E266: J.P. Morgan CIO: Mistakes Top Investors Make

Why do most investors fail at the exact moments when staying invested matters most—and how can options help fix that? In this episode, I talk with Hamilton Reiner, Managing Director at J. P. Morgan Asset Management and CIO of the U. S. Core Equity Team, about how options can be used not for speculation, but to create discipline, manage risk, and help investors stay invested through market volatility. Hamilton shares lessons from more than three decades managing equities and derivatives, explains why volatility is misunderstood, and breaks down how hedged strategies, rebalancing, and risk-based portfolio construction can dramatically improve long-term outcomes—without requiring heroic market timing.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  So Hamilton, you're head of US equity derivatives at JP Morgan. What does that mean exactly? And what do you do on a day-to-day basis?

• 0:06Speaker 01

  Sure. So I've been at JP Morgan since the end of 2009. And my responsibilities today are I have three hats I wear, David. The first one is I'm CIO of our US core equity platform. I'm a portfolio manager on numerous strategies. And in addition, I am the head of US equity derivatives within equity asset management. A lot of that goes back to my background, over 35 years of investing in equities and equity options.

• 0:32David Weisburd?

  And why would an institutional investor want to own an option?

• 0:36Speaker 01

  Options are magical. And the reason I think they're magical is because they give you the ability to express a more precise vision or expectation around a stock. Meaning if you like a stock, you can buy it. And then it's very linear. It goes up, you make money. If it goes down, you lose money. But if you like a stock, you could buy a call. You can buy a call and sell a call. You can buy a call, sell a put, you could sell a put to get your exposure. So it gives you something a little bit more precise based upon your view, your opinion on a security. When I have thought about options throughout my career, it's never been about leverage. But it's about getting that precise way of expressing a view that does not have that traditional linearity, if you will. Meaning up I win and down I lose.

• 1:21Speaker 01

  Options, I think, give you that, pun intended, optionality to, optionality out to express a view or an opinion.

• 1:28David Weisburd?

  And like I mentioned, you're head of US equity derivatives, so you run this for JP Morgan. What percentage of your clients are utilizing options in order to hedge their positions? And how many of them are leaning into them and trying to establish a view in the market?

• 1:42Speaker 01

  Sure. So throughout the strategies that I manage, about 40% of those assets are in people looking to, you know, call it hedge their exposure. But it's not about hedging your exposure. It's rather about having some type of downside protection or downside buffer, if you will, so that you can stay invested. So think about hedging in many cases as a way to not only get invested, but more only stay invested. And then the other 60% are people that are seeking income. Potentially for going some of the upside of the market in return for that bird in the hand of income today. And that's kind of the long-term use cases of options. Options were started

• 2:23Speaker 01

  You know, on exchange in the early seventies, but actually have been used for over a century by farmers in some shape or form. Where either farmers were looking to protect their crops, hedging. Or in the case of trying to know what they'll be able to sell their crops for when they harvest them, income. Um, that one is also important because imagine if you were a farmer back, you know, a hundred years ago and you planted some crops and the two biggest risks you had were number one, something unfortunate happening to your crops just as you're about to harvest them. So you'd want to hedge it. The other thing was, I had no idea when I plant my crops, what I'm be able to sell it for. When they come due to harvest and somebody says, well, I'll pay you forty dollars for your wheat today. You'll give it to me in three or four months and you say, you know what?

• 3:07Speaker 01

  I'll take the forties and it costs me twenty, I'm blocking the twenty dollars. If it goes above forty, you're happy that you were able to lock it, you know, you gave up a little bit, but you're happy you're able to get the forty. But if it goes below forty, you're really happy you're able to lock it in. You know, that's how I think about hedging and income. Income is about getting income today in terms of giving some of the upside and hedging is about truly finding a way to sleep a little bit better at night with your investment, whether it be your crops or your equities.

• 3:34David Weisburd?

  To use that example, by giving up the upside from forty dollars and higher, you get income today. So you're being compensated for taking up that, for giving up that upside.

• 3:45Speaker 01

  Yes, exactly. There's no free lunch, David. There is a trade off between those two things that you're trying to accomplish.

• 3:52David Weisburd?

  But let's say stocks are up forty percent this year. You might be concerned about the stock multiples. Let's say you wanted to stay in the market. How could options help you accomplish that and what do your clients do in those kinds of situations?

• 4:04Speaker 01

  Sure. So when we think about whether it be income or hedging, we think about it at the portfolio level. But that portfolio level could be also be done at the individual stock level as well. So let's just say there's a stock, A, B, C, and it's up forty percent. There's a couple of things you could consider. The first one is, you know, you've accumulated quite a amount of wealth on that stock. And, and it's done quite well. And you want to find a way to lock in some of that gains you've had year to date. So you could buy a put. And that put, what it would do would say, if that stock were to be go, go below a certain level. You would no longer, uh, lose any money based upon that stock going below a certain level. So if the stock were a hundred.

