Eddy Elfenbein (03:01):
I remember one of the bloggers was invited on… No, it was me. I was invited with some others and we were on CNBC, and they didn’t understand what blogging was. And I was on to talk about the markets and talking about the federal reserve and the interview, the woman treated us like we were kids at the card table. She was like, “Now, what do your bloggers say?” She thought the participants were bloggers. So, she didn’t even understand what we were doing, and we wanted to have these serious discussions about the markets, so it was very odd at the time, but that was a fun time when everything got started.

Trey Lockerbie (03:40):
Yeah. Something about blogging seems to lack a sense of authority because assuming there was such a low barrier to entry. But then you have some of the smartest people in the world putting out blogs. It’s hard to sift through it.

Eddy Elfenbein (03:50):
Exactly.

Trey Lockerbie (03:50):
But the cream rises to the top, so to speak, which I think has happened in your case. Well, that was about 17 years ago and you’ve now turned this into a fund. The fund is really interesting to me and I noticed that you tweeted recently this quote by Peter Lynch that goes, “The real key to making money in stocks is not to get scared out of them.” One way to not get scared out of them is to simply not sell the positions except to rebalance maybe once a year, which the strategy you’ve developed for this ETF that you’ve launched and also the strategy for the fund, if I’m not mistaken.

Eddy Elfenbein (04:26):
That’s exactly right. So, we started with the buy list on the blog. We started a yearly buy list. It started out as 20 stocks. It now been expanded to 25, but we said, “Here are 20 stocks and they’re locked and sealed, and we can’t touch them for a full year.” This list is set. We make absolutely zero changes, and we wanted to try to say to people, “Look, we’ll tie one arm behind our back, and we can do better than the market.” Just as well, if not better than the market. And people think, “Oh, you’re crazy. You have to be able to trade and get in.” No, not at all. As long as you have high quality stocks and you don’t get scared out of them. And the long term time is on your side, if you own these very high quality companies.

Eddy Elfenbein (05:13):
So that was the idea of the buy list that every year we would only change five stocks. At the end of the year five would come in, five would go out. So, at the time there was 25% turnover. Now it’s just 20% turnover. And so many people loved the idea of the buy list and they always would ask, “Do you manage money? Is there a product for this?” And for so many years we said, “No, there isn’t one.” And so then 2016, I was able to connect with a wonderful partner at AdvisorShares. They really have been a terrific group. Noah Hamman who runs that, and we said, “Let’s try to take the buy list.” For legal reasons, we have to say it’s based off the buy list. We can’t say it is the buy list. When you run a fund, you have to have some amount of cash just to keep it operational. But we said in the prospectus, it’s going to track this.

Eddy Elfenbein (06:10):
We had a track record of the buy list, which has been pretty good over the years. And so, I went from blogging about managing money to actually managing money. My father who’s now 87. He said to me, “It’s a good thing you didn’t blog about MMA.” But now I went from blogging about something to actually being a practitioner. So, it is a fascinating job. And then you learn that things are quite different in the real world when you compared the fund and they go through all the fees, the listing fees. It goes on the New York… It’s the NYSE Arca. For older listeners, you may remember the Archipelago. That’s what that is. Then there’s prospectus fees, and there’s custodial fees, and all these fees. And it’s like a cartoon with my eyes, the dollar signs, so many fees going into it.

Eddy Elfenbein (07:07):
And when people talk about, “Oh, the fees in funds are so high.” Well, when you’re at the other end and you realize all that goes in into running that you’re a little more sympathetic. So I had some lessons as far as that, but it’s a great experience. And just taking that theoretical construct with the buy list and turning it into a real product. And with just recently, we got to new all time highs for the traded shares, for the net asset value, also for the total assets under management. So, we’re in our sixth year now and it’s growing and thriving.

Trey Lockerbie (07:42):
Yeah. Speaking of the theoreticals concept behind it, I’m curious about the inspiration behind the buy list originally. Why the 20 stocks? why not 40 stocks? Where did the numbers come from? What was the inspiration behind it?

