Jared Dillian is a writer, trader, musician, entrepreneur and educator.
In this episode, we talk about his views on the potential $8 trillion private equity bubble, the current market environment, and how the relationship between time and money impacts financial success. We also discuss his views on commodities, investing strategies, personal finance tips and his books including his upcoming collection of short stories.
Please enjoy our conversation with Jared Dillian.
The Investipal Podcast is produced by www.investipal.co. Past guests include Meb Faber, Brent Beshore, Peter Lazaroff, Douglas Boneparth, Jamie Hopkins, Tyrone Ross and many more.
Follow us on LinkedIn: www.linkedin.com/company/investipal | www.linkedin.com/in/cameronhowe/; Twitter: www.twitter.com/camhowe16 | www.twitter.com/investipal; Tiktok: www.tiktok.com/@camhowe16 | www.tiktok.com/@investipal; or Instagram: www.instagram.com/investipal/
Find Jared Dillian at:
https://www.jareddillianmoney.com/
https://www.youtube.com/c/TheJaredDillianShow
https://www.linkedin.com/in/jared-dillian-411aaa1b
https://www.amazon.com/No-Worries-live-stress-free-financial/dp/1804090409/
https://www.amazon.com/Night-Moves-stories-Jared-Dillian-ebook/dp/B0DDLB49X1
00:00 The Unsustainability of the Private Equity Bubble
02:17 Comparing the Private Equity Craze to the SPAC Craze
09:41 The Potential for a New Super Cycle in Commodities
12:06 Understanding the Relationship Between Time and Money
17:45 Managing Finances: Keeping Money Separate to Avoid Conflicts
20:05 Investment Strategies for Retail Investors: Active Management and Diversification
21:57 The 'Awesome Portfolio': A Balanced and Low-Volatility Investment Strategy
23:38 Consistency in Asset Allocation Throughout an Investor's Career
Cameron Howe:
Hi everyone. Welcome back to the Investipal podcast. Today's guest is Jared Dillian. Jared is an ex-trader at Lehman Brothers, has published several books, and writes a widely read newsletter called the Daily Dirt Nap. Fun fact—Jared is also a DJ in his spare time, performing under the stage name DJ Stochastic. Jared, thank you for coming on today.
Jared Dillian:
Hey, thanks for having me.
Cameron Howe:
So, I know you have a widely read newsletter. I was checking some of it out before this. You have some interesting takes on the market right now. Let's start with the private equity bubble you've been discussing so much lately.
Jared Dillian:
Yeah. Private equity made a lot of sense when interest rates were zero, and you could buy companies at four or five times earnings. Starting around 2009, that strategy worked for about ten years and worked very well. But the funny thing about markets is that trades with high Sharpe ratios tend to attract a lot of interest, so it got very crowded. Now there are 17,300 private equity firms in the U.S., which means there's a lot of competition for deals. Today, you're buying companies at 10 or 12 times earnings and borrowing at 6 to 8 percent to make that happen. What made sense in 2009 doesn't make as much sense today. There's an enormous amount of leverage involved, and there are no exits these days—no IPOs, no acquisitions. If you buy a company at 12 times earnings, it's hard to sell it at 16 or 20 times. There's no appetite for that anymore. So, what I've been trying to figure out is what the catalyst will be for all of this to unwind. I really don't know what that catalyst is yet, but we've reached levels of absurdity. For example, Tony Robbins writes a book about private equity that's basically an advertorial for a PE firm he's working with called CAZ, and he's trying to get individual investors into private equity. Then you have celebrities and athletes like Kim Kardashian and Caleb Williams getting into private equity. That's usually a sign of a market top.
Cameron Howe:
It sounds almost like the SPAC craze a few years ago, where you had a bunch of non-investors thinking they were the next big investment mind, taking companies public via SPAC. Would you liken it to that?
Jared Dillian:
It's very similar, although the SPAC craze was over pretty fast. That lasted a couple of years, but this private equity boom has been building for 15 years. It's an eight trillion-dollar industry, and this is going to affect real people. There are pension funds and endowments with up to 30% of their assets in alternatives, so when this unwinds, it's going to have ripple effects that impact everybody.