• 4:49Speaker 01

  You know, and it started the year, let's call it, you know, seventy and it was up forty percent. You know, you would say, you know what, I'm gonna lock in, you know, all those gains up until ninety. Now, you could actually lock up everything up to a hundred, but the higher that protection is, that higher that put is, the more expensive it is. But once again, we talked about being able to create a more precise investment experience by using option. So that's kind of one way of trying to lock in some of your gains and protect some of your, your winnings, if you will, in that stock or even at the portfolio level. But there's another aspect to it, and that is, perhaps you don't want to lock in those gains per se by buying downside protection.

• 5:33Speaker 01

  But you also at that point say, you know what, I would actually probably sell of the stock if it went to one ten. So now all of a sudden, instead of buying puts, you could actually sell a call at one ten on a portion of your portfolio. If the stock goes to one oh one, one oh two, one oh three, one oh four, one oh five, you get all that upside appreciation plus that options premium from that call that you sold. If it were go to one eleven, one fifteen, one twenty, the amount of options that you sold based on how many shares you had. That stock, you would actually have to deliver it to somebody, but you would have continued upside appreciation plus the options premium. But you would actually have to deliver that stock to the person that bought that option from you.

• 6:18Speaker 01

  So once again, it comes back to what are you looking to accomplish with your portfolio? How can options complement the experience you're trying to give yourself in that portfolio, David?

• 6:29David Weisburd?

  So in both of those cases, whether you're buying when the market goes down or you're selling if it goes up in the future. You're basically getting paid to take the right actions. So take into the extreme, the market goes up two hundred percent, it goes from a hundred to two hundred. You know, you're gonna take some money off the table because likely there's, it's overvalued to some extent. It's the same thing if it went to fifty, it's unlikely that the same stock or in the same portfolio is worth fifty. You can make that decision ahead of time and by making that decision ahead of time, which is to sell the, to, to force yourself to sell at two hundred or force yourself to buy a fifty, you're being compensated.

• 7:05Speaker 01

  And it creates good discipline. The challenge is when many people, including myself, think about investing, if a stock were at 100, most people would say, I'd buy more down 50%. But once it's down 50%, you have to realize there could be a reason why it's down 50%. And so you still have to be comfortable. So you don't want to do, let's call it a full position from that perspective. You want to do a portion because, you know, it's easy, not easy. It's, you know, understandable that many of us don't ever think that a stock could go down 50% or even up 50% for that matter. So doing a portion, I think is best practice because that way, if it does go there, it gives you a chance to actually reconsider for a larger position. Do I still really want to buy the stock down 50%?

• 7:48Speaker 01

  Do I really still want to sell some more of the stock up 50%? So it does create discipline, but you also have to be aware that you can't suffer from buyer regret or seller regret because you're doing this in advance, as you said earlier, David.

• 8:00David Weisburd?

  I can't help but think about Rene Girard's memetic theory, which is that human beings copy the behaviors of others, which is why we have these cycles oftentimes. When things are going up, everybody gets excited, everybody else gets excited. There's this contagion of optimism. When things go down, you have this contagion of pessimism. So acting rationally almost goes against our very evolutionary wiring. It's much easier to do when you're at 100 to kind of make those, pre-bake those decisions.

• 8:26Speaker 01

  It is, and it also creates good discipline. I mean, when you think about rebalancing your portfolio, it's never easy to take profits and reduce some of your stocks and buy some more bonds in that rebalancing your portfolio. Constantly rebalancing is one of the best ways of compounding wealth over time. Or the opposite, you know, in 2020, March of 2020, the best thing you could have done, if you weren't comfortable buying stocks because you're so scared of COVID and what could happen, or even a liberation at the end of the first quarter, liberation at the end of the first quarter. You know, nothing's ever easy, but just sticking to a disciplined approach to investing, you know, buying more stocks when they go down to rebalance your portfolio back to its target state, or even selling some stocks to stay at its target state, enables you to navigate storms and markets and uncertainty.

• 9:13Speaker 01

  You know, in a more holistic and comfortable way, if you will.

• 9:15David Weisburd?

  I want to get to March 2020 in a bit, but first I want to double highlight what you said about when the stock market is up. So it's gone from 70 to 100. The biggest behavioral mistake you can make is actually getting out of the market. So if you zoom out any 10 year period, going back to, I think, 1930s, 1940s, every 10 years, the stock market goes up. Sometimes, obviously, it's at a local maximum. Sometimes it's only up by 5, 10% over 10 years. So the right time to buy is always now. And if you take that to the next logical, and the next logical point to that is there's never really a great time to sell. If it's always a good time to buy for a long time holder.

• 9:55David Weisburd?

  So when you have this market go up and you sell, let's say you sold, you bought at 70, you sold at 100. Now it's at 120, then incentive to keep on buying in and admit that you were wrong before. There's a counter incentive to do that. So buying insurance against a downturn so that you stay in the market is incredibly underrated behavior.

