Capture the Upside Podcast
About this Episode:
In this episode, we discuss the nuances of upside and downside capture ratios in high net worth investing, tracing the evolution from speculative methods to the analytical frameworks introduced by foundational texts like “The Intelligent Investor.” It critiques the reliance on capture ratios as limited in predictive power, advocating for investment strategies that prioritize client goals and values. The conversation highlights a shift towards data-informed index and factor investing, underlining a proactive approach to financial planning and wealth management.
Show Notes:
Upside Capture… It’s a way to measure financial return. It’s also an insightful podcast for high net worth investing hosted by Kevin Toler. Does either instance matter?
Episode Insights:
What are upside and downside capture rations?
Benjamin Graham: The Intelligent Investor
Connect:
Phone • 616.977.2639
Web • hillislandfinancial.com
Email • ke***@hi*****************.com
Transcript:
Sean:
Hi, I’m Sean.
Kevin:
And I’m Kevin.
Sean:
This is Capture the Upside brought to you by Hill Island Financial. For families with a minimum of $2 million or more to invest (high net worth investing).
Kevin:
We have among the industry’s lowest client two advisory ratios, and we pledge to invest our assets consistently with how we invest yours.
Sean:
So we’ve gotten or we’ve had a lot of questions both internally and externally. People we work with and people we know ask about the name, capture the upside. Kevin We I know we went through several options and this one kind of stuck out to you a little bit. What about it? I’m kind of brought capture the upside to the forefront for you.
Kevin:
Capture the upside in investing is a statistic, a measurement statistic from modern portfolio theory used to judge a manager. So I’m going to get into that explanation, but I want to kind of give a little bit of a historical arc. So if you think about investing as an industry, as an as a as an are there good or bad ways to invest, you can go back in time investing. For the longest time was entirely speculation, market timing, guessing, right where you would say, I think it’s going to be a drought and I think I’m going to, you know, save up my wheat and then sell it at a higher price than a drought or this train is going to do better than that train or I’m going to invest in this land area. And I think it’s going to grow. And it does or it doesn’t re entirely speculation. I’m not doing any research. I’m not understanding any of the data or looking at any shareholder calls. I’m just like actually it’s going to be successful, right? And then in the twenties, a guy named Ben Graham, famously a mentor to Warren Buffett, who’s the well-known investor out of Omaha, Nebraska, going to Berkshire Hathaway days. Ben Graham writes this book that is called The Intelligent Investor. It’s on the bookshelves at the office. All the analysts have to read it. And essentially he would say, look, we don’t have to just guess you can actually do some academic research and say, look, I think that Coca-Cola, is it going to outperform Pepsi or vice versa? And you could do it based on their accounting.
You could do it based on a variety of different pieces of information. And this gives rise to, you know, Mr. Goldman and Mr. Sachs. Mr. Marilyn. Mr. LYNCH Right. You get the idea that different places are going to come along and say, Hey, Shawn, we have better research than our competitors, right? Why don’t you pay us money to pick your stocks, pay us money to decide what goes in? And so that’s kind of the next 50 years of investing. And then you start in the late seventies, having Dr. Sharpe and Dr. Markowitz do some studies famously and say, you know, guess what? None of them are terribly predictive, right? In other words, there there isn’t somebody who’s got the best research strategy or knows how to make more money than the other guy.
