Last updated on May 31, 2023
Feat Elliot Kallen, Prosperity Financial Group
Elliot Kallen, founder of Prosperity Financial Group, joins the podcast to discuss his expectations for a coming recession, to start this summer, and why some of the best opportunities may be in technology stocks and corporate bonds.
Content Highlights
- Tech stocks: the pullback is coming (3:31);
- The market is starting to flatline. Look to midcap value stocks (6:04);
- The Fed will likely raise rates one more time and then reverse. Time to buy bonds — corporates (8:47);
- Consumers have already started to pull back, judging by some primary evidence the guest gathers… (12:02);
- Why the recession will be mild, despite the red flags (17:38);
- Background on the guest (24:00);
- Active management has its place (30:24);
- Thoughts on the next generation growth industries (36:53).
For More Information on the Guest
- Website: ProsperityFinancialGroup.com;
- Facebook;
- YouTube.
Quick Highlights From Our YouTube Channel
Transcript
Nathaniel E. Baker 0:28
Elliot Kallen of Posperity Financial Group, you’re the founder. Where is prosperity Financial Group, by the way?
Elliot Kallen 0:42
we’re in East Bay of San Francisco
Nathaniel E. Baker 0:46
Okay, so up in Northern California, I guess
Elliot Kallen 0:49
San Ramon
Nathaniel E. Baker 0:50
right on. So you’ve got some contrarian views here on the market on stocks. And the one that you started with, which I think is a very interesting one is that we are going to have a recession, but it’s going to be a mild recession. Right?
Elliot Kallen 1:05
Correct.
Nathaniel E. Baker 1:05
So tell me about that.
Elliot Kallen 1:07
Well, Nathan, it’s great to be on your show. Yeah. Thanks for coming. Can I call you Nathan instead? Of course,
Nathaniel E. Baker 1:11
yeah, of course. Yeah.
Elliot Kallen 1:12
It’s great to be on your show. You know, when you’re talking about the definition of contrarian, it means you’re going the opposite way of the masses. And that’s in life, that can be a very good place to be the opposite place of the masses, because it makes you stand out, kind of like the road less taken. In politics. Yes,
Nathaniel E. Baker 1:31
these are all reasons for me starting the podcast, but
Elliot Kallen 1:34
they’re great. And it says something about your personality that you don’t want to blend in. And I tell you know, running a financial services firm, as we do, and I’ve been running now for 30 years, it’s a long time. Now, we’ve always taken a contrarian point of view. It doesn’t always work, I can tell you, it’s not 100% foolproof for sure. Because if last year 2022, you took a contrarian point of view, you would have bought technology. And you would have been down no less than 40% in some cases, 50% for the year, and probably had a whole bunch of clients walk out your front door back door, and been very unhappy. And if you held that till today, they would have said, Wow, you were genius, because the masses said sell technology and don’t buy it for 235 years to come. There’s just no money in it right now. Everything’s overpriced. Still, the P E ratios are still, you know, stupid with some companies certainly don’t buy Apple, you know that. Look what happened Apple last week. So contrarian says, Okay, who’s making money? Who are the leaders? Who are the followers? And how can I be part of the leadership team. And that’s what we try to do here. So in hockey terms, in Wayne Gretzky terms, it’s where is the puck going, but Morningstar and the news. And it doesn’t matter whether you’re Fox Business, or MSNBC, or CNBC, it doesn’t really matter. You know, they everybody’s got for the most part, a rearview mirror of investing. This is what worked yesterday, this is what definitely wore today, and are almost always warm, because they work in cycles. Same thing with real estate, or the real estate has proven almost every contrary to be wrong. So we are we are very slowly buying back into technology right now. Because we think that they will come out of it. But slowly, because we know that it’s somewhere in the middle of recession here, which we think will be the summer or late or early fall. We know that when you come out of it, though, that American technology in particular will be the leader, you want to own it before it goes up by 10%. So somewhere we’re buying in little by little by little, as a contrarian point of view, versus most the mainstay will say, get out of anything that’s growth oriented.
Nathaniel E. Baker 3:42
Yeah. Where are the buying opportunities for technology? Because as you mentioned this year has been it’s an it’s a new bull market for the NASDAQ and for tech stocks.
