Bogleheads® on Investing Podcast Episode 039 – Barry Ritholtz, host Rick Ferri (audio only)

00:00:00.000 | (upbeat music)

00:00:02.580 | - Welcome to Bogleheads on Investing podcast number 39.

00:00:14.160 | Today, our extra special guest is Barry Ritholtz.

00:00:17.520 | Barry has been writing about Wall Street

00:00:19.180 | for more than 25 years.

00:00:20.480 | He's the host of the Bloomberg Masters in Business podcast

00:00:24.480 | and the CEO of Ritholtz Wealth Management.

00:00:27.140 | (upbeat music)

00:00:30.540 | (upbeat music)

00:00:33.120 | Hi everyone, my name is Rick Ferry

00:00:40.100 | and I'm the host of Bogleheads on Investing.

00:00:42.500 | This episode, as with all episodes,

00:00:44.940 | is brought to you by the John C. Bogle

00:00:46.980 | Center for Financial Literacy,

00:00:49.260 | a 501(c)(3) nonprofit organization

00:00:53.100 | that you can find at boglecenter.net.

00:00:57.200 | Your tax deductible contributions are greatly appreciated.

00:01:01.300 | Today, our special guest is Barry Ritholtz.

00:01:04.500 | Barry has been around Wall Street for more than 25 years.

00:01:08.380 | He's worked at several different capacities

00:01:10.380 | as a corporate lawyer, trader, research analyst,

00:01:14.460 | writer, book author,

00:01:16.860 | host of Bloomberg's Masters in Business podcast

00:01:20.820 | and the founder and CEO of Ritholtz Wealth Management.

00:01:25.060 | I've known Barry for many years

00:01:26.740 | and when I came up with the Bogleheads

00:01:28.120 | on Investing podcast idea,

00:01:29.740 | I contacted Barry and he generously gave his time

00:01:32.440 | to give me all the technical background

00:01:34.120 | on what I should be doing and how to launch.

00:01:36.320 | I think you're really going to enjoy this conversation

00:01:38.520 | with Barry today.

00:01:40.080 | We're going to be talking about a lot of topics,

00:01:42.120 | including investment strategy.

00:01:44.600 | During the podcast, I asked Barry to give us his views

00:01:48.560 | on active management, market timing,

00:01:52.160 | cyber currency trading,

00:01:54.300 | and a few other investment related topics.

00:01:57.560 | This is not a debate about those topics.

00:02:00.320 | It's an opportunity to learn what our guest knows

00:02:03.140 | and what he thinks.

00:02:04.780 | So with no further ado,

00:02:05.720 | let me introduce my extra special guest, Barry Ritholtz.

00:02:10.680 | Welcome, Barry.

00:02:11.840 | - Thank you for having me, Rick.

00:02:13.640 | - First of all, we'd like to wish you

00:02:15.160 | a happy 60th birthday, which was recently.

00:02:19.460 | Congratulations.

00:02:20.640 | - Thanks.

00:02:21.480 | - You're five years away from Medicare.

00:02:24.140 | - Yes.

00:02:24.980 | So people say congratulations,

00:02:26.760 | and really all I've done is avoid getting hit by a bus

00:02:30.160 | when crossing the street.

00:02:31.320 | (laughing)

00:02:32.200 | - Okay.

00:02:33.040 | - Can I tell you the best part about being 60?

00:02:35.200 | - That you're not 70?

00:02:36.880 | - Well, no, it's finding out all these people

00:02:39.440 | who are younger than me, but look terrible.

00:02:41.960 | (laughing)

00:02:42.800 | And I'm not going to mention names,

00:02:43.880 | but a handful of people said,

00:02:45.520 | "Wow, I'll be there in a couple of years."

00:02:47.240 | And I'm like, "Really, dude?

00:02:48.400 | I thought you were like five years older than me."

00:02:51.000 | - Okay.

00:02:52.280 | Secondly, I personally owe you a debt of gratitude

00:02:54.900 | because this podcast was fashioned after your podcast,

00:02:59.900 | Masters in Business.

00:03:01.500 | And when I was getting started with this,

00:03:03.620 | the first person I contacted for pointers was you, Barry,

00:03:07.920 | and you gave me a lot of great pointers,

00:03:09.620 | so I really appreciate that.

00:03:11.260 | - My pleasure.

00:03:12.100 | You know, after 400 of these or so,

00:03:14.020 | you get to be not too terrible at them.

00:03:16.180 | (laughing)

00:03:17.760 | - So let's find out about Barry.

00:03:19.940 | I want to talk a lot about what's going on

00:03:23.400 | with your column and your blog and your business

00:03:26.360 | and so forth and your Masters of Business podcast,

00:03:29.120 | all 400 of them.

00:03:30.360 | But before we get to that, I want to go back further

00:03:32.600 | so that people know who you are,

00:03:34.640 | a little bit about your background,

00:03:36.000 | sort of far back as you'd like to go,

00:03:37.920 | and we'll go from there.

00:03:39.280 | - Really good in science and math in high school.

00:03:43.880 | Managed to coast through that, go to college

00:03:46.040 | and suddenly learn, "Oh, you really got to work to do this."

00:03:49.120 | It's very competitive.

