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Episode 92: Data Driven Investing
186 Plays4 years ago
There’s a sweet spot in investing where you get to participate in the upside while getting out of a down market. But trying to actively trade to that sweet spot, knowing when to get in and out, is a stressful road that seldom works out and that is made even more difficult by the realities of human emotion. Enter Howard Capital Management.
Today we talk to Kramer Shiflett with HCM about data driven investment management, the use of algorithms to manage the triggers of when to trade and stay put, and how you can take advantage of this way of investing.
Recommended
Transcript
The Uncommon Life Project Podcast
00:00:02
Speaker
Everyone dreams about living an uncommon life, but how we define that dream is very different for each of us. And for most, it's a lifelong pursuit. Welcome to the Uncommon Life Project podcast. We're going to introduce you to people who are living that life or enjoying the journey to get there. We're going to also give you some tools, tricks, and tips for starting or accelerating your own efforts to live an uncommon life.
00:00:27
Speaker
A life worth celebrating and savoring.
Meet the Hosts and Special Guest
00:00:30
Speaker
Please welcome your hosts, Brian Dewhurst and Philip Ramsey.
00:00:36
Speaker
Hello and welcome everybody to another episode of your favorite show. My favorite show, definitely Brian's favorite show, The Uncommon Life Project. We're glad you're tuning in. We have a really good show and episode for you and something that we don't really talk too, too much about, but we're talking about investments, different types of investments. And we have a amazing guest and on the show today. And so Brian, I'll let you introduce and then let's jump in and we'll go from there.
00:01:05
Speaker
All right, good morning. And we have the one and only Kramer Shifflett.
Introduction to Howard Capital Management
00:01:09
Speaker
He is a regional vice president with Howard Capital Management, located out of Hotlana, Georgia. And he assists advisors like us in growing their business and navigating Howard's capital wide range of offerings and solutions. Howard Capital Management,
00:01:26
Speaker
uh, has almost 50 employees and is managing almost $4 billion. So, uh, excited to dig into this story and, uh, get to know them a little bit more. Welcome to show Kramer. Yeah. Thanks for having me. I appreciate the time. Absolutely. Okay. So I want to talk high level. Brian and I have this book and I love this chapter of the book. Cause we talk about the different styles of investments and there's a lot of them.
00:01:51
Speaker
for people who haven't heard or ever even dug into this or done history. So I wanted to talk about each one of them and kind of the nuances of each. So Brian, let's start with that and then we'll kind of dive into what Howard does and how they do it.
Howard's Investment Strategies Explained
00:02:06
Speaker
All right, so there's a lot of different investment styles and we want to just kind of break them down. I think the easiest one to start with is just passive investing. Howard is the opposite of that, so we'll get into the opposite of it, but passive investing is, you know, or indexing is just buying something, holding it, can also be called buy and hold, but really you're not,
00:02:31
Speaker
you're not, you know, changing things a lot. You're just buying an index like Vanguard. And you're trying to just stay patient and let things work out over time, kind of the, the set it and forget it mode, the set it and forget it mode. So there's kind of that. And then within that, you know, in our business to the, the adage has always been kind of like asset allocation, where, you know, you have, you know, large cap growth, large,
00:02:57
Speaker
or not large, but mid-cap growth, small cap value, international bonds, all these buzzwords and you're kind of putting a smattering of each of your dollars into each of those and building an asset allocation portfolio.
00:03:16
Speaker
And so from there, there's lots of other subcategories that we could dive into, dividend investing, but I'll stop there. Right. And then basically what Howard is, is the shift from the buy and hold. So that's probably a great introduction, Kramer, for you to jump in. And what would you categorize your investment style at Howard Capital there?
00:03:45
Speaker
Sure, so we call ourselves a defensive growth-oriented manager, which seems kind of odd because typically an investment manager is either going to be one or the other. They're going to be very defensive, sort of conservative, and really their main goal would be to not lose clients' assets.