Elliot Kallen 3:51
It’s very interesting on that I think technology is going to pull back in the next 60 days. That’s a good buying opportunity. I think apples always a goodbye. But you know, I’m a much bigger fan of ETFs than I am of individual stocks. I think when you’re buying semiconductors, which have been beaten up this year, and I would not buy them right now. But rather than buying Intel, I’d rather buy the ETF. So AMD said a good year Intel the stock. So I’d like I’d like there are all types of computer, computer chip, computer software buyers, different ETFs. I don’t want to do it and for them, of whether you’re like powershares iShares, sure, or pro shares, I don’t want to do that. But you should be looking at that. And that’s what we do for our clients is where’s the puck going? Yeah, and let me throw into that as well in the technology world cybersecurity, because we’re just waiting for one big national cyber attack and that not that I wish that to happen, but that will just drive that that sector straight up through the roof.
Nathaniel E. Baker 4:49
Yeah. And there too probably ETF or index investing —
Elliot Kallen 4:53
Yeah, I do. I do like ETFs rather individual stocks. Could you make more money by Apple than buying you know, phone or software ETFs? Yes, you can. That’s the beauty of having it. But you could also get blown up by owning Pay Pal and be off by 65%.
Nathaniel E. Baker 5:10
Yep, yep. YAnd especially when it comes to cybersecurity stocks, some of those are very small companies, and very volatile. But if you do the sector through an ETF, it’s probably a bit more, a better way to get the exposure.
So okay. But so, so you’re so cautiously starting to buy tech, ahead of what you’re expecting is going to be a recession. Obviously, it’s impossible for anybody to time these things perfectly. But how do you see this playing out now this summer, as the economy, I guess, starts to roll over? what’s your what’s your view there?
Elliot Kallen 5:44
I think we’re just beginning with what I call a flatline, which is a trading rage. And it’s a pretty flat trading range, I think we’re gonna be there for some time to come now. I think the money that’s been made in the markets been made, till the third recession, we own a lot of value, even our even in our growth portfolio, we own a lot of value products in there, with some growth sprinkled in there versus two and a half years ago, I own zero value. Really a big difference in there. But so everything we have now, they think pays dividends. Right? Now, if if you bought small cap value, because you wanted to be ahead of the curve, then you’re number one holding sector and inside there was regional banks. Yeah. And we didn’t do that. I haven’t I have a problem just with the marketability of small cap value. I’d like mid cap value. And the reason I like mid cap value, so much solid companies, most of them are not over leveraged, and the large companies come in to buy them out in the middle of a recession. They’ve become very saleable at that point. And I want to be there whenever you bought out.
Nathaniel E. Baker 6:51
Okay, that’s not something that I’ve heard heard of being talked about much actually this idea that mid cap value can be recession proof. I would think that a lot of the small caps, mid caps would would all be cyclical. But not that’s not the case.
Elliot Kallen 7:05
everything’s cyclical at the end that Sure, yeah, sure. But, but I like I do like if you’re gonna play contrarian, then who are the companies that have good cash flow, good market niches, and we’d love to be bought out. And then you’re looking at, basically, it’s several again, market cap of 10 million or some of these market cap numbers are so ridiculous. You can have zero profits that have a $50 billion market cap, it’s it’s just look at peloton at the height of their market cap was just ridiculously were they $30 billion with some stunning number. But so I look at instead of looking at market cap, I look at sales and PE. And if I see a company with pretty good sales and growing sales, but struggling at the bottom line, that’s a that’s a takeover candidate. Hmm.
Nathaniel E. Baker 7:52
Obviously, you wouldn’t want to have too much debt on the balance sheet either.
Elliot Kallen 7:56
You know, what I, I do stay away from companies that that heavily invest on bank loans and, and bank loan portfolios, credit loans credit. These are hard. I don’t mind some private credit. But the public credit product problem is that when interest rates go up these companies, even a company like ours, their interest rate that they’re boring, it goes from four or five to 11 or 12. And if your margins are thin, and you’re in growth mode, that’s just sucking away cash every bit of the day.
Nathaniel E. Baker 8:25
Yep, yep. Yeah. You mentioned interest rates. And he talked to the top how you also have some, well, I don’t know if I was about to call them contrarian. But who knows what qualifies as a contrarian take on interest rates anymore? Since? Yeah, but what are ya what is your take there, because we’ve been going up and up and up here. And the last Fed meeting, they raised a quarter point. Now, who knows what’s gonna happen the next one?
