Interview With Louis Navellier: Masters in Business (Audio)

dollars at Navalier and Company. If you were a financial television viewer in the nineties or two thousands, you very much probably saw Louie on TV discussing the markets, talking about how and why he picks various small cap stocks and and his approach of using both quantitative and behavioral uh information in order to make stock selections. UH. No less an authority than the Hulbert. Hulbert Financial die J named one of his newsletters as the top performing stock

selecting newsletter of the past twenty years. UH. And although we all know that past performance is no guarantee of future returns, what I found so fascinating about my conversation with Louis was the approach he took to selecting stocks and how that grew out of a project that he began in college. What what is so interesting is Navalier and Company is pretty much the only job he's ever had.

Right out of school. In college, he was working on a project to try and find a cheaper way to put together a SMP five hundred UH substitute, in other words, mashed the performance of the SMP five hundred but using less stocks in order to keep your costs down. And unfortunately they were unable to do that. Uh. They ran into a problem and that the index that they were putting together kept out before arming the S and P five and so based on the research that had gone

into that, he launched Navalier and Company. He launched his own newsletter right at his school, was pretty successful right off the bat and has grown it into uh quite a successful business. So, with no further ado, here is my conversation with Louie Navalier. This is Masters in Business with Barry Ridholts on Bloomberg Radio. I have a very special guest. His name is Louie Navalier. He is the

founder of Navalier and Associates. And if you have been involved in the markets for any length of time, you certainly have to be familiar uh with Mr Navalier. He is well regarded as both a stock picker and a long term investor. Uh He started a newsletter in night, which The Hulbert Financial Digest called his Emerging Growth Newsletter as the number one performer over a twenty year period looking from nine eighty five to two thousand and five.

In seven, he began managing assets for individuals. They his office currently runs more than two point five billion dollars. If you look at the period from five through two thousand and eight, following the advice of our guest, you would have seen gains of over two thousand percent versus the S and P five hundred index, which had an increase of barely eight hundred and sixty. Louis Navalier, Welcome to Bloomberg. It's great to be here. So I I'm

familiar with your career for a long time. You you were a fixture on the media, in the media in the nineteen nineties and beyond. But your career kind of started unusually. You began in nineteen eighty deep into a multi decade bear market. What what made you in nine eight say I know, let's go buy equities. Well, prior to actually when I was in college, UM, I was building them index products and UH I had access to Wells Fargo's computers, and index funds hadn't taken off then,

but they were they were starting up. So we were trying to figure out how many stocks we needed to mirror the SMP five hundred and the obvious answer wasn't five hundred? Can we do it with less and get the same correct? It's all the tracking correlation. Anyway, I figured I need three two stocks. So I was very proud of this three and three two stock portfolio designed to track the SMP. But I have to meet to you. I was a failure. It started to beat the market,

which was not the objective. That's tracking error in the right direct correct. So I learned that I was lied to. There there are anomalies on Wall Street, U, there are high off of stocks. So I went out to document these anomalies. And originally I started in small cap and I'm still highly ranked there, but I UH predominantly large cap manager right now because I remember you as a small cap stock picker from the nineties and really a quant before we use the term quants, is that is

that a fair statement? That's correct? Um our our QUANDT is just basically designed to find great risk adjusted performance and also to lock in on the fundamental nomalies that everybody's trying to identify. So we're a little different than most quants. Most quants nowadays just want a front run order flow, whether it's the hedge funds front running the h f T order flow and just riding. It's kind of like surfing. Uh. And then there's the quants that

basically front run the rustle rebalancing every year. So uh, you know, at the end of June wrestled as all it's rebalancing. That's a huge deal for all the tracking managers because they want to be ahead of the rebalancing and the ETFs come in and pop everything. So my quand is totally different is I just want great risk adjusted performance. As things get volto, we tiptoe out and

I have to make sure they're always fundamentally superior. But what Wall St wants fundamentally is changing and that's the fun. Part of what we do is UM. What we do is called behavioral finance. We lock in UM what it's working on Wall Street, and we score the stocks in that criteria and then we tweak our models quarterly. So so let's talk about those fundamental anomalies. What what is a fundamental anomaly? And then how can investor you profit

from that? Well, we actually put all the research free on our websites, both on the publishing side and our our management company site. But we have a dividend grader and a stock grader there. The dividend grader is mostly about you know, return and equity, cash flow, UH, sustainability, increasing dividends, while when you get to the stock grader, it's things like sales growth, margin expansion, earning stability, earnings momentum,

cash flow um, retrying equity anserings, revisions are any surprises? Now, those aren't all the criteria we test. And when you get too small cap, surprises are a bigger deal, and so is momentum. When you get to large cap, stability is a bigger deal. Okay, And that's interesting. So you have different rules in different neighborhoods and um, those fundamental rules sound somewhat similar, not identical, but somewhat similar to what the marketers these days are calling smart beta. Is

that A Is that an accurate assessment? Sure? I I have what I have a smart beta e t F with Oppenheimer, I've had it for years, and that e t F happens to be sales weighted rebalance every quarter. So they basically took our top hundred A rated stocks and we rebounced quarterly to it. The thing with any smart beta product is what what does it cost to you to get in out? Okay? And in the e t F world, you gotta be careful because et F s can have premiums to get in and discounts to

get out, so you gotta be really careful. The rebalancing costs um so I think some of the smart beta products aren't as successful as they should be because of the actual trading costs to get in and out. It's just the traditional drag of taxes, expenses, turnover costs, etcetera.

Is that is that the problem? What do you mean buying the e t F itself trading at a discount of premium to its end av that last points Stanford U C l A and honist in the University came out with a study last year that said the ETFs cost more than buying selling stocks. It was scandalous, everybody, they don't cost anything, They're free. These are nice people. No, no, no, no. In a tonal expense ratio that reflects all these calls correct.

But the specialists on exchange likes to charge you a premium and likes when you buy, and likes to charge you a discount when you sell. And then shortly after that study came out, we had August and what happened on in the morning of August one thousand, two hundred and seventy eight stocks couldn't be priced because they hit the little circuit breakers on the stock exchange when you

dropped more than five percently solliterating down. And for some reason, the specialist on exchange kept training ets even though it couldn't price the stocks. So you had all these big liquid e t F s being discounted at a shocking level. And so the et F industry still has to deal with this. There's a big SEC investigation into this. But this is a big problem, and um, we're not anti e t F, but we basically want everybody to know that when they turn the liquidity off of the market,

don't sell your e t F. I'm Barry Ridholtz. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Louis Navalier. He is best known as a small cap stock becker. These days, he's a big cap manager, a quantitative fundamental analyst, and newsletter writer as well as running two and a half billion dollars. Let's start out with a little bit of your academic undergraduate work and talk about your your brand of quantitative analysis.

So you're at cal State, you're doing this research project to mimic the SMP five dred. What makes you, as a young kid say hey, I think I could beat the market. I didn't. I'm I'm basically from Berkeley, California. I'm totally trained in socialism. I was taught that we're all supposed to in the same amount of money because

if we don't, least we share it. Were correct. But but the reason we're all supposed to earn the same amount of money, we're all supposed to index is because if we don't, will have create social unrest and so for you know, peace, love, harmony, we're all supposed to just blindly follow each other and um, and by this an index UM. However, Vogel would disagree with you, but go on. I have no problem debating with Mr Boga.

I respect him highly. The but the real issue is is that UM indexing evolved because they passed the law called Arissa and Orissa says, we need to match this benchmark to cover our butt. So basically that's why indexing evolved. And of course they started with the SMP and they've created monsters. Okay, to be honest with you, if you go back to the go go nineties, the big stocks are getting bigger because of the cap weighting the SMP. UH just before the bubble bursts in March A two

thousand SMP was in seven giant tech stocks. The issue I have with indexing and people that just blindly buy baskets of stock, they have no idea what they're buying fundamentally, Okay, so let me push back on you a little bit. Didn't we see something similar in the late sixties with the nifty fifty with the names that everybody knew, they were household names. They were all doing great, and all the managers used that as their benchmark, and everyone piled

in to the same fifty stocks, which ultimately collapsed. You had the fifty seven percent drop from seventy three to seventy four. Is that very different than what took place UH in the late nineties it's exactly the same thing, except in the go go nineties it was concentrated in fewer stocks. And then, of course we had the whole fang issue last year, okay, where the top ten stocks um in the SMP five hundred better than the other

four nineties. But Facebook, Amazon, Netflix, and Google overpowered it. And actually that was an et F story. You see, the the equally weighted ETFs got hit so hard in August some of the big wirehouses said, get the hell out of these things, go back to cap weighted. So as they paraded out usually at the time, as they paraded out of equal into cap in the last four

months a year, they made the big stocks bigger. As we started this year, I was I'm not anti faying, but I was especially anti Netflix because it was over four times earnings to beginning of the year. It's rains were forecasts of the slide, so I wrote everybody to stay away, even though it number one performer. I had some issues evaluations issues with Amazon, but I've since then about face because I was very impressed with Amazon's first quarter making money in the cloud, taking on Netflix, and

actually they're even taking on Apple. If you buy an Apple TV you can't get Amazon prime because they don't they yeah, yeah, so um. But you know, bubbles are created by these industries. I would respectedly argue that Tesla's valuation was largely caused by the q q Q. When Oracle left the q q Q, they put in Tesla and couldn't handle the money. And so you have to realize getting added to some of these baskets is the greatest thing that ever happens to some of these companies.

