Ep. 1399: Cullen Roche Interview with Michael Covel on Trend Following Radio

My guest today is Cullen Roche. He is a financial executive, author, and investor. He is also the Founder and Chief Investment Officer at Orcam Financial Group and Discipline Funds, a financial planning firm that focuses on holistic financial advice. The topic is his book Your Perfect Portfolio: The Ultimate Guide to Using the World's Most Powerful Investing Strategies. In this episode of Trend Following Radio we discuss: Investment strategies and portfolio construction Trend following vs. buy-and-hold investing Rules-based strategies Government intervention, markets, and economic incentives AI's impact on entrepreneurship Jump in! --- I'm MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I'm proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show. To start? I'd like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/ You can watch a free video here: https://www.trendfollowing.com/video/ Can't get enough of this episode? You can choose from my thousand plus episodes here: https://www.trendfollowing.com/podcast My social media platforms: Twitter: @covel https://twitter.com/covel Facebook: @trendfollowing https://www.facebook.com/trendfollowing/ LinkedIn: @covel https://linkedin.com/in/covel/ Instagram: @mikecovel https://www.instagram.com/mikecovel/ Hope you enjoy my never-ending podcast conversation!

• 0:00Speaker 00

  My guest today is Cullen Roche. I've known Cullen for 20-plus years. This is his second appearance on the podcast. We discuss his new book called Your Perfect Portfolio. He goes into an assortment of different, you could call investing or trading strategies, all the big names, including one that I am fond of. Without any further delay, let's jump right into my conversation with Cullen Roche.

• 0:39Speaker 00

  I don't know your view on it. I could probably guess a little bit because I haven't heard you say anything, and I'm not going to go there any deep. But from my perspective, as a Gen X guy who's had a chance to hear about the Vietnam War and then all the Middle East wars since my birth, we should not be there.

• 0:56Speaker 01

  Not like a libertarian, but I definitely think that my default position tends to always be, unless we're being attacked directly, is a waste of taxpayer money to be going in and blowing up shit in foreign countries where, like, we don't know a definitive outcome, so.

• 1:16Speaker 00

  You can imagine, because you know where I am today, or at least I think you know where I am today, and like, as an American here for a long time, you learn a lot. And you don't necessarily learn it from the people here. You learn it of your own curiosity to find out what happened. And if you're an American and you actually go down the rabbit hole, not just the movies in Hollywood, but if you go down the rabbit hole of what took place in Vietnam and then start to connect the dots over the next bunch of decades after, it all looks the same to me. It all looks the same. I don't see the difference. People can get into all the reasons why we're doing it, but I think when it's all said and done and history is written, it always looks like we made the wrong move.

• 1:58Speaker 01

  It seems like these wars in the Middle East especially are just a clusterfuck because we can't relate to the way those governments are operated. We don't relate to the religions there. They don't want our economic style. They're not just going to adopt capitalism and embrace.

• 2:19Speaker 00

  Hold on, we have capitalism?

• 2:20Speaker 01

  There's a debate over that, right? The government's gotten so friggin' big here that it's running the Michael Kovals out of the country, right?

• 2:27Speaker 00

  Listen, the area that we grew up in, you walk around, you're like, hold on, why is a house in Vienna, Virginia for $4 million? You know, it's insane, right?

• 2:36Speaker 01

  Five of the top 10 wealthiest counties are right around where we grew up. It's funny to come from a family of lawyers because I'm convinced that it's largely the lawyers. The lawyers have just like, they've taken over DC and now there are a million of them employed just dealing with the complexity of the government has made everything so fucking complex in our economy and everywhere that now everybody needs a lawyer to handle anything. It's crazy and everyone's covering their own ass with, it's been wild living in California because that's the main thing I've learned from the California government is I'm convinced that the regulatory system in California is super complex in large part because everyone's just covering their own ass.

• 3:21Speaker 01

  Mainly the government, the government's constantly writing these codes to be ultra complex because everybody's exposed to some form of litigation because the lawyers have been involved in all of it in a way where they've made everything so complex and the country's so litigious now that, I don't know, it's been a great time to be a Brian Roche, I guess.

• 3:40Speaker 00

  It's all about minimizing your target area. If you're PBD and you got fortunate enough to put enough in the bank where you've got the legal defense fund and you can broadcast, that kind of makes you, you know, you can defend yourself, but a lot of people, they don't have that. Even you and I right now, if we say the wrong thing, somebody bigger than us could walk in and cause hell for us, but it's still nice to at least, if you're slightly opinionated or you've got some perspective and you've got some voice, it does cause people a little bit of a pause. They say, I'm gonna go take on that guy Roche or I'm gonna take on that guy Kovaly today. Hold on, they might get onto some podcast tomorrow and start screaming about me. This is our world, right? It's kind of unfortunate, but listen, I want to start with a word that I know for

• 4:24Speaker 00

  your newest book, that is a word that you were struggling with and you could either call it investor or investing. I struggled with it at one point in time too, and I probably handled it a little bit differently, but it was just the whole idea of investing. It's subjective, doesn't necessarily mean anything to me. And so when I did my first book, I was drawing the distinction between investing and trading because at least trading, I knew, well, you get in, you get out, there's that kind of distinction. What was your perspective when you started thinking about this word investor or investing?

• 4:54Speaker 01

  I think I went through the same struggle, especially when I was early in my career. I was a pure trader in the sense that I just viewed it as an endeavor of how fast can I make money flipping my way in and out of different positions? And what is the smartest way to do that, basically? And it was when I wrote my first book, Pragmatic Capitalism, that I really encountered the contradiction between the world of economics and the world of finance. And in the world of economics, the word investment has a very specific meaning. It basically means to spend for future production. It's really when firms spend money. So when a firm goes out and builds a factory, for instance, to build widgets, that is capital expenditure.

