- Financial advisor Rob Isbitts of Sungarden Investment Management, based in Weston, Florida, defines his style as “aggressive capital preservation.”.
- He argues that successful investors need to learn how to tap the brakes as retirement approaches.
- A “serial learner,” he discusses what retirement savers need to learn.
Editors' Note: This is the transcript of our Friday, Feb. 21, SA for FAs podcast. We hope you enjoy it.
Financial advisor Rob Isbitts of Sungarden Investment Management, based in Weston, Florida, defines his style as “aggressive capital preservation.”
In this podcast (19:33), the veteran advisor, and publisher of advisor site TheHedgedInvestor.com, keeps the focus on remaining humble, which he characterizes as balancing reward and risk at all times.
Gil Weinreich: Welcome to the SA for FAs Retirement Advisor Podcast, a series that addresses issues of importance to financial advisors when dealing with the preeminent issue on their clients minds, namely their desire for financial independence. I’m your host Gil Weinreich, of Seeking Alpha and today, we will be speaking with Rob Isbitts, Founder and Chief Investment Strategist of Sungarden Investment Management, financial advisory firm based in Weston, Florida. Rob writes regularly on retirement and asset allocation issues for Forbes, and with decades of experience as a practicing financial advisor, there is much we stand to learn from him. First though, this message:
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Rob Isbitts's website, sungardeninvestment.com, has a lot of information about investing and financial planning, but what I was most touched by was the "about" page which states, "it started with a Dad and Dream." I think that’s a great place for us to start as well. Could you tell us about how your father influenced your career choice and what your vision was and is for the kind of work you do?
RI: Sure, and thank you. It’s great to be on this podcast. I am an avid fan of the podcast and it’s great to be on the other side of the mic with you Gil.
GW: Thank you.
RI: So, in my office here in South Florida, just over my computer screen I have a little plaque which surrounds a note from late father when he signed over his account paper work when we opened Sungarden about nine years ago. My Dad was never a professional in the business, but he did love the equity markets. Loved investing, loved technical analysis, and taught me to trade stocks when I was 16 years old. So, I’m celebrating the 40th anniversary of my carrier if you will as a technician.
We started Sungarden after a couple of other stocks along the way in my carrier. My wife and I started it, really with the idea that we felt like our best capability was delivering boutique service, but with investment management being the differentiator and it’s not so much or who can get the best returns, because I think if there is anything that I found in my now 34 year carrier in this industry it’s that the best return for someone, the best result for any client, especially a baby boomer or a retire is not shooting for the stars, it’s getting them what they need and it’s more a matter of sufficiency than trying to show off by making the most one year only to lose the most the next year.
And so, that really started in the late 90s, maybe a dozen years in my carrier. I started to become what I now call a hedge investor. In fact, we’re just about to launch a site for financial advisors based on that 30 years of work called thehedgedinvestor.com. So, I was thinking about this, in anticipation of speaking with you today, and if you don’t mind just a quick analogy.
GW: By all means. Go ahead.
RI: So, baby boomers in particular and those were already retired. They are on a retirement journey of sort. And to me, this is a lot like you’re driving and you are trying to get somewhere, you're on a highway, it might be hours away, and unless you hit major traffic, you don't have to do anything more than really [had the breaks]. So, what if you realize that your car’s breaks don't work very well? You're not going to be able to slow down without the break and now your exit is coming up, and you know if the brakes are going to work. And I feel like for a lot of folks who have successful as investors, as I call the 90%, the 90% of the way towards being financially retired.
My concern is trying to appeal to those folks and particularly to their advisers who support them and say your client may not care that the brakes don't work, but they’re going to have to get of that high way at some point and they are going to have to slow it down and my concern is that maybe they are not going quite as far to make sure the brakes work and that’s what really hedge investing is all about in kind of a non-financial sense and that’s really what my dad taught me from a very young age.
GW: It is a great lesson. So I infer from some of what you are saying that you have a very specific clientele and that they are mainly boomers. Is that right?
RI: That is right. They are boomers or maybe a bit older or a bit younger, but average age is probably around 60.
GW: So, based on your specific experience with your own clientele, what kinds of conversations should advisors have with these clients assuming similar demographics?