Eddy Elfenbein (07:55):
I think Lewis Rukeyser had a contest on his show, or his guests on that show they did something like that. I remember a guy, I worked with John Dessauer. He did something like that. So, I borrowed it from that. And the reason we got to 20 is I feel that’s just a good… It’s well diversified. You can get into a bunch of fields. And I also feel that that’s a good for the number of companies that I’m familiar with. Once you get beyond that… There’s some funds that have dozens and hundreds, and I can’t keep track of that many. But 20 to 25 I find that’s sort of a doable, I can understand. It’s a knowable list and well diversified.

Trey Lockerbie (08:41):
Interesting. One other question that comes to mind with the rebalancing once a year is how you sticked with that. I mean, I’m guessing you wrote it into the code, so to speak, so that you couldn’t override it with your human biases. But I imagine that that’s very difficult to maintain that conviction. Especially if you see a position in there going against you and you got 11 more months to go or whatever it might be.

Eddy Elfenbein (09:04):
You’re exactly right. I mean, look, I’m a human being, and when you see something just getting clobbered and you feel like, no, no, I just want to jump in and pull it out. And I tell you, I bet if I had my opportunity to do that, I’m almost positive that would’ve been a net loser for me because at the same time like, oh, it’s gone up so much. How much further can it go? Well, it can keep going further. I’d give you some examples. We added Zoetis last year. It started and it completely flopped out of the gate. I think it was down by about 12% around March. It turned up. It was a 40 odd percent winner for the year. Another good one is Middleby, which we just recently sold. They make a lot of the industrial baking kitchenware for restaurants and hotels.

Eddy Elfenbein (09:56):
And they got absolutely clobbered for obvious reasons when COVID first came out. All those restaurants shutting down and the stock fell from around 120 to 40 within, I mean, days. It was probably a couple weeks, but maybe three weeks, and it hit bottom and it took off, and we sold it around 200. There’s no way I would’ve predicted that. No way. Now, I knew the fact is that I liked Middleby. I thought it was a good stock, and I thought it would work well for the long term. If I would’ve picked that bottom and gotten back in? Absolutely no way. So, the urge is strong, but what I like about my strategy and the rules is it forces this discipline upon me. It says, I have to do this. And getting back to what Peter Lynch said, another quote from Lynch is that he said that, “More money has been lost preparing for recessions than the recessions themselves.” I don’t know if that’s literally true, but there’s a lot of truth behind that.

Trey Lockerbie (11:01):
That really raises the question around how do you know when to sell? When it does come time to do that and say something’s been performing well for a very long time. I understand there’s some opportunity costs at play, but walk us through the metrics you look at or what ways into that decision to finally place a different position.

Eddy Elfenbein (11:20):
It’s a hard thing to do because it’s selling your darlings. And again, I like it because it forces you not to fall in love with companies. You say, “It’s the end of the year. We got to rebalance and we got to prune the list and add new names.” So, a good example why we sell stock is they’re being bought out. And that happened to us this year with Cerner. Oracle came along and offered a lot of money to buy Cerner all in cash. Oracle’s a very, very big company. I believe this would be their largest purchase ever. So, with Cerner, which actually had been sluggish for us, boom, it takes off, a huge gain in one day on the news. And so, at some point that will become part of Oracle. I would imagine that Cerner shareholders will get Oracle shares. So, once that happened, we just took it off the list. That decision was made for us.

Eddy Elfenbein (12:13):
Another reason is sometimes we come off across the valuation. ANSYS, which is a wonderful company. I really like this. They make a lot of the 3D computer modeling for engineer. So, if you ever see something on a computer screen that’s twisting and turning all different ways. There’s a good shot that comes from ANSYS. It really lowers the cost for engineering projects, wonderful company. And it took off for us in 2020. Then in 2021, it ran into a brick wall and just didn’t perform as well. And I thought something like 50 times future earnings. I love the company, but that it’s just too much. So, I decided to take that one off the table. And again, like Middleby, which I just mentioned. That had such a big run up. It really comes down to, it’s not the thesis that we thought. We were buying it for X, Y, and Z, and the company is now A, B and C.

Eddy Elfenbein (13:12):
Another very frustrating one is where I thought we were right was Disney. We added Disney and they had absolutely blowout earnings this past year. One, I think for the Q4 of 2020, they were expecting to post a big loss, and they posted a gain. It was like Wall Street was expecting a 40% loss and they had a 30 cent gain, sorry. And really didn’t budge at all, and it was very frustrating because I thought we were right on that. We were right on streaming business and just got nothing from Disney. And there, I thought if there’s a stock, I need to sell, it’s time to prune Disney. So, sometimes I hope to revisit these as we have with Rifco, that’s back on the list, and we’ve done it with others. But the main thing is if it’s no longer the stock you originally bought.

