Today's episode is a bit different. I'm having a conversation with Tad Park, one of the most concentrated investors I know. He made big bets on Tesla in 2019 that paid off handsomely. Now, he is creating a set of growth ETFs focused on disruptive tech companies so everyone can benefit from his thesis. We talked about the benefits of concentration, convexity, and the culture of innovation and disruption. Follow Tad's work at voltequity.com.
A, I really think it's going to be higher than this in a very short amount of time.
So that's why I felt like options would be an effective financial tool to extend the returns for limited
loss. And I not only that, I was I was so bullish. I, I kind of also mortgaged my house.
Tolu Salako 0:26
Hey there. Welcome back to tillers notes. On this podcast, we'll explore young adults invest their time and their money. I also have a newsletter filled with priceless insights for young investors. subscribe for free at Tolunotes.com.
Today's episode is a bit different. I'm having a conversation with Todd Park, one of the most concentrated investors I know. He made big bets on Tesla in 2019. That paid off handsomely. Now he is creating a set of growth ETFs focused on disruptive tech companies, so everyone can benefit from his thesis. We talked about the benefits of concentration, convexity, and the culture of innovation and disruption. enjoyed the episode. All the material discussed in this podcast is for educational purposes only. It should not be taken as personalized investment tax or legal advice. It is not an indication to buy or sell certain securities. My guest tonight no guarantee the accuracy or completeness of this information. As always do your own research. Dad. How's it going, man?
Hey, hey, Tolu it's great seeing you again.
Tolu Salako 1:33
Good to see you. It's been a it's actually hasn't been a lot. I think we chatted a few weeks ago, right?
Yeah. Yeah. Nice. Yeah, yeah. Yeah. So
Tolu Salako 1:43
you're actually one of the first one of the first subscribers to the newsletter. And I think you're one of the more faithful faithful readers that I know that seriously. In that you actually, you read and you actually emailed me back and we actually have conversations about this. I wrote, you know, we debate on things, you don't necessarily just agree with everything I write? Neither do you disagree with Erica, everything I write, which is, you know, it's it's kind of nice to just have that, you know, healthy back and forth on things like that. So, yeah, thanks for being one of the earliest newsletter subscribers, man. Yeah,
I just love that. We were able to just kind of talk about things before when we're, you know, just kind of getting coffee and things like that. When, in more normal times. Yeah,
Tolu Salako 2:37
those those coffee walks, we used to do two feels, actually inspired me to start tools notes. Yeah, so just in case you didn't know,
oh, wow, I was in the beginning, beginning beginning. Not even just because the conversation was so interesting. I felt like, you know, people need to hear this more. This is like, so great. like to have a very reasoned, you know, thoughtful process to investing. Instead of just like, Oh, well, whatever, I don't know about investing. So put it everywhere. And then
Tolu Salako 3:17
I think I think it's definitely a couple of buckets. So that in that there's some people just don't care about it. And that's perfectly fine. If you don't care about it, it's good if you just automated by someone else handle it for you. But there's some who want to care about it, but I don't think they're willing to, you know, just learn or even just have conversations mostly because, you know, if you like we're gonna have later today, but you're gonna say some things. And that's not going to be my style, right? Or I'm gonna say something that's not gonna be like humans. I don't think we want people to disagree with us, right? It's really difficult for us to have conversations or for us to say, Oh, I bought this stock, x price. And so and when you tell someone else that they kind of go Hmm, I'm not sure if that's something and then you start double. You started like second guessing yourself. And a lot of people don't like that even though it's really healthy for people, especially investors. Yeah, well, let's dive right into it man. Tad, let's talk about Tesla. I feel like from the very big I think you're the biggest Tesla bull I know in that even from all the youtubers I watch, I don't think there's anyone who's as bullish on Tesla as your and that's because you were you were kind of there when no one believed in anything right? And you're already just there you weren't just there like shares you were there. Like, with options, you you've placed an actual bet, and you're like this crazy conviction. So I think we've discussed this many times but like, tell me what what is it about Tesla that you believed in back then like let's let's just remind a bit like now what you know now this was back when the board tequila, you know, you have to get to the share price. If not, you're not going to get that big payday and what and so on and so forth. And a lot of people didn't think they were going to hit their numbers or who didn't think they were going to get there. Why did you believe in Tesla?
Yeah. So I think that Tesla, I felt like was a the biggest investment opportunity of my lifetime. At that point, I've been following them for a while. And at that point, I was just so convinced of Tesla, I felt like it was my obligation, just to help other people, like I was telling everybody, and like, you know, you were there. But like, I was telling not only people at work, but you know, my family members, and the people I knew, friends, everybody, and they would just be like, Hey, stop talking about this. Like, I think some people like didn't even like me, but like, I knew that it was going to completely change things. And whoever listened would be really appreciative for investing it in at that time. So I knew that at that time, I would look crazy. But one day, some people would think me, and what I really liked is that work. At the very end, some people did think me that I made people aware of this really crazy stock, I thought was really going to change the world and go up in a short amount of time. So actually, a lot of that was after the autonomy day presentation. And that was in April, what was really weird is that presentation happened, and then the stock wouldn't keep getting hammered. So so there was a recent better day presentation that happened a couple days ago. And I think people just you know, a lot of people got into Tesla just recently. So they don't really remember the after each of these presentations, like I'm not surprised when the stock goes down after presentation. This is actually quite a common experience that I've experienced. So like, better day, stock went down. But after autonomy day, stock went down and wouldn't stop going down. After a cybertruck reveal. People were like, what the heck is this stock went down. Each of these presentations, the stock is going down. And I think that, of course to the presentation, people are all excited. But one thing about you on is that he really sucks at presenting, because he stutters all this stuff, like whatever. I think the the big difference is, with Apple, Steve Jobs was a presenter, like he could get this vision and your brain like is very good at presenting and pausing and doing all that stuff suspense. He loves, like really bad at all that stuff, because he's more of an engineer than a presenter. And I think what that created was that he can say something world changing. But if people don't understand him, they just dismiss him as a crazy guy. And that created one of the greatest growth opportunities in this stock. Basically, when he was talking about all the stuff about how autonomous driving works, and all this other stuff, I was like, wowU, Nvidia is like huge, like 100, like over $100 billion. And Tesla's only $50 billion, but they created a chip that's superior to Nvidia. And they, they have the technology with machine learning to actually like solve self driving, which would make this like trillion dollar plus company. When I saw like, all these things coming to a head like and their technological advantage and batteries, technological advantage, and like so many different things, and that the world is going to go electric, because it's a superior technology. I felt like, there's no way that this will be valued the way this. So during that time, newsmedia was just hammering everything and saying, Oh, this company is going to go bankrupt cetera, et cetera. But as long as the company is able to raise money, I feel like they can achieve their goal because they just have to survive long enough to raise the money. So I thought in my mind, they are not going to go bankrupt here. And I specifically remember having lunchtime conversation, I was talking about Tesla again with co workers. That 178 that was the bottom. This is like, it may never hit 200 again, or be below 200. Again, so. So this was pre split. So it's about $50 a share. And they, you know, of course a lot of people didn't believe me, but that was the bottom and I think that the reason was, everyone's saying I was going bankrupt. I knew for sure. It's not going big. So it's actually great
