Growth Investing Podcast #1 - Validus Growth (2024)

John Dean All right. We welcome you to the initial edition, the first episode kicking off of the Growth Investing podcast. My name is Johnny Dean. I’m here as host of the podcast, but I got a couple of people who are going to be driving this thing and driving it very well, I might add. I want to welcome two people from Validus Growth Investing. We’ll start off with we’ve got Jerry Murphy, Chief Executive Officer of Validus Growth Investing and then the Chief Investment Officer. Mark Scalzo. I’ll start with you, Jerry. Welcome to the show. I appreciate you being here and maybe give us a little insight into what you do very quickly and a little bit about Validus.

Jerry Murphey Mark and I have gone been together for about ten plus years and we started when Mark rolled out Validus and I was running a company that Mark became a sub advisor. And then we just thought, we work so well together. Let’s just keep going and so here we are.

John Dean Keep doing this on a regular basis. All right. Well, good for you, Mark Scalzo. Of course, you’re a long time friend of mine, and I’ve had you on many radio and TV shows, so I know you quite well. But for those who don’t just fill you in a little bit on, you’re more on the investing side.

Mark Scalzo Yeah, I’m on the investing side. It’s great to be back in the studio again with you, John. Yeah, I always enjoy it so much. Yeah. So I’m in the investments that I founded Validus ten years ago, ten plus years ago, 2012. With the idea of focusing on growth investments and finding growth inflections over time that that lead to really attractive opportunities for clients. So that’s what we’re, that’s what we do and we do in a lot of different formats. But essentially that’s what we do.

John Dean Well, you really, you get your research hats on and you guys really that’s a specialty that I would never be able to do. So it’s nice to have people who understand how this works. Let’s get right to the topic here, which is understanding that understanding the VIX. V-I-X. Now the VIX is the CBOE is the volatility index. Jerry, if you would explain, I kind of did, but explain what that is. And you know, when it started and why it started.

Jerry Murphey Okay. Okay, so, so, you know, it actually hit me a a week or two ago when this came up thinking about, you know, writing this blog is they talk about it a lot these days, but right now they’re talking a heck of a about, you.

John Dean Know, of course.

Jerry Murphey And so I did I actually didn’t know. I mean, I you know, but you don’t know because you never sit down and really read. And I look back on it and realize it’s only been around since 2004. Yeah. And you think about investing like. Like today. If something goes back to 1990, it’s all right. Yeah. And so it was it started in, like you said, by the C book CBOE. And it was created for traders to trade on volatility. How can we trade? And, you know, we’ll get into it, but it uses the S&P or the spider, and it allows them to hedge that by puts and calls in that type of thing based on what they think the market’s going to do.

John Dean So it gives them some kind of metric, some kind of measure. They say, well, the VIX is sitting at this number, which means that it’s either very volatile right now, or expected to be very volatile or not so volatile over the next 30 days, six months, year, whatever it is. That’s right. What it is.

Jerry Murphey Yes.

John Dean Okay. Now, if you would take it. I threw it. I said there’s a number associated with the VIX and I’ll get to you in one second Mark. But Jerry, if want to jump in? Well, yeah.

Mark Scalzo It’s interesting that I think that that volatility is generally associated with risk. And and the VIX is sometimes called the fear gauge, because the idea is, is that the higher it goes, the more volatility in the market. And therefore, it demonstrates a kind of concern in the marketplace. And it’s so I think it was a way it started as a way for investors, traders to manage some of the risk in their in their portfolios. And, you know, imagine they’ve got massive, massive books over all kinds of asset classes. So they needed something to measure that, that the risks they were taking sort of across all those asset classes, at least, at least in terms of their equity exposure.

John Dean Sure. It’s nice to have something to measure things by, right. To at least point to something. So Jerry, if you would, take VIX number, explain what it is if you can. Okay. For people listening and maybe talk for just a little bit about how the I guess the math works.

Jerry Murphey Sure. And I, I just got back into the country, so I don’t know what the VIX is today, but let’s just imagine it’s at 20.

Mark Scalzo It’s down a little bit today. Oh, yeah, in the high, high twenties.

Jerry Murphey Okay. So twenties is a pretty calm number. That’s a good number. We’d like to see it at 20. Right Mark?

