Diversity With the Core & Satellite Investment Approach (Episode 31)

Yeah, thanks Kate. And this is, I mean, truly a unique environment, right? In terms of inflation and sort of economic position that the country's in, it's something we haven't seen in a long, long time, probably something since the early eighties, you know, the recent inflation data came out at 8.3% down from 8.5, we have a CPI number coming out tomorrow. It's expected to be that high again. So this is, you know, these are historically high times for inflation. So you see the federal reserve, right? Who can kind of controls the flow of money in this country, all of a sudden reversing course, raising interest rates instead of lowering interest rates, reducing their balance sheet instead of expanding it. So these terms get thrown around like soft landing and hard landing. Right? So what does that mean? Anyone who's, you know, been on a commercial airline, knows what a hard landing versus a

And you know, I'm a Navy veteran in the Navy. They talk about, you know, the air force, no soft landing, cuz they land on my smooth runways at airfield and Navy aviators slam the jet down on the boat cuz that's how they have to get it down. So that's the ultimate hard landing, but the hard landing.

Yeah, exactly. Well, you know, top gun just came out so we gotta get it

But you know, there's kind of soft landing, hard landing talk it's right. It's how's the fed gonna be able to reign in the economy, reigned inflation without putting the economy into recession. Right. So if the fed acts too strongly, it's too hawkish raises rates too fast, they can potentially push the economy into recession. And then so then we'll have high inflation or, and a recession. Right? The soft landing is sort of the Goldilock scenario, which the Fed's been able to do really over the last 20 years, but this feels different this time.

I mean, I think look a little bit of short-term pain I think is the idea, right? Whether it's a soft, it is a soft landing, a little bit of short-term pain in the economy, meaning slowing growth is a good thing for the long term, right? These inflation numbers are unsustainable. Anyone who's been to the grocery store or the gas station in the last couple weeks. Right. Certainly feels it. But also, you know, as a retail investor, you can understand like those are the sectors that are doing well. Right. And those are the sectors you should kind of be thinking about, you know, the us consumers in pretty good shape. But if we kind of get one of these bad scenarios where the fed is raising rates and we see the economy start to shrink, start to not expand as fast as it was, but inflation being stubborn and not coming down, that's when we get into stagflation and that gets to be a bit nasty. Right. That's kind of late 1970s, early 1980s. When, you know, Paul Volker had to raise rates over night to 20%. Right. That's not a scenario anyone wants to think about

Yeah. So this is gonna be a little unique and I certainly have unique perspective. And my, you know, in my career we were talking a little bit. I spent some time in the Navy reserves and intelligence officer, as well as my time working on wall street and being a portfolio manager. I think this company that we have Guild is sort of the combination of that. And you know, we're built for the military community, but open to anyone, but we also have a foundation associated with that. And our mission really is to support the military community first with financial education, but kind of really anywhere they are. So, you know, with the war in Ukraine kicking off, we saw a major deployment of troops out of 82nd airborne in North Carolina over to Poland. And so we had, um, you know, a short notice, right? Families disrupted 3,500 troops sent over there.

And so, you know, for us, that's where our community was. So myself and one of my co-founders casual Larson, former Navy seal, we went over to, to Poland to see for ourselves and see what we could do to, to help out. And then of course, once we got boots on the ground in Poland, we, we quickly learned that there was a large, large us military veteran community actually in Ukraine, uh, volunteering, volunteering on the front lines and volunteering support roles. So that's where we went next. So I just returned, uh, three days ago from my second trip to the Ukraine. And you know, I saw firsthand one, why they call it the bread basket of Europe. So that kind of central region of sort of turnip pole to Keve from the central part of the country. I mean this time of year, it's probably one of the most beautiful places on earth, right?

It's it's like you're driving through a sea of green oceans, green fields. These farmlands just go as far as the guy can see to the horizon on both sides. But sadly, a lot of those fields are, are now mine. And a lot of those farmers are now fighting with the front lines, right? So that's gonna affect the harvest there. So you've got 10% of global wheat comes out of the Ukraine. You've got 14% of global. So comes out of Ukraine, you've got 50% of global sunflower oil out of the Ukraine. So that harvest coming offline, that yield being diminished directly impacts the supply of, of food stocks and a major factor in inflation. So not only will it in fact impact inflation numbers here, but also affect food security in the middle east and in Africa, which would cause a whole nother set of problems.