Elliot Kallen 8:52
I would say we’re in for one more quarter point hike, at least. And then that’s, that’s the top of the curve right there. So when I’m buying, you know, our we’ve owned all year, treasury bills, not treasury bonds, treasury bills, we’ve owned anything that’s two years or under in the bond market. We think that those are paying between four and 5%. That’s pretty that’s fantastic. For a lot of clients. If you’re running treasury bills, which is you know, it’s kind of a no brainer, their state tax free, if you’re living in a state, that’s, that’s taxable, which is great. But again, this summer, by time, July, August comes around, and we hit or September, we hit the bottom of that curve. You’ll never know when you’re at the bottom, you want to move the spread out. And I know we get all technical jargon on spread a curve and short end of the curve and long into the curve. But if you think about things that are doing three to five years, bonds that are doing three to five years, corporate bonds, then those bonds are considered the medium part of the curve. And those are highly beaten up right now highly beaten up, and that’s where I want to buy that in because the Federal Reserve are beginning to flatten or lower interest rates to help stimulate the economy back as we go into also a presidential year, then that’s the part that will do the best. If you own the long end of the curve, they’ll do really well when interest rates go down. But you’re so far out there, it’s so dangerously exposed if we get another bad inflation report.
Nathaniel E. Baker 10:22
Yeah, but the short end of the curve is also pretty much a victim of certainly of the of the Fed rates, isn’t it?
Elliot Kallen 10:30
Everything is again, but yes, but we’re on our short end of the curve. It’s paying between four or five and a quarter percent. Because it’s six months or less, it’s 12 months or less. That’s what I’m talking about short.
Nathaniel E. Baker 10:42
Okay, so that’s really short. Yeah. But it also sounds like you’re collecting that for the yield as opposed to as a capital gains.
Elliot Kallen 10:48
Yeah, but I have it in IRAs as well. Look, I can tell you from my clients, none of them like getting a 1099. Come on. Nobody. I don’t care how well they tell you like, well, I want to preserve my principle, I want to maintain strength. And then they come up and say, Well, I didn’t know I know so much in taxes. And they made you know, $51,000 in dividends coil $1,000 in dividends. And it’s all short term, and they’ve got nothing to offset it. Because everything that’s offsetting it is long term. They get upset with us.
Nathaniel E. Baker 11:22
Okay. So but still, so it sounds like you’re you’re expecting this summer, the economy to kind of roll over this summer and the Fed to have to cut rates sooner rather than later,
Elliot Kallen 11:31
late summer, early fall, the latest, I think we’re done, I think the travels out of our business, fuel is going to be still about where it is today. So as consumers, we’re starting to run out of capital in this country, we’re still spending it, we still have a little jetlag from COVID. But that’s all going to be behind us very shortly. And you’re gonna see people pull up their belts and spend less money i and wait, one of the ways I judge this is by the amount of traffic at Costco. Okay, that is that is down significantly. It is. And that tells me versus during COVID. It was up dramatically. It tells me people are buying less.
Nathaniel E. Baker 12:14
I didn’t know that traffic ever went down at Costco.
Elliot Kallen 12:16
I know it’s hard to imagine. Go there now at five o’clock and look at how short the lines are
Nathaniel E. Baker 12:23
What do you have to use that? Other than that what they report in their in their quarterly I guess
Elliot Kallen 12:28
that’s a visual for me. I go to several cost goes check them out. Not just because I buy at Costco. But because I do. That’s one of my place. I look. I look at lines at McDonald’s. I look at lines at traffic, cashier lines at Costco. Those are two places that I look to see what it’s like I look at how many high end restaurants are closing their doors. I went to a really nice restaurant last night in San Francisco. And I know Monday nights and off night. We were the only table there. Yeah, that says something.
Nathaniel E. Baker 12:58
How much of that do you think is a regional economy thing though? Because we’ve heard everywhere about how San Francisco has basically entered the Dark Ages. And how like all the everybody’s leaving San Francisco, et cetera, et cetera, crime and what have you.
Elliot Kallen 13:13
You’re right about that San Francisco, New York, Chicago, these are cities that just at this moment, do not get it. They’re not getting it. So they know cities, there’s going to be a problem. Austin gets it. Nashville gets it. Florida. You have many pockets. Now we’re real estate has more than doubled in the last three years. And it’s back up by 15 to 20%. This year so far. So there is some backup going on. Lots of parts of California are backing up that every part my street in Lafayette, California, because there’s so few homes for sale. They’re just there’s no prices going down. There’s still inventory. But other places that have inventory, are seeing prices coming down again, that’s less money for the consumer. Yeah,
Nathaniel E. Baker 13:54
but you don’t think that’s just a regional thing. And then look in your local economy?
