Ep743: Sam Burns – Understand What You’re Really Betting On

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 arm 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 a Stotz Academy, and I'm here with featured guest, Sam Burns, Sam, are you ready to join the mission?

Sam Burns 00:37
Absolutely.

Andrew Stotz 00:39
How'd you like my radio voice? They're

Sam Burns 00:42
outstanding. Yeah, you got it down.

Andrew Stotz 00:46
It's a little early in the morning, so you can be froggy in the morning, see, so let me introduce you to the audience. Sam is Chief Investment Strategist at Millstreet research, an independent investment research firm based near Boston, Massachusetts, for 25 years now, he has focused on global asset allocation and quantitative stock selection primarily for institutional investors. After spending many years doing research at firms like Oppenheimer, statestreet, Brown Brothers Harriman and Ned Davis research, Sam founded Millstreet, in 2016, to be able to bring all of his best work together and offer it to clients without any constraints, or conflicts. Sam, take a minute and tell us about the unique value that you're bringing to this wonderful world?

Sam Burns 01:36
Well, yeah, it's, it's been a long road to get here. And I like to think that, you know, I can take all the best of the things that I've learned and seen and done over the last 25 years, but different firms that you mentioned, and put them all together in one sort of, you know, one place, and an offering to people without any kind of constraints. And a lot of what I do, and my sort of mindset is to have a structured process and have an approach that you use consistently over time. And I think, you know, a lot of the professional money managers that I talked to you, while they kind of sound good on paper, when you actually talk to them, you find out they don't really have that. And so that, you know, my first advice to kind of anyone, whether an individual investor or an institution is to, you know, have a plan, have a program have some way to approach things, without looking at the headlines today, don't build it around what you see in the newspaper, have a structured approach of some kind, and then wrap your mind, but has to be some kind of plan, and use that to keep yourself out of trouble. And I think that's what I can try to do is to help people, you know, deliver tools and information that they can use to kind of stay out a ditch?

Andrew Stotz 02:44
And what are the typical type of people that would, you know, benefit from your, you know, from your work and what you're doing?

Sam Burns 02:51
Yeah, so most of the clients that I work with are institutional investors of some kind, which can mean very small, independent investment advisors, family offices, things like that, all the way up to big, you know, mutual funds, and banks, and hedge funds and things like that. So anyone who manages other people's money in any form, could potentially benefit. And the people who maybe particularly don't have their own internal research staff, and you know, a lot of time and money to spend building models and indicators, and all kinds of things that I've spent all these years doing. And that essentially, you know, if they can come to a place like no street and get it all, you know, built already done, and delivered to them. And somebody who knows how it all works, and can explain all the details and pitfalls. That could potentially be, you know, be valuable.

Andrew Stotz 03:39
And I'm gonna have links to all of your resources in the show notes. And I know, you've got some interesting stuff. But one of the questions I want to talk about is that before we turned on the microphone, we were talking about the idea of two things. What we were talking about is emerging markets, and we were also talking about commodities. And maybe, just because I'm in emerging markets, and many of the listeners are either in emerging markets, or they're investing in emerging markets. You know, emerging markets have been tough for a long time. It's been King Dollar and King tech in America, leading the way. And I'm just curious, when do you think that terms for does it or is it as it turned already, what is your signals that you're seeing?

Sam Burns 04:28
Yeah, no, you're right. It's been sort of a long time since emerging markets have really sustainably outperformed the developed markets, particularly the US. And you know, it's funny, I had a client asked me about that a little while ago. And I went back and looked at the earnings, the the level of, you know, earnings over time, over the last 10 years using the MSCI Emerging Markets index versus the developed markets index, and Emerging Market Index, or level earning kind of the aggregate level of earnings. Right now are about 15 to 20% less than they were 10 years ago. Whereas the developed market earnings are about 50 or 60%, from where they were 10 years ago in aggregate, just using the basic, you know, standard Lexis benchmark indexes. So there's been a fundamental reason why emerging markets have certainly in dollar terms at least lagged over the last 10 years, because the earnings have not grown in emerging markets, you know, in aggregate, overall. Now, some countries they have some stocks, they have certainly, but it's been, you know, it hasn't been simply just, oh, people don't like them, or they've, you know, it's been some sort of a sentiment thing, has been a fundamental reason for it. And so what I look for is when is that earnings trend, going to really favor emerging markets over developed markets, or the US and the US has really led the way in terms of earnings growth for a long time. And I think that's still the case, you know, I look for for the most part, right now, it's still the US kind of at the top of the list. And then China in particular, has been relatively weak. And so it's been some other emerging markets that have done relatively better, but it's been a tough period for emerging markets, both from a kind of a sentiment standpoint, but also from a fundamental standpoint.

