One and welcome everybody to another smart money circle update. I'm Adam Sarhan. With me today is Tom Samuelson, who's the CIO of Vineyard Global Advisors with over 500 million in a UN. Tom, welcome to the show. Great. Good to be with you, Adam. So Tom, we always like to begin. Can you tell us a little about your story and how you got to where you are today, please? Sure.
I started in the energy industry, the oil and gas business, and after earning a petroleum engineering degree at University of Tulsa, I was assistant to vice President of Finance at Helmick and Payne, which is a large contract drilling company, and I met many Wall Street analysts in that position and then went to work. As an analyst in Chicago for Duff and Phelps, where I became a partner of the firm.
I then went to O'Connor and Associates which is a large options trading firm eventually bought by Swiss Bank and that was partners money. So I ran a long short energy
book for them. I We used the number of creative options, strategies to manage risk, and I, I. I became firmly indoctrinated in risk management and the different techniques to manage risk, and then went to Denver to run the energy mutual fund of Invesco Funds Group, took that from bottom quartile whipper peer group to upper quartile. When I managed that, I also managed the energy portion of the University of Notre Dame's endowment.
And for the last 20-3 years though, I've branched off and and looked at all sectors before forming Vineyard Global Advisors. I was Chief Investment Officer of First Ally Satara, where we built out a series of risk managed strategies. And much of that philosophy continues today at Vineyard Global Advisors. I love it. What a great story. Duffin Phelps and you've got Invesco and you've branched off
on your own. You mentioned risk management, which I'll get to a little bit later, which is a core theme of the show. But before we get there, can you tell us a little about your investment strategy, please, and your philosophy? Right. We believe in managing both the good times and bad and. You know we we, we talked quite a bit about the math of volatility and and you know an interesting story.
I I was playing tennis with a a group of guys earlier this month and and one was talking about his growth fund that's up over 40% year to date. And I said well, how'd you do last year? He said well not not good. I was down 65%. I said, what about the last two years? He said. Well. You know, down close to 80 and another guy in the group said, well, all right, well you were down 80 and now you're up a little over 40. You made back half that loss and and I said you might want to
check the math on that. Of course, when you're down 80%, you need to gain 400% to recoup that loss and get it get back to making money for your clients. And you know, in other words, it would take 4 1/2 years of 40% gains to recoup that loss. Where most of our strategies were down mid to low single digits last year after strong performance in 2021. So they are either on the cusp of or back to making money for
clients. So that that philosophy of risk management understanding the the, the math of volatility is, is really important in in the way we manage money. I love it, I call that. I'm on a separate note, this is the first time we're speaking, but I call it negative math where the market goes down to the stock goes down 10%, you need 11% gain to get back to even if it goes down 50%, you need 100% gain to get back to even and like you said down 8400 and so on and so forth. Yeah.
It's exactly right. It's amazing how many people don't don't realize that you're you're coming off a lower base so the the percentages can be misleading 100%. So we mentioned risk management. Can you tell us a little about how you handle risk and what mistakes you see people make with respect to risk management, please? Sure. We we have a multilayer approach
to risk management. We we have several macro models that grade the market backdrop from in five phases from maximum bullish, bullish neutral bear, maximum Bear. Last year we were we were in bear or maximum bear for. You know the duration or most of the duration of of that bear market. So with that we will set equity exposure that's appropriate to the market backdrop and there's several layers of risk management. One is the, I say the first line of defense is diversification.
So you know we we run diversified portfolios. We we focus on positions, individual position sizing. And the second layer would be let's say the market start to turn more volatile, more defensive, we may increase exposure to the more defensive sectors, utilities, consumer staples and it is the market turns more bullish. Typically it's consumer discretionary and technology and and cyclicals like financials and energy that that would outperform. So that that's those sector
weightings can help. And then the final piece is raising cash and using a hedge, so an inverse fund that goes up when the market goes down and the right percentage and because of that take our risk managed income strategy. Russell 3000 enhanced dividend was off a half a percent last year after being up 27% in 2021. And even though it's it's lagged the market so far, it's now back to making money again.
So it it's it's it's a multi layered approach that incrementally increases defensiveness depending if the market continues to deteriorate and I love that, that's actually really, really good. So you talk about diversification, you spoke about having different models that rate the market. Is that a rating scale from like let's say 1 to 10 or one to 100 or or how do you set that up? It it, it is a. It's a quantitative scale. But then we take those ranges and.
Convert them into a basic message on the market, be it one of those five phases and you know generally the when the markets are neutral to maximum bullish, we don't see the big kind of drawdowns. The the drawdowns of five to 10% are not overly concerning to us. It's kind of like going from if you're traveling from point A to point B in a car, there's going to be a certain amount of. You know motion sensation, it's just the if there isn't, you're not getting to your destination.
So it it's it's the big potholes that that are going to derail you and and cause you to never get to your end goal that we're concerned about And those happen and Bear and Max Bare faces. No, I love that. So would you say your strategy is more fundamental, more technical and more quantitative? Or how do you label it from a for people that want to follow along and learn? More, it's a. It's a blend of both. I'm a. Chartered Financial Analyst, the Chartered Market technician with
the engineering degree I did. I'd say 85% of our approach is quantitative, but there's still a a subjective element to it, an overlay if you will. We we score individual stocks on a bottom up approach and we grade them from zero to 100. Eighties and above are are attractive in terms of their growth and returns on capital relative to their valuation.
