Ep745: Harley Bassman – Sizing Is More Important Than Entry Level

Andrew Stotz 00:01
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community. We know that to win 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. 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 guests. Harley Bassman Harley a UA join the mission.

Harley Bassman 00:34
Rock'n'roll man,

Andrew Stotz 00:36
literally. So let me introduce you to the audience. Harley is an industry thought leader and commentator on macro economic issues spanning decades. He spent 26 years at Merrill Lynch and from 2014 to 2017. Harley was an executive VP and portfolio manager at PIMCO. In 2011, he joined Credit Suisse, his global rates, and in 2006, he built the rate lab ace full spectrum us rates trading desk Strategy Group. Presently Harley is a managing partner at simplify Asset Management. He continues to penned episodic macroeconomic commentator as well as manage a hedge fund of one. Harley has a BA in management science from the University of California, San Diego and an MBA in finance and marketing from University of Chicago. Harley, take a minute and tell us about the unique value you are bringing to this wonderful world.

Harley Bassman 01:37
Well, you as you can tell from I guess, both of our hairstyles, the old age. So it's reminds me of my very first job on Wall Street. So I went from college to business school, you could do that once upon a time. And so I get my first job at Drexel Burnham on the trading desk there and buses a sign on his desk and I like the sign at all. But now I look from store to store for this sign. Age and treachery went out over youth and skill. And so now I am old.

Andrew Stotz 02:14
Okay, so age and treachery will well I can understand the age will win out because maybe we've been through all those battles. But what does it mean treachery? The sad behavior?

Harley Bassman 02:27
No, it's a matter of just just being quick on your feet. And having seen the movie before. You know, it's never different this time. So as an early plug over here. I write a macro economic commentary. Every 468 weeks, whenever I'm in the mood. It's all posted on convexity. maven.com. Yep, my emails there to send me an email address, and I'll add audio to it. So it's all free. And it's I wouldn't call easy reading but it's, um, it's okay. Okay.

Andrew Stotz 03:06
And how do you approach macroeconomics? Where's your where's your mind when it comes to that? I'll have a link in the show notes, by the way, so people can click Check, check on that.

Harley Bassman 03:18
I try to work with common sense, which sounds a juvenile thought, but it really isn't like when I was at Merrill, I mean, new MBAs come in for training. They knew a lot there. But they're all smarter than me make a program and they can do this, they can do that. They did not have common sense. And they didn't have it because it wasn't required. What's required to get from college, to grad school to MBA to, to Wall Street, you have to be able to work a spreadsheet, you have to be able to get the right answer on test, you have to evaluate, you know, how to create a number or something. But actually sitting back and thinking like, Does this make sense to me? That's not required to actually go and get a job and succeed, at least in your early years. That usually takes getting hit in the head with a baseball bat to learn that. So like, I could talk about an option terms we'll talk about in simple terms. I don't skydive. I would love to skydive by the way, I think it'd be pretty fun. If you like what I thought fudge sundaes as the utility of 10 and sets the utility of 100. skydiving with the utility of a million, it'll be great. But you got to go in, you know, PV that whole concept. So you have to take the odds of me having my skydive at your million of utility times point 999. And then when the cord and just having cord and you're very high up so you're gonna fall for a long way to hit the ground, trying to think about things. That's negative infinity of utility and Go point oh one times negative infinity is negative infinity and the final skydive.

Andrew Stotz 05:05
Hmm, that's funny because I was remember, I went back, I haven't been in North America for a long time. And many years ago, I went back to visit my sister. And, you know, she's into skiing and her kids are and we all the kids got together, and we went to ski slopes. And I got to the top of that mountain. And I thought to myself, I haven't been skiing in about 20 years, the risks of me breaking my leg are really, really high. And I just said, You guys go ahead, and I just like, carefully and slowly went down that mountain. But I also thought to myself, I don't think it's worth it for me to ski if I'm not doing it on a regular basis. And so I kind of stopped that, what I consider to be high risk, you know, behavior for me, because I wasn't trained in it. But the death part is not a part of skiing, just the discomfort of breaking the leg and all the other implications, but the death part is the infinity I guess,

Harley Bassman 05:57
I think it really stepped your leg off on top of a mountain, you might wish you were dead. But I mean, think about common sense. Skiing is pure idiocy, you're slapping on two pieces of wooden sled on a mountain device. That's kind of stupid, you're thinking about?

