SI #21: Bond ETFs and Market Conditions

SI #21: Bond ETFs and Market Conditions

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Passive vs. Active Management for Canadians

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Today’s guest is Kirk Chisholm from Innovative Wealth to discuss some current market conditions, bond ETFs and market corrections.

Transcription

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Braden: (00:00)
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I'll send you a spreadsheet to your inbox. Okay, let's do the episode. What's going on guys. It's another episode of the stratosphere investing podcast and today we have Kirk Chisolm and Kirk was on the show sometime last year. I'd have to pull up the exact date and we talked a little bit about real estate, but we also spend a lot of time talking about some interesting developments happening in the market, particularly with passive management, um, with whether that's structured in a mutual fund or through ETFs. I believe it's personally it's a great way for beginner investors to get exposure for though paying high fees. But it is interesting to kind of talk about how it's affecting the market and how much money is flowing into this passive income and how basically money managers don't necessarily control kind of the flow and the market. Basically everyone goes passive and there's not a lot of volatility until there is a lot of volatility and then everyone just kind of offloads a lot of their portfolio, which is mostly just as s p y, which is the s and p 500 index fund or in many other ways that it comes in. How are you doing Kirk?

Kirk: (02:26)
Good to be on the show again. There's a lot of fun. Last time. One of my kids going to his first Bruins game this week, so he's, he's super excited.

Braden: (02:32)
Oh, you guys are Boston fans. Oh, right. I forgot.

Kirk: (02:37)
Yeah. Well, you know, you might have to cut this one short. Just stop right now. Remember the good old days when we play the Canadians and that was a good a, that was a good game. The ball, the Bruins, a Canadians was, uh, I used to love those games. Real, real tough hockey back in the day. They don't play it like that way anymore.

Braden: (02:54)
Yeah, it seems like now and for the many years to leafs in the Bruins will face off in the first round just consecutively with the way it's set up. But, um, yeah, so it's fun to just chat about what's happening with ETFs right now and the market and, and kind of the mark. It's weird, like for the most part, since 2017, earnings and performance have acted completely disproportionally universally proportional. Not really sure why that is, but, uh, I mean, at the end of the day it'll revert back to the mean. Do you have any kind of takeaways on what you've seen in the last few years and even more recently?

Kirk: (03:40)
Yeah, I mean, I've got, I've got a lot of things to say about it and you can only prove some of it, but, um, you know, I think the reality is, as you know, once when we had the global financial crisis, the Fed stepped in and the other central bank stepped in to kind of save us from ourselves, if you will. Um, and they created a huge amount of liquidity and that liquidity, once people realized it really kind of raised all the boats and you know, they've, they've pumped is huge amount of money into the system and that money has to go somewhere. Well, obviously the money's going to stocks and bonds because stocks just keep going up for 10 plus years in a row. And bond yields are, I mean, in some countries are negative. So you know, effectively is looking for a location and as long as, um, it needs to be put somewhere, then it's going to skew pricing, which is part of the problem is that pricing is not acting normally.

Kirk: (04:36)
I mean when he got it, when you have guys like and Miller coming out and saying, I don't understand this market anymore. Um, and he's not the only one. There were multiple people out there who are really successful and they've all come out and said, I the market doesn't make sense anymore, so I'm just going to stop. And um, you have some of the, I guess more famous monk fund managers are actually giving money back because they don't know where to place it. I mean, this isn't just, this is your year. This has been the last few years has been happening. And the reality is is that, um, given all that money flow, it's really going into a handful of places and is skewing the prices. And that is, um, it's, it's kind of a, a self propelling or self fulfilling prophecy, if you will. Um, or a positive reinforcement loop as I would call it, is that money goes into certain stocks and it raises the price so the price goes up.

Kirk: (05:33)
So people put more money into those stocks because it's going up and then it goes up and then people see it and they put more money. So it just drives, the price is higher. Um, you know, if you'd have these Fang stocks that people have been talking about for years, I mean there's some of the largest companies out there, right? And when, um, you know, when you have companies like apple and Amazon and Microsoft there and they're going up in price, people invest in, then of course the index is investing in them because they have to, and that continues to push the prices up. So it's this positive reinforcement loop with, um, money that's coming into the system. That all works great until it doesn't, and I know it's kind of obvious, but when it doesn't, that's when people, that's when the last buyer buys shares of these stocks and then there's no one else to buy.