• 5:37Speaker 01

  They are making investment expenditure from the coffers of the business. And that will have a return on investment that then is later reflected in the way that share prices change over time. So if SpaceX goes out and builds a great big bunch of data centers in space and they take over basically all of the data center processes in the future, and they do this in a super efficient way, those humongous expenditures will have a huge ROI in the future, which is why their valuation is so crazy right now. The expectation is that there will be an ROI there. Who knows if that's going to actually play out? But that's the thinking behind the economic sense of the definition.

• 6:18Speaker 00

  The pure economics part, not like the behavioral economics part, becomes something entirely different.

• 6:23Speaker 01

  Bingo, yeah. And that's where it gets a little bit wishy-washy, is when you go into the finance side of things, it basically means to put capital at risk to try to make money. And that can be lots of different things. The thing that I really honed in on was that when you go out and you buy SpaceX, you are not investing in the same sense that the firm is, where the firm has a very clear control or influence over what they're doing and the way that they're actually impacting the return on the investment in the future. Whereas when I go out and I buy SpaceX on a secondary market, I'm doing something totally different than what the firm is doing.

• 7:04Speaker 01

  I'm putting capital at risk, but my actual expenditures have no influence at all on the way that the capital actually grows and is influenced in the actual economy. And so they're two very different things, and it's why I arrived on basically calling the outlays that what we call investors, when you buy stocks and bonds on a secondary market, I call it an allocation of savings, that you're saving some amount of money, you've saved some cash, and you're making this outlay where you're buying stocks and bonds in what is really just an allocation of savings, because it's not this investment expenditure that has a direct influence. And so the analogy I sometimes use is that when you buy stocks and bonds on a secondary

• 7:46Speaker 01

  market, it's a lot like being at the betting track where when you're buying the ticket on a horse race, you have no influence on the race. It's a very different thing than being the owner of the horse. When the owner of the horse goes out and buys steroids and he injects his horses up with them, that investment is directly influencing, or the way he trains the horse, or whatever you want to talk about, the way that you develop the actual animal and you pick the jockey and you're actually influencing the outcomes of all of this is just totally different. And I think this is a message that you talk about a lot, is that nobody knows a really purely fundamentally driven way to understand what is going to happen with stocks in the

• 8:31Speaker 01

  future. You can think that you understand the fundamentals, and lots of people spend countless hours doing that, and at the end of the day, those of us who are buying stocks and bonds on a secondary market, we don't have an ability to predict the future, and we have no influence on the actual outcome of the horse race. And so what you might call like venture capital, or somebody who's more directly an insider, who's more directly involved in the business and the actual capital expenditures of the firm, those people have a much more probably, it's more a signal there, what they're doing is much more akin to what we might think of as investing in the pure sense of the word. Whereas the rest of us are out here competing with the Goldman Sachs analysts who are spending

• 9:15Speaker 01

  100 hours a week studying one company, and they've got, you know, access to insiders and all this other information that the rest of us don't have, and that makes it a very unlevel playing field, and one that for most of us, the fundamentals are just incredibly, almost impossible to decipher.

• 9:33Speaker 00

  Ultimately comes down to, and this is where you go in your book that you've got out right now, is what's your strategy? There's a lot of different strategies. I write about one, but there's a lot of different strategies. There's a lot of different perspectives, but ultimately there is a strategy. And as you talk about the idea of buying into a share price, a strategy where people often don't actually have it, the exit strategy, but you've got the buy part, there's gotta be an exit part. Whatever your strategy might be, there's gotta be a point where you say, oh, okay, I got into something and now I'm going to get out of something. I'm sure this strikes you as unusual too, given as many years you've been in the markets. I still find it amazing that I will talk to people who will say, you know, SpaceX, I'm buying this.

• 10:17Speaker 00

  Never a thought or never a pre-planned system or approach of when they might get out. Is it just like a magic tooth fairy shows up and says, get out? When you get out, and I'm amazed, and you've got to be amazed too, after being at this game for 25 years, how does that just like naturally, after all this time, all the information flow, does it not naturally come to people like, hey, when do I get out? I'll put some blame here, since the boomers still have all the money and they have a lot of the influence. I think a lot of this is the boomer mindset. The boomers are just like, buy it and hold it. And we made a bloody fortune this way and we're not doing anything different than that.

• 10:55Speaker 01

  So for people who are listening, the book is Your Perfect Portfolio. And it's, I basically break down like 20 different really famous strategies. And this ranges from trend following to 6040 to like Boglehead three fund portfolio, to endowment strategies. Some of them are really boring and simple, like the Boglehead strategy. Some of them are much more complex, like the endowment strategy. It's like a multi-strategy basically. And you can use trend following or other strategies inside of a strategy like that. And a lot of firms and institutions do that. But the purpose of the book is really to like cover the full gamut of different really popular strategies with the idea that we're all different and we all need to try to find something that works for us.

• 11:36Speaker 01

  The thing that I've always loved about trend following and your work is that

• 11:43Speaker 00

  You're not being paid. You don't have to tell me anything.

• 11:45Speaker 01

  This is a full disclosure. I got one of your, probably one of the very first copies of trend following that was ever published. Cause you gave it to my father and he gave it to me when I was a young stockbroker at Merrill Lynch. But I'll tell you, at that point in my life, I didn't know my ass from my elbow when it came to trading. But I was trying to figure it out. And as I'm reading through the trend following stuff, the lure of the rules based process just to me made a lot of sense. It created a structure and organization in the process of doing all of this that I found very attractive. And so it's been really interesting because over the course of my career, I've probably gotten increasingly away from what we would call like a pure trading strategy.

