Cullen Roche: I talk about how there is no such thing as passive investing a lot. More than I should, because it annoys a lot of people. But there's a lot of people who demonize passive investing, and I think for kind of phony reasons. And a big part of that is this fact that, you know, the reason I talk about and try to quantify the global financial asset portfolio is because I was trying to create a benchmark for if we were going to define something as passive as, you know, truly passive to me is you're buying the full market portfolio. You're not deviating at all. You're not making any active decisions at all. And so when you quantify the gap, you can actually create a benchmark there where you understand, okay, well this is the only if you are truly fully 100% passive, this is the only thing you would own. Everyone's active. And you know, there's very smart ways to be active and there's very stupid ways to be active. And I would say that, you know, a lot of the things, the most sort of disconcerting thing that I see going on these days is that I see the issuance of a lot of strategies, and especially with the rise of crypto, there's a lot of things going on that I would describe as stupid active, where people are more having like a gambling mentality approaching all of this than than anything else.

Joe Weisenthal: Hello and welcome to another episode of the Odd Lots Podcast. I'm Joe Weisenthal.

Tracy Alloway: And I'm Tracy Alloway. Tracy, I know like everyone is like really into what's the hot stock these days? Nvidia how do I play the AI boom? It's interesting. You can make a lot of money and get the right stocks.

Joe Weisenthal: I love the general topic of just like optimal portfolio construction, it seems like a fascinating puzzle to me how to fit different types of assets together in one coherent thing. It always felt to me like a study in behavioral science.

Tracy Alloway: Yeah, most because I think everyone always says, you know, just invest in an index fund. It maybe 6040, although as we saw in 2022, that has its own problems and we can talk about that. But I think this is like the one area in people's lives where they actually crave complexity. Right? Like it doesn't sound right to be like. I know, just. Put your money in an index fund and forget about. It.

Joe Weisenthal: I know it's like the simplest it's like the simplest investing strategy is the hardest. Yeah. For people, it's really hard to do like when you see people making life changing. An amount of money is like, oh, I was in, you know, SanDisk, right? And suddenly everyone wants memory for because of AI and they're up 500% and you're like, damn, you know, like I'm really happy with my 12% year that I've been making, but I really it's really hard. I was 100% invested in the leveraged Doge ETF. Right? Yeah. Right. Like if you did that and then you retired the next day, I'd be like really annoyed.

Tracy Alloway: I'd be like a fairly I'm sad, but but it is a fun puzzle. You mentioned 2022 and we saw, of course, what we've seen really since Covid, what we've really seen since, the worst inflation in 40 years is that some of these, portfolio constructions that worked very well for very long time, particularly anything that sort of resembles that 60 or 40 thing, which just worked so beautifully in the 20 tens. But even before it hasn't worked as well. I think it's still doing fairly well. But yeah.

Joe Weisenthal: So it gets you the question is like, well, I remember we asked Bill gross why even own bonds at a time? He was like, well don't. Yeah he don't. He's like, I'm in I'm in pipelines. That's where, that's right. I'm getting by or I'm in whatever my MLP is or whatever. That's how I'm getting my yield. But yeah, I think there's some real question about like why own treasuries, why or whatever, etc..

Tracy Alloway: Well, the other thing is timing, like this is the thing that everyone has to consider, right? So in 2022, if you were about to take out a big chunk of your portfolio to buy a house, or if you were a retiree and you needed to make some chunky payment, you were really, really unlucky in 2022. If you were, if you had taken everyone's advice and invested in a 6040 portfolio. So this is the other thing. Like you can try to smooth out returns, but your own spending is going to go up and down quite a bit.

Joe Weisenthal: There's one other issue that I think a lot about, with sort of the very standard, and it sort of relates exactly to this with the sort of standard advice. So in theory, it's like we're not supposed to time the market by the highs, you buy the lows, etc.. It was 2020 was a great time to buy. March 2020 would have been a fantastic time to buy. The problem is layoffs surged. And there's this sort of phenomenon where often the best time to invest in the market are when you don't have a job and you don't. Really need money. And actually, yeah, they always say, don't sell, don't panic, sell at the bottom. There's a good chance that's when you might need to sell. That's maybe when you lose your job or something. So I the the ability to sort of mechanically actually follow the rules is setting aside behavioral stuff. Just the ability to like have the income or have the ability to like, hold through drawdowns, buy the dips, etc. may not even be possible.