as well. So options are usually very risky. And I wouldn't recommend it unless someone really knows what I'm doing and knows what you're doing. I didn't know what I was doing. But, but options are forgiving. If you're on the really, really right side of the equation, like if you're correct, then it can be forgiving if you didn't pick the right prices, the right strike price, all this other complicated stuff. So I, all I knew was, Hey, I really think it's going to be higher than this in a very short amount of time. So that's why I felt like options would be an effective financial tool to extend the returns for limited loss. And I not only that, I was I was so bullish. I, I kind of also mortgaged my house. You know,
Tolu Salako 11:02
that's, that's one of the funny parts that I knew. And I just, I wasn't
sure if you would be willing
to share it. Because when you share that news with me, I think the first thing that went through my head is like, make sure you don't tell your wife. But okay, let's Okay, this, this just seems crazy. Because right now, everyone, you know, no one can say I told I told you so. In retrospect, but you, you again, I'm not saying this is a good investment, by the way. And I'm gonna put a disclaimer all over the place just to make sure. But what if things didn't go your way? Right? Because you've, you'll put up a mortgage in your house, you're in it with options, which definitely add expiration date. There were a lot of things that could go wrong, right? You mentioned options to really forgive him. The only thing that's obviously really strict about is that expiration, and then once it's done, it's done. Right.
So there were there were a lot of things that could have gone wrong, what would you have found if things didn't go your way?
Yeah. So I think that's a really good point, I think that if I didn't have certain things in place, I wouldn't be able to risk. So I'm a big proponent of the fire movement, and like very smart investments and stuff. And I was building up to that point for quite a while. So I actually live in a in a four Plex that I own. And I have income coming in from rent. And I was had an emergency fund, and I had all these things in place already. So in any scenario, even if I lost my job or anything, I wouldn't be in a hard scenario that I would have to, you know, mess up my retirement savings or like any anything like that. So in that sense, in that situation, the way I thought about it is in the Silicon Valley, we take pay cuts all the time. And we take pay cuts for options, essentially. So these are options and world changing companies. And if it goes crazy, basically this is, you know, just how it works is that it really helps people and sometimes people retire early. But it was an affordable risk, because the salary is high enough that you can afford like a 10% pay cut or whatever, or a 5% pay cut. So in my mind, I was thinking, hey, people use a home equity loan to do like really stupid stuff. I mean, in my opinion, it was so but I mean, they might think it's really fun to have like a car boat, or like just random stuff that don't have any return. And then they just pay it off like a gigantic MIT credit card over time. So in my mind is like, Hey, this is an investment that I really believe in, if I'm wrong, but this is not unlike other trade offs I've had in my career where I took a bit of a pay cut, to be to have a piece of a world changing company. And basically, if I'm completely wrong and goes bankrupt, at least, I'm only risking a small pay cut. And I feel like because I've done really well as a software engineer, I could keep working as a software engineer for for many decades, I could easily pay this off, even if Tesla went bankrupt. So this is not a typical investment or like a wild investment. And in that, you know, people are just like putting everything and on like a blackjack table or something like like that's not how I was viewing it. I was viewing it as the expected value of this investment, I believe is really, really positive. So it's worth it to put in as much of my expendable investment allocation into this investment as possible. I viewed it kind of like a VC. I'm not not a VC but how software engineers joined a company and they put a portion of salary into the company. But without having to work at Tesla. So this was like the the best way to, without working your butt off at Tesla have a piece of Tesla. And actually, it's a lot bigger piece of Tesla than even an employee at Tesla would have. If I was were able to approach that way. That's how I thought about it. I wrote a piece of Tesla without
Tolu Salako 15:29
dealing with Elon Musk. Alright, yeah. Okay, so we're moving on here. So that Tesla that was really concentrated, right. Just in the in its nature, I think you mentioned some comparisons to others. But most people diversify, myself included. I hardly have enough conviction in a specific company to do as well my convictions are we like the broader market movements, like I think you know, some of it about like shorting retail at the beginning of the year, buying heavily with margin in mid March, and things like that, that no one else is subscribed to the newsletter would know about. But so I don't really target like specific companies, I just sort of look at either industries or, or the entire market as a whole from a macro level. But you you're one of the few that actually target specific companies. So what does it mean to be a concentrated investor? And why don't you just diversify?
Yeah, I think it's a bit of a different mindset and a different risk tolerance. So if you think about all the billionaires that are out there, pretty much all of them are heavily, heavily concentrated in one or two stocks, and that one stock might be a company that they found it. But we don't hear of any billionaires, that became billionaires, because they were, you know, diversified the s&p 500. Or they were, you know, doing any, anything like that. So it was a high conviction investment, to have a big part of a world changing company. So I believe that it's necessary to concentrate in order to grow wealth. But it's necessary to diversify to preserve the wealth. And in my stage of life, I am willing to take that bet, as if I'm an entrepreneur starting a business, and I'm willing to take a little bit more risk. Because I'm young, I can recover from a couple mistakes. And then at the end of life, if I want a very stable low volatility investment profile, I can switch over at the end of life, right before retirement. But for right now, I felt like this is how people grow wealth. And without risk, there isn't an ability to grow that wealth. And just because of my own investment goals, I it's not recommended for everybody, this is just my own the way I thought about it. If I wanted to increase my risk profile earlier on in life, and then decrease the risk profile later on,
Tolu Salako 18:20
Mark, and this, this is some of the things I write about on the newsletter, even though still not individual stock level. But when you're young, I think it's the best time to just take a lot of risks, just seen that you have time on your site. Okay, so moving on here. Before we actually move on, what's next for Tesla, where where do you see the growth coming in? I think people again, people have always said that stock has been overvalued, its entire life span. I disclaimer, I'm not a Tesla shareholder. But where do you Where do you see it going? Because you're obviously still bullish on the on the company?