Trey Lockerbie (14:11):
Well, let’s talk about the buy list for 2022 that you just recently published. It’s like the horse race has started all over again and the bell just went off. Walk us through the qualifiers to make the list in the first place because when you mentioned valuation there just now I went through the list. I was doing some back of the envelope math quickly to get a rough feel for valuation. In my opinion, for the majority of the stocks, and this very subjective, but I was coming up with pretty conservative estimates for yield, I guess. If we’re talking discount rates and expected return. So, it seems like these aren’t your high flying tech stocks in the list, and that brings up a lot of questions. So, walk us through what it takes to qualify to be on the list.

Eddy Elfenbein (14:53):
The first is one important point is since we have 25 stocks and we turn over five each year, that means the average holding period is going to be five years. And when you sit down and you say, “Okay, is this a stock I am comfortable with owning for the next five years on average?” As if I can’t touch it for five years. That’s not literally true, but it is conceptually that will be the average. Is it something I’m very willing to do that. With a company like Hershey, I have a pretty good idea with what that company’s going to look like in five years. With Tesla, I’m not so sure about that. So, that’s an important fact. I like to look for as they come back to always say companies with a strong market niche. A company that if not, is a literal monopoly has very much a monopolistic like control in their industry.

Eddy Elfenbein (15:51):
It doesn’t have to be exactly likely, but has some similarities that there’s few companies that you can go to, to get this service done. I like companies that have strong, consistent operating histories. I like to see consistently rising earnings and revenue and dividends. Not always, but that’s a good sign. I don’t pay that much attention to industry. For example, I don’t have any energy stocks and that’s not a prediction about the energy market or oil prices or any geopolitical. I just don’t see anything that looks like a really good value at the moment. So it’s a bottoms up approach, but I would, I don’t like the phrase moat, but that is a good way describing companies that have a strong market position.

Trey Lockerbie (16:38):
Why don’t you like the phrase moat? I’m curious.

Eddy Elfenbein (16:41):
I don’t know. I just figure, something about it sounds a little corny, but maybe it is fine. I guess that best describes it. The list of 25.

Trey Lockerbie (16:51):
Very interesting. So, earlier you were mentioning about this allows you to not fall in love with a certain stock. And as you were saying that the stock that came to my mind was Moody’s, which is a duopoly. It fits that description, it’s in the portfolio, it’s in the buy list, and it is one of the most widely held stocks for a lot of the billionaires that we follow, and Buffet comes to mind, he’s held it forever and others. And there’s a lot of appeal to it, I think for that reason. But investors just seem to love this stock. That’s what came to mind. And why do you think that is exactly.

Eddy Elfenbein (17:25):
One reason is it’s treated us so well. If you want to be involved in that field, you basically have to deal with them. There’s nobody else you can go to. I think that that’s really what it comes down to.

Trey Lockerbie (17:37):
So, on that note it made the list again for this year and until further notice if we seek some kind of disruption to that business, I feel like, is it just going to continue to make the list no matter? I mean, there’s obviously a price too high at some point

Eddy Elfenbein (17:51):
I would think so. Maybe if they do an unwise acquisition or something, then I might… Again, it’s not the company I originally bought, so that could happen. And there’s often a lot of talk about a player coming in, upsetting the current market segment. I don’t see… There’s a lot of talk about that. I haven’t seen that just yet. The company just delivers. I mean, year in, year out, it really does. It’s one of these steady ball players that’s always there. It was like Tom Brady going on 40 years and just delivering solid results. It’s a wonderful company.

Trey Lockerbie (18:32):
So given that you’re selling off five stocks a year, there’s 20% turnover, is that mandatory? Do you have to trade out five stocks? Is that part of the regimen?

Eddy Elfenbein (18:43):
I don’t. I’ve always done it. And there’s nothing that says in the prospectus that I don’t. So even my business partner has said what if you seel two or three, but then I think I always want other ones I want to add. And so, it always gets to five when I work towards in the closing months of the year deciding what I want. Technically, I could do that. I haven’t done it yet, and we do the rebalancing. Yeah, that always happens regardless.

