One and welcome everybody to another smart money circle
update. I'm Adam Sarhan.
With me today is Tom Samuelson, who's the CIO of Vineyard Global
Advisors with over 500 million in a UN.
Tom, welcome to the show. Great.
Good to be with you, Adam. So Tom, we always like to begin.
Can you tell us a little about your story and how you got to
where you are today, please? Sure.
I started in the energy industry, the oil and gas
business, and after earning a petroleum engineering degree at
University of Tulsa, I was assistant to vice President of
Finance at Helmick and Payne, which is a large contract
drilling company, and I met many Wall Street analysts in that
position and then went to work. As an analyst in Chicago for
Duff and Phelps, where I became a partner of the firm.
I then went to O'Connor and Associates which is a large
options trading firm eventually bought by Swiss Bank and that
was partners money. So I ran a long short energy
book for them. I We used the number of creative
options, strategies to manage risk, and I, I.
I became firmly indoctrinated in risk management and the
different techniques to manage risk, and then went to Denver to
run the energy mutual fund of Invesco Funds Group, took that
from bottom quartile whipper peer group to upper quartile.
When I managed that, I also managed the energy portion of
the University of Notre Dame's endowment.
And for the last 20-3 years though, I've branched off and
and looked at all sectors before forming Vineyard Global
Advisors. I was Chief Investment Officer
of First Ally Satara, where we built out a series of risk
managed strategies. And much of that philosophy
continues today at Vineyard Global Advisors.
I love it. What a great story.
Duffin Phelps and you've got Invesco and you've branched off
on your own. You mentioned risk management,
which I'll get to a little bit later, which is a core theme of
the show. But before we get there, can you
tell us a little about your investment strategy, please, and
your philosophy? Right.
We believe in managing both the good times and bad and.
You know we we, we talked quite a bit about the math of
volatility and and you know an interesting story.
I I was playing tennis with a a group of guys earlier this month
and and one was talking about his growth fund that's up over
40% year to date. And I said well, how'd you do
last year? He said well not not good.
I was down 65%. I said, what about the last two
years? He said.
Well. You know, down close to 80 and
another guy in the group said, well, all right, well you were
down 80 and now you're up a little over 40.
You made back half that loss and and I said you might want to
check the math on that. Of course, when you're down 80%,
you need to gain 400% to recoup that loss and get it get back to
making money for your clients. And you know, in other words, it
would take 4 1/2 years of 40% gains to recoup that loss.
Where most of our strategies were down mid to low single
digits last year after strong performance in 2021.
So they are either on the cusp of or back to making money for
clients. So that that philosophy of risk
management understanding the the, the math of volatility is,
is really important in in the way we manage money.
I love it, I call that. I'm on a separate note, this is
the first time we're speaking, but I call it negative math
where the market goes down to the stock goes down 10%, you
need 11% gain to get back to even if it goes down 50%, you
need 100% gain to get back to even and like you said down 8400
and so on and so forth. Yeah.
It's exactly right. It's amazing how many people
don't don't realize that you're you're coming off a lower base
so the the percentages can be misleading 100%.
So we mentioned risk management. Can you tell us a little about
how you handle risk and what mistakes you see people make
with respect to risk management, please?
Sure. We we have a multilayer approach
to risk management. We we have several macro models
that grade the market backdrop from in five phases from maximum
bullish, bullish neutral bear, maximum Bear.
Last year we were we were in bear or maximum bear for.
You know the duration or most of the duration of of that bear
market. So with that we will set equity
exposure that's appropriate to the market backdrop and there's
several layers of risk management.
One is the, I say the first line of defense is diversification.
So you know we we run diversified portfolios.
We we focus on positions, individual position sizing.
And the second layer would be let's say the market start to
turn more volatile, more defensive, we may increase
exposure to the more defensive sectors, utilities, consumer
staples and it is the market turns more bullish.
