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

Episode Date: May 5, 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-managing-market-risk

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 how to manage risk without missing out. on returns. John, welcome back to the program. Thank you. I'm so glad to be back.

You know, I know that you work with clients helping them manage their money for the purpose of hopefully having enough money and plenty of money to make it to and through retirement. But so many times people think I've got to grow, grow, grow money. But a lot of times retirement success isn't just about getting to a certain number. It's about protecting it as well. So where do you start when you're talking to your clients about this topic of managing risk and protecting it? Well, first of all, I have to say it is about grow, grow, grow. So don't forget that part. That's definitely there.

But both sides are certainly very important. You can't, if you drop 50%, you've got to grow 100% to make it up again. So clearly protecting the downside is every bit as important as, generating the upside. But in terms of how we talk about, I'm sorry, go ahead. I was going to just make a point right there because you said it just, you know, off the top of your head, but I think a lot of people wrongly assume if I lose 50%, I've got to quickly gain 50% to get back up to where I was.

But that's not the case because if you add 100,000 and you lost 50%, now you have 50,000, gaining 50% is 25,000. so you're not where you need to be. So you've got, if you lose 50, you've got to gain 100, and it's hard to gain anything, much less 100 or double the amount you lost. So I think that that mindset is so powerful for people to realize that you need to protect those losses because it takes a lot more effort to get those gains to get back to where you were. Absolutely. You do need to protect. It's a real balancing act, right? So we'll talk about this more, but you don't want to protect to the degree that it prevents you from gaining. You need to be

able to do both. But first, let's talk about what is risk, right? So the way I think about risk is it's the potential for a loss, whether that's the, you know, down 50% or it's the potential for a loss. And there are multiple kinds of losses that we could talk about, right? So the numbers that you're throwing out, that's really talking from a number standpoint, a financial loss. And that's the most important. But it's not always what drives us, right? There's also an emotional loss that we can talk about. And there are other losses. There's loss of prestige. Oh, I invested in this. There's loss of self-esteem. Oh, I thought I was really good at picking stocks and I bought this and it went down. There are multiple losses. But the main two are the emotional loss and the financial loss.

And sometimes we think we're making decisions in our financial interest to minimize the potential loss, minimize the risk on the financial side when really what we're doing is minimizing the emotional loss, which might not be the right answer. We're humans, right? And so humans have a, I don't know how to best say this. Humans are allergic to loss. Humans are, they fear the loss itself. Yeah.

And they will do almost anything possible to avoid losses. I think it's, it's probably part of what makes, what has made as humans so successful over the years, right? We'll do anything to avoid losing, which is great in most situations, right? It gives us desire to improve and do better. But there's also a downside to that. I mentioned in the last podcast, my chapter. passion is poison, right? So when it comes to investing, sometimes our focus on avoiding that loss, that emotional loss, it actually creates the loss that we actually feared, the financial loss.

100%. Yeah. What are you finding are some of the biggest risks for investors? Because I think that a lot of times, you know, like some of that, the ones you just mentioned, those are like the internal risks that you know you're the fear of loss kind of a thing which is so huge and I know that you know psychologists and performance coaches will say that we are motivated by the fear of losing something more than the prospect of gaining something so it's a real thing but what are some of the risks for investors that you're seeing well let me let me talk about those those risks but first before we move on to that let's let's stay a little bit more in the passion is poison concept if we might.

Because understanding human psychology is really fundamental to managing those risks. And you brought up an important point that we feel the loss is more than we do the gains. I think they say roughly people feel a loss twice as intensely. I don't know exactly how they measure intensity, but twice as intensely as they feel the pain, right? So we'll do anything to avoid that. And then we have to couple that with another failing of humanity. And that failing is in estimating probabilities, right? People are terrible at estimating.

And I don't care what we're talking about estimating. Oh, oh, yeah, I'll be finished in five minutes. Really? Yeah. When the husband says that the wife rolls her eyes over my face. Exactly. Exactly. And we deceive ourselves that way too, right? Oh, just a couple of minutes.

