TDI Podcast: The Architect (#975)

25:35When you do that research, just generically speaking, even Ben Graham used to do this. Hey, let's just go take a thousand stocks, sort them on P-E ratio. And what happens if you buy the 10 % cheapest? Oh, wow. They outperform. That's called the value effect. And so intuitively, because that's how it's researched, that's how the evidence is documented. I was like, well, that's how you would build the portfolio. You know, cause that's just, I didn't know how the industry worked. And of course what you learn in the industry is no, you would never do that because that creates a saying called tracking error.

26:08Uh, IE you start deviating in extreme ways from the index. Um, you know, so I know that now, but at the time, like I was just trying to make money and build portfolios just based on like what the actual evidence says and like how they're constructed. So that's why we did that. And that's why we've always done that. And we just tell people like, listen, this is not like every other portfolio where it starts off with S &P 500 and then adds a basis point, takes a basis point away, and then charges you a bunch of money to basically give you what Vanguard gives you for free. Yeah. I mean, that's basically why we concentrate is because, you know, why would you just do what everyone else does?

26:49That doesn't make any sense. So, or if you're going to do that, just go buy a Vanger. How do you manage liquidity with that and turnover capacity? Because I mean, obviously if it's, if it's, well, if it's, if it's market cap weighted, then there's plenty of volume, plenty of, but you start getting some of the other factors, even if it is market weighted, but market cap weighted, it's still going to be smaller and there can be volume issues. And if you grow that thing big enough, right? Yeah. So, so a hundred percent. So, so we, you know, we run those things in the ETF wrapper. And I think, you know, I'm not going to name the tickers cause then I'll have some compliance problem, I'm sure.

27:26But, you know, generic like value strategies, maybe all of our factor funds have like a billion dollars or billion and a half in those specific funds. And I mean that, yeah, if they got to like 10 billion or 20 billion, we'd have to start doing more liquidity bucketing and what have you. But and obviously if we got hundreds of billions of dollars, then we, like everyone else, would be forced to basically clause the index. Because if you have a lot of capital, you become the market. That's a funny thing you mentioned then. That's a really good point, though, because where does that demarcation point come to?

27:59It's like, hey, we're growing, and you've got partners, and you've got people, and you've got staff, and you've got, you know, everybody's like, well, just keep it going. And then you're like, well, then you're no differentiation from anybody else. Yeah, so there's a bunch of academic papers that have talked about this. And you see it in the data. and it makes sense, right? And I'll explain how we're a little bit different as a firm. But essentially what happened is asset management in the end is massive fixed cost and then it's all about scale, right? And so once you get to a point where you're like, oh, I can raise money and now we're just like a distribution marketing organization, you might lose, instead of like trying to actually do research, trying to beat the market, trying to do unique things, you might say, hey, let's just pretend like we're doing that And let's just distribute it because no one got fired for hiring Goldman Sachs.

28:50Sure. Like, for example, like we have like under our whole umbrella, we're probably like almost$40 billion now. And so, you know, you could do that. And so that's usually the strong incentive is like, okay, we need to pivot away from these weirdo boutique non-scalable turd strategies. And like just do closet indexing and market it like it's some fancy thing because that's what's in our economic incentive. right um so that's what most people do and you see that in the data um we took a different approach in the sense that the way we monetized kind of all our fixed costs and brain damage is we we started an infrastructure firm where we now we do what they call etf white labeling so so we still have our etfs but but instead of having the pressure to just you know scale and sell those things and like anyone with the pulse like please buy this you know because that's just not the nature of how we've ever operated.

29:47But we had all this excess capacity on the fixed cost to launch ETFs. So what we did is we just basically monetize that and we allow, we have other people that use our platform where we basically do all the work and they launch ETFs on our platform, but it's their brand. They go distribute, et cetera. And so that works out because now we don't have a ton of - You're just taking care of the wrapper, the process, the advisor says, hey, we're going to change the portfolio to this and you make that happen. Exactly. They send us the tickers and then they go sell it. We pretty much do everything else, but, but that, because we can monetize all the fixed costs that way, we all, for our particular things, we don't have like a massive incentive to just sell it at any cost, which is why we have such a small footprint and why, why obviously we're, we've always been weird, but now we're in a structural way where we can continue to be weird because I don't need, I don't need to raise any more money.

