Do you want a wealthy retirement without worrying about money? Welcome to “Retire in Texas”, where you will discover how to enjoy your faith, your family, and your freedom in the State of Texas—and, now, here's your host, financial advisor, author, and all-around good Texan, Darryl Lyons.
Darryl: Hey, this is Darryl Lyons, CEO and co-founder of PAX Financial Group, and you're listening to Retire in Texas. Appreciate you tuning in. I always want to remind you that this information is general in nature only. It's not intended to provide specific tax or legal advice. Visit PAXFinancialGroup.com.
Also, if you text the word “TEXAS” to 74868, you will connect with a financial advisor. You'll get a 15-minute consultation. It won't cost you anything. They have a heart of a teacher. I think you'll appreciate that conversation. [00:57.1]
We talked a little bit about the 60/40 portfolio and we're going to continue to go into the 60/40 portfolio from the last episode. If you didn't listen to the last episode, tune in and check it out. We talked a lot about the bonds and I do have one comment about bonds I failed to mention that I think it's important, so I'll cover bonds, and then we're going to jump into stocks and a little bit of forecasting the market.
This is not an evergreen podcast, meaning that, in about six months, it may not even be relevant anymore. I think I’ve got about a two-month runway for this content to be helpful for you, so be sure to digest it and think about it, and then we know that, in a few months, the landscape of investing might have changed. Who knows? Maybe it'll still be there.
But what we talked about in our last podcast was how having 60% stocks and 40% bonds didn't work last year. It was down about 15% and the reasons behind that.
Now, really just touching on bonds, and one thing I didn't bring up and ran out of time is the role of PAX, as an institution, [that it] plays in constructing your portfolio. Many people now know the cat is out of the bag that we have really latched on to the idea of Biblically-responsible investing as part of our investment offering. [02:05.3]
We don't sell products for fiduciaries, so when we place products in our client portfolio strategies or investments, we don't get paid to do that as a commission. We get paid by our clients to invest so that when we make a recommendation or make changes, there's not a conflict of interest there. The reason I mentioned that is because we like Biblically-responsible investing. We just make it available to our clients and help them understand how it works, and if they have faith alignment, then we implement it, and we just don't do it as just “Hey, we do it for all of our clients.”
So, here's the thing about it. Some good, well-intended Christian financial advisors in the marketplace, they do all Christian investing, all Biblically-responsible investing as their conviction. We haven't gotten there, and here's why. I feel I'm a little bit of a nerd in this business, and as a fiduciary, I spent about five to 10 years identifying if the returns on the Biblically-responsible investing were aligned with the marketplace, or if there is a drop off in returns, as a result of investing in your convictions. Do you know what I mean? In other words, if you use Biblically-responsible investing, did it cost you in your returns? [03:11.8]
I had to spend a lot of time researching that and I got to the point where, for me, and the research is ever-evolving because in the landscape, there's more investments today than there were 10 or 15 years ago, but the research that I’ve seen, and I’ll talk about this in my fourth book that's coming out soon, the research that I’ve seen is that there's not a drop off in returns when you're doing Biblically-responsible investing and there's actually a slight benefit in the risk. So, a little less risk, about the same returns, as simple as that. About the same returns, a little less risk.
I've seen some research that makes the case that there's better returns. I just have to see that. The sample sizes were really small. So, right now, I think that I'd feel comfortable saying that we believe that the investment returns on Biblically-responsible investing are about the same, a little less risky. I feel good there. [04:04.6]
But it doesn't tell the whole story. What about the bonds? We talked about a 60/40 portfolio. I told you about Biblically-responsible investing in the context of the 60%. But the 40% could be a totally different story, so the question is, hey, when you do Biblically-responsible investing in the bond space, is there any drop off in returns?
See, this is where I think PAX is a little different. We still play the role of fiduciaries. We still ask ourselves the same question, “Is there a drop off in returns?” and I am not convinced either way, and so I don't have conviction to be in Biblically-responsible investing in the bond space.
