Joining Jarrod on this episode is Jason Smith, the brilliant mind behind Four Quadrants Advisory. Get ready to delve into his innovative investment methods that thrive even in the face of a volatile market. Learn how we strive to protect our clients' assets.
Announcer:
Hello everyone. Welcome to the Millionaire Dentist Podcast, brought to you by Four Quadrants Advisory. On this podcast, we break down the world of dentistry finances, and business practices to help you become the millionaire dentist you deserve to be. Please be advised we do speak with an honest tongue and may not be safe for work.
Jarrod Bridgeman:
Hello and welcome to another episode of, The Millionaire Dentist. I am your host, Jarrod Bridgeman. Casey is out of town. He's actually at an event speaking as we speak right now. So instead I have brought in the CEO and Founder of Four Quadrants Advisory, Jason Smith, an all-around pretty smart dude when it comes to money and finance and all that kind of stuff, and I wanted to bring him in and talk about the market and volatility and how our firm deals with that. Jason, welcome.
Jason Smith:
Hey, Jarrod. Great to be back and what a great time to do a podcast on volatile markets and investing. A lot has gone on the last two years.
Jarrod Bridgeman:
Right. That's where I wanted to start with you, let's go back to 2022. Can you walk me through the rate of returns like the NASDAQ and the S&P 500?
Jason Smith:
Well sure. 2022 was just about a complete whitewash year. I'm going to throw a couple of things at you.
Jarrod Bridgeman:
Sure.
Jason Smith:
The NASDAQ was down about 33% negative. The S&P 500 was negative 18%. So we are what's called an active money manager. So we just don't sit back and say, "It's all about long-term investing." Though we believe in long-term investing, we also believe you should look at what's right in front of you and what other economic conditions are, and we're a [inaudible 00:01:47] money manager. And so we talk about all this dental stuff, and dental strategies, and cash cashflow strategies all the time with the financial planning and the accounting. But at the heart and soul of everything that we do on a daily basis, and I also serve as our Chief Investment Officer, is managing money the right way with the opportunity to get really good returns. But knowing that if we get about 90, 11% on an annualized basis, our clients are going to be multi-multimillionaires because our guiding light is how much money our clients save. We don't have dentists here that save $40,000 a year. After we've had them for a couple of years, they're saving 150,000. So we don't want to take that excess risk in the market. So if you just would've been in a S&P 500 index fund last year, you would have done negative 18%, just a regular, that's not even no special alternative investments. No anything you would've done negative.
Jarrod Bridgeman:
You just would've lost money.
Jason Smith:
And over negative 30% in the NASDAQ. And we tell our clients all the time, "Negative 33% or negative 50% is hard to recover from. It takes years to recover from that."
Jarrod Bridgeman:
Right.
Jason Smith:
So that is essentially the DAO is fairly positive, but that is essentially what was going on in 2022 as far as a snapshot of the entirety of the economy. Interest rates started going up, mortgages started going up, and a lot of recession talk.
Jarrod Bridgeman:
Let me ask you, do interest rates, I wouldn't say there's a correlation, but is there a trend where if the market's not doing well it's-
Jason Smith:
It more works the opposite way. If interest rates start rising, it puts pressure on stocks because usually there's a correlation that if interest rates start rising, so do bond rates. And they become more attractive and stocks start doing worse, almost always bonds will tell us and what the bond market is doing will give us a little heads up on what's to come with stocks. So I always look to those bond markets first to see what is going on. And so for example, this year bond rates started going higher and you could get a higher bond rate than you could in the past, say on a 10-year bond. And when those get more and more attractive, all of a sudden people go, "We're in a volatile stock market and I'm less interested in owning stocks."
Jarrod Bridgeman:
Got it. Okay, that makes sense.
Jason Smith:
There is a correlation and typically when those things go on and interest rates go up, so do interest rates on 30-year mortgages for houses and also if I'm a business owner and I want money.
Jarrod Bridgeman:
Got it. For business loans or that kind of thought.
Jason Smith:
You got it. Growth business loans, all of a sudden I go, "I can't afford to take an 8% loan for my business and so I might have to retract, maybe let go of some people and just hang tight for..."
Jarrod Bridgeman:
And on a practice owner level, this may be money you're hoping to use for redoing your office.
