Ep701: Charles Rotblut – Realize When You’re Lucky and Walk Away

Andrew Stotz 00:02
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 an investing you must take risk but to win big, you've got to reduce it. Ladies and gentlemen, I'm on a mission to help 1 million people reduce risk in their lives to join me and go to my worst investment ever.com and sign up for our free weekly become a better investor newsletter where I share how to reduce risks and create grow and protect your wealth fellow risk takers this is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guests, Charles Rotblut. Charles, are you ready to join the mission?

Charles Rotblut 00:44
I sure am. I'm excited about it.

Andrew Stotz 00:48
We're gonna have some fun. So Charles is a vice president and financial analysts and American Association of individual investors are also called Ay ay ay ay ay ay. He is the editor of the AI journal created both the prison wealth building process in VM to stocks, and he authored the weekly ai, ai investor update, email, his book better good than lucky how savvy investors create fortune, with the risk reward ratio was published in November 2010. Charles holds the Chartered Financial Analyst designation and has analyzed both publicly traded and privately held companies. Well, Charles, why don't you take a minute and tell us about the unique value that you are bringing to this wonderful world?

Charles Rotblut 01:39
Great, thank you. So first of all, AI, we're a nonprofit organization founded by a professor to Paul University, and our focus is helping individual investors really be better managers of their own portfolios. We're big proponents of evidence based strategies. And we really try to take a lot of the complexity that's involved in investing, and really boil it down to simple terms. And me personally, I do have an undergrad in journalism. I'm a Chartered Financial Analyst now. So I'm able to mix that ability to write with finance. And in fact, a former boss of mine described me as the guy who makes complex concepts simple. But one of the things I do even on my own job is I'm a big proponent of just really simple approaches. And I think a lot of people don't realize that some of the key things they can do for investing are just really simple things such as setting up automatic deposit. So when you get paid your money goes into savings, but also following rules based approaches. For instance, even a simple checklist will do wonders for your return. So I really try to think about what are simple things individual investors can do to really help themselves not only in the short term, but particularly in the long term as well.

Andrew Stotz 03:01
And, you know, when I, when I think about AI has been around for a long time, I remember as a young person, a young analyst, you know, getting some information there, I became an institutional analyst. So I had a flood of information that I could start getting from data providers and stuff like that, that were very, prohibitively expensive, and still are really to get some of the data feeds that we need. But I'm just interested about kind of your mission, because when I think about the overload of information these days, there's so much information, there's no way anybody can handle it all. And the problem that you face is twofold. Number one, most of that information is just for clicks, the titling the writing, trying to draw you into something to generate advertising revenue. The second problem that we face is that the media, particularly the mainstream media, is flooded with company propaganda, where companies are ceding stories to newspapers and you know, providers of media. And so we're reading those stories thinking that a journalist wrote this, when in fact, that story was ceded to them. And when I look at that, and I think about what you guys are doing, maybe you can tell us a little bit about the benefit that you bring to investors.

Charles Rotblut 04:26
Sure, absolutely. Enter. So we're individual investors, ourselves. And so we think like individual investors, and we really think about what challenges do individual investors face? How can we help them overcome those challenges? So we focus a lot on that. But we all we do take a holistic view of portfolio management and so not just how do you select the best stock or how do you select the best fun, but think about allocation. If you retire thinking about your withdrawal strategies. If you're younger, what type of risk should you take in terms of your portfolio in that long term perspective, and we really try to focus on evidence, evidence based strategies, because you're right, there's a lot of information, a lot of voices. And we really just try to concentrate on what's been proven to work over the long term. And even today, we had a discussion about how if people really want to compete against institutional investors just go buy an index fund, it's cheap, you'll get the market's return. But if you want to say perhaps get higher returns, as an individual investor, you really need to think about playing a completely different game. And we try to focus on those types of strategies that tend to be long term, low transaction, and often involve doing things that fund managers themselves know they can do, but actually can't do because of their clients. And I've sat in conferences, I'm sure you have as well. Or perhaps somebody talks about value, which is a long term strategy. And I've seen fund managers say to the speaker, I agree with everything, you're saying, my clients will kill me if I underperform for three years. But if you're an individual investor, and a strategy takes five or seven years to really have that big benefit, you have that advantage to go over that strategy. And we certainly encourage our members to think along those terms.

