Have you ever worried about protecting your wealth during a volatile election year? Wondering what the rest of 2024 holds for the market? In this episode, Toby Mathis, Esq. chats with Kevin Simpson, founder and chief investment officer of Capital Wealth Planning, LLC. Kevin is a $10.3 billion wealth management expert, and shares insights from his book “Walk Toward Wealth” on navigating market uncertainty. Learn how to manage risk, write covered calls to hedge against volatility, and discover the surprising truth about election year performance. Kevin will also delve into the Madoff scandal, helping you identify a trustworthy custodian for your hard-earned money. Don’t miss this opportunity to gain valuable advice and protect your financial future!
Highlights/Topics:
- Market volatility in an election year
- Predictions for the market through the end of 2024
- What’s driving the earnings?
- Statistics around the economy
- Capital Wealth manages $10.3 Billion
- Managing risk
- Writing covered calls, managing volatility
- How presidential elections affect the market
- Stories from Kevin’s book “Walk Toward Wealth”
- What duty should you be looking for?
- The Madoff scheme, finding a reputable custodian
- Advice for Kevin’s younger self
- Send us your questions and ideas for future show topics!
Resources:
Schedule Your FREE Consultation
Tax and Asset Protection Events
Full Episode Transcript:
Toby: Hey guys, Toby Mathis here, and I’m joined by Kevin Simpson of Capital Wealth Planning. First off, welcome, Kevin.
Kevin: Thanks for having me, Toby. Good to see you again.
Toby: It’s always great to see you. If you guys have seen Kevin on our podcast and on YouTube before, you know that he’s just a rockstar as far as knowledge and knowing the market. We’re going to dive right in. We’re going into a presidential election year or in a presidential election year. We have many months to go in this year, but it’s getting there quickly. I want to pick your brain first off of what we should be thinking of going into this election and how an investor should be thinking about the end of the year.
Kevinn: I think that really is the point, Toby. Thinking about things not reacting emotionally. When we think about our finances, it’s so difficult to separate emotion from the equation because next to our health and our families, money’s pretty high up there on the important totem pole. In a presidential election year, if you look back to 2020 or 2016—just keeping it relatively current—we saw tremendous volatility, tremendous headline risk will absolutely be in the playbook again this year.
If we can separate the politics from it (pun intended), then we can look at things from a clearer mathematical perspective, which is that the stock market can do well with either one of these candidates serving a four year term. Then you’re not talking about an eight-year scenario, you’re talking about a lame duck day one. If you have some divisiveness within the government, that would be the ideal scenario for the stock market.
Procter & Gamble, for example, a stock that we own in the portfolio, the person that sits in the White House isn’t going to affect how many tubes of toothpastes we’re buying or the price of that toothpaste. The emotions will run hot. The headlines will be there. The cycle will start early because there’s a debate, I believe in June, which is early. Then we’ll have the entire summer and fall to listen to lots and lots of political-speak.
But really what moves the markets more than anything right now are interest rates, inflation, and economic growth. The pillars that have kept the market in place, the rally, the strong bull market since October are still there. It’s still up to the bears to prove the bulls wrong. Granted, everything’s priced pretty close to perfection, but the enthusiasm between AI and Mega Cap Tech, that’s still there. People are still enthusiastic about it, and for lots of good reasons.
Economic growth is still intact. We’re still seeing production. It’s slowing a little bit, which of course will when you have restrictive Fed policy. But the Fed policy isn’t a question of if interest rates are going to come down. Now it’s just a question of when will they come down.
It should also be why are they coming down. Because we want to make sure that with a soft landing, you can navigate economic growth that’s slowing, but not falling off a cliff. If for some reason, we slip into a recession, which is still a possibility, although not our base case, then the federal government will aggressively cut rates, but it will be too late.
I feel like they’re seeing inflation come down. We had CPI and PPI that were very constructive for May, for a rate cut thesis. Will get PCE and then we’ll get June numbers. But I think the Fed would like to cut.
There was almost a pivot recently where Kashkari, who was just a few months ago talking about rate hikes, conceded that there’s probably a strong possibility of a rate cut this year. Whether we get one in October and one in December or we just wait until December, it doesn’t change the long-term thesis for investing. It’s a scenario where rate cuts will be very constructive both for growth stocks, as well as for value dividend stocks, and for fixed income for that matter.
