Ep477: Garrett Roche – Don’t Forget the Macro When Investing in Stocks

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win in investing, you must take risks but to win big, you got to reduce it, go to my worst investment ever.com and join our Facebook group to connect with our community of guests and fellow listeners. Fellow risk takers this is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guest, Garrett Roche, Garrett, are you ready to rock? Well, I'm excited to hear your story. We've even talked about it a little bit in detail before. But let me introduce you to the audience. Garrett is Chief Investment Strategist at Oxbridge Capital Advisors, a private wealth advisory firm in New York City. He assists high net worth individuals family offices and endowments with investment portfolio strategy, economic and market trend spotting, and portfolio and trading risk management. Previously, he was a global investment strategist at Bank of America, Merrill Lynch, a senior research analyst and economist at Price Waterhouse Coopers a strategic financial analytics manager at JP Morgan Asset Management and a credit portfolio analyst at Garnett Capital Advisors. He holds a BA in finance and accounting from the National University of Ireland as well as an MSc in economics, and an MA in public affairs from University College Dublin, Ireland, and he is also a CFA charter holder and F R m certified Risk Manager, my goodness, Garrett, take a minute and filling further tidbits about your life.

Garrett Roche 01:49
Well, originally, Andrew, I'm from Ireland, as people can probably gather from my resume, but I'm located in New York City. I've been here since 2004. And I've worked on Wall Street, pretty much since the get go coming over from Ireland. And about five years ago, I set up experts, Capital Advisors under my own shingle, and help high net worth private clients with their portfolio decision making process and helped them navigate the markets and their retirement goals.

Andrew Stotz 02:26
And, you know, the day that we're recording, this is September 23 2021. And there's so much going on in the markets and global markets. And the US stock market has been so high and the Feds talking about tapering. And there's so many different things, I think, what would you say is one or two things that are on your radar when it comes to global strategy global investing?

Garrett Roche 02:54
Well, I think this market is after the incredible 2021 We've already had so far, I think every man requires a very diversified approach. on a global basis. I think, United States investors, especially at the retail level, are probably very much underweight global stocks, European stocks, especially the headlines about GDP growth and slow growth in your per se, with the sort of bureaucratic impediments to the kind of growth that the United States is used to, can sometimes lead retail investors massively underweight, huge opportunities to capture gains, invest in cheaper stocks, with equivalently, global growth potential tied to emerging markets, just like a US company. And I think there's a lot of opportunities in Europe as a result, that are not being extracted by US retail investors and small portfolio holders.

Andrew Stotz 04:11
Yeah, I'm curious, you know, one of the things that when you look at correlations between the US and let's just take emerging markets where I am in Thailand as an example, you know, Thailand is definitely a lot cheaper than the US like a lot of countries around the world. But we also have this problem that, you know, we tend to be more volatile in emerging markets, and therefore if the US was to, to stumble, we really fall. And of course, after that fall, I think you could argue that there is, you know, a good investment thesis in, let's say, emerging markets in Asia that I know, you know, because of the population and growing wealth and all of that stuff, but how do you help an, you know, an individual or a high net worth individual or family office, think about? How do you make that allocation to those markets? You know, and understand what could happen to them if the US was to go down?

Garrett Roche 05:08
Well, if the US were to go down, certainly there would be quite a bit of global contagion. And as you say, the higher risk pockets of the market tend to get hurt more when the hegemonic goes down. That's probably one of the concerns that's on the horizon around the withdrawal of quantitative easing into the monetary support is that to Brent Johnson's milkshake theory about the US dollar that could really suck up to a lot of dollar liquidity around the world, that does expose emerging markets in a massive way. Emerging markets tend to be quite correlated to US inflation. And that's been something that's on the radar money and an investor in the United States, about it seems to be now coming into sort of more sharp focus from the policy makers language from the Fed, just today. And so when real rates start rising, the Fed seems to start acknowledging inflation and withdrawing things like QE and talking about doc plots and raising interest rates. That tends to suggest us the hedges against US inflation, like gold, or emerging markets can certainly take a backseat. And it's said, it's probably time to look at things like energy, energy sectors are probably some of the best value sectors. At the moment, there's a bit of an ESG overhang. That's because of that overhang. A lot of the producers are reluctant to spend money, increasing capacity. And I think it remains to be seen whether we can transition in a smooth way to anything that's ESG compatible. While we're talking about the global economy and industrialized economy, somewhat addicted to fossil fuels and restraint for capex, and you can see it by the breakdowns. That's actually quite bullish for energy sectors and oil is a commodity.