Andrew Stotz 06:19
And it's, you know, one of the lessons that you learn for the typical person that doesn't know anything about the stock market, and maybe not interested in the stock market, you know, that index fund is a great option. You know, it just provides you the market exposure without all the trouble. But we know that there's a large number of people that would say, I want to spend some time learning about picking stocks and building portfolios, then, in fact, building a high quality portfolio that implements diversification, you know, strategies that I'm sure, you know, you guys talk about, you know, that are simple things to do, like having a portfolio of maybe minimum of 10 stocks or something like that. Maybe blending in some other things like bonds or other stuff. But the point is, is that if you build a portfolio of roughly 10, stocks, an individual portfolio and you manage the risk carefully, the chances of outperforming as an individual are like, pretty high, as long as you don't make the major mistakes, right. And that's the key, you just make one or two major mistakes, two or three times in your 30 years of investing, and you probably wasted 30 years. So that's where I think it's really a valuable service that, you know, just because index funds are out there doesn't mean that that's the only way for a individual to do it.

Charles Rotblut 07:47
Yeah, absolutely. Someone's discipline, they do low turnover strategies, they can succeed really well. And it's really a matter of having set rules, knowing what you're doing and making sure you don't just follow the markets. Now, there's nothing wrong with fine a large cap stock that's really attractive, you buy and hold. But you want to make sure you're not trying to mimic what the fund managers are doing, what the people on TV are doing with this constant turnover, you really want to think about longer game. And we actually have a study we referenced in the current issue of the AI journal written in 1990s, by a fund manager who talked about just building a portfolio of stocks, shoving it to a coffee can and not touching it for 20 years. And that sounds really foreign to a lot of people. But if you pick really good stocks, yes, some are going to be complete dogs, but the stocks that you really don't expect to be superstars are going to increase your wealth enormously. And even Warren Buffett, when you look at his portfolio, it's been a small number of well researched, well selected stocks that have really built a wealth not only of Buffett but a Berkshire Hathaway shareholders as well. And I should disclose that I am a longtime Berkshire Hathaway shareholder myself.

Andrew Stotz 09:02
Let's talk about for people that go to your website, and I'll have the links to the website. But it's simple. Ay, ay ay ay.com. What what, you know, we were talking about some of the benefits and right there, you're talking about some of the benefits that you guys provide. But one of the things you talked about was the sentiment survey. And maybe you could tell us a little bit about what you guys do with your members and how you survey them and how you try to understand what their thinking is, and what does it mean?

Charles Rotblut 09:30
Sure, absolutely. So this is a survey we started in 1987. At the time we started it, no one was really giving a voice to individual investors, what are they thinking about the markets? So we started that survey 1987 And it's a simple question. It's never changed over the life of the survey. Over the next six months, I expect stocks to be up bullish to be unchanged, neutral or to be down bearish. And this is well before I joined a I we would send postcards every week and whatever postcards came back by Thursday, those were the results for the sentiment survey. We've since modernized, we do it on the internet now. But the survey period runs from Thursday at midnight to Wednesday at 11:59pm Central time, in the US. And over, because we have this long history, we actually have a long record of how the surveys actually done. And you can see extremes, say March 5, about early March 2000. We saw both seminar handle all time high, around 70% the.com bubble burst not too long afterwards. Actually, I would say March 5 of 90 of 2009. We saw bear sediment hit around 73%, the financial crisis bottom a few days afterwards. So we do have this long history of where we see extremes. And what we've seen over the long and let me just

Andrew Stotz 11:01
ask about that. Are those two? Does that then show that the members are kind of coincident indicators so that it's just a reinforcing information that the stock market appears high? And our members are ultra bullish? Or how does it work? It is