Cameron Howe:
We've seen something similar in the VC market, where there's been a significant cooling over the past couple of years, but it seems like the VC space is rebounding now. Do you think if the Fed starts cutting interest rates, it could alleviate a potential downturn in the private equity market? I’m talking about the more sophisticated firms like Blackstone, not just the celebrities getting involved.
Jared Dillian:
Interest rates will get cut for sure—we'll find out more about that at Jackson Hole. But I think the Fed will cut rates less than most people expect. I think it'll be at most 100 basis points over the next year. Even Patrick Harker today said they want to do it very slowly and methodically. So unless there's some sort of crisis, I don't see them cutting 200 or 300 basis points. In theory, yes, lower rates help private equity, but we're not getting back to the days of zero interest rates. So I think the positive effect will be minimal. If you look at the charts of the stocks, they have limited upside. They've been moving mostly sideways to slightly higher over the last year. I don't think the market is pricing in a big positive effect from lower interest rates.
Cameron Howe:
That makes sense, and I think it relates to the tightness of breadth in the market as well. You've spoken about the spike in the VIX over the past couple of weeks, which seems to have tailed off now. Are you seeing any alarm bells? Do you think there will be a big market pullback, or is it more about an unwinding of these concentrated positions like the Magnificent Seven into smaller cap names?
Jared Dillian:
I think there's going to be a reasonably big market pullback. We still have enormous risk appetite. After that market dislocation, when the S&P was down around 8%, everyone rushed in to buy the dip—retail investors across the world—and we ended up back near the highs. But I think we're starting to go lower again. Risk appetite is still high, and we're due for a significant correction—at least 10%, maybe 20%. I would say 20% is a good number. That would shake a lot of people out.
Cameron Howe:
The way I've looked at it is by comparing the S&P equal weight index to the regular S&P, which has been so concentrated in tech. Do you see money not necessarily leaving the market but shifting more into a wider breadth, going down in market cap?
Jared Dillian:
Well, that actually happened for a period of a couple of weeks. On July 11th, a softer-than-expected CPI number came out, and there was a huge rush into small caps. I don't know if you remember, but that was the day the Russell was up 3.5% while the S&P was down 2%. It was an extreme outperformance that had only happened a handful of times in history, one of them being the crash of '87. For a few weeks, you had decent inflows into small caps, and there was some broadening in the market. But that's pretty much stopped now. However, I think that could happen again.
Cameron Howe:
That’s interesting. Since COVID, it seems like the Russell really hasn’t participated at all. I wonder what that’s a result of. I also wonder if asset allocators might unwind some of their private equity positions in their alternative sleeves and start investing back into small caps for more direct exposure.
Jared Dillian:
Well, endowments and pensions have their allocations to listed equities at all-time lows—something like 12%. Listed equities make up just a freakishly low number of their holdings, and that's got to go up over time, for sure.
Cameron Howe:
You've mentioned this on another show, but you’re bullish on commodities right now, correct? Do you see this as a new supercycle in the commodity market or more of a short-term trade?
Jared Dillian:
I do. It's a very complex question and answer, but commodities have been very cheap for a while. There are periods in history when commodities are the only thing that works, like the 1970s. The stock market and bond market were horror shows then, but commodities did reasonably well. From a sentiment standpoint, retail interest in commodities is the lowest I’ve ever seen. The stock market is the only game in town, and now the bond market is interesting again because you’re getting positive yields. But nobody cares about commodities, and I think that’s reached a low point. If we had some event that caused rates to be cut significantly more than expected—let's say 300 basis points—I think you’d see the big commodities indices go up 20 or 30 percent for sure.
Cameron Howe:
Would that be broad-based commodities, or more focused on base and precious metals?
Jared Dillian:
I think that would be broad-based across the whole basket. If you look at any major commodity index, it’s mostly gold and oil—mostly oil, actually. Gold and oil make up about 40% of the index. Beyond that, you have things like copper. Agriculture, livestock, softs—they should all participate.
