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Technological disruption has ‘really changed the paradigm’: XOUT Capital CEO

XOUT ETF is weeding out companies unfit for tech disruption. David Barse, Founder and CEO of XOUT Capital joins Yahoo Finance Live to weigh in.

Video Transcript

MYLES UDLAND: We talk a lot on this program about things investors might want to have in their portfolios, different ways that ETFs and things like this can get you exposure to certain things. But our next guest is working on a strategy that takes out exposure to the dinosaurs-- companies and industries that might be left behind as we continue to see transformation within the economy. David Barse is the Founder and CEO at XOUT Capital, and he joins us now to talk about this. So, David, let's start with the fund and the basic strategy here for investors and viewers who aren't familiar with how you're approaching the construction of this.

DAVID BARSE: Great, well, thanks, Myles. It's great to be here. This is really three insights that I've developed over my long career in the asset management business. Insight number one is, flows have and will continue to go into passive index strategies. Insight number two is, technological disruption is probably one of the most important forward-facing risks all companies and industries are dealing with. And insight number 3 is, it's simply easier to avoid companies that are in disruption as opposed to trying to pick winners. So those three insights are what make up XOUT, the strategy that seeks to beat or generate alpha by just avoiding those companies that are or likely will be technologically disrupt.

JULIE HYMAN: You know, David, it's Julie here, you were a long-time value manager before you started this strategy. You were at Third Avenue, Marty Whitman I believe was a mentor, who was a sort of legendary value manager. This year, as you know, there's been this big debate about whether value is coming back. And it seems like you have found a way to circumvent that and say-- were you tired of that debate after value went out of favor following the financial crisis? Talk to us about your process.

DAVID BARSE: Yeah, well, look, value and growth are debates that have going to forever. It's been a tough road for value for a long time, quite frankly from my personal experience since the financial crisis. So what I say is that's another insight for me. It is really about the metrics one uses to determine what is value and what isn't. For us, things like technological disruption have really changed the paradigm. And the paradigm for us is just avoid losers or just avoid those companies that are in disruption. And you'll end up letting the winners take care of themselves. And if I sat there and focused on old-fashioned value metrics like price to book, or price to earnings, or tangible asset value, or cash on a balance sheet, all the things that gave rise to the foundation of value investing, we'd be left behind.

And that's quite frankly what I see as the outlook into the future. And so those insights that I listed out, along with my experience of 25 years of being an active stock picking manager, or a firm that ran funds along those lines, this is just simply a more elegant, simple, intuitive approach. And while it's a short track record that we've had since the launch of the grand shares XOUT ETF, it's shown that it's actually performed very nicely, without taking any additional data, if you will. We basically are one to one with the S&P 500, even though we only own 250 names.

MYLES UDLAND: For the companies that you do like and you do lock in on, how do you determine fair value for those companies in a market that is awash with cash and pretty much almost every day has been going up in a straight line?

DAVID BARSE: Yeah, look, fair value is an interesting concept. I'm not so sure that anyone really understands what that means anymore. And part of that is because our brains simply aren't capable of accepting valuation when there are disruption of decks that are going on. Your last segment was about Bitcoin. You guys were talking about price. I'd posit you that Bitcoin is one of those beneficiaries of something called Metcalfe's law, which is what we look at for technological disruption as well. The network effect of what's happening with Bitcoin is transforming its price. And if you try to use the word fair value to determine whether it's the right price of $27,000 or the wrong price, you'd scratch your head and just be confused forever, I think.

Because no one really knows what the future is going to be. And our brains just simply can't put our heads around it. I'd say the same thing is true for the S&P 500, for 500 large US market cap equity securities. Some of those securities, which one might argue are valued insanely, may not necessarily be an unfair value to use your parlance. So I just say, we're looking out into the future. We're very optimistic. We think the large cap equity market is a great place to be. Every investor should own a piece of that market. And we just have a better way of doing that, a smarter way of doing.

MYLES UDLAND: And then, David, just finally, given how you oriented yourself within the asset management business for a number of decades, you'd think some of the fundamental building block learnings that people have as they come up in the business, are those changing as we look out over the next couple of decades? Is Graham and Dodd still where you need to start or is the world changed?

DAVID BARSE: Yeah, let's use "changed" with past tense. I'd say that the outlook for the future remains very much technologically driven. Those fundamental metrics are important. It's like going to school. You got to take all those classes and understand the foundations and basics of the market and the market practices in the way it works. But at the end of the day, as I said, I just don't think we can put our brains around how disruption can impact markets. And we saw that this year, we launched in October of 2019 without any capability of predicting what was going to happen with the global pandemic. But it created a bifurcation, accelerated change in a way in which those that were doing the disrupting were succeeding at a faster and faster rate, those companies that were being disrupted at a faster rate.

And so clearly, we didn't have that priced into the market beforehand. And so I suggest to you that I think the outlook for the future remains one in which there will be additional disruption events. And those companies that are likely will be disrupted are going to be impacted more. And for us, it's just easier to avoid them, and to try and figure out who the next winner's going to be.

MYLES UDLAND: All right, David Barse, Founder and CEO at XOUT Capital. David, great to get your thoughts this morning. Thanks so much for joining the show.

DAVID BARSE: Thanks for having me. Good to see you guys.