We do have some exposure to Biblically-responsible investing bonds and we do make that available, but we're just not utterly convinced that there's not a drop off in returns, and we, as fiduciaries—we absolutely, a hundred percent take the role as a fiduciary—we don't want to dilute clients’ returns, because we know the effects of compounding 0.5% or 1% over time has a material impact on performance, and so we're picking up pennies for the clients. [05:05.7]
I say all that because we oftentimes will construct portfolios where the 60% of a client's money might be in Biblically-responsible stocks and the 40% might be in secular bonds, and as we get new information, we might switch that over to Biblically-responsible bonds, but, many times, we're just using secular bonds. That makes us completely different and we are fiduciaries. Here's how I would express PAX and our role in the marketplace. We're fiduciaries who honor and respect Judeo-Christian values.
We're fiduciaries who honor and respect Judeo-Christian values. So, if you come in here and say, “Hey, look, I appreciate the honor and respect to Judeo-Christian values. I don't want Biblically-responsible investing,” cool, no problem. We're not going to look down on you. We have plenty of solutions. And I think that allows us to look through the lens of a 60/40 portfolio in, what I would say, a very professional way. [05:57.2]
I spent a lot of time talking about the bond portfolio in the last podcast, and I'm going to spend some time talking about the 60% of the stock portfolio in this one, and the 60% last year was really rough. That stock market decline of nearly 20% was painful. If you were heavily leaning into the technology space, you got hurt even more.
In fact, the way we like to construct portfolios is we have what we call a core portfolio. A core portfolio, this is the big chunk of money that we don't want to really make bets on, for lack of a better word. We want to be well-diversified. We want this to work long term. We want to stick with this core strategy. We might tweak it along the way, but, really, we want this thing, this baby to be, in the context of conservatives, we just want to be boring. [06:51.3]
But then we do satellites, which satellites are areas of kind of we want to “I might want to put a little money in crypto,” or “I might want to put a little bit money in high-yield bonds,” or “I might want to put a little money in technology stocks.” And whether it's the advisor that has a conviction in a certain area or the client, we then satellite a portfolio with getting exposure to certain areas, and there might be an obvious inflection in the marketplace where it's an opportunity. So, we'll do that with the satellite, but we don't want to risk a client’s core portfolio by being wrong.
But last year, our satellite in technology stocks, which was really not described as a technology basket of stocks, it was called growth stocks, that was hurt the worst. I don't have the returns on me, but that was hurt the worst, and it was just what the market did. The Facebooks and the Googles, they all struggled in that marketplace, namely, because the Federal Reserve was raising interest rates, the market was contracting, and, obviously, the cryptocurrency had a little bit of ripple effects. The stocks did very bad last year, we all know it. We all were frustrated with our stock portfolio. [08:01.6]
But what's it going to look like this year? I mean, what are we thinking? I think it's important when I talk about your stocks to know something called price-to-earnings ratio. Now, hang with me, I think this is just important for you to know to help you better understand how stocks behave.
There's a lot of different ways to measure stocks, but one of the best ways to understand stocks is the price-to-earnings ratio, and I think of it as a small business. I'm going to make up numbers just as an example, but I’ll use PAX as an example. Now, I'm not saying these numbers are true. I'm just telling you so you can understand how the price-to-earnings ratio works.
PAX Financial Group is a small business. We're a small business. We have 22 employees. We don't take outside capital. We're employee-owned. We've grinded it from the days of me knocking on doors in the City of San Antonio just to get a client, and then coming together with Joseph and Andres and developing this, so very scrappy, come a long way, very proud of our team. So, small business. [09:03.2]
If somebody came along and said, “I want to buy PAX,” somebody might say, “What is it going to take? What is PAX worth?” Again, making up numbers just to be simple, but let's say PAX made a million dollars. You have revenue, which is the top-line number, expenses, and then after that your net income, also profit. It's kind of synonymous in a lot of ways. A million dollars.