But the market right now is just too darn narrow to buy the baskets. So you don't think Netflix at four times earnings, you don't think they're gonna grow into that valuation. No, I don't. And Amazon has been overvalued I think forever. Is it? Is that a fair state? That is correct? So let let me just walk you through Amazon, because I didn't about face on it because I'm I guess, slightly bipolar. But by the way, I'm a huge fan of both companies as as a consumer,

not necessarily as an arrest. And my family does the same. We both subscribed them. So here's here's my issue with Amazon. Last year it hit almost a thousand times trailing earnings, It lost money, the first three quarters. The fourth quarter earnings were disaster, thirty percent below endless estimates. The best thing I could say about Amazon late last year was training at two arentimes forecast earnings. When I saw the first quarter results, I didn't about face first a surprise.

They make a lot of money in cloud computing. There are taking on Netflix and programming. You may know they paid those top Gear guys from to leave the BBC. They kind of had left. They were on the way out of the BBC, got fired and they landed at Amazon. But the two and fifty millions pretty good for three guys. I realized, has a production team and a budget. On top of they have a ton of great program and in the High Tower is one and then there's catastrophe.

There's a whole run. They've become musty, cor correct and um. And when you buy a Sony TV, you have ah an Amazon Prime app on it and built in. You can't get that app again on the Apple TV. So there and then their devices they think is better than the Apple TV, and I'll let them slug it out with the Apple. But the other thing they got going for rather than taking on Netflix and Apple is again that cloud computing. They are continuing to dominate. Everyone can't

wait to have their drone delivery. Um, they're gonna start it first in the UK. You do have to put out a little matt for your drone delivery because we're correct and uh so if the dog gets it or if the sprinkles get it at your fault, okay, so what you have to have a matt. You know, I was reluctant to join Prime until a couple of years ago. I finally joined AMA on Prime. And now I don't even think about something you needed to twitch. You buy it.

It's there in two days and half the time, it's not there in two days, it's there in a day. It's it's so they're onto something. If one day they figure out how to make money, they're going to be really big. Well, they finally figured it out, and that's why I've done in about face and now they're surprising their capturing marketing. And you know Wall Street is desperate

for sales growth. When the second quarterins come out, it's gonna be the six quarter row of negative sales in the SMP, largely because the multinationals commodity stocked heart by the strong dollars. So anything that has pots of sales growth is an oasis at this moment. So we're no longer going to be able to use weak oil as an excuse for that, because oil is now hovering between

forty five and fifty. When it was under thirty dollars, it was easy to say, hey, oil has collapsed, but now it seems to be moving back towards a profitable correct and the and the energy companies are doing well because natural gas prices erupt. This little heat wave we're having is helping, however for electricity generation. Yes, However, I have to say this oil always goes up in the ring and then always goes down the fall. The inventories

in America have tightened up. However, they're still higher than they were last year. They're higher they are historically. Rotterdam in Europe is full kept any more oil there. They're still storing oil and tankers were nowhere to go, and so we still have a glut. Oil demands going up globally, but the supply went up faster. Iraq is online, I ran his online, or US fracking is just correct, and um,

what's happening is that Iraq is the big player. If I have a chart when I do seminars that shows where all the productions coming from marginal editor to Iraq is much bigger than all the fracking we've got. But now you've got a wrong coming online. Depends on the tankers and everybody's trying out do each other, so we're not gonna know where oil is to the to the to September. I'm Barry Ridhults. You're listening to Masters in Business on Bloomberg Radio. My special guest today is Louis Navalier.

He is a quant money manager, picker, newsletter writer. He has been actually running running cash for almost thirty years, and it's been in the business for for longer than that. Um, let's jump right into the whole idea of mutual funds and e t f s. You're you're an advisor to a number of funds and the number of e t f s. What are some of the disadvantages of those two structures and what are some of the advantages. Well, I think I should just tell you why I invest

them personally, Okay, Um, I married a Canadian. Uh, she has money in the Caymans and a trust we have to report to. I R s. We're not allowed to buy US funds over there, So I buy my e t F with Oppenheimer over there. Um and uh, I think that ETFs fine if you want to buy and hold. Um, it is not meant to trade. The spreads are still a little bit too wide. As it gets more liquid, maybe that will change. But I think ETFs are better

for buy and hold investing than than trading. Because of that, academics that e t f s cost more to buy and sell, and then E t F seemed to have some liquid issues on during flash crashes things like that. So bine hold is fine trading no now over. My personal money is in funds. So why did I Why do I do that? Well? I do it for a very selfish reason. Um, I sold a big chunk of my business a few years ago at a cash event, and so I have a lot of taxable money in

the market. When I see it a mutual fund, and then I run around grow it because people like me or whatever. Something happens. What happens is is the assets point in the fund to loot the taxes. So I run the places like New York and Los Angeles, and I tell everybody that you new Yorkers don't have to move to Florida. The people in ll A don't have to move to Nevada. Just invest in one of my growing funds, because you won't pay your fair share of taxes. If I grow a fun tenfold in fiscal year, we

will only pay tempers on the taxes we should. If I grow at fivefold, will only pay twenty. So this is a function of mutual fun account me. So I purposes seed funds of my own money, and then I promote them and try to get them to grow. Uh so I can better compound my money and help people stay in Los Angeles, New York. So does that technique only work when you have funds growing rapidly or would that work with any fund that's seated? And subsequently that

is correct. I left a fund company that had been with over for seventeen years as a subadvisor, and I left them last year at the end of the first quarter, and I was proud I was top one percent, But the tax time bomb that went off in that fund was just devastating. And uh So, basically when fund shrink, they become tax tigme bonds. When they grow their tax efficient and so that's why I've seeded funds with my own money. And uh, they're all new and they're all

not that big. But I'm having a ball, and I hope people don't think bad about me that I'm helping them compound their money faster. But let's just say, for argumisake, Hillary has become president and she gets her way, and we have to wait six years for long term capital gains as opposed to three years. Well one year on stocks, it's twelve months in a day. But the bottom line

is um, that will help my business. You know what I mean is there was a proposal that it was a three year wait for long term capital gains versus one year in a day. Today, Well whatever if they lengthen it six years is I haven't heard six years? So you said that my joy drop. This is when she was running against Bernie and was it was the original proposal. But the if she's modified, that's a good sign. Of course, her husband cut capital gain, so maybe they

should talk to each other about this. You know, the traditional politics is you run to either extreme and then pivot to the middle. I don't think anybody has mentioned that to the Donald pivot to the middle I assume by the time this airs, he will have begun that pivoting process. She's early stages of that. But six years is a ridiculous period of time for long term That's correct. And and the bottom line is people are stressed over taxes.

You know. I'm originally from California, and I just see the stress uh in everybody's face over there, and the steps they go to avoid paying taxes is quite interesting. So let's let's talk about that. You're a multi state sort of guy. Your offices so Navalian Associates listed in Nevada, correct, Correct our ops compliance tradings in Nevada. I still have a home there, all right. And you live in Florida. I live in the Palm Beach area. So you only

like sunny places. I can't argue with that. But I do have our private client group in New York City. I have our publishing business in Rockville, Maryland. But basically, tax restates are very interesting places. UM Reno is a fascinating place because Reno has the Schwab office there. The last I saw was the biggest in the world, Shanghai's number two UM and what it is in California barely

three thousand people pay half that state's taxes. So what they do is a lot of people like to put their money in Nevada by home in Lake Tahoe or in the hills somewhere and um, and then they drive back to California and as long as they don't spend more than five months there that they can live in California. And I have to pay that thirteen three five months. In New York's it's six months to the day. If you're here six months in a day, you you owe

the full ride. Correct. New York will hunt you down the rest of your life. And that's that. But and it was a big case. Someone literally a planeman and unscheduled landing for thirty minutes and then took off after refueled. They counted that as the day they actually lost in the New York lost in court. But that's how much they're going after the six months rule. I'm Barry Hults. You're listening to Masters in Business on Bloomberg Radio. My

special guest today is Louis Navalier. He is a quant and stock picker managing about two point five billion dollars across the United States. Let's talk a little bit about modeling and quants. What do you think people misunderstand about the idea of using mathematics to evaluate and manage assets. Well, I think the main thing that people should realize a lot of the quants are are basically doing it on order flow, so they're the nose on the dog versus

the hill on the dog. And whether they're trying to trade ahead of the Russell realignment a tracking manager, or whether they're trying to to to serve the h f T systems, the high frequency trading systems in that order flow. That's a lot of hedge funds do that. In my case, it's about getting great risk adjusted performance. My system at this moment says Facebook is safer than Kroger. That may not be intuitive to you, but that's what it is,

