And welcome everyone to another Smart Money Circle show. I'm Adam Sarhan. With me today is Yang Tang, who's the CEO and Co founder of Arch Indices. They just launched a new ETF. Ticker symbol is VWI and their website is VW ietf.com. Yang, thank you so much for taking the time, and welcome to the Smart Money Circle. Adam, thank you so much for having me. It's a pleasure to be here. So yeah, I always like to begin. Can you tell us your story and how you got to where you are
today, please? Sure. So my investing journey actually started, you know, middle school This was, I grew up in San Jose, CA and during the middle of the.com and I was fascinated by markets. Both of my parents actually worked in the semiconductor industry. So every day I was hearing that from my parents, you know, the cool things going on, technology. So I actually bought my first dock in 1999. One was a middle school and you can imagine at that time, you know, it was a pretty tedious
process. You actually had to call a broker and they charge you something like 4999, a trade one, you know, that taught me a lot because one of these stocks did extremely well, the other stock unfortunately did very poorly despite both management teams executing very well. So that gave me a very early lesson on in the power of expectations versus investor reality. OK. After I graduated from college, I started actually in sell side research.
I was an analyst for about 18 months and I moved over into commodity sales. And over time, yeah. And over time my, my philosophy has changed quite a bit. You know, I started off as very much a Warren Buffett. We got, you know, fundamentally analyzed the company and over time I became much more of a, we have to have a framework, we have to be able to quantitatively justify what we
do, right. There are so many stocks in this planet for us to justify buying one versus another, you have to be an analytical framework and that really builds kind of the decision making process and the portfolio process. So I'm actually a relatively new interest of being a professional money manager. I went to Columbia Business School and after Business School I spent about 10 years doing something called macro solutions.
And I really worked with large banks, insurance, NASA managers on structured derivative and structured financing transactions. So when you think about, you know, kind of how a bank or an insurer or an asset manager manages A portfolio, you know, returns are actually, you know, one very small part of the equation. You know, as an example, like an insurance company, you know, that's on behalf of the policy holders. So they have to think about how their liabilities and assets
match. They think about the most efficient way to #1 deploy their capital. You know, to support the business and the policy holders, #2, you have to make sure that if something bad happens in the market, it's unexpected. You know, the, the policy makers are not left holding the bag when the insurance company goes under. And we took up. So we started the company actually as a almost a
brainchild during COVID. We had actually a lot of people come to us during COVID and they were like, hey man, should I do this with my money? And you're like, we haven't talked in about 15 years. I don't really know what's going on in your life, but the short answer is no, please don't do that with your money. So ours was really kind of our grandchild and how we will manage our own money.
And the way we think about it is, you know, if we were to build a portfolio, we want to build the optimal portfolio to get us to where we want to go, which is the goal, right. And we want to deal with the least amount of volatility, right? So they so you have a great story. So you started in the 90s, you saw you got hooked instantly. Middle school, which I love, I
was training the 90s as well. And you realize there's lots of different inefficiencies, there's lots of different ways that the market things could unfold. You realize it's almost price is a function of perception or expectation versus reality. And there's more to it than just having a good new fundamentals or good story or whatever the case is. And then you were intrigued, so
you instantly fell in love. I love that you went to school, finished school and then you decided to continue your journey in the financial world. You worked in sales, worked on a few other things, worked in banks, weren't some. You went deep into some derivative stuff and some next
level stuff. And then you decided to open up a money management firm and congratulations by the way, and take your face and you created analytical framework to help you make better decisions than just throwing darts on the wall type of a thing. Is that correct? Yeah. That's 100% correct.
It's, you know, it's very interesting because when you think about even an index, right, an index is a derivative at the end of the day, you know how we built a derivative inside a bank versus how a, you know, large index company builds an index. Today is actually very night and day. And you know, the index companies actually started us. You may know this in your illicers may know this, but it's actually started as a newspaper
business. There was a number on the front of the newspaper to sell more newspapers. And you know, the the old school way of active management was so poor people would rather take an arbitrary number on a newspaper than a quote UN quote sophisticated money manager with a large team of research. And I think it's really important to think about that because investors vote with their dollars. You know, there's no being right or wrong. There's just Either investors
vote with you or they vote away. Oh, I love that. That's fantastic. So perfect. It's next great segue to my next question. Please tell us about your investment strategy and anything you want to share in that world. Yeah. So we are what we consider a systematic strategy. So we kind of think breakdown the world a little bit, right. There's kind of really two main segments.