Andrew Stotz 06:11
I'm wondering if you did, I don't know, what would be the right index to look at, let's say, Russell 2000, maybe that excludes, you know, and you could just do okay, X tech. I wonder, you know, if you strip that out, if we would see that the differential between emerging markets in the West, or let's say, developed markets ends up not being nearly as much as it appears, it was just that those Magnificent Seven really, really drove America. What is your thought on that?

Sam Burns 06:44
Are you right, yeah, I know, the big mega cap, US stocks fell into tech related stocks have really been a big driver for pushing earnings up in the US in aggregate. Now, I think there's probably still some net benefit. Now, the Russell 2000, you have small caps have definitely lagged in terms of earnings growth, for quite a while as well. And that's why, you know, large caps of generally performing large small caps in the US. And the, you know, the relative earnings growth has definitely been in the US large cap. Now, even if you took out some of the big cap tech stocks, I think earnings have still been better overall. And the tendency for analysts to want to raise the forecasts kind of the positive news has still been better in across, I also look a lot at equal weighted indexes. So taking out that mega cap bias within US stocks or globally, and you still see a relative strength in earnings estimates for US stocks relative to emerging markets, or even other developed markets, stocks. And so there is really an underlying fundamental benefit to earnings in the US and economic growth in the US relative to other other markets. But it's been especially pronounced for the big mega caps.

Andrew Stotz 08:00
Just you know, being on the sell side, all of my career a lot like you know, yourself understanding how that works. I just wrote down something that very quickly that you were saying, I was thinking, maybe to some extent emerging markets looks like emerging us, meaning mid cap small cap us that maybe there's some similarities. And that's a helpful discussion. Oh, one last question on that is, do you have any feeling or any observation from your information and your data and your model? how or when or if that's ever going to turn?

Sam Burns 08:38
I mean, it's, yeah, it's hard to say. And I kind of tried to look at it, you know, day to day, month to month and wait for the indicators to turn before rather than trying to predict them. But my guess is that, you know, China has been such a big influence on emerging markets in general, not only its weight and indexes, but its influence on all the other Asian markets and everything else. And the fact that I think it's, you know, basically running into the kind of the limits of its own growth pattern over the last 20 or 30 years, and it's gonna see a much slower growth going forward, we're already seeing that. So I think there'll be an IRA, particularly, maybe, you know, like India, some of the other big emerging markets may be able to take over kind of the growth mantle there. But I think that some of the structural issues that a lot of them face are still there, and in some cases getting worse in terms of, you know, policies and leadership and things like that. So, you know, to me, it's going to take a shift toward potentially a more shareholder friendly environment in general, for a lot of these markets, to really be able to kind of compete with, certainly the US but even developed markets in general. So unless there's something specific that a particular emerging market has either technology or commodity or something like that, they would drive it. I think they're going to struggle, particularly if the big driver of China isn't there to kind of, you know, carry them everything else along And to some degree,

Andrew Stotz 10:01
yeah, and I guess that's a good reason why we should keep in touch in watch what you're seeing in your weekly stuff. Because, as you say, your model is not trying to forecast the next year or two or three. It's trying to detect, you know, movements that are, that, hopefully are trends starting. But you mentioned something else to me before we turn on the mic, which I'd love to talk about just for a bit before we get into the key question of this podcast. And that is commodities. I mean, come on, everybody's got to be overweight commodities, we've got, you know, the, the ESG movement is trying to crush capital flows into oil companies. So they haven't been investing. We've got, you know, potential wars going on, we got Russia and Saudi Arabia really controlling supply, you know, much more carefully, we've got America drawing down the Strategic Petroleum Reserve. And we look at all of these different factors. So everybody must be considering being overweight, a commodity supercycle or commodity cycle? What's your take?

