JEFF SARTI | from Morton Wealth

My guest this week is Jeff Sarti, CEO of Morton Wealth. Jeff is a CFA charterholder managing over $3 billion in assets, and the author of the Healthy Skeptic newsletter where he challenges conventional investing wisdom. We talked about true diversification, the risks of outdated strategies, and why alternative assets are stealing the spotlight.

Jeff emphasises alternative assets for their low correlation to stocks and bonds. He highlights bridge lending in real estate as a prime example. These short-term, 12-month loans offer high single-digit returns and a 60% loan-to-value ratio, providing a cushion against economic downturns. Unlike traditional real estate, they’re less tied to GDP or interest rate fluctuations.

Another focus is private credit, particularly royalty streams in biotech. Jeff explains how investors can fund R&D by purchasing sales royalties from blockbuster drugs. These assets are largely recession-resistant—patients take medications regardless of economic conditions. Immediate cash flow reduces risk, unlike private equity’s long wait for returns. He also touches on music royalties and gold mining stocks, noting their resilience and value.

Jeff questions monetary and fiscal policies, warning of long-term inflation risks despite recent declines. He cites post-2008 stimulus and zero-interest rates as drivers of future volatility. Investors must rethink portfolios to weather these storms.

For beginners, Jeff advocates starting small, learning from mistakes, and focusing on long-term investing over speculation. His Healthy Skeptic newsletter offers further insights. This episode is a wake-up call: diversification isn’t just about stocks and bonds. Alternative assets and a skeptical mindset are key to building resilient portfolios in uncertain times.

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EPISODE TRANSCRIPT

Everyone loves cash flow, but one of the main reasons we love cash flow, you get paid right away. You're more quickly playing with the house's money as opposed to your own, to use I guess the Vegas metaphor. And so uh, with these royalty streams, you're not waiting like classic private equity for returns three, four, five years down the road. You're getting returns right away. So that would be another just niche example of something that's truly uncorrelated in the private markets.

What is true diversification and how can it reduce risk

Phil: G'day and welcome back to Stocks for Beginners. I'm Phil Muscatello. What is true diversification and how can it reduce risk? How can you trust the stock market when it seems to move completely at random? I'm joined today by Jeff Sarti, CEO, uh, of Morton Wealth. Hello Jeff.

Jeff Sarti: Hi Phil, nice to meet you.

Phil: Nice to meet you as well. Jeff Leeds, a firm managing over $3 billion in assets. I noticed you changed it. I had 2 billion before but inflation, it affects everyone.

Jeff Sarti: Inflation helps all of us, right?

Phil: Yes, that's right. Jeff helps clients achieve their financial goals while supporting employees in their career growth. He's a cfo, uh, charter holder and he shares his insights through his Healthy Skeptic newsletter. We'll get a link to that later in the episode as well. Jeff likes to challenge the status quo to help foster long term resilient investment strategies.

Jeffrey Fant: We challenge the status quo around monetary and fiscal policies

So Jeff, what is the status quo that you're challenging?

Jeff Sarti: I uh, like that you started off with that question. We do, we challenge a lot of the status quo and don't take things or dogmat at face value. And it's a couple things that come to mind as a starting point from an investing point of view. What worked in the past decades we don't take as just are God given right that it's gonna work for the upcoming decades. Mainly you know, a 6040 stock bond portfolio which works so well in a declining interest rate environment. In the last 40 years we've had a lot of concerns and questions that you'll need a very different type of portfolio construction to protect against the risks that what I'm sure we'll talk about in the decades to come. That's the first thing that comes to mind. But the second thing that really we spend the most time talking to our clients around in terms of challenging the status quo. It's around government policy and specifically I'm talking mainly around monetary policy but also in recent years fiscal policy as well. And more than anything it's coming out of the 2008 financial crisis. The amount of stimulus, I'm talking about 0% interest rates, money printing galore even around the globe. I mean we got to negative percent interest rates. No one even thought that that was even possible. And now in recent years fiscal policy, stimulus on steroids. We just really question the long term effects of those policies. Most to feel are confident that, you know, terms like the Fed put right Al, starting with Alan Greenspan. The Federal Reserve's got our back. I know that's the same with central banks across the globe, including Australia too with accommodative policy. And of course those things will support the economy and the markets over the short run. But there's a long term cost to these things we think that will ultimately rear their ugly head. And it's already even started with inflation being one of many examples. And so we challenged the status quo because we think investors going forward really have to think differently about how constructing portfolios to protect against these risks.

Phil: Let's just dig in a little deeper there. You mentioned fiscal policy and government policy. I d just like to clarify terms. So fiscal is government policy isn't what the government does and monetary is what central banks do and you're talking about it being accommodative. How does that work? Uh, I mean I have talked to other guests about this and there's thoughts about the money supply, the actual amount of money that's pay_mped into the economy that leads to inflation. And while governments seem to want to kick this can down the road, things seem to be going quite well anyway despite this. Do you think we're missing something?

