Ep742: Jay Pelosky – You Can Be Right but at the Wrong Time

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 in 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. And I want to thank you for joining that mission today. Fellow risk takers this is your worst podcast host Andrew Stotz, from East ons Academy, and I'm here with featured guest, Jay Pelosky. Jay, are you ready to join the mission?

Jay Pelosky 00:36
I'm most definitely I am. I've been at it for a long time already.

Andrew Stotz 00:39
You've been on the mission. You have been on the mission. But let me introduce you to the audience. Jay has over 35 years of both buy and sell side financial market experience. While at Morgan Stanley, he was ranked number one in institutional investor in both global equity strategy and global asset allocation strategy. He has over 20 years of global macro experience and has spent much of the past 20 years investing his own capital using us listed ETFs. His company t p w advisory is a New York City based independent investment boutique, offering global asset allocation and portfolio strategy advice to both retail and institutional investors. Through its model portfolio delivery service, you can learn more about j@pulaski.com J, take a minute and tell us about the unique value you are bringing to this wonderful world.

Jay Pelosky 01:40
Thank you, Andrew. And first of all, just somebody say yeah, it's great to be with you. And it's a wonder of modern technology. Right? Here I am in New York City. And there you are, I don't know if you're in Bangkok, but you're in Thailand. So very cool, that we can even do that. And I guess I think one of the redeeming features, let's say of TBWA advisory is that we are independent. And so we marry you know, my 35 plus years of experience on both the buy side, the last 2025 years global macro base, so focusing exclusively on how the world operates across countries and regions, as well as across assets. And I think I have I've had many years of experience within a top investment bank at Morgan Stanley. And there's a real difference between, you know, the sausage making that goes into a firm wide view and an independent assessment of that view. And I'm not saying one is more right than the other. But I think the ability to bring to the table a queer, informed, experienced perspective on the markets to have a model portfolio process that forces one to actually say what one will own and in what size and over what period. One unique feature of DPW advisory is that the bulk of my own personal capital is invested alongside the model portfolio that is our flagship, we call it the GMA with a global multi asset model portfolio. And so I think clients welcome and appreciate the fact that my own capital is at risk alongside theirs. So this isn't just a pure paper portfolio exercise. And so I would wrap it up and say that I've also experienced to the point of this program, you know, a lot of big down markets, right, I've been in was doing emerging markets, Solway from 1990 to about 1998 99. So I saw the multiple emerging market crises. In fact, one of the very first was in your neighborhood in Indonesia, back in 1987 88, when the government and decided to float subsidiaries of the big companies, and everybody thought it was going to be a wonderful market. And of course, the big companies got rid of their worst performing assets, and the market imploded. So that was back, you know, centuries ago. And while so that's probably a bit more of a long winded answer than you want it but we present a informed, experienced risk taking with our own capital point of view to the markets and we've right every week. So there's a very clear path that one can follow about what our thinking is. And I think all those things at least so far, it's been a benefit to some and hopefully more, once we go through this podcast.

Andrew Stotz 04:54
Great. And I'll have a link to your website. So anybody interested can check Get out. I really want to start off with something that you said earlier, when we were off the recorder, which is about China. China is such an interesting one right now. Because, you know, it's such, there's such a dichotomy in views. On the one hand, we thought China was going to roar back, after, you know, after COVID, it didn't really happen. And then the Chinese markets down a lot, it seems like it should be a good performing market in the future. But people have been burnt before, then you have the political aspect of what's going on in the world right now, in particular, I see that seems like every I mean, I'm not in the US. But I've watched some hearings and stuff. And I think, is there any politician in America that's not on a warpath with China, and you got some views on it. And one of the things that I like about, about being a sell side person, you know, both of us, in fact, I was also voted number one in the Institutional Investor magazine as a strategist in Thailand. So a little bit different from big New York City. But in our little way, I made it, I made it up the little ladder. But tell us a little bit about your thesis about China. And then let's have some discussion about that.