and if you chartered both, you'd see it. So obviously there's some more buying pressure under Facebook there is Kroger. We know that Kroger's lower pe and all that kind of stuff. So, um, that's the first step of quant But then I basically try to I score my stocks on various fundamental criteria that are very very important because they're influencing all the order flow on Wall Street, and there are quarters and earnings don't work. But I can

tell you they're working the last couple of quarters. And I go into every earning season locked and loaded with fund of my spirit stocks. And I really enjoy earning seasons. So I'm a little old school, you know. Um. I do meet a lot of forty year olds that I think I'm nuts for doing fundamentals. Okay, and these are

gatekeepers at big firms. Okay. Um. I have a kid that goes to Stanford that's been highly recruited by some of the hedge funds to build the algrimic models to basically, uh trade off the h f T systems and adapt. He thinks he's never taken an accounting class. He wonders why I do fundamentals. Okay, and um, but uh, you know, I'm not one of those quants. I'm a tax efficient quant. I hold stocks for over five quarters on average. I

get predominantly long term gains. Um. The interesting thing about our models nowadays is dividend growth has invaded all our models. Because the SMP yields more than treasuries. The dividends were cut in the first quarter eight four percenthre in the energy sector, and the companies are still boosting the dividends when others are cutting. Are an oasis. And of course we've had this huge bond rally and so dividends look a lot better nowadays. And of course they are attacks

efficient by and large. So when we look at the world of dividend stocks, how impactful has the FEDS policy of of zero interest rates been to that sector of the universe. The FED is caused this. The FED is not driving the bus anymore. I am extremely frustrated by the Fed. I don't know why they have to. Like in December they told us inflation is coming back, the economy is gonna be strong, so we're gonna four rate increases. Then in in March they said, oh, economy is not

as strong as we thought. Inflace isn't here yet, we only have two rate increases, and of course Janet Yelling made it very clear we're gonna have one or no rate increases. Uh. The other week after the FOMC minutes,

um are FED. I personally think they're mannipulated by Goldwin. Okay, there's a lot of Golden economists that are chummy with the FED economists, and maybe by getting the feller of well, obviously the FED economists will like to work a Goldman okay, And you have the you have the New York FED chief or or the head of research of former absolutely.

Oh and by the way, Janet Janet Yell in front of a congressional testimony the other day, pointed out that the private economists say this, okay, so actually stunt quoting the private economis. The truth is there's a lot of money around the world, and uh, with negative yields in Germany, Japan, Switzerland, money's gonna keep pouring the United States as long as we have higher rates in the rest of the world, as long as our currency is relatively stable, and as

long as our economy is will be decent. And I would make an argument that this strong dollar environment that has been haunting the United States and crushing corporate profits for the multinationals commodity stocks is going to continue unto our rates as low as everybody else, and our FED is not driving the bus. You know, under Bernankie was incredible. He spoke the London School of Economics with Mervin King and the audience and Draggy and he said, I didn't

just save the world. I didn't say the U s I say of the world, but he Draggingmrvin King all went to m T together. But now we have Mr Carry, a Canadian running the Bank of England. Uh uh King retired uh yell and replaced bernand Key. She went to Yale. And there's no coordination with the central bank activity anymore. And so the market forces are really driving this. And of course the low interest rate environments causing buy backs explode.

My average cheap borrowing go out and buy all this absolutely now it's exploding or nationally because the rates taping lower're there. My average large cap stock retires six point two percent of its float a year. That's amazing. You know, when you look at that what you described as coordinated, it's a little out of phase because you had the US start and finished their qui and just as Japan was was starting their qui and there are a couple of years into it and finally Europe is catching Oh

maybe this kewi thing is is a thing. So the conditions that have existed for the past five years, you're suggesting this is going to continue to go on. I don't know how the ECB, the European central banks gets out of this mass. They're not only a minus forty basis points. When they boost their quantitative easy and by twenty billion euros a month, they all the big thing wasn't the money. It says, oh, now you can buy corporate death. Yeah, they moved beyond just driving rates lower.

And Japan has always put their quantitative easy and all kinds of funny places at least as well Coy real estate that by everything and it's it's it's amazing it of course it's in like a read over there, but um it's it's this worldwide limbo contest. And uh I would respectively argue that our rates are going to be driven lower by all the fourth Where I live in Florida,

I'm the only American on my street. It's all Russians and Europeans now, and they've all but they've all bought homes in Florida and they based to move money out of the country. Or the Russians are up six in the last few years because there the ruble went to pot and then the Europeans are probably up twenty plus percent. This has nothing to real soon. That's just currency. If you look at the West Coast, if you look at Seattle, Portland's Vancouver especially, it's a lot of China money trying

to get out of the country. There are these brand new office buildings in Vancouver completely sold and still mostly empty. The opposite of the remember the sea through office towers in Dallas during the oil collapse in the eighties. This is see through residential towers in Vancouver due to Chinese money fleeing. Well, my my son who's at Stanford has a lot of Chinese friends and uh, he's met all their parents because when they their kids went to school here,

they happen to come here. Apparently it's not a problem in the United States if you bring some assets. And um, I know, I know, we're an election, heear. I'm not running for anything, but if I was, I would recommend we invite a hundred million new foreigners with about two million each, okay, to come to America. And sounds like a plan. And that's that's what happened to Canada. Canada was broke thirty years ago. They double the size of

their country by letting in people with money. Okay. So one thing you can say about America is at least we have our immigration is controversial, but we are letting a lot of very talented people in with money. And of course there is this corruption crackdown in China that seems to be expediting it interesting the corruption crackdown isn't in the province where the president China is from. Not not not a not a terrible, terrible coincidence. So um, what So as a quant do you look at other quants?

Do you do you see what other people are doing? You mentioned the h F T things. I look at someone like, um, let's use Cliff Fastness as an example. Who who publishes white Paper. And he's a pretty big factor um model sort of guy. He likes value and momentum. What what other quants do you pay attention to or at least find it interesting to read. I think the most readable people now from a publishing point of view

are the folks that bespoke. I think they do the most in your face graphically shocking research, compelling images that really tell us stoy uh. And I think they do a wonderful job. Are they the pure quants like me with their database online? No? But they are very academic. Uh. They like to talk about what's working on Wall Street.

They love to put a historical perspective on stuff. Um. You know, we we had our management to have a weekly freething called market Mail, and we have a historian there because it's just fascinating to always look back and see where we're at. But no, you know, you never stop learning, and that's the fun part of our business. I will admit that the new quants are trade a lot more than I do, okay, but but that's an

orderflow thing. I'm still kind of an old school behavioral finance, fundamental guy, and um, but I I respect anything that works. You know. The bespoke guys very much remind me of Jim O'Shaughnessy and the what works on Wall Street. It's the same. Let's just look at the numbers and see if there's something that's changing that's worth figuring out, well, whether it's whether it's fundamental valuation or what have you. Uh.

That book was really seminal for that approach. Sure, and but I think what everybody has to realize is the market mutates. And I think the way I like to explain it is Bill Walsh used to be a good football coach because he had a system that no one had, and then it stopped working because it went all over the league, you know, I mean, everybody figured out that

West Coast offense. And that's how Wall Street is. Whether it's cash low prices, sales or needs, momentum surprises, whatever the factors are, people are locking in on it will only work to everybody does it. So what we do is we we figure out what's working and and as the factors start to break down and get more volatile, they get trimmed from our models and then we suttress test everything. This is the fun part of what Navlier does.

At the end of each coreterier earning season, we step in, we update the models, and we tweak them to locking on what's working. So how often are those models trading, how often do you rebalancing, and how often you making major shifts in the holdings. Well, the models are stress tested on a one in three year basis at the end of each earning season. Okay, so they're being upgraded right now because we're about going to other any season.

Then the models are run every weekend. Okay, we actually do our research on weekends and uh, and then are our managers have what the models recommend for the next week, and we pretty much follow the model, so the only time will override them if there's merger news or something like that or liquidity events. But we fly on instruments and then of course we have optimization models to to

wait everything to get it as smooth as possible. One of the great things about the modeling nowadays is because dividend stock zig one grows stock zag you can mix dividend growth with real real growth stocks and really reduce the volatility. So our trademark has become really as a good risk adjusted manager, lower beta, lower max draw down, lower stanerindiviation, and we're mensely proud of that. And and then you can further do that by putting a tactical

overlay on and if you want. But but again we're obsessive risk control that starts with a quant We always have fund and many superior stocks. I don't have to worry when things are line around because I know I got good earnings the next quarter and then but as as individual stocks have become increasingly risky, I will trim them or replace them with safer stocks. And so that's the main reason we're selling well. Most of the stuff

we sell is actually pretty good. We just gotta sell with something that's better, they'll have less volatility and add the portfolio. So we're running the portfolios like you'd run a sports team. So if you're on my team and you lose a step because you know you're getting old and you know, I'll throw you off the team. Or if you're young, your party too hard and you lose stuff for that, and I'll throw you off the team for that. Usually i'll catch your minutes or I throw

you off the team. So that's how optimization works. We're always trying to build get the smoothest Stadius ride out there, and we're mentally proud of that. So if people want to find out more about Navalier or read any of your research, where's the best place for them to go. Well, there's two sites I'd recommend Navalier dot com the management company. Sign up for something called market mail, which is our free commentary comes out every Tuesday. My newsletter uh is

Navali Growth dot com. We keep those business separate, but we have free databases on sites and start playing around with their free databases. And of course you're welcome to call us anytime you'd like more information. Louis, thank you so much for doing this. Can you stick around a little bit, We'll keep we'll keep planning through some of

these questions. Uh. If you have enjoyed this conversation, be sure and stick around for our podcast extras, where we keep the tape rolling and continue chatting about all things quant modeling and stock selections. Be sure and check out my daily column on Bloomberg dot com. Follow me on Twitter at Rid Halts. I'm Barry Rihults. You've been listening to Masters in Business on Bloomberg Radio, brought to you by b A SF we create Chemistry. I'm Barry Rihults.

