May 31, 2025 • 42 mins
Ever wonder why everyone seems to chase the same handful of mega-cap tech stocks? Seth Cogswell of Running Oak challenges this herd mentality with a refreshingly contrarian perspective: the real opportunity lies in investing where others aren't.
This candid conversation explores how market complacency has driven investors to overlook compelling opportunities hiding in plain sight. Seth makes a powerful case for mid-cap stocks, which have actually outperformed large-caps by 60 basis points annually over 33 years—delivering 20% more total return—yet remain undervalued while the S&P 500's largest components trade at extreme premiums.
The discussion delves into today's unprecedented corporate debt landscape, where companies have borrowed heavily just to finance buybacks rather than productive investments. As interest rates rise, we may witness a complete reversal of this trend: companies selling equity to pay down debt, creating significant headwinds for overleveraged firms and their shareholders. Meanwhile, "zombie companies" that survived only through cheap refinancing face an existential threat.
Seth shares the philosophy behind Running Oak's RUNN ETF, explaining why quality factors like lower debt and earnings consistency matter more than ever, and why equal-weighting positions offers both protection and opportunity in today's market environment. You'll gain insights into why historical patterns suggest today's market concentration is anomalous rather than the new normal.
Whether you're concerned about portfolio concentration, seeking undervalued opportunities, or simply want a fresh perspective on navigating today's complex markets, this conversation offers practical wisdom that cuts through the noise. Ready to discover where smart money is quietly positioning for the next market phase? Listen now and reconsider what might be missing from your investment approach.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
If you're investing where others are, which implies
that you're investing after theyinvested.
Demand drives prices up.
If prices go higher, valuationsare higher and valuations mean
that higher valuations implythat you have lower return
potential and higher downsiderisk, so that's not great.
(00:21):
If, on the other hand, youinvest where people aren't
people have not driven up pricesyou're getting lower prices,
lower valuations, which implieshigher return potential, lower
downside risk.
It also gives you a margin oferror, because life is uncertain
.
Speaker 2 (00:40):
This is a sponsor conversation on Leadlag Live
with Running Oak.
Running Oak is a client, sethis a client, and I'm a fan of
the man, the myth, the PM, andhopefully you will be too by the
end of this.
So, with all that said, my nameis Michael Guyette, publisher
of the Lead Lag Report.
Joining me is Mr Seth Cogswelland I'm going to start off with
this really nice image at alittle place called the NASDAQ,
(01:02):
which I happen to have been atlast week.
Can we talk about this for alittle bit?
First of all, this is a realpicture.
This is not like Photoshopped,right, correct, yep, mid-time
swear.
So, first of all, what were youdoing at the NASDAQ?
Speaker 1 (01:19):
Well, one of the beauties of working with NASDAQ
and using their exchange is theyprovide a number of different
just services to support theirETF managers, and this is one of
them.
So if there is a reallysignificant announcement, so
each time we've hit a majormilestone, they've enabled us to
put the kind of like acongratulations up there.
(01:40):
This was actually one that wasjust messing around.
I think.
Ideally, in the long run, mygoal is to have a positive
impact on as many as possible,which includes just making
people hopefully have fun andfind things humorous.
(02:01):
This is really just me messingaround.
We are in the process ofrebranding, so it was sort of a
slight unveiling of the kind ofour new logo, our new color
palette, which was also exciting.
But as we went through thatprocess, one of the things that
we discussed was just sort ofwhat Running Oak is, which you
know, I found the company out ofmy pocket, so running out to me
(02:25):
, and so it's really a deep diveinto what matters most to me
and this the idea of us as along-term relationship just
stuck.
I thought it was hilarious,especially as far as like dating
goes, and and so this was.
You know, it was mother's day.
It just seemed like the perfecttime to do something kind of
(02:47):
funny, and so we threw thistogether.
Uh and, but the premise mattersa lot to me and that you know,
when you invest with someone,you're effectively you've got a
relationship, you're relying onthem, you're effectively dating
and you and our goal is to be avery long-term relationship that
(03:09):
can be relied upon for ourclients.
But I love the idea of datingaround making maybe some bad
choices, some mistakes, as manydo.
And so, if you think of theevolution of investing, back in
the day, you had these mutualfund managers that were charging
(03:29):
huge fees uh, you know, theywalk in with their very
complicated strategies, they'revery impressive bios, and but
then they'd fail to deliver,largely because many weren't
even trying.
They were closet benchmarkingand then charging a huge fee,
and so they could just sort ofsit back.
But they'd show up, basicallyon their harley, they'd look
super sexy, and then they'ddisappoint.
(03:51):
And the evolution, you know,once people realized and they
broke up with those managers,they moved on to passive, and
passive is largely a anevolution or a response to those
managers.
But what many miss and that I'mreally thinking a lot about as
I dig into this more.
Actually is one of the reasonswhy passive has been so
(04:14):
effective and there's manypositives to passive investing,
such as low fees, but one of thereasons why it's been so
effective as far as gainingtraction is their marketing has
been incredible.
We don't nobody thinks aboutpassive marketing.
We sort of just think of it asthis thing that's maybe
altruistic and free, except thatit's not right.
These companies are making tonsof money and the thing about
(04:39):
passive is, first of all, sure,the numbers look great, which
tends to happen when you takestatistics and manipulate them a
certain way to make aparticular story and completely
omit certain things that clearlymatter, which we could talk
about at a later date but thefact is there's really nothing
behind the data.
(04:59):
Right, the data looks good,partially because that data was
chosen to look good.
There's nothing behind it, andso you know you think of again
dating.
You're dating someone thatchecks all the boxes.
I think we probably all datedsomeone that checked all the
boxes only to realize we neededmore.
There wasn't much behind thatthat we couldn't really put our
(05:20):
finger on.
And passive you know there's noone there we couldn't really
put our finger on.
And passive you know?
There's no one there.
It's a pass.
They're just sitting there withthat vacant expression, just
looking at you with nothing tosay, and if you have a problem,
if you need a shoulder to leanon, there's no one there.
And so I look at us running oakas the next iteration.
Right, so you made yourmistakes with active and their
(05:42):
fancy bios and whatever else.
People, I think, will find thatthey've made significant
mistakes on passive and relyingon data.
That's incomplete.
And we've been here all along.
We've been, uh, the strategy,our efficient growth strategy,
has been around for, got a 36year real-time track record now
and it's kicked both active andpassive butts.
(06:05):
Uh, it's just not sexy.
It's common sense and and sowe've just been waiting.
Here, we're the guy.
We're the guy next door.
We've just been waiting allalong, um, and so now you know,
um, whenever everyone's ready,we are ready for a long-term
relationship and, uh, youfirmware, you can bring home to
your mother.
That's the idea.
Speaker 2 (06:27):
Your way of bringing a mother into a conversation
around markets is very differentthan mine.
When I say you should let yourmother know your mother's cousin
, twice removed butler's dogwalker I think it's the way I
frame it.
We're definitely going to hiton that.
I think this is going to be awell-timed conversation, because
there's a lot of concernsaround what exactly are you
(06:49):
bringing home to your mother now, especially when Bonds, which
is sort of the reliable, safegirlfriend or boyfriend, is kind
of pruning on everybody, forlack of a better way of saying
it.
Pruning on everybody for theway of saying it.
I want to get your thoughts onthe way equities have been
responding in the context ofanother round of carnage in the
(07:10):
bond market.
Yields have been rising.
A lot of people are concernedaround the way the cost of
capital is acting.
I myself happen to think thenext move is a Fed hype, and you
would think that that's notgoing to be good for stocks.
Let's, let's, let's unpack thatthe.
Speaker 1 (07:27):
In my opinion, the market has been wildly
irrational for a long time.
That's largely driven by thosewho have more control or more
impact on the market beingwildly irrational.
And you're responsible for along time.
You know if, whenever youinvest, you're walking a line
(07:50):
between risk and return and ifrisk is no longer a
consideration, or certainly ifpeople are under the illusion
that it's no longer aconsideration, that changes the
decisions that you make.