Jay Pelosky 06:16
Yeah, no, no, and congratulations to you. Anytime anyone you got is number one in anything. That takes work. So kudos to you. And, you know, I think the point that I would agree with certainly is that, you know, coming from the south side, you have to formulate your own opinions, right. And you have to develop the capacity to articulate them. And that is very different from starting out and having a whole career on the buy side, where you're fed ideas, right. And it's a menu issue, right? Like, when do I pick? Do I pick, you know, Goldman Sachs or JP Morgan. So I think there's a lot of benefit to having been at starting one's career. On the sell side, I actually started on the buy side, and went to the sell side. But most of my career, the last 20 plus years, I've been out of Morgan Stanley, actually, since Oh, two. So the last 20 years, you know, there's a lot to be said, for having to formulate your own opinion, tested, articulated, and stand by it. And, you know, one of the things we'll talk about when we get into the worst investment idea, and I have several candidates that have been around for a while, you know, is as a sell side strategist, when you get something wrong, as you know, sure. Or maybe not, maybe you never had any I know. But you know, having to stand up to a Salesforce, right when you've been wrong. And like take the heat from people who are really unhappy because they took your advice and recommended it to their clients. And now it's all unfolding. So we can talk about that. Let's talk about China, because I in print, with having said recently, in the last several weeks, or the last month or so that I think China is the single best global risk reward opportunity between now and year end. That is out there today. And I said both risk and reward, right. So there is risk, as you point out, not only the geopolitical risk, but the risk of what's going on in China, the economy hasn't been as robust as people would have thought, you know, their issues, obviously, China imports energy, with oil price at 90 bucks, et cetera. But the question then becomes how much is in the price? And I would argue that a very lot is in the price. Right? Certainly, if you look on a relative valuation basis to the United States, it's record cheap over the last 20 years. If you look at its own valuation history, it's quite attractive. If you look at foreign selling, foreign selling was a record in August and was also very significant. In September, I constantly get asked about well, what about the property market? In my role, my retort is, anyone who's worried about the property market in China is not invested in China. So that is not going to create a new dynamic of heavy selling pressure, in my opinion, even if it were to worsen, which I don't expect to do. So our view is that China is not going to do the bazooka stimulus, you know, they think themselves that the stimulus they put in place and 2012 2013 was a mistake. And so they're not going to do it again. The question is, are the drips and drabs of the policy response to date, going to gain traction such that the economy is going to To, you know, grow at 5% or so because people like China's not growing, you know, China's a mess, and it's growing at double the rate of the developed world, even though it's basically the size of not quite the US, but roughly the size of the US plus Europe. And so it's growing at 5%. And I would just point out that JP Morgan City and others in the last couple of weeks have raised their 2023 forecasts, they do think the economy will grow at 5%. And for us, the thing that's really interesting is, you know, what's the trigger? Right? So what is the catalyst that's going to shift China the view on China to be one of let me sell as much as I can to let me buy a little bit and then let me buy some more. And I think the catalyst and we think the catalyst is basically that China is now entering a period where for the next six months, the year over year, comps are going to be exceedingly easy to beat. Because we're ago China was in its most severe lockdowns. The other point is that history tells us from the US and Europe's experience that it takes about a year post COVID for economies and consumers in particular, to really pick up the slack. And so when we look at Golden Week that just ended, you know, the data is up dramatically over a year last year, but more importantly, even up a little bit nominal terms, versus what things were in terms of consumption in terms of travel, restaurants, etc, from 2019. So to me an awful lot is in the price. There's very little thought of the idea that China is going to have blowout economic numbers over the next six months. And I think those two things combined, are going to have presented us with a really significant opportunity. And the last point I would mention, Andrew is that China is already outperforming China outperform the US Chinese equity outperformed the US in dollars in September, it outperformed the US in dollars over the third quarter. And I expect that to continue. So while everyone and as you said very correctly, you can't you can't turn a page or turn a channel without someone bashing China and saying it's a mess. It's horrible, blah, blah, blah. And yet, with all that, it is still outperforming. And so, to me that risk reward is very appealing. And in our global multi asset model, which I mentioned we are significantly overweight Chinese equity.

Andrew Stotz 12:48
So ladies and gentlemen and young people who are listening that was a masterclass in the way a sell side analyst presents their views, including at the end, he hit off, what are the catalysts? Right. And you know, you talked about you being easy to beat in that type of stuff. So let's just let me just ask one other question. How, what's the best way for someone to play that? I know there's a bunch of different Chinese ETFs. But is there some best one that you think has the best or the right exposure?

Jay Pelosky 13:18
Well, yeah, that's a great question. Because I think in the US, there's something like 40 or more, China focused, US listed ETFs. Right. So right off the bat, you've already got, like, way too many options to choose from, right. And I kind of think about things in terms of the instrument pretty simply. So and I'll just tell you what we're invested in here. In our model portfolios, we have f x i, which is the China large cap with a fairly big exposure to the consumer side, because clearly, both cyclically and structurally, China needs to really have its consumer engine start to roar right, the model of fixed asset investment and export driven growth. I think that's over. And I think it's pretty well accepted, even within China policy circles, that it's over. And so, you know, when you look at China visa vie, the developed economies, you know, one thing that stands out dramatically is the savings rate is off the charts, like 30 40% of GDP, I think, some crazy number like that. And then the second is that consumption as a percentage of GDP is in the 40s. Whereas in the US, and in Europe, it's like mid 60s, or even 70%. So there's the opportunity set for China. And I think that's going to be the thing that we expect to see rarely happen. It's particularly as I said, as COVID, kind of that one year period wears off. So FSI and then the second is K web, which is the China internet and tech space. And I do think that the government has recognized that it has done the job in terms of, you know, putting a little, putting a little pressure or more than a little on the tech companies. And so now they're realizing, particularly, as you say, with all the US China, issues around advanced technology, that they need their tech companies. And therefore, I think that that pressure, that kind of box that they put the tech companies in is, is probably going to be opened up. And the China tech companies sell at a massive discount to, to the US tech companies, just an absolute massive discount. And so those are the two ways that we're at least playing it.

