Omar & Karl explore the differences between passive and active investing, identify good vs bad companies, and offer strategies for making sound investment decisions based on company fundamentals.
Karl discusses the impact of market trends on popular investments like Tesla stock, and offers perspective on how to capitalize on market fluctuations. Karl also highlights the benefits of Trinity University's student-managed fund class, providing hands-on experience managing real money in the stock market. Tune in to gain insights and strategies for navigating today's complex financial landscape.
Growing Wealth.
Omar & Karl explore the differences between passive and active investing, identify good vs bad companies, and offer strategies for making sound investment decisions based on company fundamentals.
Karl discusses the impact of market trends on popular investments like Tesla stock, and offers perspective on how to capitalize on market fluctuations. Karl also highlights the benefits of Trinity University's student-managed fund class, providing hands-on experience managing real money in the stock market. Tune in to gain insights and strategies for navigating today's complex financial landscape.
Growing Wealth.
Narrator:
You're listening to VaulkTalk. On today's episode, Omar sits down with Karl Pickler. He's the Prassell Professor for Professional Practice in Finance at Trinity University in San Antonio, Texas. Karl is responsible for overseeing the student-managed fund and for developing and delivering a practically relevant and academically rigorous curriculum for the university's finance degree. Prior to Trinity, Mr. Pickler started a leading business with Scaleworks, a private echo investment firm, and before that, he spent twelve years at Rackspace Inc. Omar and Carl dive into passive versus active investing. The difference in good versus bad companies, tesla and more. Stay with us
Omar: [00:00:00] Well, welcome to VaulkTalk. I'd like to introduce my guest and friend Karl Pickler, to the show Karl, for viewers who are not familiar with your illustrious career, can you please tell us a little bit about yourself and what brought you to San Antonio?
Karl: Sure. I'm origin from Switzerland. Born and raised there.
Karl: Studied business and finance and then had an opportunity. Joined a consulting firm in New York, which I did in just about 2000. Yeah. So I moved to New York in 2000, lived there for five, six years. And then Rackspace, which is a San Antonio company, they were a client of mine. So I joined them in 2004 as a consultant and in 2005, full-time.
Karl: And then we moved down here. I was originally head of finance. for the company. For the first couple of years, we took the company public. I went after that to London to become the regional CFO of the business which basically was everything outside of the us. . And then in 2011 I was promoted to CFO of the company and we came back in to San Antonio and are here since then.
Omar: [00:01:00] Wow, that's amazing. To be at the almost ground up level. Right. Was Rackspace still pretty much in its growth and initial growth stage at that time, or was it, would you say more of a mature company at that time? No, very
Karl: much growth. So I joined the company when we were 400 people and had about 80 million in.
Karl: and then by the time we left, or by the time I left we were 2 billion in revenue and 6,000 people. So it was it was growing every single month, every single quarter. Wow. Every single, you know, day almost .
Omar: So, and, and for those viewers that may not know or are familiar with Rackspace, what was the primary business model for rack?
Karl: Rackspace was a, what we would call a technology enabled service company. So we did we ran data centers for our customers, and in those data centers we built up dedicated infrastructure for our customers. So what that means is when you run an application or a website generally speaking, you need to host that somewhere.
Karl: You have to put it on a server, and you have to [00:02:00] have storage for your database, and you have to have connectivity so that the server is connected to the internet. All of that requires quite a bit of expertise to do. And so we did that. Some people would call, we were would call this an infrastructure as a service business.
Karl: We, we hosted everything. We owned the building. We. Made it a data center. We put in the infrastructure and then ultimately we provide credentials to our customers so they can do with their, with their infrastructure, whatever they want, whether it's an application or a website or whatnot. So we were what people would sometimes call the slow cloud.
Karl: We were the cloud before the cloud existed. And we did it in a. People enabled way. We were very service-oriented, we were customer focused and and you know, ultimately the technology became the cloud. And the cloud was was basic. The main difference was that the cloud was doing all of those, what we did in a very problematically software enabled
Omar: way.
Omar: I see. Okay. In Rackspace was really hardware driven essentially. I mean, you, you [00:03:00] had hardware, servers, the servers, and Right. That's incredible. All right, well, I'm gonna, I'm gonna throw a hard question at you first. . All right. So are you predominantly a coffee drinker in the morning or a tea drinker?
Omar: Or you don't like to be categorized by? What you
Karl: drink? Coffee. Coffee. Definitely Coffee. Yes. That's the first thing I do. I turn on the coffee machine. I also drink tea, but definitely in the morning is coffee.
Omar: Yes. . That's fantastic. I, I, I am, I'm a tea drinker, so I, I love my tea. I, I, I'm similar. I usually put on the hot water right in the morning and then, Start my day after a, a, you know, nice cup of hot tea.
Omar: Now that we've got the tough stuff out of the way I'd like to know what drew you into the investment world. In addition to already having, you know, background and experiences as head of finance for Rackspace and then CFO for the company. What actually brought you back into the investment world and, and where did that passion.