Andrew Stotz 06:10
Yeah, well, hopefully my sister doesn't hear that. Or else you may get a, you know, a letter. Now, I just curious, you know, I look at the US after 31 years of being out of the country. And, and it's just, it's kind of baffling what's happening. What I remember, when I was young was said, there were some responsible people around who, you know, did responsible things, like kept things budgets in balance, and tried to do that. But now, it seems like that's just impossible. And now it's gone so far with government spending, government debt, the Fed coming in, and it's just like, where does it end?

Harley Bassman 06:53
Um, you know, you can I, there's two different paths to go think about this. You know, one of them is that, you know, we have the GFC in Oh, 809 and the Fed printed money to go and salvage the banking system. And are the bankers good guys? No, they said lumps are gone to jail. And we need the banking system, we're a financial financial world, you need the plumbing of banking is what's the plumbing. So you say the plumbing, you can keep going after some of the plumbers. Then the Fed comes in, and they and they print money, and they want to beat inflation, and they want inflation, because we had too much debt, mortgage debt, corporate debt, government debt, the only way to get out of debt is to either grow, right? So the ratio goes down, or usually keep

Andrew Stotz 07:45
the debt and keep the debt, the same level. Right? That was

Harley Bassman 07:48
after World War Two, you know, you had the economy grow faster than the debt and you bring it back and balance. The other way is default, like the dentist goes away. Defaulting is unpleasant cuz people lose their jobs. So the better idea is inflation. Inflation is basically a slow motion default, as the value of what you're getting back in the future is reduced. It's effectively a silent tax across the entire country. Everyone pays it, and no one sees it. I mean, it's hard to raise taxes on the middle class, but you can raise them on the rich, but you can tax the rich 100%. And that will solve your problem. Inflation is where you tax the middle class, the great majority of the people, and no one really complains about it as long as stays at one to 3% You're okay, when it gets up to 6789. Then you got a problem. Fed printed money tried to create inflation. And lots of naysayers say they didn't. It is false. There's tons of inflation. It was asset inflation, stocks, bonds, houses, cars, boats, gold, art, it all went up. And the problem you had was to get to win with asset inflation. You had to have assets well, who was assets, the rich, so basically, it is widening out of the wealth, income disparity. And that's really where I think caused the problems is widening. What is the federal fault? Yes. Was it intentional? No, they were trying to do a good deed by creating inflation to delay the debt, but it'd be as inflation and this hour so this is why you Trump, it's creating this this this this widening widening gap of income and wealth. And, and then the fit of the fiscal policy came in with COVID. And that finally got the real labor wage inflation, which has now really kind of jumped things up. And this is a problem. The other issue really is seemingly this idea of we're no longer a community, we're no longer a team. The individual is more important than the group Um, and, you know, that's that is why is that? Maybe Twitter maybe other things? unclear, but I mean, you've lost the ability to go and do something for the team to sacrifice for the team to compromise for the team, or politicians, they don't compromise at all. They, they, it's all or nothing, it's a winner. It's not. And when you do that you end up with a bad situation when you're trying to operate as a team as a country. And we've lost that ethic. Why? Maybe it's linked to finance? Maybe it's not, I don't know. But that certainly is the biggest problem we have now in our politics.

Andrew Stotz 10:43
And you can feel this, you can feel that in, you know, when you look at your span, I mean, sometimes as we get older, we look back at things and we think that they're the glory days. And I'm just curious if, you know, to what extent do you really clearly see that difference? Compared to the past?

Harley Bassman 11:01
I mean, I mean, look, were the good old days that good? I mean, I mean, in my lifetime, you had black and white water fountains, for God's sakes, I'm older than you are. So I mean, I'm not sure that NGOs were all that good, right. But they're, they're different. I mean, I live in a, in a community, and I'm on the board of this community. And when you want to build a house, you know, tear it open up a new one, if you apply, and it is becoming more and more difficult to manage this process, when these people come in, they buy the property, and they want to do what they want to do. And maybe this house is not harmonious with the rest of the community and is not and other things that where it's not, we have an old community in California, and we want to kind of keep it is kind of, I would say, rustic, we're kind of low key California way to want to come in and build, you know, 10,000 foot house with with with with 10 cars, like really, it's like the cars doesn't fit into what we want over here. We're not ostentatious, low key, and how do you go control these people who they want to come in and do they want to do and they don't want to go and you know, compromise in the community. And the word compromise has become a dirty word everywhere. And even I mean, you know, I'll make a, you know, most of my, this is not one of my worst trades, although I guess some of them could be is all investing in a startup of some kind, where I know the person and it's a good idea, and they might work very well. But it might work. Most of these top most of time, what I have found is the person will get the project to a place. And then he's kind of gotten his level because one one person, and it's time to go and he will no longer at the company is going to own 40 or 50 or 60, whatever, maybe think it will be 40 He will no longer be in control over the whole thing. He does not want to do that. She wants to go he wants to go and keep control of this thing and not sell any equity at all. And that's usually when these things go, you know, on the rocks. It's, it's ego, it's control. It's, it's, it ends. I mean, my comment always isn't half liquid and no love. And my experience is people they want the whole open the whole thing goes into the tank over and over and over again. I mean, this is why we still read the Greek tragedies from you know, 3000 years ago. I mean, 300 bc we read we read Shakespeare what is always the downfall of man, we still read these books for the same reason. It's hubris. Its ego. Right now we have the same problem. I mean, we got one, you know, by definition narcissists was running for president again. It's always hubris or ego, that is the killer. Yeah. And it's never different this time. And it's just over and over and over again. It is not an exact repeat, but it always rhymes in history.