We’re looking at a scenario where all the things are in place. Earnings are good. The economy is still moving along. The jobs market is still resilient. AI enthusiasm is still really high, and the next move by the Fed will be a cut. Those are the things that’ll make the stock market continue to trend higher.
Now we’ll go a whole lot higher between now and the end of the year? Probably not. Will there be volatility with respect to the presidential election? Absolutely. I would think that there’ll be opportunities and pullbacks for investors to add to the really great investments that they have in their portfolios or things that they have on their wishlist. But they’ll be able to get in any 5% or 10% pullback that may happen between now and the end of the year. But I do think the market winds up higher than where we are today.
Toby: You believe the market at the end of the year is going to be higher than it is. Right now, we’re at all-time highs, right?
Kevin: Yeah. It’s pretty crazy when you think about that too and when you say it out loud because it’s a very high multiple that we’re pricing this on. Thinking about market expectations is a relatively simple calculus at its base level. How much money in earnings does the S&P generate? And then what multiple do you put on it?
If they’re going to generate $275 and you put a 20 or 21 multiple on it, which is high historically, no doubt about it, that gets you somewhere in the $5600 or $5700 range. The second half of the year, which will be in July very soon, we’ll be looking at 2025 earnings. We won’t be talking about 2024 earnings and that’s why you see a lot of strategists coming out and increasing their year-end price targets to $5600. Simple mathematics.
Some more bullish are calling for $6000 and maybe there comes a point in time when you start factoring 2026 earnings, but that may be a little bit further into the future than just year-end.
Toby: What do you think the big driver of these earnings are? At its core, is it inflation? Is it hey, we’re just more efficient? Is it AI? What’s driving this thing?
Kevin: I don’t think AI has had the effect yet on earnings that we know that we’ll see, or that we will feel really strongly that we’ll see. I think it’s still the scenario where, post-pandemic, you have pricing power.
Econ 101, you put prices higher and sales go down. That didn’t really happen during the pandemic or the post-pandemic, because we were so apt to want to spend and we had some money in our pockets.
If you look at retail sales last week, they were a little lighter than expected. If you look at the consumer sentiment number, that’s been trending down for three months. Consumer sentiments are one thing that’s how people feel. Retail sales are more important because that’s what people spend, but we’re still spending.
Four percent of unemployment is still really good from an economic perspective, but higher than it was over the past year or so. The labor market is still creating a lot of jobs. Jolts doesn’t have quite the same opening, but the economy is really resilient. It means if you want a job, you can get one.
If you’re a consumer and the consumer spending is what fuels the economy, then in government spending then you can spend because you can work two jobs if you want to make sure that you’ve got enough for discretionary income. We’re in a scenario where earnings were good. They were a little bit better than expected, but I don’t think it has the AI to thank for that just yet.
Toby: Fair enough. Now let’s talk a little bit about strategy and what you guys do. Just to give folks an idea, how much money do you guys actively manage over there at Capital Wealth Planning?
Kevin: We have about $10.3 billion under management. Most of it’s in our flagship strategy that we’ll probably talk about, Toby. It’s good old fashioned investing, just finding really good companies that have profitable businesses that distribute cash flow to shareholders. If you have a business that generates more cash flow next year than it did this year, if its profit margins are increasing, its revenues are increasing, and generally over a full market cycle, you’ll see its share price head in the right direction also. That’s how we invest. We like to keep it simple.
Toby: I am going to do a real simple recommendation. See this little guy right here, Walk Toward Wealth. That’s your book. If somebody is interested in learning the way that Capital Wealth Planning and Kevin actually invest, I would strongly recommend that you get this. Is it on Amazon?
Kevin: Yes, it is. It’s available in all your online booksellers.
Toby: I want to talk a little bit about it because it actually will give somebody an idea of your core principles that drive you. Give me the thumbnail sketch of how you guys manage money and I am going to put in a straight up plug. You could invest in what Kevin Simpson does by simply going to an ETF called DIVO. I’ll say that and I’ll get out of the way. Tell me what your core principles are.