And I don't know.
I think we can go back to whatthe 90s for the fed putt uh,
(08:12):
where you know, anytime themarket went down, uh, the fed
stepped in to support it andthen that's only been
exacerbated over the last orreally ramped up over the last
15 years, where it's no longerthe fed putt it's, it's straight
up printing money which wouldhave given people heart attacks
uh, you know, just before 08.
So I think a lot of what'sgoing on in the stock market
(08:34):
right now is is complacency.
It's driven by the fact thatnobody we haven't no one's
experienced risk since really 08or 09.
We've had moments in time wherethe market went down or we
experienced risk, but the marketthen just rocketed back up to
new highs and that taughteverybody that anytime the
market goes down, it goesstraight back up.
(08:56):
Anytime the market goes down,buy as much as you can because
it's only going to go straightup.
And if you believe that it'sonly going to go straight up,
you're no longer worried aboutrisk.
You no longer have to.
That's no longer a factor inyour decision-making, and I
think that explains the behaviorrecently as you, you see
(09:18):
moments where all of a sudden,the veil is lifted and people
are like, oh, wait a second,there is such a thing as risk,
and then you know that subsides,maybe due to a tweet, and next
thing you know, we're rocketingback up.
John Hussman had a tweet or a Iguess it's no longer a tweet
(09:40):
anymore a post that kind ofstuck with me me which was often
.
Market declines, especially ifyou go through a bear market,
can be very steep and swift,which we saw in april and and
then you'll get this rapidrebound and so it's so.
It's so swift that people arekind of frozen, they don't want
(10:02):
to sell.
Then it bounces back up andthat confirms that people
shouldn kind of frozen.
They don't want to sell.
Then it bounces back up andthat confirms that people
shouldn't have sold.
But we're still at a lowerlevel, and then you just do that
kind of over and over and youcan sort of stare, step down, or
people will just hold the wholetime.
I think that right now, whatwe're seeing is I think it's, I
(10:22):
think it's again, I think it'sreally complacency.
I'm trying to think of thedefinition of complacency.
Speaker 2 (10:27):
No, no, and actually it's funny.
It's funny to use that wordbecause I'm looking at one of
the comments from x.
So through too much complacency, they will learn.
Now, let's, let's play off ofthat.
Um, they will learn, because Ithink this goes back to the
discussion on passive right.
It's like if there'scomplacency, complacency is
directly tied to buying passiveindices or passive products in
(10:49):
general.
If you're worried or if thereare dislocations, you want to be
active.
Speaker 1 (10:54):
Yeah, or even I mean, if you're really worried, then
maybe you're not buying stocks,which right now there's a chart
that I don't have readilyavailable.
But regardless, the amount ofmoney that retail investors
piled into ETFs, equity ETFs, inApril was record-breaking.
(11:15):
So it's not like you knowwhether it's active or passive.
People are just piling in andthe problem is most people are
probably piling in and theproblem is most people are
probably piling into the exactsame things, right?
So passive indexes, uh, youknow the usual suspects of apple
, microsoft, amazon, tesla's up.
(11:36):
How much is tesla up in thelast like month?
Uh, 100, I mean, maybe not 100,but it's up a lot.
Nvidia has obviously bounced40% maybe.
So it's been a crazy move and alot of that money has flowed
into the things that people kindof ran out of initially.
(11:56):
Again, complacency thedefinition it's basically
confidence that's misplaced anda belief in something without
really and in overlooking therisks or overlooking certain
weaknesses.
That's what complacency is.
It's, it's confidence to adegree to which you don't see
(12:20):
what you're missing, and thatdescribes what we're seeing
right now.
There's, there's so many,there's.
We're seeing right now, there'sso many risk factors, there's
so many things of uncertaintyright now, and yet equity
markets are going straight up,so that makes no sense, but it's
not the first time we've seenthe equity market perform your
(12:40):
rational.
I think you're absolutely right, though I mean, one of the
things that I focus on or talkabout a good amount is.
One of the areas of focus forour strategy is debt.
There's no arguing that moredebt doesn't add risk, and as
individuals, we know that if wetake on too much debt, it's not
(13:01):
going to end well.
That's the same for smallbusinesses.
I have a small business.
If I take on too much debt,it's not going to end well.
That's the same for smallbusinesses.
I have a small business.
If I take on too much debt,it's not going to end well.
And it's the same for largecorporations.
And over the last decade, largecorporations took on more debt
than any time in history, nomatter how you measure it, and
they didn't do so to buildbetter companies that will be
(13:22):
more profitable and be able toservice that debt.
They largely did it just to buyback stock, and there are some
incremental positives to buyingback stock, but the problem is
it adds risk, especially ifyou're mortgaging your future to
buy back stock Higher interestrates, which we're seeing right
now.
(13:42):
It's inevitable.
If those interest ratescontinue to go higher even just
sit here, all the companies thattook on massive amounts of debt
and mortgaged their futures tobuy back stock.
They are going to, at best,have to refinance.
That Probably be at higherrates.
(14:02):
If it's at higher rates, thathurts profitability.
If it hurts profitability,earnings go down and therefore
prices need to go down in orderto maintain the same PE, which,
by the way, are elevated.
So if PE goes down and earningsgo down, then you'll have an
even larger down move.
That's best-case scenario.
If things stay where they areright now and then if we end up
(14:31):
where there's less liquidity andcompanies aren't able to
refinance, what you'll probablysee is the exact opposite of
what we saw in the last decade,which is how human behavior
works, where companies are goingto, instead of selling a lot of
debt to buy back stock, they'regoing to have to sell a bunch
of stock to buy back debt.
(14:52):
That is not good for equityholders of companies with
massive amounts of debt.
You're going to be diluted.
So it'll be the opposite ofwhat we experienced over the
last decade.
Speaker 2 (15:02):
You know I had never actually I never thought of that
, but that is a the last decade.
You know I had never, actuallyI never thought of that, but
that is a very good point.
You could see a total reversalof that dynamic, right.
Whereas it was buying stockwith debt, now it's the opposite
, right?
So yeah, the delusion point isreal, it's very real.
Speaker 1 (15:18):
I don't think anybody ever, I've never heard anybody
talk about it.
Speaker 2 (15:20):
No, that's why I'm surprised myself.
I was like man.
Speaker 1 (15:22):
that makes sense, yeah yeah, but also I mean human
behavior.
That's how human behavior works.
That's how emotions work.
We go from one extreme toanother like a pendulum.
We just went from one extrememost debt in history, just to
buy back stock likely going toresult in the other extreme,
which is a whole lot of dilution.
(15:44):
And again, that's not worstcase scenario, though Worst case
scenario, given what's going onin bond markets, is we're going
to see a lot of bankruptcy.
Companies may not be able torefinance.
I mean, one of the commonthemes over the last decade,
because of low interest rates,because of no risk, has been
(16:09):
zombie companies.
There are so many companies outthere that don't even generate
enough cash flow To servicetheir debt, and so it's been
this massive game of hot potato.
Some point that game comes onit and we're I mean it seems
like, as you alluded to, we'reprobably seeing the beginning of
(16:31):
the ending of that game.
I hope.
I actually think everybodywants to see.
Everybody thinks that it'sun-American To kind of hope for
anything other than everythinggoing straight up.
I would argue that's absolutelyridiculous and not accurate at
all.
Speaker 2 (16:49):
I'd take it a step further.
I'd argue it's un-American toonly bet on large cap companies
because so much of their revenuecomes from international sales,
versus more mid cap and smallcap companies where it's much
more domestically sensitive.
Speaker 1 (17:03):
Yeah, I mean, there's so many different ways we could
take this it's also an Americanto destroy competition.
There's been no antitrustactivity.
The low interest rates reallyfavored those that had the most
cash, so the mega caps, and theycould just crush any
competition any moment.
(17:24):
Anything pops up which islikely killing innovation.
