August 26, 2025 • 25 mins
In this episode of Lead‑Lag Live, I sit down with Seth Cogswell, Founding Partner and Portfolio Manager at Running Oak, to cut through the hype and examine what’s really underpinning today’s market momentum.
From zombie companies to the staggering dominance of passive investing, Seth lays out how fundamentals no longer align with price—and why the next correction may be bigger than it looks.
In this episode:
– Why today’s market strength is more fantasy than fact
– The hidden risks built into passive strategies
– The destabilizing role of concentrated index flows
– How Fed stimulus has delayed, not eliminated, downside risk
– Why mid- and small-cap names matter when the narrative shifts
Lead‑Lag Live brings you inside conversations with the financial thinkers who shape markets.
Subscribe for interviews that go deeper than the noise.
#LeadLagLive #Markets #Investing #SethCogswell #PassiveInvesting #MarketFragility #RunningOak
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Spotify: https://open.spotify.com/show/75YJ921WGQqUtwxRT71UQB?si=4R6kaAYOTtO2V
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Instead, if you invest where others aren't,
which again nobody.
Very few people are investingin mid cap, you get lower
valuations because people arenot driving those prices up,
which implies higher potentialupside and a margin of safety.
So higher return, lower risk.
Speaker 2 (00:28):
Welcome to Lead Leg Live.
I'm your host, melanie Schaefer.
Right now, investors aregrappling with a strange split
in sentiment.
There's plenty of discomfortand uncertainty about the
economy, yet money continues topour into momentum and passive
strategies, even with valuationsrunning higher than we saw
during the tech bubble.
It's exactly the kind ofenvironment where portfolio
(00:51):
construction decisions can makeor break returns.
My guest today is Seth Cogswell, founding partner and portfolio
manager at Running Oak.
Running Oak Running Oak'sapproach focuses on equal
weighting, mid-cap opportunityand a disciplined process
designed to avoid the pitfallsof over-concentration that come
with traditional cap-weightedindexes.
(01:13):
Seth, thanks for joining metoday.
Speaker 1 (01:16):
Thank you for having me.
I love that intro.
Speaker 2 (01:19):
Thank you.
So, seth, to start out reallybroadly, what topic is sort of
most on your mind right now?
Speaker 1 (01:26):
Really, you just summed it up.
I feel that there is apervasive feeling of discomfort
and uncertainty for the everyonefeels and yet they're investing
in precisely the opposite,precisely the opposite manner.
And so there's thiscontradiction and I've I want
(01:51):
people to trust that feelingthat they have and that unease
running oak.
Our strategy is simple commonsense.
We invest in three very obviousprinciples.
So maximize earnings growth,because nothing drives
performance like a companymaking more and more money while
(02:13):
being disciplined aroundvaluations, because the last
thing you want to do is ownassets.
That should go down over thelong run, that's worked out for
a little bit recently, but overthe long run, that is not a good
exercise for a little bitrecently, but over the long run,
that is not a good exercise.
And then, lastly, anoverarching focus on handful of
simple but again obvious metricsor qualities that clearly lead
(02:33):
to greater downside risk.
Nothing kills exponentialgrowth like big drawdowns, and
that's why we're all doing thisand so avoiding that's extremely
important.
Our strategy, that simplicity,gives me certainty and hopefully
gives our clients certainty,not necessarily in the outcome,
but certainly as far as thequalities that we're investing
(02:55):
in and knowing that we arethoughtfully investing in ways
that make sense.
Meanwhile, on the flip side,people are now all in on in an
uncertain world.
They're effectively all in oncertainty.
Investing is inherentlyuncertain, even if you stack the
(03:22):
odds in your favor by doing awhole lot of research and
investing in a company that youthink is highly likely to work
out.
Keywords there are highlylikely, there's a chance it
doesn't and the economy or theworld is feels wildly uncertain
and many people feel thatinvesting is basically a sort of
(03:44):
a derivative of the real world.
Right, it reflects what'shappening in the real world.
So you take an uncertain worldthat everybody feels and senses
and then you compound that withthe uncertainty of investing and
it's somewhat doubly uncertain.
Certain Meanwhile recentnumbers came out where
(04:09):
households have more moneyinvested in equities as far as a
percentage of their net worth20 to 30% more than they did at
the tech bubble.
So they're somewhat all in onequities.
At the same time, according tocertain numbers, over 50% of
equity assets are now in passiveportfolios or index funds, a
lot of which people aren'tnecessarily thinking about.
The risks that they're takingimpact on the investing world
(04:46):
and on investors, certainlyrelative to what was in the past
as far as active management,charging two and a half percent
while providing no valuewhatsoever.
In closet benchmarking.
