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- [00:00]
A
So Hamilton, your head of US Equity Derivatives at JP Morgan, what does that mean exactly? And what do you do on a day to day basis?
- [00:07]
B
Sure. So I've been at J.P. morgan since the end of 2009 and my responsibilities today are I have three hats I wear, David. The first one is I'm CIO of our U.S. core Equity Platform. I'm a portfolio manager on numerous strategies and in addition I am the head of US Equity Derivatives within Equity Asset Management. A lot of that goes back to my background over 35 years of investing in equities and equity options.
- [00:33]
A
And why would an institutional investor want to own an option?
- [00:36]
B
Options are magical. And the reason I think they're magical is because they give you the ability to express a more precise vision or expectation around a stock. Meaning if you like a stock, you can buy it and then it's very linear. It goes up, you make money, if it goes down, you lose money. But if you like a stock, you could buy a call, you can buy a call and sell a call, you can buy a call, sell a put, you could sell a put to get your exposure. So it gives you something a little bit more precise based upon your view, your opinion on a security. When I've thought about options throughout my career, it's never been about leverage, but it's about getting that precise way of expressing a view that does not have that, you know, traditional linearity, if you will, meaning up I win and tell, you know, and down I lose. Options, I think give you that pun intended optionality to optionality out to express a viewer and opinion.
- [01:28]
A
And like I mentioned, you're head of US Equity derivatives, so you run this for JP Morgan. What percentage of your clients are utilizing options in order to hedge their positions and how many of them are leaning into them and, and trying to establish a view in the market.
- [01:43]
B
Sure. So throughout the strategies that I manage, about 40% of those assets are in people looking to, you know, call it hedge their exposure. But it's not about hedging your exposure. It's rather about having some type of downside protection or downside buffer if you will, so that you can stay invested. So think about hedging in many cases as a way to not only get invested, but more stay invested. And then the other 60% are people that are seeking income, potentially foregoing some of the upside of the market in return for that bird in the hand of income today. And that's kind of the long term use cases of options. Options were started, you know, on exchange in the early 70s but actually have been used for over a century by farmers in some shape or form where either farmers were looking to protect their crops, hedging, or in the case of trying to know what they'll be able to sell their crops for when they harvest them, income. That one is also important because imagine if you were a farmer back, you know, a hundred years ago and you planted some crops, and the two biggest risks you had were, number one, something unfortunate happening to your crops just as you're about to harvest them, so you'd want to hedge it. The other thing was, I have no idea when I plant my crops what I'm be able to sell it for when they come due to harvest. And somebody says, well, I'll pay you $40 for your wheat today. You'll give it to me in three or four months. And you say, you know what? I'll take the 40s and it cost me 20. I'll lock in the $20. If it goes above 40, you're happy that you were able to lock in. You know, you gave up a little bit, but you're happy you're able to get the 40. But if it goes below 40, you're really happy you're able to lock it in. You know, that's how I think about hedging and income. Income is about getting income today in return for getting some of the upside. And hedging is about truly finding a way to sleep a little bit better at night with your investment, whether it be your crops or your equities.
- [03:35]
A
To use that example, by giving up the upside from $40 and higher, you get income today. So you're being compensated for taking up that. For giving up that upside.
- [03:45]
B
Yes, exactly. There's no free lunch, David. There is a trade off between those two things that you're trying to accomplish.
- [03:52]
A
But let's say stocks are up 40% this year. You might be concerned about the stock multiples. Let's say you wanted to stay in the market. How could options help you accomplish that? And what do your clients do in those kind of situations?
- [04:04]
B
Sure. So when we think about whether it be income or hedging, we think about it at the portfolio level. But that portfolio level could be also be done at the individual stock level as well. So let's just say there's a stock ABC and it's up 40%. There's a couple things you could consider. The first one is, you know, you've accumulated quite amount of wealth on that stock and, and it's done quite well and you want to find A way to lock in some of that gains you've had year to date. So you could buy a put. And that put, what it would do would say if that stock were to be go below a certain level, you would no longer lose any money based upon that stock going below a certain level. So if the stock were a hundred, you know, in the start of the year, let's call it, it's know, 70, and was up 40%, you know, you would say, you know what I'm going to lock in, you know, all those gains up until 90 now, you could actually lock up everything up to 100. But the higher that protection is, that higher that put is, the more expensive it is. But once again, we talked about being able to create a more precise investment experience by using options. So that's kind of one way of trying to lock in some of your gains and protect some of your, your winnings, if you will, in that stock or even at the portfolio level. But there's another aspect to it, and that is perhaps you don't want to lock in those gains per se, by buying downside protection. But you also, at that point say, you know what, I would actually probably sell of this stock if it went to 110. So now all of a sudden, instead of buying puts, you could actually sell a call at 110 on a portion of your portfolio. If the Stock goes to 1011-021031-04105, get all that upside appreciation plus that options premium from that call that you sold. If it were go to 1 11, 1 15, 1 20, the amount of options that you sold based on how many shares you had at stock, you would actually have to deliver to somebody, but you would have continued upside appreciation plus the options premium. But you would actually have to deliver that stock to the person that bought that option from you. So once again, it comes back to what are you looking to accomplish with your portfolio? How can options complement the experience you're trying to give yourself in that portfolio?
