Episodes

Dan Ferris: Hello, and welcome to the Stansberry Investor Hour. I'm your host, Dan Ferris. I'm also the editor of Extreme Value, published by Stansberry Research.

Corey McLaughlin: And I'm Corey McLaughlin, editor of the Stansberry Digest. Today, Dan talks with James St. Aubin, chief investment officer for Sierra Mutual Funds and Ocean Park Asset Management.

Dan Ferris: And for our opening rant... Taiwan elections and more.

Corey McLaughlin: And as always, you can e-mail us at [email protected] and tell us what's on your mind.

Dan Ferris: That and more right now on the Stansberry Investor Hour.

So Corey, you're more into this Taiwan election thing than I am. What do you think is the story here? What's the big takeaway?

Corey McLaughlin: Well, yeah. Obviously, a lot of people are talking about what's going in China right now with these protests, and it's making headlines. But over the weekend, as I was awakening from my post-Thanksgiving slumber, I saw these Taiwan elections where basically they had a lot of local elections over the weekend for mayors and local governments and that sort of thing. And the results showed support for the Nationalist Party, which is the opposition party to the ruling Democratic Progressive Party which was campaigning more on the concern of a Chinese invasion of Taiwan. And so actually, the Taiwanese president resigned over the weekend, from the leadership of her own party. Sounds like the U.K., actually.

Dan Ferris: Yeah, it does.

Corey McLaughlin: And that's just kind of an interesting story, I think, because we've been talking a lot, or a lot of people have been talking a lot about the possibility of China invading Taiwan or taking over Taiwan. And the people of Taiwan basically just voted in local leaders that aren't as concerned about that as the ruling party that's been in power.

Dan Ferris: I find that very interesting, but not surprising. I had a guy who I – actually, one of our readers a while ago, tell me that he's been living in China for a while, and he says, there's lots of Chinese people already working in Taiwan, and nobody in Taiwan seems to talk about it nearly as much as the rest of us do. And, I don't know, that's probably really an important thing to note. It's like a "U.S. and rest of the world" issue, much more than it actually should be for people who live in Taiwan.

Corey McLaughlin: Yeah. I'm not an expert by any means, but from what I was reading about it, the people – there's enough people who don't want to be completely sealed off from China... who see the benefits of it and want a status quo to remain in place... who wants their country to just be completely upended in any way, when you break it down to that level. So it makes sense.

Again, it reminds me of one of these things where the high level governments are doing one thing and geopolitics is one thing and what people actually care about on the ground every day is something else. And that's a story as old as time, I guess.

Dan Ferris: Yes, it is. If you never saw a screen for a whole month, you wouldn't – there's so many things that you wouldn't think about that you would not miss at all that don't touch your life. I don't know. This probably isn't fair, but you'd notice the price of things going up, probably, but I wonder if your anxiety about it would be as high.

Corey McLaughlin: Right. I thought that, too.

Dan Ferris: Because you add – on top of dealing with the price of things going up, which is something people deal with – there's this added layer of just politics and news, I think, that does add to the anxiety of it. Not to dismiss how difficult it is for people when the price of things goes up, at all.

Corey McLaughlin: Right. But if you just –

Dan Ferris: Probably the wrong example to make the point.

Corey McLaughlin: No, no. No, it's a good point. I've actually thought about that, too. We've talked about inflation, beat that to a pulp over the last year. And prices are higher. Nobody wants that, but inflation's been around as long as fiat money has existed. So, it's there, but yeah. But then you throw on the political discussion around it and it does seem to make it worse. I don't know what's worse, the higher prices, or the anxiety caused by the discussion about the higher prices, I guess is what – is a worthy thought to have.

Dan Ferris: Yeah. Maybe this is like two rich financial guys have no business talking about it, but the truth is, you're right. Which is worse, the anxiety or the actual thing? Because the actual higher price is something that people adapt to. It's something they deal with and live with. But the anxiety is just this free-floating thing you can't do anything about.

Anyway, I don't want to become a psychological podcast, but you get the point. And if you're living in Hawaii, that anxiety is even higher right now, because the world's biggest active volcano started erupting Sunday night. Did you hear about this? I did not. I live on the West Coast... did not hear about this.

Corey McLaughlin: I heard something, yeah, I did hear about it indirectly this morning. Somebody was talking about the Yellowstone geyser for some reason, and I think that's why.

Dan Ferris: Yeah. Oh, yeah. I live a little bit closer to that one. That one –

Corey McLaughlin: That would be more concerning.

Dan Ferris: Yeah. And it would be so enormous that, you know, it doesn't matter how close you are.

Corey McLaughlin: Yeah, but wow. Hawaii, wow. That's – as if we didn't need anything else to be happening in the world today.