Sam Burns 11:10
Yeah, you're right. Yeah, seeing all those news stories and talked to a lot of people and, and really, you know, to me, I kind of see it almost the other way around. In terms of, well, first, like, we were just saying, China has been the big driver of commodity demand for 20 or 30 years now. And I think it's not going to be it isn't right now. And it's not going to be again, to the same degree that it was, I don't think they're going to be the big source of global demand for, you know, whether it's, you know, iron, steel and cement or oil or anything else, the way it used to be. And I think that, you know, the US is now a major oil producer, and is back to producing all time record amounts of crude oil. Obviously, the US is a big natural gas producer as well. And the fact that liquefied natural gas is now being traded more actively globally. And there's no cartel for natural gas means that that side of things is much more much less likely to see big spikes in price that are sustainable. And even the fact that oil has had multiple cuts by supply by OPEC, and Russia, and what's going on the Middle East, now, you basically had every, you know, attempt to kind of force the price up. And it's really not gone up that much. That, you know, you had a few times over the past over the summer, there would be an OPEC supply cut oil would go for a day or two and then go back down again. And you did that several times. And finally, they cut enough to get the price up some, and now it's already back down again. And even the war in Israel might bring in Iran and other places, still can't really get oil prices going much. So to me, it tells me that the underlying supply demand is pretty sort of flat to down meaning it's there's plenty of supply around the plenty of oil there, it's just a matter of whether people are you know, politically willing to pull it out of the ground and sell it or, or not. And so your bull thesis really has to be that there'll be even more constraints on supply from OPEC, or wars or things like that. But the actual underlying supply demand is still, you know, in favor of, you know, flat to lower prices, in my view, and, you know, say natural gas are the same. And if you look at all the commodities, except for oil, you know, that Bloomberg has an index and other places have an index of all commodities X petroleum. And if you look at that it's making I think, you know, 18 month lows right now. So all the metals, a lot of the agricultural commodities, other things, they're not going up at all. And so that tells me it's not a broad base commodity move. It's really just kind of oil getting occasionally, you know, pushed out by, you know, political events or you know, things like that. And that's not a sustainable kind of model. I think there's still a fair amount of oil floating around.

Andrew Stotz 13:47
Okay, interesting. There's no cocktail in natural gas, wasn't there? Wasn't there a major political group that cut off the gas supply to all of Europe? And then started supplying none wasn't I think there was another group that cut the gas supply from Russia to Europe and then substituted their gas for that was Yeah. Cartel something I can't remember like the EU us.

Sam Burns 14:24
Yeah, exactly.

Andrew Stotz 14:26
Of course, the US didn't do it. And we have to officially announce here the US didn't do it with someone else. That was surely someone else although Biden admitted that, you know, hey, if you open that Nord Stream, it isn't going to continue but I'm just teasing a little bit. But one of the questions too is, you know, are all of these other commodities down because people are anticipating a recession? Is that the reason or is it supply? Do you think or what is your thinking on that?

Sam Burns 14:59
Now I think part of it is that, you know, global economic growth has slowed down. And so the demand side, globally, has certainly, you know, been weakening, and US has managed to hold up much better than most other economies. But you know, Europe slowing down, kinda is very much slowing down. And again, they're a big, big source of the demand for a lot of those commodities. And, but there is, yeah, there's enough supply, generally speaking, for a lot of them. And so if there's not a big source of new demand coming along, for a lot of these, you know, standard commodities, and the demand is kind of, you know, again, kind of flattish to down, there's not a big impetus to push them up. And so basically, with monetary policy tightening in a lot of places, that also puts downward pressure on a lot of them. And so, so I think that there's, you're going to have to wait for some kind of, you know, renewed cycles for the upside, in terms of, you know, stimulus from government spending or something. To get that really moving the other direction again, I think that'll be quite a while down the road.