- [06:28]
A
David so in both of those cases, whether you're buying when the market goes down or you're selling if it goes up in the future, you're basically getting paid to take the right action. So taken to the extreme, the market goes up 200%, it goes from a hundred to 200. You know, you're going to take some money off the table because likely there's, it's, it's overvalued to some extent. It's the same thing. If it went to 50, it's unlikely that the same stock and the same portfolio is worth 50, you can make that decision ahead of time. And by making that decision ahead of time, which is to, to sell the op, to, to force yourself to sell at 200 or force yourself to buy a 50 European compensated.
- [07:05]
B
And it creates good discipline. The challenge is when many people, including myself, think about investing. If a stock were at a hundred, most people would say, I'd buy more down 50%. But once it's down 50%, you have to realize there could be a reason why it's down 50%. And so you still have to be comfortable. So you don't want to do, let's call it a full position from that perspective, you want to do a portion because, you know, it's easy. Not easy. It's, you know, understandable that many of us don't ever think that a stock could go down 50% or even up 50% for that matter. So doing a portion I think is best practice because that way, if it does go there, it gives you a chance to actually reconsider for a larger position. Do I still really want to buy the stock down 50%? Do I really still want to sell some more of the stock up 50%? So it does create discipline. But you also have to be aware that you can suffer from buyer regret or seller regret because you're doing this in advance.
- [07:59]
A
As you said earlier, David, I can't help but think about Rene Girard's mimetic theory, which is that human beings copy the behaviors of others, which is why we have these cycles. Oftentimes when things are going up, everybody gets excited, everybody else gets excited. There's this contagion of optimism. When things go down, you have this contagion of pessimism. So acting rationally almost goes against our very evolutionary wiring. It's much easier to do when you're at a hundred to kind of make those pre bake those decisions.
- [08:26]
B
It is. And it also creates good discipline. I mean, when you think about rebalancing your portfolio, it's never easy to take profits and reduce some of your stocks and buy some more bonds and that rebalancing your portfolio, constantly rebalancing is one of the best ways of compounding wealth over time or the opposite. You know, in 2020, March of 2020, the best thing you could have done if you weren't comfortable buying stocks because you're so scared of COVID and what could happen or even in liberation at the end of the first quarter, liberation at the end of the first quarter, you know, Nothing's ever easy. But just sticking to a disciplined approach to investing, you know, buying more stocks when they go down, to rebalance your portfolio back to its target state, or even selling some stocks to stay at its target state enables you to navigate storms and markets and uncertainty, you know, in a more holistic and comfortable way, if you will.
- [09:15]
A
I want to get to March 2020 in a bit, but first I want to double highlight what you said about when the stock market is up so it's gone from seventy to a hundred. The biggest behavioral mistake you can make is actually get out, getting out of the market. So if you zoom out any 10 year period going back to I think 1930s, 1940s, every 10 years the stock market goes up. Sometimes, obviously it's at a local maximum, sometimes it's only up by 5, 10% over 10 years. So the right time to buy is always now. And if you take that to the next logical exponent and the next logical point to that is there's never really a great time to sell if it's always a good time to buy for a long time holder. So when you have this market go up and you sell, let's say you sold, you bought at 70, you, you sold at a hundred, now it's at 120, the incentive to keep on buying in and admit that you were wrong before, there's a counter incentive to do that. So buying insurance against a downturn so that you stay in the market is incredibly underrated behavior.
