Douglas Goldstein: Chris Cogswell is a buddy of mine for several years.
He really wanted to talk today about ethnic hole in the wall restaurants, but I said Chris,
you and I talked a lot about the market and the economy and because we’re both involved
in investment management, we have sort of our own language and our own type of discussions
that a lot of people never get to hear and so Chris and I were about to engage in a discussion
like that and I said, let me click on the recorder and let everyone hear the real discussions
that we have minus all of the kind of Wall Street jargon so that people know that we
too are a little bit concerned about crazy markets and what goes on.
So Chris this is our secret, private discussion which I have to tell you there’s probably
a few million people going to tune in.
First, tell me what’s your favorite ethnic hole in the wall restaurant?
Chris Cogswell: Unfortunately, it’s no longer there but it used to be called Sari-sari which
is a Filipino term and it was a Filipino restaurant that had all of six tables, and when you walked
in you thought “Boy, I’m back in a developing country.”
The food was great, the people were great and it was perfect until it closed about two
years ago.
Douglas Goldstein: And it’s in the Philippines?
Chris Cogswell: No, it’s in Louisville, Kentucky in the middle of practically the
Midwestern United States.
Douglas Goldstein: I’m finding that my clients were saying “You know Doug, they are raising
interest rates and the world is insane.
What should I do now?
Do you feel a) the raising interest rates and b) the world is inane?
Chris Cogswell: I’m not afraid of rising interest rates, the world is not insane, it’s
probably acting rationally underneath, it’s just that nobody sees it and frankly if you
believe in sort of the free hand of the market, it’s probably acting exactly the way it’s
supposed to which is rationally, it’s just that it’s made up of millions and millions
of people right?
Acting in their own best interest which is the way markets work and so I don’t think
it’s insane at all, I think it’s normal, it’s just that you know from a 30,000-foot
level, you can’t see it acting rationally, it doesn’t look rationally, but each individual
underneath is acting as they’re supposed to.
Douglas Goldstein: So you’re a big fan of this sort of free hand of the market thing.
You know it’s actually funny because certainly in the states when people are talking about
this, they’re saying maybe it’s gone too far.
Look how a lot of people are really suffering and you know the money managers, they got
all the tricks and they’re trading so fast, no one can even make a move.
How do you feel about that?
Chris Cogswell: It’s interesting.
I had a discussion with a guy and he managed his money for big institutions right?
And he found out that you talked about you know all of this really fast high frequency
trading that in fact the high frequency traders were getting there, ahead of the other big
institutions and so the institutions can’t keep up either.
So in a sense, when I was talking with my friend about it, it made sense, at least it
does from my perspective that you shouldn’t even try it, even the institutions are getting
beat up with it.
You should actually have a plan, work the plan and don’t freak out when the markets
get a little volatile.
Douglas Goldstein: I feel that you know if you are trading and the speed that you can
click send attempt to your trade really matters, you’re probably going to not lose because
some high tech traders ahead of you, it’s just because how can you possibly make decisions
that quickly and that well, and you know the academic studies show that people who do that
just end up really messing themselves up.
Chris Cogswell: Exactly and even the corollaries as what I just said, is just even the institutions
do it badly and really there’s really no argument for kind of trying to beat it.
Douglas Goldstein: Do you think that does that apply here or it just doesn’t?
Chris Cogswell: No, not at all.
You know it’s interesting you know when you manage portfolios, you really want to
say and I can feel comfortable saying I’m going to have a strategy, not a short term
trading approach.
I’m going to have a long-term strategy which is at least 12 months out and I’m going
to feel comfortable that I’ve got good resources and a good plan, and the clients know how
things are generically, hopefully supposed to work right?
Douglas Goldstein: Why do you say 12 months?
Chris Cogswell: Once you get below 12 months that’s a way into business called tactical
right?
And that’s when you start getting in the high frequency stuff because if you say “Well
I’m going to go shorter than that, well why wouldn’t you all just go all the way
down to you know, the shortest nano seconds, why do anything in six months when somebody
else can beat you to that?”
So you very quickly work yourself down to lowest common denominator which is as fast
as you can get and that’s as we discussed not where we want to go.
Douglas Goldstein: So you and I, I think definitely are on the same side of the table as far as
trading because I’m also not really digging to try and to trade and not into the tactical
thing.
In fact, I always like the comparison because you know I wrote this book about chess and
investing and I wrote it with a woman who is a world chess champion Susan Polgar and
we once played a blitz game and so we put the time right down and she said you know,
blitz game is where you get five minutes to decide and she said “Doug, you know you
take five minutes and give me one minute.”
And it means that I had five minutes to play my whole game and she had one minute to play
her whole game.
Obviously I lost, but she had a whole game, because her timer went from one minute to
about 43 seconds, meaning she was able to do a whole game in 17 seconds and I think
that’s a good comparison between institutional tactical traders and normal people who if
you can’t compete, then don’t even get involved in that game.
Chris Cogswell: But here is something interesting.
So on a conference call a couple of weeks ago, and one of these great big platform guys
out there that reviews hundreds and thousands of managers, you know institutional managers
for money, they found that even institutional managers that try to do tactical last year
failed miserably.
So it’s one of those things.
Again it gets back to the point.
