February 27, 2025 • 44 mins
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We explore the critical theme of managing investment risk amid heightened uncertainty. This discussion revolves around proactive strategies to mitigate risk in a volatile market and achieve financial resilience.
• Navigating the tumultuous landscape of investment risks
• Adjusting portfolios from stocks to bonds for safety
• Understanding the role of beta in risk management
• Exploring the use of options as a protective measure
• Embracing the philosophy of "lagom" for a balanced mindset
• Preparing for future uncertainties in investments
Straight Talk for All - Nonsense for None
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Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Clem Miller (00:02):
Hello everybody, Welcome to Skeptic's Guide to
Investing.
This is Clem Miller and I'mhere with Steve Davenport, and
today we're going to discuss howto manage risk, to reduce risk
in your portfolio, in light ofthe fact that we're dealing with
quite a bit of uncertainty.
Quite a bit of uncertainty bothin terms of domestic politics,
(00:30):
in terms of potential increasedinflation and, of course,
geopolitics worldwide.
So, with those kinds of risksout there, we really need to be
able to control the risks in ourportfolio, and I think there's
no better person than to talkabout risk mitigation than Steve
(00:52):
.
So, Steve, why don't you leadoff?
And I'll jump in occasionally.
Steve Davenport (01:00):
Okay, I mean I was very nervous about NVIDIA's
earnings and I still am.
It feels to me like we kind ofknow.
This growth can't continue at98% a year and it's going to the
Blackwell chip or the AI chipseventually.
(01:22):
They will supply every bit theycan produce in 2025.
But then 2026, the question is,what will they be doing?
Will the chip change?
Will the infrastructure of thechip be the same?
And some of the guts willchange.
How do we look at the changegoing forward and how do we look
at the market?
In my mind, the talk abouttariffs, the talk about China
(01:45):
and not allowing technology inthe US or technology from
anywhere, asml or others to goto China in the chips battle for
AI supremacy and all militarysupremacy.
I believe that we're going tosee a volatile year, and we've
had two great years in a row,which we can argue is oh, the
(02:10):
past indicates the future andtherefore we're going to have
another great year.
Unfortunately, that past leadsto the future is not a good
indicator, and so I believe whatwe're going to see is a pause,
a pause or a step back in orderto allow for a more consistent
(02:30):
long-term growth.
So I look at things in terms ofwhat can I do without paying
taxes to lower my risk, and so,in that regard, I've looked at
the non-taxable accounts,meaning my retirement assets,
and I've sold some of myexposure in some of the
(02:51):
technology sector and some ofthe sectors.
Overall, I think that, movingfrom 20% invested in bonds now
I'm something like 40% investedin bonds Now I'm something like
40% invested in bonds.
So I went from 80% in stocks to60% in stocks.
(03:14):
Is it an overreaction?
Is it too much?
I don't know.
But I'm sleeping like a babyand when I look at things and
think about them hard and do mybest, it's you know, ultimately,
if I'm still thinking about itgoing to bed and I'm still
thinking that there's problemsout there that I don't know
(03:36):
about, can't anticipate, isthere something else I can do?
And so the next step, afteryou've kind of lightened up on
some of the risk assets in yourportfolio, I look towards is can
I do something with options?
Can I do something with thenames that I'm thinking about
(03:57):
turning over?
Anyway, we've been invested in afew ETFs as sector exposures
and we replaced individualexposure with sector exposure.
Now I've sold some of thatsector exposure and I'm letting
it sit in cash and some of thoseyou know.
We've got names that we'redebating and whether we're going
(04:20):
to probably decide in the nextfew weeks.
So when that happens I willtake that cash that I put on the
sidelines and put it to work,because those names are where we
ultimately think there's valueas we see names pull back.
This week we saw Sempra pullback.
Sempra is a utility.
It missed earnings of $1.50when the market was expecting
(04:45):
$1.60.
So a $0.10 or a 6% move in thequarterly earnings.
The stock was down 25% on thenews.
I think that's an overreaction,especially for a utility stock,
but that's the reality we mustdeal with.
(05:09):
So again, first thing, are therethings in your non-taxable that
you can sell and lower yourrisk, to put yourself in a
better position to notexperience as much downside?
How much downside is going tocome?
I don't have a crystal ball.
If I did, I'd be probablymaking a little bit more money.
I think we're talking about a10% to 20% correction, but
(05:34):
that's typically the way wedefine corrections and I think
this will be a correction.
I think that we're looking atways to protect.
The next step I do is to buy putoptions.
I sell call options on some ofthe larger positions, some of
the exposures, like the S&Pexposure.
I sell a call option 10 to 15up and I buy a put 10 to 15 down
(06:00):
.
It's for a period right now.
Now it's for a period.
Right now I'm looking at theOctober's S&P and I think that
(06:22):
when we look at the October's,I'm somewhere around 525 on the
put side and 650, 675 on theupside, and that's for the SPY.
I think that we are in a periodwhere there isn't going to be a
sign for everyone to do whatthey have to do.
You need to do what you shoulddo with your portfolio, based on
what your needs are and whatyour short-term and longer-term
(06:43):
needs are.
If a client is rebuilding orrenovating and they know they're
going to need cash, then let'sisolate that cash and put it
aside so that we're not sellingit in the middle of a downturn.
Let's plan, let's prepare.
Semper Paratus is the Marines'motto and it's also in my motto.
(07:05):
I think it's always good to beprepared.
So that's kind of where I am.
Glenn, what do you think aboutrisk and what are you willing to
take and what are you willingto do to try to reduce it?
Clem Miller (07:19):
So you know, just to start off, we both agree that
there's a higher risk ofrecession.
Just to start off, we bothagree that there's a higher risk
of recession this year and weboth agree that there's a
significant probability of acorrection.
How much, we really don't know.
(07:40):
Is it enough to put us in cashentirely?
No, I think we agree on that.
I think in some ways, I'm alittle more conservative in
terms of what I own or no,steve's a little bit more
conservative than what we own.
I have about 9% cash in theportfolio 9.1 right now and I've
(08:06):
got about 4.3% gold in theportfolio.
So obviously, cash has a betaof zero and gold has a beta of
0.12.
So I'm trying to reduce beta inmy portfolio.
So cash and gold help doingthat beta in my portfolio.
(08:26):
So cash and gold help doingthat.
And I hold a number of stocksthat have relatively low betas
that help pull down my portfoliobeta.
So Progressive 0.21, bostonScientific 0.75,.
Spotify 0.85,.
Walmart 0.56,.
Philip Morris 0.85, walmart0.56, philip Morris 0.17.
(08:49):
Uh.
Uh.
T-mobile 0.45, uh.
Primo Brands 0.34, and that'sjust within the top 15 of my
stocks.
So, yeah, I've got uh, I've gotsome pretty low beta stocks
that nevertheless meet my uh,meet my other criteria.
So those are pulling down myportfolio beta.
(09:12):
I think that I do find that I'malready positioned where I've
got downside protection.
So on days when my portfolio isdown it tends to do unless it's
down a lot, it tends to dobetter than the downside.
(09:32):
And so some downside protection.
If the market goes up some ittends to outperform slightly,
but if the market outperforms alot then I do less well,
obviously, than the market.
So my beta just on stocks, isaround 0.95, 0.90.
(09:56):
If you throw in cash and goldwith their low betas, I'm
probably down more, around 0.85on beta.
That's the way I'm reducingrisk in the portfolio is by
controlling beta.
If I see even more volatilityand just seeing continued chaos
(10:23):
in Washington, I think I'lltighten up even more.
Have more cash, have more gold,have lower beta.
Problem is that it's reallyhard to find.
The universe of stocks thathave low beta and also meet
other criteria is not high, it'snot large, it's not a large
(10:47):
universe.
