Last week, I had the chance to go on the NAAIM Confidential Podcast.
We discussed NAAIM (The National Association of Active Investment Managers), the NAAIM Exposure Index, the mindset of managing money, and the growth cycle of AI and where we are now in that cycle.
Watch the interview:
Introduction and the NAAIM Exposure Index (0:13)
Ryan Redfern: Welcome, everyone, to NAAIM Confidential. I’m this week’s host, Ryan Redfern. Today we have John Rothe, CMT, with ARTAIS Capital Management. John, awesome to see you again. We did this a couple of years ago, and it’s great to have you back.
John Rothe: It’s awesome being back. I love chatting markets with you, and we always have a good time. Thanks for having me back on — I’m looking forward to this.
Ryan: Absolutely. I know our NAAIM Exposure Index is now behind a paywall, so we’re not going to show it, but I will say the number this week is about 86. John, you’re a contributor. Where are you at?
(Current ARTAIS clients, please reach out to me for a free paid subscription)
John: I’m right there. I put in about 80%, and a lot of that is the tech focus of what’s going on right now. I think there’s a little rotation coming in from the summer months, when things were focused not on tech but on the value names. Oil has obviously been a big story, along with the energy sector and what’s going on overseas. The fourth quarter, especially after elections, tends to be a really strong period for the market. So I think you’re starting to see some rotation — people reallocating their portfolios, looking for opportunities, and taking profits off the table in areas like energy that did well over the summer. That may be showing up in indexes like the NAAIM Exposure Index, where people are caught mid-rotation as they position themselves for the election and for the fourth-quarter pop we’re hopefully going to see again this year.
Ryan: I would say the same. Is the model you report to capped at 100% invested, or do you ever use leverage beyond that?
John: No, it’s always up to 100%. I’m focused on the AI space within the model right now, so it’s aggressive as is. I’m not looking to add leverage on top of that, because some of those names can move quickly and I don’t want to be caught on the wrong side of a trade. We still need to manage risk as money managers.
Ryan: Right, and that’s a high-beta space relative to everything else. It’s funny — I’m actually at 120% right now, and I can go to 200%, but a lot of that is large-cap value, which is really low volatility, and I’ve got some market-neutral positions in there. So I have exposure, but it’s very muted, low-beta exposure. My number may be high, but my risk might not even be as high as a high-beta 80%, depending on the portfolio.
John: It’s interesting getting that data. I’d love one day to look at what’s behind the scenes. I think it was Whitney Ribbons you had on, where you were talking about how everybody is allocated differently in their models. You might have somebody like you at 120% who is actually very conservative, taking advantage of value names, while somebody else might be hedged but at 100%. It’s a different reading, so you have to understand what’s in that index. Back when the index was public, I’d see a lot of people comment, “These people are on the wrong side of the market.” But when you understand there’s a lot of hedging going on and these portfolios are actively managed, it’s not as aggressive as people think.
It’s interesting to watch the ebbs and flows of the index — where the extremes are and how NAAIM members take advantage of different trends in the market. I love to see it sit above 90% for a long period as the market goes up and up, because it’s almost a confirmation. And the second those numbers drop, you know people are rotating and something is going on within other managers’ models — they’re starting to see something a little different. So I approach that data by looking at the changes rather than the values themselves.
Ryan: I love that. That’s one of my favorite things to talk about when I have guests on who contribute to that number, because how we all come at it is so different. When you get the generic “the managers are all over-allocated right now” take, it’s like — maybe? It’s not really telling the whole picture. It’s a really interesting picture, but it’s not the whole thing.
John: It’s a cool tool, and it’s cool to see and participate in, but you need to understand the data.
Why NAAIM Matters (4:47)
Ryan: Well, thanks for contributing to it and getting your angle in there.
John: I just love NAAIM in general. Like we were talking about before the show, it’s a great group of people to talk markets and talk shop with. It’s such a great organization for connecting with people outside your immediate geographic area and seeing how they view things. Everybody seems very willing to share. It’s not a closed-off environment where someone says, “I have this secret sauce and I’m not going to share it.” It’s more research-based — people focused on the research aspect rather than trying to take down a competitor. They’ll say, “I’ve been researching this for two years, and this is what I found — let me share it at the conference.” I love the organization.