Karl: Yeah. So I would say it's passion and necessity, right? Everybody in their lives becomes an investor, [00:04:00] you know, voluntarily or involuntarily. We all have to save for retirement and and to the, the degree to which we apply ourselves to that work is, is, is obviously varies across people, but I'm a student of business.
Karl: I'm passionate about business and investing is kind of the all encompassing task, right? Where it's like if you really want to think about your investments in a, in a more engaged way or a more active way if you want, then you really have to think about all of the business aspects of a company.
Karl: You have to think about their strategy, their industry, their competi, competitive positioning, their financials, what's already priced into the stock and whatnot. And and it's just a fascinating really all encompassing activity to when you really think about. Sure. I'm not really a professional investor in the sense that I don't really manage other people's money.
Karl: I just do it with my own .
Omar: Sure. Well, but you, you have some other ties to investments as well. You're currently the PRL professor of Professional Practices in Finance at Tri Trinity [00:05:00] University. Yep. I've tried saying that like four times. Really fast. , there's a lot of PS in that title. Yeah. And by the way, go Tigers.
Omar: So Tiger alum and Rackspace was also originally started by Trinity alum. That's correct. And so a lot of tiger power here and and right now you also oversee the student managed fund Yeah. At Trinity University. So aside from your teaching roles in, in some of the courses in finance that you teach the students, tell us a little bit more about what the student managed fund.
Omar: And then what your role or capacity is as the person who oversees that student managed fund. Okay.
Karl: So the student managed fund was started in, I want to say 1998 or something like that by Professor Cooley. It was like many other student funds across the nation. It was a small contribution from the university's endowment that started it.
Karl: And the whole purpose was for students to really make not only, you know, simulations and think about companies, but actually make investment decisions with real money.[00:06:00] That is part of the university's endowment. That fund grew over the last 24 years as. So to now 10 million. So we just about 10 million a little bit up and down.
Karl: Last year was
Omar: bad year all organic growth or were there additional contributions? There
Karl: were university, some contributions made, but I think the total contributions were less than a million. Wow. I think in total. And so, you know, we had a, we had a good, good period over the last 20 years in general. Anyhow so, so now it's a $10 million fund ish.
Karl: And the students get. Run that money for a year. So it's a two semester class. They have a pre they have a couple of pre-reqs, but one specific pre-req is a course called equity evaluation that we newly designed, which is, The first class where students really learn how to analyze a business and write a research report and value a company and think about what's priced in and whatnot.
Karl: And so they take that course first, and then when they come to smf, they inherit the portfolio from the previous class. So deliberately, we don't. We don't clear it. Usually when you're in a [00:07:00] work environment, you always inherit something, right? You never start with a clean sheet. And so they, they are inheriting previous classes portfolio, and then there's basically the same work in different variations.
Karl: They have to cover the companies that they inherit and they have to work on new ideas. And so, . There's there's various goals from a learning perspective. It's about, you know, writing reports. It's about presenting, it's about researching companies, it's about understanding strategy. It's about articulating competitive position and, and, and valuation approaches.
Karl: A all of these things come together, so it's not formally the Capstone class but it is considered the capstone class because it brings everything together. The students run it entirely autonomously. I'm their guide. I'm the risk control person there. I need to ensure certain levels of diversification.
Karl: I need to make sure that that decisions are substantiated and supported. It's all voted so it's like a democratic process of what gets in and what gets sold. And [00:08:00] I'm just there to basically guide and control. I don't, I have a veto, right? I've never used it in four years. And I let the students do whatever they want to do as long as it may, as it makes sense.
Karl: So, I
Omar: I, I was gonna ask about that. I was gonna say, are you kinda like the president of the United States where can say, I vetoed this idea and just completely I can't. Okay. I've never done it. Okay, great. Well, , I guess, you know, in, in thinking about the investments in, in the student run portfolio, one of the questions that I had in mind was you, is there just a single way to value a company?
Omar: Or, you know, how do you, how do your students value the positions and determine. What they want to bring into the portfolio, which really kind of, I'm, I'm leading to what is your buy side decision making process and then your sell side decision making process. And, and so that's really where I'm heading with these questions.
Omar: You know is there really just one way or do you only teach one way evaluating a company, and then how do the students decide what to get rid of from the portfolio and then what to add to the portfolio?
Karl: Yeah, very good question. [00:09:00] That's the million dollar question investing. From a approach perspective, the way that the the way that we've set it up is that every company has to be valued with a traditional DCF approach.
Karl: Okay? So,
Omar: so, oh, and, and let, and for viewers who may not know DCF is a discounted cash flow approach, right?
Karl: So, so the, the students have to. You know, analyze the history of the company, analyze the financials, think about what the marketing profile looks like, think about what revenue dynamics look like.
Karl: Is the company growing or not? Based on that, they have to form a reasonable set of expectations about the future. But the first, the first exercise really is what, what we call the base case and the base case which is a little bit different than what normally people would, would refer that to.