Andrew Stotz 15:48
Okay. And for those people that are watching the video, not listening, you probably see me looking away constantly, because I'm taking notes and looking on the internet to try to keep up with what you've got. So you've talked about FSI China large cap iShares. And, and then you've talked about crane shares, I believe is the key word Correct? Which is ESI. China internet exposure. Okay. And let's just summarize what you've talked about. You've talked about, yes, the import energy, but also, you know, they're a big producer. Now also in its growing of, of energy, particularly wind and solar, and also nuclear. You know, you've talked about how much you know, it's in the price, you know, already, so it's already in there. So, you know, how much more negative can it be? You've also talked about foreign, you know, outflows and that, you know, that can impact the market, you know, massively. That's one of the lessons I learned in emerging markets doesn't matter what you think about a particular stock, if the flows are against you, it's going to be hit. And then you talked about in one of the things about this, you talked about the stimulus, you saying, No, necessarily big stimulus coming, you mentioned that they felt like the stimulus of 2012 2013 may have been a mistake, I know that the stimulus of 2000 in 2008, was amazing. In fact, when you look at the amount of spending that's done in America, let's just take, let's just say in the last 10 years, or 20 years, maybe 10, or $15 trillion of debt that was went into gone into, and what does America have to show for a high speed rail network? No. improved infrastructure, improve highway system? No. improved education? No. Where did all that money go? But when you looked at the 2008 stimulus, it's like, holy crap, they really build up an infrastructure with that. So even if they don't do a major stimulus, their stimulus has in the past had an impact on productivity. And then you've highlighted the idea that, you know, already, okay, yeah. So it isn't for me as fast as it was. But here's a massive economy with 1.4 billion people, and it's growing at 5%. That ain't bad. And that's probably going to be better than, you know, the US and others. Now, let me throw out some counter arguments, just so we can have a little debate about it. You know, counter argument number one is that US dollar just keeps getting stronger. And if I go into the Chinese market right now, what's the risk that the currency could get hit? And we go through a devaluation? So yes, in fact, you know, the market is interesting, but I lost on the currency. Now, some of these instruments are hedged, you know, in the US. So first one is a currency. The second one is, you know, one of the things that I'm concerned about China's it's like, the COVID time, it kind of beat the resilience out of a lot of people. I mean, I had some good friends have talked to me about really being kind of beaten. And so that's the second one is like, you know, was there permanent damage that makes the economy not be able to come back? And the third one that I would say, is that, what I learned so first is the foreign exchange. The second is the spirit of the people who are just so entrepreneurial. And the third one is that one of the lessons I learned from living through the Thai banking crisis is that banking crisis usually start with property crime crisis, particularly in developing markets, because the underlying collateral to loans is property. And I remember going to speak at a CFA event in Schengen in southern China, and the lady who picked me up was working on the asset management company for the government. And I was like, You guys must be losing money on it, no property market goes up, we get the assets at a cheap price. And what we got to do is manage a portfolio of properties. So my point is that the banking sector is significant in the overall market. It's already we're talking about 30% or something and properties of pressure on the banking sector, you've got government that could inject into the bank sector. But what's the possibility that the bank sector just prevents the market from really having a recovery? So those three are kind of my, my thinking at this point, what would you say in relation to those?

Jay Pelosky 20:15
Yeah, no. Oh, good points. And you know, all very valid concerns for sure. I mean, I think, on the currency front, the way we think about it is that, you know, it's a controlled currency. First of all, it's not, it's a closed capital account. And second, China has just absolutely massive reserves. And so they control the currency, I believe, and therefore, the risk of a disorderly devaluation, like both of us have experienced in our emerging market careers, is extremely limited, in large part because also the bulk of the debt is domestic and local currency, and it's not a foreign currency driven. So, you know, take the take the point about strong dollar, that is for sure the case, I mean, that's been one of the big surprises for us this year, we've not anticipated the dollar to be as strong as it's been. And we're to be perfectly straightforward. We expect it to rollover, here, fairly imminently. But nonetheless, so that's our view on the currency on the COVID. Kind of hangover. You know, we touched on it earlier, right? That the US experience, the European experience, is that it takes about a year for that consumer, you know, animal spirits to kind of, you know, re re Ignite. And so the Golden Week, last week gives us a sense that consumers is definitely, you know, better than it was even in the earlier spring holiday period, right, there have been some analysis of the two periods, and the Golden Week is stronger. But you know, we're counting on turn of the year type for that for the consumer to come back, you know, fully robust way. And again, I think a lot of that is already in the price, just as an example. You know, you look at the European luxury goods, makers, which, you know, depend heavily on the Chinese high end buyer, and those stocks like LM, VH, etc. They've been hammered as well. The property in the financial sector, again, you know, completely appropriate concern. And I think the way we look at that is that the central government has plenty of capacity to take on more debt, like the federal government in the United States, the sense that most of the debt has been taken out by local governments. And so there is a little bit of a pass the parcel kind of environment that is going to take place. But to us, the main point is that it's domestic debt, it's local currency debt, it's not dollar. I mean, there is some dollar denominated debt, but not tremendous amount, we actually own a position in an Asian high yield fund that has about 30%, exposure to China, real estate, and it's actually doing reasonably well as an investment opportunity, which again, suggests, and that's over the last couple of weeks and months, when there's been rumors again, and worries about Evergrande, et cetera, you know, that the people who are really worried about property, they're gone, they haven't been invested in China in a while, and they're not going to be the first people to come back. So property is an issue. They're trying to put a floor under it. I think they'll ultimately be successful with that. And it's not the area of focus, though, as I say, this China high yield the sorry, Asia high yield ETF has a dividend yield of 10%. and is therefore it again to us, you know, there's, there's a price for everything right. The question is, what is the price? What's in the price? And do you see upside or downside and can you make the case? So we have had all year exposure to Asia high yield, happy to give you the symbol, it's kh YB is another crane shares ETF and you can take a look at the performance over the last month or so it's been been better than Anything's better than real estate by a mark by a mile. Yeah.

