A deep Dive edition with Zach Abraham, chief investment officer at Bulwark Capital Management,
who we invite on the show every couple of weeks to walk us through
some of the wonky stuff that we don't understand on our own when it relates
to the financial markets and the stock market and all of that hullabaloo, which
is pretty much everything. Because I don't under which is pretty much financial I
don't understand now, Zach. Before we went live or went on air,
or rather, you were saying that you have some frustration with the current situation,
care to elaborate. Yeah, well, look, I one of the
things that annoys me. You know, you guys we talk about it,
but we do our own show and we have a podcast as well. And
one of the things that drives me nuts in this industry is that everybody that
has a show or a podcast, you would think that they have never had
a year where they didn't beat the market, right. You would think that
they're just like these super geniuses are fine, and it's always hilarious because the
better they sound, we look at their underlying portfolio and you're like, good
golly, this is bad. Right, So I will just tell you that
I am very frustrated because we are underperforming the market significantly this year. We're
like up up percent or two or whatever. Stock markets up eighteen, So
that's probably not the best advertisement. Now, flip side is last year we
outperformed by even more. So we're doing fine relative to the market. But
what's fascinating about this year, and again me not offering excuses, right,
what's fascinating about this year is we went into this year and one of the
reasons we're just sitting around even on the year is because we've been very cautiously
positioned. And the reason we've been cautiously positioned is because we saw the economy
slowing down, we saw rates going higher, we saw credit contracting, especially
after the Silicon Valley bank you know scenario, and we very much that revenues
and earnings would drop this year and with higher interest rates that stocks are not
worth as much. Right, they go down, not like a crash or
anything, just saying it's, you know, it's if earnings and revenues are
falling and interest rates are going up, stocks don't go up well until this
year. So the frustrating thing is we were sitting around trying to figure out
when was the last time we got the fundamental picture right? And yet things
still went the other way? And it's never happened to us. I'm sure
there's other times where it's happened. So we start digging into historically and going,
okay, when was the last time the market was up double digits over
a six month period of time in which we saw margins, revenues, and
earnings profit falling while interest rates moved higher. And the answer we found out,
it's never happened, not once in history, which makes which makes sense.
I don't want to go too deep in the weeds and financial analysis,
but you know, just think about it. If a company these revenues,
their profits, and their margins are falling, okay, usually you wouldn't think
that that you gotta go buy, right, you got to buy that we're
looking for losers here, people. That's how you make your money, right.
And then also when interest rates go up, that pushes stock valuations down
as well. And for the simple reason of look for the last fifteen years,
if you want to buy a bond, you were making one and a
half to two percent. Now you can make five to five and a half.
Right, So taking risk in a stock where it can lose one hundred
percent of your money, it's not as attractive when we can make five or
six percent taking no risk. So you add all these things to go up,
or you addle these things together, and you're like, what why stocks
going up? And I get asked out by clients and my answer is,
you know, I don't know. Why do people think men can have babies?
You know? You know, I know we're off. I know we're
off the path. I know it's bizarre. I know it doesn't make sense,
but I don't have an answer for why. So I think we have
a couple answers. But I think that one of the dangers of this cycle
that we're currently in, especially right now, is investors and rightfully so,
one of the things that really influences our read of the economy right is the
stock market. So many of us, you know, there's the old adage
of the stock market isn't the economy, But you know we all do that,
right we're like, well the economy, Shoot, look at the NASDAC,
you know, look smps up nineteen percent, things where they got to
be heating up. No, no, it's actually going the other direction.
And I think there's a lot of reasons for that. But the scary part
in the article that you referenced is that to the greatest percentage in history,
we've never seen anything like it. The top eight stocks in the market make
up about forty percent of the value. Okay, So you have five hundred
stocks in the SMP five hundred, forty percent of the entire value of the
SMP five hundred is eight stocks. And I you know, I read a
headline about that recently. That was on CNN Business, which I always refer
to right before we're about to talk to you, so I can feel a
little bit smarter. And it said it's all tech stuff, right, It's
like Apple's Microsoft, It's Amazon, it's meta. But the headline, I
remember it said that the Biden administration is worried about that. So explain why
that's happening and what's going on. Why they would be worried because it's extraordinarily
unhealthy. So what you see, okay, So it typically in bear markets,
which statistically if you look at it, or on a technical analysis basis,
if you look at charts and look at the mark technically, there would
be a lot of arguments that would say we're no longer in a bear market.
