Global Valuations: Guest highlights a stark valuation gap, with European equities far cheaper than the U.S., implying more favorable risk-adjusted returns abroad.
International Rotation: Strong case for International Equities and Emerging Markets as recent performance leadership shifts and relative CAPE ratios suggest further compression potential.
Dollar Hedging: Owning foreign stocks serves as a practical dollar hedge, often outperforming U.S. assets when the dollar weakens—without needing explicit gold exposure.
Value vs Growth: Expect a bumpier path for concentrated U.S. growth/AI exposure; value and international baskets may offer better near-term risk-adjusted profiles.
AI Disruption: The guest underscores rapid AI adoption, likely disrupting repetitive, process-heavy roles and favoring decentralized, entrepreneurial use cases.
Company Examples: UPWK seen as vulnerable to AI-enabled substitution; DELL benefits from AI hardware demand but faces margin pressure from rising component costs.
Portfolio Construction: Emphasis on diversification and time-horizon matching (define duration) to manage sequence-of-returns risk across stocks, bonds, and global exposures.
Market Outlook: Continued massive sector/style rotations are likely, with investors needing discipline to avoid performance-chasing and to maintain all-weather balance.
Transcript
This episode is brought to you by Interactive Brokers. And ask yourself something. Will the year-over-year change in the US CPI exceed 2.6% in February? At IBKR Forecast Trader, the yes recently priced at 48% and the no at 50%. But markets move fast. Forecast contracts let you turn your views into trades on future events like the economy, climate change, and politics with simple yes or no prediction style contracts. Explore trending data, spot the trends, and if you get your prediction right, you earn $1 per contract at settlement. Plus, you'll earn 3.14% APY on your investment with an interestlike incentive coupon, and you'll get $3 for signing up with IBKR Forecast Trader, which you could use for any purpose or to start trading. Forecast contracts are not suitable for all investors. Go to ibkr.com/for and turn your views into IBKR forecast trader contracts today. Last trading day for this contract is March 11th. [music] The disciplined investor is all about you, your money, and the markets. Sit back and get ready [music] for this edition of the disciplined investor podcast. [music] >> This episode of the disciplined investor is sponsored by Horowits & Company. If you're [music] looking for a portfolio manager, look no further. Horowitz and company. From seed through harvest, [music] cultivating financial success. [music] >> How's that for a pretty solid employment report? The tech disruptors are getting disrupted. Growth versus value and abrupt change. And our guest is Cullen Ro, author of the best-selling book, Your Perfect Portfolio. All this and much more on episode number 960 of the Disciplined Investor podcast. [music] [music] [music] Hey, hey, hey, and welcome to the Discipline Investor podcast. This is Andrew Horowitz and thanks for joining me this week and every single week talking about money and finance and everything in between to try to make you uh a little bit more uh well financially stable, secure, and free. That is what we're trying to do here each and every week. Last week, well, that that show was packed with information, wasn't it? If you haven't listened, we talked about software mageddon. We talked about the fallout from AI disruption and other sectors that happened. and we're going to talk about that as well this week. We dug into precious metals. Um we we oh we talked about diversification which we're going to have a little bit of a discussion with again also with our guest today because he's all about that and there's a great response from that discussion. And I got to tell you, thank you all for your emails, your comments, and I, as I mentioned, now probably more than ever in the past year or so that I can think of is a real good time to start getting down and dig into your portfolio. Consider taking a very hard look at what you own. The reality is that things are a little bit different. was seeing a very big change in the leadership in the markets. And by the way, many of you wrote me, you went over to the discipline investor, you clicked on either the ask Andrew or anything else that was in there and you said, "Hey, what do you think about this?" And that you were going to get down and start looking at this and you're going to roll up your sleeves and you're going to get involved. Yes, some of you asked me to help you, which is fine. I could do that. But what is really great is that you're taking this thing seriously because we live in a world and an environment and an economy that is ever changing. And that being said, we need to be present to all the things that are happening, not lazy, not uh just hoham. So what's different this week? What's different this week than we had in the past? Well, last week we had that monster move like a week and a half ago on that Friday when the Dow Jones Industrial Average average blew out over 50,000 and and and now we turn around and where are we today? Well, the VIX tipped above 20 this week. We saw this massive rotation that is taking hold, right? We saw that the move from uh growth to value. We see that potentially we have some type of military action in the Middle East. Maybe, maybe not. I don't know. Uh and that's probably the reason why crude has been moving up so nicely in the past few weeks and why commodities and in particular even with gold and silver and platinum and platium doing what they're doing has been holding up really well. We are we going to go into a war conflict in the Middle East again? I don't know. But the markets seem to be sniffing out something. But I thought that the real under the radar situation that's going on that end up being I think above the line like front and present right there in front of our eyes no need for any kind of specialty glasses night vision or radar sonar anything was all about disruption this disruption that's going on you know we saw some of the companies like Upwork horrible earnings outlook horrible numbers stock cave down 25%. What kind of work is done at Upwork to give you an example of what's going on? Well, pretty much almost anything that could be done on a computer, right? Like software and web web development. They do things like um creative design work. They do translation, writing, editing, marketing, SEO, sales. They do things like uh accounting and legal. they do possibly get hired by somebody do admin and customer support. This is the poster child for something that can be disrupted with the likes of artificial intelligence of where we are today. We don't have to get into the next levels of where they are. They can be disrupted today. And they're seeing that this company apparently on the bottom line. And that is why we're seeing other companies get so skittish in the current market environment that we're in now. In fact, we also saw this week another potential, although I don't think this was I think this was overdone a bit. We saw a new financial AI that could take a look at tax returns and other financial forms and make informed tax decisions. And that sunk the companies like Schwab, Morgan Stanley, and there's a few others that got clocked with all this forced explanation that we've been hearing from the companies that are embracing AI, that they're not going to lead to job layoffs and all this. Okay, I'm calling BS. I have before, I'm going to say it again. And while AI, by the way, may not dislodge an, you know, an ex an Etsy creator or crafter, whatever they're called. Maybe someone with very specific mechanical skills, although there are some robots coming, some robots already there. There are plenty of other areas that can be impacted. There's no question about this. So investors are selling first and they're asking questions later. That's what's happening. We saw the likes of Dell highf flyier recently. Everybody loved it. I like Dell. Uh why? Because they're selling machines. They're selling a lot of them. Problem is they got some problems. The cost of chips and some of the materials that go into the device that they're making have been so elevated. Not that we have any inflation by the way. They've been so elevated. They've been absorbing much of this cost. They're on a 5day quote basis, meaning you want a quote from Dell for a particular project. It's only good for 5 days cuz prices are changing so quickly. This company has a huge footprint in the AI space, in the tech space, but they're getting smoked recently because of all the extra costs that are going into this. Pretty interesting time. We're seeing that there's a huge amount of capex that's going on. Investors are captivated right now. maintaining that general generally bullish tilt. Couple days down, then boom, right back up. Right now, is that going to be around forever? I can't tell you. But what I do see is the moves have been massive rotations for now. Huge gains in areas that have underperformed, over outperformed, putting into areas that are uh have underperformed. And this is why we're seeing this massive spread. For example, value, staples, financials, energy versus growth, tech, consumer discretionary, biotech, 10% spread there right now, 10%. The value on the large cap side, you look at the Russell 1000 up 5.5% year to date. The growth down 4.5%. That's a 10% spread. Wow. in only a short period of time. That is amazing. This is the whole point of diversification. That's why we're going to get to talking with our guest uh in a minute. We're going to do that because I think there's there's a lot we're going to learn here today. Before we do that, I want to talk about again interactive brokers because you listen, I know, you know, you do a great job. You research your investments, right? You analyze markets, you manage risk. But did you research your broker? In 2025, IBKR clients outperformed the S&P, the S&P 500. Retail clients, well, they average about 19.2% while hedge fund clients average about 28.91% compared to the 500 S&P 500 index of 17.9%. IBKRS, Here's why. You got to really understand what's going on. IBKR's lower trading costs, their competitive rates, efficient execution, and access to more than 170 global markets helped investors keep more of what they earn and put more capital to work. Makes sense. Over time, your broker is important. The broker you choose makes a difference. Interactive Brokers, member SIPC. If you care about performance, find out why the best informed investors choose Interactive and Brokers at ibkr.com/2025. All right, let's get to our guest. Get to our guest, Colin Ro. He was on years ago. We'll talk about that. He founded uh discipline funds to helped investors obtain access to low fees, diversified portfolios that helped them stay the course and meet financial goals. His primary expertise includes global macro portfolio construction, quantitative risk management, monetary economics, financial accounting, and behavioral finance. It's a lot. And prior to establishing his own business, he worked at Mel Lynch Global Wealth. He worked on a team overseeing about a half a billion dollars in assets. And upon leaving there, he managed a private investment partnership. It took advantage of reporting irregularities ahead of major corporate events. So, he's been on the show before. Let's welcome let's get into it. Let's talk with him because I'm pretty excited about his book and what he has to say. So, Colin, how are you? >> I'm doing great, Andrew. Thanks for talking to me. >> Yeah, you know the you know, you've been on the show twice before. And um the last time was August 2023. We discussed asset allocation. We talked time horizon. We talked rich risk. Back then it was the Fitch downgrade. Uh we talked about cash as an investment, discipline investing. That was in 23. >> The time before that was way back in 2015, by the way. >> I don't know if you remember that. >> You don't like talking to me very much. >> I know I was all these delays. >> What's going on? Um, we talked about China Robo Robo. We were talking about robo investing back in 2015. >> So, >> yeah, remember that. Remember the robo advisor? >> Yep. Yep. >> Boy, I guess they didn't kill all the financial advisors. >> I know, right? The death of of the death of this or that industry is well overblown in all occurrences. Um, so let's talk about I want to start with with the current market conditions, some things that are going on from your perspective, right? From your unique perspective, and then I want to talk about your book. I want to get into it because I have a lot of things after going through it and reading it. Um, I I I have a lot of dog ears on, you know, bend downs and sticky notes and things shoved in this thing. Um, but let's talk about current market and um, valuations. >> Yeah. How how should investors think about >> I don't know you want to call it high I'm going to say high valuations I'm going to say the word high valuations in the context yeah in the context of their portfolio. Yeah, I mean this is I I think especially from a a valuationsbased perspective, this is one of the most interesting and difficult times to allocate assets because the the really the thing that is really interesting to me about this environment is when you look at especially things like the historical cape ratios of the market, the the market is really all over the place. it's very very differentiated across different regions and even different um styles and sectors of the the economy. And so like specifically when you look at the current environment, I mean the the cape ratio for instance of Europe right now is about 22.85 versus the United States is 39.21. And so, >> and ours, by the way, just to put in perspective, if you look at a chart, this goes back to like 200 and what was it like uh it was back like 10 years ago or so that that and then and then we rolled over hard, >> right? Yeah. And so the the really interesting thing about this data though is that the before basically before the financial crisis, the these two regions and really most of the world, it correlated very very closely. So, like in 1999 during the tech boom, the the cape ratio, which is this is the cycllically adjusted PE ratio, which is like Andrew said, it's the it's basically the trailing 10-year cycllically adjusted PE ratio of the market. In in Europe in 1999, it was 42. In the USA, it was 45. So, this was really tight back in in 1999 during the tech boom. And then valuations collapsed. They fell a lot during the the financial crisis of course and and the the post-T tech bubble era. But then since then there's been this crazy crazy divergence where the United States has massively outperformed everything that's been largely techdriven and now you have this huge disparity where Europe looks very Europe and really