June 8, 2025 • 42 mins
Phillip Toews, founder of Toews Asset Management, delivers a master class in portfolio construction that challenges everything you thought you knew about investing. Drawing from historical market catastrophes often ignored by conventional wisdom, Toews reveals how a traditional 60/40 portfolio would have been devastated during the Great Depression – losing up to 72% of its value and remaining down over 60% after thirteen years.
This eye-opening conversation explores the concept of "adaptive fixed income" as Toews walks us through the little-discussed bond bear market from 1945 to 1981 that eroded investor wealth by 21% in real terms. With high sovereign debt levels globally and unprecedented monetary policy responses, Toews suggests we may be vulnerable to currency debasement rather than traditional market dynamics.
The heart of Toews' philosophy lies in his revolutionary approach to behavioral finance. Rather than starting with conventional portfolios and coaching investors through volatility, he advocates designing "all-weather" portfolios from the ground up that address both economic and psychological needs. His hedged equity approach aims to capture most market upside while dramatically limiting participation in downturns, potentially allowing investors to maintain positions during crashes and capitalize on eventual recoveries.
Toews introduces the concept of "corona bias" – just as society was unprepared for a pandemic despite historical precedent, investors ignore financial catastrophes outside their professional lifetimes. This collective amnesia leaves portfolios vulnerable to recurrences of historical calamities.
Whether you're an investment professional seeking to differentiate your practice or an individual investor concerned about today's complex market environment, this conversation provides a roadmap for building portfolios designed to withstand various economic scenarios while managing the crucial behavioral aspects of investing. Discover why Toews' recently published book "The Behavioral Portfolio" is changing how advisors approach client relationships and portfolio construction.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
If you lived through the Great Depression with a
balanced portfolio, you lost asmuch as 72% and at the end of it
all you were down still over60% after 13 years and you think
you're still going to have aclient paying fees for that.
So the thing that one needs todo with behavioral finance is
start with a portfolio.
You need to build a portfoliothat's designed to address both
(00:23):
economic and psychological needsof investors, which leads to
your question about how do youmanage behavior around that?
The entire second half of thebook talks about a proactive
construct that we worked withthrough our Behavioral Investing
Institute, which is adepartment of our asset
management firm.
We've done a lot of coachingand consulting over the years
(00:44):
with advisors.
Speaker 2 (00:45):
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me here is Felipe Taves, who some of you may be
familiar with in terms of thecontent that he and his team put
out at Taves.
Felipe, introduce yourself tothe audience more formally.
Who are you?
What's your background?
Have you done throughout yourcareer.
Speaker 1 (01:02):
What are you doing currently?
Yeah, so we've been runningthis shop basically, uh, since
birth, uh, since 1995.
Uh, we're a hedged equity assetmanager and we manage adaptive
fixed income strategies and wehave mutual funds and etfs and,
uh, one of the things that we'reI'm trying to do is change how
people drive, build portfoliosand straight move away from the
(01:24):
conventional construct, and Ipublished a book recently called
the Behavioral Portfolio.
I have a thousand copies herein the office.
It's been getting great reviews, michael.
It's just like people say, it'schanged the way they do
business.
So we're super excited abouthaving maybe greater influence
(01:44):
on how people run their assetmanagement, run their portfolios
.
Speaker 2 (01:48):
Adaptive fixed income .
I want you to talk about howyou get to be adaptive in a
pretty boring asset class.
Speaker 1 (01:56):
Yeah, so one of the things that we've been doing for
many years is looking at thehistory of bond bull and bear
markets, and everyone's seenthese stock, bull and bear
charts, but not many people arelooking at bond bull and bear
charts.
We have been since way beforethis recent downturn that
started in.
You know, you can argue when itstarted whether it was in 2020,
(02:16):
if you're looking at the 30year, or 2022, if you're looking
at bonds but there was amonster bear market in bonds
between 1945 and 1981.
And it lasts.
So that's 36 years for thosewho know math and during that
period, bonds lost 21% real.
But if this is a conversationwith the advisory community and
(02:39):
it often is you had an advisoryfeed of that and you're down
over 50% over basically, someinvestors' entire portfolios,
and so, honestly, for me, thisis one of the most interesting
things to talk about right now,because we've got all these I
don't know if existential may bea too strong of a word, but
massive threats to bonds.
(03:00):
You could argue that we arestill in a bond bear market.
That began a number of yearsago, and so I'm going to
actually answer your question,believe it or not.
But ultimately but by adaptiveit means able to leave just a
core bond conventional constructand be able to be in different
parts of the fixed income.
Complex so high yieldinvestment grade and T-bills.
(03:24):
Complex so high yieldinvestment grade and T-bills.
And if you do a scenarioanalysis of different kinds of
things, what that allows you todo is maybe not get a lot of
above inflation gains indifferent periods but attempt to
de-risk and not have principallosses during rising interest
rates periods.
Speaker 2 (03:39):
Is a bond bear market a function of the Fed just
being wrong, delayed, late?
I mean, can a bond bull marketstart with just the Fed getting
it right?
Speaker 1 (03:48):
So yeah, I mean bond bull markets can be amazing.
After you know, starting lastyear we were looking at the
possibility if the Fed couldhave gotten on just a regular
track of lowering rates.
Ag bonds can rally cumulativelyor have rallied as much as 50%
over a number of years.
(04:09):
So that can be a great trade.
But bond bear marketshistorically have largely been a
function of mainly inflationand of course, as we all know,
unfortunately inflation is tiedto rising interest rates.
So it's typically two thingsworking against bonds at once.
But if you look at that 45 to1981 bear market in bonds, it
(04:34):
was bookended by two episodes ofinflation, one that happened in
the 40s and then the one thatmost of us are aware of, that
happened in the 70s and the 80s.
And so it was that massiveinflation and the fact that the
real returns in bonds sufferedduring that kind of a period
that had such a big impact.
Speaker 2 (04:52):
There are, of course, a lot of different ways of
defining a bear market.
When it comes to bonds, there'sbear market in duration, bear
market in credits, spreadmovement, average default
premiums.
When you say bond bear market,are we just talking about a
shift in the curve?
Is it purely duration, or arewe talking also about corporate?
Speaker 1 (05:12):
Well, when I talk about it, really I'm trying to
talk in just almost the simplestlanguage to the advisory
community, who you know.
Yesterday, I was traveling outin Buffalo Chicken, new York,
and you know all the advisorsout there had large allocations
to just conventional bonds andmy message, which is echoed in a
commentary that we sent outthis week, said maybe one of the
(05:32):
most important things you cando right now is to leave core
bonds.
So what I'm talking about isjust the core bond space, people
that are holding positions intheir portfolios and the
possibility that that turns intoan asset that correlates with
equities, if equities lose moneyand you could have losses in
bonds at the same time that youhave losses in stocks.
Speaker 2 (05:53):
You hear the term stagflation thrown around a lot
nowadays.
I always had an issue with theidea that we're headed for
stagflation, because I justdon't think it works when your
starting point is so muchleverage and debt in the system,
which then leads to adiscussion around capping yields
, yield curve control, thingslike that Take me to the logical
(06:14):
extreme.
If yields keep rising the waythey've been rising, if
inflation is not abated, ifglobal bonds are at risk, where
does this all lead?
Speaker 1 (06:23):
to?
That's the interesting question, michael, because much as Ray
Dalio has been discussing, notjust recently but for the past
five years, he talks about manycycles within a mega cycle and
that potentially we're at theend of this mega cycle.
So we're all having thisconversation and framing it in
(06:43):
terms of how bonds and stockshave moved over the past four or
five decades.
But what's different this timeis that now we've got record
sovereign debt not record, butat peaks in sovereign debt,
similar to where we've been inthe US.
But we also have debt to GDP of100% or greater in virtually
every other developed country.
(07:04):
So, you know, as we watch overthe last couple of weeks and you
know, the 30-year breaks up to515, the 10-year threatens 450
or potentially higher.
(07:25):
It may be a change that wehaven't seen during our
professional lifetimes, which isthat I'll give you an example
of Japan right, where for years,japan increased their fiscal
debt and deficit with impunity,right and so up at 250% debt to
GDP.
And what's gone on in Japanover the last couple of years?
We've seen this incredible.
(07:46):
Well, a little bit of a changerecently, but we've seen this
incredible devaluation of theyen.
So a change in the way to thinkof this, michael, may be from a
typical bond market bearanalysis, where you're losing
principal due to rising interestrates.
Thinking about it more in termsof a potential currency
(08:08):
debasement, currency devaluationepisode, where you're made
poorer in your bond portfoliosbecause your currency isn't
worth as much.
Where it gets even moreinteresting, I think, is what if
this happens on a global basis?
What does that mean?
I think is what if this happenson a global basis?
What does that mean?
