People Hate These 5 Stocks But They'll Be Wrong with Jonathan Boyar

The Compound and Friends

The episode features a deep dive into the increasing difficulty of stock picking in an era of extreme market concentration. Guest Jonathan B

Key takeaways

• The rise of 'pod shops' (multi-manager hedge funds) creates programmatic selling pressure that exacerbates price drops in beaten-down stocks.
• Traditional 'buy and hold' is better viewed as a result of successful selection and continuous reevaluation rather than a standalone strategy.

Main topics

• Challenges of modern stock picking
• AI disruption and market sentiment

Notable quotes

Buy and hold is a result of an investment strategy, not an investment strategy in and of itself.

Conclusion

Successful investing in the current landscape requires distinguishing

Transcript preview

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A suite of 12 active ETFs spanning the full stock and bond market. Whether you use them as core building blocks or tactical allocations, you'll get the strategies you want in a convenient ETF wrapper. Simply put, Federated Hermes has the active ETFs to help you build portfolios designed to last because they've been vetted for it. Explore the full lineup at federatedhermes.com. ETFs are subject to risk and may lose value. Federated Securities Corp. Distributor. Before investing, carefully consider the fund's investment objectives, risks, charges, and expenses. Read this and more information in the prospectus or summary prospectus available at federatedhermes.com. Speaker 1 (1:44) All right, all right. Ladies and gentlemen, welcome to The Compound and Friends. I'm so excited we have a return guest today. Jonathan Boyar is a principal. The Boyar Value Group, which includes Boyar Asset Management and Boyar's Intrinsic Value Research, an independent equity research boutique founded in 1975, whose subscribers include some of the world's largest companies. sovereign wealth funds, hedge funds, mutual funds, and family offices. He also hosts The World According to Boyar podcast. Jonathan, welcome back to the show. We're so happy to see you. Speaker 3 (2:22) Thanks for having me back. Speaker 1 (2:23) Yeah. When do we have Jonathan on? I was going to say we had him in the summer during the late spring, early summer during the saspocalypse. And a lot of the stuff he was talking about ended up being right. We've seen some pretty big comebacks in some of his technology names. Do I have that right? Speaker 2 (2:44) Not Speaker 1 (2:44) all the stuff. Speaker 2 (2:45) Not Speaker 1 (2:45) everything, but nobody's perfect. Broken clock twice a Speaker 3 (2:49) day. No, no, don't say that. Speaker 1 (2:52) You were, I think, pretty bullish on CRM. Speaker 3 (2:57) And Speaker 1 (2:57) the stock was hammered at that point. And obviously the picture has now changed. They have partnered with Anthropic rather than having their throats slit by it. I don't think a lot of people felt bullish at the time, but you did. Yeah. So congratulations on that one. Speaker 3 (3:15) No, thank you. We're starting to get a similar setup now over the last couple of days. It's interesting. Speaker 1 (3:20) Okay. So we're going to get into that. Michael, why don't you take us into the first thing we want to talk about? Speaker 2 (3:26) I will. I'm excited to talk with a lifelong stock picker before we get into the first topic of. how difficult stock picking is. You know, I'm, I'm a very gullible man. And the first time that the three of us were in studio together, Josh said that you were of the famed chef boy, RD family. And I, I bought it. I bought it a hook, line and sinker. I really thought that you were, that you were, that I was talking to royalty. Sorry. Sorry. Speaker 3 (3:57) That's a point, but my whole town. Speaker 3 (4:01) Actually, like I had probably six or seven people come up to me and ask if I was really from that. So you weren't the only one. You were in good company. Josh is very convincing. Speaker 1 (4:12) Yeah, I sold it. Well, two things. Chef Boyardee was a real person. I think he was making Italian food in Cleveland or something. I don't think it was spelled the way they ended up spelling it on the can, but it was a real guy. That's one. Two, do you know what your last name means? Speaker 3 (4:29) It means noble, which is really ironic since we were thrown out of Russia. Speaker 1 (4:35) We were slaves. But before you were thrown out of Russia, before the pogroms, Speaker 3 (4:40) the Speaker 1 (4:41) boyar was like the mayor of the town. And in German, they called it Berger. So everyone you know with the last name Berger, that person somewhere in their line, they were descended from a guy that ran a town. So those are two different versions of the same word. So you were a Mayor McCheese way back. Somebody in your bloodline was an organizer, was an important person. All right. But Speaker 2 (5:10) in all seriousness, Jonathan does come from a line of stock pickers. Your Speaker 1 (5:15) father Speaker 2 (5:15) has been in this business for a long time. So Josh and I did this on What Are Your Thoughts? But I wanted to share with you, we have some data from Adam Parker on how difficult stock picking is, particularly when you benchmark yourself to the S &P or if you even expand it to not just the S &P, but the top 2000 stocks. But before we show the data, you've been doing this for a long time. Did this surprise you? And how has your experience as a stock picker changed over the last 20 years in