Episode 163 - Marks on the Markets - 2023 Year in Review with Ross Roggensack and Jake Thomsen
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Reflection is a key part of investing, and in this special Christmas edition of Marks on the Markets, host John Coleman is joined by Jake Thomsen and Ross Roggensack to give us a year in review and a look ahead at what’s ahead for 2024.
They look back on major trends and topics like Artificial Intelligence or inflation and offer their reflections on what the Christmas season means to them.
All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.
Episode Transcript
Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.
John Coleman: Welcome back to the Faith Driven Investor podcast. This is John Coleman. And I am here welcoming two of my very good friends, Jake Thompsen and Ross Roggensack to the podcast for the last marks on the market of the year. Marks on the Markets is our monthly commentary show where we talk about trends in markets. And I thought, who better to have on the show to cap the year, talk about what we've seen in 2023. Talk about what we're doing for Christmas, what we're looking forward to in the new Year than Ross and Jake Ross and Jake. Thanks so much for coming on today.
Ross Roggensack: Thanks for having me. Thanks, John.
Jake Thompsen: Yeah, indeed. Thanks, John. It's good to be with you both.
John Coleman: Awesome. Jake is lying about that, incidentally, because I spent most last week with him, and I can almost guarantee you that he doesn't believe it's good to be with me right now. But nevertheless, it's.
Jake Thompsen: It's great to be with Ross, though. I'm [....] Ross already.
John Coleman: I believe it. Hey, just to start us off and maybe I'll start with you, Ross, what were the three most important trends that you saw in market this year in 2023?
Ross Roggensack: Well, the super obvious one is high quality U.S. tech. You know, up over 50%. It sort of swamped everything else. But I think the other two that may go a little unnoticed. We've had a flat bond market, which is unusual given what we had in 22. I think it's a little overshadowed by the tech market, but I think it's still we're not out of the woods. And then I think lastly, is just the war on Israel and Palestine really has not affected markets yet. And between that and the war in Ukraine, it just feels like that's always simmering in the background. And maybe it's affecting markets more than I think, but it sure feels like it's something we'll look back on. And remember 2023 by that, we're in the middle of these conflicts.
John Coleman: Yeah, It is interesting to me that, you know, out of the gates, the war in Ukraine in particular had some impact, particularly as people had to divest of Russian assets and things like that. Out of the gates, people worried about oil and gas, for example, industries that were quite exposed to Russia or Ukraine. It does seem like there's a relatively muted impact in markets right now of the global instability in those two regions and of the potential for instability in other regions like Taiwan. I mean, obviously all of us are deeply concerned about those things. It's having a huge human cost, their major political costs. But it is odd that it doesn't seem to be creating the same type of instability in markets. Any insights on why you think that's the case?
Ross Roggensack: I don't know. Just fatigue. I don't know. I certainly talked to my team the Monday after October 7th and really thought we were going to get a very difficult week. And I just think markets have whistled past it. I think the I don't want to get ahead of our conversation, but I think the anticipation of a Fed rate cut is just sort of the sugar that covers everything else that Wall Street just can't keep its eyes off of. So kind of like the anticipation for Christmas, right?
John Coleman: Yeah, It does seem like markets are optimistic that both the Ukraine war and the war in Israel and Palestine will stay regionally contained. It feels like out of the gates, the Ukraine Russia war in particular, seem to threaten a real spillover to other things. I mean, people were legitimately worried about a war between NATO and Russia at that time. People I think, were more worried initially about something in Taiwan. And that seems to have quieted a bit as people begin to be more confident that these will be regionally contained force without global ramifications.
Ross Roggensack: Yeah, maybe the second one affected the first one. Maybe we just felt like we overreacted. The first one. So this one we won't overreact to, I don't know, but I'm certainly baffled by it.
John Coleman: Jake what do you think? What were the three trends you saw this year that you thought impacted markets the most?
Jake Thompsen: Yeah, The first one that I'd call out related to what Ross was talking about is this anticipation that inflation was going to continue to fall. And we saw steadiness in that that translated to market sentiment. And having that be a consistent trend over the year has led to a lot of other positive impacts. I think so I'd be the first one to starting of that. But for number two, and I'm a tech investor, so I'm in the VC side and one thing that you saw is a resignation that there was a little bit different, right? For the longest time, I think we were anchored that as a 2021 world or soon returning to that. And for the first time, folks are they've taken their lumps. There's been this consistency in current valuations. There's almost a default lean now, which we haven't seen in a very long time. So the zero interest rate environment is no longer the case and that's having ramifications in the tech and private markets. Then I say the third one, it wouldn't be a podcast in 2023 without mentioning artificial intelligence. You know, the new way that A.I. has transitioned from a parlor trick this time last year, right? I remember being at a Christmas party and showing people ChatGPT and we were making poems about the host, the Christmas party, and laughing about that. But over the year, it's really translated into operational value. There's a long way to go in that. I think that would be one thing that we look back that wasn't just a short term blip, but we will have true fundamental impacts on the economy and on the way that we do work and we do life going forward. And this will be the year where we start to see that take effect, I think, looking back.