It's been a positive evolution,but that doesn't mean that it's
the final evolution.
What many miss is passive atits heart, or we'll say cap
weight in construction isinherently nonsensical.
If, let's say, hypothetically,we start out with a company that
(05:13):
is fairly valued becausehistorically there's been a
belief that markets areefficient, so we start with a
company that is fairly valuedand that fair valuation reflects
a percentage of the S and P 500.
So that market capitalizationthat's related to that fair
value results in a percentagethat's allocated and let's say
(05:35):
everything else is perfectlyallocated.
That's this one moment.
Then, because people aretrading, buying and selling
stocks all day, every daysomeone comes in and buys it.
That will push it up, becausethat's what happens Demand
pushes the price up.
Now that company, despitenothing changing, fundamentals
haven't changed at all thecompany is now valued more
(05:57):
highly, which means it receivesa higher percentage of the S&P
500.
If you extrapolate that over thecourse of 16 years, in the
highest momentum period ofmomentum ever, what you get as
momentum investing iseffectively something was up, so
I'm going to buy more of it.
Then it's up and so someonebuys more of it and you get this
(06:18):
feedback loop.
You do that for 16 years.
Now all of a sudden, you aremassively overweight, overvalued
companies and underweight,undervalued companies, just by
definition.
That is the way that passiveinvesting or or cap weighting is
constructed.
You will always have moreinvested in overweight companies
(06:39):
because are overvaluedcompanies because they're
overvalued, and you will beunderweight what they should be
undervalued companies becausethey're overvalued and you will
be underweight what they shouldbe undervalued companies because
they're undervalued.
And the issue with that isagain, if you think of momentum,
you buy because it was upyesterday and people buy
yesterday because it was up theday before.
And extrapolate that over 16years and if everybody is all in
(07:03):
or many, I shouldn't sayeverybody but if over 50% of
equity assets are now investedin cap-weighted portfolios or
index funds, it expressescertainty.
It is people are all inexpressing certainty in a wildly
uncertain environment andmaking a bet that what happened
(07:24):
last year or what happened overthe last 15 years will continue
to happen.
Maybe it does, but last yearmomentum hit the 99.8th
percentile in history.
That is a one in 500 event.
So if you're all in on capweighting or index funds, or
even the max seven, becausethere's such a massive
(07:44):
percentage of index funds, youare investing with certainty
when almost everybody feelsincredibly uncertain and
uncomfortable.
And so it's really thatjuxtaposition between how people
feel and, I think, how peopleto listen to their not
necessarily their brains, but Iguess maybe their souls a little
(08:19):
bit more and actually trustthemselves, as opposed to just
trusting those who tell you thatthe market will always be up
over the long run, because thatis wildly misleading.
It may be and it probably willbe over the very long run, but
that doesn't mean it will be inthe next few years.
Speaker 2 (08:36):
It's a really excellent explanation of the
current state of the market and,as you mentioned and I did,
Running Oak's portfolio isequally weighted.
Why equal weighting versusalternatives?
Speaker 1 (08:47):
On one hand, you can invest, you can allocate the
same portfolio in a number ofdifferent ways.
Some will add value, someothers won't.
Equal weighting puts meanreversion in your favor.
So again, I feel the world'suncertain.
Investing is uncertain.
People are buying and sellingevery day, which creates noise
(09:08):
and volatility.
And if you have noise andvolatility, equal weighting puts
that in your favor because, asa stock has popped up for
whatever reason, an equalweighting portfolio will sell
that.
If a stock is knocked down orlags for whatever reason, equal
weighting will add to that.
And so if the market's noisyand volatile, that will actually
(09:29):
add value.
Again, there's times where capweighting adds value.
If momentum is especially hotand you get this feedback loop
where everything that went upyesterday is up again today,
great Cap weighting will do well.
But that assumes that it'sgoing to go up, that these over
value stocks will go up forever,into perpetuity.
(09:50):
Again, equal weighting is agreat way to express uncertainty
because, again, it takesadvantage of that noise, but
also it adds diversification.
Today, more is invested in thetop 10 companies in the S&P than
any time in history.
That's paid a lot of leadservice and we're inundated with
(10:10):
data and the same soundbitesall the time, and so we tend to
check out.
But it's worth taking a secondand just really think about that
right.
Whether it's advisors investingon behalf of clients, whether
it's clients, people's net worththat they have worked so hard
to build is massively investedin a small number of companies
(10:34):
that are arguably highlycorrelated.
They're all big tech, and thatexpresses, again, certainty,
whereas equal weighting you knowyou might have, let's say, if
you have 50 companies now, youhave 2% invested in each one.
That expresses uncertainty, andand it's uncertainty and it's an
(10:55):
alternative way to invest itputs the odds in your favor over
the long run.
