TDI Podcast: Prospective Perspective (#954)

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1:36prospective perspective. We are looking ahead by looking back. A new year. What may drive returns into 2026? And so many guests throughout the year. So much wisdom. We kick off another great year of the TDI podcast. All this and much more on episode number 954 of the Disciplined Investor podcast.

2:16Welcome to 2026. Did you ever think you'd get there? I remember when I was all excited about the year 2000. I'm like, wow, that's a long time in the future. And boy, what's going to be? Thinking about, you know, spacecraft and computers and all the things that could be, you know, 20 years in the future when you see what went on with HAL. with Space Odyssey and of course with Star Trek and Star Wars and all the things there. But we are here. We are here. It is 2026. And did you start working out yet? Did you start your diet yet? Did you start giving in to any of that stuff already? I hope not. Even though there are a lot of Mondays that we could start our diet, make every day count.

2:59Life is short. Let's be honest. So we are here and what is happening? What is happening? What happened last year? You know, we look back and a lot of things were rather surprising as we look into what actually occurred last year because we had a lot of volatility that was based on some crazy stuff that went on, especially mid-year in April. Started out a little bit rocky, but in April, things really got crazy. U.S. equities closed the year. Even with all the things that we had and all the headwinds with solid gains that was driven largely by what? By technology, right? That's what was, again, the driver of all this.

3:35That actually was part of it. There was a broad-based overall trend that lifted all ships. That tide was rising. But the leaders that were really playing were all generated around the AI trend. And that wave that seems to have massive amount of money that's being thrown at it, it's pretty cool to watch. Now, the growth-oriented sectors, well, they outperformed, as you would expect. But the broader indices posted healthy advances from the small caps all the way up to the large caps, the value side and the growth sides. That was good. International markets, what a great year. Surpassed the benchmarks in the U.S.

4:14for the first time, by the way, in over a decade. And emerging markets, wow, delivered incredible results with several countries and some of the ones that you wouldn't have expected to leading. Like China. Who would have thought China was going to do anything, right? With all the sanctions and the problems and the issues with their economy and the slowdown with industrial profits and the problems that they have with real estate and the issues that they have with their banks, all of that. But it was good. And you had countries like South Korea. Oh, my. What an incredible story there that was led by technology, of course, in their countries and Taiwan with Taiwan Semiconductor.

4:55We had commodities doing really well. One of the strongest years in recent memory. Think about all the years that oil was kind of doing nothing. Gold, silver, it's kind of hanging out there. Copper, yeah, doing all right. But more, boy, oh boy. The precious and industrial metals were surging throughout the year. It started with a concern about uncertainty in central banks buying. Then there was some ideas that maybe silver was going to be used in areas like maybe battery production, as well as in the technology area, particularly with semiconductors. Energy prices throughout 2025 softened. Meanwhile, the weaker dollar, big story here, down about 9.5 % on the basket of currencies for the year, really boosted returns for the international investments and bonds.

5:50Well, they rallied as central banks around the world decided to go towards much more accommodative policies that was aligned with a disinflationary, not deflationary, disinflationary trend that took hold. Now, meanwhile, by the way, we have to state that inflation is not dead. It's just better. It's still high. We know that. I'm not going to go into this because we talked about this 100 times. But, you know, around the world, we're looking at, you know, two and a half to 3%. Everybody still wants 2%. But 2.5%, 3 % is still the average. But central banks felt that they were getting ahead of the curve and can start working on their policies to be much more accommodative than restrictive.

6:36But you have to admit that during 2025, the bulls were the story. Firmly in control throughout the year. momentum, which was fueled by this massive AI investment that we talked about, was pretty impressive. News release after news release talked about better earnings, but also talked about capital expenditures, CapEx. That was not small by any means. I mean, huge numbers that was going into play to build some part or buy some particular semiconductor or advance some technology or something around the idea that energy was going to be needed and this whole new emergence of a brand new sector, generally speaking, on top of a hot sector, it drove optimism.