- [10:15]
B
I wouldn't call it insurance because FINRA does not allow any of us to call options insurance. So I would actually say that it's the ability to own an asset that would mitigate some of the downside, not all the downside. But you're right. When you think about, you know, car insurance, so which really is insurance, we all have it and we all hoped that we never need to use it and it never comes into play, but enables us to drive on rainy roads, I think, icy roads, sunny roads, what have you. And when you come back, investing is about putting money to work. It's also about putting money to work in a way that you feel the most comfortable from a risk perspective. If you are an investor that loses no sleep at night and can navigate the ups, the downs, the wiggles, the waggles, you're right. Basically stocks that never lost money over a 10 year rolling period. And if you're a young investor, you should probably have a significant amount of money invested in the market based upon your timeline and your horizon. But if you're that nervous Neil or that nervous Nelly, your amount of equities you should have should be in my mind. This is one person's opinion should be commiserate with never having to utter those three ugly words of get me out. You should feel comfortable with markets going up, down, sideways and if they happen to go down, you're actually in a position to be able to add more because of your risk tolerance. From that perspective, I think the biggest cardinal sin is people that have a mismatch with their risk tolerance and their investing. So everyone is happy, happy and high fiving when the market goes up. But those people that are still comfortable with their holdings when the market goes down probably have a better understanding of their risk tolerance. When you think about the financial advisor community, they have clients that are conservative, moderate and aggressive. The real question is, is that person still aggressive when the market goes down 5%? If the answer is yes, their allocations are correct. If the answers are no, then they're only aggressive. In a one way market. You need to be aggressive or moderate or conservative in a market that can go up or down. Because as you said earlier David, stocks over a 10 year rolling period historically have gone up. But it's never a straight line. There's always every decade a thing, whether it be the tech bubble. I mean, I mean I've been doing this since the, the late 80s. So you had the 87 crash, you had the 89 United Airlines kerfuffle, you had the early 90s Gulf War, you had the end of the 90s, you had the Thai bot and long term capital. Then you had the tech bubble, then you had the GFC. And then you had the US debt getting downgraded in 2011. And then you had, you know, in 2015 you had some of the challenges around oil and some of the other situations. And then 2020 and then 2022, it happens. These things happen. Liberation Day, just more recently, these things happen. And the best thing that any of us can do as investors is not only get invested, but most, most, most importantly is stay invested. And options. I believe specifically hedged strategies help you stay invested. I would almost say forget the fact that uses options. It does, but forget the fact that uses options. It's Mr. Or Mrs. Investor. Are you okay making some of the upside if in return you don't have all the downside? How you get to that by using options is how the sausage is made. But you know how to use the sausage. How to think about the sausage, how to think about a hedge strategy is exactly that. Making some or most of the upside in return for not having all the downside.
- [13:55]
A
It's interesting because the unpredictability of the market. So it might have a 8 to 10% expected return and let's say a 10% standard deviation. So some year it'll be down 2%. Some of you will be 18%. That is actually the feature because if it went straight up, it would be more like a bond. And if, if the return was more predictable, it wouldn't have that return. So the question becomes, can you deal with the ups and downs? I had Julia Reese, whose job was for a decade, to go and meet with the CIOs of foundations, endowments and pension funds, Goldman Sachs's top clients. And what she found was this, the volatility and the selling was directly this nasty chart where every time there was a drawdown was when the selling occurred. So a lot of people think of markets as this linear instrument, but a lot of wealth is actually created and lost in those downturns. There's 10% plus markdowns.
- [14:44]
B
I'll give you another cool stat I think Dave, and that is over the last 20 years, you know, a fully invested equity portfolio is up approximately ten and a half percent. If you miss the ten best days, that number goes from ten and a half to about five and a half. But many people would say to me, why would you ever think I missed the 10 best days? AM I that bad a stock picker or market timer? Well, seven of those ten best days happened within two weeks of the worst days. Of the ten worst days. Think about that for a second. When are people most likely to make those irrational and maybe suboptimal decisions? Within two weeks of those worst days. So it's not that you're not a good stock picker, you're not a good stock timer, but when do you really have to think about that behavioral component to investing? It's around those worst days. And if seven of those 10 worst days were within two weeks, then it's likely you hopefully made the right decision by staying invested. But it's also likely you had to make that decision.