Well, to a certain extent, whatthat means is inflation, but
(08:29):
not capacity-driven inflation,right?
This is a kind of inflationthat's driven by currency issues
, by sovereign debt issues.
It's a completely different wayof thinking about risks to
bonds than people are used to.
Speaker 2 (08:43):
Which, you can argue, is exactly why gold's done what
it's done and why there's somuch interest in Bitcoin and
assets from that perspective.
But there are risks there too,right throughout that sequencing
.
You mean in gold or yeah, assort of the solution to it or
the hedge to all this.
Speaker 1 (08:59):
So I have some answers for you.
I talk about it in my book andI talk about building a
portfolio that's an all-seasonportfolio and attempts to
address inflation, stagflationand deflation.
Here's what's kind ofinteresting.
Well, so first of all, let'stalk about Bitcoin and gold.
Gold obviously has performedamazingly recently and it has
(09:22):
been a great trade, and there'scertainly no problem with having
an allocation there if we seethis all play out.
I'm just not a believer inBitcoin and I know I don't make
friends when I say that becauseit's just a speculative asset.
I think maybe, if you're goingto trade it and if you know how
to do that and you're going totake a position and try to get
(09:43):
out of it that's a thing,michael, we've wanted.
Every three weeks, I asked theinvestment team can we launch a
Bitcoin blow up ETF where it'spositioned to be in Bitcoin but
to profit it blows up?
Unfortunately, the options areso insanely expensive in Bitcoin
and there's not enough volume.
It's just not doable.
(10:04):
But I would love to do that.
So the answer is where do yougo?
So if you're an advisor outthere and you're thinking more
from a conventional constructand you're not comfortable with
speculative asset class and youdon't want to go much beyond a
5% or 10% allocation of gold.
Here's what history shows.
What history shows is thatduring periods of high inflation
(10:25):
, stocks have done reasonablywell over the entire period of
inflation.
So there are three episodes ofinflation over the last 100
years.
On average, cumulatively,inflation increased by about
100%, so doubling each time, waymore than we've seen recently.
Right, and bonds did miserablyduring those periods.
But what's interesting isstocks did okay.
(10:49):
So stocks kept up withinflation.
And if you think about that36-year bond bear market that I
was talking about, stocksincreased like 780% after
inflation during that big bondbear market.
Even during the Weimar Republicwhen you're seeing these
massive inflation in Germanystocks did okay.
(11:10):
So what's interesting is stocksact as a pass through
ultimately for prices and so asa result, you know you've got
sort of a natural thing there.
Here's the problem with that.
The potential problem with thatis that as you go from low
inflation to high inflation, aswe see the 10-year and 30-year
break above the highs recently,we all know that's going to be
(11:31):
horrible for stocks.
So going into high inflation,you can have some significant
losses in stocks.
So our solution there, both fordeflation and stagflation or
inflation is in your equityportfolio, put about half in
hedged equity ETFs are funds,something that can uncorrelate
from negative economic activity.
Here's what that allows you todo.
You're adaptive in your fixedincome, trying to get out of the
(11:53):
way of rising interest rates.
Your equities are allocatedhalf to conventional, half to
hedged equity.
Now, if you do have a highinflation episode, that hedged
equity piece allows you to stickto your equity allocation and
potentially endure some kind oflong-term inflation.
That was a really long answer,but that's our thinking around
it.
Speaker 2 (12:11):
All right, but we got to define what hedged equity
means.
I hear hedged equity and Ithink to myself okay, well, you
can do that through justlowering your net long exposure
which I'm sure you can do butwith lower beta positions.
What does that mean?
Speaker 1 (12:21):
hedged equity, yeah so we're very explicit we mean
equity that is hedged, meanequity that is hedged.
So we have an ETF that is anS&P 500 product that is just
owning always the S&P, and it isa two-year full, 100% notional
(12:42):
hedge in a leap that we rollevery year in December and we
adjust it.
If the market moves up, we rollthe leap up.
If the market moves down a lot,we roll it down and monetize it
and then we sell some calls andshorter dated put spreads, as
long as they're not below ourleap strike price, to help pay
(13:03):
for the cost of that leap.
So what that is designed tolook like is exactly what we
think an advisor should put intheir portfolio.
So you're looking for something, in our opinion, that has
something like a 70% on averageupcapture to the market.
So if you've got half there andhalf in conventional equities,
you're looking at an overall 85%upcapture.
(13:23):
During normal periods, duringdown markets, what that strategy
, that ETF, is designed to do isattempt to have around 50% down
capture during a more benign,declining market, like we saw in
2022.
But if things go off the railsand it's more financial crisis,
start searching VIX extrememarkets.
What potentially happens is youmake a lot of money on selling
(13:45):
calls and the VIX causes thatleap to really have lots of loss
avoidance.
So optimally you want to haveas low correlation as possible
during a crisis equity market.
So we're looking for somethinglike 20% or maybe 30% down
market capture and here's whatthat allows you to do.
If the markets go off the rails, then let's say, you do manage
(14:08):
a sort of 20% to 30% downcapture period and then you're
rolling down your leaps and whatyou're doing is you're actually
positioned to take advantage ofthe decline Because if you can
capture a good chunk of the up,capture the falling rebound, but
not participate in a lot of thedown move, you've actually made
money in the decline in thatpiece.
But we're talking pure hedgedequity, nothing terribly exotic.
Speaker 2 (14:33):
I feel like this is a good tie into the behavioral
portfolio, because we all knowthe markets tend to go up on
more days than they go down.
But when they go down they godown with magnitude, and it's
hard to stick in a hedged equityportfolio when the frequency of
up days is more than thefrequency of down days, right?
So how do you factor in sort ofthat behavioral response to
(14:55):
time?
Speaker 1 (14:56):
Yeah.
So I think that the key is, asI was mentioning, making sure
that you're not all in the hedgeequity allocation and in the
book that I was just talkingabout, which'll bring up again
the first half.
Here's what I think behavioralcoaches and people in behavioral
finance have gotten wrong fromthe beginning is that most
(15:18):
people they start with coachingthey say we're going to take
this portfolio, which basicallywas a historical accident,
something like the 60-40construct and we're going to go
out there and try to coach youaround how do you manage
behavior with this portfolio?
What I reveal in the book isthat if you live through the
Great Depression with a balancedportfolio, you lost as much as
(15:40):
72% and at the end of it all,you were down still over 60%
After 13 years and you thinkyou're still going to have a
client paying fees for that.
So the thing that one needs todo with behavioral finance is
start with a portfolio.
You need to build a portfoliothat's designed to address both
economic and psychological needsof investors, which leads to
(16:03):
your question about how do youmanage behavior around that.
The entire second half of thebook talks about a proactive
construct that we've worked withthrough our Behavioral
Investing Institute, which is adepartment of our asset
management firm, we've done alot of coaching and consulting
over the years with advisors.
What that does is it builds anentire proactive communications
(16:26):
construct around how to talkabout the markets.
You don't shy away from bigdown markets.
You want to actually focus onhow bad down markets can get.
But then the very next thing isyou talk about how the
portfolio is designed to addressit, and then you talk about
what explicitly what actionsyou're going to take when you
have these big down markets.
And so you've got somethingcalled an investment owner's
(16:50):
manual you give them, you walkthrough different investment
challenges, how the portfolio isdesigned to address it, how you
do that.
And so it is important becauseif all you do, you're exactly
right.
If all you do is you executethis portfolio that we've been
talking about and you don'tattach the consulting around it,
the messaging around it, aftera couple of years investors are
(17:16):
kind of like look, this thing'sunderperforming, can we please
just leave it and go intoMagSava or whatever else happens
to be doing very well.
So both parts are reallyimportant, both the portfolio
part and the consulting part.
Speaker 2 (17:24):
Yeah, no, I think that that makes sense, although,
again, the thing is, I've usedthis line before it's like FOMO
is more powerful than the Fed,right, yeah, fear of missing out
, which basically is whathappens when your up capture is
less than 100% Exactly, tends tomake people then over leverage,
which then leaves themvulnerable to the tail vent
whenever that does occur, whichis always unpredictable.
(17:45):
Even though the conditionsmight be there, you don't know
the mile marker that mighthappen under.
So talk me through, from whatyou've seen with what other
advisors do.
How do advisors, how do peoplelike you, play the role of
psychologists to get people torecenter around that point?
Speaker 1 (18:06):
Well, the way our advisors that are using our
behavioral guidance talk aboutit is they actually
differentiate out the fact thatyou know oh, look at you know,
(18:39):
if you would go through thismarket, here are what the
consequences would be, you know.
So, in a sense, advisors areable to brand themselves
according to building portfoliosthat are all seasons,
portfolios that address allthese different kinds of markets
.
So in many cases it starts atthe very beginning, in how you
market yourself and how you talkabout how you work with
business.
