Meet the Masters Full Transcription:


Alex Mihajlov:

Jeff, thanks for coming to see us at Olde Raleigh Financial. It’s an honor to have you here with us.

Jeff Saut:

It’s an honor to be back in my favorite state of North Carolina.

Alex Mihajlov:

All right, well we’re glad to have you. You’re the chief investment strategist for Capital Wealth Planning. You made quite a name for yourself, grounded in decades of experience and insightful perspective. Part of that-

Jeff Saut:

That means I’m old.

Alex Mihajlov:

No, you’re not that old Jeff, none of us are old. We’re just mature. Prior to affiliating with CWP, you were Raymond James, chief investment strategist and a managing director with the firm’s equity research department.

Jeff Saut:

And I also have SWOT strategy. We produce a weekly letter.

Alex Mihajlov:

I was just getting ready to ask you about that. As you know I’ve been following you for years. We’ve met at conferences, laughed and shared stories, broken a bread a few times. I always loved your insights and approach. It’s really great to see you here. Speaking of transitions, how is the transition from Raymond James going?

Jeff Saut:

Well, I tried to retire nine months ago and it lasted three weeks. There was such a demand for the strategy letter that I’ve written for 48 years that we formed an LLC and I got two of my ex colleagues, Andrew Adams, that was my right hand guy. I write on Mondays, he writes on Wednesdays and another ex-colleague Harry Catica writes on Fridays and that’s under SWOT strategies that time.

Jeff Saut:

And that’s gone real well. We haven’t really advertised that much and we’ve got a pretty robust following. And then the association with Capital Wealth just kind of happened. I gave my wife 1 million bucks because I said if I drop over dead, Cheryl doesn’t know how to manage money. And we opened an account with Jodie Johnson and Raymond James and she puts some of the money with Capital Wealth and they saw my name on the account and they said, we’ve been reading this guy for years, we want to talk to him.

Jeff Saut:

So I went down and met with Kevin and the gang down there and I’m not really an employee, I’m more of a consultant, but it’s going real well. They’ve got like the perfect product for, I’d say the 50 year olds in and up. It’s five star rated. It’s first in its category, a large cap blue chip dividend paying stocks. They had to increase their dividend by at least 15% on a trailing five year basis and then we try to get three and a half percent dividend yield out of the portfolio and then we sell short term one to two months out of the money calls to try and get another three or 4%. So it’s never going to outperform. But we were up almost 23% last year. You’ve got about 85% to 90% upside capture with the markets, but you’ve only got about 60% to 65% downside capture and you’ve got somewhere between 5% and 7% a dividend and option distribution. So for somebody like me that’s 70 years old, it’s like the perfect investment.

Alex Mihajlov:

You can’t be 70 years old.

Jeff Saut:

I am 70 years old and I’ve been in the business 48 years this month.

Alex Mihajlov:

Well, when you’re 48 years. Tell me what’s going to happen in 2020 this year in the market?

Jeff Saut:

Well, you had the Santa Claus rally and then you had the first week of January up and they all stock market Axiom so goes the first week of January, so goes the month, so it goes a year. Historically on average you’ve gotten about an 11% return when you’ve had that sequence of events. So we just went through, I still think we’re in a secular bull market, a secular bull markets last 15 to 20 years. They’re not interrupted by a 20% or 30% decline, like the 1949 to 1966 secular bull market. You had the Jack Kennedy steel crisis in 1962 where the steel companies raised prices and president Kennedy said, no, you can’t do that. You got to put the prices back down. Markets didn’t like that and they lost 37% in a fairly short period of time.

Jeff Saut:

But the secular bull market went on for another number of years in the ’82 to 2000 secular bull market, you’d had the 1987 crash. I was actually in Barron’s in September saying I didn’t call it a crash. I said, we’re going to get a waterfall decline. You had the transportation average peak in the summer and yeah, it was September 26 Barron’s looking for a waterfall decline. But the secular bull market went on for another 13 years. The problem is there aren’t many of us old enough to have seen. I was with my friend Ron Baron and he put his hand on my shoulder and he said Jeff, there’s not many of us left. And I said, excuse me? He said, not many of us left that have actually seen in 1949 to ’66 or 1982 to 2000 secular bull market and they last 15 to 20 years.