So we're not advancing as weshould be because of um interest
rates, a lack of antitrustactivity, the favoring of mega
caps.
I think, uh, but yeah, I mean,look, small mid, just the
(17:48):
entrepreneurial spirit is smalland met and that is what has
really advanced the us and theworld, and the dynamics that
we've been experiencing for thelast decade are counter to that,
which is unfortunate.
Speaker 2 (18:03):
I love the anti-delusion theme.
Now I'm going to have to stealthat and roll with it.
I'll credit you every now andthen.
Please credit me.
Speaker 1 (18:09):
Every now and then.
I had a really good idea.
The other day I came up withthe best birthday present and I
got no credit for it.
It was a prospectus of run.
Speaker 2 (18:20):
Was that the gift?
It was a it was not.
Speaker 1 (18:23):
It was not, um, you know, it was uh.
Although I did really want togive mothers, I wanted to set up
, like this little uh temporarywebsite for people to buy shares
of run for their mom, sinceit's, you know, the strategy you
can bring home to your mother.
I was told I wasn't allowed todo that, but, um, so it was not
that compliance getting in theway of't allowed to do that.
Speaker 2 (18:39):
But so it was not that Compliance getting in the
way of giving something to mom.
That's unfortunate, okay.
So let's keep pulling on this.
You've got this ETF RUNN donereally well with it.
You and I have talked aboutyour success as far as the AUM
growth performance, the story.
Oh, that's very strong.
(19:00):
I myself very much believe thatwe, like you believe, are in a
cycle that's going to finallyfavor everything outside of
large cap tech.
Now you've seen some glimpsesof that from an asset allocation
perspective.
But whether it's higher rates,complacency on the large cap
passive side, deregulation as acatalyst, it seems like we're
set up for maybe a multi-yearcycle of outperformance.
(19:22):
I want you to talk through tothe audience why mid-caps as a
segment of the marketplace lookreally interesting here.
Speaker 1 (19:30):
It's funny how obvious it is.
It makes me feel ineffectivetalking about obvious things and
feeling like I'm not makingprogress.
Mid-caps have outperformedlarge cap over the last 33 years
by 60 basis points annualized.
I actually did the numbersyesterday.
(19:52):
That means that over those 33years mid-cap has provided 20%
more return than large cap,which is crazy, because large
has destroyed everything overthe last decade, but it's midcap
has provided 20% more returnand nobody owns it.
(20:12):
It's crazy.
And then you take that one stepfurther.
One step further.
Ned Davis did some researchcomparing companies, or we'll
say the different asset classescurrent valuations versus their
long-term CAPE ratios.
In large cap at least, as of afew months ago, it might even be
(20:35):
higher now.
Large cap was 100% overvaluedrelative to their numbers.
That means if it drops 50%, itjust simply goes back to its
long-term mean.
That's not wildly bearish.
It's just saying if it goesback to where it always has been
, so large is supposedly 100%overvalued.
Mid-cap is undervalued relativeto its long-term mean.
(20:57):
So again you've got this assetclass that has outperformed
meaningfully over the last 33years and it's the cheapest, and
yet nobody owns it.
Why that really matters is whatreally matters is looking
forward.
How does that impact thedecisions that should be made?
(21:20):
Or how is this likely to playout?
If the market continues to goup, which we were just
discussing at some point, byinvesting in the thing that's
outperformed the most and orprovided the most value and is
undervalued, at some point, somepeople are going to start
(21:40):
investing in it.
If you are on the early side ofthat, that will propel your
returns.
That'll be awesome.
You'll have a nice littletailwind.
On the other hand, if themarket struggles, you can't sell
what you don't own, and so ifpeople want to raise cash, if
they're uncomfortable withhaving 90 of their net worth in
(22:02):
the s&p 500 in seven companiesbasically and they decide they
want to raise cash becausethey're uncomfortable, the big
companies are what's going to besold, mid-cap companies, and
even we invest.
I don't really focus quite asmuch on mid-cap because there's
the line between mid and largeis a made up line anyway, but
(22:23):
there's, whether it's mid cap oreven the lower large cap
companies, which are could beone hundred billion dollars
Nobody, very few people,actually own that at all.
There are one hundred and fiftybillion dollar companies with
around a quarter of a percentallocation to the S&P.
There are companies that aregrowing rapidly they're over
(22:43):
$100 billion that aren'tincluded in large cap growth
ETFs, and so if people becomerisk averse, if what we just saw
just a month ago as far as themarket declining and people
raise cash, if you're in thingsthat people don't own and
they're not selling to raisecash, it makes sense to expect
(23:05):
that to outperform and to havesignificantly less risk.
Now, the other thing I'll touchon is interest rates, because
we were just talking about that.
If interest rates continue torise, it kind of favors mega
caps in a way, because theygenerate so much cash, they're
(23:26):
so big and they were able to getattractive terms on their debt.
Now, that said, theirvaluations are highly dependent
upon growth, and higher rateswould warrant a lower P, so
you'd still expect those tomaybe come back to reality a
little bit.
Higher rates, though, willprobably that'll make it
(23:47):
difficult on micro, small andeven, let's say, smaller mid-cap
, whereas the upper mid-caplower large-cap those should
probably do relatively wellbecause they're larger, more
stable businesses, in particularfor us.
(24:08):
As I mentioned earlier, one ofthe things that we really focus
on is debt.
So if interest rates go up byinvesting in companies that have
far less debt, that reallyshouldn't impact us much.
Now, if interest rates declinewhich right now is a little hard
to imagine, usually theydecline when we're in a
(24:30):
recession, which I guess it doesseem that we're in a recession,
but also interest rates aregoing up.
So we're in this convoluted uhtime where I guess really
stagflation is seems to probablybe the best case.
But regardless, if interestrates go down, those usually
happen during a recession.
That would favor small caps,mid caps the recessions
(24:56):
certainly don't favor smaller,more risky companies but
particularly what would getreally hit in a recession.
That's when things come back toreality.
That's when the mostovercrowded, most overvalued
companies decline, not to theirlong-term mean, but usually
right past it.
(25:17):
We were just talking about thependulum earlier.
Human behavior goes from oneextreme to another, and right
now, the biggest companies havehistorically extreme valuations,
certainly for their size, andso that is where those companies
could not just go to realitybut beyond.
And, as you know, again,according to Ned Davis, if those
(25:39):
companies or large cap is 100%overvalued, that's where those
would decline 50% just to goback to their long term.
Whereas if you're in companiesthat are not overvalued, such as
mid cap, such as small cap also, you know there's certain areas
where if they go to their longterm means they actually go up
Right.
(25:59):
So while large going to itslong-term mean would be a 50%
decline, small, mid, other areaswould actually have to go up
just simply to mean revert.
Speaker 2 (26:10):
Yeah, and I think big institutional money is going to
be more comfortable with midcaps than small caps, like there
should be less minds that youcan step on small cap is and a
very interesting space becausethat's where you get a whole lot
of innovation.
Speaker 1 (26:27):
Um, you know, one great product can make a massive
difference.
Uh, it's.
It's a really cool space.
The problem is, again, becauseof the last decade, a very large
percentage of small capcompanies are zombies and should
not be alive right now.
So I do think there could be aperiod of I think active small
(26:50):
cap could do really well whereyou're actually selecting
companies with strong balancesheets that are doing cool
things.
That could be a sweet spot.
But diversified portfolios,particularly passive, that kind
of run the gamut of small cap.
I think those will reallystruggle because such a massive
(27:13):
percentage of those companiesshouldn't exist.
So there will be a period wherethose are purged, hopefully,
because, again, walking dead isun-American.
I would say the market goingstraight up or hoping for
reality, that's not un-American.
What's un-American is walkingdead and those need to die so
(27:36):
that that capital could bereallocated to cool things that
are in great, great companiesand great products.
Speaker 2 (27:44):
I'm glad you frame it like that, because I think
people get so stuck on just thereturn potential in terms of
their personal portfolios, notin terms of the efficiency of
capital for the system.