If it was easy, clem wouldn'teverybody do it.
Steve Davenport (10:50):
Yeah, exactly, you get the same return and take
less risk.
Wouldn't you have the moneymachine on and you just keep
printing?
Clem Miller (10:58):
So I mean I like to see low short interest, low peg
and low beta and in thisenvironment it's kind of hard to
find those stocks.
Steve Davenport (11:08):
Right, I mean, I guess I'd ask you, clem, is
there a point at which you mightconsider using options?
Yes, uh, I don't.
Is it because you're not, thatyou haven't done it in the past
and you don't want to do it, oris it you have a concrete reason
not to do it, because it's justnot part of your?
Clem Miller (11:30):
philosophy.
It's not part of my philosophy.
I like to, I like to look atyou know, these fundamental
issues, and not you know, andnot try to, not try to do that,
not try to uh, set myself up forthat okay.
Steve Davenport (11:46):
I mean there's different.
You know we each have differentexperiences getting where we
are and I've kind of believedthat there is a.
There's a point at which youcan put a stronger control in
place than depending on becausein there, because there's been a
lot of research that says thatdiversification fails, it's in a
(12:11):
down market where you see adownturn for a given week of 3%
or 4%, you're going to see thatthe correlations tend to go to
1%.
So I agree that the evaluationsof beta are good long term, but
in the short term, during adecline, the overwhelming move
(12:32):
in correlation isn't maintained.
So it's hard.
It's even hard for names thataren't priced regularly Because
you've got, just because theprice that you have on your
private equity gets marked at acertain point, or private real
estate or private debt.
It's going to get marked but itmight not be as efficiently
(12:53):
marked as the public markets.
Clem Miller (12:56):
So, in other words, they'll be marked wrong.
Steve Davenport (13:00):
I'm not going to say that because, clint,
because I'm a gentle and kindindividual, I don't want to
berate anybody, I think, as Iwas saying-.
I think, as CFAs, we know thisexists and therefore the
question is if we know it exists, do we just pretend that
diversification works and sayit's the simplest free lunch, or
(13:24):
do we say it's a free lunch forsome period of time, but it
isn't all?
100% free lunch for every time?
Clem Miller (13:31):
Well, you know, if you're keen on too much
diversification, then you mightas well just hold a market ETF.
Correct?
You have to believe or haveconviction that stock picking
works, and I do have convictionin that.
(13:53):
I know you do too.
Steve Davenport (13:54):
Right.
I think that that's whatdifferentiates us.
We're skeptical thatdiversification through indexing
could be de-worsification, andI don't want to de-worsify.
I don't want to own names thatI don't believe in.
I want to own names that Ireally like.
So by doing that, we are makingdecisions that could be viewed
(14:18):
by some people as inappropriate.
Why are you making thosedecisions?
Why don't you just agree toassume the index like and I look
at it as a middle child and saythere's some benefit to having
an index.
I like having an index in theportfolio because it allows me
to easily hedge.
So when I think about theportfolio and I think about what
(14:42):
do I do to protect it, I have acomponent of 10% to 15% that is
in the index that I can easilyhedge.
It's very liquid.
It's one of the most liquidinstruments in the world.
Therefore, I trade liquidityfor some of the premium that
other people are getting fromthe private and other markets.
They believe that those thingshave a correlation that's
(15:06):
negative or zero.
I think that's entirely untrueand they know that from research
that most of those assetclasses, when they're adjusted
for the risk properly, are justas risky as the equities.
So therefore I say OK.
If we know this is a falsepremise, if we know the
correlation breaks down, I thinkthat it's worth trying another
(15:32):
tool.
It doesn't.
Just because not everyone isdoing it is not a reason in my
world to not do.
It is not a reason in my worldto not do it.
I believe our job as investors,our job is trying to help
clients protect their assets.
It's protect and grow.
There's two words, it's not one.
(15:53):
It's not just grow my assetsand I'll take whatever risk I
have to.
It's protecting as you go alongso that, if something happens,
your overall life is notaffected.
And you're looking at yourassets as I put some things
aside and I wait and I'm patient.
(16:13):
Is it wrong?
It depends on your perspectiveand I think that you know I am
going to continue to try toinfluence Clem and get him on
the derivatives bandwagon andpretty soon he's going to be
writing calls on all his namesand he's going to tell me that's
the best thing that everhappened to him.
His yield on the portfolio isup one and a half percent and he
(16:35):
never realized how it wouldmake him feel.
And I'm going to enjoy thosemoments and you know he's going
to send me a bottle of champagneand we're all going to
celebrate.
Well, we're waiting for that.
Clem, what do you think it willtake for you to become, to make
your next move or to dosomething Like?
Is there some signal you'rewaiting for, whether it's
(16:58):
Ukraine, or whether it's Gaza,or whether it's tariffs?
What's on your radar in termsof next things that you could
see?
Shoes to drop?
My radar shows debt ceiling.
Due date March 15th.
I know that they can do thingsto extend, but I think they've
(17:19):
already been doing things toextend what's on your radar.
Mine says the debt ceiling onthe 15th is going to be a
negative event.
Clem Miller (17:32):
Clearly, but I don't think there's any single
event.
I think what we're seeing is aslow well, maybe not so slow,
but a deterioration in stabilityboth in the United States and
(17:52):
overseas, and I think that thatcreates a concern, creates a
concern, and I don't know wherethe exact tipping point is, but
I think we're seeing a lot ofvolatility now and I think that
volatility suggests to me thatwe could hit a tipping point,
(18:19):
whether that's the debt ceiling,whether that's, you know,
failure to come up with a newbudget, whether that's a failure
of the Russia-Ukrainenegotiations, the US pulling out
of NATO or something alongthose lines.
The US invading Canada, I meanthat would, uh, not that I
(18:43):
really expect that to happen?
I'm not sure I should put thaton the radar.
Yeah, not that I would expectthat to happen, but you know
there there's a lot ofuncertainty right now, a lot of
nervousness, and you can seethat in in uh.
You know how the S&P 500 ismoving and how the NASDAQ is
(19:06):
moving.
You see that in the negativeperformance you had last week.
I just think that we're goingthrough a rough patch right now
and it's hard to see where Imean, what's the catalyst for
(19:28):
getting out of where we are now?
Steve Davenport (19:29):
I think that coming up with a budget and
coming up with the approval oftheir extension of the tax, the
taxes that are expiring, thetaxes that are expiring I think
that an extension of that, evenfor four years or five years,
would make a lot of people verycomfortable, right?
They're worried.
Something can happen there, andI think that you know.
(19:53):
On the other side, I can seethat this negotiation with Putin
on the Ukraine is not going tobe a smooth sailing.
I think there's going to be apoint where you know, how are
the governments of Europesuddenly going to come up with
the resources they need to fundand to help rebuild the Ukraine?
(20:17):
It's not like everybody has anextra 200 billion sitting around
, right?
It's not like everybody has anextra 200 billion sitting around
, right.
Clem Miller (20:29):
Germany and France are not in budgetary territory
where they can say this is awonderful climate.
The Europeans the EU at leasthas a self-imposed ceiling on
how much they can borrow, sothey would have to remove that
ceiling in order to be able tobuy more weaponry and contribute
to the war.
I think the key thing is goingto be the participation of the
(20:53):
UK and the French, and maybesome other governments, in
peacekeeping, but thatpeacekeeping requires there to
be a peace agreement first, andthat's what I'm skeptical about
whether there will actually be apeace agreement I'm really
nervous about, you know,notwithstanding the so-called
(21:15):
critical minerals deal that'ssupposed to be signed tomorrow,
I'm really skeptical aboutwhether the war is going to come
to an end.
Uh, I think it's going topersist.