the rest of the world looks very attractive from a valuationbased perspective. The United States look looks incredibly expensive especially on a relative basis. Yeah, that's that's what I was going to ask is the word relative going to come up here? That that was an important thing because you talk about 22 which is not low either from a cape in when we look at Europe, right? When we look at the European Cape, it's not it's not >> light, it's just relatively so much less. In fact, when we look at value and growth, growth has been smooshing value. At the top of the show, I talked about there's like a 10% differential this year so far year to date between large cap growth and large cap value. Large cap growth is up 5 and a half%. Large cap >> uh large cap value is up 5 and a half%. Large cap growth is down 4 and a.5%. >> And so I I'll tell you how I kind of think about this and how I compartmentalize this stuff especially when I'm talking to clients and other investors. I think of this stuff very specifically across different time horizons where I like to try to quantify actually what a financial planner would call like the sequence of returns risk. meaning the the way that the returns are likely to materialize in the future because I think the a mistake a lot of people make with high valuations is I think they assume that future returns necessarily have to be much lower or um maybe even negative and I don't necessarily think that's true. The way I would frame this is I would say that the the risk of a much bumpier ride is elevated when valuations are high because valuations are functionally they're they're basically just expectations. So the the multiple that's built into the the expected earnings going forward is very very high in the current environment. And so if you get any sort of disruption to those expectations, you get a lot of volatility. Whether that could be, you know, if the AI trade doesn't materialize or some unknown event transpires, a recession or something like that, you get a lot of bumpiness in the the future way that the returns will materialize. And so in a year like 1999 when valuations are super high and expectations are really high, you have crazy high sequence of returns risk where the the interesting thing about buying the market if you bought the exact peak of the tech bubble back in 2001 or 2000 the the return since then has actually been 8% per year. you've done really, really well, but of course you went through a 15-year period of horrific downturn, right, to get to that point. And so, your sequence of returns risk was really, really terrible in there. And so I would frame it the same way now where if you are loaded to the gills with AI and nothing but US technology and growth stocks, you may not necessarily generate lower expected returns, but you should expect the volatility that comes with those returns to be much higher than it would be on average compared to say, you know, an environment where valuations are much more reasonable or especially if you're buying, you know, the rest of the world, the European stocks or emerging market stocks, the likelihood for a a a less volatile ride in those uh parts of the world, a better riskadjusted return, as a you know, a financial nerd might put it, is probably a a a more probable outcome. And so, and we're kind of starting to see that actually the, you know, the the financial markets right now, I mean, the last year, God, foreign almost doubled domestic. >> Unbelievable. And now it's our emerging market small caps international are absurdly. >> It's like let's just stop and call it a year. >> Yeah. I mean you could I mean foreign [laughter] the foreign markets right now what are they up you know 10 11% already. So you know you're seeing this in the domestic US market is up you know 1 2%. So you're seeing this huge you know and and it's not I don't know a lot of people have been calling for this to occur um you know for a long time and it's looked very very bad but it's all of a sudden it's happening very very quickly where the you know th those relative um cape ratios might compress they might compress a lot more going forward. >> So there's two things about that and I want to tell you about one theory I have and I want to dig into a little tidbit underneath the surface of what you just talked about and just bring it out. I want to kind of like tease it out if you will. And you talked about the idea that the cape ratio um with regard to um the expected returns. They talk about like oh it's elevated and that means we're going to have negative returns. Everybody's like oh first of all I think we both would probably agree that trying to market time on valuation is an impossible task. >> Yeah. >> Just you can't do it. Secondly, >> totally >> the thing that you I think that we I want to talk about just briefly is this idea where most people believe that when we're overvalued means we have to have some kind kind of significant corrective action negativity right across the board somehow or within a sector to bring us down where in fact the reality is we don't necessarily have to do that. We could just temper >> yep the return. So instead of getting I'm just going to pick a number the 25% a year that people are expecting from tech stocks they may only be a mere 8% per year. >> Yeah. For the next few years. And I I think that's the the exact right way to frame this is that you you know if you have let's say 25% returns going back the last 10 years with um let's just say 20% volatility or what you know the the statistitians would call like standard deviation. Um, I think going forward if you got say 10% returns with 25% volatility that would not necessarily that would not surprise me at all to see an environment like that. And that's the what that results in. It results in a worse riskadjusted return. It doesn't necessarily mean that you generate bad returns. 10% is still a fantastic outcome. >> Tremendous. Tremendous. But it it it you you I think people should look at this sort of an environment where if you're if you're loaded to the gills with AI stocks and growth stuff. Um you should expect some bumpiness along the way there where and and higher bumpiness than we would regularly see on average. >> The thing I was going to talk about too and I would like to know your opinion on this my theory that this is kind of a loosely put together like this makes sense from a basic standpoint. You know you take down technology in the US by 2%. Right? you have this this this major run over over the last year and two years, three years, five years, pick it up, you know, whatever you want. Instead of it being, you know, a 15% position in your portfolio, now it's 18%. I got to take 3% down. 3% down in that particular uh environment is a chunk of money that now all of a sudden they're going to move. Where are they moving it? They're moving it to Europe just for a simple rebalance. That 3% that was taken out of technology is a huge number, right? Because it's, you know, you follow what I'm saying? it's going to now be pushed into these lower valuation, thinner traded, less liquidity stocks. And I wonder if some of that when you start moving that massive money that you're taking from into the smaller companies with less liquidity, uh if that's one of the reasons that we're seeing such a dramatic move in some of the EM uh small cap international and developed international. >> Yeah, I think that totally makes sense. I think that you're, you know, and gosh, I mean, not to get into like the the geopolitical aspects of all this, but you're you're starting to see, you know, this whole like sort of dollar debasement narrative around the, you know, the globe and the, you know, the the United States has become, you know, we're obviously not isolationist, but we're coming on a relative basis, a little more isolationist. And so I think the rest of the world is looking at their own asset allocation and they're they're moving away a little bit from dollar denominated assets and you know that may be part of it is political part of it may be just a sensible rebalancing mechanism that a lot of especially foreign investors are going through where they're you know they look at the valuations in the United States and they're saying you know what we're going to buy a little more um international small cap and whatnot and just to diversify the portfolio and I I think that makes a lot of sense. Um and you know but I I think in terms of the the thing for me that I try to communicate especially to clients is that I really try to talk about this over time horizons where like I would say that right now you know going back to that kind of sequence of return risk concept. I would say that the this the the time horizon over which you can reasonably predict the technology sector now to generate a stable return is longer. you have you might have to be more patient with the way that technology generates its returns versus something like if you're buying like domestic value or if you're buying international stocks. I think the the time horizon of those instruments is a little shorter. So, if you're someone who is hyper sensitive about the the short-term moves of the market or even inside of like, you know, multi multi-year time horizons, um the the growthy stuff, the tech stuff, the concentrated parts of the market, they're going to test your patience. And so I think that that's a really solid argument for if you're really time-sensitive about this, you need to have more diversification in your portfolio because you're just going to get really bumpy returns, I think, from from things like the NASDAQ 100 and the the more growthoriented parts of the US market. >> You know, it's this this last six months, and I'll stretch it to a year, has been the year of, oh my god, they're finally right. Right. Yeah. You look at Peter Schiff who is calling for the dollar debasement and you know the whole idea that well it's more than a debasement. It's more a dollar, you know, evaporation uh in his his mind, but he was he was just talking about gold and silver for years. Nothing happened, right? Yeah. >> Um the guys that I talk to all the time from the various, you know, the Goldman's, the JPs, all these guys are kind of trying to feed you some information here and there coming up with, you know, this is the year of the emerging markets. Like, okay, you know, Meb Faber, Meb, you know, Meb, he's been he's been preaching for how long? Which he's right, by the way. I I not I'm not taking anything away from me. I love him. But he's been talking about and trying to educate people for years about are you kidding me? You have how much of your investments in US only not in the rest of the world where the rest of the world is this >> uh the funny thing is it's the year of you know things turning around or maybe just uh some one thing just not working >> gold and silver interesting right you know we see this massive volatility we see that parabolic move that was I saw as an exhaustion uh gap that one day that it went up I don't know what it was some ridiculous number to the top end of where silver was uh I think SLV ETF was somewhere for about $125 a share or something like that. Um, >> and is this still something that's viable, important, or is it just another asset that has been exploited to a point that it's not even investable? >> Yeah, I mean, yeah, the the way I would describe this is it's it happened gradually and then all at once, you know, with with all these different markets. So, yeah, I mean, it's a it's interesting. I mean, I I think it it's a it's a lesson in why diversification matters to to different investors. And so, I don't know, for me, international investing is more so about currency hedging. So it's interesting to talk about this in the framework of the the dollar debasement trade because and this is one of the things I talk about in the book is I I display the data over which the the different currency regimes impact different styles of returns across different markets uh across the globe. And what you see is when the dollar goes down foreign markets beat the pants off of US markets. And so [clears throat] for me it's not so much am I trying to pick where is going to be the best performance for me owning international stocks is really it's an exercise in dollar hedging basically that you get a you know you don't necessarily have to just follow the Peter Schiffs of the world to get a dollar hedge. You you can actually hedge your dollar exposure to a large degree by owning different types of equities. And so when the when the dollar goes up a lot and the US companies are beating the pants off of of foreign companies, you know, you get you get periods like 2010 to 2024, whatever it was, that period where the the US stock market just annihilates the foreign markets and then when the dollar reverses and if it reverses in a big way like it has in the last sort of 18 months or 24 months, um you get this huge seismic shift in a reversal where um the foreign markets market then start to beat. But the the more important thing is from a for a domestic investor, you're getting a very specific type of dollar hedging where you didn't even have to own gold in the last 24 months to get a dollar hedge. You just had to own a global portfolio of equities because you got huge huge outperformance from that international slice. >> You know, I talked about that last week on this very show. I talked about looking at your international em. said, make sure if you're trying to get your biggest bang for your buck or to be pro in my opinion to an extent there's there's different reasons for different things, but look at whether or not your portfolio whether it's in the foreign bond fixed income slash or in equity is it dollar hedge because you could a lot of times you don't know right there this and all of a sudden you're like ah that's great I got this dollar going down I got this no you are dollar hedged that yeah blew out 5% of your return right there so so be careful when you're looking at this let's let's go on to um one more thing and I want to talk about the book [sighs] there's a lot of uh a lot of discussion about AI right you know we've been seeing this and I and I've been talking about this too the if if the disruptors have been disrupted that is what I am seeing right now the idea that the Zillow's the docuigns the Upworks the you know you you pick the names right out there which uh are out there the asan as the these are the the the the even even to a degree the big guys right the big like like uh Salesforce. So you have all these companies out there that were the disruptors that were um you know I don't know we'll call it you want to call it first level tech uh efficiency and [clears throat] you know um uh uh productivity bene you know beneficiaries. Now all of a sudden things are a problem, [laughter] right? We see industry after industry all of a sudden freaking out and flinching with AI. In fact, >> just