Andrew Stotz 15:58
All right. Well, great. It's, it's, it's interesting to hear your ideas. And I know, for the listeners and the viewers out there, everybody's debating, you know, what's going to happen. And we've got to look at lots of different sides of the argument. But 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, then tell us your story.

Sam Burns 16:22
Sure, yeah, I was trying to think about that. And obviously, there's many possible things, but one of them that really kind of made an early impression on me was many years ago when I was in business school, actually. And kind of learned the lesson of trading options. So for those who are familiar with trading options, and other drills and things, there's a lot more to it than simply directional views. And so I've actually been trading options for a little while before that, and, but mostly from the long side, being buying puts and calls, which, at least at the very least, has a limited risk aspect to it, you can only lose what you put in. But at some point in there, I thought I'd give it a try to do just short sell options. And there was, it was August 1998, when, as you remember, the Russian default, set off a chain reaction of problems and long term capital management, and all these things. And so when I was trading equity index options here in the US, at that time, I had been short some options at the time, which then, you know, went violently against me in the short run. And, and so I remember, you know, thinking about it, that, you know, I didn't really have a good plan, for what if something like this happened, I knew, obviously, that I could lose money and how options work in principle, but I did not have a pre established plan for what if some geopolitical event happens, and the market suddenly just falls out of bed. And so I, you know, lost a whole lot of money and got margin calls and things like that. And so since then, I've really not gone back to trying to short options, too much. And, you know, be much more careful with things like that, where there's an open ended loss kind of aspect to it. And, but also, you know, reminded me that a every any option trade is about on volatility somehow, even if you don't think about it, and you really just need to understand what you're really betting on. And that I didn't probably have a good view of exactly kind of what, you know, the all the different scenarios that might play out where, and so had to kind of re regroup after that. And so, you know, luckily, I can kind of recover from that. But, but it was a reminder that whatever technicals or indicators, or whatever you might have, are never foolproof, and you have to assume that there's, you know, some sort of that black swan risks that might come along, and certainly did that point. And, and, of course, if I look back at it, if I had been able to hold on for two more months, the Fed came to the rescue a month or two later, and the market went right back up again. And so if I had been able to have more capital and been prepared, I could have probably written it out. But in this case, I didn't didn't have the proper preparation. And so that was painful, early, early lesson there.

Andrew Stotz 19:10
So how would you let's try to summarize, that's a great story. And it definitely has a lot of lessons in it. What would you say is less than 123? Most important?

Sam Burns 19:22
I think lesson one is definitely know what you're betting on, take a step back and say, Okay, well, I think, you know, the drivers of this investment, whatever it is, are, you know, the economy, interest rates, you know, market sentiment, whatever it might be, but make sure you really understand what the driver of the underlying investment is. And in the case of something like options or any kind of derivatives, you have to make sure you know, that you're not just betting on the stock market going up or down, but up or down in a certain way, that the volatility you know, in the options market has gone up or down to make you win, or it has to happen within a certain amount of time. and options, of course, are time limited. And so all those things go into your decision making. And so if you're used to just taking directional bets on the market or in stocks, and then switch to something like derivatives, where there's the directional bet, and this sort of, you know, other stuff, volatility, bets and time, and time decay, and all those things, you really got understand what you're doing first. And then next, they have a plan. You know, what, what could go wrong? And what are you going to do about it? Before you look at the headline to see what's happening, I think that's critical for any investment plan of any kind. And, and then make sure that you're capitalized well enough to handle it or to ride through ups and downs and draw downs. The draw downs, look easy on paper, but in real life, you know, it can be very painful.