Yeah. I mean, absolutely. You have to pay attention to prices, right. You know, whether the prices of stocks or prices, commodities, you know, one of the first things they really didn't get talked about when the invasion kicked off is that, you know, kind of front month we contract when hyper Bali, right. It broke out of a range. It hadn't seen in, you know, years and years and years, but you know, wheat, soy, sunflower, they're a little bit different than oil, right? Oil's in the ground, you have to go find it and you pull it out, but you've got this kind of continual harvest with these agricultural products. So AGS a bit different. So it kind of remains to be seen what's gonna happen with the next harvest and the harvest after that. And the harvest after that, I think that is sort of a big question, mark, right? For inflation going forward, right. How are food prices, food stocks gonna look because you've got a major source of global supply offline, or maybe coming back online. So, but it's not like, you know, all of a sudden you get in, you put the pipe in the ground and it comes out, right. You've gotta have a continual production working in the land to be able to achieve that supply.

, that's absolutely right. I'm I was at, at the Berkshire Hathaway meeting this year, you know, Warren buffet to use one of his famous quotes, the likes, the recycle. Right. What makes sense at one price is ridiculous at another. Yeah. So, no, I think while we're looking at oil and I think over 120 bucks a barrel now and, you know, global food prices high, I think that, you know, if, depending on how, what your view, the situation in the companies are, there's definitely still opportunity in those sectors. For sure.

So the Guild platform itself is pretty unique, right? We are built on this idea of transparency and collective intelligence. So like we don't have to wonder and kind of, or any of our members on the platform don't have to wonder, we actually have a collective intelligence crowdsource portfolio that's updated on a daily basis. And that's the 30 most popular stocks that appear on our platform in real time in the actual percentage waitings that our members hold them. So like, I'm looking at the crowdsource portfolio now, a top stock and it's apple at roughly 15% of the portfolio. It's been that way for a while. And we've got kind of a mix and we've had a mix sort of from the beginning of this year of some kind of momentum based stocks, right. Some of the high flyers like Rivian, like you'd think too, cuz we probably have a little bit of younger demographic based on the military and based on that we're mobile app too, but we actually have some really surprising stocks on here.

One of the ones that's been on here since the beginning is the Schwab tips ETF even before, you know, while inflation was still being called transitory that appeared on our crowdsource portfolio. And then we've got, you know, some other stocks on here. Like you wouldn't necessarily think that, you know, a sort of, you know, younger tech first crowd would, would be thinking of, but builders first Southern copper tractor supply Costco. So we've got kind of a mix of, you know, sort of consumer, consumer staples and tech and then some really interesting ones like that. Schwab tip ETF. Another one that just popped on is the, um, the B dry ETF, which is the bulk rate, dry shipping ETF talking about, I guess, you know, people thinking about global supply chain issues and what do those global shipping rates look like? So it's been a really interesting sort of, uh, you know, experiment looking at this and I've been impressed with the sort of diversification of the portfolio and you know, names I really wouldn't have ever thought of. So there's a lot of information to be pulled outta this.

No, it makes perfect sense. Look, I spent a long time as a five star value manager, right? Large cap value. So, you know, by definition, we're trying to get where other people aren't or, you know, the, the kind of thrown away stocks, but by the same time, you know, there's a lot of research that talks about momentum investing in momentum stocks, how they can provide significant, significant return. And I think we've got a nice mix on here. So yeah, like, right. That's sort of the, the big question, how much momentum's two momentum, right? If you believe in the company, if you believe in the business and the financials can make sense in some realm, I think there's nothing wrong with momentum stocks and momentum investings if you believe in the, in the growth story, now look, I've made, you know, living out of relative value too.

Right. And I, you know, like I was the first at big buyer of apple, uh, for the fund, I ran in 2012 and we ran a value fund because it showed up as a value company, right. With all the cash it had on the balance sheet and the operating income it generated, I mean, it was literally the world's largest ATM. So, you know, just because when you think of a company and you look at like, oh, well that's a tech company doesn't necessarily mean it's a momentum stock or right. Or it's got no fundamentals to it from the value side. But yeah, momentum investing, I think ran smack DBB into some hard realities come this year. Right? So you had inflation and more, all of a sudden make some of these momentum stocks have to take a step back and logically look at their multiples. And then those multiples got cut in half. And in some cases then got cut in half again.