Charles Rotblut 11:20
it provides information I think provides a broad mosaic and I think you know, our members, they're human, just like other individuals, just like professionals and they react to what's going on. And what I tell people two ways one for the sentiment survey, you know, realize it's just part of the broader mosaic. So if you see sentiment being unusually bullish, or you see it be unusually bearish. It's a sign to stop and ask yourself what's going on what's causing investors to be really optimistic, what's causing them to be really pessimistic. But the other thing that's really interesting, there's that old adage of buying when there's blood in the streets, what we've noticed is actually buy when everyone else is not optimistic when everyone has low levels of optimism. We've seen in our survey, when both sentiment is unusually low, which we does, which we actually describe as being one standard deviation below with average and this case it means both segments about 27% or lower. Historically, the s&p 500 has gone on to outperform over the following six or 12 months. And what's interesting, when you look at the outperformance relative to historical average, it's actually stronger in terms of optimism being unusually low than pessimism being unusually high. If you stop and think, why is that the case? When people are not optimistic they're not likely to buy. And when there's a vacuum of buyers, prices tend to fall, when prices tend to fall. Value, investors tend to get greedy because it means stocks are on sale. And we know historically, when stocks are on sale, just like you open your wallet when you see a big sell at your favorite store. When the market goes on sale, you should really be looking at your cash underneath your couch cushions, thinking or anything you are saying whatever spare change you can get and put it into the market. Because we know that's when the big bargains have happened. And that's when we've seen has, you know really great investors, Warren Buffett, Sir John Templeton, and a long list of others really make their big money by taking advantage of those opportunities.

Andrew Stotz 13:35
So now let's preface the number that you're going to announce or tell us about that you've been that you've got. If that number is below 50%. It would mean that people are not bullish.

Charles Rotblut 13:54
Right. And we really describe bullets historically a boosted its average about 37% and actually was about 38 39%. A couple years ago, this most recent bear market has dragged it down. And over the last 80 weeks of going back to the start of January 2022. We've seen bull sentiment be below its historical average mean being below that 38% for 78, and the last 80 weeks, and during many of those weeks, it's actually been below that 27 percentile. And I've analyzed historical data now it's this has never occurred. And what's interesting is not just our members who are not optimistic, if you look at surveys of professional money managers, be an investor intelligence survey of newsletter writer writers, Bank of America's bull bear which surveys institutional investors, there's a complete lack of optimism. And although it might be starting to improve now, I think it's worth telling that people just have not been optimists. Stick even though the bear market, particularly United States has not been that bad of a bear market, it's really been kind of a typical bear market say, to quote Sam Stovall of CFRA. Really your big, it's been a garden Bear. Bear has been a garden variety bear market, I said, one of your really bad bear markets, such as 2008, your Mega bear markets 2000 890-719-7319 74. So it does suggest that once we get to this malaise, perhaps interest rates settle, perhaps we get some resolution to the Ukraine Russia war, that there could potentially be upside for stocks just because there's been this vacuum of buyers, and really this vacuum of optimism.

Andrew Stotz 15:49
Yeah, it's interesting. So just to sit to repeat that what your numbers are telling you is that your members are kind of maximum bearish. And maximum bearish generally means that the stock market could outperform in the going forward. And when I think about maximum bearishness, I can understand it from a perspective of number one, we were on the cusp of a world war. So yeah, that's, that's for anybody that is older, and also who has some awareness, it's terrifying. And the second thing is, we have had unprecedented intervention in the markets through political basically maneuvers of spending and borrowing to spend. And therefore there has been a market recovery. But maybe a lot of people feel like it's kind of a false recovery as opposed to. And so I could see, there's some reasons why people would consistently be kind of negative, and maybe not even participating as much in the upside, just because they see those two things right there.

Charles Rotblut 17:11
And certainly, you have that we had inflation really take off, you know, in the United States and Europe worldwide. Obviously, we have a war in Europe, which is always terrifying. And there's always concerned about spreading. But you're right, politically across the world, we've seen more, you know, we've seen more leaders who would be dictators have given the chance and many countries are or at least people that lean more towards being authoritarians, or at least squashing democracy in some form or fashion. And it's not a question of taking a political slant. It's just a reality. And suddenly, people can pick the country of their choosing that they want to point at, and say, well, it's happening there.