We believe that we are, meaning I believe that the recession just hasn't
hit yet and that the worst is to come. And we're really seeing the
data coming in every single day that shows deterioration. Consumers spending is slowing down.
We just had a couple different airlines come out. I think Alaska just
came out and said they had significantly slow or growth dis quarter and they guided
it down even further for next quarter. They're seeing travel demand start. So
everywhere we look, you're seeing the weakness and the stock markets literally going the
opposite way. But the reason that's dangerous is because you start building up so
much value in just a few stocks, and if one of those is to
break, or several of those or to break, there's nothing underneath supporting it
because everybody is on the same side of the ship, right, everybody in
their mother owns these eight stocks, Okay, So what triggers that? Who
knows, right, It could be one of those companies coming in with a
big earnings b or loss. The other problem it creates is what we call
price discovery, meaning we all say we believe in free markets, but I
don't think a lot of us really understand why, right, the beautiful There's
a really cool thing that's always fascinating me about statistical analysis. So if if
you know, like at the fair, well, they'll have like a giant
jar of jellybeans, right, and they're like, we gotta have you gotta
take a guess how many are in there? Right? And whoever gets it
right? Well, we know through statistical analysis if we get if we ask
enough people to give us a guess, right, and I don't know what
the number is, but let's say there's ten thousand jelly beans in the jar.
If we ask enough people and we average all of their answers together,
we will get the right answer. Okay, And it happens every single It's
fascinating to me, like how statistics work. And I've done it, I've
experimented with it. It works right. Markets work the same way, meaning
when you have free markets, you have all of these opinions coming in the
pricing accuracy of the assets in that market increases. It gets better and better
and better. Right, And so we call that price discovery, meaning if
we really want to know and think about it's as simple as if we want
to know what something's worth. Get together a huge group of people in states
in auction, right, And that's kind of the way markets work, right,
same, same basic principle. Well, when you have so much value
concentrated in such a small area, it feeds on itself. Meaning if you
go out and buy an SMP five hundred ETF. Okay, so it just
tracks the SMP five hundred you buy the stock market, forty cents out of
every dollar is going directly to those companies, Okay. The other sixty cents
is getting spread out between the other four hundred ninety two. All right,
So now enough people do that, that forty percent climbs to forty five,
right, and it keeps feeding on itself because they keep getting bigger and they
keep having more weight, and so the market gets continually even more and more
lopsided and more vulnerable because when not if when those stocks crack due to falling
earnings or they just get way too insanely expensive, which I think you can
make an argument it's getting there right now. There's nothing there to support it.
And those same people that bought the SMP without thinking about it, they
hit sell. Okay, now they hit sell, and forty five percent of
that sale pressure is going against those eight stocks, so it really increases the
volatility of the market, and it increases the vulnerability of the market if those
eight stocks drop. Let's say all the other companies are doing really good and
those eight stocks take a beating stock, market's going down huge, right because
the other side of it doesn't have enough weight to hold up against that.
And so it's just this problem. And the better those stocks do because all
that money's going into it, the more money chases them. And so you
just reach a breaking point. And who knows where it is. We think
you're getting close, but what could be wrong? Been wrong before? But
you reach a breaking point where everybody hits by all the time. Eventually they'll
all be hitting sell at the same time, and then you got a market
that goes no bid. So is it better? Like if you're just an
if you're advising an individual, do tell them, yeah, go into those
seven or eight stocks or do you say get out while you can, or
do both? Or do you like I have those like get those stocks and
then diversify. Yeah, so that's kind of what we do, right.
So but we've got we've got hedges in place constantly. So if that starts
to drop, it'll counterbalance, or it'll just kick them out automatically. But
really, in a market like this, you have to own something. You
have to own some of them, right, because you know you're not going
to be able to keep up with market performance if you don't, right,
regardless of the underlying performance. What I honestly would tell people at home doing
it on their own is, you know, if you own high quality businesses
like even an Apple, or you know, an Apple is Apples another.