earlier last week there was a discussion from altruist.ai which where you could upload your I don't know your tax forms and a few other forms and all that and uh voila they do all this work for you and some of the guys like I was talking about this at the beginning of the show Schwab, Morgan Stanley, a few others got just beat the crap in a day is AI generally speaking um from our portfolios what how should we be looking at this gosh I mean this is one of those things that I it's very it's very very hard to decipher what is going on because the and this is part of the problem with the the world today is that things are changing faster than they've ever changed And you know, I was reading this piece. There's a great piece by Matt Schumer called Something Big Is Happening. Uh people should Google it and read her read it. It's on Schumer's website. Schumer is a he's involved in the the kind of on the ground in the the whole AI ecosystem. And he talks about how there is this seismic shift that's going on that really has not even started to impact things. He basically was saying that like, you know, in short, the the AI is starting to to rewrite the code for the AI. And so he's a developer involved in writing AI where all of the sudden the people developing the software that is transforming everything are no long they're they're basically irrelevant inside of developing the software itself. And so you can start to see this world where when people who were that involved in actually developing the software become irrelevant. Well, what does it mean for the rest of us where this software eventually just starts doing all of the other things around the world? And and I don't know. I mean, I think that there is there are definitely there are pockets that are going to be disrupted and probably eliminated. And that's the scary thing from an employment perspective is that this isn't like um you know the innovation of like the car is something that a lot of people would look at and say like oh well this is gonna it's going to ruin all of the mail delivery services and you know the the Wells Fargo delivery service from you know horse and carriage is going to go away and you know that that's a really interesting way to look at all of this because the the adoption of the car was different than today because it it took God it took really like 50 years for cars to get really widely adopted. It wasn't until really like people came back from World War II and even like you know Vietnam and then really started to you know the average American then really owned a car w in a widespread manner. This is happening much faster. So this is this is different in that sense. I don't I don't think I I buy into quite the the narrative that this is gonna like destroy the employment market and because there's kind of a catch 22 in there where you know the the paradox in all of this is that if the the AI start really destroying a lot of jobs well the demand for AI then goes down because people won't be able to afford to buy all these crazy subscriptions to you know all these different services and so there's there's kind of a paradox in there where the you know unless the unless you have somebody else coming and fill the the spending void. You know, if you get enough employment, well, we reach a point where people aren't even buying this technology in the first place. So, and the other thing is like this is still very I think sort of niche in terms of its impact and the way it's going to materialize out over different sectors because until this becomes something that is like for me the the moment where this becomes really scary is when when I wake up one morning and I see robots walking across a construction site. That is the scary moment where you kind of >> know you know that >> it's going to happen. I have no doubt. I think it's going to happen in our lifetimes. But um you know I that's really scary because at that moment those robots are doing even the most manual of labor. The one thing is that's the last thing. This whole thing Colin is I call this I've been calling this for years. When we saw some of the productivity and efficiency come out um consumption cannibalism whereas you have a robot or you have a let's talk about a robot in an Amazon uh warehouse, right? They don't need to take breaks. They don't need to have a vacation. They don't whine to HR, right? Nobody's, you know, harassing them. uh nobody they don't need to uh ask for a raise. They don't need to take a lunch break. They don't need a smoke break. You know, this is where all of a sudden this happens and we see all these potential things. Now, what happened was productivity got better, more people made more money, there was more consumption. I get it. But this is kind of like that. I see this as a little bit of the tweaking of the potential for that consumption cannibalism where all of a sudden people may be out of work in certain areas or not necessary. Look at for example um uh graphic artists. I mean man you could you can go to Grock and ask a just a very simple thing. It will do a whole image for you. That's beautiful. >> Yeah. >> Beautiful. You know you used to have to send that out. You wait to the guy tweak it up to you know you send it to Upwork which by the way stock was down I don't know 25% this week on just piss poor earnings. You could do something like how about this? I look at your book I read I'm like hey chapter 12 the counter cyclical rebalancing portfolio. Chapter 13 the Bernstein no-brainer portfolio. I have an idea. I'm going to feed that into IIAi and say, "Do me a favor. Analyze this. Take your time. And I want you to spit out what is the most appropriate for this. And I want you to help me work the rebalance on this on a regular basis quarterly." >> Yeah. >> You know, I'm just saying just something like that. You know, you wrote it, my friend. You gave it to us. You gave it to us. you're you're thinking about this I think the exact right way where you're taking a creative approach to utilizing AI that I think these are the those are the use cases that where people are going to actually add a lot of value utilizing this software and you know it's the it's it's hard it's impossible to predict where all this is going I I think that I think if I was a if I'm a creative entrepreneur utilizing this software, the boy, the world is your oyster. I mean, I think that the the upside is limitless for those types of people who can really creatively use things like this. If you work at like a big clunky Fortune 500 company, you know, punching tickets, uh, you know, that those jobs, those companies actually, weirdly, I think are much much more at risk than like because that's the that's the thing. I think AI is the ultimate disagregator. It is the ultimate decentralizer because it it gives people who want to operate from a fully autonomous and sort of decentralized position >> a huge incredible value ad potential. So whereas this is much more disruptive for big big firms that are doing things that are very repeatable processes that these large language models are just really really good at doing. >> And we're not even talking about inference >> eliminating those those jobs. We're not even talking about uh inference or or nowhere near agentics yet, right? We're yeah, we're getting there. But can you imagine where where you deploy that? That that's what people are freaking out about. Let me talk about the book. The book is called Your Perfect Portfolio. By the way, I don't know who [clears throat] picked out the uh particular texture for this uh cover, but it's it's it's very soothing. You got to get this book and and seriously, people get the book and just to feel the cover if nothing else. Um but you got to do that. Uh yeah, I see >> that's what the book is for. The book is for I call it I call it good sleeping material. So I made it very comfortable in case it puts you to sleep right on top of it. >> I could have this instead of a fidget spinner. I'll just kick the book take [laughter] um no no great great stuff. The book is called Your Perfect Portfolio: The Ultimate Guide to Using the World's Most Powerful investment strategies. U got some good uh commentary from Morgan Howel, which by the way, are you good friends with Morgan? Because I want to get on my show. He was on years ago. I haven't been able to. Somehow we're not connecting. I'll ping him. He He's Yeah, Morgan's an old Morgan's an old buddy of mine. Um we God, we were, you know, both lame bloggers back, you know, 20 years ago before. Yep. >> You know, anybody knew who either of us was. Morgan is um >> cat just astronomically more famous than I am. >> So, I saw he sold 10 million copies of Psychology of Money. >> Unbelievable, right? Unbelievable. But yeah, if you could do that for me. So, let's talk about this. First of all, I'm going to ask you straight up. What do you what did you you learn from writing this book? >> Boy, I I learned a lot about all of these different strategies. me, you know, the the most I I think educational piece for me was actually studying the history of all of the different strategies because I it's funny when you talk about the so so people kind of know the the book is sort of an overview of of mainly 20 famous strategies from either Warren Buffett strategy to like the Boglehead three fund strategy to factor investing to the all-w weather portfolio all these different styles and strategies and I kind of go through and I tear them fall apart. And I kind of try to objectively analyze them, but I also like ripped through the history of all these. And so it was it was really cool like looking back and really studying the history of what where did these strategies come from and why are they a thing and why do they work the way they do? And so like for me, I loved like going through the history of like the 6040 strategy was really interesting. So that's 60% stocks and 40% bonds. And it was really interesting to to kind of study the history of that one because it doesn't have an origin story kind of like a lot of the other >> point. I was thinking about that just as you said it like cuz all these other ones have like a bit of an origin story who's who's famous for >> they have they have an origin story or a founder some famous person who's attached to the strategy and the 6040 doesn't. And it that one's interesting because 6040 is arguably like the most famous and widely used strategy of all of the strategies. >> I'm taking credit. I'm taking credit. I invented [laughter] 6040 and prove me otherwise by the way. And >> but yeah, it's weird because it didn't seem to have this origin story and so I kind of I I don't know if I exactly got the history right, but I kind of traced it back to the Great Depression and um you know the the old Wellington fund that was created um back then. And so it was it was interesting because the the origin story there it actually like runs through um you know not only the the Wellington fund but then you know John Bogle ends up running the Wellington fund at you at some point in his career through the the 60s and 70s and you know that this materializes into Vanguard which obviously everybody knows of of Vanguard now. And so, but the the the story there is basically that um the the fund itself was created right before the Great Depression and the the founder of it had been or the manager had been burned in the past and he created a a more balanced type of portfolio hoping that hey, if I if I load this thing up with a a big slug of bonds, if the stock market were to go down a lot, I wouldn't get as harmed as say an all equity portfolio. And it's funny cuz the the portfolio is built basically or implemented right before the Great Depression. It falls 40%. Which is you know pretty catastrophic by by most measures but it did way way better than 100% stock portfolio which fell 80% plus during that period. And so it becomes kind of widely adopted because it creates this more balanced type of return. And it's it's stood the test of time through World War II and the the inflation of the 1970s and then obviously in the last 40 years the the 6040 has kind of become the you know the gold standard and asset allocation to a large degree because it's just so diverse and so balanced and so but it was cool to kind of trace that back to the Wellington fund and the this more balanced type of asset allocation that now has become very very popular but wasn't really so popular throughout all of history. You know, it's interesting you talk about early in the book you talk about and you and I think you argue quite well that there's no universally accepted optimal portfolio. Even the book is called your perfect portfolio, right? It there's no per there's no perfect portfolio uh per se. There's just out there on the shelf. I remember post the 6040 and as we got into the Harry Marowitz, William Sharp, uh Briten Bower Hood and you know, pick your poison of who else you know, DFA funds, all that stuff. I was like so engrossed with getting we need one more percent in the commodities and I think that will be perfect, you know? Yeah. The the efficient frontier and all that. And then one day I'm like, what am I doing? Like seriously, it was like a year into this. I'm like, hold on a second. This is silly. 