Zach Abraham of Bulwark Capital on portfolio risk and diversification

0:01i'm ashton addison from event chain for investmentpitch media and fintech news network and today on blockchain interviews we have zach abraham the chief investment officer at bulwark capital management and the host of know your risk radio zack welcome to the show and thanks for taking the time to be here oh you bet thanks for having me you're welcome i'd love to kick off our

0:20interview with just a little bit of your background in finance and your recent focuses at bulwark before we dive in yeah so uh came to came to the business honestly my father and grandfather started a brokerage firm back in 1983 he was specialized in uh ipos and and uh private placements of small and microcap natural resource type stocks especially precious metals

0:46and never really considered doing anything else studied finance and economics in college along with playing football i think at the time i was a little more focused on football than i was financing economics but yeah that's obviously changed and then took a job with a uh mutual fund company right out of college and then went through the brokerage channels and

1:05ended up starting our own shop about five years ago and we currently manage about 130 140 million of retail money and um yeah so that's that's kind of the road to where how we got here and what we're doing on a daily basis very cool and i know that you are the host of know your risk radio and i wanted to touch a little bit on on risk there's a lot of different types of risk

1:27when you are managing a portfolio and including as we near this presidential election 2020 political risk as well how do you approach political risk in the markets when there are upcoming elections man that's a great question um something we've talked a lot about recently i i think political risk is really interesting in the past it's never really bothered me because

1:52a lot of political risk tends to boil down to binary outcomes right this person's elected or they're not and binary outcomes are pretty easy to hedge so right right it's not very tough this one is decidedly different because it's not so much what happens on november 3rd it's the fallout of what happens after that right that part of it to me is really

2:15hard to edge um right now we've got a good amount of cash built up in the portfolios um we have some you know we're staying fairly diversified trying to play it you know as we see things changing on the ground um but yeah normally like i said i think it's a great question normally it doesn't bother us yeah i think there's a lot of hand-wringing about it um

2:35again binary situations are easy to hedge this one is a wholly you know especially the other thing you have to look at is market valuations right if you have a disturbance in the market how big of a drop could it result in well when you're in the most expensive markets in u.s history a lot right so the the rest the risk is potentially really big to the downside

2:54i just think you have to stay on your toes and stay nimble at this point and um you know play it like you see it i don't know that there is a the other interesting one is that you're going into a situation like this that has so many outcomes and so many possibilities um and you're doing an environment where the vix is at 30 32 right with volatility already that's so

3:13high that takes another hedging you know typical thing that we would use for edging off the table so it's just a very unique bizarre situation we're just trying to stay diversified and liquid at this point definitely yeah it's a great answer and it is such an interesting situation in part because of the pandemic and the stimulus and increased debt in the markets and it seems that right

3:33now the economy isn't really equating to the market and normally you know in an upcoming election it would there would probably be more of a convergence and it would be more similar so there are a lot of little extra risks and you know with the fed mentioning that they're going to keep interest rates low it used to be for a few years and now it seems like many

3:51years and who really knows what that's going to happen but consumers are looking for higher yields and a lot of capital has been flowing into the equities market however you're mentioning that you're also holding a you know strong cash position as well how has this market growing over this year and the stimulus affected how your you've been rebalancing your portfolio

4:13and your investment firm's portfolio yeah another great question um i you know when we got through the financial crisis i knew that we would deal with other issues i ran a portfolio during the financial crisis as well but i remember thinking specifically that we would see different challenges um but we've probably never seen markets that crazy you know and then 2020 came knocking um

4:36so i i again i'll say the downturn to us in march and february was easy much easier to navigate than the bounce back has been um you know the fact that you'd see both multiple expansion and and real price you know new all-time highs in a year where you know gdp is going to decline by 78 that we've never seen like it um at all so one of the things that we did was a

5:05at the beginning of the year at one point you know we were 25 up on the s p so we were down like five i think the s p was down 34 or 35 something like that um so felt like we were sitting pretty good at that point um wish we'd have bought more at the bottom um but it's been tough because because you know and your question alludes this so i know i'm not breaking any news here