But then there's some othertools you can use too, like
(19:01):
Income Labs is a great tool thatallows you to look at different
kinds of markets and howportfolios would behave in them.
Hidden leverage is anotherportfolio tool that allows you
to show true worst casescenarios.
And so you start with, in thebeginning, the vast majority of
investors are just fully onboard.
But that's the easy part, right?
(19:23):
It's really easy to getinvestors and get them on board
to whatever you're talking about.
What's harder is when you getdown the road, and so you
continue to talk about whyyou've got a hedged equity
position in there.
You continue to make sure thatyou've got a fully allocated
position in there.
Michael, we actually haven't.
For advisors that are executingon this plan, they haven't run
into a lot of problems as longas their hedged equity
(19:46):
allocation is performingaccording to that.
Just generally 70% overall upcapture statistic.
Because, as I was saying before, if you're 70, 85% up, capture
your conventional stuff.
Look, your conventional stuffcould be in whatever it could be
in triple Qs.
We're looking at launching anew product that's a hedge
triple Qs.
So even in our S&P productyou've got plenty of Mag7 stuff,
(20:07):
other kinds of things that aremoving ahead as a market.
It's a cap weighted product.
We haven't seen a lot ofproblems there.
So I think it's only whenyou're you know, if you're
focused on the everyday, torecapture the market.
If you've got someone lookingevery day in a trader mentality,
that's probably going to bepretty hard to work with.
Speaker 2 (20:30):
And then you might just lose a client to say like
okay, we're just trying to chasereturns every day.
You've used that term a fewtimes old weather portfolios,
and I think about permanentportfolios, I think about risk
parity.
Talk to me about sort of oldweather from a behavioral
context.
Speaker 1 (20:43):
Well, all weather means that when you're talking
about clients, you're sayingthat we didn't design this case,
this portfolio, just for theoptimistic case.
And this world is completelybiased towards optimism Even now
.
I mean, even if you look at allof the threats between high
sovereign debt levels, betweenGod knows what's going to happen
(21:05):
in terms of the tariff scenarioand how that plays out in the
economy, all of these differentthings.
It's strange that we're justtaught as advisors and investors
sort of this mindset of it'sfine and that comes from decades
and decades of training foradvisors.
That just says, as long as youhold stocks for 20 years or
(21:28):
longer, you would have neverlost money.
And so it creates and plus,gene Fama is a powerful
influence in this whole ideathat all you need to do is hold
on to stocks and that's whereyou get the best return.
But the kind of boring analogythat we use is that it's not
about the best return.
Obviously You're not driving aFormula One car down the highway
(21:52):
.
It's actually no, no, no.
We need to build a portfoliothat has different objectives.
So I actually lay out in thebook what are the objectives you
want to.
If you start from scratch, ifyou leave, just trying to match
benchmarks.
What does that portfolio looklike?
And what that portfolio lookslike is trying to avoid losses
above inflation gains, lockingin gains when you have them, as
(22:15):
much consistency of returns aspossible.
And so it's addressing allthese different kinds of markets
and starting from a totallydifferent place.
It's fascinating.
We look at like differentiterations of all seasons.
I mean, obviously Ray Dalio isbrilliant, is brilliant and he's
got 18 million times more moneythan I do or anyone I know does
.
But weirdly, when you look athis all seasons portfolio that
(22:39):
he was talking about a number ofyears ago, it was like 50%
bonds and a significant chunk oflong-term bonds.
And at the time I was thinkinglike, yeah, I don't know if
that's designed for a highinflation, rising interest rate
environment like we frankly hadover the last four years.
So I haven't kept up to date onhow Ray is talking about an all
(23:02):
seasons approach and if he'smigrated away from that sort of
heavily fixed income,intermediate, long-term duration
play.
But yeah, building a portfoliothat addresses all those
different kinds of markets.
So then you say to an investorlike we're not worried right,
like we've built this to addresswhatever happens.
It may not always have gains,but it's definitely designed to
(23:27):
survive and maybe prosper whenthings are going badly.
Speaker 2 (23:30):
You know it's funny that when you were talking about
that point about optimism, um,it took me to the line that you
often hear that hope is not astrategy.
Yeah, all right, which is funny, because buying hold is, of
course, hope.
So, yeah, of course it's astrategy, right, and yes, it's
going to work over very longtime periods.
Speaker 1 (23:45):
I mean, think about it like this, like if you were
walking across a bridge it's'sone of those wobbly wobbly
bridges and it's on this courseof fall a thousand feet and you
say like, hey, well, about 10%of the time over, you know, if
you're walking over the courseof you know five years, it'll
break and you'll fall to yourdeath, probably not going to
(24:06):
cross that bridge, right, I'mjust not going to go there, I'll
find it, I'll walk around,right.
But in investing we say like,well, it's even more certain
that we're going to have 50%declines, like significant
adversity in the markets.
But everyone just is like, oh,whatever, we're just going to go
safely invested, because GeneFama says that we just want to
(24:28):
be passively invested and neverdo anything about the market.
Speaker 2 (24:30):
It's crazy so I had a phase in my career where I was
on the road every weekpresenting at cfa chapters.
I've been to 47 states andthese are, you know in the
audience intelligent cfa charterholders, but always blown away
by how they tend to not focus oncertain problems that are in
(24:53):
the industry that they are apart of.
And I know you've talked aboutcertain problems that you've
identified that are not reallyacknowledged by the advisor
community.
What's wrong with theinvestment advisory community?
Speaker 1 (25:07):
I believe that it has been too heavily influenced by
Gene Fama and Jack Bogle Right.
And you know what I find justthe funnest ever, because I was
raised in a small town in Kansas, michael, and everyone had a
limited perspective.
We were five towns from evensomething that looked like a
city, or five hours fromsomething that even looked like
(25:29):
a city, or five, five, fivehours from something even looked
like a city.
And so it was just such thislimited perspective.
And as I moved to firstphiladelphia and new york and
brought and went to college andI was like, wow, a lot of that
stuff that people thought orbelieved was just not really
(26:01):
valid and and so isn't it, isnthat you've got so many
brilliant minds working in thisindustry community.
The investment managementcommunity thinks about
portfolios and asset management.
They're found, at leastadditionally, uh, bankrupt.
You know to to exactly yourpoint, right.
(26:22):
So as when I, when I do avisualization and I walk through
the great depression, uh, witha balanced portfolio, and I show
year by year what's happeningin the markets, what's happening
in the news, what's happeningin the economy and what's
happening in the portfolio, youcome through that and you're
like that is a nuclear bomb onmy investment practice and on my
(26:44):
investors, yet we completelyignore that.
So, michael, I created a wordcalled the corona bias, and what
that refers to is that therewas a Spanish flu in 1915
through 1990.
25 to 50 million people died.
A hundred years later, roughlyalong comes another virus.
(27:09):
We're completely unprepared forit.
We have no idea that somethinglike this is coming.
And, similarly, what I say inthe book is I say that you know,
things happen in the marketsthat are so long ago that we
lose immunity to them.
We don't think about them whenwe build portfolios, and so we
just build in our portfolios forthings that have happened
(27:32):
within our professional careers.
But if you go outside of thatcircle, into the second circle,
there are things that havehappened historically that we
don't prepare for.
And I also I believe somepeople may be saying I grew up
listening to this saying like,yeah, but that was a great
depression, we had no FDIC, wehad all these other things
happening that wouldn't happenagain.
I believe I successfully arguein the book that depressions
(27:55):
could recur, even based on someof the things that happened over
the last 20 years.
So it's amazing, right?
You've got all of these greatminds that are thinking about
portfolios are ignoring thishistory, and you know, along
with that idea, that you know wecould be wiped out by some of
these mega cycles.
(28:16):
It just so happens, right.
It just so happens that whenwe're at this high debt to GDP
ratio and high valuations inequity markets, we may be more
vulnerable to some of thesemajor major mega cycles than we
have been in the past.
And, in fact, some of thesethings that we're ignoring, they
(28:37):
have more of an influence onreturns over the next 5, 10, 20
years than anything else thatwe're thinking about or doing.
Speaker 2 (28:44):
I tend to agree with that, although I do worry if
it's more of a cycle where it'salmost like a series of mini
tail events, because there's noappetite for any policymakers to
endure any pain for anythinglonger than a couple of weeks
(29:06):
you were any pain for anythinglonger than a couple of weeks.
Speaker 1 (29:07):
Interesting, I mean.
Uh, you know, one of the one ofthe things that you can do in
these scenarios that I love isthat you can just ask the
question if this would happen,and then what?
So you can you say well, if youhave the 30 year breakout and
it goes all the way up to 6%,and then what?
And then what?
I definitely hear what you'resaying, although I wonder if we
(29:28):
haven't put ourselves into asituation, from a macro economic
factor perspective, where weare powerless, both at the
fiscal stimulus level and from aperspective of what the Fed can
potentially do.