Jeff Sarti: It's a good question. And listen, so this is something we wrestle with. It's all a nature of short term versus long term. So yes, things are going well I would say generally over the last 15 years with some fits and stars but generally because of these very policies. It's the nature of these accommodative policies, namely stimulus. Whenever we hit a little speed bump that will result in theoretically things going well. Listen, if you're having a ah, fun party and you add a trillion more dollars to the punch bowl that's going to become a very fun party. And that's where what we believe has happened over the last decade or 15 years. But again just like that punch bowl analysy, the bigger the Punch bowl. Ultimately the worst, the ultimate hangover. It's kind of theories around like, I don't know if you've ever read like Nicholas Taleb with Black Swan or.

Phil: Great, that's a great book, isn't it? I've always recommend people listen

00:05:00

Phil: to that.

Jeff Sarti: Read book or like, you know, Minsky, which is comm in mor Vogueh, iim in Minsky, if you're familiar with him. Minsky moments. All those theories around the more that policies suppress volatility. That's wonderful. Over the short term. And they work. Those policies do work over the short term. But the longer that you don't allow corrections or imbalances to correct themselves, the ultimate volatility is going to be that much more vicious. And so that's what we're seeing. It's sort of two sides of the coin. Over the short term, yes, of course these things have suppressed volatility and things seem rosy. But over the long term, and again, we think recent years of inflation is one example of that. We think there could be some real costs.

Phil: It's a great book, isn't it? The Black Swan by Nicholas Taleb.

Jeff Sarti: Fantast. Something that everyone should read.

Phil: Yeah, everyone should read. Just to see how things come out of problems can emerge out of thin air with no one actually realizing what was going on. Anyway, I could talk for hours about that book.

Jeff Sarti: Yeah.

Jeffrey Mitigan: Diversification arguments fall apart in volatile markets

Phil: Okay. The other thing I just wanted to dig in. You mentioned the 6040 portfolio. What is it and why is it no longer applicable?

Jeff Sarti: So you know, uh, to. I'm sure the audience generally knows it, but 60 40, generally that's, you know, going to be 60% stocks, 40% bonds. And listen, I mean it's, that's worked well for most of our, our lifetimes especially again starting in the, at least in the United States and the early 80s in a declining interest rate environment, stocks, of course there's been some minor moments of volatility, but generally speaking, stocks have moved up very much so, uh, over the last 40 years. And then same with bonds, especially because we've been in a declining interest rate environment. So not only did you earn income along the way, but you had appreciation with bonds. We strongly question just because that worked in the last 40 years, will that work in the ensuing 40 years? And a lot of it is around interest rates and inflationary risk. We think these things go in long cycles, typically generational type, 30 or 40 year cycles. And again, we think potentially that tipping point was a few years ago with COVID and inflation finally rearing its ugly head. And we're seeing it now, right? We're seeing some more volatility in stocks going back to 2022 and, and of late. But then even more importantly with bonds, bonds in particular have not been the safe haven risk free asset or risk Mitigan if you will in portfolios that they were in decades pass and we think there the potentially won't be that risk mitigant going forward. One last point I'll make, just really focusing on the stocks in particular. And of course we're going to have stocks in our portfolio as well. I'm not going to imply that we avoid stocks altogether, but one of the reasons we look for lots of other asset classes to diversify risk, it comes back down to diversification more than anything else. Classic sort of CFA or business school dogma is, and this goes back to like the 1950s University of Chicago diversification type stuff where as long as you have X number of stocks in your portfolio, you're well diversified. The challenge with that is yes, most of the data does show that, but the data in upward moving markets doesn't really matter. Diversification or risk management, it's for downside, it's for bear markets, times like 2008, times like 2022, 2000 with the dot com bust. And in those environments, diversification, it just doesn't work. You could have stocks in different sectors even geographically around the globe. And what happens in really nasty markets, all stocks typically move down together. So you think you're protected because in normal markets stocks move in different directions. But when you really need those diversification benefits, they're just not there for you.

Phil: The momentum is not your friend in those situations.

Jeff Sarti: No. And that's, I mean that's a purpose. I mean there's diversification. I mean listen, there's a cost to it to some degree. Sometimes in UPMA markets you even potentially want to be more concentrated and have your winners really run. So the cost of diversification theoretically hopefully is offset by the benefits on the protection of the downside. And we strongly believe, and we think the data shows it on the downside that diversification, those diversification arguments really fall apart.

Phil: Is this why you focus a lot of your attention on alternative assets?

Jeff Sarti: Without a doubt, without a doubt. It's, it is looking for different assets, lots of different assets, asset classes, types of investments that are just going to march to the beat of a different drummer. It really is. It's not rocket science. Right. It's taking the simple theories around diversification but just expanding on them. So again, the theories of diversification going back decades, mainly again coming out of the University of Chicago decades ago, they all were very sound, but they really stopped at that point. Whereas, okay, as long as you have stocks and bonds and think about the efficient frontier and all that type of stuff, but that's where, again, the dogma really stopped. You

00:10:00

Jeff Sarti: could take that same logic to the next level and bring in other asset classes that theoretically have a lower correlation. We can talk about correlation to what? But lower correlation with one another. And that's how you improve risk adjusted returns over time.