Kirk: (06:28)
And then they drop. And you know, we saw a little bit of that in, in December because you know, the reality is is investors are not acting rationally. You know, I know that economics classes like you to believe they are, but they're not. Um, and so when people just put good money after bad, eventually bad things happen because they're not paying attention. I'll give you one example really quick. So February of last year, uh, the vix went through the roof and you know, went up, went up and touched 50, almost overnight. And you know, that's not all that surprising because that's typically what happens. You know, in 2015 it happened and went up to like in the mid fifties, you know, every year it kind of spikes for some, some reason. Just to explain to listeners, the vix is the inverse volatility index, correct? Yeah. The mix, the vix effectively measures volatility in the market.

Kirk: (07:28)
So the higher the number on the Vix, the more volatility in the market and effectively, um, the vix is what options prices are based on more or less. So as people get scared, the volatility goes up, it costs more to protect yourself with options. That's kind of the simple explanation. So what happened was, is that there were a lot of ETFs out there that were, uh, shorting the Vicks because the vix was, it hit a low point of eight and a half, 8.5, six, I think it was the low, um, in 2017 and it was there most of the year, which is shocking. I mean, I don't know how it got that low, but it did. And then people thought it was free money. They just kept shorting the vix. And I remember talking to one guy and he's like, oh, I was making like 30 some odd percent a year, shorten the Vicks.

Kirk: (08:24)
I was like, that's great. And until you lost it all, and what happened was this individual, he called me because he was complaining. He said, hey, I want to sue all these people because they stole my money. And I said, well, you can't sue them. This was not a client of mine. This is somebody who, right. Who had basically been managing his own money. And um, he, uh, he said, I want us to everybody. I said, you can't. He said, why not? I said, well, look at your perspectives. Uh, I have a lot of friends in the industry and we're were kind of chuckling about this years ago because this product came out and it basically says you can lose all your money if the vix spikes up, you know, x percent. And that's what happened. And people were investing in this, lost all their money and some of these people thought it was conservative.

Kirk: (09:12)
There were funds that were managed funds based on this thing that we're called the call themselves conservative and they, and it went to zero shorting the vix is an extreme sport. I wouldn't call it yes, it is not conservative. I say that's an accurate depiction. It's not even aggressive. It's an extreme sport literally. Yeah. And I, you know, I feel bad for these people, but you know, buyer beware, it was clearly laid out. It wasn't a secret. Like people on Wall Street knew about it, which is probably why it happened because they saw so many people in this, they figured, hey, let's blow them out. Cause that's how Wall Street works. They just find the weekends and they just, they, they, you know, they push, they push the envelope. So, you know, we were selling covered calls for clients for years before that and we're making good money at it.

Kirk: (10:01)
And then in 2017, pretty much the bottom fell out and we couldn't make any money doing it. So we just stopped. So to me it was obvious like this, you can't make any money selling them. So you just, we were actually buying them. We took the other side of that. We didn't know it ended up like this, but the point being is it, it's, um, it's not always straightforward where money is easy to be made. You have to really pay attention to what you're doing. And I think that's what most investors fall prey to is they don't know what they're doing. They hear their friend, their neighbor, their buddy, none of who are experts, but they're all telling them, hey, I made this easy money in this, or I bought cryptocurrency and I'm making millions of dollars. And then you know, they don't know what they're doing and then they lose a bunch of money that's sealed.

Kirk: (10:47)
Whisper stock. Nespresso stock. Yeah. It's a fancy name. And this is so funny hearing Peter Lynch talk about it and a one up on Wall Street about was there was, there was a time, yeah, there was a time where those actually, um, that stuff sort of happened I think. Uh, not so much. So back, back then, computers were not controlling the market's. Now they are. Back then people were controlling the markets. Now, you know, people are controlling computers, but they're not paying attention to the computers are automated. So it's basically computers are, are, you know, I'm fighting with other computers over, over price. So the whisper, I mean, give me an example. You could have inside information now and you could be totally right with your information and the stock could go the exact opposite direction. Yeah. Okay. It's not, it's, it's nonsensical. I mean, this is why some of the, not suggesting these fund managers traded inside information, but this is the kind of action that these fund managers just hung up their spurs because things don't make any sense. You know, when a company blows out earnings and then it drops 10%, you're just like, what is going on? Um, and I think that's part of the problem is that the markets are not acting in a rational way and it's effectively algorithms fighting against each other and you know, any sort of retail investors getting caught in the cross fire. And that's the unfortunate part of it. So I think unless you've got a meaningful edge, it's really hard to make a, uh, to make a difference in this kind of market.