So if you go to the last timein the US when we had 100% debt
to GDP, which was in 1945,post-world War II, what was the
(29:53):
play out economically?
Well, we had 8% GDP growth for20 years.
Following that episode, we hadtop marginal tax rates of over
90% for over 20 years and we hadmassive inflation in the 40s.
So do you think we're going tohave 80% GDP growth coming out
of this peak in depth of GDP?
No, do you think any of theseother factors that I was talking
(30:19):
about are potentially going toplay out.
So I almost wonder if it gets alittle negative.
It gets a little doom andgloomy when you talk about these
kinds of things, but I almostwonder if.
Because what are you going todo if you have more fiscal
stimulus, when people arealready bidding up interest
rates because they don't believethere's sustainable debt?
(30:39):
Is the Fed able to do anythingif interest rates are moving
higher and you've got rampantinflation?
So I almost think thatpolicymakers may be powerless.
What do you?
What do you think about that?
Speaker 2 (30:50):
I I don't disagree um , although it's like.
The one thing that we know isthat policymakers are very
creative at delaying creativedestruction uh all right.
So the numbers keep gettingbigger and bigger, and maybe
this is a conversation foranother, different podcast.
But I do think that the mostconsequential dynamic of what
happened with the COVID crashwas the Fed basically saying
(31:13):
we'll buy up junk debt to savethe system anybody's imagination
at the time right and explainswhy credit spreads have been so
tight.
Because there's this moralhazard now that the Fed is
putting directly into corporatecredit which creates all kinds
of distortions.
You can argue.
Speaker 1 (31:34):
I'm just curious then , and I'm curious what your
perspective is then on.
So you start to have massiveduress, you start to have risk
assets falling.
Does that happen again?
Does the Treasury come in andbuy this and then?
What are the implications?
Speaker 2 (31:53):
I don't know.
A cynic would say it depends onif Powell's buddies with Trump
or not.
Speaker 1 (32:00):
You can argue, I don't know, haven't we seen that
in Japan?
Basically right, I mean, and Iguess what have the consequences
been?
I mean, right now we do haveyield surging right to crazy
levels.
I mean, can you imagine, likealmost touching what?
Speaker 2 (32:15):
4% yeah, and what's weird to me about this cycle,
which I think is reallyunderappreciated, is there's
this belief that if you're, thegovernment and the private
sector are totally separate, sowhatever's happening on the
government financing side isirrelevant to what's going on in
the corporate sector.
Right, and it doesn't make senseto me.
It's like in 2011, when you hadthe first downgrade by S&P of
(32:39):
credit quality of US creditquality, the reaction was
actually the opposite of whatyou would have thought, meaning
yields went down on thatdowngrade on treasuries and
stocks collapsed and creditspreads blew out.
Now you can argue that thereason that was actually a
logical response to thatdowngrade of credit quality was
because if US credit quality isgarbage, then everything else's
(33:00):
credit quality must be garbage,because the US government owns
us through taxation.
You don't have that anymore.
It's like you don't see theprivate side of the investment
landscape responding to anythinggoing on as far as risks on the
government side.
But to your point, with what'sgoing on with Japan, maybe it's
just a long lag and we're goingto see something very nasty hit.
(33:21):
And if that's the case, can thepolicymakers really do much at
that point, because the problemis coming from them.
Speaker 1 (33:29):
And I guess I think I would argue no, and I guess you
know, as you were talking, Iwas thinking, and so how crazy
is it that, when you considereverything that's going on,
everything that we're talkingabout here, we've just recently
seen this massive bidding up ofrisk assets, right and sort of.
(33:52):
There's a kind of impunity forequity investors in terms of
like, this isn't going to haveany ultimate effect, we're just
going to keep rallying everychance we get into whatever
happens, despite what, maybejust past June starts to hit
really hard data and things likethat.
So it reminds me a little bit,michael, of do you remember that
(34:15):
I actually placed this hugetrade in my personal accounts
when I saw what was going onover in China at the start of
the pandemic and the emptystreets and people coming over
into New York and I'm like placethis massive, massive short put
trade on the S&P 500.
And that was in February andthen markets rallied like more
(34:38):
than 5%.
I got chased out of that trade.
It went up even more and I wasgoing to double down of that
trade.
It went up even more and I wasgoing to double down on the
trade and our options tradertalked me out of it.
Man, I would have really madenorth of like $5 to $10 million
in the trade, but I didn't do it.
(35:04):
But it reminds me a little bitof kind of what we've been
seeing recently, which is thatyou got all this potential
negativity coming, I think, inthe second half of the year,
although maybe the tariffs getblown out of the water by the
courts.
I mean, it's very much in flux,obviously, as we know, but
we've been rallying and thiskind of reminds me of what was
going on, coming into thepandemic.
(35:24):
Of course, at the end of that,obviously, stocks went down 30%.
Is that?
Speaker 2 (35:27):
options trader still with you, is that?
Speaker 1 (35:30):
options trader still with you.
He's an amazing part of thefirm.
You know what he is.
You know what the thing isabout options traders.
He's our derivative specialist.
They mainly want to sell vol.
They always want to make moneyselling vol.
The idea of paying money forvolume and doing the other side
of the trade they just neverlike it.
Yes, yeah, I think that'sinteresting.
Speaker 2 (35:52):
Okay, let's kind of wrap up here back on the book,
right?
Okay, so it's a big endeavor towrite a book.
I mean, I've never done it.
I remember as a kid my fatherdoing it twice on an old
WordPerfect machine or somethinglike that, where it was a
screen with a typing.
I remember it was orange on ablack screen.
I don't know if you remember.
Speaker 1 (36:10):
I'm hoping that it wasn't a typewriter.
Speaker 2 (36:11):
No, no, it's not a typewriter.
No, no, I actually rememberhaving a typewriter when I was a
kid.
But talk me through thatprocess of writing the book.
How cook did you always havethe idea?
Were there things that youdiscovered as you're writing
that were like aha moments?
Speaker 1 (36:24):
because I think that's a whole fascinating
journey in and of itself so whatI would say is, if you're going
to write a book, don't do whatI did, which is take forever.
First of all, for 10 years, Isaid I was writing a book and I
wasn't really.
And then I but one thing I diddo that was right is I have a
friend who's a in publishing andshe's actually my writing coach
.
So I was sort of nowhere in thebeginning and I started writing
and every week she would lookat it and do some edits and then
(36:46):
I would write it again.
And I actually got a deal withHarriman House in 2018.
And this brilliant editor,craig, said just give me the
final draft.
And you know what I never did?
And one of the reasons I didn'tis I wasn't really happy with
the book.
So about two years ago, I saidokay, I've got to get this done.
My staff is like rolling theireyes when I say I'm writing a
book.
It's like it's a joke.
I'll never get the book out.
So I involved everyone at thecompany.
(37:08):
I involved the marketing teamto plan marketing stuff, the
analytics team in the backoffice to review all the data
compliance team.
So I'd be so shamed, michael,if I didn't finish it that I
would never be able to show myface even at the company.
But I did the rewrite and Icompletely changed the book.
And what's really cool is, bythe time I was done, I didn't
need the writing coach.
(37:28):
I could just sit down, hammerout a chapter, and that then, I
think, has been influential,even in the stuff that I write
now.
That's shorter form.
But here's what's so amazing,is that?
So the first time I had a callwith a multi-billion dollar RA,
I hadn't realized he'd read thebook and it had just come out.
And I got on the call and saidI just read the book.
And he said I was terrified.
(37:48):
After the first third of thebook I felt better.
After the next third.
I finished the book and Irealized I have to change the
way I do business.
Now, michael, I don't know howmuch you work with multi-billion
dollar RIAs, but typically whatyou can tell them is nothing.
You can market to them for twoyears and they might make a 3%
(38:09):
allocation which they hold forsix months.
So that was transformational.
But here's what I'll say.
I would say that if you have a,there's some significant
messages in terms of how peopleshould build portfolios and how
you should manage investorbehavior.
That we know.
That I wanted to share, and theonly way that I feel like you
can convey that super long formmessage is through the book.
(38:30):
I don't think if I did 10 hourlong Zooms, I don't think I
could convey what's in the booknearly as well as someone
reading the book.
So for those on the line, mychallenge is read the first
third of the book.
I think it'll change the wayyou think about investing,
especially if you're a moreconventional construct
investment advisor.
If it doesn't, you're mad at me.
Just write me.
(38:50):
I'll send you a refund orwhatever it is.
It's called the BehavioralPortfolio.
It's on Amazon.
Yeah, it's been fun doing.
But find a coach, have themjust edit it.
Get through that first and havethem help you organize it and
get the first draft done.
Don't wait five years to getthe final draft done.