Tracy Alloway: Absolutely. Well, anyway, I'm excited to say we really do have the perfect guest, someone we've had on the podcast before. Also someone we've just known for a very long time. One of the most interesting thinkers in the realms of sort of investing in portfolio managing. And so forth, a voice of sanity, I would say, which is very rare these days. We're going to be speaking with Cullen Roche He is the founder of Discipline Funds, and he is the author of a brand new book called Your Perfect Portfolio about exactly this topic. So, Cullen, thank you so much for coming back on the podcast. It's nice to see you.

Cullen Roche: Nice to be here.

Joe Weisenthal: What would you rate this book?

Cullen Roche: Well, this is a problem that I've always run into throughout running my business is that I, I think as the portfolio manager and financial advisor, I've run into this issue where I'm trying to construct a model portfolio that is ideal for my business so that I can easily implement something, and then kind of just plug and play it in the client portfolios. And what I've realized over the course of managing money for, you know, however long it's been now, multiple decades, is that everyone's different and everyone needs their own level of customization. And so it's very hard to just take a model portfolio and then plug and play in the, you know, the kind of funny thing with the financial services industry is it's largely built around these ideas that you take a product and then you sell it to the client. And oftentimes what I find is that when you're trying to sell the product to the client, it just doesn't mesh with their needs. And so everyone needs to find their own perfect portfolio. So the book isn't titled The Perfect Portfolio. And the purpose of the book really is to what I do is I go through a number of sort of famous portfolios, and some of them are very boring and some of them are more sophisticated. But the overarching ethos of the book is that you have to sort of understand all these different approaches, and then you can plug and play the way that you want to build your own perfect portfolio so that it works for you.

Tracy Alloway: One thing I'm curious about, because, I've never had a professional financial advisor or anything, but how do you actually evaluate your client's needs? Like what do those questions look like? I imagine, you know, they're probably a lot of finances involved, but are there questions like, how do you feel about losing 40% of your portfolio in a single year?

Cullen Roche: That's actually that's my my very favorite question. Okay. The question I hate the most because for, I don't know, 20 years, I used to print out these phony risk profile questionnaires and I would send them to people. And one of the questions is always, you know, how do you respond to a market that falls 30 or 40%? And literally 98% of people will answer that question the exact same way, because they know the right answer. They'll say, oh, I stay the course, I will buy the dip or whatever. And then Covid happens and, you know, 50% of my clients are calling me like, this has never happened before. What the hell do we do now? This is terrifying. We need to sell everything right? And I'm there, you know, and even I'm looking at that, and I'm kind of like, you know, because in the throes of it. Yeah, that's the hard part about investing into a bear market, especially when it's actually going on. It all feels right, feels justified. Totally. And you're looking at it. One of my favorite charts in the book is a chart of the Great Depression downturn, and it shows this like horrific 80% downturn where the market just went down like every month for basically 3 or 4 years, and it goes down a full 80%. And when you're in the throes of that sort of 30 or 40% downturn that we saw, say, during the GFC or during Covid, you're thinking to yourself, well, wait a minute, I know that this the market has gone down 60, 70, 80% in the past. So if we're at 40, that means we probably have another, you know, 40% haircut or cut coming down the line. And so that's the psychology of it when people are actually in the middle of it. And I remember vividly during Covid because even people like Buffett and Bill gates, like some of the the most practical thinkers in the world, they're sitting around there saying, this has never happened before. We've never seen this. No one living has seen what is going on right now. And so it all feels rational. And then, you know, so from a risk profiling perspective, it's really difficult because that sort of subjective nature of it all is really sort of irrelevant, because when you're actually in it, it all will feel totally rational.

Joe Weisenthal: Now remember thinking that even like obviously April of last year during, the brief but very sharp selloff, after Liberation Day and it's like, well, Trump just changed the rules of capitalism. This is going to be this is really different or going back to Covid like the yeah, we all say we're going to, just hold through the downturn. But in that moment we're like, oh no, this isn't really this is well, this is not like the other sell. This is different. This is not like.com or there was just an overvaluation. This is not like 1991 when we had a fed engineered recession. This is something different. The old rules about buying and holding must not apply this.

Cullen Roche: Yeah it's funny. You know, I see a lot of people get mocked. A lot of the analysts back then were, you know, they were changing their estimates and they kind of, you know, after the the tariffs more or less got scrapped. They then, you know, up there at their estimates for the year on targets. And in retrospect, that looks kind of stupid. But in the throes of it, if you remember, like they were saying they were going to replace the income tax. Yeah. Oh yeah. Like I'm writing, you know, they're doing the math on that. And I'm like, wait a minute, that's a $2.5 trillion corporate or a tax increase. Like that's a gigantic number, an incredibly frightening number if it's true. And then, you know, of course, the CEOs of Home Depot and Target and all them walk into the white House, they're like, do not do this. And so they're still doing the tariffs and they're still impactful and they're still a corporate tax and whatnot. But they're not nearly the size that you know they were going to be. You know, they were claiming to be. And so the that frightening moment where, you know, they announced that, you know, got quickly scrapped. And you know, when they, when they were kind of reversed course on it.