Ryan: Absolutely. And personally, I’ve shared some of my best stuff and people have been like, “Yeah, that’s okay.” We all have different ways we approach the market and think. We’re still dealing with our own mentality and biases. We could all have the same strategy and still trade it differently, which I think is fascinating.
Mindset and Managing Other People’s Money (5:55)
John: Mindset is such a big key in this industry when you’re managing other people’s money. I sometimes talk to young guys coming into the industry about how important mindset is. To take a step back: there’s a sports psychologist, Dr. Gio Valiante, who coached a lot of professional golfers on the PGA Tour. Because of that work, somebody saw him and invited him to Steve Cohen’s house — the legendary hedge fund manager — when Cohen created Point72, to do mindset work with his portfolio managers. The big takeaway was ego versus mastery.
Think about a golfer. When you’re a kid, you love hitting the ball. You might be out there in the rain, like the kid on the basketball court shooting baskets in the rain — you just lose yourself in it. Then once money gets involved and you start thinking about people watching you, you start worrying about outward appearance, and it messes up your game. Before we moved out to the beach, we lived by a golf course that had this gorgeous hole overlooking a river with a deep valley. If you love golf, you could go out there and just smack the ball — it was such a cool hole. But it was right by the patio where everybody ate. So if you were really into golf, you might think, “My wife is over there telling everybody how much I’ve been playing, my friends are there, people are going to laugh if I mishit the ball.” A lot of people would mess up, and you could see the difference because that mentality got in there. The little kids would just go up and smack the ball because they didn’t care. They were having fun.
The same applies to investing. If you’re worried about what your clients are going to think — “If I take this position and lose money, or I’m on a losing streak where my last couple of trades haven’t been profitable, I’m worried about getting yelled at” — it changes how you manage. As a result, a lot of people run their own portfolios differently from their clients’ portfolios. Their best ideas are in their own accounts, where they think, “I should be buying this right now because it’s on sale.” Whereas if you’re focused on what your clients are thinking instead of making money, you might say, “I’m not going to take this, because what if it doesn’t work out and I get yelled at?”
I think a lot of that comes with being young. As you get older, you realize you need to focus on the research and build a mastery-level skill set — understand the markets, try to make as much money for your clients as possible, but rather than worrying about getting yelled at, educate your clients about what you’re doing. When I talk to young guys about this, they look at me funny: “I’m just here to make a lot of money.” But that’s again why I like the NAAIM community so much. A lot of the members are about mastery and the research side of things rather than a “look at me, look what I’ve done” attitude. There’s a big mindset component to this business.
Ryan: I find personally that instead of trying to have crazy performance, I’m trying to have the best risk-adjusted returns. How much can I make with as little risk as possible? I tell people we’re not going to be impressive when the market’s great, but when the market stinks, you’re going to love what we do.
Explaining Active Management: The Farmers Market Analogy (9:32)
John: When I talk to people about active management, I explain it like a farmers market. I grew up in an area that had a year-round farmers market in a building with fixed counters — you could go in December for lunch and get sandwiches. It was really cool. So I say, imagine you can take ownership in that farmers market. That’s like buying the index. Inside, you have all these little vendors and stands. If you want to take a deeper dive, you say, “I come in and I notice there are lines at all these other shops. Instead of investing in the whole market, I’m going to put my money where the lines are,” or use some kind of analysis to figure out where the trends are. That’s active management.
That’s the way I approach it and the way I explain it, and a light bulb clicks on. It’s not so much “your method is right, your method is wrong.” It’s “I see — you’re getting more into it, analyzing what’s going on, trying to take advantage of the winners and keep the losers out.” That makes sense to a lot more people when you explain how the market works. That’s where people like us on the active management side can really provide value, because you’re seeing those trends before the bigger marketplace sees them.
Ryan: Absolutely. And I think we can have opposite opinions on a stock, a sector, whatever, and both be right depending on the time frame. If I say I think tech is going to stink this week, I might be right, but you might say it’s going to be amazing three years from now, and we can both be right. That’s what I find funny about Twitter. You see people arguing about it, but if your time frames don’t match, you’re arguing about different things.