30:43Right. Like I've already raised plenty of capital on the infrastructure side. So alpha architect, the weird people. Yeah, pretty much. Uh, yeah, we, we don't, we don't flow to the same beat as others with respect to how the products are produced. So let's take it, let's stay on this topic here because there are a lot of advisors that listen to the show and, um, you know, and actually, um, sophisticated investors because it's not limited to advisors. Anybody can create an ETF, right? I mean, it's not limited to somebody per se, although there may be some licensure issues in certain regards. But for both advisors and sophisticated investors, those groups in general, and maybe who want to build their own quant systems, right?

31:25So I have two questions about building ETFs and quant systems that can go hand in hand. First about maybe the pitfalls, because I've done a lot of work in technical analysis doing backtesting. And I can't tell you how many times I get the most perfect, beautiful, backtested strategy. And the second you flick the switch, you know where I'm going with this, right? Yeah, yeah, yeah. Ah, damn, it doesn't work anymore. Doesn't work, doesn't work, doesn't work. Yeah. You could do everything you can to try to kill the strategy too ahead of time. Yeah. But there's data snooping, there's survivorship bias on certain stocks, there's look-ahead bias.

32:09So what of these things, these pitfalls in backtesting are you maybe looking at and would you warn against most? Sure. So I did that for, I don't know, almost 20 years. I've written multiple books, multiple papers, got a PhD. This is all I did my whole life. and weirdly um you know coming full full circle on it like it boils down to is there a first principle reason to believe this and then then the second question is like why would this continue to exist out of sample because just intuitively if something if there's a 20 bill on the ground and it's easy to pick up it's not going to exist especially nowadays with supercomputers and ai Like that's just stupid talk, right?

32:57So usually what I like to see in a back test, because one of the biggest kind of principal reasons capital doesn't flow into a particular strategy, is it either it makes you look really dumb, i.e. you can't raise a lot of capital, or it just has weird performance. Like it's just an erratic strategy, right? And so my favorite chart to look at in any back test, doesn't really matter what the strategy is. I call it, would other asset managers or people actually do this as a product? Because that's what they're going to go sell it, raise capital and like, you know, move prices around. And so I always look at like, you can do, I do three, five and 10 year, but just look at the rolling three-year performance versus a benchmark.

33:39Like, you know, if you're doing long only equity strategies, just call it the S &P 500, right? And so what you want to do is a three-year period, that's kind of like the institutional mandate you know like most boards they give you three years and if you outperform you get more money if you underperform you get fired that's literally the mandate right and so three years is a pretty good one because that's actually in like a lot of like board of director and trustees mandates and so most strategies like for example value and momentum they're the best ones like it's not a secret that value and momentum over like hundreds of years and every data sample and every fucking guy or every, excuse me, every person that's ever tested it or mucked with data can identify that, wow, these cheap stocks on average and outperform, you know, blah, blah, blah.

34:26But, but the real telling fact is when you start looking at like, well, what is the proportion of times over three year periods? Is the relative performance better they call it the S &P or whatever the benchmark is, you know, it might only be 60 % or 50%. And then even over five years, maybe it's 70%. And over 10 years, maybe it's 80%. But that means that, and you love to see that because if a strategy over three year is basically like a coin flip, like that's terrible for business, right? Like we don't, we're not going to see tons of capital just arbitrage that away. And so any strategy that back test really well, just like an absolute, like I'm a personal investor.

35:13I just care about compounding my money with low drawdowns. That's a total different way of thinking about the world than how capital, like outside capital thinks about it, right? So back tested strategies that have weird activity relative to benchmarks, like trend, technical stuff for great examples, right? Like, Hey, I'm going to go trend follow. And when the market sucks, I'm going to go flat. And then when it's on, you know, like that's a classic one that's been around for. Theoretically that makes sense. I've never understood it by the way, because I've never understood when the in and out goes.