Tracy Alloway: I feel like we should note here that we're recording on January 8th, and we are expecting the Supreme Court to make a decision on the tariffs. So the entire game could change again. Change again. Yeah. You mentioned the Great Depression. And one thing I thought was really interesting in the book is you talk about how no one really quite knows the origins of the 6040 portfolio, even though it's become fairly standard in finance, but you trace it back to the Great Depression. So tell us how you did that.

Cullen Roche: Yeah. Well, I don't know if I did do it correctly, but it was kind of a guess. But I you know, I found that so fascinating that 6040 is arguably the most famous portfolio of all the portfolios. And we all probably own something that kind of looks like 6040 at some point in our lives. And it was actually Corey Hoff Steen from, who, manages the return stacking ETF that he asked on Twitter one day, where did this thing come from? And there were hundreds of responses and none of them seemed right. And so I just had so happened to be writing the book at this time, and I'm writing the chapter on 6040, and I started digging into it and had found the story about this guy named Walter Morgan, who's running a fund called the Wellington Fund and Wellington Fund, obviously, you know, famous because it turns into a Vanguard fund later is run by John Bogle, who some people may have heard of and he's doing this, though in a very unusual way, back in the depression, where during the depression, equity investing was kind of the dominant way to actually allocate assets. And Morgan had been burned before that. And so he goes into the Great Depression. He launches the Wellington fund right before the depression. But he does something really unusual. He adds a huge chunk of bonds to the portfolio, and the thing gets crushed in the depression, but it gets crushed way less than everything else got crushed. And so then all of these research analysts are starting to look at, you know, kind of, you know, picking through the dust of the Great Depression and the returns there. And they're noticing that, hey, this fund did really well in the relative sense. And so Morgan's fund kind of takes off because of this, because the relative performance was so good. And then the story is interesting because then Walter Morgan hires John Bogle. Bogle runs the Wellington Fund through, you know, the fund goes through the World War two when the, the boom of the 1960s and then the scary inflation of the 1970s, Bogle actually does something really weird. He turns the fund closer into like an 80, 20 fund kind of chasing performance, and which is sort of like antithetical to everything that Bogle ultimately is kind of known for. And then we all know the story from there. The 6040, from 1980 to, you know, present day has been, you know, kind of like one of the best performing portfolios ever. So it's, you know, through all of these trials and tribulations, though, this portfolio has done incredibly well, and I traced its origin mostly back to the Great Depression in the way that Wellington Fund was sort of built as the first real balanced index fund.

Joe Weisenthal: It's actually you zoom out or back up a little bit and talk theory, because you said that many of us or most of us will have some portfolio that is 60, 40 ish, but then there's going to be various modifications and people are going to, want to slug of real estate or commodities, whatever. But what do you talk about? Maybe from the academic perspective, like what is the 6040 portfolio really is? And like what is it theoretically achieved that is given it this sort of it's Lindy, this sort of enduring effect that it accomplishes. Go and talk to us about like why from the perspective of a planner, maybe it's not perfect for everyone, but it has certain qualities.