- [15:45]
A
It sounds like when you say these 10 days, it sounds like some, some meaningless marketing drivel. Yes, if you Cherry Pick these 10 days randomly, you're not going to get that return. But when people are systematically selling exactly two weeks behind before those 10 days, then that, that starts to illuminate. I used to try to develop and cultivate myself this steady hands, this in crypto hodl, right, These ability to withstand crises and then I listened to an interview with Stan Drunkenmiller, and he said, nothing looks as cheap as after it's gone up 40%. And I had an epiphany which is rather obvious, which is if one of the greatest traders of all time, Stan Druckenmiller, struggles with trading and not prescribing to when things go up, buying more, and when things go down, selling less, maybe what needs to be done is not to cultivate this kind of strong hands, but it's to structurally create a portfolio that does not require this heroic action. That's when I started to look at things like illiquidity. I have this whole paradoxical belief illiquidity could have a lot of virtue. In fact, when I interviewed a lot of the top crypto investors, like the top decile, fun investors. So think of there's hundreds of millions of crypto investors. There's these elite fund managers that a small percentage of the population has said can hold their assets, and then there's top desk. All of them, both privately and publicly, they admit that their best investments are actually their illiquid ones. In other words, it's the illiquidity that made their returns good, not actually the picking, picking and choosing of different cryptocurrencies.
- [17:12]
B
And there's something set to be said about that, because you don't have to make the decision to sell when you can't. It's unilateral. You know, I'm married to this position because it's illiquid. But I'd also say those illiquid positions, if I had a. If I were a betting man, had underlying fundamentals, underlying valuations, underlying things about them that attracted people to them. There's plenty of illiquid stuff that, you know, could be a little schlocky, right? That just doesn't have the right reasons to own it. But to all those wonderful, great investors, publicly and privately, to share with you, some of the best investments were illiquid. It's the underlying fundamentals. I mean, the things about those. Those securities were the same, whether it be public or private. But because they're illiquid, they didn't have to make that decision up to buy, hold, or sell. They were holding them because there was no choice.
- [18:09]
A
Previous guest Cliff Asness calls this volatility laundering. He complains that private equity funds only have to mark their books once a quarter. I actually think that's the feature of the asset class. A lot of people will say on this topic, sure, retail investors. Grandma, you know, my mom Might have weak hands, might sell at the exact wrong time. But surely institutional investors are not prone to this bias. And then when you look at the governance at institutional investors, you see the ultimate poor decision making governance for these kinds of decisions, which is committee. You have these 10 people committees and if only one or God forbid two people on that committee are panicking, you are going to have a contagion and you are going to have this compromise of selling a big part portion of the portfolio. And this is something that we see over and over regardless of market cycle, for decades, ever since the early 20th century.
- [18:57]
B
So investing's about risk. There's no getting around it. You have risk. When you have an investment, the question is what is the magnitude of that risk? And if you were in a committee like approach, you are subject to I told you so. And nobody wants the I told you so, whether it be personally from your significant other or professionally from your investment committee. And so when I think about investing, it is behavioral. And I'm not a big fan of using the term all weather portfolio. I'd rather say balanced portfolio. And many institutions do it quite well, David, where they have some private, some public, some fixed income, some extended fixed income. And they don't have all of their eggs in one basket. Because when I think about investing, it goes back to what I was talking about. It's about risk tolerance. So I don't start, and I don't think people should start with asset allocation. Stocks, bonds, alts, I need some of all of them. No, my belief is you use the word standard deviation before. Standard deviation is volatility. It's a range of outcomes to your portfolio. It's a range of outcomes to a stock, to a bond, to a private. And so I think portfolios are, you start with how much risk can we take as a pension, endowment, foundation, individual, and then how do I fill that bucket of assets? And it could be in stocks, bonds, alts, privates, to actually meet that targeted risk profile such that you can actually, at a committee level, individual level, or a CIO level, stay invested. Because if you have a portfolio that's well balanced to risk and the market goes down, you can all look around the table and say, you know, markets are down 20% and we're only down 8, we're only down 10, we've done a good job in creating a well balanced portfolio. Now if you're chasing returns and you're 100% in stocks and you're down 20 or maybe even more, the market down 20, then there's this oh my God, what if we continue to go down? Well, if we're down another 5, 10 or 15 or 20. And I love how you quoted Stanley Druckenmiller because everyone hearkens back to March of 2020 saying it was a generational time to buy the market. On TV and on radio and on podcast, there were numerous people calling for the end of the world, saying we should close markets till Labor Day, saying that this is terrible and getting worse, we're shutting down the economy, all these things. But it was a generational opportunity to buy the market if you had the ability or the risk tolerance or the risk available, put some money to work or the best thing you could have done at the very least in March of 2020 was not sell. Because once you sell in March of 2020, you'll never get that money back.
