Strategies for Today's Markets: Adapting to the New Investment Landscape

Lyn Alden (00:00)

So, one thing that's interesting is research has shown that the average stock actually doesn't perform very well. Most of the stock market's returns come from a pretty small number of names, and it tends to be certain industries where you're able to get excess profits. So tech, healthcare, energy, communications, those tend to be the sectors that have a higher than normal, like higher than average rate of outperformers. So, I focus on certain sectors more so than others. But primarily what I do is I look for profitable companies that have economic moats, meaning that they're hard to disrupt. They have a lot of inbuilt advantages that are hard for competitors to overcome, which allows them to have pretty high margins.

Announcer (00:45)

Welcome to Paychex THRIVE, a Business Podcast where you'll hear timely insights to help you navigate marketplace dynamics and propel your business forward. Here's your host, Gene Marks.

Gene Marks (01:01)

Everybody. It's Gene Marks, and welcome back to another episode of the Paychex THRIVE podcast. I'm thrilled to have back with me, Lyn Alden. She's the founder of Lyn Alden Investment Strategy and she is the author of Broken: Why our Financial System is Failing Us and How We Can Make It Better. First of all, Lyn, your book's doing pretty well, isn't it?

Lyn Alden (01:23)

Yeah. People are enjoying it. It was a pleasure to write it, and definitely one of the more meaningful things I've kind of worked on recently.

Gene Marks (01:30)

Yeah, I believe it. And you have got such a great and engaged following, mostly on Twitter. I mean, I'm not sure if you're as active elsewhere, but people taking copies of your books and taking photos of it all around the world and in different places and whatever is, it's got to be really heartening. Are you working on anything new?

Lyn Alden (01:51)

Not in terms of a book. I'm focusing on the rest of my business. I do have ideas for a second book, but it's not something I'm rushing into because it is a very big task to put together a book.

Gene Marks (02:01)

It really is. And I know that it's gratifying to write the book, and I know that you enjoyed the process, although it's a lot of hard work. I mean, I'm just kind of curious for all of us that are out there, do you think it's, do you think it's worth it, writing a book? Like, was it, it certainly gives you exposure and helps your brand. I get that. But financially, would you recommend the exercise to others?

Lyn Alden (02:24)

I think it depends. I mean, for example, I went into it knowing that as far as my business lines go, it's not a great ROI compared to that amount of time spent elsewhere in my business. So, for me, it was not mostly a financial decision. It was mostly that it was distracting not to write the book. Like, I had a book that formed in my head. And so, all the other benefits of writing the book were what I was focusing on. Of course, it did well financially, but as compared to other business lines, it's generally, you rarely write a book for money. You write it for those other aspects.

Gene Marks (03:01)

Yeah. I'm glad you said. There was actually a really good article written by this woman who really dug through this lawsuit that was going on between two large publishing houses recently where a lot of the details of the publishing industry came out. And I'll send you a link to it and we can share it in the show notes as well. But the conclusion was that nobody makes any money writing books. Not that it doesn't have an impact, but it's the big-name people, the celebrities, those kind of people, they make the money. So, for most of us, I've written six books, and, you know, they suck. I mean, like, I haven't really made that much money off of doing it. I mean, they've more than broken even, but it's more like a branding thing. And it's also just an opportunity to, I think it's like a mental exercise, you know what I mean?

Lyn Alden (03:47)

Yeah. And there are like, different, you know, different pieces of content have different. They reach different people. They have different purposes. So, for example, instead of pointing people to ten different articles, I can point them to a book that really kind of walks them through a more complete picture of kind of what I'm trying to share. And it's purposely written in such a way to be as evergreen as possible so that five years from now, it's still referable.

Gene Marks (04:11)

That is the biggest challenge that you have when you're writing a book on the topics that you focus on is keeping it evergreen because the topic could get stale. So, okay, so you wrote the book. It's great. I bought it. I've read it. I recommend it to all of you guys watching. It's just a sound, basically. It basically walks you through the history of money and it's, you know, like you call it through the lens of technology and how monetary systems have changed and things that we should be aware of and how economies work. It's a really great, insightful book. Besides the book, for all of you guys watching and listening, Lyn writes an amazing monthly newsletter that she shares. It's free. I haven't paid you for this, Lyn. So sorry. I don't think there's a subscription. But you do have a paid subscription base, correct?

