[00:04:22] Lance Roberts: And BTFD became a kind of became acronym for the markets. And so this really put value in the back seat. We were just taking, you know, chasing growth while 2022 kind of turned that on its head as people started to understand. You know, a lot of these growth stocks and unfortunately, you know, between the fallout of FTX and the, you know, the collapse in stocks like Peloton and others, you know, this kind of mad driven frenzy into just any investment that promised outsides growth in 2021.

[00:04:55] Lance Roberts: And 2020 because of all that liquidity we had put into the markets by both the Federal Reserve doing 120 billion a month in QE, plus the government sending 5 trillion worth of checks to households. You know, it was just too much money chasing too few assets. So we all just kind of disregarded anything about value or fundamental structure.

[00:05:15] Lance Roberts: It didn’t matter if they made earnings or even had a reasonable business plan. And you know, we just paid astronomical valuations for stocks. That really came home to roost in 2022. Valuation has made a return now. Great. This is wonderful. As the Federal Reserve is reversing this liquidity, the 5 trillion worth of stimulus checks are gone.

[00:05:36] Lance Roberts: The Fed is tightening policy, hiking rates, reducing the balance sheet. So this is making valuations. This is making fundamental growth of a much better place to put money, at least for now, because it’s not going down as much as some of these highly overvalued companies we were chasing over the last couple of years.

[00:05:55] Lance Roberts: So that’s why you’re having that dispersion pick up this year. 

[00:05:59] Rebecca Hotsko: Okay. That was super helpful. And the other thing I wanted to ask you about this is how much does the rising interest rate environment impact the performance difference of value stocks versus growth? 

[00:06:12] Lance Roberts: Well, exactly. Kind of what you’re seeing this year. Okay. So let’s clarify something real quick, Rebecca. Cause when we say that value outperforms growth, Now that doesn’t mean that value stocks are going up and stocks growth stocks are going down. That’s not what that means. What it means is that growth, that value stocks, they might be going up this year.

[00:06:31] Lance Roberts: You know, one of the biggest in 2022, 1 of the biggest outperformers in all of 22 was a sector that we discussed in 2021. Because nobody wanted to own energy stocks and we said, Hey, here’s a great sector undervalued trading extremely cheaply, 2% of the overall market cap. And you know, this is where you want to have money invested going into 2022.

[00:06:53] Lance Roberts: And that’s been an excellent place to be this year because again, this whole value outperformance now that one sector energy. Has performed positively this year, but other value sectors in the market have not. They just but importantly, they have not gone down as much as growth stocks in the market.

[00:07:12] Lance Roberts: So it’s provided you some safety relative to your portfolio performance this year. And again, when we talk about, you know, chasing a benchmark index, I’m a passive investor, so I go up with the markets, I go down with the markets, I just get whatever the markets give me. Well, being a little bit more logical about your investment process, that’s fine if you want to be a passive and a passive investor.

[00:07:35] Lance Roberts: But instead of just buying the S&P, think about passively investing and changing your allocation to sectors relative to what’s happening in the economy and in the overall interest rate environment. Because as interest rates go up, the cost of capital goes up, which makes companies that operate on a value basis more valuable than growth companies that typically do not. 

[00:08:00] Rebecca Hotsko: Yeah. And so it’s really interesting when you look at a longer time series of value versus growth stocks because this valuation gap wasn’t always this wide. And so I’m wondering, can you talk a bit about what drove this large and widening gap in the first place? 

[00:08:17] Lance Roberts: Yeah. Again, what created that massive gap in the first place between growth and values, I said is a lot of this is just chase of money chasing assets.

[00:08:26] Lance Roberts: And again, when we go back and we look historically over the last hundred years or more and look at value versus growth over very long-term timeframes, there are always periods where value outperforms growth and periods where growth outperforms value and those periods are very recognizable.

[00:08:44] Lance Roberts: They’re called secular markets. So when you have a secular bear market value outperforms growth, when you have a secular bull market like the eighties and the nineties as an example, growth outperforms value, that’s become much more exacerbated in recent years because of all this extra liquidity that’s been into the markets and creating this kind of chase re for returns.

[00:09:05] Lance Roberts: And, you know, that’s going, that’s not going to change. And this is one of the premises of the article, why fan stocks aren’t dead is because we haven’t broken that paradigm. Of liquidity floods into the markets when the Federal Reserve and these rate hiking campaign that they’re on eventually break something in the economy.

[00:09:25] Lance Roberts: You know, whether it’s a credit event or just a deep economic recession, they’re going to reverse course, they’re going to drop rates, they’re going to go back to QE at some point. That’s going to fuel the chase back into growth stocks where investors can get a higher rate of return on capital in the short term. So this will reverse.

[00:09:43] Lance Roberts: That’s one of three reasons I laid out for that. And why face stocks will or will continue to perform. And the other big reason, and we’ll talk about that, is passive investing itself. 

[00:09:53] Rebecca Hotsko: Yeah, I think we can dive into that now because that is really interesting and I think it can be misunderstood how passive investing impacts the underlying companies share prices.

[00:10:05] Rebecca Hotsko: So can you walk us through that and how that works? 

[00:10:09] Lance Roberts: Sure. So one of the second reasons that a lot of the F stocks will continue to perform in the future is because of this rise of passive investing and really that’s a misnomer to a great degree when somebody says, I’m a passive investor. What that implies is that I buy an S&P index, I put my capital in it, and then I never touch it again, and I just let it go.

[00:10:31] Lance Roberts: But that’s not really what we’re talking about. What we’re really talking about is the universe of exchange-traded funds. That has now become a very big absorption of capital by investors in the marketplace versus individual stocks. And what became very problematic, and another, this is another one of those byproducts of all this liquidity from the Fed.

[00:10:53] Lance Roberts: It was too hard to try to really pick the one stock or two stocks that are going to go up and perform well versus the other, you know, kinda the stocks in the universe. And so a lot of investors, like, it’s just too hard to, you know, pick individual stocks. I’ll just buy an etf, I’ll just get the whole sector or the whole market and it’ll go up.

[00:11:11] Lance Roberts: And as long as it’s going up, I’m happy. I’m just not happy when it goes down. But this is one of the and honestly this is one of the things that I think is one of the biggest drags on the financial services industry. And look, financial advisors, you know, have deservedly gotten a very bad rap over the last few years.

[00:11:30] Lance Roberts: Because they’ve stopped doing what their job was supposed to be, which was to actually manage client assets, provide a value for the service. And what they started doing was just, well, here I’m going to, you just buy this basket of ETFs. You have small cap make cap, large cap internationals, some emerging markets, some growth, some value, and you just leave it alone and just let that go up and down.

[00:11:50] Lance Roberts: And this was the formation of Betterment and Wealth front and others. And that’s fine, but what are you paying for? Because you can do that yourself. And the issue with it is that while we call it passive investing, it really isn’t because as soon as you make a decision that I’m going to sell energy and buy consumer discretionary, so I sell one ETF and buy another, you’re now an active investor.