John Coleman: So I want to pause on that because one of the craziest stories of the year that we actually haven't covered in marks on the markets because we haven't had one since then, was what happened with Sam Altman and with Open AI with the board. I mean, Jake maybe in just a couple of minutes. Unpack that for us. What the heck happened with Open AI? You know, open AI for listeners who are less in the artificial intelligence or tech world is kind of the what I would call the premier independent platform for artificial intelligence. They were the ones that launched chat GPT, made a number of breakthroughs in what are called large language models, which is why Chat GPT is predicated on they were co-founded actually by Elon Musk and Sam Altman and a few other luminaries in the space. But now it's more under control of Altman, and they were recently kind of quasi purchased by Microsoft, although the deal came with some strings that made it not quite an outright purchases the way that I understood it. But then suddenly this massive, successful platform that had grown more rapidly than almost any tech company in the world in a weird like Twitter announcement, fired its CEO and co-founder Jake, what happened there?
Jake Thompsen: Yeah. So the short version is we still don't quite know, although I think we're normalizing around some explanation. And I would offer up some of the most drama that we've seen around there has been the result of this experiment in structure, right? Where the company is actually owned by a nonprofit and there is a for profit subsidiary within that. So investors went into the for profit part of it, and yet the governance was at the nonprofit side at that level. And there is a nonprofit was there maybe to step back and explain the difference between generalized artificial intelligence and more localized? And the idea of localized artificial intelligence is that you can have a very specific problem. Maybe it's for reviewing legal docs, something like that. You can train a model. It can do that very, very well. But this idea of generalized artificial intelligence is much more of the Terminator esque Skynet, right? Something that passes the Turing test, which is this idea that if you're talking with this A.I. and you can't tell whether it's a human or not, well, it's passed a certain threshold. And eventually you get this generalized, almost consciousness, some people might say. And so the nonprofit was set up to say, well, that would be a big problem, right? You get that, then all of a sudden maybe you do have a Skynet type of outcome. You have all kinds of issues with what it can do with encryption and cryptography. I mean, across the board, it gets to be pretty risky. So the nonprofit was set up to say, if we see that happening, then let's push the abort button, Right? And so what most analysts would say is that Sam Altman was going and negotiating deals in the Middle East for chipsets that would be able to advance the company in that direction. And there was a lot that wasn't being run by the board as open AI got closer and closer to that and so the board got scared and said, okay, we've got to stop this. And so the core, what it was is there was a mission that had nothing to do with fiduciary duty around shareholder value. And so you had the for profit and a nonprofit with totally different incentives. And so in some ways it was the most rational thing in the world, given the structure. But of course, when that happened, all of a sudden you had more than 90% of the open AI team members that said, Well, Sam doesn't come back, we're gone. Sam Altman joined Microsoft for 2 or 3 hours, right? He threatened to recruit all the different developers out there. So the board got together and said, Well, hey, we've got to do something about this. A lot of pressure from Microsoft and other investors. And so everything 3 or 4 days later were completely reversed, with the exception that the board was replaced. And so there's still investigations ongoing into what exactly tipped it off. But I think that's what a lot of the analysts would say was at the crux of it is this just incentive with misaligned incentives with the nonprofit and for profit. And I suspect you won't see that structure being used any time real soon.
John Coleman: And it was a weird board, right? I mean, the independent board members seemed almost grossly inadequate to a $70 billion platform. I mean, these were not people if you seem to have, let's call it advanced careers in the space or had deep experience serving on boards, I mean, it was just an odd board construction that I haven't seen explained well either. So yeah, Jake, I think you're probably right. People are going to pay attention to boards a little bit more now and they're going to pay attention to governance and operating structure. And you know, as we were going through it, I thought, gosh, this is going to be the best HDS case study for like the governance class in history. Right. It just indicates all the problems with these things. If we camp out on artificial intelligence as a topic for a minute. And Ross, maybe you want to jump in. It is what everyone's talking about right now. It reminds me a few years ago when blockchain was kind of a part of everything, you know? You'd get a coffee company that added blockchain to its title and would spike 100% in public markets or whatever, because because of the name, everybody's talking about artificial intelligence, everybody's trying to add it to what they're doing. How do you think about it, Ross? Is it kind of overblown at the moment? Is it kind of properly evaluated in markets? Is it underestimated? What's your view on the AI marketplace right now?