Lyn Alden (04:55)

Yeah. I have a premium service that comes out every two weeks, whereas the public newsletter comes out roughly every six weeks, about eight times a year.

Gene Marks (05:04)

Got it. Okay. That sounds good. I really should subscribe because I am a fan. This last newsletter that you wrote was your April newsletter, and it was all about investing. I thought, let's talk about that today. We have a lot of watchers and listeners. Our audience are business owners. The average age of the us small business owner is 55 years old. More than half of the business owners in this country are over the age of 50. When I go out and I meet clients and I speak to groups and associations, like, all around the country, it's just a bunch of, like, older people that are in the room, you know, and they have, you know, a very strong interest in investing wisely, as we do all. But they have a little bit more capital at risk. And your April newsletter really, really dug into certain strategies of investing, and I wanted to touch on some of the main points. So, for starters, Lyn, you talk about a 60/40 portfolio, and you also say that you feel that the expected return, the rate of return on this portfolio, will be lower than what we've seen over the next 40 years. Can I ask you, first of all to explain to us what you mean by a 60/40 portfolio, whether you recommend it or not, and why you believe that this rate of return is likely to be lower?

Lyn Alden (06:25)

Sure. The 60/40 portfolio refers to the classic 60% stocks, 40% bonds portfolio that is often used as a baseline. And the reason that portfolio is constructed is because, generally speaking, stocks, more often than not, are inversely correlated to bonds. So stocks do better overall. But then, during recessionary environments, when stocks generally do poorly, bonds usually do pretty well. Interest rates fall, bond prices rise. If you have that 60/40 portfolio and balance it, you can get most of the returns associated with equities, but with less volatility. That's how that portfolio is constructed. But the challenge is that that portfolio became popular over the past 40 years, which was an era of steadily falling interest rates from a very high level. And so, especially in the first three decades of that, bonds did very well because you both had high interest rates, so you're getting paid well to own them. But then also the interest rates are steadily falling, which means your bond price is appreciating as well. And so that was a very good strategy. The problem is that once you get down to pretty low interest rates, especially relative to the ongoing money supply growth that's happening. Those bonds become less attractive as part of a portfolio. And generally speaking, when you look at inflationary decades, bonds historically lose a lot of their inverse correlation to equities. They start to, if anything, become more positively correlated with equities, which makes them less compelling, at least as a 40% portfolio chunk. Generally speaking, when you have an inflationary decade, and in modern history, we've had really four of them, there's the 1910s, the 1940s, the 1970s, and then to some extent the 2000s, although that one had a lot of offsets. But what you generally have in common of those four inflationary decades is that a stock/bond portfolio does not do particularly good, especially in real terms, let alone nominally. It could do decent, but it's still usually not great. And so the article, the newsletter explored what does do well in those decades, and generally the answer is commodity-type assets. Commodity producers could be hard. Money is like gold. Obviously, bitcoin doesn’t have that track record, but now Bitcoin could be in that category as well. You have a number of those types of things that generally do pretty well in those inflationary environments. If anything, some of those are causing the inflation that’s happening. You have these energy and commodity capex cycles where you underinvest for a while, and then you get higher prices. You have to invest more, and that eventually results in oversupply. So you get a period of lower prices. But generally speaking, that tends to be a more useful diversifier in, say, an equity portfolio. If you want to have a portfolio that's geared not entirely to disinflation and instead want to have a portfolio that is prepared for either disinflationary scenarios or more inflationary scenarios.

Gene Marks (09:33)

You've said, though. But I mean, you say that, listen, this traditional 60/40 split is you don't think the rate of return on this is you think it's going to be lower for the next 40 years, though you just said there are certain decades where we're in an inflationary environment, but these didn't go on for 40 years. Why do you seem so pessimistic on this type of split now?