00:03:50.880 | So I end up, after a couple of years

00:03:54.200 | of applied mathematics and physics,

00:03:55.640 | switching to political science and philosophy,

00:03:58.280 | finish school, don't know what to do, go to law school,

00:04:01.800 | and when I actually go to register for the bar,

00:04:04.240 | that's when I learned that I didn't graduate.

00:04:07.440 | And after a convoluted series of legal sleight of hand,

00:04:11.920 | managed to graduate college and law school the same day.

00:04:15.240 | And, you know, practiced law for a couple of years,

00:04:18.000 | loved law school, didn't really like the practice of law.

00:04:21.960 | It was just granular and filled with minutiae

00:04:24.880 | and, you know, no pun intended,

00:04:27.000 | I'm a big picture sort of guy.

00:04:29.320 | And so ended up, when the opportunity came along,

00:04:33.260 | to join a firm that a friend was running

00:04:36.040 | that turned out to be the predecessor firm to E-Trade.

00:04:39.560 | I did that, became a trader, and why don't we stop there?

00:04:43.720 | 'Cause that brings us, you know, to the mid-90s.

00:04:47.120 | - Okay, well, before we even get that far,

00:04:49.840 | we have to dig into

00:04:51.080 | some of the more interesting aspects of you.

00:04:53.560 | And you were a member of the Stony Brook equestrian team,

00:04:57.360 | and you successfully competed

00:04:59.040 | in the national championships back in 1981.

00:05:02.000 | - So I am at Stony Brook.

00:05:04.740 | I switched to poli-sci from, you know,

00:05:07.080 | no more double physics lab

00:05:08.660 | and no more insane applied math homework.

00:05:12.160 | And I find I have myself a little bit of time.

00:05:14.560 | And one day I'm reading in the campus paper

00:05:18.080 | that Stony Brook has a competitive horseback riding team.

00:05:22.040 | And I'm like, "What?"

00:05:23.240 | And not just competitive,

00:05:24.440 | but, like, consistently national ranked

00:05:27.960 | for, like, years and years.

00:05:29.760 | So I wandered down to the barn.

00:05:32.160 | I'm not exaggerating.

00:05:33.840 | It's like a 20-minute walk from campus.

00:05:36.280 | And I start talking to them.

00:05:37.640 | Tell me about the team.

00:05:38.860 | What do you do?

00:05:39.700 | What do you have to learn?

00:05:41.080 | So I joined the riding team, and it was just fascinating.

00:05:45.480 | It was a whole different sport,

00:05:47.800 | a whole different set of rules.

00:05:50.560 | And, you know, horseback riding is incredibly expensive

00:05:54.360 | and challenging area.

00:05:56.940 | But as a student at a state school,

00:05:59.680 | I got to ride for $5 a week.

00:06:02.400 | And if that sounds cheap,

00:06:04.300 | even back in 1980, that was cheap.

00:06:06.760 | So it was just great.

00:06:07.840 | And I did that for a couple of years and just loved it.

00:06:10.960 | It was a blast.

00:06:12.120 | - Well, that's cool, though, that you did that.

00:06:14.440 | - It was fun. - That's interesting.

00:06:15.280 | - It was a lot of fun.

00:06:16.120 | - Yeah.

00:06:16.940 | You went through law school.

00:06:18.040 | You did well.

00:06:19.000 | You were a cum laude, 3.56,

00:06:21.840 | and you became a lawyer eventually.

00:06:23.720 | And you were in corporate law, too.

00:06:25.720 | - So when you're at any decent-sized firm,

00:06:28.600 | whether you're doing corporate law

00:06:30.160 | or antitrust or litigation,

00:06:32.480 | and you're entry-level,

00:06:34.560 | you're in the library, you're in the stacks,

00:06:37.220 | you're just putting together research memos

00:06:39.560 | so the partners who are actually doing the real legal work,

00:06:43.520 | you're saving them a lot of research and a lot of writing,

00:06:45.960 | and you're giving them some groundwork.

00:06:48.140 | And it's really a grinding, tedious existence.

00:06:52.720 | And I kind of recognize that I wasn't motivated enough

00:06:57.720 | to become a partner in a law firm

00:07:01.600 | to do that for seven to 10 years.

00:07:04.920 | It's like, now look, the seven to 10 years

00:07:07.280 | are gonna go by no matter what you're doing.

00:07:10.000 | But it was just an intimidating,

00:07:14.080 | unpleasant view of your 20s and 30s,

00:07:17.640 | and I just couldn't bring myself to do that.

00:07:21.320 | And so when the opportunity came

00:07:23.560 | to hit the eject button from the legal profession

00:07:26.960 | and enter finance, I jumped at it.

00:07:31.240 | - And you were a trader at one time,

00:07:33.160 | and were you trading your own account,

00:07:34.680 | or were you trading other people's accounts?

00:07:36.320 | Tell us about that.

00:07:37.320 | - You're trading three things.

00:07:39.840 | A, if you have your own capital, you get to trade that,

00:07:42.520 | but I was young and relatively broke.

00:07:44.720 | B, you're trading other people's money.

00:07:46.680 | And lastly, you're trading the firm's order flow.