Andrew Stotz 07:25
It's an interesting point, you know, when you think about people, like, first question for the listeners out there, have you switched from driving to work, from a petrol or gasoline fueled car to an electric car? If you haven't? Well, you're not alone? Most people haven't, either. Next question is, have you stopped using plastic and plastic derivative products in your life? If they all come from oil? And if you haven't, many people, other people haven't? Also, next question is, have you stopped the food that you eat? Is it no longer fertilized through products, fertilizer products that are derived from petroleum? If the answer is no, you have not reduced it, which is probably the answer, because most agriculture these days, at least in the US is like industrial produced, then other people haven't either. And therefore demand for oil has not really fallen that much. And when supply contracts, as you've said, you call it an ESG overhang. Basically, you've got a contraction in potentially in supply, and it takes years to bring supply online in oil. So that's a very interesting area to look at, for the listeners out there that want to pursue some ideas, you know, related to strategy and all that. Well. Now it's time to share your worst investment ever. And since no one goes into their worst investment thinking it will be tell us a bit about the circumstances leading up to then tell us your story.

Garrett Roche 09:02
Well, it goes back to the tech bubble of the late 90s, early 2000s. It wasn't where I got wrapped up in the cell phone, hand device maker Nokia, which was originally founded in 1865. I looked up and there it was 134 years after it's finding it's becoming a hot stock because it's the number one cell phone hunt device maker in the world. And in 98 took over took Motorola as the top maker of hands devices. And I got into the stock when was already well on its way they've been languishing sub $5 A share since its ADR listing at least and I got into it around $13 In the summer of 99, and I think I bought more of a at $21 in early 2000s, and rode it up to $31 $34. The peak, which from from the first biday to the peak was about 154% upside. So I thought it was a genius, of course. And the fundamental seems extremely sounds. And any sort of deep dive into the company of fundamental Equity Research Woods sort of be very, very bullish on the stock, and that the price was merely reflecting the strong fundamentals of strong growth outlook. And it comprises a huge component of the finish Helsinki exchange. It was in fact, its revenues, I think, for something like 4% of Finland's GDP. So 70% of the Helsinki exchange, so it really was a banner stock. performance to the peak was, of course, full of, you know, gusto and excitements. And, of course, as we know, a bubble started to burst across the telecom landscape as well as the technology landscape. And it was really one for the ages, there had not been a similar bubble in many years. I mean, there have been other other kinds of investments, because in stocks, and of course, the famous John Templeton words, this time is different is a very dangerous time. And that's the kind of thing that was being pumped around the media, and a whole sort of a new paradigm was being discussed. And those kinds of games, it was looking back on it, it was foolish to just let it ride and keep on writing. But from the peak, seven weeks later, it's fallen 40%. And you sort of you know, you want to hang on, and the you get caught up and sort of a bull trap, then where you go from sort of 21 back up, again, a little bit to sort of the mid 20s. And you think, okay, maybe I'm okay, maybe we can get back to somewhere near the peak. And within the next eight weeks to sort of October 2002, they've gone down another 23%. And that's been then, in fact, they're off by since purchase gains are only 21%. So only in the summer of $2,000 over 154% By October 2021. And the sort of Hope springs eternal, and you're holding on nine $16 A share having been in and around 13. And you're hoping and you're hoping and then it sort of by the end of 2000 has gone up to $28. So it was a real roller coaster down the jagged edge of the cliff. And that it was just enough to sort of head fake you into holding on rather than just getting dilated.

Andrew Stotz 13:26
And you can picture you can picture as like a fundamental person saying I still like the story. There's still billions of people in the world, you know, meaning?