Kevin: We touched on it. Identifying the simplicity of profitable businesses. Maybe there’s a little bit more to it than just keeping it that basic, but not that much. What we want to create is a portfolio of 25–30 stocks, Toby. We don’t want to have a portfolio that’s so diversified that you don’t even know what you own. We want people to be able to look at the holdings very, very quickly, and understand exactly what it is that they’re investing in 25–30 stocks across all market sectors. No market timing, no sector bets, even to the extent that we may have a strong conviction on any one particular stock, we won’t allocate more than 5% per position.
Everything that we’re doing is trying to be focused on risk adjusted return, risk management. When we’re investing, we only think about risk when stocks go down and never think about it on the upside. But as professional portfolio managers, making sure that risk management is the number one process that’s governing everything you’re doing can really help when you have declining markets or volatility. And we tend to stick with S&P 100 names. They’re big, mature companies.
The common theme throughout every stock that we invest in, it’s going to pay a dividend and it’s going to have a very strong history of increasing those dividends. If we can have a company increasing its dividends because it’s increasing its earnings, then it goes back to the idea that you should see total return and price appreciation over time. We’re looking for about a 10% compounding annual growth rate on that dividend. That’s the target and it’s a pretty lofty target.
But for the past 10, 11, 12 years as we’ve been managing the portfolio as an SMA, we’ve been able to garner nine and change, and that’s a big dividend growth. If you think about an inflationary hedge, if you have a portfolio and we get about 2%–3% from dividends, that’s pretty much the dividend yield, but that’s increasing at 9% and changing every year. Whether inflation’s at 9%, 3%, or it gets back to 2%, that’s the magic in our strategy. That’s the secret sauce. It’s not that secret, but I think that’s really the engine that fuels the portfolio.
We also, in keeping with the risk mitigation mindset, will sprinkle in some covered call writing. So we’ll use volatility to harvest those opportunities, not systematically across the board. Not on any index, we don’t leverage, we don’t use margin, but we’ll write covered calls on a handful of positions on a monthly basis in an attempt to reduce volatility and to reduce downside capture so that if we can use covered calls as a very modest hedge, that will allow us to, not willing, participate in less of down markets.
Historically, we’ve done that. We’ve been able to mitigate a lot of the downside. There’s no free lunch in life. If you write covered calls to protect some of the downside middle, you’re going to forfeit a little bit of the upside. But I always think it’s much more important not to have big losses than to try to make the most money. We don’t need to outperform the upside. We just need very consistent returns and the covered calls, even to the sometimes frugal extent in which we will utilize them, will generate another 2% or 3%, maybe as much as 4%, in the volatile year in cash flow.
When you combine the option premium with the dividends, now we’re kicking out 4% or 5%, maybe as much as 6% a year, whether the market’s up, down, or sideways. If we’re able to use that as a compounding factor, dividend reinvestment, just old school dollar cost averaging, I think that’s the true secret to wealth creation.
Toby: I want to emphasize that because you just mentioned there are three ways that you’re making money on a stock. I don’t want that to go on unheard to folks that are getting out there who are so used to growth. Frankly, the S&P could be the S&P 500, could be the S&P 7, or the S&P 5 right now. I mean, all of this growth is really concentrated.
At the end of the day, there’s always money that’s being paid out and you’re receiving the dividend that’s the payout to the shareholders. You’re also receiving the covered call premium and I’ll ask you to explain that in a second so that people who maybe aren’t familiar understand what that is. Then you’re getting appreciation.
Kevin: Hopefully.
Toby: Yeah, hopefully they appreciate it. I’m sure there are situations where your stock went the other way and you had a company that cut its dividend and dropped.
Kevin: Humbly speaking, sometimes we buy a stock and it doesn’t always go up. We just need to be right more times than we’re wrong statistically to perform for our investors. We’re not always right.
Toby: It’s easier when you’re making money consistently. Again that you’re speaking my language because I always say like, hey, if you’re getting the profit year after year and you own a stock for 20 years, there’s a good chance it’s free. It paid you back what you paid and everything’s gravy. What’s the idea of this covered call writing though? And what type of money are we talking about that you’re able to get?