Dan Ferris: It just feels like one of these ominous portents. With everything else happening in the world, you don't want to hear about a volcano. And for me, I'm kind of obsessed with this global-currency thing, because I keep seeing examples. The latest example is in the country of Ghana in Africa, which was one of the great, growing economies in Africa. And of course, they do what every growing economy in a place like Africa does – they borrowed way too much money... too much of it in foreign currency... I think mostly euros in their case. It's always one of the big reserve currencies – dollars, euros, yen. And, of course, their currency is now the worst-performing one in the past year, down close to 60%, because they need to get more currency. And the only thing they have to get it with is their currency. So, that's the dynamic that plays out.

What fascinates me is that in Ghana, here they are, they borrowed too much, they need more currency, more foreign currency, and their own currency's tanking as a result. And there are other aspects of this, too. But what really interests me is that the dynamic, with little, teeny Ghana, is the exact same dynamic with Japan or England. The same dynamic, which it tells you something about the influence of reserve currencies in the world.

And Ghana did this thing where they said they're going to require all the gold miners in the country – because that's the big industry there – to sell them 20% of their gold, and they're going to pay them with Ghana currency called the cedi, C-E-D-I, cedi. And of course, where are they going to get the cedis? They're going to print them. And what are the gold-mining companies going to do as soon as they get the cedis? They're going to sell them for something else. That currency is toast.

Corey McLaughlin: Yeah. And that's playing out all over the world, in all these developing, emerging markets right now, because of the strong dollar – and still, I guess, relatively strong euro – compared to... not compared to the dollar, but compared to everything else. You really do wonder what the outcome of all of that, of what you're describing is, ultimately.

Dan Ferris: Yeah. I do.

Corey McLaughlin: Can't imagine it's anything stable.

Dan Ferris: No. I think it's all the stability of an erupting volcano is where I was headed with it.

Corey McLaughlin: Oh, OK. All right. So you're coming back to the volcano. All right.

Dan Ferris: Yeah. It's just erupting, but it's slow. And it doesn't fill the headlines week after week. It sort of pops up, and then it goes back down. It's whack-a-mole. So it pops up, goes back down, pops up, so people don't get a chance to get really terrified about it. And then one day, all of a sudden, you live in a place like – well, it wasn't too long ago, Sri Lanka, they defaulted on their debt. And then a month later, oops, the government disappeared, just evaporated in front of everyone's eyes.

Corey McLaughlin: Yeah. It's scary.

Dan Ferris: That happens in the little, tiny places.

Corey McLaughlin: Well, and then relatively quietly, I think it was last week or the week before, the U.S. government hit the pause button on the student-loan payments again. So, it's like adding to the inflationary storm here, quietly. And that's the thing that's, I'll go back to the U.S. here because it's where we live, but there's going to be this push and pull within this inflationary environment or era – whatever you want to call it – of inflation higher than people have seen in 40 years, and these fiscal policies and all the spending policies that people have known for their entire lives, mostly, and calls for more. So it's really, I don't know, something's got to give.

Dan Ferris: Something does got to give. And in the end, it's always the currency. And I think right now, it's the epic struggle. It's always an epic struggle between the currency and the bond market. So that's what you see in – that's what we've seen in little places like Ghana and Sri Lanka, and big places like the U.K. and Japan. There's this struggle between they're trying to save the debt market... try not to kill the currency. And in the end, the currency always in the one that gets killed. They always try to save the debt market by killing the currency.

And I think the United States does become that, eventually, but it's the last one, because it's the big reserve. It's the one everybody needs to try to save their debt markets. So it is in high demand, even as Treasurys may not be in high demand, because the dynamic is they all own dollars in the form of Treasurys, so they sell the Treasurys to get dollars to buy back their own currency. It's this "hypertrophy of finance" that George Gilder talked to us about when he was on the show. And so, it's a weird dynamic. In the end, it winds up not being very good for whole civilizations, whole countries, whole cultures.

Corey McLaughlin: Yeah. Which brings us back to the whole Taiwan discussion, what the government's doing versus what the people want or would prefer, whether they know what's happening or not. Most people on the street out here are not fluent in reserve currencies, nor should they be.

Dan Ferris: Right. They don't know what it is.

Corey McLaughlin: Yeah. And that's part of the reason.

Dan Ferris: They don't know what it is. They don't know what a central bank is.

Corey McLaughlin: Yeah. That's part of the reason I got into this whole industry. It's just to learn about finance and money because it's just not taught anywhere. And you get to these points and these instances with 40-year-high inflation, and you're like, "Oh. What does this mean?" Most people are like "what the hell does this mean?" and "how did we get here?" And they just get angry over whatever political party's in power or whoever is the easiest person to blame... path of least resistance – try to find that. And that causes all kinds of chaos, which is what we've been seeing the last two years. And I don't know, it all comes back to the currencies, unfortunately, I think, is what I've been realizing more and more.