Trey Lockerbie (19:10):
So something I’m just endlessly fascinated about is how people distill down from the huge universe of stocks down to say something like 20 and maybe distillation isn’t the right word. But that to me is how I’ve been doing it, filtering it through screeners or what have you. Do you take a quantitative approach to get lists or the universe down to a certain size that’s manageable?

Eddy Elfenbein (19:33):
What I do is I have a broader, what I call my watch list. And that’s usually I aim for about 100 names. So that’s names that I don’t know. As I was saying, I can know 25 stocks. 100 stocks, bullet points about it. I can know something. And that’s sort of AAA for that you, that’s where the pool of talent comes for the buy is a company making it into there. And so, I’m constantly adding and deleting to that. And it’s not so much quantitative. I like to look behind the numbers. I think that’s an issue for many investors. So, looking for a company with a strong market position will manifest good numbers. So if you screen for whatever, ROE or whatever kind of numbers, it will come up, but I try to look behind those numbers. You want to look at numbers, but don’t be a slave to that, and that’s very important.

Eddy Elfenbein (20:34):
I talked about this recently with a stock I like called AmerisourceBergen, which is a drug wholesaler, and it’s very, very consistent operating history, nice earnings line, just going right up. The stock hasn’t moved that much, and by conventional metrics it’s a bargain. It’s less than 15 times earnings and just getting this beautiful earnings line going up. Well, the problem is it has… It’s open to the opioid crisis and litigation from that. So that’s weighing on the stocks and that can give you without looking behind it a false sense that this is a value stock. So screening is fine, but it has to be… You have to know more about the company as well.

Trey Lockerbie (21:23):
You mentioned value, is that the school of thought you come from when you started investing, were you following the Ben Graham approach and following the likes of that kind of philosophy?

Eddy Elfenbein (21:33):
I would not call myself a strict value investor. I have a lot of companies which are very much on the growth side of things. So I would not… I applaud the tenets of value investing, but I’m not looking by say a B- stock for a D- price because then you’re just stuck with a B- company. I’d rather get the A+ stock for the best price I can get. That’s more important. So, I think a value investor is less concerned about the quality of the company, where I’m much more concerned about that. So a company like Thermo Fisher Scientific, that’s a growth stock. That’s a tech stock. Just because I used to have Microsoft, but I don’t have Google or Facebook, but that’s up there as well. But again, it’s got the qualities I like.

Trey Lockerbie (22:27):
I noticed a number of positions in the buy list offer dividends. Is that something that you factor into the equation at all when you’re considering a stock?

Eddy Elfenbein (22:36):
I can. Again, I’ll look at it, but there are companies that don’t pay dividends, but more than that I would like to see the consistent increase in earnings. So, Stepan, I think just had their 54th consecutive dividend increase and Abbot Labs had their 50th, 50 straight years of increasing dividends. I think FactSet is up to 17 years, maybe more than that. It’s more like a lot of the companies I look for have those consistent increases. So they have the market position that can manifest those cash flows to supporting those rising dividends.

Trey Lockerbie (23:19):
A couple more questions around the actual portfolio itself. So, in reading some of the comments on the stock positions that you’ve posted, I noticed this interesting fact about Aflac and that was that 70% of their revenue comes from Japan and given I’m in the US and I’m familiar with how much they market here in the US, I just found that surprising and made it into your short anecdote or bullet point. I’m just curious what your thought or why that is.

Eddy Elfenbein (23:48):
It’s a fascinating company. So, it’s originally the American Family Life Assurance Company. It’s based in Georgia. It’s basically a family run company, all the top executives. Oh, with the Amos family. So, I think it was three brothers who started it. So, now it’s all these nephews and cousins that own the company. I’ve been really impressed by them over the years to one company. They’ve been one company they’ve been on my buy list since the beginning. And what they did was one of the brothers I think visited Japan at their world’s fair at Osaka, and he saw all the people walking with masks on. That was a big deal back then and realized this is a risk of averse country. And at the time they… I’m not sure the terms of that, but they were sort of legalistic monopolies that the Japanese economy was at and Aflac was allowed to have that. They were benighted to have this important position within the Japanese economy.