5:27but um you know what the action and the response you've seen in equity markets or in asset markets in general has been completely disconnected from the underlying fundamentals um and yet i almost feel like government intervention and central bank intervention and stimulus and all these things i feel like they're sort of becoming fundamentals i feel like they're going

5:47to be here a lot longer than most of us think and so it really is a balancing act it's it's you know especially this year has been integrating enough things that we really believe in and then also integrating some things into it that we think are more dangerous but just to you know keep up with markets and performance you know we've added some of those things sparingly

6:09um but just to make sure that you know we don't end up with a year where the market's up you know 30 or something like that our clients are sitting on a four percent gain obviously that's not doing the job but it's been tough um you know it's not j and it's not just the separation from asset prices to the underlying economy it's also the separation of the asset

6:28prices from the underlying performance of the company right you know we could sit here all day long and talk about different companies whose stocks have gone parabolic and the underlying right the underlying fundamentals driving that company are nowhere near what the stock would suggest um yet that's what's working and we work in a competitive environment so it's

6:46been it's been tough basically just really focusing on risk management focusing on how much exposure we have at any given time and taking advantage of opportunities when we see them that's kind of been it definitely and it's really interesting to see it from the perspective of an investment management firm when you're managing other people's money and the market all of a sudden isn't

7:06really based on pure fundamentals as it was you know a few years back where you're you know it seems that the valuations are a bit inflated and there's bankrupt companies you know like hurts or airlines companies that are going up and you and it may be more of a shorter term than a longer term and you're trying to manage you know investments do you go with the trend and go with the

7:28flow and jump into things that don't necessarily have as much fundamental value as as they did when you were about evaluating it a few years ago just because that that's the way that the market changes or do you do you sit back and keep to your strategy uh well if you could tell by the look on my face while you're asking a question i was grimacing um that's been something really tough

7:50for us to adjust to because we traditionally are value managers um so looking for underpriced securities attractive prices things like that we're still engaging in that i i think the best way to describe that is that what we've done is broadened our horizon of what value means um so still trying to hold true to the ethos and the principles that drove

8:11that that that principle um but just broadening our horizons because it is it and you know i think even saying that valuations are stretched i think is you know like reverse hyperbole because you know again i think if you adjust the way we look at it so if you adjust for earnings through the end of 2020 you know i think that realistically if markets end up anywhere in this

8:36neighborhood you're looking at a p e ratio market wide of probably somewhere between 38 to 40. um in a year where you're going to see a 78 hit to gdp um corporate balance sheets at record debt levels and climbing it'll be the first recession in the history of the united states where corporate debt levels actually rose you know so you're looking at for

8:55instance a value stock i hear the airlines get thrown around as value stocks you're looking at several of these airline companies that are trading at greater enterprise values today because of the debt they've taken on their balance sheet then they were trading at enterprise value prior to covid so you know if you want to call that a value play i guess you can

9:14but it's not um and you know that's where we see it the other area where you look at value places in the energy space there's a lot of value plays there right um i don't know that i've ever seen so much negative uh sentiments surrounding a sector as i do energy which makes it to me look really attractive in the long run but you know you know this as well as i

9:37do investing is a long run game that you get judged on frequently and uh in the short run right so you know we don't want to do the right thing you know it's we run a business here at the end of the day so we don't want to do the right thing over the next 20 years and lose all of our clients over the next three so it really is balancing that it's also

9:55looking at saying okay if we're going to go a little further out on the risk curve here than they otherwise normally would making sure again where the risk management aspects come in and go okay we got to be we got to be accounting for that somewhere else in the portfolio definitely and it i'm sure it's tough when you're managing you know you have to have that long-term

10:12perspective and then something comes along like today in the stock market where you know it's the biggest drop in the market since the beginning of september in the last two months and retail investors they they play on that emotion of the fear and they're like oh no it's down and then the next day it's it's back up and they're happy but you know it

10:30they're calling you saying why is it down and you're you have to keep that five to ten year strategy in place and just trust that that that's the strategy that you're going to implement not change just because what happens on one day right and yeah yeah so i think i think one of the toughest things about this environment is that yes things have gotten crazy in the last