Braden: (12:31)
Right. You could look at, at though from a retail investor perspective that that kind of real inefficiency in the market is pretty, pretty nice if you have a long term mindset and you're buying good companies. Um, in that sense it could, it could work for you. I found it really interested talking about, you know, when money goes into more passive and then it goes up and you get that kind of feedback loop happening in the market cap weighting structure of these types of passive investing just kind of then pumps the bigger ones even higher. Um, and they make keep up even more of more of the indexes. This kind of feedback loop happens. What about when they, when you know people are massively selling these ETFs. I like this a question that I've always had but never understood cause I don't woke up block rock or Vangard.

Braden: (13:25)
I know wonder if you have any insight and and especially with more illiquid things like bonds, this, this lists literally doesn't make sense to me. So ETFs for instance are generally depending on which ones some more liquid than others, but generally very liquid and the underlying assets like in the net asset value or not necessarily super liquid. So how do they like actually operationally manage the fund? If you know, you have something like Christmas eve last year where the Dow dropped insane amount and like some of the highest point difference in a single day. How does vanguard and blackrock actually manage the fund when extreme amounts of billions of dollars are leaving it?

Kirk: (14:14)
Well, so for the bigger companies, there's an interesting trend where effectively the management fees for these, these indexes are going to zero and eventually there'll be at zero. But I mean, they're managing enormous amounts of capital and they've got an enormous team of risk managers that make sure that they're not exposed. So I can't speak to how they work in house, but effectively how it's supposed to work is they're supposed to have let's say 500 stocks for the s and p there usually aren't. It's, you know, whatever this smaller number that makes an impact because the smallest companies are not going to be a blip on the screen. So let's just say for sake of argument there, they have like 300 companies or so. Um, so they're trading all of those companies and you know, they're buying and selling proportionally for what they need. They have algorithms in place to do that.

Kirk: (15:09)
So when people are selling the index, they sell x amount of shares of the stocks to cover. Um, but effectively they're on the hook. So it's their job to make the index mirror the index. And that doesn't always happen. So in 2008, um, they had just come out within inverse ETFs on financial stocks and you know, we were, we were in cash, uh, the like the summer, August of, of Oh seven. So we went to cash and we were just kinda sitting around. But uh, yeah, I mean we kind of knew what was going on a little bit, so we were just honestly scared the pants off me and it was, it was hard sitting in cash, but I'm glad afterwards that it was just, yeah, it was difficult not knowing what was gonna happen. But, um, we actually just for play, like for my own money, I had bought one of these inverse financials and I was like, oh, I'm going to clean up.

Kirk: (16:09)
Because they were just, I mean, at financials were imploding. Do you know that I lost money on that. I had bought it before the financials imploded and sold it after some, I mean the financials were much lower and for whatever reason, even though I should have made like 20% actually lost like 5% so that was painful. Even though I was right, you know, the ETF was wrong. Um, that doesn't generally happen. It does happen with newer ETFs that aren't really seasoned. Sometimes there's some arbitrage that happens with trading desk that was different. And honestly, during that time I learned my lesson that when you know, when the shit hits the fan, you just get out of the way. You don't try to, you, you don't try to ride the train, you just get off because um, you could, I mean if you watch the movie the big short, you mean some of the guys in there, they made a pretty accurate call.

Kirk: (17:12)
He said, yeah, you can be right. But at some point you got a cash out. So, you know, I mean I remember in uh, it was 2000 and I forget what year was, it was 2010 or yeah, it was 2010 where the flash crash happened. I remember that day because I was trading that day. My, I was trading my account because it was, the day was kind of a mess. I remember it was so bad that there were actually no quoted prices and that was the day that Johnson and Johnson, there was a trade marked for like two bucks even though it was trading at like 60 like there were random price anomalies all over the board that day and they had to fix them because you couldn't get a price. Like I was watching the price movement, I was shorting it and it went down and it went down to a point where I didn't know where the price was.