You're listening to Masters in Business on Bloomberg Radio. My special guest today is Louis Navalier. He is a quant and stock picker managing about two point five billion dollars across the United States. Let's talk a little bit about modeling and quants. What do you think people miss understand

about the idea of using mathematics to evaluate and manage assets. Well, I think the main thing that people should realize a lot of the quants are are basically doing it on order flow, so they're nose on the dog versus the tail on the dog. And whether they're trying to trade ahead of the Russell realignment, a tracking manager, or whether they're trying to to to serve the h f T systems, the high frequency trading systems in that order flow. That's a lot of hedge funds do that. In my case,

it's about getting great risk adjuster performance. My system at this moment says Facebook is safer than Kroger. That may not be intuitive to you, but that's what it is. And if you charted both, you'd see it. So obviously there's some more buying pressure and your Facebook there is Kroger. We know that Kroger's lower pe and all that kind

of stuff. So, um, that's the first step of quant But then I basically try to I score my stocks on various fundamental criteria that are very very portant because they're influencing all the older flow on Wall Street. And there are quarters when earnings don't work that I can tell you they're working in the last couple of quarters. And I go into every earning season locked and loaded with fund of my spirit stocks. And I really enjoy

earning seasons. So I'm a little old school, you know. Um, I do meet a lot of forty year olds that I think I'm nuts for doing fundamentals. Okay, and these are gatekeepers at big firms. Okay. Um. I have a kid that goes to Stanford that's been highly recruited by some of the hedge funds to build the agrithmic models to basically, uh trade off the h f T systems and adapt. He thinks he's never taken an accounting class. He wonders why I do fundamentals. Okay, and um, but uh,

you know, I'm not one of those quants. I'm a tax efficient quant. I hold stocks for over five quarters on average. I get predominantly long term gains. Um. The interesting thing about our models nowadays is dividend growth has invade aid at all our models. Because the SMP yields more than treasuries. The dividends were cut in the first quarter eighty four percent whre in the energy sector. And the companies that are still boosting the dividends when others

are cutting our an oasis. And of course we've had this huge bond rally, and so dividends look a lot better nowadays. And of course they are attacks efficient by and large. So when we look at the world of dividends, stuffs. How impactful has the FEDS policy of of zero interest rates been to that sector of the universe. The FED is caused this. The FED is not driving the bus anymore. I am extremely frustrated by the Fed. I don't know

why they have to. Like in December they told us inflation is coming back, the colonomy is gonna be strong, so we're gonna four rate increases. Then in in March they said, oh, economy is not as strong as we thought. Inflace isn't here yet. We only have two rate increases. And of course Janet yelemated very clear, we're gonna have one or no rate increases. Uh. The other week after the FOAM ce minutes, um are FED. I personally think

they're inniplated by Goldman. Okay. There's a lot of Goldman economists that are chummy with a FED economists and maybe by getting well obviously the FED economists would like to work at Goldman. Okay. And you have the you have the New York FED chief or or the head of research of former absolutely. Oh. And by the way, Janet Janet Yell in front of a congressional testimony the other day pointed out that the private economists say this, Okay,

so I actually sound quoting the private economis. The truth is there's a lot of money around the world, and UH, with negative yields in Germany, Japan, Switzerland, money's gonna keep pouring the United States as long as we have higher rates in the rest of the world, as long as our currency is relatively stable, and as long as our

economies will be decent. And I would make an argument that this strong dollar environment that has been haunting the United States and crushing corporate profits for the multinationals commodity stocks is going to continue into our rates as it was everybody else, and our FED is not driving the bus. You know under Bernankee it was incredible. So if people want to find out more about Navalier or read any of your research, where's the best place for them to go. Well,

there's two sites. I'd recommend Navalier dot com the management company. Sign up for something called market Mail, which is our free commentary comes out every Tuesday. My newsletter UH is naval Growth dot Com. We keep those business separate, but we have free databases on both sites and start playing around with their free databases. And of course you're welcome to call us anytime you'd like more information. Louis, thank

you so much for doing this. Can you stick around a little bit keep We'll keep planning through some of these questions. Uh. If you have enjoyed this conversation, be should stick around for our podcast extras, where we keep the tape rolling and continue chatting about all things quant modeling and stock selections. Be sure and check out my daily column on Bloomberg dot com. Follow me on Twitter at Rid Halts. I'm Barry Ridhults. You've been listening to

Masters in Business on Bloomberg Radio. Welcome to the podcast. Louis, Thank you so much for for doing this, h I said earlier, and I really didn't get a chance to to elaborate on this in the intro. I've been following you and your methodology and how you approach looking at stocks for a long time. It's funny. I'm the old man in my office and we have a lot of young guys twenties something thirty something. So who's the guest

this week? And I knew it was coming, I said, Louie Navalier, and they looked at me and said, who I go go back look at some old barons go pull some of So did you have do ruck Keiser? And I might remember I did it. Frank Campiello was the it was late late in the uh in the cycle. But you you were a fixture on financial television for for many, many years. And I'm always astonished when the

kids don't know who came before them. It's just search navalier slash stock picking and you'll you'll find out all you need to know. So, so, before we get to our standard questions, is so much stuff here that I didn't get through last time. Let's let's let's plow through some of this. I'm fascinated by the idea that undergraduate or graduate in I graduated from college and then I

got my m b N seventy nine. Then I started the newsletter in June of So I'm fascinated that here's a guy with an NBA two years from college, deep into one of the worst bear markets and generations, and you say, I know, let's let's go into the stock market. That's where the fun is. What what motivated that it? Had? You had to have some inkling, You were onto something before saying here's a terrible industry, let's join that. Well, first of all I had been building databases behind the scenes.

I was fortunate to get access to mainframe computers. Um in college from Wellsford was Kevist cal State Hayward, which was not called cal St D. S. Bay. But we were fortunate to get access to wells Fargo's computer. So I'm old. You know, I had a slide role. We used to punch cards anyway, so we I figured out what was working, and then I built my own databases. And every stock was a card going through a t

I programmal calculator. So every week and I would get Barrens and I update everything and key it in, and I had my own database. But in seventy seventy nine, and in the first few months you had a big small cap rally and then that bubble burst. But I knew there were an omblies on Wall Street. I could see him in small cap, and so I started in small cap, assuming that was the least effect efficient place. In fact, that's that's how I first came to know you as your rep was, hey, this is a great

small cap stock picker. Correct, And then my first letter was O T. C Insight later renamed MPT Review. It's not called emerging growth. The publishers like to rename us, but the that's how it all evolved. And then this guy Holbert picked me up and said nice things about me, and that helped my career. And uh, and so I publishing still a big thing. You know, we're very popular in the in the brokerage world. Um, the way it works is, um, if a stock goes up, it's their idea,

of it goes down to my idea. So there's a lot of folks out there that are are trading off our portfolios. And it's somewhat stressful because we have a bit of a wake nowadays. So when we make a recommendation, there's a little blip on the stock. And I'll be honest with his ax has picked me up eighty five percent times, so there's another blow. So this becomes an issue. But you know, we do influence markets, but markets are

also very fragile. So it's funny. I spent the first half of my career on the cell side, and what you described right out of the broker handbook. Hey, you know, anything anybody else suggests, if it doesn't work out, it's that guy. But if it does work out, I'm the genius who brought it to you, so that that is I think paid to one. That's correct. And I meet a lot of I meet clients that think I'm running their money and then I can't find them on our

system because their brokers running it. But they're the broker pace run newsletter. So I don't argue. Okay, and uh so, but different how many different You have a run of different newsletters? Oh gosh, I think we have six now, But um, what do they typically close for a year? Well, we start everybody in blue chip Growth, which is our flagship, and um, I think that's two forty nine a year, and then Emerging Growth is a little bit more. That's

more small cap. Uh. Then we have something called Ultimate Growth, wheref you we trade socks a whole about four to five months more for the pensions, um, and then if you get all three, you get Ultimate Growth. And now we have a family trust service which follows my wife's my mother in law's money a little more conservative blue chip hire dividend yield buying, dip selling the strength that's kind of plays the range of the stocks. And then

we have a new dividend service. You know I should talked to you about mentions them know, we have our stock Grader we're mensely proud of. We wrote a book on this. What's the name of the book, The Little Book that Makes You Rich with John Walling? Yeah, and um, that introduced our stock grader, and that's all freeing the

public domain. We haven't a Dividend Greater service up there, and they are Dividend Greater, believe or not, has actually beaten our stock greater in the last ten years, but barely now that this locks in a dividend growth, not high dividen and dividend growth. And when we merge the A rated stocks and Dividend Greater with A rated stocks and stock Grader, the rich results are incredible. But I only can find three to four stocks a month, So I'm actually at the stage of my life where I'm

running out of capacity. I'm running all places to put the money. And so we have very concentrated portfolios nowadays, and I can find that, you know, I can do better with an eighteen stock profolion. I can with a thirty seven stock profolio the market but better before the market is shockingly narrow right now, well, insisting you say risk, But my eighteen stock profo is safe in the thirty seven because it's the putting the dividend versus the growth stocks.