• 12:27Speaker 01

  Probably just because I've become much more hands off with my own money for mainly for tax reasons for the most part. But I've followed a very rules based and systematic process. And a big part of that goes into what you're talking about where you have to have these very structured rules. In large part because I think so much of the battle with all this is that you have to control your own behavior. And you have to set up rules inside of all of this so that you insulate yourself from being the worst enemy of your portfolio. Ben Graham has this famous quote that your worst enemy is going to be yourself in the investing process. Without rules, you leave yourself exposed to these environments where when you don't have that exit strategy,

• 13:09Speaker 01

  you don't have a framework for navigating the markets in a very systematic way. You leave yourself open to these huge behavioral biases where you end up in a bear market and you didn't have a sell rule. And you need cash for some reason, or you're just scared because you don't know what's going on. And when you're in the middle of a COVID or a great financial crisis, everything seems rational and scary. Like you're not normal. If you go through those environments, you just don't get scared at all. But if you don't have a system to navigate those sorts of environments, you're going to have a really hard time being an investor or trader, or whatever you want to call it, a saver, whatever we call these things.

• 13:51Speaker 01

  Because it's going to expose your worst emotions at the worst possible times. And when you make these like huge catastrophic mistakes, it derails a plan, not just for a little while. It derails it potentially permanently.

• 14:07Speaker 00

  Let me give you a very big philosophical type question to let you run with. Whether they call themselves investors or traders, everyone can see in the last, especially the last, let's say, nine months or so, the movement in Oracle, the movement in Nike, gold, silver, the Korean stock market, Bitcoin. I mean, these have been some fantastic moves, right? And if I look back to when you and I, essentially, even though you're younger, we got looking at the markets roughly at the same time. You were in school, I was at a school, but it was the same time. And I really had no experience either, I was just a curious guy. But, you know, we got to live through the dot com stuff. And you see what happened with the NASDAQ bottoming out in the fall of '02. And then you see the great financial crisis. And let me get to that March of '09 time period.

• 14:53Speaker 00

  I wonder, did we need to make, because there's definitely been ramifications of these choices, did we need to do what we did in March of '09, which arguably went all the way up until COVID? Because I think now, since COVID, markets have started to act like markets again, crazy, volatile, up and down. But we had this long stretch, March of '09 until, let's say, COVID, where we really had no interest rates. So if you had cash, you were being ramrodded, like in a Tarantino film, if you had cash. What do you make of the choices that we made? Well, not we, but the choices that powers that be made? Did they need to do what they did, starting in March of '09?

• 15:33Speaker 00

  Or would we have been better off to just let things play out?

• 15:39Speaker 01

  Oh, man, that is a great, big philosophical one. I don't know, you know, I've thought about it a lot over time. And it's easy to judge all that stuff in retrospect. To me, in real time, I was very critical of the bank bailout.

• 15:57Speaker 00

  Goldman Sachs and Morgan Stanley should not exist. If Lehman and Bear were not going to, those two should not have.

• 16:03Speaker 01

  Yeah, a lot of the US automakers shouldn't exist. General Motors probably shouldn't exist. Ford probably gets toppled in that environment. We kept a lot of these firms alive. They should have changed, they should have been forced to evolve.

• 16:18Speaker 00

  Back to your capitalism point earlier?

• 16:20Speaker 01

  There's no capitalists in depressions, with kind of the no atheists in foxholes.

• 16:25Speaker 00

  Give me your view, though, seriously, that kind of March of '09 going out and the choices that were made, the zero interest rate policy for seemingly a decade, that has ramifications.

• 16:35Speaker 01

  I hated ZERP, Zero Interest Rate Policy. I hated quantitative easing. I have a more nuanced view on quantitative easing. I don't think quantitative easing actually does that much. My main criticism was that it actually isn't very impactful, but it has this huge behavioral impact, especially in the social sphere where it has this perspective of being massively misguided and manipulative. And people look at the size of the Fed's balance sheet and stuff like that, and they crow about all the manipulation that's going on. And that's really destructive because it feeds this perception that now the government is doing things that is really manipulative. And they were doing a lot of stuff that was manipulative back then, whether it's the interest rate policy.

• 17:20Speaker 01

  The interest rate policy drives me crazy because, again, going back to our sort of systematic perspectives of the world, I'm a very systems-based person. I often make this joke that if I was running the Fed, the one of the first things I would do, my first day on the job, I'd go in, I would hand somebody an algorithm for how interest rates are going to be set. I would fire myself, I'd fly back to California, and that's how interest rates would be set. Just set it on an algorithm, let a computer run it, or set a simple set of rules, rather than having 12 random people who, most of whom have no market experience, they're just, for the most part, they're academic economists who don't even have real experience in markets. And they're just sort of setting interest rates based on a series of flawed inflation

• 18:03Speaker 01

  metrics that may or may not be pretty close to what's actually going on in the real economy. And we know it's a very imprecise process.

• 18:12Speaker 00

  Years back, I made a film, and the last edit that I made in that film was March of 09. And it was a screenshot of what the indices were in terms of their drawdowns in March of 09. That was the last edit that I made. So that's always going to stick with me. And it was, obviously, March of 09 is an infamous-type month. But what would have happened if we didn't do what we did? Would it have been so bad? Of course, this is theoretical.