1% even if I'm wrong, doesn't mean anything. That was the whole point, by the way, of these studies, right, of of of uh of of the major uh uh pieces of white papers that were put out about all this. And I got kind of, you know, soaked up in this, but um how do you how do you how did you kind of distinguish between a portfolio that's kind of uncomfortable versus one that's genuinely misaligned with, you know, who the people are that are investing in it? Yeah. Well, I mean, that's the main message of the book is that there there really isn't a an overarching perfect portfolio. There's only a portfolio that's perfect for you. And so, the you know, part of the one of the analogies I used in the the book was to dieting and that there, you know, there's all these interesting dieting studies and one of them found that basically the there they studied all these different sort of fat diets and what they found was that they all worked, but they only worked for people who stuck with them. And so, you know, the that's one of the messages of the book is that, hey, here are a whole bunch of really good strategies. These will probably all work fairly well if you stick with them, but you've got to find the one that's right for you. And that's kind of the main message of the book is that we're all different. We're all unique. We all have different financial goals and needs, and you've got to find a portfolio that you can ultimately stay loyal to and stick with. And if you do, that portfolio will probably serve you pretty well. But you've got to find the one that's right for you because if you're incompatible with it, you know, it's kind of like finding a spouse in a lot of ways. That's the other metaphor I use in the book a lot is the you know finding a good portfolio is like finding a spouse and someone you can stay loyal to and someone that you know you you don't want to do you like I spent a lot of my 20s having you know not real one night stands but portfolio one night stands where I was constantly flipping and kind of tweaking and changing things trying to optimize everything to to make it better and better. And I finally realized like, hey, actually, I need to just find something that is good enough for me because perfect really is the enemy of the good in this process. And you have to find something that is just it's good enough for you that is going to solve your financial goals hopefully. And you stay loyal to it. And you got to make changes of course on the the fringes over time because your life is going to change and the the portfolio needs to be rebalanced and you know reallocated to be consistent with the the underlying strategy and your changing goals. across time, but you have to find a process especially that is something you can really stick with and stay loyal to and that that'll be your perfect portfolio in the long run. >> I have this envision of you in your 20s with like a dating app afro portfolio swiping left and right. [laughter] >> Exactly. That's that's pretty much who I was. >> And then and you know the other thing is uh I want to also put this uh analogy metaphor depending on how you want to look at this. I don't ever remember which is which. You know, when you have people in the kitchen, there's some people that like to cook freestyle and there's some people like to bake. >> Some people like to be like, I need a quarter cup, a teaspoon, and you know, for 42 milligrams of the whatever it is, right? And some people like, hey, throw the garlic in the pan, throw the wine in the pan, you know, get it around, mix it up, throw some salt, get on the plate. >> Yeah. >> So, so there's but but that person can't be the baker and the baker can't be that person. And if you ever try to do so, you're probably gonna be miserable >> and then you're not going to want to do it. And that's exactly what you're saying with this. So, let's talk about um you talk a lot about behavioral discipline, investor psychology, and and I I think if I I guess when I kind of wrote this down because I was taking notes, I was reading, you often emphasize that that behavioral risk is often more damaging than market risk, which is kind of a adjunct of what we're talking about here, right? So, which portfolio structures do you um do you look at as as maybe doing the best job of pro protecting an investor from themselves, right? Not just from volatility because that again that's what you're talking about, but I want to expand on that. >> Well, that's the hardest part about all this I think is that people are constantly chasing performance and looking at where the grass is greener and those shifts often times occur at the worst possible times. And so one of the things I emphasize in the book is that don't don't spend so much time chasing to where the grass is greener because often times you when you you know you you go to where the grass is greener and you're buying you know a lawn that is actually on the verge of dying and then you have to you know you're going to realize that lawn is dying. You're going to look across the yard and you're going to see you know grass growing where you just were and you're going to flip back to that one. And you want to avoid that process because it it just results in suboptimal returns because you're constantly chasing to where the returns are actually the worst and the the risks are the highest. And so, you know, for me, it it it really does depend. I mean the the portfolios that are more diversified that do sort of a more of a sort of I guess an all-weather style of investing strategy where you sort of you have to acknowledge that the grass in some part of your portfolio is always going to be brown and that's actually not necessarily a bad thing. I think a lot of people look at their portfolio and they sometimes think well gosh you know the the foreign equities in my portfolio really just they've done so dreadfully compared to the US equities. I'm just going to I'm going to ditch them completely. And then you get, you know, years like the last couple years and the the international piece blows the pants off of the the domestic piece and you realize, ah, I should have just, you know, I should have watered my own lawn. I shouldn't have just been jumping around. And so I think that sort of all-w weather style strategy where you're you're very broadly diversified and that, you know, for some people that might just be stocks and bonds across very, you know, structurally different time horizons. It may be something more like, you know, the permanent portfolio where you're buying something very intentionally to own things like gold or commodities and you're hedging against very specific regime structures where you've got kind of this all-weather portfolio that you've you you got to get into something like that knowing that in the long run in totality it'll serve you very well. But there's going to be times where pockets of that portfolio do really poorly. And that's one of the it's one of the big lessons from diversification is that, you know, one of the quotes I love from Brian Portoy is that good diversification is learning to hate some of your portfolio all the time. And that's really true. It's that you're you're never going to find a portfolio where the whole thing is performing really really well all the time. And and that's perfectly fine. And so again, kind of going back to that perfect is the enemy of the good is that you don't necessarily want your whole portfolio to be perfect all the time because it probably means your portfolio actually isn't that diversified. Because that's one of the things you have to acknowledge is that when the stock market gets really hairy and starts going down, you need if you if you're going to remain comfortable inside of that thing, you need other hedges. And those other hedges are they're not going to perform as well. when the stock market is rip roaring and doing really well, those hedges are not going to be doing well. And that's just the trade-off that you have to accept in in part of this process. >> So, I'm going to give you something for your next book. Uh something that I wrote about in my first book, which is the flower garden. So, I've been talking about this for I don't know 15 years. Um and that when we build a portfolio, you want to look at it as a flower garden, similar to your grass. Um, but in that flower garden, if you have things that only pop up once a year and you fill your whole garden with that, they look beautiful for a month or two, but then you just got this arid dirtridden patch of dry that goes into mud and it looks horrible, but then it pops back up. That's great. Whereas, if you had roses, heliconas, and impatients that come up, and you have annuals, and you have semiannuals, and you have evergreens, by the way, which are like your money markets, right? Never never changing color. something is going to hopefully pop at any given time. Now, unless we have a hurricane that comes or a tornado that rips through everything like tornado uh 2022, uh you know that that's going to be the kind of thing and we're going to call it all weather, but I call it my flower garden that we can kind of visualize something in bloom at any given time of the year. >> Yeah. Well, hey, that's why you need inside plants. [laughter] >> Exactly. That's why I need fake plants. Let's >> I like that. The the flower garden strategy. >> That's what we do. Um >> All right. I need to add a chapter. You want to write it for me? >> Yeah, I've written it right. I can give it to you. We can just bolt it on the back. Um so in again in in in this book, which by the way, you can go over to the discipline.com for show notes episode number 960 and the link right to Amazon will be right there so you can grab the book. I can encourage you to do so. Um and also by the way tells you more about Cullen and founder of the disciplined funds which is missing a D clearly for the disciplined investor but there is no relationship with us but he uh also does a a grouping of uh uh ETFs uh called the discipline funds but I want to ask you about that. So one of the things you talk about and then I think it reflects also in your actual real life investment strategy is um the idea of uh define duration right this could you could you explain exactly what that is >> yeah so really I I'm sort of extending the idea of bond duration to other instruments specifically mainly the stock market I think the stock market is very hard for people to remain disciplined with in large part because people don't understand the time horizon over which they should judge the stock market. And so what I basically have done with this methodology, I've created a way of actually trying to assign a time horizon to the stock market. So to to use kind of a simple example, if you we're we're really trying to quantify like what a financial planner would call the sequence of returns risk inside of this instrument. And and that's the risk that if you were to buy a 100% allocation in the stock market today and let's say it fell 50% tomorrow, what is your temporal risk in that instrument? And so if you were to apply something like a cape ratio and assume the let's just assume the future expected returns of the US stock market are 5% in real terms. Um well, in that scenario, if the stock market were to fall 50% and generate a a 5% annualized return in real terms from there, it would take about 14.2 years for you to break even. And that's your point of indifference. Basically, that's the time horizon over which that instrument has no sequence risk for you anymore. And so when you embed this into a broader sort of like bond duration methodology, you can start to assign very specific time horizons to the instruments where we can look at something like the stock market and say, well, in today's environment, 14 years for a retiree who's very sensitive about the way they're going to generate their returns, 14 years is the time horizon over which they need to think about that instrument. And so I utilize a very sort of structured asset liability matching process inside of my planning processes where like I'm going in and for somebody I work with, I'm I'm quantifying the the expenses they have and the liabilities they have and then we're we're matching instruments to give them actually a time horizon over which they know they have principal certainty of that instrument. So for me, >> the stock market is this very sort of long-term instrument where if you're thinking of it in inside of like your retirement plan, you've got to think of it as a a decade plus long instrument because that's functionally what its sequence risk is potentially across different time horizons. Whereas something like a money market fund or a T bill, something like that, [clears throat] you can match that thing to, you know, your emergency fund, your annual expenses. something like a a five-year bond, you can match that to, you know, if you if you're planning to buy a house in at some point in the next five years, you don't really know when, you could reasonably go out and buy a fiveyear bond and, you know, if that thing's got a a duration of about five, you kind of know what your sequence risk is inside of that instrument. And so, for me, good financial planning is all about really understanding time horizons and the way we're going to apply certain assets to match certain goals. And so I created this methodology that I call define duration to try to help people kind of implement more of like a an asset liability matching process where they can go in understand their liabilities and expenses over time horizons and then build a a really diversified portfolio that isn't just diversified across asset classes so much but is very strategically matched to very specific time horizon so that the investor can look at the portfolio and say ah >> well I own $100,000 of T bills because I needed $100,000 for a home down payment in the next year. And I know that's not going to beat the stock market, but it's serving a very specific temporal goal inside of my portfolio. >> Right. It's also not going to make them buy a $65,000 house in a year, >> right? Yeah. So you can match these things very quantifiably though where the whole portfolio is basically serving a a really a financial planning based set of goals rather than the you know sometimes we we put together sort of cookie cutter portfolios like a 60/40 where you know your 6040 is great it's diversified but what is the underlying goal of the instruments in there it's not always necessarily very clear. Yeah, I hear you. Cullen Ro, your perfect portfolio. Uh, get it wherever you get things. Uh, it's going to be available at I'm sure at all fine fine uh bookstores that are remaining out there that are actually standing up or uh right on Amazon. >> You can go there or go to uh the discipline.com >> Amazon Heramman House. >> Yep. All those places. It's great. Thanks for coming on. We'll have you on uh again soon. Great book. Appreciate you coming on and and and imparting all this great knowledge as well. >> Awesome, Andrew. Thanks for having me. >> All right. Thanks. That was really interesting. The book is great. He is a He is a really interesting fellow and I appreciate him coming on. We'll definitely have him on again more than five years from now. [laughter] I'll tell you right now, we'll definitely do that. Thanks for joining me this weekend and every week. Uh we're working our way into the middle part, the heart of February. A short month for markets. Uh oftentimes a little bit of a squirrely month for markets, but here we are. Thanks for joining me. Make sure to go over to the disciplinedinvestor.com. see what's available there, the various strategies that we manage for clients just like you. Whether it's uh the the the our specialty of dollar cost averaging through opportunistic and timebased DCA dollar cost averaging or whether it's our lobster trap mentality or even uh investing like the flower garden. All this is available to you. Make sure to go over there if you want some really clean advice. Yes, we manage IAS, we manage uh noniras and trusts, and we do estate planning. We have wealth management. All that is available to you. So go on over to disciplined investor. Just reach out. That's all you have to do and we'll make sure to get back to you and figure out how you can be best situated and into the hands of uh your future financial security. Thanks for joining me this week and every week. I'll see you again real soon. This podcast is [music] intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits & Company Inc., an investment adviser registered with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. Advisory services are only offered to a client or prospective clients where Horo is a company is properly registered or is excluded from registration requirements. Any mention of thirdparty companies, products or services is provided forformational purposes only and does not constitute an endorsement. Hypothetical scenarios or forward-looking statements are for illustrated purposes and should not be viewed as guarantees. Content is intended for US residents only and may not be applicable in other jurisdictions. Listeners should consult a qualified financial adviser before making any investment decisions. Please visit our website for additional information, disclosures, as well as a copy of our form [music] CS. Advertisements are not related to the host or affiliates and are not considered recommendations by the host of the show or [music] any affiliates of Hollywood company. >> [music]