Now, look, there is exceptional ism and it’s somewhere in the ballpark of 15%. And again, if you get into the academic research, it’s confusing. But when you find a fund manager that is outperforming consistently, right, you can take a look at all of the different pieces of data. And we have tons of big data now that can say we think this idea is going to do better than that idea or trend to give us predictive value. And very few of those pieces of data have as powerful a predictive capability as manager tenure, right? So in other words, if Shawn is the guy who’s the exceptional guy and you want to know the minute that that guy stops working, there is that for that fund reliably, statistically significantly, is going to start performing differently than it had in the past. Makes sense. So exceptionalism doesn’t does exist, right? Unknown whether or not they’re using anything from Ben Graham or intelligent investor. But there are guys who are like savants at their stuff. They’re just few and far between. And the vast majority of us, you know, you can’t really retire on that because at some point they’re not going to be doing it anymore. You track what I’m getting them. So again, you go big picture, you got speculation, market timing, you got research, you do. Then we’ve what are called fundamentals, the intelligent investors. And then we come along and find out that actually doesn’t help at all. And then you have the index investing revolution and modern portfolio theory. And modern portfolio theory essentially says that over 90% of your returns are predicted based on your allocation. high net worth investing
In other words, did you own stocks and had you on bonds, not which stocks you picked, but if you bought these different types of stocks and again, they’ve been sort of identified stocks and measured them based on different what they called the classes, the large mids more bottom line is modern portfolio theory came along index funds came along as an idea. And again, all the people who are making a lot of money saying, pay me for my research, I’ll pick better stocks. Hated the index funds, but the index funds Vanguard, Schwab, they ultimately won the day, right? So now you have index funds being the most popular way of investing. And in fact, we’ve moved beyond just index funds to also factors factor investing there. It comes out of the University of Chicago, believe it or not, your hometown. Right. So University of Chicago has got tons of Nobel laureates. They do a lot of good research. They’re identifying these factors that say, well, it’s not just indexes, it’s indexes and a factor based on the price to book ratio, based on cash flow, based on this, you know, and we have these abilities to determine this factor when placed into a portfolio and filtered, say, I’m going to do 100 stocks, but I want them all to be able to qualify for this factor. (high net worth investing)
Well, now your portfolio is going to either underperform or outperform the benchmark or the baseline based on that factor. Right. So again, you’ve got speculation for ever and then you’ve got research on fundamentals. You throw out research on fundamentals, go to indexing modern portfolio theory, asset allocation, and now you’ve got factors. Well, on this asset allocation, on the factors, one of the ways we measure a portfolio manager or an index fund is through modern portfolio statistics. So it’s things like Sharpe ratio R squared, right? Treynor ratio, standard deviation understanding. Also one of those statistics is upside and downside capture ratio. And so upside capture ratio does if the market or the baseline, the comparison went up 10%. Did this fund go up 110 right then you’d have a new or excuse me, go up 11, then you’d have 110% write upside capture ratio goes down ten and you go down eight. (high net worth investing)
You get an 80% downside capture ratio. It’s a fairly appealing measurement, right? You would say, Well, I would like the fund that has a 0% downside capture ratio and a 200% upside as a get me too right. And this is one of those classic kinds of things where it makes sense. They do an upside capture ratio. The reason I named the podcast after it is because they published a wonderful academic paper in 2021 that essentially said, Hey, look that as a measurement is kind of a salesy marketing tool. It actually has very little predictive capability if you’re putting it into a fund or into something and saying we have a great upside capital ratio or downside capture ratio, that’s actually not the case. It’s highly correlated to what you call a fund’s beta. And I chose to name this podcast, capture the upside for two reasons. One good insider joke on look upside and downside capture ratio is actually an entirely false marketing tactic that mutual funds use, right?
It is actually not a meaningful measurement. And so capture the upside is like, well, look, the way to capture the upside is to do the hard work of getting along into a client case brief, deciding what they need invested, and then putting those investments to work and not necessarily paying attention to whether or not it’s in comparison to the benchmark, you know, capturing the upside of the downside. And then secondly, it’s a general outlook of optimism. I mean, truly, all kidding aside, I like to be like, hey, look, when you talk about money, there’s a lot of anxiety, there’s a lot of fear, there’s a lot of unknowns that’s captured the upside of whatever your situation is. All right. Let’s just take a look and be like, hey, every case, I run into their opportunities to improve in their opportunities, to live in alignment with your goals and your values. (high net worth investing)
Sean:
It also seems to me, Kevin, it implies some aggressiveness. The word capture, meaning you have possession, the ability to go out and make some of these things happen. As an investor. It’s not just look for the upside, it’s no, it’s capture, it’s go out and get it. We had a soccer coach in college that said luck was 99% preparation, right? You got to put yourself in a position to be lucky. Now, 1% is the payoff, but it was the 99% which you just spoke about that is going to put you in the position to capture the dark side, to be lucky, to have a good result. And I just thought that when we talked about that term capture, it was it was taking the car, it was taking the conversation under control, not being passive, but going out and putting yourself in a good spot to be successful. So well done. (high net worth investing)
Kevin:
None of this stuff happens by accident. I mean. Right? It’s adulting and it’s not. Nobody wakes up in the morning and it’s like I am going to put more into my 401K and that brings very few people and that’s going to bring me joy, right? And so it is capture the upside, right? Like get out there and take control no matter what your situation is. And I want somebody who’s going to walk. I mean, this sounds like a commercial song, but I want somebody who’s going to treat my car at the mechanic like their car. Don’t charge me 250 bucks for something that is could cost five, Right? Act like this is my money and treat me how you would. And that’s why, you know, I’ve retired over 215 times. I’ve sent over 300 kids to college. Right. We’ve given away over $300 million in philanthropy gifts over the course of the years with clients. I can tell you what it feels like. I can tell you what I’ve seen work, what I’ve seen, not work, what clients have been more satisfied, less satisfied. So there’s this element too, of like, well, I think I want that. (high net worth investing)
Well, I don’t know. I can tell you what a jet has felt like to other people. I can tell you what you know, the third home has felt like two other people, right? I can walk you through kind of like it the encourage the kid to go to the expensive college or not. Right. I can walk you through how that feels. So I think that I like that go out there and capture the upside, be aggressive.
Sean:
So whether whether you’ve got you just starting, whether you have 200 million or whether you have 2 million, how can how can people reach out and get a hold of you and your team whole island?
Kevin:
Sean, anyone can always contact me Kevin and he’ll Island Financial and I respond every email personally and you can take a look down on the show notes my phone number is down there and also our website. Dub Dub Dub Dub Hill Island Financial dot com.
Sean:
Amazing. Thank you very much. I’ll talk to you next year.
Kevin:
Sounds good. John. Thank you.
About
Hill Island is a fiduciary focused on goal-based guidance to help you tackle today’s challenges and achieve your dreams. Our wealth management services team is here to help!
No commitments are ever made based on our first conversation. Instead, we will provide you with a list of actionable to-dos to get you started. If you decide you’d like help implementing anything on the list, we’re here to help, but we will never pressure you.
We look forward to getting to know you.
Important Disclosures
Hill Island Financial, LLC is a registered investment advisor. This show does not intend to provide personalized investment advice through this broadcast and does not represent that the securities or services discussed are suitable for any investor. Investors are advised not to rely on any information contained in the broadcast in the process of making a full and informed investment decision.
• Investment Advisory and Financial Planning Services are offered through Hill Island Financial, LLC, a Registered Investment Advisor.
• Hill Island Financial, LLC does not offer tax or legal advice. Consult with your tax advisor or attorney regarding specific situations.
• Opinions expressed are not intended as investment advice or to predict future performance.
• Past performance does not guarantee future results.
• Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
• All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy.
• Intended for educational purposes only and are not intended as individualized advice or a guarantee that you will achieve a desired result. Before implementing any strategies discussed you should consult your tax and financial advisors.
CFP® – The CERTIFIED FINANCIAL PLANNER™ certification is by the Certified Financial Planner Board of Standards, Inc. To attain the right to use the CFP® designation, an individual must satisfactorily fulfill education, experience and ethics requirements as well as pass a comprehensive exam. Thirty hours of continuing education is required every two years to maintain the designation.
AIF® – Accredited Investment Fiduciary designation is administered by the Center for Fiduciary Studies fi360. To receive the AIF Designation, an individual must meet prerequisite criteria, complete a training program, and pass a comprehensive examination. Six hours of continuing education is required annually to maintain the designation.
CPA – Certified Public Accountant is a license set by the American Institute of Certified Public Accountants and administered by the National Association of State Boards of Accountancy. Eligibility to sit for the Uniform CPA Exam is determined by individual State Boards of Accountancy. Typically, the requirement is a U.S. bachelor’s degree which includes a minimum number of qualifying credit hours in accounting and business administration with an additional one-year study. All CPA candidates must pass the Uniform CPA Examination to qualify for a CPA certificate and license (i.e., permit to practice) to practice public accounting. CPAs are required to take continuing education courses to renew their license, and most states require CPAs to complete an ethics course during every renewal period.