Elliot Kallen 14:00
all buying all real estate is always regional? No matter who you are, there are always pockets, like Nashville, or Austin that are blooming today, no matter what, because the pockets that are suffering, are moving to the pockets that are thriving.
Nathaniel E. Baker 14:16
So tell me about that line at McDonald’s. Is that a is that a contrarian indicator? Or is that a is that like a leading indicator? Like is it good for the economy or bad like?
Elliot Kallen 14:23
Well, you would think when times get tough, the lines of McDonald’s get really long because people still want to eat. But now a typical McDonald typically, McDonald’s thrives during bad times, right? But they just didn’t lay off the corporate headquarters, right. And so they see some things happening out there that are not good for them. And they just changed the taste of their hamburger around. Now a part of that could be that there’s more competition than ever but you can’t watch any major show without seeing an ad for Wendy’s or call Jr’s or Burger King or McDonald’s or Chick fil A. You know they brought back but burger they’re doing things to try Get back on top and they’ve been the lead dog for a very long time but they’re the lines in so many places have gone down. Our office is right across from In and Out Burger in at burger here in California for people that that run a country that is a staple of fast food unique to California. Unlike where I grew up White Castle was the best hamburger route. And these guys in
Nathaniel E. Baker 15:22
Queens or Brooklyn?
Elliot Kallen 15:24
Jersey
Nathaniel E. Baker 15:25
Okay, I didn’t realize it
Elliot Kallen 15:29
So out here in California, I could see out my window to In & Out. The lines are down at night, and they’re long lines there. They’re down by 20 30% if you count the number of cars.
Nathaniel E. Baker 15:43
That is really interesting.
Elliot Kallen 15:44
And people in my office have started to bring their lunch. Oh, gosh, it’s becoming so expensive. I can’t go out anymore,
Nathaniel E. Baker 15:52
Huh
Elliot Kallen 15:52
And we’re a building that 50,000 square feet more people bring your lunch that says something right there again.
Nathaniel E. Baker 15:59
Interesting. Wow. I wonder about also like Chick fil A lines like if you guys don’t know if you have them out there. But here on the East Coast, wherever you see these. I mean, the lines are like the cars are like back down like around the block.
Elliot Kallen 16:12
Well, that might be because they’re stealing business, from McDonald’s or other places. I know Burger King down here out here in California. And again, we’re regional. Burger King lines are down as well. Yeah. So there’s something going on here some shifts going on. They’ve been their shifts going on every day. I just heard today was it today that Wendy’s announced was at Wendy’s announced that it will start using AI in the late night drive thru line to figure out what should be what they need to have made to make the line speed up. Wow. Okay, they expect that to decrease the number of people that need by third. And
Nathaniel E. Baker 16:53
AI is one of these things now where people sneak language of it out in their press releases, and it gives their stocks a boost. Kind of like cryptos in 2017 or 2018. Or Okay, wow. So that’s all a bunch of really interesting stuff. But but you don’t think that the the recession when it hits is going to be particularly bad?
Elliot Kallen 17:10
No, I’m under I know there are plenty people who see deep recession, there are big warning signs out there things. Red flags, let’s call red flags out there. The $31 trillion of debt is a red flag in this country. The $267,000 of average debt per taxpayer on the federal debt is just an alarming number. It’s so big, it can never be paid back. We’ve crossed the line of ever paying it back. So now who’s gonna buy US Treasuries? And how much do we have to get them out in the marketplace for and and when the US government does that they crowd out other debt. And so that’s a that’s a red flag out there. But I’m, I’m still going with that the majority people because they’re hearing every day about session, every day, 24 hour news cycle? You know, you’re doing what you’re doing. I’m doing what I’m doing. Five years ago, who heard of the podcast? Yeah, yeah. And so since we’re hearing of it, we’re kind of bracing for it, we’re more aware of it. And therefore I think just as consumers, we’re willing to say, Okay, how long is this gonna last? And let’s get out of it quickly. Okay, we’re not going to be the victims that we’ve been in the past.
Nathaniel E. Baker 18:24
Okay, that’s interesting, like, but I always thought that in the age of social media, we haven’t had a social media recession yet, except for if you unless you include COVID, which is like a what a month. But I say this is based on as having lived through the await disaster. And even from before that, in the early 90s. When I recall, it seems that every single recession is the worst one since the Great Depression. And it’s always like, it doesn’t seem there’s really a mild recession when you’re going through it. But that’s something that’s applied retroactively. That’s kind of my theory. But you, do you.