Cullen Roche: Yeah, this is a good portfolio to me. The 6040 is like the good enough portfolio. It just to be just to define it. So a 6040 portfolio means basically 60% equities and 40% treasuries. Exactly. Okay. But talk about why it's good enough. What is it. What are the properties of it. So it's the portfolio that by owning 60% stocks you will you'll do well enough. You'll capture enough of an equity market bull market. And also conversely, during a bear market, because of the 40% bond slice, you typically will buffer the equity volatility in the portfolio just enough that you won't capture all of the downside. And so it's it is balanced in this way that it it doesn't capture all of the upside or all of the downside and kind of can help you stay the course. I talked specifically in one chapter about something called the Global Financial Asset Portfolio. And I really like understanding this portfolio, especially from like a theoretical perspective, because the most interesting thing about it actually, is that nobody owns this portfolio because it's mostly, investable or you can't fully invested. And it's actually, you know, I talked to a lot of famous researchers about this topic when I was researching the book, and they all kind of concluded that the screwy is part about actually quantifying that portfolio is that it's actually really controversial how to quantify it, because all of the assets in that portfolio are not investable. So, for instance, like China, A-shares are not necessarily investable for foreign investors. And there's lots of assets that are held by, you know, the Swiss National Bank owns a lot of assets that make the assets they're own investable. And so, you know, the fed has been buying a lot of Treasury bonds. So technically you could say, you know what happens to the market cap of outstanding bonds when the fed is the owner of a lot of these bonds. And you can start getting into these sort of very academic theoretical debates about, well, what is the market portfolio and what's actually investable versus UN investable. And it's especially interesting from like a, a theoretical. And in theory, that portfolio includes like gas stations in Burma, right? Yeah. Well, God, if you go into all of the assets, you know, I did financial assets on which I kind of excluded all the non-financial assets. So things because then then the whole portfolio kind of turns into a real estate portfolio. Okay. So basically everybody's houses is everything that we own. But from a financial asset perspective, it was really interesting because especially when you look at things like the full cap versus the free flow, which is basically the the actual assets you can invest in versus the portfolio that is actually the issuance of outstanding financial assets. These portfolios are really different. And if you like, for instance, in today's environment, the outstanding market cap of of stocks versus bonds is roughly 6535. And when you look at the, sorry, the equity market, when you look at the the U.S. versus foreign, it's 65 versus 35. But when you look at the actual issuance, the full cap, it's almost the opposite. And so the U.S is way smaller from a full issuance perspective, but from an actual investable perspective, the US is, you know, what we call like this extraordinary market, this unusual, huge part of the full market cap and which is weird to think of because when Vanguard and some of these big index funds create these products, they have to issue what is investable. They can't just say theoretically, like I sometimes will tell my clients, well, hey, if you want to actually own the true market cap portfolio or the market issuance portfolio, you should actually be closer to like 40% U.S, you should be underweight the U.S. market versus foreign in this environment because that actually is representative of the full issuance. Whereas if you're Vanguard and you're running this index and you have to buy what has actually been issued, it's almost the exact opposite and you're way overweight. U.S so you get into these interesting sort of like theoretical debates about how to even do this in the first place. I want to talk more about illiquid assets like real estate, because for most people this is their biggest investment, right? Their actual house. But before I do, you just reminded me, gold. So in the book you talk about gold as like one of the true uncorrelated assets. But of course, over the course of last year, it looks like a momentum stock. Right. How are you judging gold at this moment in time? You know, gold and commodities are really hard to compartmentalize into the portfolio construction process because I typically think of commodities in general as they're just they roughly track inflation because they are just cost inputs in, you know, corporate, you know, costs. And so they should roughly reflect something close historically to the rate of inflation, which is pretty close to what the data shows. Gold is a really screwy one because gold has this whole other element to it where there is huge swaths of the population that view gold as money, even though, you know, in a modern monetary system, you could argue that gold is actually a pretty terrible form of money just because it's impractical to use for the most part. So it's it's got this store of value in this sort of I refer to it as a faith put inside of it, where its price almost gets like a premium because it's not just an input in, you know, cost inputs. It is something that people believe in, that people hold and people have demand for because it's got this other strange use. And so it's weird in the context of today's environment. Another concept I talk about is I talk a lot about time in the book about how important it is to think about portfolios and asset performance across time horizons. And, you know, I do a lot of asset liability matching, and that basically entails working with somebody where I'm quantifying liabilities and expenses over time horizons, and I'm matching assets. And in not dissimilar way to like maybe a big pension fund would or banks might operate. And that's all about understanding time and an asset liability mismatch. And if you get that wrong you end up like Silicon Valley Bank and which you. Talk about in the book. Yeah. And the interesting thing about even like a retail investor, you know, and it took me for, you know, two decades working in the business to realize this, that the better way to go through a risk profiling process is not to ask people phony questions about the subjective nature of how they feel in a bear market or something like that. It's figuring out it's solving that asset liability mismatch. Because what happens to an investor when they go through a bear market is they're realizing that they own too much of. I refer to equities as long duration instruments. Corporations are very long term entities by design, by function. And when someone owns 100% stock portfolio and they go through a big bear market, what happens to them is they're if they get scared, they're realizing, I don't have enough safe assets to make me feel comfortable with this. So if they own the 40% slice like the 6040, maybe they feel more comfortable. Or if they own, you know, there's a whole chapter on what I call the T-bill and chill portfolio, which is like the Liquid Reserve portfolio.