• 10:14Speaker 01

  I wouldn't call it insurance because Finner does not allow any of us to call options insurance. So I would actually say that it's the ability to own an asset that would mitigate some of the downside, not all of the downside. But you're right. When you think about, you know, car insurance, so which really is insurance. We all have it and we all hope that we never need to use it and it never comes into play. But enables us to drive on rainy roads, icy roads, sunny roads, what have you. And when you come investing is about putting money to work. It's also about putting money to work in a way that you feel the most comfortable from a risk perspective.

• 10:53Speaker 01

  If you are an investor that loses no sleep at night and can navigate the ups, the downs, the wiggles, the waggles. You're right, you know, basically stocks that never lost money over a 10 year rolling period. And if you're a young investor, you should probably have a significant amount of money invested in the market based upon your timeline and your horizon. But if you're that nervous Neil or that nervous Nelly, your amount of equity you should have should be, in my mind, this is one person's opinion, should be commensurate with never having to utter those three ugly words of get me out. You should feel comfortable with markets going up, down, sideways. And if they happen to go down, you're actually in a position to be able to add more because of your risk tolerance from that perspective.

• 11:37Speaker 01

  I think the biggest cardinal sin is people that. Have a mismatch with their risk tolerance and their investing. So everyone is happy, happy and high fiving when the market goes up. Uh, but those people that are still comfortable with their holdings for the market goes down, probably have a better understanding of their risk tolerance. When you think about the financial, financial advisor community, they have clients that are conservative, moderate and aggressive. The real question is, is that person still aggressive when the market goes down 5%? If the answer is yes, their allocations are correct. If the answers are no, then they're only aggressive in a one-way market.

• 12:18Speaker 01

  You need to be aggressive or moderate or conservative in a market that can go up or down. Because as you said earlier, David, stocks over a 10-year rolling period historically have gone up, but it's never a straight line. There's always every decade a thing. Whether it be the tech bubble, I mean, I've been doing this since the, the late eighties. So you had the 87 crash, you had the 89, uh, United Airlines kerfuffle. You had the early nineties Gulf War. You had the end of the nineties, you had the Thai bot and long-term capital. Then you had the tech bubble, then you had the GFC. And then you had the US deck getting downgraded in 2011.

• 12:58Speaker 01

  And then you had, um, you know, in 2015, you had some of the challenges around oil and some of the other situations. And then 2020 and then 2022. It happens. These things happen. Liberation Day, just more recently, these things happen. And the best thing that any of us can do as investors is not only get invested, but most, most, most importantly is stay invested. And the options, I believe specifically hedged strategies help you stay invested. I would almost say, forget the fact that uses options. It does, but forget the fact it uses options. It's Mr. Or Mrs. Investor. Are you okay making some of the upside if in return you don't have all the downside?

• 13:41Speaker 01

  How you get to that by using options is how the sausage is made. But the, you know, how to use the sausage, how to think about the sausage, how to think about a hedged strategy is exactly that. Making some or most of the upside in return for not having all of the downside.

• 13:55David Weisburd?

  It's interesting because the unpredictability of the market, so it might have a eight to 10% expected return and let's say a 10% standard deviation. So some year it'll be down 2%, some year it'll be 18%. That is actually the feature because if it went straight up, it would be more like a bond. And if the, if the return was more predictable, it wouldn't have that return. So the question becomes, can you deal with the ups and downs? I had Julia Reese, whose job was for a decade to go and meet with the CIOs of foundations, endowments and pension funds, Goldman Sachs's top clients. And what she found was this, the volatility and the selling was directly this nasty chart, where every time there was a drawdown was when the selling occurred. So a lot of people think of markets as this linear instrument, but a lot of wealth is actually created

• 14:40David Weisburd?

  and lost in those downturns. There's 10% plus markdowns.

• 14:44Speaker 01

  I'll give you another cool stat, I think, Dave, and that is over the last 20 years, you know, a fully invested equity portfolio is up approximately 10 and a half percent.

• 14:55Speaker 01

  If you miss the 10 best days, that number goes from 10 and a half to about five and a half. But many people would say to me, why would you ever think I missed the 10 best days? Am I that bad a stock picker or market timer? Well, seven of those 10 best days happened within two weeks of the worst days, of the 10 worst days. Think about that for a second. When are people most likely to make those irrational and maybe suboptimal decisions? Within two weeks of those worst days. So it's not that you're not a good stock picker or not a good stock timer, but when do you really have to think about that behavioral component to investing? It's around those worst days. And if seven of those 10 worst days were within two weeks,

• 15:37Speaker 01

  then it's likely you hopefully made the right decision by staying invested, but it's also likely you had to make that decision.

• 15:45David Weisburd?