Another good point is, prior tothis last decade, equal
weighting had outperformed capweighting over every single
rolling decade, every single one.
It's only the last 10 to like12 years when we've been in this
sort of momentum machine drivenby a number of things passive,
(11:19):
all the stimulus, what have youbut equal weighting was always
the way to go.
The one exception is right nowor recently, and so the question
is are you going to bet againsthistory, or are you going to
bet on uncertainty and history?
Speaker 2 (11:38):
Yeah, and I wanted to talk a little bit about RSP.
That's some P500s equal weightETF.
It's popular for investorslooking to hedge against cap
weighting.
How does running Oaks portfoliocompare to RSP?
Speaker 1 (11:51):
Yeah, rsp is an excellent way to diversify from
cap weighting.
It's a good way to expressuncertainty.
The problem is does anyonebelieve that all 500 companies
in the S&P are created equallyand that they're all attractive?
I don't.
I think that some are probablybetter investments and better
(12:12):
companies than others.
If you feel that way, then RRSP, while it's better than some
alternatives, is incomplete.
You know, at its heart, thesimplicity of our strategy is we
(12:37):
help clients focus on traits orqualities that you know are
desirable.
They're clearly desirable, suchas, again, maximizing earnings
growth, avoiding overvaluedcompanies or, ideally, investing
in undervalued companies,investing in profitability,
because making money iscertainly a good thing there's
no argument in that and maybemore importantly than what we
help clients invest in is whatwe help them avoid, especially
right now.
So we help companies, we helpinvestors avoid companies that
are unprofitable.
(12:57):
We help our investors avoidcompanies that are wildly
overvalued.
Right now, the top 10 holdingsin the S&P, the forward P is, I
think, 20% higher than theforward P of the top 10 in the
tech bubble.
I mean, we thought the techbubble, I thought we would never
see anything like the techbubble again, at least not for a
(13:19):
while.
But here we are and maybe itcontinues, maybe it doesn't, but
we help clients hedge againstthat and invest away from
overvalued companies.
We also help clients investaway from companies that have
too much debt.
As individuals, we know that ifwe take on too much debt, it's
(13:40):
not going to be good.
We've all probably made thatmistake and regret that, and
companies over the last decadehave taken on more debt than any
time in history, no matter howyou measure it.
And they didn't do it to buildbetter companies that will be
more profitable and that will beable to pay that interest and
then pay that principal down andthen deliver profits on top of
(14:01):
that.
They didn't do that.
That's what they did in thepast.
In the last decade they did notbecause interest rates were so
low.
Instead, they mortgaged theirfutures to buy back stock.
Buying back stock has somebenefits as far as kind of
shrinking share count, which, atleast for those who are still
invested, increases earnings pershare.
(14:22):
But you're adding a lot of risk, and now interest rates are a
lot higher.
So it was one thing to take ona bunch of debt when interest
rates were lower.
They're now higher and at somepoint companies have to
refinance.
That's the way debt works.
Lenders only lend money for acertain period of time and then
you got to go back to the table.
These companies are going tohave to go back to the table.
(14:45):
Interest rates are higher.
If they roll that debt intohigher interest rate debt, it's
going to hurt profitability.
If it hurts profitabilitygenerally, growth and
profitability is an argument forhigher PEs.
That could bring downvaluations.
That won't be good.
But the other thing is, aspeople we tend to swing from one
(15:07):
extreme to another and again,in the last decade companies
took on more debt than any timein history just to buy back
stock.
There's a good chance you seethe opposite and companies have
to sell stock to buy debt, whichis not good for equity holders.
So again, to kind of wrap allof that up, rsp is a great
(15:28):
investment certainly relative,in my opinion, in the longterm
versus cap weighted and S and Pa 500, but are all 500 companies
in there creatively?
Are, or would you rather investin desirable ones versus less
desirable ones?
That's what we help, helpclients do, uh, and we do it in
(15:48):
very simple, obvious mannersavoiding companies with too much
debt, avoiding companies thatare overvalued and should go
down, and so it's basically justa more thoughtful RRSP.
Speaker 2 (16:01):
And so another way that you do it is focusing
significantly on mid caps.
Why do you think advisorsshould consider running Oak
versus MDY or other passive midcap exposures?
Consider running Oak versus MDYor other passive mid-cap
exposures.
Speaker 1 (16:15):
So we invest in basically the upper mid-cap to
lower large.
It's important to remember thatthat line between mid and large
is completely made up.
The people that make up thoselines, the multiple people,
don't even agree on where thatline is.
But mid-cap is a completelyoverlooked space, kind of like
your middle child.