Andrew Stotz 24:48
Okay, those are, you know, excellent, excellent points. And the one other thing that I can see from here is like First of all, I just published a strategy piece to my client base here. And it's called Five righteous wars. And I explained how the US is now engaged in five wars, and how it's bankrupting America and those wars, we may have just entered war number six over the weekend, but one of those wars is a war against China. And when I listen to politicians, it's so hard to not see coming confrontation. And knowing we already have, you know, restrictions coming from the US trying to squeeze down China. Now, of course, that's part of the reason why the markets down right in foreign investors are coming out and stuff. But one of my concerns is that the US politicians start to do things such as limit more and more the amount of flows of capital that can go into China. Or that they basically or I could imagine, you know, here's a crazy thing. You know, 20 years ago, the ETF or the, let's say, the MSCI Emerging Markets, Asia, didn't have any China in it, except for eight shares in Hong Kong. But we knew that China was growing to become 40% of Asia, ex Japan, or let's say, you know, Asia emerging markets. And so MSCI agreed that they would slowly add this weighting of China into the indices. Now, you could be faced with a situation where fund managers go back to MSCI and put pressure on them a lot, as well as politicians and say, we can't replicate this index. And, and therefore, that has to be changed. That's a very drastic thing. I'm not saying that it's going to happen. But what I'm saying is that the political environment scares me. But again, one of the things that, you know, we've learned over the years, is it just when you're scared, just when it seems like there's no way out is probably the time that you should be investing. But how would you address the political aspect of them?

Jay Pelosky 27:08
Yeah, no, you know, again, very valid, and certainly here in the US, and the one thing that both parties can agree on, is, you know, they're concerned about China. So but it's one of the very few bipartisan, they're pretty

Andrew Stotz 27:21
good at War Two, I'd say. There's a lot of consensus in the area of war.

Jay Pelosky 27:27
I mean, I don't think there's quite Yeah, I mean, I don't think there's a consensus that we want to be in a war with China or in a war with China or that China wants to be in a war with us? I don't think so. I mean, my view is that China has a lot of issues it needs to focus on internally and domestically, without getting into a massive conflict that's got a lot of downside to it. I mean, I think Russia and the Ukraine is a pretty good deterrent to that line of thinking. But, you know, in the US case, I think the point about, you know, politicians trying to reduce capital, like pension fund money, that's certainly been discussed, and has even there's even pieces of legislation floating around that has that as part of the legislation, there's not a lot of support for that legislation. But there is that, you know, those kinds of bills floating around Washington, DC. I mean, to me, I think the likelihood of something like that is very, very small, because the government doesn't want to get in the business of telling pension funds, what they can and can't invest in. Right. And I think that's more the issue than singling out China or, you know, some other adversary at some point down the road. Now, there's definitely been a trend in the US towards using kind of economic coercion to kind of drive decision making and positioning of other countries. Certainly, that's been the case. And we saw that with Russia very, very visibly over the last 18 months or so. And so it is a risk to me, is that imminent? You know, again, go back to the catalyst question, is that something that's likely to happen imminently? I don't think so. And therefore, it's not really a focus for the timeframe that I'm talking about, which again, very clearly stated, this quarter and next quarter, the next six months is really what I'm looking at as an opportunity. As we progress over time, you know, we'll reassess where we stand. But the issues of the geopolitical nature, I think, are actually getting better. Right. I mean, President Xi, President Biden, what sounds like they're gonna meet on the sidelines of the APEC meeting in San Francisco in a month or so. You know that took a big step forward versus where we were, you know, whenever the spy balloon that was floating over the US, and Lincoln was supposed to go to China, and we got it cancelled. So I think both sides realize that, you know, the idea of separating completely from China is just just not a real like realistic thought it maybe sounds good when you're on the hustings out in Iowa or something. But it's not reality, right? I mean, the two economies are way too intertwined. What were fought, what's being focused on is the very top of the tech pyramid, where, you know, the real exclusive, high end stuff, yes, the US wants to kind of keep that stuff for itself. And China is trying to get there increasingly on its own. And, you know, we'll see how all that plays out. That's a big, that's a subject that we've been talking about a TP W for a couple of years. We talked about Splinter net, and tech ecosystem, splintering, that was stuff that, you know, you can go on our website and see our history of what we've been writing about. We were writing about that a couple of years ago, I don't think that's, you know, that's right news to people per se,

Andrew Stotz 31:15
okay. And just looking at the PE of the market, it's D rated from about 18 times at its recent peak down to about 13 times. So. And I think what's also critical is, you know, you've made clear about your timeframe, that in some ways you could argue this is a is it's a little bit of a trading idea, as opposed to, let's say, a long term, hey, this is the next three years, this is the place to be exposed. So definitely. I take you I take your points on that. And I think the argument is strong. Let's, let's now go into one other thing that we wanted to talk about briefly before we went into your story. And that is, you know, you've had a few lessons that you've learned that are I would say, let's say general lessons about investing, and you know, all that maybe you could just share a couple of those. And then after that, we'll get into your story.