Cameron Howe:
Do you think that call might vary based on the upcoming election? Like, for instance, oil might not have a bull run if Kamala gets elected or re-elected?
Jared Dillian:
Honestly, if she gets elected, oil might still have a bull run. But just in the last week or two, oil has been collapsing. I think it's trading around $73 right now. I think it has a bit more downside before it starts to get interesting. If it gets into the 60s, that’s when it might get interesting.
Cameron Howe:
I should probably spend more time looking at the commodities market, like a normal retail investor. It's an area I used to pay attention to, but with all the negative news around ESG and government efforts to counteract oil consumption, it’s hard to see the value. Changing gears a little bit, I know you’re out with a new book, How to Live a Stress-Free Financial Life. A key part of that book discusses the relationship between time and money and how getting that balance right is crucial for building wealth. Can you expand on that?
Jared Dillian:
Yeah. People have the relationship between time and money totally backward. Criminals are a good example—they’ve got it all wrong. Let me tell you a story. About ten years ago, I moved into my last house. I was in the middle of moving in when a police car shows up. The officer told me there had been a bunch of burglaries in the neighborhood and asked if I had seen anything. I told him, “Look, manCertainly! Here's the continuation of the transcript:
Jared Dillian:
...I just moved in. But thanks for letting me know there are thieves in my neighborhood.” A couple of months later, they caught the guy. What this guy was doing was looking at rental house listings online, checking the photographs to see if they had TVs, and then stealing those TVs. He stole 24 TVs in that neighborhood. If you have a hot TV, you might be able to sell it for $200. So, 24 nights of his life, risking going to jail, to make $4,800. He would have made more money if he just got a job. Over a few months of doing this, if he had just worked, he would have earned more money legally. Eventually, he got caught and went to jail for eight years.
You can't make more time, but you can always make more money. If I lose my wallet with $300 in it, I don't care about the money. What I care about is the time I'll waste going to the DMV, canceling credit cards, and dealing with all that nonsense. It's an enormous time suck. And I don't have 10 hours to waste. I have money, but I don’t have time. You always have to prioritize time over money. That’s one of the themes of the book.
Cameron Howe:
Do you think the younger generation gets that relationship out of whack? Are they always seeking higher pay at the expense of more time?
Jared Dillian:
That’s a good question. I don’t know. I really don’t know how they think about it. I teach at the university level, but I don't have a solid handle on how they perceive it.
Cameron Howe:
It’s interesting because there’s such a hustle culture now where everyone feels they have to go all out, myself included. You've done it too—launching your company and investing so much time with the hope of a big upside, but maybe not. You might end up burning years of your life trying to launch something that doesn’t pan out. It feels like people are being geared to think about money, money, money, instead of following a European mentality of enjoying life and perhaps taking a lower-paying job to achieve work-life balance.
Jared Dillian:
Well, I’m not a big work-life balance guy. I work all the time because I enjoy it. Especially when you're young—I'm 50 now, so I've taken my foot off the gas a bit—but in your 20s and 30s, you should be in growth mode, working as hard as you can to make as much money as you can so you can relax later in life. The whole work-life balance thing for someone who's 24 doesn’t make sense. That’s the time to work until midnight, come home, crash in bed, and do it all over again the next day.
Cameron Howe:
Very true. Another part of your book that I found interesting was how you and your wife manage finances. Could you elaborate on how you think about splitting finances with your spouse?
Jared Dillian:
Yeah, we keep our money totally separate—like completely separate. I have 93% of the money, and she has 7%. For expenses like heating bills, water bills, and insurance, we split it 93-7. I literally make 92.7% of the income, and she makes 7.3%, so when we get the mortgage bill, I pay 92.7% of it. We have a spreadsheet where we track how much principal we own in the house. It might sound like a pain, but the reason we do this is so we never fight about money. If you keep your money separate, you won't fight about money. If you combine finances, you might not fight about money, but you might. People do this mental accounting where they think, “I put $500 in the joint account, and she put $300, so this is my money, and this is her money.” Then, they get upset when the other person spends what they see as “their” money on something they think is stupid.