Jeff Saut:

So depending on your starting point, let me back up a little bit. There was a Dow theory sell signal on September 23rd and 99. I wrote about it and I raised 40% cash. There was a Dow theory sell signal in June of ’03. And then there was another down theory cell signal in November of ’07. And I was bearish. My dad used to tell me, son, if you think it’s going up and be bullish, if you think it’s going down, be bearish. But for gosh sakes, make a call. Because there’s so many people on Wall Street that talk out of both sides of their mouth so that no matter what the markets do, they can say, see, I told her that was going to happen. And if you make calls, you’re going to be wrong and you’re going to be wrong more often than you think you’re going to be wrong.

Jeff Saut:

And the real secret for successful investor is to say you’re wrong, be wrong quickly for a de minimus, loss of capital, it’s all about managing risks. If you manage the downside in the portfolio and avoid the big loss, the upside takes care of itself. So in November of 2008 I said it was November 10th 92.6% of all stocks traded made new annual lows. I’ve never seen that. I’m not sure it made, it happened in the 30s but I’ve never seen it. It’s a six or seven standard deviation event. It is not supposed to happen in your lifetime. The majority of stocks bottom in November of ’08 the average is went lower into March of ’09 because the financials kept going down. So you want to start your count from November of ’08 15, 20 years. You want to start it and from March of ’09 here’s something nobody’s talking about.

Jeff Saut:

So you have the 1949 to 1966 secular bull market and then the markets peaked and went range-bound. It didn’t feel like a range-bound, but it was basically range-bound between a thousand and call it 600. The market made its nominal price low. The lowest it would go on December 6th of 1974, it was at 577.60 that was the Dow Jones industrial average. It didn’t break out until the summer of ’82 out of that trading range, that 600 to 1000 trading range. Nobody measures the start of that secular bull market from the nominal price low in December of ’74, they measure it from when it broke out of the trading range. Everybody wants to measure this secular bull market from the nominal price low in March of ’09 when maybe just maybe we should be measuring when it broke out of that 13 year trading range in April of 2013, where ever you want to pick your starting point. These things run 15 to 20 years, so I think there’s years left in this one.

Alex Mihajlov:

That’s great. Interestingly enough, I read recently where the general public is exiting the stock market.

Jeff Saut:

Yes.

Alex Mihajlov:

Talk about that.

Jeff Saut:

Yeah, it’s actually quite amazing because people didn’t manage the risk in 2000 to 2003 which is why you need a good financial advisor by the way. And because they didn’t manage the risk between November ’07 and March of ’09 they’re scared to death. You go out and scratch most individual investors, they’re scared to death, right? It’s tough to get them to buy a stock. So that’s not the way bull markets in, think how giddy people were in 1998, 1999 and early 2000, that is the way secular bull markets in. So again, I think this thing’s got years left in it and very few people believe it. Ron Baron believes it. Tom Lee, that used to be a JP Morgan believes it. Tom Lee thinks this thing’s going to run up into the 2032 timeframe. So another 12 years.

Alex Mihajlov:

Anything you see on the horizon in terms of short term risks? I mean, in terms of like this year, what could derail a bullish outlook?

Jeff Saut:

Well, I take to be political, but I think if Bernie Sanders or Elizabeth Warren got elected, the market’s going down. If you had crude oil go to $150 a barrel, that would not be good you’d probably throw the country into a recession. Geopolitical events, a huge policy mistake out of DC. But quite frankly, I don’t see any of that happening. They’ve been telling me for three years that we’re going into a recession and I keep going, I don’t see it. I mean I travel all over the world and restaurants are full.

Alex Mihajlov:

And employment is not to be head, you can’t hire people.

Jeff Saut:

You can’t hire people. You saw where was it Taco Bell is going to pay managers $100,000 signing bonus. That’s how hard it is to get people.

Alex Mihajlov:

Yeah, that’s crazy. Any concern on your part about indexing products and everybody?