Phil: Because as you mentioned, the 6040 portfolio, which is bonds, that was supposed to be the balance in your portfolio to protect against, um, any downside, but now you believe it's things like alternative assets. What kind of alternative assets are you talking about?

Jeff Sarti: So it's a lot of different things and even just philosophically, and I'll get into some examples, but I think philosophically.

Phil: I love a bit of philosophy, Jeff.

Jeff Sarti: On this podcast, why not? Let's go there. It's thinking about things that will truly be exposed to different risk factors. So what I mean by that, when you think about stocks and bonds, uh, they're mainly exposed to two primary risk factors. One is the growth of the economy or gdp, and the second is interest rates. So both stocks and bonds, generally, you want a solid growing economy. Things do well when you're not in a recession, right? When you're in a growing, healthy economy, and obviously, you know, when, when you hit a speed bump in the economy recession, stocks don't do well, but that, then definitely some bonds might do okay, but some bonds, especially corporate bonds, can get hit. And then secondly interest rates, and we've been all so spoiled for decades in a declining interest rate environment that supported all asset prices, stocks, real estate, etc. But then obviously supported bonds as well. So when we are looking for alternative asset classes, we are looking for things that really will not be nearly as affected or potentially won't be affected at all by those two factors, namely the economy, GDP or interest rates. And there are things that are out there that really, again, March should be to their own drummer, that are driven by different risk factors. So even if the economy hits a speed bump, these things have enough margin of safety that they're just going to do fine, they're going to do okay. Or if interest rates rise and you have nasty sort of inflationary risks, they're going to be insulated from that. In fact, some of them might even do better because maybe they have, uh, structures in place where maybe floating rate structures will they'll do better in a rising interest rate environment. So it's really those thinking about those two risk factors, GDP and interest rates and finding things that are outside of that type of exposure are ah, you confused about how to invest? Life Sherpa can ease the burden of having to decide for yourself. Head to lifepa.au to find out more. Life Sherpa, uh, Australia's most affordable online financial advice.

Sometimes these alternative assets aren't available to just on the market

Phil: Let's have a look at some examples about some of these alternative assets. And I think too sometimes these alternative assets aren't available to just on the market that you have to have different approaches to achieve some weight of these in your portfolio.

Jeff Sarti: Uh, yeah, and that is some of the challenge. I mean not a lot of these things are not available in public markets. Some are and there's movements m towards that with democratization of some of these investments. But for a lot of them you do have to be more in the private marketplace. But again they are becoming more available to the quote unquote average investor. I'll start with more of a plain vanilla one and then I can go into maybe some that are a little bit more interesting and truly uncorrelated but like a more plain vanilla one that I think lots of investors can really understand.

Bridge lending is an asset class that's less exposed to interest rates and economy

It is tied to real estate, but in a different way. Caus generally speaking and we love real estate but a lot of real estate is tied to interest rates and GDP like I mentioned. So what are ways you can target real estate as an asset class that'll be less exposed to the economy and interest rates and what that is in if you're familiar with like the lending or bridge lending side uh, of real estate, it's very prevalent here with niche opportunities here in the United States where the classic example is let's say you'll have a real estate developer or investor and they spot an opportunity. Let's say it's a 10 million dollar or apartment building, M, you know, with 10 units located here somewhere in Southern California. And they find that opportunity, they want to buy it and they go to their bank for a loan, their lending relationship and the bank says great, I'll make a loan but it'll take 90 days to underwrite that loan. That buyer says I don't have 90 days. They want to close on it quickly. So what do they do? They go to the private lending market and there are lots of private lenders that navigate in this space and that those, a lot of these private lenders, they have the ability, they don't have the red tape of a bank and they can move quickly. So speed to execution is key. So we partner with these private lenders that can make loans within a couple weeks. They know the real estate and they can underwrite it fairly quickly. But what is the difference between these underwriters and the banks? It's two main things. One is the short duration of the loans. So these are not long, long term loans.