7:34The corporate spending that went on and that was committed to over the next three to five years or more, pretty impressive. But at the same time, we have to look a little bit beneath the surface because beneath the surface, there's some stress. There's a few warning signs that are starting to emerge. There's no question about that. We have the concerns and the constant discussions that you hear about stretched valuations in certain sectors, particularly some of the technology area. They're there on a constant basis. They're not easy to ignore by anybody because if you just look at the levels of where we are, they are consistent with market tops, generally speaking.

8:19It doesn't have to be an immediate top, but I got to tell you, what we're seeing throughout the last quarter of this year, particularly into the end of this year, where Santa did not show up really for the rally that was supposed to be. Even though it was a good quarter, the end of the year was a little bit slow when it came to many of these areas.

8:45And when we add the lingering trade tensions and the uncertainties about shifting monetary policy, we have a little bit more of a nuanced picture than just saying, yeah, the S &P 500 is going to be 7 ,500 at the end of next year, simply slapping on another 7 % or 8 % to where we are now. It's a lot more that needs to go into it, and I find that it's really kind of gross that time after time, whether it's Bloomberg or CNBC or Fox Business or, you know, pick your poison, these analysts just come on and just simply give us a very, I would say uneducated view of just let's post the optimism and then it will follow.

9:37They really don't allow for many of the naysayers to come on board. That would be, that would be bad. We can't have somebody saying that the market's going to go down next year. And nobody's going to listen anyway, because the optimism is so great right now with the idea that we're going to get a new fed chair coming in, in April, and they're going to be very accommodative looking at two, three, four. I don't even know how many cuts because just that's what everybody wants. But for now, let's be very clear about something. Very clear. The trend is still our friend. And it's important to recognize that the opportunity and risk are really running side by side.

10:20And the Bulls and Bears, if you want to look at it that way, are pretty much neck and neck right now. But the Bulls have been doing a much better job because the news flow is very positive for their cause. And as the new year begins, I think that we need to make sure to maintain discipline, embrace diversification. And that's what's going to be our main strategies here as we manage money for clients into 2026. We're going to look to capture upside while staying prepared and very aware and open-minded to there can be sudden shifts in the market's, you know, the market's way of being at this point.

11:05And that has happened before and we see it. And right now, it seems to be ripe for that kind of situation. But what are we looking at specifically for 2026? I just want to kind of throw this out very briefly. there are a lot of geopolitical tensions that are going on. And some of the recent enthusiasm in the tech trade may be a little bit overdone, right? That's what we're talking about. And defense, the defense sector, looks like a sector with strong fundamentals and some clear catalysts right now. So we have the Trump administration is signaling a more aggressive stance. We changed from the Department of Defense to the Department of War.

11:47They're looking at a greater level of military readiness and offensive capabilities, talking about building massive warships. So we're expecting, and I don't think anybody would argue this, accelerated procurement for strategic platforms, right? Missile defense systems, modernization programs, and that creates a rather compelling backdrop for U.S. defense contractors. So we're seeing this, right? The rising tensions in places like Ukraine and Taiwan and Nigeria, Venezuela, Middle East Some of them are not rising, they're there And this is fueling a surge in allied orders Export demand for advanced defense systems There's a lot of companies out there Many of them, for example, like Who do we have?

12:38Raytheon, General Dynamics, Northrop Grumman Like Raytheon, right? The surge in Patriot missile requests. Aerospace recovery, strong international demand. Huge backlog. Northrop Grumman. The B-21 radar production acceleration. The Sentinel ICBM program. Space and cyber growth. Hypersonic contracts. Backlog 80 billion. General Dynamics. The Gulfstream deliveries are ramping up. Virginia-class submarine contracts, new surface combatant programs, defense IT modernization, $103 billion backlog. Pretty good. You know, EPS growth, Raytheon about 36 % with a forward PE of 25. Northrop Grumman, EPS growth expected to be 10 % with a forward PE of 20, so that's not as compelling.