  It sounds like when you say these 10 days, it sounds like some, some meaningless marketing drivel. Yes. If you cherry pick these 10 days randomly, you're not going to get that return. But when people are systematically selling two weeks behind before those 10 days, then that starts to illuminate. I used to try to develop and cultivate myself this steady hands, this in crypto hodel, right? The, these ability to withstand crises. And then I listened to an interview with Stan Druckenmiller and he said, nothing looks as cheap as after it's gone up 40%. And I had an epiphany, which is rather obvious, which is if one of the greatest traders of all time. Stan Druckenmiller struggles with trading and not prescribing to when things go up, buying more and when things go down, selling less.

• 16:27David Weisburd?

  Maybe what needs to be done is not to cultivate this kind of strong hands, but it's to structurally create a portfolio that does not require the Seroque action. And that's when I started to look at things like illiquidity. I have this whole paradoxical belief, illiquidity could have a lot of virtue. In fact, when I interviewed a lot of the top crypto investors, like the top decile fund investors. So think of, there's hundreds of millions of crypto investors. There's these elite fund managers that a small percentage of the population has said, can hold their assets and then there's top decile of them. Both privately and publicly, they admit that their best investments are actually their illiquid ones. In other words, it's the illiquidity that made the returns good, not actually the picking, picking and choosing of different cryptocurrencies.

• 17:12Speaker 01

  And there's something said to be said about that because you don't have to make the decision to sell when you can't. It's unilateral. You know, I'm married to this position because illiquid. But I'd also say those illiquid positions, if I had, if I were a betting man, had underlying fundamentals, underlying valuations, underlying things about them that attracted people to them. There's plenty of illiquid stuff that, you know, could be a little schlocky, right? That just doesn't have the right reasons to own it. But to all those wonderful, great investors, publicly and privately, to share with you, some of their best investments were illiquid. It's the underlying fundamentals.

• 17:54Speaker 01

  I mean, the things about those, those securities were the same whether it be public or private. But because they were illiquid, they didn't have to make that decision up to buy, hold or sell. They were holding them because there was no choice.

• 18:08David Weisburd?

  Previous guest Cliff Asness calls this volatility laundering. He complains that private equity funds only have to mark their books once a quarter. I actually think that's the feature of the asset class. A lot of people will say on this topic, sure, retail investors, grandma. You know, my mom might have weak hands, might sell at the exact wrong time. But surely institutional investors are not prone to this bias. And then when you look at the governance at institutional investors, you see the ultimate poor decision-making governance for these kind of decisions, which is committee. You have these 10 people committees. And if only one, or God forbid, two people on that committee are panicking, you are going to have a contagion and you are going to have this compromise of selling a big portion of a portfolio.

• 18:50David Weisburd?

  And this is something that we see over and over, regardless of market cycle for decades, ever since the early 20th century.

• 18:56Speaker 01

  So investing is about risk. There's no getting around it. You have risk when you have an investment. The question is, what is the magnitude of that risk? And if you were in a committee-like approach,

• 19:07Speaker 01

  you are subject to I told you so. And nobody wants the I told you so, whether it be personally from your significant other or professionally from your investment committee. And so when I think about investing, it is behavioral. And I'm not a big fan of using the term all-weather portfolio. I'd rather say balanced portfolio. And many institutions do it quite well, David, where they have some private, some public, some fixed income, some extended fixed income. And they don't have all of their eggs in one basket. Because when I think about investing, it goes back to what I was talking about. It's about risk tolerance. So I don't start, and I don't think people should start with asset allocation.

• 19:51Speaker 01

  Stocks, bonds, alts, I need some of all of them. No, my belief is, you used the word standard deviation before. Standard deviation is volatility. It's a range of outcomes to your portfolio. It's a range of outcomes to a stock, to a bond, to a private. And so I think portfolios are, you start with, how much risk can we take as a pension, endowment, foundation, individual? And then how do I fill that bucket of assets? And it could be in stocks, bonds, alts, privates, to actually meet that targeted risk profile, such that you can actually, at a committee level, individual level, or a CIO level, stay invested.

• 20:31Speaker 01

  Because if you have a portfolio that's well balanced to risk and the market goes down, you can all look around the table and say, you know, markets are down 20% and we're only down eight. We're only down 10. We've done a good job in creating a well balanced portfolio. Now, if you're chasing returns and you're 100% in stocks and you're down 20 or maybe even more than the market down 20, then there's this, oh my God, what if we continue to go down? What if we're down another 5, 10 or 15 or 20? And I love how you quoted Stanley Drucker Miller because everyone hearkens back to March of 2020, saying it was a generational time to buy the market. On TV and on radio and on podcasts, there were numerous people calling for the end of the world.

• 21:15Speaker 01

  Saying we should close markets till Labor Day, saying that this is terrible and getting worse. We're shutting down the economy, all these things. But it was a generational opportunity to buy the market if you had the ability or the risk tolerance or the risk available, put some money to work. Or the best thing you could have done, at the very least, in March of 2020 was not sell. Because once you sell in March of 2020, you'll never get that money back.