00:04:04
Speaker
Or they're going to be sort of growth oriented. They're going to swing for the fences and try to generate a lot of return knowing that there's going to be some added risk. What I think we do well is combine the two. So we are what you would call an active manager.
00:04:21
Speaker
We don't favor asset allocation. We don't really buy and hold. We're consistently trading our accounts. And why we do that is we believe we can generate a higher rate of return. And then on the flip side, there are times where active manager is less about trading and more about getting out of the way. And that's where you'll see a manager like Howard Capital employ some sort of algorithm like the Howard Capital buy line.
00:04:50
Speaker
which will tell us basically to get in and out of the market. So we're active on both sides of the coin, which I think is, in my opinion, a bit of an advantage. But that's true active management and the full sense of the term.
HCM Byline Algorithm's Development
00:05:04
Speaker
I want to jump in here and pause the conversation and I want to go backwards into how Howard got started. We were looking for a money manager like Howard for about four to five years coming out of the 0809 collapse.
00:05:23
Speaker
I think anybody can resonate with this, whether you're an advisor or just normal investor. You just read the headlines today and everything is so dramatic, so polarizing. It doesn't feel like the news anymore. It feels like opinion and the sky is falling constantly. We were looking for a data-driven approach that drowns all of that out. I remember
00:05:49
Speaker
I can't remember what movie it was, but it might have been old school where Vince Vaughn says earmuffs. You just want to put earmuffs on all of this headline news and what is the data saying we should be? Should we be long? Should we be in cash? Should we be defensive, expecting the market to go down? We found Howard and they fit this bill of a data-driven,
00:06:11
Speaker
money manager approach. You mentioned the HCM byline. So can you kind of talk to our listeners about how Howard was created and founded and then we can kind of step into the algorithm?
00:06:24
Speaker
Yeah, absolutely. Vance Howard is the founder, president, and CEO of Howard Capital. He has been an entrepreneur, business owner from the start. He owned a waste management company in his 20s. He sold it in his late 20s for a decent amount of money.
00:06:47
Speaker
He's always been sort of an analytical guy, so he started trading his own accounts. And he would actually fly out and sit with traders that he'd read about in New York Times or Wall Street Journal or books that he had read about trading, and he would shadow them. And he turned into sort of a sponge, right? And he's traveling all over the country interviewing traders, talking to different money managers, really just fascinated with the
00:07:16
Speaker
the industry. Um, and then he became an advisor. So he started advising, you know, friends and family trading their accounts and it sort of took off from there. Um, he ended up getting a few requests from broker dealers, uh, to manage money for other advisors clients, which to him was sort of the ultimate compliment. Right. Cause I mean, this, he's a good old boy from Texas and he never really, you know,
00:07:44
Speaker
He didn't set out to be a money manager. It just sort of came to fruition through a fascination he had with the markets. And he started the HCM byline in the early 90s. And it was very simple calculations. Ratio of new highs to new lows was a primary indicator. It seems simple, but it makes a lot of sense, right? If you have more new highs in the market than you do new lows, that's a good thing. We should probably trade that market.
00:08:11
Speaker
As he grew and as assets came in, he became more well-known in the industry. He had more resources to put behind the algorithms. Today, we're looking at thousands and thousands and thousands of lines of code in the HCM byline, whereas
00:08:31
Speaker
At the very beginning, in the early 90s, it was written down on a notepad. It's been a very long road, but we've been using this algorithm as a firm for over 20 years. It has proven its worth time and time again.
Market Entry and Exit Strategies
00:08:45
Speaker
The dotcom bubble, early 2000s, the byline helped us navigate that, 2008 as well, and then most recently, COVID. It's
00:08:55
Speaker
We have a bit of a benefit having an algorithm that's been around so long. So let's try to deconstruct this or make it really simple for somebody who doesn't know maybe what or is intimidated by an investment algorithm or some of these words.
00:09:13
Speaker
That's usually where I jump in. Let me just jump in there quickly. Because this is the reason why Brian and I gravitated towards this style of investment. Because if you ask somebody, hey, you describe your best, your perfect investment, this is what they would say. I don't want it to go down, so I want it to be in cash when it goes down. But when it goes up, I want to be in the market. I want to make money. So that's basically what people would say. When it's going up, I want to be in. When it's going down, I don't want to be in.