Dan Ferris: Right. And that level of ignorance that you point out – which is completely understandable – lets people like Liz Warren and Bernie Sanders – and probably people on the right, too, I don't care about right or left – but just political people say things like, "Grocery stores and oil and gas companies are causing inflation. They don't print money, I promise. They don't cause inflation." It's ridiculous.

Corey McLaughlin: Yeah. What are we not supposed to have any businesses at all?

Dan Ferris: Yeah. In the '70s, they blamed it on labor unions for causing inflation. And that was absurd, too. It was ridiculous.

Corey McLaughlin: Yeah. When Biden is – I don't care which president it is – is telling a gas station owner to charge less for gas. Come on. What are we talking about here? It's insane.

Dan Ferris: Right. And I forget who it was that came out recently and said, "Don't give your workers raises," or something like that. Some politician I can't remember off the top of my head, but you just reminded me of it. It's absurd. Oh well, if only everybody knew what you and I knew, the world would be a wonderful place, would it not? Come on.

Corey McLaughlin: Well, yeah. I think it'd be a little more peaceful if people were financially literate and knew what their governments and the people in power are actually doing with every decision that they make. And most of the time, it's just kicking the can down the road for somebody else to deal with, and that's a problem.

Dan Ferris: Yeah. There is a gap out there. There is an opportunity for a whole lot of people to become more financially literate, that is for sure. And if they did so, maybe they would fall for fewer weird vaporware cryptocurrencies and other similar kind of scam-my things.

Corey McLaughlin: Yeah. I think so.

Dan Ferris: Well, having solved the world's problems –

Corey McLaughlin: Once again.

Dan Ferris: – having solved the world's problems, maybe we should talk with an actual expert who knows about these things and is wisely less willing to try to solve them... our guest, James St. Aubin. James is a very smart guy, very knowledgeable and very sane and rational unlike myself 100% of the time – I won't speak for Corey. So let's find out what's on James' mind. Let's talk to him. Let's do it right now.

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All right. It's time for our interview. And today's guest is James St. Aubin. James is the chief investment officer for Sierra Investment Management. He's an accomplished investment management executive. His career of more than 20 years includes leadership roles in asset allocation, manager research, and portfolio construction. James is also a board member and treasurer for the Children's Bureau of Southern California, a local nonprofit organization focused on primary prevention of child abuse – a worthy cause. James, welcome to the show.

James St. Aubin: Thanks for having me, Dan. It's great to be here.

Dan Ferris: Yeah. So you're new to the Investor Hour family, and we would like to get to know you a little bit. So I'm going to ask you my classic "get to know your asset manager" question, which is simply if you and I met in a bar and we struck up a conversation and the conversation turned to finance, and I said, "What kind of an investor are you?" how might you respond to that?

James St. Aubin: Yeah, sure. So I guess I would say that I'm an investor that focuses on risk – optimizing risk, minimizing risk of course – and focusing on the maximization of return... which sounds very generic, but it's really about finding portfolio solutions that are geared toward achieving the outcomes that we're trying to get to. So, I would say that most of my career has been focused on multi-asset solutions and looking for the right level of risk for individual investors and how to optimize risk-taking within financial markets.

Dan Ferris: All right. I saw on the Sierra website, which I found interesting, by the way – I encourage listeners to go there. I saw one description and it said, "Our tactical investment disciplines were developed with the goal of limiting downside risk to 5%, even in a down month or quarter." And that single point there really attracted me, because I thought, "Well, these guys must be crushing it this year with everyone getting really hammered." I thought, "Wow. Most people in your business are probably trying to keep the assets from running out the door." But how are you guys doing?

James St. Aubin: Well, we're very fortunate. We're in an environment that's very favorable, on a relative basis, for our performance, that's for sure. We focus on drawdown mitigation. Sierra was founded 35 years ago by David Wright and Dr. Ken Sleeper. I believe you've had Dave on the show in the past. But at that time, back in the '80s, they recognized something very important. The pain of large drawdowns, portfolio drawdowns for investors – particularly those that were either in or near retirement – created a lot of psychological distress, and it certainly had a great impact on outcomes.

So they researched a lot of solutions, potential solutions to this problem... how to mitigate these big drawdowns, like the one we're in right now, in both the stock and bond market. And they felt that following a price-momentum strategy can help truncate the impact of these big market drawdowns without sacrificing a lot of the upside. So we have a trailing stop under every position that we hold in our funds, and that keeps us out of, like as we say, trouble – meaning that we can avoid when participating in those drawdowns. Now, we will not avoid all impact of the drawdown, but we've done, I think, a really good job sidestepping some of these big drawdowns like we've seen very frequently – more and more frequently, it feels like, in the last few years.

Dan Ferris: So, trailing stops. This, of course, is a topic near – you probably don't know this – but near and dear to Stansberry Research's heart. It's a widely used tool in all the Stansberry Research newsletters and research products and trading services and everything. And that is the primary risk-limiting tool that you use?