Karl: it's not the student's best estimate, but the base case is basically what, what the market says today. So they are modeling out future cash flows that equate to the current price. Sure. And and that that answers obviously there's a million variation of how you get to the current price, but, [00:10:00] but that, that answers the question of what's priced in.
Karl: And that's the core of the debate, which is like when we have a position that we're considering buying or a position that we haven't considered selling or holding or, or, or upping. Is, is that what's priced in? And, and do we feel that the growth expectations that are already reflected in the price are higher or lower than what we can reasonably think this company's able to do?
Karl: Sure. And that's what the discussion is really all about. The ball case and the bear case variations. Those discussions then that happen, which is like what can go wrong and what has to be right and what do we have to believe in for this to be a really good investment. Because as we all know, good companies are not necessarily good investments.
Karl: And and, and so, and,
Omar: and, and what do you mean by that? Because it, that that's a really important part of market psychology that a lot of people really don't understand. Yes. You, you made a great comment. Good companies are not necessarily good investments. Yes. So
Karl: most, most people that are non-professional investors think make [00:11:00] that, make that step very quickly, which is like, you know, This is an awesome company that does these cups, right, where you can basically temperature control your cup and it never gets cold, never gets hot.
Karl: Oh yeah. The ember. The ember. It's great, right? And so this must be an awesome company, so I want to invest in that stock, right? But the problem is that if if, if you have, everybody believes that this is a great company and everybody piles into that stock, then the price will eventually be high enough for, for it to not be a great investment.
Karl: Meaning that all the. Ember cups that will be sold and the profits they're gonna make are already capitalized in today's price. Got it. And, and we have that problem. We've had that problem over the last 10 years, pretty much be because we had such a strong market that every company was just very expensive.
Karl: Mm-hmm. And especially the good ones are very, very expensive. And you want to find good companies at the low price . Sure. That is the, that is the. You know, the, the, the trick I guess about investing and usually good companies are trading at very high
Omar: [00:12:00] prices. Absolutely. And, and in the industry, you, you often hear terms like growth at a reasonable price.
Omar: Yes. Or you know, value managers looking for stocks that are not value traps, but actually have value relative to their future cash flows or earning. Based on their current price. So there's room to room for growth. That's right. And for, for investors who are maybe new to the industry or are learning about investments, oftentimes for example, wealth managers or investors will look at one of those ratios known as.
Omar: Price to earnings or the PE ratio. Yep. And is that something that you also do, do you all look at kind of the ratios and, and look at, you know, when you're assessing kind of where the company is in its cycle and relative to its potential future earnings and cash flow? Are you looking at some of these ratios?
Omar: Absolutely. Okay.
Karl: Yes, absolutely. I mean, the, the price earnings ratio is a, is a short cut ratio for what's priced in, correct? Right. And so if you have a high PE stock, it simply means that a lot of future earnings have. Have already been capitalized into the price. And, [00:13:00] and in order for this to be a good investment, the company has to outperform those expectations and grow even faster, or grow profits even faster, which is which is something that you need to the, you know, build conviction around If you wanna invest in that.
Omar: And, and so one that comes right to mind which is a hot topic of a debate, and you probably know which one I'm about to spring on you. But so, you know, there's a lot of debate as to what the correct valuation or the right PE multiple is for Tesla. Tesla happens to be a highly debatable stock because if you looked about a year and a half ago, two years even, yeah.
Omar: You know, the, the PE multiples were just outrageous. I, I mean, I think it was in excess of, you know, like 80 to 90, maybe even over a hundred at. In the last few years. And so you, you have to, but at the same time, the stock has done quite well. You know, over the years. It's, it's had a tremendous amount of growth.
Omar: You know, so how do you, how do you really like, figure out, you know, what that PE is trying to tell you, and is it reasonable to, to go by that? You know, sometimes you might have to hold your nose and just buy the company because the market really. Hasn't [00:14:00] factored it in one way or the other. What are your thoughts on, on that specifically?
Omar: What are your thoughts on, you know, Tesla's, pe what you know? Is it too high? Is it too
Karl: low? Yeah, so, so I'm a big fan. Let, let me put that first. So I'm, I'm a little bit biased, but we, we have looked at Tesla in various classes. It is part of the fund. We have it in the portfolio, and we talked about Tesla extensively as a case study.
Karl: Great. Yeah. In various classes. So we, we've spent a lot of time. I, I personally think it's one of the, probably, if not the best, one of the best companies ever created.
Omar: And, and why, why
Karl: do you think that? I just think that the The, a lot of, a lot of the things that they do differently is just going to be so disruptive for the existing industry the, the degree of vertical integration that allows them to iterate much faster.
Karl: The focus on manufacturing scale. I mean, they have the largest factories already. Now, the, the, the long-term bets that they've made, which you know, one example is the supercharging [00:15:00] network, which, you know, in the beginning nobody was the building EVs because you didn't have a supercharging network and, and.