[00:12:13] Lance Roberts: You’re just an active investor in a different form. So you’re not passive. Once you start making these decisions, you’re just active in a manner of how you’re allocating capital to markets. Instead of individual stocks, I’m now actively trading. ETFs, and we’ve seen a big change in that environment. Here’s the important thing about this.

[00:12:30] Lance Roberts: If passive investing was just simply buying an ETF or an index, there wouldn’t be five. You know, actually technically 384 ETFs that all own Apple, everybody just came out with, you know, saying, Hey, this is a great business. Everybody’s throwing money into ETF, so I’m going to start an ETF, right? I can just collect money flows.

[00:12:49] Lance Roberts: I charge you a fee for buying my ETF I make money. You’re supposedly happy because that value is going up. But in reality, I’m not really providing any benefit for the service, right? You’re just buying a vehicle in a different form. Well, if you take a look at how the S&P 500 is, let’s just use the S&P 500 as an example.

[00:13:08] Lance Roberts: You take a look at the top 10 stocks of the S&P, right? So it’s Apple, it’s Microsoft, it’s Nvidia, it’s Google, it’s those F stocks, right? Well, you start looking at, okay, apple is the largest company in the S&P 500 index, and you take a look at the top 10 and you say, okay, well how many ETFs own Apple?

[00:13:29] Lance Roberts: Well, everybody that comes out with an ETF, they want performance. If my ETF doesn’t perform, Rebecca doesn’t buy my ETF, right? I mean, there’s you. I don’t want something that’s not performing as well as this ETF. So again, just like we’re chasing stocks, we’re now chasing ETFs, and the managers of these ETFs are simply just trying to buy whatever’s going up so their ETF performs as well as somebody else’s.

[00:13:52] Lance Roberts: You know, think about Kathy Wood and the ARC ETFs, right? She was the darling of the ETF environment until it all kind of blew up on her. And now she’s not. And that’s the way it occurs. And so when I come out with my ETF, I want everybody to invest in it. So I buy the stocks that are going up. I buy Apple, Microsoft, Google, right?

[00:14:10] Lance Roberts: Because that’s what’s going up. And because of that, you have 384 ETFs that own Apple. You’ve got another 420 some odd that own Microsoft. You got another 350 that own Google, so forth and so on. So every time a dollar goes into these ETFs, because of the market cap waiting in the index, 30 cents of every dollar invested goes just to those top 10 stocks.

[00:14:39] Lance Roberts: The remaining 70 cents of every dollar is distributed to the other 490 stocks below that. And that’s why you’ve seen such the, such massive outperformance of the FANG stocks in 2021, as an example, almost 50 or 60% of the entire advance of the market in 2021. Was the top 10 FE stocks. So, you know, they have a very big outsized contribution, but they’re also the biggest absorption of money flows coming into the market.

[00:15:08] Lance Roberts: So every time individuals buy ETFs, they’re just sending money directly into these top 10 stocks and that really has been working and will continue to work in the future because that market cap waiting isn’t going to change that much. 

[00:15:24] Rebecca Hotsko: Wow. So then for passive investing, these ETFs that hold all of these big name companies, if they didn’t exist then how much would the prices fall?

[00:15:34] Rebecca Hotsko: Like how much is their price, I guess, influenced by the inflows to passive investing? Is it still just a relatively small amount? 

[00:15:43] Lance Roberts: No, it’s a lot because active fund managers have been losing assets over the last decade. ETF inflows or more money going into ETFs. There’s just a huge gap between the two.

[00:15:54] Lance Roberts: And because again, you know if I’m looking at a mutual fund thatI have to pay, you know, one and a half percent for that mutual fund, plus a 12 one fee or whatever it is front commission, if it’s an aha, you know, it’s kind of a dying breed of investments. Mutual funds are really, they’re the dinosaurs.

[00:16:11] Lance Roberts: They’re going to go extinct at some point, but ETFs, they’re easy to issue. I can hire a company and within a couple weeks I can have an ETF out on the market. All I need is really some good marketing. So I get on the, on your podcast here, and I say, Hey, I’ve got a new ETF out. If you want to buy it, everybody goes and buys it.

[00:16:27] Lance Roberts: I get inflows. That’s very easy. And the fees are cheap, right? So depending on where you buy, it’s a half a percent down to 0.5 if it’s a Vanguard ETF. And so, one, you know, part of the chase of ETFs has been finding the ETF that replicates the index that has the lowest fee. , and that’s kind of been the big push by the media.

[00:16:46] Lance Roberts: It’s like, why are you paying an advisor? Just go buy these et. And again, nothing wrong with all at, at all with that. It’s just knowing when to not be in those ets versus, you know, being in a, in other aspects of the markets.But, you know, long term that is not going to change because of a you know, we have raised an entire generation of investors now, you know, if you take a look at the number of investors in the markets today, you know about 80% of them have never seen a bear market because you think about when you go through a bear market, what happens?

[00:17:22] Lance Roberts: Is that people, they leave the market and they never come back. After the crash in 1974, it was called a black bear market. People left the market. They never came back to invest in stocks again until almost 1990. In 1990, 80% of all investors had made their first investment. In the mid 1980s, in 1995, 80% of all investors had made their first investment.

[00:17:47] Lance Roberts: In 1990, after the two thousand.com crash, most of those investors weren’t even around anymore. There was a whole new group of investors that came in. Financial advisors went outta business, or they left the industry altogether because they had lost too much in assets and there was a whole new group of advisors.

[00:18:02] Lance Roberts: And so we ran into the financial crisis. After the financial crisis, people had lost so much money and they were discouraged and despondent and depressed about what happened with the portfolio. They left the market. I have clients today, That are showing up in my office saying, I’ve been out of the market since 2008.

[00:18:21] Lance Roberts: I want to get back in now. And this is 2022 . And you know, they’ve been outta the market this whole time, but that’s what real bear markets do to people. So the majority of people that are in the market today, and a vast majority of advisors, if you take a look at a lot of the advisors that are out there today offering advice or doing podcasts, they’re doing, you know, videos and they’re writing newsletters, whatever.

[00:18:42] Lance Roberts: A lot of the media that you read the, these journalists that write articles about, you know, what to buy or sell on the markets, go take a look at their age. Most of them were still living at home with parents in 2008. You know, their first election was President Obama was the first time they voted. The first time they invested was in 2000 9, 10 11.

[00:19:02] Lance Roberts: So a lot of investors today have never been through a real bear market and they’ve never seen that kind. And look, we have not been through a bear market yet. The market’s down. 15 to 20% this year. We are not in a bear market yet. This is still in all aspects of correction. We haven’t violated the bullish trend that went back to 2009.