Jason Smith:
Adding operatories.
Jarrod Bridgeman:
And adding operatories.
Jason Smith:
And essentially some of this and going towards a recession is what our government wants right now. They want inflation to cool off and they want interest rates to come down. But in order to do that, we have to do some of the things that we're doing from an economic policy standpoint.
Jarrod Bridgeman:
Right.
Jason Smith:
So where does that leave us is just going back to 2022?
Jarrod Bridgeman:
I wanted to ask, NASDAQ was down 33%, S&P 500 down about 18%. How did our clients do?
Jason Smith:
We actually finished between negative nine and our worst client was negative 11%. And interesting enough, we worked really, really hard for that to happen and we only had one-third of the loss of the market depending on what index you're looking at. And so we wiped out two-thirds of the risk that was going on for our clients and kept them safe because when you have a negative 9% year, you're not happy about it.
Jarrod Bridgeman:
Sure.
Jason Smith:
But you can recover pretty fast from that.
Jarrod Bridgeman:
I was going to ask, you said with the larger discrepancy it takes possibly years, but with only 9%, it's a much shorter time there.
Jason Smith:
Absolutely. Its really easy to think even in a bull market, if you go negative 33% for a year, even three years in a row, just simple math, 10 to 12%, it's going to take you three plus years to break even. And so we did a great job, but what stinks, and that is not intended by any clients, I've never gotten a high five for doing negative 9%. And I should have and what a lot of these advisors here did and our great team did to bust our butt to omit risk last year, but then we get to 2023.
Jarrod Bridgeman:
So did any of what you saw in the market and what you and our team here accomplished, how did that affect or change your thought process coming into '23?
Jason Smith:
Well, after we got done with the holidays, every statistic out there said a hard recession is coming, interest rates are going to continue to go up. And then here again, especially mid-sized businesses, not your Apples and Googles of the world, because they have cash for a hundred years at their fingertips. But when I'm a mid-sized business and I need money, I can't get it now. I can't afford that kind of interest, so I can't grow. So then we have layoffs coming and everything starting for simplicity. January 1 was, hold on, a recession is coming. And so that immediately puts us in a defensive stature.
Jarrod Bridgeman:
Right. Let me ask you when these rumors, not rumors, but the feeling comes out on the news that a recession might be coming, does that ever become a self-fulfilling prophecy? Like everybody starts thinking there's going to be a recession so they might be pulling money out of things that may have prevented that?
Jason Smith:
There is definitely more emotion and activity in a market like this. We had a great client of ours who saw a mutual fund that kind of mimics the S&P 500, or I'm sorry, it was a NASDAQ, and said, "Hey, have you guys ever considered this fund because that fund is all tech." It was a retiree. And one of our advisors wrote him back and said, "Hey Doc, if you would've been in this last year, you would've been over a negative 28%."
Jarrod Bridgeman:
Dang.
Jason Smith:
Probably would've been time to go back to work. But let me give you some statistics for this year.
Jarrod Bridgeman:
Yeah, please.
Jason Smith:
It's this tight of a stock market, which makes it very difficult. But seven stocks in the S&P 500 this year are responsible for 92% of the rate of return and the performance. And they're all the big seven. Your Googles, your Apples of the world, Meta, everything else is negative for the year.
Jarrod Bridgeman:
Wow.
Jason Smith:
The NASDAQ has ran away. But with that being said, I printed all this off a couple of days ago. So it's still pretty fresh.
Jarrod Bridgeman:
Sure.
Jason Smith:
The NASDAQ was up 21.25% for the year, which is an incredible number. And also for you to have gotten that kind of performance, honestly, you would have to be with an advisor who did nothing for the year and last year and your money was just sitting in there and they got lucky. This is the year of being lucky if that happened because no investment house that I respect had people fully invested this year. They were protecting their client's money, January 1st and even at the end of last year. To give you an idea, even the NASDAQ over the last month is negative 3.8%. So the last 30 days have been just terrible. Usually in one month, if you lose a percent and a half, that's a turbulent market conditions. So over the last month, it's been negative 3.8%. The Dow Jones has been negative 2.28%, which is more conservative than the NASDAQ. And year to date, the Dow Jones is negative 1%. So sometimes our great clients don't understand those things are going on. That's our job to watch that. Those were reasons and all those other conditions that are taking place, why we're not keeping up with the NASDAQ this year because we would just have to roll the dice if that happened with our clients. And here again, we want them saving a lot and we want that 9% to 11% every year. And we are far from being in a bull market yet.