Kevin: The covered calls are a piece that tend to work best when we need them most in periods of higher volatility or declining markets without getting too wonky and breaking down the Black Scholes model and boring everyone on the podcast. The volatility is a huge component in option pricing. I think there are three main components: price, time, and volatility.
The price, we can pick. If we own a stock that’s $100 a share and we write a covered call at $105, we’re selecting that $5 potential upside, 5% potential upside capture. We can select that.
We can also select the time. Usually we’re writing calls for two, three, or four weeks. That’s it. We’re not going out longer term. We think we can really control the portfolio by keeping things short term, but by controlling the price and the time, we’re subject to the whims of volatility.
The higher the volatility as measured by the VIX in this simple example the greater the premium. The lower the VIX, the lower the premium. It is not that simple, but it’s not that much more complicated.
You can imagine that there’s typically an inverse relationship between volatility and market performance. Not always the case, but over the longer term, it’s a pretty consistent trend. If you see really high volatility, we’re usually in a volatile, scary, or choppy, and in many cases down market. That’s where it comes up with the nickname, the fear indicator. If volatility is very muted, usually you’ll see the stock market trending in the right direction.
We analyze it on a position by position basis every day. When there’s a little volatility behind the security for whatever reason, then we can take advantage of that, write a covered call. We still have some upside capture and we have a little bit of a hedge from the premium we bring in.
Those hedges are modest. I mean, literally, we’re talking 2%–3%, or 4%, a year annualized total premium would be, it would be a big number. But 2%–3% added to a 2%–3% dividend getting 4%–5% and that 6% potential, not a huge stretch, is a very, very consistent cash flow.
We’re writing covered calls to hedge, reduce volatility, and smooth out the ride. We enjoy a modest by-product of cash flow in addition to the dividend.
Toby: In an election year where we have higher than normal volatility, we’re expecting some volatility, is this an opportunity then for those of you who are in this world of covered call writing?
Kevin: I’ll be very surprised if we’re having a conversation in a few months where we’ve harvested that volatility. Now there’s very little of all out there as we sit here today, but again, hearing back to 2020 and 2016 and having 32 years of experience doing this presidential election, this one in particular, will introduce volatility into the world. I’ll be shocked if that’s not the case.
Toby: I will be too. Then to give everybody’s nerves a little bit of a massage. Everything I’ve seen statistically is, especially if you have a mixed Congress and the White House aren’t the same party, you do very well always after an election year. It seems like the market tends to do well. If we start cutting interest rates, it seems to bode well at the end of the year that next year is going to be a continued upswing.
Kevin: Anything can happen geopolitically. We had a COVID crash. We’d had a great recession with a financial crisis. We’ve seen things happen. But if history is, again, an indicator of what we should expect post-presidential election, rate cutting cycle, non recession, soft landing, I don’t know if it’s ever happened before. Some people said it did in ’95. I was in the business in ’95. It didn’t seem like quite the same setup. We weren’t coming off a zero-interest rate base.
But be that as it may, if the tea leaves give us any indication of what to expect, it should be a constructive time for equities. Eventually you assume you pay the piper and we go into a recession at some point, but that doesn’t seem to be on the near term horizon and that’s a great thing.
Toby: Absolutely and you mentioned history. Let’s talk a little bit about history. I read your book and there were a couple of things I wanted to ask you about. First off, there was the bad broker. I always think of you telling a story about a guy who was just writing people for penny stocks and then he ate them because somebody didn’t send him a check. I just love that story. Can you give that in a nutshell?
Kevin: In the old days, when we were stockbrokers, we would make trades on the behalf of clients, sometimes at their discretion, sometimes at the recommendation of a firm. Some recommendations were better than others and some advisors, some old-school customer men stockbrokers were better than others.
There was a time period in which there was a bad broker and he would really harass his clients. That’s a polite way of suggesting how the relationship was from my perspective. They would make trade recommendations or he would execute and fulfill trades that the clients would instruct him on and you would have time to settle a trade. You would buy 100 shares of AT&T, IBM, and you’d mail a check to the brokerage firm and they would settle the transaction.