• 21:40David Weisburd?

  I have a prideful moment in March 2020. I had the opportunity Sequoia was doing a round into Robinhood. And this is this golden, golden grail to invest alongside Sequoia directly on cap table. And I hit up a bunch of family offices that have been asking me for years for this impossible Sequoia co-invest in a, in a top company. And all of them said, well, yes, but it's COVID, not understanding that the whole opportunity existed because of COVID. And my thesis was rather simple and perhaps it was very differentiated than other people, because a lot of people took wrong action, which is if the world ends, it doesn't matter anyways. If it doesn't end, it's a good investment. That was honestly my thesis. Obviously, there was, there was a diligence on the, on the company, but everything about the company looked good and looked promising.

• 22:22David Weisburd?

  But this whole COVID risk to me was not a real, real risk. It was kind of things are going to happen the way they're going to happen. We didn't know at that point. We didn't know, maybe it would be like the black plague and maybe society will be wiped out. But regardless, I wasn't worried about that outcome from an investment standpoint.

• 22:38Speaker 01

  I agree. And let's just bring that back for a second to, you know, my background in equity and equity options. Everyone calls the VIX the fear index and it's not about fear. It's a measurement of uncertainty. When the VIX is higher, it's because there's more uncertainty in the world or the markets. You know, in March of 2020, the VIX, I think, went to 50, 60. There was a lot of uncertainty. There was a greater range of outcomes from any investment. And range of outcome does not mean down. It means up or down. So that's why in the second quarter, you know, when the market's ripped about 20%, people should not have been surprised by that magnitude because the VIX was projecting a greater range of outcomes. It could have been down 20 or up 20.

• 23:18Speaker 01

  But the fact is, is that that is, in my mind, an opportunity where your job as an investor is to scale your investments appropriately, as well as take that as an opportunity to put money to work or to reallocate. You know, in 2020, there are certain asset classes that did their job for you, whether it be puts or bonds, or for that matter, cash. But then when the market gives you this opportunity to be risk efficient or risk opportunistic, you know, you, you should put money to work. But once again, the higher the risk, also the higher potential reward, which means you don't need to put as much money to work. If your normal investment in the market is $100, when the VIX is 60,

• 24:01Speaker 01

  you really only need to put 20 or 30 to have the same opportunity as a normal environment.

• 24:07David Weisburd?

  I actually want to double click on that because alongside being head of US equity derivatives, you're also the CIO of US Core Equity at JP Morgan. There's a orthodox belief that volatility is bad. In fact, the entirety of modern portfolio theory is about how do you maximize return while minimizing standard deviation? But you said something there, which is sometimes risk in small doses could be extremely good. Let me give you a thought experiment. Let's say that US equities had a 20% return with a 20% standard deviation. Obviously, you wouldn't size it the same. You wouldn't put 60% of your portfolio into, into that. But would that be, in some ways, a better asset class than 10 and 10? Talk to me about how you think about that.

• 24:47Speaker 01

  So let's come back to my original statement a few minutes ago, where I talked about, let's not talk asset allocation. Let's talk about risk management, targeting a volatility risk profile. Once again, volatility talks about a standard deviation of returns. So if you have Mr. or Mrs. Investor that feel comfortable as a moderate investor saying, you know what? I need to get invested, stay invested. I want to be in the market for the long run. But my risk tolerance is sort of like a 10% loss in any given year. Conceptually, and it's not exact, but humor me. It means if, if equities have a 10 volatility. And 10% return, you'd be 100% in stock. If 20 return and 20 volatility, you'd be half in stocks.

• 25:31Speaker 01

  You still should have the same expected return on your stocks. The question is, what do you do with the other 50% of your money in that 20 and 20 environment?

• 25:38David Weisburd?

  Because, just, just to, that's very interesting. So, just to double click on that. And the reason for that is the 10% drawdown is this constraint. So you're building a model of how do I maximize my returns while dealing with this constraint? In other words, if you made that 10 a 20 and you expect to just one standard deviation drawdown, or if you're only accounting for two standard deviations drawdowns, in this case 20 minus 40, then you would put all your money in equities in theory. So it's only constrained by your risk tolerance. Said another way, if you didn't have risk tolerance, if you were truly in AI trying to bet against the house, you would have 100% of your portfolio there.

• 26:16Speaker 01

  In which one?

• 26:17David Weisburd?

  In the 2020.

• 26:19Speaker 01

  Sure. And, and, and absolutely, because if you're just trying to maximize return without a risk constraint, then you should be using leverage and risk and all those things. But as soon as you actually incorporate a risk tolerance, and to be quite frank, I feel as though almost every single investor portfolio needs some type of risk tolerance. Then all of a sudden, you scale your weightings appropriately. Let's just say, let's bring it back to just a stock. If you have a low volatility stock and a high volatility stock, and both of them have some type of return profile, you don't need to own as much of the high volatility stock if, to, to deliver the same amount of expected return, because it has a greater range of outcomes.