Speaker 2 (39:10):
Appreciate those that watch this podcast.
Felipe, for those who want tomaybe learn more about your firm
, where are you going?
Speaker 1 (39:17):
to yeah, so just go to tavescorpcom website or
tavesassetmanagementcom,thebehavioralportfoliocom
website ortaveassetmanagementcom.
Or.
If you want to learn more aboutthe book, there's a
thebehavioralportfoliocom linkright to the book and you can
read some more information onthere.
Speaker 2 (39:32):
The book is available on Amazon Kindle hard copy
Audible Appreciate everybodywatching this live stream.
Hopefully I'll see you all onthe next episode.
Thank you, Felipe, Appreciateit.
Speaker 1 (39:43):
Awesome.
Thanks, Mike.
Speaker 2 (39:44):
Cheers everybody.
If you lived through the Great Depression with a
balanced portfolio, you lost asmuch as 72% and at the end of it
all you were down still over60% after 13 years and you think
you're still going to have aclient paying fees for that.
So the thing that one needs todo with behavioral finance is
start with a portfolio.
You need to build a portfoliothat's designed to address both
(00:23):
economic and psychological needsof investors, which leads to
your question about how do youmanage behavior around that?
The entire second half of thebook talks about a proactive
construct that we worked withthrough our Behavioral Investing
Institute, which is adepartment of our asset
management firm.
We've done a lot of coachingand consulting over the years
(00:44):
with advisors.
Speaker 2 (00:45):
My name is Michael Guyatt, publisher of the Lead
Lag Report.
Joining me here is Felipe Taves, who some of you may be
familiar with in terms of thecontent that he and his team put
out at Taves.
Felipe, introduce yourself tothe audience more formally.
Who are you?
What's your background?
Have you done throughout yourcareer.
Speaker 1 (01:02):
What are you doing currently?
Yeah, so we've been runningthis shop basically, uh, since
birth, uh, since 1995.
Uh, we're a hedged equity assetmanager and we manage adaptive
fixed income strategies and wehave mutual funds and etfs and,
uh, one of the things that we'reI'm trying to do is change how
people drive, build portfoliosand straight move away from the
(01:24):
conventional construct, and Ipublished a book recently called
the Behavioral Portfolio.
I have a thousand copies herein the office.
It's been getting great reviews, michael.
It's just like people say, it'schanged the way they do
business.
So we're super excited abouthaving maybe greater influence
(01:44):
on how people run their assetmanagement, run their portfolios
.
Speaker 2 (01:48):
Adaptive fixed income .
I want you to talk about howyou get to be adaptive in a
pretty boring asset class.
Speaker 1 (01:56):
Yeah, so one of the things that we've been doing for
many years is looking at thehistory of bond bull and bear
markets, and everyone's seenthese stock, bull and bear
charts, but not many people arelooking at bond bull and bear
charts.
We have been since way beforethis recent downturn that
started in.
You know, you can argue when itstarted whether it was in 2020,
(02:16):
if you're looking at the 30year, or 2022, if you're looking
at bonds but there was amonster bear market in bonds
between 1945 and 1981.
And it lasts.
So that's 36 years for thosewho know math and during that
period, bonds lost 21% real.
But if this is a conversationwith the advisory community and
(02:39):
it often is you had an advisoryfeed of that and you're down
over 50% over basically, someinvestors' entire portfolios,
and so, honestly, for me, thisis one of the most interesting
things to talk about right now,because we've got all these I
don't know if existential may bea too strong of a word, but
massive threats to bonds.
(03:00):
You could argue that we arestill in a bond bear market.
That began a number of yearsago, and so I'm going to
actually answer your question,believe it or not.
But ultimately but by adaptiveit means able to leave just a
core bond conventional constructand be able to be in different
parts of the fixed income.
Complex so high yieldinvestment grade and T-bills.
(03:24):
Complex so high yieldinvestment grade and T-bills.
And if you do a scenarioanalysis of different kinds of
things, what that allows you todo is maybe not get a lot of
above inflation gains indifferent periods but attempt to
de-risk and not have principallosses during rising interest
rates periods.
Speaker 2 (03:39):
Is a bond bear market a function of the Fed just
being wrong, delayed, late?
I mean, can a bond bull marketstart with just the Fed getting
it right?
Speaker 1 (03:48):
So yeah, I mean bond bull markets can be amazing.
After you know, starting lastyear we were looking at the
possibility if the Fed couldhave gotten on just a regular
track of lowering rates.
Ag bonds can rally cumulativelyor have rallied as much as 50%
over a number of years.
(04:09):
So that can be a great trade.
But bond bear marketshistorically have largely been a
function of mainly inflationand of course, as we all know,
unfortunately inflation is tiedto rising interest rates.
So it's typically two thingsworking against bonds at once.
But if you look at that 45 to1981 bear market in bonds, it
(04:34):
was bookended by two episodes ofinflation, one that happened in
the 40s and then the one thatmost of us are aware of, that
happened in the 70s and the 80s.
And so it was that massiveinflation and the fact that the
real returns in bonds sufferedduring that kind of a period
that had such a big impact.
Speaker 2 (04:52):
There are, of course, a lot of different ways of
defining a bear market.
When it comes to bonds, there'sbear market in duration, bear
market in credits, spreadmovement, average default
premiums.
When you say bond bear market,are we just talking about a
shift in the curve?
Is it purely duration, or arewe talking also about corporate?
Speaker 1 (05:12):
Well, when I talk about it, really I'm trying to
talk in just almost the simplestlanguage to the advisory
community, who you know.
Yesterday, I was traveling outin Buffalo Chicken, new York,
and you know all the advisorsout there had large allocations
to just conventional bonds andmy message, which is echoed in a
commentary that we sent outthis week, said maybe one of the
(05:32):
most important things you cando right now is to leave core
bonds.
So what I'm talking about isjust the core bond space, people
that are holding positions intheir portfolios and the
possibility that that turns intoan asset that correlates with
equities, if equities lose moneyand you could have losses in
bonds at the same time that youhave losses in stocks.
Speaker 2 (05:53):
You hear the term stagflation thrown around a lot
nowadays.
I always had an issue with theidea that we're headed for
stagflation, because I justdon't think it works when your
starting point is so muchleverage and debt in the system,
which then leads to adiscussion around capping yields
, yield curve control, thingslike that Take me to the logical
(06:14):
extreme.
If yields keep rising the waythey've been rising, if
inflation is not abated, ifglobal bonds are at risk, where
does this all lead?
Speaker 1 (06:23):
to?
That's the interesting question, michael, because much as Ray
Dalio has been discussing, notjust recently but for the past
five years, he talks about manycycles within a mega cycle and
that potentially we're at theend of this mega cycle.
So we're all having thisconversation and framing it in
(06:43):
terms of how bonds and stockshave moved over the past four or
five decades.
But what's different this timeis that now we've got record
sovereign debt not record, butat peaks in sovereign debt,
similar to where we've been inthe US.
But we also have debt to GDP of100% or greater in virtually
every other developed country.
(07:04):
So, you know, as we watch overthe last couple of weeks and you
know, the 30-year breaks up to515, the 10-year threatens 450
or potentially higher.
(07:25):
It may be a change that wehaven't seen during our
professional lifetimes, which isthat I'll give you an example
of Japan right, where for years,japan increased their fiscal
debt and deficit with impunity,right and so up at 250% debt to
GDP.
And what's gone on in Japanover the last couple of years?
We've seen this incredible.
(07:46):
Well, a little bit of a changerecently, but we've seen this
incredible devaluation of theyen.
So a change in the way to thinkof this, michael, may be from a
typical bond market bearanalysis, where you're losing
principal due to rising interestrates.
Thinking about it more in termsof a potential currency
(08:08):
debasement, currency devaluationepisode, where you're made
poorer in your bond portfoliosbecause your currency isn't
worth as much.
Where it gets even moreinteresting, I think, is what if
this happens on a global basis?
What does that mean?
I think is what if this happenson a global basis?
What does that mean?
Well, to a certain extent, whatthat means is inflation, but
(08:29):
not capacity-driven inflation,right?
This is a kind of inflationthat's driven by currency issues
, by sovereign debt issues.
It's a completely different wayof thinking about risks to
bonds than people are used to.
Speaker 2 (08:43):
Which, you can argue, is exactly why gold's done what
it's done and why there's somuch interest in Bitcoin and
assets from that perspective.
But there are risks there too,right throughout that sequencing
.
You mean in gold or yeah, assort of the solution to it or
the hedge to all this.
Speaker 1 (08:59):
So I have some answers for you.
I talk about it in my book andI talk about building a
portfolio that's an all-seasonportfolio and attempts to
address inflation, stagflationand deflation.
Here's what's kind ofinteresting.
Well, so first of all, let'stalk about Bitcoin and gold.