RI: You start to become pre-retired or in retirement, it’s so much more important to know in advance what your likely expected range of outcomes would be. And there are software tools that helps to do this, but it is beyond software tools. It’s a human conversation and I think it really comes down to try and get each client and their family into a comfort zone. So, bring it back to the individual family client and how the advisor operates with them.
If their focus is retirement, you need to squeeze the range of possible outcomes down and then you need to figure out what tools of the trade that you can use most effectively to keep them in that range. And it’s not a market timing gain at all. It is just a matter of setting your own long-term target and a comfort zone around that otherwise the markets might [indiscernible] have it on it and you don't want this inanimate object called the financial markets to [screw up] your client's plans because they just work too hard to get there, and you work too hard to get your practice there and oh let’s not forget there is another side benefit to this for the advisor.
One thing I can say about my practice over time is that the assets under management don't fluctuate as wildly as maybe some others do because of the investment style. Now, a lot of that descends from the type of client that I gravitated to and that has gravitated to me over the years is a sort of aggressive capital preservation oriented client and then they want to make as much as they can, but that makes it so that, if you’re managing x one-year, a year later you're not going to be managing x minus 20% or 30% and have to explain to the client oh well the market is down. So, it’s happening to everybody. As Mike Tyson famously said, everybody has a plan until they get punched in the face.
GW: Sounds like you’re trying to keep them from getting punched. Well, maybe you could help us by answering this question. You described yourself earlier very nicely, I thought, as a "serial learner." What do retirement [savers] need to learn?
RI: Great question. So, they need to prioritize absolute return over rate of return. That doesn't mean that in every environment, every week, every month, even every year they’ll necessarily have a positive return, but if you get to the point where a great year is 15 and a lousy year is minus 7, just to throw a sample numbers at it, okay.
That’s a lot better than they are likely to get. And that includes a 60/40 stuff because I’m about to update a research study that I did several years ago on this, but your odds of making at least 4%, 5%, 6%, 7%, 8% a year over a multi-year period compounded is higher with a hedge portfolio that starts with equities and takes out the biggest fear factor as opposed to the old 60/40 40/60 or just straight equities to fixed income.
So, that is not absolute return in that, your positive all the time, but you’re at least within striking distance of positive. And I think it was Meb Faber on your podcast not too long ago, who was talking about that, you know the classic mathematics of loss. You lose 20%, make a lot more than 20% to get back to even and who wants to get back to even after 3, 5, 10 years. That’s not worth paying the advisers.
So, absolute over relative, but in the modified sense that I just mentioned. I think they need to always be thinking about what they would do and what their plan would be for a secular bear market, that’s not just in stocks, but in bonds because I think they might already be in the secular bear market for bonds. In other words, over the next decade or so, I think it’s much more likely that rates will be in the same range, which is pretty damn low or higher and people of this generation don't realize because they haven't experienced it that you can lose a ton of money in fixed income if rates go up on a regular basis for multiple years at a time.
The next thing I think is, so they have to understand at the end of the bond full market, it’s a complete game changer and it should be for advisers also and it’s why we tend to try to get our income from stocks that pay dividends, but not just buying and holding them, but trying to be tactical with those dividends. That’s one of those wrinkles that sort of gone on my investment game plan over the last decade as these clients got to the plan point where they were no longer just prudent moderate risk savers, but turning the page and getting to the point where income alongside lower volatility was a priority for them.
I think investors today also and certainly advisers advising them. There is an inevitability of deficits and debt at the government level, the consumer level, to some degree the corporate level, I like to site the fact that over 50% of the bonds in bond mutual funds now, in investment-grade funds. Over 50% of the investment grade bond fund holdings are in triple beats.
In other words they are shifting all the way down to the lowest possible level. So, what happens if you get some downgrades from BBB to BB well those funds by mandate a lot of them are going to have to sell a lot of those bonds. I think the other thing is really understanding how new market players impact your retirement goals. I am speaking of the algorithms. I am speaking of the hedge funds they’ve been around for a while with high-frequency trader types, and just the gentle mentality that develops when people get overconfident latent cycles.
I don't know when it is going to end, I just know that I have a plan for when it ultimately ends. That’s the short list and I think it all comes down to, they are always looking for what is next and not being satisfied with how your portfolio is doing and understanding that returns today really have to be engineered is much more so than they were in the past. It is another way of saying buying a holding from here, it might work, but for – we keep something here called the investment climate indicator and back in January 2018 it went to [stormy], which is the most severe of four weather-related ingredients.