terms of just wherever you want to go? Is it harder? Does it require more patience? Does it require the opposite? Do you need to be trading more? How has your strategy evolved over time, given that the landscape, whether it's market structure, the companies today, clearly things look a hell of a lot different in every way possible than they do today than when you started? Speaker 3 (6:09) Yeah, I think that article was like buy and hold is dead. I think there was something. It's Speaker 2 (6:13) a buy Speaker 3 (6:14) and hold doesn't work. Speaker 2 (6:15) Buy and hold, Speaker 3 (6:16) I don't think it ever worked. I kind of reject the premise of buy and hold. I think buy and hold is a result of an investment strategy, not an investment strategy in and of itself. It's good. So that's kind of how, if you are a good stock picker and you're able. to find great companies and buy it at a reasonable or an attractive price, hold on to it. But continuously reevaluate it. This is not, you know, you're not married to the stock. You have to constantly see two things. One, how's the business doing? Are they executing? You know, how's the competition, et cetera? And if it's going fine, keep it. And valuation. Is it selling at a reasonable multiple? I would say most of our accounts at Boyer Asset Management are taxable. So we're extremely tax sensitive. So I'm fine if something Speaker 2 (7:14) gets a little bit overvalued Speaker 3 (7:16) because Speaker 2 (7:17) you basically have to, you Speaker 3 (7:20) know, you have to find something that's 25 % better, essentially. I mean, the math's not exactly that way. So it's okay. Just I think if you are able to find, I think they said there's only like 23 or 24 stocks that outperformed the Speaker 2 (7:35) S &P 500 or 23%. John, chart on. So you're right. Keep talking, Jonathan. Yeah, about Speaker 3 (7:40) 20. So if you can find one of those, stick with it. But you have to be prepared to look really different than most people. And most people don't like to be different. You have to be prepared to have lots of concentration because these stocks are going to become disproportionate parts of your portfolio. And you also have to be prepared to have years where things go against you. The beginning of this year was horrible. for a lot of our accounts because we own Microsoft. And I felt like a moron when it went from $579 or whatever it was, wherever it went. But now it's back. I would never have known when to buy it back. And my clients, if I was smart enough to buy it at the top, which is impossible, and then buy it again when it dropped. And my clients would have been really worse off. So you have to just stick with it. And unless things get blatantly overvalued, and that happens. You know, I don't know. You know, we're big. I think you have a Warren Buffett or Charlie Munger thing behind you there, I think. I do. It's my Speaker 2 (8:50) fat Speaker 3 (8:50) head. Speaker 1 (8:50) Yeah. I mean, he's the goat. But he said. He traded all the time. Speaker 3 (8:56) Traded all the time. If, you know, if something lasted two or three years, he generally kept it. Or four years. But he said one of his biggest mistakes ever was in 1998, not selling Coca-Cola when it was at 60 times earnings. Great business, terrible valuation. And since then, it dramatically underperformed the S &P 500. And he wasn't able to invest it in things that were higher returning. So you have to be careful with both things. And you have to pay attention with both things. Speaker 1 (9:29) I have this like... I have this concept in mind when I think about Buffett and probably some of the great investors is like, first of all, people trade around positions. Speaker 1 (9:42) Like, if you think about the way people talk about stocks on TV, let's say, or the way sell sign analysts talk about stocks when they put a buy rating, a sell rating, whatever, it seems so black and white. Like, I like the stock. I'm buying this. You might like a stock, but you might want to take 20 % of it off. That doesn't mean you don't like it anymore. That could mean it's gone up so much. that it's become a concentrated position in your portfolio. It could mean there are three other names that you just need capital to allocate to. It could mean so many things. We don't talk about position sizing and trading around positions on TV almost because it's like a gotcha moment. Speaker 3 (10:25) Like Speaker 1 (10:26) the way it's presented to the audience is, uh-oh, you're losing faith in Apple? No, the stock's up a thousand percent over 10 years. I'm taking some off. Is that okay with you? So am I a bull? Am I a bear? That's problematic, but it's the way the media talks about stocks. Speaker 3 (10:46) But I think that concentration is okay. I mean, it's a lot harder for an individual investor to do it. And, you know, anytime you sold Apple, pretty much it's been wrong. And those trims were a bad idea in retrospect. And I don't think there's anything wrong with having. you know, a 15 % position, 10 % position in Microsoft. If it grew that way, why not? I mean, if you own the S &P 500, you have a 6 % position in it anyway. So I think, yeah, I just had Chris Mayer, who's great. He wrote a book called 100 Baggers on my podcast, and he talks about the dangers of trimming. And most of the time, doing nothing is the best thing someone can do. Because, I mean, even when you trim, you trim that apple, you're going to have a big gain and you're going to have to pay Uncle Sam. Speaker 1 (11:36) Yeah. Put