John: People come up with the immediate knee-jerk reaction. Look at some of the stuff Elon is doing with SpaceX. People love him or hate him, but he’ll say, “I want to do this,” and someone will say, “You can’t do that. That’s impossible.” Well, he’s got a hundred engineers working day and night to figure it out. Have you spent that time trying to figure it out, or are you just repeating something you heard? It’s the same thing with markets. If you’re really researching it and diving in and you disagree with me, then yes, I want to look at your research — maybe I missed something, maybe you have a different take. But if you’re just on Twitter saying, “No, you’re wrong, that’s not what’s going to happen,” you haven’t done any research to back it up. Social media cracks me up. It’s entertaining, but…
The Rebrand: From Riverbend to ARTAIS (12:18)
Ryan: I wanted to dive into something. You did a firm name change — really a whole change. Generally, when I see people do that, it’s like the worst idea I’ve ever seen. The new name is terrible, or they got merged, which is never good for companies. So when I see a name change, my reaction is usually, “Ooh, what’s wrong?” But watching you do it, and what you’ve changed to, has been fantastic. It’s one of the rare cases where I think, “This guy did it right.” I’d love to know your process. Why did you do it, how did you do it, and how did you get to that point?
John: It’s been a multi-stage process over the last couple of years, and it really started during COVID. I got into this business in the ‘90s, and during that time there was a period where people were getting away from stock trading and focusing more on financial planning. There were a couple of older guys in my office who took a liking to me — these were guys who had survived the ‘70s. If you look at the markets in the ‘70s, they were really volatile. If you just bought and held, you didn’t make any money, but there were huge opportunities in there. The guys who survived the ‘70s had found something that worked, and they were all using some form of technical analysis. They’d pull me in and say, “Look at this chart — this is why I’m doing this.” And they absolutely crushed it during the ‘90s, with all the volatility from the tech sector, because they were using those charts.
So I initially started off like that, and then I slowly drank the industry Kool-Aid: pick a fixed allocation for somebody, hold on to it, and focus on financial planning. That’s where the industry turned, because that’s where a firm could really maximize profits.
During COVID — and I turned 50 last year, so maybe this was the early part of a midlife crisis — I started thinking, “I’m really not that happy with what I’m doing right now business-wise.” I didn’t like the way my business was structured. I thought about whether I should retire early, do something else, or work part-time. Talking to my wife, I said, “I really like the research aspect of this.” That has always been the thing I lose myself in. Friday night comes along, I’m sitting on the couch, and what am I doing? Looking at stock charts and data. That’s what I really like to do.
So I decided to make my firm a research-based firm that also manages money, rather than the financial services firm I had before. That’s when I went and got my CMT. I was already using technical analysis, but I wanted to know the broad base of everything, so I could go down different rabbit holes and learn how things are constructed. I slowly transformed the firm to where I wanted it to be — focused on research — and that’s where the name change came from too. I was rebranding everything and taking a very different approach.
From the outside, these firms all look pretty much the same. But in my day-to-day work, 90% of my day is now spent on research — looking at models, looking at charts. I go through hundreds and hundreds of charts a day. I’m not worried about whether so-and-so gets their dividend check next quarter to hit their retirement numbers. I don’t do any financial planning at all.
I’ve also dwindled my models down to just one. What I found was that with a couple of different models, clients were never really happy: “I should have been in that higher model that made so much more money,” or “This one’s pulling back — I should be in a more conservative model.” So I said, my best ideas are in this one model. This is what I’m doing on a Friday night. This is the model I’m really studying. Let me just go there with my best ideas, and for the people who understand it, let’s make as much money as we can — with a risk-managed approach so we don’t blow ourselves up.
The Technology Background Behind the Strategy (16:42)
John: I’ve always been interested in technology. I’ve been a tinkerer — I’ve always taken things apart. I probably should have been an engineer; my dad is an engineer. Before we moved down to the beach during COVID, we lived in Northern Virginia, which is a huge tech area. There are a lot of data centers there, and AOL started there. A lot of my friends and neighbors are tech guys who understand this stuff. So before AI became popular, they were talking about it in 2018, 2019, 2020. I started picking up on it and realizing this was starting to look like the internet boom — one of those major transformative events. There were white papers that came out in 2018 about how large language models might work, and there was a very different approach to how people were building AI models.