Lyn Alden (09:57)

When I make that comparison, I'm basically saying that the next 40 years are less like, like unlikely to be as good as the prior 40 years. And so, of course, some years and some decades will be better than others. But the main reason is that the past 40 years, that steadily falling interest rate was a huge tailwind both to bonds and then also to equities. Because if you're investing in equities, if you can get 15% on a treasury, you're not going to pay very much for an equity. But as they steadily fall to 10%, 5%, and almost zero at one point, you can pay very high valuations for an equity because you have a lower opportunity cost. And so, the problem is that when we enter an environment of, say, flat interest rates or even rising interest rates more structurally, then you have an issue where equities, they're still generating earnings, they're still growing in that sense, that they still have these nominal long-term earnings growth, but that additional valuation increase, say, the average cape ratio of the market. So cyclically adjusted price-to-earnings ratio, when that goes from 15 to 30 on top of growing earnings, that's a really strong equity return environment. And if you go through a period where valuations are just flat now, let alone potentially falling on top of long term higher earnings, generally you just get lower returns. They still could be decent, but they're not likely to be as good as you've come to expect.

Gene Marks (11:27)

Got it. Obviously, individual stocks and individual bonds can play out their own ways. So, you're talking in general terms. So, when you talk about having a 60/40 portfolio in stocks and then bonds, what's your recommended makeup of that portfolio? When you say 60% should be in stocks, are you saying they should be in a Dow fund or an S&P 500 fund or something similar to that?

Lyn Alden (11:55)

So, I think that the S&P 500 is kind of a classic benchmark. It does have kind of selection bias that the U.S. was the best-performing market over the past 40 years. And so most stock markets globally don't perform that well. The U.S. one's done very well. And so, there's a couple of things you can do to potentially improve it. So, evidence has shown over the long term that an equal-weight S&P 500 historically outperforms the normal S&P 500. And what I mean by that is the normal S&P 500 is weighted by market capitalization. So, for example, Apple, as a multi-trillion-dollar company, has a much bigger weighting than, say, American Express, which is a large company, but it's nowhere near the size of Apple. So, it's way more allocated to Apple than American Express. Whereas an equal-weight S&P 500 would put equal amounts into each of the 500 companies and rebalance that on, say, a quarterly basis. And that has periods of time where it outperforms and periods of time where it underperforms. But in aggregate, it has generally outperformed. And that's because you're generally a little bit less concentrated in the biggest stocks while still being invested in the same top 500 companies. You can also take your equity section and diversify a little bit internationally where you have some foreign developed, some foreign emerging. And it's one of those things like for one decade that'll feel like a drag in a portfolio. For example, if you had any international exposure over the past decade, it's pretty much only been for the worst because us markets have gone almost straight up and a lot of other markets have gone sideways. But there's other decades where American equities do pretty poorly. They chop along, they go sideways, they don't do very good. Whereas other markets experience better returns. Generally speaking, when they have that starting point of being cheaper and under-allocated to because they've had a long period of bad returns, that's generally when they're in a better position to offer better returns going forward. I would at least consider some geographic diversification within that equity slice.

Gene Marks (14:08)

In your newsletter, you do share some of the stocks that you own and some of the places that you invest in. Do you personally lately, do you invest in stock market index funds, Vanguard funds or Fidelity or whatnot? Or are you more of a targeted owning specific shares or specific bonds?

Lyn Alden (14:25)

So, because I've been investing for like two decades, I tend to like that approach of kind of knowing what I own. But I still also do use some index funds as well. One of my retirement accounts is index funds. I also use index ETFs for some of my foreign exposure because I'm less able to pick out a lot of good companies internationally. There's still some internationally that I do, but just the number of individual names I'm going to fully understand in international context is lower. So, I often just spread the diversification out by owning some ETFs. For me, it's a mix of both.

Gene Marks (15:04)

As a private investor, this is what you're spending full time on this a lot. I'm curious if you do have any advice for our audience when it comes time, if they are interested in holding individual shares, what are the kinds of things that you look at in a company to help you decide whether or not it's a good investment or not?

Lyn Alden (15:26)

One thing that's interesting is research has shown that the average stock actually doesn't perform very well. Most of the stock market's returns come from a pretty small number of names. It tends to be certain industries where you're able to get excess profits. So, tech, healthcare, energy, communications, those tend to be the sectors that have a higher than normal, like higher than average rate of outperformers. So, I focus on certain sectors more so than others. But primarily what I do is I look for profitable companies that have economic moats, meaning that they're hard to disrupt. They have a lot of inbuilt advantages that are hard for competitors to overcome, which allows them to have pretty high margins. And then I look for reasonable valuations. So, for example, I often look for a dividend adjusted price to earnings to growth ratio that's below two. So, for example, if a stock is growing earnings at 10% a year, I generally want to try to buy that for under 20 times earnings if possible. I don't want to pay 40 times earnings for a stock with that type of growth. Basic certain valuation checks. And then they also inform me, if I look at a market, I see a lot of stocks that are overvalued. It might make me dial my exposure down a little bit to that market. If I see another market where there's a bunch of stocks that all seem to be trading at pretty reasonable valuations, I might increase my exposure to that market. In addition to helping with individual stock selection, it helps with understanding the expected forward returns of a, say an index. So, for me it’s a good balance sheet, profitable company and then reasonable valuation.