To throw another figure at you, even over the last month, the S&P 500 is negative 3.21. So every index over the last month has been aggressively negative.
Jarrod Bridgeman:
Wow. Yeah.
Jason Smith:
If you annualize negative three every month out, that's a big, big loss. We've got two indexes that are just doing okay. Seven stocks make up 92% of the S&P 500, but then we have this other little island called the NASDAQ that has had these runaway returns that almost doesn't even function with the rest of the market this year or the rest of the economy.
Jarrod Bridgeman:
Those seven companies that are kind of doing exceptionally well compared to everybody else.
Jason Smith:
And inflation hasn't started coming down and neither have interest rates. So let me ask you this, if you were a really good investment advisor, what would you be thinking this year?
Jarrod Bridgeman:
With you talking about how interest rates have not gone down, to me it almost seemed like you still want to find ways to protect the money.
Jason Smith:
That's a great call on your part for being a marketing guy. We are still very much in protection, protection, protection mode, and we're still sitting on a lot of cash for our clients, but we are fully invested in the market.
Jarrod Bridgeman:
Now that cash, we're not just keeping that under our mattress, are we?
Jason Smith:
Well, I do actually some of it, the wife and I are going to take a nice vacation here soon. You do remember Bernie Madoff, right?
Jarrod Bridgeman:
That's right, yes.
Jason Smith:
But actually, great point on your part because of late bonds have started weakening and they're not as good as they were. So we bought some bonds earlier this year and we did very well on them. But lately, we are almost getting and sometimes are getting 5% in our money market accounts with virtually no risk. So 5% in the money market accounts. So we have about 30, 35% in cash. Then if the stock market does take off, we're there to be a part of that because we have enough invested in good tech companies, we're still big fans of energy. And frankly, a little bit of healthcare and rumor has it, we even picked up John Deere the other day.
Jarrod Bridgeman:
Oh, all right.
Jason Smith:
Great company, great stock, it's classified as industrial. And so we have enough invested to take a part of this market if it takes off, but by having that 30% in cash, if it starts going down and we would make further actions, we go down way less than the S&P 500 or the NASDAQ or any other index, the Dow Jones because they don't hold cash. We do. And so we're protected well there. With all of that being said, I think there's a great chance we're going to have a Santa rally and a lot of people are calling for a bull market next year. So it's not bad enough to be totally out of the market and it's not bad enough to be totally in, which is very frustrating.
Jarrod Bridgeman:
I bet a lot of your finance guys out there seem pretty competitive if you want to beat the market or beat your fellow companies.
Jason Smith:
Extremely, extremely. And you're trying to make the right decisions always for clients and especially with what our, here again, what I call it our guiding light, but our investment philosophy, what we're trying to do because we are the king of savings for dentists. I think on earth, hands down, nobody has our results and you just don't do things like other people when you have people with their eyes shut, saving 150,000 a year for retirement, we just can't risk it and you can't let your ego get in the way.
Jarrod Bridgeman:
So would you say it would be fair to say over the last, let's say, two years or 24 months or whatever, that we've pretty much been beating the market.
Jason Smith:
If we finish even a little bit positive, which if the market continues to go up, we will this year. I don't have a hard figure for you, but I would guess it would be probably plus 7%. But if the market, if we have this Christmas rally and where we're sitting right now and then our returns from last year, we will have beat the market, collectively, two years in a row.
Jarrod Bridgeman:
That's incredible.
Jason Smith:
I can't do that much better for clients. I can't give them a plus 27% out of the NASDAQ this year, but will they look at the last two years and look at all the economic conditions going on that we explained to our clients going, "It's very obvious you protected the hell out of our money." You bet.
Jarrod Bridgeman:
Do you think sometimes with clients or people who just me for example, are not much knowledgeable, do you find that when it comes time for yearly meetings or when people are going through the process, how much time and energy it takes to educate that person on what we do and what those numbers might mean?