00:15:00

These are typically 12 month in nature. That's the term bridge. You're bridging the gap between the person who's buying the property and maybe either selling it or refinancing it into a cheaper loan. And that's incredibly important. Goes back to the interest rate risk. You're not, you're not taking on interest rate risk with a 12 month loan, very short duration. If interest rates rise and you, you know that's only a 12 month loan and you renew it at a higher rate, that's one key aspect. And then the second key aspect, it's more around the resiliency and the margin of safety. It's the loan to value on these loans. So we're in first position. You know, they're first trustee, you are the bank. In essence, you own the keys in a foreclosure. So that provides a lot of downside protection. But we're lending typically with our partners call it at about a 60% loan to value. So on that 10 million dollar property, you're not lending $8 million like an 80% loan, but you're lending $6 million. So even in a tough or choppy real estate market, there's a lot of margin of safety where, and we're in one right now, right? A little bit of a choppier real estate market where maybe that property won't just go up with each passing year, but instead of being worth 10 million, maybe it's worth nine and a half or 9 million. Your exposure is at that $6 million level. So you really have a large cushion of protection. Or even in a real nasty real estate environment, a lot of bad things would have to happen for your principal to be threatened. So that's where again, you're really insulated from GDP or economic risk because of that loan value cushion. And you're really insulated from that interest rate risk because of the short duration. And then lastly, I mean, you're being paid well, you're being paid well in this with these niche loans because they're private markets and the borrower, because it's a short term loan is actually not really interest rate sensitive. They're willing to Pay high single digits or many cases double digit type interest rate because they know they're only going to be in the loan for nine to 12 months and then refi out of it.

Private credit has exploded in size in recent years, credit standards have deteriorated

Phil: I love talking about alternative assets, even though despite the name of the podcast, I think it's um, well worth knowing how the whole financial industry works. Is this um, we've been hearing in Australia recently about private credit markets. Is this a kind of private credit market that you're referring to here?

Jeff Sarti: That's without a doubt an example of private credit and I'm glad you brought that up because private credit has really, really exploded in size in recent years.

Phil: Same here in Australia and the regulators.

Jeff Sarti: Are starting to have a look at it as well. Yeah, and listen, I understand there's rational reasons why banks have uh, because of regional at least's here in the US we had some regional banking crises, et cetera and they left a void. And so private credit groups have come in to fill that void. Generally speaking that's not a good trend. It's a lot of money chasing these loans. Underwriting standards, covenants, um, on loans, protections have without a doubt deteriorated. It's a nature of anything when too much money enters a space, whether it's a sector of the stock market, whether it's real estate, whether it's private credit which we're talking about now. We have seen credit standards, underwriting standards and covenants protections deteriorate. We the examples, the types of stuff that we're doing, yes, is in the private credit space, but it's in niche areas that we feel are very insulated from that flood of new money. The main reason that is is the bulk of what we do, whether in real estate or I could give other examples more lending to corporations is that we are very, very focused on lending with collateral assets as the backing of the loan. The lion's share of private credit is not that. The lion's share of private credit is lending in the US to corporate America. Big companies, lots of dollars chasing these deals where you're lending to corporate America and you're lending to companies based on those companies health or cash flows. That's all well and good, but again it goes back to that whole correlation argument. What are you exposed to? You're exposed to the health ofat underlying company, you want that company to succeed, GDP risk and interest rate risk. So you continue to be exposed to those factors. When we make loans with our partners that we lend with to companies, we're really agnostic as best as we can be to the health of the underlying company or gdp because we're not lending to the company based on its cash flows, we're lending based on its assets. Could be its trucking fleet, it could be its inventory. Sometimes it's intellectual property ip, you name it. And again, the key is the ability to grab those assets if things go south because sometimes they do. And do you have enough of a cushion? It's always a cushion. How the bigger the cushion the better. Where if you have to grab those assets and unfortunately uh, have to sell those assets in a liquidation, let's say you're going to be fine. So I kind of weaved outh, uh, it was a long winded answer over yes, yes. Private credit without a doubt has completely exploded in size. But what we're doing is a very u subset of that that has not fallen victim to

00:20:00

Jeff Sarti: those lower underwriting or covenant standards.

How about infrastructure? Do you have thoughts on infrastructure

Phil: How about infrastructure? Do you have thoughts on infrastructure? Because that would seem to me to m fulfill those requirements.

Jeff Sarti: Yeah, you know we do. We've dabbled in infrastructure. It's some things that we've kind of had little exposure to over the years. The truth, it hasn't been large in nature from a long term point of view. I like the infrastructure play. I think it's a general theme of governments and economies continuing to spend on infrastructure over time. Uh, it's just a trend that I think is not going anywhere. The reason we haven't gone heavily though in that space is again it's some of the factors that really drive the success or not are out of our control. A lot of it's around policy, projects going to completion, things of that nature that regulatory issues that are again feel a little bit outside of our control. I guess narrow the uh, comfort zone if you will, or path of safety zone. We like to have a wide Runway when we're landing our plane. And when you have lots of these unknown risks, again especially as it relates to policy related risk, those are areas we tend to shy away from. Again, I think the trend is interesting and it's a good trend, but we would rather be uh, in things that are less influenced by public policy.

Biotech has low correlation to other asset classes, which is interesting

Phil: Are there any other alternative assets that you have your clients investing in?