[00:19:23] Lance Roberts: We’ve done nothing to discourage investors after a bear market. Nobody wants to invest. And if I came on here, you know, if we were in the middle of a bear mark, I said, today is today, Rebecca. We need to all get in the market and start buying. The response should be, oh hell no, because the market’s going to zero.

[00:19:42] Lance Roberts: And this is the way it was in 2008. 2008. Nobody wanted to buy stocks. And so, but you know, in 2009, in February of 2009, now remember the market bottomed in March of 2009, March 9th, 2009. In late February, I wrote an article calling eight Reasons for a Bull Market and Why You should be investing in Stocks Now.

[00:20:02] Lance Roberts: And I had about 50 million worth of assets leave my firm literally overnight because people were convinced that the market was going to zero and that was the time to start buying stocks. But that’s the way behavior works today. We don’t have that behavior. Everybody’s trying to figure out when’s the Fed going to pivot so I can buy, because that means the bull market’s.

[00:20:23] Lance Roberts: That’s why we’re not in the bear market yet. We haven’t broken that psychology of investors. We will eventually, if we actually do go through a bear market, that’ll break that psychology. But that’s where you’re going to get your real value in the market ultimately and when value will really start to outperform growth going forward.

[00:20:40] Rebecca Hotsko: Okay, so then just tying that together, because I do want to get your market outlook. You have a bit of a different outlook than I’ve heard from other guests and so some investors seem kind of optimistic that Fed Pivot might happen. But what’s your outlook and any risks that you think investors should still be aware of and be thinking about during this time?

[00:21:01] Lance Roberts: Sure. So a fed pivot, you know, there’s a, have you, I dunno if you’ve ever seen the movie, the Princess Bride. There’s, you haven’t, oh, well you should take this weekend off and go watch the Princess Bride. It’s a spoof on, it’s a spoof on fairy tales. And it’s really well done and it’s very funny, but there’s the Sicilian there.

[00:21:22] Lance Roberts: One of the characters is called the Sicilian, and he uses this particular word. He uses it all the time, and eventually one of the other characters looks at him and says, I don’t think that word means what you think it means. And that’s the word pivot. Pivot doesn’t mean what a lot of investors thinks it means.

[00:21:40] Lance Roberts: It’s what the Fed pivot is when the federal. Is not just pausing rates right now, the market’s going, man, if the Fed will just stop hiking rates at 75 basis points and do 50, that’s a pivot. No, that’s not a pivot. That’s just the Fed’s still hiking rates and by any metric and measure. Historically, going back to 1913, a 50 basis point rate hike is extremely aggressive Fed policy.

[00:22:05] Lance Roberts: It’s just not as aggressive as 4 75 basis point hikes in a row. The Fed was always going to slow their pace of rate hikes from 75 to 50 to 25 to zero. They will stop hiking rates at some point. That was always. Inevitable. The pivot is when they start dropping rates and taking rates back to zero, the pivot is when they stop doing QT and start doing QE again.

[00:22:31] Lance Roberts: When they do that is not bullish. That is not the moment you want to be buying stocks. It’ll be the moment you want to be out of equities entirely. Because when they get to that point, they have broken something economically, or more importantly, credit wise in the market and the economy. And that’s why they’re having to reverse their monetary policy decisions very quickly.

[00:22:53] Lance Roberts: And if you take a look at a history of Fed fund rate hikes, going back through history, You’ll see that fed fund rate hikes take. There’s an old saying about, you know how stocks work and works the same way for rates, interest rates take the stairs up and an elevator down, and they’re very quickly, and the reason that the drops in interest rates are so sharp is because you’re either in the middle of a recession, which hasn’t been recognized.

[00:23:20] Lance Roberts: Or you’ve had some type of credit event, et cetera, and what do we have going on right now? We’ve got the housing market down 30% from its peak. You’ve got manufacturing indexes that are rolling over. You’ve got, you know, credit rising very sharply for homeowners for not for homeowners. I’m sorry, for consumers who are just trying to make ends meet.

[00:23:38] Lance Roberts: And so you take a look at retail sales, you go retail sales were strong. Not really. That was all the function of consumers taking out credit cards to pay more for the same amount of goods they were buying two months ago, just to feed their families and keep their lights on. That’s not economically sent.

[00:23:55] Lance Roberts: So when the Fed begins to make this pivot, and by talking about a pivot, we were talking about a reversal of monetary policy. It is that moment in time where stocks are going to have to start repricing for much slower economic growth, much weaker economic output and earnings. Now remember, where do earnings and revenue come from?

[00:24:12] Lance Roberts: They come from economic activity. So if economic activity is slowing, by the way, exactly what the Fed said they want, the Fed says, we want to slow economic activity. We’re going to have to have some pain to bring down inflation. So whether you want to call it a soft landing, a hard landing, a geopolitical crash, whatever you want to call it, the fact is they’re going to slow economic activity.

[00:24:35] Lance Roberts: Earnings have to come down, which means that the market has to de-risk or they have to price lower in order to compensate for lower earnings growth and lower outlooks. 

[00:24:46] Rebecca Hotsko: Yeah, I think one of the things that is often forgot about the interest rate hikes is that they take several months to move through the economy, so they’re not felt instantly in these companies and the decisions.

[00:25:00] Rebecca Hotsko: And so I guess with that in mind then, how much do you suspect or maybe expect earnings to be downgraded, given that outlook? 

[00:25:10] Lance Roberts: So yeah, you’re right. So first of all, if you think about the interest rate policy in 2022 so far, right? The first rate hike was a quarter basis point in March. Then six weeks later they did 50 basis points.

[00:25:22] Lance Roberts: And then after that we’ve had 4 75 basis point hikes. So total all those up, that’s 3.75% in rate hikes. So far we’re, we were at a quarter to start with, which is why we’re at 4% now. So we’re at 4% Out of that 4% on the Fed funds rate only 25 basis points of that has actually shown up in the economy. So there’s still three and three quarters basis points of rate hikes that have not impacted economic activity yet.

[00:25:49] Lance Roberts: Now you’re going to add another 50 and two more quarters to that. So that’s going to be basically almost 5% of rate hikes that have not been in reflected in economic activity. And what do I mean by that? Right. So when credit, when interest rates go up, that means your credit card rate goes up, that means your car note goes up.

[00:26:07] Lance Roberts: That means anything is tied to variable rate goes up because all, the only thing the Fed controls is the very short end of the. On interest rate yields the long end of the curve, the 10 year yield, the 20 year, the 30 year yield, those are influenced by economic activity, inflation and wages.

[00:26:24] Lance Roberts: So the Fed is trying to bring down that end, and they’re going to do that by slowing down economic activity. Gotta bring down inflation. I slow down economic activity, that means yields come down as well. Now this is part of our thesis of how you will be invested next year as well. So as that long end of the curve comes down, that’s fine, but the long end.