(16:35):
Everybody focuses on the firstborn.
They put all the pressure onhim to deliver, and then the
third born you know it's thebaby, you got to do it and the
middle kids just left to fendfor themselves.
That's very much the case formid cap.
Yeah, so most allocators that Italk to and with the launch of
our ETF a couple of years ago Ispeak with, I've had the
(16:56):
opportunity to speak with manyof the largest.
They build portfolios basicallyin the same way.
They start out with large capgrowth because if you didn't
have a lot of large cap growthover the last decade, you got
fired, which nobody wants.
And then they you know theydiversify that with small cap,
so you get this kind of barbellapproach.
(17:16):
Some use SMID as sort of a onestop shop.
Very few use pure MED, and soif you think of large cap growth
balanced by small or SMID, itleaves this huge area between
the middle of mid cap all theway up to basically the high end
of large cap.
So there's a lot of lip servicethat's paid toward the
(17:40):
concentration risk in the S&P.
What's overlooked is that sameconcentration risk exists in
many probably the majority oflarge cap growth portfolios,
whether they're passive oractive, partially because the
only way to keep up over thelast decade was to try to, you
know, just throw in the toweland participate.
And so I use SCHG a lot, whichis a Schwab large cap growth
(18:06):
passive portfolio, as an example, because I see it so often.
Schg, last I looked, had almost60% of its portfolio was
invested in only eight companies.
So people think that they'reinvesting, thinking they're
getting this diversifiedexposure, that their risks are,
you know, somewhat being managedbecause you're not all in on a
(18:28):
few companies.
Turns out that's not the case.
You actually have very littleinvested in almost the entirety
of large cap growth or core, andthat's sort of where we sit now
.
That leaves mid cap completelyunderinvested.
And why that really matters iswhen people invest in something,
(18:49):
as we talked about earlier,that demand pushes the price up.
Over the last decade, again,people have been piling into
large cap growth the same namesand then balancing with small,
and as demand pushes thoseprices up, it pushes valuations
up.
Higher valuations imply lowerpotential return and higher risk
(19:12):
.
Neither of those.
We don't want those.
Instead, if you invest whereothers aren't which again nobody
very few people are investingin mid cap you get lower
valuations because people arenot driving those prices up,
which implies higher potentialupside and a margin of safety.
(19:32):
So higher return, lower risk.
That is an asymmetric riskreturn opportunity.
That is what we all want.
So the other thing is mid-cap,over the last 30 years, has
actually outperformed large.
I think over the last 33 years.
Last I saw mid it outperformedlarge by more than 60 basis
(19:53):
points per year, which ends upas an aggregate of 20% more
return, which is great.
That's what we want.
Also, according to certainnumbers, large is maybe 100%
overvalued, whereas mid,according to certain numbers, is
actually undervalued.
So if history ever repeatsitself and things just go back
to what made sense historically,large could actually decline
(20:16):
50%, while mid would have to goup.
All those are great reasons toconsider mid.
Now, as far as MDY, though,again going back to the RSP
conversation, do we feel thatevery single company in?
I think MDY is the S&P 400, Ithink.
(20:36):
Do we feel that every singlecompany in that index is created
equally?
Every single one is a greatopportunity?
I don't.
I think some are great and someare less great, and we help
clients again really focus onqualities that we can expect, or
at least we would bet ondelivering value over the long
(20:58):
run, as well as avoid qualitiessuch as too much debt, such as
overvaluation, that are likelyto destroy value and wealth.
The other issue that I wouldalso mention and why I might
favor, say, the Russell mid capversus MDY, is MDY tends to be a
little lower in the capspectrum.
(21:19):
Right, invest in smallercompanies and it just seems like
it's going to be a difficultroad, at least in the near term,
for smaller companies.
There's so many because ofinterest rates being low,
because of stimulus.
There's so many zombiecompanies or companies that are
barely hanging on that tend tobe in that, like lower mid and
(21:42):
small cap area, those arecompanies that you just don't
want to invest in, whereas asyou invest in larger and I love
more entrepreneurial companies,I'm running a small business,
but at this time I think thatthe upper mid cap area provides,
again that asymmetry, higherreturn potential in lower risk.
Speaker 2 (22:04):
There's probably lots of middle children out there
watching who will enjoy thisanalogy.
Before we wrap up, can you tellour viewers where they can go
to learn more about you and yourfirm?
Speaker 1 (22:16):
We have a brand new shiny website, running oakcom.
You can also go to running oakETFscom.
I have very begrudgingly beenmore active on LinkedIn and
social, so definitely you cancheck out my LinkedIn site.
I've also very begrudginglydone more interviews like this.
(22:36):
Luckily, it's less painful formany to watch than it used to be
, so there's content out therethat's maybe a little more
targeted.
