James van Geelen on Thematic Investing Right Now

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1:32Hello, and welcome to another episode of the All Thoughts Podcast. I'm Tracy Alloway. And I'm Joe Weisenthal. Joe, do you think it's fair to say that things seem a little uncertain at the moment? Well, yes. What do you have in mind? Okay. I mean, of course, yes, and big things going on. So I was thinking particularly of three things. So number one is obviously U.S. presidential elections. And things seem very uncertain on that front. We're not sure who's going to win in November. And more than that, at this point, I think we're not entirely sure who the Democratic candidate is going to be. There's uncertainty there.

2:12But then secondly, there's uncertainty about the direction of the stock market in a number of ways. So we have seen some of the air kicked out of the tires of big outperformers from earlier in the year. I'm thinking specifically of NVIDIA and some of those big tech companies. They've come down recently. There are people talking about how AI is the future of industry, but there are also people talking about how AI is a massive bubble. And I think Goldman Sachs had that analysis out earlier this week talking about how there was no actual use case for AI, which seems to be the polar opposite of some of the enthusiasm in the market.

2:52And then thirdly, we still have that underlying economic tension where it seems like there are some signs of a slowdown. But the Fed so far is kind of resisting any pressure to cut interest rates. So lots of things up in the air at the moment. Yeah. I mean, like you said, uncertainty is always with us in the market, but there are some really big questions about things that are going on. The AI one in particular, because a lot of people, as you know, it is like, wow, they're really spending a lot of money on all this chips and electricity and the payoff is ambiguous. And so there are a lot of questions about that.

3:28clearly the political landscape, although, you know, on questions related to the market, look, the stock market has done really well under Joe Biden. It did really well under President Trump seems to mostly go up over time. But yes, the age of uncertainty, I would not disagree with you. So all of this had me thinking, you know, if you're an investor and particularly a thematic investor at the moment, I think you're facing some tough choices because it's not just a range of uncertainties. In some respects, it's like polar opposite outcomes. Either you get Trump and everything that comes with it, or you get Biden and everything that comes with that.

4:05And some of that is very different. Totally. Well, the other thing that I've been thinking about, and the AI conversation really has driven this home, which is that if you're a discretionary investor, now me, I'm just spy and die all the way. So I don't have to think about all this stuff because I own NVIDIA and through my S &P 500 index fund. But if NVIDIA falls out of favor and something else rises, well, I'll have that too. So I'm a spy and die. But I understand that some people have to like beat the benchmark or beat the index or justify why someone else would pay them fees to invest money on their behalf.

4:40Then of course, you really have to get the call correct because the only way that you beat the market over this year or last year is if you got the AI call. And if you weren't heavy on NVIDIA or some of these other names, you almost certainly did not justify someone paying you money to invest. And so these are really tough questions for investors who have to do well, so to speak, relatively to answer. Yes. So I am very pleased to say that we have the perfect guest. We are going to bring back on James Van Geelen. He is, of course, the founder of Citrini Research. We spoke to him last year about one of his big investment themes, which at the time was Ozempic and the associated GLP-1 weight loss drugs.

5:23That was a huge winner in the months since. We're going to get a handle on what he's looking at now and also his thought process for developing new investment themes at a time when a lot of things seem to be very uncertain. So, James, thanks so much for coming back on All Thoughts. Thanks for having me back. What are you looking at nowadays? Hmm. Let's start with the easy question. Yeah. Well, you know, AI obviously is a huge theme in the market. I've heard of it. Yeah. Have you really? Yeah. It's this little thing. But I think that the most important way to basically track this theme is it's one of those technologically innovation driven kind of themes.

6:05And the way that I view thematic investing is along this spectrum of you have disruption or continuation, and then you have macro drivers or micro drivers. And I'm not talking about necessarily macro in the sense of macroeconomics, but, you know, demographic shifts, even like consumer attitudes, the Overton window shifting, just big things changing versus big things staying the same. So over the past 12 months, there have been probably 10 or 12 themes that I think have really made themselves known in the market and the way that assets move. And right now, there have been a few that I've probably overstayed my welcome in.