Eddy Elfenbein (24:50):
And so, that enabled them to grow very quickly. Now, they have a big business in the US as well, and everybody knows them about their advertising. They had an interesting crossroads where they went to an advertiser and they said, “We’ve had great business results, but nobody has ever heard of us, the American Family Life Assurance Company.” So, they said, “I have a crazy idea. When you’ll say the name of the company, it sounds almost like a duck talking.” And they said, “Let’s run an ad involving a duck.” And they ran it on the Fiesta Ball on January 1st, I think maybe about 20 years ago. And the ad took off, and they went from something like 20% name recognition to 97% name recognition. And even Mrs. Trump was even in an Aflac ad. So, now everybody knows the duck stock and that just came from their advertising.

Eddy Elfenbein (25:48):
But I’ll give you one example when there was the awful earthquake in Japan, a number of years ago. I remember when Dan Amos, the CEO, everybody’s worried about what’s going to happen in the payouts of this. And I remember he said, “Look, this is what we’re planning for. We go to work on Monday morning at 9:00 AM. This is exactly what we plan for. So we got this, it’s not a big deal. We can take care of that. And it really impressed me the leadership of the company. They ran into some difficulty just being in a low interest rate world. So they made some changes about how they run their portfolios, but they’ve even noticed recently, I think the stock just hit a new all time high today. It’s over 61, maybe $62 per share. So, they’re one of these, it’s sort of like a blue blazer. It never goes out of style. It’s always has a place in a gentleman’s wardrobe.

Trey Lockerbie (26:47):
There’s a few other names that stood out to me in the list, just when I was doing those rough valuation calculations, they just popped out as potentially opportunistic, and I was curious to get your thoughts on a few of them. Just high level, what the appeal is for you. The first one was Silgan Holdings. I think if I’m saying that correctly. I hadn’t heard of this stock before. It’s coming up on our platform with some interesting numbers. Kind of curious to know a little bit more about it.

Eddy Elfenbein (27:16):
Containers is what they do. Everything you see is got to be shipped and they do everything with metal containers. They have a very, very strong market position. Boring stock, completely uninteresting, and very profitable. And I always find it interesting that there’s so much commentary you can find about other stocks and really nobody talks about this one very much at all, but wonderfully run company, and just consistently churns out very impressive earnings. I don’t think Wall Street bets may talk about it very much. Maybe they do, but it doesn’t come up a lot. I like boring company, makes something everybody needs. Very much a Peter Lynch kind of company.

Trey Lockerbie (28:00):
This next company might fit that description as well. I’m not sure, but Science Applications International Corp, SAIC, talk to us a little bit about this one.

Eddy Elfenbein (28:10):
They’re brand new to the portfolio. Cool company based not too far from me in Reston and probably the best way to describe them is they’re the Pentagon’s IT help desk. They’re tech support for the entire Pentagon. They also have civilian and things like aerospace and the intelligence community they work with as well. Very strong connection. I mean, they’re sort of just an outsourcing. They’re the Pentagon dressed in a corporate clothing. They do so much work things like getting all of the intelligence, and IT structure behind a new Navy defense systems that will all go through SAIC, and it’ll be several different companies working on the armament system, and SAIC brings it all together.

Eddy Elfenbein (29:03):
The company was started by interesting guy who was a much a pioneer in the employee ownership company. And so, they had a huge amount of the company was owned by the employees. And many people made a huge amount of money that changed a lot once they had their IPO, but again, it’s one of those companies that isn’t talked about a lot, but be very impressive. If you want something done, you can go to SAIC or pretty much nobody else. So, if you have a big defense system, you want to get the IT architecture behind it. They’re the ones you got to go to, or they’re first on your list.

Trey Lockerbie (29:44):
Now, this next one, I’m very curious about. Reynold’s Consumer Products, REYN. And I’m curious about it mainly because it seems like the free cash flow really took a dive through COVID and it sounds like this is added to your portfolio. Is there a turn round of events that you expect for this company. Where is the bullishness coming from here?

Eddy Elfenbein (30:05):
It’s Reynolds Wrap. It’s hefty bags. It’s not literally the solo cuts, but it’s the parts. I mean, they’re in 95% of us households. They just make stuff that make behind running a house. What I really like is they’re the exclusive private label distributor for Amazon, remarkable position they have there. I love a lot of consumer staple stocks. So, I do see a bright future for them, despite this stumbling during the COVID. I think that maybe gave us a bit of an opportunity to add that. Cool company.