Karl: And, you know, mosque is a, is a, is a person that, that has demonstrated many times that he has a 10, 20, 50, a hundred year vision when he goes, starts building companies. And he's done it numerous times now. And, and you need somebody like him to, to really shake up an industry or, or retake an industry in the context of the, of the cars.
Karl: And you know, without him, we, we still would not have any EVs. I mean, the existing incumbent, the, the incumbents didn't do anything over. 20 or 30 years because it was always this kick in an egg with like, well, we have an existing business that's doing quite well. We have a, we have a supercharging network, the gas stations, which are everywhere, right?
Karl: So why, why would we start thinking about doing something else? And it needed somebody like him and and the, and the startup really to, to, to shake up that industry. And it, it's just amazing to see, like if you look at any company if you look at. Amazon grew in the first 10 years. If you [00:16:00] look at how Apple grew over the first 10 years, which was a very rocky path at the beginning, but all of the most you know, successful companies that came, that were started in the last 20 years I think there are very few that are comparable to them, and they have huge opportunities that are going back to your question.
Karl: So why is their PE so high? Well but there's always this debate. This is it a car company or not? And, and of course it is a car company on one hand. They build cars. They build I, I do have a Tesla. They build fairly awesome cars. I think. It's a, it's a very large market. It's obviously questionable as to what size or what share of the market they will be able to capture and how quickly the competition is gonna catch up and to what extent.
Karl: But even if you think about that you know, which company will really be able to build electric cars at the scale that Tesla does and, and it's likely that nobody will be able to catch up
Omar: and, and not just in terms of manufacturing. I mean, we think car company, I mean, we, we think just the nuts and bolts, but I mean, Tesla's far more than that.
Omar: I mean, [00:17:00] Software companies. Exactly. They, they were one of the initial I would say pioneers before all of the recent recent trend around like this, ai, et cetera. I mean, they were already kind of developing that technology in terms of like self-parking, car, self-driving cars. Yep. I mean, so you, you really think of it, it's not just, to me it's, it's kind of like Apple.
Omar: You know, apple integrated both the software and the hardware together. Yeah. And, and you know, Elon Musk has done similar, like Tesla to me is just not a nuts and bolts manufacturing car company. I mean, it's, right. It's much, much more than
Karl: that. And that's what drives the multiple up. Right? Because they have so much optionality, as people would call it, that.
Karl: They, they, they have an insurance business, which is very interesting. They have a, they have a supercharging network they can now open up and, and generate, you know, money on that. They have the, the batteries, they have the battery business. They will probably likely endeavor into mining or at least they've said that many times.
Karl: They have the, the self-driving thing, which, you know, ELAM Musk has promised to be final and ready every year for the last 10 years, and it's not done [00:18:00] yet. And openly said that this is the hardest problem, land harder than landing rockets. It's, it's a very, very difficult problem to solve. But again, if there's anyone who's gonna solve it, it's them.
Karl: Sure. Right? And maybe it's gonna take another 10 years, who knows. But the, this is what also drives the volatility of the stock, which is that, you know, sometimes people lose faith in, in his promises. And and, and you know, if the self-driving, the self driving technology and the commercial opportunities associated with it are so large that if you believe that the likelihood is high, it's coming soon, the valuation has to.
Karl: you know, properly reflect that. Yes. And, and if the, if the belief goes away, then, you know, the stock can collapse very quickly. Sure. And that's, I think, what we see in a company like this, that even though the prospects are fantastic, the volatility around it is very
Omar: high. Of course. And, and, and oftentimes that volatility for some of our viewers who may not be familiar with, with the company.
Omar: A lot of that volatility also is around what Musk is doing with some of his [00:19:00] other businesses, et cetera. There's, you know, the whole Twitter issue in the pastor, et cetera. But you know, I, I really think it's a, it's a game changer. It's a technology that he's really pushed as a pioneer and brought to the forefront, and now everyone else is.
Omar: Starting to follow that trend and that model. So thanks. I, I think that's wonderful insight in, in responding to those questions kind of about, you know, valuations and PE multiples for companies such as Tesla. As a que as another question for your, your fund. You all, how do you all think about risk for your fund?
Omar: And so, you know, for example, what's the largest size position you might take in a particular company? And then secondly, what do you benchmark. Yeah.
Karl: Okay. So we basically have two parts to the portfolio. We spent the first month, or the first maybe three weeks of the first class. So the first semester talking about passive investing.
Karl: Which is, you know, a, a, an index approach to investing where you don't try to figure out what stocks to pick and what [00:20:00] SEC sectors to weigh on, but simply, I'm gonna buy the entire market. And I do it in a very cost effective way, and I don't trade. Right? So there's, there's a couple of variations on this, what it's called indexing or buying hold, but the whole idea is, That you contribute to your portfolio in a, on a, in a somewhat a continuous and regular way.