35:44Yeah. And there's a million you could do, you know, others a thousand ways you can do it. They all get you to the same point. And generally speaking, a strategy like that works quote unquote or the long haul. However, However, if you compare your chart of like long only beta against trend follow beta, especially over the past 10 years, you're going to literally look like the biggest idiot on the planet. And you 100 % will not be managing other people's money because almost certainly you've underperformed by magnitudes. But that doesn't necessarily mean the strategy is bad because you can look at every asset class that's ever been traded on the planet Earth at this point.

36:25And if you just do like a brain dead long only like trend fault, like long term trend rule, like you own it if it's trending, you go flat if you're not like literally you get most of the return with half the drawdown. If you have the horizon to think like that. Right. Right. And so those are great strategies where the back tests, you know, where I can pick a million flavors of ice cream, but they're all the general same idea. as long as I know that the market for capital hates it, that's, you know, it makes sense as a first principle idea. And then who would actually implement this as a business?

37:02If the answer is nobody with half a brain, you're probably on to something. But on the flip side of that, you got to deal with that, right? And every day when you put on CNBC and, you know, you're down 5%, the market's up 20 % again, you know, now you got to deal with your own demons of human psychology. and, and, but, but that's also like, ironically, why those kinds of strategies are probably more likely to work in the future. You mentioned, you mentioned something about retail a second ago and, and the individual investor. And I think it's fascinating, particularly today, when I say today, I mean, like, like the last few weeks today, where I have, I have, you know, people that I know that are, let's call them risk averse, generally speaking, you know, where, where they're like, Oh, you know, you know, I'm doing terrible.

37:44I'm like, what do you mean you're doing terrible? You're up 12 % or whatever it is. You know what I mean? Not terrible comparatively, just terrible because they always think they're doing terrible no matter what happens. Sure. That concept. And meanwhile, then they send you an email or something. Oh, you know, should we be in the markets? I'm really worried about this and that and this. Okay. The next email is, what do you think about the SpaceX IPO? I'm like, what? What? Exactly. What are you talking about? Right? I mean, the market's full of that stuff, man. FOMO, fear, greed, like all the things that people have been talking about for since the beginning of time.

38:20It's no amount of education can derail monkey brain. It's just part of the deal. And that's again that going back to your initial question. Why do I personally like computers and systems is because I understand that I also have monkey brain and it's bad. And so the only way to get rid of my monkey brain is I have a system that I could design in like a calm, you know, moment when I'm feeling like relatively stable in life. And I just follow the system, period. Right. Even if I think the system may not be perfect, it's just better to have a system and a process that you follow with extreme discipline.

39:01Because if your system works, I'm just going to pick a number and this is really, but if your system works 75 % of the time, I'm not talking about winning all the time, but 75%, there's some backups here and there and all. But at least you got that because the human nature, obviously, we've talked about this with, I can tell you how many behavioral finance guys, right? You know, Dan and those guys, tons. A couple of weeks ago, we had Dr. Moore on. You know, the thing is that we're all susceptible to the same thing. So anybody listening out there, these are two guys that have been, I've been in business a lot longer, but nonetheless, two guys managing money for a long period of time.

39:33I've seen it all, back-tested, worked with some of the best. and the fact of the matter is don't don't think that eugene fama by the way didn't have some kind of weird fomo and weird stuff and not thinking his stuff worked every once in a while too of course you know he's also a human yeah um and then the other thing that gets people is like yeah have a system and just know you're human and you know one trick that that we always tell people because i deal with a bunch of insanely rich folks because we're kind of in the tax side of the world is just, I call it like the fun bucket. It's kind of like, you know, you go to the casino, bring a hundred dollars, but not your credit card.

40:10Same thing. Like, okay, fine. You're a billionaire. You know, take 50 million and go do your gambling with CNBC stock picks and all your back testing. But for the other nine 50, just do it in like in some like very systematic, uh, process that, you know, keep the fees down, keep the taxes down, keep the diversification high, just, you know, do all the things that are, that you can control because you can't control the market. But yeah, it's one way to psychologically, you know, keep you having fun, but not blowing up the whole kitty. And also keeping you involved in the situation. I want to talk to you about commodities for a second, managed commodities and managed futures maybe.