I'm concerned that the us has,uh has tilted toward russia to
some degree, certainly more sothan before, or become neutral
(21:40):
with respect to russia,certainly more so than before,
or become neutral with respectto Russia.
I'm concerned about, I'm reallyconcerned about, the Elon Musk
situation.
Steve Davenport (21:59):
I'm concerned about what that implies for the
rule of law in the US.
So, yeah, I mean, I hate to.
To me, I think, thepersonalities of Musk and the
personality of Trump willeventually have a follow up.
I don't see this as an alliancethat can last centuries.
I think this is an alliancethat will last a series of
(22:20):
months, not years, and so Ibelieve that when they get
through all of the courts andthe Supreme Court and
everybody's weighing on whetheryou can or you can't change the
(22:41):
budget the Congress determinesthe budget how do we get?
How do we get where we need togo, get where we need to go?
I think that some of thechanges and some of the, you
know, eliminating people who areon some type of suspension, I
think is not going to beaccepted or is going to be
embraced by all the people, asthat's what Trump ran on.
Trump ran on a lot of things.
(23:01):
He made a lot of statements.
You know, as we know, aboutPanama, about Greenland, about
Canada.
He's very good at makingoutlier statements.
As we mentioned the pufferybefore.
I don't think that we will seethis alliance kind of thrive and
prosper.
I think it will come down toegos and, as we look at
(23:24):
political leaders.
We like to think everything isbased on reasons and facts.
I think that we're dealing withhumans, and these two humans
have too big an ego to let theother get attention for or get
credit for any of the changes.
Clem Miller (23:43):
By the time that happens, though, steve, by the
time they break up, there'sgoing to be, I think, a huge
amount of chaos within thegovernment.
There already is, but I thinkit's going to be even bigger,
and I'm concerned.
I'm concerned that Musk andTrump will ignore the courts.
Steve Davenport (24:05):
Yeah, I have a little bit less urgency than you
do.
I think that we're just I kindof believe that we're a very
resilient economy.
We have very resilientbusinesses, and I think that I
don't know how we're going toabsorb any of the people that
are cut from government.
(24:25):
I don't know how we're going topay for the increased
unemployment.
I don't know how we're going topay for the increase in
interest rates if we keep goingforward.
I think there's a lot of issuesto be discussed and dealt with
and I don't think any of themare going to go easily.
So therefore, like you, youseem to think that the steam the
(24:46):
bulldozer keeps destroying.
I look at things and say Ithink the bulldozer runs out of
gas and I think we start to seeagain.
He only has a time period hereof about a year before we start
thinking about re-election forthe House and Senate, and so his
(25:09):
time frame of when he wants toget things done and what he's
able to get done, I think isgetting shorter, and I think
he's expending energy in placesthat doesn't really deserve the
time and effort.
So I'm a little bit lessfrightened by things, which
maybe I'm naive, but I alsobelieve that, you know, there's
(25:34):
a lot of good people and there'sa lot of good things in this
country that will be very hardto untangle or break down, this
country that will be very hardto untangle or break down, and
so I have more faith in theAmerican people than what
they've shown thus far.
So I think that I think we willsee a resurgence, and it will
be a resurgence based on some ofthe treatment of some of the
(25:58):
people in these differentsituations, whether it's USAID
or whether it's something else.
I think there are a lot ofpeople who are upset with what's
happened, and to me, what'ssetting up for is Trump gets,
you know, loses majority in boththe House and Senate in the
midterm elections.
I've talked about it, and maybeit's too far away and we should
(26:20):
deal with something closer.
I don't know, but I look at theability of him to get things he
needs in the next six monthswith regard to debt ceiling,
budget and tax reform, torestate or reengage or extend
(26:40):
the tax benefits.
If the government does nothing,tax rates go up and government
collections go up.
I think that, unfortunately,there are people who and I'll
say that they are in thepolitical realm who would walk
around and say I didn't increaseTrump didn't extend it long
(27:02):
enough, I didn't increase taxes.
Well, you knew that if itexpired, that you needed to do
something to maintain it.
Oh, that's Trump, that's not me.
I'm just sitting here in my owndistrict and you know I don't
like to see everybody payingmore.
But am I glad that you knowsalt went away, or am I?
Clem Miller (27:22):
glad that you know that Medicaid is continuing.
Steve Davenport (27:25):
Medicaid is continuing, I think I am.
Medicaid is continuing, I thinkI am.
And so I think that when welook at this historically, we're
going to say, just like therewas the Newt Gingrich revolution
I think revolution might havebeen a little extreme.
I think Doge the governmentefficient.
Like the two words governmentefficiency, they are oxymoronic.
(27:51):
They don't make sense together.
I was an industrial engineer.
The efficiency in government isa non sequitur.
It doesn't exist.
If you believe it exists, thenI got some land in Florida that
you can build your house on.
It's just not a factor, and socreating an agency around
(28:22):
government efficiency is just asmuch a pipe dream as we're
having a revolution in the House, and it's going to affect all
of government and all of what'shappening in the Republican
Party.
And 10 years later, you know wehave Bill Clinton as president
and he agrees to NAFTA and heagrees to, you know, do some
things that he would never haveagreed to before.
(28:42):
Is that the revolution?
I think a revolution might betoo strong a term.
I think government efficiencyis too strong a term.
I think we're going to see aninteresting period in government
and I think it's going to bevery hard to see where we go in
five years or 10 years afterwhat's happened, but I think
(29:03):
we're going to see, most likely,a lot of battles and a lot of
things fight for, but I thinkultimately, we're going to see a
return to a more balancedgovernment, which is a more
divided government, and I thinkthat's simply what we're going
to.
The only big thing I think wesee out of this is, if the
(29:24):
depression is bad enough and ifthings are, I think the US is
eventually going to move to amulti-party system instead of
the Republican and Democraticlogjam that we have right now,
which is neither one is trulymaking the Democrat voter happy
or the Republican voter happy orthe independent voter happy.
(29:45):
The choices are too narrow andthe choices are too defined.
Therefore, I think we adoptmore of a British, french,
italian type consensus Germangovernment that is built by
consensus, with people who wantto work together to improve
things, and I think that thatcould be the best thing that
(30:08):
ever happens to America, becauseultimately, I think it would be
harder to get things done andthe conditions would remain more
stagnant, and if everybodyloves standoff or, you know,
stalemate, no businessman wantsto see his tax rate changing.
He wants to see his governmentsubsidies changing.
(30:29):
He wants to see his governmentsubsidies changing.
He wants to see his employeetaxes changing.
Clem Miller (30:34):
They want to know the rules of the game.
That's what they want to know.
Steve Davenport (30:37):
Just tell me how to play and I will play the
game, but don't change the gamehalfway through For those people
who are 55 and looking to selltheir business.
You know, I think that changingthe cap gains rate or changing,
you know, it is going to be thegovernment that delivers the
(30:59):
most benefit to the most peoplethat ultimately wins.
And I think that right now,these groups are fighting
battles that don't need to befought.
These groups are fightingbattles that don't need to be
fought.
We need to focus on defense,education, some of the things
that are core.
Our healthcare system is.
We're charging most and we'renot getting the best results In
(31:23):
any other sector that wouldimmediately result in.
Well, how do we get betterresults for the average American
?
But in this reality, it's socomplicated and there's so many
rules and regulations we can'tfigure out a solution.
I think we've got to go back tofocusing on those things health
, education, welfare.
(31:45):
Those are the things thatpeople really care about.
Those are the things thatpeople really care about.
I'm sorry if I disagree withyou, clump, but I still have
this idealistic, hopeful part ofme that believes that we could
go into a battle, we could seechaos for a period of time, but
(32:06):
we will ultimately come out theother side.