Andrew Stotz 17:52
So it's a lot of great information for, for the listeners and the viewers, make sure you go check out ai.com and learn more about what you guys are doing. And I'll have a link to that in the show notes. And they do have some ways of signing up at a very low price, like $1, $2 and $3, as I see, for like a portion of time where you get to, you know, understand what's available. So I'll have links to all that in the show notes. And 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 it and tell us your story.

Charles Rotblut 18:31
Sure, absolutely. And I'm going to age myself a little bit. And it was during the.com bubble, November 1998. And I will say unfortunately, I don't remember exactly the stock and I don't remember the price. So I apologize for not having those details by remember everything else perfect pretty vividly. It was a.com stock that I bought, probably right before Thanksgiving, maybe the week before. And it's sort it just really took off. I mean were triple digit gains. And I remember that Friday during right after Thanksgiving, I was visiting my parents and I was telling my dad about this investment how well I was doing. And he kind of come in at to me well maybe need to think about taking profits. And of course you could see what this is going already. Yeah, this is younger me being overconfident. And I probably said something to the fact that oh, that I think it could run even higher. Suddenly, certainly we've seen this happen with the meme investors more recently. And in my case, I'll admit they were famous last words. So what happened was the following Monday, I got into work lots into computer, right the market open I saw a stock was even going higher. And then my boss called me into his office. We were working on a project he wants me to go over it. And we probably spent an hour conversing going over the product over the stuff. After that he's able to walk back and I was Walk into my computer, one of my co workers who knew us in a stock knew what happened, he was kind of looking at me, giving me that sympathetic look. So I already knew I had some trouble. I logged in and the stock had given up pretty much all of its gains, maybe there's a little bit of gain left, but all those profits, just pretty much vanished. And I got the stock, and I might have had a little bit of gain. But you know, nothing near what I could have should have gone. And it really was a case of just waiting too long to sell had any point up to the head, I said, this sucks really going, I'm going to take some profits, I would have done a lot better. But instead, I stuck with it, they can always say go higher get higher, not realizing this is a case of you know, if everyone is jumping in maybe I should think about looking for the exit doors. And well, I'm guilty as charged on this one. I wrote it up and I wrote it right back down.

Andrew Stotz 21:03
So let's think about it a young person right now who's getting seduced into something like a meme stock? And, and, you know, how would you describe the lessons that you learned from this for them?

Charles Rotblut 21:17
You know, I think the biggest thing was just to be cognizant of when luck happens. And it's really easy to confuse skill with luck. And when good luck occurs, recognize and realize that something's happening that you didn't expect. And if you don't want to sell everything, at least take some of your profits. And to give an example. As a way I personally learned this lesson. You know, fast forward about 10 years during the financial crisis in 2008, I had bought JP Morgan, because the stock have been beaten up, it looks like it stabilized. And within a three day period, the stock had jumped about 30%. And I knew then all the headlines about the financial crisis had gone away, there's a lot of risk. And I had realized at that point, I had just gotten plane lucky and I got all my stock. And again, this is sometime in the summer, early fall of 2008. And as we all know, JP Morgan and several other major banks went a lot lower from that point. But I got out not because I had the skill but because I had realized from that prior experience that I had gotten lucky. And I shouldn't press my luck, I should just realize I got lucky took my profits. And I think one of the things I realized that's really important about the market is it has an uncanny ability to make you look silly. And it doesn't matter how smart you are, how skilled you are, the market can and will make you look stupid, and not just on one occasion on several occasions. And those of us who've been in the market long enough, know, there's nothing we can say there's nothing we can do to prevent it from happening. So when Mr. Market wakes up in a good mood, he shines on you, and He gives you sudden wealth, realize that act of kindness, don't push it, take some money off. And if you really think that stocks gonna go higher, then maybe you take some of your money out and leave a little to run. But make sure you tick enough out and make sure you've perhaps set a limit that the stock pulls back to X price, I'm still going to exit it. So I still walk away with a big gain. Don't think that you're going to be as some of the kids use now the holder mentality that I'm going to hold on to the stock for dear life. Yeah, take the wealth, put it index fund, you'll still keep your allocation. And if the stock was up more, just realize that hey, you got lucky, and you're smart enough to walk away with that good fortune.