the chart back up. it's not just that the stock picking is hard. So what this is showing is the percentage of stocks beating the S and P 500 over the last three years. Um, it's so this is, this is Adam only 23.2 % of the top, uh, 500 us stocks held for 10 years, beat the index brutal for three year holding periods, uh, for three year holdings, the hit rate is 27.7%. But it looks like it's getting harder over time. is the message of what Adam was saying. Do you guys have an opinion? What are the factors that's making it actually getting worse and worse and worse? The chart is going from 2002 through today. So it's been a progression. The obvious answer is that Speaker 2 (12:29) since at least 2017, it's been the FANG stocks, the MAG7, it has been concentration. But it is also true that that line was going down well before Apple became the dominant company. So I don't know that we're ever going to get a level where it's back up to 60 % of the, first of all, that would be ridiculous. Why would you expect 60 % of stocks to be the stock market? Could it get back up to 50 %? Yeah. If there was an AI, if there was an AI meltdown, if Apple, Nvidia, Google meta, whatever, if they all go down 70%, I would hope that there will be other stocks that are outperforming them. But absent that, I think it's going to continue to be very difficult. Speaker 3 (13:11) Yeah. Yeah, I fully agree with Michael. And if you look historically, over the last 20 years, the equal weight has significantly underperformed the cap weighted index. And that kind of proves the point there. But there have been periods of time where that hasn't happened. I think over time, most stocks are not going to outperform the S &P 500. So Speaker 2 (13:33) here's why. Here's why. Think about market structure today. This is not how individuals invest, but this is how the market works. Money moves to where it is treated best and money is treated best with the best companies. So the idea that most stocks, forget about the stock pickers, that most stocks are going to be treated equal to the other best companies. That's just not the case. It's not going to happen. So Jonathan, as far as how your stock picking strategy goes, when I'm looking at your portfolio or the list of stocks that you... do research on, and we're going to talk about this later in the show. I don't view you as a deep value investor. You're not only the biggest pieces of shit that are trading at 11 times earnings. Yeah. Speaker 3 (14:14) You, Speaker 2 (14:15) but you are, you are a value investor and your portfolio is not one thing. I think he's Speaker 1 (14:19) more Garpy than value. I know he calls himself value, but. Speaker 2 (14:24) So it's hard to change a name. I have all these signs. I have everything. But Speaker 3 (14:28) on Speaker 2 (14:28) the growth side, like your companies tend to be. high single digit mid-teens growers. Like you are investing in businesses that you believe are good companies. Speaker 3 (14:39) You know, we've morphed when my dad started the business and it's how time, you know, how the market has changed in the seventies. It was buying net nets. You were buying, you know, really cheap cigar butt investing. That's what worked. That's been totally, you know. What is, Speaker 1 (14:56) what is that? Can you describe, it's like a business that you know is in decline. But it's like the market has overdone it on the valuation. So you buy it like knowing it's not a great business, but it's just so ridiculously oversold. Speaker 3 (15:10) In terms of a cigar, but yeah, you have like kind of one like final puff at it. And it was a great way. Buffett was doing Speaker 1 (15:18) that. Speaker 3 (15:19) Yeah, it was a great way to do it when you had no competition. No one even barely had a calculator. You had to go to the New York Public Library to get. you know, information that that world is gone deep. If you're a deep value investor, you're investing in, you know, broken retailers. That doesn't work. Deep value is maybe the worst strategy on the planet. It's, it's terrible. It might have like small periods of, you know, outperformance. They're very, very small. I want to buy something that I can hopefully, I mean, it's impossible. No one can tell five, 10 years in the future, but you have the chance of owning it. for 5, 10, 15 years, a great business, a dominant business, or something that's unique. And I would say, if you had to say, are you growth, are you value, I'm value, but I would say I'm an opportunist. I want to make money for myself and my clients. And how I do it is try to buy something for less than it's Speaker 1 (16:12) worth. Do you take any price signals into account in your research? Do you? Because I read your stuff. but you don't get into technicals really. But I'm sure like you want to know if a stock is currently going up or going down or like how else do you gauge sentiment if not for technicals, I guess would be the question. Speaker 3 (16:35) I mean, we look at it a little bit, but we try and blind it out as best as we can. But we also, you don't want to catch a falling knife. You know, one of the stocks we'll talk about, you know, Pool Corp, we can talk about it later. You know, that stock. looked somewhat cheap at 400. It looked cheaper at 300. It looked even cheaper at 200. Fortunately, we didn't buy it, but you have to, you know, you have to pick your spots. You don't want to get in front of a freight train. That's just a recipe to Speaker 1 (17:04) lose money. So you, what you do care, if you,