Strategies and Systems Want Your Money
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Welcome the money for the rest of us. This is a personal financial on money, how that works, how to invest IT and how to live without worrying about IT. And your host David's dying today is episode five o one.

It's titled strategy and systems want your money. I recently read a memo by Howard Marks. He is the co founder and cohan of oti.

Capital management of firm that I invested with at my vision firm is the author of mastering the market cycle. We discussed his approach to investing back in episode three ninety seven. We always linked to related episode in the showing te to the podcast, so you can check out that episode link there.

In his memo, mark, who who I believe is in his late seventies, wrote, from my vantage point, acid allocation is a relatively new thing. No one used that phrase when I joined the 3 fifty five years ago。 That would be back in one thousand sixty nine.

Structuring portfolio was a pretty simple matter. Following the classic six forty split, most us investors limited themselves to investing in U. S.

Stocks and bonds. And there was a time honored notion that something like sixty percent equities and forty percent bonds represented reasonable diversification. Mark continues that now investors have so many choices in that the term asset allocation is very prominent. There are individuals and whole department dedicated to doing acid allocation, and which means to decide the weight of ask classes to be held in a portfolio.

And so he listed off questions that are asked as part of the asset allocation process, how much in stocks for s bonds, how much an alternative investments, which includes private capital such as venture buyout funds, really state, how much in one's home country versus outside of one's home country, how much in develop versus emerging markets, how much in high quality asset versus low quality, how much leverage do we use? What about derivatives? These are all questions we've covered on episode of money for the rest of us because my background as a professional investor and advisor is asset allocation.

When I got into the advisory business in the midd nineties, a typical client that we would bring on, we're using maybe two managers and they were baLances manager that the manager might be running a separate managed stock account, picking individual security, perhaps forty to fifty stocks, and they would manage a bond account. Selecting individual bonds in the allocation weight was typically sixty. We would go through an acid allocation study with the client.

We would introduce the concept of international diversification, allocating to small cap stocks, which typically weren't always represented in the portfolios. The sixty, forty portfolios typically would be heavily waited toward large company stocks. We would structured a traditional portfolio.

IT was neutral. So there would be elements of growth style, investing value style. Most of the assets were using either simply managed accounts or muto funds.

There was a focus on adding value through manager selection, who in turn were trying to generate excess return through security selection. That was the approach for the first seven years or so of my advisory career. And I found IT frustrating because these managers were often under perform.

There was constant pressure from the investment committee to fire and under performing manager and replacing with a outperforming manager that typically was outperforming about the short term and long term, which means their style had been in favor over the last few years. And often that manager might get hired and their style would go out of favor and then they were under performance. So IT sort of this manager rotation.

We as advisers did not have this question in that the committees or the client made the final decision both as to the asset allocation as well as which managers to hire. Now around this time, I had become a partner of a firm. I SAT on our management committee.

This would have been in the early two thousands. And so I spent a lot of time thinking about strategy. And what is strategy? What is our corporate strategy? What is our investment strategy? One of the resources I turned to was a one hundred and ninety six article by Michael e.

Porter in the harvard business review. Porter is an economist, researcher and a very one on expert on strategy in the article. He said, strategy is about being different, choosing a different set of activities that deliver a unique mix, a value as investment consultants.

Our activity was the research managers and recommend them to clients who then choose them as part of their portfolio. I wanted to pursue some different activities, a different approach to investing, and I experimented with different approaches. And I came up with something called, and this was in two thousand, two opportunities.

Value in the idea is to assist client and to achieve their long term investment objective by focusing on the primary drivers of long term investment success, asset allocation, portfolio struction and minimizing fees and expenses. The idea was to use primarily etf and to make opportunities adjustments in the allocation in order to avoid speculative bubbles and to overweight under value segments of the market. We would have direction so we could implement changes generally one to three changes a year.

And these changes are often incremental on the margin is part of rebalancing, but emphasizing the areas they had the most attractive risk reward opportunity within the confined to the investment policy statement, the target allocation and the ranges. I put together a presentation with the bad test that I had done, and I shared IT with my partners. This was a big change for us because IT meant we had to change our government forms, which is known as the A D.

V, to say that we would have direction where's previously, we were non discretionary managers. And so is that like managing money? yes. And the so IT was a different activity and IT was a cultural hurdle for our firm and our partners because we never had done that. We didn't know what how our clients would react, but we did.

IT in partner, I put up some money to start building out the track record, and then we started eventually marketing IT, and the portfolio grew to almost two billion dollars and assets and IT in IT continues today at F, F, G. And eventually evolved into their outsource C I O service. Before we continue, let me POS and share some words to one of this week.

