The Dividend Cafe - Special Edition - TBG Investment Committee - How NOT to invest in the fast-moving segments of the current market

Episode Date: March 1, 2021

Investing options are growing at a rapid pace with some what were once fringe investment areas are now making it mainstream to the tune of tens of billions or dollars. With what is happening, what does today's investor do or not do to make wise investment choices? Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello, welcome to a special issue Dividend Cafe podcast back with our investment committee, albeit some of us at different locations around the country, but we kind of have a little special topic that's come up. And so I wanted to assemble the other gentlemen here on this committee. We had a pretty lengthy meeting ourselves near the end of last week. And I thought doing a little podcast for you all just to kind of capture some of the thought process behind a lot of the things that are happening right now in the markets. And so the conversation we had was a bit different than what this is going to be in one obvious sense, is that we're not going to talk about individual securities. talk about individual securities. We're not going to be naming some of the stocks that kind of caused this discussion. Because if we do that, then it kind of limits, you know, what we can do

audience wise and distribution wise, just because of some of the regulatory matters. And we really want a kind of full conversation and allow people to get the whole gist of what we're saying. And I don't think it's necessary for us to say particular names. So we're going to do it that way. I'm saying this to kind of set it up for you guys, the audience, but I guess I'm also saying it to my partners here who are going to be part of this discussion that they have to be very careful because for all of us, it's kind of hard to not let that stuff slip out, but it just makes a difference in terms of the regulatory apparatus. So the issue that faces a lot of investors right now is what to do with some of the parts of the market that have moved at a rapid pace. And there's a particular element, it's got a lot of press. The portfolio manager

behind the strategy has become a sort of spokesperson for a lot of the movement that is solar powered investing, that is crypto, that is high disruptive innovation. It has attracted tens of billions of dollars in a very quick period of time. So there's a space that is not FANG. It's not large cap growth. There's barely any large capitalization companies even in this sort of universe. But like a lot of what's happening in crypto, like a lot of what's happening in electric vehicles, particularly the largest electric vehicle company in the world. There's a challenge for investors right now as to how to think about something that might have already moved up 100 or 150 or 200%. And in some cases, much more than that, quite candidly, I think about, I want to get the exact percentage because these things are moving so quickly.

But I think about like even the largest electric vehicle company in the world, you know, it's moved 350% over the last 12 months. So you have a lot of things that have just performed phenomenally well. And guys like all of us that are here in front of you on the video, and you'll hear their voices in a moment on the podcast, have to make decisions about where it's appropriate, not appropriate in the context of pursuing growth enhancement, pursuing something that adds volatility and adds risk into a portfolio, but does so for the greater good of a higher total return,

a higher growth objective in the portfolio. And I think that this whole thing going on right now and playing out has invited the Bonson Group to chime in on like three or four of our sort of hobby horses, the contrarian theme, technical structure of investing, and the cost benefits analysis that goes into how we get exposure to certain themes, not to mention valuation, not to mention sentiment. So there's just a lot of things that are really in the daily consideration of what we all do as the investment committee at the Bonson Group that now are kind of playing out in real time. So I'm going to start with you, Julian, because I don't think that this right now,

specific to the discussion about something like a really high-performing innovation strategy that we decide to sell, you know, by the, you know, and so forth. I don't think that that's specific to the bond yield story of last week and all the people wondering about the rotation, growth to value, that kind of stuff. There's overlap, there's connectivity, but I think that it invites other issues for consideration as to what's going on out there in the market. And the first amongst those that I'll ask you to comment on is the euphoria that you see with tens of billions of dollars coming into new strategies after they've gotten done going up 100% or 150%. There's an argument out there that the momentum sometimes

is what you want to be buying. Myself, more contrarian-minded, thinks that sometimes that momentum is a setup for a big reversal. But what do you think right now is the risk that you would most focus on embedded in some of these high flyers that are a part of the marketplace? I think you put it very well, the word euphoria. And one way just to look at it, as you said, is the assets under management that some of these managers have. And they've been around, some of them have been around for 10 years. And it took them 10 years or nine years to go from zero to a billion.