Right, and you want the systemto be more efficient, which
means you don't want the zombiecompanies.
And you want the system to bemore efficient, which means you
don't want the zombie companies.
You want money to be funneledwhere it's going to be best
(28:04):
treated, which is notnecessarily based on what maybe
some retail are meaning at amoment in time.
It's about the company, it'snot about stocks.
No, I think that's very wellarticulated.
When it comes to run itself,let's talk about the screening
mechanism a little bit more.
You mentioned debt.
Quality is a big component ofthis.
(28:25):
We should define quality forthe audience.
How do we think about qualityinvesting?
Speaker 1 (28:29):
There are a lot of different definitions, but I'd
say they largely rhyme andthey're pretty obvious.
It's basically just companies.
When you look at their balancesheets, they make sense and
they're conservative, so the bigone that really stands out to
me is just simply less debt.
Again, too much debt leads toproblems, and quality you could
(28:56):
certainly argue a problematicbalance sheet is not quality.
So the other thing is earningsconsistency.
That's another factor that manylook at.
That's something that we lookat as well, so you mentioned our
criteria, or sort of ourprocess.
(29:17):
Our goal is to maximize earningsgrowth, because nothing drives
price performance like earningsgrowth.
We're all doing this to makeour clients more money and
invest in clients' assets incompanies that are growing and
creating more wealth, whichflows back to their investors.
That's a good way to createwealth for our clients.
The second, though, is beingvery disciplined around
(29:38):
valuations, and I'd say that'scertainly on the sell side.
That's our biggestdifferentiator.
It does not make sense to holdan asset that should go down
Right now.
There's a lot of money incompanies where valuations do
not make sense, and I'm actuallypersonally a little excited
about it because at some point,I'm actually personally a little
(30:00):
excited about it because atsome point our clients will
realize the benefit of avoidingthose companies.
I think you know what isTesla's PE now?
Hundred and ninety, I don't.
I don't know what they have todo to justify that.
Speaker 2 (30:15):
It's Musk man and he's doing the economy more you
know he's doing the.
Speaker 1 (30:20):
It's crazy, but I mean even Apple.
I haven't looked recently, Ithink their P's it's in the 30s,
probably maybe up to 34, 35,given the rise in the market,
apple for a very long timetraded a P of 13.
And when it did it had a ton ofcash and considerable growth.
Now it has little to no growthand we'll see how tariffs play
(30:45):
out.
That maybe as negative growth.
Um, in as no cash, it generatesa lot of cash, so I'm not
worried about going bankrupt.
But it actually back in the day, I think maybe a quarter of its
balance sheet, maybe even athird, was cash and now it has a
negative net cash position andthen it has more debt than cash.
But yet it's trading at liketwo and a half, two and a half
(31:06):
times its long-term valuation.
And I love apple, but thatdoesn't make any sense.
Um, and the problem is that'sprobably the biggest holding for
most people.
Many might not even be aware ofit because their 401ks are just
sort of automatically investedinto target date funds that just
(31:28):
invest more into index funds.
So that's definitely a concern,but again, our criteria are
focused on maximizing earningsgrowth, discipline around
valuations because you don'twant to hold something that
should go down and overarchingfocus on lower downside risk,
because nothing derailsexponential growth, which is
(31:52):
what we're all shooting forright.
We're trying to provide growthto our clients.
They've worked very hard for along time.
We're trying to help them growwhat they've worked to
accumulate so that they canretire or live the lives they
want.
Nothing derails that like amajor drawdown, and so again,
(32:17):
whether it's debt or other riskfactors, that'll have a
considerable impact on theclients over the long run.
Speaker 2 (32:26):
Let's talk about on-run RUNN, your ETF, the
weighting, Because quality isalso, I think, to some extent
relative to the sector and youcan rank things in different
ways.
There's factor-based weighting,there's market cap weighting.
Let's talk about the weightingfor run.
Speaker 1 (32:44):
Run is equally weighted as far as the holdings
go.
Yeah, what's funny is equalweighting became a dirty word.
If you use a hyphen, otherwiseit's two words, but either way
it became a dirty phrase.
I remember, maybe a decade ago,when I was in business school
and we were looking at differentweightings and at that time,
(33:06):
equally weighted portfolios hadoutperformed their cap weighted
portfolio, cap weightedcounterparts every single
rolling decade in history.
Now, at this point, this is theone time, or the last decade or
you know 12 years, where thathasn't been the case.
(33:26):
But every other time in historyequally weighting was the way
to go, the reason being marketsare noisy, there's whether it's
emotions or who knows whatthings go up and down and equal
weighting puts mean reversion inyour favor.
So you're basically that noiseactually benefits you Over the
(33:47):
last decade because momentum wasso hot.
Last year, momentum hit the99.8th percentile in history, so
the hottest time ever, otherthan maybe the tech bowl, is a
close, close tie, and thatmomentum was due to complacency,
uh, just piling into the samethings over and over, um, and
(34:10):
that favored cap-weightedindexes.
But again, historically equalweighting has always been the
place to be.
There's no reason to think thatif it's always been the place
to be, other than one anomaly,which just happens to be very
recently, that it won't continueto be the place to be.
(34:31):
But one of the reasons why wefavor equal weighting is because
we have absolute conviction inthe investment philosophy we
provide clients of higherearnings, growth, tracked
evaluations, lower downside risk.
We don't have a ton ofconviction in the individual
companies.
There's just more uncertaintythere.
(34:53):
But if we can maintain anaverage across the portfolio,
then we believe that it willdeliver value, whether it's
higher return, lower risk,likely both by equally weighting
.
That enables us to basicallyhedge our bets.
We're not taking any crazy betson one company which could
certainly.
Maybe it works out, maybe itdoesn't.
(35:15):
By equal weighting we play thenumbers.
Speaker 2 (35:19):
Yeah, and it's funny if you look at equal weighting
strategies whether they'reactive or passive, against
market cap weighting, it lookslike the ratio relative strength
is improving.
So, yeah, it could be a goodera for that as a style of
portfolio construction.
Speaker 1 (35:43):
Yeah, it could be a good era for that as a style of
portfolio construction.
Maybe for the last few minutes,seth, make the pitch for using
run versus something like an S&P400 mid-cap passive product and
where people can learn more.
And I just read our most recentnewsletter and kind of focused
on this is the idea of investingwhere others aren't.
It's a pretty simple idea, butI never hear anyone talk about
it and, frankly, I hadn't reallythought too much about it.
(36:04):
But if you really give it somethought, it's extremely
compelling.
Invest where others aren't.
If you're investing where othersare, which implies that you're
investing after they invested,demand drives prices up.
If prices go higher, valuationsare higher and valuations mean
(36:27):
that higher valuations implythat you have lower return
potential and higher downsiderisk, so that's not great.
So, again, investing wherepeople are implies higher prices
, higher valuations, lowerreturn, higher risk.
If, on the other hand, youinvest where people aren't
(36:50):
people have not driven up pricesYou're getting lower prices,
lower valuations, which implieshigher return potential, lower
downside risk.
It also gives you a margin oferror because life is uncertain.
So it's really a no-brainer.
(37:12):
And the beauty of it goingforward is if you invest where
people aren't and you do so fora compelling reason.
That's the other thing.
You don't want to invest in acompany that should be bankrupt
tomorrow.
There's a reason why nobody'sinvesting in it.
But if you invest in anexcellent investment that others
aren't invested in, at somepoint, if people see the error
(37:33):
in their ways, that will propelyour returns.
That'll be a nice tailwind.
On the other hand, on the flipside, if the market struggles,
you can't sell what you don'town.
So if you invest where peoplearen't, there aren't people
there to sell what you bought,and so that should provide a
(37:54):
pretty significant again, marginof error or downside protection
.
It's a very simple concept, butI never hear anyone speak about
it and it's incredibly simpleand compelling.
It's so obvious.
It obvious, it's, it's uh, it'ssuch a win-win where, if you
(38:16):
invest where people aren't, youget more upside, less downside.