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Now, I left F, G. And twenty twelve and launched money for the rest of us a couple years later. And I had a different strategy, different activities.

I was going to provide education through audio, podcast and video that I was not going to be an adviser nor an as a manager. Podcasting was a fairly new medium, had been around a few years, but they weren't that many personal finance podcast. I chose a different activity by doing a solo show, primarily as opposed to interviewing guest.

So things that were different and choosing not to do some things, choosing other activities. We launched a plus membership where we have mono portfolios and monthly investment conditions and strategy report. We provide guidance on reasonable return assumptions.

We look at what's attractive, where their bubbles, essentially how I manage money at F A G, but applying in a way where we were actually managing the asset. One of the big influences for me in leaving F V G and launching my own firm is sah golden. Seth goldman described himself as a teacher that does projects, and he has written numerous books.

In two thousand eight, he wrote a book called tribes and launched a form, a tribes form, where we interacted with individuals and made friends and connections effect. We had a friend statter home couple weeks ago that was here from england that I had met on this tripes forum. And I have other friendships that met back in two thousand and eight.

We've kept up that connection. Sah has a different definition of what strategy is. He's talked about IT for years, but recently he came out with a book called this is strategy that built off his earlier work.

This is marketing, and i've took that. This is marketing course. My son have taken that course. And so when he comes out with something new, I I think about IT.

But goin strategy is a philosophy of becoming, what are we going to become, who do we seek to serve and what is the change we're seeking to make, add money for the rest of us. Our strategy is to help individuals understand money investing in the economy so they can make Better, more confident financial decisions. The change is confidence piece of mind.

And when we interview listeners and members, they say that's what they get having interacted with our podcast and materials plus membership. One of the changes that we seek is listeners and members feel like they have enough expertise that they can be relied on by families and friends, and that gives them some status to be able to explain and help main investment concepts because many people, even they're responsible for the retirement, they just don't understand and it's confusing and complex. And so if somebody can explain the basic, that can be very helpful.

So strategy is choosing what activities we want to pursue and what activities we don't want to pursue. In the process of installing change, of making change, introducing change, our strategy inevitable runs up against systems. Systems are made up of nodes and connections.

A city is a system with many interactive parts that has buildings which are note, people note, but he has connections, roads, linkages. There are conventions, standards. There is protocol.

At university, as an underground, I took a class on unwritten rules and IT out that to succeed in or anything, we needed to understand the culture and the written rules. An example of another system detailed and sets book, this is strategy, is the whaling system. In eight forty six point ted out, the american walling fleet reached all time peak.

There were seven hundred and thirty five ships, seventy thousand people employed in the industry, and they were hunting sperm wales because where royal was used for lighting. Now there were nodes to this walling system. There were boats, sellers, ducks, they were manufacturer of lanterns.

There were companies that distributed the oil that brought the whale liber to the shore. So all these nodes, and these noted, in sense, things that they want IT, things that they cared about, there are linkages and conventions and rules. But then the system changed.

Systems have momentum, but they can change. And what changed is the development of carosse lamps and the discovery of oil. And pennsylvania sah points out that the system didn't want to kill whales.

I mean, there was a whaling system, but the real system was just trying to solve the problem of darkness and make a profit from IT. And when they became cheaper and more efficient, use carosse than the system of lighting evolve and IT evolved began with electricity. So there are always outside forces buffering the system.

We think about A I today. A I is impacting all types of systems, every single company, and sometimes to trying to implement IT. But it's out there. There are financial systems. And as an investment adviser and now as an educator and software developer, I think about what are the systems that we, as business owners and also in the visual investors, interact with.

Within the financial system, there is the financial advisor system where the nodes of people, they want to help people manage their asset and charge a fee for doing so. There are the system of product sponsors and vanguard swap. They wanna generate fees by offering products, E, T, S, index funds, advisory services.

There are the index providers such as msci, bloomberg, S N P. They provide data and indexes. And they want acid managers, product sponsors, to use those indexes to create et so that the index provider earns fees from that.

They want more etf following their indexes. In fact, there are more indexes out there now. They're proferred than ever been, even more than there are individual funds and etf.

Another system within the financial system is the financial media. They want eyes and ears consuming content so that they can generate advertising revenue and they can get authority. Financial regulators, or another part of the financial system, they are, they enforced. They want people did not get hurt, and they want to be recognized as authority.

There is the education tools and conversation platforms, podcasting forms, videos, courses, and within that educations and the other systems are all kinds of factions that have different world views, an index, or as a different world view, than somebody that's very focused on security selection and active management. This, the fire community, the financial independence, retire early. They have a view and a world view.