Kirk: (18:01)
I just, I just put it in a market order, just said I want out because I don't know, I don't know where it is. I know I'm making money. I don't know how much, I don't care. I just went out like there's a point where you know, the system breaks down and you can't, um, you can't expect it to operate in a normal way. And I think that's the challenge with some of these funds. So getting back to your original question, using some of these stories to, to, to help with that. So my inverse financial ETF lost money, even though I should have made money on the trade now, fat Flash, uh, uh, fast forward that to let's say the bond ETFs, which you talked about. So bond ETFs are interesting. So stock ETFs, they're liquid. You know, people trade stocks every day. Bonds are generally not liquid.

Kirk: (18:50)
Like we think they are. They're the biggest market out there. They dwarf the equity market. I mean, there's, I don't know how many x size, you know, 10 X. I don't, I don't even, I don't even know. But the bond market completely dwarfs the equity market. And so, you know, if you look at the bond market, people are buying, you know, huge traunches of bonds, but they sit on them and they hold them to maturity. That's generally how they're bought. They don't, you know, they used to be trading desks and these financial firms, and then they got to the trading desks. And now what was the liquid environment through these financial firms no longer exists. So now that liquidity is gone and now they're traded through these ETFs. Well the problem with that is the ETFs are liquid and the bonds are not what I'm wondering what happens.

Kirk: (19:39)
Yeah. So how do you, how do you pair that together? So if you look at, um, I believe it was, uh, 15 December of 15 going into 2016 where the, um, where the oil markets started to melt down. And you know, went down to I think in the 20s. But what happened was, I think there were three days a row in a row that three separate high yield bonds, one each day. Um, we're frozen because they weren't liquid and people were trying to sell, but they couldn't sell because they couldn't get a price. So they owned a bunch of bonds they couldn't sell. So the PR, if you can't, if nobody wants to buy it, then your prices zero. Right, right. There's a, there's a buyers and sellers. If there's no buyers, then your price is zero. And they couldn't liquidate because they couldn't find a buyer.

Kirk: (20:32)
So they had to freeze up the fund and eventually, you know, they liquidated to fund and, and you know, the market returned to normal. That was just an appetizer for what could happen. So that was the oil market. I mean, we started, we were this closely, we started to see it. It was getting really ugly where the oil mark was imploding and he had all this highly leveraged oil companies out there that were effectively worthless if, if they're, you know, if oil prices are low. So that was a small segment of the market and that almost caused contagion to the rest of the market. Contagion is something we're very, very, you know, watchful for because what happens with contagion is once you have one area of the market spider web out into another part of the market, you know, if you can't, so for instance, let's say this was a diversified fund, well they can't sell their oil, high yield oil bonds.

Kirk: (21:25)
So they got to sell apple stock, right? Cause they can only sell something that's liquid. So they sell something good. Well then that starts dropping apple stock. Well then people don't want to sell apple, they sell something else. So the contagion is effectively to selling. It's a selling pile on where people are trying to find liquidity in the market and they, and they sell anything they can just to get, just to get liquidity. And that's a lot of what happened in 2008. So, you know, it's not a simple, um, it's not a simple conversation. There's, there's a high degree of complexity here. High yield bonds are, I mean the corporate bond market itself is a mess and it's, it's illiquid anyway. And if people are treating it like as the liquid market, they're going to be sorely mistaken when things blow up. Right? I'm not suggesting they will, but it's a, it's a black swan in the making, let's put it that way.

Kirk: (22:21)
It's a, it's a, you know, it's a red flag that we watched because we know it's there. It's Kinda like the vix blowing up in, in February of last year. We know it's there. We're making sure we're not on the wrong side of it. Uh, we don't know when it's going to happen. We know eventually it will. Um, the high yield bond markets worse because the corporate bond market, you know, it's, there's some liquidity there. The high yield bond market, there's less liquidity and it's smaller. So let's take this for example, I think 10 years ago, um, I think it was like 10%, 10 or 15% of the investment grade corporate bonds were triple B basically borderline junk. So they go down one, one ranking and their junk. So when, when that happens, when they downgrade them to junk, all these funds that own it as a investment grade bond have to sell and these high yield bonds, uh, funds have to buy it.