Yes. So I'm not in that. Now. This is investment advice. though. I am a shareholder. This is the way I view it when I do my own investments. But basically, I see world changing companies like Amazon on this whole write up to over a trillion dollars and things like that. And they were saying that they were overvalued the entire way up by all the traditional financial metrics always overvalued. But they were changing. And I think in the same way, if you look at a disruptive company from the traditional financial lens, it doesn't make sense, because they are using those profits to grow and to set up the infrastructure for a world change. So you can't say oh, this is the P e ratio, it seemed overvalued, all that stuff. None of that stuff applies to a disruptive growth company and That being said, even as an auto, it seems like it's a little overvalued, because, you know, Toyota, Honda, GM, and Ford, all of those companies combined is the same value as Tesla now. So it's almost the entire auto auto industry. So you can argue, well, even if they execute, and everyone's driving these things, you've hit your value. So there's no seat, the you know, you can't get any higher than that, and I understand their viewpoint. But I think that if you view it as a, as a technology company, it's completely different. They are in the midst of unlocking so many technologies, and they are going to be the backbone and the leader of the electric car revolution. And not only that, I think the most promising aspect is autonomous cars. So right now, yes, they're ahead in electric vehicles. Yes, sir had and all these things. That's why Wall Street is still pressing them around the current price, maybe about 30%, lower, but they're in the ballpark of the current price, because they're a leader in in this field. What they are not pricing in, in my opinion, is what value would be unlocked when autonomous cars come into the picture. So if you look at Apple, Apple is a $2 trillion company right now. They sell these, you know, $1,000 phones. And yes, there's recurring income from the apps that you buy in the app store and things like that. Their margins are pretty healthy, like over over 35%. But you know, in the end of the day, they are hardware software combination, selling mainly $1,000 phones. And they're $2 trillion, with healthy margins, right? Now, imagine a world with autonomous cars, you're not selling $1,000 phones, you're selling cars that are $25,000 to $50,000. And imagine applying healthy margins on top of that. And those healthy margins are possible if you charge on a recurring basis because of the autonomous car, that the car is driving itself. And because you're the software platform, you can charge that on a recurring basis. So once that's unblocked, is it really overvalued? Like, is it really overvalued, to be in the trillion or over a trillion or in the trillions? I would say that at that time, people would view it as pretty affordable for the service that they provide, and what they're providing society. And that unlock has not happened yet. Because that will unlock incredible value. So it's a critical question to answer, whether they are on track to unlock this technological breakthrough or not. That is what I want to provide to the world.
Tolu Salako 22:53
With me. I want to I want to move on so bad, but like, there's so much to touch on. So I really hope Yeah, since I'm so are you familiar with the diffusion of innovation, the chart where you have things just imagine exactly the Bitcoin chart, that's the exact Diffusion of Innovation chart where no one knows about something, you get some early adopters, and then there's like hype. Yeah, there's like overvaluation. And then there's like a crash all the way back down. And then things kind of stable back up and things move on from there. So with that in mind, and that's how a lot of technologies happened with the internet. Also, the 1999 tech bubble was the high spot for Bitcoin I was when it reached, what is the 19,000? or whatever, rich? And don't you feel like for self driving cars, Tesla, whatever, there's going to be that bubble slash high phase. I'm not saying that the company will make it. I'm not saying that there's anything wrong with what you're trying to do their benefit to humanity as a whole. But don't you feel like just because it's human nature to be greedy, and we're never at any equilibrium, or just get out, eventually going to drive up that price all the way to the overvaluation level, then it'll come crashing back down before the true nature of the stock before we actually see what Tesla truly is. or autonomous driving or the auto taxis, whatever you want to call it.
Yeah. So yeah, there's this interesting question that you bring up because I actually am pretty involved in launching these funds. So I'm, I'm watching funds with the company. We're the company that serves cobalt equity. And one of the things that we apply is this concept of convexity. And it's specifically for that, usually disruptive companies, they're not quite understood by society. And the stock movements can be very, very sudden. And it can just be very disorienting, but it actually produces a lot of financial opportunity in the derivatives market. So like things when you use options and things like that. So basically, with this concept of convexity, you can protect against the downside, when it does crash, we actually expect for these contentious like battleground stocks, before people fully understand them to have a pretty wild, right. And the way that you can invest in that is with convexity. If the stock moves really fast up, you can move faster than that, because there's options. And the options do not price in that a company will be disruptive, they think that the company will just be as it was before. So you can get options for cheaper than what it affords you if they are disruptive. And when it crashes, you can have protection, because other people are not expecting the crash, it's possible to have some protection from a broad market crash. So that if it tanks, you have a little bit of protection on that side as well. And of course not nothing's free. So there's a cost to carry to these options. Yeah,
Tolu Salako 26:12
there's a there's definitely a lot to unpack there. But yeah, what I'm understanding now is that you're you have both calls inputs. So you're right in the momentum all the way up. But then you're also trying to protect yourself against the momentum crash at the bottom. Is that is that a correct assumption?