That might be beneficial.
So reach out or check out anyof those and then also feel free
to email me at seth atrunningoakcom.
I love talking stocks, lovetalking what's going on in the
(23:00):
world, so feel free to reach out.
Speaker 2 (23:01):
It's awesome.
Well, thanks again for joiningme, Seth, and thanks to everyone
for watching.
Be sure to like, share andsubscribe for more episodes of
Lead Leg Live.
I'm Melanie Shaper.
See you next time.
Instead, if you invest where others aren't,
which again nobody.
Very few people are investingin mid cap, you get lower
valuations because people arenot driving those prices up,
which implies higher potentialupside and a margin of safety.
So higher return, lower risk.
Speaker 2 (00:28):
Welcome to Lead Leg Live.
I'm your host, melanie Schaefer.
Right now, investors aregrappling with a strange split
in sentiment.
There's plenty of discomfortand uncertainty about the
economy, yet money continues topour into momentum and passive
strategies, even with valuationsrunning higher than we saw
during the tech bubble.
It's exactly the kind ofenvironment where portfolio
(00:51):
construction decisions can makeor break returns.
My guest today is Seth Cogswell, founding partner and portfolio
manager at Running Oak.
Running Oak Running Oak'sapproach focuses on equal
weighting, mid-cap opportunityand a disciplined process
designed to avoid the pitfallsof over-concentration that come
with traditional cap-weightedindexes.
(01:13):
Seth, thanks for joining metoday.
Speaker 1 (01:16):
Thank you for having me.
I love that intro.
Speaker 2 (01:19):
Thank you.
So, seth, to start out reallybroadly, what topic is sort of
most on your mind right now?
Speaker 1 (01:26):
Really, you just summed it up.
I feel that there is apervasive feeling of discomfort
and uncertainty for the everyonefeels and yet they're investing
in precisely the opposite,precisely the opposite manner.
And so there's thiscontradiction and I've I want
(01:51):
people to trust that feelingthat they have and that unease
running oak.
Our strategy is simple commonsense.
We invest in three very obviousprinciples.
So maximize earnings growth,because nothing drives
performance like a companymaking more and more money while
(02:13):
being disciplined aroundvaluations, because the last
thing you want to do is ownassets.
That should go down over thelong run, that's worked out for
a little bit recently, but overthe long run, that is not a good
exercise for a little bitrecently, but over the long run,
that is not a good exercise.
And then, lastly, anoverarching focus on handful of
simple but again obvious metricsor qualities that clearly lead
(02:33):
to greater downside risk.
Nothing kills exponentialgrowth like big drawdowns, and
that's why we're all doing thisand so avoiding that's extremely
important.
Our strategy, that simplicity,gives me certainty and hopefully
gives our clients certainty,not necessarily in the outcome,
but certainly as far as thequalities that we're investing
(02:55):
in and knowing that we arethoughtfully investing in ways
that make sense.
Meanwhile, on the flip side,people are now all in on in an
uncertain world.
They're effectively all in oncertainty.
Investing is inherentlyuncertain, even if you stack the
(03:22):
odds in your favor by doing awhole lot of research and
investing in a company that youthink is highly likely to work
out.
Keywords there are highlylikely, there's a chance it
doesn't and the economy or theworld is feels wildly uncertain
and many people feel thatinvesting is basically a sort of
(03:44):
a derivative of the real world.
Right, it reflects what'shappening in the real world.
So you take an uncertain worldthat everybody feels and senses
and then you compound that withthe uncertainty of investing and
it's somewhat doubly uncertain.
Certain Meanwhile recentnumbers came out where
(04:09):
households have more moneyinvested in equities as far as a
percentage of their net worth20 to 30% more than they did at
the tech bubble.
So they're somewhat all in onequities.
At the same time, according tocertain numbers, over 50% of
equity assets are now in passiveportfolios or index funds, a
lot of which people aren'tnecessarily thinking about.
The risks that they're takingimpact on the investing world
(04:46):
and on investors, certainlyrelative to what was in the past
as far as active management,charging two and a half percent
while providing no valuewhatsoever.
In closet benchmarking.
It's been a positive evolution,but that doesn't mean that it's
the final evolution.
What many miss is passive atits heart, or we'll say cap
weight in construction isinherently nonsensical.
If, let's say, hypothetically,we start out with a company that
(05:13):
is fairly valued becausehistorically there's been a
belief that markets areefficient, so we start with a
company that is fairly valuedand that fair valuation reflects
a percentage of the S and P 500.
So that market capitalizationthat's related to that fair
value results in a percentagethat's allocated and let's say
(05:35):
everything else is perfectlyallocated.