Andrew Stotz 14:16
Somebody mentioned something to me, I was reading something I can't remember. But then I said they were referring to Plato's Republic. And so I got it and started reading it and then you just realized like, yeah, it's yesterday. It's it's, it's yeah, it's so for anybody listening. That's a great you know, a great reminder to go back to the classics if you want to understand what's happening in the world. Humans haven't changed. Now, I would say that maybe are so are tools that we have in society now. Mainly coming from mobile phones are firing up those they're intensifying the human frailties. You No Harley, I teach a class in ethics and finance here in Thailand. And I just kicked off my latest one in

Harley Bassman 15:08
finance, like,

Andrew Stotz 15:10
yeah, no, that's that can do. And I had 80 students, and I asked them this simple question I asked all everywhere I go to present, I asked the same question. Raise your hand, if you think you are not addicted to your mobile phone. And what percent of people do you think raise your hand, but wires 00. And sometimes I think, you know, as I said to them, I said, you know, one day, the youth of this world just may rise up and wake up to the fact that the adults, maybe they didn't do their adult work on allowing kids, you know, to do the things that they've been doing, particularly the mobile phone, the destructiveness of that, you know, there's lots of good, but the destructiveness of it, I don't think that any of us thought, if you remember how the back in the 70s, when calculators came out, Texas Instruments and others, there was people that were saying, Look, if we use these calculators, young people are not going to be able to do arithmetic in their head, they're not going to be able to do long division, or multiplication, or they're not gonna be able to do any of that. And that was like, you know, some crazy, you know, group of people at that time. Well, of course, that was right. Now, do we stop using calculators? No. But we did, there is a consequence. And so we saw the consequences, I think about my father, who did you know, all of that calculations in his head, and now I don't. So there's a consequence for everything. Now, I just wanted to talk about what you're doing it simplify for a couple of minutes. Because I think it's important for listeners to understand just a little bit more about, you know, you know, a lot of people that are my listeners are investing in mutual funds. And they're investing in mutual funds in markets that may not even have ETFs, or other ways of accessing those funds strategies. Now, in some cases, I've got listeners that absolutely are accessing ETFs. And beyond mutual funds. But I would be grateful if you could just kind of explain about, you know, a little bit about the background of what you're doing and why you're doing it. It's simplified.

Harley Bassman 17:27
So, I mean, most of everything on Wall Street, in finance, if you took ninth grade stat, that's all you need to know, it's not much further than that. Of course, not many people like ninth grade stuff, that's a problem. But I mean, the math is not more complicated than that. The old idea of a mutual fund was people go and pull their money together. And one person or one team manage that money, because they're specializing in investing, because everyone can't do everything, you know. So you hire a professional, and you do it, you know, in a big group. So each person puts in $1,000. But all of a sudden, you might have 100 million in this pool, and then any charge you you know, a low fee, you can put your money in once a day, or take it out once a day, at four o'clock, New York time in the market closed, and you would get in or out at the closing price of the market. And that was it. My thing is good or bad. It is what it is. The ETF is basically taking that mutual fund, and putting it on the stock exchange, so you can get in and out all day long. Are you supposed to go and be buying and selling all day and trading it for speculation? That wasn't the idea, but you're welcome to do it. But the idea was, the market goes down in the morning, and you want to go and get into the market at you know, 10 o'clock New York time, as opposed to waiting for it o'clock when the market might be higher. And by the way, it's put your order in by one o'clock. So you even know what price you're getting in at right could be higher or lower by four. So that was the basic ETF is taking mutual funds. And then you could take up to a healthcare mutual fund or a tech mutual fund and oil funder Defense Fund and the other 1020 stocks in there. So that was basically kind of, you know, ground zero level one of ETFs. What happened was next. Five years ago, the SEC changed the rules and allowed us to put derivatives, futures options and other things into ETFs. They weren't allowed before my company simplify. That's where we start. That's what we did. We started making ETFs that you could put drifts into. I'm a dribs expert. That's why I was at Maryland 26 years Wall Street 35 years, I was a dribs guy. options but ever with everything else that's not you know, in that world.