Joe Weisenthal: You know, I heard a story. I don't know if it's true. It, speaking of 2 billion. Sure. Though, I don't know if it's true, but because I heard the second hand, someone was telling me there was, like, some famous, like, very, very successful trader, like Goldman Sachs, who was, like, trading commodities, pulling down millions and millions of dollars each year. And he just, like, had all his money in T-bills. He's like, look, I don't need like my I make a ton of money. I just like basically want to save it. I don't know if that's even true, but I do wonder. So when we were talking about alternate ways of assessing risk profile, do you think about like try to get a sense of the client income volatility. So like maybe someone who, you know, a federal judge who is going to have a job for life, etc. at a guaranteed pension, maybe they don't make a ton of money, but you were very confident that you could predict their income for the next 50 years. Maybe. Whereas someone who makes a lot of money, but they're like a real estate developer in Miami, and the odds of those guys going broke every ten years is pretty high, etc.. Talk to us about like sort of that role of calculating expected.

Cullen Roche: And yeah, it's. It's arguably, I would say the most important part of the whole equation because one of the things I talk about in the book is I frame your human capital and your income as a literal fixed income allocation. So I almost like to think of your income in your job as like a bond allocation. And so in the context of like, you know, someone like you're talking about or let's use an even simpler example of someone who's, you know, 25 and they make a decent amount of money. That person not only has a really long time horizon, but if they've got a really stable job, they've got this embedded fixed income allocation that maybe they don't actually quantify it like that on a, you know, portfolio statement, but. That has a net present value. That's exactly, you know, so if the the really simple example is if you make 100 grand a year in, you know, you could almost think of that as I've got $1 million bond that earns 10% a year. And what that does, especially if it's a very stable fixed income, it frees up a huge amount of behavioral bandwidth for you to take other risks. And that's one of the arguments why, if you're 25 and you've got, you know, 40 years to retirement or whatever, and you've got a stable, you know, solid income, well, you can think of your, your income versus your balance sheet as being super stable, which allows you to take a lot of risk with your balance sheet that you might not otherwise have. And that's another thing I talk a lot about retirement planning in the book, because the thing that I've seen very front and center is that when people get close to 65, that income issue becomes hugely important because people start to realize that, oh, crap, that fixed income allocation that I've had all these years, it's about to just disappear overnight or it's about to shrink down to whatever your Social Security income is or whatever. And so people go through this sort of psychological mind trick where when they near retirement and then enter retirement, they struggle with that, you know, adapting to this big, big change in their income because they're realizing that, hey, I don't have this fixed income that I could fall back on for the last 40 years.

Joe Weisenthal: Is investing time horizon more important than macro? Because in the book you do talk about the importance of macro. But on the other hand, if people are reacting to a changing economy all the time, then that looks a lot like what you're not supposed to do, right? Yeah. I mean, gosh, I generally in my practice I am constantly trying to downplay macro he cod and geopolitics and things like that. I mean, it's funny, you know, the reason that I probably even know you guys is because I've written so much about macro econ and I'm not an economist, but people, I think, sometimes think of me as a macro thinker, in large part because I've spent so much of my career fielding bad questions about, you know, hey, is the US government going bankrupt or you know, what is going on with China? And I'm trying to sort of write about this stuff, not because it's important in this, the, you know, the context of portfolio construction, but because it's more so about understanding how these things operate it, more of a sort of a first principles level where you can you can look at a bond allocation if you own a huge slug of, you know, U.S. Treasury bonds, for instance, or T-bills, you know, you can look at these things when you understand them more mechanically, you can look at these things and say, okay, well, the odds of the US government actually going bankrupt are extraordinarily low because I understand how these things function. I understand that the the U.S government is not going to run out of money. I understand that, you know, maybe bond vigilantes aren't quite as powerful as we've all been told. And you can understand these things in the context of owning something so that you're more comfortable with what you're doing. And that's that's actually the hardest part about all of this is that it's all very complex and it's all very emotional. And if you don't understand what you own, then you won't be comfortable with it and you won't stick with it. I bought a house in 2016. I think it's done all right, but sometimes I'm like, man, I really wish I just put that all to Q-q or something like that. And then the other thing with houses that I think is interesting, which is like you could look at maybe I'll say you own a house outright and it's like, oh, this is worth $1 million or something like that. You can really sell it because then you have to buy a house. And so it's like, I'm not even sure, like I got to live somewhere. And so I know you can't monetize that to the same degree. You could, you know, sell your stock and buy stuff. But talk to us about how one should think, let's start that, how one should think about the role of their home in their overall portfolio.