That's this one moment.
Then, because people aretrading, buying and selling
stocks all day, every daysomeone comes in and buys it.
That will push it up, becausethat's what happens Demand
pushes the price up.
Now that company, despitenothing changing, fundamentals
haven't changed at all thecompany is now valued more
(05:57):
highly, which means it receivesa higher percentage of the S&P
500.
If you extrapolate that over thecourse of 16 years, in the
highest momentum period ofmomentum ever, what you get as
momentum investing iseffectively something was up, so
I'm going to buy more of it.
Then it's up and so someonebuys more of it and you get this
(06:18):
feedback loop.
You do that for 16 years.
Now all of a sudden, you aremassively overweight, overvalued
companies and underweight,undervalued companies, just by
definition.
That is the way that passiveinvesting or or cap weighting is
constructed.
You will always have moreinvested in overweight companies
(06:39):
because are overvaluedcompanies because they're
overvalued, and you will beunderweight what they should be
undervalued companies becausethey're overvalued and you will
be underweight what they shouldbe undervalued companies because
they're undervalued.
And the issue with that isagain, if you think of momentum,
you buy because it was upyesterday and people buy
yesterday because it was up theday before.
And extrapolate that over 16years and if everybody is all in
(07:03):
or many, I shouldn't sayeverybody but if over 50% of
equity assets are now investedin cap-weighted portfolios or
index funds, it expressescertainty.
It is people are all inexpressing certainty in a wildly
uncertain environment andmaking a bet that what happened
(07:24):
last year or what happened overthe last 15 years will continue
to happen.
Maybe it does, but last yearmomentum hit the 99.8th
percentile in history.
That is a one in 500 event.
So if you're all in on capweighting or index funds, or
even the max seven, becausethere's such a massive
(07:44):
percentage of index funds, youare investing with certainty
when almost everybody feelsincredibly uncertain and
uncomfortable.
And so it's really thatjuxtaposition between how people
feel and, I think, how peopleto listen to their not
necessarily their brains, but Iguess maybe their souls a little
(08:19):
bit more and actually trustthemselves, as opposed to just
trusting those who tell you thatthe market will always be up
over the long run, because thatis wildly misleading.
It may be and it probably willbe over the very long run, but
that doesn't mean it will be inthe next few years.
Speaker 2 (08:36):
It's a really excellent explanation of the
current state of the market and,as you mentioned and I did,
Running Oak's portfolio isequally weighted.
Why equal weighting versusalternatives?
Speaker 1 (08:47):
On one hand, you can invest, you can allocate the
same portfolio in a number ofdifferent ways.
Some will add value, someothers won't.
Equal weighting puts meanreversion in your favor.
So again, I feel the world'suncertain.
Investing is uncertain.
People are buying and sellingevery day, which creates noise
(09:08):
and volatility.
And if you have noise andvolatility, equal weighting puts
that in your favor because, asa stock has popped up for
whatever reason, an equalweighting portfolio will sell
that.
If a stock is knocked down orlags for whatever reason, equal
weighting will add to that.
And so if the market's noisyand volatile, that will actually
(09:29):
add value.
Again, there's times where capweighting adds value.
If momentum is especially hotand you get this feedback loop
where everything that went upyesterday is up again today,
great Cap weighting will do well.
But that assumes that it'sgoing to go up, that these over
value stocks will go up forever,into perpetuity.
(09:50):
Again, equal weighting is agreat way to express uncertainty
because, again, it takesadvantage of that noise, but
also it adds diversification.
Today, more is invested in thetop 10 companies in the S&P than
any time in history.
That's paid a lot of leadservice and we're inundated with
(10:10):
data and the same soundbitesall the time, and so we tend to
check out.
But it's worth taking a secondand just really think about that
right.
Whether it's advisors investingon behalf of clients, whether
it's clients, people's net worththat they have worked so hard
to build is massively investedin a small number of companies
(10:34):
that are arguably highlycorrelated.
They're all big tech, and thatexpresses, again, certainty,
whereas equal weighting you knowyou might have, let's say, if
you have 50 companies now, youhave 2% invested in each one.
That expresses uncertainty, andand it's uncertainty and it's an
(10:55):
alternative way to invest itputs the odds in your favor over
the long run.
Another good point is, prior tothis last decade, equal
weighting had outperformed capweighting over every single
rolling decade, every single one.
It's only the last 10 to like12 years when we've been in this
sort of momentum machine drivenby a number of things passive,
(11:19):
all the stimulus, what have youbut equal weighting was always
the way to go.
The one exception is right nowor recently, and so the question
is are you going to bet againsthistory, or are you going to
bet on uncertainty and history?