Once in a while, if it was a smaller stock that maybe wasn’t that AT&T or IBM back then, but it was something that we may not have heard of. If you think of the main trades today or some of the dotcom stocks in 2000, you can think of something like that. Things that weren’t that great, but maybe they had one in a million potential to actually go higher. The stock wasn’t higher.
The client who had executed the trade was to send a check in to the advisor to pay for it and the advisor was pretty nasty to the client. The advisor had made the recommendation. It was really riding the client and making a scene of it to the other folks in the room.
He gets an envelope in the mail from the client that he’s presuming is the check to settle for the trade because just days before the client had said that I’m sending you your check. Again, he continued to be really mean to the individual and made a scene of getting this envelope, marching around like a peacock in the office and opening up the envelope.
In it is the advisor’s check, Mr. X’s check, but it wasn’t a check made out to the brokerage firm to secure the transaction. It was literally just a piece of paper with a check on it. It said that his name was on the check. That was a good lesson for somebody to learn to make sure you’re always polite to people and you take their finances very, very seriously.
If you’re going to make a recommendation, you’re not always going to be right. That’s a reality, but you want to make sure you have really good fundamentals and a good rationale behind it and you don’t want to take people for granted.
Toby: Don’t force feed them. I keep thinking of a boiler room or something like the guy’s on the phone and the guy’s sweating.
Kevin: This individual should have been in the movie. He’s the same person.
Toby: Probably not going to make it as a broker.
Kevin: He was very shortly thereafter removed from the industry.
Toby: It is a good time to just point out the difference, and your book does a good job of laying out the difference between suitability standards, fiduciary standards, and things like that. When somebody is dealing with somebody and a lot of folks are out there and they think they get an advisor or they’re talking to a broker or whatnot, what are the duties that they are actually owed and what should you be looking for as far as that duty?
Kevin: Yeah, it’s always a good question because we have new investors coming into the marketplace every day. The most important thing I always feel is knowing where your money is. Where’s my money? And that goes to the custodian. Wherever or whatever financial advisor you’re working with, you want to make sure that they have a reputable custodian, and that the money is with the custodian, not with a financial advisor. That was a mistake that I think most of, if not all, of Bernie Madoff’s clients fell victim to.
Toby: That was weird because usually like if you’re at a Schwab, they’re not the custodian. There’s a third party. Then Bernie Madoff was his own custodian. If that wasn’t a big enough red flag, getting dot matrix statements wasn’t a big enough red flag. It was just bizarre, right?
Kevin: Almost impossible to believe and maybe that’s why it took so long to bring down that house of cards because it just was so outlandish. But if you have a major financial institution, your financial advisor can work at that institution. You just want to make sure that the custodian is one in which you’re aware of and go online and see things. Toby, to your point, you’re not getting a dot matrix statement in 2024.
Whether you work on a commission basis or a fee basis, you want to make sure that the person you’re working with, that they have very high ethics, that you can trust them. Trust is the most important factor, more so than even I think investment management in a lot of cases because financial advisors these days are so important for every individual, not just for finding a stock to invest in, but the whole holistic financial planning approach and bringing in the estate people, tax people.
Even for smaller and newer investors, the foundation being built properly out of the gate is going to be just so powerful as you proceed through life. Know where your money is and find someone that you get along with, that you like, and that you trust.
Toby: Do you believe you work with fiduciaries folks that have to put your needs above their own? Is that a major component of it?
Kevin: It sure is. But I think sometimes we see some commercials that make it implicit that there’s only one firm out there that’s a fiduciary. He just has a lot more money than a lot of the financial advisors we work with. In fact, by a lot more this week. But yes, I think a fiduciary responsibility to put your client’s best interest first is paramount and the advisors that we work with, all of them act in the best interest of their clients. That’s incredibly important.
Toby: And I agree, and I’m always looking at these folks that are on the Internet, telling people to do strange things. I’m like, at the end of the day, you’re paying somebody, make sure that they have to put your interest before their own. CPAs, attorneys, it goes without saying are fiduciaries. On the advisor side, I think you’re probably mentioning RIAs, registered investment advisory firms. I think they’re all fiduciaries now. CFPs are all fiduciaries.