13:36General Dynamics, 18 % growth on the forward basis, 20 on the PE. So while the market's been focusing on technology stocks where valuations, again, appear a bit stretched, some of this is kind of interesting. So what are we doing? What are we doing? We're looking at these kinds of names, but we're also looking at things like the ETFs that are in the area of defense, like SHLD and ITA and a few others. We're looking for those and implementing for those for our clients right now and put some of that into place already, looking for a place to have opportunity and also a place somewhat more exempt from the potential rollover if technology does roll.

14:32Something to think about, something to look at into 2026. Now, we have something that we're about to share right now, and that is the guest clips from 2025. Ryan Raditzki, who is a great guy, puts together all of this for us on a regular basis. This is all about looking back and looking ahead. So Ryan, thank you for putting this together and spending your time on this. And it's going to be a lot of fun because if you listen, it tells you pretty much the guests that came on, a little clip what they talked about. You may have to want to listen to this slowly, listen to this over and over. Some great tidbits and discussion and idea generation from the guests.

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16:04Rates are subject to change. Get started today at IBKR.com slash compare. IBKR is a member of SIPC. Now let's get it on. Let's hear about this guest clips that was put together by our good friend Brian and find out what was going on and see if we have any ways of getting a glimpse at maybe opportunities for 2026. Episode 903, Pat Kamusu. If you take a crypto and you just put it into a contract, delegate it to a contract, and then that provides you a yield, that's not going to be a taxable event. But if you were going to exchange a crypto or multiple cryptos for another token, like a UNEV2 position, or going from ETH into WETH to where you're going to get some yield off of it, but also you're getting a new asset with a new liquidity profile to it, that's really the difference.

17:06Episode 904, Ryan Zabrowski. The longer the time horizon is for a portfolio, the heavily the weighted should be valuation factors. So we know what is the most predictive of future return. Those are valuation factors. But that work is only really predictive over 7 to 10 years. If your time horizon for performance is shorter than seven years, you have to assign weights to technical analysis. I call it market health. You want to be taking more risk in a healthy market and a market that's health is waning and starting to roll over. That's when you need to be careful. You know, that's what we saw in the.

17:58episode 905 howard linton the degenerate economy is nobody's fault it's just this culmination of technology and culture and zerp and rigging and the class war you know the writ the haves versus the haves nots all these things that have just happened blame whoever you want but if you really step back and go, Jesus, it's obvious that kids are going to want to gamble. They can't afford a home. They've been screwed by the government. They have no COVID. Interest rates are now high. Their parents, they have anxiety. They've been fed sugar. They're vaping. So you have these walking zombies. I have two myself.

18:45I feel so bad for them. When I graduated from college, I thought the world was my oyster. I can tell you from raising two, owning and operating two millennials that they are fucking stressed. Okay. Because they're not stupid. They see prices. Episode 906, Carson Block. I mean, look, activist short selling, it's different from traditional short selling in that activist short selling is always intended to make money. It's an absolute return type of strategy. Um, but yeah, it, it becomes harder when, when people care less and less about, um, you know, about these issues and it's like Tesla, like, you know, when, whenever people talk to me, Oh, why don't you talk about Tesla?

19:32Cause everybody knows, right. And they don't care. So it's until, until there's, until there are real losses experienced and people remember why stewardship of companies is important and why the accuracy of information they're provided is important until that happens it's just it's you know it's it's a harder business than uh than it really should be episode 907 danielle d martine boove again go back to why so many companies that are reporting are beating their estimates it's because they're in cost cutting mode right now, meaning we're firing people or people are choosing to leave by way of attrition, quote unquote.