In a way, they interact with the different parts of the financial system. There's trader, there's crypt or there's academia. Now, one of the things that sah points out of in his book is we can't fight the system that is incredibly difficult.

There is momentum is very difficult to roll up. River is Better to follow. The momentum is launching a new product like we have with asset camp.

We think a lot about the different systems that are out there and where our product fit or something like money. The rest of us plus and IT interacts with all these different systems. And it's it's understanding the connections and that what strategy is, is figuring out the change we want to make.

What activities are we pursuing that, that are different, how do we interact with the systems, hopefully attract attention from people that find what we offer helpful and are willing to pay money for IT. That's what capitalism and business is. Before we continue, let me pause and share some words from this week.

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Status is about who gets to eat lunch first, who's up and who's down. We all care about status. I read a book on IT recently been a couple years now with David Marks, all about status and culture. And it's just something that's engrained with us. Even though we might think that we don't make decisions based on status, we all do. The filling ation is about are we in sink in that what's the person to my right into my left, what are my competitors doing, what are my partners doing? And we want to be affiliated with others because we want that sense of community and freedom from fear.

So all businesses and all individuals in in terms of your career or you're running a business, we make certain in terms of what we're offering to the world the changes were seeking to make and how are we granting people additional status or affiliation or alleviating their fears with something like asia camp, which are stock and bond market research tools for understanding happened with markets, the natural markets where we now in terms of valuations and earnings and trends and what are reasonable expectations going forward that the product we offer, the status and piece of mind of a knowing the why and how of the financial market providing the data and the tools and a framework insider knowledge that typically was only available to institutional investors. Now individuals can have IT at incredibly affordable Price as part of business. There's always tension to marketing means tension.

And there's that fear of not knowing, making a mistake of financial room. That's what we all fear. That's why people hire financial because they fear they don't know enough.

And so hire somebody for that piece of to help alleviate that fear of ruin a mistake. Or that's why people sign up for trading course. They want to status of being a trader, but they're also fearful.

Somebody knows how to trade and they don't. They want alleviate that fear to get that edge. There is some thoughts on strategy.

You know I if I think about IT a lot because of the businesses we run, I have a consult in call with the business this week. Occasionally our consult with other businesses on their strategy. But I thought about in the context of Howard Marks memo because of how the financial system has changed.

Eventually the system changed back in the seventies and eighties, and even in to the early nineties, the mid nineties, when I became a financial advisor, the financial systems are very different. Most asset managers were baLanced managers. E, T, S, didn't exist, closed, and funds were a bigger portion of the financial system.

As for individual brokers that earn money from commissions, commissions were a huge part of the financial and system and incentive structure. Now commissions are mostly free, and that has changed. The approach is, why is so much more trading now among individuals? Because there is no commission to do that if you paid forty dollars per trade like you did in the late eighties, who was very difficult at for a retail investor to be a trader.

So these systems change hower mark then in his memo and thinking about acid allocation and the whole system of acid allocation that has developed an expertise in the area, had what he called in a australian epic, the idea. There's only two asset classes, ownership and debt. We either own part of something or making alone to IT.

He pointed out. In one thousand hundred and seventy eight, he was he moved from city bank's equity research department to the bond department. And they had a machine that you could type in the bond interest rate, its maturity date, its market Price, and I will tell you the yield to mature IT, what the bond would return if you bought IT, inhaled IT to maturity and IT didn't default march.

This was revolutionary to me. On the equity side that come from, there was no place you could look to find what the return would be. Because with an individual stock, there are so many other things that influence did. Ownership is much more risky because you're getting a share, the residual income after everyone else gets paid, including the dead holders.

Now one benefit of indexing and putting indexes together is we actually can generate reasonable expected returns and range returns for stock based on the underlying drivers, the dividend yield, the earnings growth, the change in valuations and the impact of currencies for non home country stocks. But still, bonds are easier in terms of the expectant return because it's that starting yield to maturity. So two types of assets.

And then in Marks of you, the fundamental decision is to decide how much do we want to allocate to ownership, primarily stocks versus lending, primarily debt. And that's a function of how much we want to preserve capital, which is easier with bonds depending on the environment, versus growing your capital through ownership and stocks. He says you can't simultaneously emphasize both preservation of capital and maximization of growth of defense and office.

We have to baLance them out, but we need the truth or risk pasture. In how I approach investing, we measure risk by how much could we lose, which the maximum drawdown, and will we be ruined if that worst case scenario comes about? Mark shows some graph in his memo, and he, on the personal access is the return, and on the vertical access, its probability and for band is very steep and narrow in that the rain potential returns for bonds is much narrowed than the range of returns for stocks.