6:48I think that some of them are getting a little bit frothy. You were early to AI, right? Yeah, and that's one of the risks of doing this kind of investing. You know, there's a great quote from Robert Schiller. Nobody has ever made a decision based on a number. They always need a story. I don't know if that's the exact quote, but another one of my favorites is Kyle Harrison said that price is a number today multiplied by a story tomorrow. And the way that I view investing is it's always going to prioritize a good story and a good narrative. And that's what has the making of the theme, because you need people to make the decision to execute a trade and move price.

7:32And then you also need on the other side something to actually happen in the real economy. And as far as artificial intelligence, this kind of fast moving, innovative theme that we don't really, you know, you can say, what is AI going to look like five years out? And you'll get five different answers from five different people. and i started from a place of you know which became consensus very quickly the picks and shovels right and then the picks and shovels are the picks and shovels and then you get this thing where you know during the gold rush it wasn't just everyone showing up to sell picks and shovels you know just everyone waiting there until the so we have to kind of look now for this controversial thing of does ai have use cases right and i think it's pretty clear that it does if you're looking for it but in terms of like monitoring the way that it's going to progress i think the biggest component here is going to be going from b to b to b to c and what i said about two months ago was that the company that was going to make this really happen it's not going to be microsoft you know with chat gpt and open ai i think it's going to be apple and you know if any company can get it done it's going to be apple and you have this kind of dynamic where you need something to happen that forces people to use it right it's kind of like uh like facebook right or social media in general where you know there's only so long you go you could go without being connected to everything and everyone and apple is you know have you ever texted someone like hey i'm coming over and then you get in the car and if it connects to carplay it'll give you a notification that says like you know directions to joe's house yeah your phone knows everything about you right and your phone knows who you are It knows what you're doing.

9:40It knows what you want to do. It knows who your mom is. And that information, combined with Apple's trust and the consumer trust, and the idea that they place a high premium on privacy, you can't have this AI assistant that knows everything about you if you think that it's going to be stored on a server in Cupertino. It needs to be on your phone. So the next thing is how do we start having these big models that are trained in these very big data centers and all this capex that's spent on that. Now we have to, just like every other technological trend, we have to miniaturize it, right? And we have to basically have your phone doing inference, sending to those models, but also these smaller models.

10:27Can I push back on that real quickly? Because I've given up every piece of information about my entire life already to the internet. I have. Yeah, of course I have, just by existing in the world. Right. And it all exists on servers somewhere in either Cupertino or Amazon servers or whatever. What is it about AI specifically that changes that need? Because like I said, I don't want to, but just the reality of life in the world is my information is already out there. So AI has two sides, training and inference, right? And you can train on all this data that you've already given up to the faceless kind of entity that controls the world.

11:10But what AI brings about is in real time, drawing conclusions from that data. and it's two-sided there's convenience and then there's privacy concerns and i agree with you that convenience definitely outweighs privacy concerns when it comes to the consumer but when you have this ecosystem that apple has created with this walled garden and then you kind of alleviate the privacy concerns and you have this constant inference that's going on and there will come a time where you know you'll be walking down the street and you'll say I just called Tracy a week ago. What did we talk about? And when did we say we're going to meet?

11:52Okay, can you text Tracy and tell her, actually, I have a thesis that just got destroyed, so I don't really want to talk about that one. And can you text Joe and let him know too? And then can you look at my calendar? When am I available? You can be walking down the street and the productivity gains from your phone doing inference and inferring what it knows about you from that data. that's huge real quickly so you mentioned the picks and shovels nvidia then the picks and shovels who provide the picks and shovels then people got to tell you about super micro and the racks and maybe dell super micro never heard of it i've heard of it just so we're clear you're long apple yeah i'm any name that i mention inherently i'm automatically going to be longer short of that name yeah you mentioned the privacy concerns and i just thought back to this moment my husband and I were in our kitchen and we were talking about something really innocuous like corn or something and suddenly Alexa started telling us a joke about corn and like we hadn't said Alexa or anything like that it just started talking like clearly had been recording everything that we were saying and I will admit that that was that was kind of a jarring experience I would be less surprised if my Apple phone did that versus my Alexa that I use to turn on the lights and things like that.