And they're all lower stocks, but they move differently, so as long as we optimize them properly. But you're ready, You're right. If I had an extraordinary event, if I laid an egg in one of them, I I probably Literification implies lower potential expect returns, more draw downs. People. People seem to misuse the term volatility for risk. What I mean is, hey, we know what you expected returns are based on these qualify these characteristics of the holdings.

What are the odds that we're not gonna get those returns in anyone year? What are the odds that we're gonna have an outsize draw down? That's the loose definition of of of risk. I like to eat and we can. You know, we know we have beatam extra out downstair innoviation, we have unsus, we have all kinds of different ways to slice it. But the bottom line is I'm actually safer today on eighteen stocks and I'm on about thirty

seven and uh and uh. But that's the function of the optimization models blending the dividend growth with the growth stocks. But I we really enjoy we do. We see in our own products. We're one of the few managers that are willing to work for tempercent and profits build by annually, no fixed fee. Uh, and say that again. Let's let's

go over that. So it's not two and twenty and it's not a straight one percent, it's we won't charge anything and we'll just take ten percent of the profit that of all costs, advisor, brokerage, firm, everything, it's sec real two or five dash three that the client must say they have a two million liquid net worth. As long as they say they have that, we're willing to run their money for temper cent and profits build by annually or a reasonable fixed fee. We have either or

so we really enjoy what we do. Our firm is increasingly we run more and more like a family office because we're very fortunate and I think I'm married well, and I sold some business at the right time. But the bottom line, we love what we do. We heavily invest in what we do. We're not as big as a rom baron or anybody like that, but we really enjoy what we do and that gets reflected in the business. So so let's go back to you launching a newsletter

right out of grad school. What was a mood likene on Wall Street and in the early nineteen eighties that that had to be you know, we we just had a double deep precition eighty and eighty two. Inflation was teenage numbers. The tenure bond I think was yielding sixteen Who the hell once stopped? Well, that was interesting. I was in San Francisco at the time, and San Francisco was much less stressed out than um, New York, New York because you know, they're it's kind of all land

out there, and it's it's any more. I think San Francisco is more stressed out than New York these days. Fights over Google buses, apartment rents, everything's gone very stressful, stepping over homeless people everywhere. But the the uh. But did to make a long story short, the um this is at the end of the vocal era. But by the way, the homeless in California was Giuliani's gift from New York to call that was that was our gift. They mean, well, but it is there. There's a a

few of them out there. Um l A San Diego, the whole West coast old California's as a New Yorker who has seen the number of homeless tick up recently. You know, if you remember in the seventies and eighties, homelessness in New York was terrible. That all changed once we started treating it like a a mental health issue and not um as a you have the right to sleep in the park. And it's ticked up since Bloomberg left the mayoralty, it's ticked up a little bit. And

I'm shocked every time I go to California. By the sheer note, I have a good friend, Bruce peccable dresser, beautiful wife, UM, very successful gentleman. UM. In the eighties, he had a slight crack cocaine problem. We always wondered what was wrong with Bruce. He was sitting in the tenderloin and somebody bit his finger off. Human h Yeah, it's I'm from the Bay Area. It's it's shocking to see people eat pigeons and things. So it's uh something I don't want to see ever again, do you know

what I mean? It's and yet California is not responding to this. California is a fasciname place of Californias don't have bank accounts. There's this huge cash economy there. So well the other the drivers out there don't have insurance. Well it might be the same group. You know, it's funny. It's uh. If you went to California d m V, they would say, don't blame us. They had Schwarzenegger's picture there because of the budget cuts. But the ski resorts

got extra traffic because they had the mandatory layoffs. You know, I have the mandatory leave in California and the budget problems. I have California employees because I'm on I have some people who live in truck you to work from you right near the border. And I remember a few years ago, I said, I'm sorry about your paycheck, and this is what happened because they got less money. Well, California was broke, so they had more withholding. They just with held more.

Figure will borrow it from the future, and of course you can fire tax returned in time. You gotta iou but they are benefiting from the Then they attack Boom now and I think they're okay. But going back to the cash economy that dominates a Silicon Valley and a lot of other places, in Los Angeles. You know, there is a theory that maybe the check cashing stores are more efficient than the banks. But the truth matter is there's there is a cash economy there and they're very innovative.

And it is what it is that that has to be a large chunk of legal immigrants, housekeepers, gardeners, whatever, who are getting paid in cash and don't show up on the balance sheets anywhere. And that's a part of the country. It's a great country. And uh, what what can I say? And um, you know, and you know, I'm really from Berkeley, and you know, when you're in the pot business in Berkeley, you have to be nonprofit

because you're doing this for the good of mankind. Okay, And they did arrest one of the Berkeley pot growers because he made too much money one year they rested for capitalism. That's pretty hilarious. It's so now that we have states like Colorado and Oregon and another two dozen states about to make marijuana not just medical marijuana, but recreational marijuana fully legal. Is that going to become an investible thesis anytime soon? No, because you can't you can't

can't cash the money, can't bank. So anytime you see a marijuana investment, unless it's an LED lighting to make the plants grow faster, or hydroponics or some mechanical thing behind the scenes, I wouldn't invest in it, Okay, And that's because of the federal law on on banking doesn't allow them to, uh to actually put money in bank. Correct. And what's happened in Vegas because unfortunately, uh, there are

some people in Nevada they're slightly stoned. Okay, Um, in Vegas, it's all gone to the East Cigarettes because they can't trace it. Uh So what do you mean the money has gone to East Cigarettes? In other words, they're selling East siggs as well as they're they're they're getting their marijuana through the East cigarettes and they can't trace it. Well, if you smoked it or ate it, they could apparently trace it better. So the marijuana industry in they guess

has collapsed. Now Vegas is a big LDS area. Is it is it legal? Is marijuana? Is it recreational or medical? And you know that's a good question, but it's at everything. Everything is legal. It's Vegas, It's it's it's at every ski slope I've ever been to, even in Utah, so it is a performance enhancing drug. Apparently, though, Utah had an interesting solution to the their homeless problem is they said, we're spending x hours a year on each individual homeless person.

If we can spend less and solve the problem, will entertain any solution. And the solution someone came up with was give them an expensive apartments pay for it. This way they get their meds, they have access to their whatever. And so far Utah seems to have come up with the only um solution that seems to be working. California should should take a look at what they're what they're

doing and maybe even save some money along the way. Yeah, you know, I go to some states that are very interest saying, like Alabama's very church oring and you have to you know, Wednesday night's church night. You better better not catch you out going for dinner on Wednesday. Uh, for some reason in Alabama a lot obviously, Utah's very LDS, Nevada's very LDS as as well, um so as the

Latter Day Saints. Okay, it's suggesting liberal Democrats, and I'm like, I would think that's more California than so uh Mormons LDS. I suspect there's a bit of a church influence going on in Utah too. I would be shocked if there isn't. Um so we probably you know that. I don't know if that model will work everywhere, but we have to see how it's strong. It's coming from the church versus somebody else. But kudas to them for you know, being a little creative and thinking outside the box and not

just spending them. You can't just throw money at problems that doesn't solve them. One thing I can tell you is in South Florida where I happen to live, we have all the rehab places and we have a lot of the second steps and you go there and it it's funny when I fly back to Florida and there are a lot of them were flying with front of the front of the plane because it's very expensive rehaf and you know they're all, you know, getting all their little drinks and they have one last hit. You know.

Most of them are opiates, you know, perkose dad and an oxy cotton and all the legal drugs or whatever. El Chapa was something I don't think you could get perkeo Dan. Yeah, I guess you could get percoset. I had my wisdom teeth out between college and grad school, and um uh, they gave me a prescription of Perka Dana. I call that the best month of my life. Yeah, but at the end of the month, you're done. You're done. There was no that seems to have changed these days. Yeah,

and it's a serious problem. We have a good friend going names who had a problem for four years with this. He had he thought he had teeth problems, but he had a little aneurism in his head and they had opened his head. In fact, Ben Carson almost cut on him. Ben was his second choice, and so they got they deal with his aneurism. But he apparently like doxicon for a while. And so he's back. He's fine. We're all reaching out to him to help him, and he's fine.