That's it, and that's exactlywhat we're all looking for.
As far as finding running Oakor run uh, I welcome emails.
Seth at runningoakcom.
I'd love to speak with you.
(38:37):
Otherwise, you can go to ourwebsite, runningoakcom or
runningoaketfscom, also onLinkedIn.
So please reach out.
Speaker 2 (38:47):
Appreciate those that watch this and those that added
some comments.
Make sure you also follow Sethon X, as I do.
I've said he's one of thegreats and I think I got you a
few followers when I said that.
Speaker 1 (38:59):
Yep, yep.
I appreciate that.
Speaker 2 (39:01):
I guess I have some influence on that and thank you
for watching.
Cheers everybody, Thank you.
If you're investing where others are, which implies
that you're investing after theyinvested.
Demand drives prices up.
If prices go higher, valuationsare higher and valuations mean
that higher valuations implythat you have lower return
potential and higher downsiderisk, so that's not great.
(00:21):
If, on the other hand, youinvest where people aren't
people have not driven up pricesyou're getting lower prices,
lower valuations, which implieshigher return potential, lower
downside risk.
It also gives you a margin oferror, because life is uncertain
.
Speaker 2 (00:40):
This is a sponsor conversation on Leadlag Live
with Running Oak.
Running Oak is a client, sethis a client, and I'm a fan of
the man, the myth, the PM, andhopefully you will be too by the
end of this.
So, with all that said, my nameis Michael Guyette, publisher
of the Lead Lag Report.
Joining me is Mr Seth Cogswelland I'm going to start off with
this really nice image at alittle place called the NASDAQ,
(01:02):
which I happen to have been atlast week.
Can we talk about this for alittle bit?
First of all, this is a realpicture.
This is not like Photoshopped,right, correct, yep, mid-time
swear.
So, first of all, what were youdoing at the NASDAQ?
Speaker 1 (01:19):
Well, one of the beauties of working with NASDAQ
and using their exchange is theyprovide a number of different
just services to support theirETF managers, and this is one of
them.
So if there is a reallysignificant announcement, so
each time we've hit a majormilestone, they've enabled us to
put the kind of like acongratulations up there.
(01:40):
This was actually one that wasjust messing around.
I think.
Ideally, in the long run, mygoal is to have a positive
impact on as many as possible,which includes just making
people hopefully have fun andfind things humorous.
(02:01):
This is really just me messingaround.
We are in the process ofrebranding, so it was sort of a
slight unveiling of the kind ofour new logo, our new color
palette, which was also exciting.
But as we went through thatprocess, one of the things that
we discussed was just sort ofwhat Running Oak is, which you
know, I found the company out ofmy pocket, so running out to me
(02:25):
, and so it's really a deep diveinto what matters most to me
and this the idea of us as along-term relationship just
stuck.
I thought it was hilarious,especially as far as like dating
goes, and and so this was.
You know, it was mother's day.
It just seemed like the perfecttime to do something kind of
(02:47):
funny, and so we threw thistogether.
Uh and, but the premise mattersa lot to me and that you know,
when you invest with someone,you're effectively you've got a
relationship, you're relying onthem, you're effectively dating
and you and our goal is to be avery long-term relationship that
(03:09):
can be relied upon for ourclients.
But I love the idea of datingaround making maybe some bad
choices, some mistakes, as manydo.
And so, if you think of theevolution of investing, back in
the day, you had these mutualfund managers that were charging
(03:29):
huge fees uh, you know, theywalk in with their very
complicated strategies, they'revery impressive bios, and but
then they'd fail to deliver,largely because many weren't
even trying.
They were closet benchmarkingand then charging a huge fee,
and so they could just sort ofsit back.
But they'd show up, basicallyon their harley, they'd look
super sexy, and then they'ddisappoint.
(03:51):
And the evolution, you know,once people realized and they
broke up with those managers,they moved on to passive, and
passive is largely a anevolution or a response to those
managers.
But what many miss and that I'mreally thinking a lot about as
I dig into this more.
Actually is one of the reasonswhy passive has been so
(04:14):
effective and there's manypositives to passive investing,
such as low fees, but one of thereasons why it's been so
effective as far as gainingtraction is their marketing has
been incredible.
We don't nobody thinks aboutpassive marketing.
We sort of just think of it asthis thing that's maybe
altruistic and free, except thatit's not right.
These companies are making tonsof money and the thing about
(04:39):
passive is, first of all, sure,the numbers look great, which
tends to happen when you takestatistics and manipulate them a
certain way to make aparticular story and completely
omit certain things that clearlymatter, which we could talk
about at a later date but thefact is there's really nothing
behind the data.
(04:59):
Right, the data looks good,partially because that data was
chosen to look good.
There's nothing behind it, andso you know you think of again
dating.
You're dating someone thatchecks all the boxes.
I think we probably all datedsomeone that checked all the
boxes only to realize we neededmore.
There wasn't much behind thatthat we couldn't really put our
(05:20):
finger on.
And passive you know there's noone there we couldn't really
put our finger on.
And passive you know?
There's no one there.
It's a pass.
They're just sitting there withthat vacant expression, just
looking at you with nothing tosay, and if you have a problem,
if you need a shoulder to leanon, there's no one there.
And so I look at us running oakas the next iteration.
Right, so you made yourmistakes with active and their
(05:42):
fancy bios and whatever else.
People, I think, will find thatthey've made significant
mistakes on passive and relyingon data.
That's incomplete.
And we've been here all along.
We've been, uh, the strategy,our efficient growth strategy,
has been around for, got a 36year real-time track record now
and it's kicked both active andpassive butts.
(06:05):
Uh, it's just not sexy.
It's common sense and and sowe've just been waiting.
Here, we're the guy.
We're the guy next door.
We've just been waiting allalong, um, and so now you know,
um, whenever everyone's ready,we are ready for a long-term
relationship and, uh, youfirmware, you can bring home to
your mother.
That's the idea.
Speaker 2 (06:27):
Your way of bringing a mother into a conversation
around markets is very differentthan mine.
When I say you should let yourmother know your mother's cousin
, twice removed butler's dogwalker I think it's the way I
frame it.
We're definitely going to hiton that.
I think this is going to be awell-timed conversation, because
there's a lot of concernsaround what exactly are you
(06:49):
bringing home to your mother now, especially when Bonds, which
is sort of the reliable, safegirlfriend or boyfriend, is kind
of pruning on everybody, forlack of a better way of saying
it.
Pruning on everybody for theway of saying it.
I want to get your thoughts onthe way equities have been
responding in the context ofanother round of carnage in the
(07:10):
bond market.
Yields have been rising.
A lot of people are concernedaround the way the cost of
capital is acting.
I myself happen to think thenext move is a Fed hype, and you
would think that that's notgoing to be good for stocks.
Let's, let's, let's unpack thatthe.
Speaker 1 (07:27):
In my opinion, the market has been wildly
irrational for a long time.
That's largely driven by thosewho have more control or more
impact on the market beingwildly irrational.
And you're responsible for along time.
You know if, whenever youinvest, you're walking a line
(07:50):
between risk and return and ifrisk is no longer a
consideration, or certainly ifpeople are under the illusion
that it's no longer aconsideration, that changes the
decisions that you make.
And I don't know.
I think we can go back to whatthe 90s for the fed putt uh,
(08:12):
where you know, anytime themarket went down, uh, the fed
stepped in to support it andthen that's only been
exacerbated over the last orreally ramped up over the last
15 years, where it's no longerthe fed putt it's, it's straight
up printing money which wouldhave given people heart attacks
uh, you know, just before 08.
So I think a lot of what'sgoing on in the stock market
(08:34):
right now is is complacency.
It's driven by the fact thatnobody we haven't no one's
experienced risk since really 08or 09.
We've had moments in time wherethe market went down or we
experienced risk, but the marketthen just rocketed back up to
new highs and that taughteverybody that anytime the
market goes down, it goesstraight back up.