Trey Lockerbie (30:44):
Now, the last question I have about the buy list is how much sector exposure you weigh into the allocation. So, for example, I took a look at the list and the breakdown is roughly 19% healthcare, 16% financials, 16% information technology, 12% materials, 20% industrials. Again, I’m rounding 13% consumer staples, 4% consumer discretionary. If you go over say like 20% in a certain sector, you said you were agnostic to sector earlier, but I’m curious, there’s a certain weight that I imagine you consider. You don’t want to be 100% necessarily in maybe one thing. Would you think about changing the allocation if you were hitting a certain threshold?

Eddy Elfenbein (31:28):
I have to say it’s fascinating hearing you say that because I’ve never calculated it. I was actually impressed. It seemed pretty, fairly well divided among the groups. So, there are certain companies I really like to add. For example, love Hershey’s, Church & Dwight, these consumer staple stocks and Reynolds. I love those kinds of companies. Very consistent. They’re easy businesses to follow. I mean, get a 10K, you see pretty much what’s going on. No bizarre embryonic industries to technologies shaking things up. Other companies I’m a big fan of are medical device companies and medical devices, Stryker, companies like that. So, I’m always worried about adding too many of those kinds of companies, but it’s not an overwhelming urge. A lot of it, I really just look for the best company. I got to say I’m surprised by it falling out that way.

Eddy Elfenbein (32:31):
I would think the ones I don’t have are the financials. Of course, I have Aflac, and the energy. But even energy it’s now, it’s a very small part of the S&P 500. It’s probably about three or 4%. So that would come to maybe one name, but I know when there’s a big day for energy on the market usually we’re going to lag. And if there’s a bad day for energy, usually we’re going to do well. I don’t follow any rules as far as that. It’s all bottom up, and it’s sort of worked out that way. If it did get really slanted like 30% or more to one company then I would probably consider. But up till now, it’s just never been a foremost concern of mine.

Trey Lockerbie (33:14):
Well, I definitely wanted to save some time to move on from the buy list because you write consistently about the markets and the economy in general, and I really wanted to get into some of that. So your latest report was talking a lot about jobs, mainly that the US had created nearly 200,000 jobs, but it was well below expectation. How do we read into that exactly?

Eddy Elfenbein (33:37):
That is a good question. I don’t know exactly. We came in less than half of expectations. And then earlier this week, we got the ADP report, which more than doubled expectations. So we got this huge increase and also a huge beat and a huge miss. I think the economy is still growing. And I think the federal reserve is going to be focused on raising interest rates this year, three times, perhaps four times this year. In fact, I think there’s a good chance it will become four rate increases. We’re at a very bizarre point in the economy.

Eddy Elfenbein (34:16):
I did a tweet today. Right now the unemployment rate is lower today than it was at any point during the 1970s, the 1980s, and the 1990s, during that entire period. But we get this odd thing where a lot of people, particularly people in that late fifties, early sixties age group, who maybe had planning on retiring in a few years, they’re retiring right now. So, we see at one end that workforce is getting smaller. So less people looking for work. In the younger age cohorts, it hasn’t had a big shift among those. We need to see more people in the workforce, but that’s not as large as a lot of people assume.

Eddy Elfenbein (35:03):
So, we have this odd thing of increasing inflation, low interest rates, and low employment, and lagging workforce participation. Of course, there’s still COVID so people are just plain nervous about going back to school. For a lot of families, childcare, that’s a major issue. You get somebody look after the kids so they can go. And then with remote learning and things like that at school that plays into it. So, all these things are going on at the same time. I’ve never seen anything quite like this. So, the jobs miss surprise me just as much as anybody.

Eddy Elfenbein (35:41):
We are seeing the increase in earnings as pay workers are getting more pay, but a lot of that’s being eaten right back up by inflation. Inflation is particularly cruel on lower income people. It hits you at the gas tank, it hits you in milk and eggs and things like that. So, a lot of the gains that people have… Really, workers have not seen anything like this in decades where they’ve been on the upper hand. We saw the recent report this week, an all time record number of Americans quit their jobs in November. There’s been like 10 million jobs that help is wanted for, and we can’t fill them all. So, it’s all these cross currents going on at once. It’s all from COVID and trying to get back to COVID. I don’t think the unemployment benefits are such a huge variable, but I think that plays into it as well.