Ross Roggensack: I'm pretty old, John, so my view of it is very slow and it is kind of like Bitcoin or blockchain. I would rather give it to experts to figure it out than me. I am suspicious of the actual value of that. It might be just a tad overblown in the hope that it can, you know, transform so many businesses. It might have few kind of like wi fi or the internet, like it changed the world, but it wasn't very investable. So I'm not quite sure it might change the world, but it might be really hard to make money directly off of AI. I just don't know yet. And so we've not really spent time chasing the theme. Sure, it excites me in certain areas, but I think that. The natural cynic comes up in me, John, when I when everybody's thinking one thing. It just always makes me slow down a bit.
John Coleman: I'm shocked to hear Ross is a cynic and he has occasionally accused me of superficial intelligence, but never artificial intelligence. Jake Thompsen You're living in this world quite a lot, and I know you've actually evaluated some early stage deals in the artificial intelligence space. How are you thinking about it? What do you think of its presence in markets right now?
Jake Thompsen: Yeah, I think for now it's overblown in the short term. Like anything we often overestimate in the short term, underestimate the long term. I think that's probably the case. This truly is, I believe the next platforms shift. And I agree with Ross, right? If you had the advent of the PC of being a very notable, more recent platform shift as we start using word processors and PCs and the rest, then you get to the Internet age, all the impacts that had on business, society, even mobile connectivity. And now I'd say this is the next big one. And if you actually look at some of the spend for those technologies along the way, you see these economic multipliers, right? Where in the late 20th century, if you look at the revenue of the big guys, right back then it was Microsoft and Dell and IBM. For every $1 of their revenue, it tended to lead to about $10 of GDP in the economy more broadly. So the idea is because people are consuming those goods, they're becoming more productive. There's a lot of value that is created out in the industry. So I think we'll see that with artificial intelligence. The estimates are something like $100 billion of revenue from AI companies in 2025. So assuming there's a similar kind of relationship as a ten X and that's $1 trillion worth of GDP because of productivity gains that would happen, which is which is 4 or 5% of our national GDP. So if you just break that down per year, I mean, the potential right on this is a bull case to have 2 to 2.5% of additional growth for a year because of productivity gains from something like A.I.. But Ross's point, it's one thing to spur that in the economy, it's another to capture those gains. I think a lot of them will be from the big tech companies. What we're seeing in the marketplace is a whole lot of wrappers around large language models, meaning that doesn't take a whole lot to build a company, but you use the guts of what OpenAI and others have done. Those are less interesting, right? And there's a lot of proprietary data and company coming from that that gets much more interesting. So there's still so much chaos and so much friction. We're watching it closely. We think there'll be a lot of opportunity. But I agree with Ross. It's hard to tell where exactly that will go. But what we are seeing are more and more tools that are making folks ten, 20, 30% more efficient, whether it's around content creation or creating images, reviewing legal documents, even planning events. Right. There there's software now that will do that all for you and 10% of time. I think we'll see more and more of that. That will be introduced into the day to day first in tech, but then more broadly. So we're bullish on it longer term. In the short term issue, I feel like there's a whole lot of hype.
Ross Roggensack: Yeah, John, something to watch on to is A.I. requires a lot of energy. Yes. Can't be interrupted. And so there is some interest in small nuclear reactors that are being built that don't rely on the grid. You can basically supply your own grid. And so companies like Microsoft and others are certainly beginning to move that direction, which is interesting to us, that there could be this and pouring of new energy that's outside the grid for industry, specially made for not just Bitcoin and that but also for AI so interesting to watch.
John Coleman: Well, what I found really interesting on that front, Ross, was and may be remembering the numbers slightly off but I think I saw a report that Microsoft was intending to invest something like $50 Billion in infrastructure to support artificial intelligence, which to my knowledge was the biggest tech infrastructure investment I'd seen announced over the last 12 or 18 months other than Chip Re onshore. Some of the stuff that Intel and Associated organizations are doing to build chip factories here rather than leaving all the exposure in Taiwan. And I do think that says something to Jake's point about at least the medium term reality of this. Right? I don't think you'd see a company as adept as Microsoft investing that kind of money in physical infrastructure without some hope that this is a transformative technology in the medium term. And I do think, Ross, from my perspective, some of the most interesting investment opportunities are likely to be the ancillary ones that surround this ecosystem where if you can find those spots, whether it be compartmentalized energy, real estate related to the physical infrastructure of this, the engineering of that, you know, in companies, there could be some really, really interesting opportunities as these outlays of tens of billions of dollars happen with people chasing the underlying technology. And I wouldn't be surprised if there are more Nvidia style runs in companies that happen into an ancillary component of this artificial intelligence ecosystem.