That’s when a light bulb went off, and it brought me to the conclusion during COVID that I needed to focus on what I really like doing — research — combined with tech, which I understand. That whole process took a couple of years, and almost the last phase was renaming and rebranding the firm. Now I’m working on research projects. I have a Substack where I publish research, and I’ve spent the summer figuring out how I want it structured. After the summer is over, I’m going to launch full speed ahead and share that research. For the people who understand it and want to come on board — “By the way, you also manage a model based on this research” — they can do that too. It’s a very different approach from what a lot of us learned over the last 10 to 15 years about managing money, but it’s something I’m very interested in, and that’s what led to the whole rebranding.
Ryan: Nice. So do the letters stand for something?
John: It stands for Absolute Returns Through Adaptive Investment Strategy. I have to give my wife credit for that, because she’s the one who thought of it. I thought it was a cool name, and no one is going to copy it. We were Riverbend Investment Management before, and there are a thousand Riverbend Investment Managements in the world. This distinguishes us a little better and shows what we’re doing.
Ryan: I love it. It’s very unique and different. You’re right — Riverbend was more generic. It wasn’t bad, but it was generic. This is very precise. I think you did an awesome job rebranding, specifically for the path you were heading into.
The AI Thesis: We’re in the AOL Era (19:42)
Ryan: You gave me some slides. We normally don’t do the presentation thing as much as we used to, but if somebody has a good slide, let’s look at it. This is the one you were talking about — AOL consumers online.
John: This is the basis of the thesis for the model I’m using right now. When we go back to the ‘90s and compare where we are now to where we were with internet growth, we’re in that early part where AOL was just starting to appear. Remember, they used to send out those little discs everywhere — you’d get one in the mail all the time. “Sign up for AOL for free.” A lot of people were on AOL, but they weren’t really on the internet. They were using AOL as a portal, but they never really got online. There wasn’t a lot of content, and you didn’t really have browsers the way you do now. If you look at the stats, in 1996 the people who were AOL-only were online for less than 30 minutes a month. In 2000, only 22% of people had bought anything online. It was a very different world from where we are right now, which shows you the growth potential for AI.
People say, “Everyone’s using AI chatbots — we’re obviously in a bubble.” Yes, we probably are in a bubble, but I think we’re at the very beginning of it. When you make the comparison, these chatbots are basically AOL. You’re not really utilizing the full power of AI agents. The app store apps are basically the AOL discs — they’re giving people free access, and people are on the AOL platform, but they’re not building anything with it.
When I talk to people, I tell them I’ve built out multiple agents. They used to be like dumb interns, then they got to be smarter interns, and now they’re like junior associates. They keep getting smarter and smarter. I have them work on research, build things for me, and analyze data, and it all runs automatically. I come in in the morning and it’s like having a junior associate who worked all night — like on Wall Street, where the poor kid has been up all night building reports. I have all this data and can get right to research instead of organizing everything. They’re getting more and more powerful. But when I bring that up to people, they look at me and say, “I can do that?” They had no idea, because they’ve never explored it. It’s the same conversation as back then: “Oh, you can get online with it.” “I am online — I’m on AOL.” “No, there’s this whole other thing behind it.”
Ryan: And this next slide shows where we are on the timeline.
John: We’re at about 1992 or 1993 right now with AI. Eventually it’s going to get bigger and bigger and fit more into the consumer market. I remember reading articles in the ‘90s — Newsweek called it “the information superhighway,” then it became “surfing the web” and “getting online,” and eventually it was “Google” — you Google your name. Today, you don’t say “I ChatGPT’d myself” or “I Claude’d myself.” There’s no consumer marketing for it yet. They haven’t made that transition, because it’s built for the geeks right now — for the nerds who will deep-dive into this stuff. They don’t need to market to us, because we understand the tech. The system isn’t big enough yet to handle the conversion to the consumer market, because they’re still building everything out.
That’s how I view it: we’re at the very beginning stages. There’s a huge opportunity in this transformation, and there’s going to be a lot of money made. I remember this period. It’s when I entered the industry, and it was a lot of fun. A lot of people made a lot of money because things seemed to go up every day. As somebody who loves looking at charts and taking a research view of the stock market, it’s really cool to see it happen again — and to participate from the start instead of coming into the industry halfway through and catching the tail end. I’m excited for it. That’s the background of the thesis I built for the strategy we’re moving forward with.