Elliot Kallen 18:55
I don’t subscribe to that. And I’ll tell you why. We just had a and we’re really still in a regional banking crisis. Yeah. Three banks disappeared in the last month. Okay. And it’s all over the it’s everywhere. Everybody in America knows about this. We live in California, Republic bank, Silicon Valley Bank out here. Everybody knew about it. So what did the consumer do with 24 hour news? They moved their money out of Republic bank, and moved to chase and BV since the banks too big to fail. What happened in 2008, everybody was a victim and did nothing. Because they did there was no internet telling everybody what was going on. We were just hoping, kind of crossing our fingers that this would not fall apart. So the consumer is reacting very quickly, and saying Where can I be safe? Where can I be smart? That and so that’s not just going to happen on banks. That’s going to happen on every business. That McDonald’s announces tomorrow. I’m sorry, we’re going to recall 25 million hamburgers because of E. coli. And the next day, the lines at Burger King, and in and out at Chick fil A are out through the roof. And nobody’s at McDonald’s when there’s no internet telling them that they don’t really know what’s going on. So we’re nimble down, very nimble, and much smarter.
Nathaniel E. Baker 20:17
Yeah. And to your point, everybody has brokerage accounts now, which by the way, are free, which they were not in 2008. It was like $20 a trade or something ridiculous back then.
Elliot Kallen 20:26
Let’s say you’re expecting your you are more accepting the fact that your if your account goes down by 10%, you’re not going to go out of your mind and withdraw. In 2008. The second net started to go down. People were just freaking out, didn’t know what to do. And in 30 seconds that went down by 30 and 40%. Yeah, yeah. People could react to it. We’re much more. Again, we’re much more nimble. And we’re much smarter about today.
Nathaniel E. Baker 20:52
Very interesting. All right. Elliot Callen, this is some very interesting insights onto the economy on to stocks. And I want to come back and ask you some more stuff about yourself about your firm about your views on the markets. But let’s first take a quick break. If you are a premium subscriber, don’t go anywhere, don’t touch the dial, you will not get the break. We’ll be right back. In fact, we already are. Welcome back. Everybody here with Elliot Cowan, founder of prosperity, Financial Group, Elliott, this is the segment of the show where we ask our guests to tell us a little bit more about themselves, and how they got into this station in life. I mentioned that you’re the founder of this firm. So three years what you did before, how long the firm has been around? And I guess Yeah, how you got into investing in the first place to? Yeah, to kind of put it all into Marvel terms here with an origin story. Yeah, so yeah, take it away. Let tell us.
Elliot Kallen 21:48
Thank you, Nathan You know, I’ve been doing this down for 30 years, the firm is 27 years old. I’ve been doing this for 30 years. And I’m, I consider myself much more of an entrepreneur than a financial advisor. Because this is not the first company I’ve started, I started a packaging company, environmental cleanup after that work, doing mathematical mathematics. And then came to California in 1993, and joined a financial advisory firm, and then started our own firm shortly thereafter. And today we’re pushing, we have two firms. Here, each one is pushing $400 billion in total assets out of the same office. And then we have a charity that we want as well. So we have been working with b2b, and clients on a regular basis for my entire career, and then transitioned to include b2c here. 40% of our clients are entrepreneurs, and own company or own companies or did own companies. They’re the referrals of people that own companies, we speak their language, we understand how you can have receivable problems, payable problems, employee problems, HR problems, we’ve been there, done that. And so we have that language. And then we’ve all experienced here, the problem is not planning properly, with your state with taxes, with kids that have fought over money, with losing family over money and divisiveness that comes around. So there’s a lot of real life experience that has gone into our firm. And we work we have several, we have five advisors with myself. We’ve worked with them, I try to I work with the higher net worth group on that I build my own portfolios. So we are direct builders of portfolios. I spent 70% of my time doing this interacting a 30% of my time, a little bit of an economic walk, building models talking to pm, money managers, sorry, reading economic reports, I get over 100 a day, you can’t even begin to read them. But you get over 100 a day, some of them very much contrary with each other.
Nathaniel E. Baker 23:47
Yes, yes. I know that from reading some of these and in some cases writing and editing them myself.
Elliot Kallen 23:53
And if you listen to CNBC, morning, afternoon, these people can be 100% polarized with each other.