Jay Pelosky 32:09
Yeah, sure. And I'd be happy to do that. Because, yes, over the career that I'm sure we both have had, we've both had some success, we both had some failure, you know, in the investment world, it's kind of like being a baseball player, right? If you bet 300. In American baseball, you're like a superstar. So for, you know, for us in the investing world, you know, it's kind of like you want to stay in the game, right? You don't want to take such a big loss that you're out of the game. And, and you want to make, you know, singles and doubles, I think more than homeruns. So, one of the lessons when when you invited me to come on your show, for which I'm very grateful. I was thinking about, you know, what we'll be talking about, and one of the lessons so not in not the worst investment ever. But one lesson that I thought that has always stuck with me. And it's now you know, 30 plus years ago, was in 1990. I had just been hired at Morgan Stanley, on the asset management side. And I was told to go down to Brazil, and start a Brazil fund. And it was Morgan Stanley working in conjunction, you may remember, back in the day, when the World Bank, the IFC arm of the World Bank was involved in helping create, you know, country ETFs and country funds and stimulate foreign capital flow. And so it was Morgan Stanley in the World Bank, trying to develop a fund for Brazil. And we could not raise any money. It was the period of hyperinflation in Brazil, and there was you know, the economy was a mess. And if we really struggled to raise any money whatsoever, we finally got the fund off the ground because the gentleman that you mentioned when we were talking offline, Barton Biggs, who at that time was the chairman of Morgan Stanley Asset Management was good friends with Julian Robertson either fame and Julian White said to Barton okay output in you know, whatever, 10 million 15 million to make sure the Fund had enough of a corpus to actually launch. And so it was a great lesson in the time to invest versus the time to market. It was absolutely not the time to market a Brazil font, there was no interest to participate. But it was absolutely the right time to invest in if you go back and look the dollar low all time dollar low for the Brazilian stock market was 9090 9091. Okay, because they were able to get hold of inflation, inflation collapse, the currency stabilized and went up dramatically in dollar terms. And, you know, it was, it was a great success over a period of years. But it was a lesson that always stuck with me. And when I see things like, just in the last year or two, right, the whole IPO craze or the Gamestop, and the crypto craze, it, you know, always sticks with me that time to invest versus the time to market, they are not, most of the time, they are not the same thing. Right. So that's one and then the other one that I thought of, is also went in my cell side strategy days. Well, that was a by side, that was my five side day, Oh, fun. Then I became Latin American strategist for Morgan Stanley before going on to do emerging and then global. So in my emerging market days, we would go and go on a marketing trip right to Europe, or wherever. And you usually start on the continent, you know, in Holland, or in Germany, or in France, or someplace, and you're gradually wind your way towards London. Because London was where the money was, right? So it's almost like being off Broadway, and getting ready to go on to Broadway. So you get all the kinks of your story out. And in the continent. And the last stop before London, is in Scotland, in Edinburgh, because the Scots are always very tough. Yeah. And they will, they will, they will really pick holes in your story. And so there I was, and in Edinburgh at a launch, you know, the featured speaker, I can't even remember to be honest. And what it's what we were touting at that point, as a sell side strategist. But I, somebody raises their hand and says, so like, you know, what's the biggest risk that you see to your thesis. And I just froze. Because I was so like, into my boiler story that I couldn't, you know, I didn't have any big risks. And that was another great lesson, right? You always have to lay out the risks. And so hopefully, you've seen just in our conversation, how over the years, I've been able to shift from not being able to talk about what the risk is to talking about risk and reward. So that's second lesson is, you know, no matter how bullish you are, no matter how appealing the story looks, identify the risks and be able to articulate them, and be able to weigh them so that you can figure out the risk reward, and then that helps you then figure out, you know, position size, which when you get into portfolio construction, obviously, you know, how you weight different bits and pieces of the portfolio is pretty important. So those are, those are two, two interesting stories. That one, I mean, it was so embarrassing. The guy who I was marketing with at the time for years, would bring up that story of Jay being completely silent when this guy just and then the guy is like dude, like, What? Are you kidding me? You don't have?

Andrew Stotz 38:24
Yeah, the Scots are tough.

Jay Pelosky 38:25
It was a rough. It was rough and not much.

Andrew Stotz 38:29
So two core lessons, there's a time to invest in, there's a time to market the idea or the investment. You talked about the hyperinflation in Brazil, and thinking about hyperinflation in Argentina right now. And then the other one is, you know, always lay out the risks. I'll tell you a funny story. When I moved to Thailand in 1982, I became an analyst in 93. And I didn't leave the country for two and a half years for the first, you know, when I first came, but my boss asked me to go to New York and present at an institutional investor conference, which you know, was full of people looking at emerging markets, and there's China coming up, you know, and all that. And then I went around to visit, you know, fund managers from my first time, face to face. And I remember, like, probably my first presentation, I had a bank sector report that I'd written and I was talking about bank of bank and other banks, and then I went into there, and I presented my pitch and all that and I left I felt pretty good about myself. Like I did a pretty good job. They were very nice, you know, got in the elevator, I was alone with the salesman. He said, Don't ever do that again. And I was like, what what what did I do? He said, You sat there and talked about the pros and cons of a bank our bank Well, you know, it could be a buyer and these are the reasons and a good VSL and these are the reasons and you know I went the other way at feeling like I needed to cover all bases and that's where I learned that you know, you got to you got to come up with your opinion as a sell side analysts. And that's, you know what we've been talking about. But I think your point is very well taken that you just have to accept that you could be wrong. And if you're wrong, and you're managing money, or you're advising someone, you know, what's the risk? And it could be serious. And you have to think about how do you mitigate that risk. So I think great, great lessons. 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 an intelligent story.