00:07:49.800 | So you can either go to the market

00:07:51.680 | and just execute the trade in the market,

00:07:54.440 | or if an order comes in and you think there's an advantage

00:07:57.800 | to trade around that order or take the position yourself

00:08:01.760 | and buy it cheaper or sell something

00:08:05.140 | and try and cover the trade at a different price,

00:08:07.800 | you had the ability to operate around that.

00:08:10.840 | And it's how you really learned how the market worked,

00:08:14.240 | more than trying to buy 10,000 shares of X

00:08:17.720 | and then sell it a point higher later in the day.

00:08:20.880 | - Did you have your own clients?

00:08:23.320 | Were they giving you money to manage?

00:08:25.160 | - In the beginning, it was mostly firm clients,

00:08:28.200 | and then every now and then someone would say,

00:08:30.080 | "Hey, I have some money.

00:08:30.920 | "Do you want to trade this for me?"

00:08:33.820 | I was a very inconsistent trader.

00:08:36.320 | I found I would make money some months

00:08:38.040 | and then give it all back the next month.

00:08:40.180 | And in fact, that volatility of my own P&L,

00:08:45.180 | as well as, you know, you're sitting on a trading desk,

00:08:48.400 | there's eight guys or 10 guys in a row.

00:08:50.960 | And I was always astonished the guy on my right

00:08:53.680 | would be making money one month,

00:08:55.640 | while the guy on my left was losing money.

00:08:57.560 | And then the next month, their roles reversed

00:09:00.800 | and suddenly the previous month's loser is killing it

00:09:04.180 | and the previous month's winner,

00:09:05.660 | whatever he touches goes to hell.

00:09:07.900 | And between that sort of volatility

00:09:10.820 | and my own inconsistent trading

00:09:14.380 | kind of sent me down the rabbit hole

00:09:16.260 | of behavioral finance in the mid '90s,

00:09:19.620 | before all the cool kids were doing it.

00:09:21.940 | 'Cause I couldn't find a rational explanation

00:09:25.500 | for why Shecky on my left was doing well this month

00:09:29.940 | and Bob on my right wasn't,

00:09:31.720 | they seemed to be doing the exact same thing.

00:09:35.000 | And over time, you kind of learn,

00:09:38.500 | it looks like they're doing the same thing,

00:09:40.400 | but they're actually doing different things

00:09:43.800 | from an emotional, psychological perspective.

00:09:46.680 | And that had an immense impact on their trading success.

00:09:51.680 | - You know, it's interesting that one of the very first

00:09:54.720 | people that you interviewed was Jack Schwager,

00:09:58.800 | who wrote a book called "Market Wizards,"

00:10:01.340 | interviews with top traders.

00:10:03.020 | And in fact, you interviewed him recently as well.

00:10:06.340 | And I listened to that interview

00:10:08.700 | and he was talking about people who give money to traders

00:10:13.340 | and who does well with it and who does not.

00:10:17.100 | Could you comment on both of those interviews,

00:10:18.860 | the very first one that you did

00:10:20.500 | and then the more recent one?

00:10:22.140 | - So the first book that Schwager wrote, "Market Wizards,"

00:10:28.100 | ostensibly, it's about trading.

00:10:31.060 | But as you work your way through the book,

00:10:34.100 | really, it's a behavioral finance book.

00:10:37.380 | That was the first book I read about trading.

00:10:41.600 | "Market Wizards" is all about things like discipline

00:10:45.340 | and understanding stop losses and risk management

00:10:49.160 | and overconfidence.

00:10:50.960 | And as you go back and reread the first book,

00:10:55.200 | and you'll be astonished,

00:10:56.760 | some of the traders are futures traders,

00:10:58.440 | some are bond traders, some are stock traders,

00:11:00.920 | some are derivative traders,

00:11:02.520 | all these people in different fields.

00:11:05.080 | The key takeaway I got from that book

00:11:08.440 | was the single biggest variable

00:11:11.240 | with the largest impact on your results

00:11:14.360 | that is within your control is your own behavior.

00:11:18.540 | That was the big takeaway.

00:11:20.280 | And not only did I find the book fascinating,

00:11:24.560 | but in the back of my head

00:11:26.520 | when I was first pitching "Masters in Business"

00:11:28.920 | to Bloomberg, "Market Wizards" was very much on my mind.

00:11:32.680 | The thought process was,

00:11:34.080 | hey, let's find some of these really successful people,

00:11:37.320 | accomplished, intelligent people

00:11:39.800 | who have put together not just a track record,

00:11:43.320 | but a methodology and a philosophy

00:11:45.760 | that will be beneficial to the listener

00:11:48.600 | and have an intelligent adult conversation.

00:11:51.920 | I don't wanna ask them what their favorite stock is.

00:11:54.160 | And I wanna ask them when the Fed's gonna raise,

00:11:56.400 | where the market will be from here a year from now.

00:11:59.560 | I wanna ask them, who are you and how did you get that way?

00:12:02.680 | Tell me about how you started to come up

00:12:05.440 | as a research analyst and a writer

00:12:07.760 | and how that evolved into

00:12:10.240 | doing the "Masters in Business" podcast.

00:12:13.440 | I tend to be very scattershot,

00:12:16.200 | easily distracted, lack of focus.

00:12:18.500 | And in my saving graces,

00:12:20.640 | I have a degree of self-awareness

00:12:22.360 | of my lack of organizational skills.