Typically it's consumer discretionary and technology and
and cyclicals like financials and energy that that would
outperform. So that that's those sector
weightings can help. And then the final piece is
raising cash and using a hedge, so an inverse fund that goes up
when the market goes down and the right percentage and because
of that take our risk managed income strategy.
Russell 3000 enhanced dividend was off a half a percent last
year after being up 27% in 2021. And even though it's it's lagged
the market so far, it's now back to making money again.
So it it's it's it's a multi layered approach that
incrementally increases defensiveness depending if the
market continues to deteriorate and I love that, that's actually
really, really good. So you talk about
diversification, you spoke about having different models that
rate the market. Is that a rating scale from like
let's say 1 to 10 or one to 100 or or how do you set that up?
It it, it is a. It's a quantitative scale.
But then we take those ranges and.
Convert them into a basic message on the market, be it one
of those five phases and you know generally the when the
markets are neutral to maximum bullish, we don't see the big
kind of drawdowns. The the drawdowns of five to 10%
are not overly concerning to us. It's kind of like going from if
you're traveling from point A to point B in a car, there's going
to be a certain amount of. You know motion sensation, it's
just the if there isn't, you're not getting to your destination.
So it it's it's the big potholes that that are going to derail
you and and cause you to never get to your end goal that we're
concerned about And those happen and Bear and Max Bare faces.
No, I love that. So would you say your strategy
is more fundamental, more technical and more quantitative?
Or how do you label it from a for people that want to follow
along and learn? More, it's a.
It's a blend of both. I'm a.
Chartered Financial Analyst, the Chartered Market technician with
the engineering degree I did. I'd say 85% of our approach is
quantitative, but there's still a a subjective element to it, an
overlay if you will. We we score individual stocks on
a bottom up approach and we grade them from zero to 100.
Eighties and above are are attractive in terms of their
growth and returns on capital relative to their valuation.
We have sector models that help us overweight and underweight
sectors and then we have a couple macro models that grade
the the entire you know investment backdrop.
So there there is a a subjective overlay the for example the the
banking crisis that hit with Silicon Valley in the second
quarter in March, we we just knew that that was going to
weigh on financials and. And it will take time for the
trend following indicators in our sector model to pick up on
that. Same thing with, you know, oil
and gas was white hot last year, but then oil began it's it's
plunge, it's it's down 40% from its peak back in the spring of
last year and natural gas is down 73%.
That decline in oil and gas is a leading indicator for energy
stocks. And as we saw that declining,
eventually the trend following indicators will pick up on it.
But we moved slightly ahead of when our sector models did and
we also have a bias. So the quantitative approaches
is good but there can be certain elements like a banking crisis
that aren't picked up on in a timely fashion.
So it's it's a blend of fundamental technical and and
quantitative disciplines. But no, I'm a big fan of both.
Also, I wrote a book called Psychological Analysis for
Investing, which is the third cornerstone, if you will, at the
third leg of the pyramid. So I'm a big fan of I Smell what
you're cooking and I love it. So let's shift gears a little
bit, Tom, and talk about some timeless lessons you've learned
along the way that you'd like to share with the audience either
in the market or in life or both.
Right. There's there's there's been
several and you remember episodes over your career and I.
I do what you know, I was listening to an interview of of
John Chambers, who was the CEO of Cisco during the Internet
boom. And so Cisco's kind of a poster
child of that era, just like NVIDIA is now of artificial
intelligence. And you know, John, John was
saying that the bulk of the revenues from that era came
through after the early days. And and he believed we were
still in the early days of artificial intelligence.
And I I think that's true, but for investors, remember Internet
Cisco soared from 95 to 2000 and only 10% of the revenues that
come through over that 15 year period that stretched to 2010.
So he's absolutely right. The 90% of the revenues came
after 2000. But all of the stock market
performance came in the first five years.
Cisco actually declined 75% from 2000 to 2010.
So one of the the tenants is is get in front of big trends but
pay attention to evaluations and speculation and and bubbles and
when you get to 40 times sales you you are in a bubble.