The marketplace for a small business takes that million dollars and says, “Okay, I'm going to pay you in the small-business world five times that million dollars. Five times a million dollars,” and so if PAX were to sell, we'd get $5 million, if we made a million dollars of income. Then all the owners would get paid, right? Five times that million dollars. That's called a multiple. Very important for you to understand this to understand how stocks behave. I think this will help you a lot. Five times that million dollars. That's the small-business world. [09:56.7]
Now, when information becomes more prevalent and there's more buyers and sellers, that five goes up. Because there's not a lot of information in small business, my financials aren't public and a lot of due diligence is necessary, the multiples, five times that million dollars, aren't as high. But as we move up to the stock market--
Now, the market works this way: you’ve got the small business market, and then you've got kind of this other middle market, which is called private equity, where the buyers are more considered private equity firms. We'll get into that later, maybe at another time. The multiples will move up from five to 10 in the private equity market. But when they get to the stock market, what's the multiple people pay on earnings or net income, or profit, all kind of synonymous? What do they pay for that?
If I were PAX Republic and we made a million dollars, we wouldn't get five times our earnings, net income, or profit. Again, it’s all synonymous. We wouldn't get five, if we moved up to the private equity market, which is a little bit bigger. We’d get paid 10 times, because there's more information, more people involved. [11:05.6]
But when we moved to the publicly-traded market, if we were to go to the New York Stock Exchange, and I go up on TV and I hit a bell and we're traded on the New York Stock Exchange, we would get paid 15 times earnings. Fifteen times earnings. That's just the historical price that people pay for earnings. That's the price that they pay per share. That's the price-to-earnings ratio. The price-to-earnings ratio is 15 times earnings.
That's important for you to know that stocks historically have traded at 15 times earnings. Why is that important for you to know? Because when stocks go above that price, they're kind of expensive. When they go below that price, they're on sale. What happened last year is we saw that technology space trade 20, 25, 26, 30 times, even above 30 times, in the biotech space earnings. [12:06.7]
Why were they trading so high? We know that the U.S. government printed a lot of money, and so there's a lot of money floating out there, and people were making bets on these companies that “Yeah, I know you don't have a lot of earnings,” but they expected the company to be sold to a bigger company like Google or Facebook, and then everyone would get rewarded. When the economy started to restrict and the people became fearful, those 205s and 30s, they dropped down to 18, where they're hovering today, at about 18, still slightly above the historical averages.
But if you go to Europe, you're going to see 12. In emerging markets, you're going to see even less than that. Then there's pockets, even in-- I’m trying to think of some. I'm thinking energy, but energy does ebb and flow. But there's pockets of sectors that are below 15. So, you are seeing some opportunities to buy companies at a lower price, and that makes the economy much more healthy. [13:05.6]
I’ve been anchored to price-to-earnings ratios since I first started in this business, because I started in 1999. In 1998, I took a class at St. Mary's University as an undergraduate and they gave us all a bunch of fake money. This was 1998, the dotcom bubble, and they said, “Whoever makes the most money by investing it by the end of the semester gets the best grade,” or something like that, maybe an award, and so I won that award. But I was really nerdy about this stuff, so I had done my research. I, basically, made a ton of money. It was all fake money, but I did it and I did it by just kind of paying attention to price-to-earnings ratio. I became kind of addicted to that.
Now, I’ve seen a lot of creative firms unwind and kind of look at different other ratios, but because that's the gold standard of how people view the economy, it still is the one to pay attention to the most. In 1999, I started paying attention to the price-to-earnings ratio because the dotcom companies were way, way, way above that 15. They were 20, 25, 30, like we saw just recently, and then you saw them just crash, get back down, and then buyers came in and started buying again. [14:16.2]
When you understand that ratio, in fact, you can actually have your advisor run an analysis on your portfolio and identify what the P/E ratio is on your stocks. You can say, “Okay, it's my P/E ratio, the price-to-earnings ratio, above 15? Oh, it's a little expensive,” or it's really cheap.
The whole reason I tell you this is because people ask me all the time, or maybe they tell me, it's kind of like they tell me with a question mark, “Man, the stock market is expensive?” or “Man, the stock market is on sale?” and the reason they say that is because they're just referencing maybe what we consider a high watermark or a low watermark, based on what they saw on their statement or so on TV. [15:00.7]
It doesn't necessarily mean anything, because the earnings can change and price changes, there's a lot of factors, but it can be deceptive when you think the market is expensive or cheap, based on what you saw before, a few months ago, either on your statement or on TV, or heard on TV. I think, if you can just answer the question whether or not the stock market is expensive or cheap, based on the price-to-earnings ratio, it kind of gives you an objective way of understanding stocks.