[00:26:40] Lance Roberts: So right now the Fed fund’s futures are predicting the Fed will be at 5% next year. The 10-year treasury is currently at four percent-ish. We’re just ballpark. So the yield curve is inverted across almost the entire spectrum currently between the Fed funds rate and the tenure. . Now, as the economy starts to slow down, as inflation comes down, remember we’re at 5% here, 4% of the 10 year as inflation and economic activity slows down, that 10 year yield is going to continue to fall.

[00:27:11] Lance Roberts: Making that inversion deeper and deeper and deeper. And the more deeper that inversion gets, the harder the economic impact is going to be. Because again, the long end of yields are coming down. But everything that impacts me and my family and me trying to make ends meet and wages and all those type of things are all being impacted by that cost of borrowed capital upfront and the impact of interest rates on the homeowner and on the household and on the consumer.

[00:27:37] Lance Roberts: So everything that occurs is happening on that short end of the curve, constricting consumption and activity. When, so in order to get the yield curve to un-invert, that means the fed’s gotta be rapidly cutting the short end of the curve. So they’ve gotta go four on the 10 year they’re at five.

[00:27:53] Lance Roberts: Inflation comes down the 10 year yield falls to say three. The Feds gotta go from five to two to get the yield curve un-inverted Again, that’s a very sharp contraction in rates on the short end, which means that something is broken. They’re not going to do that just out of the goodness of their heart saying, oh, we just need to un-invert the yield curve.

[00:28:11] Lance Roberts: And this is the reason the yield curve when it’s inverted always predicts a recession that’s coming. And if you go back in history and look at this and this is an important point about. The inversion of the yield curve is not recessionary. So right now we have an inverted yield curve and everybody’s like, see, it’s different this time.

[00:28:28] Lance Roberts: The economy’s fine. It’s all good. Don’t worry about it. because yield curve’s inverted and everything’s fine. Right? Still got very low unemployment. That’s not what that says. When the yield curve ts, that’s when you have the recession. So the inversion is the warning sign. That’s the big flashing red light, the big sirens that are going off the air raid horns, that’s telling you the recession’s coming, takes about nine to 12 months.

[00:28:50] Lance Roberts: But when that yield curve un-inverts and it un-inverts very quickly, as we said, that’s because the recession has actually impacted the economy. And then that’s where the markets are repricing. So to that point, Going into early next year, I want to be probably longer on the fixed income side of my portfolio.

[00:29:08] Lance Roberts: In other words, I want to be long treasury bonds, as an example, have a heavier weight in that, an underweight position in equities. And I want to have my equities primarily invested in the value side of the index. So I’m both picking up a dividend yield as well as I’ve got the safety of good valuations and fundamental cash flows as yields come down, those bond prices are going to go up now as yields approach zero when the fed pivots and rates approach zero, which by the way, that’s where we got down to half a percent in 2020 as an example of getting close to zero.

[00:29:40] Lance Roberts: So as we approach zero, once yields have come down that far, I’ve now maximized the value of my bond holdings and I have probably done as much damage as possible to the earning side of the equation in the economy, which means I’ve now repriced equities. You will sell your bonds and going into the second half of next year, sell your bonds, reap those gains, and then by your deeply discounted growth stocks and other companies that you want to own in your portfolio, where you can generate a four or 5% dividend yield in your portfolio.

[00:30:14] Lance Roberts: Have a growth allocation portion of that allocation, be overweight equities, and then whatever fixed income you do have will be in things like distress debt, high yield junk that’s been blown out the back door. You know, those type of things. So there’ll be some great investing opportunities when we get there.

[00:30:29] Lance Roberts: Now this is all assuming that thesis plays out . So the important thing is we’ll always have to be nimble. If things change, you know, we’ll change that outlook. But right now, if the game plan plays out, as historically, the data suggests that’s going to be the outlook for 2020. 

[00:30:47] Rebecca Hotsko: That was super helpful to hear your outlook on that and your strategy for 2023, because I think that’s something that’s on the mind of all investors right now.

[00:30:56] Rebecca Hotsko: And I’m wondering, given your outlook on what’s ahead, can you share your seven rules on how to navigate a bear market with us? 

[00:31:05] Lance Roberts: So yeah, let’s go over those seven rules before we get there. Let me just say this one thing. Individuals tend to get kind of attached to a certain outlook or a certain view, and the important thing is that nobody knows the future.

[00:31:18] Lance Roberts: Nobody can predict the future accurately. All we can do is simply look at history as a guidepost. And make some assumptions about how things should work out theoretically, but things can always change. And as investors in the markets, we’re doing a lot of gambling and speculating. And as a gambler or a speculator, we have to make room for possibilities.

[00:31:39] Lance Roberts: And again if I’m making a bet on something, I can bet the possibilities and I can bet the probabilities. I can bet that a, in a horse race that the hundred to one favorite would win. But it’s a very, it’s what’s called a long shot. The possibilities of that horse winning are very small. But if he wins, I win a lot.

[00:31:59] Lance Roberts: It’s great. But I can bet the probabilities and I can pick the Sure Fryer winner. And I’m not going to make as much money, but I’m going to win. And so this is the same thing with investing, is that we need to have these views, but always leave room for that possibility to surface. And this is why I want to talk about a second ago in our allocation, we’ll still have an allocation to equities.

[00:32:19] Lance Roberts: Because again, a lot of people say, well, if you believe this, why aren’t you just a hundred percent bonds and have no equities? Why don’t you just sell your equities, be just cash and fixed income? Because there’s a possibility that stocks could go up, the Fed could immediately reverse. I don’t think they will, but the Fed could immediately start doing QE Tomorrow I could wake up and this whole thing we just talked about has entirely changed.

[00:32:41] Lance Roberts: And so I need a portion of the portfolio that can benefit from that change and go up if the market, if the equity markets are going up, you know, if bonds don’t work as I expect, then I need to be able to rotate that into equity sooner than plans. So make sure that you take, you know, this analysis for what it is.

[00:32:59] Lance Roberts: It’s a guess. And we’re all trying to make the right guess, and I’m trying to make the right guess for my clients and our portfolios. But just understand that between now and the next time that you and I talk, Rebecca, things could change dramatically. We may get back on here next time and say, I’m a hundred percent long socks, and this is why.

[00:33:15] Lance Roberts: And you’re like, yeah, but the last time you were here, you said . You know you were all bonds. What happened to that? Things change. And so I just want you to know that things can’t change, but this is why these seven rules of investing capital. Are so important because it incorporates a lot of this idea and philosophy When you’re thinking about your money, invest your money the same way that you would do anything else.

[00:33:38] Lance Roberts: And do it logically. Just don’t follow blindly something that somebody said, because everybody has the propensity to be wrong from time to time. So the first step is always move slowly, right? So rule number one, and investing money always moves slowly. One bad tendency we have is like, oh, I really like this stock.

