#1 - Introducing Your Host: Alex Shahidi

0:06Welcome to the Insightful Investor Podcast, a weekly series that seeks to share industry investment and market insights. We define insights as concepts that are counterintuitive, widely misunderstood, or underappreciated. In other words, unique ideas that you probably won't hear elsewhere. I'm Alex Shahidi, the host of the podcast and co-CIO of Evoke Advisors, one of the nation's leading investment advisory firms. Learn more about our show at insightfulinvestor.org.

0:43This is episode one of the Insightful Investor podcast. For this first episode, I put myself in the hot seat to give listeners the opportunity to learn about the host. Hopefully that will be interesting and helpful as you listen to future podcasts over the coming weeks, months and years. I thought it was only appropriate to invite my partner of the last 10 years and co-CIO of Evoke Advisors with me, as well as a good friend, Damian Besserier. Damian, welcome. Thanks for joining us. Thanks for allowing me to be your initial guest on this podcast. Absolutely. Damian, why don't you quickly introduce yourself before we jump in?

1:32My name is Damian Besserier. As Alex said, we've been partners for 10 years, known each other for 20 years. I work closely with Alex overseeing investment research at Evoke Advisors, which is a large registered investment advisor in Los Angeles. And I'm excited to allow the listeners to get to know you at least a little bit as well as I know you. Sounds good. So to get started, Alex, tell us about your background, what led you to this industry? I think there are four characteristics about this industry that initially attracted me to it and have kept me here 25 years later. This was basically my first job out of school, being an investment advisor, and I haven't changed course since.

2:23So I think there's got to be something really interesting and attractive about this industry to bring me here and keep me here. So I think the first one is I've always been a numbers person. and obviously there's a lot of numbers involved in managing portfolios and falling markets. But one of my early discoveries was being a numbers person, I kind of saw the world in black and white. And anytime something came at me, I felt that I needed to categorize it and put it into something clean and organized. And I learned early on that the world isn't always in black and white. There's a lot of shades of gray.

3:05And I kind of understood that and started to realize that early in college. And so I decided to go to law school. And my intention was never to practice law, but I wanted to go to law school because in law school, they teach you the shades of gray. If you ask a lawyer a question, the answer always begins with, it depends. Depends on this, depends on that. There's no clear answer. They operate in the shades of gray. And so law school trains you to think like a lawyer. So I went to law school to develop that side of my thinking. And if you think about the markets, there's a lot of black and white, you know, there's the science of it, and then there's a lot of art and the shades of gray.

3:43So I think that is something that has been very attractive. I've always, you know, since I was a little kid, as far back as I can remember, I've always wanted to have my own business. I view it as you decide what craft you want to get involved with. You want to try to master that craft. You want to try to service your customers, your clients. And in this business, regardless of where you work, I feel like you effectively have your own business because the person you're serving is your clients. I started my career at Merrill Lynch. I worked at Merrill Lynch, but I always felt like I worked for my clients.

4:17And I do the same today, even though I have my own business. I feel like the client is the boss. And my job is to try to master my craft in service of that client. So this industry lends itself well to that framework. I've also always been a naturally independent thinker. I don't necessarily, you know, when I see the way convention works and the way things are being done in any industry, I don't automatically assume that's the best way. Oftentimes it is, but many times it isn't. So I approach it from a fresh perspective And I think the investment industry in particular lends itself well to new perspectives, not following the herd.

4:59A lot of this podcast is going to talk about conventional thinking and some of the flaws in it and different perspectives. So I think that part keeps me engaged and has been for 25 years. and then also sort of related to that and finally is that you know this industry has an extremely steep learning curve you know I'm the type of person that if I get involved in something and I feel like I've gained mastery in it and I'll quickly get bored you know at first you're excited that you reach that level but then you get bored and you want to move on to the next thing in some ways I feel like that I have more to learn now than I did when I first started And I think you do that by surrounding yourself with smarter people than you, talking to great minds, learning from them, opening new doors into universes you never even knew existed, and then you realize how little you actually know.