Cullen Roche: It's the hardest asset to buy, I think, because it is it's an instrument that you want to generate a return on. So you want to do like some financial analysis on it and, you know, try to nobody wants to buy a house in, you know, 2007 or something and then see it go down 30%. But also your house is where you live. It's where you're going to raise your kids and you're going to eat most of your meals, and you're going to do all the little boring things in life that are actually really important to you. And so there's this really personal part of it that it makes the to some degree, it throws all the financial math out the window. But from a basic, you know, first of all, going back to your 2016 purchase, I would say, you know, that was unbelievable timing because. Oh, thank you. For the. Thank you. The you could argue that going through Covid, I mean, any house that was leveraged, did you have a mortgage. Yeah. Yeah. So any house that was leveraged was the best inflation hedge right. Maybe maybe the best inflation hedge trade of the last 50 years. You could argue just in terms of just providing this stable level of certainty. Yeah. You know the low mortgage is an inflation hedge. The you got 50% price appreciation or probably something like that. So but that's interesting too, to think about that when you're kind of going back to the question of gold that I didn't fully answer. What happens when an asset goes up so much in the short term? The way I like to think of it at least, is that let's say that housing typically generates, a low real return or, you know, even historically it hasn't generated a real return. The way that I like to think about things like that are environments where you get these, what I call a price compression. You get a huge boom in an asset class. And it's it's almost easier to think of this in like a fixed income market where like when the when the bond market goes down, a lot of interest rates go up. The math completely changes on. All right. So a lot of people these days are saying like bonds are dead. And I would say like no, bonds are actually probably more attractive because mathematically from a yield perspective relative to the falling price decline, the the future returns are much more stable now, much more probable. And so what happens in an environment where you get a 50% increase in real estate or a, you know, what was gold up last year, 65%? You know, let's say that let's just be generous and say gold is going to continue to do 8% per year for the next, you know, however many years when you get 65% of that return all crunched down into one year, I think what happens is you create a higher probability of what a financial advisor would call sequence of returns risk, which means that the probability that the future returns are going to be much more volatile becomes much higher. And so that's one thing with real estate is that, like, I'm not super optimistic about future real estate prices for now because we went through this big boom. It creates this price compression and you get lots of returns into one year all crammed up. And that means that the likelihood of either sideways or sort of, you know, not great returns is is pretty probable. So, you know, going forward, you know, I think that it's, it's good to think of your house as basically a, it's a block of commodities, and an appreciating piece of land. And, you know, the thing that's important with real estate is I talk about this a lot in the book, that you have to think of everything in terms of real, real returns. And that means you have to back out inflation and you have to back out all the other costs.

Joe Weisenthal: Can we talk a little bit about tech stocks for a second. Because this strikes me as very important. And I think about this all the time. You know you see these surveys is that Bank of America does have fund managers. Like what's the most crowded trade in the world. Tech. They've been saying that since like 2013, you know, and it's still just performs. And all these other there are all kinds of other knock on things, you know, it's like people talking about U.S versus international exposure. But at the end of the day, this is sort of just a bet on tech when we're talking about the U.S. And the other thing I think about tech a lot is that setting aside sort of theories of portfolio construction, these companies make gobs of money and they make more and more and more and more each year. You know, we recently did an episode and, Ben Snyder, the top equity strategist at goal of Goldman was on. He's like, well, the big tech companies, it's like 33% of S&P 500 earnings. And I listen to that. It's like, well, that's another 67% of total earnings for them to gobble up. But it strikes me that like can you just tell it like it must drive portfolio managers crazy that there's this one sector and you know, this is a novelty, right? Because these are big companies that are growing faster than almost anyone else, which is not the case in many environments. When we associate big companies with maturity and slow growth. So like there is this thing going on for years and years and years that just sort of feels to bust every other strategy. And if not overweight tech, they're probably underperforming.

