Radio Show: Buying Stocks At All Time Highs…Fund Manager Sentiment…Year End Questions for Advisors and Brokers | #190

Episode Summary

Executive Summary: The episode covers end-of-year portfolio reflections, arguing that all-time stock-market highs are not a reason to fear equities, while valuations and private equity froth deserve caution. It also stresses the long horizons required to judge active managers, highlights Simons/Renaissance as proof of process and human psychology, and gives practical year-end checklist questions on fees, cash yields, securities lending, taxes, and home-country bias.

Main Topics: All-time highs, sentiment, and trend following (Priority: 5/5): The hosts discuss why investors often fear markets at all-time highs, but evidence suggests buying at highs can still produce strong returns and lower volatility. They connect this to trend-following and channel-breakout ideas. Active manager evaluation and the limits of short time horizons (Priority: 5/5): A Morningstar study on elite U.S. stock managers illustrates how even highly skilled managers can underperform for long stretches. The takeaway is that strategy evaluation should use long horizons and clear sell rules, not just recent performance. Private equity valuations and future risks (Priority: 5/5): They argue private equity valuations have risen substantially since 2009 and may no longer offer the spread that once justified allocations. The discussion warns that institutional demand for returns may make private equity a major risk factor over the next decade. Jim Simons, Renaissance, and the human element in quant investing (Priority: 4/5): Using Gregory Zuckerman’s book on Renaissance Technologies, they highlight Simons’ imposter syndrome, long development period, and the reality that even systematic investing is run by humans with emotions and governance issues. Year-end portfolio hygiene and advisor due diligence (Priority: 5/5): A detailed checklist is proposed for investors reviewing accounts: fees, commissions, cash yields, securities lending revenue, ETF vs mutual fund tax efficiency, advisor alignment, and home-country bias. Listener questions on asset allocation and alternatives (Priority: 4/5): Questions address whether to time global equity implementation, how to use passive ETFs in emerging markets, how outside investments fit into a broader portfolio, and whether high-fee niche strategies can still be worth it.

Key Arguments: All-time highs are not something to fear by themselves; the more important risk sign is a downtrend or drawdown from highs. Buying stocks at all-time highs has historically produced returns on par with markets, but with lower volatility and lower drawdowns in some tests. Trend-following and channel-breakout strategies can exploit the market’s tendency to move between all-time highs and drawdowns. Many investors and allocators judge selling decisions by performance alone, which is a mistake; process should be part of both buy and sell decisions. A manager can be legitimate and still underperform for 1, 3, 5, 7, or 10 years; evaluation horizons likely need to be closer to 20 years. Private equity has likely become more expensive as too much capital has chased it, reducing or eliminating the historical valuation advantage versus public markets. The next decade’s institutional problem may be the need to meet return targets with bonds yielding too little and equities looking expensive, which pushes more money into private equity. Renaissance’s success shows that even the most systematic investing businesses still involve human judgment, emotion, and business-building skill. Investors should scrutinize fees, cash sweep rates, securities lending, and tax efficiency because hidden frictions can materially reduce returns. If an advisor’s value proposition is only rebalancing or product selection, investors should question whether the fee is justified.

Data Points: Client count: over 45,000 investors - A thank-you note to Cambria clients and investors Money managers bullish on stocks: 27% - Barons sentiment survey cited in Jerry Parker tweet Sentiment horizon: lowest in 20 years - Bullish money-manager reading from the cited survey Market behavior: around two-thirds to 70% of the time in drawdowns - Discussion of how often markets are away from all-time highs Backtest start date: 1928 - Test of buying world stocks when the month ends at an all-time high Strategy result: great returns on par with the actual stock market - All-time-high entry strategy on world stocks Volatility reduction: almost half the volatility - All-time-high entry strategy versus regular stock ownership Private equity outperformance reference: 5% historical outperformance - Question posed to large private-equity managers about persistence U.S. stock funds nominated: five - Morningstar fund manager of the decade nominees in 2010 Decade performance of nominees: zero outperformed - All five nominated managers failed to beat the market in the following decade Average underperformance: 5% per year - Average shortfall across the five nominees Winner underperformance: 8% per year - The selected fund manager of the decade Emerging markets outperformance swing: 300 percentage points then 200 percentage points - EM outperformed the prior decade by about 300 points, then lagged by about 200 points this decade Evaluation horizon: 20 years - Suggested minimum horizon for evaluating strategies/managers U.S. bonds yield: sub 2% - Example of low fixed-income returns creating pressure for institutions Funds under discussion management fee: $2 and $20 - Reference to Renaissance/hedge-fund style fee structures Renaissance fee structure: 4% management fee and 44% performance fee - Historical Medallion Fund fee mention Trading commission target: zero - Modern brokerages often charge no commissions Cash yield target: 1.5% or more - Suggested reasonable yield on brokerage cash balances Short lending revenue: returned to shareholders - Policy described for the speaker’s funds ETF vs mutual fund tax advantage: about 0.7% per year - Estimated advantage of ETFs in equity taxable accounts Betterment savings yield: over 1.5% - Example of cash account offering Advisor fee standard: 1% - Industry-standard advisor fee referenced Home-country bias example: 70-80% in U.S. stocks - Typical U.S. investor equity allocation Average emerging-market allocation: 3% - Claim that most investors underallocate to EM Emerging-market allocation question: one-time decision at age 65 - Listener says they will likely implement a global portfolio only once

Pivotal Quotes: "hopeful with losses, afraid with profits" — Justin / Jerry Parker quote discussed by the hosts: Used to describe investor psychology around all-time highs and drawdowns "you should actually be afraid of them when they're not at all-time highs, namely, they're going down from those all-time highs" — Justin: Core thesis on risk being greater in drawdowns than at highs "Do we own any funds that cost above 1%? If so, and why?" — Justin: Part of the year-end investor checklist for evaluating portfolio costs

Implications: Listeners are encouraged to focus on process, costs, taxes, and diversification rather than market headlines. The message: all-time highs are not a sell signal, but hidden frictions, valuation excesses, and poor allocation habits deserve attention.