5:56So this industry has an amazing ability to constantly keep you on your toes. You're never going to master this craft, but you can spend your career trying to get there. And that's what keeps me motivated. Yeah, from my vantage point, and like I said, I've known you for 20 years, I've never seen you work harder or been more excited about what we're doing. And so that enthusiasm is infectious. And I think it speaks to the never-ending challenge of understanding the world and how it works and seeking out new and fresh perspectives. One of the things that's always stood out to me with regards to you is that you have this ability to see the forest from the trees that I think is very unique.

6:41As far back as I can remember, you've pointed out things that, you know, that kind of sound along the lines of everybody else does it this way, but that's wrong because of this. And it may have been a perspective that I hadn't really thought about and seems so obvious once you mention it, but it wasn't obvious to me nor most of the investment public before you had said it. And so I think this podcast should be a really great venue for you to share those insights, not only your own insights, but the insights of some of the smartest and most accomplished investors in the world. Tell us, what are some of the things that have surprised you or that people may find surprising about the industry?

7:27There's a long list. I'll name a few. The first, and I think is, if you think about people in this industry who are experts, and this is all they do, you would think they'd be better at predicting how markets are going to behave. And one of the really interesting discoveries through time and through experience and through talking to really smart people is the best investors are wrong all the time. And I think it's because markets can be irrational for an extended period of time. The future, believe it or not, is hard to predict. And I think for somebody who isn't on this side of the business, it can be easily misunderstood that somebody who is an expert has a better ability to predict the future.

8:14So I think that part of it is really interesting. And that should keep you humble all the time. And I think as a result of that, one of the really fascinating parts about this industry is from the outside, it's really difficult to differentiate between somebody who's mediocre at their job versus somebody who is exceptional. And if you think about it, just about any other industry, if you talk about medicine or architecture or sports, somebody who is really good that excels in that industry, it's obvious that they're good. And it's obvious almost all the time. Maybe they make mistakes here and there, but it's obvious.

8:53And the ones who are mediocre or poor performers, they really stand out and it's clear. In our industry, you could be a brilliant investor and be wrong for a year, for five years, you could be wrong for 10 years and look like an idiot until you're proven right. But that's indistinguishable from being wrong and not being a great investor. And likewise, you could be a terrible investor and do well for an extended period of time. And so it becomes very difficult to differentiate from the outside. And even from the inside, it's difficult to differentiate. So that's a really interesting concept. concept.

9:35A lot of this industry is counterintuitive. It's widely misunderstood. It's underappreciated. And a lot of it is because it's so different from the rest of the world. And I think part of that is because markets are relatively efficient. The information that we have, by and large, is priced in. And what happens to markets is dependent not only on what happens in the future, but how that relates to what was expected to happen and how the expectations of the future from that point forward shift. And all those things are very difficult to predict. Like, for example, one of the things that I think is just fascinating is markets are inherently cyclical.

10:14So the best periods tend to follow the worst periods and vice versa. And that's with asset classes as well as managers. It's really hard to consistently outperform. And it's also very hard to consistently underperform because there's a lot of randomness in the returns. And so the natural response to that is somebody's underperforming, you get out of that asset class, you fire that manager. And when somebody's outperforming, you get in. And in reality, you should be buying low, selling high, not buying high, selling low. And so that part of it is very counterintuitive. So that, I think, is something to really dig into further on this podcast.

10:51trust. One other thing that I think is pretty interesting is the industry, when I say the industry, I mean the financial advisory industry, is effectively dominated by salespeople, not necessarily by great investors. That's been my experience. And part of the reason I think that happens is, you know, when I started Merrill Lynch, you come in, they give you a phone and a computer, and they say, go get clients. That's the hardest part of our business is getting clients, convincing people to give you their hard-earned money or convincing institutions to trust your advice. And so you have to be a very good salesperson in order to cross that threshold and convince people to give you their money to manage.