20:22So that's one of the reasons that they are protecting their margins. And then you've also got this gigantic presence of passive investing in the market. And that just passive investing is more than 50 % of inflows into the US stock market. And it doesn't care what the price of NVIDIA is, it's going to buy it. If I take money out of my paycheck twice a month and that flows into my 401k and my 401k's got an index fund in it, I'm going to buy the stock no matter what the price is. And that is a powerful force to contend with. Episode 908, Carly Garner. The reality is I've been doing this long enough to know that you hedge first and then you ask questions later.

21:05Because if hope is your strategy, you're going to be in trouble. Hope is not a strategy. Yeah. So at some point we can fairly say we're probably wrong or at least very early. And so it's time to start hedging. In markets like crude oil or gold, there's micro futures and you can slowly incrementally hedge. And that's a really far preferable way to go. What we try to do is we try not to let any of our options become in the money. So for example, if we're short an option that has a strike price of$4.25 and coffee's trading at like 4.15. We really don't want that thing to go in the money. It's not the end of the world if it does, because it can come back down and so on and so forth.

21:44But if you sold an option with a strike price of 4.25 and you bought a futures contract at 4.25 and the market just kept going, even though you were wrong and it was a little bit stressful, you would still keep the premium you collected. So you actually would make money on a position you were exactly wrong on. Episode 909, Vartelli Katzenalsen. we had technological changes before and every single time you had a technological change there was a bubble was developed in the stock market the problem is the problem is the road to the change is not non-linear right think about 1999 how much uh internet has changed our life right?

22:26But first we had a huge bubble and a crash and then and then it actually did change our lives now NVIDIA today it's a hardware company that basically Chunyot that has margins as opposed to software company because everybody wants its product it's like Tesla a car company that has valuations like a tech company No, actually, very true. Except NVIDIA, it actually has a literally, if you look at it, income statement, and I did not tell you that it was a hardware company, you would not know that. Right. Episode 910, Meb Faber. If you look at the average endowment, or you look at, say, my nemesis, CalPERS, here in California, that manages hundreds of billions of dollars, or even if you look at Bridgewater, the largest hedge fund in the world, right?

23:22And you say these institutions have all the resources. They have access to the best investors all over the planet. They have teams of dozens, if not hundreds of employees, on and on. They should be able to outperform just a generic ETF buy and hold portfolio. But the reality is, historically, often they don't. So we've written a lot of articles over the years on Bridgewater, on CalPERS, say, should CalPERS be managed by a robot? Should CalPERS fire everyone and buy a bunch of ETFs? Episode 911, Dr. Daniel Crosby. When this country was founded, you know, 250-ish years ago, 85 % of the world was living in poverty.

24:12Today, that number is 9%. So as a world, you know, capitalism has brought us this enormous bounty. The world is richer and more equal than it's ever been before. And yet we have this mental health crisis and this crisis of connection and loneliness and all of these sort of related concerns. Some of my previous work, like the behavioral investor, if you're a hardcore dollars and cents quant type money manager, that's going to be more your style. But right now, I'm loving this conversation around money and meaning and helping people take the wealth and the abundance they've created and spend, save it, invest it in ways that make them happy.

24:56We're more focused on providing the utility that allows our clients to trade anything they want around the world. And so on our platform, you can easily trade these markets or crypto or, you know, there's been interest in bonds lately with interest rates, you know, that uncertainty and certainly on FX rates, all these things. And, you know, I just heard the other day that there are a number of institutions that are, you know, trading between the markets. I mean, that's the third reason people go into these markets is arbitrage. So they can buy crypto ETFs and sell the futures on the CME or vice versa.