Andrew Stotz 20:04
So to simplify, let's imagine a typical person has a typical 6040 portfolio of 60% stocks, 60% or 40% bonds. They're, you know, they're 4045 50 years old, you know, maybe it's 70%, stocks, whatever. But there's some stocks, and there's some bonds. And they're, they're open for things that could either reduce their risk or enhance their returns, what would be a simple example of a type of derivative that would, you know, come into an ETF that would enhance that return, or sell protect its downside, I don't know.

Harley Bassman 20:45
Level one person has his money. He goes, he buys 70% of spy, that's the basic broad equity index. And he buys 30% of like, you know, some five year investment grade ETF, where they're where they buy high grade corporate bonds, five year maturity, That's level one. Level two, what we would do is this, we would go and buy futures contracts on the five year or the 10 year treasury, listed on the Chicago exchange trades like water, okay, we would go and put that into an ETF. Now, there's no cash required for that, we would get the cash and maybe invest that into some short term is like a three month t bill. And because I won't go into details, but when you buy that Treasury futures contract, there might be an implied interest rate, a borrowing cost of let's say, four and a half percent. And maybe I can go and buy treasury bills at 5%, I would now own the extra exposure of the five year tenure contract. But pick up an extra half percent, because I put the cash into a treasury security or some other high grade security. Now this, by the way, is not genius. This what PIMCO did, PIMCO was the first investment bond manager to use derivatives in a large mutual fund. And so now, theoretically, you have leverage, which sounds bad with leverage, because you if you have $1,000, you bought $1,000 of treasury futures, and $1,000 a t bills. Well, you have $2,000 of investments going $1,000 of money. So it sounds like you're levered to one. But you're not because that one month t bill has no risk to it right? Now. I mean, you could buy other stuff. But I mean, that basic structure is leverage, I would call that balance sheet, leverage your two items on your piece of paper, it's not risk leverage. Now, if you bought two futures contracts, will that be real risky leverage? So you got it. When you talk about leverage, you got to talk about is it balance sheet leverage where the risk is unchanged? Or is it economic leverage, you really have more risk per movement.

Andrew Stotz 23:17
Okay, so let's, let's take a step back for a second and just understand this type of instrument or this type of trade that you've described? Is that is the regulation that must be in an ETF on its own? Or no, you can just bring that strategy into any ETF.

Harley Bassman 23:33
I could do whatever I want. I could put in ETF I want. I mean, I can make a very simple ETF of just treasury bond futures. And we actually have two ETFs, where we have that exact one we on the two year when we were the five year, but you could also, you know, use futures in other ways, but it's additive. So you'd buy tenure futures contracts as opposed to tenure treasuries as a way to get exposure to interest rates, because it's more efficient. And so we do that. And then of course, we also do, we have really come sexy but kind of crazy trades I trade I created two years ago, was to buy a seven year put on the 30 year treasury. That's perfect PFI x. That's my baby. We brought this public two years ago at 50. It went down to 37. As rates went down two years ago, it's now trading at 102. So it's basically a triple from where it was a year and a half ago. And all this trade was a seven year put, which decays very small it's like a one month option that disappears in the blink. The Seven Year option mandate, it's very, very stable, and was a way to go and buy Long Term Insurance. Just in case rates went higher, and we worked very well. But the trick was, you can't buy a seven year option anywhere except as a professional on Wall Street. And so we have what's called is the ISDA agreement. They're hard to get, we have four of them, we have one with each counterparts with one with Goldman Sachs, or Morgan Stanley, one deck America, one JP Morgan. And so we can trade with them as a professional, but then take these professional tools and jam them into an ETF. And that's really what we're doing here is we're going and taking professional investment products that civilians ordinary investors cannot get, and putting them into ETFs. I'm not, we're not trying to make up crazy things with crazy risks.