Gene Marks (17:06)

I have an uncle, he's since passed away. He was in his 80s at the time, but he was a lifelong investor and he's on my wife's side of the family and lived in London, and he was the old-school investor. He would read the Financial Times every day. He would get the shareholder reports, he would always go to the shareholder meetings he would buy and hold for a long period of time. He would evaluate management of the company and whether or not he trusts them, or thinks they know what they're doing and how they answer questions and how transparent they are. All those kinds of factors. Are those factors even relevant today? I mean, you didn't mention that right now and I just wonder if there's a reason why you didn't mention that. Those kinds of things.

Lyn Alden (17:50)

So that comes down to sector by sector, especially if it's a smaller company, more and more diligence is needed. And so, for me, those types of things can build high conviction in a more concentrated position. For my approach, what I do is I blend macro with individual company analysis, because the macro can inform me of what types of exposures I might want to have. And also looking at individual companies helps inform my macro view, because I view this as a period of time where macro is very important. Right. You know, so for example, with the kind of the very large fiscal deficits, for example, and some of the, some of the geopolitical dynamics and things like that, those forces, there are decades where they don't really matter that much, and there are other decades where they matter quite a bit. And so I generally view that those top down forces to be quite substantial at this time. And so for me, you know, for most companies, I don't do that super deep due diligence in the same way that I would if I was, say, running a really concentrated book and only have ten or 15 stocks. That's when you really have to dig down into it. But there are certain stocks in certain sectors that I do that type of analysis on.

Gene Marks (19:02)

It obviously depends on a lot of different factors. But I'm wondering if you have a... Selling a stock, I think, to me is harder than buying it. Different people have different parameters, lines that they reach when it comes time to trigger a sale. Do you have something like that? Is there something out of the box? You're like, well, would we get to a certain valuation of a certain times earnings or a certain stock price? I'm definitely going to sell. Or are there other factors that go into your decision when you decide to unload a stock?

Lyn Alden (19:32)

Yeah, there's really two main reasons to sell. The way I approach it. One is that the valuation became unattractive. So if I owned a stock and thought it was worth 20 times earnings, and I bought it 15 times earnings, but now it's worth 30 times earnings and the growth has not doubled, the growth rates not doubled, but the market's just paying twice as much for it. That's a candidate for me to either trim the position or potentially remove it entirely. And it usually feels pretty good because it generally means your investment performed very well. The other reason would basically be that the thesis has changed. Let's say I had certain growth expectations for the company, I had certain reasons to expect why they would gain market share, while maybe their overall industry is growing. And if there starts to be evidence that that's not the case, and it's not just a bad quarter or a cyclical hiccup, it's actually like there's more structural signs that the thesis was maybe inaccurate, then I might have to sell, even if it's in the red. And that's probably the hardest type of sale because people they benchmark to their starting price, they have like a sunk cost fallacy whereas what you really have to do is analyze your portfolio kind of fresh and think, like, if I were investing today, would I pick this today? Because if I'm not going to pick it today, then why do I still hold it?

Gene Marks (20:52)

That's actually great advice.

Lyn Alden (20:53)

Yeah, that's the hardest reason to have to sell a company. Luckily, it doesn't happen too often, but it does happen from time to time.

Gene Marks (21:00)

And about how many individual stocks do you personally own?

Lyn Alden (21:03)

I own a few dozen. I own probably four dozen. Actually. I own quite a big number, but that's often because their ETFs, for example. They might be in a sector where they're not giving me the type of exposure I want and I'm able to go that more blend of enough names that I have a pretty diversified base, but that I'm able to sculpt it a little bit more than I could if I was just relying on pure indices. And those names tend to be spread. I try to diversify across sectors, but there's inherently certain sectors that I'm more interested in or more knowledgeable on than other sectors. And so, yeah, there tends to be a decent amount of sector concentration. 