Gold obviously has performedamazingly recently and it has
(09:22):
been a great trade, and there'scertainly no problem with having
an allocation there if we seethis all play out.
I'm just not a believer inBitcoin and I know I don't make
friends when I say that becauseit's just a speculative asset.
I think maybe, if you're goingto trade it and if you know how
to do that and you're going totake a position and try to get
(09:43):
out of it that's a thing,michael, we've wanted.
Every three weeks, I asked theinvestment team can we launch a
Bitcoin blow up ETF where it'spositioned to be in Bitcoin but
to profit it blows up?
Unfortunately, the options areso insanely expensive in Bitcoin
and there's not enough volume.
It's just not doable.
(10:04):
But I would love to do that.
So the answer is where do yougo?
So if you're an advisor outthere and you're thinking more
from a conventional constructand you're not comfortable with
speculative asset class and youdon't want to go much beyond a
5% or 10% allocation of gold.
Here's what history shows.
What history shows is thatduring periods of high inflation
(10:25):
, stocks have done reasonablywell over the entire period of
inflation.
So there are three episodes ofinflation over the last 100
years.
On average, cumulatively,inflation increased by about
100%, so doubling each time, waymore than we've seen recently.
Right, and bonds did miserablyduring those periods.
But what's interesting isstocks did okay.
(10:49):
So stocks kept up withinflation.
And if you think about that36-year bond bear market that I
was talking about, stocksincreased like 780% after
inflation during that big bondbear market.
Even during the Weimar Republicwhen you're seeing these
massive inflation in Germanystocks did okay.
(11:10):
So what's interesting is stocksact as a pass through
ultimately for prices and so asa result, you know you've got
sort of a natural thing there.
Here's the problem with that.
The potential problem with thatis that as you go from low
inflation to high inflation, aswe see the 10-year and 30-year
break above the highs recently,we all know that's going to be
(11:31):
horrible for stocks.
So going into high inflation,you can have some significant
losses in stocks.
So our solution there, both fordeflation and stagflation or
inflation is in your equityportfolio, put about half in
hedged equity ETFs are funds,something that can uncorrelate
from negative economic activity.
Here's what that allows you todo.
You're adaptive in your fixedincome, trying to get out of the
(11:53):
way of rising interest rates.
Your equities are allocatedhalf to conventional, half to
hedged equity.
Now, if you do have a highinflation episode, that hedged
equity piece allows you to stickto your equity allocation and
potentially endure some kind oflong-term inflation.
That was a really long answer,but that's our thinking around
it.
Speaker 2 (12:11):
All right, but we got to define what hedged equity
means.
I hear hedged equity and Ithink to myself okay, well, you
can do that through justlowering your net long exposure
which I'm sure you can do butwith lower beta positions.
What does that mean?
Speaker 1 (12:21):
hedged equity, yeah so we're very explicit we mean
equity that is hedged, meanequity that is hedged.
So we have an ETF that is anS&P 500 product that is just
owning always the S&P, and it isa two-year full, 100% notional
(12:42):
hedge in a leap that we rollevery year in December and we
adjust it.
If the market moves up, we rollthe leap up.
If the market moves down a lot,we roll it down and monetize it
and then we sell some calls andshorter dated put spreads, as
long as they're not below ourleap strike price, to help pay
(13:03):
for the cost of that leap.
So what that is designed tolook like is exactly what we
think an advisor should put intheir portfolio.
So you're looking for something, in our opinion, that has
something like a 70% on averageupcapture to the market.
So if you've got half there andhalf in conventional equities,
you're looking at an overall 85%upcapture.
(13:23):
During normal periods, duringdown markets, what that strategy
, that ETF, is designed to do isattempt to have around 50% down
capture during a more benign,declining market, like we saw in
2022.
But if things go off the railsand it's more financial crisis,
start searching VIX extrememarkets.
What potentially happens is youmake a lot of money on selling
(13:45):
calls and the VIX causes thatleap to really have lots of loss
avoidance.
So optimally you want to haveas low correlation as possible
during a crisis equity market.
So we're looking for somethinglike 20% or maybe 30% down
market capture and here's whatthat allows you to do.
If the markets go off the rails, then let's say, you do manage
(14:08):
a sort of 20% to 30% downcapture period and then you're
rolling down your leaps and whatyou're doing is you're actually
positioned to take advantage ofthe decline Because if you can
capture a good chunk of the up,capture the falling rebound, but
not participate in a lot of thedown move, you've actually made
money in the decline in thatpiece.
But we're talking pure hedgedequity, nothing terribly exotic.
Speaker 2 (14:33):
I feel like this is a good tie into the behavioral
portfolio, because we all knowthe markets tend to go up on
more days than they go down.
But when they go down they godown with magnitude, and it's
hard to stick in a hedged equityportfolio when the frequency of
up days is more than thefrequency of down days, right?
So how do you factor in sort ofthat behavioral response to
(14:55):
time?
Speaker 1 (14:56):
Yeah.
So I think that the key is, asI was mentioning, making sure
that you're not all in the hedgeequity allocation and in the
book that I was just talkingabout, which'll bring up again
the first half.
Here's what I think behavioralcoaches and people in behavioral
finance have gotten wrong fromthe beginning is that most
(15:18):
people they start with coachingthey say we're going to take
this portfolio, which basicallywas a historical accident,
something like the 60-40construct and we're going to go
out there and try to coach youaround how do you manage
behavior with this portfolio?
What I reveal in the book isthat if you live through the
Great Depression with a balancedportfolio, you lost as much as
(15:40):
72% and at the end of it all,you were down still over 60%
After 13 years and you thinkyou're still going to have a
client paying fees for that.
So the thing that one needs todo with behavioral finance is
start with a portfolio.
You need to build a portfoliothat's designed to address both
economic and psychological needsof investors, which leads to
(16:03):
your question about how do youmanage behavior around that.
The entire second half of thebook talks about a proactive
construct that we've worked withthrough our Behavioral
Investing Institute, which is adepartment of our asset
management firm, we've done alot of coaching and consulting
over the years with advisors.
What that does is it builds anentire proactive communications
(16:26):
construct around how to talkabout the markets.
You don't shy away from bigdown markets.
You want to actually focus onhow bad down markets can get.
But then the very next thing isyou talk about how the
portfolio is designed to addressit, and then you talk about
what explicitly what actionsyou're going to take when you
have these big down markets.
And so you've got somethingcalled an investment owner's
(16:50):
manual you give them, you walkthrough different investment
challenges, how the portfolio isdesigned to address it, how you
do that.
And so it is important becauseif all you do, you're exactly
right.
If all you do is you executethis portfolio that we've been
talking about and you don'tattach the consulting around it,
the messaging around it, aftera couple of years investors are
(17:16):
kind of like look, this thing'sunderperforming, can we please
just leave it and go intoMagSava or whatever else happens
to be doing very well.
So both parts are reallyimportant, both the portfolio
part and the consulting part.
Speaker 2 (17:24):
Yeah, no, I think that that makes sense, although,
again, the thing is, I've usedthis line before it's like FOMO
is more powerful than the Fed,right, yeah, fear of missing out
, which basically is whathappens when your up capture is
less than 100% Exactly, tends tomake people then over leverage,
which then leaves themvulnerable to the tail vent
whenever that does occur, whichis always unpredictable.
(17:45):
Even though the conditionsmight be there, you don't know
the mile marker that mighthappen under.
So talk me through, from whatyou've seen with what other
advisors do.
How do advisors, how do peoplelike you, play the role of
psychologists to get people torecenter around that point?
Speaker 1 (18:06):
Well, the way our advisors that are using our
behavioral guidance talk aboutit is they actually
differentiate out the fact thatyou know oh, look at you know,
(18:39):
if you would go through thismarket, here are what the
consequences would be, you know.
So, in a sense, advisors areable to brand themselves
according to building portfoliosthat are all seasons,
portfolios that address allthese different kinds of markets
.
So in many cases it starts atthe very beginning, in how you
market yourself and how you talkabout how you work with
business.
But then there's some othertools you can use too, like
(19:01):
Income Labs is a great tool thatallows you to look at different
kinds of markets and howportfolios would behave in them.
Hidden leverage is anotherportfolio tool that allows you
to show true worst casescenarios.
And so you start with, in thebeginning, the vast majority of
investors are just fully onboard.
But that's the easy part, right?
(19:23):
It's really easy to getinvestors and get them on board
to whatever you're talking about.
What's harder is when you getdown the road, and so you
continue to talk about whyyou've got a hedged equity
position in there.
You continue to make sure thatyou've got a fully allocated
position in there.
Michael, we actually haven't.
For advisors that are executingon this plan, they haven't run
into a lot of problems as longas their hedged equity
(19:46):
allocation is performingaccording to that.
Just generally 70% overall upcapture statistic.