Andrew Stotz 25:54
So let's take that one that you've just talked about that. How would that have, if you're thinking about an ordinary investor that is looking at how to, you know, improve, and access these tools now that institutional investor, you know, gets, so you've said the benefit of, of what you're doing is, number one, they're just going to get access to the institutional, you know, market, let's say, or the institutional options. And the second is, they're going to get the ability to get in on a trading idea of a professional in that space that you put into an ETF wrapper. And I'm assuming that that ETF is just a standalone that trade, right, there's no other, okay, so they're gonna get a pure exposure to that. And now, if they had a 6040, or even less, we could simplify and just say, 100% stock portfolio, what would be the benefit of adding, I don't know, 5% 10% of this trade into that strategy into that own portfolio,

Harley Bassman 26:54
we recommend doing 5% relative to the part of your portfolio that's industry driven. So if you were 6040. And if you said my stocks have no rate risk, which is not true, but let's say don't ever get 40% bonds, we were 5% of that. So you'd buy 2%, a fix, right? 5% of 40 is going to be 2%. That's how you do it. And it would just smooth out your portfolio. If rates went up, you'd make money on that product will offset your losses in your rate products. And it's very slow decay. And if you go back to my website, convexity maven.com, go look back two years, I wrote something called helicopter defense. And that was the product description basically. And it'll explain how the product works and what it does. So that's the thing. It's just offering a relatively simple, straightforward idea to civilians, because they can't get it ordinarily, would also do crazy stuff. I can do crazy stuff also in these things. But in general, we don't we just try to make it very simple. For call simplify.

Andrew Stotz 28:06
Yes, exactly. And my last question, is that, are these strategies small and not very liquid? Or what if someone wanted to get into this particular strategy that you've created? What's the size or the AQa are the assets under management? Or, you know, whatever the measure is,

Harley Bassman 28:23
oh, pics got to 450 million last year. Okay, about two or 50 million now and trades. Average is about how to build this for today. It trades pitches very liquid are already so yeah.

Andrew Stotz 28:35
Okay, great. Well, that's a great, you know, lesson on kind of on ETFs number one, and what's happening? And it's also, you know, let me ask you one last thing is that if somebody's you know, going through ticker codes and looking at this stuff, where should they be going to find out more? Should they be going to simplifies website? Or is it

Harley Bassman 28:57
gonna go? Simplify? simplify.us You've got a whole menu there. By the way, let me just finish the story. Yes, please. Yeah, mutual funds, close at four o'clock every day. Level one ETF was saying I'm gonna have that mutual fund, and I could buy and sell all day long. Level two is putting two ribs futures and options in level three, which is going to start to happen soon is we make these ETFs active. So what you're going to see happen over time, is hedge funds migrate into ETF form. And that way you get rid of all these high fees. Because, you know, I mean, the market won't take it. So um, you're gonna see activity, they're not there. They're not really here yet. But there'll be level three is active ETF so putting hedge funds into ETFs

Andrew Stotz 29:50
by you saying that in I don't know five years or 10 years we won't really have the we won't really have much AUM in the mutual fund structure.

Harley Bassman 29:59
I You'll still have a lot of hedge funds out there. But the two and 20 that the market will get rid of that fee structures. It's just It's, I mean, as I people like to say, as a hedge fund as a, as a compensation scheme masquerading as an asset class.

Andrew Stotz 30:22
Well, now it's time to share your worst investment ever. And since no one goes into their worst investment, thinking it will be. Tell us a bit about the circumstances leading up to it and tell us your story.

Harley Bassman 30:35
Well, I'm a UChicago MBA, I'm a monetarist. I'm a value investor, which is why I've never owned a tech Much to my sadness, because I mean, the P E 's and every ratio on these tech stocks is always nuts. And, and I was looking at the banking sector that got hurt a while ago, this before COVID. And, and the banks have finally come back, and the economy is doing fine. And the banks are all trading above book value, except Citibank. And Citibank is trading Kelley Blue Book, stream blue tangible book. What does that mean? When a bank goes and buys another bank, it takes the bank onto his books at were kind of bought the thing at. But let's, let's say a bank is worth 100, you pay 120 for it? Well, what do you do with the 20 bucks that you overpaid? Another 20 bucks is probably for the name of the company for its client base, lots of other intangible goodies, where there's value. You know, it's rare you buy company for just the value of its, you know, buildings and assets. Usually, there's a value to the ongoing concern of it. And most bigs traded above that level, Citibank was the tangible book, and that's 20 bucks, called goodwill. And it gets put on the balance sheet because I gotta put it somewhere. And it'll show up as part of book value. Because you don't wanna take a loss on an accounting loss right away. Um, see bank was built by lots of Sandy wildlife by lots of smaller banks and other institutions and putting them together. Of course, the great irony is Jamie Dimon was working for Sandy Weill, in the early, you know, the 90s. And he was like, the genius guy out there. And he should have gotten the job as being the boss. But of course, they said he give the job to his daughter instead, that was a bad idea. And said, he went and he became head of JP Morgan, now the best bank in the world as a sidetrack. So Sandy put together all these various institutions in the city bank, and has booked it to be 100. But if you strip away all the goodwill, the tangible book, which is just the value of all the bonds that owns on its buildings of everything else, no depreciation, it's basically the value of this company, you could sell it for scrap tomorrow. I mean, really, I mean, Citibank, which is one of the too big to fail banks, is good trade at scrap value. I see them likely to me. So I went, and I bought some calls and sold some puts on Citibank stock for zero cost strategy. And I think your spots to go up because, you know, as it catches up to its, you know, peers are all trading above their book value that Citibank, you know, will go and follow with it.