So the probability of your confidence level of your return for bonds as much tired than IT is for stocks, but that expected to return for debt was much lower between two thousand and nine and twenty twenty one. And now it's tired. So the expect return for bond has increased as interest rates and yelled to maturity has increased.

And his point is bonds are more attractive now than stocks. So maybe we should be allocating more to our bond, changing to gic allocation or making hydarnes ics shift. For me, that's not controversial.

That's how I see the world. That's how i've managed assets for twenty years coming up with expected returns, looking at variations at how I manage billions of dollars as an didn't adviser. But that's my worldview and that's my investment strategy.

But that's not everyone said I was recently on the bogo head forum. Bogo heads are a group. They do an annual conference.

They celebrate the life and contribution of john bogo, and they are very focused on index investing. Within the bogo had community, there is a wide variety of opinions. Some are level five investors. They just want one index fun, maybe two, and they keep that allocation no matter what. Others are more level.

Foreign stars are willing to diverse five among a number of asset types, including segment within the stock Marks, such a small cat value on the forum, someone posted a post titled static versus dynamic acid allocation, Victor meets the overhead and Victor is Victory of partners. We discussed Victors work in his the missing billionaire in episode four fifty one, on how much should you invest in stocks in a linked to the article that the post referred to, IT was in advisors perspective and agi was making the case for dynamic academic based on expected returns. It's a controversial post because there are level five investors, no, you you can be done.

There are level four investors that says IT can. It's just a question of how active and I I had a post and I said I read their books last year, which I joined and released a podcast episode on IT. No, I didn't identify myself because one of the unwritten rules of the bogo head form, as I understand, as you just don't do self promotion, so I didn't even mention the podcast or link to the pisos.

I continued. The whole idea is that our allocation to stocks and other risky assets is a function of the real expect or return and a risk talents, whether we are strategic or more dynamic alica ors. That shouldn't be controversial, at least in my world view, for some IT is.

And I gave the example, allow locating more to treasury y inflation protection securities and locking in higher yields because the real yell went over two percent. That made sense because I can get a guaranteed return for lending on an inflation adjust the basis a higher than I could have got four years ago when the real return was negative versus ownership and stocks. And I did some screen shots of masa camp and showed expect to returns for different stock indexes versus bond.

I included an allocation of value on bond appears like a safer bet than an allocation to growth at this junction. We don't know what will happen, but we know what yields and valuations are today. We make judgments of relative values and potential payoff.

And in many areas of our lives, we can do the same as investors. Now i'm in this case coming up the the system of bogo head and I wasn't trying to convince them, I just was sharing my view. And IT IT lies with marx's view and IT extended lies with hagan's you at own partners, but then even that their degrees are more like Marks and make fewer changes to my portfolio in our adaptive models.

Where is my understanding is own partners will make more changes to also corporate leverage using the murder share, which we talked about epson four fifty one. But the conclusion is, know with our money how we invest, who we hire. We need to understand what is that they want, what is their world of you, what change are they seeking to make us? What system are they from and how and what way do we want to interact with them? What does our belief, what change we seeking, what are the different activities that we want to choose and how do we want to interact, act with others? It's incredibly iterative.

And over times, systems change, our strategy can change, but it's helpful to step back and think about IT and says, has once you start looking at systems, you can't stop to try to understand. But we can't just be a cog. We need to step back and reflect and understand a year ago, over year ago, we lot launched asset camp and it's been a slow grind as we share with others.

We have a core group that love IT, but it's hasn't gone viral, nor do we think IT would. But I love this quote by tim cook in an interview with the wall street journal, apple launched the apple vision pro and it's not convivial. This is not selling like that and go on the website and in some ways are fighting against the system.

When they describe if you describe what's an apple vision pro, they say IT seamlessly blends digital content with your physical space. The era of space or computing is here. And I tried IT.

It's for early adopters. This is a quote by cook. It's not that people are wrong and we're right. We have enough faith that if we love the product, there will be enough other people out there that love IT, too. And that's how i've always created things. As an initial al adviser, I didn't know if people would love are etf dynamic allocation approach, but it's 除外 true to me， given my frustration with focusing on active management and not having discretion, I hope people would resonate with our core message of money for the rest of us and they have over over ten years now.

And my hope is if we build the type tools that I have used in my investing for two decades and gave people access to over a thousand charts and combined IT with education for what they mean and how we apply that, that will be attractive to people. And that has so we're going to keep plugin away, as you should, with your strategy, as we interact with systems that four fifty one, you can learn more about what we offer at as a camp dot com and money for the rest of us dot com. Thanks for listening.

Everything I shared with you in this episode for general education, i've not considered your specific risk situation, not provided investment advice. This is simply general education on money investing in the economy. Have a great week.