Jason Smith:
Everybody is different, but it does take time to educate people and we are happy to do it. It's harder to educate in markets like this because everybody wants to talk about the hot, sexy stock their buddy has, and especially dentist and specialists.
Jarrod Bridgeman:
I mean, not even two years ago, crypto was the hottest thing around.
Jason Smith:
Sure. And ask those people how much they have lost. But people don't talk about when they're losing money, or what they're doing to protect money, or how much they did lose. We're getting ready to do a consultation on somebody, and I can't give you age or anything because we have several consultations going on. But it's somebody that is not a client who might become one. And we've got about 10 years to get really serious and it's very evident they have not saved the money they have and probably have had along the way some great, great losses because that's usually what you find when somebody's in their late fifties that doesn't have the money they should. This is a long-term game here and approach to managing money and being smart. It's really easy in a bull market when every other day the market's up to make a lot of money. And we know because we have a lot of individual stocks, we know our portfolio and the companies in it is very strong. We don't turn a bunch of mutual fund companies loose on managing our client's money. I looked at a mutual fund the other day and it was a growth fund, just a regular good old-fashioned growth fund, and a good company, I believe Vanguard, was the company and the fund had over 3000 stocks in it. That is so over-allocated and diversified that there's such a thing as too much diversification. So when I look at a fund like that, I don't know what we're buying. Like the S&P 500, I believe 25% of the S&P 500, it's close to that. It's between 14 and 25%, it has to be in financial stocks at all times. Well, financial stocks, banking stocks, the banking crisis we had this year.
Jarrod Bridgeman:
Like what was that bank out in California?
Jason Smith:
Yeah. Silicon Valley. And banking, we don't want our clients to be in financial right now. So things like that, that's how they're registered with the SEC and they have to continue to follow those rules. And here again, that's back to our active management. So financial certainly is a place that we don't think we should be in, and we certainly don't think... we're probably not buying any utilities anytime soon. That's just a very weird market. Mostly it's down and then about every fourth year you might make a lot of money.
Jarrod Bridgeman:
Okay, now I know when I'm playing Monopoly, the railroads seem to do pretty well.
Jason Smith:
Yes. I like the railroads in Monopoly too, and I like Boardwalk.
Jarrod Bridgeman:
Right. Oh, yeah.
Jason Smith:
And what's the one next to it?
Jarrod Bridgeman:
Is that Park place?
Jason Smith:
Park Place and Boardwalk. I wish it was that easy because if I could just put a couple motels on those two babies...
Jarrod Bridgeman:
You'd be set.
Jason Smith:
Then we might quit taking new clients. But we're just continuing to be patient for the rest of the year. And I think we're set up, the stocks that we have for our clients if we have a bull market, we're set up to do very, very well. And so really the name for us, because we're organized, we would know what our guiding light is, is we've got to be patient. And we might have some turbulent months coming ahead, but having faith in what we're in and the type of companies we're in long-term, we're in great cream-of-the-crop American companies.
Jarrod Bridgeman:
The team we have here are just a bunch of smart people, man. Just hearing them talk about this stuff is always eye-opening for me.
Jason Smith:
It is always a team approach. And the things they helped me with, they even did it yesterday on looking at stocks. We looked real hard at Caterpillar yesterday, but I think that stock price is going to come down to, I think it's about $219 right now, and I think it's going to hit about $205 and then it gets very attractive. We just bought Eli Lilly the other day, been a magnificent company. As far as pharma goes, I think it's the cream of the crop. Been a magnificent company always, but the last five years especially. And we will continue to probably dollar cost average into that and if we get some buying opportunities, or the bottom line is when it's been a shaky market for a couple of months, virtually all stocks go down.
Jarrod Bridgeman:
Sure.
Jason Smith:
It's very rare that you have that one stock that did the opposite of what the entire market did. So what we've kind of done over the last couple of months actually when the market has been bad is we've seen that as a buying opportunity and we like to buy things on sale as much as possible.
Jarrod Bridgeman:
I love a good deal.