00:12:26.000 | And so to compensate or overcompensate for that,

00:12:30.280 | I would each day write down,

00:12:33.480 | here are the earnings that are scheduled to be released.

00:12:35.280 | Here's the various economic releases that are coming out.

00:12:38.720 | Here are a series of stocks

00:12:40.240 | that are on the precipice of a breakout or a breakdown.

00:12:43.080 | And I just put together like a whole run of things

00:12:45.800 | that I thought were really interesting.

00:12:47.720 | And then I would tape it to my computer monitor.

00:12:51.840 | It started out like three by five cards

00:12:54.080 | and then it became the bigger four by six cards.

00:12:56.360 | And then eventually it was a full page.

00:12:58.800 | And once it became a full page,

00:13:00.360 | people had asked me, "Hey, can I make a copy of that?"

00:13:03.440 | And what started out being Xeroxed

00:13:06.840 | and circulated around the office,

00:13:08.680 | started getting faxed around town.

00:13:11.140 | And then eventually it became a Yahoo GeoCities thing.

00:13:15.540 | I would take all my notes and post them online.

00:13:18.320 | Not that anybody was paying attention back in 1998.

00:13:22.720 | And then eventually it became a pretty substantial email list

00:13:27.520 | which eventually became the blog,

00:13:29.600 | eventually became the big picture.

00:13:31.580 | And street.com was 2002, three, four.

00:13:36.580 | The Washington Post started publishing me 2010, 2011,

00:13:41.040 | something like that.

00:13:42.160 | And then Bloomberg started in the fall of 2013.

00:13:46.120 | A lot of this just began because,

00:13:48.960 | hey, I'm really disorganized

00:13:50.400 | and I need to get my act together each day

00:13:54.600 | and just have a sense of what's going on.

00:13:57.280 | And writing it out, typing it out

00:13:59.240 | was just a useful exercise.

00:14:01.460 | - Well, I'm just amazed that when I read this email

00:14:04.800 | that you send out and the weekend reads and all of that,

00:14:07.360 | how in-depth you get.

00:14:09.040 | You must be reading constantly.

00:14:11.400 | - Yeah, there's a surprising method to the madness.

00:14:14.520 | When I first began in the industry,

00:14:17.640 | I thought my role was to be an omnivore

00:14:19.920 | and consume everything there was.

00:14:22.080 | And eventually you kind of learn addition via subtraction

00:14:26.600 | and information hygiene becomes really important.

00:14:30.040 | There's a handful of pretty well-known writers

00:14:32.400 | and other media personality

00:14:33.880 | that I think are hot death warmed over,

00:14:37.440 | that they're consistently wrong

00:14:40.280 | or when they're right, they're lucky

00:14:42.000 | or they're right for the wrong reason.

00:14:43.600 | And I just don't want those people in my thought process.

00:14:47.360 | And so there are a number of publications

00:14:50.380 | and a number of folks that I have found to be

00:14:53.960 | very click baity, but useless.

00:14:55.800 | So they get removed from the source.

00:14:59.960 | And at this point, like in the morning,

00:15:03.320 | I open up 50 different tabs and I work my way through them.

00:15:06.120 | And I open up far fewer late in the afternoon,

00:15:10.000 | but after doing this for 25 years,

00:15:13.120 | 20 years anyway, you find that it takes a sentence or two

00:15:17.600 | and you can quickly identify if something is terrible.

00:15:22.480 | There's also a run of folks from Jesse Eisinger

00:15:25.280 | to Morgan Housel, to Derek Thompson,

00:15:28.160 | to Jason Zweig, to Dan Gross.

00:15:30.040 | I probably have about 30 people,

00:15:32.600 | Mike Hiltzik at the LA Times,

00:15:35.040 | that anything they put out, I'm absolutely gonna read

00:15:38.040 | 'cause it's so consistently good.

00:15:40.400 | And so once you have your team of all stars,

00:15:43.400 | suddenly it becomes much easier.

00:15:46.860 | And the trick of 10 is that it forces you

00:15:50.960 | to really curate, to really make difficult decisions.

00:15:54.360 | So when I said there's a method to the madness,

00:15:57.400 | on any given day, the weekends are a little different

00:15:59.680 | 'cause I try and do something.

00:16:01.700 | Saturday is long form and Sunday I go on my way

00:16:04.120 | to look at really terrible policy decisions or errors.

00:16:08.760 | 'Cause I don't wanna look at them all week,

00:16:10.480 | it's so negative, it's such a buzzkill.

00:16:13.500 | But on Sunday it's like, all right,

00:16:14.760 | here's all the terrible stuff,

00:16:16.600 | go to church and beg for forgiveness

00:16:18.160 | 'cause all you people are just awful

00:16:19.720 | and here are the things you did.

00:16:21.780 | So I kind of push all that negativity to Sunday.

00:16:26.240 | But during the week it's pretty much,

00:16:28.600 | starts out with a broad market or investing concept.

00:16:32.480 | Sometimes it'll be something about trading

00:16:35.600 | or some specific ETF or product or something like that.

00:16:40.280 | If I find something on retirement, 401Ks,

00:16:43.520 | that kind of works its way there.