Because, as I was saying before, if you're 70, 85% up, capture
your conventional stuff.
Look, your conventional stuffcould be in whatever it could be
in triple Qs.
We're looking at launching anew product that's a hedge
triple Qs.
So even in our S&P productyou've got plenty of Mag7 stuff,
(20:07):
other kinds of things that aremoving ahead as a market.
It's a cap weighted product.
We haven't seen a lot ofproblems there.
So I think it's only whenyou're you know, if you're
focused on the everyday, torecapture the market.
If you've got someone lookingevery day in a trader mentality,
that's probably going to bepretty hard to work with.
Speaker 2 (20:30):
And then you might just lose a client to say like
okay, we're just trying to chasereturns every day.
You've used that term a fewtimes old weather portfolios,
and I think about permanentportfolios, I think about risk
parity.
Talk to me about sort of oldweather from a behavioral
context.
Speaker 1 (20:43):
Well, all weather means that when you're talking
about clients, you're sayingthat we didn't design this case,
this portfolio, just for theoptimistic case.
And this world is completelybiased towards optimism Even now
.
I mean, even if you look at allof the threats between high
sovereign debt levels, betweenGod knows what's going to happen
(21:05):
in terms of the tariff scenarioand how that plays out in the
economy, all of these differentthings.
It's strange that we're justtaught as advisors and investors
sort of this mindset of it'sfine and that comes from decades
and decades of training foradvisors.
That just says, as long as youhold stocks for 20 years or
(21:28):
longer, you would have neverlost money.
And so it creates and plus,gene Fama is a powerful
influence in this whole ideathat all you need to do is hold
on to stocks and that's whereyou get the best return.
But the kind of boring analogythat we use is that it's not
about the best return.
Obviously You're not driving aFormula One car down the highway
(21:52):
.
It's actually no, no, no.
We need to build a portfoliothat has different objectives.
So I actually lay out in thebook what are the objectives you
want to.
If you start from scratch, ifyou leave, just trying to match
benchmarks.
What does that portfolio looklike?
And what that portfolio lookslike is trying to avoid losses
above inflation gains, lockingin gains when you have them, as
(22:15):
much consistency of returns aspossible.
And so it's addressing allthese different kinds of markets
and starting from a totallydifferent place.
It's fascinating.
We look at like differentiterations of all seasons.
I mean, obviously Ray Dalio isbrilliant, is brilliant and he's
got 18 million times more moneythan I do or anyone I know does
.
But weirdly, when you look athis all seasons portfolio that
(22:39):
he was talking about a number ofyears ago, it was like 50%
bonds and a significant chunk oflong-term bonds.
And at the time I was thinkinglike, yeah, I don't know if
that's designed for a highinflation, rising interest rate
environment like we frankly hadover the last four years.
So I haven't kept up to date onhow Ray is talking about an all
(23:02):
seasons approach and if he'smigrated away from that sort of
heavily fixed income,intermediate, long-term duration
play.
But yeah, building a portfoliothat addresses all those
different kinds of markets.
So then you say to an investorlike we're not worried right,
like we've built this to addresswhatever happens.
It may not always have gains,but it's definitely designed to
(23:27):
survive and maybe prosper whenthings are going badly.
Speaker 2 (23:30):
You know it's funny that when you were talking about
that point about optimism, um,it took me to the line that you
often hear that hope is not astrategy.
Yeah, all right, which is funny, because buying hold is, of
course, hope.
So, yeah, of course it's astrategy, right, and yes, it's
going to work over very longtime periods.
Speaker 1 (23:45):
I mean, think about it like this, like if you were
walking across a bridge it's'sone of those wobbly wobbly
bridges and it's on this courseof fall a thousand feet and you
say like, hey, well, about 10%of the time over, you know, if
you're walking over the courseof you know five years, it'll
break and you'll fall to yourdeath, probably not going to
(24:06):
cross that bridge, right, I'mjust not going to go there, I'll
find it, I'll walk around,right.
But in investing we say like,well, it's even more certain
that we're going to have 50%declines, like significant
adversity in the markets.
But everyone just is like, oh,whatever, we're just going to go
safely invested, because GeneFama says that we just want to
(24:28):
be passively invested and neverdo anything about the market.
Speaker 2 (24:30):
It's crazy so I had a phase in my career where I was
on the road every weekpresenting at cfa chapters.
I've been to 47 states andthese are, you know in the
audience intelligent cfa charterholders, but always blown away
by how they tend to not focus oncertain problems that are in
(24:53):
the industry that they are apart of.
And I know you've talked aboutcertain problems that you've
identified that are not reallyacknowledged by the advisor
community.
What's wrong with theinvestment advisory community?
Speaker 1 (25:07):
I believe that it has been too heavily influenced by
Gene Fama and Jack Bogle Right.
And you know what I find justthe funnest ever, because I was
raised in a small town in Kansas, michael, and everyone had a
limited perspective.
We were five towns from evensomething that looked like a
city, or five hours fromsomething that even looked like
(25:29):
a city, or five, five, fivehours from something even looked
like a city.
And so it was just such thislimited perspective.
And as I moved to firstphiladelphia and new york and
brought and went to college andI was like, wow, a lot of that
stuff that people thought orbelieved was just not really
(26:01):
valid and and so isn't it, isnthat you've got so many
brilliant minds working in thisindustry community.
The investment managementcommunity thinks about
portfolios and asset management.
They're found, at leastadditionally, uh, bankrupt.
You know to to exactly yourpoint, right.
(26:22):
So as when I, when I do avisualization and I walk through
the great depression, uh, witha balanced portfolio, and I show
year by year what's happeningin the markets, what's happening
in the news, what's happeningin the economy and what's
happening in the portfolio, youcome through that and you're
like that is a nuclear bomb onmy investment practice and on my
(26:44):
investors, yet we completelyignore that.
So, michael, I created a wordcalled the corona bias, and what
that refers to is that therewas a Spanish flu in 1915
through 1990.
25 to 50 million people died.
A hundred years later, roughlyalong comes another virus.
(27:09):
We're completely unprepared forit.
We have no idea that somethinglike this is coming.
And, similarly, what I say inthe book is I say that you know,
things happen in the marketsthat are so long ago that we
lose immunity to them.
We don't think about them whenwe build portfolios, and so we
just build in our portfolios forthings that have happened
(27:32):
within our professional careers.
But if you go outside of thatcircle, into the second circle,
there are things that havehappened historically that we
don't prepare for.
And I also I believe somepeople may be saying I grew up
listening to this saying like,yeah, but that was a great
depression, we had no FDIC, wehad all these other things
happening that wouldn't happenagain.
I believe I successfully arguein the book that depressions
(27:55):
could recur, even based on someof the things that happened over
the last 20 years.
So it's amazing, right?
You've got all of these greatminds that are thinking about
portfolios are ignoring thishistory, and you know, along
with that idea, that you know wecould be wiped out by some of
these mega cycles.
(28:16):
It just so happens, right.
It just so happens that whenwe're at this high debt to GDP
ratio and high valuations inequity markets, we may be more
vulnerable to some of thesemajor major mega cycles than we
have been in the past.
And, in fact, some of thesethings that we're ignoring, they
(28:37):
have more of an influence onreturns over the next 5, 10, 20
years than anything else thatwe're thinking about or doing.
Speaker 2 (28:44):
I tend to agree with that, although I do worry if
it's more of a cycle where it'salmost like a series of mini
tail events, because there's noappetite for any policymakers to
endure any pain for anythinglonger than a couple of weeks
(29:06):
you were any pain for anythinglonger than a couple of weeks.
Speaker 1 (29:07):
Interesting, I mean.
Uh, you know, one of the one ofthe things that you can do in
these scenarios that I love isthat you can just ask the
question if this would happen,and then what?
So you can you say well, if youhave the 30 year breakout and
it goes all the way up to 6%,and then what?
And then what?
I definitely hear what you'resaying, although I wonder if we
(29:28):
haven't put ourselves into asituation, from a macro economic
factor perspective, where weare powerless, both at the
fiscal stimulus level and from aperspective of what the Fed can
potentially do.
So if you go to the last timein the US when we had 100% debt
to GDP, which was in 1945,post-world War II, what was the
(29:53):
play out economically?
Well, we had 8% GDP growth for20 years.
Following that episode, we hadtop marginal tax rates of over
90% for over 20 years and we hadmassive inflation in the 40s.
So do you think we're going tohave 80% GDP growth coming out
of this peak in depth of GDP?
No, do you think any of theseother factors that I was talking
(30:19):
about are potentially going toplay out.
So I almost wonder if it gets alittle negative.
It gets a little doom andgloomy when you talk about these
kinds of things, but I almostwonder if.
Because what are you going todo if you have more fiscal
stimulus, when people arealready bidding up interest
rates because they don't believethere's sustainable debt?