• 18:35Speaker 01

  It would have been worse in the short run. Instead of having a relatively brief market downturn and GDP decline, you probably

• 18:44Speaker 01

  They have something that lasts, I don't know, five years. And that's hard to go through. It's interesting to talk about this in the context of capitalism because I think the main thing that's driving a lot of the bad narratives these days is the fact that inequality is so bad and all of the things that they did exacerbated inequality. We propped up house prices, especially during COVID, this was even more magnified. We prop up house prices, we preserve balance sheets for the wealthy, and we didn't really do a lot for the rest of the middle class or the lower class. And so you've had this growing divide in inequality and that's resulted in these narratives about how now inequality is destroying the country and how

• 19:29Speaker 01

  I think people look at all of this and they say capitalism is ruining the country. I think a lot of young people, there's been a lot of polls lately about how young generations now are, they're more socialist than they've ever been, or at least in a very long time. And that's disconcerting because when you look at the driver of what caused a lot of the inequality in the last 20 years since the financial crisis is it was exactly the things we did during the financial crisis that propped up all these firms. These socialist sort of implementations that actually propped up these firms, allowed them to survive and kept asset values much higher than they probably should have been,

• 20:10Speaker 01

  which exacerbated the inequality issue. And now here we are and it was the government that exacerbated the inequality by saving a lot of these firms. And if you'd gone through a larger downturn, we would have wiped out a lot of the bad actors that it would have been more painful in the short run, but I think we'd be in a better place in a lot of ways if we had not implemented the bank bailouts in the way we did, not implemented the auto bailouts. I oftentimes, I criticize Obama. I actually think Obama was a very good president in general. I'll probably get a lot of hate mail for that, but I think in general, I think he was a pretty good president, but I think he made a colossal mistake implementing the Affordable Care Act back then. I think that you could not have chosen a worse time in the world.

• 20:54Speaker 01

  To do that. I think it was well intentioned and he

• 20:57Speaker 00

  I don't have a problem with you saying you think Obama is a good president. The part that sometimes I hear this about Vietnam is the well intentioned part is I don't know if it was well intentioned. I don't know what the intentions were because I can look at my own personal healthcare costs. And I try to keep myself in shape, but the costs are just insane. Also, big picture, and this is essentially why you wrote the book. Everything we're talking about right now, you need a strategy on top of to navigate. Because you can't sit around and have a philosophical conversation like we're having and say, Cullen and I talked and now I'm buying. No, it doesn't work that way. What we're working through gives people the understanding of, oh, wow, this is the complexity at which I face.

• 21:39Speaker 00

  What can I do with this complexity? How can I navigate it? How can I get a system across it? But back to the healthcare cost, you know, look, if I'm in Vienna, Virginia, and I drive through the McDonald's with a friend and I'm spending 35 bucks for, you know, two Happy Meals or whatever. To me, that doesn't feel like something, along with the housing prices and the healthcare. Those things don't feel like natural market prices. Those things feel like they've got to where they are because of what you're talking about. The actors at powerful positions to make certain decisions. Because it doesn't make a damn sense. It doesn't make any sense for the prices to have jumped like they have jumped.

• 22:24Speaker 00

  And I think people do see that. And back to the young people to play devil's advocate. The young people see that and they're like, okay, hold on. You boomers and Gen X and maybe some millennials can actually buy a house. We can't buy a house. Nobody in our generation even wants to. Men and women don't even seem to like each other anymore. I mean, it's a real mess. I do think that there's going to be fair criticism that if boomers sit back on the easy chair with the 10,000 square foot house and all the cash, the boomers, they have some responsibility for what millennial and Gen Z are facing.

• 22:56Speaker 01

  There's this famous chart that's been around from Mark Perry and the American Enterprise Institute, where it shows what's gotten more Expensive over the last 30 years and what's gotten less more affordable over the last 30 years. And the things that have gotten more expensive are hospital services, college textbooks, college tuition, childcare, average hourly wages and housing. And then the things that have gotten cheaper are basically household furnishings, clothing, cell phones, toys, TVs, computer software.

• 23:27Speaker 00

  If I go to Lululemon to buy workout clothes, that stuff ain't cheap. The damn shirt I'm wearing costs like a hundred fucking bucks.

• 23:34Speaker 01

  What's the commonality with all the stuff that got exorbitantly more expensive? The government subsidizes huge amounts of it. You know, there is this sort of, when I say Obama was well intentioned, I think that part of what a lot of politicians don't understand or what they don't think about is this idea that the more and more they're trying to help, the more and more they're potentially getting in the way, the more and more they're potentially hurting a lot of these things. And so I think it's fair to look at the way that especially the US government has evolved over the course of the last 30 years and say, you know what? There is a lot of truth to the idea that the US government has just gotten too big. Like, I'm not like a totally anti-government guy. I think government is necessary to some degree. We need rules, we need a military.

• 24:19Speaker 01

  I don't even think it's bad to necessarily subsidize some things just for the sake of giving people market access who otherwise would never get it. But at the same time, there's definitely a tipping point where you get to a point where you're too involved. And I think the college cost is probably the most prevalent one where we've just, for 20 years now, we've subsidized college loans and we wonder why there's a student loan problem and it's in large part because, hey, the government subsidizes all of this. And so it sets a bad incentive structure and that's so much of what is important in understanding good economics is understanding incentives.

• 24:53Speaker 00

  I think I paid $2,000 for an MBA at Florida State.

• 24:57Speaker 01

  Gosh, I remember when my wife was at UCLA, I think she was paying something like $4,000 a year or something. It was crazy. Granted, this was, you know, 800 years ago, but still the cost now of even these public institutions is truly Mind boggling.

• 25:16Speaker 00

  Let me add one thing. I'm going to take you back to the markets here. In terms of the well intentioned thing, I went ahead just as a random Facebook post right when this Iran war started. And I laid down criticism of it. And I immediately got backlash from right leaning people that I knew about it being well intentioned. And some of it was just insane. And some of this was people that I don't necessarily know if I knew them personally, but they had been in my world for a long time. I'd seen their names for a long time posting commenting. I had blocked several of them because I essentially said it was not well intentioned.