13:15Yeah, it turns out that large language models are really good at language. Yeah, surprising. I think that the next kind of picks and shovels idea, the thing is everyone's always, well, what are we going to invest in that's doing the use cases? And then those same people will come around and say, why are these five stocks driving the entire market? And the thing is the latency between a company starting and becoming successful and doing an IPO has gotten a lot longer in the past like two decades. So if you're a public equity investor, you might not really get to the use cases that you can invest in are those five stocks.

13:55And combine that with, you know, everything else. And like you said, the uncertainty, when there's uncertainty, people tend to crowd into things that they know are going to work. I think that really the picks and shovels thing will probably play out again. But when it comes to edge AI and doing inference on device and kind of, I mean, this is probably a controversial statement. But I think that we might see the first real true replacement cycle, like real replacement cycle where Apple comes out with a new phone. and it has all these productivity gains and it has all this new hardware and it can do these things.

14:34And if you don't have that phone, you can't do it. And it becomes kind of like that sci-fi movie, Gattaca, where, you know, if you're left out, you're just left behind. I've been wondering about this because at some point in my life, it stopped being important to upgrade. I mean, at some point in my life, it stopped being important or interesting to even tune in to like the new Apple events. And those used to be big events online. And then people stopped. And then at one point, if someone asked me, what iPhone do you have? I would have told them the answer. I was like, oh, I have the iPhone 5 or whatever.

15:06I have no idea which one I have right now. I got it a couple of years ago. It does everything I need. I have zero idea which one it is. So I've been sort of wondering, yeah, so you think that there's the potential at least for some unlock of new capabilities where the people who don't have that new phone actually feel, oh, I really just can't interact in the same way that people who have it do. Yeah. And that kind of replacement cycle drives that new picks and shovels thesis where you're looking at all these kind of, you know, system on chip names. And that's where I see this theme that, you know, everyone is talking about going.

15:40But the thing about thematic equity is that if you let it, it just becomes momentum investing. because themes are stories and stories translate into momentum very easily. And when people do an association with momentum, they're always thinking about kind of momentum in a bull market, like what we've been seeing. And, you know, that's not the case at all. There was plenty of themes in 2022 when everything else was going down. I mean, tech going down was a theme, you know, the interest rate hikes, the inflation for the first time, And that's a theme, that's a story that grabs people's attention and makes them go to their terminal and execute a trade.

16:21And same thing with energy and the war in Ukraine. And so I try my hardest to, it's super cliche, but think a few months ahead at least.

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18:04Go to public.com slash market and earn an uncapped 1 % bonus when you transfer your portfolio. That's public.com slash market. Paid for by Public Investing. All investing involves the risk of loss, including loss of principal. Brokered services for U.S.-listed registered securities, options, and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA, and SIPC. Crypto trading provided by XeroHash. Complete disclosures available at public.com slash disclosures. So for something like the U.S. presidential elections, you know, again, things are currently up in the air and you can look at the polls and have a sense of who might have a lead.

18:43But overall, it's pretty difficult to tell who's going to be in office come next year. How do you start preparing for something like that from an investment perspective? So if the question, how do you start preparing? The answer early. You start preparing early, right? I don't think that, you know, was anyone surprised that we have an election this year? Yeah, some people. Some people really are because of how few people have been paying attention. I mean, it's one of those things where I think it's like when you're a kid and you touch the stove and you get burned. And you're not doing that again.