(08:56):
Anytime the market goes down,buy as much as you can because
it's only going to go straightup.
And if you believe that it'sonly going to go straight up,
you're no longer worried aboutrisk.
You no longer have to.
That's no longer a factor inyour decision-making, and I
think that explains the behaviorrecently as you, you see
(09:18):
moments where all of a sudden,the veil is lifted and people
are like, oh, wait a second,there is such a thing as risk,
and then you know that subsides,maybe due to a tweet, and next
thing you know, we're rocketingback up.
John Hussman had a tweet or a Iguess it's no longer a tweet
(09:40):
anymore a post that kind ofstuck with me me which was often
.
Market declines, especially ifyou go through a bear market,
can be very steep and swift,which we saw in april and and
then you'll get this rapidrebound and so it's so.
It's so swift that people arekind of frozen, they don't want
(10:02):
to sell.
Then it bounces back up andthat confirms that people
shouldn kind of frozen.
They don't want to sell.
Then it bounces back up andthat confirms that people
shouldn't have sold.
But we're still at a lowerlevel, and then you just do that
kind of over and over and youcan sort of stare, step down, or
people will just hold the wholetime.
I think that right now, whatwe're seeing is I think it's, I
(10:22):
think it's again, I think it'sreally complacency.
I'm trying to think of thedefinition of complacency.
Speaker 2 (10:27):
No, no, and actually it's funny.
It's funny to use that wordbecause I'm looking at one of
the comments from x.
So through too much complacency, they will learn.
Now, let's, let's play off ofthat.
Um, they will learn, because Ithink this goes back to the
discussion on passive right.
It's like if there'scomplacency, complacency is
directly tied to buying passiveindices or passive products in
(10:49):
general.
If you're worried or if thereare dislocations, you want to be
active.
Speaker 1 (10:54):
Yeah, or even I mean, if you're really worried, then
maybe you're not buying stocks,which right now there's a chart
that I don't have readilyavailable.
But regardless, the amount ofmoney that retail investors
piled into ETFs, equity ETFs, inApril was record-breaking.
(11:15):
So it's not like you knowwhether it's active or passive.
People are just piling in andthe problem is most people are
probably piling in and theproblem is most people are
probably piling into the exactsame things, right?
So passive indexes, uh, youknow the usual suspects of apple
, microsoft, amazon, tesla's up.
(11:36):
How much is tesla up in thelast like month?
Uh, 100, I mean, maybe not 100,but it's up a lot.
Nvidia has obviously bounced40% maybe.
So it's been a crazy move and alot of that money has flowed
into the things that people kindof ran out of initially.
(11:56):
Again, complacency thedefinition it's basically
confidence that's misplaced anda belief in something without
really and in overlooking therisks or overlooking certain
weaknesses.
That's what complacency is.
It's, it's confidence to adegree to which you don't see
(12:20):
what you're missing, and thatdescribes what we're seeing
right now.
There's, there's so many,there's.
We're seeing right now, there'sso many risk factors, there's
so many things of uncertaintyright now, and yet equity
markets are going straight up,so that makes no sense, but it's
not the first time we've seenthe equity market perform your
(12:40):
rational.
I think you're absolutely right, though I mean, one of the
things that I focus on or talkabout a good amount is.
One of the areas of focus forour strategy is debt.
There's no arguing that moredebt doesn't add risk, and as
individuals, we know that if wetake on too much debt, it's not
(13:01):
going to end well.
That's the same for smallbusinesses.
I have a small business.
If I take on too much debt,it's not going to end well.
That's the same for smallbusinesses.
I have a small business.
If I take on too much debt,it's not going to end well.
And it's the same for largecorporations.
And over the last decade, largecorporations took on more debt
than any time in history, nomatter how you measure it, and
they didn't do so to buildbetter companies that will be
(13:22):
more profitable and be able toservice that debt.
They largely did it just to buyback stock, and there are some
incremental positives to buyingback stock, but the problem is
it adds risk, especially ifyou're mortgaging your future to
buy back stock Higher interestrates, which we're seeing right
now.
(13:42):
It's inevitable.
If those interest ratescontinue to go higher even just
sit here, all the companies thattook on massive amounts of debt
and mortgaged their futures tobuy back stock.
They are going to, at best,have to refinance.
That Probably be at higherrates.
(14:02):
If it's at higher rates, thathurts profitability.
If it hurts profitability,earnings go down and therefore
prices need to go down in orderto maintain the same PE, which,
by the way, are elevated.
So if PE goes down and earningsgo down, then you'll have an
even larger down move.
That's best-case scenario.
If things stay where they areright now and then if we end up
(14:31):
where there's less liquidity andcompanies aren't able to
refinance, what you'll probablysee is the exact opposite of
what we saw in the last decade,which is how human behavior
works, where companies are goingto, instead of selling a lot of
debt to buy back stock, they'regoing to have to sell a bunch
of stock to buy back debt.
(14:52):
That is not good for equityholders of companies with
massive amounts of debt.
You're going to be diluted.
So it'll be the opposite ofwhat we experienced over the
last decade.
Speaker 2 (15:02):
You know I had never actually I never thought of that
, but that is a the last decade.
You know I had never, actuallyI never thought of that, but
that is a very good point.
You could see a total reversalof that dynamic, right.
Whereas it was buying stockwith debt, now it's the opposite
, right?
So yeah, the delusion point isreal, it's very real.
Speaker 1 (15:18):
I don't think anybody ever, I've never heard anybody
talk about it.
Speaker 2 (15:20):
No, that's why I'm surprised myself.
I was like man.
Speaker 1 (15:22):
that makes sense, yeah yeah, but also I mean human
behavior.
That's how human behavior works.
That's how emotions work.
We go from one extreme toanother like a pendulum.
We just went from one extrememost debt in history, just to
buy back stock likely going toresult in the other extreme,
which is a whole lot of dilution.
(15:44):
And again, that's not worstcase scenario, though Worst case
scenario, given what's going onin bond markets, is we're going
to see a lot of bankruptcy.
Companies may not be able torefinance.
I mean, one of the commonthemes over the last decade,
because of low interest rates,because of no risk, has been
(16:09):
zombie companies.
There are so many companies outthere that don't even generate
enough cash flow To servicetheir debt, and so it's been
this massive game of hot potato.
Some point that game comes onit and we're I mean it seems
like, as you alluded to, we'reprobably seeing the beginning of
(16:31):
the ending of that game.
I hope.
I actually think everybodywants to see.
Everybody thinks that it'sun-American To kind of hope for
anything other than everythinggoing straight up.
I would argue that's absolutelyridiculous and not accurate at
all.
Speaker 2 (16:49):
I'd take it a step further.
I'd argue it's un-American toonly bet on large cap companies
because so much of their revenuecomes from international sales,
versus more mid cap and smallcap companies where it's much
more domestically sensitive.
Speaker 1 (17:03):
Yeah, I mean, there's so many different ways we could
take this it's also an Americanto destroy competition.
There's been no antitrustactivity.
The low interest rates reallyfavored those that had the most
cash, so the mega caps, and theycould just crush any
competition any moment.
(17:24):
Anything pops up which islikely killing innovation.
So we're not advancing as weshould be because of um interest
rates, a lack of antitrustactivity, the favoring of mega
caps.
I think, uh, but yeah, I mean,look, small mid, just the
(17:48):
entrepreneurial spirit is smalland met and that is what has
really advanced the us and theworld, and the dynamics that
we've been experiencing for thelast decade are counter to that,
which is unfortunate.
Speaker 2 (18:03):
I love the anti-delusion theme.
Now I'm going to have to stealthat and roll with it.
I'll credit you every now andthen.
Please credit me.
Speaker 1 (18:09):
Every now and then.
I had a really good idea.
The other day I came up withthe best birthday present and I
got no credit for it.
It was a prospectus of run.
Speaker 2 (18:20):
Was that the gift?
It was a it was not.