40:50So for years, I did something for client portfolios that I never liked. And what I mean by that is we always had a position in commodities as part of a big asset allocation. Why? Because everything we've read, done, tested, reviewed, seen, it made sense, right? Always have a little bit of, that's my view. I'm not asking if it's your view, but it's my view. But for years I'm like, I hate this, I hate this, I hate this because I don't feel like I'm ever getting anywhere with these commodities. And it's just a drag, even in the bad years for equities and bonds maybe, I'm like, okay. and I had an epiphany.

41:30And tell me what you think about this. The normal Bloomberg basket of commodities is, I'm just going to throw something out there, heavily weighted, we know, in energy, right? So let's just say round number 50 % energy, which may be natural gas and heating oil and crude, et cetera. There is a ceiling of how high prices can go, in my opinion. The higher the price, then you get to such a level that it kind of cuts off people from buying. Yeah, or they find substitutes or what have you. So you're going to get, and you get a floor. You know, things get low enough, we're going to buy for the strategic petroleum reserves or somebody's going to start, you know, instead of being an electric car, they're going to buy an F350 or whatever, right?

42:12And I figured, well, if we're always in the same positions, how do I ever make money here? Especially if there's contango most of the time going on and I'm going to roll with this and lose and get clipped the whole time. Two years ago, I'm like, I've had it. Now, I know at that point, if I was to get out of commodities, we're going to see a run. Okay. Yeah, of course. But I changed my parameter. I found an ETF style, which is basically a managed commodity program that looked to primarily invest in 14 different commodities that are backwardation primarily. And they can shift around on a continual basis.

42:52In other words, it was a, bottom line, without all the details, it was a trading process. So tell me about that if you've ever studied that managed futures, managed commodities overlay versus static commodities and how that blends in a portfolio. Yeah, sure. We've been running managed futures program for over a decade now. So, yeah, I know everything about this at this point, or at least studied a lot of it. Don't know everything about it, obviously, or have a private island. But essentially, yes, long only commodities, because the reason you mentioned are tough, you know, they kind of give you inflation, but with 80 percent drawdowns.

43:30And that's not exactly fun. But they kind of have, you know, the two drivers would be like the carry component. So, you know, you know, contango versus backwardation, like all else equal, you'd prefer to have contango contracts. And I think the other big driver in that space is probably trend. Right. If something's trending, great. Own it. Otherwise, you know, go flat or don't own it. So as long as you have a strategy that trades in future, like specific commodity futures or really any of those futures, you know, if you include some carry in there, if you include some trend, you know, that's probably on average, you know, going to be better as far as a diversifier than just buy and hold the generic commodity basket.

44:12Right, because actually the contango is going to kill you over time, but just holding is going to... Yeah, no, exactly. 1 % every three months. Thank you. Yes. Gone. Yeah. And gold, like all the metals, all those contracts. If you just do like a generic, whatever, six months moving average or 12 month moving average over their whole histories, it's pretty obvious. You don't want to buy and hold those things. Like if they're trending, own them. Otherwise, don't. And if you want to get into the nuance of it, like you were saying, you know, focus on backwardation. Contango is also important at the margin.

44:48And to your point, there's ETFs and structures out there that do that. So you don't have to deal with it. So here we are. We're at a 30-year treasury that is back to where it was in 07. We see the JGB, Japanese bond, 10-year, the highest since 1996. 1996. Obviously that was a much more, I mean, the pain in 2022 and bonds, in my opinion, is nothing like what's going on in Japan. That's painful. Yeah. No, no, for sure. And like, like weirdly, like, cause again, all of our, all of our things that trade this are systems. It doesn't care. We, you know, we, we primarily trade like trends, but yeah, I've just been seeing like this year, especially the managed future trade is basically short bonds, long commodities, long gold, plus or minus.