Yes. It's just not from like, the thing is, if it was a, it's, it's possible to achieve convexity, with, like, no foresight, whatsoever, like, you could just do it on any stock out there, right. So you can just buy calls on the way up puts on the way down, and it just basically washes out because it goes by the the market movement, actually, you would lose money, because nothing would happen really like you would kind of gain a little bit kind of lose a little bit. And then you'd kind of lose money over time, because you have to pay for these premiums. Now Now when it gets really effective is if you view it as an insurance premium. So if you put a very small exposure to options, and the market did not price it in as a world changing company, you can have really outsized exposure to this upside. As an example, I put in into my own options software, I use e trade, and I have this like power terminal and things like that. They, they said it was like a 1% chance that Tesla would be above 1000, or something like that, by the end of this year. So at COVID. I was like, Okay, I'm pretty sure that this can recover. And I was basing it on like many, many different things. Yeah, but I guess not, not right now. But I was like looking at the logarithmic chart as opposed to linear chart, and I was like, okay, millions are not going to die. So then there's actually more than a 1% chance that the Tesla stock is going to recover. So I spent $3,000 for 18 $100 call option. And then you know, recently that was worth $700,000. So something that I put in $3,000 for became worth $700,000. That's the asymmetric return. Now imagine if you had a very big portfolio by only risking a small premium, that's completely like this. So under priced for the true probability of it hitting that price. So the market thinks it's a 1% chance that it's going to hit that price. That's why they're willing to sell it to you for $3,000. But imagine if the true probability was 30%, that it would hit that price, then actually, that's really, really cheap. So if you apply this options overlay, as long as the company is disruptive, you can supercharge your returns. And this is so different from other types of investing out there. Normally, when people introduce options and things like that, in a fund context, it's leverage. So it's super easy to borrow 100 bucks when you have 100 bucks, and double your return. But you're actually doubling your risk as well. Because when it goes down, it goes down twice as hard and you have like risk of bankruptcy and all this crazy stuff, right? So super easy to like ramp up the borrowing and wrapping up the risk. It's really hard to increase the return while keeping the risk managed. And that's when it would be really, really interesting opportunity. And that's what convexity unlocks is that this is not a pure leverage product. It's meant for people who are going to hold it long term Long term growth investors, but also adding this layer of disruptive convexity, that you're being able to supercharge companies if they truly are disruptive because it's not priced in into the market. Okay,
Tolu Salako 30:16
so this this won't work with just any company, right? Because if a company is growing at the exactly at the expected rate, your options would never make you any money.
Yes, exactly. You You, you'd actually lose money. So it's only the thesis is correct that it is a very limited time
Tolu Salako 30:37
period. Right? It has to be correct in that it has to be correct and realize in the time period, yes.
So, and that's just a warning for anyone thinking of doing this with spy is that or like the s&p 500 is that the s&p 500 is really it is the expected volatility that usually is the case. And something like what you just mentioned, would work in a black swan events in a black swan event like the Coronavirus, but nine times out of 10. You're just losing money, if you something like this on the s&p 500.
Yeah, if I could kind of go on that. Yeah, so this is not related to the funds that I'm planning to launch and bring to market. But some of the partners that I work with, they're very simple class and management. They have normal convexity, not disruptive convexity. So that they're helping me achieve that invest convexity in my own portfolios and my own funds, but they have normal convexity over the s&p 500. So you would think that putting an options overlay would be not worth it. And it just all is a wash because it's very expected. But amazingly, like in the, in their own, like, this is all hypothetical, you know, past results do not guarantee future returns. But when they did a lot of rigorous back testing over many different time periods, they were able to greatly exceed the return of the s&p 500. And those drops were completely unexpected by the market. And they were able to get it so that the portfolio did not drop that much, if at all, sometimes even positive, depending on the severity of the drop during those crashes. So if there was a crash, there was a crash in year 2000. There's your crash in 2008. And then this crash into 2020. Just those crashes happening like once every 10 years or something allows you to pay the value of that insurance and greatly exceed the returns of the s&p 500. And I was very confused on how that was possible. Because you would think that it's all priced in for something as well known as s&p 500. And I think it's the concept of humans doing things that are not correct. Because of psychology, and you being someone who always does the correct systematic move, according to all of history, and society. So how this would work is like you're saying it's totally correct. someone tries to do this themselves. Because of psychology, they might do it wrong, actually, unless you have this really crazy system and like algorithms and all that stuff, most likely, it's not the correct way to do it. In the sense that, they think in their mind, they bought a put option, and it keeps expiring worthless, right? And it's actually 95% chance that it's going to expire worthless. So you're thinking in your mind, do I want to, I didn't hit my price target. So do I want to make $1,000 by selling this put option and closing it out right now? Or do I want to hold it to expiration and make it expire worthless. So over time, they're training their brain that 90% of the time, it's expiring worthless, so they training their brain to constantly sell it before it expires. But what this creates in the market is humans are actually making the wrong decision, because they're not also factoring in the probability of a crash. And then when you also factor in the probability to crash, that might actually be a very cheap option for the insurance value that it provides. So if you're systematically doing it in a system, then it might actually allow you to save yourself from a crazy crash and get outsized performance over long periods of time. So in the short term, yeah, there's all these day traders and all that stuff, but they're not thinking about the probability of these like crazy events. So then that depresses the price of the protection and you can buy The chief protection has insurance. So this is not a pure leverage play, this is an insurance play. And I believe that simplifies the at the forefront of this. And they're first to market in this disruptive financial product where they can treat options like insurance and buy up these cheap options that you know, 90% of the time will expire worthless, but in all of their back tests have proven very promising to exceed returns and be better than holding bonds.
Tolu Salako 35:37
So I'm not I'm not fully familiar with, simplify or what they what they do. But let me see if I can share my screen right now. And I'm sorry for those listening on this through Spotify, they're not gonna see this. So this is spy. Yeah. And CBO II as this index called, it's just people. And what they do is they monthly they take 5% of the portfolio, and they buy the mean, I don't know if it's 5% of cocoa, but it by 5%. out of the money puts with this. And this. So this is the performance over like a long period of time. Let me see if I click on the chart, you can see since its inception, the put would have outperformed risk in recent history. So So here today data performance, you can see that's exactly my COVID here, and that's when the outperformance started, but what so I was reading this on AQR. And what they found out was that it underperformed the s&p on average by 4%. Over I think, a 20 year period. And they said, doing this is really equivalent, which is old in less than 40% equity, and throw in 60% of your of the rest of your portfolio in just cash, you'll have match the returns of this, just like 5% out the monocle, obviously, I don't know what simplifies doing. But this is just how this is designed. And what they found out is that this is the outperformance is due to two things. And the first is negative equity beta. Obviously, once you're selling, I mean, once you're selling some of your portfolio to buy puts, you're selling out of stocks, so you have like a negative beta, which isn't necessarily a bad thing, because that also reduces your risk. So we can kind of ignore that. And it's like, oh, less equity, less risk, let's just kind of ignore that. What the finance, like the second one is due to the volatility risk premium. And this is the premium. The people who sell the put are collecting every time you buy the put from them. So I'm not I'm not so this obviously this doesn't work. We can, we can see like it'll work this year. But this is a black swan year that occurs, let's say you know, very rarely.