• 27:04David Weisburd?

  Said another way, a perfect portfolio might be 10 different types of investments with a 20% return, maybe even 20% volatility, that somehow it didn't have correlation, it doesn't exist. But you would basically want a little bit of all these things, knowing that on average, they're going to get 20%, but knowing that some will be up 40, some will be down 20, and that's just the name of the game. That's, that's the portfolio I built.

• 27:27Speaker 01

  As long as they all have positive correlation, yes, but as soon as they're positively correlated,

• 27:31David Weisburd?

  It's all the same. Good luck finding it. In a traditional 60-40 portfolio, what percentage of a portfolio should be in options? And how do you fit that into the 60-40 framer?

• 27:42Speaker 01

  My humble view is 60-40 is a risk outcome that happens to comprise 60% in stocks and 40% in bonds. Stocks tend to have what's called an average 16 volatility. Bonds tend to have approximately one-third the volatility of stocks. You put those together, you end up with a risk profile. Options are not meant to replace stocks or bonds. It's meant to complement it. So if you have a hedged equity strategy that has half the volatility of stocks, theoretically, it's about asset allocation. You take 5% from stocks and 5% from bonds. Your risk profile stays the same, but you'd hope your sharp ratio would increase, your up capture would increase, your down capture would decrease,

• 28:26Speaker 01

  and your total return would go higher. Because if you have a hedge equity strategy, your goal is to create asymmetric returns, better risked returns, and reallocating some of your stocks and some of your bonds would actually complement. So if you have a 60-40, I think option-oriented strategies could be anywhere from 10% to 20%, taking a little bit from stocks and a little bit from bonds.

• 28:48David Weisburd?

  And in theory, but more importantly in practice, if you have a 60-40 portfolio and you're hedging some of the downside in your equities, shouldn't you own more? In other words, you may have slightly capped upside, but you also have lower downside. So doesn't that make the equity better than the bonds on a relative basis?

• 29:07Speaker 01

  It could and should, but more importantly, if you put options on top of some of your equities, you actually have decreased your risk. And my goal in thinking about 60-40 is to maintain the risk. So if you have a 60-40. If you actually put options on, let's call it 10%, actually no, 20% of your stocks. You now have taken 20% of the 60 and reduce the risk by 50%. You theoretically want to actually reduce your bonds and add to your equities to maintain that risk profile. So a 50 stock, 30 bonds, 20 hedged equity. We'll have a very similar risk profile of a 60 40.

• 29:50Speaker 01

  What I just do, I just reduce my bond by 10%. I reduced my equity, even though it's hedged by 10% because 50 plus 20 is 70. And so it comes back to, you know, trying to, and you talked about the efficient frontier. Maximizing the return, but still maintain that same level of risk. You know, carving out that 20% if you will, should actually move that dot above the line, but keep it on the same risk profile.

• 30:18David Weisburd?

  You've been in this market for 37 years. I'm not trying to age you, but you've gone through so many market cycles. And what is something that you've changed your mind on in the last couple of years?

• 30:27Speaker 01

  One of the things that, you know, a younger version of me believed is that my job was to outsmart the market. To time the market, to, um, you know, have a algorithm that knows when to get in and get out. But, you know, we've all heard the expression, markets could stay irrational longer than I can stay liquid. Timing the market to me is not like free throws. If we were having a free throw competition, you and myself, you'd probably win, but regardless. If I was to hit nine out of 10, I would say I was pretty good at it and you'd said was pretty good at it. But being right on the market nine out of 10 times probably means you're unprofitable.

• 31:11Speaker 01

  Had you missed liberation day, because you thought it was going to persist and tariffs going to be the end of the world. Had you missed, um, 2020, had you missed the US deck getting downgraded? I mean, had you missed any of these idiosyncratic events, which aren't so idiosyncratic because they happen more often than people think they happen. You're going to give up everything and then some. You could have timed the sell off in COVID perfectly.

• 31:39Speaker 01

  But if you didn't get back in in March, you gave it all back. You could have timed liberation day perfectly. But if you didn't get back in some point, you know, at the, you know, around April 8th, you gave it all back and then some. At some point this year, the markets were down over 20%, only to see the S and P right now up. Last I looked around 15%. Think about that for a second. You could have nailed everything geopolitical, political. So my, my belief is being, finding a way, you know, my younger self would have said, my job is to outsmart the market and beat the market. Maybe my slightly mature self and many of my friends and colleagues and family say it's not so mature. But maybe my slightly more mature self today would say, you know, find a way to be as efficient as possible

• 32:25Speaker 01

  to maximize return, but be able to stay invested and use those market sell offs opportunistically in your favor because you have some dry powder or you have the ability to reallocate. My younger self would have been a little bit more, uh, you know, competitive to beat the market as opposed to finding a way to use the market as a tailwind.