And then year 10, they go from a billion to 20 billion or sometimes even more. So clearly, you can see just from the size of the AUM that have exploded that there's a lot of appetite for these stocks or these strategies. a lot of appetite for these stocks or these strategies. And people, of course, when they see something move to 100%, they assume that that could be repeated maybe to perpetuity or at least the next few years that there's a hot strategy and everybody wants to get involved. But quite often when you decide to get involved, at that point you miss the train and you might

be the last marginal buyer. When we look at these specific portfolios as well, one thing I looked at last week was the liquidity of the underlying portfolio. That's the problem you have with hedge fund managers. You can have here with a very popular ETF is if you're trying to buy stocks that are relatively small, innovative companies, you have a limited amount of supply out there. So if you have a billion to invest, it's much easier than with 50 billion. So if you go to 50 billion, you're going to have to compromise probably on what you're trying to achieve. And you're going to have to compromise probably on what you're trying to achieve. And you're going to have to look at bigger companies or you're going to have to take a liquidity risk.

And if people run for the exit, that could be a stampede. So Julian, I think that you started with one of the big risks, which is the euphoria risk that often can mean from a contrarian standpoint, that there's just a lot of people out there buying with bad timing, buying for the wrong reasons. And you could make an argument that that's risky because human nature often tells us it, but you can also make an argument that just history has told us. But then you sort of transitioned out of that risk. You use the evidence of flows, right? It went from 1 billion to let's say 60 billion for a whole apparatus, 20 or 25 billion for one strategy in a year. That went from being evidence

of euphoria to a problem in and of itself because of liquidity. Are those two different things that you're getting at? I guess they're related to one another. Euphoria is going to create these flows and these liquidity risks. So I think the difficulty with this strategy is when you get involved, you need to be able to be comfortable with the downside of anything you own. And I guess when there's that before you and these stratospheric valuations, the hyperbolic stock prices.

I don't know how you can get comfortable if people run for the exit that you would want to add more. I guess that's where it can be dangerous. Yeah, I think it's important when you're looking within a certain strategy to understand how that strategy has changed over time, understand what that manager's strengths are, and use metrics like price to earnings, median market cap, and try to track those at the portfolio level over time and try to see how those are changing. And if they're changing drastically, especially after flows have gone up a whole lot, those two things are probably related. And if they are related, then it should be reason for some questioning on the investor's part.

So if you can wrap your head around that, I think that it will make you a more educated investor in those types of products. So are you comfortable with the way I was sort of summarizing it, that to the point that Julian made, we are dealing with something that is a problem, that is something that is evidence of a problem, and something that creates a problem, meaning the flows of tens of billions of new dollars, that it both indicates a problem of euphoria, mania, things like that, and then creates the liquidity problem that we talk about. that can be victims of their own success. And funds that try to manage this a little better

will have closings where they stop accepting new capital. But obviously, if you're an open-ended type structure, you're not able to act the way a hedge fund would. So absolutely, you have to look at how strategies can be victims of their own success, both on the euphoria end and both as far as internally the problems it creates with the fund structure. Now, an open-end fund can cut off new investors as well. What would make them not want to do that? A little bit of revenue. Yeah. It's hard to resist the appeal of an extra, you know, whatever dollar you make from the management fee, right?

So, I guess the temptation will always be to compromise on the liquidity or on the quality of the assets to just be able to get more assets in and more fees. So, that's how they're going to go for bigger companies or compromise on liquidity and create a risk for, you know, for you as an investor if you're in that fund. Brian Saitel, I thought about using a treasury strategy as an example because of the almost infinite capacity, but that's not necessary. We can make the same point using a large cap growth strategy. We wouldn't be having the same conversation, would we? Now, maybe we'd be worried about

the contrarian argument, the euphoria, people bubbling into something. But in theory, a strategy that went from a billion to 25 billion to 60 billion, and really even to hundreds of billions, could buy a whole lot of companies that are themselves 50 billion to 2 trillion in market capitalization before they run into the liquidity concern Julian was talking about. So this is different because we're talking about smaller capitalizations? because we're talking about smaller capitalizations? It is, yeah. I mean, you end up with these niche strategies that have great ideas. It's an innovation strategy to buy smaller,

kind of up-and-coming innovative technology companies that have smaller liquidity amounts and smaller valuations. And then, like Deya said, it's kind of a victim of your own success where you kind of take in these inflows because your thesis was proving out. And then the actual flows coming into the fund actually self-perpetuate the growth of it in some of these smaller names inside of it.