Nathaniel E. Baker 23:59
Right? And there are certain individuals that will remain nameless, Jim Cramer, that are very good contrarian indicators as well. But that’s another topic for another day.
So I’m wondering here as a fiduciary, and you have, you’re gonna, you’re responsible for like, like you said, these individuals and family and business wealth? How does one go about balancing life? And how do you like shut off? Or do you shut off? And, you know, the risk and the responsibility that comes with that? How do you go about managing that?
Elliot Kallen 24:31
We have a saying here that says, if it’s money, it’s personal, we own that and trademark that saying? So there are some advisors that leave them leave their business at work, they leave their clients at work, they don’t want to be bothered. We’re not that I’m the opposite of that. And that’s a double edged sword, because that means clients can call me seven days a week, and some do, especially if they’re worried and can’t sleep. I’ve gotten this for him as we work our way through that. I don’t want to say we’re boutique because that means in a recent survey that meant small All rather than giving great service, but we’re definitely a white glove organization and give really great service. So the idea is, when, when a client is making money, we want to share in the joy with them, not just the billing joy, but we want to share with them, we want to make those calls, we want to talk to them, want to let them know things are going well, and what we’re doing to fix that, and improve that. But when COVID hit, especially when the majority of people in my industry took their head and put their head in the sand, and acted like a bunch of ostriches and stopped going to the office and the big brokerage houses, they completely shut down. And even to this day, they’re they’re half empty, a lot of them, we were the exact opposite. We went aggressive. We put an entire marketing department together, at the beginning of COVID, we started to reach out to our clients, we sent out bi weekly emails of what we’re doing and we began to buy, we began to clean up portfolios, and by so when everything dropped dramatically, and we thought the end of the world was coming, because we had the next Spanish flu of 1980. We were by, and we were buying heavily into biotech and tech 2020. And of course, we went up by 60% that year. And for the most part, it was a great time to be in that. So we put we take this personally, and I can tell you 2020 We stayed up every night today, we’re up a lot during the night at two in the morning or three in the morning, my wife looks at me, like really, you just can’t sleep, I can’t sleep. I feel it hurts me to have any client not making money and not reaching your financial goals.
Nathaniel E. Baker 26:31
Yeah, how quick are you to sell out of positions that once they go against you? Do you have strict stop loss limits?
Elliot Kallen 26:36
Yeah, yeah, we have no we, here’s how we work it, we look at a strategic how we want it to look strategically. So the portfolio is set up to look a certain way strategically. 4% here, 3%. There 7%. There, but tactically is where we really excel, because we put the what we feel are the best products from the best vendors inside these portfolios. And we are merciless to them. We hope we tell them look, and we may kick you out in 30 days, 120 days, in nine, we might kick you out, because you’re not doing what you told us you were gonna do. Now if the markets down and there’s and they’re down with it. We’re not kicking anybody out. Sure. But if the markets up and they’re not tracking, or they’re not beating what they said they would do, they’re not going to make it till the end of the quarter, we will be merciless. Our clients have asked us to be more solicit. Look, we trust you. We know that you’re looking at it every day of the week. And so just because you’re I’m taking you out of the portfolio in May doesn’t mean you’re out of the portfolio forever. I may put you back in in August. But I needed to go down further, because I see it coming.
Nathaniel E. Baker 27:42
So it sounds like you have some active and actively managed component there. I mean, it’s I’m not talking about what you’re doing. But what you’re who you’re investing in. Are those actively managed mutual funds?
Elliot Kallen 27:51
We don’t do anything passive. We do if you want to call it passive is we do sector bets. We useETFs. Yeah. And once you call that passive investing, but even then you could get into the Alpha side of those passive and they become much more aggressive and much more active.
Nathaniel E. Baker 28:10
Oh, that’s interesting. Okay, so because, yeah, because we, you know, we’ve heard a lot of debate, of course, about the whole passive versus active thing and active management being dead and blah, blah, blah, it doesn’t sound like you quite subscribe to that, I would assume.