We might actually believe it when we say it. But we're terrible at estimating. Count the number of jelly beans and you'll win a big prize because nobody can estimate the number of jelly beans in that jar. But it doesn't matter what we're estimating. And I think this problem has gotten worse over time. The internet has not helped out, right? My wife is often a bit fearful.

Oh, I heard a story about somebody getting killed walking across the street. Oh, well, you better not walk across the street then. because we're terrible at estimating those probabilities. So I think that's a challenge for most people. One of the things, I didn't really talk about it much in the last podcast when I gave my introduction, but my background is in a chemical engineering. That was my undergrad. And chemical engineers are better.

I have a lot of respect for chemical engineers. They're trained to estimate well. and they estimate all the time. You would probably be afraid if you had a chemical plant next to you to know how often chemical engineers estimate, but they do, right? So, oh, here is an unknown liquid. What should we assume about it? Well, it's probably a lot like water. Let's use the properties of water.

We know water. Oh, here's a guess. What properties should be? Just pretend it's error. They're trained to know when they can estimate and when they can't and what the probabilities are. So I think that's an advantage that I bring to this. But humans in general, outside of chemical engineers, I have to give a little shout out to my fellow chemis.

But people in general are good at self-delusion, self-deception, bad at understanding the risk. Now, getting back to your question, what are the greatest risks? They really fall into two camps, two big risks. And those two big risks tend to line up with the big emotions with investing. Greed and fear, right?

Greed and fear. So if I am more on the greed side, I might be all in in the market. I might even be levered in the market. What's the risk for me? Well, the risk for me is market crash or prolonged bear market, right? I'm all in, I'm levered and things crash.

Big problem. In an extreme example, 1929 people jumping out of windows big problem right that's that's a big fear of loss the other problem which tends to align more with those who focus more on the fear is they they end up investing too conservatively and they don't end up meeting their goals the most fundamental goal of course being not to outlive your money right i don't want to be homeless living on the street because because of a market crashed. And so therefore, I'm going to put my money under a mattress.

Well, guess what? You're still going to be homeless, right? Sure. Just for a different reason. So those are the big two fears. And actually, they're quite a bit in conflict with each other, right? So I can be afraid of a market crash, therefore I underinvest and I still end up with the same bad result. It's like I'm trying to avoid one and I hit the other if I try to avoid

if I try to avoid living on the street and I invest too aggressively, then I hit run into the other fear. And I should say this is not just about outliving your money. It depends on what your personal financial goal is. Sure. My father was not concerned. My father with nine kids was not, but he had a good job worked for IBM for 29 years. He was not. not, he had a great pension. He was not concerned about running out of money, but he wanted to leave a legacy to his children. And he wanted to leave a substantial legacy to his children. And so it depends on what your goal is, but whatever your goal is, fear of not obtaining that goal can be a powerful motivator. And you have to balance those two concerns, the concern of a

drop in the market and the concern of basically underinvesting, being too conservative and not not earning as much as you want. Yeah. Because we all want more. And there always will be inflationary, you know, times and crashes. We know, you know, there's always going to be the times that, whatever, the economic crisis, the market crashes, 9-11, market crashes, COVID. There's always things that will impact. And same with external things like inflation.

Are those some of the main risks that you're finding, that you're. clients are facing? Yeah, I think they are. The crash, the bare markets associated with COVID, and along with not without living your money. But the nice thing about the first fear, the market decline fear, the nice thing is we kind of have a handle on that, right? We know something about market declines. We've lived through a number of them. We know they come about once every five years. We know they last on average seven months, they're going to drop 20, 25, 30%. But, and they can be larger, right? So we acknowledge that.

Great Depression. We acknowledge that it always happen again. But we generally know what to expect. And the even better news is we know, we know based on history that it's going to recover. So we know that when we try to quantify that fear, we know that it's a short-term concern. And as long as you don't let your emotions get in the way, it stays a short-term concern. But unfortunately, it's a scary concern, right? Nobody wants to see their portfolio drop 30%.