[00:33:55] Lance Roberts: It’s gone up a lot, so I’m going to put all my money in it. And that’s the great way to lose a bunch of money as well. If you find a stock you really like, or maybe there’s a stock you want to own right now that’s really beaten up and you’ve been wanting to own it for a while, but it’s still going down, but you’re not quite.

[00:34:10] Lance Roberts: Buy a little bit of it. You know, football is a game of inches. You win football games by moving the ball down the field a little bit at a time, consistently making first downs, moving the line down towards the goal post. They say the same thing about baseball. You know, you win baseball games by hitting singles.

[00:34:25] Lance Roberts: So investing is the same way. Just hit consistent singles with you’re investing and you’ll win. The long term investing game where people go broke is by making big bets and being wrong. So move slowly when your thesis plays out for whatever it is, you know, I really like this company, it’s now starting to go up in value.

[00:34:41] Lance Roberts: Add more to it and then be sure that when that trade is over, that you take some profits out of it as well and reverse that process. Second thing is that if you’re overweight equities now and you’re concerned about another leg lower in the markets next year, which I think is a possibility, again, it’s a possibility versus probabilities, you know, we don’t know.

[00:35:00] Lance Roberts: But if you’re really overweight equities, don’t try to just sell everything into cash today and go buy bonds. Right, do it slowly. Start slowly, rethink about where you want to be, adjust your allocation model to what your objectives are, and then rebalance that risk a little bit of time. Again, moving slowly, you know, the best thing to do in portfolios.

[00:35:19] Lance Roberts: And I’ve actually got an article I’m going to publish probably right towards the end of this year. It’s called Why Your Portfolio is Like Gardening. Gardening has a lot of similarities to managing a portfolio. If I’m going to build, if I’m going to plant a garden, first thing I gotta do, I’ve gotta till the soil, I’ve gotta plant the seeds, I’ve gotta water it.

[00:35:36] Lance Roberts: And once the plants grow, if I don’t harvest the product of that garden, if I just leave the bell peppers on the vines or whatever, they’ll rot, right? So I’ve gotta harvest the fruits and the vegetables from time to time that’s taking profits. And if I don’t pull the weeds in the garden, those are your stocks that aren’t doing well.

[00:35:54] Lance Roberts: But I’ll pull those weeds, they’ll eventually take over the garden and I’ll have no garden anymore. So this is part of selling laggards and losers. You know, if you have a stock that you’ve bought or a position that’s not working and you don’t understand why it’s not working, or the thesis wasn’t good to start with, you bought an overvalued company trading it 20 times sales or whatever it was, it’s okay to sell.

[00:36:16] Lance Roberts: It. Doesn’t mean you’re a loser. That doesn’t mean that you’re a terrible investor. It just means you made a mistake. And that happens with investing. Everybody makes. And if you’ve never made a mistake investing, you’re not really investing, but sell those ones that aren’t working and put that money into things that do work.

[00:36:31] Lance Roberts: You know, one of the best rules of investing is to do more of what works and less of what doesn’t. And that’s the surefire way to be a good a good long-term producer returns in your portfolio. And again, that kind of goes to the fact that once I sell my lag and losers, That’s where I want to start adding money to things that are doing well.

[00:36:47] Lance Roberts: So that’s kind of rule number four. You know, adding to these sectors that are, and stocks that are doing well, if they’re doing well, give them some more fuel to work with. That’ll help create better returns in your portfolio. It’s always cap-stop losses. If you’re managing a portfolio without a stop loss, if you’re just like, know, I’m going to own this, and no matter what happens, I’m going to just hold onto it.

[00:37:06] Lance Roberts: That’s a great way to wind up with a whole portfolio full of stocks that aren’t performing for you. So always have your stop losses at some point. Have those trail up behind whatever position you own. You can use a moving average, like the 200 day moving average, the 50 day, whatever it is, if you violate those levels.

[00:37:22] Lance Roberts: Sell the position. You can always come back to it later. It’s always, one thing that’s always fascinated me about in individuals is they’ll sell a stock and they think that once they sell it, they’re in some club that has now banned them from ever buying that stock back. , I can sell ExxonMobil today and if I sell it for a profit, I can turn around and buy it back tomorrow.

[00:37:42] Lance Roberts: If I sell it for a loss, I wait 31 days to avoid my wash, sell rule violation. I can buy the stock back. There’s nothing that says just because I sell something, I can’t buy it back in the future at a better price or a better technical level, or when I know for sure now that stock is performing.

[00:37:59] Lance Roberts: Number six, of course is, you know, selling to rallies when you have a big rally in the markets and things get really overbought and you need to reduce. Use that rally to sell into. We, that’s one thing we’ve talked a lot about since just really the bottom of the market. In September we were talking that we’re going to have this rally in the market and to use this rally to reduce risk, rebalance portfolios, et cetera and raise overall cash levels.

[00:38:22] Lance Roberts: That’s what we’ve been doing for our clients and as we move into the end of the year, we’re going to continue to rebalance that risk, getting ready for what we think will be possibly a pretty tough first part of next year. And we’ll see. And again, look, if none of that makes any sense to you and it doesn’t, you know, kind of, you know, resonate that this is what you should be doing with your money, this is where you go find an advisor that will do this for you, not just put you in some basket of ETFs.

[00:38:52] Lance Roberts: You can do that yourself. But if you actually need somebody to help you manage the risk, do your sector allocations, those type of things, go hire a manager that’ll do that. It’ll be worth the fee that you pay them if they’re good in the long term. And that’s really the seven rules to follow. 

[00:39:06] Rebecca Hotsko: That was super helpful and I think it got me thinking when you were talking about why we don’t think we can buy a stock once we’ve sold in.

[00:39:13] Rebecca Hotsko: I wonder if that’s just due to anchoring where it’s, we think of the price we first bought it at and then we think it’s overpriced ever since that initial price. That’s interesting. 

[00:39:24] Lance Roberts: Yeah. No, it’s great. You know, there’s a whole show we could do on behavioral biases of investors, you know, from anchoring to hurting to confirmation bias to gamblers, fallacy, just on and on.

[00:39:35] Lance Roberts: The, you’re absolutely right. You know, this is we get focused on what they, oh, I bought that stock before and I lost money in it, so I don’t want to lose money again, so I’m not ever going to buy it back. You know, those are just some of those psychological behaviors that we tend to do when we’re investing that leads poor returns over time.

[00:39:53] Rebecca Hotsko: The other thing that I really wanted to talk to you about today was, it was in that article as well and you showed just such a great graph of the decomposition of returns for the S&P 500. But this was super interesting to me seeing this breakdown. So I was wondering if you could go over this for our listeners.

[00:40:12] Lance Roberts: Sure. Yeah. So returns come from several different aspects. Obviously one is the valuation multiple, the what we call valuation expansion. Of course, you’re dividend, if your stocks pay a dividend, then that’s part of your total return. and then of course price appreciation. So once you start kind of factoring in, you know, all these different variables, you know, you have to start looking at where am I getting the bulk of my returns over time?