There's the low cost index, you know, product which is market exposure and just fundamentally that's very flawed because market cap or equal weight shouldn't be the determination of how you build a portfolio, right? You know, up to probably I guess the last 10 years being a big company was actually a bad one. So people got around that, they go, well, I don't want just the biggest companies, I want all the companies. But if you think about it, it's
actually a little bit crazy. Why should a company that you know is very small, maybe doesn't have any profitability, has really more volatility, get the same amount of weight in your portfolio as say at Microsoft. So that's going to be the problem of low cost beta. If they don't understand probably how to weight a portfolio and you go through phases where it works, it doesn't work. The other end is you know, very
expensive active managers. And if then again to be fair, you know active management is a lot of flavors. There's plenty of, you know, active managers that are under fees, but the vast majority do not and they don't because number one, you know, they have no way of discerning the proper research process in this day and age. There's so much public information.
It's not like in 1970 where somebody faxed the SEC, their annual report and you waited outside and then you had somebody like sort of the report right away reaching the numbers over the telephone. And next thing you know, you're on the floor of the exchange and you can buy quick, right. The information in public securities is largely down to a very negligible number. So a lot of the active managers struggle with, you know, what are they like.
And that's actually more of a reflection of their personal bias and their investment bias rather than a analytically proper framework. So what we want to be is we want to be committed, we want a systematic rules based strategy and this really helps you two things. Number one is it's fully transparent and #2 is it reduces as much human decision making as possible to reduce as many errors from human judgment, right.
When people think about passive, it's not low cost market cap product, it's a systematic way allocating assets to prevent errors from human judgment. That's what we do, a low cost product at best step. I love that. So are you using price as a primary factor to make those decisions or is it fundamentals? Or how do you come up with the criteria for the system, so to speak? Yeah. So we've developed a process which we call various optimized index.
So you can think of this as a modern portfolio theory framework, but correcting for a lot of the flaws, right? When, you know, when people think about Harry Markowitz, the man is a genius, but the man is also an academic and the MPT only works in the classroom. For example, modern portfolio theory assumes that you can predict expected returns and expected volatility, right. If you and I could do that, we
wouldn't be talking today. We would probably be driving around in a very fancy car on a private island. So you have to think about that. So but the analytical framework is correct, right. What you want is you want some kind of factor of assets. So what is it? A quantitatively about securities that makes them attractive, right. There's a number of factors we can go into it a little bit later. So we want, the factor that we want or #2 is we want low
volatility, right? Low volatility means there's not much investor debate on what's going on. So if you think about how people go wrong with positions, they should become very volatile first before they either implode or they do very well, right? Most times they implode, sometimes they do very well. And the third is you want to look for a portfolio that doesn't always move together to correlation. So what we do is we look for our ETF is income. So what we target is current
income. We have dividend stocks and we have bond ETFs. So we look for stocks at a high yield, low volatility. So we call that the ratio, the performance ratio. And then we look for a bunch of assets that have high performance ratio individually, but they're not moving together at any given moment. So they're de correlated over time, you know and then that's how you build a portfolio to reduce volatility.