James St. Aubin: That's right. It's our primary risk-mitigation tool, and it's been very successful, as I said earlier, in mitigating some of these big drawdowns. I think if you look across the trading landscape in terms of the population of folks that trade markets on a day-to-day basis, a trailing stop is a critical function for almost every successful trader. And that was something that Dave and Ken recognized 35 years ago and felt it was not used for most retail clients and decided to bring these solutions to light for that reason.

Dan Ferris: Well, that has echoes of our own... my colleague Dr. Steve Sjuggerud who is the guy who brought trailing stops into the fold here and helped propagate their use. So the key question then becomes what level do you set the stop at? How do you determine where to set the stop on a particular position?

James St. Aubin: Well, Dan, we use what are called banded moving averages, and our stops are set at the upper end of the lower bound of that band. So when the price, or shorter-term exponential moving-average price of each holding breaks below that band, that's an automatic sell, and we move into cash.

Dan Ferris: Sounds easy-peasy, simple.

James St. Aubin: Easy.

Dan Ferris: So, this subject of trailing stops, there's a discipline here... oddly enough, it makes people really uncomfortable. We do get a little bit of resistance sometimes. People say, "You mean, if it goes down I just sell it and that's it?" Do you ever have clients questioning you saying, "You sold that stock? It's a great business," etc. Do you get that kind of pushback from clients?

James St. Aubin: Not really, because we do, I think, a pretty good job of explaining what we do and why we do it. We're very clear about our process, and very transparent about our process. And yes, it does sound a bit simplistic. But if you believe that price momentum is – and certainly, there's a lot of empirical research behind it, and academic research – I would say that if you believe in that process, then that makes a lot of sense. And we try to be very careful about articulating our process to our clients and why we think it is an important risk mitigation tool.

Dan Ferris: I like the topic of when to sell. So hitting a stop is one time when you sell. Can you tell me more about sell discipline and when you would exit a position otherwise?

James St. Aubin: So we primarily invest in mutual funds and ETFs, either broad-based market products or maybe more narrow, sector-based products. But primarily, each one of those has a custom trailing stop, as I mentioned earlier, with those bands around the price. And when that price crosses below the upper end of the lower band, that's an automatic sell for us. And of course, then we can wait to buy that back when we see what we think is a sustainable uptrend. And that's the key. You not only have to be able to get out of the market when the markets are creating an unfavorable environment, but you have to get back in to participate on the upside.

So really, I think our sell stops are very hard and fast. We don't have any discretion if it moves below that lower band. And everything is customized, so it's not a generic sell signal. On the asset class level, it's really based on individual funds' own behaviors. And I think that's very important.

Dan Ferris: OK. So that's the sell discipline... hits the stop, you're out, and you don't worry about trying to capture more gains at the top of the band or anything like that.

James St. Aubin: Yeah. The way I would articulate it is to say we're really just trying to find some asymmetry between the downside capture and the upside capture. And if we can cut off more of the left tail and less of the right tail during this process, we can have, I think, a better client experience and outcome for portfolios.

Dan Ferris: So are all your products and all you portfolios – is it all based on this idea of momentum? Or are there other –

James St. Aubin: No. We have products that have different – we have six funds. Three are multi-asset funds, meaning fixed income and equity – and three funds that are solely focused on fixed income. Each one of them has the exact same discipline applied to each holding that it can hold, based on its mandate.

Dan Ferris: Oh, I see. So the different products – sounds like they're about different assets, more than...

James St. Aubin: Right. Yes. We have products, again, that do invest in equities, and fixed income. And those products are certainly a little bit more risky than our fixed-income-oriented products. But overall, they all apply the same discipline to each holding that they hold.

Dan Ferris: OK. So, just looking down some of the list here on your website, if you're buying high-yield bonds, municipal bonds, that's still ETFs and mutual funds?

James St. Aubin: Yes. We don't buy individual securities. We're a fund of funds.

Dan Ferris: OK. Fund of funds. All right. Well, that simplifies things, doesn't it? Makes a lot easier.

James St. Aubin: It certainly does. We have a lot of respect for the folks that have a more macro, discretionary views, or fundamental views based on their signals. But for us, what works and has worked consistently over 35 years is this simple process applied religiously to each holding. And over time, we've found that that just provides a better risk-adjusted return, relative to what a buy-and-hold strategy would have produced.

So, that's our main focus... really just trying to provide, as I said earlier, a better risk-adjusted return and a better client experience overall because again, we work in a very theoretical framework, but our industry has a lot of practical problems with investor psychology that we have to deal with on a day-to-day basis and advisers have to face on a day-to-day basis. So it's certainly, again, about improving outcomes and, just as importantly, that psychological distress that comes in those periods of big drawdowns like we are in today, where people look at their statements and really have a lot of distress. That's something that we can help with.

Dan Ferris: So do you short any of the ETFs or buy short ETFs?