19:21That's how I think the 2020 election was for me. So as soon as I saw that the year was an election year, I started kind of preparing for this. This was back in January when the odds of Trump even being a nominee, right, or like being the Republican nominee were like 20 percent. It was relatively easy back then to look at these very kind of exposed equities and say this is a swap, I guess, on Trump being a nominee. So I've seen some sell side research about who would be exposed. One clever one, the company Five Below sells a bunch of cheap stuff, which you can't sell cheap stuff if there's a massive tariff on cheap stuff.

20:05And that stock has been, well, that's a total dog. That stock was over 200 back in March, and now it's at 102 at the time we're talking about this. What stands out to you as being exposed? Depending on what the theme is, I create either a long, short basket to kind of gain exposure because I don't ever want that kind of idiosyncratic, like single name equity risk where a company ends up doing really well and it has nothing to do with my actual thesis. So I constructed a basket that kind of played on a few different themes. Tariffs was a big one of them, right? So you look at how much comes from China.

20:41First, you look at Trump's, what he says, right? Right. A hundred percent tariff, 60 percent tariffs. You know, and the thing is protectionism from China trade, that's not a that's not a partisan issue anymore. Right. There are no China doves in the government. But Trump is certainly a unique brand of that when it comes to the trade policy. So that seemed like the most asymmetric way to kind of capture that. So you look at Five Below, for example, Restoration Hardware, Floor & Decor, Best Buy, these companies that really do a lot of business when it comes to China. And that's a lot of their input costs and tariffs really would affect them.

21:23And that's your short side. And then you say, OK, well, who is going to be all right here? And that comes down to pricing power. You know, if consumers start consolidating their spending because of tariffs, who can kind of keep that pricing power regardless? And like Costco, Walmart, some of the automotive parts, like O 'Reilly, that's your long side. So that makes up one component of the basket and then move on. Okay. And the thing is, for the past three years, one of my exposures to a theme has been Bidenomics. so you know that was big on electrification and infrastructure spending and generally fading the idea that we could have a recession when fiscal policy is spending like a drunken sailor and we said okay well now we need some kind of offsetting beta here we need some trump beta and there are these orphan equities like fannie mae and freddie mac and and you know i looked at the story and i said, I don't think that that's going to happen.

22:25He didn't do it the first time, but it doesn't matter because it's a story. So people are going to take action based on that story. Then looking at things like private prisons and law enforcement. I remember that from 2016. That was like a big Trump winner. Yeah. And that, but that was when I was kind of looking at this, that I think was the first place that I start is basically sell side research just to see what is being said. and there were a lot of kind of well here's how you know these equities performed when trump was president here's how they performed when biden was president and if you go into anything like that with that kind of thinking where you're just overfitting to like two periods of time i mean when biden was elected if you had that kind of thinking you would have went long clean energy right you know in short oil and you would have gotten destroyed because like no matter who's the president, there are going to be bigger forces at work.

23:21So you really have to try to specify and get rid of as much incongruous kind of correlation. So names like Axon or Geo Group or, you know, CoreCivic, those will probably benefit. I had kind of a fun one that was a company that makes the storefront glass for retail stores, because I figured no matter who wins this election, there's going to be people that are angry. It's funny you mentioned Fannie Mae, equity because it still exists there it's like that cockroach but i've always thought that it's like the boomers crypto it's like that's like if you look at like there is a fanny and freddy twitter yeah and it's like they talk the same way that people are talking about the random tokens but their money spends just as well right and it moves the bid up and yeah so i think that i came into this year all prepared right here's how the basket is going to look the thing that really made me the most satisfied about this.

24:19I mean, the basket has done quite well because Trump odds went from 20 % of being the nominee to, you know, 63 % of being the president. And the performances track that pretty well. And there are a few other aspects of that basket. But the thing that obviously didn't make me happy because something that I owned went down, but right after that debate, which I think, you know, there were a lot of people that were surprised by that. And I guess you could, if you were drawing a chart of like, should I be concerned about Biden's performance in a debate after the state of the union, you, you know, maybe you had some moments where like, he's talking about, you know, where's that lady that, and the lady died three, three weeks ago or something, or, or, you know, there were signs, but you know, I wasn't necessarily surprised by that.