Jay Pelosky 40:29
Yeah, that's, I've got the one that I always reflect on. For sure. Again, and the good news is right, that you want to get these lessons hopefully out early in your career, right, you want to you want to take hits early in your career, not late in your career, because obviously, the exposure should hopefully not be as great. So happy to say that most of the things we've talked about, and the one we will talk about, all occurs 20 to 25 years ago, that's not to say I haven't had mistakes in the intervening period, for sure that many, but the ones that really stick with you or those early ones, in tends to be the case. So back again to the 1990s, Latin America, emerging markets. Now strategist, I haven't shifted from the buy side at Morgan Stanley asset management to Morgan Stanley, the sell side broker I was the Latin American strategist was the head of the research department had hired all these people. And we were, you know, doing a lot of IPO business again, because of us. The emerging market enthusiasm days, and a lot of people who were s&p investors were peeling off five or 10% of their exposure and putting it in emerging markets so they could juice their returns relative to the s&p. And so there I was telling the story of Latin America. And at this point, now, we're talking about Mexico. So you may, given your experience, know where I'm leading to on this, but I was bullish Mexico, and you know, people were getting concerned. You know, there was concern about, again, debt, and foreign currency debt, and the risk of perhaps a devaluation in Mexico. And so I went on vacation, and I was in the Pacific Northwest and in California, and I was camping, and hiking through the Pacific Northwest. And you know, when you go camping, or you're out in the woods at night, and you hear all these sounds, and it's like, it sounds scary. And you know, what if there's a bear in the woods, right? So of course, you know, being like creative sellside die, I decide I'm gonna write a piece. When I come back about Mexico, and devaluation for years, and how it's just like going camping, and hearing bears in the woods. In other words, you know, don't worry, Mexico's not going to devalue. Everything is going to be fine. stay invested. And lo and behold, you know, we know what happens next fair, given the title of your show, the government devalues in the middle of the night, I'll never forget, I got a phone call in the middle of the night, saying, you know, they've just pulled the plug. Their devalued things are down, like, you know, all sorts of percentages and you know, 20 30% type, you know, fall like, like that. And I had to go in front of the Salesforce. And, you know, stay I got it wrong. I had to articulate how I got it wrong. I was the poster child. I was number one and I as a Latin American strategist. And so I was the poster child in the Wall Street Journal for how Wall Street got Mexico wrong. There. I was, you know, J Polaski. Morgan Stanley, I number one completely wrong. And the great thing, the thing that really stuck with me subsequent to that was after I faced the Salesforce, and you know, got beaten up pretty badly and you know, it was not pretty. But I'm out now in the quarter after going through the Salesforce presentation. In Byron Wien, who was the US strategist for Morgan Stanley at the time and is now vice chairman at Blackstone. Byron pulled me aside and Here's what he told me, you can be wrong at the top. And you can be wrong at the bottom. You cannot be wrong at the top and the bottom. In other words, you better figure out where the bottom is, and get people in at that bottom. And it was great because, you know, he was seeing your and he was experienced way more than me. And you know, he like it was it was like drops of wisdom, right? And put it behind you, you're wrong, right. It's like a great quarterback in football, or a great hitter. You know, they don't think about the time they hit throw an interception, or the last time they strike out. Every time they get up the bat. It's a fresh at bat, in a approach it as such. And so for me, it was a great lesson about, you know, hindsight and not looking back and not in refusing to be, you know, kind of tarred with the brush of the guy who got it wrong, right? Yes, I was the guy who got it wrong for a period of time. But Byron was focusing me on the future. And making sure I got it right. Going forward. And so it was you know, it wasn't like, you're an idiot, you're don't get away from me, which is kind of what I was expecting. Yes. Like, you know, walk up young. You know, the game is only half, it's half time, it's not the end of the game. And you got to your job is to now nail the bottom. Yeah, yeah. So for me, you know, and I went on, I had a very good career, Morgan Stanley. I went from Latin American strategist, global emerging markets, to global equities, all the way to head of global asset allocation strategy at Morgan Stanley. And so I was able to, you know, take that hit, a big hit. And it was super embarrassing. And I was really, really tough to deal with. But you know, and I tell my kids and other young people who work with me and who I talk to, you know, you're not, that's not necessarily who you are at the moment. But that's not that doesn't predicate who you're going to be. So it was really great advice. You can rock top, you can be right at the bottom, but you cannot be wrong at both.

Andrew Stotz 47:25
So besides that, how would you summarize, that's a great summary idea of a lesson, but how would you summarize the lessons that you learned from this experience?