Dealing with AI Hallucinations (24:19)
Ryan: How do you deal with AI hallucinations, which still come and go? I’ve had clients come to us with financial planning questions where the AI used 2018 tax numbers, which messes up your whole assumption. It’s still not perfect. So how do you handle that?
John: Two ways. First, I look at it as a junior associate. It’s gotten smarter and smarter, but it’s still somebody who doesn’t fully understand the last 10% — the details. So you still need to review everything. There are going to be some mistakes, but it’s done 90% of the work, so I just need to go in and review it.
The other thing is persistent agents — one is called Hermes, for example. What I have set up is a group of agents that are my employees and do things for me, and then almost a master agent, like Jarvis from Iron Man, that oversees everything. It chats back and forth in Slack, verifies things, and fact-checks. It will pull out the mistakes and say, “We fact-checked this, and this agent is making stuff up again.” Then I can go work on that agent and figure out why it’s going into the weeds. The agents do get a little lazy, and I think some of that may be programming by these companies to preserve power and energy, where they take shortcuts here and there.
So yes, it is a problem, and it’s something people need to be aware of. Sometimes people will say, “I pulled this up on ChatGPT and it said this,” and it’s obviously wrong because it pulled from some random website. That’s a big problem too. Because these agents are searching online, there are ways to use search engine optimization for certain search terms. You can start a website, put completely wrong information on it, and set it up so that Claude thinks, “This guy’s an expert, let me use this data.” So you need to look under the hood. I always tell it to give me sources so I can go verify things.
But if you have ten of these things doing 90% of your work and you just need to review it, it’s a pretty interesting way to get a lot more done and be more productive — without dealing with actual employees you have to pay, the drama, all of that. They just work 24/7. It’s very cool. But you have to be aware of how these things work, which again is why I think they aren’t marketing to the public yet — only the nerds and geeks like us understand what’s going on.
Ryan: It’s funny you say that. I’ve built a whole dashboard we use to manage our things and keep tabs on data. I see myself phasing out of a lot of the charting platforms I use and just going to my own, which is kind of crazy.
John: I’ve done the same thing. I’m using Render to set things up. It gives me the signals, the things to watch out for — everything in one spot, instead of going through all these charts and software that gets slow when you have everything open. And you can utilize the power of a data center that’s much more powerful than your desktop PC and speed through it. It’s very cool to build tools like that. But again, most people see it and say, “Wow, I didn’t know you could do this.”
Ryan: To your other point, I find that after a couple of hours of building, it gets tired and lazy.
John: It’s the weirdest thing. “Okay, we’re done for today.”
NAAIM Events and a Favorite Quote (28:23)
Ryan: I feel like we could go for another hour. This was so much fun. We have our NAAIM Outlook conference coming up October 26th and 27th in Dallas. I don’t know if you’re going to be there. Have we ever met in person? I feel like I’ve known you forever.
John: I’ve been so busy with this transformation that I haven’t had the chance to make a lot of these conferences, but now I’m trying to get more involved again, because there are so many good ideas at them. NAAIM is one of those organizations where people are so willing to share what they find. There’s so much useful information out there. I’m amazed more people aren’t joining, because there’s so much data and research within the organization.
Ryan: Absolutely. I didn’t prep you on this, but do you have a favorite investment quote?
John: In the theme of everything we’ve discussed: “History doesn’t repeat, but it rhymes.” That’s the theme of what’s going on with tech right now. The world is going through another cycle of similar stuff.
How to Find John (29:45)
Ryan: Love it. How does somebody find you if they want to hear about your strategies?
John: Type in johnrothe.com and it will take you right to my Substack, where I put a lot of research. You can also go to artaiscapital.com. I’m still tweaking that website so I can put some of the research there as well. Those are the two main places I post. I’m not that active on Twitter anymore, for the same reasons we talked about — the research guys are more on Substack.
Ryan: That’s true, that’s where I’m seeing things go as well. Well, thanks for being here today. I love this — I’d do it every day if I could.
John: It’s a good time, just like our NAAIM Shared Thursdays — the last Thursday of the month. We talk on there quite a bit. That’s another great resource.
Ryan: That’s an amazing resource. More people should take advantage of it. All right, we’re at time. John Rothe, great to see you again. Always great talking to you. We’ll see you all next time.