Kirk: (23:23)
So there's a big back and forth that goes on. But the high yield bond market smaller, so it tends to distort the price. So that's just one company. Okay. If that happens, one company goes through that, there's a little bit of back and forth price, anomalies, whatever. And then it sorts itself out. That was 10 years ago, we had 15% of of corporate bonds were rated triple B. Now it's close to 50%. I think it's maybe even higher. I think the expectations is going to be like, you know, 60 or 60% or more soon. Um, I have to go back and look at the numbers. I know it's some ridiculously high number. So if you're talking about 50% of the, of the investment grade, you know, these are supposed to be the safe bonds, if you will. You know, the investment grade bonds, um, are borderline junk.

Kirk: (24:18)
What happens in an extra session where they start downgrading these companies and these companies probably deserved to be junk now, many of them, but they're not. So what happens when that happens? All of a sudden you've got all this money in bonds that has to sell with no buyers except for the high yield bond market, which is smaller. It's going to, I mean that's the thing that I'm really worried about because the bond market is huge. So that's going to just store it all these conservative portfolios. It's going to be, I just, let's just say, I'm not going to describe it. It's just something that I'm very scared about. Right. So would you say if you were to own bonds that through an aggregate or high yield bond ETF would be unwise?

Kirk: (25:08)
I would not touch any bond ETFs right now. That's just me. I, I know that people do and there are some bond ETFs that are fine. I'm not going to give names cause I don't want compliance and knocking on my door. But, um, but I can tell you that, uh, you know, short term bonds are probably okay. Like there's a lot of, a lot of short term treasury paper that'll be fine. I mean, treasuries generally we'll be fine because, um, there's no such as, there's no such thing as a guarantee. Um, and there's no such thing as a, as a risk free asset, but people call treasuries, you know, risk-free because there was close to it as you can get. So you know, if, if you, if you buy them short term, you hold on to maturity, you'll be fine. Um, but it doesn't mean there'll be, there won't be distortions and other issues because you're not owning the treasury's directly.

Kirk: (26:01)
If I was worried about all this, I would just own the treasury's directly, then you have no concerns. The only concern is whether the US government is going to be solid and well, I have my doubts. I don't think that that's a short term problem. I'm worried about it. They can always print more money. Right. So, you know, I know a lot of people rail against the government and say, well, you know, it's, it's bankrupt and it's, it's this and you know that it's worthless and you should buy gold. That's all fine and good. But that's longterm thinking, short term thinking, it doesn't apply because they can always print money if they need it. So in the short term they could. Yeah.

Speaker 3: (26:37)
Okay.

Kirk: (26:38)
Do you want a list of the best Canadian dividend growth stocks

Braden: (26:44)
on the Toronto Stock Exchange Right now? I will send you a spreadsheet to your inbox right away. Go to get stockmarket.com again, that's getstockmarket.com and not a redirect to the stratosphere investings page where you can get a list of the best Canadian gross stocks sent right to your inbox. So when this, these kinds of things happen, I mean obviously the, the bull market's been going on for a while and at the end of 2018 it looked like, Ooh, something might be happening. And then all of a sudden January and February where some pretty lucrative time to be in equities. So yeah, it just makes me wonder a about market corrections and I mean, I'm so young, like a market correction is like the most exciting thing possible for someone who has a long investment horizon and, and various companies. And especially with my investing style and mindset.

Braden: (27:50)
Like I'm just, I'm happy to buy, you know, equities when there's blood on the streets and buy them at a, at a discount. Do you think that the majority of these passive investors or DIY investors that's now been possible because of the new age of technology, which I think is great. I think it's amazing for the most, most people to be able to get access to these kinds of things. Do you think most people will be somewhat rational due to the fact that, you know, a passive portfolio is kind of hands off. You don't even need to do anything. There's no active management. You could set it and forget it. Do you think there's going to be much setting and forgetting if you know another, another thing rolls around that's a bit more sustained than the end of end of 2018

Kirk: (28:42)
well, so I think it's, um, it's a, it's a good question. So most people in the market now have been in this for, you know, 10, 11 years. Uh, you know, the people who've been around for a long time, we've been in over 10 years. They know what a recession looks like. They know how much it hurts. But you know, I've talked to a lot of people who started investing in the last 10 years and they think they're, you know, brain surgeons are like, oh, it's easy. I can just, I can just do this. Like, yeah, cause you haven't seen a recession, you don't know what it's like. And you know, it's really easy when times when the market goes up to make money. Um, and I think what a lot of people don't realize is when the markets go up, it's easy to make money.