• 25:55Speaker 00

  Whatever is taking place in Iran right now, from my perspective, did not appear to be, or at least it was not explained to me in any sort of a way where I could say that's well intentioned. It was explained to me in a way where I had 10,000 freaking questions. And those questions were never answered. Anyways, let me get away from the controversial stuff. Talk to me about your perspective, because here we are, we're laying out all these different geopolitical fundamental type things that still require us to make decisions in the markets. How do you think about the word risk at this point in your life? What does it mean to you?

• 26:28Speaker 01

  This industry is great at creating slippery words that we don't actually define very well. I always loved the Ken French quote. Ken French is famous from Fama and French. He's a Dartmouth College Finance professor, and he said that risk is uncertainty of lifetime consumption. The reason I like that definition of risk is that it's very broad. Like, an academic might look at market risk and say, is it volatility? And obviously, that's a really lazy definition because volatility can be really good, volatility can be really bad. Nobody complains about having a super volatile stock that only goes up most of the time.

• 27:07Speaker 00

  Was that a criticism of the Sharpe ratio?

• 27:09Speaker 01

  Well, yeah, and metrics try to resolve that, but even so, like, the academic solutions are still kind of sloppy. You know, somebody like Morgan Housel will say, risk is what you don't know. I like framing it in the context of personal consumption. Because I'm a financial advisor, so I manage people's money and I see this front and center where I think that when I see somebody who is tempted to sell a stock, for instance, in a big bear market, what's really happening in their mind is they're experiencing the risk of uncertainty relative to their future consumption. They are saying to themselves, let's say they have a hundred thousand dollars in Apple stock and it goes down by 50%.

• 27:49Speaker 01

  What that person says to themselves is, I had a hundred thousand dollars and if I spend, you know, let's just say ten thousand dollars a month, Apple alone was making up 10 months of my consumption, whereas now my consumption, my living standard has materially shrunk. It has shrunk literally in half potentially. And so my ability to predictably consume now has been altered. And that's the, I think, mind trip that people go through when they go through a big downturn is they're really experiencing this realization that, oh my God, I'm not going to be able to feed my kids as much as I wanted to, or I'm not going to be able to pay for the healthcare plan that we have.

• 28:30Speaker 01

  And so what people do when they sell stocks and they're buying, what's happening in that transaction is you're buying cash, you're selling stocks and somebody else is buying your stock and selling you their cash in that transaction. And the thing that cash does is cash gives you near-term certainty. The principal value stops moving. You look at it and you say, oh, thank God, I sold my Apple stock. Now I have fifty thousand dollars. I have stopped the bleeding and now I know for certain that I still have five months of consumption here in my cash position or something.

• 29:02Speaker 00

  But now the McDonald's cheeseburger is now 20 bucks, so that logic goes.

• 29:07Speaker 01

  That's the problem is that in the long run, you've made an awful decision because Apple stock or whatever position it is, in the long run, you know, especially if you're buying a diversified portfolio, you're probably in the long run accruing gains. Or more importantly, you're accruing inflation-protected gains. And I mean, that's the main thing that the equity market does well is the equity market protects pretty well against inflation because that's what corporations. Really are designed to do corporations. They buy things at cost and they sell things at a markup. And that's ultimately what accrues as shareholder value in the long run to the shareholders is they're getting a little bit of an inflation hedge because corporations are pretty good inflation hedgers in the long run.

• 29:51Speaker 00

  I've got to pick on you about this long run because you're a student of history and you know there can be bear markets. There can be down periods and they can go on for a very extended period of time back to the Great Depression, the seventies, even the NASDAQ dropping down, the dot com crisis, it took a long time to bounce back. And you lay this example out of, let's say, the person that has the Apple position. And okay, it's a bear market and they're looking, okay, my purchasing power is down. He's thinking about his consumption. The question is, what do you think is the percentage? This is a crazy question, but the percentage of people that are still in this mindset of like, I have these equities in my portfolio, they're just in there and now we're in a bear market. And there really isn't a strategy other than buy and hold. That's still the primary way, isn't it?

• 30:35Speaker 01

  I think this is one of the great arguments for why diversification of different strategies works. And this is ultimately where I arrived later in the book is that I basically say, you need a multifaceted plan. You can't just have, you know, one knife in all your defense mechanisms. You need to have a full arsenal of different weapons to combat different types of environments. And one of the strategies I talk about is a permanent portfolio or Harry Brown's all weather strategy. And the reason I love those sorts of strategies is because there's a tool for each type of defense that you might need as you're navigating different market environments. Like the beauty of something like a managed futures strategy or trend following,

• 31:16Speaker 01

  or even just, God, holding an uncorrelated asset class like gold or whatever it might be. The benefit of that is that those things tend to zig when all the other stuff zags. And I'm a big advocate of building a portfolio around cash flow generating instruments. Just because I, working from more of a financial planning perspective, I try to create more of a cash flow method. I'm a big advocate of asset liability matching. So kind of the way that big banks and pensions funds work. I'll work with a client in a methodology where I'm trying to actually quantify their expenses. And then I'm saying, look, okay, you need $100,000 of years in spending power. And so we need to block out enough assets so that maybe you've got emergency funds.

• 31:59Speaker 01

  Maybe we're matching assets to the home down payment, a future college tuition payment, whatever it might be. But giving people certainty of, hey, we're going to have a certain amount of cash at very specific times. But the thing that doesn't fully resolve for is it doesn't resolve for all the tail risk. And especially all of the risks that you're going to run into across your life, where especially when something like 2022 happens. If those cash flow generating instruments of, I'm speaking mainly about stocks and bonds here. Those things become really highly correlated and you go into a year like 2022 and you only hold longer duration bonds and stocks.