Speaker 2 (11:38):
Yeah, and I wanted to talk a little bit about RSP.
That's some P500s equal weightETF.
It's popular for investorslooking to hedge against cap
weighting.
How does running Oaks portfoliocompare to RSP?
Speaker 1 (11:51):
Yeah, rsp is an excellent way to diversify from
cap weighting.
It's a good way to expressuncertainty.
The problem is does anyonebelieve that all 500 companies
in the S&P are created equallyand that they're all attractive?
I don't.
I think that some are probablybetter investments and better
(12:12):
companies than others.
If you feel that way, then RRSP, while it's better than some
alternatives, is incomplete.
You know, at its heart, thesimplicity of our strategy is we
(12:37):
help clients focus on traits orqualities that you know are
desirable.
They're clearly desirable, suchas, again, maximizing earnings
growth, avoiding overvaluedcompanies or, ideally, investing
in undervalued companies,investing in profitability,
because making money iscertainly a good thing there's
no argument in that and maybemore importantly than what we
help clients invest in is whatwe help them avoid, especially
right now.
So we help companies, we helpinvestors avoid companies that
are unprofitable.
(12:57):
We help our investors avoidcompanies that are wildly
overvalued.
Right now, the top 10 holdingsin the S&P, the forward P is, I
think, 20% higher than theforward P of the top 10 in the
tech bubble.
I mean, we thought the techbubble, I thought we would never
see anything like the techbubble again, at least not for a
(13:19):
while.
But here we are and maybe itcontinues, maybe it doesn't, but
we help clients hedge againstthat and invest away from
overvalued companies.
We also help clients investaway from companies that have
too much debt.
As individuals, we know that ifwe take on too much debt, it's
(13:40):
not going to be good.
We've all probably made thatmistake and regret that, and
companies over the last decadehave taken on more debt than any
time in history, no matter howyou measure it.
And they didn't do it to buildbetter companies that will be
more profitable and that will beable to pay that interest and
then pay that principal down andthen deliver profits on top of
(14:01):
that.
They didn't do that.
That's what they did in thepast.
In the last decade they did notbecause interest rates were so
low.
Instead, they mortgaged theirfutures to buy back stock.
Buying back stock has somebenefits as far as kind of
shrinking share count, which, atleast for those who are still
invested, increases earnings pershare.
(14:22):
But you're adding a lot of risk, and now interest rates are a
lot higher.
So it was one thing to take ona bunch of debt when interest
rates were lower.
They're now higher and at somepoint companies have to
refinance.
That's the way debt works.
Lenders only lend money for acertain period of time and then
you got to go back to the table.
These companies are going tohave to go back to the table.
(14:45):
Interest rates are higher.
If they roll that debt intohigher interest rate debt, it's
going to hurt profitability.
If it hurts profitabilitygenerally, growth and
profitability is an argument forhigher PEs.
That could bring downvaluations.
That won't be good.
But the other thing is, aspeople we tend to swing from one
(15:07):
extreme to another and again,in the last decade companies
took on more debt than any timein history just to buy back
stock.
There's a good chance you seethe opposite and companies have
to sell stock to buy debt, whichis not good for equity holders.
So again, to kind of wrap allof that up, rsp is a great
(15:28):
investment certainly relative,in my opinion, in the longterm
versus cap weighted and S and Pa 500, but are all 500 companies
in there creatively?
Are, or would you rather investin desirable ones versus less
desirable ones?
That's what we help, helpclients do, uh, and we do it in
(15:48):
very simple, obvious mannersavoiding companies with too much
debt, avoiding companies thatare overvalued and should go
down, and so it's basically justa more thoughtful RRSP.
Speaker 2 (16:01):
And so another way that you do it is focusing
significantly on mid caps.
Why do you think advisorsshould consider running Oak
versus MDY or other passive midcap exposures?
Consider running Oak versus MDYor other passive mid-cap
exposures.
Speaker 1 (16:15):
So we invest in basically the upper mid-cap to
lower large.
It's important to remember thatthat line between mid and large
is completely made up.
The people that make up thoselines, the multiple people,
don't even agree on where thatline is.
But mid-cap is a completelyoverlooked space, kind of like
your middle child.
(16:35):
Everybody focuses on the firstborn.
They put all the pressure onhim to deliver, and then the
third born you know it's thebaby, you got to do it and the
middle kids just left to fendfor themselves.
That's very much the case formid cap.
Yeah, so most allocators that Italk to and with the launch of
our ETF a couple of years ago Ispeak with, I've had the
(16:56):
opportunity to speak with manyof the largest.
They build portfolios basicallyin the same way.
They start out with large capgrowth because if you didn't
have a lot of large cap growthover the last decade, you got
fired, which nobody wants.