11:31And so what ends up happening is there's a natural screening process of those who are great salespeople survive and those who are not don't really make it. And the success rate in our industry is really, really low, maybe 10 % or something like that. And so the industry ends up being dominated by salespeople who know a little bit more about investing than whoever their clients are, you know, whichever clients they serve. So the more sophisticated advisors may have more sophisticated clients, the less sophisticated, less sophisticated clients. And as long as they know a little bit more, those clients have a hard time differentiating between that advisor and somebody who knows a lot more than them.

12:07As I mentioned, it's hard to differentiate between, you know, great and mediocre. And so the industry ends up being dominated by salespeople. And as it turns out, if you view the world through the client's eyes, whose money is being managed, it doesn't benefit the client if your advisor is a great salesperson. It's not like they're a real estate broker and their great sales skills are going to benefit you because they can sell your house for more. As an investor, sales doesn't help the client. And so I feel like the industry is set up in a way that's not necessarily in the best benefit of the client.

12:40And it's understandable why that exists, and it's probably going to last that way for a long time. But I don't think it's right. And so I feel like to make things better, you can try to educate clients so they're more informed. You try to educate advisors so they're more informed. And part of the goal here is to share some of that insight and hopefully move the needle a little bit. You know, there's a lot of randomness and luck in, you know, in markets, and that can easily be confused for skill. You know, you could have somebody that thinks they're skilled because they have good returns, but that could have been completely luck and just randomness.

13:18And that's hard to distinguish. You know, one thing that I think is interesting is that most of the, you know, a conventional portfolio is not really that well constructed. You could do a lot better with just some simple changes. And it's pretty remarkable that it's been convention for decades, even though it's not really that well constructed. So that's, I think, something that is a little bit surprising. And then I guess the last thing is, you know, when you turn on CNBC or read the Wall Street Journal, they're talking about, you know, what, you know, whoever is talking on screen is basically telling you what they think the future holds.

13:59There's a lot of predicting in this business. And I think that's what people want to hear. They want to hear what stock you think is going to do well or how the stock market is going to perform. But if we required everybody that is sharing a prognostication about the future, if we required them to list their actual track record, an honest assessment of their historical results. So imagine a face on CNBC and below their name was required to have their track record, what their hit rate is. You'd find that most people's hit rate isn't much better than 50%. If you know nothing, your hit rate is 50%.

14:33If you know a lot, maybe it's 55%. That difference isn't really that useful in terms of investing. Yet that's what most people's attention is drawn to. That's what's in the media. So I think that's just a very interesting dynamic. and obviously a lot, I just threw a lot out there and that's just, I think, the tip of the iceberg. Yeah, I mean, a lot of those observations that you've had are the things that stood out to me early on. When I knew you, I was at Bridgewater and you were a large client at Bridgewater. And when I made the choice to move back to California, it was a pretty obvious choice to work with you because I saw you approaching the industry in what I thought was the right way, but was sadly unique, where you were really seeking out the wisdom of the most insightful investors, the most successful investors, where you were doing your own independent research and you were advising clients in a way that I thought was, you know, best in class.

15:36And I thought it would be a great opportunity to work with you. And so one of the things that, you know, I think you mentioned, which is finding those with truly differentiated insight is, I think, a really important aspect of being well-educated as you approach this industry and as you approach the challenge of investing. So what are some of the key investment lessons that you've learned from those insightful individuals that you've come across during your career? And by the way, before I answer that question, one of the reasons that I wanted to work with you, because I've been searching for a business partner for probably 10 years, is you challenge me and you tell me where I'm wrong.

16:24For a long time, anytime I had an idea, I'd share it with people around me and everybody would say, oh, great idea. You should do that. And I knew that couldn't always be correct. and after a few years of interacting with you, I'd share an idea with you and you'd say, you know, that's a terrible idea for these three reasons. And at least two of the three were always right. And after a while, I stopped asking everybody else and I would just go to you because that's honest feedback that's well-informed. And I feel like if you want to grow, this is in our industry and even beyond, is you got to surround yourself with people who will challenge you, that have insightful commentary, that can see things that you don't see.