Then you end up with a fund that owns 15 percent of the outstanding float of a single stock. And so it happens in that environment. It goes the other way and the tide is now going out versus coming in, then you sort of end up with some liquidity constraints. And so the way that we look at this is there's always sort of a root or a fundamental valuation calculation that we're coming up with of why we're going to own certain things for certain reasons. we're going to own certain things for certain reasons. And in this particular case, it was a combination of valuations being just abnormally high and over some comfort level there. And then also some momentum, some euphoria. And then the last part, which kind of probably was icing on the cake for the decision itself, was just that the strategy had not only started to shift into larger cap companies, because of course it has no choice. It has to do that just from a compliance perspective, from a safety perspective. So it kind of shifted.

And then there's some headline risk and some press risk around other players in the marketplace that might want to take advantage of what kind of felt like blood in the water a little bit with some risk and liquidity. So we'll come back to that aspect on where potentially hedge fund exploitation and technical risks end up surfacing. But back to that issue of victim of their own success. I think a couple of you have used that expression now. In theory, something doing well and people buying into it doesn't mean to be a risk, right? However, tell me where any one of you jump in. My thesis is this. What something just got done doing is totally immaterial and irrelevant to what it's about to do. Yet, when you see a whole bunch of

new flows come into something that just got doing well, the presumption is that those new flows are coming in because it just got done doing well. And those new buyers believe that that means it's going to continue doing well. Ergo, their bad decision as to what the past means for the future adds to my risk as a present holder going forward. Is that a kind of fair summary of the contrarian logic? Other people buying something for the wrong reason adds to my risk. I think that's a key part of it is for the wrong reason. If they're just piling in because other people are piling in, then yes, I think every marginal buyer is taking more and more incremental risk. So I would completely agree with that.

And so what about the argument, though, that people are piling in because they believe that it is going to continue doing well? I mean, I would say that, you know, you can look at flows and where they're coming from. And usually when you get a whole lot of retail flows into a certain asset class or sector, it's a telltale sign. And so there's that. And then what I would just say is that you can have momentum. You can have something doing well, a sector doing well, a strategy doing well. Those things in and of themselves aren't what would bother me. It's more when you start to get a decoupling away from the actual fundamental valuations of what is being bought and replaced with, it's just going to go up because it's going to go up. And I think crypto, in my opinion, has a little bit of that with it.

But, you know, so those two things. I would say, I would add, I think it has a lot to do as well with the underlying assets. So, you know, if you buy the market and then you have COVID coming and you get shaken and you lose 30%, you still have, you know, you still, it's the U.S. economy and you get comfort that it's going to recover at some point and you're going%, you still have, you know, you still, it's the US economy and you get a, you get comfort that it's going to recover at some point and you're going to do okay from that. If you buy this basket of innovative technologies, it's really hard to say what is worse.

You know, are they going to be making it? Are they going to be around, have some successful cash generative technologies in 10 years? So what's your down, you know, what, what would you be comfortable adding? If this goes down 30%, I think you'll be much less comfortable. So you're much down, you know, what would you be comfortable adding if this goes down 30%? I think you'll be much less comfortable so you're much more likely to sell these things first.

So, you know, to me, that's one of the risks as well, just like you don't have the same conviction of comfort owning these things.

I think that if a lot of the people that were piling into things after they've done really well were making a decision that no, they just simply believe is going to continue doing well. And that they really have the same sort of thoughtful,

optimistic outlook. They can be right or they can be wrong. But at least I would feel a little bit better about the mentality of the entry position. My concern that is rooted in my incorrigible contrarianism is I don't even think it's based on a future outlook. I think that when you go from 1 billion to 60 billion, 10 to 20 to 30 of those billions came from people only looking at what just got done doing well, being really pretty classic rear rear mirror oriented and buying into the embedded logic that what just got done doing well will continue to do well. So it isn't even rooted to sort of, again, either right or wrong, but at least as kind of thoughtful projection of the future and forecast and so forth.