Karl: You never really sell, you don't really try to time the market. You don't try to find the next Tesla. You just buy the index and you accumulate your portfolio that way. Sure, right. And I would say for 99% of non-professionals, that's the way that probably investing should be done. And then, you know, because it takes a lot of expertise, time, and experience to be successful at, at, you know, beating the market.
Karl: And academically, at least the, the, the track record of active investing is. Is you know, questionable at least. Anyways, so we, we spend a little bit of time on that and that creates a a core in our portfolio. So we have about 50% of our portfolios allocated to a three index [00:21:00] fund Okay. Bo head portfolio.
Karl: Sure. Which is which is basically we own a US index fund for US equity. We own international non-US equity fund, and then we own a little bit of. Okay. And not that that is any way interesting or, or very full of insights, but it's just a, a very standard way of, of, of creating a passive portfolio.
Karl: And so what we do is whenever we have an active position, so when we want to pick a a specific stock, we're gonna sell part of the index funds. by the, by that position. And when we sell, we do the opposite. Okay. So we have no cash. Okay.
Omar: Zero cash. So you're always invested. We're always fully invested.
Omar: And, and are those your three primary? Well, really it's two asset classes. You've got equities, domestic, international. Yeah. And then bonds. And then bonds and that's it. Got it.
Karl: Okay. That's it. And so we spend a little bit of time in talking about that. And then, and then that's done. Because there is not much to talk about.
Karl: Passive investing is fairly easy. And then, and then we spend the rest of the time. You know, trying to find [00:22:00] stocks that we believe are unvalued ultimately. So the, the benchmark is technically the s and p 500 which is a, you know, the 500 largest stocks in the United States. We've had a couple of conversations.
Karl: The benchmark close is not that, that trivial of a decision because we have a bond allocation Correct. And we have an international allocation. Which makes you deviate from the benchmark by design. Correct. And so really what we should use, and we use that too in our performance analysis, we have a, what's called a strategy benchmark, which is basically our passive portfolio.
Karl: Okay. And,
Omar: So in other words, were you, were you creating returns better than just being passive? Yes. By choosing specific stocks and companies? Yes. And the other half of the portfolio, Versus just having been completely passive and putting it all on the market. That's right. Next month. Okay.
Karl: And that, and that, and that's kind of the, the, the idea, right?
Karl: You create a passive portfolio, see how easy, easy it is. And, but but now that's your benchmark, right? Right. And so now whatever you do, whenever you take money out of that and put it into something else, you [00:23:00] have to beat the benchmark. And so, So that's really, I think, the more appropriate benchmark for us because we do have these, these two allocations that, that deviate from the s and p quite a bit.
Karl: So that's what we use. Yeah,
Omar: that, that's fantastic. And when you think of those allocations, and you take something out to, let's say, put it directly into a company. Are you doing a weekly kind of comparison, monthly comparisons, you know, was it, and do you do it? You know, was it better just having left that in the s and p 500, for example, versus in Tesla?
Omar: And then does that also determine whether you should sell that position? Yeah. So yeah. How often do you come back to, let's say, quote unquote rebalance the portfolio? Yeah,
Karl: so we usually. . So, so generally, so there are a couple of rules that are, or a couple of constraints that we've set up. So per investment policy, so we have an investment policy statement that is governing the overall approach and that those constraints are US only well US traded.
Karl: So we have international, we have non-US companies that are traded on, [00:24:00] on US exchanges. That that's fine too. But it has to be traded on the US exchange. No position can be more than 5% unless it grows to above 5%. Okay? So the initial setup of the position cannot exceed 5%. And then we have to be reasonably diversified, but we don't really have to diversify too much because we have this 50%.
Karl: passive that's index quite satisfied is a huge diversifier, right? Sure. So we don't really have to diversify across our active positions. We've reduced the number of active picks from when I started we had almost 40 stocks in the portfolio, which is just impossible to. Monitor. Sure. To your second question, which we'll get to in a second, because, you know, these stocks you have to constantly think about Right.
Karl: And reassess and think about whether you want to buy or sell or, you know, hold or whatnot. Right? So we've, we've limited, we've basically said we're gonna not, we're gonna not have a 40 stock portfolio. We're gonna have a, an anchor of an index. Portion, which [00:25:00] acts as a diversifier, and then we're gonna make fairly concentrated bets of no more than 15 stocks.
Karl: Okay? So right now we have 11 so we only have 11 positions, and all of those positions are around half a million dollars. Okay? And so when the students propose a position they have to make, Proposition as well. So not just buy or not, but but but buy up to the 5% maximum or less so, which is a reflection of their conviction and the degree too, which they can convince the other students in the fund.
Karl: And so, you know, if they make a very compelling case, we may invest $500,000 in the stock. And I can tell you that the students are. very intimidated by making a suggest a recommendation of that size. Sure. If it's like a hundred thousand or if it's a simulation, it's like, yeah, whatever. But if you bet half a million dollars on something I did research on,
Omar: that's a, you gotta have some strong conviction.