So how much has it outperformed in the past seven years or so? I
Tolu Salako 38:17
don't have like the seven year chart I have like the all boys it's kind of misleading because their spy, okay, so
even even even five years, how
Tolu Salako 38:27
five years? It's 79% versus 29. So about 20%. Over from just from just from COVID. So no, I'm not I'm not saying something like this doesn't work. What I'm really just saying is that this the most important part of this is the human psychology. Right? Because I think simplifi also launch ETFs right? Yes. So once COVID hits and these, everything starts tanking. Yeah, there are people who may sell simplify, even though it may be the only thing that's green, he'll sell it just because the entire market is going down. Right? Because human psychology works that way in that it doesn't matter what's going on at that moment that everything that's that your brain just goes to let me just conserve cash. Let me stop losing money. So you sell what's out, you sell what's down, doesn't really matter. You just want to get out of everything. Once everything is tanking. Or, Steve simplify. I want you to see if I'm not sure during ah fun. Like I think I've written about this multiple times. But as much as this is designed to work if you just forget they have it and you just let it do its own thing. Every 10 years we have a black swan event. It's like a fat tail distribution. Something happens. You make money, but you have to be willing Go through the years of underperforming, right. Yeah. For this to be able to work?
Yeah. Well, unless you have a 1% call and a 1%. Put, then you you also overperform during the, the bull market and during the crash in both scenarios, so that that would be convexity, which is kind of counter counterintuitive that you can actually exceed the value of the premium for both of those things. Gotcha. And that's, that's only I shared an article in the chat. But it's, uh, only if you're buying it very affordably.
Tolu Salako 40:43
I think it really matters, you can't just say I'm going to blindly buy puts that are 5%, or X amount out of the money. And then that's my etea. These are like people who are very, very good. And they're using a lot of brainpower to basically applicant insurance company. So it matters what kind of risk premium they assign each person when it like a car insurance company like Geico assesses you as a driver. Yeah, if they get that risk number wrong, they'll go bankrupt. So they're very, very good at assigning what the expected value is, and doing the right move over and over and over over many, many people. And that's how they're able to be a very, very strong, profitable company. So in the same way, instead of doing random contracts, and saying, Hey, you guys all get the same insurance premium for driving all across the border across entire nation. If they're very wise about it, and make sure that it's very cheap. They can really, like use this as a tool to have outsized protection for the amount that you're risking. For spy, see, it's only risking 2% of their portfolio 1% for puts 1% for calls, but yet they're able to have outsized performance in the past. You know, this is, of course, all hypothetical. But in this blog article I shared with you between 2007 to 2020, the benchmark return is hypothetically 200%, for the s&p 500. But this strategy has a 500 over a 500% return in the same period with less volatility.
Tolu Salako 42:31
So let me let me share it. Let me share just so those that are watching on video on YouTube can also see this. So this is the article you've just shared. I'm seeing this for the first time. I haven't read it yet. But what you're saying so this is what you're pointing to in that. So they were able to be the s&p 500. volatility is also lower, and some people view volatility as a short term risk. So I see that maximum drawdown as 30 is lower
Tolu Salako 43:06
So you won't be you won't be you know, the hurt doesn't feel as painful, right? Yeah. So, you know, this fund expects a huge black swan like crash drop, whatever you want to call it. Every legislative timing for every 10 years, that's kind of on average, our average happens. Yeah, so what just happens if we go, if we have like a long period of just outperformance? Are you still saying this font outperforms, even with even when the s&p 500 as well, because I'm looking at the chart here. And I see in short to desktop sharing again, I need to just keep it on in 2019, for example, which I think the s&p 500 returns, what is it 30% or something crazy like that the font underperformed in 2018 where we actually had, there was a drop at the end of 2018. But the drop wasn't big enough. I'm guessing so the font also underperformed. It underperformed in 2017 in underperformed in 2016. So this is this is the underperformance I'm talking about in that a lot of people that won't be able to stick with something like this, even though something like 2020 is this insane, asymmetric return that you would have profited from.
Yes. Yes. And I I'm really appreciative that you point that out. That it's sometimes people misunderstand it and say, Hey, the s&p 500 went down. Like point six 8% today Why is this fun down slightly more. It's saved me from all downturns and all up up swings. It's better in every single way but it's Like, no, that's not how it works is if you do compound returns, it's better compound returns. So imagine you have, like, you know, just one event where it's like crashes everything that can completely kill your portfolio, and you have to start over again. But imagine that was not a reset for you, then when you multiply each year's return over time, over a long period of time, your overall return will be a lot better by just having some protection. This is all hypothetical. But that's kind of the idea. And that is what people do for bonds actually. So right now, sometimes, you know, traditional Portfolio Manager, money manager would recommend like a 6040, mix 60% stocks, 40% bonds, for those times where, you know, things crash and stuff, because the bonds are returning, you know, three 4% or something, it doesn't matter because less of your portfolio was exposed to the crash. So that's like a typical normal portfolio theory. This is applying modern portfolio theory. So, I mean, we're not even talking about current environment where bond returns suck, and they're like less than 2%. And interest rates are all time lows. The previous way of thinking about protecting a portfolio may not apply anymore, because the interest rates are so low, but assuming that the interest rates are normal, this might be able to give you outsize performance because yes, you're underperforming by worst case scenario. 2%. Because 98% spy 2% insurance, say it's a worst case scenario, everything's always flat. You're always underperforming, but 2% of it's always expiring. Right? Oh, sorry.
Tolu Salako 46:59
You broke up for a bit. You're always aspiring. Could you repeat that?
So you're only exposing yourself to the 2%? premium? Yeah. In a normal, kind of like, worst case scenario where the markets are flat, right. But then when the markets are. But but then for bonds. How does that work? I mean, you keep the 40% bonds. And later in retirements, like 60% bonds, or whatever that is, yeah. Because the market might crash. And what is that differential? The differential is huge. Now, instead of the s&p 500, it's 10%. Return, the bonds return is 1%. Right? So instead of having this huge cost of carry, which is having bonds in your portfolio, what if you can remain in the market? And yes, it's a little bit less return than s&p 500. But you're getting that protection that the bonds would have provided you as a better alternative to, you know, keeping stocks and bonds. I see. So this is like a creative way of getting the same protection and having more exposure to the market. No more exposure.