James St. Aubin: No, we do not buy short ETFs. We can, in one of our funds, use an inverse ETF to cover our long positions. But for the most part, most of the time we do invest in cash as an alternative when we don't have a buy signal.

Dan Ferris: Got it. So, we actually have interviewed quite a few folks who do a version of this. They're not fund of funds, but there are a lot of – well, we interviewed Jack Schwager and a couple of the Market Wizards folks, so they're all about the stops. My question, though, is they tend to monitor 50 markets or 70 markets or something because they're trading futures and anything – they'll trade anything – what does that look like for you? What are you guys monitoring, looking for a buy signal?

James St. Aubin: Well, I will say – and going back to my comment earlier – Dave and Ken recognize those successful traders that you mentioned. And what has made them successful, and what they tend to focus on is the stop discipline. So where they may look at assets, individual stocks, or bonds – we tend to think about it a little bit more simplistically in the sense of mutual funds and ETFs.

So, for example, our tactical bond fund, we'll look at high-yield corporate bonds, primarily. When those are in an uptrend, we'll own high-yield corporate bonds or longer-term Treasurys. So those are a binary option for us. We have two options to be long. And then, of course, if neither of those is in an uptrend, we'll be in cash. And a lot of these traders, frankly, are much more short term in nature. They'll trade day-to-day, intraday. On average, we tend to find what we call two round trips per year in our asset classes.

Our strategy is designed not to create an incredible amount of turnover that you would see in a more aggressive trading strategy. So what we try to do is really limit the round trips and avoid some of the volatility that you might see in those more aggressive strategies.

Dan Ferris: OK. So, do you apply leverage in any of your strategies?

James St. Aubin: No, we do not.

Dan Ferris: No leverage. All right. And I love this because we actually got to the topic of risk pretty quickly. But we always wind up there. We always wind up here with folks like yourself. Risk mitigation becomes the whole shebang. It's the big focus. And the funny thing is, of course, clients and retail folks... they're always looking at upside. It's like, "How much am I going to make?" And you're sitting there saying, "Well, we're not going to lose more than this much." And there can be difficult moments with clients. And my question then is, you mentioned psychology and the difficulties with that. Were you referring to conversations with clients at that point?

James St. Aubin: Absolutely. We like to say we win by not losing. And the famous quote from Ben Graham – that the essence of investment management is management of risk, not the management of return – sometimes gets lost in markets like we saw in 2020 and 2021 where we had a pretty steady uptrend there for a long time that persisted... very low volatility. And then we come into '22, and everybody starts remembering, "Yeah, we have to think about risk again." We never forget about it. So it's a core focus of our strategy. And we think ultimately over the long term, risk management is really what will be the foundation for success.

Dan Ferris: Man. I feel like we should stop right there because that's the nugget, isn't it? "Risk management is the foundation for success." It's hard to beat that. So, one thing I do want to talk with you about, James, that was different this year, is that folks used bonds to mitigate their losses in stocks... 60/40 has been this idea that's been ongoing for a long time. And that obviously got killed this year. And it made me wonder, as you were speaking a moment ago, "I wonder when Sierra was out of TLT, the long bond fund."

James St. Aubin: Right. Well, it's been a very, very difficult year in fixed-income investing. And I don't know if we ever envisioned this type of drawdown in this type of market, but it certainly does play into the hands of our strategy. We have been buying... we haven't been in cash all year. We have had some instances we've seen some rallies, both in fixed income and equities, this year that turned out to be false starts, if you will.

So we have been invested in and out of individual positions throughout the year. We never know when that uptrend will be sustained, so we don't try to predict that. We just follow the trend. And if the trend leads us to a buy signal, we will be invested. It may be for a short time, depending on how fickle the market might be. But I think coming into 2022, we were talking about the risk that a lot of advisers may not have recognized in fixed income or may not have fully appreciated, let's just say, in terms of the extension or the increase in duration of investment-grade bonds relative to the yield.

So you had this really bad setup, if you will, from a fundamental perspective, in terms of return per unit of risk in fixed income. You had return going down, and risk going up, as measured by the sensitivity to interest-rate moves. So here we are, in this very violent drawdown – historic drawdown – in fixed-income markets. And so our process, not necessarily predicting this type of market environment, definitely reacted. We like to say we react, we don't predict. We reacted to the market drawdown, sold, and have been in cash for most of the year, save a few instances when we saw some rallies as rates fell. Rates started to fall for a short period of time during the year.

Dan Ferris: So when you say "been in cash," what kind of percentages are we talking here?

James St. Aubin: So right now our funds are between 90% and 100% in cash. So we do have a few small positions in the equity market. As you know, there haven't been a lot of places to hide... not many uptrends. But there are a few pockets of strength within the equity markets. And of course, commodities in some of our funds is an option. So we have some small positions there. But for the most part, it's been hanging out in cash. And right now, you're actually getting paid to be on the sidelines, unlike some not too distant past, where that hasn't been the case.