25:07And when that happened, the Bidenomics basket, you know, goes down by 5%. And then the Trump basket goes up by 10. And, you know, that's kind of reinforcing where it shows you that, you know, you're not just riding beta. You've been allocated to the right thing. I was going to ask how you weight those respective baskets, like a Biden long short basket versus a Trump long short basket. But maybe maybe you equal weight it and then the returns are asymmetric, as you just mentioned. Yeah, there's some discretionary aspect where I think that, you know, something matters more than or that investors are paying more attention.

25:44You know, I don't I didn't think back in March that this tariff aspect was getting as much attention. I figured that would kind of progress and get more attention as the year went on, as Trump said more about trade policy, whereas something that's, you know, his first order thinking is, you know, if Trump's president, we're going to need more, you know, border prisons or, you know, that. But so the weighting kind of changes throughout the course of the narrative progressing. It's kind of weird, like going back to if we had a 100 percent tariff on imported goods, and this is a little bit of a sidetrack.

26:18I feel like that would be incredibly disruptive to the way we do economics in this country. And I don't have any opinion on whether it be good or bad. I'll leave that to others. It is sort of funny to think we're going to have this big tariff, this big change in how we interact with the world. And so we're just going to take it all out on, you know,$5 billion company, five below. Like, I just have a feeling that if we did have this wholesale orientation of how we trade, like, they're not going to be the only company that's affected. No, of course not. And I think when people kind of look at – when I share my portfolio with people, which, you know, I know some people are kind of neurotic about that.

26:55But I'm not big enough to where I think that someone's going to, you know, attack me. But when I show my portfolio to people, they are kind of taken aback by how many securities are in there. But the way that I view it is, you know, I have diversification at the security level, but I'm very concentrated in these themes. On the thematic level. Yeah. So like GLP-1s might make up 15, 20 percent of the portfolio, but it's not just Lilly and it's not just Novo Nordisk. It's also, you know, something like Torrid, which is a woman's kind of fashion for plus size clothing. Clothing. But you would be short that one.

27:28No. Oh. Well, think about it, right? You don't teleport your weight. Hmm. If you're 300 pounds and you go down six sizes, first off, you're happy that you're losing weight, right? So you want to show that off, but you're still plus size. Oh, I see. Okay. So you're buying clothes the whole way down. Ah, all right. And then there is, in fact, you know, like this is like well documented. There is a rebound effect from GLP-1 drugs. If you stop them, you regain a portion of the weight. Oh, so it's actually like the weight fluctuation that matters here. Okay. I mean, if you know anyone that's overweight that struggled with their weight, they have these closets full of just, you know, various sizes of clothes.

28:13So, you know, but the general idea is applying second order thinking to capture a theme in not just the most obvious way because that's going to be the most crowded way. And that's, like I said before, you really want to try to not just have this be story-based trend of following. Wait, I love talking about second order effects. And I have a bunch of favorite examples that I have probably said on this podcast before. So I'll spare all our listeners from repeating those. But do you have a favorite sort of second order play? I want to hear yours first. Well, the one I always think about, well, there's the gummy bear one, and then there's also like the sawdust one.

28:56Gummy bear? Hold on. I'm going to have to look this up. No, I remember what it was. Oh. Do you remember the gummy bear one? Yeah. Do you remember both of them? Yeah. Oh, okay. Well, I don't remember the sawdust one. I'll look up the sawdust one. It has to do with chickens or something like that, and there wasn't enough sawdust. Cows and milk. Right. So after the housing bust, then there wasn't enough wood, and there wasn't enough sawdust, and that wasn't good for cows, and then that wasn't good for milk production. So there was less milk. So no one would have expected as a result of the 2008 housing collapse that you would see milk prices go up because there was less milk.