Andrew Stotz 23:48
Yeah, it's I guess that's that's the key is realize when you're lucky and walk away. One of the my take away is, first of all, one way to get over this kind of behavioral bias is just set your sights on 50%. Whenever you get to a point where a stock has gone up so much or down so much that you're starting to question your situation, that why not sell 50% of your position. And with this concept, it takes some of the heat off some of the pressure off, you still have a position. But you've taken 50% On the second thing that I would I talk about and I use in my own strategies is a rolling stop loss. And I use that based upon a three month period. In my case, every three months, I reset the stop loss. But of course if you're trading on a shorter period of time or whatever, but when I do that, let's say a stock is trading at $100. And I set a stop loss in this case at $80 saying it's going to fall by 20%. I'm going to get out 100% Get out and I don't Don't set a stop loss on the upside for the three month period. And then what I do is I let the stock run for the three months, and at the end of the three months, let's say it went up to 200. Now I reset my stop loss to be instead of 80, I'll set it at 116 or so to say, Now, if it goes back down to 160, then I'm going to sell my position. That's an example of a stop loss on the downside, because I'm reevaluating every three months, I don't have to worry too much about the upside, unless a stock is just crazy, you know, racing up, and that's a little bit of you know, what you're talking about, which I would say, the final thing, of course, is have a diversified portfolio and have only a portion of your money in each one. So if one does go wild, you can also feel more comfortable to sell it. It's you know that that? So those are some of my takeaways and anything you would add to that.

Charles Rotblut 25:58
Yeah, no, I think it's a good rule, I always have the rule of sell half on a double. So the stock doubles, you take out what you invested in the rest of lending, right. But I think that's a good idea of rolling stock losses, or just have some mechanism that you're going to stop checking, you know, realize if you're gonna get out. But I think the other thing is, if you do take profits, don't just leave it in cash, put it into an index fund. I like that. Yeah, and you're getting the market to return. And the nice thing is that index fund, if you find something else, in particular, that ETF, you can sell it quickly, you know, usually low transaction costs, if it's, you know, something like an s&p 500 fund, and moving out. So you're making 10, your allocation. But I think the other thing is, like you said, just have some rule that allows you to get out and a lot of people go into a stock, let it run, and then he decide what their cell rules are versus having that cell rule pre established before you get into the stock know where the exit door is. And you know, it's fine, doesn't have to be very complicated can be very simple. And people overlook, you know how important simple things are. And one of the examples I give is a rock band, Van Halen, they were known for requesting no green m&ms and the candy jar and the room. And it used to be a joke. Why? Why is that? Well, David Lee Roth in interview, the lead singer of Van Halen, said we have very complicated setups, and we used to go to smaller venues where they may not have the skill set. So if we saw green m&ms, and the kidney dish, that was our sign that they're not following everything that contract, specifically, and that we should go by and check everything. So against the little stuff of will. And maybe it is, you know, if it goes up 3% In three months, I'm going to take some money out something as simple as that. And will you have times where it's unnecessary, absolutely. But chances are, those times will be fewer than the times when you didn't do it and you wish you had no sun at 30% gain you had in a short period of time, you just gave it back because the stock pulls back, you're always better off taking a small profit, say throwing an index fund than trying to push your luck. And wishing you had taken that profit and just you know, okay, I'll go back and just get the markets return, and not try to really push my luck too much.

Andrew Stotz 28:23
So when you move your money into that index fund, you're basically you're reducing your single stock or portfolio of individual stock risk, and then putting it back into market risk, which is something market risk is something that you really need to be exposed to for the life of your investments. If you're not, you're gonna be in trouble because you just don't get the compounding. So lots of great actionable advice right there. Let me ask you, what's the resource of yours or any other that you'd recommend for our listeners?