00:16:46.440 | Very often I'll put something industry related

00:16:49.560 | in the fourth slot.

00:16:51.520 | Real estate is a big part of the world,

00:16:53.320 | so when there's an interesting real estate story,

00:16:56.000 | it shows up.

00:16:57.240 | Then comes whatever technology or venture capital

00:17:01.240 | or new trend shows up.

00:17:03.620 | If I find something interesting involving

00:17:06.700 | either behavioral finance or information hygiene,

00:17:10.080 | something that makes people think carefully

00:17:12.280 | about what they're consuming, that'll find its way in.

00:17:15.800 | I leave the last two or three slots

00:17:18.000 | for a rotating mix of science or the last spot,

00:17:23.000 | sports, music, entertainment is a slot.

00:17:25.800 | Every now and then there'll be an interesting article

00:17:29.080 | about politics and what I mean by that

00:17:31.640 | is not the partisan bickering nonsense,

00:17:34.800 | but when I find something that,

00:17:37.160 | I love when someone forces me to rethink my views

00:17:41.000 | or uses data to challenge an underlying belief.

00:17:45.160 | So this is a perfect example.

00:17:46.860 | Terry McAuliffe bet on voters hating Trump.

00:17:49.720 | Turns out they dislike Democrats more.

00:17:52.160 | Like that sort of flip where the obvious theme

00:17:57.160 | gets turned on its head and in an unexpected way,

00:18:01.520 | I'm fascinated by that.

00:18:03.280 | I'm pretty convinced that all of us

00:18:05.880 | just live in a world of our own biases and illusions

00:18:09.800 | and confirmation bias.

00:18:13.220 | And anytime I have the opportunity to prove to others

00:18:16.480 | or myself, hey, this deep fundamental thing you believe

00:18:19.980 | is wrong and here's proof.

00:18:22.040 | Now go rethink your entire world philosophy.

00:18:25.620 | That's useful, not just as a person, but as an investor,

00:18:30.080 | it forces you to not take anything for granted

00:18:34.600 | and to carefully think about what you assume

00:18:38.460 | and what you believe is true.

00:18:39.920 | So if one of our listeners today decided

00:18:43.480 | they wanted to start to get this information from you

00:18:46.280 | on a daily basis, how would they do that?

00:18:48.840 | So go to rithults.com.

00:18:50.800 | You can scroll through to any of the reads

00:18:53.080 | and you'll click on a signup sheet.

00:18:55.520 | I just actually told someone today that because of inflation

00:19:00.360 | our free newsletter has doubled in price.

00:19:03.400 | And so you can sign up for two times the regular free price.

00:19:08.400 | That's a good Boglehead price, by the way.

00:19:10.280 | We like that.

00:19:11.400 | You also wrote a book called "Bailout Nation,

00:19:13.920 | How Greed and Easy Money Corrupted Wall Street

00:19:17.020 | and Shook the World Economy."

00:19:19.840 | Tell us about the book.

00:19:20.760 | Why did you write it and what it's about?

00:19:23.840 | So another really long story I'll try and make short.

00:19:26.920 | Bill Fleckenstein wrote the book "Greenspan's Bubbles"

00:19:29.880 | and that did really well for a business book.

00:19:32.300 | And so when McGraw Hill came back to him and said,

00:19:35.120 | "All right, Bear Stearns just went belly up.

00:19:37.280 | Let's write about them."

00:19:38.160 | He was like, "Thanks, but no thanks."

00:19:40.800 | And they asked him, "Well, who's covering that?"

00:19:43.880 | And he goes, "Oh, that's easy.

00:19:44.720 | Rithults has been screaming about Bear Stearns for months.

00:19:47.640 | Go talk to him."

00:19:48.480 | I ended up turning them down, I don't know, eight times.

00:19:52.400 | And every time I turned them down,

00:19:54.080 | I would give them an excuse.

00:19:55.840 | And each time they would address that excuse.

00:19:58.160 | And so that turned out to be really fortuitous

00:20:01.540 | because at the end of the year,

00:20:04.800 | when McGraw Hill was unhappy about the manuscript

00:20:08.560 | I gave them that had a very critical chapter

00:20:11.460 | about S&P Ratings Agency, a McGraw Hill company,

00:20:15.780 | well, I had already gotten final edit in my contract

00:20:21.080 | because I said to them, "I don't need to work with you.

00:20:24.320 | I got a very large platform.

00:20:27.820 | Why do I need to write a book for you

00:20:29.280 | and have you muck it up with your editors?

00:20:32.360 | I know what I want to say, leave me alone."

00:20:33.960 | And they're like, "Oh, we'll give you final cut."

00:20:36.040 | That was kind of like the last objection.

00:20:38.760 | Again, long story short, I pulled the manuscript.

00:20:43.020 | I gave them an updated chapter on McGraw Hill,

00:20:47.180 | which was much less hysterical, hair on fire,

00:20:51.300 | the world's coming to an end,

00:20:52.540 | and much more data-based and calm,

00:20:54.820 | which coincidentally had the unintended consequence

00:20:58.480 | of being much more devastating to S&P

00:21:02.740 | than the original, like it would have been very easy

00:21:04.860 | to say, "Oh, this guy's crazy."

00:21:07.100 | The rewritten chapter was, "Oh, that's a lot of data.