- [21:40]
A
I have a prideful moment. In March 2020 I had the opportunity. Sequoia was doing a round into Robinhood and this is this golden golden grail to invest alongside Sequoia directly on cap table. And I hit up a bunch of family offices that had been asking me for years for this impossible Sequoia Co investment in a top company. And all of them said well yes, but it's Covid not understanding that the whole opportunity existed because of COVID And my thesis was rather simple and perhaps it was very differentiated than other people because a lot of people took wrong action which is if the world ends, it doesn't matter anyways. If it doesn't end, it's a good investment. That was honestly my thesis.
- [22:17]
C
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A
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- [23:03]
A
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- [23:15]
A
Obviously there was, there's a diligence on the, on the company, but everything about the company looked good and looked promising. But this whole Covid risk to me was not a real risk. It was kind of things are going to happen the way they're going to happen. We didn't know at that point. We didn't know maybe it would be like the black flag and maybe society will be wiped out. But regardless that I wasn't worried about that outcome from an investment standpoint.
- [23:36]
B
I agree. And let's just bring that back for a second to, you know, my background in equities and equity options. Everyone calls the VIX the Fear index. And it's not about fear. It's a measurement of uncertainty. When the VIX is higher, it's because there's more uncertainty in the world or the markets. You know, In March of 2020, the Vix I think went to 50, 60. There was a lot of uncertainty. There was a greater range of outcomes from any investment. And range of outcomes does not mean down, it means up or down. So that's why in the second quarter, you know, when the markets ripped about 20%, people should not have been surprised by that magnitude because the VIX was projecting a greater range of outcomes. It could have been down 20 or up 20. But the fact is, is that that is in my mind, an opportunity where your job as an investor is to scale your investments appropriately as well as take that as an opportunity to put money to work or to reallocate. You're, you know, in 2020, there are certain asset classes that did their job for you, whether it be puts or bonds or for that matter, cash. But then when the market gives you this opportunity to be risk efficient or risk opportunistic, you know, you, you should put money to work. But once again, the higher the risk, also the higher potential reward, which means you don't need to put as much money to work if your normal investment in the market is $100. When the Vix Vix is 60, you really only need to put 20 or 30 to have the same opportunity as a normal environment.
- [25:05]
A
Actually, I want to double click on that because alongside being head of U.S. equity derivatives, you're also the CIO of U.S. core Equity at JP Morgan. There's a orthodox belief that volatility is bad. In fact, the entirety of modern portfolio theory is about how do you maximize return while minimizing standard deviation. But you said something There, which is sometimes risk in small doses could be extremely good. Let me give you a thought experiment. Let's say that US equities had a 20% return with a 20% standard deviation. Obviously you wouldn't size it the same. You wouldn't put 60% of your portfolio into that. But would that be in some ways a better asset class than 10 and 10? Talk to me about how you think about that.
- [25:45]
B
So let's come back to my original statement a few minutes ago where I talked about, let's not talk asset allocation, let's talk about risk management, targeting a volatility and risk profile. Once again, volatility talks about a standard deviation of returns. So if you have Mr. Or Mrs. Investor that feel comfortable as a moderate investor saying, you know what, I need to get invested, stay invested, I want to be in the market for the long run. But my risk tolerance is sort of like a 10% loss in any given year conceptually. And it's not exact, but humor me. It means if, if equities have a 10 volatility and 10% return, you'd be a hundred percent stock. If 20 return and 20 volatility, you'd be half in stocks. You still should have the same expected return on your stocks. The question is, what do you do with the other 50% of your money in that 20 and 20 environment?
- [26:36]
A
Because just, just to. That's very interesting. So just to double click on that. And the reason for that is the 10% drawdown is this constraint. So you're building a model of how do I maximize my returns while dealing with this constraint. In other words, if you made that 10 a 20 and you expected just one standard deviation drawdown, or if, if you're only accounting for two standard deviations drawdowns, in this case 20 -40, then you would put all your money in equities, in theory. So it's only constrained by your risk tolerance. Said another way, if you didn't have risk tolerance, if you were truly an AI trying to bet against the house, you would have a hundred percent of your portfolio there.
- [27:14]
B
In which one.
- [27:15]
A
In the, in the, in the. In the 2020.
- [27:17]
B
Sure. And, and, and Absolutely. Because if you're just trying to maximize return without a risk constraint, then you should be using leverage and risk and all those things. But as soon as you actually incorporate a risk tolerance, and to be quite frank, I feel as though almost every single investor portfolio needs some type of risk tolerance, Then all of a sudden you scale your weightings appropriately. Let's just say, let's bring it back to just a stock. If you have a low volatility stock and a high volatility stock and both of them have some type of return profile, you don't need to own as much of the high volatility stock if to to deliver the same amount of expected return because it has a greater range of outcomes.