45:38And that has been so hair raising where like, for example, today it's, you know, getting destroyed and it's kind of like gone up a bunch, down a bunch, up a bunch. And it's just, it's fascinating. We're not just JGBs, but the entire 10 year, you know, sovereign complex has just gotten crushed. um but yeah i mean today's obviously an exception to that rule but doesn't that tell you something west this this idea that you know back in you said you started back basically you studied things but you started in 1999 and back in 99 i can tell you that uh starting really for a few years before that many years before that uh this was like well this is this is the new thing right you know we're going to need this we got the internet of things we got this we got you know this was going to be something and all these things that were happening was no it doesn't matter if they don't have money Oh, it doesn't matter if we're valuing a particular website based on eyeballs, right?

46:33And I'm always like, are we counting one? Are we counting two? What are we doing with the eyeballs, right? Yeah, yeah, exactly. And, you know, now we're in a situation where it's almost, again, now they tell me the same thing. It's different this time. Why is it different this time? Because there's a lot of money behind it. Yeah, but then I'm like, what about the circular financing, the vendor financing, and all this other crap that's going on? And, you know, the pricing that's going on. The other thing is that I guess I want to ask you about in today's environment, specifically in today's environment, the topic that has been troubling me is where we look at intermarket relationships, correlations.

47:15and historically, as you mentioned about GGBs and golds and things like that with the trending, you know, you see things like, okay, bonds down, stocks up or pick your particular intermarket relationship, dollar down, oil up, right? Or whatever. Yeah. And that seems to be a little bit broken right now in favor of let's just watch the news and the Twitter feeds of right now, the Middle East newspapers or, and I'm not saying just now, this is going on a little while, right? Where last week we saw, oh, out of nowhere, quantum computers. Interestingly, last week, the Barons had a big article on quantum computing being a great thing.

47:54Quantum computing starts moving a little bit this week. And then on Thursday this week, we saw a$2 billion investment into the industry by the government of the United States and taking positions in the companies. 25, 30 % runs on these names. Are we in a period of time, long story to get to this point, are we in a period that it's like macro news moving is more important than anything else? You know, I don't know if you've had Bob Schiller on here. He has this great book called Animal Spirits. And the basic thesis is that everything's behavioral. And when confidence is high and greed is high, all stories sell.

48:38and then, you know, we don't know who's swimming naked till the tide goes out, which is the Warren Buffett quote. Clearly, we don't know when this ends, but I think it's pretty obvious to anyone who's ever been around for longer than five minutes. We're in a high, strong animal spirit environment. And people, for whatever reason, just have low risk aversion. Stories are hot. YOLO, you know, FOMO, all these things are at extremes right now. And we're just in that type of a market. Like, and we all know that in the end, gravity has to matter. Like, why would you buy a stock in the end? Well, technically it's, it's, is it a real business that generates cash flow that I could actually eat?

49:18So like I can actually eat that cash flow someday because otherwise it's just bullshit. You know, at some point that has to matter in the long game, but as we all know, like in the short game, you know, these things can go crazy. Like, I mean, which is what's happening right now. And the problem is, you know, that's great. Like we know it's overvalued. We know people are insane. We know risk aversion is way too low. How do you make money from that? The answer is that's really hard. And it usually comes back to like, well, you can't because that means you got to predict when the humans are going to change their confidence in their animal spirits.

49:53And nobody knows how to do that as far as I can tell. And so in the end, it doesn't really matter from like a strategic investment standpoint. You do all the boring shit, right? Stay diversified, lower your fees, lower your taxes, you know, own a commodity stuff, own your bonds, own everything. Because how can you predict this stuff? Even though we all know it's going to crash at some point, you know, you don't know if it's going to be next week or 20 years from now. And it might be worse to be all cash. You know, what if we have hyperinflation? You know, also knows about this. The author of Animal Spirits wrote another book called irrational exuberance.

50:32Yeah, yeah, exactly. He has all the good ones. Right. And he explains all these things. That was a great book. I really enjoyed it. Let's switch gears now. Let's talk about, one of the things that's happening is that a lot of people have, because of the nature of the market to the last number of years, there is this idea that you get these positions that become concentrated in your portfolio. Yeah. And, you know, when they get to be a size that you're uncomfortable with, some people like, well, what do I do with it? Well, you know, a lot of advice would be to let us, you know, sell a little bit of it off here and there, maybe write some covered calls on it.