17:08And it's challenging because it's much less painful to be in an environment where everybody agrees with you. It's more challenging to be in an environment where you struggle to get to what you think is the truth. So that's one of the reasons that I thought it made sense to work together. And I feel like, you know, after working together for the last 10 years, that one plus one equals three, you know, I think our individual ideas are pretty good, but together, they're much better. For sure. So, and so your question about what have you learned, it's come through that process of constantly, you know, challenging yourself, talking to people that challenge you, hearing different perspectives.

17:51And then I think of it as, you know, the main goal for us in our seat is to be independent and objective. And you have to not only be independent and objective of wherever you happen to work and what the convention is, but also your own biases. And you have to think about what are your blind spots. And our goal is to provide the best insight we can, the best advice, knowing everything we know and knowing all the things that we don't know. And so I think some of my responses are related to kind of having that perspective and that experience. In terms of some of the, I think, most interesting things that I've learned, I'd say one is returns are easy to see, but risk is not.

18:38And what I mean by that is, you know, when we're assessing historical performance of whatever we're looking at, the total portfolio, individual asset classes, managers, we always see the returns. But the risk of what was taken, the risk that was taken to achieve those returns is not apparent. And I think of risk as one of those things that is kind of hidden all the time until every once in a while it rears its head and you experience pain. And it's kind of like, if you think about your health. Your health is, for the most part, always priority number one. But when you go through an extended period where you enjoy good health, it falls on the priority list.

19:22You don't think about it again until something bad happens, and all of a sudden it's priority number one again, and everything else is a distant second and beyond. And I think of risk similarly, is it should always be priority number one. You should always be thinking about the things that go wrong. I think you don't want to be overly optimistic. Some of the greatest investors that I've seen, regardless of how much success they've enjoyed, they're always terrified of losing money. They're skeptical. They're paranoid about what they're doing wrong, what's going to happen. And if you think about it, long term, markets trend up.

19:56As long as you don't take a catastrophic hit, you're going to do great. But if you get overconfident in your ability to predict a future, overconfident in any outcome, then you can, you're exposed to putting yourself at risk of catastrophic loss. And so, and I think that's as a result of risk not being visible. You know, when we, when we look at it, like, so, so, you know, let's say the markets are up 20 % in a year and you look back, you can look at it and say, oh, that was 20%. Those are great returns. And you can think about the opportunity costs of not getting that. You know, I think about, well, yeah, think of it as like a roulette wheel.

20:36and has 100 spaces and you spin it and it lands on plus 20 for last year. I don't think of it as the result of, you know, I don't think about the final result of 20%. I think about how many spaces on that roulette wheel were plus 20, how many spaces were negative 20, you know, and if it's, you know, one out of 100 that was plus 20 and 99 that were negative 20, and it just so happens to land on plus 20, I don't view that as if you got the plus 20, that was a good investment decision. So I think a lot of it is thinking about what is the makeup of that roulette wheel? It's always spinning. And is it mostly good?

21:11Is it mostly bad? How can you change your roulette wheel by having a better portfolio so that it has more good spaces to land on than bad spaces? And don't be so focused on what space it actually lands on. Be focused on what does the wheel look like? Because over time, that's how you succeed. And I think the best investors in the world that have enjoyed long-term success, I think, think of it similarly in terms of what was the process and what were the odds of success. And I think that's just much more sustainable. The other risk to think about isn't just the risk of catastrophic loss, but also, you know, and you and I have talked about this, is the risk of a lost decade.

21:54You know, it's one thing to take a 20 % hit and then hold on and rebound. It's another to have terrible returns for 10 years or longer. And I think one of the big flaws in the way that the conventional portfolio works is it's basically betting on one thing, the stock market. And I think a lot of that is just in the flaw in the way people think about building portfolios. They think returns come from stocks. So own as much stocks as you can. And you own some bonds to reduce the risk. And you own more bonds if you want less risk. You own less bonds if you want more risk and higher return. And the flaw in that is you're basically betting on one thing.