He's mentally he's sharpest can be. But it's it's uh, it's a happy place apparently apparently. You know, I don't mind the occasional mood altering drink or what have you, but it's not it's a place to visit for vacation. It's not a place to live in on a permanent basis. But uh, that's why we have to watch all our trading deaths. Okay, because that's a place to visit and not a place to uh So, so let's go back to when you're coming out of grad school and launching

the newsletters. Were you working in New York where you were aware of the mood of wool Street or did that? So? So, how did that affect the way you looked at the decision to let's launch your business right into the teeth? Well, I was thinking of moving here and I prayed around here and then uh, of course I had to get used to the weather. It was pretty hot when I was running around here. But the I decided to to

work for myself and um. I was originally sponsored by a little firm called Van Casper in San Francisco, which is part of Wells far Ago, and it's all my manage accounts were going through there. And then uh then I went in and started to work with other people and platforms and we just want to take care of

people and treat everybody like we treat ourselves. And you know, in fact, I just had my sec d O l audit Um departmently brought it and uh I they walk into a growth shop and they saw how much dividend management a lot of our clients had. And uh so I think they even I can't say this, he was happy, but I was happy with with it. With the audit

was not as long as I thought. And uh and they brought the deal lawyer there on loan to make sure that we do suitability and we put you know, we put everybody gets a mix that's suitable for them versus some can mix. You know. I think if they caught any of us, you know, treating everybody, you know, putting the round client in the round slot and square, they don't like that. You have to literally listen to people do what they want and to dial it in

and change it as their needs change. So we're we're pretty proud of what we've done. And our private client group here in New York is growing rapidly because we're trying to taking care of people. So what was your take on the whole um suitability versus fiduciary standard that the d o L rules changed. Did you have any thoughts on that or I have no problem with it. I think uh, I think the real problem is the

conflicts we have out there. So I don't have a conflict because we have either a low and stitutional figure that incentaphie. But what's happened to our business? And I'll pick on my I guess I'll pick on my daughter. So my daughter is a mutual fund wholesaler. She has a four thousand dollar month budget. The guy she married used to give her fund business because he was wanted

show he loved her. Okay, now that he's her husband, he just as I shares because at his firm he gets an extra fifty basis points to I shares over funds. One of the conflicts we that's emerged in our business is the E t F hold salers have more money than the phone hole salers. And so there are what we call a pay to play system out there, um uh, and a lot of it's mass with intelligence that the firms say, well and exchange this money will will make

you work more efficiently and tell you where you should go. Okay, So I don't pay to play anywhere. So this isn't my problem. But this is what the industry is dealing with. And that's a lot of people don't realize that, um when the E t F s a rebalance every ninety days, that it's that that if that e t F controls the specialists, the e t F might actually profit on it.

So it's kind of like the bond business. So in the bond world, everybody will always give you everything without no fees, no transactions because all the money's in the spread. People don't realize how big the spreads are ants or or it's already a householding and the charging the markup. I used to have this discussion with people who would say, I don't understand who paying bond managers. My guy at

filling the blank wirehouse doesn't charge me for bonds. And I would always laugh and say, let me explain to you. There is no free lunch. Of course you're being charged. It's just not transparent or disclosed. You're not seeing either it's stuff, it's house inventory that they're selling to you as a markup, in which case they don't have to show it, or there's you could drive a truck through that spread and they own it on one side and

they're selling it to you on the other. That's correct, and so what's happened is the asset gatherers on Wall Street, which dominate our business, are a very good gathering assets, convincing where they have low fees. But they people may not realize they make money in securities lending with legit. They make money on can make money on market making for the e t F through their special suffiliate, which is legit if they don't hose them too much. But

that's just a little bit of hosy goes. Well, this is what let's take some of the big robo programs. The robot programs, there are no managing fees, that's correct. But if you read like page fourteen of the disclosure, one of them, each et F pays a quarter million to be in there. Well, why would you pay a

quarter million year if you're hardly get any feast? Well, because your e t F is free balanced every ninety days and the specialist affiliate could make a lot of money, especially sincludit ETF and there's an internal expense ratio built in. We don't have to pay a fee to buy it. It's not like the old days of c shares there the fee is is built in. You know, if you if you look at a number of custodians, there's a one of ETFs that they'll allow you to trade at

no charge. It's like, well, why is that? Because they have relationships. When they're either constructing or deconstructing the individual shares and and there's oney to be made, they're happy just to have it there in house. And you know it's funny. I go to Europe and they do not like ETFs. The Bank of eng Until not to do it. I have a friend that used to arbitrage between London and New York, went to jail for three years, Mr Spister Gottam, And they're still are being in in Europe

right now. Okay, because there's a difference between the e T F and and it's holdings. So when the U s what's supposed to keep those arbit treasures are supposed to keep the price between the N A V and e TF identical. In the way they do it is, hey, here's a market solution to not allowing these things to get out of black. The financial incentive allows people to

trade that and and bring them into SINC. And I don't mean to be too negative, but I unfortunately the SEC is behind I can tell you what the SEC did wrong when we had first off, when they got rid of the twelve one fees on mutual funds. Okay, the firms figure out how to get paid even more. Okay,

so actually the SEC caused this conundrum to exist. And when we had the flash crash in two thousand and ten, at five minute period, the SEC came in and broke every trade where somebody lost more than so they basically tell every specialist you can steal money until hit. And that's exactly what you saw in August two fifteen. Okay,

the circuit breakers hit. They couldn't price the stocks, being why Melon had a little pricing issue and and uh, but there were E t F orders out there, and everybody looked at each other and they dropped a bid and picked everybody off. But they didn't pick off anybody. They picked off d v Y that I shares five star e t s, They picked off googleheim SMP equal, they picked off a bunch of Vanguard equally E t F s. And that's why the SEC to the scathing report,

like what the hell is going on? And if I was the SEC and implementing this d O L thing I put, I would probably tell the E t F world, uh, you better behave okay, uh, because there's just the spreads are two wide. People E t s do not trade in an asset value. Okay, and this is a huge problem.

And I have my own issues with morning Star. Morning Star will show in August a two thousand, um uh fifteen aug that that month that the d v Y only had a one basis point trade risk, but for some reason I had a fifty three point three percent range intra day. Okay. So I would argue that when he starts not doing their math right, okay, because you can look at a chart like on Bloomberg and you see the risk, and then look, morning Start wears the risk. So there's a lot of things that need to be

cleaned up. And um, this is gonna be fixed really fast. But right now those folks that run the exchanges are are laughing at us, and every time there's an extraordinary event, they're gonna make a lot of money. That that that's really, um an interesting take. I can't say I disagree with the whole a lot of that. So I want to get to our favorite few questions before they kick us out of here. But there are so many things I skip through before. Let's let's talk about geopolitical risk, Brexit,

US elections. Does any of that stuff matter to you? I'm sure? I mean model for that sort of stuff. Well, we've already seen this incredible rally in Europe because they briefly thought that Britain might stay, okay, because the tragic assassination the Member of Are went that kind of swung the polls. Now the polls are are going the other way, and there are on pins and needles. So there's a lot of cash on the sidelines ready to pour in if Britain stays. If Britain leaves, UH, the dollar will

have this incredible rally. It will pinch uh SMP earnings for the multinationals commodities even more. It has profound ramifications. But if you look at the electric around the world, people seem to be a little ticked off. Nationalism is on its way back. And we've even here, even here, so we'll see what happens. I have Brits that work for me, and UH, they've told me they all they that people know are voting to leave. But you know

it's it's um, Well, we'll see what happens. You know, this this office happened Canada and then they told the Quebeckers how much they love love each other. So maybe the folks in Brussels need to tell Britain how much they love them, you know. So speaking of overseas, you run models both US and international. When we look at the world of their value or small cap we see those factors outperform even more overseas than they do in

the U S at least developed x US. When you create a model for overseas stocks, do you do anything differently or is it the same factors that you're applying, just tweaking them somewhat in a different balance. Well, first of all, we have our hottest product this year is an emerging market product and we're getting a lot of money in it. But I have to tell you, um, we've been pretty good on currencies. And the key is when you invest internationally, you better not get the currency wrong.

And to demonstrate it, I'll give you an example where I'm made a mistake. Many years ago. I had the Coca Cola bottler of Mexico because the the Co Cola bottler is well, the average Mexican drinks sixty gallons of soft drink a year. By the way, it's better down there is here, It's exactly. And the time I go to the Islands, I picked up Coca Cola. It's delicious, So it's a it was a booming busines this and I think the bottle of the district before I forget,

I'm starting before I forget. If you go into certain gourmet supermarkets in New York, like Whole Foods, you can buy a four pack of ten ounce glass bottle Mexican coke, which is made with cane sugar, not high fruit excellent. Sorry but no anyway, so booming business. And um, but if you drink sixty gallons of soft drink a year, as the average Mexican does, you might get diabetes. So I at that time I had no venordis a diabetes company.