00:09:40
Speaker
I want all the upside with none of the downside. I want it locked in. And if I kid, I don't want to pay tax. Right now, we're not saying that Howard is that exact thing for the record for compliance purposes. That being said though, this HCM byline is something that they are going to try to figure out when the market is going to go up and when the market isn't going down. And that's what Kramer has been talking about. And so, okay, that's my dumb way to break that down. I'm sure Kramer, you're going to do a great job, but
00:10:10
Speaker
That's what I would say. It's sort of like, um, it's a guard rail, right? So, you know, I'm, I'm up here in North Georgia and, you know, we've got a lot of mountains up here and you go down a mountain road, right? You're twisting your turning, you go up, you go down, you go sideways. We're the guard rail on the side of that, that road, right? We're not going to stop everything. We're not calling tops or bottles. We're not perfect, you know, but
00:10:35
Speaker
we'll keep you from going over the ledge. And that's the big thing. We're really just trying to, if we can catch 70 to 80% of the upside and miss 70 to 80% of the downside, we're in a really good spot. And that's what we're trying to do. I think that's a great way to explain it. I mean, kind of the way we explain it, which is similar to a road analogy, is just red light, green light. And sometimes it's yellow light. But for the most part, when the market with these indicators or algorithm flashes and they have all this coded,
00:11:05
Speaker
It's like you're driving your car and there's a red light. It's time to get out or caution. You need to slow down. That's what their indicator does and it tells them what to do and then they do it. It's a data-driven process. It helps them exit their positions in the market when they see or expect volatility to increase and potential downside to increase.
00:11:29
Speaker
Then, with any indicator or algorithm, we get a lot of people obviously talking about the headline risk right now. There's just a lot of things people are concerned about. Whenever you're out of the market, it's always the question of when do you get back in? I think as part of any algorithm or indicator, it's double-sided. It's not only getting out, but getting back in. Can you talk about that as well?
00:11:55
Speaker
Sure. Yeah. So a good way to think about the HCM byline is if you're familiar with moving averages at all, or just think of it in general as a trend line. We've basically taken calculations that we think are going to tell us if the market's going up or down.
00:12:13
Speaker
and we've put them into a moving average, a proprietary trend line. If the market falls below, we're out. When the market rises above our trend line, we're in. Various things will cause that market or that trend line to move. Really, what we're looking at is, is the market trending in an upward direction and how fast is it trending?
00:12:35
Speaker
That's really all you need to know. I don't need to know why it's doing what it's doing. I don't need to look at what's going on in the headlines or what CEO is saying what. It doesn't really matter. It just matters if the market's moving in which way is it going. When we talk about getting back into the market, it's very tricky. That's where that growth part of the defensive growth manager comes in.
00:12:58
Speaker
because you have to get back in the market at the right time and you have to do it with conviction, which fortunately we're able to do because we trust the math that we've been using for the last two decades. But it's very important when you get back in that you have momentum behind you. So that's something that we look at. We put a lot of emphasis on is, okay, the market is moving upward and that's good. Of course,
00:13:20
Speaker
But how fast is it moving upward because the quickness of that rise is very indicative of how long it's going to stay there, right? So if the market is moving quickly up, there's a very good chance that it's going to hold. And then the other thing that you have to look at, which is equally as important,
00:13:36
Speaker
is it actually holding? We have set constraints on our trend line where we're basically saying, it has to continue to rise or stay at this level for a given amount of time so that we know it's a true byline call. We really don't want
00:13:54
Speaker
to be willy-nilly trading accounts. If the market's up, we trade. If it goes down, we're out. We don't do that. We really need a sustained trend. When we talk about getting back into the market, those are the things we're looking at. The momentum behind the market recovery and how long it's going to stay there. It's a proprietary mix. The number of days that we let it sit up before we get back in is a secret sauce, but it's worked out very well for us.