Yeah. And oftentimes it's a sudden drop, which makes it even scarier because the other thing we humans are good at is extrapolating, right? Well, we think we're good at extrapolating. We do it too often. So, oh, it just dropped 30% in a month. Next month is going to drop another 30%, another 30%, and hey, all my money is gone. Yep. So that fear kicks in, and that's when we make mistakes and end up opting out of the market.

Oh, I've got to protect what I have. The fear kicks in. I'm holding everything close to my chest, and I'm liquidating the exact opposite of what you should be doing in that situation. But that's so that's for the market decline fear. We know it. We understand it. We know that it isn't a certainty, but it is a probability. It's kind of, like I said, it's going to happen every five years, roughly, you know. The other fear, I think, is the bigger problem. It's the bigger problem, partly because it's the underappreciated problem. It's the slow death instead of the sudden death. And there's a lot of unknowns about it. So if we're talking about outliving my money, for example, How long am I going to live? Many people go to bonds in retirement. Most people go to bonds in retirement because they think they have to be more conservative.

But stop and think for a second, how many more years are you going to live in retirement? On average, if we're talking about females, I think the number is about 20 years. So if you retire at 65, you make it to 65. On average, you're going to make it to 85. That also means some people are going to make it to 80s. to 95 or 105. My grandmother lived to 101. Was she expecting that?

Probably not. Fortunately, she didn't outlive her money, but you don't know what to plan. There's a lot of uncertainty around that. Is it, you know, do I have a 20 years or more? So it's uncertain. It's also invisible.

It's not something we pay attention to because we are talking about the risk of inflation, eating away our purchasing power. and inflation at a few percent a year, it's almost invisible. Now, sometimes like recently, it's become a more visible problem. And it gets up to 7, 8 percent inflation. People start to pay attention because they can feel it a little bit better.

But nobody knows what that number is going to be in the future. And it could be significantly higher, right? Yeah. You know, when we think about mitigating, risk like we've been talking about, asset allocation always comes into the conversation. So is there a stock standard optimal asset allocation that you start with and then you kind of tweak and polish up as the market bobs and weaves?

Well, I'm a bit different than most. I'm actually not a believer in bonds. I am a believer in being in the market and always in the market. If we look back over the last 200 years, and I've got a graph this effect, if this were not audio only, I'd throw it up on the screen for you. But I've got a graph that looks at bonds and how they've done over 200 years, gold over 200 years, cash over 200 years, stocks over 200 years. Stocks over 200 years. And I've got to tell you, Mike, there is no comparison. that stock chart is just up, up, up, up, up, ten times better than anything else.

The stock market is one of the greatest inventions of mankind for generating the assets that we need to survive, especially in retirement, or to leave a legacy to our children. People talk about the 60-40 portfolio, right? That's kind of the, that's been the standard. there's a couple of problems with that standard. It really relies on two big assumptions. One assumption is that the two asset classes are uncorrelated, so that when stocks go up, bonds go down, and vice versa.

And that isn't always the case. So 2020, we had a really bad year in the stock market. Well, guess what bonds did? They also went down. So I should say the assumption is that they're inversely correlated. So one goes up and the other one goes down. In 2022, when you needed those bonds to go up, instead they did the opposite. It wasn't the protection people were expecting.

The second assumption is that you regularly rebalance between the two. If you invest 60, 40 and don't rebalance, meaning when, stocks go down, you sell some of your bonds and you buy those stocks, you don't rebalance, all you're doing is diluting your earning potential. And sleeping a little bit better at night, perhaps, because the swings aren't as big, but eventually you'll find yourself sleeping on the street. So we don't want that, right? So that's kind of a, that's a big problem. and as long as inflation continues to eat away at our money

and I believe it will I mean let's let's talk about inflation for just a few minutes right where does inflation come from inflation comes because it's a hidden tax by government it's a tax that politicians can get away with

without getting fired right they they keep running the printing press you know before World War II we didn't really have inflation in this country but what we both voters and politicians discovered after World War II because we printed a lot of money in World War II and it wasn't the end of the world. So politicians saw this and ever since World War II, they've been printing more and more money and every generation of politicians prints more and more money. So inflation, it's a problem today.