But to your comment right now, Julian, I think it's interesting when we talk about, like as Dan mentioned earlier, and he's very right, we're all really valuation-conscious investors. Our dividend growth philosophy, which is the core of what we do, everything we're talking about right now is supplemental around growth enhancement, but everything we do is always very valuation driven. And that applies to full asset classes and it applies to the companies that we seek to develop a long-term relationship with inside dividend growth. However, I'm somewhat flummoxed by the tension of saying that 100 times earnings is okay, but what you can't know about five years, 10 years down the line? In other words, you're really just sort of making an all-in bet on innovation and disruption event that kind of transcends historical financial analysis?

Yeah, I think that's the right way to put it because if you own something 100 times P or why not 200 times or 300 times? As you say, you're not really buying for the P's or the earnings that are pretty much minimal of the next few years. You're just buying these companies because you think that in 10 years, they're going to basically transform some key parts of the economy and become leaders in some of the sectors and just get rid of the incubants and just going to have some dominant positions. It's really hard to value or price that. So you just, because you have very cheap money,

you can afford to make these very long-term bets. And I think we're probably going to talk about that later, but the duration, I guess, with money being so cheap, the rates being so low, has pushed the valuation of these tech companies to very high levels because basically the discount raises are much lower. So clearly, yeah, I think, but for these companies, as you say, it's more about trying to value what their dominant position could be 10 years and not really based on earnings really.

And what the size of that market looks like. not really based on earnings really and what that what the size of that market looks like and what portion of you know it's funny because it's it's what venture capitalist uh people do all the time and they get presented to uh by entrepreneurs and the presentation will often look like here's this uh here's this tam and if we can just get two percent of this tam we're valued at you know four trillion trillion or something like that. So valuations like that, when there's absolutely no earnings, there isn't even a concept really, are based off some target size for market and you kind of have to work backwards. And it does obviously introduce a lot of uncertainty into your valuation.

But venture capitalists know that and they know how to spread their bets accordingly and they understand their upside, where if you're an individual investor, you tend to overbet on some of these technologies without the diversification or the upside that the venture capitalist is getting because obviously they were in a lot earlier. a lot earlier. Yeah. Yeah. I would just say, I would, I would agree with you guys. I would just, I would just add in again, at the end of the day, it's, it's what you're after on the strategy. So, so you're, to your example on venture capital firms and things totally get it. Although there still is a PowerPoint and a pro forma of what the, what the underlying opportunity set is and what, what, what they're after as far as an end goal. I think the difference to this particular time was we just started, or I'll speak for myself, I just started to feel a little bit like it was just decoupling even from that. So whatever the pro forma was, now it's just trading at this valuation that was pricing in this perfection on top of it. And I think that with what we've gone through

in the past several months, we've just noticed and noted that the herd in the amount of money that's out there and the power behind it to move markets has never been greater than now. And there was a gaming company that was victim of this through a social networking site where people piled into it and really caused dislocation. And I'm not saying that- They were a victim? Yeah. I guess some were victims, some were not. But I guess if there's any whiff of that for me on most strategies that we employ at the Bonson Group, it's just the risk-reward skew ends up being unattractive in some level.

And so it's just not something that, from a risk perspective, we take on all that much. Yeah. I think that that's a really important point, is that we need to talk as much as possible about cost benefits analysis and about risk reward skew, because I think it's fundamentally different to frame things and for us to make decisions the way we do in that context, what you just said, Brian, versus saying we have an outlook that this thing's about to go down. You know, my view on FANG is not really directional. I don't believe these things are about to go down. I just simply have a belief that the risk reward skew is not super attractive.

And I think that that is important for a number of reasons. First of all, not just to sort of offer better specificity or better illumination as to what our thought process is on certain things we don't like, but also to make really clear on what we're saying about everything that we are invested in. Everything we are invested in is not because we came to a determination that these things are all going to go up. It's that we made a determination that weighing the risk and reward generated what we considered to be an attractive investment opportunity. And that thought process is not limited to only things we don't like or limited to high risk things. It's really at varying degrees of self-consciousness, what we're always doing, what all good investment

managers are always doing is weighing risk and reward. And I think back to, again, without saying names, but there was a shopping mall REIT that is represented in our core dividend portfolio. And a lot of people don't know that in 2020, you had shopping malls closed down in the midst of the COVID pandemic lockdowns. And you already had what everyone knew to be secular pressures and headwinds in that space. and headwinds in that space. And in our determination to keep that particular company, one of the things I found myself trying to reiterate a lot to clients was, hey, this is about weighing the risk versus the reward. We know the risks. We're aware of them. But so does everyone else. We think they're largely reflected in price. Here's where we see the upside to be. And there can be error in those calculations. And there can be times when a lower probability risk overwhelms