Jay Pelosky 47:34
Well, I think you have to have a pretty thick skin to be an investor, I have to be in the markets. Because you're, you're gonna get stuff wrong, it's as you know, we're dealing with the future, and nobody knows the future. And, you know, if you're a sell side strategist, or if you're a portfolio manager, or an analyst, you know, you're talking about the future. So you've got to be able to handle being wrong. And it's not for everybody, right, you've got to be able to handle being run publicly. As I said, I was the poster child for Wall Street getting Mexico wrong as a relatively young guy, that was not the kind of publicity I was looking for, what the firm was looking for. And, you know, you have to be able to shake it off, understand kind of where you went wrong. Be honest, you know, I didn't spend a huge amount of time going back and saying, oh, I should have done this, or I should have seen that. It was more about okay, you know, next play, you know, what are we going to do now really go here. So that forward, looking forward thinking approach, I think, is very valuable and very important to have? And the recognition that, you know, yeah, you were wrong, and we move forward, and you're gonna get the next one, right. And I think those were lessons that really have stuck with me ever since. And, again, I've said, I've been in this business for 25 years since then, and I'm still here, and, you know, still making mistakes, but cell phones, while we're, and, you know, excited about, you know, this is a great business, and I can tell looks behind you that you have a similar view that, you know, this is this is really intellectually challenging work. But it's in the real world. It's not a PhD on something. It's real world activity, you know, real dollars and cents, you know, constantly changing variables interacting in very unique and different ways, as we've seen just in the last couple of years. And, you know, you have the opportunity to try a puzzle through that, either yourself or in a firm or with colleagues, partners and clients. And that's a wonderful opportunity to have and I've been very fortunate in my career to be able to continue to work at what I really love to do, which is why I'm still doing it is very advanced age.

Andrew Stotz 49:59
advanced age? Well, let me just summarize a couple of quick things. You know, from my perspective, one of the lessons I've learned is that, you know, you, you, sometimes you, you're right, it just it just that you're, it's just the wrong time. So you know, you can be right about a particular stock as an example. And then you say, hey, now's the time to buy, and then it falls by 20%, because of something that you know is going on, and actually buying it that 20% down was the right time, it just said, you can never time it. So the first thing is that you can be wrong, you can be right, but at the wrong time. The second thing, you know, the critical thing here is I think the advice you got was incredible, because the point is you don't want to be wrong on the at, you know, both the top and the bottom, or else you're gonna get destroyed, you're gonna get run out of the business, basically, by the sales force. And that's another point that money, people who haven't worked on the sell side, you know, don't know about the impact of the sales force, you know, it's very critical. And at a big, firm, there's a lot of salespeople relying, and they're trying to figure out who to rely on. But you also have to remember that everybody's day comes up, you know, if your day doesn't come up, that you messed up in your, your recommendation didn't work, then you've never taken any big risk. Because, you know, you've got to take the risk. And the point is, from a management perspective, when you're managing sell side analysts, it's at that point where they're taking a risk, and they're wrong. That's the time that a manager needs to be supportive, because it's easy to be supportive when you're right. And so, you know, I think that's another critical one. And it's also, you know, there's not only that there's regulatory pressures that come in these days, from the SEC, and companies complain, and people complain. And then all of a sudden, we had a particular case here in Thailand, where a company complained about an analyst who was wrong, and they had some arguments. But at that time, I was president of CFA society. And I remember talking to the head of the SEC, at the time, just saying that, just be careful if the analyst was doing his job, and he wasn't like grossly negligent in what he was doing. And he had his, everything covered, which I knew he did, then, basically, if you punish him, then the nobody is going to take risks. So that's a whole nother aspect. The other thing and reminded me of Episode 597, with a guy that was a friend of mine, and has been a friend, and I've known him for since he was in Thailand many years ago. He's in the US now. His name's Lance Depew. And he basically had a particular stock idea that he was in and it just went down and down and down, and down, and down, and down, and down, and down, and down, until eventually exited at this, you know, very, very, very low price. And it had been, you know, decades that he'd been trying to make that work and are the title of that particular episode, I titled it, you're going to lose, despite your best efforts, and that the point that I would make that final point of my takeaways is that you will lose, get ready. And if you're taking risks, you're definitely going to lose, and even the best people are going to lose. So it's just part of the game. Anything you would add to that?

Jay Pelosky 53:22
I mean, yeah, there are a couple things. One, you know, I love your approach there. And the way I put it is that, you know, the only person again, to use like a baseball analogy, the only person who hasn't struck out is the person who hasn't swung the back. Right. In other words, if you're going to be in this business, you're going to make mistakes. And that gets to your second point about you know, okay, if you're going to be wrong, then, you know, how wrong Are you willing to be? And that's why people, you know, a lot of people have different ways of dealing with the downside, right? If you look at like the top hedge funds, they have risk managers, right, and they walk around and if you're down more than two or 3%, you're out, they force you to get out of the position, because they really don't want to take drawdowns. Then there's others who have a more flexible approach to when they take losses when they force themselves as a rule to cut in, be gone. So they don't face that sub that you know, that drain of like, you know, big, big, big drawdowns because again, if you want to stay in the game, you can't afford to have lots of big draw downs, you can take, you know, you can you can take a strikeout or two or three but you can't, you can't take, you know, nine strikeouts in a row, whatever the case may be. So I think there's an app for us at DPW advisory really is that you know, the positioning size, how we size positions, how long we're going to stay in positions, why we frame the China trade as a free, very specific timeframe. If As opposed to a an investment, and we tend to be long term type investors, we're not trader. But that, you know, those are some of the issues around that, okay, accepting that you're going to be wrong is critical, and then assessing, you know how you protect yourself from yourself in terms of being wrong, and not having it carry you out of the business. Whether you're an analyst who gets things wrong too often, you're let go, or a pm who's underperforming as let go, or private investor was a lifestyle that they're funding in, they can't afford that lifestyle anymore. So I mean, all those things. You know, it behooves one to have a plan for not only when things go right. But you know, for when things go wrong. Okay, here's