Mark Scalzo We’d like to see below 20.

Jerry Murphey Yeah, but all I’m saying, it’s not 30 and not 40, you know, and so it’s at 20. What 20 means is that in a one year period, the number is going to be 20 either how up or down from where the the S&P is right now. And so.

John Dean What like a percentage, you’re saying.

Jerry Murphey As a percentage, right. So you’re saying that we believe the the S&P is going to be either up 20% or down 20% that range or a year over a 12 month period.

John Dean Okay. Alright

Jerry Murphey Now, they don’t traded on a 12 month period. They traded on a 30 day period. The traders do they’re trying to say what’s going to happen the next 30 days.

John Dean Are these like options traders then.

Jerry Murphey Options trader. Right. And what are they doing? They’re saying that we own these stocks and it looks bad out there. Let’s just say it’s really high. It looks bad out there. What can we do? We can just sell, sell and run for the hills or we can go out and buy some puts and takes some of the risk off based on this volatility index. And that’s kind of how they use it. Right. But people watch television and they go, Oh, the VIX is high, this and that, and it’s not really meaningful most of the time when you see them talking about the way they do on television.

John Dean Um, yeah.

Mark Scalzo And it’s been low. The, the VIX, we’ve, we’ve gone through a period other than a financial crisis or COVID or something major, some, some really connect. You could call it potentially a black swan type event. Other than that, volatility has been unusually low over the last ten years since the financial crisis. Was it.

John Dean Because they kind of righted the ship back in 2000 whatever.

Mark Scalzo We had the Fed is as a tailwind providing, you know, lots of liquidity.

John Dean Interest rate cuts.

Mark Scalzo Easy monetary policy. And so in that environment we went through a period where the VIX and volatility overall was lower than normal. And we kind of got used to it. And what’s happening now is now the Fed is taking away some now. Now we’re going from easy to tightening and less liquidity in the marketplace. And so we would we would expect and we’re seeing more volatility than we’ve been used to historically. But we kind of got used to a lower level that we should have never gotten used to.

John Dean So the fear relative to what it used to be is a lot higher in other words.

Mark Scalzo Exactly.

John Dean If you want to put fear on the fear index. Well, let me ask you guys this then. Do investors, as a rule, I mean, some do they prefer less volatility or do they ever look at volatility as something to take advantage.

Mark Scalzo An opportunity. Yeah. Yeah. Well, you certainly should try to look at it from that perspective. And and when the volatility is higher, I think from an in the way we would think about it is that you need to get rewarded for for that additional uncertainty that’s in the marketplace. So whatever investment you make should, the expectations should be that you would be rewarded..

Jerry Murphey For the risk.

Mark Scalzo Yeah. For taking that additional risk or for that greater uncertain outcome that that you can see at that point in time. So certainly you take it, take account of it from that perspective. Now recognize that the generally you’re making longer term investments and the VIX is usually evaluated over a shorter period of time. So they don’t they don’t always match up completely in terms of matching the risk with the potential reward. But generally, if you think about it in those terms, then that’s the way you implement it in a portfolio.

Jerry Murphey So in theory, the index is supposed to and does most of the time have a very low correlation to the 2 stocks, right? So when stocks are going up, it should be going down. And when stocks are going down, the VIX would be going up. Okay. But that’s true about 70, 75% of the time.

John Dean The other time.

Jerry Murphey The other the other time. They’re perfectly correlated, which means now it’s meaningless. Right. And that’s the problem is when is that happening? It could be happening now or it could be happening, you know, the other way. And so that’s when you got to say, well, that’s a good gauge, but it’s good only in context of many, many other measurements that professionals use to make a decision. They don’t just look at the VIX and go, let’s go, you know.

John Dean Well, yeah, in fact, that kind of you know, when I look at this, the VIX is kind of a general market metric, right? That’s kind of how you guys have described it. What you guys at Validus do is you look at individual company metrics, right?

Mark Scalzo You look more bit more specific yes.

John Dean Yeah, you are. Well, I’ve seen what you do. Yes. And you’re looking at individual. I mean, you’re kind of getting into the nitty gritty of this. Yeah. So how do you guys Mark or however the company, how do you guys use something that’s a broad market in your general day to day operations? Or do you not necessarily use it?

