And welcome everyone to another Smart Money Circle show.
I'm Adam Sarhan. With me today is Yang Tang,
who's the CEO and Co founder of Arch Indices.
They just launched a new ETF. Ticker symbol is VWI and their
website is VW ietf.com. Yang, thank you so much for
taking the time, and welcome to the Smart Money Circle.
Adam, thank you so much for having me.
It's a pleasure to be here. So yeah, I always like to begin.
Can you tell us your story and how you got to where you are
today, please? Sure.
So my investing journey actually started, you know, middle school
This was, I grew up in San Jose, CA and during the middle of
the.com and I was fascinated by markets.
Both of my parents actually worked in the semiconductor
industry. So every day I was hearing that
from my parents, you know, the cool things going on,
technology. So I actually bought my first
dock in 1999. One was a middle school and you
can imagine at that time, you know, it was a pretty tedious
process. You actually had to call a
broker and they charge you something like 4999, a trade
one, you know, that taught me a lot because one of these stocks
did extremely well, the other stock unfortunately did very
poorly despite both management teams executing very well.
So that gave me a very early lesson on in the power of
expectations versus investor reality.
OK. After I graduated from college,
I started actually in sell side research.
I was an analyst for about 18 months and I moved over into
commodity sales. And over time, yeah.
And over time my, my philosophy has changed quite a bit.
You know, I started off as very much a Warren Buffett.
We got, you know, fundamentally analyzed the company and over
time I became much more of a, we have to have a framework, we
have to be able to quantitatively justify what we
do, right. There are so many stocks in this
planet for us to justify buying one versus another, you have to
be an analytical framework and that really builds kind of the
decision making process and the portfolio process.
So I'm actually a relatively new interest of being a professional
money manager. I went to Columbia Business
School and after Business School I spent about 10 years doing
something called macro solutions.
And I really worked with large banks, insurance, NASA managers
on structured derivative and structured financing
transactions. So when you think about, you
know, kind of how a bank or an insurer or an asset manager
manages A portfolio, you know, returns are actually, you know,
one very small part of the equation.
You know, as an example, like an insurance company, you know,
that's on behalf of the policy holders.
So they have to think about how their liabilities and assets
match. They think about the most
efficient way to #1 deploy their capital.
You know, to support the business and the policy holders,
#2, you have to make sure that if something bad happens in the
market, it's unexpected. You know, the, the policy makers
are not left holding the bag when the insurance company goes
under. And we took up.
So we started the company actually as a almost a
brainchild during COVID. We had actually a lot of people
come to us during COVID and they were like, hey man, should I do
this with my money? And you're like, we haven't
talked in about 15 years. I don't really know what's going
on in your life, but the short answer is no, please don't do
that with your money. So ours was really kind of our
grandchild and how we will manage our own money.
And the way we think about it is, you know, if we were to
build a portfolio, we want to build the optimal portfolio to
get us to where we want to go, which is the goal, right.
And we want to deal with the least amount of volatility,
right? So they so you have a great
story. So you started in the 90s, you
saw you got hooked instantly. Middle school, which I love, I
was training the 90s as well. And you realize there's lots of
different inefficiencies, there's lots of different ways
that the market things could unfold.
You realize it's almost price is a function of perception or
expectation versus reality. And there's more to it than just
having a good new fundamentals or good story or whatever the
case is. And then you were intrigued, so
you instantly fell in love. I love that you went to school,
finished school and then you decided to continue your journey
in the financial world. You worked in sales, worked on a
few other things, worked in banks, weren't some.
You went deep into some derivative stuff and some next
level stuff. And then you decided to open up
a money management firm and congratulations by the way, and
take your face and you created analytical framework to help you
make better decisions than just throwing darts on the wall type
of a thing. Is that correct?
Yeah. That's 100% correct.
It's, you know, it's very interesting because when you
think about even an index, right, an index is a derivative
at the end of the day, you know how we built a derivative inside
a bank versus how a, you know, large index company builds an
index. Today is actually very night and
day. And you know, the index
companies actually started us. You may know this in your
illicers may know this, but it's actually started as a newspaper
business. There was a number on the front
of the newspaper to sell more newspapers.