Speaker 1 (18:23):
It was not, um, you know, it was uh.
Although I did really want togive mothers, I wanted to set up
, like this little uh temporarywebsite for people to buy shares
of run for their mom, sinceit's, you know, the strategy you
can bring home to your mother.
I was told I wasn't allowed todo that, but, um, so it was not
that compliance getting in theway of't allowed to do that.
Speaker 2 (18:39):
But so it was not that Compliance getting in the
way of giving something to mom.
That's unfortunate, okay.
So let's keep pulling on this.
You've got this ETF RUNN donereally well with it.
You and I have talked aboutyour success as far as the AUM
growth performance, the story.
Oh, that's very strong.
(19:00):
I myself very much believe thatwe, like you believe, are in a
cycle that's going to finallyfavor everything outside of
large cap tech.
Now you've seen some glimpsesof that from an asset allocation
perspective.
But whether it's higher rates,complacency on the large cap
passive side, deregulation as acatalyst, it seems like we're
set up for maybe a multi-yearcycle of outperformance.
(19:22):
I want you to talk through tothe audience why mid-caps as a
segment of the marketplace lookreally interesting here.
Speaker 1 (19:30):
It's funny how obvious it is.
It makes me feel ineffectivetalking about obvious things and
feeling like I'm not makingprogress.
Mid-caps have outperformedlarge cap over the last 33 years
by 60 basis points annualized.
I actually did the numbersyesterday.
(19:52):
That means that over those 33years mid-cap has provided 20%
more return than large cap,which is crazy, because large
has destroyed everything overthe last decade, but it's midcap
has provided 20% more returnand nobody owns it.
(20:12):
It's crazy.
And then you take that one stepfurther.
One step further.
Ned Davis did some researchcomparing companies, or we'll
say the different asset classescurrent valuations versus their
long-term CAPE ratios.
In large cap at least, as of afew months ago, it might even be
(20:35):
higher now.
Large cap was 100% overvaluedrelative to their numbers.
That means if it drops 50%, itjust simply goes back to its
long-term mean.
That's not wildly bearish.
It's just saying if it goesback to where it always has been
, so large is supposedly 100%overvalued.
Mid-cap is undervalued relativeto its long-term mean.
(20:57):
So again you've got this assetclass that has outperformed
meaningfully over the last 33years and it's the cheapest, and
yet nobody owns it.
Why that really matters is whatreally matters is looking
forward.
How does that impact thedecisions that should be made?
(21:20):
Or how is this likely to playout?
If the market continues to goup, which we were just
discussing at some point, byinvesting in the thing that's
outperformed the most and orprovided the most value and is
undervalued, at some point, somepeople are going to start
(21:40):
investing in it.
If you are on the early side ofthat, that will propel your
returns.
That'll be awesome.
You'll have a nice littletailwind.
On the other hand, if themarket struggles, you can't sell
what you don't own, and so ifpeople want to raise cash, if
they're uncomfortable withhaving 90 of their net worth in
(22:02):
the s&p 500 in seven companiesbasically and they decide they
want to raise cash becausethey're uncomfortable, the big
companies are what's going to besold, mid-cap companies, and
even we invest.
I don't really focus quite asmuch on mid-cap because there's
the line between mid and largeis a made up line anyway, but
(22:23):
there's, whether it's mid cap oreven the lower large cap
companies, which are could beone hundred billion dollars
Nobody, very few people,actually own that at all.
There are one hundred and fiftybillion dollar companies with
around a quarter of a percentallocation to the S&P.
There are companies that aregrowing rapidly they're over
(22:43):
$100 billion that aren'tincluded in large cap growth
ETFs, and so if people becomerisk averse, if what we just saw
just a month ago as far as themarket declining and people
raise cash, if you're in thingsthat people don't own and
they're not selling to raisecash, it makes sense to expect
(23:05):
that to outperform and to havesignificantly less risk.
Now, the other thing I'll touchon is interest rates, because
we were just talking about that.
If interest rates continue torise, it kind of favors mega
caps in a way, because theygenerate so much cash, they're
(23:26):
so big and they were able to getattractive terms on their debt.
Now, that said, theirvaluations are highly dependent
upon growth, and higher rateswould warrant a lower P, so
you'd still expect those tomaybe come back to reality a
little bit.
Higher rates, though, willprobably that'll make it
(23:47):
difficult on micro, small andeven, let's say, smaller mid-cap
, whereas the upper mid-caplower large-cap those should
probably do relatively wellbecause they're larger, more
stable businesses, in particularfor us.
(24:08):
As I mentioned earlier, one ofthe things that we really focus
on is debt.
So if interest rates go up byinvesting in companies that have
far less debt, that reallyshouldn't impact us much.
Now, if interest rates declinewhich right now is a little hard
to imagine, usually theydecline when we're in a
(24:30):
recession, which I guess it doesseem that we're in a recession,
but also interest rates aregoing up.
So we're in this convoluted uhtime where I guess really
stagflation is seems to probablybe the best case.
But regardless, if interestrates go down, those usually
happen during a recession.
That would favor small caps,mid caps the recessions
(24:56):
certainly don't favor smaller,more risky companies but
particularly what would getreally hit in a recession.
That's when things come back toreality.
That's when the mostovercrowded, most overvalued
companies decline, not to theirlong-term mean, but usually
right past it.
(25:17):
We were just talking about thependulum earlier.
Human behavior goes from oneextreme to another, and right
now, the biggest companies havehistorically extreme valuations,
certainly for their size, andso that is where those companies
could not just go to realitybut beyond.
And, as you know, again,according to Ned Davis, if those
(25:39):
companies or large cap is 100%overvalued, that's where those
would decline 50% just to goback to their long term.
Whereas if you're in companiesthat are not overvalued, such as
mid cap, such as small cap also, you know there's certain areas
where if they go to their longterm means they actually go up
Right.
(25:59):
So while large going to itslong-term mean would be a 50%
decline, small, mid, other areaswould actually have to go up
just simply to mean revert.
Speaker 2 (26:10):
Yeah, and I think big institutional money is going to
be more comfortable with midcaps than small caps, like there
should be less minds that youcan step on small cap is and a
very interesting space becausethat's where you get a whole lot
of innovation.
Speaker 1 (26:27):
Um, you know, one great product can make a massive
difference.
Uh, it's.
It's a really cool space.
The problem is, again, becauseof the last decade, a very large
percentage of small capcompanies are zombies and should
not be alive right now.
So I do think there could be aperiod of I think active small
(26:50):
cap could do really well whereyou're actually selecting
companies with strong balancesheets that are doing cool
things.
That could be a sweet spot.
But diversified portfolios,particularly passive, that kind
of run the gamut of small cap.
I think those will reallystruggle because such a massive
(27:13):
percentage of those companiesshouldn't exist.
So there will be a period wherethose are purged, hopefully,
because, again, walking dead isun-American.
I would say the market goingstraight up or hoping for
reality, that's not un-American.
What's un-American is walkingdead and those need to die so
(27:36):
that that capital could bereallocated to cool things that
are in great, great companiesand great products.
Speaker 2 (27:44):
I'm glad you frame it like that, because I think
people get so stuck on just thereturn potential in terms of
their personal portfolios, notin terms of the efficiency of
capital for the system.
Right, and you want the systemto be more efficient, which
means you don't want the zombiecompanies.
And you want the system to bemore efficient, which means you
don't want the zombie companies.
You want money to be funneledwhere it's going to be best
(28:04):
treated, which is notnecessarily based on what maybe
some retail are meaning at amoment in time.
It's about the company, it'snot about stocks.
No, I think that's very wellarticulated.
When it comes to run itself,let's talk about the screening
mechanism a little bit more.
You mentioned debt.
Quality is a big component ofthis.
(28:25):
We should define quality forthe audience.
How do we think about qualityinvesting?
Speaker 1 (28:29):
There are a lot of different definitions, but I'd
say they largely rhyme andthey're pretty obvious.
It's basically just companies.