TDI Podcast: The Perfect Portfolio (#960)
Summary
Transcript
This episode is brought to you by Interactive Brokers. And ask yourself something. Will the year-over-year change in the US CPI exceed 2.6% in February? At IBKR Forecast Trader, the yes recently priced at 48% and the no at 50%. But markets move fast. Forecast contracts let you turn your views into trades on future events like the economy, climate change, and politics with simple yes or no prediction style contracts. Explore trending data, spot the trends, and if you get your prediction right, you earn $1 per contract at settlement. Plus, you'll earn 3.14% APY on your investment with an interestlike incentive coupon, and you'll get $3 for signing up with IBKR Forecast Trader, which you could use for any purpose or to start trading. Forecast contracts are not suitable for all investors. Go to ibkr.com/for and turn your views into IBKR forecast trader contracts today. Last trading day for this contract is March 11th. [music] The disciplined investor is all about you, your money, and the markets. Sit back and get ready [music] for this edition of the disciplined investor podcast. [music] >> This episode of the disciplined investor is sponsored by Horowits & Company. If you're [music] looking for a portfolio manager, look no further. Horowitz and company. From seed through harvest, [music] cultivating financial success. [music] >> How's that for a pretty solid employment report? The tech disruptors are getting disrupted. Growth versus value and abrupt change. And our guest is Cullen Ro, author of the best-selling book, Your Perfect Portfolio. All this and much more on episode number 960 of the Disciplined Investor podcast. [music] [music] [music] Hey, hey, hey, and welcome to the Discipline Investor podcast. This is Andrew Horowitz and thanks for joining me this week and every single week talking about money and finance and everything in between to try to make you uh a little bit more uh well financially stable, secure, and free. That is what we're trying to do here each and every week. Last week, well, that that show was packed with information, wasn't it? If you haven't listened, we talked about software mageddon. We talked about the fallout from AI disruption and other sectors that happened. and we're going to talk about that as well this week. We dug into precious metals. Um we we oh we talked about diversification which we're going to have a little bit of a discussion with again also with our guest today because he's all about that and there's a great response from that discussion. And I got to tell you, thank you all for your emails, your comments, and I, as I mentioned, now probably more than ever in the past year or so that I can think of is a real good time to start getting down and dig into your portfolio. Consider taking a very hard look at what you own. The reality is that things are a little bit different. was seeing a very big change in the leadership in the markets. And by the way, many of you wrote me, you went over to the discipline investor, you clicked on either the ask Andrew or anything else that was in there and you said, "Hey, what do you think about this?" And that you were going to get down and start looking at this and you're going to roll up your sleeves and you're going to get involved. Yes, some of you asked me to help you, which is fine. I could do that. But what is really great is that you're taking this thing seriously because we live in a world and an environment and an economy that is ever changing. And that being said, we need to be present to all the things that are happening, not lazy, not uh just hoham. So what's different this week? What's different this week than we had in the past? Well, last week we had that monster move like a week and a half ago on that Friday when the Dow Jones Industrial Average average blew out over 50,000 and and and now we turn around and where are we today? Well, the VIX tipped above 20 this week. We saw this massive rotation that is taking hold, right? We saw that the move from uh growth to value. We see that potentially we have some type of military action in the Middle East. Maybe, maybe not. I don't know. Uh and that's probably the reason why crude has been moving up so nicely in the past few weeks and why commodities and in particular even with gold and silver and platinum and platium doing what they're doing has been holding up really well. We are we going to go into a war conflict in the Middle East again? I don't know. But the markets seem to be sniffing out something. But I thought that the real under the radar situation that's going on that end up being I think above the line like front and present right there in front of our eyes no need for any kind of specialty glasses night vision or radar sonar anything was all about disruption this disruption that's going on you know we saw some of the companies like Upwork horrible earnings outlook horrible numbers stock cave down 25%. What kind of work is done at Upwork to give you an example of what's going on? Well, pretty much almost anything that could be done on a computer, right? Like software and web web development. They do things like um creative design work. They do translation, writing, editing, marketing, SEO, sales. They do things like uh accounting and legal. they do possibly get hired by somebody do admin and customer support. This is the poster child for something that can be disrupted with the likes of artificial intelligence of where we are today. We don't have to get into the next levels of where they are. They can be disrupted today. And they're seeing that this company apparently on the bottom line. And that is why we're seeing other companies get so skittish in the current market environment that we're in now. In fact, we also saw this week another potential, although I don't think this was I think this was overdone a bit. We saw a new financial AI that could take a look at tax returns and other financial forms and make informed tax decisions. And that sunk the companies like Schwab, Morgan Stanley, and there's a few others that got clocked with all this forced explanation that we've been hearing from the companies that are embracing AI, that they're not going to lead to job layoffs and all this. Okay, I'm calling BS. I have before, I'm going to say it again. And while AI, by the way, may not dislodge an, you know, an ex an Etsy creator or crafter, whatever they're called. Maybe someone with very specific mechanical skills, although there are some robots coming, some robots already there. There are plenty of other areas that can be impacted. There's no question about this. So investors are selling first and they're asking questions later. That's what's happening. We saw the likes of Dell highf flyier recently. Everybody loved it. I like Dell. Uh why? Because they're selling machines. They're selling a lot of them. Problem is they got some problems. The cost of chips and some of the materials that go into the device that they're making have been so elevated. Not that we have any inflation by the way. They've been so elevated. They've been absorbing much of this cost. They're on a 5day quote basis, meaning you want a quote from Dell for a particular project. It's only good for 5 days cuz prices are changing so quickly. This company has a huge footprint in the AI space, in the tech space, but they're getting smoked recently because of all the extra costs that are going into this. Pretty interesting time. We're seeing that there's a huge amount of capex that's going on. Investors are captivated right now. maintaining that general generally bullish tilt. Couple days down, then boom, right back up. Right now, is that going to be around forever? I can't tell you. But what I do see is the moves have been massive rotations for now. Huge gains in areas that have underperformed, over outperformed, putting into areas that are uh have underperformed. And this is why we're seeing this massive spread. For example, value, staples, financials, energy versus growth, tech, consumer discretionary, biotech, 10% spread there right now, 10%. The value on the large cap side, you look at the Russell 1000 up 5.5% year to date. The growth down 4.5%. That's a 10% spread. Wow. in only a short period of time. That is amazing. This is the whole point of diversification. That's why we're going to get to talking with our guest uh in a minute. We're going to do that because I think there's there's a lot we're going to learn here today. Before we do that, I want to talk about again interactive brokers because you listen, I know, you know, you do a great job. You research your investments, right? You analyze markets, you manage risk. But did you research your broker? In 2025, IBKR clients outperformed the S&P, the S&P 500. Retail clients, well, they average about 19.2% while hedge fund clients average about 28.91% compared to the 500 S&P 500 index of 17.9%. IBKRS, Here's why. You got to really understand what's going on. IBKR's lower trading costs, their competitive rates, efficient execution, and access to more than 170 global markets helped investors keep more of what they earn and put more capital to work. Makes sense. Over time, your broker is important. The broker you choose makes a difference. Interactive Brokers, member SIPC. If you care about performance, find out why the best informed investors choose Interactive and Brokers at ibkr.com/2025. All right, let's get to our guest. Get to our guest, Colin Ro. He was on years ago. We'll talk about that. He founded uh discipline funds to helped investors obtain access to low fees, diversified portfolios that helped them stay the course and meet financial goals. His primary expertise includes global macro portfolio construction, quantitative risk management, monetary economics, financial accounting, and behavioral finance. It's a lot. And prior to establishing his own business, he worked at Mel Lynch Global Wealth. He worked on a team overseeing about a half a billion dollars in assets. And upon leaving there, he managed a private investment partnership. It took advantage of reporting irregularities ahead of major corporate events. So, he's been on the show before. Let's welcome let's get into it. Let's talk with him because I'm pretty excited about his book and what he has to say. So, Colin, how are you? >> I'm doing great, Andrew. Thanks for talking to me. >> Yeah, you know the you know, you've been on the show twice before. And um the last time was August 2023. We discussed asset allocation. We talked time horizon. We talked rich risk. Back then it was the Fitch downgrade. Uh we talked about cash as an investment, discipline investing. That was in 23. >> The time before that was way back in 2015, by the way. >> I don't know if you remember that. >> You don't like talking to me very much. >> I know I was all these delays. >> What's going on? Um, we talked about China Robo Robo. We were talking about robo investing back in 2015. >> So, >> yeah, remember that. Remember the robo advisor? >> Yep. Yep. >> Boy, I guess they didn't kill all the financial advisors. >> I know, right? The death of of the death of this or that industry is well overblown in all occurrences. Um, so let's talk about I want to start with with the current market conditions, some things that are going on from your perspective, right? From your unique perspective, and then I want to talk about your book. I want to get into it because I have a lot of things after going through it and reading it. Um, I I I have a lot of dog ears on, you know, bend downs and sticky notes and things shoved in this thing. Um, but let's talk about current market and um, valuations. >> Yeah. How how should investors think about >> I don't know you want to call it high I'm going to say high valuations I'm going to say the word high valuations in the context yeah in the context of their portfolio. Yeah, I mean this is I I think especially from a a valuationsbased perspective, this is one of the most interesting and difficult times to allocate assets because the the really the thing that is really interesting to me about this environment is when you look at especially things like the historical cape ratios of the market, the the market is really all over the place. it's very very differentiated across different regions and even different um styles and sectors of the the economy. And so like specifically when you look at the current environment, I mean the the cape ratio for instance of Europe right now is about 22.85 versus the United States is 39.21. And so, >> and ours, by the way, just to put in perspective, if you look at a chart, this goes back to like 200 and what was it like uh it was back like 10 years ago or so that that and then and then we rolled over hard, >> right? Yeah. And so the the really interesting thing about this data though is that the before basically before the financial crisis, the these two regions and really most of the world, it correlated very very closely. So, like in 1999 during the tech boom, the the cape ratio, which is this is the cycllically adjusted PE ratio, which is like Andrew said, it's the it's basically the trailing 10-year cycllically adjusted PE ratio of the market. In in Europe in 1999, it was 42. In the USA, it was 45. So, this was really tight back in in 1999 during the tech boom. And then valuations collapsed. They fell a lot during the the financial crisis of course and and the the post-T tech bubble era. But then since then there's been this crazy crazy divergence where the United States has massively outperformed everything that's been largely techdriven and now you have this huge disparity where Europe looks very Europe and really the rest of the world looks very attractive from a valuationbased perspective. The United States look looks incredibly expensive especially on a relative basis. Yeah, that's that's what I was going to ask is the word relative going to come up here? That that was an important thing because you talk about 22 which is not low either from a cape in when we look at Europe, right? When we look at the