25:49We're going to look at the collective evidence of what everyone says, do our own research, try to replicate other studies, and knowing full well that we're never going to be perfect. but like what, what, what do we think is genuine truth in the marketplace? And, you know, usually our standard is, and would I put my own money in this thing? You know, and that, that to us means evidence-based. Now the problem with evidence-based as a term is it become bastardized because now everybody that runs a back test says it's evidence-based, but that's different evidence-based because you ran your own custom back tests over a certain period under certain conditions that gives you the answer you want to say that's not that's not intellectual truth that's just called you know fitting the data to the narrative that's marketing episode 914 david geffen there is a lot of tinkering with economic levers sort of with the notion that they are independent of one another you know it's you know yes in this weird ideal world you would you know in their minds you would have in change in where our goods are being produced.

27:00There is a long valley between that on how you get to that point if you can get to that point. And other things can happen. You know, you can have a recession. You can have job losses. You can find out the things that you planned don't work out. And as you were talking about capitalism, it's something I've been thinking about, too. I mean, you are, you know, assuming that millions of independent economic actors will do what you want them to do and they may not do that episode 915 tim knight because you know one more chartish thing that i'll sort of toot the horn at and i'm not an expert at all uh is elliot wave because elliot wave um i found stinks during bull markets but during bear markets i found it to be really really really helpful and this notion that we're in you know and this is not to be conflated with the fourth turning even though there's a number involved If we're in the third wave of this particular move, it's kind of a big deal because everybody expects these things to only happen like in October.

28:02But, you know, so far, the whole Elliott wave bang out of what's been happening has been just spot on. So that's another sign to me that, OK, this is really a bear market because it's acting like one. Especially we saw the small caps already down 21 % from top to bottom. That's bear market. Hello. Right? Right.

28:24Well, we are market timers, but of course there are many breeds. So we are DAO theorists. So this means that we use the DAO theory in our own rendition, our own interpretation, which was developed by Jack Shanep. And the basic difference with a traditional DAO theory is that we also include the S &P 500. So we use three indexes, Dow Industrials, the Dow Transportation, and the S &P 500, instead of just two indexes as the original or classic Dow Theory does. The classic Dow Theory only uses the Dow Industrials and Transportation. and Jack Shanep decided to include the S &P 500, which for me makes lots of sense because you know that the Dow theory is almost 130 years old.

29:19So at that time, we didn't have the S &P 500. Episode 917, Brian Dress. If you remember back to COVID, when we went back down to the zero interest rate bound, a lot of companies went out and took advantage of that and issued quite a bit of debt at that time. So that was what, five years ago? Some of those were seven, 10, 15 or 20 year bonds. And so capitalization remains reasonably good even in high yield land. Obviously, if there are companies that have maturities coming up, meaning if they have bonds that are maturing soon, that may be more of an issue. And that's why we select individual bonds.

30:04We don't buy a whole, you know, we don't buy bond funds. But there are individual situations where companies remain well capitalized. Maybe they pay a dividend. So there's an option where they could stop paying the dividend and, you know, continue servicing the debt. Things along those lines. That's the way we kind of look at things. Are there levers to pull? Episode 918, Patrick O 'Hare. Even if the tariffs come off, I would venture prices don't come down. Thoughts? well i think yeah right that that's you know you hear about it as being a one-time price adjustment right um and you know i i think we've seen here even before this happened right is as we talked about inflation and the fed talked about inflation coming down into the you know two and a half percent range from where was it you know eight nine percent um it's better but you still have inflation and so the you know one of the keys is going to be is you know what happens to you know real wages, right?

31:05Can it keep up with that? It's not going to keep up with 10%, certainly. Episode 919, Dan Peeler. Under the Biden administration, the Congress passed the Inflation Reduction Act, which itself is a farce, but that's a different discussion. They appropriated$80 billion to the IRS. $80 billion, almost$700 billion. $80 billion to the IRS over 10 years, right? Not all at once, but over 10 years, specifically to hire about 87 ,000 additional IRS workers, Congress clawed back 20 of that$80 billion. So it was carved down to$60 billion. In 2023, when that act was passed, over the next two years, 2024, 2025, 2026, about 30 % of the IRS's workforce was eligible to retire.