Omar: Yes. When your portfolio is a 10 million portfolio.
Karl: Yes. Right. That's a big position. Yep. And [00:26:00] so anyway, so then basically what happens is, The, it's the classes portfolio. So I tell them, we do whatever you guys bring to the table. So you've, we have them allocated, so everybody owns, or a pair actually owns the stock.
Karl: That's inherited that we have in the portfolio, and they're supposed to monitor that, right? There's listening to earnings calls. They have to Oh, that's great. Keep up with the news. They have to, you know, do an ad hoc presentation if something happens to the company coming back to the class and tell everybody what's going on.
Karl: And, and at any moment in time, they can suggest to completely sell everything or to trim or to buy more. That's up to. And to the students that, that cover the stock. We have a formal checkin in each of the semesters where we have where they present formally, but decision time could be time.
Karl: Okay. What normally happens is that we build or rebuild the portfolio at the end of the semester. Once we heard, oh, I see everything. Sure. Because in [00:27:00] most cases it's like, , you know, should we sell some? But then what do we buy instead? And, and let's hear about all the other ideas that are in the works. And so usually what happens is we make most of the decisions at the end of the semester.
Omar: So they're presenting the ideas throughout the semester. Yeah. And then usually at the end of the semester, the classes says, all right, let's take X amount and put it into Yes, these companies. Okay. That's, and it's just Democratic vote. So majority rules.
Karl: Majority rules. . And, and it's a, it's a, it's a fascinating.
Karl: process of group decision making which you know, you have varying degrees of engagement in the student bodies. You know, if some people are very vocal, if some people are more quiet. Sure.
Omar: But varying degrees of risk
Karl: tolerance as well. Vary degrees of risk tolerance. Exactly. You have. Comp you have you know, some people care a lot about esg.
Karl: Other students don't care at all, right? And we've had one student two years ago who successfully convinced the class to sell Goldman Sachs, for example, which is probably, [00:28:00] you know, the premier investment banking organization in the world. But you know, as always involved a little bit in the scandal here and the scandal there.
Karl: And so one student made a, made a pitch that, you know, we should not own a company like that. Too much involved in things that, that are questionable and he convinced the class and result the position. Okay. Again, like, you know, not something I would veto on, but
Omar: so, so really not based on the company fundamentals, in terms of its valuation, et cetera, just, you know, kind of more of an ethics Yes.
Omar: An ethical standard. Yes. Wow, that's incredible. Yeah. And, and do you average cost in, or is it kinda like, boom, we're gonna take all 500,000 for this position? Or is it kind of, Hey, let's go in with the 2% position, see how the company does? So whatever they, they set, you're just
Karl: all in. Yeah. We doubled down on certain positions.
Karl: Like we doubled down on Tesla, for example, when it, when it came down a lot. And but yeah, we don't, you know, one of the challenge with the, with smfs, with, with ours and in general is that the, the, the class only owns [00:29:00] the portfolio for a year, right? And, and so it's a short, very short term and per, per designed class is really not the trading.
Karl: Class. It's really an investing class. And so, so that's really
Omar: interesting cause you have this much longer time horizon. So when we're thinking investing, we're, we're thinking of something many, many years out and versus trading, which could be something that's just held for a very short period of time.
Omar: Day, two days, three days a week. But. Yet your port, quote unquote, portfolio managers are constantly changing. So the investments have a long term horizon, but the portfolio managers are churning over continuously. Yes.
Karl: And so that's exactly right. And so what you end up with, if I, if I think back about how the portfolio transitioned over the last four years, because of that, I think we now end up.
Karl: With just the best companies. And, and this goes back to what we started this conversation with, which is not necessarily the best companies are not necessarily the best investments, but if you have a constant debate [00:30:00] around, you know companies and you have new people come in, they, they have to redevelop conviction or not.
Karl: Mm-hmm. You end. You end up with the unquestionable powerhouses of our times, which is the apples, the Facebooks, the Googles, the Teslas, the, you know, the companies that everybody knows because they are so well positioned. They produce so much profits. They are they're so competitively. , you know, well situated that it's, it's almost like, you know, what can you argue?
Karl: It's only about what's priced in at that point. Sure. So
Omar: the Sterling Quality companies Yes. The companies that, that, that I say are like the, the high quality giants of the industry. Yes, sure. Yeah. And and so I presume that you all have had the opportunity to see kind of that rise in meme stocks and, and has anyone come to the table and said, Hey, we need to buy GameStop and put like 500,000 in it, like now.
Omar: No . So, so you've taught them about, you know, trend following versus actual investing. Yes.
Karl: We, you know, we [00:31:00] can quickly kill that attempt by just, you know, reinforcing the point we're investing in our trading .
Omar: That's fantastic. And what, what are some of the core principles that you hope to teach your students while they're participating in this unique and, and quite amazing opportu.