• 32:38Speaker 01

  Well, you find yourself in a really bad situation because if you're withdrawing from that portfolio, you're living off the portfolio. You know, let's say you needed money because let's say in 2022, you really wanted to buy a house back then for whatever reason. Or something like that, you had to sell some of your stocks and bonds at a loss. And that's one of the very last things you ever want to happen in any sort of investment portfolio is you become a forced seller at an inopportune time. And that's the argument for having what I would call a lot of opportunity across an investment strategy. Where you've got the ability to look at different pockets of it and say, okay, my stocks and bonds are down.

• 33:17Speaker 01

  But look, my gold is up 50% and this managed futures fund that I own is up 25%. I've got options now where I can go into different pieces of my portfolio and I can pick and choose. Okay, I've got a hundred grand in a managed futures strategy here that is up 50%. I don't have to sell any short-term bonds or any bonds at all during this bear market because I've got the cash allocated there. And that's the way I like to communicate the benefit of owning a really multi-strategy type portfolio. Where you've got a lot of different optionality across different types of instruments, different uncorrelated sorts of strategies.

• 33:57Speaker 00

  Do you know why the term managed futures is somewhat popular or somewhat known?

• 34:03Speaker 01

  No, but I bet you do.

• 34:05Speaker 00

  I think it's because, a large part of it is because of me. Because if you don't control the phrase trend following and some guy that's gallivanting around the world has the phrase trend following in his hip pocket, then you've got to choose another term to sell to everybody. Otherwise, you're giving him free publicity.

• 34:20Speaker 01

  Yeah. You know, that's the thing about that concept of managed futures is that these strategies are inherently systems-based. And so the risk is very strategically managed. Whereas like when you buy into a 60-40 strategy or the one I talk about owning just 100% equities in one of the chapters, just full 100% equity risk, there's no exit strategy. There's no real management of what you're doing. It is a one-trick pony to a large degree. I've had this debate a million times and over the years. There's a lot of people that view the word active as this dirty word in the process of asset allocation.

• 35:02Speaker 01

  I try to bring people back to reality that, hey, everyone's active. We all need to be active. Nobody owns the full market portfolio and nobody can or should actually own that portfolio. And everybody deviates from it to some degree. And there's a lot of sense in doing that. And so don't view activity as necessarily something that is negative or an inherently bad part of this whole process. Managing the risk and implementing the risk in intelligent ways is really the thing that's going to make your financial plan succeed in the long run. Cause it'll keep you sensible when everybody else is being unsensible.

• 35:39Speaker 00

  By the way, the whole premise of the book is to compare strategies. Do you have competition there? Look, people can find out strategies in all kinds of different ways. But the idea of taking a whole slew of strategies and putting them in one book and kind of offering a perspective about all of them. I don't think that's really been done. I mean, a Market Wizards book will have different traders talking about different strategies. But you tell me, you surely looked into it.

• 36:01Speaker 01

  Yeah, the Market Wizards books are really close.

• 36:04Speaker 00

  But this is different. You're doing something different. You're going into the particular strategy.

• 36:08Speaker 01

  I'm using what I would call the, I don't know, the big gorillas of all the strategies too. I talk about the Warren Buffett strategy, just using equity 60-40.

• 36:19Speaker 00

  They've survived.

• 36:20Speaker 01

  Exactly. The ones that have survived, the ones that we kind of know are tried and true. And there's not just a lot of people who implement these strategies. There's big institutions that implement these strategies and banks and pensions and dowments and even the boglehead. The boglehead strategy is about as simple as it gets, but man, there's an army of people online who will back up that strategy and a lot of them are really goddamn smart. All the strategies I talked about in this book are the tried and true strategies. It was hard to narrow it down. I mean, it was really hard to write a relatively all encompassing book that actually covered all these strategies, you know, in a sensible and sufficient way, just because nobody wants to read a thousand page book from Colin Rose.

• 37:05Speaker 00

  Hey, look, I was disappointed. I expected, when I understood the premise of the book, I expected to open it and not see trend following, still interview you and then be able to beat you up. And it's actually been there.

• 37:18Speaker 01

  No, see, that's the cool thing about what I was trying to do. And it's funny, I've gotten a lot of feedback from people that I think go into the book and they think that I'm going to give them exactly what they want or I'm going to give them some sort of holy grail. And I hate to say it, but there is no holy grail. There's no single strategy out there that works for everybody. And even trend following, as great as we might think it is, whether it's for certain pockets of your portfolio or certain people, there's a lot of people who it would be really bad for. And I think that the bad analogy I use throughout the book is that finding a good portfolio is a lot like trying to find a good spouse in that there's a lot of options out there and you can't just open whatever popular magazine there is and say, oh, this is who

• 38:02Speaker 01

  they declare the most beautiful person in the world. You may not believe that. That person may not work for you. You've got to find what works for you. And that's really the key message of the whole book. And I've tried to write and describe the strategies and the history behind them in a way where I'm trying to help people expedite that whole process. Cause for me, it took me 20 years into the process of actually finding a strategy where I now kind of know when I work with somebody from a financial planning perspective, I feel really confident that what I'm doing for them is a financial planning based investment strategy. People can blow a million holes in it. That's totally cool. Again, it doesn't work for everybody, but I know for me and the people that I work with that.

• 38:45Speaker 01

  These strategies are right for them and their process and their methodology. And everybody has to find something like that for themselves. There's people who are going to want to take more risk. People who are going to want to take different types of risks. There's so many different variations out there of the right way to implement this that you've got to just find what works for you. I kind of hope the book expedites that whole process because it took me 20 years of kind of dancing in and out of different strategies and trying to find the best sort of systematic process for me that I could stay loyal to. Because that is really, I think, the key to success in a lot of this is finding something that is good enough for you and then just staying steadfastly loyal to it.

