Business Innovators Radio - Interview with John Wright, CFA Chief Investment Officer of Stellar Assets Discussing Beating the Market

Episode Date: May 7, 2025

John is a Stanford guy, but not Wall Street. He has spent his entire career in the real world solving the biggest problems facing the largest companies.Problems like how to win, grow sales, and improve the stock price. He has driven value across diverse industries: Consulting, Technology, Industrial, Retail, and Transportation. But he no longer works for McKinsey, HP, Exxon, AutoZone, or GM. Now he works for you! And he applies that problem-solving, creativity, and corporate background to decide how to best invest your assets. It would be his honor if people would consider him a money manager.On a personal note, he is married with 3 children. He is the 7th of 9 children in an extended family where everyone still gets along. They were raised by faithful parents who taught strong values, including that they are all part of a greater family of brothers and sisters. He served a 2-year full-time mission in the Netherlands & Belgium to help share that message.Learn more: http://www.stellar-assets.com/Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-john-wright-cfa-chief-investment-officer-of-stellar-assets-discussing-beating-the-market

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of influential entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us John Wright, who's the chief investment officer of stellar assets, and we'll be talking about if it's possible to beat the market and minimum downside risk. John, welcome back to the program.

Thank you so much. It's a pleasure to be here. Hey, I know that this is a tall task, but beating the market, A, is a tall task, but while minimizing downside risk, that's another tall task. So is it actually possible to do that? These are tall tasks. No one would deny that. We need to put on our stretching shoes here or something like that. So let's break it apart a little bit. Beating the market and minimizing downside risk, let's first talk about minimizing downside risk.

Because if we just look at that one goal, life is easy, right? I can minimize downside risk all day long. In other words, avoiding a crash. I just stick my money in the mattress, stick it in an ICD. I've minimized that, check the box, move on, right? Life isn't that. But then you're too conservative and the opportunity cost is you're missing out on something. Absolutely. And we talked about that in the last podcast, right? That how people have the concern of outliving their money or maybe not out living their money, but not accomplishing the goals that they have set out financially for themselves because we're all human and we all want more. And whether you want enough to live on or for your posterity to live on, more is usually better than less. And you're not going to get more by sticking it in the mattress or. or in a CD.

Or a CD. Yep. That's right. So minimizing is easy. Beating the market is the hard one. So let's focus on that for a little bit. Easy to say, very hard to do. Most money managers fail at this task.

You would be better off, I don't want to speak ill of my profession, but you would be better off hiring a bunch of monkeys to throw darts than hiring the average money manager. right after fees uh and there are a bunch of reasons for that i go into some of them in my in my book which uh people are welcome to a copy or go on amazon and get that uh you know nothing about picking stocks and that's okay by john right but um most money managers lose money so they won't even talk about this right they don't they can't they can't promise it to you uh nor should they right there are no guarantees in investing but they won't even talk about it

because when they're honest, and I'm more likely to hear this than you will, but when they're honest, they acknowledge they have no idea what to pick. I was talking a few months back with an old friend of mine in California in the money management business, quite successful. And she told me flat out, she says, John, I have to tell you, I have no idea what to pick for my clients. I just look down the list and I check this and check that. And I, so, well, this sounds good, right?

they don't know most money managers don't know any more than you do you know we talk about diversification and one of the quotes in my book is about i can't remember word for word but it essentially says what you don't realize is that your money manager is diversifying not for your benefit but for his right because he doesn't know which stocks to pick and that's very true so so beating the market very hard to do. Easy to say, very hard to do. And then when we throw on that third part, minimizing risk, it almost feels impossible, doesn't it?

Like, how can I beat the market, which we all know risk equals reward? How can we take on more risk while minimizing risk? Very hard. But what people don't recognize is that a lot of your performance depends on how you, you do in market declines. And if you have a way of systematically sidestepping a large share of declines, you can actually do both, right? You can minimize the downside risk and it helps your long-term performance. The key is to how do you do that without deteriorating your everyday performance? That's the challenge. But it is possible. I do believe it is possible to

do both made easier actually when you can minimize that when you minimize that downside risk. You know, that's the trick is, is can you do them both, which is more important. And I don't know that there is one easy answer, but you framed it up really well. What are you doing or what are you advising your clients when you're trying to achieve this when there's a downturn? So in other words, this sounds great when things are going just fine, but if we see some troubled waters, how do you achieve higher returns without getting wiped out when there's maybe, you know, a little cloud of your sky is happening? Well, we have two recent examples that we can learn from. We have the one just a month ago, it's a very severe, significant loss. And for a longer time perspective, we can look back to 2022. So, Back in 2022, I was mostly running equity-only portfolios. And those portfolios significantly outperform the market, and they did so by sidestepping a lot of that risk.