Kevin: Even at the wirehouses, they’re all operating in that same business model so it’s not specific to RIAs. I mean, you’re looking for a qualified financial advisor. All of the best ones will be fiduciaries and most of them will be CFPs. When we’re thinking about things that sound crazy on the Internet we probably don’t want to follow that advice, and we don’t want to be paying for things on the Internet that are hot tips.
There’s a counterfeit version of me that exists on the internet. That’s out there trying to sell stock picks if you can believe that. Make sure you’re not falling for some of the oldest tricks in the book, that P.T. Barnum idea that there’s a sucker born every day is true, but you don’t have to be that sucker.
Toby: Every time somebody says you can make 100% or you can double your money, you can be a day trader and all those things, I immediately say, if that was true, they wouldn’t be selling it to you.
Kevin: Exactly.
Toby: It would just be sitting there compounding their money so quickly that they’d all be billionaires. It’s a point well taken.
Moving on just because I know we’re probably getting close to time. I want to ask you a very odd question, but something that I’ll be interested in your answer. Reading through your book, there seems to be a theme. You had some good mentors, I think your grandmother, and then if I say his name, was it Bill Berlin?
Kevin: Yeah.
Toby: We all need good mentors, but thinking of good mentors, if you could go back to your 16 year old self—I grew up outside of Philadelphia in a place called Media for part of my life, and you were a Philly boy, I believe—what would you tell that young man? The young Kevin Simpson at 16, what would you go back and say to him?
Kevin: I would have listened to Bill much more than I did. He’s passed on now, but I had a chance to meet with him just prior to COVID and it was very emotional and a really good ending. I would listen and not talk as much as I talked and didn’t listen. Now, eventually, you learn things and you mature, but I think I would have matured a whole lot faster if I had done a lot more listening and a lot less talking.
Toby: Did he really kick you out of the office and make you put on a long-sleeved shirt and a suit?
Kevin: I was in a short sleeved shirt with a collar because we were scheduled to have a golf outing with clients in the afternoon, and I was sitting at my desk with long pants and a golf shirt with a collar with short sleeves. He came up behind me and said, do you have a short-sleeved jacket to go with that shirt? I said, what are you talking about? He’s like, well, unless you have a short-sleeved suit coat to go with your short-sleeved shirt, I suggest you go home and put the right shirt on. I said, well, it’s a golf shirt with a collar and you said that we’re leaving to go to this golf event. He’s like, yeah, we are after lunch. After lunch, you can take your suit coat off and your long sleeve shirt, and you can put that on outside of the office. I had to go home and change.
Toby: I don’t think we’re getting much of that anymore. I love it. Your 16 year old self, if you’re going to go in there, you’re going to say listen to Bill.
Kevin: And maybe my parents a little more than I did too, if we’re going back.
Toby: Fair enough. I’m just going to put this out there, go get Walk Towards Wealth. Fantastic book. If you want to invest the Capital Wealth Planning Way, the Kevin Simpson way, there are two right now. There are two ETFs that you guys have and then you have a third one coming up?
Kevin: We have DIVO, which is our flagship. That is everything that we’ve talked about dividends, dividend growth, covered call writing, and domestic blue chip companies. IDVO is a sister fund to that utilizing all of the same techniques, but allocating to international stocks outside of the U.S. Not to say that you should or shouldn’t invest internationally. Lots of financial advisors will have an allocation to international investing. I thought if you’re going to have to do it, why not use our methodology where you’d have the covered call component that can still be a little bit of a hedge.
Then next month, we’re going to come out with QDVO which will be a more aggressive version. We’ve been running it as a separately managed account space, more on the cues, the Russell 1000 growth, the magnificent seven/five and they do have really great option premise because there’s more volatility there.
If you want to be invested in that space. And you want a little bit of a parachute, just a little bit of a cushion covered calls can modestly reduce some of that volatility. We’ll have three exchange traded funds available in the market by the end of the summer.
Toby: Perfect. Well, I really appreciate your time today. Hopefully this gives people a little bit of pause going into the presidential election. They don’t put all their money in cash and sit on it so that they feel a little bit better. I just really appreciate your time, Kevin.
Kevin: Hey, Toby, next summer, we’ll talk about the cautious bull still walking towards wealth if the sequel comes out.
Toby: Oh, perfect.