Kirk: (29:26)
Everybody looks like a rock star. You really don't have to do anything. You can just put your money in an index and leave it. I mean, you could try to say, you know, beat the index or whatever. I, some people are good at it. Some people aren't. The is, let's just for the sake of argument, let's just say you're indexing. So great, you're making money every year and then something bad happens and then the market goes down 50%. Well, you didn't just lose 50%, but you just lost time. So if you look at 2000 to 2000 and uh, let's see what it was, I think it was 2011. Um, let's see. Uh, I can't go back that far. Uh, so basically I think it was like around 2011, 2012 that from 2000 to that period you made no money. So if, if you bought, if you, let's say you put 100,000 in, in, in, you know, uh, January of 2000 and you held it until, until that date, um, I think it was 11 or 12, you basically had $100,000.

Kirk: (30:29)
You just lost 12 years of your life with no returns. And what I think a lot of people don't realize is they say, well, I'll just buy and hold a weight. Yeah, but you're losing time. How about not losing money to begin with? I think that is a better strategy now. Somebody like you, maybe you're early in your career, you don't have as much saved where as 10 20 years from now, you'll have a lot more. You can always buy into it, right? Because proportionally you may have less than the market. Even if it goes down, you'll be putting more in so you can average it out and you'll be fine. But there are a lot of people out there don't have that luxury right there. 50 60 years old and getting ready to retire. They can't afford to take a risk that the market is going to be down for another 10 or 20 years.

Kirk: (31:12)
I mean, look at the Great Depression. Marcus are down for decades. This one, we were lucky we had rebounded quickly. I don't worry about that. I worry if, what if it doesn't? What if, what if it drops and then stays there and there's no recovery for 20 years? And think about how that, how much that would hurt. So I think what people need to realize is, is, you know, investing is not easy and it's easy when times are good. I mean, Warren Buffet says, you know, you don't find out who's swimming naked until the tide goes out. I mean, there's, there's a lot of, yeah, I do too. I mean, it's, it's, it's great. There's a lot of truth to that, but the reality is, is that, you know, there's a lot everyone swimming naked right now, you know, and, and they don't realize it. And you know, if you look at 2000 to 2003 that was a few year period while the market, you know, declined in the recession, look at 2008, 2008 happened relatively quickly.

Kirk: (32:08)
You might've had a year to prepare for that. I mean, you know, it wasn't off the radar. I mean, people knew. But basically if you look at 2008 it went, you know, for the whole year it was going down. Um, you even had time before that. So I'd say at least 12 months, right? This time it's not going to be 12 months this year, this time, it might be three months or two months. I mean, what if, what happened in December kept going right? I mean, I've had conversations with clients and they're just like, you know what happened? Just like, well, I mean, you know, basically the market went down a ton and no one was paying attention and everyone freaked out and then it bounced back. But I don't think what a lot of people don't realize is that drop last year was significant. And what if it kept going right?

Kirk: (32:56)
Because there comes a point where the markets drop enough and there's no support because people just, they pull all their buy orders and they just wait in the sidelines. That's what happened in the flash crash in 2010 everyone pulled their orders so no one was buying and then the market drops and then people freak out and then, you know, we're back to having problems again. So I think that what would people need to understand is they need to have a strategy in place. They can't think about it as buy and hold. They have to think about it as well, here's, let me tell you how I think about it. I don't want to tell other people what to do. How I think about it is, you know, if you're driving a car, right, you drive a car, you're driving down the highway, you're going straight, all of a sudden, you know, a car pulls in the middle of the road and just stays there.

Kirk: (33:45)
Well, what do you do? Do you go straight and run into the car or do you, you know, make a turn and go around the car? Well, most investors buy and hold, they just drive straight into the car and say, well, you know, I get the car fixed and I'll drive against some other day. Versus being more what I call tactical, which as you drive around the car. So what I think, you know, the way I look at it is I'm more tactical with, with my investing approach, where I'm looking at the markets, I'm looking at, um, opportunities and I'm looking at risks and I see the risks and I say, this is a risk that's too big to handle. I don't want to stomach that risk. I can, I can, you know, I'm seeing the market to, I mean, last year in the summer, you know, we, we hedged a lot of our portfolio in the summer and it worked out well for us to, the markets crashed at the end of the year and I didn't care cause we weren't exposed to it.