So I said, I am a great portfolio manager. I have this great bottler, and I have the diabetes company, and I have eliminated risk. Okay, onnesigs one perfectly hedge for diabetes until the Mexican paco went the wrong way and my trade came. And so the moral of stories when you invest internationally, don't get the currency wrong. And um, you know hedge uh currency when we don't and uh

and you can see how wild it is right now. Um. Obviously there are countries that that are more commodity oriented. New Zealand and Australia, Canada that get hurt when their commodities go down. There's political risk like there was in Russia when they invaded Ukraine. And Venezuela I have, well, first of all, a lot of the middle class Venezuela live with me in Florida. Now they they live in Weston. But the UH no to say it's a tragedy. There's got to be a revolt there. It's it's coming, it's

got to be. But it's on this broadcast. It'll probably be over. Yeah, but it's you know, no electricity, it's it's just no food rating, the school cafeterias for food with people, the schools. Everything's breaking down, it's truly. And then of course the oil is pronominally heavy sour crew No one wants the refinery blew up, and the only way they can sell that stuff is to refine it. You know. That's that's why Sawdi and Kuwait have their own refineries, because no one wants their heavy sour stuff

unless they refine it. Anyway. It's just you've got to get the currency right. And UH. Emerging markets, going back to risk, UH do balance out a big diverse five portfolio and are getting a bigger share because they're zigging one other thing zag So they're the models are are calling for more of that right now. So let's um

that that's really interesting. Let's let's go with the last question before I get to my favorites, which is how different is managing other people's money from writing a newsletter. It's not that different, you know. It's funny. The SEC will never let us clone a newsletter for management, so they never quite match. Okay, why is that? You can't you can't just turn it into a an E T F or something like that. Correct. Um, well, there's it's

it's obviously regulatory rulings. But um there was a manager near me in Jupiter, Florida that was cloning his newsletter and he got fined two point three millions. So we just noticed that. Okay, So what I do even though there was such a rule, because you're not the new newsletters not not not um uh permitted marketing material. So if I ever have a newsletter touching my management material, I'm really bad. Okay. So that is why the management

is headquartered Marina, Nevada, and publishings in Rockville, Maryland. We're trying to separate the correct and so, but the truth of matter is there's obviously a tremendous overlap. We don't have We have different names, So large cap might overlap my blue chip letter, but it might have a overlap. But they don't match and they have different names. I'm a different managers on it, and so we try to

we do try to differentiate it. But in the end, the clients come to us for that good risk adjuster performance. What the way our system really works is we keep six conservative stocks modetly aggressive ten percent aggressive, and as things get more volatile, we start to trim or sell out right. And a lot of people will take the newsletters and they'll try it, and they forget to trim,

and they come to us when markets are narrow. So this is a great time for our business because the markets aren't easy and it is very narrow, and they really want our help with the risk controls. And then

we have to dial in on taxes. If it's a pension, we might chase more of our A rated stocks, if it's a if it's a tax efficient account, we might buy A's or Bees, or if they're in a high tech state, we might put them in a growing fun but we always have to blend in the dividend management because it zigs and other stuff zags um, the gross stock zag and and it's really about dialing in and getting everybody as smooth as possible. And of course as people get older, they want more income and we can

make that transition very easily. So we were really proud of our private private client group, and we enjoy working with people and and we treat everybody like family. That's what we try to do, all right, So let's jump into our our standard questions we ask all our guests, and let's start right with the mentors. Who are some of the early mentors who influenced your thought process about investment. Professor Sharp at Stanford wrote a little book that was

religious reading to me very short. Um, what was the name of book? I have no idea. It was red and it had all the formulas in there I needed. And no Bill Laureate, yes he's in his nineties now, who was the advisor for Financial Engines which is now running about a hundred and fifty billions. Financial Engines very very successful. I had honor meeting Harry Mark at Wits

and Tahoe once, and Harry's a great guy. One of my professor's Arnold Lankson, who's in his nineties now, his buddies with Harry and likes to call Bill Sharp every now and then. But you know, those were the people that gave me the formulas, and I just set out the document. It um there are efficiently priced talks out there, and then there are things they're not officially priced. So what I don't care how how many anomalies are. I

just want to find them. And basically I'm saying a lot of the market is efficient now, whether that's E T F S or indexing, but I just care about the inefficient one. And those are the ones that Russell's gonna be adding their industries poppy. Those are the ones that are reacting positive, their earnings are growing dividends. But it is shocked, Lynarrow, our dividen greater. You gotta be the top of leven cent our stockarate, you gota the top nine percent. That's how tight the markets are at

this time. So those are those are academic mentwers. How about investors? What specific investors have affected the way you think James Stoward is at at American Centry was obviously very influential. He was one of the original James Stalwart Stours Stowers. He was one of the original um Ernie's Momentum guys. He was American Centry in Kansas City. He was buying research from B. J. Young and San Francisco. I remember meeting those guys. See, I did all this

pre computers. Okay, I did on calculators, and then obviously I tried to stay on the head of automation and the those guys were we watched, well, we also watched the Peter Lynches of the world. Um, I think Peter Lynch, uh, you know, I know it all the story and all that stuff, but there was there was a lot of math. In fact, I did when I was pretty young, I did a report for Fidelity on my quant stuff. So

so Peter Lynch is a closet quants another life. Well, he had some other people there that there was a guy named rich Fetton that seemed to be more of a quant and um but that he was a good mentor for that whole team of Fidelity and Um. But you know, it's you get to a size where you can only manage so much money and Fideli's at that size, but remember it has been for a long time. Remember Ned Uh, the ram Fidel, he was a pretty good man. It was a pretty good manager. Abigail Johnson is his

daughter's running it. Ned Johnson was running a fund back in the air. Yeah, prety Peter Lynch. It was pretty successful too. So you mentioned Bill Sharp's book. What other books have been influential after that? It was just ib D and UH staying on the cutting edge. I don't agree with how to exit like ib D says. I wouldn't set a stop at seven percent or anything, but uh, you're guaranteed to get taken out of stocks that are going.

Of course, in fact, you know because of our volatility last August, you know, the New York stocks change man physical stops and gtcs for two months and that's how bad it was. But yeah, you never show anybody order. You never show me your cards. But I learned that early in my career. If you put a stop out there, somehow a specialist will get the price they're take it and then move it away. Correct. And Uh, I have three good extrators that work for me. They aren't trading now.

They try to educate everybody. But but the truth of the matter is is the markets are always mutating and just got to stay on top of it. And I don't like any theme that doesn't make money. I do like them when they make the transition from negative positive rains if I can time at that quarter, I like that because it's explosive, But most of the time might change from negative to positive. I like that, But most of my stocks are Most of my stocks are go

up in a very smooth, steady manner. There's relentless buying pressure and buy backs into the surface. There's growing evidends, and so I jump on him as long as I can ride them and they're safe. And then eventually they get more erradic for whatever reason margins are under compression, or buy backs are slowing down, or the sectors going out of favor. I had this experience last year. You know, I had gillyad um, which is uh the hepatitis cpill.

I would get grief on that because Hillary said the pill is too expensive, and I would argue, it's a cure for hepatitis is cheaper than dying to people death in the hospital to leave Gilly alone, to say, just to just to clarify, this is cheaper than dying a long, slow, painful death. And yes, yes, and so check that, okay, and then uh but but you know, they start to hit the biotech funds. They started at the farmer funds because Hillary was specking on the healthcare stocks. You know,

I had to sell Allergen. I said, Hillary is not gonna mess with Alligien's bow talks. Okay, you know, and we're very familiar bowt talks in South Florida. You can see who has it because they're they're they're drooling at

the cocktail parties. That the dentist to bow talks in South Florida mandatory at least, I think the thing you have to tell him not to do bow talks, okay if you don't want to, yes, yes, but the anyway, to make a long story short, you know, there are sectors that get hit because they're in a big basket. You know, they do throw the baby out with the bathwater when we have the big energy meltdown. You know. He said, well, I don't know, I don't know if

they'll hit the terminals, the pipelines in the front. Yeah. Yeah, well then their knees would come out and one side would have her any other, but then it was just too long, and then they took everything out. I remember there was one LED lighting company that was in an energy et F, so they took it out because it was in the wrong ETF. Okay, because it made LED lighting. We see all sorts of people confuse symbols. News comes

out and a similar symbol gets whacked. I mean the behavioral side of which is really what what I like how is no one can read the second sentence, okay, which everybody just reads the headline, and you trade off the headline and and then you can have a correction and no one cares that one's programmed a trade off corrections. To my knowledge, yet, that's amazing. So you mentioned a lot of the things that have changed since you're joined

the industry. What do you think is the most significant changes? What if you had to pick one thing, what what has had the greatest impact on investment? Decimalization? Really, so going from teenas and quotas and eighths to decimalization, that that changed the research equation, didn't it? Yes, I missed the old system. I preferred the old system. I preferred

getting on NASTAC level three. Collin Markin started colleague market makers cleaning out their inventory, accumuli in stocks, never moving them. Today I deal with an algorithm. I deal with an anonymous high frequency trading system, and I don't like it. We calculate something called unsystematic risk. The risk we can't diversify way in large cap stocks is about point six percent of trade. In mid cap stocks and small cap it's still running almost six d bases points of trade.