Garrett Roche 13:36
Yes, I mean, they increase their turnover fivefold. In five years, they were 31 billion euro revenue company. There, they were innovating, their r&d budget was substantial. They were developing devices, new models all the time, much faster than the Pan Pan. device makers do today. Like they brought out a new version. You know, nearly every six months, they were the first device maker to introduce a camera phone in North America. So they had that sort of mindset, that growth mindset where you trusted management's a lot of the headline, the top line numbers were growing very well. And you know, at one point you were up 150%. So why would you betray it and be so they get emotionally attached to the stock? Instead of seeing that, you know, looking at the price chart, even now it has all of the characteristics of that sort of classic bubble chart does anyone can Google look up the image of where the cells phase, the awareness phase, the mania phase? And clearly I sort of got in at the beginning of the mania phase, where the media attention started to come about. And the new paradigm was the peak, Terry and Tao was getting roped into these bull traps and getting sucked down into a eventually became capitulation. Which, by the way, you know, September 2001, I lost about 60% of my original money, they could have gotten out. So I wrote it all the way up and all the way down effectively went massive, massive about faces on the way down. And it was a solid lesson. It's one of my first personal investments in the early start of my career, and it was a lesson for the agents.

Andrew Stotz 15:45
So how would you describe the lessons that you learned from him?

Garrett Roche 15:50
Well, I suppose not getting caught up in the detail of the single stock holding, where you're focused so much on the fundamentals that you live in. There's the forest from the trees, so to speak. I think the main lesson is to stand back and take a broader view. And my experience now tells me that even if you like a particular stock, let's say it may outperform within a sector. Well, hold on let's ask, is that sector going? And then even if it's if that sector is going to perform what, what kind of region? Is it in? Where does it derive most of its value? And how does that region going to perform, and so layering a fundamental view, evaluation view, from an equity research perspective, layering upon that as a macro view that incorporates a broader picture, I think is, the more detail.

Andrew Stotz 16:59
Maybe I'll just share a couple things that I take away. I mean, I remember, in Thailand, you know, in 1990, I don't know probably in 1995, I got my first mobile phone. And it was a Nokia, and, and probably up until BlackBerry really, I was just looking on the internet right now. And the peak of BlackBerry was they had 85 million subscribers in 2013. So you know, we go back to 2000 2010, or whatever, when BlackBerry really, you know, was at a peak, whatever that, you know, when it was starting, that was one thing that that really hit Nokia really hard, but it was hard to imagine that Nokia would be so badly hit, you know, because we were all holding the product, I think about Peter Lynch's books, like one up on Wall Street to teach us to buy the products that we know and you know, do some research on him. And, you know, if you did that with Nokia, you would have been happy to buy it. And so what I want to do is highlight two things that I thought about one is stop loss. And I know as fundamental investors, we very rarely think about stop losses. But you know, stop losses can bring value. And even if you decide, you can, you know, you can look at a stop loss and say, Okay, I'm going to automatically sell the stock, or I'm gonna automatically sell half of my position, maybe it's just bad timing right now. Or you can do another point where you say, Okay, I'm not going to automatically do something. But if the price hits x, in other words, it's fall into X, I'm going to take the following action, I'm going to sit down and talk to somebody or whatever. That's the first thing. But even that doesn't solve this problem. Because you know, if you sit down and talk with someone, you're going to say, I love this idea. Stock is great. You know, that's the challenge of being an analyst. But the second thing that it reminds me of is the concept of portfolio construction, and how critical that is. I did an academic paper, when I was working on my PhD, and it's on the internet, basically, it's 10 stocks are enough in Asia. And what I tried to show is that, you know, if you have a portfolio of about 10 stocks in Asia, you've gotten rid of most of the company's specific risk without giving up the potential to really outperform. And you know, whether that's I always tell individual investors, you know, you should have about 10 stocks any more than 10. And you can't really manage it as an individual. And any less, you're starting to expose yourself to individual risk of that particular stock. So you also kind of remind me of the portfolio, construction and the importance of that, in addition, you know, you've talked about the macro aspect. Is there anything you would add to that?

Garrett Roche 19:46
Yeah, no, I think, you know, I concur with your concentration of portfolio. I think 10 is enough. I think we're very fortunate these days to have sector eight ETFs and country ETFs that you don't have to go and buy a specific company and do all of the research and very single stock risk that doesn't get necessarily rewarded. And you're exposed to earnings announcements and management's hiccups. And we look at Facebook today that headline risk was abandoned today, but Facebook, importantly, giving itself favorable news through its own feed. That wasn't well received by the professional investment community today. So you know, whereas if you were in, you know, a telecommunications communication services, ETF, I would have been hedged across a number of other big players. And so, you know, you can get that diversification for very little overheads in terms of allowing iShares or Invesco to do my own stuff. For you.