Karl: Yeah. So you know, back to my P P P P P title, right? So I'm an non-academic and I think Trinity has done a, a really awesome job in creating these positions, which they call professional practice which are professor positions that are held by non-academic, but people with pr practitioner experience or practice experience.
Karl: And so I see my job as getting. The kids, I call them kids affectionate, the kids ready for to be successful, right. In the workplace. And and you know, it's not about stock picking and beating the market, really. I mean, that's one of the objectives because how can it not be if you invest money, right, in an active way, it has to be the, the, the, the, you have to beat the benchmark.
Karl: Why are you doing it? But the, the learning [00:32:00] outcomes are really much broader than that. I think. Students need to learn how to write and how to present and how to package their, their package and present their ideas, right? That's at the core of what they do. And so when we look at this equity evaluation class where they do research on a company for the first time, and they also have to present twice during the semester and before the midterm and then before at the end about their company to all the way at the end when they do SMF two, the last presentations, I mean, that progression is.
Karl: Amazing to see. I mean, at the end of of before they graduate, they can talk about the company for an hour. Wow. In front of the class, well researched, substantiated, covering everything. The company, the industry, the competitive positioning, management, the financials management, valuation, everything. Right.
Karl: And they can talk freely, they can talk, you know, in a convincing, more or less convincing manner. They, they create good looking slides. You know I, I all, I tell them all the time, [00:33:00] you know, if you, if you if you have the best thoughts, but you don't present them in a visually appealing way, people disconnect.
Karl: Right? Or if you write a report and has three typos on the first paragraph, Nobody believes what you have to say. Sure. Because you're just considered to be, you know, not engaged enough to create a, a document without typos. How can your thoughts be clear if you can't write? And so, you know, there's all these things, right, which is like, well, how do you have a good debate?
Karl: How do you bring in other people's opinion? How do you so there's so many things that this class allows you to train and practice, which is why it's so great, I think. And, you know, picking stocks. A little sliver of it. But it's really about how do I, I mean, there's business students, right? And finance majors at the end of the day.
Karl: So how do you think about the business? How do you talk about the business? How do you analyze it, value it compare it, all of these things are coming into play. So
Omar: I, I, I don't know if you knew or not, but I was one of the [00:34:00] early student manage fund students. And so at that time I remember that it was groundbreaking because there weren't that many universities that were actually dedicating a portion of their endowment to have students management.
Omar: Yes. And or to have students manage that. That portfolio and and now it's just incredible to see where it's gone. I mean, from when we started around the 500,000 mark to 10 million is just incredible. And on the show generally, I don't invite guests here to come and talk about performance because performance, you know, it's, it's historically based and, and so there's show isn't about performance and how you did, but it, it always begs the question we have.
Omar: So are your positions generally beating the passive index? Do you find that the active positions are over time outperforming the passive index and over time could be, let's say a year or longer? Right. I mean, this last year was also a great indication of what happens to the downside when the market start falling or capitulating a lot of those gains.
Omar: Yeah. So, you know, what, what's your OB observance of that in the student managed? Without really getting into the numbers, we don't have to talk about the actual performance, but just Yeah. [00:35:00] Relatively you're, you're, what, have you seen the students stock picking selection averse of passive? Who's winning?
Karl: Well, it's a little bit different every year, . Okay. So we have and when, when, when I first started taking over, we had a long conversation with the investment committee, which, which is basically the, the, our boss, right? The Trinity's board of trustees as a subcommittee, the investment committee. They oversee the endowment.
Karl: Okay. And the endowment is run by, by gentleman, by the name of Craig Crow. Who's, who's great. And And we had a lot of conversations about what, what we should be doing differently, if anything from relative to the previous regime. Right. If you want. And and one of the things that the previous regime did was they had the, the very big portfolio, the 30 plus stocks, and the significant portion of cash.
Karl: Mm-hmm. . And when you look back to the, to the presentations, To the investment committee clear, which is kind of the annual performance review if you want. There was always a lot of emphasis put on the fact that we are about to enter into a big downturn. Right. And as, as [00:36:00] the saying goes, you know, the, the even a broken clock is right twice a day.
Karl: Something like that. Sure. Yes. And, you know, the, the fund was lagging significantly because as you remember over the last, you know, tenish years, Everybody constantly talked about the fact that next year's gonna be a back year, and it happened. In 18 or something,
Omar: despite such a run in the FANG stocks, for example.
Omar: That's
Karl: right. And then we had re, we had, you know, yield curves that were reversed and all, all these, these recession indicators were around all the time, right? Yes. And so the, so one of the things we decided is like, we want to be constantly invested, right? No cash anymore. Which was a fundamental decision just in terms of the investment strategy.
Karl: That's what Sure. In the LA application. Correct? Exactly. That's what led to the, to the three fund portfolio, the, the passive position. And and we did that change. We implemented that change. We made the decision in February of 2020 which was pre covid and then we, we dollar cost averaged in over six months.