- [28:02]
A
Said another way, a perfect portfolio might be 10 different types of investments with a 20% return, maybe even 20% volatility that somehow it didn't have correlation, it doesn't exist. But you would basically want a little bit of all these things, knowing that on average they're going to get 20% but knowing that some will be up 40, some will be down 20. And that's just the name of the game. That's, that's the portfolio that you built.
- [28:25]
B
As long as they all have positive correlation, yes. But as soon as they're positively correlated.
- [28:29]
A
It'S all the same. Good luck finding In a traditional 6040 portfolio, what percentage of a portfolio should be in options and how do you fit that into the 60:40 framework?
- [28:40]
B
My humble view is 60:40 is a risk outcome that happens to comprise 60% in stocks and 40% in bonds. Stocks tend to have what's called an average 16 volatility. Bonds tend to have approximately one third the volatility of stocks. You put those together, you end up with a risk profile. Options are not meant to replace stocks or bonds is meant to complement it. So if you have a hedged equity strategy that has half the volatility of stocks, theoretically it's about asset allocation. You take 5% from stocks and 5% from bonds, your risk profile stays the same, but you'd hope your sharp ratio would increase, your up capture would increase, your down capture would decrease and your total return would go higher. Because if you have a hedge equity strategy, your goal is to create asymmetric returns, better risk adjust returns and and reallocating some of your stocks and some of your bonds would actually complement. So if you have a 60 40, I think option oriented strategies could be anywhere from 10 to 20%, taking a little bit from stocks and a little bit from bonds.
- [29:46]
A
And in theory, but more importantly in practice, if you have a 6040 portfolio and you're hedging some of the downside in your equities, shouldn't you own more? In other words, you may have slightly capped upside, but you also have lower downside. So doesn't that make the equity better than the bonds On a relative basis?
- [30:05]
B
It could and should. But more importantly, if you Put options on top of your, some of your equities, you actually have decreased your risk. And my goal in thinking about 60, 40 is to maintain the risk. So if you have a 60, 40, if you actually put options on, let's call it 10% actually, no, 20% of your stocks, you now have taken 20% of the 60 and reduce the risk by 50%. You theoretically want to actually reduce your bonds and add to your equities to maintain that risk profile. So a 50 stock, 30 bonds, 20 hedged equity will have a very similar risk profile of a 60, 40. But what I just do, I just reduce my bonds by 10% and I reduced my equity even though it's hedged by 10% because 50 plus 20 is 70. And so it comes back to, you know, trying to, and you talked about the efficient frontier, maximizing the return, but still maintaining that same level of risk. You know, carving out that 20% if you will, should actually move that dot above the line, but keep it on the same risk profile.
- [31:16]
A
You've been in this market for 37 years. I'm not trying to age you, but you've gone through so many market cycles and what, what is something that you've changed your mind on in the last couple years?
- [31:25]
B
One of the things that, you know, a younger version of me believed is that my job was to outsmart the market, to time the market, to, you know, have a algorithm that knows when to get in and get out. But you know, we've all heard the expression markets could stay irrational longer than I can stay liquid. Time in the market to me is not like free throws. If we were having a free throw competition, you and myself, you'd probably win. But regardless, if I was to hit 9 out of 10, I would say I was pretty good at it and you'd said was pretty good at it. But being right on the market nine out of ten times probably means you're unprofitable. Had you missed Liberation Day because you thought it was going to persist and tariff's going to be the end of the world, had you missed 2020, had you missed the US debt getting downgraded, I mean, had you missed any of these idiosyncratic events, which aren't so idiosyncratic because they happen more often than people think they happen, you're going to give up everything and then some, you could have timed the sell off in Covid perfectly. But if you didn't get back in in March, you gave it all back. You could have timed Liberation Day perfect perfectly. But if you didn't get back in some point, you know, at the, you know, around April 8, you gave it all back and then some. At some point this year, the markets were down over 20%, only to see the S and P right now up last. I looked around 15%. Think about that for a second. You could have nailed everything geopolitical, political. So my, my belief is being, finding a way, you know, my younger self would have said my job is to outsmart the market and beat the market. Maybe my slightly mature self and many of my friends and colleagues and family who say it's not so mature, but maybe my slightly more mature self today would say, you know, find a way to be as efficient as possible to maximize return, but be able to stay invested and use those market sell offs opportunistically in your favor because you have some dry powder or you have the ability to reallocate. My younger self would have been a little bit more, you know, competitive to beat the market as opposed to finding a way to use the market as a tailwind.