• 39:25Speaker 00

  As we wind down, my last question, another one of these big philosophical ones. Are you Gen X or millennial, late millennial, early Gen X? Where are you?

• 39:33Speaker 01

  Gen X.

• 39:34Speaker 00

  You're Gen X.

• 39:34Speaker 01

  Yeah, I was born in 1980s.

• 39:36Speaker 00

  You're the tail end, okay.

• 39:37Speaker 01

  I get to tease my wife. My wife is officially a millennial, so I get to tease her. She's 81.

• 39:42Speaker 00

  But see, I would have been 12 years old in 1980. Yeah, I guess from our perspective of how we understand things, it's going to be similar. So you know, you've made a case today, and it's not unique. Most people make these kinds of cases. You talked about life, marriage, love, school, housing, other things that I think about these days. You can look at the rates of these things and compare generations. And it sure looks like, and then if you add in, and I'm going to go there in a second, if you add in social media and you add in AI, we look at all these big life picture issues. Let's say the boomers and Gen X and millennial would be approaching because that's the normal way to look at things, the normal way things are happening.

• 40:22Speaker 00

  But even in a place like Asia, you can see where fertility would have been a very normal, not questioning thing. Even in places like China, you would think after the one child policy that fertility has taken off. And then you put on top of this, the social media and on top of this, the AI. I don't think there's any doubt that the types of strategies that you're talking about are going to endure. People are people, but the way that younger generations are facing opportunity and the way things have changed. Can Gen Z just sit back and look at the things that you talk about or the things that I talk about? And think about them objectively as something that I want to do?

• 41:04Speaker 00

  When their lives are completely different, they're not buying houses by 30, they're not being married by 30. There's no kids. It's a very changed world now. And AI especially. So I'd love your take on that and have a little bit of take on your perspective about AI. To me, AI is going to, the way that I use it, it's changing the world, but maybe not in ways people think. What's your take on where I'm going with all this?

• 41:27Speaker 01

  From a macroeconomic perspective, you get into really a debate about living standards, I think, when you start talking about this stuff. And I think there's two different things going on here. The world has gotten a lot more complex in really messy ways. But also, it's undeniable to say that living standards are better today than they've ever been. Like, the world today as a whole is a significantly better place to be born into than the world of 30, 40, or 50 years ago. But it's also a much more difficult world to navigate because it's gotten so complex. And a big part of that is like in the United States, like these studies about the impact of social media.

• 42:11Speaker 01

  And social media is a really hard one to navigate for, especially for young people who haven't even developed the ability to really internalize and interpret a lot of the data that's being thrown at them. And so I think people confront these things and it's really easy to get caught up in like the rat race of what does your neighbor have when all you're seeing all over social media is how great everybody else's life seems to be. We fail to internalize the fact that a lot of this is just pure BS, that what you're seeing in social media is just being fed to you because the system is taking advantage of your own personal biases. So it's really hard to break that down.

• 42:48Speaker 00

  If you're Gen X looking back at that, what perspective does Gen Z or Gen Alpha have? They don't have any perspective to look back on it. They're in the middle of it.

• 42:55Speaker 01

  It's funny, being as online as I am, because I am way, way too online, but I remember, God, like the early days of the internet. The early days- Of the internet were a cesspool like the AOL chat rooms like when that stuff was first coming online. It was like some of the most frightening. It was like the west of a Reddit forum or something like that. And so I remember how bad it was. A lot of us, especially the Gen X generation, like we built up, I think, a little bit of a thicker skin to this stuff. Because we actually traversed both of those worlds. I remember the world before we had technology. And then I was old enough, when the AOL chat rooms were becoming popular and stuff like that. I was old enough to say, holy cow, this is toxic, awful stuff.

• 43:38Speaker 01

  And I was probably a bad behavior in it too, but matured through it to the point where now when somebody's mean to me on Twitter, I'm like, the joke's on you. This stuff does not hurt my feelings. So move on pals.

• 43:50Speaker 00

  Skin is leather, man. Come on. You got a shot for my Covel? Bring it on.

• 43:54Speaker 01

  I am bulletproof to online criticism and half of it, I'll be like, someone will be like, your face looks like it'll be like, you know, there's probably a lot of truth to that. So, you know, again, who cares? But going back to the main question though, I do think that the world has gotten really complex. And I see this as a young parent. I've got a four and six year old daughter. I see people living around me, other young parents who we put so much pressure on ourselves to do these things. And live up to the new living standards of the world that being a participant in this world is in a lot of ways, just really hard. Like you could theoretically just have one car and you could theoretically just go live in a 1500 square foot house.

• 44:36Speaker 01

  But that's also when you're caught up, especially in the rat race of what does your neighbor have? It's really hard to accept that sort of a lifestyle and say, yeah, this is good enough and maintain perspective. But that gets into a whole other discussion about what is enough and how much do you need? And does the pursuit of more, more actually make anybody happy? And those are bigger questions than I can answer in this podcast.

• 45:00Speaker 00

  Especially choice, the nonstop choice. There's never enough choice.

• 45:05Speaker 01

  And there's always a better choice too, especially the way things are evolving.

• 45:09Speaker 00

  It's a perceived better choice. It's an argued better choice. I'm somewhat shell shocked when I go back to the States and I look at the state of so many Gen X that I know that are going through these brutal divorces. All this stuff. And I'm just like, what the hell is, you know, going on? It's a strange place that we put ourselves all addicted to the screens.