Learning from Market Challenges
00:14:24
Speaker
I love that you guys take the emotion out of it. Follow the data and especially with the headlines and you read the front page of the newspaper, like it's basically going to go to zero. But when you have data, you don't have to worry about that. You have convictions of a history.
00:14:41
Speaker
proven track record, take the emotion out of it, follow the data, jump in when you need to, but you take the emotion out of it. And I've seen probably the most successful traders that I've ever known, just take the emotion out of it. When you start getting your emotion into it, goodbye, it gets all over. So I love that there's data involved and that there's a history of it. So what were you going to say, Brian?
00:15:06
Speaker
Yeah, a couple of things. One, I think we've talked about on the podcast a lot is this process. McDonald's is known for their process in the franchise world. And so what you would say earlier, Kramer, though, is this isn't perfect. We're not trying to set this up as this is the end all, be all to investing. And they're not perfect. They're not calling the exact top, the exact bottom. Nobody's doing that on a consistent basis. But they do have a process.
00:15:34
Speaker
And so 2018 was one of your tougher years. So it's not at all roses and sunshine. It was a tough year for most money managers because it was a very volatile entry year. The market went up and down. I think we had over two 10% losses entry year, but ended up closing like 1% or something like that. So it was just a really rough ride. So can you talk about 2018 and then how you guys kind of retooled the process and the algorithm from there?
00:16:02
Speaker
Yeah, absolutely. And I'm glad you brought that up. When you're running a quantitative model or a data-driven, math-driven formula, you're always right until you're wrong, right? There's no foresight in math. It's either good, and when it's not good, you've got to go back and look at it.
00:16:25
Speaker
The market you guys i'm sure remember the last quarter of twenty eighteen the market declined something like fourteen percent and fourteen days it was right around the holidays.
00:16:37
Speaker
showed us that we were correct in our thinking of, it's not Kramer and Brian trading our Apple stock back and forth, it's algorithm versus algorithm. Who's got the best one and who's gonna be faster? Computerized trading, that sort of market, and it was quick, right? So we lost a lot of assets pretty quickly. We realized that the byline of 2008, right? The byline that kept us out of the market in 08,
00:17:07
Speaker
was not fast enough for the market of 2018. Not having the benefit of being able to predict these things because we do run a non-emotional data-driven formula, we experienced a fairly rough last quarter.
00:17:24
Speaker
Why this benefits us is that we're able to go back and look at what happened. We've got the data, so we can go back and backtest these formulas and the algorithms and find a mix that would have caught it. We tweaked our byline and made it a little bit faster. You've got to be very careful that you don't make it too fast. We spent a ton of time and resources
00:17:47
Speaker
and defining the right mix on our trend line to make it trigger quicker without being too quick. And it sounds easy, but there's a fine line there. Yeah, if you saw a chart of their trades, that would make a lot more, you know, if we could put a visual up for the podcast.
00:18:04
Speaker
But no, I mean, there's a lot of three to 5% pullbacks in a year, two years, three years, four years that you guys aren't trading. This thing isn't trading 60, 70 times a year. It actually trades very infrequently, which is why we're so excited about it as well.
00:18:22
Speaker
Yes, absolutely. We've probably made 60 to 70 byline calls in total. That's an off-the-cuff number, but you're right. We don't use it unless we have to. 2019 happens. Nothing to see here, right? A fairly normal year.
00:18:40
Speaker
And then we get hit with COVID in 2020. February, March, and April were really the trading months through COVID. And our byline, thanks to the adjustments that were made, actually started reducing exposure on our portfolios
00:18:56
Speaker
in February, and we re-entered the market in April. The reason I bring that up is that the experience of 2018, while not great, it really led us to some adjustments that bear fruit in 2020. We were able to sidestep most of that volatility through COVID, and we had the best year performance-wise as a firm in 2020 due to those 2018 adjustments.