And then they you know theydiversify that with small cap,
so you get this kind of barbellapproach.
(17:16):
Some use SMID as sort of a onestop shop.
Very few use pure MED, and soif you think of large cap growth
balanced by small or SMID, itleaves this huge area between
the middle of mid cap all theway up to basically the high end
of large cap.
So there's a lot of lip servicethat's paid toward the
(17:40):
concentration risk in the S&P.
What's overlooked is that sameconcentration risk exists in
many probably the majority oflarge cap growth portfolios,
whether they're passive oractive, partially because the
only way to keep up over thelast decade was to try to, you
know, just throw in the toweland participate.
And so I use SCHG a lot, whichis a Schwab large cap growth
(18:06):
passive portfolio, as an example, because I see it so often.
Schg, last I looked, had almost60% of its portfolio was
invested in only eight companies.
So people think that they'reinvesting, thinking they're
getting this diversifiedexposure, that their risks are,
you know, somewhat being managedbecause you're not all in on a
(18:28):
few companies.
Turns out that's not the case.
You actually have very littleinvested in almost the entirety
of large cap growth or core, andthat's sort of where we sit now
.
That leaves mid cap completelyunderinvested.
And why that really matters iswhen people invest in something,
(18:49):
as we talked about earlier,that demand pushes the price up.
Over the last decade, again,people have been piling into
large cap growth the same namesand then balancing with small,
and as demand pushes thoseprices up, it pushes valuations
up.
Higher valuations imply lowerpotential return and higher risk
(19:12):
.
Neither of those.
We don't want those.
Instead, if you invest whereothers aren't which again nobody
very few people are investingin mid cap you get lower
valuations because people arenot driving those prices up,
which implies higher potentialupside and a margin of safety.
(19:32):
So higher return, lower risk.
That is an asymmetric riskreturn opportunity.
That is what we all want.
So the other thing is mid-cap,over the last 30 years, has
actually outperformed large.
I think over the last 33 years.
Last I saw mid it outperformedlarge by more than 60 basis
(19:53):
points per year, which ends upas an aggregate of 20% more
return, which is great.
That's what we want.
Also, according to certainnumbers, large is maybe 100%
overvalued, whereas mid,according to certain numbers, is
actually undervalued.
So if history ever repeatsitself and things just go back
to what made sense historically,large could actually decline
(20:16):
50%, while mid would have to goup.
All those are great reasons toconsider mid.
Now, as far as MDY, though,again going back to the RSP
conversation, do we feel thatevery single company in?
I think MDY is the S&P 400, Ithink.
(20:36):
Do we feel that every singlecompany in that index is created
equally?
Every single one is a greatopportunity?
I don't.
I think some are great and someare less great, and we help
clients again really focus onqualities that we can expect, or
at least we would bet ondelivering value over the long
(20:58):
run, as well as avoid qualitiessuch as too much debt, such as
overvaluation, that are likelyto destroy value and wealth.
The other issue that I wouldalso mention and why I might
favor, say, the Russell mid capversus MDY, is MDY tends to be a
little lower in the capspectrum.
(21:19):
Right, invest in smallercompanies and it just seems like
it's going to be a difficultroad, at least in the near term,
for smaller companies.
There's so many because ofinterest rates being low,
because of stimulus.
There's so many zombiecompanies or companies that are
barely hanging on that tend tobe in that, like lower mid and
(21:42):
small cap area, those arecompanies that you just don't
want to invest in, whereas asyou invest in larger and I love
more entrepreneurial companies,I'm running a small business,
but at this time I think thatthe upper mid cap area provides,
again that asymmetry, higherreturn potential in lower risk.
Speaker 2 (22:04):
There's probably lots of middle children out there
watching who will enjoy thisanalogy.
Before we wrap up, can you tellour viewers where they can go
to learn more about you and yourfirm?
Speaker 1 (22:16):
We have a brand new shiny website, running oakcom.
You can also go to running oakETFscom.
I have very begrudgingly beenmore active on LinkedIn and
social, so definitely you cancheck out my LinkedIn site.
I've also very begrudginglydone more interviews like this.
(22:36):
Luckily, it's less painful formany to watch than it used to be
, so there's content out therethat's maybe a little more
targeted.
That might be beneficial.
So reach out or check out anyof those and then also feel free
to email me at seth atrunningoakcom.
I love talking stocks, lovetalking what's going on in the
(23:00):
world, so feel free to reach out.
Speaker 2 (23:01):
It's awesome.
Well, thanks again for joiningme, Seth, and thanks to everyone
for watching.
Be sure to like, share andsubscribe for more episodes of
Lead Leg Live.
I'm Melanie Shaper.
See you next time.
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