10:49two years but as far as you know the other thing i don't think people are thinking about is if you look at the last 10 years dating back to the financial crisis you're looking at the slowest growing decade in the history of the united states on real terms including the great depression yet at the same time you've had asset prices across you know nasdaq's up what 580

11:08over that same period of time s p's up 350 360. right so it there there's been a disconnect for a while in terms of the underlying economic activity i just think that you've seen it blow open and sort of what we've experienced over the last decade is now just happening on steroids right um and it and it and it's gotten very difficult um i think a perfect

11:32analogy of this is in the first week of the coronavirus stuff that started happening we bought zoom technologies which has become a darling this year we bought it for 103. um we turned around two weeks later and sold it for 118 because it was just too expensive you know i i was like okay good trade we'll pocket it you know what does zoom close say a 540 or something like that

11:53you know we did a lot of work on it we thought it was a good company we thought it was going to succeed but the reason we dumped it was because even we were taking into consideration the success that it would experience because of covid we couldn't get the numbers within 50 percent of where the stock's currently trading on a fundamental basis yeah and yet

12:11obviously it doesn't matter right i wish i'd held it you know so i think that's a perfect microcosm and it's not us crying about spilled milk it just says that if you're a traditional investor you know why does warren buffet have 125 billion billion sitting on his balance sheet he does it because there's nothing else out there to buy i mean you know at valuations that make any

12:29sense so then you say all of that in the context of zero percent interest rates like you said you brought up and i don't think enough people have talked about this the fact that the federal reserve is talking about a v-shaped recovery while simultaneously forecasting interest rates is 0-20-23 right talk about talking out of both sides of your mouth yeah right

12:50it just doesn't make a lot of sense that's just kind of where we're at yeah it seems seems like it and a part of that is just managing risk and preserving wealth and preserving capital right and i want to ask your opinion on you mentioned diversification and hedging your risk and a lot of investors have been considering looking at hedged assets like like gold

13:08and silver and bitcoin as well as hedges to the capital markets you know what's your perspective on those assets as a hedge and as a diversification right now so i will i will again to avoid talking out of both sides of my mouth i'll put my bias straight up there we currently own no crypto assets or anything like a bitcoin or any quote unquote alternative assets that would

13:32fit that space in our client accounts that is purely a product of not having those types of investments available to us we have advocated for all of our clients told somewhere between one and a half to two percent of their assets in blockchain bitcoin something of that nature i prefer bitcoin it's the one that i know the best um and i think that again when you look at

13:54and and i was a um i was a very early uh bitcoin caught my attention very early on as a matter of fact i remember the day i was sitting in my office and was it i think it was 09 when it launched i remember when they first bought the first pizza with bitcoin um and i remember being fascinated about it at that point because i saw what we were doing with qe

14:15with the stimulus coming out of oh 809 and i was one of those guys at that point that thought you would be looking at hyperinflation or not hyperinflation dramatic inflation as a result of qe and things of that nature obviously that didn't play out um but we are very paying a lot of attention to that and once you dig deeper into those blockchain spaces and

14:34you really understand the way they work i think one of the biggest misconceptions that people have is that quote unquote bitcoin bulls or blockchain bulls are saying that they know a certainty where a certain investment is going and the vast majority of professional money managers that i know their bitcoin advocates they're not in it because they know

14:53exactly where it's going they're in it because they've come to the same realization that i have which is a the monetary system as we know it has been flipped on it's here and b when you understand bitcoin and bought those blockchain chain assets especially bitcoin in particular there is no ceiling on its price right like you and i were talking about

15:14it could easily go to 500 000 per bitcoin and people are sitting there going well that's ridiculous and i look at them and i go on what basis right you've got you've got tech companies like zoom technologies trading at 90 times revenue right um i i think that bitcoins technology that it offers will have far greater impact on the world than zoom technologies yet nobody's worried

15:34about paying 90 times revenue to buy zoom and they're sitting on oh bitcoin can't work um the other thing that's attracted me to bitcoin i don't know are you familiar with mike krieger liberty blitz.com okay so he's a buddy of mine too um and mike really made this point come clear to me which was that at a certain point the populist in general is going to