Jake Thompsen: Yeah, the pickaxes and shovels. I think this is the time to be looking for those, because those I don't think are quite as highly valued. Whereas to your guy's point, any time that somebody comes and makes a pitch, you just add AI to it, right? And of course the valuation expectations are so much higher.
John Coleman: Yeah. This is the FDI AI podcast now. We're expecting to quintuple listeners tomorrow.
Ross Roggensack: I'm not done yet, John. Quickly, I think another area to keep an eye on that excites us. We're we've been big bulls on biotech and have been really right and then really wrong the last couple of years. But we do think that the convergence of technology and AI on medicine to affect human flourishing in the curing of diseases that could really speed things up. And it's it's interesting to watch. I'm hopeful that AI rather than just you know, making my Wikipedia page easier to read, will actually bring some, you know, curing of disease, which would be pretty cool.
John Coleman: We had Finny Kuruvilla on earlier this year, actually, and that was one of the things he highlighted was he thought we were currently understating the potential impact in medicine because all the focus had been on these large language models that are easy to kind of understand. It can take a test, you know, an AP exam, it can you can give it a task to write an essay and it can do that. And that's kind of a cool parlor trick. It has some substantive uses, but we haven't even begun to scratch the surface on these truly substantive uses in health care and energy and other places. I'd love to stay on this topic, but it sounds like we need to do an artificial intelligence oriented podcast, although it was, I would argue it was probably the biggest theme of the year in many ways in markets, even though nobody has quite a grasp on how to handle it. If I back all the way up, Ross, you started to touch on this and maybe you could kick us off this year. We're coming out of two of the most interesting macroeconomic years in recent US history, right? A combination of inflation, something that always looked on the precipice of recession and never quite tipped there, at least in the United States, a relatively late and in apt Fed response, followed by a pretty solid response and then, you know, volatile valuations in markets as a result of that. Give us your outlook for the US economy and the global economy in 2024 as it relates to inflation and recession, which are the two things that people keep focusing on?
Ross Roggensack: Well, the answer is I don't know. The way that I like to tell it is that economists market strategies to try to guess on these short term kind of I mean, 12 months is nothing, right? And I compare them to weather forecasters and allocators, actual people on the ground that have to allocate assets. I compare them to farmers like a farmer who listens to a weather forecast, still has to prepare for everything that could happen. And so even if I said, well, I think inflation's dead, the Fed's going to cut recession will be a soft landing. It's going to be great next year for people to invest in that direction would be silly because we just don't know. You have to prepare for lots of different outcomes and I would highly recommend people to go back and watch Jamie Diamond's interview at the DealBook conference, The New York Times DealBook conference just a week or so ago. Very insightful. Very interesting. Asked him about a soft landing in inflation and he just said, I don't know. But he's suspicious when everybody's in agreement that maybe we're going to be wrong and that he is running a bank like that. He still has to prepare for every possible outcome. And so I would just be cautious about listening this time of year to all these outlooks and pinpoint accuracy, detailed things about it. S&P is going to finish in 4952 next year, like, okay. But we still have to prepare for every single outcome. And.
John Coleman: Do you, I'll ask you a point question. The talk of the day, as you mentioned earlier, is whether the Fed will actually start decreasing rates, will reverse course after one of the steepest periods of rate increases in recent memory, which has been cataclysmic for parts of the real estate industry for valuations in certain areas. Do you have any perspective on whether you do think the Fed will likely begin to decrease rates or do you think it's too soon to tell even for them?
Ross Roggensack: My gut tells me they will not and that the supply demand of U.S. treasuries is really weak right now. So the demand side is awful and it really won't matter if that holds that rates will have to go higher because the price will go down because they will get bid for. And I'm just a little nervous that even though we think the Fed. It might cut next year, we could actually see rates go higher. The yield curve still inverted. It's still messed up. It's been inverted for, I don't know, two years, which is unprecedented. And certainly we're not bond investors, at least until the yield curve normalizes. We're just going to wait it out. I don't know if I answered your question, but we're waiting on bonds until we see and we might be really wrong, like badly wrong. But we just would rather see a normalized yield curve before we invest in a ten year bond.
John Coleman: Jake, what are you seeing on your side? How do you think about inflation and recession, especially within private markets where you tend to operate? What's been the impact in 2023 and what are you anticipating for the year ahead?