Tolu Salako 48:13
Gotcha. Gotcha. Okay. Yes, this is
it's not meant for everybody, it's actually meant for like, actually, like asset managers, so they're targeting asset managers who will know, hey, if it crashes, don't sell this, because that's what this product is
Tolu Salako 48:28
definitely, if you can, if you can, if you can get me on some, some white papers with some of the studies they've done without actual data. I promise not to share it. But I would just love to like nerd out to read what they what they're doing with this.
So we can talk about that later. Yeah,
Tolu Salako 48:48
definitely. So moving on from this, how are you using this in volts equity. So I see this convexity, and using this puts, and then the call and that 2%, they put in a site for this auction? How are you going to use that in the funds that you're launching?
So for the funds that I'm watching, it's not going to be you know, 2%, or whatever, it's a different market. So it will be probably a higher options percentage. But I think that the concept of convexity and the execution of it, I don't think there are other partners that are as good as the people who invented the thing, like invented this new way of having protection and supercharging the upside in a very systematic way. Like one of the people who is a co founder of simplify David Burns. He is an MIT PhD in quantum computing. Like, you know, options are really complicated, but like there's a there's linear algebra, all this crazy stuff, decay, a lot of things to consider a normal person doesn't keep all that in their brain. So to do it very systematically, you have to attend Take into account many different things. So he's doing all of that systematically with software, all that stuff. very amazing team. Also another person he, Paul, he's one of the co founders, and he started ETFs, a billion dollar ETFs. And then David risk managed $4 billion funds. So this is like a very solid execution of options. This is not some blind, like, I'm just gonna do 10% out of the money puts and do it forever, kind of strategy. This is a very thoughtful execution of convexity. And it's applying it in a new way. So this is already first to market product of convexity. Now, it's putting this first to market idea on to disruption. And remember, if things move as expected, it was slightly underperformed by the cost of carry, right? And if everything's flat, and like, nothing happens to someone good it performs normally. So the idea is, what if there's a partnership between volta equity, my company that comes up with the growth companies to invest in, and there's a partnership with simplify that applies this proprietary technology to Super supercharge certain investments? It's, it's like a great like, it's like a match made in heaven, because because the convexity goes even crazier, if it moves unexpectedly. So you're picking stocks that you think will move unexpectedly, so you can get outsized exposure to the upside, for a very limited amount that you're putting in? So one thing about the way that I was investing? Yes, I was very bullish about Tesla. But I also was in cash for a lot of that run up. I mean, I exceeded the 10x. But I was in cash for, I guess, many, many different reasons. I think it was because I was also starting this company. And I intend to invest a lot of this into this company. But I was able to gain the like I did over 10x, because of options. But I did still have exposure to the upside for a very limited amount of money. So even though I might have been in, you know, certain amount of cash or like other investments, stuff like that, I still got the return as if I was 100% into Tesla. And of course, it was majority Tesla, but it was as if I was purely 100% Tesla. And more than that, because I had a small options, exposure. And like I was saying about that thing that you buy for, you know, $3,000. And then if that works out, then it's huge outside return. Yeah, just a couple of those options can give you exposure to the upside if placed correctly, right. So
I think that was really attractive to me, because I don't have to risk losing everything. I only have to risk losing a small portion of my portfolio, I can lock in these massive gains that I had, but still have exposure to this upside if this company is indeed disruptive, because at that all the way up, people were like, this is a bubble disposable disposal, there's no way it's gonna keep going up. But in my mind, I'm like, there's a real possibility it's gonna keep going up. And it's more than 1% or whatever the market is saying. Yeah. So I get that exposure, exposure exposure, while limiting it to a smaller portion of my portfolio. That even if I had a positive expected value, and it crashes or something, my portfolio is not ruined, right? So you so you get like, for the risks that you're taking, you can get outsized, you know, returns, and when it sounds simple by they were like, hey, by the way, we're doing this, right. It was it was a stealth company. So I just signed up for, you know, random reason was talking to the founder. He didn't say what he was doing. And then I explained my story. And it was just like, Dude, this is convexity. Like, I was already a convexity investor. And they were bringing a first to market with us convexity product, and then it just became a partnership. We weren't even intending that. And, yeah, so it's, it's kind of kind of an interesting story.
Tolu Salako 54:36
That's, that's, that's really fascinating, man. Awesome. Let's, uh, let's move on. That was really great. So we would like to focus on more, I guess market specific stuff. For example. You are you're a growth investor, right?
Tolu Salako 54:55
Did you read the latest newsletter I sent out? Yeah. On this I'd like the letter to grow. Okay, I see you smiling already. Okay? For those for those who didn't get to read it, it was basically saying, the recent outperformance of growth versus value and see now usually value performance growth, but in the last 10 years of growth is really up from value by a lot. And it's it's not it's all growth, but mostly just large cap growth. And all of the wealth created creation is just concentrated between a few large cap growth companies and newsletters basically saying to diversify into small value as well, just to get like a full exposure to the market. So as a growth investor, what's your conviction? And why do you just believe that growth will continue to outperform value for the foreseeable future?