Andrew Stotz 33:51
Can you explain why you didn't just buy the share, as you said, you're expected to share to go up? Why did you do the strategy that you did?

Harley Bassman 33:58
Because I had, I had my cash invested in muni bonds paying 4%. And I'm in a high tax bracket. So it's like, it's almost like an 8% yield for like, double A rated California bonds.

Andrew Stotz 34:13
So you didn't want to take that huge chunk of cash that you had, and deploy it into me to buy all the shares for the full amount. Okay.

Harley Bassman 34:22
There was more it's also it was it was speculative to some degree, but I felt I thought I said, you know, the stocks not going to go much below. Tangible kind of can't like it's kind of silly, isn't it? And if it did go below, I could probably buy the shares. I wouldn't mind that well. Comes COVID and everything goes sell and feedback goes south. You know, what threw a goose and all of a sudden, I'm looking at this thing trade and like, you know, seven have some tangible and it's like, oh my god, I just really didn't think it could get there. I mean, I In theory, it could, but I just didn't think about that. And this is where I mean, there's lots of bad traits I have, like somebody that I could even be up for hours playing with my dad trades. But that one in particular, because really, I just said, I understand how Wall Street works, I understand how banks work, more or less, it's kind of in my wheelhouse. And you really should not trade below tangible if you're an ongoing concern that makes a profit, and they're making a profit, they're adding the tangible book at the time was like sitting like 75 of a tangible facility back now. The second there add, like, two or $3 a year, for dollars a year to tangible, making a profit. And it's like, I don't lose on this thing. And lo and behold, down it went, and, you know, it got to the point where it's like, well, I know, I'm not gonna wait till this movie ends, I'm out of this thing. And that was it, it was probably the biggest trading loss ever, ever actually took I put on more of this trade that I thought I should have. And but it was really, like it was just getting hung up on this value construct and I really was not thinking about why is the stock trading, you know, under tangible in meat? I mean,

Andrew Stotz 36:26
and what was the time period from when you executed the trade and when it went down to this 70%

Harley Bassman 36:33
ended up trade in late 2019 As matter of fact, I actually have I wrote about this trade, it's in my library. So about this ticket because I thought was such a good idea. And then you know, stock went from you know, on the 70 ish down to 40 ish. And you know, we've got like we've got the 52 with like, I guess pull the plug at that I've out okay, got that the 41 the stock is now at it went all the way up to 85 so I'm sad stocks now like 45 And do you know what tangible is no 85 tangible went from 70 ish to 85 and last four years, this stock is still down 50 50% was you know a year ago

Andrew Stotz 37:29
and how would you summarize the lessons that you learned from this

Harley Bassman 37:35
when something is trading well below what you think value is you got to look at why why is that what what don't I know someone knows? Um, you Chicago markets are efficient, they're not always efficient. There are markets gap around and you know, the whole stock market rent in COVID and come all the way back up. So you'd COVID That's why I never was. It was a liquidity Musa stocks and bonds and gold all go down that should have happened it should have been one or the other. There you had a you had a a liquidity crisis. Okay, so that makes sense. I was just playing value over there. And I didn't appreciate that it was trading below book for a reason. And the reason I think the reason is that Citibank has never managed to integrate all their business together. And they're making money and this and that, but for some reason, they can't make it work and everyone else has made it work or gotten close to it. You see big America, which was obviously they bought countrywide which and Wells Fargo they took a massive loss on, on their shenanigans. But Goldman Sachs and Morgan Stanley, I mean, I mean, why can't any bank to I don't know if I'll say this one thing is, which is if you want to talk about the biggest loss I ever took, but it wasn't my last opportunity. So Bear Stearns gets into a pickle in 2007. And you know, subprime miss, and Mark were down, they came back up this net, and then things started going down again, in a way and my boys were at the time where I know they can 1214 15 Nice say up and they they've seen bear to kind of go under or spoken about it. I'm not sure why picture care. Pokken can Conville the bankrupt and I said no. They can't go bankrupt. I mean, we at the time, we owned 49% of Black Rock. Okay, forehead to the Black Rock. We don't