I mean, Apple's a beast of a company, but the value their valuation
has exploded this year while they've had two consecutive quarters of declining revenues and declining
earnings and declining margins. Right, So it's just bizarre world. Right,
if you want to buy and hold for a long time, you know I
would. I don't think Apple's going to ruin you. Like I said,
I think they're a great company. But what I would say is, um,
I think this is the tough Well, I don't think this is the
toughest market I've ever navigated. And I've been running a portfolio live right.
We don't buy mutual funds and ETFs for our clients. We actually manage the
underlying portfolios. I've been doing that since oh seven, so we've gone through
some rough spots, you know, or seven. I'm just like trying to
picture that that you were doing this when you were seven. Seven? Yeah,
seven, Like the cutest visual ever. Yeah, that's how I became
a billionaire at age nineteen. Right, I was like, look at you
with your big brains, Zach at eight seven? Now I was discussing stock
Okay, well still that is adorable. Seriously though, that is the cutest
visual, though, is to see Zach at age seven, like just crunching
the numbers. Yeah, I don't have time for dinner. I've got to
hedge these positions. I'm not playing a little, I'm doing numbers. Yeah.
What advice would I give to the individual doing on your own? Well,
obviously unbiased, but I mean I just I would just say, this
is not a market to learn in. Um, it's it's it's it's just
not your grandparents' stock market. And I would say to be highly cautious.
The other thing, here's the other thing that makes this so bizarre to me,
is you're running up, You're running up these stocks that two prices that
make this I mean no sense at all, and you're doing it when you
can make five times the amount of interest that taking zero risk that you've been
able to make it at any time over the last fifteen or sixteen years.
So you're just looking at people going what on earth are you doing? And
um, you know, but it's hard, guys. You know, I'm
not the first person to say this. My grandfather, you say it's me
all the time. Just because something is inevitable doesn't mean it's imminent. Timing
of these things is really hard. I just know that when we look at
history, bubbles are not a new thing. They happen, things get irrationally
expensive, people chase it. This goes back. This goes back to as
long as Isaac Newton, Isaac Newton, the Great Isaac Newton lost all of
his money betting on the South Sea Company right in a bubble, and he
knew it was a bubble, and then it kept going up and he put
all of his money into it right at the top and then got killed.
Right the guy that like basically brought modern astronomy to us, right, So
not a dumb guy. So this is a tale as old as time,
and it's one of the toughest parts of investing. A couple of my mentors
that have had unbelievable success being money managers, they've got it. They both
say the same thing. If you're doing the right thing at the top of
these cycles, you're probably gonna lose clients because they're gonna sit there and go,
why are we not going up? And you're like, because this doesn't
make any sense and it's going to crash. But every day that it keeps
going up, everybody believes it more and everybody sticks with it, and so
you know, we just sit there and go, look, I think there's
a lot of companies out there paying really good dividends that aren't expensive, that
are actually stupid cheap. I think we can make five percent taking zero risk,
and we, just as risk managers with our clients money, just go,
you know what, now is not a time those things might keep going
up. That's fine. You know, if my clients make five or six
percent in the market's up fifteen, I'm not going to be happy about it.
But making five to six percent doesn't ruin somebody's retirement. Losing fifty percent
does. Right, That is a perfect way to that, and that is
why it's so important for people to know where they can get more advice from
you. So where is that? Yeah, so you can go to the
podcast. We do a show every week, Know Your Risk Radio. It
goes it's on several different radio stations on the West Coast and then but it
is podcasted out right, so they can find us on iTunes. Just go
into iTunes or or anywhere else that has not iTunes. I guess with the
Apple podcast, any podcast app, Spotify, whatever it is. Just go
and type in Know your Risk Radio will pop up and hopefully we can shed
some light. And we don't just talk about what we think. We also
interview other money managers, get other perspectives, and hopefully try to break things
down. You know, you guys are a perfect example. You're like,
oh, we don't know anything you do. You just don't know the vernacular,
right, you know what I mean? You get the concepts, it's
just you don't know the code words. So we try to make it digestible
for the people that don't do this for a living. Yeah. Well,
Zach Abraham, Chief Investment ob Circle Work Capital Management. Check them out now
Your Risk Radio dot com. Thank you. Investment advisory services offered through Trek
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