- [33:43]
A
One of the mind twists about this is I interview people and now I've had this podcast for over two years and I talk to them about these things. And I know that when Liberation Day came, they sold. Even though they were talking about, well, you know, when there's, when there's sell offs, we buy. I just know categorically, and I talk to people on and off the camera, they committed this, this investing fallacy again. And yet they still, they don't see the pattern between their investing history and they still believe that next time they'll pick it again. So humans have this twisted way of having revisionist history, thinking that they have learned the lesson of history not understanding that to your point, the next black swan by definition is, is unpredictable. It's a three standard deviation event. So it's something that we can't even fathom, thinking that they'll behave differently there, not understanding that what needs to be learned is to act rationally and to stay invested during those downturns, or if you could be heroic to add to your positions. But even just not taking action is actually the thing.
- [34:40]
B
I agree, David, and I don't know if it's heroic. On. On April 8, your 6040 based on market conditions went to 5545. You could actually buy five units of equity just to get back to your target state. You don't have to be heroic, you just have to be disciplined, saying, you know what, when I get out of balance, I want to maintain my risk Profile I have the ability to add because my portfolio is now slightly imbalanced relative to my long term investing goals. So it's actually a, a, a positive discipline to buy in April because your portfolio is now out of whack with your long term investing goals.
- [35:17]
A
This goes back to this whole behavioral, which is a lot of people then get stuck in, oh well, maybe it'll go down and I'm, I'll, I'll buy it at the exact right day, at the exact right second, which of course is absurd, but the pros that people have been in it for 20, 30, in your case, coming up to 40 years are actually just rebalancing their portfolio. What do I do? I go from, they went from 60 to 40 and then it goes down to 55, 45 and I go back to 60, 40. The genius insight from 40 years. And yet if people did that, they would do extremely well. They would not only get the market, they would actually surpass the market without doing any other thing, strictly by doing that and just buying indexes and being very disciplined.
- [35:54]
B
Now, I do believe that if you do the homework, just like you would in a basketball, football or baseball draft, to find those talented young athletes that you want to add to your team, I think financial investors are like athletes. And if you do the work and do the homework and find people with the process and philosophy you believe in and it's consistent and repeatable, I do think you can find active managers that can outperform the market. But it's like being a GM in any sports team. You have to do the work first.
- [36:24]
A
You must master the beta, and then you could find alpha. If you could go back 37 years ago, what piece of timeless advice would you give a younger Hamilton that would have helped you accelerate your career or avoid costly mistakes?
- [36:36]
B
I'd say there's a handful. Let me share them with you. In no particular order. Number one, patience. Things always take a little bit longer than you expect or want. The second thing when it comes to just career advice. For over two decades, people would say to me, who owns your career? And I'd puff out my chest and say, I do. But the reality is your career is a joint venture between you and your manager. The amount of times people talk about you, think about you, or mention you and you're not in the room is a lot more than when you're in the room. So you might as well share your career aspirations. The things that you're looking to accomplish with your, your mentor, your manager to help you get to that Point. I would also say that, you know, we all aspire to, to serve and to answer questions. A more mature, older version of me takes a second to compose my thoughts or my opinions, as opposed to being the first one to answer the question. And then I would say sometimes you have to reflect on, you know, where you are, what you're doing, and sometimes it's perceived that the grass is always greener. It's not always. I think you have to have this perspective on, on what you're doing, with whom and for whom. And if you any of those three things are missing, I think you're probably going to find career dissatisfaction satisfaction when it comes to investing. I would like to tell you that, you know, humbly, I'd like to say I'm always the smartest one in the room. I'm not. And so I've always thought, you know, over the last couple years of X number of decades, this is something I always want to be surrounded by some of the smartest people. So for a brief window of my career, you know, I did a, you know, a, an internal hedge fund with three people I loved. But I realized by myself, you don't learn and grow and develop, you know, being in a room with three other people as you would in a slightly larger organization. So you should also learn a little bit about yourself. What kind of environment do you operate best? How do you think about that, you know, that optimal way to, to create success. And then lastly, I would say you have to teach yourself some, some resilience. Having worked at Lehman brothers in 2008 and having lost everything because you weren't allowed to sell your stock unless you were getting married or having a kid. And I already had done both of those things, so I lost everything at Lehman. And by doing that, it gives you a greater appreciation for investing risk management. It also gives you a great appreciation for, you know, things aren't always glass half empty. More often than not, the glass half full is something that's a pretty good way to operate your career, your life, your relationships with.