Andrew Stotz 39:56
say bears you're talking about now rolling

Harley Bassman 40:00
his own forelimbs of black the hood of Black Rock now, and we are firm so that the reason why is that Merrill gave our entire asset management business to Black Rock together, and we took a minority stake. The tray was supposed to go to Morgan Stanley or someone else, but they want to pick the 1%. Our guys said, we'll get we'll let you go be the majority owner genius trade. We don't 20% of Bloomberg. Okay, but we used to own a lot more than that. We Merrill Lynch was the financial backer of Michael Bloomberg, because Sullivan wouldn't do it. They'd already fired him before. And we owned at the twist of Bloomberg was worth about 10 billion, like eight numbers. And then we had the investment bank, and we had the South Tower, which was the stockbrokers, girls, the biggest in the world of time with unknown 12,000 stockbrokers, right. And then with the investment bank, and I'm thinking he doesn't think could be worth zero, and the company is still worth, you know, 40 50 billion, like, how would you possibly get the investment bank worth negative 50 billion? Turns out if you own 45 billion CDO is that go? You indeed, can be worth negative 40 billion. And so there'll be word we got everyone got bought by bank America, which was very sad. I owned a lot of stock. I showed love options. That's it Merrill Lynch, that were well in the money when 95 Not so much in the money finger. 12. So I won't say it was a loss per se, it was just an opportunity loss. I cashed in my options. Oh, and sold stock over the years. But I mean, you know, I did not sell Merrill Lynch, you know. So all my stock out, you know, you know, seven, I mean, which would have been insane to do. I mean, there had huge draw downs. And in 92, I started 94 had drawdown 98 drawdown. And so I mean, we just kind of goes like that, I mean, I was not margin, it wasn't levered. So I was big margin called. It was, but you know, clearly, we'll talk about dollar loss. That was, I mean, I was a senior managing director for 26 years, I had plenty of stock and options.

Andrew Stotz 42:35
So maybe I'll just summarize a couple of takeaways. The first one is I was a bank analyst in Thailand, from 1993 until 2003, which was the tail end of our 8519 85 to 9095, you know, massive boom. And then by that time, the banks were starting to, you know, collapse under the weight of their loans. And there were a lot of different things going on. But typically, Thai banks just lend money, they don't invest in securities so much in the old days. And so if you look at it, and they didn't buy other companies, you know, so they didn't have any goodwill. So it was all tangible book. And, and there, and the interest rate risk wasn't there, like you can look at US banks. And they're sitting on a huge portfolio of government bonds as an example, or maybe other types of bonds that, you know, there's an interest rate risk if interest rates go up the value of that portfolio falls. And what happened was that people didn't pay back loans. And our non performing loan ratio went to pretty much the highest in the world in the banking crisis, which was 55%. Oh, my God, that's a big number. Yes, huge. And so basically, nearly about 50% of the total GDP of Thailand, in assets of companies went through the bankruptcy process that they create, they created a whole new bankruptcy process and streamlined it and did a lot of stuff because they had to, they had to deal with all of that. So when I look at tangible book, and I look at the balance sheet, and I look at the loans, I always, you know, come from it from a perspective that these could you know, that the value of those assets could fall. Now in America, it's a lot different. There's a lot more legal safeguards for banks, and they've got a lot they're a lot more conservative, maybe, you know, I think a lot has changed over time. So the idea of even having a five or 10 or 15% loss on that is pretty pretty low. But the reason why, in my mind perspective as a bank analyst, the reason why banks never traded real premiums to their book value that are large and sustainable, except in rare cases is because Some of the risk of that loan portfolio or of that bond portfolio, that you have a sliver of equity in a bank, maybe 10% of assets are financed with equity, maybe 15% versus on average, a typical company's about 40%. And so therefore, that sliver of equity is not a problem, unless that loan portfolio or that bond portfolio gets just a little bit of a hit. And then next thing, you know, that equity could be gone. So, for the big takeaway, from my perspective, for listeners out there is a little bit different, you know, what I'm talking about a little bit different from what you're talking about, which is the goodwill, the acquisition of companies and then saying, you know, this goodwill, we should be, we should be gaining from what we've paid for. And the goodwill on the acquiring banks balance sheet is basically saying, I'm willing to pay higher than fair value for this other bank or this other asset, because I think I can make a lot more out of that. By bringing that into my business, either I can make it more efficient, or I can distribute its products through my platform, or whatever that is. And so there's, my main takeaway for everybody is just, you know, be very careful when investing in banks because of that, mainly because of that sliver of equity. How that sliver of equity gets hit, it can, you know, it can be many different ways, anything you would add to that,