Eddy Elfenbein (36:39):
So, I really don’t think I answered it all for saying that it’s a difficult position where the economy is right now, and it’s just being, of course, we don’t know what will happen with the Omicron. I mean, Washington, and next week we’re going to go to vaccine passports, so I don’t know how or when this will all end.

Trey Lockerbie (37:01):
Now the market, the week we’re recording, which is the first week of January is experiencing somewhat of a tantrum again. And the US tenure has been inching upward at 1.76% as of today, which is essentially pre-COVID. It was back flirting with these numbers about a year ago, but this is where we were right before the big drop in yield. I’m curious if you think this gain in rates maybe has to do with people expecting a lack of liquidity and the Fed to actually raise rates over the next year or two. Is that why we’re seeing a dip here, and do you have any forecasts where we go?

Eddy Elfenbein (37:45):
I think you’re exactly right, and we saw this. I mean, you can see it happened this week when the Fed released the minutes from their last meeting. This was the meeting in mid December. Now, if you remember at that meeting when the Fed decided to ramp up its tapering. So, it was going to pull back its bond buying at a faster rate than they had originally planned. So, when the minutes came out this week, the description of the debate among the Fed participants showed that there was a greater concern about the direction or the need to raise interest rates. That spooked the market. And you can see it was right at 2:00 PM on Wednesday everything changed, and the market started to pull back and had that sort of temper tantrum.

Eddy Elfenbein (38:33):
I got to say, for me speaking, I wasn’t particularly surprised. I thought the Fed had been suggesting that very strongly in their actions and in their speeches and comments. Perhaps it was just actually seeing it in the Fed minutes convinced Wall Street investors that this was really going to happen, but that’s why I think there’s a good chance we’re going to see maybe four rate heights next year. And here we are, where the 10 year, the benchmark is at one three quarters, and we’re still getting six, 7% inflation. We’re going to get the CPI report next week, and I think the year over year rate of inflation will in excess of 7%. So I assume that the market believes that this inflation will cool off at some point. That could be right. That could be. I haven’t seen the evidence for it just yet.

Trey Lockerbie (39:33):
Would you say that that is the biggest risk to markets at the moment as far as you can see? I mean, obviously there’s unknowns out there. We don’t know everything, especially with the Omicron stuff, but as far as investors who are wanting to put money to work right now, should they hesitate? Should they be reluctant to put money into the markets at this time?

Eddy Elfenbein (39:52):
It depends what you buy, but I don’t think there’s any hesitation for buying shares of Church & Dwight. I mean, it’s baking soda and condoms. It’s always going to be with us. So what you say scariest known concerns would be inflation. I would say that that’s top of the line, and any sort of economic weakness. Of course, there are the unknown ones. We don’t know what those could be, but I would say I see no particular reason why investors should be afraid of investing in high quality stocks like you find in the ETF right now.

Trey Lockerbie (40:32):
Yeah, I noticed the ETF was, I would say defensive of sorts would be a term that comes to mind. Is that intentional?

Eddy Elfenbein (40:40):
I guess it comes out that way. I wouldn’t say intentional, but for the kind of companies I look at, it comes out that I would say high quality defensive oriented portfolio.

Trey Lockerbie (40:51):
Now, the buy list of 25 stocks, obviously you don’t fall in love with any of them. Is there one in particular that you’re very excited about though? Is there one that you’re like, I think might be the best opportunity of the bunch?

Eddy Elfenbein (41:05):
Oh, boy. It’s funny because always the big winner of each year completely surprises me. It’s like I never would’ve guessed that one. I have a soft spot in my heart for Miller Industries, which is by far the smallest company. I think it’s… Stepan, which we mentioned before. It’s something like six times larger, and that’s the second smallest, and Miller makes towing and recovery equipment. They very much, very close to a monopoly. They’re not followed by any analyst, and last year when we added them, they started very well for us. And then they had a very… I mean, they were down 10, 12% or something for the year swimming against a pretty strong year. So, there’s something I really like about this company. It’s kind of an off the beaten path company. As I said, no analysts follow it. So, when you come out earnings. Do they beat or they miss? We can’t say. And since it’s so small, I wouldn’t be surprised if it gets a big jump in the year ahead. So that’s the one that really has a soft spot for me. I think it’s a cool company.