a higher probability reward. And you end up having to kind of deal with that. But my argument is the risk reward calculation is at the heart of what we're doing. And the comments you made, Brian, about that in this case really apply to everything we're invested in. Yeah, it's exactly right. And it's not that the strategy itself is not good or it's bad or anything like that. And I kept saying the same thing. I'm stealing it from Deo. is not good or it's bad or anything like that. And I kept saying the same thing that I'm stealing it from Deo, but it's part of it was, you know, just, you know, being a victim of its own success and so on and so forth. And then, you know, when you overlay that with some fundamental core

philosophy at the Bonson Group, just didn't quite match up anymore, regardless of whether it goes up another 100% or not. So I tend to agree with you perfectly. So in terms of the not distinguishing something like small cap or higher risk, higher volatility, innovation strategies from core dividend or from fixed income and stuff like that, those things I think are really like not even apples to oranges, but they're apples to carburetors, as I like to say. But then the innovation disruption world versus FANG, versus large cap growth, still very distinct and different, Julian, but maybe the distinction is less. Then it becomes more apples to oranges. There's greater similarities. So how are you thinking right now just about overall risk assets? Now, we will broaden the subject a bit. Bond yields where they were and maybe where they're going.

I'm of the mindset that 1.5% versus 1% on a 10-year is really almost immaterial, especially with a still 0% Fed funds rate. We've talked about PE ratios that exist just in the broader NASDAQ or S&P 500. But how would you distinguish risk thought between large cap growth, FANG, NASDAQ, versus this much more nuanced space that we're referring to. Yeah, I guess the innovation is very specific niche. And then it's companies that you really value based on their, you know, on the business plan, as you say, more like as a venture capital and, you know, not so much on valuation. If you go back to more like established, you know, large cap equities, it's going to be then much more based on their current and predictable

cash flows of, you could say, the next three to five years. And then, as you say, it's all about the risk reward and the risk reward is not something that static. It changes every day and it changes on a basis compared to the other opportunities out there. And the number one opportunity or the you know, the benchmark for everything else being the 10-year yield, which is now, you know, close to 1.5%, which was below 1% not so long ago.

But we're still below, you know, the level of pre-COVID level, which was 1.6%. But, you know, that's so. But then, you know, we've had these very big moves last year. If you look at different sectors, basically with technology, they are performing a lot. And the reason for that being, again, because of the duration of the cash flows with the rates going lower,

that was really helping valuation of these tech companies. And I think now basically what's happening is a reversal of that. So with the yields moving higher, there's the shift that you could expand at some point back into value. Traditional sectors is happening, and also more the cyclical sector. So you've seen bigger performance of energy, of financials, and it's likely to continue for a while

as the rates are likely to keep going higher. But do you view the rate levels as particularly, as a primary driver to the types of stuff we're talking about in Cathy's strategy, smaller cap type things? Do you think that rates are really what's moving prices around? I don't think so. I think, I mean, if the main reason would be, you know, it's like, you know, basically the economy reopening, people looking for ways, you know, they want to put risk to work and you start with what's less risk, you know, the least risky, you go back into equities, you know, large cap US.

And then as you get more comfortable and more confident about the world, then you start going more emerging markets, you start going more into small cap, you start going into innovation. So I think it's more, you know, I think it goes with, you know, the bullishness in the market. So the more bullishness you have, the more you're going to have people going for the more exotic strategies. And the same way that as soon as you have some scare, that's probably the thing that people want to sell first. Yeah, I completely agree. Yeah. What do you got? It's a combination of factors. If yields increase rapidly in the short term, sure, there's an argument to be made that that can have effect on volatility in the equity market, especially amongst those higher

duration assets that Julian was describing. Going forward, over the long term, which we try to maintain our focus on, we think that what the volatility does in the rate market won't have too much of an effect on the long term, primarily because you have to look at what's causing those bond yields to increase. And if those bond yields are increasing gradually as a result of an increasingly strengthening economy, ultimately, that would be a good thing for equity prices. So there's also a short-term versus long-term argument here when you're talking about volatility in the rate markets. So we try to stay focused on the long-term. Indeed. Well, Brian, why don't you try as much as layman's terms as possible to unpack a point