• 32:45David Weisburd?

  One of the mind twists about this is I interview people and now I've had this podcast for over two years and I talk to them about these things and I know that when liberation day came, they sold even though they were talking about, well, you know, when there's, when there's sell offs we buy. I just know categorically and I talked to people on and off the camera. They committed this, this investing fallacy again, and yet they still, they don't see the pattern between their investing history and they still believe that next time they'll pick it again. So humans have this twisted way of having revisionist history, thinking that they have learned the list lesson of history, not understanding that to your point, the next black swan by definition is, is unpredictable. It's a three standard deviation event. So it's something that we can't even fathom.

• 33:30David Weisburd?

  Thinking that they'll behave differently there, not understanding that what needs to be learned is to act rationally and to stay invested during those downturns, or if you could be heroic to, to add to your positions. But even just not taking action is actually the thing.

• 33:42Speaker 01

  I agree, David, and I don't know if it's heroic. On April 8, your 6040 basis on market conditions went to 5545. You could actually buy five units of equity just to get back to your target state. You don't have to be heroic. You just have to be disciplined saying, you know what? When I get out of balance, I want to maintain my risk profile. I have the ability to add because my portfolio is now slightly imbalanced relative to my long-term investing goals. So it's actually a positive discipline to buy in April because your portfolio is now out of whack with your long-term investing goals.

• 34:19David Weisburd?

  This goes back to this whole behavioral, which is a lot of people then get stuck in, oh, well, maybe it'll go down and I'm all I'll buy it at the exact right day at the exact right second, which of course is absurd. But the pros that people have been in it for 20, 30, in your case, coming up to 40 years, are actually just redonating their portfolio. What do I do? I go from, they went from 6040 and then it goes down to 5545 and I go back to 6040. The genius insight from 40 years. And yet, if people did that, they would do extremely well. They would not only get the market, they would actually surpass the market without doing any other thing, strictly by doing that and just buying indexes.

• 34:54Speaker 01

  And being very disciplined. Now, I do believe that if you do the homework, just like you would in a basketball, football or baseball draft, to find those talented young athletes that you want to add to your team. I think financial investors are like athletes. And if you do the work and do the homework and find people with the process and philosophy you believe in and is consistent and repeatable, I do think you can find active managers that can outperform the market. But it's like being a GM in any sports team. You have to do the work.

• 35:25David Weisburd?

  First, you must master the beta and then you could find alpha. If you could go back 37 years ago, what piece of timeless advice would you give a younger Hamilton that would have helped you accelerate your career or avoid constant mistakes?

• 35:38Speaker 01

  I'd say there's a handful. Let me share them with you in no particular order. Number one, patience. Things always take a little bit longer than you expect or want. The second thing, when it comes to just career advice, for over two decades, people would say to me, who owns your career? And I puff out my chest and say, I do. But the reality is, your career is a joint venture between you and your manager. The amount of times people talk about you, think about you, or mention you, and you're not in the room is a lot more than when you're in the room. So you might as well share your career aspirations, the things that you're looking to accomplish with your mentor, your manager, to help you get to that point. I would also say that, you know, we all aspire to serve and to answer questions.

• 36:21Speaker 01

  A more mature, older version of me takes a second to compose my thoughts or my opinions, as opposed to being the first one to answer the question. And then I would say, sometimes you have to reflect on, you know, where you are, what you're doing. And sometimes it's perceived that the grass is always greener. It's not always. I think you have to first have this perspective on what you're doing, with whom and for whom. And if you, any of those three things are missing, I think you're probably going to find career dissatisfaction satisfaction. When it comes to investing, I would like to tell you that, you know, humbly, I'd like to say I'm always the smartest one in the room. I'm not. And so I've always thought, you know, over the last X number of decades, this is something I always wanted to be

• 37:05Speaker 01

  surrounded by, some of the smartest people. So for a brief window of my career, you know, I did a, you know, a internal hedge fund with three people I loved. But I realized about myself, you don't learn and grow and develop, you know, being in a room with three other people as you would in a slightly larger organization. So you should also learn a little about yourself. What kind of environment do you operate best? How do you think about that, you know, the optimal way to create success? And then, lastly, I would say you have to teach yourself some resilience. Having worked at Lehman Brothers in 2008 and having lost everything because you weren't allowed to sell your stock unless you were getting married or having a kid. And I already had done both of those things.

• 37:47Speaker 01

  Um, so, uh, I lost everything at Lehman and by doing that, it gives you a greater appreciation for investing, risk management. It also gives you a greater appreciation for, you know, things aren't always glass half empty. More often than not, the glass half full is something that's a pretty good way to operate your career, your life, your relationships with.

• 38:10David Weisburd?