Mark Scalzo Well, you don’t you don’t use it. No, we don’t. From in terms of making specific trades or making investment decisions. But as I said before, when you’re making any decision about what you might invest in, you have to take account of the risk. And when when risk is higher overall, when outcomes are less certain overall, which is really what the the VIX represents, at least for the equity markets. And you can look at volatility in other asset classes like fixed income and other things. But yeah, but the VIX is meant to be the, the, the volatility that’s expected for, for equities in general, the equity markets. And so when that’s higher, you want to you want to be rewarded, as I said before, for that risk. And you need to take account of whatever the the characteristics of that that security is, whether it’s a company or whether it’s a mutual fund or whether it’s an ETF, for instance, how it. Might perform in a more volatile environment. And therefore. And then considering that, what do you need in return for taking that additional risk? And so that’s how I think. I think about it in terms of applying it. You know, it’s kind of a when you see the VIX going up and it’s kind of a sentiment gauge in a way.

John Dean Oh yeah. And the fear index. .

Mark Scalzo Yes. And you and you. And then then you start to ask yourself, Well, if I’m going to make an investment today, then I need to take account of the fact that there’s these greater uncertain outcomes. And therefore, I need, I need a different kind of reward. And so if I don’t have that, if I can’t find that, or if my investment doesn’t deliver that that I’m considering, then it may not get over the hurdle and actually get into the portfolio.

John Dean So it plays a role.

Mark Scalzo It does.

Jerry Murphey Yes. Yes.

Mark Scalzo Most of the time it doesn’t because it’s relatively calm, you know, day to day.

John Dean Sure.

Mark Scalzo And you don’t have massive swings day to day. You know, the VIX doesn’t spike ten points in a day unless it’s a really you know.

Jerry Murphey That would be meaningful

Mark Scalzo That would be meaningful. But you probably don’t want to do anything that day.

Jerry Murphey Yeah. Yeah.

Mark Scalzo Right. Because the things are too uncertain in that moment.

Jerry Murphey It’s kind of like a gauge, like a weather gauge. It’s going to tell you..

John Dean I was thinking the same thing.

Jerry Murphey What the weather’s like outside. But it’s not going to say what kind of experience you’re going to have out there, because it could be, you know, there’s other things you need to know about what’s going outside before you make a decision. But it’s a good idea. If I told you it’s 70 degrees outside, you’re probably thinking. It’s going to be a nice day. And we would, too. But you better look and check some other things, depending on what you plan on doing.

Mark Scalzo If it’s raining, bring an umbrella.

Jerry Murphey Is it going to be 70 degrees or be raining?

John Dean 70, and rain could be 70 and 150% humidity. And you need to know that kind of stuff, right, if you’re having a picnic. 70 degrees sounds perfect, but if it’s in the middle of a thunderstorm, then you need to know that.

Jerry Murphey And I was kind of honing in. I was writing this. It’s like there’s this external experience that we have with things like the VIX, where it’s on the news and it’s scary and we’re watching all this kind of stuff go on and then internally how we feel when we see those things. And that’s really what drives the markets. It’s this behavior that that that ultimately gets to how we feel about what’s going on. And so we hope what we’re able to do, like what we’re talking about today is say, listen, when you hear these scary words, you know, talk to the right type of people that know what those words mean. Because, of course, if the VIX is at 50 right now or 60, we should all stop and take a look and find out why.

John Dean Well, yeah now this is a.

Mark Scalzo Now maybe take a breath.

Jerry Murphey Right.

John Dean We’re almost out of time. But very quickly, I mean, it seems like it’s sort of a complicated thing that this all weaves together, but you got to know what you’re doing. Can the average person ever look at a market metric like the VIX and and take advantage? Or is that not something that the average person should be really looking at?

Mark Scalzo Well, I suspect it’s probably more an indication of, as Jerry said, when to pause, when to consider if I was going to make if I was going to make an investment today and I see the VIX spiking, maybe I want to hold off, you know, maybe there’ll be better days, you know, and I’ll be able to get it lower tomorrow if the VIX stays elevated. I mean, just as an example. And so I think that it can give you some indications of maybe when not to take certain actions more than it. I think more than it tells you what to do, per se. Right. It tells you sort of.