And you know, the the old school way of active management was so
poor people would rather take an arbitrary number on a newspaper
than a quote UN quote sophisticated money manager with
a large team of research. And I think it's really
important to think about that because investors vote with
their dollars. You know, there's no being right
or wrong. There's just Either investors
vote with you or they vote away. Oh, I love that.
That's fantastic. So perfect.
It's next great segue to my next question.
Please tell us about your investment strategy and anything
you want to share in that world. Yeah.
So we are what we consider a systematic strategy.
So we kind of think breakdown the world a little bit, right.
There's kind of really two main segments.
There's the low cost index, you know, product which is market
exposure and just fundamentally that's very flawed because
market cap or equal weight shouldn't be the determination
of how you build a portfolio, right?
You know, up to probably I guess the last 10 years being a big
company was actually a bad one. So people got around that, they
go, well, I don't want just the biggest companies, I want all
the companies. But if you think about it, it's
actually a little bit crazy. Why should a company that you
know is very small, maybe doesn't have any profitability,
has really more volatility, get the same amount of weight in
your portfolio as say at Microsoft.
So that's going to be the problem of low cost beta.
If they don't understand probably how to weight a
portfolio and you go through phases where it works, it
doesn't work. The other end is you know, very
expensive active managers. And if then again to be fair,
you know active management is a lot of flavors.
There's plenty of, you know, active managers that are under
fees, but the vast majority do not and they don't because
number one, you know, they have no way of discerning the proper
research process in this day and age.
There's so much public information.
It's not like in 1970 where somebody faxed the SEC, their
annual report and you waited outside and then you had
somebody like sort of the report right away reaching the numbers
over the telephone. And next thing you know, you're
on the floor of the exchange and you can buy quick, right.
The information in public securities is largely down to a
very negligible number. So a lot of the active managers
struggle with, you know, what are they like.
And that's actually more of a reflection of their personal
bias and their investment bias rather than a analytically
proper framework. So what we want to be is we want
to be committed, we want a systematic rules based strategy
and this really helps you two things.
Number one is it's fully transparent and #2 is it reduces
as much human decision making as possible to reduce as many
errors from human judgment, right.
When people think about passive, it's not low cost market cap
product, it's a systematic way allocating assets to prevent
errors from human judgment. That's what we do, a low cost
product at best step. I love that.
So are you using price as a primary factor to make those
decisions or is it fundamentals? Or how do you come up with the
criteria for the system, so to speak?
Yeah. So we've developed a process
which we call various optimized index.
So you can think of this as a modern portfolio theory
framework, but correcting for a lot of the flaws, right?
When, you know, when people think about Harry Markowitz, the
man is a genius, but the man is also an academic and the MPT
only works in the classroom. For example, modern portfolio
theory assumes that you can predict expected returns and
expected volatility, right. If you and I could do that, we
wouldn't be talking today. We would probably be driving
around in a very fancy car on a private island.
So you have to think about that. So but the analytical framework
is correct, right. What you want is you want some
kind of factor of assets. So what is it?
A quantitatively about securities that makes them
attractive, right. There's a number of factors we
can go into it a little bit later.
So we want, the factor that we want or #2 is we want low
volatility, right? Low volatility means there's not
much investor debate on what's going on.
So if you think about how people go wrong with positions, they
should become very volatile first before they either implode
or they do very well, right? Most times they implode,
sometimes they do very well. And the third is you want to
look for a portfolio that doesn't always move together to
correlation. So what we do is we look for our
ETF is income. So what we target is current
income. We have dividend stocks and we
have bond ETFs. So we look for stocks at a high
yield, low volatility. So we call that the ratio, the
performance ratio. And then we look for a bunch of
assets that have high performance ratio individually,
but they're not moving together at any given moment.
So they're de correlated over time, you know and then that's
how you build a portfolio to reduce volatility.
So we have two angles who always want to give the investor the
exposure, in this case income and then we want to give them
the least volatile portfolio to do that.
OK. I love that.
So that's a really good point. Now let's talk about risk
management. How do you handle risk and what
are some mistakes do you see people make with respect to risk
management please? I think the biggest problem of
risk is kind of size positions. And you know what we do is we
have a, you know, a weighting engine.
It's not a traditional matrix optimizer that you see from the
competitors and that's what the modern portfolio theory is based
on. We've actually built a
completely proprietary system based on a tree model.