Jeff Sarti: Yeah, it's a lot of things they'll all have. Not all, but most of them will have different versions of lending or private credit. But I'll give one example again that really kind of speaks to the uh, low correlation or lack of correlation to other asset classes. We really like the healthcare as an industry for obvious reasons. Aging demographics, advancements in technology, etc. We think it's a trend that we want to be on the side of. But the question is, how do we want to be on the side of it? Instead of being speculative, we want to be more in a resilient way. And so the way we do that, if you're familiar with royalty streams and how they work, I'll give you a simple example. So class example here, uh, in the US really around the globe, is there a lot of biotech companies that will have their blockbuster drug fighting some critically, you know, necessary critical disease, could be some diabetes, could be an immunology drug on cancer, could be a vaccine. And so they have their blockbuster drug, they're making a lot of revenues, but what do they do with those revenues? They plow them back into R and D to try and come up with the next blockbuster drug. So these companies, even though they're making a lot of revenue, they actually have negative earnings again because their expenses in R and D are very high. Because of those negative earnings, they can't really go to the debt markets to raise money. So their other source of raising money is often to sell equity. Many of these companies don't want to dilute, they don't want to sell equity, especially in the current environment. It's been a tough environment for biotech stocks. They don't want to sell more equity or dilute when equity prices are down and depressed. So there's this third avenue of raising money and it's through selling off part of their sales royalty streams from their underlying blockbuster drug to a third party in exchange for a check in exchange for a check to help fund those R and D efforts. And so that's what we've done. We partner with groups that will write checks to these biotech companies to help fund these bio tech companies are and D efforts in exchange for a, uh, stream of sales, a percentage of the sales of that underlying drug. And we love this space for a couple reasons. One of the main reasons it goes back to correlation. You think about risk factors, talk about gdp, right? You talk about interest rates. If someone is taking their medication to fight a disease, doesn't really matter if there's a recession or not, they're going to keep taking that drug. So really low correlation of the underlying economy. Another really cool aspect about this asset class is the internal diversification within a fund. So what I mean by that is just even imagine, let's say you had 10 underlying drugs or medical devices within a portfolio. That immunology drug has absolutely nothing to do with that. Diabetes drug or maybe that diagnostic tool and that's another, has another royalty stream. They really, all, all 10 of those things are very different. Something happens to one, it won't affect the other nine. So really interesting asset class that also a lot of what we do is very focused on immediate cash flow. That's another thing. Listen, everyone loves cash flow but one of the main reasons we love cash flow, it's just a risk mig. Again you get paid right away. You're more quickly playing with you know, the house's money as opposed to your own, to use I guess the Vegas metaphor. And so uh, with these royalty streams you're not waiting like classic private equity for returns three, four, five years down the road. You're getting the returns right away. So that would be another just niche example of something that's truly uncorrelated, uh, in the private markets.

Royalties are a really fascinating space, aren't they

Phil: Royalties are a really fascinating space, aren't they? I've had

00:25:00

Phil: a couple of guests on. We've uh, discussed mining royalties and we also discussed royalties from the music business. There is cash there, isn't there? These kind of royalty streams that are spitting out money. Any other kind of royalties that you.

Jeff Sarti: Look at, We've done music. Music's a great example. Yeah, we've been very active in the music space.

Phil: You are in California, right?

Jeff Sarti: We have to be. We've done a little less of late with the group that we partner with. It's become a little more crowded but still, we still think that's an attractive space. But you know, music is a growing industry and again to some degree not perfect but pretty much recession resistant. You know, people arenna still listen to music, uh, matter no matter what happens in their life. You mentioned royalty streams on mining. It's something, we haven't done that much of it but just even continuing to expand on other alternative assets. I know in Australia, very much of a focus on industrial and mining sectors, etc. We've had a core position in gold going back really a decade now for our clients for reasons at the top of this discussion, you know, concerns around monetary debasement, et cetera. So we, we've had a core position in gold that's done well for us for quite some time, especially of late. And we've had a smaller feels, it's more of a speculative position because it's more volatile but a smaller position in gold mining stocks as well that you know, as you, as you probably know, very volatile but more from a long term fundamental value based investing approach. We really like the gold mining stocks. We Think they've continue to be out of favor. We think they're cheap. Whether you look at them on a price to cash flow basis, priced in nav basis price to book value, etc. We don't take on a lot of sector exposure in stockland just because we don't have a ton of stocks in our portfolios. So we're doing other things in private markets. But that has been one area that we've put on more exposure uh, in the stock side of things with specifically gold mining stocks.

You don't think inflation has been subdued even though latest figures show inflation dropping

Phil: What I'm hearing in the subtext here is you don't think the inflation dragon has been subdued even though latest figures seem to show inflation dropping. Do you think that it's going to rear its ugly head again?