John Dean Absolutely.

Jerry Murphey The weather is a good analogy. And it’s yeah, if I looked at the weather and next week it’s going to be 100% chance of rain, I may want to reschedule my golf game.

John Dean Great way to look at this. We’re out of time here. We’ve been talking with Jerry Murphy, chief executive officer, Validus Growth Investing, Mark Scalzo, Chief Investment Officer of that same company. We’ve been talking about the VIX index, understanding how it works and why it’s important to what it is you guys do and may matter to individual investors too. If they want any information on this, can they go to your website.

Jerry Murphey Or just go to validusgrowth.com and you can contact us there or we have a blog, wonderful front page and read that. Lots of stuff like this in there.

John Dean Validus. V-A-L-I-D-U-S growth dot com. All right. My thanks, Jerry. Mark. Thank you so much.

Jerry Murphey Thank you John.

John Dean I know you traveled a long way to be here and we appreciate that. You’ve been listening to the Growth Investing podcast. I’m your podcast host, Johnny Dean for the entire crew here. I thank you so much for listening and we’ll be back on our next program.

As an enthusiast with demonstrable expertise in the field of finance and investing, I can provide insights into the concepts mentioned in the provided article. The individuals in the conversation are involved with Validus Growth Investing, and they discuss the VIX (Volatility Index) and its significance in the investing world. Here's a breakdown of the key concepts used in the conversation:

  1. Validus Growth Investing:

    • Jerry Murphy is introduced as the Chief Executive Officer (CEO) of Validus Growth Investing.
    • Mark Scalzo is introduced as the Chief Investment Officer (CIO) of Validus Growth Investing.
    • The collaboration between Jerry and Mark has been ongoing for more than ten years, and they founded Validus with a focus on growth investments.
  2. VIX (Volatility Index):

    • The VIX is the CBOE Volatility Index, often referred to as the "fear gauge."
    • It was created by the CBOE (Chicago Board Options Exchange) in 2004.
    • The VIX is used by traders to gauge the expected volatility in the market over a specific period, usually the next 30 days.
    • It is associated with risk, and a higher VIX value indicates higher expected market volatility.
    • Jerry Murphy explains that the VIX is calculated based on the expected percentage movement (up or down) of the S&P 500 index over a one-year period. However, it is traded on a 30-day basis by options traders.
  3. Role of VIX in Investing:

    • The VIX is often considered a measure of market sentiment and uncertainty.
    • Mark Scalzo refers to it as a tool to manage risk in portfolios, especially during periods of higher volatility.
    • When the VIX is elevated, it may signal a greater level of uncertainty and risk in the market.
    • Investors may use the VIX as an indication of when to pause or reconsider certain investment actions.
  4. Market Volatility Trends:

    • Mark Scalzo mentions that over the last decade, there has been a period of unusually low volatility, attributed to factors like easy monetary policy and interest rate cuts.
    • He notes that the recent shift from easy to tightening monetary policy has led to increased volatility.
  5. Investor Perspective on Volatility:

    • Investors, as a rule, may prefer less volatility, but Mark Scalzo suggests that they should also consider volatility as an opportunity.
    • Higher volatility may demand a higher expected reward for taking on additional risk.
  6. Individual Company Metrics vs. Broad Market Metrics:

    • Validus Growth Investing focuses on individual company metrics rather than relying solely on broad market metrics like the VIX.
    • While the VIX may provide a general sentiment gauge, specific investment decisions involve a deeper analysis of individual securities.
  7. Average Person and VIX:

    • Mark Scalzo suggests that the average person may use the VIX as an indication of when to pause or reconsider certain investment actions.
    • It can provide indications of potential opportunities or risks, but it may not dictate specific investment decisions.
  8. Validus Growth Investing Website:

    • Individuals interested in more information can visit the Validus Growth Investing website at .

In summary, the conversation revolves around Validus Growth Investing, the VIX as a measure of market volatility and sentiment, and how investors can navigate and potentially benefit from periods of higher volatility.

Growth Investing Podcast #1 - Validus Growth (2024)
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