you started to make a bit earlier regarding the hedge fund exposure. And what I mean by that is when these liquidity challenges come up and some of the kind of technical nuances of ETF ownership, some of the kind of technical nuances of ETF ownership, the ability of the whole market to see something and exploit it and where that becomes something we just kind of don't want to touch. Can you elaborate in a way that it might be a bit more understandable? Yeah, happy to. I mean, at the end of the day, the strategy that we're talking about, this innovation strategy is pretty transparent.

We know what's inside of it, and everybody else does too. Not only that, but you can look at the constituents inside of it, and you can see how many shares are outstanding, how many of those shares, what percentage of those shares are currently being borrowed and sold short, and things like that. and sold short and things like that. So there's just a plethora of information for some really big wallets and even as big as this fund that we're talking about itself to go out and try to take advantage of dislocations. They sort of know what the fund owns. They know how much percentage of the shares the fund has. And by putting enough pressure on it, by sending the price lower, by selling it and going short, they could cause different markets in different positions to act in certain ways and profit from that.

And there's nothing wrong with that. This is a free market. It's the way the world turns. And I have no issues with any of it. The only issue is just from a compliance or not, that's not the right word, probably just from a risk standpoint. Being a part of being kind of caught up in that when that wasn't the original intent of why we purchased it in the first place, it starts to tilt the risk reward skew towards we can get growth and we can get the strategies we're after for our clients, but we don't need to also open up some outsized risk while it's small, still represent something that's hard to quantify and not something we can directly control. And I'd like to see that play out. I just, I don't know if we need direct ownership while that happens, just to take that sort of outlier

risk off of the table. So I don't know if that is enough of a 360 around some of the rationale and some of the metrics that would happen, but those are the reasons. No, I think actually it's a great explanation. I appreciate it a lot. Hopefully our listeners do because you summed it up very well. I think that if I can sort of reiterate a point that I've tried to make for many, many years now, and it's something that I kind of had an epiphany in one of our New York trips back in the day, I feel like there's a lot of risks that all investors are taking on that are mostly known risks that are discounted, that are acceptable, they're compensated risks, but they're out there and you have operational risks. You have beta risk on how a whole asset class is going to do.

There's geopolitical risk that's going to affect anything going on in stock and bond markets. There's currency risk. It's all out there. And I feel like I go to bed every night with enough risks. And I'm not necessarily looking for there to be less, but I don't feel great about adding more on top of all the risks that already exist. Sometimes you're taking one risk versus another, right? Like there's a trade-off. That's one thing. But when we're talking about a wholly additive risk

of these kind of technical function issues, the illiquidity of underlying instruments in an ETF, for example. I don't think there's very many investors that understand they're taking those risks sometimes. And I also admit that for, look, I've been very worried about high yield municipal bonds inside of ETFs for a long time. What I mean by that is underlying investments that I happen to know don't ever trade, that have very limited liquidity, and yet they're bundled inside a vehicle that trades second by second. And I've always felt that

there's the potential for that to become very messy and under the right circumstances in capital markets create a very bad outcome. But very candidly, other than like maybe a few hours on a few certain days, we've seen this in the preferred market a few times. There can be some inefficiencies in how these ETFs trade for a little bit, but that's usually been really short-lived and it hasn't been systemic, but the risk is there. There's this unknown risk that I just feel is not needed in our risk budget. And so right now, I guess I'm asking any of you who want to, to push back. If you think I'm being too conservative or too paranoid, overthinking it, it seems to me right now, investors with valuation risk, with interest rates, with all the different things

are already out there and the world's coming along and we're fine, but we have things to deal with, with pandemic and the economy and all of the things that adding to that the potential risk of an inefficient market or inefficient instrumentation strikes me as a really bad idea. You can agree if you want, but I don't mind at all if anyone wants to push back or maybe play the other side of this. I would agree with you. I mean, when you said