Charles Rotblut 28:55
Yeah, I've been a longtime proponent of stock screens, and these are essentially database filters. And the great thing about stock screens, you can say, you know, if you're a growth investor, I want earnings growth of X percent. I want sales growth of X percent. If you're a value, maybe you're looking for maximum level price to book our price to sales. Obviously, if you're a dividend investor, you might be looking at dividend growth or yields. But the nice thing is, they'll go out and find stocks that have those characteristics. Often there'll be stocks you never heard of. But often those stocks you never heard of, have the exact characteristics you want and should be considered. And as I was a proponent of stock screens long before I joined Ay ay ay but at a i, i will tell you our own screens we have 60 stock screens. Some are based on famous investor strategies, Templeton, Warren Buffett Waymo, Neil Driehaus, but we also consider factors such as earnings estimates, dividend growth price As the earnings and so people can use those preset screens, so you don't have to think about, oh, what do I put in a screen. But we do have screeners if people understand finances, they know exactly what type of criteria they want. But what I always tell people if you don't use our stock screens, and obviously I'd love people to come to AI. But there's certainly other companies. If you're an active stock investor, use a stock screen, it will widen your universe of stocks, because the s&p 500 There's 500 stocks. If you look at something like CNBC, the number of stocks that probably talked about regularly, probably under 100, on and just in the US alone, there's about 5000, exchange listed stocks. And certainly, if you're either countries or you're able to invest internationally, there's 1000s of more stocks. So why limit yourself to this narrow universe where as an individual investor, you can buy stocks or less frequently traded, you can go where perhaps a large cap manager can't go, you'll have more opportunity, that means more opportunity to find winning stocks. So use it to your advantage. And then again, using the stock screens to find stocks that again, have all the traits you're seeking for, except the one thing you haven't is that nobody else is talking about it. And you can definitely use that to your advantage.

Andrew Stotz 31:25
You remind me of two books I have on my shelf. So the book that was really, you know, amazing for me was Jim O'Shaughnessy book, what works on Wall Street, Jim was a guest on the show. And we talked about that a bit. And the other one, which really goes to what you're saying is market gurus. And I remember getting this book many years ago, that basically broke down the strategies into kind of manageable, you know, formulas. And now, you know, you have that in your screening set up so that anybody could just go in and say, I want to invest like Warren Buffett, what would I buy? And there you have this?

Charles Rotblut 32:18
Yeah, and I will say we actually do have just honestly strategies in our portfolio. He's a longtime friend of the association, a great person. And I will say, if someone wants to be an active investor, Jim's book, it's long, but it's filled with detail. And it's a really a great resource, and I can't recommend it enough.

Andrew Stotz 32:38
Yeah, it's fantastic. It's a little bit more complex, maybe for some people, but for someone that wants to dig into that it's a great book. And I have links to both of those in the show notes. Last question, what's your number one goal for the next 12 months?

Charles Rotblut 32:55
I guess I can give you two I think one is just financially My goal is always just to save more this year than last year. I can't control what the markets are going to do. But I can't control my own savings decisions. And the other thing I'll say, personally, for those of you familiar with TED talks, that's been a longtime goal of mine to try to get on the stage. Do you want, I always admire their speakers, great stories, great presenters, and maybe this will be the year I'm able to get on a stage and join that. Join that very elite, and well spoken group. Well, we're looking forward to hearing that. And when I look over your shoulder, I see all of these medals. You know, and I see a D 4559. Which makes me think is that are you is that for marathons, or are you let is I actually did a half marathon on Sunday, this Chicago 13.1 And it was a little bit more enjoyable because my running buddy kid and I stopped around mile four and had some emotions. So yeah, so Sunday morning, they're serving you know, champagne and orange juice, and it just seemed rude not to stop.

Andrew Stotz 34:09
Well, listeners, there you have it another story of loss to keep you winning. Remember, I'm on a mission to help 1 million people reduce risk in their lives. If you've not yet joined that mission, just go to my worst investment ever.com and join my free weekly become a better investor newsletter to reduce risk in your life. As we conclude, Charles, I want to thank you again for joining our mission and on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Charles Rotblut 34:43
Yeah, I think the one thing is just be disciplined. Think about simple strategies. If all you do is write down very simple buy and sell rules, and you follow those routinely. You will have returns that are far in excess of the average investor.

Andrew Stotz 34:58
And that's a wrap on another great steroid help us create grow and protect our well fellow risk takers let's celebrate that today we added one more person to our mission to help 1 million people reduce risk in their lives this is your worst podcast host Andrew Stotz saying I'll see you on the upside.