Et f s last August were four fifties, four fifty eight. Now they're three fifty seven basis points of this is unsystematic risk, the static, the fudge factor, how much they might pick you off if you're careless with your order, and so not. So when we optimize the portfolio, we have to get the lowest beta possible. We have to get the unsystematic risk down, and we get the office high as possible. And there's ways optimized, but the unsystematic

risk exploded when they decimalize the market. I like the old system. The fact that Europe, Europe is gone in August, the fact that most of my friends here in New York are gone the second half of August. I hate August. I just hate it. Okay, Now, in the presidential election year.

Often it's better because we're all being distracted by the conventions apparently correct, but the I think the rhetoric will be pretty hot and heavy the summer, I personally is as long as Trump and Hillary are sucking up to people, that's good. I'm waiting for them to start sucking up to people. Okay, normally we rally going to presidential electioneer because of the sucker factor. It lifts consumer confidence, rubs

off investor confidence. But I know this is not a conventional election er, but I would hope that they would make August a little smooth at this time. I know it'll be entertainings as can be, but it's uh. I would like to see a little suck up with the with the attacks. I love that um our. Last two questions, So, if a millennium or millennial or some recent college graduate came to you and said, Louism thinking about a career in finance, what sort of advice would you give them? Well,

I'll tell you something. I told my son, you better take a psychology class because the market is a mant of crowd and um and uh, that is what behavior finances. We're studying crowds and we're locking in on what they like. And the crowd movement will last for several months, and so we want to lock in on it, if not years.

The second thing is better taken an accounting class. If you have any criticism of all the CFAs out there, they're all trained to track, they're all trained to uh you know, hug these benchmarks throughout a few dogs if they want to try to beat it. And everybody's forgotten about accounting, okay, and they better learn finance. Um I. There's the number of investors out there that have no idea what a p ratio is or you know, it's incredible, you don't we deal with this because we have Tesla

and Reno. You know, they're building the battery plant and uh I deal with in California and they're all they're all in La La land. They I don't think they have any idea of the risk they're incurring with that stock right now. Quite fascinating. And the last question, what is it that you know about investing today that you wish you knew when you started out in Well, that's

a that's a very good point. You know, you have to read the credit markets because the credit markets influenced the stock market, but I think it's the credit market meltdown in two thousand and eight that's the most profound. Um, what happened on wall streets started to leverage debt And this is a goods closing point. I obviously live in South Florida. Bernie was up the street six home south to me was a guy named Tom Petters, still three

point a billion fake and commercial paper my neighbors. Bernie isn't Bernie made off? Bernie was up the street. I thought we were talking Bernie uh Sanders. Bernie Madoff was up up the street, and then um, Tom Petters was six home south and me still three point billion fake in commercial play for eighteen years. I blog to golf club where the founder of this big fancy fund of

funds only recommended Bernie and Petters. Well, he has no stereviation because everybody's lost their money and there is some upside as attorney generals are cover. But my neighbors got wiped out more by leverage debt then, more than the maide offs of the UH. Well, it might be the club I bunked, but the bottom line is the UH they were leverage and double A rating munis eight to one the Falcon Funds and uh, they lost ninety percent their money. This is part of the credit to false

swap problem and uh collapsing and um. So anytime I see leverage debt, I freak out. Okay, and I see a response, I see a little now two to one. Obviously we had the s i V problem. That was tender one, that was our bet in the yield curve. That's what sunk bear Sterns and Lehman. But the thing that shocks me to this day is the guy that led the Falcon Funds who lost twenty one point one

billion dollars for City Bank. He obviously got fired over this whole mess, and he finally got a new job and um and uh, and he's a very controversial guy anyway. His his name is is Jack Luke, and he is our Treasure Sasuary Secretary, United States. So that si V grouping lost how much money for City back the the well, the si vs was a big fiasco, and that was

a whole another matter. But Jack lou to my knowledge, was doing the leveraged munis with leverage correct and that got Sally Crotchack fired and then he lost his job too. Because his little division lost twenty one point one billion. Plus you had the SIV lost on top of it. Obviously, somebody at City called Robert Reuben and City was deemed too big to fail and got built out. But but but it's it's shocked. It's shocking to me how you can blow up people and then become get a New

Jersey secretary. That that that's amazing. I knew that City Group was toast long before they actually hit the floor, but I had no idea. The losses on leverage munis were twenty one billion dollars. That was that's a huge, huge number. That was the Falcon funds. That was a muni's leverage eight to one. Everybody loved him. In fact, I still remember I went to a party in Palm Beach. Everbody's bragging how much money they're making funds. Yeah, you can look at one. Well, leverage is great as long

as it's going in a direction. As soon as the market goes the other direction, you're completely And I do. I do have a bond business. And my bond guy worked at a I G. And he tells a funny story that that when they kicked Hank Greenberg out of his own firm because he liked Hank, and they put in this auto insurance guide to run a I G. They wrote all these credit to fault swaps at bogus

rates because they already wanted a bonus. So my bond guy actually blames the government for blowing up a I G. Okay and uh and the collapse of the credit to fault swap market. But you know, the bond markets wild. It's been wild this year, whether you've seen in high yield, and so I wish I knew a little bit more about the bond market. Uh. You know, I have I keep friends in the bond market. I talked to him all the time. They're just a wreck most of the time.

I'll be honest with you. I mean they're a wreck. I mean it's this is not an easy job. So a stock guys, I think I have a lot of easier job than these credit guys. See, I look at the bond side as what's the big deal. Here's your duration, here's your your coupon, here's your risk. That stuff practically runs. I once had a conversation with Paul McCulley. Hey, that stuff practically runs itself. What do you guys having so much angst out in PIMCO. I have about we have

a bond business. We play in the triple ber and and so but so, our neighborhoods a lot safer than the other neighborhoods. But it's uh, you know, the distress debt world is fascinating and that's where I get all the good Trump stories. Okay, because Trump would beat you up to get forty cents on the dollars and he's your best friend. Okay. So the theory is if he did become president, I realized it's not. We don't know yet, but if he did become president, I'm sure he's going

to cut deals with everybody. I mean, that's what That's what he didn't business well, but I know I can't imagine him cutting a deal saying, Okay, everybody who's holding US treasuries, we're gonna give you sixty cents on the dollar, and that's how we're gonna solve our our deficit. That comment, I think isn't good to fly. But we do have a joke, and this is a joke, I want to be clear, And we used to joke that it's easy

to get rid of our deficit. All we have to do is refinancing and negative yielding tips and our problem went away. Can I tell you something, I don't think that's so much of a joke. I think you look too not too far off in the future. That's a real possibility. Certainly, fifty year bonds when when the US goes to zero eight um are not unthinkable. That's one way to think. By the way, I think the government did help cause A I G. To blow up, but

in a different way than you realize. Uh and Ron had been agitating for the Commodity Futures Modernization Act to get past, which basically took all those derivatives out of the normal. No reserve requirements, no exchange listings, no counterparty disclosures, no just transparency. And A I G wrote three trillion dollars worth of them. It was just a nons that started when Hank was there with g FP. UH. There should be some reasonable amount of regulation to prevent us

from our own worst knee. Men's not an excessive amount of regulation that hamstrings us and prevents us from opening new businesses. That is the never ending battle. UM. A I G ended up seeing an opening and they said the quote from a I G. FPS president was it's free money. You just write premiums and countercast running in. You know, that's what we say about cover call writing. Don't you want the free money? And it makes sense in a choppy washing machine market, but getting a strong

RiPP oring bullmarket, everything we get called away. So there are these windows out there, but as people extrapolate them to infinity as opposed to saying this is a temporary cycle and eventually, and as as a stock guy, you I have I want to have friends on the credit side. I understand what's going on out there because I need to see what's happening. And I respect those guys because I think that's a very very stressful business. And uh all the best stock guys always come with a some

form of a credit background. But as we close here, here's the ultimate irony. The winner in the low interest environment are stocks because everybody's barring in the bond market buying their stock back. The multinationals can borrow in Europe and other places even cheaper than can borrow here. And this is the stock market is actually dying on it. So my average stock is going to be gone fourteen years from buy backs and the SMP at the current buy back pace might be gone in years, so obviously

that can't go on forever. That's why the market's melting up. It's melting up on order and balances, it's going up on light volume. It's really really eerie. But as long as the dividends are higher than the treasuries, I think people should go. Because you're not Louis. This has been fantastic. Thank you for being so generous with your time. And I would be remiss if I did not say. Vonnie Quinn said to say hello, I know you guys know each other from way back when. UM let me thank

my recording engineer, Reggie, my producer, Charlie Vollmar. Taylor Riggs is our booker. Mike Batnick is the head of research. If you have enjoyed this conversation, be sure I'm looked up an inch or down an inch on Apple iTunes and you can see any of the other nineties six or so such conversations that we've had. You've been listening to Masters in Business on Bloomberg Radio, brought to you by B A. S F. We create chemistry