sleep well at night, I think about it the exact same way. It's like I understand and I'm very educated in all those other risks that you talked about, systematic, unsystematic, markets, rates, all of it. But then there's sort of the structure part of it where it's going to be unknowable because I can't predict that and markets do change fast. And so just removing something that is intuitively not something I feel comfortable with, I think is a good idea. So I would agree with everything you said, and that's the reason why. The other thing I would say on the other side, on your high yield muni part, is I also agree because we've talked about it over the years, but just it's interesting how we've had these two sort of really dark moments in the GFC, great financial crisis, and then

the COVID moment. My only, just to bring it up, is just that technically there were dislocations across the board. And actually some of those exchange traded funds with some illiquid stuff in it, call it long, long dated high yield munis, actually did break apart a little on the NAV from the discount. The NAV was there, but it wasn't dramatic. And it did kind of come back. And so my worry has dissipated a little bit today than it has been, say, 10 years ago, just because we've been through these two crises. But that would be my only pushback. Yeah. Yeah. As far as some of the risks go, and I think it's really important that listeners get an idea of how we approach portfolio management.

And it is primarily from the risk side first. You have to understand what are all the things that can go wrong and then where exactly to allocate capital. But where all things can go wrong comes first before you start looking at upside. And especially in the case of this fund, if you're looking at certain risks that are idiosyncratic to this fund, but you're trying to get exposure in this disruptive space with electric vehicles, cryptos, and other futuristic-type sectors, it's important to look at what other structures might be able to offer you that exposure. And if you can get out of that idiosyncratic risk into something else while still maintaining the exposure to those types of companies that you wanted,

then you just eliminate part of that risk from your portfolio. This case is a little different, but just talking about more in general, trying to eliminate risk that is idiosyncratic, that's specific to either a specific company or a specific investment vehicle. that's specific to either a specific company or a specific investment vehicle. Well, yeah. But so Julian Dodd, today's point isn't the idiosyncratic risk he refers to liquidity risk and structure risk best remedied by owning these types of vehicles in, in structures that don't offer daily liquidity LPs. Well, if that's a, that's something you're willing to do. Yes. But I guess when you go into a product, thatPs? Well, if that's something you're willing to do, yes.

But I guess when you go into a product that's, well, you go in that product because it's liquid and it should stay liquid. So I guess it depends on, you know, if you go into a venture capital vehicle knowing it's going to be liquid and you're going to be there for five years, it matches your, you know, whatever commitment, then I don't see a problem. going to be there for five years, it matches your, you know, whatever commitment, then I don't see a problem. But if you go into an ETF that has daily liquidity and then suddenly they, you know, they blow up or they can't somehow, they cannot, you know, the, you know, the Navy, NAV starts

dislocating because they cannot basically redeem enough shares for everybody and pushing the valuations down there. And I think it's a problem. So it's more about aligning the vehicle with your intentions. One thing I should say, and I think you guys might have loosely alluded to it earlier. A lot of this is not criticism of these managers or the ETFs. It's more just a realization of how things can change after the fact.

And I think that's what's happened with some of these that went from 1 billion to 60 billion is I think that there's a certain desire to liquidity profile. Dan and I have had, and Brian, you've sat in on a lot of these meetings too, but we've sat in with plenty of small cap managers and plenty of hedge funds that have described the right asset level they want to maximize returns and stay in a

universe that they feel good about the opportunity set and their liquidity. And then a year later, two years later, they had far exceeded it and they were redefining what they're looking to do. they had far exceeded it and they were redefining what they're looking to do. And I think that they're doing that because of a change in circumstances. And I understand it. I really do. But I use this analogy in a client meeting over the weekend because I want people to understand what we're talking about. And it's a ridiculous example. I'm only using two companies just to kind of make the point. But the point is the same with 40 or 50 companies.

If I own a portfolio of two companies, and one of them is Dave and Julian's Lemonade Stand. Okay, so it doesn't trade. There's barely anyone out there. Not a lot of people want to buy it. It may be a good company. It may be profitable. But it's really closely held and really illiquid. And let's say that company is 40% of our portfolio. And then the largest technology company in the world publicly traded is 60%.