[00:40:37] Lance Roberts: And if you go back to, as an example, in 2020, we were getting a big chunk of our actual return from just valuation expansion. We We were running up the price of stocks relative to the earnings that they were producing. So we had this big multiple expansion that was generating the big bulk of returns for the index.

[00:40:55] Lance Roberts: You know, this year’s obviously been a bit different and you know, but it’s important when you start thinking about, okay, when I buy, and this is, this also is a very important case about why you buy dividend yielding stocks versus non-dividend yielding stocks because that dividend provides that secondary leg of the stool of your total return to your portfolio.

[00:41:15] Lance Roberts: So when we look at building a portfolio as an example, this is why we own bonds. And you know, a lot of people’s like, oh, I don’t want to own bonds. They don’t go up as, as much as stocks. I’ll make more money if I just buy an index. Well, that’s true, you will in the short term. But what bonds provide are really kind of three very important components.

[00:41:33] Lance Roberts: One is that they provide a risk reduction of the overall volatility of the portfolio. The second thing is when I add bonds to my portfolio, they generate a function of principle returns. So if everything goes wrong in the world, I always get my money back if I own individual bonds. And the third thing is, of course, they provide interest income.

[00:41:51] Lance Roberts: So when I look at the total return of the portfolio at this point, if I have stocks and bonds in my portfolio, I have capital appreciation in my stocks. I have dividend yields for my stocks, and I have interesting income from my bonds. And so this gives me my true total return. I have that three legged stool of returns in my portfolio.

[00:42:07] Lance Roberts: So really no matter what’s happening in the overall market, I’m generating returns in my portfolio. Stocks can be going down, but I can still be collecting my dividend yield in my interest. Income stocks can be going up, and now I’m getting all three. So there’s always something happening and we talk a, you know, a lot of podcasts for that.

[00:42:24] Lance Roberts: I see for, you know, younger investors and millennial investors in general talk about creating passive income, right? You need to go buy real estate so you can have passive income. There’s nothing wrong with that, by the way. I invest in real estate as well, but I can create a portfolio that generates passive income also.

[00:42:40] Lance Roberts: And so investing, and it also keeps me highly liquid. You know, the problem with buying real estate is I’ve now lost liquidity in a portfolio. I can create all three stools of return, which are also, I can have liquidity return, and preservation of capital over time. And that’s a very hard combination to beat.

[00:42:59] Lance Roberts: In any other investment. In other words, if I have real estate, I can create returns, but I have no liquidity. And so I lose a component of my cash management over time once I invest in hard assets. And I’m not saying you shouldn’t, don’t take me wrong. I’m just saying you have to always evaluate the importance of liquidity because that provides opportunity costs that you need to be aware of.

[00:43:21] Lance Roberts: So again, we go back to looking at the decomposition of returns. Understand that there’s there’s several components of that return structure that come in. And the best thing you can try to do is to try to accomplish a portfolio that can benefit from that entire structure of return builds over time.

[00:43:39] Rebecca Hotsko: Yeah. What was so interesting to me when looking at this is, I’ll just read it for the listeners. 7.1% of the returns came from dividends. 40.5% came from share buybacks, 31.4 from earnings and 21% from multiple expansion. And it was really cool because it showed it changing over time. And so the big piece that stuck out to me there was the share buybacks and how that has exploded in recent years.

[00:44:07] Rebecca Hotsko: And that made up 40% of the total returns. And so thinking about that from assist. Sustainability like is share buybacks being that high, a sustainable source of returns? Or how is, how do you think about that? 

[00:44:22] Lance Roberts: Well, for now, yes. If you take a look at Apple as an example, Apple’s bought back over half a trillion dollars worth of stock.

[00:44:29] Lance Roberts: So that’s been a big boost. Now, how did buybacks work, right? So when a company buys back its own shares, they’re reducing the number of shares outstanding. So let’s just do a hypothetical calculation here real quick. And let’s say that my company earns a dollar worth of earnings. So I’ve got one dollar’s worth of earnings.

[00:44:46] Lance Roberts: I have two shares, so I have 50 cents a share in earnings, right? So that’s simple math. But let’s say I buy back one of those shares. So now I’ve only got one share outstanding and I still earn a dollar’s worth of revenue. Now I have a dollar’s worth of earnings per share. Now, did I create any more earnings?

[00:45:03] Lance Roberts: But by reducing the share’s outstanding, I improve my earnings per share. And that’s what we all look at in terms of s like what’s their EEPs and what’s their e p s growth. Well, over the last 10 years, since 2011, share buybacks have been distorting the E P s structure and the markets by lowering the share count outstanding, making earnings growth appear stronger than it really is.

[00:45:27] Lance Roberts: And again, so if you go back and look at that decomposition of returns that you’ve got, 40% of the growth of the market came from share buybacks. If I strip that out, the market’s no longer trading at 4,500. At the peak, it’s like 2,700. . So it’s made up a massive increase in the share price of the market.

[00:45:46] Lance Roberts: And the only people that and again, there’s a kind of a fallacy. People say, well share buybacks benefit shareholders because it’s a return of capital shareholders. That’s not really true. The reason is that when Apple buys back their shares, yes, my share price may go up.  Now Apple did share buybacks in 2022 and my share price didn’t go up.

[00:46:06] Lance Roberts: So where was my shareholder distribution? Right. The only time that shareholders get a distribution from a company is when the company pays a dividend. The only other people that benefit from shareholders from stock buybacks are insiders of companies that are granted shares of the company. They have stock options, stock grants, et cetera, that they’re selling back to the company itself.

[00:46:26] Lance Roberts: So the insiders of the company, they generate a lot of wealth through share buybacks, individual shareholders, you, me, everybody listen to this podcast. We own shares of Apple, and Apple buys back stock. You know, maybe our stock price goes up, that’s great, but that would probably happen anyway because of the entire market going up and I can sell my shares at any time in the open market.

[00:46:46] Lance Roberts: So there’s really no benefit to me personally of share buybacks. So it’s a bit of a bit of a fallacy when they say it’s a return of capital shareholders. Cause there’s no capital being returned to shareholders. It’s being returned to insiders mostly. 

[00:47:00] Rebecca Hotsko: It’s really interesting, I think I remember reading a Warren Buffet quote in a book where he said that investors should be indifferent between share buybacks and dividends because they could just sell the shares and create a dividend.

[00:47:14] Rebecca Hotsko: But that’s really interesting. I haven’t heard that argument before. Can you expand a bit on that? So why don’t we benefit from the share buyback? So just because we would have to sell our shares essentially to benefit from that versus the dividend. We get it. We don’t have to sell any positions, 

[00:47:31] Lance Roberts: right so what is the share buyback, right? Let’s start with there first, right? So a share buyback says, I’m Apple, you own a share of stock. And I say, Rebecca, sell me your share of stock. So you sell me your share of stock, I give you a hundred dollars for it, right? Cause that’s the going price. So I give you a hundred dollars for it.