• 45:31Speaker 01

  I'll leave you with an optimistic perspective on AI because I think there's a lot of doomerism around it. I think the traditional labor market is really gonna struggle under this sort of technology. Because what this does is, for me, AI is the ultimate disaggregator in terms of the way that it actually gives power to small companies, entrepreneurs and people who are really creative. Because all of the sudden, like I'll give you an example of me personally. My firm is, in the grand scheme of things, relatively small. My firm has doubled in size in the last year,

• 46:11Speaker 01

  purely because two years ago, when I first started using ChatGPT, I didn't lean into it. I started building like all of my processes around it. Because I started building all of these algorithmic systematic processes to do everything. My entire investment management process is fully systematic. A lot of my financial planning process now is fully systematic, where I can just input numbers, it spits outputs. And what this does, and the reason I'm giving you this example is because it takes a very small firm like me, and it makes me very competitive with a much larger firm. Where now I can operate, you know, I used to work on a big team at Merrill Lynch. I would say, even as a single financial advisor,

• 46:53Speaker 01

  I would say I'm doing better work right now than a team of the five guys that we had at Merrill Lynch back when I was there. Just because I have the tools now to operate with such scope that I have basically assistants working for me through AI that they're better than the human assistants would be. And people who can really lean into that, especially small investors, entrepreneurs, small business operators, I wouldn't be shocked if there's a huge boom in entrepreneurialism. And I think people who really lean into this and really learn how to use it and embrace it, rather than treating it as this big scary monster that's gonna destroy the world or destroy companies. God, actually, I hope it destroys a lot of the big companies.

• 47:36Speaker 01

  That would be the best outcome in my world, is that McDonald's of the The world, these big conglomerates, they just get clobbered by the competition, especially going, God, let's go full circle here. Go back to the big law firms, the big law firms that we could just nuke half of the big law firms, because a single man operator can come in and all of a sudden operate like a 10 person law firm, because he's got the tools to be able to do that. Man, that is a way better world. But I spent 18 months of a lot of the last couple of years where I was basically up till 3 a.m. writing code and building systems and leaning into this and really learning how the weaknesses of it, especially impact things and constantly feeding it information and saying, hey,

• 48:21Speaker 01

  you messed this up, do it right. You messed this up, do it right again. And you get incrementally better and better. And I think that people who are willing to be really persistent with it and learn from it and lean into it are going to have a big advantage in the world of the future.

• 48:36Speaker 00

  I 100% agree. It's my experience too. Everything you're saying, it's so true. Small teams and individual, it is the ultimate piece of leverage. It is unbelievable leverage. It's free essentially. But here's the thing, though, that sometimes two entrepreneurs talking, sometimes we have to sit there and play this game of like, well, but you know, we're entrepreneur. But you know, when you're a big corporation of 10,000 people, that's the same for you too. No, it's not. It's not. It's not the same for you. If you're an individual right now, if you're an 18 year old kid, a 25 year old kid, a 30 year old kid, this is your gift. Maybe this is your way to get around all the crazy stuff that you and I've talked about in this conversation.

• 49:18Speaker 00

  But AI for the young people, you wake up and you've got this ability to do anything, to create anything. It wouldn't make any sense to me for young people to say, gosh, my goal is to go work for the big company. Have you looked at AI? Have you played around with it? Oh, right?

• 49:32Speaker 01

  It's crazy. A lot of colleges are pushing back against it. And I say, man, you gotta be teaching these kids how to use it. This sort of a tool is something that is going to be indisposable to them. It'll be the greatest learning tool they ever encounter. Then you get into another mess where, you know, the world is becoming so technologically Driven, you lose the ability to function in society. You can't go too much into it because then, but the end of the day, I do think that we're social creatures. We've got to be able to interact with each other and ultimately you've got to be able to sell yourself to other people. I don't give a damn what you've got working in terms of an AI product or service or whatever. You've still got to be able to

• 50:13Speaker 01

  sell that thing to other people. And that's a social interaction that is in large part learned through just doing it. And a lot of people are forgetting or never learning how to sell themselves and just interact like normal people now.

• 50:29Speaker 00

  That's also one of the negatives for the younger generations. I've noticed just in the last handful of weeks, if I open up any of these social media apps, I'm noticing a lot of ladies now, often beautiful women, who are now doing something with the filters and it's no longer human. Who knows where it all ends up. Hey, the book, Your Perfect Portfolio, The Ultimate Guide to Using the World's Most Powerful Investment Strategies. Cullen, where can we send people to check you out? The book, they can find it. Harriman House, easy to find. Where can we send them to come check you out?

• 51:02Speaker 01

  Harriman House, Amazon. I mean, I write at disciplinefunds.com is where I still sort of blog and I publish a newsletter called Discipline Alerts there. Some of that is just really sort of general thinking. It's typically popular, modern events or what's going on in the markets, things like that. But talking a lot about not just portfolio strategy, but these sort of big questions that we touched on today. So.

• 51:29Speaker 00

  We'll have to do this more. You know, I don't recall our conversation. It was a long time ago, our first conversation on the podcast. We didn't have video either. And you are the college professor interview. It's easier to kind of rope you in on video. But if I can't see you, it's hard to rope you in, you know?

• 51:44Speaker 01

  Hey, I think it's been like 15 years since the last one. We'll do it again in 15.

• 51:50Speaker 00

  Yeah, cool. Hey, Cullen, cool stuff. I appreciate it.

• 51:53Speaker 01

  It's great talking with you. Thanks for having me.

• 52:01Speaker 02

  I see a time when those awake will understand how to make money in up, down, and surprise markets. Whether a new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately, send me an email, [email protected]. I will send you the right trend following steps to take along with my free video. But if you want to buy and hold, trust the government and trust Wall Street, this is absolutely not for you.