When you look at their balancesheets, they make sense and
they're conservative, so the bigone that really stands out to
me is just simply less debt.
Again, too much debt leads toproblems, and quality you could
(28:56):
certainly argue a problematicbalance sheet is not quality.
So the other thing is earningsconsistency.
That's another factor that manylook at.
That's something that we lookat as well, so you mentioned our
criteria, or sort of ourprocess.
(29:17):
Our goal is to maximize earningsgrowth, because nothing drives
price performance like earningsgrowth.
We're all doing this to makeour clients more money and
invest in clients' assets incompanies that are growing and
creating more wealth, whichflows back to their investors.
That's a good way to createwealth for our clients.
The second, though, is beingvery disciplined around
(29:38):
valuations, and I'd say that'scertainly on the sell side.
That's our biggestdifferentiator.
It does not make sense to holdan asset that should go down
Right now.
There's a lot of money incompanies where valuations do
not make sense, and I'm actuallypersonally a little excited
about it because at some point,I'm actually personally a little
(30:00):
excited about it because atsome point our clients will
realize the benefit of avoidingthose companies.
I think you know what isTesla's PE now?
Hundred and ninety, I don't.
I don't know what they have todo to justify that.
Speaker 2 (30:15):
It's Musk man and he's doing the economy more you
know he's doing the.
Speaker 1 (30:20):
It's crazy, but I mean even Apple.
I haven't looked recently, Ithink their P's it's in the 30s,
probably maybe up to 34, 35,given the rise in the market,
apple for a very long timetraded a P of 13.
And when it did it had a ton ofcash and considerable growth.
Now it has little to no growthand we'll see how tariffs play
(30:45):
out.
That maybe as negative growth.
Um, in as no cash, it generatesa lot of cash, so I'm not
worried about going bankrupt.
But it actually back in the day, I think maybe a quarter of its
balance sheet, maybe even athird, was cash and now it has a
negative net cash position andthen it has more debt than cash.
But yet it's trading at liketwo and a half, two and a half
(31:06):
times its long-term valuation.
And I love apple, but thatdoesn't make any sense.
Um, and the problem is that'sprobably the biggest holding for
most people.
Many might not even be aware ofit because their 401ks are just
sort of automatically investedinto target date funds that just
(31:28):
invest more into index funds.
So that's definitely a concern,but again, our criteria are
focused on maximizing earningsgrowth, discipline around
valuations because you don'twant to hold something that
should go down and overarchingfocus on lower downside risk,
because nothing derailsexponential growth, which is
(31:52):
what we're all shooting forright.
We're trying to provide growthto our clients.
They've worked very hard for along time.
We're trying to help them growwhat they've worked to
accumulate so that they canretire or live the lives they
want.
Nothing derails that like amajor drawdown, and so again,
(32:17):
whether it's debt or other riskfactors, that'll have a
considerable impact on theclients over the long run.
Speaker 2 (32:26):
Let's talk about on-run RUNN, your ETF, the
weighting, Because quality isalso, I think, to some extent
relative to the sector and youcan rank things in different
ways.
There's factor-based weighting,there's market cap weighting.
Let's talk about the weightingfor run.
Speaker 1 (32:44):
Run is equally weighted as far as the holdings
go.
Yeah, what's funny is equalweighting became a dirty word.
If you use a hyphen, otherwiseit's two words, but either way
it became a dirty phrase.
I remember, maybe a decade ago,when I was in business school
and we were looking at differentweightings and at that time,
(33:06):
equally weighted portfolios hadoutperformed their cap weighted
portfolio, cap weightedcounterparts every single
rolling decade in history.
Now, at this point, this is theone time, or the last decade or
you know 12 years, where thathasn't been the case.
(33:26):
But every other time in historyequally weighting was the way
to go, the reason being marketsare noisy, there's whether it's
emotions or who knows whatthings go up and down and equal
weighting puts mean reversion inyour favor.
So you're basically that noiseactually benefits you Over the
(33:47):
last decade because momentum wasso hot.
Last year, momentum hit the99.8th percentile in history, so
the hottest time ever, otherthan maybe the tech bowl, is a
close, close tie, and thatmomentum was due to complacency,
uh, just piling into the samethings over and over, um, and
(34:10):
that favored cap-weightedindexes.
But again, historically equalweighting has always been the
place to be.
There's no reason to think thatif it's always been the place
to be, other than one anomaly,which just happens to be very
recently, that it won't continueto be the place to be.
(34:31):
But one of the reasons why wefavor equal weighting is because
we have absolute conviction inthe investment philosophy we
provide clients of higherearnings, growth, tracked
evaluations, lower downside risk.
We don't have a ton ofconviction in the individual
companies.
There's just more uncertaintythere.
(34:53):
But if we can maintain anaverage across the portfolio,
then we believe that it willdeliver value, whether it's
higher return, lower risk,likely both by equally weighting
.
That enables us to basicallyhedge our bets.
We're not taking any crazy betson one company which could
certainly.
Maybe it works out, maybe itdoesn't.
(35:15):
By equal weighting we play thenumbers.
Speaker 2 (35:19):
Yeah, and it's funny if you look at equal weighting
strategies whether they'reactive or passive, against
market cap weighting, it lookslike the ratio relative strength
is improving.
So, yeah, it could be a goodera for that as a style of
portfolio construction.
Speaker 1 (35:43):
Yeah, it could be a good era for that as a style of
portfolio construction.
Maybe for the last few minutes,seth, make the pitch for using
run versus something like an S&P400 mid-cap passive product and
where people can learn more.
And I just read our most recentnewsletter and kind of focused
on this is the idea of investingwhere others aren't.
It's a pretty simple idea, butI never hear anyone talk about
it and, frankly, I hadn't reallythought too much about it.
(36:04):
But if you really give it somethought, it's extremely
compelling.
Invest where others aren't.
If you're investing where othersare, which implies that you're
investing after they invested,demand drives prices up.
If prices go higher, valuationsare higher and valuations mean
(36:27):
that higher valuations implythat you have lower return
potential and higher downsiderisk, so that's not great.
So, again, investing wherepeople are implies higher prices
, higher valuations, lowerreturn, higher risk.
If, on the other hand, youinvest where people aren't
(36:50):
people have not driven up pricesYou're getting lower prices,
lower valuations, which implieshigher return potential, lower
downside risk.
It also gives you a margin oferror because life is uncertain.
So it's really a no-brainer.
(37:12):
And the beauty of it goingforward is if you invest where
people aren't and you do so fora compelling reason.
That's the other thing.
You don't want to invest in acompany that should be bankrupt
tomorrow.
There's a reason why nobody'sinvesting in it.
But if you invest in anexcellent investment that others
aren't invested in, at somepoint, if people see the error
(37:33):
in their ways, that will propelyour returns.
That'll be a nice tailwind.
On the other hand, on the flipside, if the market struggles,
you can't sell what you don'town.
So if you invest where peoplearen't, there aren't people
there to sell what you bought,and so that should provide a
(37:54):
pretty significant again, marginof error or downside protection
.
It's a very simple concept, butI never hear anyone speak about
it and it's incredibly simpleand compelling.
It's so obvious.
It obvious, it's, it's uh, it'ssuch a win-win where, if you
(38:16):
invest where people aren't, youget more upside, less downside.
That's it, and that's exactlywhat we're all looking for.
As far as finding running Oakor run uh, I welcome emails.
Seth at runningoakcom.
I'd love to speak with you.
(38:37):
Otherwise, you can go to ourwebsite, runningoakcom or
runningoaketfscom, also onLinkedIn.
So please reach out.
Speaker 2 (38:47):
Appreciate those that watch this and those that added
some comments.
Make sure you also follow Sethon X, as I do.
I've said he's one of thegreats and I think I got you a
few followers when I said that.
Speaker 1 (38:59):
Yep, yep.
I appreciate that.
Speaker 2 (39:01):
I guess I have some influence on that and thank you
for watching.
Cheers everybody, Thank you.
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