Dan Ferris: Wow. So, we had a guest recently, and I think he said he was 76%... you guys manage billions. He's a much smaller guy. But I think he was 76% in cash. And I thought, "Wow. Nobody goes that far." But you got him beat there at 90% to 100%. That's insane.

James St. Aubin: We're definitely not afraid to be in cash. And we think it is the safe haven, really the only safe haven that we've had this year. Traditionally, bonds can be a safe haven in equity market drawdowns. That, obviously, hasn't been the case this year. So, "cash is king," and that's what we've been saying to our clients right now.

Dan Ferris: Yeah. Good on you. That is awesome to hear that. But of course, you're very obviously not dealing with the mandates and things that prevent a lot of institutions from doing that, right?

James St. Aubin: That's true. We set our strategies up to be very tactical... to be completely tactical. Unlike most strategies, they have a buy-and-hold approach – which we don't necessarily buy into, but for some folks that works. For us, we felt like the better approach would be to be tactical and not participate, if we can avoid it, in these big drawdowns which are, again, very devastating to portfolio values.

Coming back to the genesis of the firm, thinking about folks that are in retirement or near retirement, you start to get into a situation where that affects the outcome... how long they can sustain their lifestyle in retirement on their portfolios. And when you're in a drawdown and making withdrawals, your distributions from your portfolio – you magnify the impact of these big drawdowns. And so you're thinking about dollar-weighted rate of returns rather than time-weighted rate of returns. And there's a big difference there in these scenarios where you have distributions. So that was really the problem that they set out to solve. And the way they found to be the best and most effective way to do that was to use this trailing-stop process.

Dan Ferris: James, you make it sound just positively easy and delightful of a process.

James St. Aubin: Well, you really have to focus on taking the emotion out of it. And I think that's why it sounds easy, and I think what appealed to us was the fact that we weren't making any subjective calls on what's going to happen to interest rates, what's going to happen to equity markets, what's the Fed going to do.

We do certainly think about that. We talk about what's driving narratives, what's behind the trend. But as we've seen, predictions are very difficult. And you just think about even the Fed, who a lot of folks would assume have the foresight to understand what's going to happen in the future from an economic and policy perspective, but have been very wrong in their calls and their expectations about where policy was going to be.

Remember, this time last year, they were expecting to hike rates once in '22. And here we are, above 3%, and more to go. Probably going to end up close to over 4%. So that's a big turnaround. It's a proof point that even those with expertise, if you will, have difficulty foreseeing the future. And that's why we said, "Look, can it be done? Yes." There are some great macro discretionary investors out there. It's hard to do consistently, and that's where a discipline comes into play that takes out the guesswork, if you will, of market navigation. And so, again, the trailing-stop process keeps us out of trouble, keeps our investors out of trouble, and to us that is a really important feature of our investment approach.

Dan Ferris: Right. So this raises a question then, for me. You're thinking about those macro issues, you're discussing them, but you made it clear earlier, there's no discretion. When you hit the stop you're out, and that's it. When the signal... on the entry, I assume, it's the same way. You get the buy signal, you buy, and that's it. So, what function did these discussions have? Is it... it doesn't sound like it's really part of the process. It sounds like something you just can't help talking about around the office.

James St. Aubin: That's true. We like to think of ourselves as market junkies, and we certainly enjoy the attribution of what's happening to certain market events. But as you know, we've seen several market reactions that seemed to be counter intuitive to the data. And looking at that, and you try to say, "Well, what's driving the markets today?" And sometimes it's obvious, sometimes it's not so obvious to us. So we definitely like to understand what's happening in the market from an intellectual curiosity perspective. But as far as feeding that back into the process, it's really not part of our job. But we do like, we love, like anybody else, love to discuss back story, the market environment, what's driving the big trends that we're seeing.

Dan Ferris: OK. So James, I'm reminded of a trip that I took many years ago, it might have been 20 years already, to, let's just say, one of the TurtleTrader firms, so-called TurtleTrader firms, and we were walking around the trading floor, and there was a vice-president guy, and he said, "OK. I'm going to leave you in the hands of our head trader here." He let us look at the screens and see everything he was doing. He explained everything. And I'll never forget he had a chart in his hand, and he said, it was cable, British pound.

And he said, "Well that's a signal right there." And then he said, "But do you really want to sell cable after five days of this?" Because it was down, down, down, down for five days. And I thought, "That sounds like discretion to me. That doesn't sound like... " There were ten math PhDs on the floor below, and computer guys, kicking out signals, and thinking about the system and all this. And this guy's saying, "Do you really want to sell?" It was an enlightening moment, just let's say. Would that occur at Sierra?

James St. Aubin: We do have those conversations. We're human beings by nature, and we look at the process and what it's telling us. And sometimes it feels maybe counter intuitive at some level, what the signals are giving us. But we have to remove ourselves from that. We don't react, we don't act on our own gut, if you will, because when you start doing that, of course, you are removing... you are adding discretion into the process. And as much as we all have our opinions about which direction the market is going, or whether a signal is going to be sustained or not sustained, we have to just disconnect ourselves from those reactions, from those impulses, to second guess the strategy, second guess the signal. So we really don't let that happen.