Jeff Sarti: Um, man, you're asking the crystal ball question where uh, it's always a hard one from uh, I'll talk a little bit short term versus long term. Long term we think nothing has changed. We don't until we really see potential dislocate real dislocations where policy philosophy around policy has to change. Across the western world we think inflation is sort of built into the cards. And again now so much, especially in the US with debt levels are so extreme, we think the path of lease resistance now to just cure our government debt levels is to inflate our way out of those risks. So we do think that over the long run the inflation risks are here to stay. Over the short run, you're right, it's become more subdued. Although we still haven't hit the Fed's 2% target. It seems to be kind of sticky in the 3 ish percent range. I will say though that still is not great news because we had a few years in a row of really nasty high single digit inflation. We're over to call it a three or four year period. Prices went up 25 to 30 or even 40% now they're at a new level. It's not like because inflation went from 8% to 3%, prices came back down. No, they now are at a new sort of floor where you asked the regular American about you know, the price at the grocery store and it wasn't like again, prices went down, they're just going up at a less accelerated rate. That's not really, that's not really a wonderful uh, situation.

Phil: It's's uh, real, it's a real misunderstanding for people, isn't it the idea about inflation. It doesn't bring PL prices down just.

Jeff Sarti: Because it does not, it does not bring prices down.

Phil: That's Deflation.

Jeff Sarti: It is, it is. We have not had deflation. One last point I'll make and I. History has been this guide Whether the 40s or the 70s or other periods of high inflation. There's the potential. It's a nature of inflationary environments where it doesn't mean just inflation is here to stay, but the nature of inflation creates more volatility within the fl. Inflationary statistics where you have more fits and starts and you can have, even have periods within that longer term inflationary run of uh, short term deflationary pockets. And I, I wouldn't be surprised if that happens where you can have because of inflation, economic slowdowns, upheaval that will ultimately then result in small periods of deflation. I think those will potentially be head fakes. If that does happen, we think again policymakers will likely come back and go back to their tried and true methods of combating deflation. I think they have much more fear around combating deflation as opposed to inflation. And inflation will come theoretically roaring back. Listen, that's all hypothetical and that's a few steps down the road. But that's the nature

00:30:00

Jeff Sarti: of really nastier throughout history, nastier inflationary cycles where there are head fakes along the way, where you can actually have brief periods of deflation where people think that inflation's over, but that's actually not the case.

Can anyone with any level of experience and wealth start to invest? Absolutely

Phil: Can anyone with any level of experience and wealth start to invest?

Jeff Sarti: Absolutely. The answer is yes, without a doubt. And listen, and I know a lot of what we're talking about here maybe is not quite available to the smaller investor because some of it is in private markets. Although again a lot of more democratization, lower minimums.

Phil: Yeah, there's more vehicles. More vehicles are coming there. More.

Jeff Sarti: You got to be careful though because some of those vehicles are inappropriate and might have inappropriate illquidity and they're very.

Phil: Difficult to understand for regular investors.

Jeff Sarti: They are, they are. But still that trend, I'm happy the trend is moving in that direction, but it's got to come with education and investors building their knowledge. But even just from a high level, let's say starting investor doesn't have the wealth or ability to do that. You can still take these same principles to so much and I've, you know, some heard some of your podcasts on um, just the fundamentals of stock investing. So many of these principles can still apply to, you know, it's gram and Dodd value based, fundamental based investing and same on the bond side. I mean if re. If you're investing in bonds, think about your Margin of safety. Are you being paid well enough on the interest rate, you're getting, uh, the protections, the covenants in place. And then again going back to the stock side of things, what's your margin of safety? What is the valuation of that stock or that sector that you're dipping your toe into? So yeah, I mean there's, there's always opportunities to learn on the investing side. And my recommendation especially, we have lots of clients and their kids come in, they ask us to help their kids learn how to invest. And my answer is just start, just start, do it. The way you learn, the way I learn is you make mistakes, you s, that's how you're going to learn, make mistakes. Investing companies that you have knowledge in that you're passionate about and that's, that's how you're going to learn.

Tell us about the difference between speculating and investing

Phil: Tell us about the difference between speculating and investing.

Jeff Sarti: It's a great question, something we talk about a lot internally and with our clients from a high level, uh, just very simplistically it is around timeframe. Speculating of course is going to be more of a gambling mindset, short term timeframe horizon versus investing, which will be more of a long term patient discipline mindset. But going back to the mindset difference, that timeframe matters because if you think about a short timerame, what really uh, can take advantage, what really can take hold in that type of short term environment, it's your emotions, right? It's fear and greed, all that behavioral 101 instincts that we're trying to avoid as sound investors. When you are speculating, you're more victim to those emotions in fear and greed. And we all know that's when you can really make mistakes. Very different than a long term mindset, which is much more of an ownership mindset from an investing point of view versus speculating where you're just going to be more disciplined. You're not going toa let your emotions take advantage because you go in with a mindset with an understanding that you know what, I'm in this for the long term. Waiting is a part of the game, volatility is a part of the game. And I'm not going to let that shake me out if you will. A couple other things I'll just mention, of course, speculating. There's obvious examples, right? People trading in stocks, day trading meme stocks, single day to expiry options that have exploded just to a tremendous degree, levered ETFs. All of these are signs of speculative environment. But even more so, I'll give Like an example. That's more normal, I should say that many investors do. I don't know if it happens to you, but when people find out that I'm in the finance industry, the most classic question I get is, oh, how are stocks going to do this year? Right? What's your view on the stock market? And I understand why people are doing it, right? They want a silver bullet. But the nature of that question, they think it's sort of an investing related question. It's a speculative question. It really is. They're looking for a silver bullet. They know I don't have an answer. They know I don't have a crystal ball. They just met me. But yet still they're asking that speculative mindset type of question. And one of my frustrations really about our industry is I think our industry really feeds on that type of mindset.