00:21:10.500 | Ooh, those guys did what?

00:21:11.820 | Oh, wow, that's just terrible."

00:21:13.820 | So I made it far less histrionic

00:21:17.300 | and more factual and data-driven,

00:21:19.920 | and it made it more devastating,

00:21:21.980 | and they refused to accept that one.

00:21:24.100 | And so I pulled the book, put it up for auction,

00:21:27.260 | and it ended up, Wiley ended up buying it.

00:21:29.540 | It turned out to be a successful partnership.

00:21:32.220 | We sold a decent amount of copies.

00:21:34.180 | I don't remember the exact number,

00:21:35.220 | but it was somewhere north of 30,000.

00:21:37.740 | Again, for a business book, is really pretty good.

00:21:41.340 | Then eventually, let's circle around to

00:21:44.660 | your master's in business,

00:21:46.100 | which I think you've probably become the most famous for

00:21:49.460 | in many ways because of the guests that you interview.

00:21:53.980 | And one of the Bogleheads was asking,

00:21:57.180 | "Can you talk about your most memorable guests?"

00:22:00.900 | Good, bad, or indifferent,

00:22:02.120 | but they were the most memorable.

00:22:03.820 | So I'll give you a good one and a bad one.

00:22:07.980 | Well, let's start with the bad one.

00:22:09.700 | The bad one was somebody who had written a book

00:22:13.300 | and had kind of become famous,

00:22:15.020 | but he had just continuously blown up,

00:22:18.220 | like made a fortune, blew up, made a fortune, blew up.

00:22:20.700 | Well, that could be anybody, I mean.

00:22:22.500 | Not at this level.

00:22:26.540 | It's one thing to say,

00:22:27.540 | "Oh, look, I got $100,000 in my 401(k).

00:22:29.740 | "Oh, it's 25,000."

00:22:31.420 | It's something else to say,

00:22:32.340 | "I'm worth tens of millions of dollars."

00:22:34.580 | And it's like, "Shit, where'd it all go?"

00:22:37.180 | And do the same thing over and over again.

00:22:39.540 | And when I had a conversation with him,

00:22:42.380 | he spoke in a normal cadence.

00:22:44.780 | I thought that would be a pretty interesting interview.

00:22:48.660 | And instead, each question was greeted with a heavy sigh,

00:22:53.660 | and a, "Ahh, let me, uh, uh-huh."

00:22:59.380 | And then he would answer the question.

00:23:02.820 | And so a 90-minute interview

00:23:04.700 | was about 45 minutes of material,

00:23:07.860 | and 45 minutes of someone

00:23:10.100 | that it seemed like a cry for help.

00:23:13.140 | And maybe 15 minutes into the interview,

00:23:16.420 | I have the producer in my ear going,

00:23:18.760 | "None of this is usable.

00:23:20.000 | "Let's just throw him out and be done with it."

00:23:22.820 | But what we eventually did

00:23:24.260 | was just edit out all of those gaps,

00:23:27.140 | and it became what sounded like a normal interview.

00:23:31.300 | But when you're experiencing it,

00:23:33.420 | it was just like, "Do I need to call

00:23:38.420 | "a mental health hotline?

00:23:39.860 | "Is this person a danger to himself?"

00:23:42.660 | I mean, I guess I forced him to think about things

00:23:46.460 | he hadn't thought about for decades.

00:23:48.540 | And so it was really, so that was the worst one.

00:23:51.000 | The best one, and I'm gonna call out Mike Batnick

00:23:54.420 | about this, 'cause he gave me so much grief about this.

00:23:58.780 | About five years ago, I thought,

00:24:01.260 | on the 15th anniversary or so of September 11th,

00:24:05.220 | it would be worthwhile to interview the special master

00:24:09.900 | from the 9/11 Fund, Ken Feinberg.

00:24:13.500 | And he's a lawyer, he's kind of public.

00:24:17.780 | It's been a long time since 9/11.

00:24:21.180 | He hasn't really been out talking about it.

00:24:23.060 | Maybe there's something interesting here.

00:24:25.300 | - Just to clarify, this was the person

00:24:27.060 | who had to decide how the money

00:24:29.500 | was going to be divided from 9/11?

00:24:32.140 | - The congressional $8 billion allocation

00:24:35.540 | to the victims of September 11th, right.

00:24:39.500 | So we do the interview, and two weeks later, it goes live.

00:24:43.380 | And on that Monday, Mike walks in.

00:24:45.140 | He's like, "I can't believe how wrong I was.

00:24:47.800 | "That was amazing.

00:24:49.580 | "There were several moments in that interview

00:24:52.000 | "where I wanted to cry and just give him a hug."

00:24:56.180 | I'm like, "Right, the guy is just amazing.

00:24:58.200 | "It's an amazing story."

00:24:59.940 | And then five years later, now there's a movie,

00:25:03.200 | and there's this, and there's that.

00:25:04.860 | But that was just one of the most astonishing,

00:25:08.740 | just to be able to just gently nudge him along

00:25:12.640 | through discussing all these different things.

00:25:15.260 | And of course, he's very intelligent.

00:25:18.380 | He's very articulate.

00:25:19.540 | He has an incredible breadth of,

00:25:22.620 | not just experience, but empathy.