00:19:22
Speaker
Yeah. And it's unfortunate we weren't working with you in 2020, but we are now just full disclosure. So we do work with Howard with our client portfolios and our models. But this is a point I wanted to touch on, kind of something that relates to what we were talking about earlier is the data. What was really frustrating to me as somebody in this business was it came out, I don't remember when it exactly came out, it was either like mid or late summer when I first saw it.
00:19:50
Speaker
that the Fed basically admitted to injecting money or basically buying the S&P 500 futures or index. And they were openly buying the stock market with borrowed money. And that wasn't public information, but it had a massive effect on the market rebounding and then obviously just going on a tear the last 18 months. We're recording this podcast
00:20:15
Speaker
just at the start of fourth quarter 2021.
Accessing Howard's Services
00:20:19
Speaker
It's been about 18 months since COVID happened and the market's gone pretty much straight up from there. This is another reason where if you would have been reading the headlines, there wouldn't have been anything to read until after the fact and you already missed the move. But because of Howard's data and analytics,
00:20:37
Speaker
You guys, and if you remember in America, COVID in mid-April, it was still really dodgy as to what was going on, how bad this was going to be, what was the prudent response as a country, businesses. I mean, it was a pretty hairy deal then, and you guys bought the market 100% in mid-April because of the HCM bioline indicators. So that to me is a pretty big testament to the process.
00:21:06
Speaker
You said something important there that I should bring up as well. We bought the market at 100%. That's a huge benefit for us that we're running a proven mathematical model that we believe in. When the market does go positive and the buy line goes positive and our algorithm says to buy,
00:21:26
Speaker
We don't dip our toe in the water, see how it's going, wait a couple of weeks, maybe put a little bit more in. We go in aggressively at 100%. That is a big advantage for us. You can only do that with a non-emotional system. Otherwise, you'll go crazy. That's true. Very true.
00:21:48
Speaker
Let's say our listeners want to somehow get access to Howard. What are the ways that you guys, you can help and obviously you can reach out to us. We can help you try to implement this, but like, I know that you guys can do some specific work through the self-directed 401k space, which I think is really neat. Cause as soon as you hear the story, you normally want a piece of what you guys are doing. So can you talk through that to our listeners, please?
00:22:15
Speaker
Yeah, absolutely. So this, in my personal opinion, the 401k participant is a very underserved community. Amen. You know, it's sort of like the people that need the most help get the least help and that's the 401k participant, right? Nobody's in there.
00:22:33
Speaker
Yeah there are good obviously good advisors that are doing 401k work but for the most part they're sort of underserved and so what we're able to do at Howard Capital is actually go into a participant's 401k account
00:22:51
Speaker
not the plan, just their account, and manage it for them. We do this at companies all around the world. Delta, for instance, here in Atlanta, is a big company where we're managing not the plan. We don't manage the Delta 401k. We manage one particular client's
00:23:08
Speaker
personal account. So it's a very personalized approach where we're going to really take care of that individual person and trade their account for them. So they'll have the same byline that all the big institutional clients we have or anyone else has, and we're able to do that on their behalf. So they're not having to, through COVID, for example,
00:23:31
Speaker
log into their account in February where they're watching CNBC and they're getting nervous and they're wondering if they should trade this target date fund. They don't have to do that with Howard Capital because we're in there trading it for them. So they'll log in and they'll just notice that their account balance is in cash and it's done. So it's a really nice thing for a participant, but we're able to go in there and help people on an individual basis and give them a little bit of peace of mind and knowing that somebody's looking out for that account for them.
00:24:00
Speaker
How would they find out if they have that self-directed sleeve?
00:24:04
Speaker
To the easiest way to do it, to be honest, is probably ask your HR. If you have a tech savvy listener, they could probably log into their 401k page and find it on their own. But in most cases, we advise the clients just call their HR and ask them if they have it. Oftentimes as well, we can look it up. So if you guys have clients that are curious if they have it, we can look it up for them as well.
00:24:33
Speaker
Yeah, and just to speak into that a little bit, obviously, we're the advisor on several 401Ks for our clients, that type of thing.
