guaranteed to get higher pricesbecause there's demand.
So you're going to get higherprices, which means you're
paying higher valuations, whichmeans that your upside is
arguably limited and you havequite a bit more downside risk.
So, less upside, more risk.
That is not how I think anybodywould ever say that's how I
(38:12):
want to invest, but that's whatyou're getting.
If you're piling into the samestuff that everybody else is
piling into, you're playing themomentum game, which works.
There's some value to themomentum, but you're basically
riding a wave and just prayingthat that wave doesn't crash
while you're still on it.
Now, if you invest where othersaren't, there's less demand for
(38:33):
for those holdings or thoseassets and so there's less
demand for those prices drivingthe ups, driving them up.
So you get lower prices, lowervaluations, which implies higher
upside and lower downside, soyou're getting higher potential
upside and a margin of errorwhich is asymmetric risk and
(38:55):
return.
That is exactly what you want.
We want to take as little riskas possible for the biggest
payoff possible.
Ideally and if you think of ourstrategy, that is what it's
designed to do that is theinefficiency that we capitalize
on.
That focus on relative valuationseeks out companies that are
(39:16):
growing at a considerable pace,historically quite a bit higher
than the S&P that we're able toget at a value, and we usually
get them at a value becausepeople are not investing in that
moment, they're not popular,they're not piling in, so we get
again that lower price, lowervaluation, which implies higher
(39:37):
upside, lower downside risk.
That's what I'm really excitedabout is, you know, there are
people that say the market'sbroken because so many people
and so much money is going intopassive, and I hope to God
that's not true, because if themarket's broken, that implies
that the US economy is broken,so let's all hope that passive
(39:59):
investing is not indicative of,or doesn't become indicative of,
how the US economy works whichright now it seems like it is
but that there's so much moneygoing into just a small number
of things that that creates verysignificant opportunity.
Again, we saw no one how thatplayed out, and I think that'll
(40:21):
play out again.
Speaker 2 (40:23):
Seth.
I want to learn more about Ronand track more of your thoughts.
Where would you point them to?
Speaker 1 (40:29):
Feel free to reach out Seth at RunningOakcom.
I am on X, you can just searchfor Seth Cogswell.
Same with LinkedIn, a littlemore active on LinkedIn.
Speaker 2 (40:38):
So, seth Cogswell, you can also check out our brand
new shiny website at runningoakcom or running oak etfscom I
love me some mid caps and I loveme 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 watchthis on uh juneteenth, happy
juneteenth, should we say.
(40:58):
I don't know, I think sayinghappy juneteenth, I don't know,
it's a holiday, uh, federal, but, um, appreciate those that
watch this.
Hopefully we'll see you all onthe next episode of Lead Lag
Live.
By the way, folks got some bigsurprises coming up in the next
month and some new faces, so Imay not be the only one that's
doing these interviews with Sethgoing forward.
Appreciate it, seth.
Thank you, cheers everybody.
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