So that's .1 is how do you think about weighting, how do you
think about methodology? It's a pretty complex
mathematical process, you know, anyone who wants to learn more
can always reach out. We have life papers and more
information to provide and #2 it, you know, how do you protect
as many scenarios as possible. So when you think about what
goes wrong, what we do, we take into account correlation, how
assets move together over a long period of time.
Assets have been shown to either be positively correlated or
negatively correlated or uncorrelated at all, right.
The uncorrelated assets I think generally don't exist or they
only exist for a period of time. So what really goes wrong for
investors is if correlation either massively goes up right?
But the market goes down. So that's a liquidity event.
Also a market crash. For example yesterday is a great
example. Stocks went down, bonds went
down, inflation came in hot right?
The S&P dropped 2%. The 30 year bond dropped 1 1/2%.
So that's a pretty bad day if you're expecting bonds and
stocks to be negatively correlated.
Luckily, there's two ways to think about them.
Number one is you can buy what we call a tail hedge, which is
an insurance policy. It's usually an out of the money
caller, but that's, you know, they lose money on these things
over time, but they happen to pay off on that day.
Like a fixed calls an exam, right?
You know, buy, you know, calls on the US dollars, another exam
or #2 is, you know, you're trying to basically build a
portfolio where you know those days are going to happen, but
you have enough staying power over time when you make money
over time or those days are unpleasant, but you know it's OK
because it's one out of 100 days and you're not trading in and
out of this all day. Understood.
So that makes perfect sense. Now, as far as stops, do you use
stops at all or do you use it based on your expected return
versus what's actually happening?
Or how do you know when you're wrong and your thesis is busted
and you want to get out? So at any given moment, there's
your optimal portfolio. So our ethnic RETF rebalances
every quarter. So we, we just rebalanced
beginning actually February 8th about a week ago.
So the portfolio changed ever so slightly before, let's say with
81% dividend stocks, 19% bonds, now it's 21% bonds, 79% stocks.
So every single day you drift a little bit away, a little bit
away, a little bit away from the optimal portfolio.
The majority of the time it doesn't make sense for investors
to rebalance because of the transaction cost.
So there are some days where yeah, you're going to, you're
going to need to rebalance faster.
But we do a quarterly on a systematic basis because the
other problem is, you know, you don't want yourself to be
reactionary to the market, right.
If you know like you're down X percent today, you know it's
going to come back tomorrow, it's going to negatively de
correlate the market, what's the point of rebalancing at the
bottom? So you're also trying to prevent
the, you know, the feedback loop of spinning your portfolio out
of control. So for that reason, we don't use
stops. We just do the optimization
every quarter. Some years, you know, it's a
very little change. Some years it's a more, you
know, rapid change. It really, you know, rebalances
itself to the optimal market condition.
Understood. So your stop, I guess your risk
would be just sizing the position from the get go and
then also making sure that they're not correlated assets,
so you're not too heavily involved in one specific area
that could. Crush the portfolio, right,
Yeah, about constructing the portfolio and then you know we
back tested this about five years before we launched.
So we covered from 2018 to 23, which is a great number of
scenarios, right. We covered the first Fed height,
we covered COVID, we covered the Fed post COVID and then we
covered the biggest rate hike in about 40 something years.
So I will point out is from the index perspective, you know the
index had so it's because it's you know somewhere between 7080%
dividend stocks over the five year period we had the same
total return as the high dividend index which is 100, the
high dividend stocks. But we only realized 71% of the
volatility. So it got you to the same path
over a period of time, but again you got less volatility during
that period. Yeah, it makes sense.
OK, let's thank you for that. Let's shift the conversation a
little bit. Talk about some timeless lessons
that you've learned along the way that you like to share with
the audience. Yeah.
So I think the biggest lesson is you have to have a friend,
right. I think many times investors go
in and, you know, they hear something, you know, a great
idea or a great pitch. And, you know, even, you know,
the professionals have this problem.
Like, you know, one of my friends, you know, telling me
about a real estate fund he's looking at.
And I think myself like, wow, this is an interesting way to
plant the commercial real estate.
And then then I have to stop myself and go, this is great,
but #1, how does this fit into My Portfolio and what I want to
do? So the key is this, having the
framework for what you want and making sure that you're playing
your game and your game is important, right.