Future Plans and Innovations at Howard
00:24:43
Speaker
Because of the way the government and all these rules have set up the 401K space, it's highly regulated. It's not very scalable, so it's hard
00:24:54
Speaker
to create investment solutions like this for Howard, like we're talking about today, for a sophisticated investor. It's hard to scale that in the way the whole 401k space is constructed. So these guys kind of just come in. It's like an open window in the back. And you essentially authorize them to trade your account. And they're trading your account in your 401k. You haven't left employment. You can still keep contributing.
00:25:23
Speaker
None of that changes. It's just a self-directed window within your plan. Please ask if you want us to look. We can look it up or your HR administrator can. As the 401k space, a lot of these companies have been bought and sold. So many
00:25:43
Speaker
so many of these 401ks now, especially bigger companies, are all on two to three platforms. And most of those platforms, Howard's able to work with. So if there's something you're interested in, definitely ask. That's good. Yeah, absolutely. I think about 55% to 60% of 401k plans will have it. So there's a very good chance it's available.
00:26:09
Speaker
What's on the future for Howard Capital? Like obviously you guys are doing some great things. You're helping people a lot, but is there a future and what is it that you want to do where you want to go? And I would love to like walk through that as a company.
00:26:23
Speaker
Yeah, so we spend a lot of time and resources on our quantitative models. We've got software engineers that we've hired. We're constantly putting money back into the business. Just trying to make sure that we stay ahead of the curve because the market and especially algorithmic traders and computerized trading, it's growing so quickly. We really spend a lot of time trying to make sure that we're at the forefront
00:26:52
Speaker
Aside from improvements on what already exists, we're really as a firm trying to break into the West Coast a little bit more. That's been an area at Howard Capital. We've done very well in the Midwest. We've done very well in Texas. We're growing like crazy in the Southeast and Northeast.
00:27:10
Speaker
For some odd reason, the West Coast just eludes us. We're looking at some socially responsible ETFs possibly launching the next couple of years, maybe probably sooner than that. Again, our core business is helping financial advisors. When I say what's next, it really depends on what the landscape provides us. What do advisors need? Typically, that's where
00:27:40
Speaker
the various lines of business that Howard Capital is in, it stems from that. You guys may call us and say, hey, we really need this. This is a pain point for us. We'd like to grow our business doing this particular thing. That might be what's next because that's our business. We're traders, but we work for the advisor.
00:28:02
Speaker
It depends. I'm excited to see what it is. That seems like every other year we're launching something new. So stay tuned. There'll definitely be some new developments coming around the bend. That's good. Okay.
00:28:22
Speaker
Well, I've asked for the HCM byline being applied to Bitcoin, so I'm waiting patiently for that. I knew you were going to bring that up. You knew I was going to bring it up. I shoot up the flagpole. That's a long flagpole. That's all you can do. It's a long flagpole with an old crypto.
00:28:40
Speaker
Yeah, that's a tough one. Well, Kramer, I appreciate you being on the show and just kind of walking through all those different ways that you guys, the active managers do participate and help people achieve what they want to do because investments are something that
00:28:57
Speaker
A lot of people want to just have good investments. They want to have those go up, but they also want to be able to pursue their dreams. That's something that we've always helped people with is just, hey, you focus on what you're passionate about and then we'll be good stewards of your money as well. Howard Capital has definitely filled a void for us in our practice. I thank you for being on the show, walking us through everything. Any closing thoughts, Brian?
00:29:21
Speaker
I'm going to do a compliance closing thought that past performance is not indicative of future returns and that we're not promising investment gains or returns on this podcast, and that this is for informational purposes only. So I'll leave it at that. Thank you, Kramer, for your time, man. Yeah, thanks for having me, guys. Really enjoyed it. Yeah. Until next time, go be in common. Thanks for listening. All right. Bye.
00:29:44
Speaker
That's all for this episode of The Uncommon Life Project, brought to you by Uncommon Wealth Partners. Be sure to visit uncommonwealth.com to learn more about our services. Don't miss an episode as we introduce you to inspiring people who are actively pursuing an uncommon life.