Yeah, that's a that's a really good question. And I, I understand the viewpoint that people are coming from, and it's a very, very common viewpoint, right? This has worked for a long, long time. I mean, just look at Warren Buffett's, you know, returns, it's been amazing. And it's absolutely amazing. But in the past 10 years, I don't think he's really been beating the s&p 500. But for the vast majority of his career, he's was like, really spot on, on doing this value investing. And I think that this recent search of growth, investing exceeding value investing is not a fluke. Because one perspective is you can view it as cyclical, so therefore, these value stocks are super cheap. And now's the time to pour into value stocks. Or you can view it as a paradigm shift. And everything that was correct before is not correct anymore. Just because the stock price seems cheap. It's actually a trap, it may not actually be cheap, because they're going to be disruptive. So would you do you want all the media companies, including all the newspapers that are going to go out of business? Or do you want to focus on these crazy companies that are the future growth, and their numbers don't make sense right now, but they will in five years kind of companies and be part of the future. And for me, I want to be part of that future. And I believe that there's going to be a crazy disruption, and continued to have disrupted industries going into this next decade. And the way that looks, especially with technology is AI is going to change everything. So like the way AI works is, the more data you get, the better AI works like people are not programming everything by hand anymore. There's been such a upsurge in the power of AI and the potential of AI that hasn't even been scratched yet. So the reason why Alexa and Siri and all these things came out is it was like a like this. People can't see this on on Spotify, but it was straight vertical, because it was really, really crappy voice recognition for a long, long, long, long time. And suddenly, the quality of voice recognition just went shot rate up. And that was because it was not programmed as an if else in programming language. It was trained in AI. And AI is now to the point where if you feed enough data, it will just understand, this is why Google gets better and better. Every time someone searches for something, it kind of knows what you want to look for. And it's really hard to start a search engine today, as opposed to before, even if you have a lot of funding. Now what this means for the investment world is that these companies that are very big people can say, oh, they're so big, it's going to cycle out. Well, that paradigm may not hold true if AI helps them secure that advantage. So when you look at this new landscape, just because they're big doesn't mean that they can't keep growing bigger, like like Amazon, and get better and better and more relevant results. It all depends on the technology infrastructure. Of course, there are some overvalued growth stocks that the general market do not understand. Like they don't use AI, they don't do all the stuff. It's very easy to recreate their tech, but they still pay a ton for it. So
Tolu Salako 59:15
so but yeah, something that you did bring up is that just because this company is too big now, doesn't mean they will be big in the future. I completely agree with that. Besides does not require return. Right? So if Amazon is big today, this is just an example, by the way. So let's say you have a company. So evil companies big today, and a company is big in 2013. So this is very important in 2020. The company's vision 2020 and the company still really relatively just huge. In 2030. That doesn't mean that company is outperformed the market. It's in that decade. Right there. There are huge companies that have just not outperformed. So and I think my initial question Was that why you thought growth companies would remain big? But I guess the real question should be Why do you think growth companies will continue to give those same kind of outsized returns?
I think you come upon a very important point. Yeah, I'm not saying that just because you're big, you automatically have this advantage, you can keep growing. I mean, it might, like you're sharing underperformed the broader base index. And for a lot of reasons, because of bureaucracy, because of all this stuff, they're just too, too slow to move or innovate or do anything. So it's usually ends up being pretty unattractive investments. Now, just because they are big does not mean that they are infested with bureaucracy, though. So there are a lot of companies that hit 100 million, and then they just stay there, a zombie like for years, and there's a lot of companies that hit 1 billion, and the same thing happens. 2 billion 50 billion, same thing. But yet, companies like Amazon, they've kept growing, and now they're over a trillion dollars. And the reason is, like you see them like, oh, they're now going into this, oh, they're now going into this. And they're like disrupting left and right. And you look at their culture, and it's a culture of innovation. So the key to Amazon is that culture, where they're always questioning the status quo, like they, they take the take the head of books, right. And then they make him the head of Kindle, and say, Hey, the future is digital, you disrupt your previous industry, you know everything about print books, but now you're head of this and make it disruptive. And they have that kind of culture. Now, now will a big, stodgy, normal company that is resting on the laurels. Think that way, they wouldn't think that way. But Amazon does. And that's why they were able to sustain that growth over Dec over decades, is because it's internal to the culture. Now, some, some companies, they're one and done, they had an innovative idea. But then it just kind of dies off, like the founder is not there or whatever, and they don't continue to innovate. And then they SAP out all the gains from that one idea until it's dry. And they slowly lose market share to the innovators. So it's really important for disruptive companies to identify, are these disruptive companies? Do they have groundbreaking ideas, but not only that, and more importantly, are they innovative and have a well of innovation, that they can continue to apply to more and more problems to continue to feed into this growth? So yes, within large caps, there's a lot of traps where they're continuing to lose market share slowly and bleed drive because of bureaucracy. And there are some large caps for example, Tesla, that continue to innovate. And there's a lot of fields to disrupt that they're continuing to look toward, that will continue to feed them and allow them to get a bigger market cap. I'm probably butchering this quote, but someone said that diversification is kind of like ignorance, right? Or, like, if you don't know what it is, and just invest in everything, right. And that's like one way to approach it. But what if you actually thought that certain investments are better than others? Right. And I think that's even Warren Buffett, the quintessential like, awesome value investor thinks that way, that there are some companies that are way stronger than others. And basically 20 stocks propelled his entire portfolio to this crazy valuation right now. So he, he concentrates Actually, that's a very concentrated for typical approach to this. Yes, if you buy the whole basket, it's going to crash. So in [the.com](http://the.com/), crash, if you bought Cisco, for example, it crashed like 90%. And it actually never recovered to the highs of the crash of the peak. So that's super scary, right. But if you look at Amazon, it also crashed 90%, but it's way exceeded the peak of 2000. So I believe that it's very important to be thinking about why it's moving up, because there's going to be a lot of people who are investing just because it's moving up, including pumping up very poor stocks that like make no sense even in the growth world. So for example, Nikola, and stuff everyone was, you know, pumping it up to multibillion dollar valuation, because they don't understand that they don't actually have any technology. But if you analyze these companies, you would think that Tesla and Nikola are completely worlds apart. And there's no way why Nicholas should be worth billions of dollars because they have nothing proprietary about what they're doing.
Tolu Salako 1:05:00
I'm not I'm not saying you're wrong, but I'm also saying you're a Tesla.
Yeah, yeah, t shirt t shirt. But But I All I'm saying is, people are just investing everything into electric, electric anything nowadays in the current climate that we're in. But then I don't think that's a good idea. Even in the short term, you might be thinking that it's outperforming because it's momentum. But I mean, like you were saying, when it cycles away, a lot of the weaker companies are going to go away. So what I'm saying the value in is there might be value in systematically, very thoughtfully picking very strong companies, and anchoring on that, looking at their culture, do they have innovation? Do they have all these things, all these things that are consistent with disruption? Like we we've, you know, kind of shared common work experience with disruptive company. And we've seen that, so if they have the culture that's consistent with disruption. In the long run, I mean, that's very, very attractive. So there's a value to actively kind of picking that. Alright, I believe that there is. And that's totally different from just picking the whole basket of whatever is moving.
Tolu Salako 1:06:21
This is this week to that. Awesome, then. Yeah, just wrapping up here. I've taken quite a bit of your time, what to you makes a successful investment?