Kirk: (34:41)
Um, you know, uh, it wasn't ready to jump back in, but you know, we didn't, we were hedged. We use options to hedge. So we were, we weren't exposed. So I look for opportunities and how can we minimize the risk in this situation? You know, I just look at the market now we're rebounded back to where it was last year. Well, we're not exactly in a good place. Um, markets are expensive and you have a huge tranche of, of high yield debt come and do that may not roll over. That could cause some, you know, the problems we were talking about earlier. Um, and as, as kind of go more on that, like look at what happened. Toys are us last year. I mean, toys r us has been around forever and that was a high yield debt. And basically they had to roll over their debt and no one wanted to give them any more debt.

Kirk: (35:33)
So they had to file for bankruptcy. It wasn't that it was poorly run. It was, it wasn't that they had bad financials. They did. But so many other companies have that and, but at that point, nobody wanted to, uh, fund anymore of, you know, of toys are us. So they just decided, no, we were not going to buy any of the debt. So they had to file for bankruptcy and they had, and they couldn't even get out of bankruptcy through other debt. They had to actually liquidate, which is sad because I don't know where I'm going to get my kids toys now. Yeah. I don't really like Amazon at this point, but I don't really have a choice. So the choice, the rest is out of business. Now we have fewer choices, but that's one company that was the first of many. So what's going to happen when all these other companies have to refinance their debt and they can't. I mean that's, those are the things that I worry about. So, you know, we're looking at, um, you know, we're talking about ETFs and we're talking about, you know, the markets. We know we're, we're always looking out for risks. I think that's one of the more important things that we can, we can do is just managing risk.

Braden: (36:39)
Yeah, it makes a lot of sense. I mean, why wouldn't you? Um, I find it funny how you said, and everyone who's only seen a bull market, they think they're a genius. They said, quote, I like that I have an a blog post that weed stocks, just warning people of the insane valuations on a price to revenue type basis. And the quote reads, as a bull market continues, almost anything you buy goes up and makes you feel that investing in stocks is very easy and safe and that you're a financial genius by Ron Chernow. It's Kinda so true. Like, I mean, I've, I'm, I'm so young that have only been an investor in during the time period of after 2008 because I wasn't even 18 at the time before that. But being a student of the f the past in terms of like being a almost like a market historian and it's so helpful to get some perspective if all you've ever seen is a bull market.

Kirk: (37:39)
Yeah, it's, I agree with 110%. I mean, I've been, I've been, you know, professionally, um, in the markets for 20 years and when I was in calls before that I was, I was investing and I have to say that learning about this through history books is a very different experience than when you live through it. Personally, I've been through this personally. I've seen, you know, two big recessions and obviously a lot of volatility in the interim. Um, and I've learned a ton from it. And you, you can't learn it from a book. You can't read a book and say, I know what happened, the Great Depression. I know what happened in the great and the global financial crisis. Like, you know, if you weren't in the trenches, it investing is not about logic investing is about emotion. Markets are driven by emotion, by fear and greed. So if you've not experienced that, you really don't how you're gonna react.

Kirk: (38:36)
You know, we, we have this silly silly procedure we have to go through for compliance, which is a risk questionnaire, which in theory it makes sense. But in reality it doesn't because you know, let's say you and I are working together, I have you fill this thing out. You're the markets are rosy, everything looks good. You're going to say, yeah, I've got a pretty high risk tolerance. I can take a lot of pain. You know, I don't care. I'll buy and hold. Well what if, what if I ask you to fill it that same questionnaire and march of two or you know, February of 2009 you're going to say, I can't take any risk. I don't have any tolerance. You, I mean, you're going to have different answers, right? And it's not your fault. Like you, you're thinking about things logically and you're saying, well, it makes sense to buy at a low, but I'm really skittish because it could go lower.

Kirk: (39:22)
That's just, that's, you know, that's not logic. That's emotion. And we all have that. Some of the best people out there have that problem. And the only way that they, they do well is by finding solutions to counteract that problem. So for me, you know, I have a weakness when it comes to stop losses. I find it hard because the market will pick off your stop losses. You can't put them in the market. So I have to sit on them. And well, when they hit the stop loss, then I start rationalizing, well it looks like it's going to bounce from here. Maybe I had a hold a little longer and it goes down. Maybe I'm going to hold a little longer. You know, your, your emotions get the best of you. And this is, I think, human nature. So the more you leave up to emotion, the worse off you are.