Phil: Especially, especially the financial media.

Jeff Sarti: Especially the financial media. Everything is short term predictions, right? It's short term forecasts. Name the Wall street bank or per your comment, cnbc, the expert that comes on, what's their stock pick of the day and what's the trend? What, huh? Where's the s and P goinga 500 going to end up at year end? That's such wasted energy. Such wasted energy. One, because we all know, I mean studies have shown this, right? It's very far in few

00:35:00

Jeff Sarti: between, few between who, who are really excellent at predicting market trends. So. But many again in our industry are promoting and preying on that speculative mindset that we try to protect investors from. Because again, we think, we think it's just wasted energy. And instead of spending time on that, on forecasting short term trends, we're focused on long term trends and building in resilient pieces of a portfolio pie to help build resilient structures. That's where we spend our time as supposed to, as opposed to again forecasting, which uh, we think is a fool's errand.

Phil: Trouble is though, that people want it, there's a demand for it. Oh, that's why it is there. I mean I found that with the podcast as well. People want to hear about individual companies and stories about those companies. They don't want to do the hard work.

Jeff Sarti: They don't listen. I couldn't agree more. Uh, we have, we have a saying that like with our client, investing starts with investing in yourself. People want silver bullets. It doesn't exist. It doesn't exist. And so people like to chase narratives, they like to chase names and the challenge of upward moving markets, which we've had a Lot of in recent years or even the last decade or so is that behavior can be even reinforced where you know, things work and you buy stock X, Y and Z and then it doubles or triples and then all of a sudden that builds in your confidence and overconfidence and you think you can do no wrong. And uh, you know, it's just. But for every Nvidia and Apple there's how many peloton and zooms that are down 90% and those are still successful companies? How many other companies that are just out of business. And you go now to the dot com age it just. Yeah, we think it's really short sighted and people looking for that silver bullet. Listen, I get it, I understand you want, you'd rather get rich quick than do the hard work. But easier said than done.

Phil: Yeah. What's that quote? I think it might have been Buffet Munger kind of quote. You know we hear all of those ones. The, the stock market is a machine that transfers wealth from the impatient to the patient. Something like to that effect.

Jeff Sarti: Yeah, it is, it is something like that. I can agree more.

Price targets are something our industry promotes that does not do service to sound investing

One, one last point that made me think about again something that our industry promotes and I think does tend to veer a little bit more towards speculation. To your question as opposed to investing, it's price targets. Everyone, even analysts, they'renna have a price target for a stock. And I understand that. Right. There's a discipline to buying st down.

Phil: To a decimal point, right?

Jeff Sarti: It is to a decimal exactly. Like they can fine tune it to that degree. But to me again there's a speculative element when you buy a stock of setting a price target because that the implication of that is when you buy something you are already on day one of thinking when you are going to sell it. You think about long term investing. If you think about investing in your business or investing in a piece of real estate, you're not thinking about what price I'm going to sell my business or piece of real estate. That wouldn't even cross your mind. And that's what makes for a healthy long term compounding investment over time you're in it, you're in it, you're going to help it, you're going to make it grow. If from day one, even if you're excited about something for the long term, literally you're already thinking about at what price you're going to sell it. Again, distraction. That's where emotions come into play. You can get whipsaw on transactions. I just think that's somewhat of a perverse thing that I think our industry really promotes that really does not do service to long term investing, sound investing principles.

What does market psychology have to work hardest to help clients overcome uncertainty

Phil: So another question I've got here is what does the market psychology have to work hardest to help clients overcome? Is that it or are there any others that you come across?

Jeff Sarti: Oh man. Yeah, we, yeah we talk so much about market psychology. I'd say the main thing, it's an overarching theme that we really talk about. It's how investors react to uncertain_ty especially listen, we're in, we're in a pretty uncertain environment here in the US with policies around tariffs and the Trump administration. And you know, investors are more nervous as a result. And so the general strategy that investors take when faced with uncertainty is what do they do? They try to outsmart an unknowable future. They look to place controls around something that we feel is inherently uncontrollable. The world is inherently uncertain. But yet again it goes back to our industry, our whole industry promotes the thesis that we're all brilliant, we all have our PhDs that are various banks or Wall street firms and we can outsmart an unknowable future. We think again, that is not the right approach. Instead of trying to outsmart an unknowable future, we embrace the uncertainty. It's a little bit humbling, it's a little bit of a change of mindset. But acknowledge that you know what, we don't know what the future holds. And when you take on that approach, it results in a very different way that you approach portfolio construction. Because again, instead of trying to time things perfectly and outsmart the system and have more winning bets than losing bets, that's not the goal. The

00:40:00

Jeff Sarti: goal is to just build. Again it goes back to that diversification argument. A more resilient structure, a more resilient portfolio that whether you're right or wrong, goes back to that real estate lending example, right? If you, if you make a loan at 60% loan of value, listen, hopefully everything goes right and the economy keeps moving forward, that loan is going to do fine. But guess what? If things do turn and things get a little rocky, that loan will also probably do fine. So that's what we're looking for more, more things like that to uh, just that where we embrace the uncertainty as OPP opposed to trying to outsmart it.