Gene Marks (21:46)

I'm glad you brought that up. When you say there are certain sectors that you're more knowledgeable about, I mean, back before your time, but during my time, Lynn, a very famous money fund manager named Peter Lynch, he was the manager of the Magellan Fund of Fidelity, wrote a couple of big best-selling books. His whole strategy was, you buy what you know, you walk around the shopping malls of the day and you see where your kids are, what stores they're flocking to, and you don't invest in areas that you don't understand what the company does or you're not familiar with the industry. I mean, you just said that you tend to lean more towards some investments in sectors that you're more familiar with. So, do you buy into that strategy? I bought, like, American Airline stock and Marriott stock because I use them so much. So, I have a real touch and feel as to how the businesses are run. Do you think that's a good strategy? Is that something that you do?

Lyn Alden (22:39)

I think it's a good starting point. It's challenging because some companies are inherently business to business, so it's less likely that you would encounter them. So, if you only use that strategy, it kind of pigeonholes you into B2C type of businesses, business-to-consumer businesses. So I wouldn't only rely on that approach, but I do think that that's a good starting point? Basically, if you use a product on a regular basis, you know what makes it good, you know what you'd like the company to make in the future, related products. And so that could be a good insight. That's a type of research that's basically already done for you because you've already done the product research just by having used it. But yeah, there's like all sorts of kind of business-to-business type of investments as well, where I might have, I'm not in a position where I'm going to use their products, but I have to understand those products. And so in addition, if you know a company very well, you could get blinded by valuations or something like you might, for example, just not look at the valuations because you like the company, whereas you do have to be diligent around is the company kind of affordably priced relative to its fundamentals and growth expectations.

Gene Marks (23:55)

I was a controller at a publicly held company years ago, so 30 years ago, and we were a small biotech company at the time, and we had a product in clinical trials, and the valuation of the company was obviously aligned with how those clinical trials were going to go. And I'll never forget this, Lyn. So, the results of the clinical trials came back and they were negative. So, we were like, okay, this is going to have a big impact on our stock. And I remember it was me and the CFO and the CEO of the company. There was only like 100 people in the company. We drew up the list of our institutional investors in our company, and when the markets were opening the next morning at 9:30, or whenever they opened, we called them within the legal timeframe. It was like ten minutes before the market opened. We each called our institutional investors personally to tell them the results of this trial. So frankly, so they can get out, so they're happy to get out while they can. And hopefully we'll come back in the future when we have working on other stuff, like they're not getting messed around, and that's exactly what they did. So, within 5, 10 minutes after the market opening, our biggest investor pulled out and the stock lost literally 50% of its price. And by the time you woke up in the morning and checked your stock price, more price, you were already left out in the cold. There is this perception, and my story is meant to tell you that it's more than a perception that, not that the market is rigged, but there are big players that go back and forth to each other. What are your thoughts on that and the impact on individual investors like you. Does that, does that scare you, concern you? Or is that just one of the risks that you just assume so?

Lyn Alden (25:43)

Generally speaking, the smaller, more concentrated the company, the bigger risk of something like that is. That's actually a reason that I don't personally invest in small biotech, because I don't have an edge. I'm not knowledgeable in that subject matter. There are people, that's their whole profession, they run a biotech fund, for example. They look over these trials all the time, whereas that's outside of my area of expertise. For me, I like the mid-cap space or sometimes large caps where they're less prone to those really big one-time news events that can affect them that significantly. Basically, the market is somewhat rigged against the little guy. That's been the case. For example, in recent years, it's become popular that if you track politician portfolios, they're actually outperforming some of the best hedge fund managers.

Gene Marks (26:38)

Wow, what a surprise.