And that, I think, have been key to our success is not letting that creep in and second guess in. Because again, this strategy's been around for 35 years. It's time tested. So the fact that we might have our own biases, we're not going to put that into the approach and change it after it's been working successfully for such a long time.

Dan Ferris: Yeah. It's got to... that first time, once you do it that first time, you're in chaos. You've violated the whole reason for the existence of the... you injected emotion, essentially, back into the process.

James St. Aubin: You open up Pandora's box. And I think that's generally where people get into trouble, honestly, is where they start to second guess the strategy, because I think any quantitative investment manager will tell you they've had that moment of, is this working? Is this not working? And tries to think about, at least, if not act on it, but think about what the signal might be missing. And the only way you stay successful, I think, as a quantitative manager, is to stick to the discipline and do research. We don't want to, again, use our own judgment about whether or not a signal is still effective or not. We will go back and study that signal and see if the performance is still, over a longer-term time period, still working. But if it's not, for a short period of time, we cannot impart our own judgment here, or else we're setting ourselves up for failure.

Dan Ferris: Right. Nothing works all the time. Nothing works forever, right?

James St. Aubin: No. You're absolutely right. In my former life, I was a gatekeeper in manager research, so I've seen a lot of different strategies, about fundamental and quantitatively based strategies. And I think a key focus of mine, really, was "are they sticking to their disciplines?" If they change their stripes, whether it's a fundamental or a quantitative strategy, that's usually a red flag and a reaction to something that may not be working over the short term.

Dan Ferris: Interesting. Wow. It just never fails to fascinate me how I can talk to –James, I'm talking like a few dozen folks, who really followed this same basic model of momentum, and stops out, that's it. No discretion. And yet, still they're 50 different personalities, they're 50 different styles, 50 different ways of looking at the same thing. It's fascinating to me. You'd think they'd all wind up buying the same stuff at the same time and selling the same stuff at the same time. But it doesn't happen.

James St. Aubin: Yeah, no. That's a good point. I always like to say there's more than one way to skin a cat. And I think that everybody has their own approach that works for them, in looking at whether it's technical or quantitative strategies. And I don't think there's necessarily a right or wrong way to do it, or a perfect way to do it. Everyone has their own parameters, and has their own risk tolerance, and we dialed ours in to meet the needs of our clients. So it's very much connected to the practical side of our investment strategy and what our clients want and what we think we can deliver in our funds.

Dan Ferris: Cool. I'm still amazed by the 90% to 100% cash. I have to admit, that's been churning in the back of my mind. And it's awesome and it's wonderful, I think.

James St. Aubin: No, I was just saying, we are... Again, I think I'll stress that we have been invested at different points during the year, and those rallies have been short lived. But I would say overall, we don't think of cash as a long-term investment. We don't want to be there for a long time. So, even though it obviously has some yield now, we'd still rather be invested in productive, income-producing, or capital-appreciation assets that are expected to have some capital appreciation over the longer term.

So I'd say, on average, we're in cash maybe 20% of the time, and invested in our respective asset classes about 80% of the time. This year, it's sort of been the opposite. We've been in cash 80% of the time and invested about 20% of the time. But it's a very unusual market environment, and our signals are reflecting that.

Dan Ferris: So I normally... I can't believe I haven't gotten to the question yet. It would normally be one of the first items. So, we've talked about how your sell discipline is, and I've just assumed that the buy discipline is very similar. You're waiting for a signal. You get the signal, no discretion, you're in, correct?

James St. Aubin: That is true, but there's a slight difference. So, obviously, we're selling when the price hits the upper end of the lower band. When the price moves above the most recent bottom of the upper band, plus a more secondary signal in that one, which doesn't apply to the sell signal, is a more intermediate-term moving average. So we have a more intermediate-term moving average to confirm that uptrend. So in some cases, you can cross the lower bound of the upper band and still not have a buy signal until it crosses that intermediate-term trend line. And once it does, then it becomes a buy signal.

And the reason we do that is to make sure that it is a true uptrend, and we're not getting more of a head fake. So we want to see more evidence of a sustainable uptrend on the buy signal.

Dan Ferris: I see. I remember years and years ago, when I first read the Market Wizards books and was finding out about this way of looking at markets, one of them revealed that they were, I think he said they were buying 21-day breakouts. Is that the type of assessment that you make? When you get a buy signal?

James St. Aubin: I don't know about that particular strategy. I don't think we would consider our, what I call a breakout. We're not looking for that. And I think that's more of a shorter-term strategy. What we'd like to obviously invest in is a long-term, sustainable uptrend... and not try to capture a profit on a one-day, two-day, five-day move for our process to work on the upside... that we want to have a sustainable uptrend. And being whipsawed in and out of positions, or trying to trade on a day to day basis isn't part of our strategy.