51:11There's a lot of things to do, but you're still susceptible to a lot of risk when the proportion of that asset becomes so large. You have done a great job of creating something. I'm going to let you take this from here, but the single stock concentration, tell me and kind of Let's go through a little bit, because I think we have in another show, we talked about this, but tell me about, you know, the 351 exchange and actually where it came from, because there's always been this, right? Goldman and these guys always had this kind of thing. Yeah. So just stepping back right now in the marketplace, this is literally a white pot business right now.

51:46Not just us, but I'll walk you through kind of like all the different solutions out there. and we're all like the bell of the ball at the moment because there's tons of people that have massive amounts of wealth in like a handful of things and but they can't do anything because they don't want to pay the tax right like why would you give up 50 or 20 or whatever it ends up being to get diversified because you're also giving up a big chunk your wealth it'd be way better of how could I do this and keep kicking the the taxes down the road right so basically there's a million solutions out there and this is a dangerous world because you know if you start talking to banks and structure products like it can get very opaque very expensive and like any sort of uh you know benefit that someone might be talking about well great i might as well after the fees and all the chaos you created i might as well just held nvidia and paid the taxes you jerk But so for if you have super concentrated situation, like let's say you own SpaceX and that's all of your wealth, right?

52:50There's really only two solutions there. There's you can do what they call the exchange fund, not to be confused with the exchange traded fund. and exchange fund, it basically leans on something like partnership lots called section 721, where essentially you can contribute your SpaceX into a pool and then you kind of get access to all the other things in the pool. So, you know, whatever. Warren Buffett puts in Berkshire, Michael Dell throws in Dell stock. So at least you can move from SpaceX to like this other stuff, right? And that's your point where you alluded to. That's what, you know, Goldman Sachs, Eaton Vance and those guys have done for a long time.

53:29There's now newer solutions that are much cheaper and I think more efficient example would be like this firm called Cash Financial. But it's the same idea. If you have a contrary position, you could dump it into these partnerships and you get diversified, but there's a catch. You got to hold it for seven years. And that sucks, right? Because now you're stuck in this thing. So yeah, you get diversified, but now you're also illiquid for seven years, unfortunately, but it's, it's one solution. The other solution that I would say is the whitest hot flame out there is what they call long, short tax loss harvesting, where it's, I'm sure your users are probably familiar with like tax loss harvesting, but essentially what they'll do is let's say you have a million dollars of, again, NVIDIA in your Schwab account.

54:16Doesn't everybody, doesn't everybody by the way? Yeah. Yeah. I mean, maybe at this point, everyone probably does if it keeps going up so high. Um, but, and so the problem is you're like, geez, that NVIDIA is like, what if that goes down a lot? You know, that would stink. And so what they'll do is, is they'll use that and they'll put like a long short system around it. And they're, uh, it's kind of complicated, but basically what it's going to do is generate a whole bunch of losses that you can use to like start to slowly sell down that. And then you, you kind of transition your basis into like a diversified long portfolio.

54:47Um, so that's another solution that people like. And then one of the solutions that we do specifically as a firm, but it's, I would argue it's like one of the cleanest, but also has the most constraints, unfortunately, is what you alluded to, the 351. And so the 351 is when you can contribute property tax-free into a new ETF structure, which is awesome. because now I just move like my NVIDIA and my other stuff or whatever it is into a low cost, transparent, beautiful ETF. And there's no holding requirements, none of this stuff. However, the big catch on 351 is the only way to get the tax-free treatment is you have to contribute what they call a diversified portfolio.

55:30So if all you had is like NVIDIA, that ain't going to work because the requirements are no single stock can be over 25 % of the contribution. And there's another rule called the 50 % rule. So anyways, that's kind of your trio, right? You can go to the exchange fund route, which has a seven-year lock, but you get diversified. You can do the long, short tax-less harvesting, which is complicated, but not bad. But it also takes like two, three, four years, but at least it's liquid. You're not stuck in some structure. And if you happen to have like a contrary position, but other stuff to kind of diversify away the the concentration a little bit, IE have 24 % NVIDIA, not a hundred percent of your money's in that, you know, then you can contribute in these big 351 deals.