So the market was down about 20% in 2022. I don't have the number in front of me, but I think my equity portfolios were down about minus 5%. So it's still negative, but I would much prefer a minus 5% year to a minus 20% year. And if you can do that, then you can, you know, assuming the other years go fine, you can improve your long-term performance pretty significantly because, as you and I have talked about before, when you take a 50% decline, you have to earn 100% back in order to break even. So avoiding significant declines has a lot of value towards your, long-term performance.

So back in 2022, what did those equity portfolios do to help avoid that risk? This goes back to my investing philosophy, which I outline a little bit in the book. But one of the rules that I follow is to have specific metrics to tell me whether a stock is good value or not good value. I've got a bunch of different models I run. And one of those models that I run, these are regression models that, let me back up a second. So, and I talked about this on a previous podcast, but I used to work for AutoZone. And in that capacity, one of my roles there was managing a team of data scientists who would run quarterly regression models to help AutoZone understand what was driving same store sales. So we had a lot of rain last quarter.

How do I translate from rain into a decrease in same store sales? Or what was the effect of O'Reilly opening up a bunch of competitive stores? What was the effect on the aging of the automobile fleet, et cetera? So identifying the factors that drove their sales and then quantifying those factors. And then actually I'd go one step further and use those factors to predict the next quarter and the quarter after that. That was my role there. And in my role now, as a money manager, I use that same process to develop models to correlate company attributes, or I should say stock attributes, with performance in specific market environments. So, for example, I will look at a time period

when stocks fell off the cliff. And in that window, I will look at which stocks do did really well and which ones did not so well. And I can then back into, through regression modeling, I can back into the factors that are common between stocks that did well and predict how stocks will do in the future, stock by stock, if we have another correction. Now, life is never the same and all things change. And certainly the accuracy of these models

is far from 100% accurate, right? The world is complicated. But I use these models when evaluating which stocks to select. In back to 2022, I was using this risk off model, as I call it, in helping me to select stocks. So when the decline came, I was already positioned holding, stocks that would hold up well in that scenario. I have other models as well. I've got momentum models. I've got value models. I got interest rate models. And I blend all these models together.

So I'm not just focused on preventing the downturn. I'm trying to find stocks that will do well, regardless of what the market throws at me because I don't know, you don't know, what the market is going to bring next. So I'm looking for robust stocks. And that was the case in 2022. And that helped out tremendously. Now, more recently, I'm going to talk a little bit about option investing. Because this last month has been one of the best times ever for my option clients. With option clients, I always have them invested on the long side and the short side. with puts and with calls.

I'm always buying options. I'm not, this gets a little bit complicated, so I don't want to bog down too much with your audience. But the short answer is they were invested in options that paid off in the event of a market decline. They also had the other side covered. But with the recent volatility,

my option clients made a ton of money. I think last, I looked at it, well, it's probably been a week since I've looked at it, but not a lot has changed, but they were up roughly 50% over the prior a few weeks on average. So option clients have done tremendously well while the world around them was crashing. So that was probably a very long-winded answer.

How do you avoid getting wiped out in the next downturn? I don't want to avoid getting wiped out. I want to actually make money in the next downturn. Yeah. That's playing not to lose and not playing to win. Absolutely. I played a win and not just in a down market, but also an up market. So I mentioned I always invest in both put options and call options. So if the market goes up significantly, that's great for my clients. If the market goes down significantly, great for my clients.

If the market stays flat for an extended period of time, that's where we lose some money. So we don't do it or at least don't make as much money as the market. So there's always a cost, everything you do. That's the cost. but providing downside protection and avoiding sidestepping those minus 20% years or the minus 12, 13% a couple of days. There's a lot of value and not having to run as hard on the upside if you can avoid that downside. Yeah, for sure. You know, you've talked about your rules for equity investing and your book that you've written. And then options like you're mentioning can be a great mix to provide stability to the

similar rules apply to options investing? Yes. So I do have 10 rules of option investing. One of them, I already mentioned, I hold both, I always hold both put and call options. I always hold options on individual stocks as another rule. I don't hold options in the overall market. I choose individual stocks because I've shown with my equity portfolios a history of being able to pick winners and losers.