No one knows what will happen in the future, but the incentives are still there for politicians to print more. money in the future. So inflation will likely become an even bigger and bigger and bigger problem. So when we think about these two risks, what you're essentially, what most people are doing is they are ignoring, they're trading in an, they're foregoing an emotionally scary possibility of a short-term risk, namely a market decline, for instead, a guaranteed long-term risk of financial insecurity, long-term risk, which is emotionally more satisfying, but financially more devastating. So 60-40, no, I don't believe in that. I believe in being all-in in the market. Take your lumps if you have to, and we can talk more about how to avoid those lumps,

because I think that's an important part of the plan. But if you have to, worst-case scenario, take your lumps and it'll be short-term pain and the market will come back. 1987, 23% drop. How long did it take for the market to come back? Less than two years. So I can accept a dip for a couple of years knowing my long-term future goals are going to be met, or I can ignore that and guarantee my long-term goals are not met, by sticking, I mean, worst case scenario, sticking my money in a mattress, but in a CD or even in bonds, which can also decline in price.

So there's a lot of problems with that. For sure. And there's no one template that works for every single person or else that would be online and everyone goes, I don't need anyone to help me because I'm going to follow this template done. So everyone is different. Every recommendation for every client is different. that's true that's true uh that's true uh i think there are some common recommendations though some things that we can do to improve the odds what we really want is we want the returns that the stock market can provide while minimizing the risk of the decline and there are some things that we can do to

minimize or make less painful that that possibility of loss one thing that we can do is a dollar cost averaging. Great concept, right? Every month, if I'm still in savings mode and not into retirement, I can continue to put away a little bit of money every month, rain or shine. That means when the market goes down, you don't let fear take over and stop putting money in the market. If anything, you double up the money you're putting in the market. But dollar cost averaging, it's a very simple tool. Anyone can do it. Everyone should do it. The second thing that

everyone should be doing is diversification with rebalancing. You always need something to sell. When markets decline, that's a huge opportunity. I loved this last month. To me and my clients, this was a great month. I mean, unbelievable month because we were well positioned going into it and because I always had something to sell. So I had a number of assets that did very, very well in the decline, I was very busy, especially those two days, identifying assets to sell, sell, sell, but not selling out of fear, not selling out of panic, selling because they were triggering my upside gains. I was making money on these assets, and I had to lock in those profits and prepare for the next round. So always having something to sell is pretty important. and diversifying can help with that. Most people diversifying, what I just described is an extreme example that I do with my investors. But most investors, at least they'll, even if they don't have something that's made a lot of money in a downturn,

they at least have some things that have lost less if they're diversified. And they can still sell those in order to buy the ones that are down even more, buy low, sell high, right? You know, John, that's really huge to be thinking about these methodical decisions and approaches. And, you know, sure, people can try to do it on their own, but then you get your motions involved. You mentioned a minute ago about, you know, about every five years there's a market correction, which is the nice word to say market crash. How can investors prepare for market crashes and then how do you prevent being wiped out? Well, the first thing to remember is that no one knows what the market will do.

So, and that also means in the middle of a crash, I was on the radio a couple of years ago. I guess it was 20, 22, when the market kept having significant down days. And on one of those down days, the radio station called me to ask my opinion. And it's actually the last time that they called me because I don't think they liked my opinion. They said, well, what do we do? Do we, you know, is the market, actually, they said, is the market going to go up or down from here? and I said, well, no one knows, right? That's the short answer.

The best indicator of future price is the current price. And whether it will go up or down is a complete guess. And I'm not going to make that guess. I don't know. I just want to be prepared for all eventualities. So always stay fully invested in the market because you don't know what's going to happen. And normally, when your emotion is screaming the loudness, to get out is exactly the right time to put more money to work, not less.