56:16And those are nice because now you get pulled in and you can basically kind of turn it into like S and P 500. So, but, and that's also way cheaper. There's no controls. And by the way, just to be clear, so everybody knows you're going to move this into there. You're going to keep your tax basis. If you have a, if you have a 90 % gain in NVIDIA, you're going to move this. The problem is you're going to move this into this 351 fund. You're still going to have a 90 % basis in there. Plus the difference is now you diversify your investments. You don't have to worry about the volatility. That's really the big issue there.

56:50Yes. Yes. The huge issue is the IRS, as you know, the only way you get rid of basis is you have to die. Right. Like that's the only way to get a step up. And that's not a preferable way of doing things. That's not, yeah, great. You're going to kill me. And then you give me the benefit. Like, thanks guys. Everything else, the best you can do is essentially deferral, which is your point. And the key thing here is you want to move away from concentrated risk to diversified risk, because it's just, you know, you, you, you maximize your chance to compound at a higher rate without the volatility drag.

57:22And then more importantly, if, if once you move to the next layer of sophistication is it's way easier to leverage and borrow against a diversified portfolio. So a lot of people are talking trash about it right now, which, and this is like a public debate, like political debate, but, you know, a lot of like the Democrat type folks out there, you know, they say, oh, well, all these rich people, all they do is borrow against their positions. I'm like, well, yeah, of course. And it's even better if you can get to a diversified portfolio because your ability to borrow against like an S &P 500 type asset is way better than trying to do what Elon does and borrow against like Tesla stock.

58:05Right. So, so another benefit of getting more diversified is it also just kind of gives you better liquidity and access to your portfolio via like the lending markets. And you can kind of keep punting the tax down the road, but you get access to your capital again. So, you know, there was, there was, I don't know if you around for this because I don't know what the date was, but there was something way back when we used to use love short against the box. Do you remember the short against the box? Yeah. Yeah. They all had that, unfortunately. That was great stuff. Yeah. But that's generally speaking what people still do, but they do it in a financial engineered way, right?

58:39Like you can't, you can't just go long Microsoft and then short Microsoft or use an option or whatever. Like that's just too egregious, but you know, you might be long a basket of whatever, 350 kind of market cap stocks and short SPY. And it's not technically identical and it's not going to, it's not going to be considered like a short against the box, but it's, it's 95 % risk catched. Right. And you still, you know, so there, there, there's, there's a gradient there and that's something that the IRS has really not attacked. Like the, it's like, what does substantially identical mean? You know, you've talked, some guys are like, oh yeah, I go long.

59:17I, the Russell 1000 and short SPY. I'm like, well, they're 99.99 % correlated. They're like, yeah, but they're not substantially identical. I'm like, well, no one's ever been busted on it yet. But, but you know, but a ton of people do that and I don't, you know, I'm not the IRS and it's a gray zone, but, but that's, that's an area where people kind of gravitated from like the obvious ones they outlawed to like, well, let's do like ones that are 99 % correlated, but different index. I remember, seriously, I don't think I was, been emotional at this level for any kind of regulatory change ever since I think, well, I was excited about the move from away from half steints and teenies.

1:00:01Remember those days? Yeah, sure. That was a good thing. I was emotionally happy about that. That, of course, some of my friends that were market makers were devastated. But the short against the box is one of those I was like, oh, so upset about. It was like, oh, this is such a great tool for temporary money in and out, you know? And then back then there was also, you know, a lot of collars still done, collars still done. Yep, yep. Where, you know, you buy some options on top and the bottom, kind of call the whole position so it doesn't move. But the interesting thing about that is it seems like that's great, but you're not moving it.

1:00:31You're just, you're walking up the down escalator. Yeah, it's just, again, all those things, and those are still all around. There's a bunch of rules. They always try to constrain these things, which is great. That's more of a public policy thing. If it's up to me, I would just like eliminate the tax because I want capital to have low cost of capital because I figured it'll spur like more innovation, more wealth, etc. But I'm obviously a Chicago school guy like Milton Friedman type. Right. I got voted off island because apparently it's all communist these days. But in my philosophy, I wouldn't have any of these stupid roles.