So, we have been at stormy. That doesn't mean all stocks are going to fall, it just means that when you take on the task of generating return it’s coming with more risk than it has at any point in the last 8 to 10 years. That’s what I believe just based on the data that I run, and so we keep innovating in the investment process and frankly that’s a lot of what thehedgedinvestor.com website will be about, but also ways for advisors to collaborate with each other in kind of a closed-door environment.
GW: We’ve been talking a lot about the accumulation process. Can you talk to us about your general approach to portfolio withdrawals for retires who need to take income?
RI: Yes. I think the prerequisite for having confidence in any withdrawal plan is having the confidence that you’re going to as we say here, number one role in investing that you're going to ABL. I'm guessing you don't know what ABL is, unless maybe…?
GW: I don't know.
RI: ABL here is "avoid the big loss." So, we could line up 20 investors and ask them what a “big loss is’. And we probably get 20 different answers. So, I think that the avoiding the big loss and making it so that even in years where the total return is not that high, it won't be that low. The second thing is something that I’ve been actually working on with a group called S network indexes, which is taking my dividend approach to investing and kind of index sizing it and using it as let’s say more of a research tool.
If you’re going to have a steady withdrawal rate, it really helps to know that some of it’s going to come from cash on cash income and I know it’s very sexy today with the fangs stocks running the mark, but income investing is something that people can fall back on maybe it will only be 100% of your portfolio, but it is not going to be bonds and it really can't be at these rates unless you want to reach for yield and you have lower quality bond issue problem.
You need to look at equities, but you can't simply buy and hold them. I think that’s okay for total return, but what I’m favoring is taking whatever income-based withdrawal approach you have and using a combination of the dividend ex-calendar technical analysis, which you know 40 years in on that and what a fundamental discipline you have an coming up with a repeatable process to try to identify ways that you can squeeze more income, more dividend income out of our portfolio. And the bottom line yield, I guess is, if you look at a bunch of stocks that you follow and they yield 2% to 4% with a little bit of tactical management and some risk management along the way, I truly believe that you can squeeze a dividend yield at the upper end or much higher than that range, I just gave you without putting a lot of capital at risk.
And that’s something that we’ve set out to do in some client portfolios, but I think that’s, if we are talking about this maybe 2 years to 3 years from now, I think you will find it’s a bit more mainstream certainly in our practice here. More active approach to generating dividend income.
GW: Interesting. Switching gears a little bit, a recent article of yours on Forbes about protecting and capitalizing from market volatility is relevant to what we are speaking about. You made one comment that sounded particularly intriguing. You wrote that investors should be supremely humble and devoid of greed and remain focused on balancing reward and risk properly at all times. I think you’re right that there is a character element to investing. Could you explain how investors are to reflect this humility in their investing?
RI: I mean for those of us who’ve been through 1987 crash, 1990 recession, dotcom era, and the financial crisis, those are kind of the big four in my career. People act a certain way when you’re at the extremes. And I do see a lot of signs of that. And it concerns me, it doesn't concern me for the folks that I interact with directly, but it concerns me because it’s so easy to forget history and especially – look for those of us who are practitioners, okay, we have this muscle memory, okay, or as they say in baseball twitch response, which is how you are able to [fast fall] when they had a like a quarter of a second to figure out whether they are going to swing or not.
We have that twitch response from having been this through so many battles and ups and downs over the previous advisers, and you cannot expect the investors to have that, and so you have to be able to find effective ways to make them understand that they shouldn't be so highly confident, you know there is bulls, bears, and pigs, bulls and bears can make money, pigs get slaughtered. And there is, I think as they get close to retirement they do have to make these adjustments. And I mean how do you teach humility as an investor, but I try to do in the Forbes column and hedge investor is try to just bring some sort of straight through clarity and data and a little bit of analytics, hopefully without being too wonky and again it goes back to 16 years old and my dad teaching me here is how to make money, but do it in a defensive manner.
GW: It started with a dad and a dream, but it continues with new generations of aspiring investors making the necessary sacrifices to achieve their ideal futures. Rob Isbitts, thank you for taking the time to share your experience with our audience.
RI: What a pleasure. Thank you, Gil.
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