Jake Thompsen: Yeah, the impact in 2023, as you can imagine, in venture capital rates go up and risky asset, the demand goes way down and we see that in funds that are raising. It gets much harder, right? Good funds right now are typically raised about 30% of their targets. Right. And that's been a challenge. I think looking at 2024, what's some of the challenge or what some of the worry is that we're seeing is that inflation is gradually coming down. So much of it is related to wages now, which tend to be stickier. And yet Powell is very aggressive in saying we're not doing anything until it gets down to two. And yet you see a lot of the rest, the economy that is probably getting closer and closer to hitting a little bit of a wall. Right. I even think about debt. Debt is such an important topic. Of course, the rates and you look at consumer side credit card debt, consumer debt that ticked up by 5% year over year. Right. A lot of that is variable rates. That's just going up. A lot of businesses are refinancing their business at the federal government. Right. We're going to probably run a $2 trillion deficit next year. Another 5 to 7 will be refinanced at much higher rates. Right. At some point, some of this starts to break the system. Not to mention, speaking of the federal government, if you strip out a lot of the employment related to the Chips Act, the Inflation Reduction Act, it looks like private employment is actually starting to contract a little bit. And the Fed is notoriously relying on lag indicators. It's a lot of stuff that's backward looking. So there's one potential future, one hypothesis that would say Powell and the Fed will wait until inflation comes down. The rest the economy will break a bit before then. There'll be a reaction to reducing rates fairly quickly, similar to what we saw in areas like 1981, 2001, where it comes down quickly and yet you don't see the impact of that in the markets for six to 9 to 12 months. The real economy a little bit later. And so I'm probably a little less bullish on the economy in general because I think there are going to be some of those challenges we have to try to navigate. And yet we've seen a Tale of Two Cities the last few years, right? 2022 and early 2023. There was a major recession in tech, but the rest, the economy did pretty well. I think we may see a bit of a reversal where technology, as we've seen in the latter part of 2023 by the Magnificent Seven and some new baskets really driving some returns. And yet much of the real economy, much of traditional sectors may start to stumble a little bit. But I suspect overall, we don't dip into recession. But again, that's relying on some of the thinking that Ross has rightly pointed out and saying, hey, here's a point estimate that is absolutely going to happen. But those are the things that I'm kind of worried about, some things that we're thinking about on the private market side.
John Coleman: And as we all know, the Fed is an independent entity. But the pressures in an election year to not dramatically increase unemployment could be quite high. And so it'll be interesting to see, particularly in an election year, if they are willing to stay as aggressive as they've been, even at the cost of real economic impact, Jake, which I think was what you were speaking to, particularly as CPI does seem to be declining. And the interesting thing about it is it's always a lagging indicator, right? You tend to overshoot on both sides. Either you act too late and you stop too slowly. Right. And so I'm actually kind of where you are, Ross. I bet they take a wait and see for a period of time. I doubt they'll increase. I doubt they'll decrease too quickly, but no one knows right now. It's probably the biggest area of speculation in markets. One thing I wanted to touch on related to that, but kind of separate, is in the private markets, a lot of our listeners invest in private equity, venture capital, real estate, private credit. This has been on one hand, one of the most difficult valuation environments in a while precisely for what you indicated, Jake. We've got interest rates rising. Taking on debt for a company or real estate development is more costly than ever. Mortgage rates are higher, you know, all those sorts of things. On the other hand, it's also been one of the most difficult fundraising environments for alternative asset managers in my career, probably. I mean, just people being cautious about their allocations to things like venture and private equity and for a period of time acting on the denominator effect, which is when public markets have declined, they're overallocated to private markets. So they have to kind of stop allocating private markets that ward off, I think. Over the last year, and yet people have stayed conservative. Ross, you're in the world dealing with institutional allocators that are quite sophisticated every day. You all advise people like that. What do you see ahead as that difficult fundraising environment in alternative asset management thawing? Do you think that will continue into 2024 or do you think this is a time when we see a lot of institutions and sophisticated investors getting money back into the private markets?
Ross Roggensack: Well, I mean, price usually solves those problems, right? And so as valuations come down in the private markets, or at least perceived valuation, interest will rise. It will. And I think that, you know, I don't know if part of the issue has been that it's been easy to invest in the capital markets. If we get more trouble, maybe we'll get a swing back. I don't think so. I just think that price will cure that eventually and that money will flow back into venture and private equity just because valuation would be too attractive and money would just flow back that direction. It's just a natural flow of any market really. But I think it did get ahead of itself, get overfunded and it just self corrects. But I don't think it's going anywhere. And I think it's going to be much longer before we start to see better inflows.
John Coleman: Yep. Jake, what are you saying?