Clem Miller (32:12):
I'm a little skeptical about that.
Steve Davenport (32:15):
You had to use that word.
I am skeptical too, clem.
I'm not saying it's a 90%probability event.
I'm saying that when you getinto chaos and disorder,
ultimately people start to askquestions of how do we restore
order, how do we lessen thechaos?
(32:36):
And I wouldn't be surprised ifyou know some people.
You know maybe we had anindependent candidate that took
over in 28.
I think that the time for anindependent is ripe, because I
think both parties have showntheir failure to understand what
(32:58):
Americans really want.
Clem Miller (33:00):
Yeah, I think the likelihood of a third party is
of a realistic third party isminimal.
I just think that you know of arealistic third party is
minimal.
I just think that you know it'sbeen tried before and the only
(33:25):
thing it does is it throws theelection.
Steve Davenport (33:27):
So that's all, that's the only thing it does.
So do you think the Germanslook at the election as having
been thrown?
I mean, these other countrieshave these multiple parties and
they don't always win, andthey're they represent some type
of a consensus.
Ultimately, they have to buildbetween the different parties.
I'm not sure.
Just because we've not had itdoesn't mean we're going to
(33:47):
throw an election.
Clem Miller (33:48):
So there's a big difference.
Because in the US we're talkingI mean, right now, you, I think
you've been you're talkingabout a president, right?
Okay?
So there's only one person whocan be president, and so if you
have a third party, come in.
They're going to take votesaway from one of the candidates
(34:10):
and then the other candidatewill become president.
In a parliamentary system, theprime minister is chosen by the
parliament, and in a lot ofthese countries not all of them,
but in a lot of Europeancountries one party doesn't have
enough seats in order to beable to choose the prime
(34:31):
minister, so they have to form acoalition with another party in
order to, and then they givethat other party seats or roles
in the cabinet, they give thempositions and they adopt some of
their policy stances.
(34:51):
So it's a negotiation, but itcomes up with a prime minister
who's from the first party.
So, taking Germany, the recentGerman examples as an example,
even though there hasn't been achancellor picked yet there
hasn't been a chancellor pickedyet it's, you know, almost
certain to be they had thisfellow, friedrich Murs, who's
(35:15):
the you know who is the PrimeMinister, who is the head of the
Christian Democratic Party andhe is going to align himself
with the Social Democratic Party, which is is the center left
party, and they're going tofreeze, uh, the neo-nazi party,
the, the uh afd out of, uh, youknow, out of government.
(35:38):
They're going to keep them out.
So the first party and thethird party and maybe the fourth
or fifth party will gang up andkeep the second party out of
the, out of parliament.
So that's how it works thereand it's very different than you
know.
It works, but within aparliamentary system where the
(35:58):
prime minister is chosen.
So it doesn't.
I realize we're a ways away,clint.
Steve Davenport (36:07):
And it might not be 28.
But I I believe that we'regetting a very frustrated
electorate to consider trying todo something different, and
maybe it doesn't work the firsttwo or three times we try.
But it feels like labor and itfeels like some of the social
socialist side of the DemocraticParty is looking for a better
(36:30):
candidate and they would rather,you know, elect bernie sanders
and not win the election thanthey would voting for somebody
that they feel is, yeah, youknow, absolutely, you know just
getting lip service.
Clem Miller (36:45):
Yeah, I do think.
I do think there's a a largepercentage of the conservative
Democrats and the more liberalyou know anti MAGA Republicans,
you know people who are out ofpower, who could gang up and
(37:09):
become a centrist party alongthe lines that you're talking
about.
I think that's possible.
But they can only throw apresidential election.
They'll throw it to one of theother candidates.
Will they gain power inCongress?
That's a different question,and it may be that they could
(37:30):
gain a quarter of the seats or afifth of the seats in Congress.
Steve Davenport (37:34):
I don't think this.
This party is going to dominatethe other two parties, but all
I'm saying is it will create anopportunity for those people who
have been sitting in the middleof jumping back and forth,
never really happy with the full, that I think we can find a
middle party, right interestparty that will that satisfy
(37:54):
that scratch right, it would uhin order to uh, in order to be
able to bring I mean, there'dhave to be a lot of consensus uh
, there would be a more moderateset of policies, more moderate
set of budgets, becausesomebody's going to have to
bring along the moderates.
Correct?
I look at things and say are weat an extreme of this pendulum
(38:19):
swing?
We swung with Obama andultimately with Biden one way.
We're swinging another way withTrump.
One way, we're swinging anotherway with Trump, and what I'm
frustrated with is that man inthe middle who is not being
addressed and is ultimately, youknow, kind of lost, and I think
(38:40):
that you know so.
Anyway, one of the things thatI look at as a risk is that this
party system has some degree ofa blow up occurring, and it
could happen.
It could not happen maybe inthe next two or three years, but
our goal was really to getpeople to reduce risk, and we
(39:01):
kind of went off track here.
Is there anything else you wantto say to people about?
No, that's about it.
The other thing I would say isand this has nothing to do with
your investment portfolio, butit is something that I read
recently is that there's aSwedish philosophy called lagom,
l-a-g-o-m, and this philosophyis a belief in enough, and the
(39:26):
idea is, in America, we alwayskeep growing, growing, growing,
demanding, demanding, demanding,wanting more, wanting more.
I want to do better, I want todo better than my parents.
I want to do, you know I wantto do better than my neighbor,
and I think that the Swedishphilosophy of enough we all
(39:46):
could use a little bit moregrounding in that concept of
enough.
If we think about enough all ofa sudden, I don't need my
portfolio to go up 25% this yearfor me to feel good about my
investments.
I think we need to focus, as acountry, on more of our mental
(40:07):
well-being, physical well-beingand, ultimately, our education
and knowledge well-being.
And those things, whenunderstood well together, could
lead you to feel comfortableabout your portfolio, just as
selling some equity and buyingsome bonds or buying some gold
will.
So I think that we have tosometimes look at things in
(40:30):
terms of what's going to get methrough this next period of
volatility, and it may be inyour portfolio that you look and
feel great.
It may be looking at yourselfin the mirror and saying I feel
good about myself and what I'mdoing and my family's doing.
So I'm not going to let thesethings in the market influence
(40:51):
my life.
So that's my philosophicalranting for today.
Do you have any rantings youwant to?
Clem Miller (40:58):
Well, I mean along those lines, I would say that
you know, at least as far as I'mconcerned, one thing that helps
is to do travel right.
I enjoy travel.
You know I have done.
You know, every fall I've beenaway for, like you know, or fall
or summer I've been away for,you know, four or five weeks,
(41:22):
and you know that's a way to getaway and recharge and see new
things and experience new things, and you know, I think that's,
you know that's a good thing todo and see new things and
experience new things, and Ithink that's a good thing to do
Right.
And also, teaching.
I teach every Friday during thespring and I really enjoy
(41:51):
teaching students and I thinkthat's helpful too to give back
in that respect.
I know you give back too, yeah.
Steve Davenport (41:57):
I mean, I think I've just got a friend here in
Charlotte who's starting to talkto me about doing more with
financial literacy, and I thinkthat education and financial
literacy are key.
As we look at our position inthis industry and we look at
what we're doing, I think CFAsshould as much as they have
benefited from their career infinance.
I think we should say here's away to give back to others and
(42:19):
make their lives better.
I hope that some of this stuffis helpful to you.
I hope the Skeptic's Guide doesdeliver on improving your
investing and financial IQ and Ihope we can continue to have
you listening and have you enjoywhat we do.
Just a note we're going to havethree guests in the next three
months Frazier Rice talking tous about planning ideas and tax
(42:45):
ideas.
We're going to have JamesThorne from Canada talking to us
about what the economicsbetween the US and Canada is
going to become in this newtariff era.