Do you talk to clients about enjoying life while planning for the future

Phil: And uh, do you talk to clients about enjoying life while planning for the future as well? Because you can get very serious about this and too focused on money, can't you?

Jeff Sarti: Yeahah. Uh, this has been a serious talk so without it doub, we get passionate about it, without it out. I'm glad you asked that question. Two things. First is it goes back even to the portfolio construction. One of the reasons I love what we do is the end result for our clients. The best thing I can hear from a client is they can sleep at night. Markets are down 10, 20%, and they don't, they don't care. They're not watching the market. And they can honestly say that because instead of 50 or 60 or 70% in stocks, they might have 20% in stocks. And sure, that 20% might be down, but it's a small part of the portfolio, and knock on wood, other things are doing fine. And so they are not distracted by the news, distracted by the headlines. And so they can focus on all the other things for them that are fulfilling in life. They can go on vacation and spend money with their kids and their grandkids and whatever it is. I mean, that's really our job, right? To help our clients do exactly that, enjoy their life. So that's the first thing on portfolio construction. But then get that gets due.

There's a difference in financial planning depending on your age

And I know we talked so much about investments, but so much what we do is on the financial planning side, help people plan for their futures and achieve their goals, et cetera. And we actually, we like to talk to our clients about spending strategies as opposed to budgets. Budgets are not fun. Who wants to budget? Right? But if we can help our clients live their lives and spend their money and enjoy it with their loved ones and their hobbies and whatever it is, then that's really real success for us. So those are the types of conversations.

Phil: We have, our clients, just generally as an overview, what's the kind of difference to the financial plan and the portfolio construction from someone approaching retirement, say, to someone who's only in their 30s, for example.

Jeff Sarti: You asked specifically, like a difference on financial planning depending on your age? Yes, very different. Very different. Classically, like financial planning, really, as an industry. And we're no different with this. You know, it's more for people as they're approaching retirement, maybe in their 50s, more likely 60s, and they're really thinking through, all right, do I have it? What's the number? Do I have enough to retire? I want to give to kids, maybe a legacy for my kids, charitable endeavors, you name it. That's kind of classic financial planning. Very different than financial planning for people, young people starting out, a career, starting out with families, growing families. It's less about where I wa wantna be towards a retirement. It's actually Much more complicated. And that this and in many ways our industry really under services this client. This is a whole initiative that we've really undertaken in the last few years where we lean into those problems and meet those 30 and 40 year olds where they're at. They're asking questions like I want to start a business, how do I structure that business? How do I bring in other partners? I want to buy a home, but real estate's expensive. Can you help me? Do I buy a home or do I rent? Do I send my kid to private school or public school? I need an estate plan cause I have a lot of kids and I realized I didn't do my will and trust. It's actually more complicated for the 30 and 40 year old young people starting out. But our industry again doesn't really typically have the resources to support thatuse everything's on, you know, more of an aum asset based model. So that's something we're really, really passionate about is, is supporting those people that look and feel like I was going to say me but I just turned 50 so I'm a little bit, I'm a little bit older than that, that subset now. But that really need those more o la carte type helps. We like to think of it almost like a concierge doctor. But instead you kind of have your financial advisor in your pocket where we can help you across all of these complexities that you face as you're navigating, you know, growing up in the world.

Phil: So you're based in Calabasas. Um, do you ever run into the Kardashians in the local grocery athletletes store?

Jeff Sarti: Funny question. Believe it or not, I have now they don't, they don't know who I am. But of course, you know, I haven't run into all of them. They're a big clan. But I've run into a few of them just in the neighborhood shopping mall.

Phil: So yeah, we have o. I can't believe that they just go to the grocery store.

Jeff Sarti: I guessah literally was at the grocery store.

Tell listeners where they can find out more about your newsletter and all about Morton wealth

Phil: So tell listeners where they can find out

00:45:00

Phil: about more about your newsletter and all about Morton wealth and yourself.

Jeff Sarti: Yeah, great places. Our website. We spend a lot of time on our website with educational content. My content I write, I do write a regular newsletter called the Healthy Skeptic. So that's at uh, Morton Weth M O r t o nealth.com. and put. I'm very active specifically on LinkedIn so you could just find me Jeff Sarti s a r t I there. I'm really active with content on LinkedIn.

Phil: Jeff Sarti thank you very much for joining me today. I really enjoyed this conversation.

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