15:56recognize the shell game that's being played by central banks right and and we can get into the motivations behind central banks i think the vast majority of these central bankers are acting out of good faith like i think they're doing what they think is actually the best thing to do um i don't think that they're running around trying to you know jack everybody up or screw everybody up

16:17um at the same time the long-term ramifications are what they are i mean you're going to go to you know currency devaluation as a principle as a a way that they run monetary policy just keep deep you know depreciating the currency um and then when you look at blockchain through those eyes and you realize that it's a it's an escape hatch it's a it's a rescue pod if you will out

16:39of the current monetary system to be able to own a truly deflationary asset um and you know you and i were talking about this the the reason we advocated a one and a half to two percent position for our clients is if we're wrong and it ends up not taking root and i still think along with the conversation i've had with mike krieger about it i still i still contend that i think the biggest

17:00risk to something like bitcoin or blockchain in general are the central banks themselves they've had a great gig right they get to create money out of thin air and they got no competition um but i when you look at that and you look at i i guess i what i'm trying to say is that i think projecting bitcoin out to 500 000 per unit is far less crazy than thinking that you're

17:23going to keep being able to run these kind of deficits and not see massive currency devaluation um i think bitcoin going through the roof if it doesn't if it doesn't then maybe our clients lose 50 to 60 percent of their money which is a 1.25 hit to the overall portfolio s p was down 2.3 today right if we're right or or if bitcoin does what we think it's possible of doing and

17:48it goes up by 20x then that two percent of your portfolio just made you the equivalent of 40. right so my downside is one and a quarter my upside is 40. the convexity of that trade is just too much to pass up on i just i think that people that are anti-bitcoin my answer to them is great be anti-bitcoin but for god's sakes buy yourself a one half to two

18:08percent portfolio position right yeah it just makes sense yeah i think it's great advice and i like what you said about the price point you know it's hard to predict everyone has a different number but it's clear that public companies in america are starting to put bitcoin on their balance sheet and they're saying that it's because it's a better you know it's a hedge

18:27against the dollar and they believe that it will devalue less than the dollar you know relatively to preserve the wealth of that public company and we're seeing uh multiple companies starting to do that as well now paypal introducing bitcoin into the platform and you know their 344 million customers if they each wanted to buy 0.1 bitcoin they wouldn't even be able to because

18:48there isn't that much so it's interesting um and we're running out of time zach but um i love if you could give any last comments on on bitcoin and blockchain and just risk and diversification um for people that are uh heading into the market through the end of this year and beyond to preserve their wealth yeah i think that i think that um especially for the average retail

19:12investor i think that something that hasn't gotten paid a lot of attention to is the bond portion of their portfolio so when you get bonds paying what they're paying right now right there's two reasons traditionally why we own bonds it's for the income stream the predictable income stream and the the fact that it is a non-core or or a negatively correlated asset

19:33traditionally to stocks right well the income stream aspect has been blown up because of interest rates where they're happy um and then the correlation the correlation myth as we refer to it has been blown up this year so that bonds got hit basically just as bad as equities did they're darn near close so when you're looking at your bond portfolio for the average retail

19:52investor that owns let's say 40 percent of their assets in the bond portfolio to to use that bond portfolio that really can't do much for them regardless of what happens economically right the most dramatic thing that can happen to that bond portfolio is a significant loss to take a portion of that bond portfolio and to allocate to precious metals or to bitcoin i think makes all the

20:14sense in the world because it's never been cheaper right so you're gonna miss out on that two percent yield you were making on your bond portfolio to to get the possibility of a 20 x win in bitcoin or uh a three or five x winning gold or it just it just makes sense and i think people really if they don't take those actions i think they're gonna really regret it

20:35um and i think it will endanger their financial security in the future and again take take some of those assets diversify them away from stocks and bonds buy some precious metals buy some bitcoin and just have a more diversified portfolio i just think it's i just think it's a it's a can't lose definitely well great advice zack i really appreciate appreciate you coming

20:57on to take take the time uh for this discussion and i think it's a really important time to do so and i will leave the links to your twitter bulwark capital in the description box below for the viewers and thank you so much for the time and let's follow up in the near future hey sounds good anytime thanks for having me on you