(30:39):
Is the Fed able to do anythingif interest rates are moving
higher and you've got rampantinflation?
So I almost think thatpolicymakers may be powerless.
What do you?
What do you think about that?
Speaker 2 (30:50):
I I don't disagree um , although it's like.
The one thing that we know isthat policymakers are very
creative at delaying creativedestruction uh all right.
So the numbers keep gettingbigger and bigger, and maybe
this is a conversation foranother, different podcast.
But I do think that the mostconsequential dynamic of what
happened with the COVID crashwas the Fed basically saying
(31:13):
we'll buy up junk debt to savethe system anybody's imagination
at the time right and explainswhy credit spreads have been so
tight.
Because there's this moralhazard now that the Fed is
putting directly into corporatecredit which creates all kinds
of distortions.
You can argue.
Speaker 1 (31:34):
I'm just curious then , and I'm curious what your
perspective is then on.
So you start to have massiveduress, you start to have risk
assets falling.
Does that happen again?
Does the Treasury come in andbuy this and then?
What are the implications?
Speaker 2 (31:53):
I don't know.
A cynic would say it depends onif Powell's buddies with Trump
or not.
Speaker 1 (32:00):
You can argue, I don't know, haven't we seen that
in Japan?
Basically right, I mean, and Iguess what have the consequences
been?
I mean, right now we do haveyield surging right to crazy
levels.
I mean, can you imagine, likealmost touching what?
Speaker 2 (32:15):
4% yeah, and what's weird to me about this cycle,
which I think is reallyunderappreciated, is there's
this belief that if you're, thegovernment and the private
sector are totally separate, sowhatever's happening on the
government financing side isirrelevant to what's going on in
the corporate sector.
Right, and it doesn't make senseto me.
It's like in 2011, when you hadthe first downgrade by S&P of
(32:39):
credit quality of US creditquality, the reaction was
actually the opposite of whatyou would have thought, meaning
yields went down on thatdowngrade on treasuries and
stocks collapsed and creditspreads blew out.
Now you can argue that thereason that was actually a
logical response to thatdowngrade of credit quality was
because if US credit quality isgarbage, then everything else's
(33:00):
credit quality must be garbage,because the US government owns
us through taxation.
You don't have that anymore.
It's like you don't see theprivate side of the investment
landscape responding to anythinggoing on as far as risks on the
government side.
But to your point, with what'sgoing on with Japan, maybe it's
just a long lag and we're goingto see something very nasty hit.
(33:21):
And if that's the case, can thepolicymakers really do much at
that point, because the problemis coming from them.
Speaker 1 (33:29):
And I guess I think I would argue no, and I guess you
know, as you were talking, Iwas thinking, and so how crazy
is it that, when you considereverything that's going on,
everything that we're talkingabout here, we've just recently
seen this massive bidding up ofrisk assets, right and sort of.
(33:52):
There's a kind of impunity forequity investors in terms of
like, this isn't going to haveany ultimate effect, we're just
going to keep rallying everychance we get into whatever
happens, despite what, maybejust past June starts to hit
really hard data and things likethat.
So it reminds me a little bit,michael, of do you remember that
(34:15):
I actually placed this hugetrade in my personal accounts
when I saw what was going onover in China at the start of
the pandemic and the emptystreets and people coming over
into New York and I'm like placethis massive, massive short put
trade on the S&P 500.
And that was in February andthen markets rallied like more
(34:38):
than 5%.
I got chased out of that trade.
It went up even more and I wasgoing to double down of that
trade.
It went up even more and I wasgoing to double down on the
trade and our options tradertalked me out of it.
Man, I would have really madenorth of like $5 to $10 million
in the trade, but I didn't do it.
(35:04):
But it reminds me a little bitof kind of what we've been
seeing recently, which is thatyou got all this potential
negativity coming, I think, inthe second half of the year,
although maybe the tariffs getblown out of the water by the
courts.
I mean, it's very much in flux,obviously, as we know, but
we've been rallying and thiskind of reminds me of what was
going on, coming into thepandemic.
(35:24):
Of course, at the end of that,obviously, stocks went down 30%.
Is that?
Speaker 2 (35:27):
options trader still with you, is that?
Speaker 1 (35:30):
options trader still with you.
He's an amazing part of thefirm.
You know what he is.
You know what the thing isabout options traders.
He's our derivative specialist.
They mainly want to sell vol.
They always want to make moneyselling vol.
The idea of paying money forvolume and doing the other side
of the trade they just neverlike it.
Yes, yeah, I think that'sinteresting.
Speaker 2 (35:52):
Okay, let's kind of wrap up here back on the book,
right?
Okay, so it's a big endeavor towrite a book.
I mean, I've never done it.
I remember as a kid my fatherdoing it twice on an old
WordPerfect machine or somethinglike that, where it was a
screen with a typing.
I remember it was orange on ablack screen.
I don't know if you remember.
Speaker 1 (36:10):
I'm hoping that it wasn't a typewriter.
Speaker 2 (36:11):
No, no, it's not a typewriter.
No, no, I actually rememberhaving a typewriter when I was a
kid.
But talk me through thatprocess of writing the book.
How cook did you always havethe idea?
Were there things that youdiscovered as you're writing
that were like aha moments?
Speaker 1 (36:24):
because I think that's a whole fascinating
journey in and of itself so whatI would say is, if you're going
to write a book, don't do whatI did, which is take forever.
First of all, for 10 years, Isaid I was writing a book and I
wasn't really.
And then I but one thing I diddo that was right is I have a
friend who's a in publishing andshe's actually my writing coach
.
So I was sort of nowhere in thebeginning and I started writing
and every week she would lookat it and do some edits and then
(36:46):
I would write it again.
And I actually got a deal withHarriman House in 2018.
And this brilliant editor,craig, said just give me the
final draft.
And you know what I never did?
And one of the reasons I didn'tis I wasn't really happy with
the book.
So about two years ago, I saidokay, I've got to get this done.
My staff is like rolling theireyes when I say I'm writing a
book.
It's like it's a joke.
I'll never get the book out.
So I involved everyone at thecompany.
(37:08):
I involved the marketing teamto plan marketing stuff, the
analytics team in the backoffice to review all the data
compliance team.
So I'd be so shamed, michael,if I didn't finish it that I
would never be able to show myface even at the company.
But I did the rewrite and Icompletely changed the book.
And what's really cool is, bythe time I was done, I didn't
need the writing coach.
(37:28):
I could just sit down, hammerout a chapter, and that then, I
think, has been influential,even in the stuff that I write
now.
That's shorter form.
But here's what's so amazing,is that?
So the first time I had a callwith a multi-billion dollar RA,
I hadn't realized he'd read thebook and it had just come out.
And I got on the call and saidI just read the book.
And he said I was terrified.
(37:48):
After the first third of thebook I felt better.
After the next third.
I finished the book and Irealized I have to change the
way I do business.
Now, michael, I don't know howmuch you work with multi-billion
dollar RIAs, but typically whatyou can tell them is nothing.
You can market to them for twoyears and they might make a 3%
(38:09):
allocation which they hold forsix months.
So that was transformational.
But here's what I'll say.
I would say that if you have a,there's some significant
messages in terms of how peopleshould build portfolios and how
you should manage investorbehavior.
That we know.
That I wanted to share, and theonly way that I feel like you
can convey that super long formmessage is through the book.
(38:30):
I don't think if I did 10 hourlong Zooms, I don't think I
could convey what's in the booknearly as well as someone
reading the book.
So for those on the line, mychallenge is read the first
third of the book.
I think it'll change the wayyou think about investing,
especially if you're a moreconventional construct
investment advisor.
If it doesn't, you're mad at me.
Just write me.
(38:50):
I'll send you a refund orwhatever it is.
It's called the BehavioralPortfolio.
It's on Amazon.
Yeah, it's been fun doing.
But find a coach, have themjust edit it.
Get through that first and havethem help you organize it and
get the first draft done.
Don't wait five years to getthe final draft done.
Speaker 2 (39:10):
Appreciate those that watch this podcast.
Felipe, for those who want tomaybe learn more about your firm
, where are you going?
Speaker 1 (39:17):
to yeah, so just go to tavescorpcom website or
tavesassetmanagementcom,thebehavioralportfoliocom
website ortaveassetmanagementcom.
Or.
If you want to learn more aboutthe book, there's a
thebehavioralportfoliocom linkright to the book and you can
read some more information onthere.
Speaker 2 (39:32):
The book is available on Amazon Kindle hard copy
Audible Appreciate everybodywatching this live stream.
Hopefully I'll see you all onthe next episode.
Thank you, Felipe, Appreciateit.
Speaker 1 (39:43):
Awesome.
Thanks, Mike.
Speaker 2 (39:44):
Cheers everybody.
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