Lyn Alden (26:39)

Yeah, they have a lot of information. And it's funny, like if you work, for example, at the FAA, you're not really allowed to own airline stocks and things like that. You're actually, because you could have information that you probably shouldn't be profiting from. Whereas if you're in Congress, you can own anything you want even though you actually have far more information. So, yeah, from politicians to large pools of capital, there are entities that have bigger edges than others. I think for a smaller investor, one of the edges that a small individual investor has is time frame. So, in a professional investing environment, usually they have to do well every quarter. If they have a couple bad quarters in a row, their career could be at risk. Whereas if you make your money elsewhere and you're investing for yourself, the only people that really is looking at it is you and your spouse. And so, you're not answerable. You don't have to sell something at the wrong time. You don't have to pick things that are going to do well in the next two quarters. You can pick things that say, I'm going to filter out all the short term stuff and just focus on the question. In three to five years, will this company likely be more valuable than it is now? You can narrow your focus, and that's one of the few advantages I think an individual smaller investor has compared to larger pools of capital.

Gene Marks (28:01)

Makes sense. One last story and then we'll let you go. And just because I wanted to get your thoughts and I didn't even cover some of the other things you had in your investment newsletter. But your advice is so helpful to all of us. Crypto and Bitcoin. True story, again. It was last summer, I'm walking on the beach of Margate, New Jersey with my brother-in-law, and we were looking at the price, and I don't know nothing about crypto. I mean, I'm not, I don't invest in it, but I get questions about this all the time. And I remember the price of Bitcoin at the time, and I was making the argument to him, saying even if it lost, half of its value would still be worth a significant amount. And when you look at its history, it's been a twice the value that it was when we were walking down the beach last summer. Of course, I didn't buy anything, and neither did my brother-in-law. Now we just saw each other last night. We're like, we're idiots, I guess, because now Bitcoin more than doubled it was last summer. It's a volatile area. People like to invest in it, and they think they can make quick money off it. You cover crypto. Please share your thoughts and recommendations when it comes to crypto. For the typical Main Street investor, like most of us that are watching or listening to this podcast, is it something that you would have in your portfolio, even as a small amount that you're willing to lose? And do you really think that stocks like bitcoin, or not stocks, but viable currencies like bitcoin will significantly increase or decrease as time goes on? What are your thoughts on crypto?

Lyn Alden (29:40)

Yeah, because they're volatile, you have to size them accordingly for your risk tolerance. That's the first things I'd recommend. In general, I view bitcoin as highly investible and not really most of the other cryptocurrencies. Generally speaking, anytime in history when there's been a gatekeeper that's kind of brought down, there tends to be a long tail of low-quality things. So, for example, when people could self-publish books more readily, on one hand, that's a good thing, but on the other hand, you get a long tail of really low-quality books on the market, and then same thing for shows and podcasts. We've gone around the gatekeepers of media, but that also means that there's a lot of low-quality stuff that hits the market. And what this technology does is it goes around kind of financial gatekeepers. And so basically, I think the core innovation of what Bitcoin is, is profound. But then you get a long tail of really low-quality stuff coming to market. And if you look at the track record of most cryptos in a sample of, for example, 20,000 of them. Only something like three of them ever made a higher high relative to Bitcoin in the next cycle. And so, they generally have this one big, glorious moment and then they have this long period of stagnation relative to bitcoin. So, I think the things that are really kind of solving people's problems and then have staying power, probably Bitcoin and stable coins. Stablecoins aren't really investable in that sense. They're more utility asset, especially for people outside of the United States that might want dollar exposure or as a unit of account for trading. That for me really is Bitcoin as the one investible asset in the space. And I do think that having a non-zero position in it is prudent.

Gene Marks (31:31)

That's great. Lyn, You've been fantastic as usual. Lyn Alden is the founder of Lyn Alden Investment Strategy. Lyn, how do our listeners and viewers get a hold of you?

Lyn Alden (31:39)

They can check out lyndalden.com or they can check out my book, Broken Money. Thank you for having me.

Gene Marks (31:44)

Yes, I'm glad you were on and everybody do check out Lyn's book, Broken Money: Why our Financial System is Failing Us and How We Can Make It Better. Thanks for coming on, Lyn. You're great. I look forward to speaking with you again. Do you have a topic or a guest you would like to hear on THRIVE? Please let us know. Visit payx.me/thrivetopics and send us your ideas or matters of interest. Also, if your business is looking to simplify your HR, payroll, benefits, or insurance services, see how Paychex can help, visit the resource hub at paychex.com/worx. That's W-O-R-X. Paychex can help manage those complexities while you focus on all the ways you want your business to thrive. I'm your host, Gene Marks, and thanks for joining us. Till next time, take care.

Lyn Alden (32:31)

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