Jeff Saut:

Usually when everybody leans to one side of the boat, it’s a good idea to go to the other side of the boat. Every blur I go, people are talking, well I’ll just index and forget about it and I just… My investment model is really quite simple. I start with a base of actively managed mutual funds and I only invest in mutual funds where I know the portfolio manager like Amy Zhang at Alger was up 40 some odd percent. Marie La Sante that I’ve known since EF Hutton was up like close to 30%. Tom O’Halloran, Lord Abbott, one of the best large cap growth stock pickers I know was up I think 33% or 34% last year.

Jeff Saut:

And then because I talked to these boys and girls, I hear ideas. Okay. So I was an analyst, a portfolio manager, director of research at five firms, head of capital markets at three firms.

Jeff Saut:

I don’t Facebook, I don’t do any of that social media but I own Facebook because Tom Will Howard and said take a look at Facebook and I spent a half an hour running the numbers on it and I own Facebook. So then I layer these individual ideas over the top of this broad base of mutual funds. And quite frankly, I never look at the prices of the mutual funds because I know that Tom O’Halloran is going to make me money over the long cycle. The only people that look at the price of my mutual funds are a tax attorney and our CPA. Now do I pay attention to the stocks, the individual stocks, you bet you.

Alex Mihajlov:

Any thoughts on bonds? Fixed income?

Jeff Saut:

I own one fixed income product and it’s the Putnam Diversified Income Trust Class, PDI, NX and it’s run by my friend Bill Coley and he has a negative duration. So he’s actually bet and on interest rates creeping up.

Jeff Saut:

We don’t think interest rates are going up a lot by the way, but we think they’re eventually going to go higher. So I’m not really that interested in fixed income here. If I’m looking for a fixed income alternative, I’m using the master limited partnerships. You can think of them as transportation companies without wheels because they own the pipes and the storage facilities. So it’s a hedge against inflation because you’ve got hard assets. They have long-term contracts with people like Exxon Mobil and Chevron and it’s the infrastructure system of the company. That’s the way you ship all your energy around the country and everybody hates them because they got burned in the upstream MLPs because the upstreams had price sensitivity to crude oil. Well, these don’t have price sensitivity to crude oil and you can get anywhere between an 8% and 10% distribution and 80% of it’s tax deferred in most cases.

Alex Mihajlov:

They’re about as cheap as they’ve ever been.

Jeff Saut:

There’re as cheapest as they’ve been in 20 years.

Alex Mihajlov:

All right, what are you reading?

Jeff Saut:

What am I reading? I’m reading The Intelligent Investor for probably the 12th time. Warren Buffet says it’s the best book ever written. I’m reading the Wall Street Journal, Barron’s New York Times, Washington Post. Reading lots of research, looking for ideas.

Alex Mihajlov:

Toughest question. What was dad’s best lesson to you?

Jeff Saut:

Manage risk, manage the risk and do drill that into my head and I didn’t do it in 73, 74. You can’t believe how bad. People think ’08 was bad. Stocks went down 80% and 90% in ’73 ’74. You had companies trading below book value. You had GM trading below book value with a 10% dividend and you couldn’t get people to buy. It’s the only product I’ve ever seen where they put it on sale nobody wants to buy it. It’s amazing. And it’s because they didn’t manage risk on the way down.

Alex Mihajlov:

How did your dad get involved in the market? Because that was pretty, I mean, how old was your dad when he passed?

Jeff Saut:

93.

Alex Mihajlov:

Right. So how did he get involved in the market?

Jeff Saut:

He had a dual degree in aeronautical engineering and mechanical engineering. And he designed aircraft in World War II. He wasn’t in the service, he was designing aircraft for Douglas & Company before it became McDonald Douglas. And because of his extensive knowledge of aluminum, Reynolds Metals hired him. And that’s how we got to Richmond Virginia. And he was managing money for the firm.

Alex Mihajlov:

It’s a great story.

Jeff Saut:

It’s a true story.

Alex Mihajlov:

A great story. We appreciate you being on Meet the Masters at Olde Raleigh Financial. Really thrilled you’re here. Always good to see you.

Jeff Saut:

My pleasure.

Alex Mihajlov:

Thank you so much.