Harley Bassman 46:26
I'll give you what I think is the most important thing for the end. When you make an investment, invest enough, so that it will be so there's gonna be a material gain. Again, it's worthwhile, not so much as you'll get taken out. What that means is, sizing is more important than entry level. Don't try and pick tops and bottoms, you're not going to do it, the better you try, I'll probably get it backwards. Forget timing, size, the investment, pick the size, such that you'll make enough. If you're right, you'll make money enough that it's worthwhile. But if you're wrong, you won't get wiped out. And that's most important thing, sizing is more important than entry level.

Andrew Stotz 47:13
Yep. That's great, great advice. so on. So let's think about all the experience you have. And let's go back in time, to that particular Citibank trade. And I was the head of Research at Citi Bank here in Thailand. And so I have a little bit of connection there. But based on what you learned from this story, and what you continue to learn what what action would you recommend our listeners take to avoid suffering the same fate?

Harley Bassman 47:42
I think don't fall into a value trap. It's easy to do. And the value traps are very, very obvious. The other thing is, be careful of single names. Single names are really tricky, because you get this lightning bolt effect. So you think back on 510 years ago, remember when British Petroleum had punched a hole in the ocean and oil came out? If you look at the time, Chevron Shell, BP, total they all had about the same PE about the same dividend about the same everything. Give the five majors all the same? And a BP pistol hold the ground and blew up and the stocks down 40%. Is there any way that you could know which one of those fives or take a lightning bolt? No. And so when you're doing single names, be really careful because away from all your good work, which can make you right, there's always this kind of lottery effect that you can never predict. And even even a solid company like BP, I mean, that was that hurt. That hurt. I saved the Exxon Valdez, you know, a fourth 30 years ago. Where'd that come from? The guy the guy he got some seasonal pilot driving the boat on through there. How's he going? Is he good? No. So yeah, be careful. Careful, single names.

Andrew Stotz 49:14
Yep, that's great advice. I wrote a paper a long time ago called 10. Stocks are enough in Asia, with the idea being that if you want to balance between risk and return, I would say the sweet spot for an individual is 10. Stocks you add, you just build a portfolio of one or two, you're dead. But if you build a portfolio of 20, or 30, you might as well own an instrument such as a mutual fund or an index, type of ETF. Let me ask you, what's a resource either of yours or any other resource that you'd recommend for our listeners?

Harley Bassman 49:48
Oh, boy, um, you know, I just really do single name stuff. I tend to be a macro thinker. So I kind of look at the big numbers. I really try to use common sense and figure out, you know, what am I missing? Why am I buying this, and CMS has not figured out for me, unless I'm just buying into the generic, you know, rate or a buying as that as a long term Bible, I tend to have like a five year horizon, I just don't think I'm smart enough to go and do anything right over the course of a year. for a really long time, I guess. I have to after MIT that I just did not go and outsmart somebody in general on these things.

Andrew Stotz 50:33
And I'll mention the Maven mantra. You're sure. For those of you who are meeting me for the first time, Let me recite my mantra. Number one, it's always about character. Number two, it's never different this time. And number three, you're born, you are born, you live, and then you die. Prioritize your life. So I think that's a great resource right there. Check it out at convexity. maven.com. I'll have a link to that in the show notes. Last question. What's your number one goal for the next 12 months? is what got you off the sofa? That's what I want to know out of retirement.

Harley Bassman 51:15
I mean, financially, we're issuing a brand new ETF be next month, but away from that. You know, I have four kids, and they're gonna be healthy. I have my first grandchild came three months ago. You know, focus, focus and things like that. Don't get buried in the office. You got to work hard, and I assure you, I worked very long hours. But as you're born, you live you die, and you're dead much longer than you think. So take your day. Take your vacation. Go with your family. Enjoy your kids. Everybody is replaceable. Okay, graveyards are full of irreplaceable people.

Andrew Stotz 51:58
Yes, take a walk in a graveyard and it can really push that home. You know that message home. Someone once said to me, the Grim Reaper is undefeated. Alright 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 Harley, 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?

Harley Bassman 52:32
We're good, man. Just be careful, be safe.

Andrew Stotz 52:34
And that's a wrap on another great story to 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.