European Cape, it's not it's not >> light, it's just relatively so much less. In fact, when we look at value and growth, growth has been smooshing value. At the top of the show, I talked about there's like a 10% differential this year so far year to date between large cap growth and large cap value. Large cap growth is up 5 and a half%. Large cap >> uh large cap value is up 5 and a half%. Large cap growth is down 4 and a.5%. >> And so I I'll tell you how I kind of think about this and how I compartmentalize this stuff especially when I'm talking to clients and other investors. I think of this stuff very specifically across different time horizons where I like to try to quantify actually what a financial planner would call like the sequence of returns risk. meaning the the way that the returns are likely to materialize in the future because I think the a mistake a lot of people make with high valuations is I think they assume that future returns necessarily have to be much lower or um maybe even negative and I don't necessarily think that's true. The way I would frame this is I would say that the the risk of a much bumpier ride is elevated when valuations are high because valuations are functionally they're they're basically just expectations. So the the multiple that's built into the the expected earnings going forward is very very high in the current environment. And so if you get any sort of disruption to those expectations, you get a lot of volatility. Whether that could be, you know, if the AI trade doesn't materialize or some unknown event transpires, a recession or something like that, you get a lot of bumpiness in the the future way that the returns will materialize. And so in a year like 1999 when valuations are super high and expectations are really high, you have crazy high sequence of returns risk where the the interesting thing about buying the market if you bought the exact peak of the tech bubble back in 2001 or 2000 the the return since then has actually been 8% per year. you've done really, really well, but of course you went through a 15-year period of horrific downturn, right, to get to that point. And so, your sequence of returns risk was really, really terrible in there. And so I would frame it the same way now where if you are loaded to the gills with AI and nothing but US technology and growth stocks, you may not necessarily generate lower expected returns, but you should expect the volatility that comes with those returns to be much higher than it would be on average compared to say, you know, an environment where valuations are much more reasonable or especially if you're buying, you know, the rest of the world, the European stocks or emerging market stocks, the likelihood for a a a less volatile ride in those uh parts of the world, a better riskadjusted return, as a you know, a financial nerd might put it, is probably a a a more probable outcome. And so, and we're kind of starting to see that actually the, you know, the the financial markets right now, I mean, the last year, God, foreign almost doubled domestic. >> Unbelievable. And now it's our emerging market small caps international are absurdly. >> It's like let's just stop and call it a year. >> Yeah. I mean you could I mean foreign [laughter] the foreign markets right now what are they up you know 10 11% already. So you know you're seeing this in the domestic US market is up you know 1 2%. So you're seeing this huge you know and and it's not I don't know a lot of people have been calling for this to occur um you know for a long time and it's looked very very bad but it's all of a sudden it's happening very very quickly where the you know th those relative um cape ratios might compress they might compress a lot more going forward. >> So there's two things about that and I want to tell you about one theory I have and I want to dig into a little tidbit underneath the surface of what you just talked about and just bring it out. I want to kind of like tease it out if you will. And you talked about the idea that the cape ratio um with regard to um the expected returns. They talk about like oh it's elevated and that means we're going to have negative returns. Everybody's like oh first of all I think we both would probably agree that trying to market time on valuation is an impossible task. >> Yeah. >> Just you can't do it. Secondly, >> totally >> the thing that you I think that we I want to talk about just briefly is this idea where most people believe that when we're overvalued means we have to have some kind kind of significant corrective action negativity right across the board somehow or within a sector to bring us down where in fact the reality is we don't necessarily have to do that. We could just temper >> yep the return. So instead of getting I'm just going to pick a number the 25% a year that people are expecting from tech stocks they may only be a mere 8% per year. >> Yeah. For the next few years. And I I think that's the the exact right way to frame this is that you you know if you have let's say 25% returns going back the last 10 years with um let's just say 20% volatility or what you know the the statistitians would call like standard deviation. Um, I think going forward if you got say 10% returns with 25% volatility that would not necessarily that would not surprise me at all to see an environment like that. And that's the what that results in. It results in a worse riskadjusted return. It doesn't necessarily mean that you generate bad returns. 10% is still a fantastic outcome. >> Tremendous. Tremendous. But it it it you you I think people should look at this sort of an environment where if you're if you're loaded to the gills with AI stocks and growth stuff. Um you should expect some bumpiness along the way there where and and higher bumpiness than we would regularly see on average. >> The thing I was going to talk about too and I would like to know your opinion on this my theory that this is kind of a loosely put together like this makes sense from a basic standpoint. You know you take down technology in the US by 2%. Right? you have this this this major run over over the last year and two years, three years, five years, pick it up, you know, whatever you want. Instead of it being, you know, a 15% position in your portfolio, now it's 18%. I got to take 3% down. 3% down in that particular uh environment is a chunk of money that now all of a sudden they're going to move. Where are they moving it? They're moving it to Europe just for a simple rebalance. That 3% that was taken out of technology is a huge number, right? Because it's, you know, you follow what I'm saying? it's going to now be pushed into these lower valuation, thinner traded, less liquidity stocks. And I wonder if some of that when you start moving that massive money that you're taking from into the smaller companies with less liquidity, uh if that's one of the reasons that we're seeing such a dramatic move in some of the EM uh small cap international and developed international. >> Yeah, I think that totally makes sense. I think that you're, you know, and gosh, I mean, not to get into like the the geopolitical aspects of all this, but you're you're starting to see, you know, this whole like sort of dollar debasement narrative around the, you know, the globe and the, you know, the the United States has become, you know, we're obviously not isolationist, but we're coming on a relative basis, a little more isolationist. And so I think the rest of the world is looking at their own asset allocation and they're they're moving away a little bit from dollar denominated assets and you know that may be part of it is political part of it may be just a sensible rebalancing mechanism that a lot of especially foreign investors are going through where they're you know they look at the valuations in the United States and they're saying you know what we're going to buy a little more um international small cap and whatnot and just to diversify the portfolio and I I think that makes a lot of sense. Um and you know but I I think in terms of the the thing for me that I try to communicate especially to clients is that I really try to talk about this over time horizons where like I would say that right now you know going back to that kind of sequence of return risk concept. I would say that the this the the time horizon over which you can reasonably predict the technology sector now to generate a stable return is longer. you have you might have to be more patient with the way that technology generates its returns versus something like if you're buying like domestic value or if you're buying international stocks. I think the the time horizon of those instruments is a little shorter. So, if you're someone who is hyper sensitive about the the short-term moves of the market or even inside of like, you know, multi multi-year time horizons, um the the growthy stuff, the tech stuff, the concentrated parts of the market, they're going to test your patience. And so I think that that's a really solid argument for if you're really time-sensitive about this, you need to have more diversification in your portfolio because you're just going to get really bumpy returns, I think, from from things like the NASDAQ 100 and the the more growthoriented parts of the US market. >> You know, it's this this last six months, and I'll stretch it to a year, has been the year of, oh my god, they're finally right. Right. Yeah. You look at Peter Schiff who is calling for the dollar debasement and you know the whole idea that well it's more than a debasement. It's more a dollar, you know, evaporation uh in his his mind, but he was he was just talking about gold and silver for years. Nothing happened, right? Yeah. >> Um the guys that I talk to all the time from the various, you know, the Goldman's, the JPs, all these guys are kind of trying to feed you some information here and there coming up with, you know, this is the year of the emerging markets. Like, okay, you know, Meb Faber, Meb, you know, Meb, he's been he's been preaching for how long? Which he's right, by the way. I I not I'm not taking anything away from me. I love him. But he's been talking about and trying to educate people for years about are you kidding me? You have how much of your investments in US only not in the rest of the world where the rest of the world is this >> uh the funny thing is it's the year of you know things turning around or maybe just uh some one thing just not working >> gold and silver interesting right you know we see this massive volatility we see that parabolic move that was I saw as an exhaustion uh gap that one day that it went up I don't know what it was some ridiculous number to the top end of where silver was uh I think SLV ETF was somewhere for about $125 a share or something like that. Um, >> and is this still something that's viable, important, or is it just another asset that has been exploited to a point that it's not even investable? >> Yeah, I mean, yeah, the the way I would describe this is it's it happened gradually and then all at once, you know, with with all these different markets. So, yeah, I mean, it's a it's interesting. I mean, I I think it it's a it's a lesson in why diversification matters to to different investors. And so, I don't know, for me, international investing is more so about currency hedging. So it's interesting to talk about this in the framework of the the dollar debasement trade because and this is one of the things I talk about in the book is I I display the data over which the the different currency regimes impact different styles of returns across different markets uh across the globe. And what you see is when the dollar goes down foreign markets beat the pants off of US markets. And so [clears throat] for me it's not so much am I trying to pick where is going to be the best performance for me owning international stocks is really it's an exercise in dollar hedging basically that you get a you know you don't necessarily have to just follow the Peter Schiffs of the world to get a dollar hedge. You you can actually hedge your dollar exposure to a large degree by owning different types of equities. And so when the when the dollar goes up a lot and the US companies are beating the pants off of of foreign companies, you know, you get you get periods like 2010 to 2024, whatever it was, that period where the the US stock market just annihilates the foreign markets and then when the dollar reverses and if it reverses in a big way like it has in the last sort of 18 months or 24 months, um you get this huge seismic shift in a reversal where um the foreign markets market then start to beat. But the the more important thing is from a for a domestic investor, you're getting a very specific type of dollar hedging where you didn't even have to own gold in the last 24 months to get a dollar hedge. You just had to own a global portfolio of equities because you got huge huge outperformance from that international slice. >> You know, I talked about that last week on this very show. I talked about looking at your international em. said, make sure if you're trying to get your biggest bang for your buck or to be pro in my opinion to an extent there's there's different reasons for different things, but look at whether or not your portfolio whether it's in the foreign bond fixed income slash or in equity is it dollar hedge because you could a lot of times you don't know right there this and all of a sudden you're like ah that's great I got this dollar going down I got this no you are dollar hedged that yeah blew out 5% of your return right there so so be careful when you're looking at this let's let's go on to um one more thing and I want to talk about the book [sighs] there's a lot of uh a lot of discussion about AI right you know we've been seeing this and I and I've been talking about this too the if if the disruptors have been disrupted that is what I am seeing right now the idea that the Zillow's the docuigns the Upworks the you know you you pick the names right out there which uh are out there the asan as the these are the the the the even even to a degree the big guys right the big like like uh Salesforce. So you have all these companies out there that were the disruptors that were um you know I don't know we'll call it you want to call it first level tech uh efficiency and [clears throat] you know um uh uh productivity bene you know beneficiaries. Now all of a sudden things are a problem, [laughter] right? We see industry after industry all of a sudden freaking out and flinching with AI. In fact, >> just earlier last week there was a discussion from altruist.ai which where you could upload your I don't know your tax forms and a few other forms and all that and uh voila they do all this work for you and some of the guys like I was talking about this at the beginning of the show Schwab, Morgan Stanley, a few others got just beat the crap in a day is AI generally speaking um from our portfolios what