We don't want to be chasing. You know, the analogy is you're
never going to catch the bus if you go to a different bus stop
every two minutes, right. You have to stay with the bus
stop, you have to stay with the path and of course if your path
changes then it makes sense to readjust.
So I would say that is the first piece and the second piece is
you have to think about risk adjusted returns.
You know and I think a lot of people they wake up and they go
oh I'm up 10% but so and so is up 15% like I should be doing
that instead. Well no, that's not the case,
right. That guy being up 15% may have
had two X of volatility. So my risk adjusted perspective
you may have been better off you know and it's like going to the
casino, right. You know if you flip coins you
know over time and you keep betting tails where you keep
betting heads, well you're going to break even you know.
So you want to make sure the game that you play, it's
thinking about the risk in the path.
Interesting. So what about some timeless
mistakes and how do you avoid them?
I think the biggest mistake of any investor is themselves right
is it's controlling your your fear on a down day.
It's controlling your euphoria on an update and not making any
rash decisions, right. A lot of these investment
mistakes come from just pure rash decisions.
You know, it's for example, I think it was Julia Robertson,
right, was shorting Internet stocks, going into the.com boom.
And then he was right. Of course, a lot of those things
collapse, but he gave up at the peak, obviously.
I think it was different, you know, he was older, different
part of life, so forth. You know, it was more moving on
from life. But when you think about that,
right, he was right the whole time, you know, But from a
emotional perspective or from a life perspective, he stopped.
So if you just stick with the path, you don't let the euphor
young good days make you overly happy.
You know, try to have less drinks on that day, right?
But you know, don't let the, you know the down days really get to
you where you don't have to reevaluate everything, right?
Maybe have more drinks that day. I hear you, you know, just
balance it out and then have the plan that you want to have.
So what you're saying here is just I like we said earlier,
about being, not being reactionary and mistakes you see
people make are getting too euphoric or too depressed on
updates or down days. So make sure you check your
emotions. What about some advice?
What's some timeless advice you'd like to share with the
audience about the markets or off markets?
Anywhere you want to go with that or give your, you know,
younger self. I think I would tell my younger
self is, you know, you have to be very careful doing research
and listening to people, right? Everyone has some kind of angle
and some kind of way they think, right?
So number one, you know, even in this 20-30 minute conversation,
you know, I've told you a lot about myself, but you don't know
enough about my thinking and how I think about positions to just
blindly follow my advice. So, you know, when you follow
someone's advice or you follow someone's strategy, you really
have to go very deep and understand what you're doing.
And the biggest thing is, you know, make sure you know all the
scenarios of all the outcomes or as many as you can, right.
Because you know, the problem is people think of life as a normal
distribution. It's actually not a normal
distribution. It's a very long normal
distribution and not a lot of people appreciate distribution
of outcomes. So that's I would tell myself
that and to everyone that is, you know, understand exactly the
research process, the philosophy and you know, you don't have to
agree with it. And if it's not for you, it's
not for you. You know, a lot of people don't
agree with quantitative investing methods, right?
You know, they don't feel comfortable with the idea of a
machine, like that's fine. There's nothing wrong with that,
right. That's you.
If you're not comfortable with a strategy, you know you're going
to, you're going to misuse the strategy.
And you know, I've seen people get comfortable with fundamental
investing. You know, they do very well,
right. They have some kind of internal,
you know, process They do. And it seems to work fine for
them, right. You know, I wish those people
very well and they do very well. But again, for me, I'm a
quantitative person, so that would never work for me.
So I would never get comfortable with that.
Right. So, you know, I'm just going to
search up myself to a lot of human biases, right?
Because, you know, that mean we all have bad days.
That person is going to have a bad day, right?
The moment that person has a bad day, I'm going to be like I'm at
this was a bad idea. And I you know.
You know, Yang, so much in the book I talk about human biases.
I have whole section cognitive biases as well.
And mental walls. You ever do something hit a
wall? We all have.
I call them mental walls. And then I say there's an
infinite number of ways to make money in the market.
Your job is to find one that works for you and echoes.
Exactly. We just met.
I mean, literally. So I love that.
OK, beautiful. Well, Yang, thank you so much
for taking the time to speak today and Congrats on the launch
of your ETF and future ETFs. If you go in that direction and
all the success you're going to have, I mean fantastic job.
All right. Thank you so much, Adam, and
thank you for having me here today.