00:25:25.740 | And as a lawyer, there's a very specific formula

00:25:30.480 | that you basically operate off of

00:25:33.600 | when there's an accidental death

00:25:35.740 | and there's civil litigation.

00:25:37.640 | There are all these different factors.

00:25:39.120 | Yeah, there's pain and suffering,

00:25:40.160 | and there's this, and there's that.

00:25:41.520 | But the prime driver is the economic loss

00:25:45.040 | of future income to family.

00:25:48.200 | And I know that's kind of crude and blunt,

00:25:51.520 | but that's what's evolved over hundreds of years.

00:25:55.600 | And so you end up with this really insane story.

00:26:00.480 | I'll give you one.

00:26:01.600 | It's a little disturbing,

00:26:03.260 | but he tells the story of the bond trader

00:26:06.160 | who jumped from the 105th floor of the World Trade Center,

00:26:10.660 | so he didn't burn to death,

00:26:12.680 | and lands on a fireman, and of course they both die.

00:26:17.240 | Now, the bond trader is making a million dollars a year,

00:26:19.760 | and the fireman is making $100,000 a year.

00:26:23.560 | Why are their lives worth so different amounts?

00:26:26.840 | And he had to come up with a way that got everybody,

00:26:31.580 | all of the families, all the estates, to buy into.

00:26:34.980 | And talk about an impossible Solomonic task

00:26:39.560 | to split that baby.

00:26:42.120 | This guy is a true American hero

00:26:45.880 | who took on a impossible, thankless task

00:26:49.880 | and did it as well as anyone could have possibly hoped for.

00:26:54.400 | A great and horrible story, right?

00:26:57.040 | - Yes, I remember that story.

00:26:58.440 | I remember that.

00:26:59.640 | Let's go on to other masters in business,

00:27:02.480 | because you've done 400 of these.

00:27:04.940 | I guess my question on this whole thing,

00:27:06.680 | you're interviewing all of these people

00:27:08.280 | who are the top of the top in their industry,

00:27:11.120 | and some maybe who aren't so top, like me.

00:27:13.040 | You interviewed me one time.

00:27:14.560 | But other than that,

00:27:16.640 | I mean, does this any of all of this help,

00:27:21.280 | let's say a person who's trying to trade their account,

00:27:25.240 | trade their portfolio, outperform the markets, if you will.

00:27:29.560 | Does any of all of these interviews help anyone do that?

00:27:34.560 | - That's an interesting question.

00:27:37.560 | When there is the opportunity to sit down

00:27:42.080 | and have an adult, thoughtful conversation

00:27:45.280 | with someone who has been incredibly successful,

00:27:49.160 | both in finance and investing and in life,

00:27:52.500 | there are lessons to be learned there.

00:27:56.560 | Basically, it's like a bookshelf,

00:27:59.200 | a library of 400 books about everything

00:28:03.560 | from behavioral finance, to investing,

00:28:06.600 | to technology, to venture capital, to psychology,

00:28:11.600 | to go down the whole list.

00:28:13.600 | Hey, of those 400 books,

00:28:15.960 | if you can't find a little something

00:28:18.920 | that makes you a little smarter, a little more thoughtful,

00:28:22.320 | a little more aware of your limitations,

00:28:25.120 | and teaches you how to take better advantage of your skills,

00:28:30.120 | you're doing something wrong.

00:28:34.640 | I mean, there's no magic bullet, but dear Lord,

00:28:40.160 | Howard Marks and Ray Dalio and the head of fixed income

00:28:45.160 | at Double Line and PIMCO

00:28:49.240 | and the head of private equity at Blackstone,

00:28:52.440 | and just go down the list.

00:28:55.480 | There's so much to learn from these people.

00:28:58.720 | And I mean, I used to say, I'll let you in on a little secret

00:29:02.240 | but I've said this enough times

00:29:04.460 | that it's no longer a secret.

00:29:07.120 | I do these for an audience of one.

00:29:10.600 | I do this for myself

00:29:12.720 | 'cause I have the opportunity to get a Richard Thaler

00:29:17.440 | or a Danny Kahneman, and I'm gonna spend 90 minutes

00:29:20.360 | sucking as much knowledge out of them into me.

00:29:24.680 | And anybody who's listening

00:29:26.080 | should be able to figure out something.

00:29:29.080 | Think about Bill McNabb.

00:29:30.560 | I think I interviewed him three times.

00:29:32.800 | Or Jack Bogle, to say the least.

00:29:36.320 | Bogle was a fascinating conversationalist

00:29:39.520 | and he plowed straight through for 90 minutes.

00:29:43.920 | That's just an astonishing, astonishing moment in time.

00:29:48.920 | And I know for a fact

00:29:50.720 | that there's something to be learned from these

00:29:52.920 | because I get emails all the time

00:29:54.800 | from business school professors

00:29:56.840 | who assign these out as class projects in MBA classes.

00:30:01.840 | I mean, there's a ton of stuff to be learned here.

00:30:05.580 | You just have to be thoughtful

00:30:08.320 | and approach the topics with a little skepticism.