Jake Thompsen: I agree with that. I think you have the prices that are coming down, but the fundamentals do seem to be holding steady. It's a little bit like a forest fire over the last couple of years, which is hard at the time, but it's healthy for the forest and you start seeing green shoots popping up after that. And I think we see a lot of that in the private markets, whether it's from the tech and more generally had a lot of layoffs that are bottoming out. Right. The ones you see today are a little bit more specific to the company or because of the AI impacts of just being more efficient. They tend to bottom out. Valuations are slightly taken up. They're more steady coming up just a tiny bit. You start to see some IPOs that were lackluster back in September, and yet they generated $3 billion worth of market caps. And since that are still doing okay and has some exits for folks. So as more and more of that happens, enterprise spending is probably the other one where if you look at indicators like spend on cloud infrastructure, right? So any technology company is generally going to use in AWS or Microsoft Azure or others, right? That has bottomed out and is starting to pick back up, too. So enterprise spending is likely going up. So a lot of these seem to say that green shoots are starting to grow and know we often say the green shoots are encouraged and yet they can be stamped out. So it's anybody's guess. And yet we're optimistic that the fundamentals will be increasing. Prices are in a good place. And so especially if you have institutional money, right, as they're trying to maintain their different allocations to different asset classes, that even if that starts, the price is going back up, folks will be jumping back in. Now, whether that's six months or two years, we're not quite sure.
John Coleman: And a problem for a lot of institutions is they haven't been getting distributions in two years. Right. So typically, you're selling off venture and private equity positions at a pretty good clip. But right now, funds are holding longer because the environment has been poorer. That inevitably will have to I mean, people have to sell their positions at some point that will kick in. I suspect 2024 is going to be a better fundraising environment and private markets, certainly. And Jake, I know we've talked about the data on this. I suspect it will be a pretty good vintage. Typically when you come out of these difficult economic environments like this, where valuations have declined, the vintage of private investing immediately following that valuation decline and the economic difficulty is pretty good. And I would guess that will be the case in private equity and venture, where I feel like valuations have come back to Earth. I still don't have a good read on real estate. It feels like you have to think about that more subsector by subsector where I'm still quite nervous about office, for example, in that we haven't seen a real correction there. It feels like multifamily housing has corrected and even single family housing is mostly corrected just because there's such a shortage. But I think that one is probably a bit more nuance than venture in private equity, where it feels like people have now adjusted to this rate environment and are starting to actually move positions, IPO companies again, those sorts of things. Ross Are you seeing the same thing from a valuation point of view? Like, do you think things are getting a bit more attractive right now in the private markets and and maybe specifically in real estate? Are you guys looking at that area pretty closely right now?
Ross Roggensack: And we're looking at it, but we're not going there. I don't think especially commercial office space, like you said. I think it's really scary. And that's not just because maybe we have a recession coming, but just the overall change in lifestyle. And I'm not sure that's going away any time soon. I'm in my home right now working from my office in my home, and I think the need for huge footprints is fading. And I think once companies get used to not spending that much money, they're not going to. And. I would be nervous about that part, but I think I agree. Multifamily looks really good and we're looking at different areas, especially on the faith side. We think there's lots of opportunities to change lives in real estate. So if we can do it that way, yes. But in general, I think that office is still an area that's not corrected. Maybe the way it's going to. I just I wouldn't want to be sitting on a large building in a large city right now. Would make me very nervous.
John Coleman: You want to camp out on that residential faith driven component for a minute, Ross Because I do think this is an exciting area. Maybe just 2 or 3 minutes on what you're seeing there, what you're most excited about in terms of the way managers are incorporating faith into the developments, the innovations in the way those are delivered. I think real estate can be one of the most redemptive investing areas because you're so directly touching the lives of people every single day in the environments in which they live. But say more about what you're seeing and why that's exciting to you right now.
Ross Roggensack: Well, even the movement in refugee housing is just really exciting in the way that you can for profit invest in multifamily that attracts refugees in certain cities that Louisville and other cities like that that draw a lot of people in. And then they incorporate the equivalent of a housemother or a den mother at each facility that checks in on people that are in a new culture that have no idea even how to get to a grocery store or find a doctor or, you know, figure out how to go to school even like they're kind of lost and they need help. And building up those relationships and owning that sort of real estate is interesting to us. The apartment life is another one that's well established, but a really good way for even young professionals and move into an apartment. Maybe it's their first professional job and moving to a city and they just they don't really know anybody. They're sort of lost. They know people at work, but that's about it. They don't really have a social life. And to have somebody come alongside them and befriend them and then ultimately share the gospel with them is really exciting to us to be able to converge those two things in one investment. We're always looking for ways to do that.
John Coleman: I want to ask one more question that's kind of more market oriented and then turn back to this faith driven component which both of you are so knowledgeable of. And Jake, I'll start with you, even though nominally my question is kind of outside of your domain area, but I think it touches on it Ross
Jake Thompsen: Never stopped me before, John.
John Coleman: Yeah, I know you're very comfortable commenting
Ross Roggensack: Artifical intelligence Is back.