Karl: Okay. And we actually went [00:37:00] in through the covid. Oh,
Omar: great crash. That's ideal. So
Karl: was amazing. Right. So our first year was out of the park. Great. But it was an allocation thing, not a selection. So, for the viewers, if you analyze portfolio performance, you can distinguish your, your excess performance or lack thereof between.
Karl: selection and allocation. Allocation basically means what weights do you put on the market versus maybe foreign versus domestic, or bonds versus stock. Sure. And then selection basically means can you pick the right stocks? Correct. And that's great. We have you know, if you look at the last couple of years or any years, you always have a mixed bag.
Karl: You know, sometimes you're better off because of allocation, or worse off because of allocation, depending on what the market does. If you have a fixed income allocation in your portfolio and the market does well, you're. Right. Just because of that. Right? Sure. So we tend to, when, when we look at the results, with the exception of last year, 2022, where we did not well at all we tend to have a positive selection effect, which means that our stock picks tend to [00:38:00] be good picks.
Karl: But we're talking. A point or two, not like five or 10 . Sure. So fairly small. And from an academic point of view, I would say that, you know, it is mostly associated with Locke. I would say at the end of the day, whether you pick the right ones or not, I mean, even Tesla, which is again from a company perspective, such a well positioned company you know, depending on which timeframe you measure the stock performance in, whether.
Karl: 20 or 21 or 22, you get vastly different results. Sure, absolutely. And it's just very hard to, to generalize the results that are measured on a, on an annual basis either. .
Omar: Well, I, and I tend to be both fundamental as well as technical. So yeah, in, in my practice, I, I try, it's, I can't say I timed the market because timing the market, I, I don't have an algorithm for it.
Omar: And I, I can't say that I've ever been successful in actually timing the market. If I get it, it's because of luck. It just happened to be, you know, the, the right opportunity when the market decided that there was some by pressure and I caught it [00:39:00] at the right time, it went back up. Right, right. But I do believe you mentioned, you know, the cyclicality of stocks, you know, they go up, they come down in certain years, but.
Omar: asset classes that you're in, I think in most advisors will say it's really the asset classes and your allocation to those asset classes over time that generate meaningful returns. Yes. But you know, the, the fun part though is always, you know, can you pick the companies that are gonna be the winners and, and that's, that's where the fund comes.
Omar: And so it sounds like you're giving the students the opportunity to do both. And in our discussion, you, you actually helped answer. Indirectly or just voluntarily, you answered questions for our audience, such as, you know, what's the difference between passive and active investing? I was gonna ask you about that, and we've had a great discussion about that.
Omar: You know, great discussion about you know, just how to think about the fundamentals when evaluating companies and it's just incredible that you're giving. Do, its this opportunity to implement and practice that before they actually get into real investment world jobs where they're having to make those decisions on, on the regular basis.
Omar: And and so you've [00:40:00] provided tremendous insight. I do have one question for you, . It's kind of my capstone question cuz the minute someone finds out that I'm in private wealth management, the first question they wanna know is, what is the market gonna do this year? So, Carl, what is the market gonna do this year?
Karl: Well, I mean, I, I'm, I'm of the firm belief that on average the market is going up and on along the way, it's gonna go up and down. So, and we don't know more than that. That's kind of my, my thinking, which is like, you want to be in equities in the long term. You want to have a significant allocation to your point.
Karl: two equities including a, a global allocation because the world is very US centric, but there are other parts of the world too, and they, they don't work in lockstep. So that provides additional benefits, diversification benefits so you want to have a significant exposure to equities in, in general because in the long term, if you think yourself as a long term investor, you, you will benefit that.
Karl: [00:41:00] And to your point, asset allocation is 80% of the results. So you want to have that. I I, the way that I explain, or the way that I'm trying to articulate the value of bonds, which we know they're more stable, supposedly weren't last year. Right. That's right. They still fell quite, is that quite, you need to have enough bonds so that you can stomach the swings.
Karl: I
Omar: see. So it is just help weather. Yes, it's,
Karl: it's all psychological. Right. If you want to have a big equity exposure, , you want to be, you want to be able to not sell when the market goes down, because every now and then it does like it did last year, right? So if you sell in a down market, that's really bad.
Karl: And so the bonds help you. to lower or to smooth out some of these swings, which probably takes the, the, the temptation away or ideally removes the temptation to selling a downturn and to really move through the swings. But in the long term, you want to be exposed to the market because it, it's gonna grow up.
Omar: That. That's [00:42:00] fantastic. Well, Carl, thank you so much for spending your morning with me. Thank you. And for being my very first guest on my show on V Talk and Honor. Yeah, I'm honored as well. I really appreciate your insight and you know, we're just so excited to have you at Trinity. I I think you're just been a tremendous asset to Trinity University, you know, great mentor for the students there.
Omar: And thank you for the work that you're doing. Thank you very much. Yeah. Appreciate it. Thank you all for our first episode of VaulkTalk and we will be back. Yeah. Hey man. Welcome that. You too. Thank you.