It, it, it, it's all been said. Well, you never know.
Well, when you're at 40 times sales, that that should be
telling you you're at a bubble. And there can be enormous damage
that comes from the implosion of these bubbles.
Many cloud stocks for example dropped over 80% last year.
No that that's so smart. So you're saying that the
markets are forward-looking mechanism and it's going to
anticipate those earnings, remove the stocks going to move
up and then subsequently down before the revenue necessarily
kicks in, if it kicks in at all? Exactly, right.
Stocks are a discounting mechanism and and if if
artificial intelligence, which which we're big fans of this has
a 39% compound annual growth rate going out over the next
nine years, we're going to grow from 67 billion to 1.3 trillion.
There's going to be a lot of beneficiaries of that.
But if it's anything like the Internet, a lot of that will be
discounted before the bulk of the revenues comes through.
You know, one other kind of. Fun story or story that I
remember over my career is is during that that Internet phase
of 2000 there was a there was an old market technician.
He was he was old school. His name was Justin Namus and he
was he was highly respected in investment circles and but he
did things in the old school way he'd he'd literally chart by
hand, you know the indices and. Individual stocks.
And he felt that gave him the best feel.
And I remember him coming into the firm.
I was, I was working at the time and he said, well it's over.
And this was the fall of 2000 and there was a question from a
portfolio manager who said what do you mean we're we're at the
dawn of the Internet era And he said, I always remember his
quote. His quote was, well, that is an
intellectual. Argument.
I'm just telling you what the laws of or the the laws of
supply and demand are telling me and a lot of good news is
discounted and there's these stocks are going to decline and
decline for a long time. There's a lot of pain coming.
So and he was absolutely right. And you know, it's just it's one
of the lessons I've learned over my career is is pay attention to
valuations, pay attention to bubbles and also.
There's a there's a characteristic look, we're we're
not there yet. I I think with the A I frenzy,
if you you go into a vertical phase like a F16 going straight
up, these stocks will go vertical.
You know that this often said that markets decline on
pessimism. They bottom on despair.
They they rise on optimism, but they peak into euphoria, and
we're not at euphoria yet. And there's a there's typically
a look of a bubble, and we will get to it.
Fear of missing out. Euphoria will drive many of
these stocks vertical. If it's anything like the
Internet craze, no, I love that. And talk about some timeless
mistakes that you've learned along the way and or you've seen
other people make. And how would you recommend
avoiding them? I think that that that's one of
them. One of the main ones is just pay
attention to to risk. It can be really damaging if
it's we we manage a lot of money for clients that are on the cusp
of or into their retirement years and and once you start
withdrawing 3% or so a year from your nest egg, it's going to
have an even lesser chance to recover from something like an
8080% loss, so. One of the lessons, markets now
move faster. So with the advent of
algorithmic trading and now we have activist central banks that
that if we see a slow down they're they're much more
willing to to accommodate that with liquidity.
And we we saw this in, in 2019, you know Fed Chairman Powell
Blinkton and the the central markets move faster now.
So we've had to evolve some of our risk models to to adapt to
that and you know a willingness to to markets evolve and there's
a need to tweak our models and refine our models to to evolve
with it. Got it.
No, that makes perfect sense. So make sure you evolve isn't if
I hear you properly, don't be too rigid in your approach.
Make sure you're open and open minded and flexible and evolved
as well. So I love that.
Tom, let me ask you this question.
What's the best piece of advice you'd like to give your 30 year
old self or you'd like to share with the audience?
I would say identify the big trends, get in front of the big
trends, but be aware of valuation and be aware of
bubbles. Love it, love it.
Well, Tom, thank you so much as always for coming on the show.
This has been absolutely fantastic.
What is the best way for people to get in touch with you?
You can get in touch with us through our website
www.vineyardglobaladvisors.com and we'd love to hear from you.
And thank thanks very much, Adam.
Enjoyed the show, beautify, enjoyed having you on.
Hopefully we'll see you again soon.
Thanks, Tom.