And Stephen Gattuso talking tous about national debt and debt
management and how do weincorporate that as we look at
(43:07):
budgets and things going forward.
So I'm excited for our threeguests coming up and I hope you
continue to listen and send usideas.
All right, everybody have agood day, thank you, thank you.
Hello everybody, Welcome to Skeptic's Guide to
Investing.
This is Clem Miller and I'mhere with Steve Davenport, and
today we're going to discuss howto manage risk, to reduce risk
in your portfolio, in light ofthe fact that we're dealing with
quite a bit of uncertainty.
Quite a bit of uncertainty bothin terms of domestic politics,
(00:30):
in terms of potential increasedinflation and, of course,
geopolitics worldwide.
So, with those kinds of risksout there, we really need to be
able to control the risks in ourportfolio, and I think there's
no better person than to talkabout risk mitigation than Steve
(00:52):
.
So, Steve, why don't you leadoff?
And I'll jump in occasionally.
Steve Davenport (01:00):
Okay, I mean I was very nervous about NVIDIA's
earnings and I still am.
It feels to me like we kind ofknow.
This growth can't continue at98% a year and it's going to the
Blackwell chip or the AI chipseventually.
(01:22):
They will supply every bit theycan produce in 2025.
But then 2026, the question is,what will they be doing?
Will the chip change?
Will the infrastructure of thechip be the same?
And some of the guts willchange.
How do we look at the changegoing forward and how do we look
at the market?
In my mind, the talk abouttariffs, the talk about China
(01:45):
and not allowing technology inthe US or technology from
anywhere, asml or others to goto China in the chips battle for
AI supremacy and all militarysupremacy.
I believe that we're going tosee a volatile year, and we've
had two great years in a row,which we can argue is oh, the
(02:10):
past indicates the future andtherefore we're going to have
another great year.
Unfortunately, that past leadsto the future is not a good
indicator, and so I believe whatwe're going to see is a pause,
a pause or a step back in orderto allow for a more consistent
(02:30):
long-term growth.
So I look at things in terms ofwhat can I do without paying
taxes to lower my risk, and so,in that regard, I've looked at
the non-taxable accounts,meaning my retirement assets,
and I've sold some of myexposure in some of the
(02:51):
technology sector and some ofthe sectors.
Overall, I think that, movingfrom 20% invested in bonds now
I'm something like 40% investedin bonds Now I'm something like
40% invested in bonds.
So I went from 80% in stocks to60% in stocks.
(03:14):
Is it an overreaction?
Is it too much?
I don't know.
But I'm sleeping like a babyand when I look at things and
think about them hard and do mybest, it's you know, ultimately,
if I'm still thinking about itgoing to bed and I'm still
thinking that there's problemsout there that I don't know
(03:36):
about, can't anticipate, isthere something else I can do?
And so the next step, afteryou've kind of lightened up on
some of the risk assets in yourportfolio, I look towards is can
I do something with options?
Can I do something with thenames that I'm thinking about
(03:57):
turning over?
Anyway, we've been invested in afew ETFs as sector exposures
and we replaced individualexposure with sector exposure.
Now I've sold some of thatsector exposure and I'm letting
it sit in cash and some of thoseyou know.
We've got names that we'redebating and whether we're going
(04:20):
to probably decide in the nextfew weeks.
So when that happens I willtake that cash that I put on the
sidelines and put it to work,because those names are where we
ultimately think there's valueas we see names pull back.
This week we saw Sempra pullback.
Sempra is a utility.
It missed earnings of $1.50when the market was expecting
(04:45):
$1.60.
So a $0.10 or a 6% move in thequarterly earnings.
The stock was down 25% on thenews.
I think that's an overreaction,especially for a utility stock,
but that's the reality we mustdeal with.
(05:09):
So again, first thing, are therethings in your non-taxable that
you can sell and lower yourrisk, to put yourself in a
better position to notexperience as much downside?
How much downside is going tocome?
I don't have a crystal ball.
If I did, I'd be probablymaking a little bit more money.
I think we're talking about a10% to 20% correction, but
(05:34):
that's typically the way wedefine corrections and I think
this will be a correction.
I think that we're looking atways to protect.
The next step I do is to buy putoptions.
I sell call options on some ofthe larger positions, some of
the exposures, like the S&Pexposure.
I sell a call option 10 to 15up and I buy a put 10 to 15 down
(06:00):
.
It's for a period right now.
Now it's for a period.
Right now I'm looking at theOctober's S&P and I think that
(06:22):
when we look at the October's,I'm somewhere around 525 on the
put side and 650, 675 on theupside, and that's for the SPY.
I think that we are in a periodwhere there isn't going to be a
sign for everyone to do whatthey have to do.
You need to do what you shoulddo with your portfolio, based on
what your needs are and whatyour short-term and longer-term
(06:43):
needs are.
If a client is rebuilding orrenovating and they know they're
going to need cash, then let'sisolate that cash and put it
aside so that we're not sellingit in the middle of a downturn.
Let's plan, let's prepare.
Semper Paratus is the Marines'motto and it's also in my motto.
(07:05):
I think it's always good to beprepared.
So that's kind of where I am.
Glenn, what do you think aboutrisk and what are you willing to
take and what are you willingto do to try to reduce it?
Clem Miller (07:19):
So you know, just to start off, we both agree that
there's a higher risk ofrecession.
Just to start off, we bothagree that there's a higher risk
of recession this year and weboth agree that there's a
significant probability of acorrection.
How much, we really don't know.
(07:40):
Is it enough to put us in cashentirely?
No, I think we agree on that.
I think in some ways, I'm alittle more conservative in
terms of what I own or no,steve's a little bit more
conservative than what we own.
I have about 9% cash in theportfolio 9.1 right now and I've
(08:06):
got about 4.3% gold in theportfolio.
So obviously, cash has a betaof zero and gold has a beta of
0.12.
So I'm trying to reduce beta inmy portfolio.
So cash and gold help doingthat beta in my portfolio.
(08:26):
So cash and gold help doingthat.
And I hold a number of stocksthat have relatively low betas
that help pull down my portfoliobeta.
So Progressive 0.21, bostonScientific 0.75,.
Spotify 0.85,.
Walmart 0.56,.
Philip Morris 0.85, walmart0.56, philip Morris 0.17.
(08:49):
Uh.
Uh.
T-mobile 0.45, uh.
Primo Brands 0.34, and that'sjust within the top 15 of my
stocks.
So, yeah, I've got uh, I've gotsome pretty low beta stocks
that nevertheless meet my uh,meet my other criteria.
So those are pulling down myportfolio beta.
(09:12):
I think that I do find that I'malready positioned where I've
got downside protection.
So on days when my portfolio isdown it tends to do unless it's
down a lot, it tends to dobetter than the downside.
(09:32):
And so some downside protection.
If the market goes up some ittends to outperform slightly,
but if the market outperforms alot then I do less well,
obviously, than the market.
So my beta just on stocks, isaround 0.95, 0.90.
(09:56):
If you throw in cash and goldwith their low betas, I'm
probably down more, around 0.85on beta.
That's the way I'm reducingrisk in the portfolio is by
controlling beta.
If I see even more volatilityand just seeing continued chaos
(10:23):
in Washington, I think I'lltighten up even more.
Have more cash, have more gold,have lower beta.
Problem is that it's reallyhard to find.
The universe of stocks thathave low beta and also meet
other criteria is not high, it'snot large, it's not a large
(10:47):
universe.
If it was easy, clem wouldn'teverybody do it.
Steve Davenport (10:50):
Yeah, exactly, you get the same return and take
less risk.
Wouldn't you have the moneymachine on and you just keep
printing?