Trey Lockerbie (42:17):
The strategy somewhat brings to mind the Magic Formula by Joel Greenblatt, at least the rebalancing or lack thereof, and frequency of that. And I was actually surprised to hear when I asked you about it, that you didn’t say, “Well, we back tested this thing 40 odd years, and this is how it came out. And so this is why we have the conviction that we have.” But it doesn’t sound like that’s quite the case. It sounds like it’s a much more qualitative approach.

Eddy Elfenbein (42:45):
Absolutely. And I think that that’s a problem that investors have. It’s not about the numbers. It’s about the story behind the numbers. It’s not buying a low PE ratio. It’s about getting a value stock. It’s about look what makes the numbers go, don’t look at the numbers themselves. A lot of people I’ve noticed in my years in investing, a lot of people on Wall Street who are interested in investing, they are… I always get this backwards. I think they’re right side people. It’s the very rational part of the brain, but you also need that creative side of the brain to be able to look at what the companies do and how they… What they address in a marketplace that you can’t quite see on a balance sheet. And that’s a key to investing that I’ve learned to appreciate over the years.

Trey Lockerbie (43:37):
One thing our listeners love to learn about are books that have really inspired or influenced the way that you invest. So I’m curious if there’s some that you gift most to other people or one that sit on your bookshelf is the most cherished books that really got you to where you are on the investing piece. To clarify it could also be philosophical or any other. It doesn’t have to be an investing book.

Eddy Elfenbein (44:01):
On the investing, I think something like One Up on Wall Street by Peter Lynch probably had the most impact on me, just understanding what really works in the market and the right ways to think about investing. A lot of Warren buffet’s essays, his yearly shareholder letters, lots of great nuggets of wisdom in that. It doesn’t tell you what to invest in, but it tells you how to think about the markets, how to think about investing. So, I’d say those are two of the bedrocks of the industry of the financial book world.

Trey Lockerbie (44:37):
Fantastic. Well, Eddy, before I let you go, I want to make sure I give you the opportunity to hand off to the audience where they can learn about you, where they can learn about the buy list, Crossing Wall Street. Any other resources you want to share?

Eddy Elfenbein (44:49):
You can get my Substacks, and that’s cws.substack.com. And I have a more general interest newsletter that goes out on Tuesday that’s free unless you want to get the premium one that goes out very late Thursday night, we date it for Friday. So, cws.substack.com. And then there is the ETF, advisorshares.com/etfs/cws. If you just go to AdvisorShares, you can find CWS there. And that’s a great webpage because it has all the information about the net asset value, and we have our customer service team there that can help you out. So anything about that, you always know exactly what’s in the ETF. It’s the same as what’s on the buy list. So you get that absolute transparency.

Eddy Elfenbein (45:45):
One other thing about the ETF. We were the very first ETF to have a fulcrum fee, which basically means that if the fund does better, I get a little bonus comes to me. If the fund trails to benchmark, which is the S&P 500, then shareholders get a little saving. So that did exist in the open end phase. I think Fidelity had a bunch of fulcrum fees, but we were the very first one ETF to have the fulcrum fee in that space. More have joined it, but our little fund we were the first one to do it.

Trey Lockerbie (46:22):
Very cool. Well, I’ve really enjoyed this and I love your takes on Twitter and this was a really fun discussion. So, I hope we can do it again sometime soon. I’m really eager to maybe catch up a year from now and see how the buy list has performed, and [crosstalk 00:46:36]-

Eddy Elfenbein (46:35):
I’d love to do that. Thank you very much.

Trey Lockerbie (46:36):
And catching up on [crosstalk 00:46:37].

Eddy Elfenbein (46:37):
Thank you very much for having me.

Trey Lockerbie (46:40):
All right, everybody. That’s all we had for you this week. Hey, listen, Eddy and I connected on Twitter originally. You can always find me there @TreyLockerbie, and what was so cool was to compare the buy list to what a lot of billionaires are currently holding in their portfolio, and there was some cross over, which you can see on our TIP Finance tool. Simply Google TIP Finance, it’ll pop right up. And with that, we will see you again next time.

Outro (47:03):
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