Cullen Roche: Yeah. And it's really it's frustrated the hell out of people, especially the factor investors who haven't been in the momentum trade, who have been more value oriented or, you know, the people who know that small has outperformed large in the long run, like it's all been flipped on its head. Yeah. So I again, going back to the the time horizon thing the way that at least I try to think about this is tech and growth is really interesting in the current environment because in going back to the Nasdaq bubble, you can actually, you know, a lot of people make that corollary. And the interesting thing about the Nasdaq bubble is that if you bought the very tippy top of the Nasdaq bubble and held on to today, you've made like 8% per year. This is great. You've done really, really well, which is crazy. But you had this crazy sequence of returns risk because yeah, yeah, especially in real terms. You went through this traumatic like 15 year downturn over that period. But the so the interesting thing, you know, compared to then is that, like you said, these entities are completely different. Like everybody was expecting the internet to be a big thing. And it was. And everybody expects A.I. to be a big thing. And I think it will be. But the interesting difference between that environment and this environment is that these companies are they make more money than any entities have ever in human existence. So this is completely different than they did every year. They beat analyst expert. It's crazy. And they're growing crazy crazy fast. So it's almost unbelievable. But the the thing is kind of going back to that whole idea of like price compression and thinking about time horizons. The way I think about it is that and I write about this specifically in, in probably my favorite chapter to write in this book was an original strategy that I call the forward cap portfolio. And what I did was I took five huge macroeconomic trends, and I distilled them all down. And I tried to extrapolate data out into the future. And one of the big ones is tech, where I look at something like, e-commerce, retail sales. And I say, you know, this is currently whatever it is, 25% of all e-commerce retail sales, as a percentage of total retail sales, it's 25%. And that number, you know, is probably going to go to 50 or 60 or 70% at some point in the future, all retail sales will just turn into e-commerce sales at some point, like you said. Like, you know, this is there's 75% more for e-commerce to double up. I believe. That. And so if you believe that and you want to buy technology, well, what should you own? Should you own the market cap weighting of 35% like it is now in the S&P 500? Or should you go to like 50 or 60%? And the way I kind of frame it in the book is it's skating to where the puck maybe is going, rather than when you buy a market cap weighted index fund. What you're doing is you're basically skating with the puck, which is it's a good strategy. It works really well, but you're not necessarily trying to skate to where the puck is going. And so I'm doing a lot of guesswork. It's obviously very active. And, you know, there's a lot of there's a lot of estimates that are involved in all of this. But if you think forward, like, I don't think it's unreasonable to say that in 40 or 50 years, the market cap of technology in the S&P 500 might be 5060, 70%. Who knows? Like everything's probably turning into a two years. But the tricky part about that is that when especially when valuations are really high, I talk about how valuations are the equivalent of high expectations. And when expectations are really high, it doesn't take much to disappoint. And so your your margin for error when expectations are really high is just really low. And so what that does is it causes this potential where you have higher sequence of returns risk in the short term, where, you know, I would say if I'm talking to, you know, a 20 year old who's coming out of college who just got a great job on Wall Street or something, I might tell him, well, hey, your your time horizon is so long and you could be so aggressive, you should maybe just go buy a growth fund and just, you know, lose the password to your brokerage account for, like, four years. Yeah. And open it up and you'll probably have done really well. But if you look at that thing in five years, it might be down 50%. You don't know. And so that's the way I kind of frame it. And so if you're if you're very time sensitive, I would say, you know, the the retiree who is retiring next year and they're loaded to the gills with Nvidia and Google and Microsoft. That person has a totally different risk exposure than that 20 year old does.

Tracy Alloway: How do you think about the index providers in this equation? Because, you know, there's this perception that you put your money in an index fund. It's a passive investment, but actually it's kind of active because the index provider is making decisions about what to do. And I know the index providers always say they're just holding up a mirror to the market. But, you know, some of that seems very subjective to me. Like whether or not you're going to add Chinese bonds into a debt index and things like that, are we just outsourcing our investment decisions to the indexes. To a large degree?