We think... In a perfect world we'll see a recovery, the same recovery, the types you typically see coming out of big bear markets, the rallies. And we want to be able to capture that. So once we get the buy signals in our funds, in our fund universe, we'll add the positions. And our hope is that we hold those positions for quite some time. Like I said, cash is a last resort for us. We're really just trying to cut off those big tail events that we've seen, again, more and more frequently, in 2018, 2020, 2022. And of course, you can go back to the global financial crisis, or the dot-com bubble.

Our strategies, we're able to successfully navigate those areas and limit that drawdown. Again, winning by not losing is the key. We're not trying to create any sort of, as some of the more famous traders might do, create these quick trips and capture small profits consistently over time.

Dan Ferris: I see. Interesting. I was going to ask you about the financial crisis and the dot-com. I'm glad you mentioned them. And basically, at that time, the strategy hasn't changed meaningfully since then.

James St. Aubin: Right. Even beyond that, back to the last '80s, it hasn't changed meaningfully from there. We do research on our signals and maybe try to tweak them to some degree and make them a little bit more effective. But the foundation in the process, the core of the process has been in place for 35 years, and that's why we think it's so reliable. It's time tested. It was studied before it was implemented, and then out of sample, over 35 years, it continues to deliver the behavior of our portfolios that we're expect, and sidestep these big drawdowns.

And we've been able to do that successfully, and just be able to cut off those left-tail events is a huge win because you have to make up that – obviously, the bigger the drawdown, the more you have to recover. So if we can, again, truncate that drawdown, we don't have to recover as much. And so it's a little bit of the tortoise and the hare, right? We can win by not losing. We can just chip away at performance over time. We'll build a really robust profile of risk adjusted returns.

Dan Ferris: Right. So James, it's time for the final question. And the final question that I ask, it's the exact same question for every guest, no matter what the topic, even if sometimes every now and then we have a nonfinancial kind of a guest, exact same final question for everybody, and that is simply, if you could leave our listeners with one idea today, what would it be?

James St. Aubin: I think that taking a close look at one's portfolio and how it's being invested and whether you are in the right portfolio for your level of risk tolerance, I think a lot of folks don't necessarily appreciate risk, as I said earlier... especially end investors... how much volatility, how much risk they're taking in the portfolio, should be well understood. And we're getting to the point where if they're not in the right portfolio, and we experience a large volatility event, as we are now, that can be a mismatch, and I would suggest folks regularly check their portfolio and talk to their adviser about the level of risk they're comfortable with, because, I think, oftentimes that gets lost in the discussion. And as you mentioned earlier, folks think about return and not the effect of risk. So, just a reminder for everyone out there listening, that your risk level should be the primary determinant of what portfolio you're in, and hopefully people are in tune to that.

Dan Ferris: All right. Thank you for that. And thanks for being here, too. I really appreciate your spending some time with us.

James St. Aubin: Thanks, Dan. It's been great.

Dan Ferris: Yeah. And you're definitely going to get a call back from us at some point over the next, I don't know, six, 12 months or something. So be ready for that.

James St. Aubin: Looking forward to it.

Dan Ferris: All right. Thanks again, James.

James St. Aubin: Thanks, Dan.

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Well, I hope you heard on my final question what topic did James go straight to. And even when we started out, what topic did we go straight to? It's risk. It's always risk. Professional asset managers who know what they're doing are all obsessed with risk. What's my downside? While their clients are saying, "How much money am I going to make?" the manager is saying, "well, here's how much you're not going to lose." And it's not sexy, but it's got teeth. It's real. That's how you really do it in the real world. And like academics, they look at things, and they look at 50-year, 100-year, long-term returns. "Oh, you should always be invested."

But reality is quite different, isn't it. When you're in those drawdowns and bear markets, and god-awful sideways markets, and things, you are a human being, and your emotions can really mess you up. And guys like James, they sit around all day. They're obsessed with not getting messed up by their emotions. And that sense of discipline that he communicated to us, when I challenged him on the TurtleTrader story, he was like, "No, no, no. We stick to our guns." And that's what you need to do. It's hard, but obviously it's worth it, especially when a year like 2022 comes along.

And that's another interview, another great interview, and another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.

We provide a transcript for every episode. Just go to www.investorhour.come, click on the episode you want, scroll all the way down, click on the word "transcript," and enjoy.

If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com. And do me a favor... subscribe to the show on iTunes, Google Play, or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review. Follow us on Facebook and Instagram – our handle is @investorhour. On Twitter, our handle is @investor_hour. If you have a guest you want me to interview, drop us a note at [email protected], or call the listener feedback line, 800-381-2357. Tell us what's on your mind, and hear your voice on the show. Till next week, I'm Dan Ferris. Thanks for listening.

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