So if I can do it with the individual stock, it makes it a lot easier to do it with the relevant option. A third rule is I always take profits on the way up. So I should say when the option value goes up, right? So those two days where the market really cratered, I was very busy checking my rules and selling my winning put options at regular intervals. And the way this works is I always try to buy in lots of three or divisible by three. And then after the option position goes up by 125%, I sell my first third. It goes up 250%. I sell my next third.

It was up 400%. I sell the last third, roughly speaking. So I was constantly, the market was going down and moving so fast that it was constantly blowing through my rules. I was constantly just trying to sell my winners, sell my winners, sell my winners, because that really gets to the last rule, well, the last that I want to talk about today, which is I never allow one side to get above 80%. So when the market is crashing, the value of my put options is going through the roof. The value of my call options is going to the floor. But I got to stay at least 20% invested in call options. So there's two ways.

to do that. You can sell a bunch of put options, which my other rules were forcing me to do anyway, or you can buy more call options. So I was busy selling my winners, taking profits, taking profits, taking profits. And then as things calmed down a little bit, I started to dabble into buying call options to keep that 20% floor. And that 20% floor is really important because we need to acknowledge our ignorance. That market can turn on a dime like it did. And when it did, I actually didn't give back the profits that we earned for my clients. We actually stayed about flat in the market bounce back, which was very helpful to the long-term performance, right? I mean, it's easy to say, oh, we made 50% and then we gave it back again two days later.

Now, we held on to it because we were locking in the profits and then dabbling, excuse me, buying on the call side when the implied volatility allowed to do it and there's another rule about implied volatility so we don't want to overpay for options. But the bottom line is yes, I have very specific rules that I follow

because as we talked about on a previous podcast, emotion is your enemy when it comes to investing. So the rules help take away that emotion and I've demonstrated a history of them working. I believe they will continue to work and we can talk about why that is, but I like to

follow the rules. And I think it's been very profitable for my clients. That helps the taking the emotion out of the equation. I think another thing that takes emotion out of the equation is this new topic that no one's ever heard of, which is artificial intelligence, you know, ha ha, but that changes the landscape of all kinds of things that we do. How is AI, impacting investing and is that going to help out or are we going to find some people relying on that and then it's going to, you know, turn dark on us? Well, AI is a complicated topic and I can only provide a guess because as my book says, you know nothing about picking stocks and that's okay. I know I know nothing about AI and I guess remains to be seen whether that's okay or not.

AI has the potential for leveling the playing field to some degree. But as long as the incremental buyer is still human, and I think that will be the case for a long time to come, but as long as the incremental buyer is still human, then pricing is still going to largely be influenced by those very strong emotions of greed and fear. Right. So things will still be mispriced. I don't believe that AI will magically create a perfect market overnight, maybe eventually. But I'm not seeing any signs that were close to that point today. There's still plenty of opportunities in the market. The, to some degree, AI may make my job easier. I've dabbled in this, but so far, I mentioned, these regression models. So I actually, a couple of months ago, I did a private AI server and

tried to use AI to develop my regression models for me. Well, let's, hey, why not use it? Take advantage of it and offload that task from me. Unfortunately, the AI wasn't up to spec, didn't quite produce the results that I needed. So I'm back to doing it myself. But eventually, eventually it's going to be there and I'm not going to have to worry about it as much. Yeah. But there's some other reasons. Like anything,

there's, you know, you still need to be the human behind the AI analyzing and pulling the strings and letting it do some of the hard work and the calculations. But, you know, we can, we never are going to let AI make major decisions and blindly take the results. Right. And even if AI were making the decisions, What AI would do is what most money managers encourage their clients to do, which is in the option world, it's to sell covered calls.

That's considered easy money in the option world, right? Oh, I own the stock. Go ahead and sell covered calls. Basically offload the risk. Offload the risk to a third party. Well, what we're doing is we're taking on that risk, right, which sounds risky. But when you take on the risk of a diverse portfolio of stocks, that risk tends to blend itself away to some degree. Yeah.