We have sector models that help us overweight and underweight sectors and then we have a couple macro models that grade the the entire you know investment backdrop. So there there is a a subjective overlay the for example the the banking crisis that hit with Silicon Valley in the second quarter in March, we we just knew that that was going to weigh on financials and. And it will take time for the trend following indicators in our sector model to pick up on
that. Same thing with, you know, oil and gas was white hot last year, but then oil began it's it's plunge, it's it's down 40% from its peak back in the spring of last year and natural gas is down 73%. That decline in oil and gas is a leading indicator for energy stocks. And as we saw that declining, eventually the trend following indicators will pick up on it. But we moved slightly ahead of when our sector models did and
we also have a bias. So the quantitative approaches is good but there can be certain elements like a banking crisis that aren't picked up on in a timely fashion. So it's it's a blend of fundamental technical and and quantitative disciplines. But no, I'm a big fan of both. Also, I wrote a book called Psychological Analysis for Investing, which is the third cornerstone, if you will, at the
third leg of the pyramid. So I'm a big fan of I Smell what you're cooking and I love it. So let's shift gears a little bit, Tom, and talk about some timeless lessons you've learned along the way that you'd like to share with the audience either in the market or in life or both. Right. There's there's there's been several and you remember episodes over your career and I. I do what you know, I was listening to an interview of of John Chambers, who was the CEO of Cisco during the Internet
boom. And so Cisco's kind of a poster child of that era, just like NVIDIA is now of artificial intelligence. And you know, John, John was saying that the bulk of the revenues from that era came through after the early days. And and he believed we were still in the early days of artificial intelligence. And I I think that's true, but for investors, remember Internet Cisco soared from 95 to 2000 and only 10% of the revenues that come through over that 15 year period that stretched to 2010.
So he's absolutely right. The 90% of the revenues came after 2000. But all of the stock market performance came in the first five years. Cisco actually declined 75% from 2000 to 2010. So one of the the tenants is is get in front of big trends but pay attention to evaluations and speculation and and bubbles and when you get to 40 times sales you you are in a bubble. It, it, it, it's all been said. Well, you never know. Well, when you're at 40 times sales, that that should be
telling you you're at a bubble. And there can be enormous damage that comes from the implosion of these bubbles. Many cloud stocks for example dropped over 80% last year. No that that's so smart. So you're saying that the markets are forward-looking mechanism and it's going to anticipate those earnings, remove the stocks going to move up and then subsequently down before the revenue necessarily kicks in, if it kicks in at all? Exactly, right.
Stocks are a discounting mechanism and and if if artificial intelligence, which which we're big fans of this has a 39% compound annual growth rate going out over the next nine years, we're going to grow from 67 billion to 1.3 trillion. There's going to be a lot of beneficiaries of that. But if it's anything like the Internet, a lot of that will be discounted before the bulk of the revenues comes through.
You know, one other kind of. Fun story or story that I remember over my career is is during that that Internet phase of 2000 there was a there was an old market technician. He was he was old school. His name was Justin Namus and he was he was highly respected in investment circles and but he did things in the old school way he'd he'd literally chart by hand, you know the indices and. Individual stocks. And he felt that gave him the best feel. And I remember him coming into the firm.
I was, I was working at the time and he said, well it's over. And this was the fall of 2000 and there was a question from a portfolio manager who said what do you mean we're we're at the dawn of the Internet era And he said, I always remember his quote. His quote was, well, that is an intellectual. Argument. I'm just telling you what the laws of or the the laws of supply and demand are telling me and a lot of good news is discounted and there's these stocks are going to decline and
decline for a long time. There's a lot of pain coming. So and he was absolutely right. And you know, it's just it's one of the lessons I've learned over my career is is pay attention to valuations, pay attention to bubbles and also. There's a there's a characteristic look, we're we're not there yet. I I think with the A I frenzy, if you you go into a vertical phase like a F16 going straight up, these stocks will go vertical. You know that this often said that markets decline on
pessimism. They bottom on despair. They they rise on optimism, but they peak into euphoria, and we're not at euphoria yet. And there's a there's typically a look of a bubble, and we will get to it. Fear of missing out. Euphoria will drive many of these stocks vertical. If it's anything like the Internet craze, no, I love that. And talk about some timeless mistakes that you've learned along the way and or you've seen other people make. And how would you recommend
avoiding them? I think that that that's one of them. One of the main ones is just pay attention to to risk. It can be really damaging if it's we we manage a lot of money for clients that are on the cusp of or into their retirement years and and once you start withdrawing 3% or so a year from your nest egg, it's going to have an even lesser chance to recover from something like an 8080% loss, so. One of the lessons, markets now
move faster. So with the advent of algorithmic trading and now we have activist central banks that that if we see a slow down they're they're much more willing to to accommodate that with liquidity. And we we saw this in, in 2019, you know Fed Chairman Powell Blinkton and the the central markets move faster now.
So we've had to evolve some of our risk models to to adapt to that and you know a willingness to to markets evolve and there's a need to tweak our models and refine our models to to evolve with it. Got it. No, that makes perfect sense. So make sure you evolve isn't if I hear you properly, don't be too rigid in your approach. Make sure you're open and open minded and flexible and evolved as well. So I love that. Tom, let me ask you this question.
What's the best piece of advice you'd like to give your 30 year old self or you'd like to share with the audience? I would say identify the big trends, get in front of the big trends, but be aware of valuation and be aware of bubbles. Love it, love it. Well, Tom, thank you so much as always for coming on the show. This has been absolutely fantastic. What is the best way for people to get in touch with you?
You can get in touch with us through our website www.vineyardglobaladvisors.com and we'd love to hear from you. And thank thanks very much, Adam. Enjoyed the show, beautify, enjoyed having you on. Hopefully we'll see you again soon. Thanks, Tom.