Clem Miller (10:58):
So I mean I like to see low short interest, low peg
and low beta and in thisenvironment it's kind of hard to
find those stocks.
Steve Davenport (11:08):
Right, I mean, I guess I'd ask you, clem, is
there a point at which you mightconsider using options?
Yes, uh, I don't.
Is it because you're not, thatyou haven't done it in the past
and you don't want to do it, oris it you have a concrete reason
not to do it, because it's justnot part of your?
Clem Miller (11:30):
philosophy.
It's not part of my philosophy.
I like to, I like to look atyou know, these fundamental
issues, and not you know, andnot try to, not try to do that,
not try to uh, set myself up forthat okay.
Steve Davenport (11:46):
I mean there's different.
You know we each have differentexperiences getting where we
are and I've kind of believedthat there is a.
There's a point at which youcan put a stronger control in
place than depending on becausein there, because there's been a
lot of research that says thatdiversification fails, it's in a
(12:11):
down market where you see adownturn for a given week of 3%
or 4%, you're going to see thatthe correlations tend to go to
1%.
So I agree that the evaluationsof beta are good long term, but
in the short term, during adecline, the overwhelming move
(12:32):
in correlation isn't maintained.
So it's hard.
It's even hard for names thataren't priced regularly Because
you've got, just because theprice that you have on your
private equity gets marked at acertain point, or private real
estate or private debt.
It's going to get marked but itmight not be as efficiently
(12:53):
marked as the public markets.
Clem Miller (12:56):
So, in other words, they'll be marked wrong.
Steve Davenport (13:00):
I'm not going to say that because, clint,
because I'm a gentle and kindindividual, I don't want to
berate anybody, I think, as Iwas saying-.
I think, as CFAs, we know thisexists and therefore the
question is if we know it exists, do we just pretend that
diversification works and sayit's the simplest free lunch, or
(13:24):
do we say it's a free lunch forsome period of time, but it
isn't all?
100% free lunch for every time?
Clem Miller (13:31):
Well, you know, if you're keen on too much
diversification, then you mightas well just hold a market ETF.
Correct?
You have to believe or haveconviction that stock picking
works, and I do have convictionin that.
(13:53):
I know you do too.
Steve Davenport (13:54):
Right.
I think that that's whatdifferentiates us.
We're skeptical thatdiversification through indexing
could be de-worsification, andI don't want to de-worsify.
I don't want to own names thatI don't believe in.
I want to own names that Ireally like.
So by doing that, we are makingdecisions that could be viewed
(14:18):
by some people as inappropriate.
Why are you making thosedecisions?
Why don't you just agree toassume the index like and I look
at it as a middle child and saythere's some benefit to having
an index.
I like having an index in theportfolio because it allows me
to easily hedge.
So when I think about theportfolio and I think about what
(14:42):
do I do to protect it, I have acomponent of 10% to 15% that is
in the index that I can easilyhedge.
It's very liquid.
It's one of the most liquidinstruments in the world.
Therefore, I trade liquidityfor some of the premium that
other people are getting fromthe private and other markets.
They believe that those thingshave a correlation that's
(15:06):
negative or zero.
I think that's entirely untrueand they know that from research
that most of those assetclasses, when they're adjusted
for the risk properly, are justas risky as the equities.
So therefore I say OK.
If we know this is a falsepremise, if we know the
correlation breaks down, I thinkthat it's worth trying another
(15:32):
tool.
It doesn't.
Just because not everyone isdoing it is not a reason in my
world to not do.
It is not a reason in my worldto not do it.
I believe our job as investors,our job is trying to help
clients protect their assets.
It's protect and grow.
There's two words, it's not one.
(15:53):
It's not just grow my assetsand I'll take whatever risk I
have to.
It's protecting as you go alongso that, if something happens,
your overall life is notaffected.
And you're looking at yourassets as I put some things
aside and I wait and I'm patient.
(16:13):
Is it wrong?
It depends on your perspectiveand I think that you know I am
going to continue to try toinfluence Clem and get him on
the derivatives bandwagon andpretty soon he's going to be
writing calls on all his namesand he's going to tell me that's
the best thing that everhappened to him.
His yield on the portfolio isup one and a half percent and he
(16:35):
never realized how it wouldmake him feel.
And I'm going to enjoy thosemoments and you know he's going
to send me a bottle of champagneand we're all going to
celebrate.
Well, we're waiting for that.
Clem, what do you think it willtake for you to become, to make
your next move or to dosomething Like?
Is there some signal you'rewaiting for, whether it's
(16:58):
Ukraine, or whether it's Gaza,or whether it's tariffs?
What's on your radar in termsof next things that you could
see?
Shoes to drop?
My radar shows debt ceiling.
Due date March 15th.
I know that they can do thingsto extend, but I think they've
(17:19):
already been doing things toextend what's on your radar.
Mine says the debt ceiling onthe 15th is going to be a
negative event.
Clem Miller (17:32):
Clearly, but I don't think there's any single
event.
I think what we're seeing is aslow well, maybe not so slow,
but a deterioration in stabilityboth in the United States and
(17:52):
overseas, and I think that thatcreates a concern, creates a
concern, and I don't know wherethe exact tipping point is, but
I think we're seeing a lot ofvolatility now and I think that
volatility suggests to me thatwe could hit a tipping point,
(18:19):
whether that's the debt ceiling,whether that's, you know,
failure to come up with a newbudget, whether that's a failure
of the Russia-Ukrainenegotiations, the US pulling out
of NATO or something alongthose lines.
The US invading Canada, I meanthat would, uh, not that I
(18:43):
really expect that to happen?
I'm not sure I should put thaton the radar.
Yeah, not that I would expectthat to happen, but you know
there there's a lot ofuncertainty right now, a lot of
nervousness, and you can seethat in in uh.
You know how the S&P 500 ismoving and how the NASDAQ is
(19:06):
moving.
You see that in the negativeperformance you had last week.
I just think that we're goingthrough a rough patch right now
and it's hard to see where Imean, what's the catalyst for
(19:28):
getting out of where we are now?
Steve Davenport (19:29):
I think that coming up with a budget and
coming up with the approval oftheir extension of the tax, the
taxes that are expiring, thetaxes that are expiring I think
that an extension of that, evenfor four years or five years,
would make a lot of people verycomfortable, right?
They're worried.
Something can happen there, andI think that you know.
(19:53):
On the other side, I can seethat this negotiation with Putin
on the Ukraine is not going tobe a smooth sailing.
I think there's going to be apoint where you know, how are
the governments of Europesuddenly going to come up with
the resources they need to fundand to help rebuild the Ukraine?
(20:17):
It's not like everybody has anextra 200 billion sitting around
, right?
It's not like everybody has anextra 200 billion sitting around
, right.
Clem Miller (20:29):
Germany and France are not in budgetary territory
where they can say this is awonderful climate.
The Europeans the EU at leasthas a self-imposed ceiling on
how much they can borrow, sothey would have to remove that
ceiling in order to be able tobuy more weaponry and contribute
to the war.
I think the key thing is goingto be the participation of the
(20:53):
UK and the French, and maybesome other governments, in
peacekeeping, but thatpeacekeeping requires there to
be a peace agreement first, andthat's what I'm skeptical about
whether there will actually be apeace agreement I'm really
nervous about, you know,notwithstanding the so-called
(21:15):
critical minerals deal that'ssupposed to be signed tomorrow,
I'm really skeptical aboutwhether the war is going to come
to an end.
Uh, I think it's going topersist.
I'm concerned that the us has,uh has tilted toward russia to
some degree, certainly more sothan before, or become neutral
(21:40):
with respect to russia,certainly more so than before,
or become neutral with respectto Russia.
I'm concerned about, I'm reallyconcerned about, the Elon Musk
situation.