Andrew Stotz 20:48
Yeah, it's, it's interesting is one of my takeaways is the, you know, ultimately, you gotta know what you're betting on. As you were saying, you know, you're betting on volatility, you're also betting against time. And, and, but I also would say, No, what's the actual thing that you're betting on? You know, you may think that you're betting on such insights going up or down, but you're actually betting on, let's say, volatility rising. And so sometimes when we're beginner, where we're actually exposing ourselves a great example, like when I started as an analyst, I thought, here, I was recommending Bangkok bank here in Bangkok, to a fund manager in Boston as an example. And what I missed about that was fund flows, and how significant fund flows were in and out of emerging markets, and therefore, I couldn't put that piece together. So I was betting, and sometimes my bet would be really right. And I thought that I was right, because the stock was cheap. But really, it went up because of something other than what I thought. So based upon what you learned from this story, and what you've continued to learn, let's think about a beginner or somebody getting into that space, what's one action that you'd recommend they take to avoid suffering the same fate?

Sam Burns 22:14
Yeah, and you're right, there often are kind of hidden drivers of of an investment, that it's not what you think it is, it's, you know, that maybe it's a currency movement that's really driving it or a commodity movement, and you're attributing it to the stock or your your fundamental analysis. And it's or it's the, you know, the Fed interest rate policy that suddenly shifts and goes in your direction. And there's things that are not relevant that people think are the money supply, or the bank of the Fed's balance sheet things, like gets attributed to that was, but that's not really what's driving things. So I think, yeah, making a point to really think through what's behind it. And, you know, what are, what are the other things moving at the same time, that might explain the movement of, of the asset that you're that you're interested in. So that there's a lot of things there where there's a hidden macro driver, or you know, a currency or a commodity, or something else, a policy movement, that's driving things that you're not focused on. And that's, you know, that's really the reason, but you didn't know it. And so when it goes away, you know, all of a sudden your investment goes the wrong direction. So I think that's, that's really important to

Andrew Stotz 23:23
know. And that, that's where focusing on price movements, and shorter term movements, sometimes you're giving some of that responsibility to the market, the market starting to move, and the observations of what's happening that could be different from what your thesis is, is very helpful. Let me ask you, what's the resource, either of yours or any other resource that you'd like to recommend for our, for our listeners?

Sam Burns 23:49
Yeah, no, there's certainly things that you can pick up, you know, from the library, Twitter and LinkedIn accounts that I follow for military research, where I'll post, you know, examples of the work I do and kind of some of the conclusions that I come to, and basically things where I think, you know, maybe the market or other people that are maybe, you know, taking a different view, you know, why I'm taking the particular view that I am. But otherwise, you know, I think it's important to, you know, try to listen to or read people who are practitioners, people who are really involved in markets day to day, rather than say, you know, nothing against journalists, they do, they do a great job, and it's a difficult job, but a lot of them are writing for a different reason than to make you a better investor. So that whatever is in the newspaper or a lot of headlines and things are not written for you as the investor to do well with or to get information ahead of other people. So yeah, like

Andrew Stotz 24:43
journalists hates that. Why journalists hate Twitter.

Sam Burns 24:48
Well, yeah, certainly competition for them, right. Yeah. That's a good yeah, that's and that's the thing. You can learn things from Twitter, but you have to be very, very careful with who you listen to. So yeah, so I would say Be careful about where the source of your information is in terms of whether it's somebody you think is a trustworthy source that has experience, direct experience in what you're talking about.

Andrew Stotz 25:09
And I'll have links to your Twitter and LinkedIn in the show notes. Last question, what's your number one goal for the next 12 months?

Sam Burns 25:18
My number one goal, I would say is to try and stay on the right side of the macro picture. I think that's been the hard part, the last couple of years, with COVID. And everything else, the macro picture is so difficult and so complicated. And so unlike all the past cycles, and that relying too much on, you know, history, and what normally happens in an economic cycle, has not been helpful this cycle. And so if I can get through the next year, and not make any major macro mistakes, by reading too much into history and not looking at what's happening now that's different, then I will, you know, I will have a big accomplishment. Yeah.

Andrew Stotz 25:55
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. As we conclude, Sam, I want to thank you again for joining the mission and on behalf of a starts 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?

Sam Burns 26:20
I have a plan.

Andrew Stotz 26:22
Beautiful. I don't think we can end it any better than that. And 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 worst podcast hose Andrew Stotz saying. I'll see you on the upside.