Jason Smith:
Absolutely, who doesn't? But when you buy stuff on sale, it takes a few months for it to start producing. And especially if you had, for example, a stock that the price is down 30 or $40, or call it 35 plus percent for the year, there's probably a reason for that, or a pullback, or that industry as a whole just isn't doing well. And so when we buy something like that that is that far on sale, or let alone if it's down 65%, the chance over the next three to five years to make a lot of money on that is huge. But is it going to take nine or 10 months for it to probably turn around? Absolutely. But that's where you get the real deals too.
Jarrod Bridgeman:
Well, and I feel like a lot of times people who aren't as familiar with the market and finance, they're looking for more of that instant gratification. Why isn't it going up? Why am I not making money now? Or why am I losing money this quickly? Or...
Jason Smith:
Most people don't have enough-
Jarrod Bridgeman:
Patience.
Jason Smith:
... organization and knowledge on why they buy a stock or even if they put it in a mutual fund, which a mutual fund is going to probably mirror the S&P 500 because it has a ton of stocks in it and so does the S&P and we have that much diversity. It's going to trend the same way. Up is up, down is down. And you don't get more specialized than that unless you are in a given year and you omit industries that aren't doing well. And so that's an easier investment versus buying an individual position. And why I like buying individual positions is because I feel like we know what we're paying for and we can research the company, the industry a lot more. But having a plan when you go into buying something, is a big ass deal. And if we get into, we own a lot of Marathon and Chevron right now and when we bought it, we expected to buy it two or three more times and continue to get good deals. But we wanted to establish a position because right now energy is going nowhere. And we know they're good long-term companies and they pay wonderful dividends. And so for our retirees, we'll take those dividends home every month and live off of them or every quarter if they pay that way, some pay monthly, some pay quarterly. And then for our young people, we'll just reinvest those dividends. It is the epitome dollar cost averaging back into the market and compound interest. And we don't want our whole portfolio to be dividend-paying stocks because usually growth-minded companies like Google don't pay a dividend or they pay a very little low dividend, but we want some of the portfolio to have some of that and it's more defensive, less risk and all that fun stuff. But the bottom line is whatever you're buying, you've got to have a plan why you're buying it and what you're going to do with it.
Jarrod Bridgeman:
And if you don't have a plan, it may not hurt to find someone who can help you with that.
Jason Smith:
That is 100% true because there's nothing worse than seeing a... we do it every day, seeing a really talented dentist. And with all of our events across the country, my God, I think we're up to about 70 events a year now. We're so fortunate to be able to meet those people who just haven't found the advisory to be at the level of their talent as a dentist and their damn good producers and they're running a good practice, but they don't have anybody in their corner that's as good as they are or has any industry knowledge.
Jarrod Bridgeman:
Or have the capabilities of having all the services that we do in one house. So the accounting team speaks with the finance team and the investment team and all that kind of stuff.
Jason Smith:
I'm going to be really honest with you, the average investment person or financial advisor that would have a dentist as a client out there, and no offense to them, doesn't understand that that practice or that doctor is probably capable of saving 150 to $200,000 a year because they don't have other clients like that. And they don't know that's the standard and it should be the standard and it is here. And they can do that and take a ton of money home. And when we do all of those things and we get good practice decisions like are we going to merge a practice into your practice, add some operatories, or frankly not buy something sometimes too. And when you get all those things and good tax control working your way, same practice, that is now a game changer. And I couldn't think of any way to end on a better note than that.
Jarrod Bridgeman:
Thank you, Jason. Folks, if you're out there and you're wanting to take a look at some finance stuff, please feel free to give us us a call. If you want to learn more about Four Quadrants and how to master the business side of dentistry, we're hosting events all over the country. In fact, coming up, we're going to be in the Phoenix area and as well as Louisville. Go to fourquadrantsadvisory.com/events and click on one of those if you're in that area. Jason, thank you so much for popping by today.
Jason Smith:
Thanks, Jarrod. Appreciate the time today and register for those events fast because they're selling out very fast.
Announcer:
That's all the time we have today. Thank you to our guests for their insight and for sharing some really great information. And thank you to you, the listener, for tuning in. The Millionaire Dentist Podcast is brought to you by Four Quadrants Advisory. To see if they might be a good fit for you and your practice go on over to fourquadrantsadvisory.com and see why year after year they retain over 95% of their clients. Thank you again for joining us and we'll see you next time.