And then all of a sudden we get people who are wanting to sell. It's rather obvious that the person who owns that portfolio is going to end up with a lot more of the lemonade stand company and a lot less of the largest tech company in the world, right? And so even though that seems like an absurd thing, that's kind of exactly what happens when you have a bunch of really big liquid companies and then smaller ones and then smaller still, and you get into this situation where you don't have a choice, but to do one of two things, either risk up your portfolio by selling a lot of the heavily liquid stuff, you know, my, the law I've repeated over and over, over the years, when you have to sell, you sell

what you can, not what you want to. So you're selling some of your bigger, more liquid names, which is leaving you with higher risky, less liquid names, or you're selling the less liquid names and getting a worse price. You're hurting the performance to sell out at things at presumably discounted prices to what you think is a reasonable value. There's not really any other kind of choice around it. And so I think that when we evaluate this, we're not in a position as portfolio managers where we have to make a judgment call

as to whether or not someone did anything wrong. It's more just a description of the necessary reality they found themselves in and making a decision judiciously to not expose our clients to that risk. Dale, what do you think? Yeah, I think it's really important when you're looking at in the public equity markets to understand what liquidity is and how something can be illiquid. And you can have an illiquid investment in a public equity. And that happens. And let's define liquidity in general. Liquidity in general means you're able to sell the position without affecting the price. And unfortunately, if you own 15% of a small cap company, that sale is going to, for you to completely get out of that position without affecting the price, is going to you're trying to manage exposures, I think it's one of the most important aspects of any

portfolio. I also think that with analogy I just used, that we're going to get a barrage of interest and inquiry in Dave and Julian's lemonade stand. And it's important that I say that for both our compliance department and regulators and investors that it was a hypothetical, although we would have done it, but the regulatory environment in France to start a lemonade stand was way too high. So we couldn't get it off the ground. Maybe we can use a SPAC as a vehicle to float it. Maybe we can use a SPAC as a vehicle to float it. The sad thing is, I bet we could. If anyone is listening to us.

Good, absolutely. Speaking of euphoria. That's funny. Okay, well, each of you take a second for some closing comments, and I'll wrap us up. Brian, you got anything? Sure. No, I appreciate all the listeners.

In kind of going through, I would encourage those that are listening that have questions about it or saw activity in account. And we didn't mention the exact name, but I'm sure that you could figure it out. If you have questions or thoughts on it, please reach out to us. We'd love to hear it. Again, it isn't anything indicative of the person managing the fund. I hold her in super high regard. I know all of us do. And I think it was a great, great position.

And frankly, I'm pleased the way that it worked out for us. And I'm also pleased that I feel like we took some unknown risk off of the table to focus on bigger and brighter things in the portfolio with some risks that we feel better about. I would say this is for me a good example of rational risk management. You go into a thesis based on an analysis we've done, and then the thesis shifts because of the success of the thesis. And you don't own the same thing, and that's a good reason to basically revisit and exit. And that's what we did. Yeah, absolutely. Hopefully, it gives listeners insight into our risk management process.

It gives the listeners insight into why ongoing due diligence matters. And sometimes buying something and forgetting all about it may not be the best strategy, especially since new risks do present themselves, both at the market level and the idiosyncratic or the structure level of the company level. So yeah, I'm glad everybody got more insight to our thinking. I appreciate all you guys jumping on to do this and share some of our kind of internal discussions with the public at large. I think when you start hearing terms like illiquid and idiosyncratic and the structural stuff we've talked about, I think

that a lot of you listeners today probably are hearing certain things that might be from a vocabulary that you're not totally comfortable with or familiar with. And yet, hopefully, some of you find the deeper dive a little bit interesting or engaging. But it is important for us to try to do new things, to present new content, and give you as much of a holistic view of our worldview and our thought process as possible. So we certainly welcome your feedback, whether positive or negative. We'd love any constructive comments you have on what we've tried to do here today, not just in our delivery of it, but even the underlying decision around what's going on right

now in our management of the growth enhancement sleeve of our portfolio management. So I will go ahead and leave it there. Thank you, as always, for listening to Dividend Cafe, watching the video. Please give us ratings, subscribe, all those things that help kind of drive the traffic of this stuff. It's useful and makes it more convenient for you as well, by the way. But with that said, we'll have our regular DC Today commentary continuing to go up, thedctoday.com each and every day this week. And then on Friday, our weekly Dividend Cafe. I had a long flight last night and got a good head start. I'm looking forward to talking this coming week about what is money. So with that said, have a wonderful week and thank you for listening to the Dividend Cafe.

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