  It's almost right to say you lost money in Lehman 2008. It's the best thing that happened to me, but there's also downsides. Maybe your risk tolerance goes down. Tell me about the pros and cons of having something like that happen in your career.

• 38:22Speaker 01

  It's not about risk tolerance, about risk management. And so it actually has crafted how I think about investing my money as well as other people's money, trading balance in your portfolio. For example, you know, I'm a believer in AI. I am, I think it's going to be transformational. I see it, I use it, I witness it, I witness it at the firm I work for, I witness it in my personal life, I witness it, how my, my day to day works. This is not a pet rock. This is the adoption rate here is much faster than the internet. But even though I believe that in my heart, my brain, my core, it doesn't mean that's going to be my only investment for my investors. I'm going to have a well-balanced portfolio. They may tilt a little bit into AI.

• 39:03Speaker 01

  It may tilt a little bit into the beneficiaries, you know, across the, the, uh, the, uh, the stack, if you will, you know, the infrastructure, the chips, the, the distribution, the usage, what have you. But shame on me if my entire strategy is 100% based upon a single philosophy or theme.

• 39:24Speaker 01

  So I think, you know, I think that's one of the ways I, I would manifest the question.

• 39:28David Weisburd?

  There's this adage in wealth, concentration builds wealth, diversification preserves it. And while that's true, another force unrelated to that, that builds wealth is compounding. Einstein called it the eighth wonder of the world, but staying in the game is just so important, whether it's in your career, whether it's in your investments, and that's chronically undervalued. And just having those chips kind of goes full circle to the beginning of our conversation. If your portfolio is up 40%, you don't have to either buy or keep all the chips on table. You could buy options, you could protect your downside. Compounding is one of those things that's just so tricky to understand until you see it with your own eyes. It's almost one of those unlearnable lessons that you must see for yourself.

• 40:10Speaker 01

  I completely agree, and I love the quote that, you know, compounding the eighth wonder of the world because it's been a tribute to Einstein. I think people give Buffett credit for it. Regardless, it's magical. And the reason it's magical, I'll give you a couple of examples, and I believe this. My passion for markets came from my grandmother. My grandmother was invested. She loved markets for her whole life. And every year for the holidays, instead of giving me a toy, she'd give me a share of a stock. And I'm like, what am I going to do with this certificate, Grandma? And she goes, you know, someday you'll thank me. And so my passion around markets coming from her is why I thank her. But when I graduated high school, she gave me $1,500 worth of mobile. Ultimately, it became ExxonMobil.

• 40:55Speaker 01

  I, you know, after a quarter, I got a dividend check and I'm like, what am I going to do with this? So I did dividend reinvesting around it. So I did a drip. That $1,500 with dividends reinvested and compounded, and it's not like ExxonMobil's been a great stock for nearly four decades, but that $1,500 right now is worth over 160K. Think about that. That's the power of compounding. And let me bring that to life today. As you may have some younger listeners, if I could guarantee you 4% on cash for the next three-plus decades, 200 grand becomes 800 grand. It's pretty darn good to have that compounding effect, David. But, and most people would say it's pretty good because five years ago, that 200 grand,

• 41:39Speaker 01

  30 years later, it was still 200 grand because it's cash, it's getting zero rate. But that same 200 grand getting average, nothing heroic, average equity market returns.

• 41:49Speaker 01

  Over that same period of just over three decades is $3.2 million, a $2.4 million gap. The power of compounding is so powerful. But the next part of that question that I love is which do you think is more likely? 4% of your cash for the next three plus decades or average equity market returns? So with all this cash on the sidelines today, it's remarkable how much money is being left on the table because people don't necessarily see the benefit of compounding on equity market returns and having to navigate through those wiggles and waggles because they're going to happen. And that's one of the reasons people saying cash is they don't want the wiggles and the waggles, but the juice is worth the squeeze on that little 200 grand, that $2.4 million gap.

• 42:33David Weisburd?

  There's two sins. One is not investing and the second one is selling at the, at any time, really, or selling all of it. You could say wrong time, right time. That also could be just a 10% difference when you zoom out enough. It's the difference between having 3 million and 3.2 million, but the real mistake is actually just getting, getting the chips off the table. I looked it up, Warren Buffett, 99% of his wealth came after the age of 56, speaking of, of compounding. On that note, Hamilton, this has been absolute masterclass. Thanks so much for jumping on the podcast and look forward to continue this conversation live.

• 43:03Speaker 01

  David, thank you so much. Truly enjoyed it. Love to come back if you'd ever have me again.

• 43:08David Weisburd?

  Absolutely. Thank you, Hamilton. That's it for today's episode of How Invest. If this conversation gave you new insights or ideas, do me a quick favor. Share with one person in your network who'd find it valuable or leave a short review wherever you listen. This helps more investors discover the show and keeps us bringing you these conversations week after week. Thank you for your continued support.