So there will always be players, whether it's AI or human, wanting to offload that risk. And that means there will be an opportunity for players who can pick the right stocks, right? So if you can't pick the right stocks, then you're probably break even at best. But if you can pick the right stocks and then take advantage of they don't want the – I mean, I stock. doing covered calls years ago because every time I do a covered call, not every time, but quite often the stock was called away from me because I ended up picking good stocks. Right. It was very frustrating. So why not take the other side of that trade? And that's what we do. The other insight as to why this will work long term is when options are priced by AI or human,

they're done so based on the probability of the stock ending at a certain price point. But they don't say anything about the journey to get to that endpoint. And oftentimes, stocks will overshoot that price and then come back again. And if you just buy and hold, you end up with an out-of-the-money option. But if you are systematically locking in profits as it goes up or down, depending on your option type, you can lock in profits. And oftentimes I'll make money or at least avoid losing money on. options that expire out of the money.

So that's another advantage that we have. And the final one I'll mention is the strategy is self-correcting. So I might be 80, I'm closer to 50-50 today in my mix of put and call options. I'm actually about 60-40, 60% call options right now. But let's say that the market goes down a lot more. Let's say that I was at 80% call and 20% put. the market goes down a lot. Those put options, the 20% are going to increase in value dramatically, and I'm going to be back to normal in no time.

So it has a stabilizing effect. And that's not going to go away either. So with that approach that with all of your rules and your options with equity mix, talk a little bit as we wrap up here with your risk management strategies, how they've performed over. a long period of time given the market volatility and downturns because I feel like a lot of times people go, I can just do this myself, but then they make a couple wrong decisions and they go, please help. And you're taking a very technical approach. So talk a little bit about how your risk management strategies perform over the long term, even with the highs and the lows. Yeah. So I've been doing these option accounts for

little over three years now. I started at the beginning of 2022. And the returns, my historical returns have been so large that I'm embarrassed to say because I'd probably, somebody would try to get me in trouble. Then don't say. Yeah. But I can say that what I will say that if I, if I, 2020 was my best year. I tend to do better in down markets than up markets. So if I take out 2022 and then I discount the returns by 20%, I'm still several times greater than the average market return. Like still obscene, not as obscene, but still obscene,

even if I take out the best year and discount by 20% on my option accounts over the last three, that's actually that analysis was before the last quarter, it was at the end of the last quarter, I should say, so it ignores the 50% run-up that we just experienced.

But still obscene even before the 50% run-up on the option accounts. Now I will say that there are and on the equity accounts as of the end of last quarter outperform the market on the equity accounts, not by a ton.

a few percent, but outperformed. And then on the option accounts, there's a wide range of, there's a wide range depending on how aggressive the investor is. So for conservative investors, they can invest in 10, I got one investor in 10% options, 20% options, 30% options, super aggressive would be mostly options. And that's not recommended for most people because you do have a very high month to month volatility. You have to be the right investor to weather the storms

because there will be significant up and downs if you're 85% invested in options. But they have made a lot of money better than the market for both equity and amazingly better on the option side. Excellent. Well, you know, I'm glad you didn't. It was vague enough without putting an actual...

It was vague enough while still providing great content. So that's perfect. So I think through this conversation here has been really helpful to see some of the mindsets that you need to keep in mind. So that's been really great, John. And as people are thinking about how to potentially beat the market and minimize downside risk, what's the best way that they can learn more about what you guys do and reach out and also connect with you? Well, first, they can visit a website at Stellar-Assets.com, S-T-E-L-L-A-R-Assets. they can call us at 8665 Stellar, 8665 Stellar, or they can shoot me an email at my email address,

J-A-R-G-H-T at Stellar-G-H-T at Stellar-Assets.com. I'd love to hear back, and I just, even if it doesn't go anywhere from my standpoint, I'd love to help you with whatever problems your listeners might have. Excellent. Well, John, thank you so much for coming back on. It's been a real pleasure talk. with you. It's been my pleasure for each of these podcasts. Appreciate it very much. You've been listening to Influential Entrepreneurs with Mike Saunders. To learn more about

the resources mentioned on today's show or listen to past episodes, visit www. www.com.