how should we be looking at this gosh I mean this is one of those things that I it's very it's very very hard to decipher what is going on because the and this is part of the problem with the the world today is that things are changing faster than they've ever changed And you know, I was reading this piece. There's a great piece by Matt Schumer called Something Big Is Happening. Uh people should Google it and read her read it. It's on Schumer's website. Schumer is a he's involved in the the kind of on the ground in the the whole AI ecosystem. And he talks about how there is this seismic shift that's going on that really has not even started to impact things. He basically was saying that like, you know, in short, the the AI is starting to to rewrite the code for the AI. And so he's a developer involved in writing AI where all of the sudden the people developing the software that is transforming everything are no long they're they're basically irrelevant inside of developing the software itself. And so you can start to see this world where when people who were that involved in actually developing the software become irrelevant. Well, what does it mean for the rest of us where this software eventually just starts doing all of the other things around the world? And and I don't know. I mean, I think that there is there are definitely there are pockets that are going to be disrupted and probably eliminated. And that's the scary thing from an employment perspective is that this isn't like um you know the innovation of like the car is something that a lot of people would look at and say like oh well this is gonna it's going to ruin all of the mail delivery services and you know the the Wells Fargo delivery service from you know horse and carriage is going to go away and you know that that's a really interesting way to look at all of this because the the adoption of the car was different than today because it it took God it took really like 50 years for cars to get really widely adopted. It wasn't until really like people came back from World War II and even like you know Vietnam and then really started to you know the average American then really owned a car w in a widespread manner. This is happening much faster. So this is this is different in that sense. I don't I don't think I I buy into quite the the narrative that this is gonna like destroy the employment market and because there's kind of a catch 22 in there where you know the the paradox in all of this is that if the the AI start really destroying a lot of jobs well the demand for AI then goes down because people won't be able to afford to buy all these crazy subscriptions to you know all these different services and so there's there's kind of a paradox in there where the you know unless the unless you have somebody else coming and fill the the spending void. You know, if you get enough employment, well, we reach a point where people aren't even buying this technology in the first place. So, and the other thing is like this is still very I think sort of niche in terms of its impact and the way it's going to materialize out over different sectors because until this becomes something that is like for me the the moment where this becomes really scary is when when I wake up one morning and I see robots walking across a construction site. That is the scary moment where you kind of >> know you know that >> it's going to happen. I have no doubt. I think it's going to happen in our lifetimes. But um you know I that's really scary because at that moment those robots are doing even the most manual of labor. The one thing is that's the last thing. This whole thing Colin is I call this I've been calling this for years. When we saw some of the productivity and efficiency come out um consumption cannibalism whereas you have a robot or you have a let's talk about a robot in an Amazon uh warehouse, right? They don't need to take breaks. They don't need to have a vacation. They don't whine to HR, right? Nobody's, you know, harassing them. uh nobody they don't need to uh ask for a raise. They don't need to take a lunch break. They don't need a smoke break. You know, this is where all of a sudden this happens and we see all these potential things. Now, what happened was productivity got better, more people made more money, there was more consumption. I get it. But this is kind of like that. I see this as a little bit of the tweaking of the potential for that consumption cannibalism where all of a sudden people may be out of work in certain areas or not necessary. Look at for example um uh graphic artists. I mean man you could you can go to Grock and ask a just a very simple thing. It will do a whole image for you. That's beautiful. >> Yeah. >> Beautiful. You know you used to have to send that out. You wait to the guy tweak it up to you know you send it to Upwork which by the way stock was down I don't know 25% this week on just piss poor earnings. You could do something like how about this? I look at your book I read I'm like hey chapter 12 the counter cyclical rebalancing portfolio. Chapter 13 the Bernstein no-brainer portfolio. I have an idea. I'm going to feed that into IIAi and say, "Do me a favor. Analyze this. Take your time. And I want you to spit out what is the most appropriate for this. And I want you to help me work the rebalance on this on a regular basis quarterly." >> Yeah. >> You know, I'm just saying just something like that. You know, you wrote it, my friend. You gave it to us. You gave it to us. you're you're thinking about this I think the exact right way where you're taking a creative approach to utilizing AI that I think these are the those are the use cases that where people are going to actually add a lot of value utilizing this software and you know it's the it's it's hard it's impossible to predict where all this is going I I think that I think if I was a if I'm a creative entrepreneur utilizing this software, the boy, the world is your oyster. I mean, I think that the the upside is limitless for those types of people who can really creatively use things like this. If you work at like a big clunky Fortune 500 company, you know, punching tickets, uh, you know, that those jobs, those companies actually, weirdly, I think are much much more at risk than like because that's the that's the thing. I think AI is the ultimate disagregator. It is the ultimate decentralizer because it it gives people who want to operate from a fully autonomous and sort of decentralized position >> a huge incredible value ad potential. So whereas this is much more disruptive for big big firms that are doing things that are very repeatable processes that these large language models are just really really good at doing. >> And we're not even talking about inference >> eliminating those those jobs. We're not even talking about uh inference or or nowhere near agentics yet, right? We're yeah, we're getting there. But can you imagine where where you deploy that? That that's what people are freaking out about. Let me talk about the book. The book is called Your Perfect Portfolio. By the way, I don't know who [clears throat] picked out the uh particular texture for this uh cover, but it's it's it's very soothing. You got to get this book and and seriously, people get the book and just to feel the cover if nothing else. Um but you got to do that. Uh yeah, I see >> that's what the book is for. The book is for I call it I call it good sleeping material. So I made it very comfortable in case it puts you to sleep right on top of it. >> I could have this instead of a fidget spinner. I'll just kick the book take [laughter] um no no great great stuff. The book is called Your Perfect Portfolio: The Ultimate Guide to Using the World's Most Powerful investment strategies. U got some good uh commentary from Morgan Howel, which by the way, are you good friends with Morgan? Because I want to get on my show. He was on years ago. I haven't been able to. Somehow we're not connecting. I'll ping him. He He's Yeah, Morgan's an old Morgan's an old buddy of mine. Um we God, we were, you know, both lame bloggers back, you know, 20 years ago before. Yep. >> You know, anybody knew who either of us was. Morgan is um >> cat just astronomically more famous than I am. >> So, I saw he sold 10 million copies of Psychology of Money. >> Unbelievable, right? Unbelievable. But yeah, if you could do that for me. So, let's talk about this. First of all, I'm going to ask you straight up. What do you what did you you learn from writing this book? >> Boy, I I learned a lot about all of these different strategies. me, you know, the the most I I think educational piece for me was actually studying the history of all of the different strategies because I it's funny when you talk about the so so people kind of know the the book is sort of an overview of of mainly 20 famous strategies from either Warren Buffett strategy to like the Boglehead three fund strategy to factor investing to the all-w weather portfolio all these different styles and strategies and I kind of go through and I tear them fall apart. And I kind of try to objectively analyze them, but I also like ripped through the history of all these. And so it was it was really cool like looking back and really studying the history of what where did these strategies come from and why are they a thing and why do they work the way they do? And so like for me, I loved like going through the history of like the 6040 strategy was really interesting. So that's 60% stocks and 40% bonds. And it was really interesting to to kind of study the history of that one because it doesn't have an origin story kind of like a lot of the other >> point. I was thinking about that just as you said it like cuz all these other ones have like a bit of an origin story who's who's famous for >> they have they have an origin story or a founder some famous person who's attached to the strategy and the 6040 doesn't. And it that one's interesting because 6040 is arguably like the most famous and widely used strategy of all of the strategies. >> I'm taking credit. I'm taking credit. I invented [laughter] 6040 and prove me otherwise by the way. And >> but yeah, it's weird because it didn't seem to have this origin story and so I kind of I I don't know if I exactly got the history right, but I kind of traced it back to the Great Depression and um you know the the old Wellington fund that was created um back then. And so it was it was interesting because the the origin story there it actually like runs through um you know not only the the Wellington fund but then you know John Bogle ends up running the Wellington fund at you at some point in his career through the the 60s and 70s and you know that this materializes into Vanguard which obviously everybody knows of of Vanguard now. And so, but the the the story there is basically that um the the fund itself was created right before the Great Depression and the the founder of it had been or the manager had been burned in the past and he created a a more balanced type of portfolio hoping that hey, if I if I load this thing up with a a big slug of bonds, if the stock market were to go down a lot, I wouldn't get as harmed as say an all equity portfolio. And it's funny cuz the the portfolio is built basically or implemented right before the Great Depression. It falls 40%. Which is you know pretty catastrophic by by most measures but it did way way better than 100% stock portfolio which fell 80% plus during that period. And so it becomes kind of widely adopted because it creates this more balanced type of return. And it's it's stood the test of time through World War II and the the inflation of the 1970s and then obviously in the last 40 years the the 6040 has kind of become the you know the gold standard and asset allocation to a large degree because it's just so diverse and so balanced and so but it was cool to kind of trace that back to the Wellington fund and the this more balanced type of asset allocation that now has become very very popular but wasn't really so popular throughout all of history. You know, it's interesting you talk about early in the book you talk about and you and I think you argue quite well that there's no universally accepted optimal portfolio. Even the book is called your perfect portfolio, right? It there's no per there's no perfect portfolio uh per se. There's just out there on the shelf. I remember post the 6040 and as we got into the Harry Marowitz, William Sharp, uh Briten Bower Hood and you know, pick your poison of who else you know, DFA funds, all that stuff. I was like so engrossed with getting we need one more percent in the commodities and I think that will be perfect, you know? Yeah. The the efficient frontier and all that. And then one day I'm like, what am I doing? Like seriously, it was like a year into this. I'm like, hold on a second. This is silly. 