Tactical doesn’t really work even for institutions a lot of the time.
Douglas Goldstein: I happen to know that Chris when you managed portfolios, you often move
to cash which seems to me like a tactical decision in order to protect from the down
side, am I letting people in on the secret that they shouldn’t know about?
Chris Cogswell: No, not really.
I think that what we are doing is we are recognizing the fact that volatile markets, and this is
key in understanding this.
Volatile markets tend to go down more often than not.
So what we are saying, we are not running away from the market, we are actually understanding
the market better and saying if the volatility is going up, we sensed that we probably head
down more than we will up, so we’d rather not be in a down mark.
We are still participating in the market just in a different way than being fully invested.
Douglas Goldstein: What does that mean?
What does it mean you are participating if you are in cash?
Chris Cogswell: Well that’s still part of the market.
Douglas Goldstein: So you define cash as a strategic asset as oppose to other people
who’ll just say “Gosh, if cash is sitting in a bank or in a money market earning zero”
and they don’t see that as a strategy, they see that as a lack of investing, is that a
fair differentiation?
Chris Cogswell: I think that’s exactly right.
I mean it’s a part of any strategic plan or portfolio you do for any client.
If you think about it, when you do financial planning for an individual client, you say
“Do you have your emergency reserves?”
you know, maybe I need to set some aside for a specific event in the future, not the least
of which you say “I have to have this in cash because I can’t lose it.”
So cash is in fact a strategic asset.
It always has been.
Just because it’s not in the market, i.e. it’s not buying any listed bonds or securities
or funds, anything like that, it doesn’t mean it’s not invested.
It doesn’t mean it’s out of the market.
It means that it’s a strategic piece of any plan in any portfolio.
So we use it to manage risk and that’s in any respect what you should do.
Douglas Goldstein: Do you think normal people should use it that way also?
In other words let’s say a guy looks and he says “Wow, December, January, crazy markets”
right?
Whatever is going on in the market he goes “I can see the volatility, let me go to
cash” is that the type of decision of someone who’s managing his own portfolio should
make?
Chris Cogswell: Here I’m going to argue for institutions that can do certain things
better than individuals and to a certain degree, I dislike admitting it, the fact of the matter
is most people shouldn’t say “Well I know what I’m doing with “timing” and I’m
going to pull things in and pull things out” you would get to a level of sophistication
where you can say “I can monitor and manage volatility globally” in other words I know
what’s going on in you know Asia, Africa, Middle East, Europe, United States, you know
the America and things like that and you can monitor those levels, or if you can, if you’re
just sort of taking the temperature on, what the market does when it opens that day or
in a given couple of days a week, that’s a very different thing right?
And so most people, in fact if you just look at it at that level of timing, they will also
do worse in the market short term, medium term and long term.
So what the difference here in this case is we’ve got a track record of saying “We
can see over long periods of time with volatility management at a certain sophistication that
we can outperform.”
So they are two very different things and it has to do in reality with sophistication
level.
Douglas Goldstein: So you are saying and just to be very clear that for regular people managing
their accounts, using cash or any investment strategy is they’re competing or they’re
simply not going to be able to do it at the same level than an institutional manager is
and tell me why.
Chris Cogswell: Frankly, it’s sophistication level.
You know if you got an institution and in example in our case, our particular partner,
they have offices in Asia, U.S. and Europe and they are monitoring volatility and that’s
their entire goal is to manage the volatility to a certain level right?
The average investor who says “Well, I don’t feel really comfortable to say, or I’m a
little worried about things, I’ll put more in cash.”
But they’re not necessarily you know, rules-based and they don’t have enough information to
really make you know the informed decision that over a long period of time, will give
them a successful track record in doing it.
Douglas Goldstein: What do you think of the scenario that if interest rates go up even
a little bit, the U.S. is not going to be able to pay the interest on the treasuries
that are coming due all the time and it could lead to a total breakdown in the U.S. government
and economy?
Chris Cogswell: I think there are some validity to that concern on paper.
I think you know the average person who runs a company and an organization or even their
home, they look at that and they say that’s a real problem right?
The U.S. is a slightly different sort of a place, basically it prints its own money and
it is for the moment still the reserved currency of the world.
Normally that’s what will happen and the U.S. being its own bank, there is a tension
of where that will play out.
I’m not sure that’s actually going to be the case although in black and white terms,
that is what you would expect to happen right?
So you know there is a real concern about that.
I think that’s one of the reasons that interest rates have not gone up maybe prior to this.
But interestingly enough since we are talking a little inside baseball here, saw some research
a couple of weeks ago that said that when the United States got rid of quantitative
easing, starting I guess a couple of years ago that you know, the taper and they brought
down all of machinations with the balance sheet of the United States, in fact including
the 25 basis point, interest rate increased that we just saw in December, there’s actually
been a tightening of 325 basis points in the last two years.
It’s not just 25 basis points.
In a sense, you know to your point, the debt service potential has gone up dramatically
already even though it’s actually technically enlisting a 25 basis point increase.
Douglas Goldstein: Tell everyone how can they follow you and follow your work?
Chris Cogswell: They can go to my website at www.chanceryfa.com.
I am on LinkedIn as well, Chris Cogswell, they can also go to our corporate website
which is www.prginc.net Portfolio Resources Group.