Elliot Kallen 28:22
No, I am a big fan of active management. I think Vanguard has done an amazing job. Educating and advertising to the public. That cost is everything. They’ve done a great job with that. And they’ve got a loyal base because of that. Okay. What they never say what I think is more important that your total return after cost is really what is most important to the client. That’s what everybody asked me to sit down with them. How am I doing? They don’t say how much does it cost to do what I’m doing? That’s not their first question. They will we will talk about that. But they want to know how they’re doing. And so in in, in stretching terms, if I make my client 20% This year, okay. Every one of them is gonna be really happy, right? But if I really made him 30, but to charge them a 10% fee to do that. Will they still be happy making 20%? I would think so. Right? Because if you’re looking at the 20% and let’s assume that beat the market and we’ve killed it, they should be thrilled. But Vanguards got them thinking No. That fee that advisor took is more important than your total return. And they’ve got it backwards. The client, we don’t pay bills based on top line numbers, we paid bills on what we take home. You show your returns and your success based on the net after everything and now if your net is not good, then your fees may be too high and you’re compounding The problem, right, but if you’re within reason, and you’re out doing what you said you would do, I don’t mean that I’m doing the index, because to just be the s&p 500, your portfolio may not be good enough to do that. But to out be whatever you compare to as an index and not get paid on it, then you’re not a good business person often.
Nathaniel E. Baker 30:20
Yeah and, you know, that’s the argument that hedge fund managers certainly use. And, you know, some with reason, I mean, if you invest in, you know, Renaissance hedge fund that did crazy returns, and you’ll gladly give them 3% and 35, off the top or whatever was it they they charge? Because the returns are consistently, so far ahead of the market? That it doesn’t matter. So do you find it but it must be a challenge to find these active managers? And do you have any without getting too much into it? What kind of criteria do you use to find determine who’s a good active manager?
Elliot Kallen 30:55
When we meet with almost every active manager with a resume or a person? We don’t just take them on. Nowadays, with Zoom, you know, that’s the best thing about COVID is the Zoom Zoom world. Even though if you invested in zoom in 2021, you’ve not been happy at the end of 2022. Right? So we talked to him, we look at them, we want to understand them. What is the I don’t want to say alpha? Because they are meant to industry? jargons? What is the exceptional advantage that they bring to the table that the index doesn’t provide? And for many of them, it’s actively getting rid of the dogs. Indexes always include dogs, they just have to by definition, and so that’s good. So if I can have an s&p 275 that crushes the s&p 500. I’ll take that all day long. And that’s just one example of it. They say, Haley, I’m putting this together, I think it has a real bent towards active actively run, well run technology companies that are leaders in their field across the board. Well, that’s a that’s a positive active manager. Yeah, that’s what I want for my active managers. I want them saying they’re good. This is why a minute. And this is what I bring, as above and beyond the normal return, you’re paying 340 basis points additional to have that happen. So what how much
Nathaniel E. Baker 32:28
of the, you know, typical portfolios are in active management versus ETFs? versus individual stocks versus bonds? Like how do you usually structure these things?
Elliot Kallen 32:38
I’m almost I would look at percent of everything, or 80 to 90% of everything I do is active. Right? It’s right up there. And
Nathaniel E. Baker 32:48
meaning you allocate to active managers, or you do active investing, or both?
Elliot Kallen 32:51
Both. Yeah, I use active managers. It’s kind of like a double activity thing. Yeah, I want active managers that’s do what they say they’re gonna do, or explain to be why they did. I want to be very active with them, and very on top of my game, in a strategic world, right. But we can’t take the old mutual fund concept of just buying hold. That doesn’t work. That’s like the 6040 portfolio. It doesn’t work anymore. It’s been out of fashion. For a long time buy and hold doesn’t really work. Could you avoid ICA from American funds in 1940? and holds it today and be worth billions? Yes, absolutely. That’s true. Or no, Matt, no question about that. But today’s a different time. And you’ve got to think about what’s in that and where the puck is going. Where’s the market going? Because it is changing by the day. Now, on that note there, Nathan, is you don’t want to also be subject to the whims of the headline that says, what came out in 2000. Where revenues are everything and profits are meaningless. The new economy is good, and the old economy is dead. That was the headline of 2000. That was completely incorrect. So if you didn’t want to be just a headline follower, you want to dig underneath it. And that really pertains to your whole concept of a contrarian that what are they saying? And I’ll do the opposite. Yeah.