1% even if I'm wrong, doesn't mean anything. That was the whole point, by the way, of these studies, right, of of of uh of of the major uh uh pieces of white papers that were put out about all this. And I got kind of, you know, soaked up in this, but um how do you how do you how did you kind of distinguish between a portfolio that's kind of uncomfortable versus one that's genuinely misaligned with, you know, who the people are that are investing in it? Yeah. Well, I mean, that's the main message of the book is that there there really isn't a an overarching perfect portfolio. There's only a portfolio that's perfect for you. And so, the you know, part of the one of the analogies I used in the the book was to dieting and that there, you know, there's all these interesting dieting studies and one of them found that basically the there they studied all these different sort of fat diets and what they found was that they all worked, but they only worked for people who stuck with them. And so, you know, the that's one of the messages of the book is that, hey, here are a whole bunch of really good strategies. These will probably all work fairly well if you stick with them, but you've got to find the one that's right for you. And that's kind of the main message of the book is that we're all different. We're all unique. We all have different financial goals and needs, and you've got to find a portfolio that you can ultimately stay loyal to and stick with. And if you do, that portfolio will probably serve you pretty well. But you've got to find the one that's right for you because if you're incompatible with it, you know, it's kind of like finding a spouse in a lot of ways. That's the other metaphor I use in the book a lot is the you know finding a good portfolio is like finding a spouse and someone you can stay loyal to and someone that you know you you don't want to do you like I spent a lot of my 20s having you know not real one night stands but portfolio one night stands where I was constantly flipping and kind of tweaking and changing things trying to optimize everything to to make it better and better. And I finally realized like, hey, actually, I need to just find something that is good enough for me because perfect really is the enemy of the good in this process. And you have to find something that is just it's good enough for you that is going to solve your financial goals hopefully. And you stay loyal to it. And you got to make changes of course on the the fringes over time because your life is going to change and the the portfolio needs to be rebalanced and you know reallocated to be consistent with the the underlying strategy and your changing goals. across time, but you have to find a process especially that is something you can really stick with and stay loyal to and that that'll be your perfect portfolio in the long run. >> I have this envision of you in your 20s with like a dating app afro portfolio swiping left and right. [laughter] >> Exactly. That's that's pretty much who I was. >> And then and you know the other thing is uh I want to also put this uh analogy metaphor depending on how you want to look at this. I don't ever remember which is which. You know, when you have people in the kitchen, there's some people that like to cook freestyle and there's some people like to bake. >> Some people like to be like, I need a quarter cup, a teaspoon, and you know, for 42 milligrams of the whatever it is, right? And some people like, hey, throw the garlic in the pan, throw the wine in the pan, you know, get it around, mix it up, throw some salt, get on the plate. >> Yeah. >> So, so there's but but that person can't be the baker and the baker can't be that person. And if you ever try to do so, you're probably gonna be miserable >> and then you're not going to want to do it. And that's exactly what you're saying with this. So, let's talk about um you talk a lot about behavioral discipline, investor psychology, and and I I think if I I guess when I kind of wrote this down because I was taking notes, I was reading, you often emphasize that that behavioral risk is often more damaging than market risk, which is kind of a adjunct of what we're talking about here, right? So, which portfolio structures do you um do you look at as as maybe doing the best job of pro protecting an investor from themselves, right? Not just from volatility because that again that's what you're talking about, but I want to expand on that. >> Well, that's the hardest part about all this I think is that people are constantly chasing performance and looking at where the grass is greener and those shifts often times occur at the worst possible times. And so one of the things I emphasize in the book is that don't don't spend so much time chasing to where the grass is greener because often times you when you you know you you go to where the grass is greener and you're buying you know a lawn that is actually on the verge of dying and then you have to you know you're going to realize that lawn is dying. You're going to look across the yard and you're going to see you know grass growing where you just were and you're going to flip back to that one. And you want to avoid that process because it it just results in suboptimal returns because you're constantly chasing to where the returns are actually the worst and the the risks are the highest. And so, you know, for me, it it it really does depend. I mean the the portfolios that are more diversified that do sort of a more of a sort of I guess an all-weather style of investing strategy where you sort of you have to acknowledge that the grass in some part of your portfolio is always going to be brown and that's actually not necessarily a bad thing. I think a lot of people look at their portfolio and they sometimes think well gosh you know the the foreign equities in my portfolio really just they've done so dreadfully compared to the US equities. I'm just going to I'm going to ditch them completely. And then you get, you know, years like the last couple years and the the international piece blows the pants off of the the domestic piece and you realize, ah, I should have just, you know, I should have watered my own lawn. I shouldn't have just been jumping around. And so I think that sort of all-w weather style strategy where you're you're very broadly diversified and that, you know, for some people that might just be stocks and bonds across very, you know, structurally different time horizons. It may be something more like, you know, the permanent portfolio where you're buying something very intentionally to own things like gold or commodities and you're hedging against very specific regime structures where you've got kind of this all-weather portfolio that you've you you got to get into something like that knowing that in the long run in totality it'll serve you very well. But there's going to be times where pockets of that portfolio do really poorly. And that's one of the it's one of the big lessons from diversification is that, you know, one of the quotes I love from Brian Portoy is that good diversification is learning to hate some of your portfolio all the time. And that's really true. It's that you're you're never going to find a portfolio where the whole thing is performing really really well all the time. And and that's perfectly fine. And so again, kind of going back to that perfect is the enemy of the good is that you don't necessarily want your whole portfolio to be perfect all the time because it probably means your portfolio actually isn't that diversified. Because that's one of the things you have to acknowledge is that when the stock market gets really hairy and starts going down, you need if you if you're going to remain comfortable inside of that thing, you need other hedges. And those other hedges are they're not going to perform as well. when the stock market is rip roaring and doing really well, those hedges are not going to be doing well. And that's just the trade-off that you have to accept in in part of this process. >> So, I'm going to give you something for your next book. Uh something that I wrote about in my first book, which is the flower garden. So, I've been talking about this for I don't know 15 years. Um and that when we build a portfolio, you want to look at it as a flower garden, similar to your grass. Um, but in that flower garden, if you have things that only pop up once a year and you fill your whole garden with that, they look beautiful for a month or two, but then you just got this arid dirtridden patch of dry that goes into mud and it looks horrible, but then it pops back up. That's great. Whereas, if you had roses, heliconas, and impatients that come up, and you have annuals, and you have semiannuals, and you have evergreens, by the way, which are like your money markets, right? Never never changing color. something is going to hopefully pop at any given time. Now, unless we have a hurricane that comes or a tornado that rips through everything like tornado uh 2022, uh you know that that's going to be the kind of thing and we're going to call it all weather, but I call it my flower garden that we can kind of visualize something in bloom at any given time of the year. >> Yeah. Well, hey, that's why you need inside plants. [laughter] >> Exactly. That's why I need fake plants. Let's >> I like that. The the flower garden strategy. >> That's what we do. Um >> All right. I need to add a chapter. You want to write it for me? >> Yeah, I've written it right. I can give it to you. We can just bolt it on the back. Um so in again in in in this book, which by the way, you can go over to the discipline.com for show notes episode number 960 and the link right to Amazon will be right there so you can grab the book. I can encourage you to do so. Um and also by the way tells you more about Cullen and founder of the disciplined funds which is missing a D clearly for the disciplined investor but there is no relationship with us but he uh also does a a grouping of uh uh ETFs uh called the discipline funds but I want to ask you about that. So one of the things you talk about and then I think it reflects also in your actual real life investment strategy is um the idea of uh define duration right this could you could you explain exactly what that is >> yeah so really I I'm sort of extending the idea of bond duration to other instruments specifically mainly the stock market I think the stock market is very hard for people to remain disciplined with in large part because people don't understand the time horizon over which they should judge the stock market. And so what I basically have done with this methodology, I've created a way of actually trying to assign a time horizon to the stock market. So to to use kind of a simple example, if you we're we're really trying to quantify like what a financial planner would call the sequence of returns risk inside of this instrument. And and that's the risk that if you were to buy a 100% allocation in the stock market today and let's say it fell 50% tomorrow, what is your temporal risk in that instrument? And so if you were to apply something like a cape ratio and assume the let's just assume the future expected returns of the US stock market are 5% in real terms. Um well, in that scenario, if the stock market were to fall 50% and generate a a 5% annualized return in real terms from there, it would take about 14.2 years for you to break even. And that's your point of indifference. Basically, that's the time horizon over which that instrument has no sequence risk for you anymore. And so when you embed this into a broader sort of like bond duration methodology, you can start to assign very specific time horizons to the instruments where we can look at something like the stock market and say, well, in today's environment, 14 years for a retiree who's very sensitive about the way they're going to generate their returns, 14 years is the time horizon over which they need to think about that instrument. And so I utilize a very sort of structured asset liability matching process inside of my planning processes where like I'm going in and for somebody I work with, I'm I'm quantifying the the expenses they have and the liabilities they have and then we're we're matching instruments to give them actually a time horizon over which they know they have principal certainty of that instrument. So for me, >> the stock market is this very sort of long-term instrument where if you're thinking of it in inside of like your retirement plan, you've got to think of it as a a decade plus long instrument because that's functionally what its sequence risk is potentially across different time horizons. Whereas something like a money market fund or a T bill, something like that, [clears throat] you can match that thing to, you know, your emergency fund, your annual expenses. something like a a five-year bond, you can match that to, you know, if you if you're planning to buy a house in at some point in the next five years, you don't really know when, you could reasonably go out and buy a fiveyear bond and, you know, if that thing's got a a duration of about five, you kind of know what your sequence risk is inside of that instrument. And so, for me, good financial planning is all about really understanding time horizons and the way we're going to apply certain assets to match certain goals. And so I created this methodology that I call define duration to try to help people kind of implement more of like a an asset liability matching process where they can go in understand their liabilities and expenses over time horizons and then build a a really diversified portfolio that isn't just diversified across asset classes so much but is very strategically matched to very specific time horizon so that the investor can look at the portfolio and say ah >> well I own $100,000 of T bills because I needed $100,000 for a home down payment in the next year. And I know that's not going to beat the stock market, but it's serving a very specific temporal goal inside of my portfolio. >> Right. It's also not going to make them buy a $65,000 house in a year, >> right? Yeah. So you can match these things very quantifiably though where the whole portfolio is basically serving a a really a financial planning based set of goals rather than the you know sometimes we we put together sort of cookie cutter portfolios like a 60/40 where you know your 6040 is great it's diversified but what is the underlying goal of the instruments in there it's not always necessarily very clear. Yeah, I hear you. Cullen Ro, your perfect portfolio. Uh, get it wherever you get things. Uh, it's going to be available at I'm sure at all fine fine uh bookstores that are remaining out there that are actually standing up or uh right on Amazon. >> You can go there or go to uh the discipline.com >> Amazon Heramman House. >> Yep. All those places. It's great. Thanks for coming on. We'll have you on uh again soon. Great book. Appreciate you coming on and and and imparting all this great knowledge as well. >> Awesome, Andrew. Thanks for having me. >> All right. Thanks. That was really interesting. The book is great. He is a He is a really interesting fellow and I appreciate him coming on. We'll definitely have him on again more than five years from now. [laughter] I'll tell you right now, we'll definitely do that. Thanks for joining me this weekend and every week. Uh we're working our way into the middle part, the heart of February. A short month for markets. Uh oftentimes a little bit of a squirrely month for markets, but here we are. Thanks for joining me. Make sure to go over to the disciplinedinvestor.com. see what's available there, the various strategies that we manage for clients just like you. Whether it's uh the the the our specialty of dollar cost averaging through opportunistic and timebased DCA dollar cost averaging or whether it's our lobster trap mentality or even uh investing like the flower garden. All this is available to you. Make sure to go over there if you want some really clean advice. Yes, we manage IAS, we manage uh noniras and trusts, and we do estate planning. We have wealth management. All that is available to you. So go on over to disciplined investor. Just reach out. That's all you have to do and we'll make sure to get back to you and figure out how you can be best situated and into the hands of uh your future financial security. Thanks for joining me this week and every week. I'll see you again real soon. This podcast is [music] intended forformational purposes only and does not constitute personalized investment advice. Investing involves risk, including the possible loss of principle and past performance is not indicative of future results. The views and opinions expressed are those of the host and any guests and may not necessarily reflect those of Horowits & Company Inc., an investment adviser registered with the US Securities and Exchange Commission. Registration with the SEC does not imply a certain level of training or skill. 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