Andrew Stotz 55:53
the toughest question in my podcasts, most people can't answer it the way I asked it. So I'm going to give you a challenge. This question, I want to now think about a young man or woman out there early in their career, they're very excited about a particular idea. They've been seeing, they're digging, they're deep into it, they're writing about it. And also, just keeping in mind, something that you said, which is that you're careful to kind of position and communicate the type of trade it is because sometimes beginners hear other people talking, and they think, Oh, my God, these guys are doubling down on it, when in fact, they're only putting an extra 2% in it. But here's this young person early in their career, they're so caught up in this story that they've gone. But you see the risks, what's one action that you'd recommend that they take to avoid suffering the same fate?

Jay Pelosky 56:55
I would suggest talking it over with someone who's got more experience, so that they can, you know, not only that, that way, they articulate it, and force themselves to be able to articulate as I said, I think that's really critical. It's the old story of like, you know, you don't know anything until you teach somebody that thing. So I think our tick, I don't have the paper and, you know, I taught a graduate level course, for a decade or so. And a lot, a big chunk of the course was people getting up and making their own investment cases. So I think there's a lot to be said, for making for articulating the case, to someone or some people who are more experienced, that will give them an honest read on what their what their, you know, they're they're both bullish view is, and then, you know, probably ask them to identify some of the risks, which will be a very valuable lesson, so that I think there's a lot to be said, when you're young and starting out to lean on the counsel of others who have experience, because most people who have experience are going to be happy to kind of talk with younger people about, you know, their point of view and how they're doing it. And so, there's usually not a lot of resistance to 10 minutes over a cup of coffee, you know, let me give you my spiel, tell me what you think. And I think that's a good way of making sure you're not, you know, over your skis too far in danger of really making a big mistake.

Andrew Stotz 58:34
Alright, so what's the resource, either of yours or any other resource that you'd recommend for our listeners?

Jay Pelosky 58:42
In terms of,

Andrew Stotz 58:43
well, I guess, about investing about life about what helped you, you know, what are some some ideas that you've got, as far as, you know, young a young person is read a book or is it to, you know, what, you whatever you got?

Jay Pelosky 59:02
Yeah, no, that's, that's great. I mean, I do a fair bit of mentoring. And I have interns at my company who are young, some still in college, some MBA types, etc. And I'm a big believer and having people put their money where their mouth is. So I encourage people, even if you can do it today very easily for very low cost. You know, establish your own portfolio. It can be paper at first if you want. But, you know, force yourself to think about some of the very things we've talked about here, right and through positioning sighs You know, multiple investment ideas, because you're not going to put your eggs in one basket. Be able to articulate to yourself and then over time to others, why you have those positions such that you do, but I think like if you're trying to get into the business, I just had this conversation last week with someone if you're trying to get into the business of Wall Street or investing, capital markets, whatever the case may be, I think being able to tell people that you have been building your own portfolio, or you have been trading on your own account, or you have been putting your own personal money at risk. That goes along way having skin in the game at a young age, and it doesn't have to be a lot of money, it doesn't have to be all your money, it shouldn't be all your money. It's the idea that you have skin in the game, that you believe in yourself so much that you're willing to bet on yourself. And by showing that you're willing to bet on yourself, you go a long way towards encouraging others to consider to bet on you. Yep. Great,

Andrew Stotz 1:00:47
great advice. And it's surprising the number of people that don't have the portfolio and that type of background that then come in and apply. Alright, last question, what's your number one goal for the next 12 months?

Jay Pelosky 1:01:00
Number one goal for the next 12 months? Wow, that's, that's an excellent, excellent question. I guess to do have a good portfolio performance is probably uppermost in my mind, we have a pretty good track record, here going back a dozen years. And we want to try and keep it that way. So you know, continuing to identify opportunities and avoid pitfalls in the markets and be able to provide a service to my clients. Most importantly, because that's how we do it to our clients to provide a service to our clients that we can be proud of.

Andrew Stotz 1:01:40
Right? 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. And this helped a lot today. As we conclude, Jay, I want to thank you again for joining our mission and on behalf of ACE dots 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?

Jay Pelosky 1:02:06
No, thank you very much, Andrew. It's been a great discussion. I appreciate your questions and the opportunity to tell some of my stories. It's always fun. My kids are tired of hearing of hearing them so happy to share them with your audience. And again a degree at the same time is excellent. Thank you very much.

Andrew Stotz 1:02:24
Well, that's a wrap on another great story to 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 words podcast host Andrew Stotz saying, I'll see you on the upside.