I wanted to share this with you because I wanted to talk about the debt ceiling. The debt ceiling is going to impact the P/E ratios and it's going to create a window of opportunity, because I do think that the noise is louder than ever. It's always been loud, and it's getting louder and louder and louder, and that impacts the volatility of the stock portion of your portfolio. [15:55.0]
So, we have to look back in 2011 and 2013. Now, the debt ceiling has been adjusted, I think it’s over 80 times now, so there's a historical context for adjusting the debt ceiling. But some of that me referencing the historical context of the debt ceiling, what happened in the stock market when the debt ceiling changed, sometimes can be a little bit irrelevant, because the noise today is so amplified that, looking at the 1970 debt-ceiling issues, it doesn't necessarily tell us much about what might happen this year. It helps, but 2011 and 2013 are a little bit better, and so I look at those two years.
Let me tell you what happened with the debt ceiling then. The S&P 500, so just the stock portion of your portfolio, that fell 17% in 2011, and 4% in 2013, just for one month. Okay, so we might see that price-to-earnings ratio dropped during those months. But then this is what's cool. Then the buyers come in, because they see stuff on sale and they see, Oh, man, it was at 20 times. Now I have a window to buy it at 10 times. So, the index, the S&P 500 index, rose 28% and 21% the following 12 months. I mean, that's pretty cool. [17:11.7]
Now, it's scary, though. I mean, the debt ceiling is going to have a lot of noise associated with it, and I mean, we're already seeing it already, and the market going down, it seems like that's an inevitable. But I think, if we can get those price-to-earnings ratios down during those time periods, I think we're going to see buyers come in the market. It's my conviction. It's my conviction that-- Now, I don't know this to be true, but I watch the market every day, all day pretty much, and I see these talking heads and it feels like everyone believes the market, the stocks are going to be worth more in 12 to 18 months from now. It seems like that's almost the consensus. [17:52.1]
But it also seems that not every investment manager is willing to go all in because there appears to be a few potential inflection points along the way where they can buy stocks at a cheaper price. Whether that's the Federal Reserve raising rates and causing disruption, boom, I'm going to buy. Or the debt ceiling, market goes down, boom, I'm going to buy.
I say all that because, if I were to forecast the next 12 to 18 months, pending anything that's crazy, like China stuff, I would say, buckle up for some volatility with the Fed raising interest rates and the debt ceiling. But don't freak out, you may find an opportunity to take some cash, put it to work. And definitely revisit with your advisor if the 60/40 still makes sense or if you need to make minor adjustments, 70/30, whatever. You may even talk with your advisor about adding satellites, if there's an inflection point to buy. [19:02.5]
Man, I hope this gave you some ammunition to better understand both your bond portfolio, which was the last episode, and your stock portfolio, the portions and how they work together, and a few questions to ask your advisor with a heartbeat teacher. They can educate you on these things.
Then, again, like I said, this is a journey and this is going to be a crazy year, just like every other one, but I do have a lot of confidence and I have a lot of conviction that I know this is kind of a crazy world we live in today, but I still have conviction that people are starting businesses. The consumer is still going to buy toothpaste, tires, and toilet paper, and people are still coming up with creative ideas, and people still have ambition and inspiration to do great things.
So, if you look at me as an owner of PAX Financial Group, I'm betting on the future. We're hiring new employees and reinvesting, and so if you want to look at my convictions, you'll look at my pocketbook, and you'll see that I'm very much invested in the company's growth. I'm invested in the market and I'm invested in ministry, and I'm invested in my family, so I have a lot of hope for the future and I think it's just kind of getting through these volatile times. [20:06.0]
Thank you for listening with me to the end. Visit with your financial advisor to kind of go through some of these questions. And I want to remind everyone, you think different when you think long term. Have a great day.
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