What makes a successful investment or investor investments? Oh, investment? I think it actually, in a lot of cases, depends on your life situation, right? So I mean, I'm not I'm not like a lesson advisor to any people or anything. But like, basically, the way I view it is, you know, if you're like, really young in life, that may be completely different than you're a year away from retirement, and you're about to move into the house and like Florida or something. So the goals are different. The you know, your risk tolerance might be different. It's not, I don't view that investors as a particular type of person, like, oh, they've got a certain risk profile forever, or certain things forever, like certain things might afford them what they need in that stage in life, now for an investment, they all have different behaviors, right? So growth, stocks have completely different behaviors and value stocks. bonds have different behaviors, and they all have different needs and things that they're very good at for those particular things. And some might be appropriate versus others. Now, if you're maximizing for long term return, then yeah, what what stock is maximizing for long term return? And I would argue that growth stocks are pretty if you're in the midst of a technological revolution, could be pretty attractive. And people can argue, well, you get dividends with these other stocks that are stable. But you know, the stock price kind of goes down exactly by the amount of the dividend. It's been, you know, so if you look at the total return, I mean, I think if there's a changing of the guard coming, then it's good to be ahead of that trend, and be part of the future.
Tolu Salako 1:08:37
Awesome. What are some must read books? What are your top three? Top three books you've recommended?
So this is this is really weird. The growth investors tend not to like books from value investor. But I actually enjoy reading Intelligent Investor by Benjamin Graham.
Tolu Salako 1:09:02
That's, that's the number one book on this show. And I feel like ever, but never read that.
Okay. Yeah, a lot of it is actually not relevant. Like, there's a lot of things about these companies that it's like, I don't know what this company is. But I think the whole idea of, hey, the way I take it, or what I take away from it, is you can be ahead of the market if you use very smart analysis. So if you I mean, that even if you're a value investor, it's same thing holds true. It's not like the amazing opportunities and value right now, you know, but say the whole entire, you know, market is like really disparaging a particular stock. But you know, from the fundamentals and just by the cash balance itself, it's worth like five times more than it totally makes sense to purchase it right now. You know, stock market is a voting machine, but in the long term, it's a weighing machine. And if it's a if it's a solid company, You actually preempted the market by getting in early. Now, that kind of thinking can also apply to growth investment, that the market does not understand it, because there's all the psychology involved and all this stuff. But you know that this is undervalued, and you still invest. Of course, we're a different set of criteria. It's not because of balance sheets, not because of PE ratios, different things, but you still think about it the same way. So in that way, I like Intelligent Investor. I also like a recent book psychology of money, I thought was pretty interesting. Okay, I just, I just like how it talks about psychology, and there's a big part of psychology in investing. And that's super important. Like, just I've experienced for myself, how much it can affect my own thinking, my emotions and everything, you know, and like you were mentioning in your in your article, like, even though you know that something is the right decision over 30 years, when you're in the thick of it, like you think that the world is ending, it's very easy to sell, press the sell button, you know, so I guess it's kind of good to know, how everyone behaves, including ourselves, like, we're tempted for a lot of things, and you have to ground yourself in knowing like, what's actually going on when things are going on. And that's why I really like your, your notes is thank you talk out that, you know, I like very, very few people talking, talk about that, that it's not just theory, but it's about living it out in real life.
Tolu Salako 1:11:39
I think people who only read, invest in finance or economics books are typically make really bad investors, because you don't understand how people work. Right. And for me, I think those books are really important, enjoy them. But people are at the core of everything, if you can figure out how people behave, you know, all investments might change. companies may change market conditions, they change, people stay the same, it takes us millions and millions of years of evolution to change. So through your lifetime, the only constant pain would be people. And if we can just understand how people act, and honestly, all the bad, so usually have a pretty typical? Well, I would say I'm typical, like I use a lot of options and stuff, I don't sound like you know, a typical investor, or some of the craziest bets are placed. And I've been profitable. I've just been I've just come out from understanding the psychology of people, right? A lot of people look at the market conditions, they look at everything. Sure, those are all important. But ultimately, what else to make, my final decision is just behavior. And I feel like people would either overreact or under react, or, you know, what, what people may be thinking at that very moment, and even if it's true or not, so, thank you, I'm really glad that you find the newsletter. This will, you know, if any young investor or someone that all this can learn from that should be on this show.
Yeah. Like a, like a, another type of investor that could be on this show, I think. I really like Galileo Russell's from hyper change. So I think that he's really good in epitomizing. Like, what is so groundbreaking about, like Tesla, for example, and I know, it might seem like kind of only going on Tesla horse again, but I think it's the it applies to many different growth investments, like the way that he thinks about things. Yeah, like that the technology actually matters. And sometimes you can have an advantage that the market has not realized yet. For example, a core technological advantage, and the market does not price it at that until the technology is deployed. But you can get in potentially before the technology is deployed, and that's the growth potential for growth. So in that way, any talks about stocks a lot, so yeah,
Tolu Salako 1:14:29
is your YouTuber.
Yep. Oh, definitely. Okay,
Tolu Salako 1:14:32
thanks. Thanks for that recommendation. Now, I gotta ask the final question. What was your percent return on Tesla?
I mean, I, I haven't really kind of counted it all how it's that
Tolu Salako 1:14:53
good. It's now you don't you don't even count a percentage you just count it and access it. All right.
But let's let's just say, I've slightly exceeded I'm pretty happy with the return because I just slightly exceeded what it would have been if I was in 100% Tesla stock. And the reason why I'm happy even though I slightly exceeded that is because for the risk that I was risking, I thought it wasn't an excellent return because I was able to take part in the wild run up, but limit my risk with options. But it was roughly as if I was holding the stock
Tolu Salako 1:15:38
world in it. Awesome. Awesome. Well, Chad, this has been great. I think this is the longest episode
yet. Thanks for coming on the show. Thanks for having me. It's just awesome talking to you. It's very interesting
Tolu Salako 1:15:50
conversations every time. Awesome. Awesome. Well see you soon. Okay. Hello. I hope you enjoyed that episode. You can support the show by subscribing wherever you get your podcasts and leave a review. We're also on YouTube if you'd like to watch your smile and laugh as you listen. Also subscribe to my premium newsletter at Toulouse notes calm. That's t o l u s n o t e s.com for timeless lessons for young investors. See you next week.
00:00 - Intros / Preview
05:00 - Why Tesla?
12:00 - Managing Risk with Options
18:40 - Where is Tesla heading now?
26:00 - Convexity
36:00 - Pros & Cons for Convexity
48:50 - Volt Equity (Disruptive Funds)
54:50 - Why Growth? Why Concentrate?
01:10:30 - Investing Psychology
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