[00:47:48] Lance Roberts: Now, you may not have capital, but you no longer have any shares of Apple. , right? But you can do that any day of the week. You can go into the open market any morning and liquidate your shares of Apple. You’ll now have cash and somebody else Jim, over to your left he’ll now own your shares of Apple, right?

[00:48:06] Lance Roberts: Whoever you bought, the, whoever you bought, sold the shares to, got the cash from. So there’s really no benefit when the company is buying back shares from shareholders. It’s the same thing as anybody else buying your shares. There’s no return of capital to you. You’re just getting capital from the market.

[00:48:19] Lance Roberts: Where it benefits individuals is where they are insiders of the company and they’re granted, they’re given stock, right through a stock option, through a grant, whatever. And when the and the s e C did had a whole study on this and actually made some statements about share buybacks, that the only people that benefit from it are the insiders because they’re granted they’re given something for free, basically, that they then sell to the company and the company gives them capital.

[00:48:46] Lance Roberts: So they’ve now converted this gift into cash. So they’ve created wealth, and this is why insiders and companies are so vastly wealthy, right? You know, again, shareholders, as you and me and everybody else, we try to attribute share buybacks as being beneficial. Because typically when companies are doing share buybacks, the stock price is going up.

[00:49:06] Lance Roberts: So we say, oh look, it’s benefiting us because the share price is going up. Well, buybacks didn’t really become massive until 2011. Stocks were going up in 2003, 4 5 67. So, you know, if share prices were going up without this big benefit of net buybacks, then what benefit is a shareholder? Am I really getting it?

[00:49:25] Lance Roberts: because nobody’s giving me any money. I’m only getting the price appreciation. Again, 2022 is a good example. Apple share prices are down and they’re still buying back shares. So I’m actually, the share buybacks in 2022 are costing me money because importantly, what happens to that capital? The capital for Apple, using it for share buybacks, is the least best use of capital.

[00:49:48] Lance Roberts: issuing a dividend to shareholders is a better use of capital than share buybacks, but Apple just spent over half a trillion dollars. They came out with a new phone, but it’s not phenomenally better, right? They haven’t bought any major acquisitions to expand their product base or their customer base.

[00:50:05] Lance Roberts: They haven’t done any type of, you know, investment that would lead to long-term economic growth. Instead, they’ve used over 500 billion to do a one time benefit, right? Because when I do a share buyback, that capital is used one time to buy back shares, and that’s it. The share the capital is used and it’s distributed to whoever now else has it.

[00:50:24] Lance Roberts: So maybe it has some economic benefit of those individuals buying a house with the money or buying a car or whatever. But there’s no long-term use of return or low long-term gain that will be benefited from that reduction in share count other than boosting the EPS. And this is why if you take a look at stock price of the market versus earnings growth, we’ve had a massive expansion in the price of the market, but earnings growth has only grown by about 40 to 44%.

[00:50:55] Lance Roberts: In total cumulative revenue growth since 2009. So revenue growth has lagged far behind the price of market, and this is why you see an abnormally large number of companies today trading at 10, 15, 20 times sales because sales have simply not grown nearly as fast as market. Again, 40% of that growth coming from share buybacks.

[00:51:14] Lance Roberts: And this is also a reason why until 1990 share buybacks were illegal because they were a form of market manipulation. It was only after 1990 that they reinstituted the ability to do buybacks. And then when President Clinton, in the late nineties capped executive salary at a million dollars, that’s when Wall Street went crazy and said here’s how we’re going to compensate executives.

[00:51:37] Lance Roberts: And they created these stock option plans, stock buyback plans, and stock-based compensation that led to this massive surge in share buybacks so they could convert. Those shares issued to them into capital, and this is why we talk now about this wealth gap and the economy and how the executives of corporations make so much more money than the workers.

[00:51:56] Lance Roberts: Well, you can thank Bill Clinton for putting that. 

[00:52:00] Rebecca Hotsko: That’s super interesting. And I’m wondering, cause I remember reading this in the CFA that share buybacks can also be a way for management to signal, they think their share price is underpriced and so they buy back shares and then it has that effect. So I wonder how much of it is that behavioral effect and then to your point, it’s not perhaps long-term growth because as you talked about, you have to sell your shares to benefit from that.

[00:52:25] Rebecca Hotsko: But most people aren’t selling their shares, they’re holding it long-term. And so I guess I’m wondering, do you think that share buybacks, are you of the view that it is a bit of manipulation then? 

[00:52:37] Lance Roberts: Well, first of all, you know, that’s kind of a myth that companies buyback shares because they think their stock is undervalued because, well this is call, what it is.

[00:52:46] Lance Roberts: Because you know, they, you know, apple was buying back shares at record valuations and so they didn’t think the company was cheap then. And as the market was falling in price, they stopped buying as many shares. So, you know, there’s really, if you take a look at insider buying and selling, you take a look at corporate buyer buying and selling of stocks.

[00:53:05] Lance Roberts: They tend to do exactly what investors do. They tend to overpay for their shares when they’re expensive and then they don’t buy them when they do get cheaper. Because in the middle, if we get into another recession and another deep drawdown of the markets, the first thing that’s going to get cut is share buybacks.

[00:53:20] Lance Roberts: Because they’re going to need that capital to pay for salaries and compensation and everything else that goes on in the company. And they’re going to look for that strength of having a cash holding. Take a look at what happened during 2020 is a good example. When the market cracked in 2020 and we shut down the economy, buybacks stopped.

[00:53:37] Lance Roberts: So they weren’t buying stock, you know, they weren’t, even though stocks were cheap, you know, after the pandemic, they weren’t doing buybacks because they needed that capital to survive. So again, this idea that you know, companies are buying back stock cause they think it’s cheap, it’s A wide tale.

[00:53:52] Rebecca Hotsko: Yeah, that is an interesting point, how companies seem to buy at the peak and not when it’s severely depressed. You would think it’d be the opposite. One last thing. So on the outlook for a share repurchases then, because that’s been such a large portion of total returns earnings, we know that lots of companies are kind of under pressure now, especially the FANG stocks.

[00:54:15] Rebecca Hotsko: So what’s the outlook for Share Repurchases going forward? Have they announced buybacks and is it more or less in the previous year? 

[00:54:24] Lance Roberts: Well, 2022 is a record year for announcements of stock buybacks. In fact, this is one of our thesis coming into October. You know, we had a pretty tough September and we said, look, once we get through earnings for the third quarter, the buyback window will open up, and that’s 5 billion a day in stock buybacks through the end of the year, because we had a trillion dollars worth of stock buybacks.

[00:54:46] Lance Roberts: That’s a record, by the way. So there is no incentive right now for companies to stop buying back shares and using that capital for share buybacks, because A, it benefits the insiders. B, it helps them meet Wall Street estimates, and C, it helps elevate their stock price. Well, again, they’re an artificial buyer.