1:01:07and we would just let people get as rich as humanly possible because that's just better for business formation and wealth creation, et cetera. But obviously we're not going to do that apparently. So we have all these rules, which is totally fine. And then what people like, I feel like my job and other people's job is like, okay, you just tell me the rules and I'm just going to maximize as much efficiency from a tax perspective as humanly possible. And that's just how we're going to play this game. I have one question I want to ask you in closing, and I don't know why I just thought of this. I just don't know where it just came from because I don't think I've ever really talked about it, ever.

1:01:44Yeah, sure. I've been doing this since 2007. I don't think I ever brought this up before. Structured products. The idea that you're going to buy the S &P with a five-year period of time, that if it's above this or below that and all this stuff. Yeah. I see this stuff being sold. It's not being bought. It's being sold. And every time I see it, it puts the hair on the back of my neck up a bit. And, you know, first of all, the prospectus is this thick. Nobody understands. Even the guys that sell it don't really understand how you make money in it. No, no, they just know that they get a 2 % front end load or whatever it ever is.

1:02:20Are these things going to ever go away? I mean, your analysis on this, I don't know how much you know about it, but it looks terrible. Yes. So one of the things that actually the ETF market done, I don't know if you're familiar with the firm Innovator and like the whole buffer fund. Yeah, sure. But basically, like they basically took what was a classic kind of insurance heavy strategy where, you know, they, you know, the Boley Coley guys would give you that pitch. And it's like, oh, my God, the fees and like all the all this stuff is insane. And so they've moved all that into the ETF structure.

1:02:51And I wouldn't say it's necessarily like cheap and efficient like Vanguard, but it's way more tax efficient. It's way more transparent. And the fees have come way down in those products. And that's why I think you've seen such growth in the buffer and the outcome ETF market. Because even though you can make arguments from like a quantitative finance perspective, like, well, that's dumb. Why don't you just own a mix of like cash and stocks? You do your own Delta hedging. It's way cheaper. But, you know, a lot of people, they just love outcome ETFs or like structures where like, oh, I get 10 % upside, but no downs, whatever it is.

1:03:27And so at least I think as those products have moved into the ETF wrapper and they're way more accessible. It's putting, I think, a lot of competition on insurance guys because they're like, oh, crap. Now there's actually a competitive alternative. So at least I got to make, they're still going to be opaque. They're still going to not be transparent. The prospectus will be a million pages long and you should run like hell when you see it. But at least at the margin, I think the competitive market is at least making it less onerous on people, generally speaking. Those things were packed with fees.

1:04:01The only person that ever saw making money was the actual firm putting it out. They were doing the whole process to make money for themselves. Yes. And that's still the case. It's still huge because they got captive distribution. But like I said, you know, competition is a, is a, you know what, for people that are not selling something competitive. and that the ETF market has been a very good force for good, at least from a consumer perspective of like forcing everyone in the financial service businesses to like deal with competition, which is awesome. I love it. And that's also I like being in the ETF business because I feel like we can just help continue to push that forward.

1:04:38Great stuff. Wes Gray, Alpha Architects, appreciate you coming on and being a good friend of the show and everything that you do for the industry. Great stuff. Great stuff. Thank you. Likewise. Appreciate you having me. All right, buddy. See ya. Yeah, we'll see ya. That's a smart guy. That's a really smart guy. And I really appreciate all the smart people that come on this show. And we have a lot of them. Great stuff. Great stuff. Got another one coming up next week with the head of analysis and stocks and markets. And great stuff. Steve Sosnak from Interactive Brokers is coming on next week. onto the show.

1:05:16So make sure to stay tuned for that because it's going to be a good one. I promise you that. Other than that, I want to wish you a great weekend. Hopefully all things are good. Welcome to June. Welcome to maybe they're not boring. We'll see what happens. Welcome to the next phase of this rally. Maybe is going to be underway as well. I'll see you soon. Thanks for joining me.

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