I hope they're looking to the future because their computer's broken if they think they're buying it on, um, you know, fundamentals today. But no, I mean, I think that's a great, great point, right? I think that is something that retail investors miss. So I'm a, you know, a big believer sort of in the monger buffet mantra of right. I'd rather buy a good company at a fair price than a fair company at a good price. Right? So meaning the first thing you have to do is buy a good company. And I think retail investors are really good at that. Right? They look at Rivian, they look at all this technology, they know the future of EV's there, right? Or they look at, you know, some latest kind of soft, good clothing line and it's got great traction and everyone's wearing it, think where retail investors need to do.

The kind of that second piece of work is like, you know, what is a fair price? Cause there's difference between a fair price and a ridiculous price. Mm-hmm right. So buying the good businesses and buying kind of, you know, name brands and business brands that have vision, I think retail investors are great at spotting. Those, I think it's on the kind of valuation side and it's, you know, for momentum stocks where there's no really earnings anyway, it's hard to kind of figure out the momentum or excuse me, figure out the, you know, what the appropriate multiple would be, but at least to have some kind of got glide path to like, there's gonna be some kind of operating income here one day. Right, right. What it would have to be like, right. You know, you've got a point where Tesla was trading, you know, over a thousand. Right. And it was like, okay, it's, you know, bigger than every car company put together times, you know, whatever, since cars were invented

Yeah. And again, right. It's like the idea of, you know, cannabis is gonna be widespread and people are going to use it. And legalization, you know, means a lot of help for people that need it medicinally. But like what is the actual business model, these companies, right? Like how, where do they generate their operating revenue? What's their expense structures look like. That's where like even just a little bit of research, a little bit of work on, you know, publicly available Google or Yahoo finance could help. And you can sort of, you know, paint a picture for yourself, right. Of, you know, where these stocks are trading, the price that you're paying, cuz you're owning a piece of the company. You're owning a piece of the, the earnings today and then your earnings down the road. What is that actually that you're buying.

Well first I'll say that's probably a good thing, right? I think retail investors have significant advantages over institutional professional portfolio managers. One is they don't have to get worried about week to week or month to month performance. Right? As a professional, if you've underperformed by 60 basis points over the last month, right. You're gonna be answering a lot of emails and I mean, underperform versus your benchmark and retail investors tend to, you know, be a little more forgiving themselves, which I think is good will help them in the long term. So, but I think the number one problem with most retail investors and then, and the data sort of pulls it out. Most retail investors have like between five and eight stocks in their portfolio, right. They don't have any sort of diversification. And when you look deeper into their portfolios, they have five stocks, you know, and three of 'em are all in the same sector. Right. So they've got too much concentration, which, you know, from 2012 to, you know, the beginning of the pandemic looked great, right. You're concentrated the marks going up and these stocks are going along with it. Right. You've got a high beta portfolio. That's a little more concentrated than you would think it would be. That's a good thing. But you know, we get the pandemic and then we get, you know, the scenario we're now people, once again are having to like look at the benefits of diversification.

Yeah. I mean, look, if it's not working, it's not working. Right. I mean the market's telling you something, you, I mean, if you're in a stock that's not working, you better have pretty good conviction about it. Right. And that's look, I always say, if you hate your kids raising to be value managers, because , you're usually buying something that's going down and gonna stay down for a while and uh, you're gonna take a lot of abuse for it. But unless you're prepared sort of to live that life, I think looking at sort of the fundamentals of a company, understanding really what it is you're buying at the end of the day. It's just because you know, an advisor tells you to buy this stock and stay the course, but it's massively underperforming all the time. Let the market's telling you something about it. Right. Mm-hmm so should have more conviction than someone's advice to you over that, you know, at the same time too, when you're looking at your portfolio, right?

You look at it in a couple different ways, look at it. Some sector diversification, look at it and you know, types of stocks they are where they tech stocks, are, they momentum stocks, are they value stocks, right. A little bit of diversification can go a long, long way and making sure that, you know, the five or 10 or 15 stocks you have now aren't that highly correlated. And I think that's one of the benefits of kind of the new mobile apps, including ours have come along are for commission free investing in fractional shares. Right. So now for a small dollar amount, you can be pretty well diversified.