[00:55:02] Lance Roberts: In fact, if you go back and look at 2000 and, you know, 16, 17, 18, 19, and really even into early 2020, almost 100% of the net buying of stocks of equities came from stock buybacks. They were the largest purchaser. Of equities in the markets all these major corporations. And importantly, you’re only talking about these big, large cap companies that can afford to buy 500 billion worth of stock buyback.

[00:55:28] Lance Roberts: You know, most of your small cap mid caps, they can’t do stock buybacks to any great degree. So this is why, again, we go back to why thanks stocks aren’t dead. And ultimately it’ll be because passive investing that’s going to drive a lot of capital flows into those top 10 stocks. But these are also the companies that can benefit from stock buybacks.

[00:55:47] Lance Roberts: And though they will allocate that capital to stock buybacks to reduce the number of shares outstanding, boosts their earnings, that attracts more capital inflows. It boosts their stock price, which attracts more capital inflows. And you get this repetitive cycle that creates this expansion in the markets.

[00:56:02] Rebecca Hotsko: Yeah, that is so interesting when we look at companies that favor the share buybacks versus paying a dividend because, as you mentioned, share buybacks, boost earnings, but if the company spent that same cash instead on a dividend, their EPS growth would be lower. And so it’s just really interesting to think about which companies choose the buybacks instead of giving it directly to shareholders in the form of a dividend and what impact this is having.

[00:56:29] Lance Roberts: That’s right and again, this is why prior to 1990, Stock buybacks were considered illegal. It was a form of market manipulation because a sh stock share buybacks, you know, it boosts the price of the stock again. So you’re artificially boosting the price of your stock by either buying the actual stock and lifting the stock price by being an artificial buyer, or B, improving the outlook for the stock by and improving the outlook for earnings by reducing the number of shares outstanding.

[00:56:57] Lance Roberts: So again, you know, when we, to your point, this is why prior to 1990, it was a form of market manipulation because it’s not a natural occurrence of what’s happening. This is artificial capital being done. And amazingly this is such an important part for some of these companies that, you know, one of the problems that we may see for buybacks in 2023, is these higher interest rates because companies were going out and borrowing money to do stock buybacks in order to boost their share price and lower earnings.

[00:57:27] Lance Roberts: But they could do that because interest rates were so cheap. You know, I can go out and borrow money at three, 4% and then go buy back my shares and get a higher net return than what is costing me in terms of capital. Now, with interest rates have gone up, that’s not going to be the case. But, you know this is those trade-offs.

[00:57:45] Lance Roberts: And again, instead of expanding employment, creating new products, buying and or merging with, you know, acquiring another company, acquiring, you know, some new form of production or none or some new product that you want to start putting out, you know, that would createlong-term growth for the company.

[00:58:01] Lance Roberts: That’s risky. Why? Why do I want to do that if I invest? It’s a good example of this. You know, we’re talking about oil prices being so high, right? And, you know, gas prices are high. Why? It’s because we haven’t built a refinery. In the US in 40 years, it takes 10 years. If you build a refinery, it’s a huge capital commitment and it takes 10 years to start making money out of a refinery.

[00:58:21] Lance Roberts: Who wants to go invest money in a refinery when I can just buy back shares and get an immediate impact today in terms of profitability versus something I’ve got to invest capital in and takes 10 years to pay off, right? Not to mention all the political risk and you know, environmental risk and everything else, just the fact I’ve gotta invest capital for 10 years.

[00:58:40] Lance Roberts: So there’s no incentive in this market that we have today because it’s so driven by high frequency trading and algorithms and online trading and everything else. We have shortened our timeframe from buying a stock and looking, this company’s going to make me X dollars over the next 10 years to how much money is it going to make me between now and three months?

[00:58:59] Lance Roberts: The average holding time for stocks is now below six months. The average person’s not holding stock for more than six months. So what type of long-term aspect do I have? For a company to invest capital long term, when I can buy back shares and have an immediate benefit and as an insider benefit from it.

[00:59:16] Rebecca Hotsko: Okay. So one last question for you. I’m wondering, how do you think about and factor in companies that do a lot of share buybacks into your investment process and analysis? Because we know that it’s a source of return and it’s historically grown to be one of the biggest sources of return, but you also kind of talked about how it might not be the best one.

[00:59:38] Rebecca Hotsko: And so I’m just wondering how you think about companies that do this. 

[00:59:43] Lance Roberts: Buybacks are very important because again, like I said, this is, you know there’s a correlation when companies are buying back shares in a rising asset market, right? So again, right now we’re not in a rising asset market, so buybacks don’t matter that much.

[00:59:55] Lance Roberts: But as I said, you know, as we’re factoring in when markets get really oversold, we were looking for that buyback window to open because we knew that was 5 billion a. Of net buying coming into the market. So if nobody else wants to buy stocks, I knew there was going to be a stock buyer coming in, then that’d be the corporation.

[01:00:13] Lance Roberts: So yeah, buybacks are an important factor for when you get into markets where markets are trending and you got asset prices rising and you’ve got money chasing stocks, those buybacks certainly provide a benefit. So yes, you have to factor that into your equation. I don’t have to be, I don’t have to support it.

[01:00:31] Lance Roberts: Right. Morally right. I think morally it’s a terrible thing to do buybacks because it, it really kind of robs shareholders of long-term returns. But from an investment standpoint, I think you have to factor it in and make it a consideration. 

[01:00:45] Rebecca Hotsko: Well, thank you so much, Lance. That was super insightful and helpful as always.

[01:00:49] Rebecca Hotsko: Just as a reminder for our listeners, where can they go to connect with you and read all about your work? 

[01:00:55] Lance Roberts: Yeah, so our website is realinvestmentadvice.com. We put out a blog. We have a daily market commentary we put out every day. Just gives you a quick market update, real quick read. We produce a couple of blogs a week on various topics and a lot of things we talked about today.

[01:01:10] Lance Roberts: And we have a weekly newsletter that we produce every week that goes over our portfolios, market statistics, stock sprains, everything you need to help be a better investor. 

[01:01:19] Rebecca Hotsko: Perfect. Thank you so much. 

[01:01:21] Lance Roberts: My pleasure. Thank you, Rebecca. 

[01:01:24] Rebecca Hotsko: All right. I hope you enjoy today’s episode. Make sure to subscribe to the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I’d really appreciate it if you left us a rating or review. This really helps support us and is the best way to help new people discover the show. And if you haven’t already, be sure to check out our website, theinvestorspodcast.com.

[01:01:55] Rebecca Hotsko: There’s a ton of useful educational resources on there, as well as our TIP finance tool, which is a great tool to help you manage your own stock portfolio. And with that, I will see you again next time.

[01:02:11] Outro: Thank you for listening to TIP, Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday we teach you about Bitcoin and every Saturday We Study Billionaires, and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional, this show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.