So we have two angles who always want to give the investor the exposure, in this case income and then we want to give them the least volatile portfolio to do that. OK. I love that. So that's a really good point. Now let's talk about risk management. How do you handle risk and what are some mistakes do you see people make with respect to risk management please? I think the biggest problem of
risk is kind of size positions. And you know what we do is we have a, you know, a weighting engine. It's not a traditional matrix optimizer that you see from the competitors and that's what the modern portfolio theory is based on. We've actually built a completely proprietary system based on a tree model. So that's .1 is how do you think about weighting, how do you think about methodology? It's a pretty complex mathematical process, you know, anyone who wants to learn more
can always reach out. We have life papers and more information to provide and #2 it, you know, how do you protect as many scenarios as possible. So when you think about what goes wrong, what we do, we take into account correlation, how assets move together over a long period of time. Assets have been shown to either be positively correlated or negatively correlated or uncorrelated at all, right. The uncorrelated assets I think generally don't exist or they
only exist for a period of time. So what really goes wrong for investors is if correlation either massively goes up right? But the market goes down. So that's a liquidity event. Also a market crash. For example yesterday is a great example. Stocks went down, bonds went down, inflation came in hot right? The S&P dropped 2%. The 30 year bond dropped 1 1/2%. So that's a pretty bad day if you're expecting bonds and stocks to be negatively correlated.
Luckily, there's two ways to think about them. Number one is you can buy what we call a tail hedge, which is an insurance policy. It's usually an out of the money caller, but that's, you know, they lose money on these things over time, but they happen to pay off on that day. Like a fixed calls an exam, right?
You know, buy, you know, calls on the US dollars, another exam or #2 is, you know, you're trying to basically build a portfolio where you know those days are going to happen, but you have enough staying power over time when you make money over time or those days are unpleasant, but you know it's OK because it's one out of 100 days and you're not trading in and out of this all day. Understood.
So that makes perfect sense. Now, as far as stops, do you use stops at all or do you use it based on your expected return versus what's actually happening? Or how do you know when you're wrong and your thesis is busted and you want to get out? So at any given moment, there's your optimal portfolio. So our ethnic RETF rebalances every quarter. So we, we just rebalanced beginning actually February 8th about a week ago.
So the portfolio changed ever so slightly before, let's say with 81% dividend stocks, 19% bonds, now it's 21% bonds, 79% stocks. So every single day you drift a little bit away, a little bit away, a little bit away from the optimal portfolio. The majority of the time it doesn't make sense for investors to rebalance because of the transaction cost. So there are some days where yeah, you're going to, you're going to need to rebalance faster.
But we do a quarterly on a systematic basis because the other problem is, you know, you don't want yourself to be reactionary to the market, right. If you know like you're down X percent today, you know it's going to come back tomorrow, it's going to negatively de correlate the market, what's the point of rebalancing at the bottom? So you're also trying to prevent the, you know, the feedback loop of spinning your portfolio out of control. So for that reason, we don't use
stops. We just do the optimization every quarter. Some years, you know, it's a very little change. Some years it's a more, you know, rapid change. It really, you know, rebalances itself to the optimal market condition. Understood. So your stop, I guess your risk would be just sizing the position from the get go and then also making sure that they're not correlated assets, so you're not too heavily involved in one specific area
that could. Crush the portfolio, right, Yeah, about constructing the portfolio and then you know we back tested this about five years before we launched. So we covered from 2018 to 23, which is a great number of scenarios, right. We covered the first Fed height, we covered COVID, we covered the Fed post COVID and then we covered the biggest rate hike in about 40 something years.
So I will point out is from the index perspective, you know the index had so it's because it's you know somewhere between 7080% dividend stocks over the five year period we had the same total return as the high dividend index which is 100, the high dividend stocks. But we only realized 71% of the volatility. So it got you to the same path over a period of time, but again you got less volatility during that period. Yeah, it makes sense.
OK, let's thank you for that. Let's shift the conversation a little bit. Talk about some timeless lessons that you've learned along the way that you like to share with the audience. Yeah. So I think the biggest lesson is you have to have a friend, right. I think many times investors go in and, you know, they hear something, you know, a great idea or a great pitch. And, you know, even, you know, the professionals have this problem.
Like, you know, one of my friends, you know, telling me about a real estate fund he's looking at. And I think myself like, wow, this is an interesting way to plant the commercial real estate. And then then I have to stop myself and go, this is great, but #1, how does this fit into My Portfolio and what I want to do? So the key is this, having the framework for what you want and making sure that you're playing your game and your game is important, right.