Andrew Stotz 21:04
Yeah, that those tools just didn't exist in the early days, you know, going back to that Nokia time, you know, in that time, when you started, you know, you just couldn't go, I'm gonna grab an ETF of telecom companies, you know, just wasn't there. So you had to build that now, you don't have to. So based on what you've learned from this story, and what you continue to learn, what action would you recommend our listeners take to avoid suffering the same fate?

Garrett Roche 21:29
I would say, definitely take a step back when you're fully compelled about a narrative around a stock, especially a new type of industry, like, like cell phones were in the day. So for example, today, one could apply similar caution around things like Tesla and electric vehicles, just as an example. You know, that the fervor can take over retail markets, and create classic bubbles like Nokia was like tech was in 99. And I'd say take a step back, ask yourself, Is this rational? Are you hearing headlines like this time is different? It's a new paradigm. And I'd always sanity check. incredible momentum plays against the classic bubble charts that's available on Google images. Once a month, just chocolate.

Andrew Stotz 22:32
Yeah, that's great advice. I think the other thing that I would add to that is just the fact that you look at we look at stocks today, and we cannot imagine their fall. Facebook, Google, Amazon, it's just it's almost unimaginable that they would fall. And that was the same feeling that you probably had with Nokia, at that time.

Garrett Roche 23:02
Yes, you're one of the lessons, I suppose when someone is the top dog in a particular industry, in some ways, there's only one place to go and that's down. They either maintain their top dog status requires that very different type of management outset and behavior from the one probably the management that got them into the top dark spot. And that's that seldom is the case that they just turn over management's and okay, we're going to have a different management style to retain our top dogs, they usually keep taking risks, really trying to reinvigorate themselves. And very often those investments go by the wayside, which is a case in point of Nokia, you know, when Motorola and Research In Motion, but BlackBerry started to take market share, Nokia went and made what now seemed very sort of arrogant OLED investments about trying to put games on the phones, and kept recapturing the youth market, but a gaming console on the phone. And of course, if they'd spent billions of dollars on this thing, it didn't really have sort of wallowing ever since.

Andrew Stotz 24:16
Yeah, I guess, you know, I distinct it's, it's such a, I normally don't add anything at this point. But I just want to, you know, highlight to the listeners out there, that if you show me a company, that is the market leader, I'll show you a loser. It's unbelievable. But if we were to make a long term bet, whether that market leader will continue to be the leader, five or 10 years from now, the odds are dramatically in my favor. If I bet that they're going to lose that market leading position, and I'm willing to take that bet. And if anybody listening wants to take that bet, contact me and let me know Make it. So. Last question, what's your number one goal for the next 12 months?

Garrett Roche 25:08
Well, I have ambitions and goals around increasing assets under management and clients service was built in terms of performance and new AUM wander in the door. I'm also developing some machine learning and machine learning techniques and algorithms around portfolio construction, which I'm excited to be involved with, which will employ some of the latest artificial intelligence techniques of big data techniques, which should help enhance our portfolio performance and be a more sophisticated service offering to our clients prospects.

Andrew Stotz 25:56
And where's the best place for somebody that wants to learn about your service to go? I'll have links in the show notes, but maybe you can just tell the listeners are

Garrett Roche 26:05
sure. I'm on LinkedIn with Garrett Roche is my name on LinkedIn. And my website is Oxbridge. capital.com.

Andrew Stotz 26:14
Got it. So reach out to him. I'll have links in the show notes link, reach out to Garrett on LinkedIn, or go to Oxbridge. And so listeners there you haven't another story of loss to keep you winning. Remember to go to my worst investment ever.com and join our Facebook group to connect with our community of guests and fellow listeners. As we conclude, Garrett, I want to thank you again for coming on the show. And on behalf of a Stotz Academy I hereby award you alumni status for turning your worst investment ever into your best teaching moment you have any parting words for the audience?

Garrett Roche 26:54
Just stay vigilant and always remember the macro overnight.

Andrew Stotz 26:59
Great advice and that's a wrap on another great story to help us create, grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.