John Coleman: Man, so public markets this year, this story has been at least through October. So the run of mega caps, right. It was the large, dominantly technology oriented players like Tesla, Facebook, Google, Amazon that drove almost all of public markets returns. If you I think a couple of months ago, I looked at it and if you stripped out those top ten tech names or so, you would have been negative in the S&P for the year rather than positive and they were driving returns. That appears to have softened a little bit in November and December. From what I can tell, there's been a reversion to the mean where small caps and mid-caps have been a bit undervalued. The mega caps have seemed to slow a bit, at least in some circumstances. Jake, maybe starting with you, especially from the tech perspective, any reason you think there's been such a run in these largest technology players? And do you see a reversion to the mean now where you feel like they've got to come back to Earth and that some of the smaller players actually have an opportunity to accelerate now? Or do you think this is structural like the big tech players just have such a structural advantage that they're destined to segregate themselves from the rest of the market? What do you think when you look at how those have moved in public markets?
Jake Thompsen: Yeah, I think two things are going on with the big tech companies. One is they've done a very, very good job of cost cutting. Right. These are high operating leverage types of companies where you're able to cut some things without necessarily sacrificing your core business. And a lot of those magnificent seven companies, for instance, have done that very effectively. And then you're just printing cash. So I think that was having their unique and being the types of companies they are to be able to have that kind of outcome. But two, if you look at the names, I mean, Nvidia is in there, right? You mentioned them earlier. That is squarely a graphical processing unit play, right? That's the core horsepower behind a lot of artificial intelligence and a lot of the other ones, whether it's Meta or Microsoft or others, have to do with the artificial intelligence play that I think people are excited about. So I do think it's more thematic of what investors are interested in. Right? The average return of tech tends to be about 6% a year versus 6% of the market. And so I think there was some aversion of the mean when everything tanked a whole lot starting to come back. But the ones that are coming back the most are being driven by that cost cutting and by some of the trends in what people are excited about right now.
John Coleman: Ross, are you guys getting more optimistic that small and mid-caps or frankly, any stocks other than these kind of 10 or 20 largest technology names are going to be able to accelerate? Or do you think this trend is going to continue?
Ross Roggensack: Well, with Charlie Munger's passing, it was just really interesting to read through and remember the effect he had on Warren Buffett. And that was, you know, Buffett's approach was this cigar butt deep value, there's a price for everything. And I think Munger came along and said and taught him that quality matters. The right price is good, but it has to be a high quality company. And I do think that I'm a little worried about large tech. Just because of the price doesn't mean they're not good companies, doesn't mean Apple won't do really well. But Apple is, I don't know, 30 times earnings and it's growing at 5%. I mean, at some point those things have to match. Same with Microsoft. It's it's a great company. It's 36 or 37 times. And it's I don't know what the growth rate is, Jake, is ten might be ten. So I mean, I think that just like private and venture price matters and yes, money will come back to small and mid-caps and I think now is a really good time to shop there. But I wouldn't do it just on price. I think back to Munger. If you can find high quality small and mid-cap companies, they're probably very cheap right now because all the money is going to Nvidia and Microsoft and Apple and that. And so I think that there's going to be lots of values, lots of good money made in small and mid-cap over the next 3 to 5 years. Certainly.
John Coleman: I want to conclude the program with two questions. We're going to turn to the last one in a moment, which is just what the Christmas season means to you. We usually end the program by asking people what they're learning through Scripture. I want to mix that up a bit today as Christmas approaches and just ask kind of what is Christmas mean to you? Before we do that, both of you have been leaders in faith driven investing for quite some time now. Despite his youthful appearance, Jake Thompsen was an early mover in this space, has been a real pioneer in the venture side of the business, as well as just helping the full ecosystem flourish. My observation, perhaps one lived within this bubble is that faith driven investing seems to be kind of peeking into the mainstream right now, that it's starting to become more of a topic that's well known through the industry. More people are getting into it. More managers are attempting to manage things in a faith driven way. What are your observations right now about the mainstreaming of faith driven investing, Jake, and what's the next frontier in your mind?