- [39:08]
A
It's almost trite to say you lost money in Lehman 2008. That's the best thing that happened to me. But there's also downsides. Maybe your risk tolerance goes down. Tell me about the pros and cons of having something like that happen in your career.
- [39:20]
B
It's not about risk tolerance, about risk management. And so it actually has crafted how I think about investing my money as well as other people's money. Creating balance in your portfolio, for example, you know, I'm a believer in AI. I am. I think it's going to be transformational. I see it, I use it, I witness it. I witness it at the firm I work for. I witness it in my personal life. I witness it how my, my day to day works. This is not a pet rock. This is the adoption right here is much faster than the Internet. But even though I believe that in my heart, my brain, my core, it doesn't mean that's going to be my only investment for my investors. I'm going to have a well balanced portfolio that may tilt a little bit into AI, it may tilt a little bit into the beneficiaries, you know, across the, the, the, the stack, if you will, you know, the infrastructure, the chips, the, the distribution, the usage, what have you. But shame on me if my entire strategy is 100% based upon a single philosophy or theme. So I think, you know, I think that's one of the ways I, I would manifest the question.
- [40:26]
A
There's this adage in wealth, concentration builds wealth, diversification preserves it. And while that's true, another force unrelated to that, that builds wealth is compounding. Einstein called it the eighth wonder of the worlds. But staying in the game is just so important, whether it's in your career, whether it's in your investments, and that's chronically undervalued. And just having those chips kind of goes full circle to the beginning of our conversation. If your portfolio is up 40%, you don't have to either buy or keep all the chips on the table. You could buy options, you could protect your downside. Compounding is one of those things that's just so tricky to understand until you see it with your own eyes. It's almost one of those unlearnable lessons that you must see for yourself.
- [41:08]
B
I completely agree. And I love the quote that, you know, compounding the eighth wonder of the world because it's been a tribute to Einstein. I think people give Buffett credit for it, regardless. It's magical. And the reason it's magical, I'll give you a couple examples, and I believe this. My passion for markets came from my grandmother. My grandmother was invested. She loved markets for her whole life and, and every year for the holidays, instead of giving me a toy, she'd give me a share of a stock. And I'm like, what am I going to do with this certificate, grandma? And she goes, you know, someday you'll thank me. And so my passion around Mark is coming from her is why I thank her. But when I graduated high school, she gave me $1,500 worth of mobile. Ultimately came ExxonMobil. I, you know, after a quarter I got a dividend check and I'm like, what am I gonna do with this? So I did dividend reinvesting around it. So I did a drip. That fifteen hundred dollars with dividends reinvested and compounded. And it's not like ExxonMobil has been a great stock for nearly four decades, but that fifteen hundred dollars right now is worth over 160k. Think about that. That's the power of compounding. And let me bring that to life today, as you may have some younger listeners. If I could guarantee you 4% on cash for the next three plus decades, 200 grand becomes 800 grand. It's pretty darn good to have that compounding effect, David, but, and most people would say it's pretty good because five years ago, that 200 grand, 30 years later was still 200 grand because gas was getting zero rate. But that same 200 grand getting average nothing heroic average equity market returns over that same period of just over three decades is $3.2 million, a $2.4 million gap. The power of compounding is so powerful. But the next part of that question that I love is, which do you think is more likely? 4% of your cash for the next three plus decades or average equity market returns? So with all this cash on the sidelines today, it's remarkable how much money is being left on the table because people don't necessarily see the benefit of compounding on equity market returns and having to navigate through those wiggles and waggles because they're going to happen. And that's one of the reasons people saying cash is they don't want the wiggles and the waggles, but the juice is worth the squeeze on that little 200 grand. That $2.4 million gap.
- [43:31]
A
There's two sins. One is not investing and the second one is selling at the, at any time, really. Or selling all of it. You could say wrong time, right time. That also could be just a 10% difference. When you zoom out enough, it's the difference between having 3 million and 3.2 million. But the real mistake is actually just getting, getting the chips off the table. I looked it up. Warren Buffett, 99% of his wealth came after the age of 56. Speaking of compounding. On that note, Hamilton, this has been an absolute masterclass. Thanks so much for jumping on the podcast and look forward to continuing this conversation wise.
- [44:02]
B
David, thank you so much. Truly enjoyed it. Love to come back if you never have me again.
- [44:06]
A
Absolutely. Thank you, Hamilton. That's it for today's episode of how to Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.