Cullen Roche: Yeah. I mean, I, I talk about how there is no such thing as passive investing a lot, more than I should, because it annoys a lot of people. But there's a lot of people who demonize passive investing. I think, for kind of phony reasons. And a big part of that is this fact that, you know, the reason I talk about and try to quantify the global financial asset portfolio is because I was trying to create a benchmark for if we were going to define something as passive as, you know, truly passive to me is you're buying the full market portfolio. You're not deviating at all. You're not making any active decisions at all. And so when you quantify the gap, you can actually create a benchmark there where you understand, okay, well, this is the only if you were truly fully 100% passive, this is the only thing you would own. And the funny thing is nobody can buy this thing and nobody does buy this thing, because even at a stock bond, weighting the stock versus bond weighting right now is something like 4555. So you're you're inherently underweight stock. So it's not even that close to even like the 6040 portfolio. And so everybody deviates from this. And I write about how that's totally fine. There's nothing wrong with deviating and there's nothing wrong with being a little bit active. And so even from the indexing perspective, though, like, I laugh at like the, you know, the way the S&P 500 is constructed, it's, it's a committee of people that are constantly picking and choosing which firms to introduce. And it's very methodical. It's, you know, very data dependent. So it's a very systematic sort of process. But at the end of the day, they're choosing the 500 companies that go into that index in the first place. And so, you know, in the context of the global equity market, it's even more interesting because they're excluding thousands of other entities just, you know, by their own volition. So everyone's active. And, you know, there's very smart ways to be active. And there's a very stupid ways to be active. And I would say that, you know, a lot of the things, the most sort of disconcerting thing that I see going on these days is that I see the issuance of a lot of strategies, and especially with the rise of crypto, there's a lot of things going on that I would describe as stupid active, where people are more having like a gambling mentality approaching all of this than, than anything else. If we had like another hour, actually, I would love to just pick your brain about the investment advisory business, like less than the portfolio construction per se, and just how this world works, because I have so many questions about that. But have one. And, you know, we've seen you we run into every once in a while down at the Futureproof conference in, Southern California and, you know, or there's a lot of advisors and then there's a lot of vendors and they're selling various products. And one of the things that we know that they're trying to get people excited about owning private assets or, you know, various alternatives, etc., non vanilla things in your perspective for most clients that you see, is there like a compelling reason for some of these novel products or for some of them to include like, yeah, private credit, private assets, private, whatever it is, do these solve problems for the portfolio manager, for the investment advisor that the existing publicly, liquid assets don't provide? Yeah. 2022 messed a lot of people up because when stocks and bonds become highly correlated and you own that 6040 portfolio that, you know, the bonds go down 15% or whatever, and the stocks also go down 25%. Well, then you look at your portfolio at the end of the year and you say, well, I don't own I don't I'm not actually diversified. If you were that retiree that you mentioned, Tracy, that is retiring that year, you feel like you made a bad decision, even though the 6040 portfolio, for the most part, is a pretty good portfolio. And so there's this there is an increasingly compelling argument in that context for things like alternatives. I, I mean, me personally, I tend to just sort of default towards simple is better because I think that this whole process can get so complex so quickly that the little things you can do to create organization and structure, to simplify it as best as possible, is going to result in a better process, a better outcome in the long run. So, you know, little things like, I mean, God, I woke up ten years ago and I looked at me and my wife's financial accounts and I was like, oh my God, we've got I've got a mirror, an old Merrill Lynch for okay. And I've got, you've got old fidelity for one case and you've got your bank account over there. I have a bank account over here. We've got three brokerage accounts that Charles Schwab and you know, different custodians, TD Ameritrade or whatever it might be. And I was like, this is I can't manage all this. I've actually forgotten the password to some of these accounts or something. And so collapsing all this down and consolidating it and simplifying it and trying to own, you know, something that is very, very simple. I one of the portfolios I talk about is the bogle had three fund portfolio in the book. And I think one of the reasons that so many people love that and those the followers of that portfolio are they're very, almost militant about it. And I think in part because it is so simple that it is it's just beautifully sort of elegant in its simplicity and but then you could get into debates about is it too simple? What is it? The Bogle had three. It's basically a bond aggregate. And then and you can mix this up, you know, in different slices based on your risk profile. But it's three funds. It's a domestic equity fund a foreign equity fund. And the bond aggregate. And these investors will buy this and they'll buy it for, you know, costs like three basis points or something in total. Yeah. And so it follows like all the sort of like Taylor Laramore was the founder of it. And Taylor was he's someone I interviewed in the book and he's not he wasn't really in the financial advisory business. But what he he became great friends with Bogle over the years because he was just emailing with him. He had a actually a funny backstory where he, he comes back from World War two and, he fought in the battle of the bulge and jumped out of airplanes and had all these cool stories about it. But he, he comes back and I guess he married like the hottest woman in Miami or something. And she was a model, and she's making crazy, crazy amounts of money modeling. And so he comes into all this money and he doesn't know what to do with it, and he hires a financial advisor who hoses him and he starts emailing John Bogle. And Bogle, then starts telling him, like, now you should be doing this, this and this. They become great, great friends. Bogle ultimately crowns him the king of the Bogle heads later in life. And so he's kind of like the most famous of all the Bogle heads now. And but he distilled all of Vogel's thought processes down into, like, the simplest of all possible portfolios, which is this famous three fund portfolio. But it's arguably I, I am finally critical of it because I would say that to some degree, there is such a thing as too simple also where, for instance, like if you own the three fund portfolio in 2022, you probably wish you owned some of the T-bill and chill portfolio, or maybe you wish you owned, you know, something completely uncorrelated, like the trend following portfolio or something, you know, that added a little bit of diversification that kept you, you know, helped you sort of stay the course, as Bogle would say.