Jake Thompsen: I do think there's a tip of the spear that sure feels like it's in the season. And I'd say the most exciting time to be a part of something like this because it's been professionalized in a lot of ways and yet isn't totally mainstream yet. And that's a really interesting place to be as it's growing. And yet your point, a lot more managers that have been at household name VCs or investment banks, just very excellent people are getting into it and leading from a faith driven perspective. You have more and more public vehicles that are out there. They're spreading the word on how to be able to do this in a faith driven way that everyday people, everyday retail investors can be a part of as well. And everywhere you look, everything's moving in that direction. Even a lot of the more secular areas, whether they're banks or the impact investing, whatever, now have faith groups not because they're necessarily faith driven, but because they recognize this is an emerging asset class. And that I think is very, very interesting. But now it's incumbent upon everybody in this space to be able to show, well, now that we're x number of years in. Right. And that you can measure that as several hundred years. Right by some measures or kind of six, seven, eight years by other measures. And it's getting to the point where the most recent iteration really has to show the proof is in the pudding. The performance has to be there, the excellence has to be there. It's more than just the sizzle, right? It's going to be gauged on the stake, so to speak. Just like a venture stage company where there's a lot of hype, a lot of excitement, that's a good thing. But you need to be able to translate that into the fundamentals. And we're at the exciting space that we're starting to show that as an industry in the sector. More folks are coming in there. So I think there's a lot of a lot of tailwinds going in the space that I think is are really interesting. Very, very small. So it's still people that are getting into it today are still going to be the pioneers in 10 or 20 years for sure.
John Coleman: Ross, what are you seeing? I mean, you've been around this industry about as long as anyone at this point. I mean, what are you seeing right now? Are you encouraged by what's happening in the marketplace right now and what's the next frontier?
Ross Roggensack: Yeah, well, I'm the oldest in my firm by 20 years. And I think that the generation behind me has a great desire to change the world. And I think that the ESG movement overplayed its hand. I think the pendulum swung way too far. And I think some people are seeing that and reacting to that and wondering what else they can do. We talked about Sam Altman and the governance issue there. There's probably some attachment to ESG there. And I think that we're waking up to the fact that that didn't change the world quite the way we wanted to change the world. And I think that there's so much talent coming in our direction is so exciting to see. And the conversations I have with even compared to five years ago with faith driven organizations is way easier now. It was conceptual five years ago, Now it's reality and now it's as Jake said, Now I think we are seeing quality. It's rising and we are producing returns every bit as good as the Second World gets while taking this concentrated capital and slowly changing the world. And it's it's really exciting.
John Coleman: Love it. And today, instead of concluding with scripture, I'm going to I'm going to go off script. I think Henry would be okay with that. Henry told me when I took on this podcast.
Ross Roggensack: He doesn't have a script.
John Coleman: No Henry does not. But he said, John, you always got to end with this scripture thing because it's so important. And I agree that's important given the season. I thought we'd take a pass on that. And you can use Scripture or not that, Jake. Obviously the Christmas season is one that's just so meaningful to people of faith, to people of Christian faith. What does it mean to you? How do you think about this season as it approaches?
Jake Thompsen: You know, it becomes meaningful in a different way now that we have young kids, right? We got kids that are at that age where there's just so much wonder to the season, right? And it's appropriate wonder, it's sweet and it's innocent. And there's a certain part of me that it's pretty easy to think ahead. And like, man, all that wonder you have is going be crushed by the world, right? That's the part of growing up. And yet what Christmas represents is that we don't just commit ourselves to some philosophy or some way of living, and we commit ourselves to this narrative that God has authored. There's a beginning of what he did and what he is doing, and there's an end that he's going to come back and make all things new and we'll be resurrected in worship and work and be together on a new redeemed set, right Earth. I think he will look at us much like I look at my kids without the bittersweet sadness of what might come, whereas we have a wonder of everything that he sets, right? And Christmases for us. For me, it's a reminder of his role in that story and the promise of him coming and making that right. And what we do talk a lot in our family because our kids are going through something in the church in school that Zephaniah 3:17 that says the Lord, your God is with you, He's mighty to save. He'll take great delight in you. He will quiet you his love. He will rejoice over you with singing. I think this is an area or a time of the year. We're just stepping back. Think man, God loves us so much you can't help but just bust out in song. That's just the carols and all the rest. That comes together in a really poignant way for me and for my family.
John Coleman: Awesome word, Ross. You want to close us out with your thoughts?
Ross Roggensack: Yeah, I think that just the miracle that God was made into flesh, that he came to us, that we don't have to go to him. Just that simple fact is just remarkable. And then just reflecting. I always reflect on Luke 2 and just the angels that tell us to not to fear. Fear not, you know, they bring good news of great joy. And, you know, that's enough for me that he came down to us that we don't have to strive to get to him. He's right here. He came here. It's a great reminder.
John Coleman: Hallelujah. Hallelujah. Well look, Ross Roggensack, Oak City Consulting, Jake Thompsen, sovereign's capital. So grateful to you all being on today and to all of our listeners, a merry Christmas. We hope This is an amazing season of flourishing for you all. We hope that you can reflect on the true meaning of this season, on the sacrifice that God made for us, on the just the miracle of the incarnation of Jesus Christ and on the hope that this represents for mankind. And we will see you in the New Year with another faith driven investor podcast. Take care.
Ross Roggensack: Amen Merry Christmas.
Jake Thompsen: Merry Christmas.