So always stay fully invested. That's rule number one. The other thing that you can do or that we do is we skew our modeling. So we have very detailed regression models that we have developed in-house that identify common factors when stocks, when a market correction happens, common factors when the market does really well, a model on interest rates, etc. So we've got all these models and we assign weightings to those models. So one of the things that we will do to make sure that we are insulated from crash is we oftentimes apply extra weighting to our risk off model.

So this has us a bit over-invested in stocks that will do well in a crash environment. There's a cost to that, right? If the market ends up being a strongly momentum-driven market, and it's all about Google and Facebook, then we might not perform quite as well as the market with our equity portfolio in that scenario. But it provides wonderful protection, when the market does what we most fear.

And then the other point is to always have something to sell. Like I mentioned before, diversification helps that. With my clients most recently, what we've been selling is put options. So a lot of my clients, I invest in both call options and put options at the same time. an option gives you the right to buy or sell at a set price. And so if you buy put options, what happens is if the market declines, you get to put those shares back to somebody else at a set price, which is higher than now the dropped market price.

So you can buy today and immediately turn around, sell all those, that equity to someone else at a much higher price and make a lot of money. So that's what's happened with our option clients. They always had something to sell. In this case, when the market was crashing, they, we, I, on their behalf, sold, close out some of these put option positions and locked in those profits. And I think options, we can talk about this a little bit more, but I think options are an underappreciated asset class for many, many investors. because they can be very, very effective at not only protecting the downside, but paying you during the downturn.

I ran into an investor of mine over the weekend, and his account was maybe high 300,000, and he says to me, he's like, John, I couldn't believe it. In two days, I made $150,000. He said, that was, I can't tell you what a comfort that was when the rest of my portfolio was declining, right? I had other assets, and they were all crashing, and yours were making up the difference. So even if you're a conservative investor, there can be a place for put options as protection against those market crashes. Like I said, you always need something to sell. And sometimes those best sell opportunities if you're positioned right ahead of time and be during that market crash. And combining those options with equity gives you stability.

But I think the missing ingredient in that is all of the decades of knowledge you have come to, you know, the formulations and the formulas. Because trying to figure that out on your own is a recipe for disaster because you've got to learn from the school of Hard Knocks. Please do not do that. So have someone like you to guide the process. So one of the chapters in my book is on weapons of mass financial destruction. That's another way of saying options. As a do-it-yourself investor, I would steer clear of options. they are highly volatile.

They work for me in my accounts because I am diverse, well, partly because of my background and my history, partly because I always invest in individual stocks and I, and I've done a lot of modeling to know which stocks to invest in. That is hard for do it yourself or to replicate. and partly because of my risk tolerance, frankly, I can handle those swings, but there are significant monthly month-to-month swings that can come in an option account.

And I'm not saying it's right for everyone in large doses, but in small doses, it can provide the protection that you need when you need it the most. And so I think it's appropriate for investors of all stripes to consider options. The question becomes how many options, what percent of my portfolio was options?

This investor that I mentioned this last weekend is highly risk tolerant and his target option percentage was 85% of his portfolio of the portfolio that was held with me. So he was highly prepared for a downturn. Very few investors can stomach the month-to-month volatility

of 85% options. But 10%, 20%, maybe even 30%, maybe even 30% options, a much wider audience can handle that. Well, John, I tell you, this has been really eye-opening, and if someone is interested in getting your opinion on how maybe some of that diversification and options combined with equities could benefit them, what's the best way that they can reach out and connect with you? Well, please reach out.

Phone number is 8665 Stellar, 8665, Stellar, or visit our website for more information, Stellar-assets.com. Ask me for a complimentary copy of my book. More than happy to share that with any of your listeners. It covers 10 rules of investing, which I follow in my equity accounts and to a large extent my option accounts as well. Excellent.

Thank you so much, John. I really appreciate you coming back on today. It's been my pleasure to be here. Thank you 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.com. www.

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