Steve Davenport (21:59):
I'm concerned about what that implies for the
rule of law in the US.
So, yeah, I mean, I hate to.
To me, I think, thepersonalities of Musk and the
personality of Trump willeventually have a follow up.
I don't see this as an alliancethat can last centuries.
I think this is an alliancethat will last a series of
(22:20):
months, not years, and so Ibelieve that when they get
through all of the courts andthe Supreme Court and
everybody's weighing on whetheryou can or you can't change the
(22:41):
budget the Congress determinesthe budget how do we get?
How do we get where we need togo, get where we need to go?
I think that some of thechanges and some of the, you
know, eliminating people who areon some type of suspension, I
think is not going to beaccepted or is going to be
embraced by all the people, asthat's what Trump ran on.
Trump ran on a lot of things.
(23:01):
He made a lot of statements.
You know, as we know, aboutPanama, about Greenland, about
Canada.
He's very good at makingoutlier statements.
As we mentioned the pufferybefore.
I don't think that we will seethis alliance kind of thrive and
prosper.
I think it will come down toegos and, as we look at
(23:24):
political leaders.
We like to think everything isbased on reasons and facts.
I think that we're dealing withhumans, and these two humans
have too big an ego to let theother get attention for or get
credit for any of the changes.
Clem Miller (23:43):
By the time that happens, though, steve, by the
time they break up, there'sgoing to be, I think, a huge
amount of chaos within thegovernment.
There already is, but I thinkit's going to be even bigger,
and I'm concerned.
I'm concerned that Musk andTrump will ignore the courts.
Steve Davenport (24:05):
Yeah, I have a little bit less urgency than you
do.
I think that we're just I kindof believe that we're a very
resilient economy.
We have very resilientbusinesses, and I think that I
don't know how we're going toabsorb any of the people that
are cut from government.
(24:25):
I don't know how we're going topay for the increased
unemployment.
I don't know how we're going topay for the increase in
interest rates if we keep goingforward.
I think there's a lot of issuesto be discussed and dealt with
and I don't think any of themare going to go easily.
So therefore, like you, youseem to think that the steam the
(24:46):
bulldozer keeps destroying.
I look at things and say Ithink the bulldozer runs out of
gas and I think we start to seeagain.
He only has a time period hereof about a year before we start
thinking about re-election forthe House and Senate, and so his
(25:09):
time frame of when he wants toget things done and what he's
able to get done, I think isgetting shorter, and I think
he's expending energy in placesthat doesn't really deserve the
time and effort.
So I'm a little bit lessfrightened by things, which
maybe I'm naive, but I alsobelieve that, you know, there's
(25:34):
a lot of good people and there'sa lot of good things in this
country that will be very hardto untangle or break down, this
country that will be very hardto untangle or break down, and
so I have more faith in theAmerican people than what
they've shown thus far.
So I think that I think we willsee a resurgence, and it will
be a resurgence based on some ofthe treatment of some of the
(25:58):
people in these differentsituations, whether it's USAID
or whether it's something else.
I think there are a lot ofpeople who are upset with what's
happened, and to me, what'ssetting up for is Trump gets,
you know, loses majority in boththe House and Senate in the
midterm elections.
I've talked about it, and maybeit's too far away and we should
(26:20):
deal with something closer.
I don't know, but I look at theability of him to get things he
needs in the next six monthswith regard to debt ceiling,
budget and tax reform, torestate or reengage or extend
(26:40):
the tax benefits.
If the government does nothing,tax rates go up and government
collections go up.
I think that, unfortunately,there are people who and I'll
say that they are in thepolitical realm who would walk
around and say I didn't increaseTrump didn't extend it long
(27:02):
enough, I didn't increase taxes.
Well, you knew that if itexpired, that you needed to do
something to maintain it.
Oh, that's Trump, that's not me.
I'm just sitting here in my owndistrict and you know I don't
like to see everybody payingmore.
But am I glad that you knowsalt went away, or am I?
Clem Miller (27:22):
glad that you know that Medicaid is continuing.
Steve Davenport (27:25):
Medicaid is continuing, I think I am.
Medicaid is continuing, I thinkI am.
And so I think that when welook at this historically, we're
going to say, just like therewas the Newt Gingrich revolution
I think revolution might havebeen a little extreme.
I think Doge the governmentefficient.
Like the two words governmentefficiency, they are oxymoronic.
(27:51):
They don't make sense together.
I was an industrial engineer.
The efficiency in government isa non sequitur.
It doesn't exist.
If you believe it exists, thenI got some land in Florida that
you can build your house on.
It's just not a factor, and socreating an agency around
(28:22):
government efficiency is just asmuch a pipe dream as we're
having a revolution in the House, and it's going to affect all
of government and all of what'shappening in the Republican
Party.
And 10 years later, you know wehave Bill Clinton as president
and he agrees to NAFTA and heagrees to, you know, do some
things that he would never haveagreed to before.
(28:42):
Is that the revolution?
I think a revolution might betoo strong a term.
I think government efficiencyis too strong a term.
I think we're going to see aninteresting period in government
and I think it's going to bevery hard to see where we go in
five years or 10 years afterwhat's happened, but I think
(29:03):
we're going to see, most likely,a lot of battles and a lot of
things fight for, but I thinkultimately, we're going to see a
return to a more balancedgovernment, which is a more
divided government, and I thinkthat's simply what we're going
to.
The only big thing I think wesee out of this is, if the
(29:24):
depression is bad enough and ifthings are, I think the US is
eventually going to move to amulti-party system instead of
the Republican and Democraticlogjam that we have right now,
which is neither one is trulymaking the Democrat voter happy
or the Republican voter happy orthe independent voter happy.
(29:45):
The choices are too narrow andthe choices are too defined.
Therefore, I think we adoptmore of a British, french,
italian type consensus Germangovernment that is built by
consensus, with people who wantto work together to improve
things, and I think that thatcould be the best thing that
(30:08):
ever happens to America, becauseultimately, I think it would be
harder to get things done andthe conditions would remain more
stagnant, and if everybodyloves standoff or, you know,
stalemate, no businessman wantsto see his tax rate changing.
He wants to see his governmentsubsidies changing.
(30:29):
He wants to see his governmentsubsidies changing.
He wants to see his employeetaxes changing.
Clem Miller (30:34):
They want to know the rules of the game.
That's what they want to know.
Steve Davenport (30:37):
Just tell me how to play and I will play the
game, but don't change the gamehalfway through For those people
who are 55 and looking to selltheir business.
You know, I think that changingthe cap gains rate or changing,
you know, it is going to be thegovernment that delivers the
(30:59):
most benefit to the most peoplethat ultimately wins.
And I think that right now,these groups are fighting
battles that don't need to befought.
These groups are fightingbattles that don't need to be
fought.
We need to focus on defense,education, some of the things
that are core.
Our healthcare system is.
We're charging most and we'renot getting the best results In
(31:23):
any other sector that wouldimmediately result in.
Well, how do we get betterresults for the average American
?
But in this reality, it's socomplicated and there's so many
rules and regulations we can'tfigure out a solution.
I think we've got to go back tofocusing on those things health
, education, welfare.
(31:45):
Those are the things thatpeople really care about.
Those are the things thatpeople really care about.
I'm sorry if I disagree withyou, clump, but I still have
this idealistic, hopeful part ofme that believes that we could
go into a battle, we could seechaos for a period of time, but
(32:06):
we will ultimately come out theother side.
Clem Miller (32:12):
I'm a little skeptical about that.
Steve Davenport (32:15):
You had to use that word.
I am skeptical too, clem.
I'm not saying it's a 90%probability event.
I'm saying that when you getinto chaos and disorder,
ultimately people start to askquestions of how do we restore
order, how do we lessen thechaos?
