In this episode, I am joined by JD Gardner, founder and managing member at Aptus Capital. In his time in the industry, JD has served in the role of associate financial advisor, analyst to a deep-value equity fund, and analyst at a short-term, systematic, managed-futures fund.
These varying experiences have mixed to culminate into JD’s ultimate philosophy: it’s all about the investor’s return, not the investment return.
I like to say, “No pain, no premium” as pithy shorthand for the notion that long-term outperformance requires short-term pain along the way. For JD and the team at Aptus, their funds are first and foremost governed by the question of achievability. For them, the contest is not in the theoretical purity of your factor exposure, but rather whether the investor can stick around long enough to harvest it.
A theoretically sub-optimal solution can be best if it helps the investor bridge the behavior gap.
In light of this philosophy, the team at Aptus has launched two strategies. We discuss their Fortified Value index, one of the more unique spins on value investing that I have come across. Not only does the strategy aim to employ a measure of value that leads to greater investor returns, but it also rolls out-of-the-money put options in effort to protect the portfolio against sudden, short-term declines in value that may otherwise invite client misbehavior.
Classic Graham and Dodd value this is not. But for some, JD argues, a much more achievable alternative.
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2:32 - Corey and JD kick off the podcast with a bit of basketball talk.
4:02 - JD discusses his background, playing basketball in college, and taking the CFA.
6:14 - The penny stock trade that financed JD's wife's wedding ring.
7:34 - JD opens up about his first job as a financial advisor's assistant and the behavioral foibles he witnessed among clients.
11:22 - Lessons that JD learned in trying to control and guide client misbehavior.
12:31 - JD discusses his transition into a deep value analyst role, but expresses frustration in his ability to communicate expectations to clients.
16:18 - JD is introduced to a world almost completely opposite to his experience in deep value research: managed futures.
18:55 - Finding harmony between fundamental research and systematic investing.
20:21 - Exploring the philosophy of "winning bigger than you lose."
22:21 - What's more important: the relative size of your winners versus losers or your overall accuracy?
23:55 - "Diversification is the most overused word in the financial world."
26:10 - Where does Aptus fit in the landscape of value investors?
27:41 - JD explains the basics of the Fortified Value strategy.
28:31 - The origin of the idea for Fortified Value.
29:31 - The Fortified Value process and building a more "achievable" value strategy.
32:45 - Is this a diluted form of value investing?
34:05 - How do you build a portfolio around the idea of "winning bigger than you lose?" Let winners run.
38:51 - The behavioral benefit of looking less "suicidally value."
41:28 - Exploring the put option protection embedded in the Fortified Value portfolio.
45:35 - Corey asks JD to defend the use of put options where research suggests that put options provide little true protection for their cost. Corey specifically references the paper Pathetic Protection: The Elusive Benefits of Protective Puts.
47:54 - JD outlines how they implement the put option strategy in a valuation-dependent manner.
49:18 - Thinking of the put options less as protection and more as generating capital that can be invested when markets fall.
51:13 - If you were an investment strategy, what would you be and why?