22:31If you think about one of the core principles of investing is be diversified. Don't put all your eggs in one basket. Yet people do that all the time. Their portfolio is basically betting on the stock market. And the problem with that is the stock market is prone to lost decades. And that happens all the time. And it's easy to forget. We have short-term memory as investors. So for now, the last 15 years, major bull market. The previous decade, the stock market was negative during the decade of the 2000s. We had another lost decade from the late 60s to the early 80s, where cash did better than stocks.

23:07And then, obviously, the Great Depression years, there was about 20 years where stock market averaged zero. So if you're betting on that, that's just such a risky bet. That roulette wheel doesn't look that attractive versus a portfolio that's more thoughtfully constructed. So I think that's the other part about this industry that I've learned. And then I'd say the last thing is the importance of behavioral science and what a significant role that plays in outcomes. I think it's one thing to have a better sense of how to invest, to have a more sophisticated approach, a more diversified approach.

23:50But it's another to think about how do you actually implement that in practice? And I think of it as a spectrum. On one end, you have what may be more optimal on paper. On the other end, you have what is common practice and convention. And I think our job as advisors is to find the right point along that spectrum, which is as good of a portfolio as the client can handle. And everybody's different. And it has something to do with sophistication. It also has something to do with whatever your reference point is. Is it the stock market? Is it an absolute return? It has a lot to do with your patience.

24:27I think as investors, you have to be very patient because things don't go up in a straight line. And you have to think about the path that you're on as opposed to what has happened over a short period of time. So the impact of behavioral responses to markets has to be factored in to constructing portfolios for investors. Because generally people make investment decisions and life decisions based on emotion as opposed to reason. And our job is to try to balance the two to get them to the best outcome for them. So that part of it is extremely challenging. I mean, in some ways, you're playing more psychologist than you are investment expert.

25:13But that's part of this industry. And it's something that people should be aware of. They should be aware of whatever their biases are, whatever their reference point is in terms of judging success from failure and factoring all that into the equation of how do I build a good portfolio? Yeah. In many ways, I think this accumulation of knowledge and your desire to share this knowledge has really been the arc of your career. If I think about the various things you've accomplished, writing a couple books on asset allocation, all of the recognition, just your desire to share conversations with really accomplished business people and investors for our client base and all the research that you published.

26:07it's really been an effort to share these insights with investors and help them make better decisions to better, more reliably achieve their desired outcomes. So I think the next step in that evolution, that arc is now the podcast. So tell us, why did you launch the podcast? What are you trying to accomplish? Well, I mean, this is part of my life goal is to leave the world in a slightly better place than when I entered it. And when I kind of zoom in into the investment world, I just think there's so much that is, there's just a lot of misinformation out there where people read something, they see something, their intuition leads them down a certain path that may not be the truth.

26:55And I want to try to at least show a different perspective so people can make a better informed decision. And I think there's just not that much great quality content out there to begin with. And it's for the reasons that I described earlier, it's a difficult industry to understand and appreciate and assess. So this is part of that arc that you described to try to get in front of people more frequently and share some of those insights and hopefully move the needle a little bit. I mean, if I think about how much I've learned the last couple of decades going through this process and having access to the smartest people and the experience that I've had, I feel in some ways a responsibility to share as much of that as I can.

27:42And that'll come through things that I say, but also interviewing people that I think have great insight. And my job as the host is to extract the great insight from that person. And in my experience, a lot of the interviews that I've seen, they don't ask the right questions. You have somebody who's brilliant in front of you and you ask them questions that doesn't really tap into that insight. And so my goal is to try to share that insight through those interviews. And ideally, I want to talk about things and cover topics and insights that most people don't see elsewhere. I think it's not a great use of time.