We don't want to be chasing. You know, the analogy is you're never going to catch the bus if you go to a different bus stop every two minutes, right. You have to stay with the bus stop, you have to stay with the path and of course if your path changes then it makes sense to readjust. So I would say that is the first piece and the second piece is you have to think about risk adjusted returns.
You know and I think a lot of people they wake up and they go oh I'm up 10% but so and so is up 15% like I should be doing that instead. Well no, that's not the case, right. That guy being up 15% may have had two X of volatility. So my risk adjusted perspective you may have been better off you know and it's like going to the casino, right. You know if you flip coins you know over time and you keep betting tails where you keep betting heads, well you're going to break even you know.
So you want to make sure the game that you play, it's thinking about the risk in the path. Interesting. So what about some timeless mistakes and how do you avoid them? I think the biggest mistake of any investor is themselves right is it's controlling your your fear on a down day. It's controlling your euphoria on an update and not making any rash decisions, right. A lot of these investment mistakes come from just pure rash decisions.
You know, it's for example, I think it was Julia Robertson, right, was shorting Internet stocks, going into the.com boom. And then he was right. Of course, a lot of those things collapse, but he gave up at the peak, obviously. I think it was different, you know, he was older, different part of life, so forth. You know, it was more moving on
from life. But when you think about that, right, he was right the whole time, you know, But from a emotional perspective or from a life perspective, he stopped. So if you just stick with the path, you don't let the euphor young good days make you overly happy. You know, try to have less drinks on that day, right? But you know, don't let the, you know the down days really get to you where you don't have to reevaluate everything, right?
Maybe have more drinks that day. I hear you, you know, just balance it out and then have the plan that you want to have. So what you're saying here is just I like we said earlier, about being, not being reactionary and mistakes you see people make are getting too euphoric or too depressed on updates or down days. So make sure you check your emotions. What about some advice? What's some timeless advice you'd like to share with the audience about the markets or off markets?
Anywhere you want to go with that or give your, you know, younger self. I think I would tell my younger self is, you know, you have to be very careful doing research and listening to people, right? Everyone has some kind of angle and some kind of way they think, right? So number one, you know, even in this 20-30 minute conversation, you know, I've told you a lot about myself, but you don't know enough about my thinking and how I think about positions to just
blindly follow my advice. So, you know, when you follow someone's advice or you follow someone's strategy, you really have to go very deep and understand what you're doing. And the biggest thing is, you know, make sure you know all the scenarios of all the outcomes or as many as you can, right. Because you know, the problem is people think of life as a normal distribution. It's actually not a normal
distribution. It's a very long normal distribution and not a lot of people appreciate distribution of outcomes. So that's I would tell myself that and to everyone that is, you know, understand exactly the research process, the philosophy and you know, you don't have to agree with it. And if it's not for you, it's not for you. You know, a lot of people don't agree with quantitative investing methods, right? You know, they don't feel comfortable with the idea of a
machine, like that's fine. There's nothing wrong with that, right. That's you. If you're not comfortable with a strategy, you know you're going to, you're going to misuse the strategy. And you know, I've seen people get comfortable with fundamental investing. You know, they do very well, right. They have some kind of internal, you know, process They do. And it seems to work fine for them, right. You know, I wish those people
very well and they do very well. But again, for me, I'm a quantitative person, so that would never work for me. So I would never get comfortable with that. Right. So, you know, I'm just going to search up myself to a lot of human biases, right? Because, you know, that mean we all have bad days. That person is going to have a bad day, right? The moment that person has a bad day, I'm going to be like I'm at this was a bad idea. And I you know.
You know, Yang, so much in the book I talk about human biases. I have whole section cognitive biases as well. And mental walls. You ever do something hit a wall? We all have. I call them mental walls. And then I say there's an infinite number of ways to make money in the market. Your job is to find one that works for you and echoes. Exactly. We just met. I mean, literally. So I love that.
OK, beautiful. Well, Yang, thank you so much for taking the time to speak today and Congrats on the launch of your ETF and future ETFs. If you go in that direction and all the success you're going to have, I mean fantastic job. All right. Thank you so much, Adam, and thank you for having me here today.