(32:36):
And I wouldn't be surprised ifyou know some people.
You know maybe we had anindependent candidate that took
over in 28.
I think that the time for anindependent is ripe, because I
think both parties have showntheir failure to understand what
(32:58):
Americans really want.
Clem Miller (33:00):
Yeah, I think the likelihood of a third party is
of a realistic third party isminimal.
I just think that you know of arealistic third party is
minimal.
I just think that you know it'sbeen tried before and the only
(33:25):
thing it does is it throws theelection.
Steve Davenport (33:27):
So that's all, that's the only thing it does.
So do you think the Germanslook at the election as having
been thrown?
I mean, these other countrieshave these multiple parties and
they don't always win, andthey're they represent some type
of a consensus.
Ultimately, they have to buildbetween the different parties.
I'm not sure.
Just because we've not had itdoesn't mean we're going to
(33:47):
throw an election.
Clem Miller (33:48):
So there's a big difference.
Because in the US we're talkingI mean, right now, you, I think
you've been you're talkingabout a president, right?
Okay?
So there's only one person whocan be president, and so if you
have a third party, come in.
They're going to take votesaway from one of the candidates
(34:10):
and then the other candidatewill become president.
In a parliamentary system, theprime minister is chosen by the
parliament, and in a lot ofthese countries not all of them,
but in a lot of Europeancountries one party doesn't have
enough seats in order to beable to choose the prime
(34:31):
minister, so they have to form acoalition with another party in
order to, and then they givethat other party seats or roles
in the cabinet, they give thempositions and they adopt some of
their policy stances.
(34:51):
So it's a negotiation, but itcomes up with a prime minister
who's from the first party.
So, taking Germany, the recentGerman examples as an example,
even though there hasn't been achancellor picked yet there
hasn't been a chancellor pickedyet it's, you know, almost
certain to be they had thisfellow, friedrich Murs, who's
(35:15):
the you know who is the PrimeMinister, who is the head of the
Christian Democratic Party andhe is going to align himself
with the Social Democratic Party, which is is the center left
party, and they're going tofreeze, uh, the neo-nazi party,
the, the uh afd out of, uh, youknow, out of government.
(35:38):
They're going to keep them out.
So the first party and thethird party and maybe the fourth
or fifth party will gang up andkeep the second party out of
the, out of parliament.
So that's how it works thereand it's very different than you
know.
It works, but within aparliamentary system where the
(35:58):
prime minister is chosen.
So it doesn't.
I realize we're a ways away,clint.
Steve Davenport (36:07):
And it might not be 28.
But I I believe that we'regetting a very frustrated
electorate to consider trying todo something different, and
maybe it doesn't work the firsttwo or three times we try.
But it feels like labor and itfeels like some of the social
socialist side of the DemocraticParty is looking for a better
(36:30):
candidate and they would rather,you know, elect bernie sanders
and not win the election thanthey would voting for somebody
that they feel is, yeah, youknow, absolutely, you know just
getting lip service.
Clem Miller (36:45):
Yeah, I do think.
I do think there's a a largepercentage of the conservative
Democrats and the more liberalyou know anti MAGA Republicans,
you know people who are out ofpower, who could gang up and
(37:09):
become a centrist party alongthe lines that you're talking
about.
I think that's possible.
But they can only throw apresidential election.
They'll throw it to one of theother candidates.
Will they gain power inCongress?
That's a different question,and it may be that they could
(37:30):
gain a quarter of the seats or afifth of the seats in Congress.
Steve Davenport (37:34):
I don't think this.
This party is going to dominatethe other two parties, but all
I'm saying is it will create anopportunity for those people who
have been sitting in the middleof jumping back and forth,
never really happy with the full, that I think we can find a
middle party, right interestparty that will that satisfy
(37:54):
that scratch right, it would uhin order to uh, in order to be
able to bring I mean, there'dhave to be a lot of consensus uh
, there would be a more moderateset of policies, more moderate
set of budgets, becausesomebody's going to have to
bring along the moderates.
Correct?
I look at things and say are weat an extreme of this pendulum
(38:19):
swing?
We swung with Obama andultimately with Biden one way.
We're swinging another way withTrump.
One way, we're swinging anotherway with Trump, and what I'm
frustrated with is that man inthe middle who is not being
addressed and is ultimately, youknow, kind of lost, and I think
(38:40):
that you know so.
Anyway, one of the things thatI look at as a risk is that this
party system has some degree ofa blow up occurring, and it
could happen.
It could not happen maybe inthe next two or three years, but
our goal was really to getpeople to reduce risk, and we
(39:01):
kind of went off track here.
Is there anything else you wantto say to people about?
No, that's about it.
The other thing I would say isand this has nothing to do with
your investment portfolio, butit is something that I read
recently is that there's aSwedish philosophy called lagom,
l-a-g-o-m, and this philosophyis a belief in enough, and the
(39:26):
idea is, in America, we alwayskeep growing, growing, growing,
demanding, demanding, demanding,wanting more, wanting more.
I want to do better, I want todo better than my parents.
I want to do, you know I wantto do better than my neighbor,
and I think that the Swedishphilosophy of enough we all
(39:46):
could use a little bit moregrounding in that concept of
enough.
If we think about enough all ofa sudden, I don't need my
portfolio to go up 25% this yearfor me to feel good about my
investments.
I think we need to focus, as acountry, on more of our mental
(40:07):
well-being, physical well-beingand, ultimately, our education
and knowledge well-being.
And those things, whenunderstood well together, could
lead you to feel comfortableabout your portfolio, just as
selling some equity and buyingsome bonds or buying some gold
will.
So I think that we have tosometimes look at things in
(40:30):
terms of what's going to get methrough this next period of
volatility, and it may be inyour portfolio that you look and
feel great.
It may be looking at yourselfin the mirror and saying I feel
good about myself and what I'mdoing and my family's doing.
So I'm not going to let thesethings in the market influence
(40:51):
my life.
So that's my philosophicalranting for today.
Do you have any rantings youwant to?
Clem Miller (40:58):
Well, I mean along those lines, I would say that
you know, at least as far as I'mconcerned, one thing that helps
is to do travel right.
I enjoy travel.
You know I have done.
You know, every fall I've beenaway for, like you know, or fall
or summer I've been away for,you know, four or five weeks,
(41:22):
and you know that's a way to getaway and recharge and see new
things and experience new things, and you know, I think that's,
you know that's a good thing todo and see new things and
experience new things, and Ithink that's a good thing to do
Right.
And also, teaching.
I teach every Friday during thespring and I really enjoy
(41:51):
teaching students and I thinkthat's helpful too to give back
in that respect.
I know you give back too, yeah.
Steve Davenport (41:57):
I mean, I think I've just got a friend here in
Charlotte who's starting to talkto me about doing more with
financial literacy, and I thinkthat education and financial
literacy are key.
As we look at our position inthis industry and we look at
what we're doing, I think CFAsshould as much as they have
benefited from their career infinance.
I think we should say here's away to give back to others and
(42:19):
make their lives better.
I hope that some of this stuffis helpful to you.
I hope the Skeptic's Guide doesdeliver on improving your
investing and financial IQ and Ihope we can continue to have
you listening and have you enjoywhat we do.
Just a note we're going to havethree guests in the next three
months Frazier Rice talking tous about planning ideas and tax
(42:45):
ideas.
We're going to have JamesThorne from Canada talking to us
about what the economicsbetween the US and Canada is
going to become in this newtariff era.
And Stephen Gattuso talking tous about national debt and debt
management and how do weincorporate that as we look at
(43:07):
budgets and things going forward.
So I'm excited for our threeguests coming up and I hope you
continue to listen and send usideas.
All right, everybody have agood day, thank you, thank you.
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