Kirk: (40:04)
So my solution was to use options as a way to mitigate that stop loss problems. So, you know, if it blows up, it blows through the stop loss. I don't care cause I have a, I have a maximum exposure that, um, that I've already agreed to. So for me, that's a, that's a way around it. And that's the way I invest because it, it, it, um, it supports it. Basically it takes my weakness and it solves that problem because we all have strengths and weaknesses and you need to identify your weaknesses and solve them or else the markets will eat you alive. And that's how I've solved my weakness. And the rest of it I find to be relatively easy. But each one of us has different problems because we look at the world differently. So, you know, it's important to, it's not just important to read history, that's very important.

Kirk: (40:51)
It's also important to live it and to, to be in the trenches and understand it. You don't have to do this professionally, but you know, buy a share of a company, buy a share of an index, you know, just be involved with it. Feel what it feels like as you go through it. Because you know, if you know, let's say someone's your age, let's say I've got a smaller amount of money at your age, when they're 65, they're going to have a much larger amount of money. And if they've never invested before, that's the most sad thing that I've come across because I people, I mean I get a lot of calls now, people like, Oh, you know, I get two calls. One is am really scared of the stock market. I want something alternative, which what we do. Um, the other type say, Hey, I just, you know, I've been reading about this pot stock.

Kirk: (41:38)
I really want to invest in. Can you help me? Or I want to put all my money in gold, or I want to put all my money in cryptocurrencies and I see that happen. And you're like, all right, so you want to put your entire retirement account and cryptocurrency, I can't think of a worse idea. And this is this year, this is like two years ago. And I was like, no one knows. Yeah. Like we're not doing that right. You can go. Yeah. And I, and the hard part is I can't send them somewhere else. I can't say no, I'm not going to do that. Go somewhere else because I know they will. And someone will sell it to them and they'll get it. They'll get burned and they'll lose their entire retirement. I mean, it's, so we have to really work with, I mean, we take, we deal with a lot of the emotional side of money for people.

Kirk: (42:16)
Yeah. So that's a huge part of what we do because people in many ways are their own worst enemy is they don't, um, they're not investing with their mind. They're investing with their heart and their emotions. And that's the problem. Um, and you know, they're not knowledgeable enough. I mean, none of us are. I mean, do you know Warren Buffet even comes out and says, I don't know everything. I mean, right. You can't, like the market's too big, too complex. Um, but a lot of people just think they could just show up and buy a stock and make lots of money and like, you know, we, I was on an interview while ago with, with a buddy of mine who was, it was, it used to trade for a living and he's like, he's like, you can't day trade anymore. This is it. You can just can't do it. The markets aren't set up that way. You could, there were times you could do it, but now they're not built that way. And I think people just think they're going to buy a penny stock and make lots of money and it's easy and it's just not,

Braden: (43:12)
no, it's, it's definitely not easy. So the main takeaway there is then to take your entire nest egg, put it into bitcoin and canopy growth quote during the tire savings for bullying. Okay. Yeah. No, I, it's, it's amazing how, how many people have a huge portion of their portfolio who are apparently scared of risk yet still have a massive portion of their portfolio in high flying crazy fang or uh, or weed. It's, it's, you see a lot of it, it's been a terrifying.

Kirk: (43:48)
So I think too many people are putting their money in. We in the wrong way. But that's a, that's a whole different podcast. I think that's two podcasts. That's not the spot.

Braden: (43:56)
Yeah. So Kirk, where can we find, yeah.

Kirk: (43:59)
Uh, yeah, so you can find me@ainnovativewealth.com. Um, that's, that's my company. We were a wealth management firm. Uh, we provide a full service wealth management. We specialize in alternatives held in retirement accounts. So if you want to buy real estate or horses or tax liens or Crypto or whatever you want inside the return timer count, that's what we do. So you can go to innovative wealth.com and find out more about that stuff there.

Braden: (44:27)
Perfect. Yeah, it's great to have you on and you have so much knowledge and experience in the market. It's always good to pick your brain.

Kirk: (44:36)
Well, I always enjoy our conversations and, uh, we'll see how our teams respective teams during the playoffs this year.