Podcast Summary: The Compound and Friends – Episode: "Cut Your Losses, Size up Your Winners"

Host/Author: The Compound
Guest: Nick Kolis
Release Date: December 20, 2024

I. Introduction

In this episode of The Compound and Friends, hosts Downtown Josh Brown and Michael Batnick welcome their recurring guest, Nick Kolis, co-founder of DataTrack Research. The discussion kicks off with light-hearted banter about book reading habits and the challenges of consuming rapidly evolving content, especially in the realm of artificial intelligence (AI).

II. Navigating the AI Landscape

Michael Batnick delves into the difficulties of keeping up with AI advancements, noting, “By the time this guy got his book into a print, he was already apologizing for how out of date it would be by the time you read it” (01:15). Nick Kolis shares his approach to integrating AI into his daily life, emphasizing the importance of using AI as a baseline for information and adding personal insights where possible.

• Nick Kolis: “The way I use AI, I use it every day. And the way I do it is I will type in a topic I'm thinking about and then I read the answer and that's what I know is the baseline” (01:33).

III. Market Reaction to Fed Announcements

The conversation shifts to recent market turmoil following the Federal Reserve's latest meeting. Nick Kolis observes that the market initially appeared orderly until midway through the Fed's press conference, after which panic ensued, leading to significant declines across various sectors.

• Nick Kolis: “It felt orderly until about halfway through the press conference and then it just began to go” (14:14).

Josh Brown highlights the unprecedented nature of the day, citing, “you had 483 stocks were down on the day most since December” (18:29), and discusses the spike in the VIX, a measure of market volatility.

IV. Growth vs. Value Stocks Performance

A substantial portion of the episode is dedicated to analyzing the ongoing outperformance of growth stocks over value stocks. Nick Kolis references a pivotal study by Henrik Bessembinder, which reveals that only a small fraction of stocks have driven the majority of market returns over the past three decades.

• Nick Kolis: “Over the last 30 years, 1990 to 2020, only 2% of stocks, 2.4% of all US equities created all the value in US equities” (49:40).

The hosts discuss how technological advancements, like ChatGPT, have skewed market dynamics, making growth stocks more attractive due to their potential for future surprises and innovations.

• Josh Brown: “It feels like ChatGPT is the mother” (54:47).

V. International Investments and Home Country Bias

Nick Kolis addresses the persistent home country bias in international investing, particularly in countries like Japan and Canada. He explains how domestic preferences and limited stock options in these markets have historically hindered overseas investment performance.

• Nick Kolis: “They still have a very modest but noticeable home country bias” (04:33).

The hosts explore the challenges faced by international investors, including currency fluctuations and differing economic conditions, which further complicate cross-border investments.

VI. Trading Philosophies: Cutting Losses and Letting Winners Run

Central to the episode is the discussion on effective trading strategies, emphasizing the importance of cutting losses early and allowing winning positions to grow.

• Nick Kolis: “You never sell a new high or buy a new low” (73:00).

The conversation reflects on the rigorous training methodologies used at SAC Capital, where traders were regularly assessed on their ability to manage losses and capitalize on gains without being swayed by fear or greed.

VII. Tesla and Traditional Car Companies’ Valuations

The debate turns to Tesla's meteoric rise compared to traditional car manufacturers like Ford and GM. Nick Kolis criticizes the low price-to-earnings (PE) ratios of established automakers, attributing it to their stagnant business models and lack of innovation.

• Nick Kolis: “It's fine. It's not a car company. It's a call on Elon Musk's ability to influence policy and get paid for it” (58:12).

Michael Batnick and Josh Brown discuss the implications of Tesla’s dominance and the challenges traditional car companies face in adapting to a rapidly changing market landscape.

VIII. Impact of AI on Investing and Information Arbitrage

The hosts explore how AI tools like ChatGPT have revolutionized investment research, reducing traditional information edges and flattening the playing field for investors.

• Nick Kolis: “Math is not an edge. Assume everybody has the same numbers at their fingertips” (52:40).

This democratization of information forces investors to seek new strategies and value-added insights beyond readily accessible data.

IX. Historical Market Comparisons and Future Outlook

Drawing parallels to past market events, Nick Kolis reflects on the 1997-98 Asian financial crisis and the 2000 dot-com bubble, emphasizing the cyclical nature of market sentiments and the triggers that precipitate significant downturns.

• Nick Kolis: “It's hard to understand” (07:18), referencing the complexity of parliamentary systems impacting economic policies.

The discussion culminates in an optimistic outlook for 2025, with Nick Kolis predicting continued growth driven by solid earnings and strategic market positioning, despite short-term volatility.

• Nick Kolis: “I am so excited about proving the Bears wrong again in 25” (77:35).

X. Notable Quotes with Speaker Attribution and Timestamps

• Josh Brown: “are you integrating AI maybe it shouldn't be a book at all into your life” (01:30).
• Michael Batnick: “What's the point of reading an AI book?” (00:57).
• Nick Kolis: “You never really pay for that quarter's earnings. You're paying for the hope about one year out earnings” (34:28).
• Josh Brown: “There are times to be long Europe, times to be long China, and that's perfectly fine” (39:22).
• Nick Kolis: “Customers gave money to buy, put a down payment on a house” (63:37).
• Michael Batnick: “We need a reckoning. We need to pay for our sins” (33:12).
• Josh Brown: “I'm very good at cutting my losses” (75:28).

XI. Conclusion

The episode provides a comprehensive analysis of the current financial landscape, blending historical insights with contemporary challenges posed by technological advancements like AI. Nick Kolis offers valuable perspectives on trading strategies, market sentiments, and the enduring dominance of US equities. The hosts reiterate the importance of disciplined investment approaches and staying informed amidst evolving market dynamics.

Key Takeaways:

• The rapid evolution of AI necessitates adaptive investment strategies.
• Growth stocks continue to outperform value stocks, driven by innovation and future growth potential.
• Home country bias remains a significant factor in international investments.
• Effective trading requires cutting losses early and allowing winners to run.
• Tesla’s growth underscores the shift towards innovative and tech-driven companies in the market.
• Historical market events provide valuable lessons for navigating current and future financial landscapes.

For more insights and detailed investment research, visit DataTrack Research and follow Nick Kolis on LinkedIn and Twitter (@DataTrekMB). Subscribe to their YouTube channel for up-to-date market analysis and expert commentary.