My approach isn’t necessarily prescriptive. If you have joint accounts and it’s working for you, great. If you’re not fighting about money, that’s fine. But if you are fighting about money, the way to fix it is to keep everything separate. I've been married for 27 years, and we have never fought about money—not once.
Cameron Howe:
How do you handle gifts, knowing you’re essentially the breadwinner? For instance, if your wife wants a new handbag or to go on a trip, are you still splitting that 93-7, or is it more of a luxury you afford your family?
Jared Dillian:
It’s funny because we’re going through something similar right now. We just moved into a new house three months ago—it’s a big house, and we need a lot of art. She doesn’t care about the art; I do. So I’m the one buying it, and that’s fine. When it comes to vacations, we usually split it—I'll take care of the airfare, and she'll take care of the hotel, or vice versa. Gifts are unconditional. If I buy her a piece of jewelry or something, it’s completely unconditional.
Cameron Howe:
Interesting. Tying this back to retail investors, what would your approach be for a more basic retail investor? How should they treat investments if they don’t have all the time in the world to research individual securities? Are you a proponent of index investing, given your background in ETFs, or do you favor playing into macroeconomic themes?
Jared Dillian:
I'm not really a fan of index investing because it’s hard to mitigate your risk. With an index, you get the return of the index, and for the S&P 500, those are great returns, but you also get all the volatility of the index. Volatility and risk are the enemy. I focus a lot on investor psychology and volatility because volatility exists to make people make stupid decisions. Whatever you can do to mitigate volatility is crucial. One way to do that is through active management. A small-cap value manager, for example, can do things to mitigate volatility. Any mutual fund can hold up to 5% in cash, which some say is a drag on returns, but it’s also a drag on volatility.
Cameron Howe:
Would you have any advice for someone just starting out on what an ideal investment strategy would be if they don’t have all the time to research individual stocks?
Jared Dillian:
In my book No Worries, I talk about the “awesome portfolio.” It’s 20% stocks, 20% bonds, 20% cash, 20% gold, and 20% real estate. It’s sort of passive, but you have to rebalance it once a year. This portfolio returns 8.1% a year with half the volatility of an 80-20 portfolio and a maximum drawdown of 12%. You can do it all with low-cost ETFs, so there aren’t a lot of fees.
Cameron Howe:
Interesting. So you’d pick a real estate ETF and a gold commodity-focused ETF?
Jared Dillian:
Yep.
Cameron Howe:
Does that awesome portfolio tilt based on age at all? For instance, would you go heavier into stocks in your 20s?
Jared Dillian:
No, absolutely not. It stays constant throughout your entire investing career.
Cameron Howe:
So you don’t adjust asset allocation based on risk? It’s agnostic of the investor's age?
Jared Dillian:
If you have a target-date fund that gradually shifts from a 90-10 split to 50-50 over 40 years, that’s fine. But the awesome portfolio isn’t set up that way.
Cameron Howe:
That’s interesting. After spending a lot of time in the investment advisory world, everything we’ve been taught gears towards something like a 90-10 split when you're younger, shifting to 20% equity and 80% bonds as you get older.
Cameron Howe:
Jared, this has been a very interesting conversation. If anyone’s interested in learning more about your books and your content, including the Daily Dirt Nap, what’s the best place to find you?
Jared Dillian:
You can find the newsletter at dailydirtnap.com. I also have a personal finance company called jareddillianmoney.com. By the way, No Worries isn’t my latest book. I have another book coming out in about a month—a short story collection called Night Moves, which is up on Amazon now for pre-order.
Cameron Howe:
Is that personal finance-related as well?
Jared Dillian:
No, it’s a short story collection—fiction.
Cameron Howe:
Very interesting. That’s different from your previous content. We’ll leave a link in the show notes for anyone interested in checking that out. Jared, thank you so much for coming on today.
Jared Dillian:
Thank you.
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