Nathaniel E. Baker 34:07
So I’m curious. You’re you’re out there in Northern California, which is, has been, of course, the kind of center of all things tech for 40 years. And, you know, do you have any views into what you think might be the next big growth? Maybe not companies, but industries. Do you have any thoughts on that? Or is that outside of what you what you do is that I love
Elliot Kallen 34:31
what you’re saying on that. I think if I were to pick one sector, that is going to be above and beyond it be healthcare, biotech, okay. Those are biotech companies get started and get sold. Yeah, that’s the nature of biotech. So when you’re buying biotech, you want to buy small and medium sized companies, they’re going to be sold. That’s your winner. When you’re buying healthcare, you want to buy large companies that have that pay dividends, because they’ve got a lot of cash on the books. So those two, as we’re aging, and I don’t see any gray hair in your head, but I don’t have any hair either. So yeah, but you do some some gray in my, on my face and head. And so that healthcare cost is gonna go higher and higher. My doctor that I’ve had now for, I would say, five years, why I really like announced that he and his wife in a practice together, are going to become concierge doctors, and by subscription, and it’s 250 a month for my wife and 250 a month for myself, still with Blue Shield, though. But now I have to pay to go see them a subscription price, you’re gonna see more and more of those type of things out there. Because it’s harder to get a primary care physician. They’re being handcuffed by everything. And by the cost of doing business around there. You’re being diagnosed earlier with diseases that are now curable but super expensive. The cure is millions of dollars. Kaiser’s already made a decision years ago, most of those high end cures, they’re not going to bring in house. They’re not they may send you to Stanford, but there’s a good chance that you’re just not going to get it I’m sorry, you’re a statistic, you’re a little bit all that maybe your time is up. You and I don’t accept that probably because we’re the consumer, that somebody, some institution is going to tell us when our time is up. So we’re gonna want to spend that million dollars on a very rare drug that cures by very rare cancer. And that’s again, who’s doing that, how’s that going to work? So I like that a lot. I think cybersecurity, again, that’s an ebb and flow. But once you have an attack, again, that’s just going to take off, we get another type of experience thing, where two thirds of Americans social security numbers get compromised, people are gonna go crazy. And you’ll see that sector just blossom, or playing go down or something like that. We’ll get that I think that’s a really good. I think chip makers are really going to struggle for a while on that, although it’s interesting to see that whether the United States decides to put up a ton of money to help manufacturers move out of China, and either bring it back here, or bring it to Vietnam, somebody is going to be the beneficiary of leaving China because China, people are beginning to realize just finally, that China is our enemy. And China wants a world domination, much like Japan did in the 20s or 30s. Or Germany did. And they’re gonna they’re gonna go after it in a big way. And you can’t even buy a simple antibiotic shot, if that’s not made in China today. But we went to war with China. We’ve got a big time problem with our medical business. And that’s the things that have to change.
Nathaniel E. Baker 37:43
Yeah, and that’s something that both parties rarely get get behind now. Really interesting. All right, Elliot Talon of the prosperity Financial Group. Thank you so much for joining me contrarian investor podcast today. In closing, maybe you can tell our listeners how they can find out more about you more about your firm. Imagine you have a website. I don’t know if you’re on social media. But yeah,
Elliot Kallen 38:07
we’re everywhere on social media. It’s prosperity, financial group.com. It’s Elliott e ll IoT, at prosperity, financial group.com. We’re on Facebook. We’re on Instagram. We’re on LinkedIn. You can catch me on LinkedIn. We’re in Northern California. I kid around. I’ve got a face that’s great for for radio and a voice for TV. But you could catch us and we’d love to talk to you and like yourself there. Nathan. We have a number of podcasts that people are welcome to listen to subscribe. I love to subscribe to yours and
Nathaniel E. Baker 38:44
iTunes and stuff. What’s it? What’s the podcast called?
Elliot Kallen 38:47
Meet the Expert with Elliot Kallen.
Nathaniel E. Baker 38:51
Okay
Elliot Kallen 38:51
That’s on all the major places that you get podcasts.
Nathaniel E. Baker 38:56
But you did not make you mentioned you’re not on Twitter.
Elliot Kallen 39:01
For a long time Twitter was unacceptable in my industry. It was it was an issue. It is no longer that issue. Because the issue was capturing all about capturing. The message had to be captured and archived somewhere and Twitter was not geared up for that. But now we’ve Smosh and Smosh now can handle that. And so I’m not yet on Twitter. Okay, that’s one thing I’m not on yet. But you could bet that’ll change in 2023. And quite short.
Nathaniel E. Baker 39:30
Very cool we will look for you there too. But for now, I’ll put those links in the show notes. Everybody can access them. Elliot, thank you so much for joining the podcast again. And thanks for your time. I really appreciate it. Thank you all for listening. And we look forward to speaking to you again next time. See you then. Bye.