Oh sure. I mean, we've got, you know, in the kind of military theme, we actually have a diversification ribbon diversification award for people on our platform that have 10 or more stocks in their portfolio. So you get a ribbon that looks like a military ribbon and it actually sort of modeled on the army good conduct metal. Right. Cause we think diversification is good conduct. Yeah. But somebody, when you can buy increments of, of a dollar of stock, right. You can 10 bucks, you can have a 10 stock portfolio and be at least minimally diversified. So yeah, we see plenty of hundred, $200 portfolios with pretty good diversification in them. And then of course, right, there's always that one stock or one ETF you can buy that provides instant diversification and that's, you know, broad based ETF like spider S and P 500. And from that, one of the things I like to preach, especially to retail investors, because, you know, managing a big 30, 40 stock, 50 stock portfolio, which for a professional is very small concentrated, right?

If you're, you know, a large cap mutual fund for 40 stock portfolio, it's very concentrated, but for a retail investor, an individual that's a lot to keep track of. So I like to preach the core satellite investing methodology, right? Look put a bunch of money into the S and P 500, the S P Y right, buy that core ETF. You know, you're gonna get market performance, you're gonna pay very, very little for it. Right. You know, that's what you're guaranteed. And by definition, you've got diversification, although that can be kind of, you argued now since sort of the top 10 market cap weighted stocks. And they're all pretty heavily tech consists of, you know, overweights in tech now, but you know, get yourself diversified by, by buying that ETF and then satellites around it, right? Buying individual plays you like around at some individual stocks.

So, you know, if you put 60, 70% of your assets in kind of the core, broad base market ETF, then you got another, you know, 30, 40% you can buy, you can buy a roofing with, you can buy some Tesla with, you can buy tractor supply right. Based on how you feel, but you've always got that kind of core piece delivering you market performance, right. And then you can seek to one, get more diversified, two offset, some risk and three try and get some increased return from these satellite investments. And it's something that we see certainly big public pension plans and professional sort of investors that have to allocate across different asset classes really, really follow that core satellite approach.

Yeah, absolutely. I mean, we sort of equate in the military sense, we sort of equate the core satellite approach to like, if you think about the core part would be big Navy. Right. So think about surface ships, think about aircraft carriers and destroyers and submarines. And then the satellite approach is like, you know, our Navy seals or our, you know, underwater technicians, the EODs right. All these really micro kind of specialized jobs that get in and get outta places quickly, right. You can trade in and out of them quickly, they do specific jobs. They train for specific jobs, but big Navy is always there kind of to give you that core protection, right. The way the S and P 500 could do for your portfolio.

Sure. Yeah. So we launched this in Guild. It's an investment mobile only investment app. We're in beta launched on no veteran's day and then came out beta in January, it's myself and two other co-founders all former Navy officers. So we're an all veteran owned and operated team. So you can find us on the app store Guild, financial and the website for us is guild.financial. And that's the whole domain. You know, we are sort of from the military for the military, but open to anyone. And the reason why we're open to anyone, unlike U S a a is we know that the more members we have on Guild, the more resources we'll have to be able to fulfill our mission, to serve this military community and help them secure their financial freedom. And a big way we do that is through financial education, right? So that's really the second leg.

One is access to investing with commission free and Al shares, but also basic financial education and basic financial education that people can actually pick advantage of. You know, when I was, I'm old enough to remember in home EC right, used to get like basics on like how to fill out a tax form. This is what a check is. This is what a routing number is. People don't get that anymore. These younger generations don't get that anymore. We see these young kids, you know, trained to drive a billion dollar submarine, ultra bright, super early adopters of technology. But, you know, they just have never had the basics in financials, right? So like they use Venmo or they use the cash app, but they barely will even keep money in a BA in a savings account. So it's kind of hard to get them to understand like, no, you know, this is the basics of the financial system, and this is kind of what you need to do.

So we have basic investing modules. The first one is on just investings versus savings. And again, we've got this collective intelligence and transparency piece to it. You come on the app, everyone gets a username. Now you can choose to share your profile with the community or not. But every day we rack and stack everybody on performance daily, weekly, and monthly. So you can see, you know, somebody's username at the top. Like if you look at me, I'm Guild one actual and see, whenever I fall on the top 10 of the leaderboard, you can look at me, you can click on my portfolio and see exactly how I have my portfolio allocated all on percentages. So you don't see any personal information. You don't see any actual notional dollar sizes. You just think, see things percentages, but that's really a kind of a good corollary to the collective intelligence portfolio, right? It's like, we think about Yelp, you got the star rating at the top, which everybody likes, but people wanna see those individual reviews and that's our leaderboards. So it's a unique experience I think, for investing. And I think it's the way, certainly the market's going with the sharing economy. So we're happy to be a part of it.

You got it. Kate. Thanks so much.