00:30:13.320 | I'm not gonna tell you

00:30:15.040 | that everything said by every person is gold

00:30:19.160 | and is guaranteed to make you money,

00:30:21.240 | but if you can find some useful information, some ideas,

00:30:26.140 | not the usual TV, buy this, sell that,

00:30:30.280 | 'cause that's got a shelf life of about 30 seconds,

00:30:33.280 | but things about methodology

00:30:36.320 | and how to create a mental model

00:30:38.560 | that allows you to deal with certain changes in the market,

00:30:42.480 | or how to deal with adversity

00:30:44.160 | and brush yourself off and keep going.

00:30:46.160 | Or one of the things I love about the Ray Dalio interview,

00:30:50.000 | his whole career is based on recognizing,

00:30:53.240 | oh, I'm wrong and I'm gonna be wrong frequently.

00:30:56.560 | How can I take these strikeouts at bat

00:31:01.320 | and become a better hitter?

00:31:02.900 | Like, his entire career is expect to be wrong,

00:31:07.900 | but if you just leave it there,

00:31:09.600 | you're gonna be wrong regularly.

00:31:10.960 | If you expect to be wrong

00:31:12.600 | and then learn something about why you were wrong

00:31:15.560 | and what you should do differently next time

00:31:17.720 | and incorporate that into your thinking process

00:31:20.360 | and incorporate that into the way you invest in trade,

00:31:23.080 | and so each time you're wrong,

00:31:24.480 | it should make you a little better,

00:31:26.640 | I mean, that's gold, Jerry, gold.

00:31:29.780 | I don't know how somebody can hear any of that conversation

00:31:33.980 | and not come away better for it.

00:31:36.160 | Well, thank you, Barry.

00:31:38.320 | I mean, you get into these interviews

00:31:39.620 | and you start asking questions,

00:31:41.360 | and it's always fascinating to listen to some of the answers

00:31:45.700 | because it's just so insightful.

00:31:48.860 | Gotta kind of move along here to something that you said,

00:31:53.500 | and I twisted it a little bit, quite frankly,

00:31:55.780 | but I was listening to you,

00:31:57.420 | I can't remember, you were on a podcast somewhere.

00:32:00.600 | You were talking about news and the dissemination of news,

00:32:05.600 | and you were talking about how a lot of news

00:32:08.440 | has way too much weighting in people's minds

00:32:12.060 | than it's actually worth,

00:32:13.760 | and what I took away from that

00:32:15.680 | was that news is equal-weighted,

00:32:18.880 | but the stock market is cap-weighted.

00:32:20.920 | Sure, so there are two things

00:32:24.800 | that speak directly to that philosophy.

00:32:28.260 | One was a series of pieces I did for the Washington Post

00:32:31.700 | about signal-to-noise ratio

00:32:33.940 | and how to get more signal and less noise,

00:32:36.420 | and generally, this is part of that evolution

00:32:40.140 | from omnivore to very selective,

00:32:42.980 | Michelin star-rated restaurant consumer.

00:32:47.260 | When I was younger, I would eat anything.

00:32:49.260 | When you're older, you're kind of like,

00:32:52.100 | oh, maybe I should be a little more selective,

00:32:54.980 | and so what ends up happening

00:32:56.960 | is you really become choosing

00:33:00.720 | in what you consume in terms of information,

00:33:03.080 | so that was sort of the setup,

00:33:05.600 | and that was a couple of, you know, five years ago.

00:33:08.120 | Last summer, the summer of 2020,

00:33:10.880 | so I do these quarterly calls for clients,

00:33:13.280 | and we try and keep it under a half hour,

00:33:16.240 | you know, two or three dozen charts,

00:33:18.000 | and we just click through a lot of them,

00:33:20.600 | and basically, a lot of this comes from questions

00:33:24.400 | from clients and advisors,

00:33:25.880 | and most of it is nonsense we hear on TV and elsewhere.

00:33:29.800 | Like, a perfect example would be stagflation.

00:33:32.700 | You know, more recently,

00:33:34.080 | people are talking about stagflation.

00:33:35.400 | Well, go back and look at the data,

00:33:37.080 | and the 1970s and the 2020s are not even remotely similar

00:33:41.240 | on any of the data points that would relate to that,

00:33:44.120 | so over the summer of 2020,

00:33:46.200 | when the market was, you know,

00:33:47.740 | not only off the lows set at the end of March,

00:33:50.560 | but by August, it regained the previous highs

00:33:52.880 | and kept going,

00:33:54.120 | the question we kept hearing over and over again is,

00:33:57.160 | you know, I look around, and the economy looks terrible,

00:34:00.240 | and yet the market goes higher and higher.

00:34:01.920 | This doesn't make any sense.

00:34:03.960 | I'm really perplexed, and I want to liquidate my portfolio,

00:34:07.840 | so we looked into this and said,

00:34:10.200 | okay, let's see how realistic this assessment is,

00:34:13.520 | and so when you look around your neighborhood,

00:34:15.520 | you see a bunch of restaurants and a bunch of dry cleaners

00:34:17.820 | and a bunch of retail stores,

00:34:19.240 | and they're all doing really poorly

00:34:20.960 | in the middle of a pandemic,

00:34:22.900 | but for the most part,

00:34:24.960 | none of those companies are publicly traded.

00:34:27.360 | They're relatively, not just small business,

00:34:30.560 | I mean, they're really small businesses.

00:34:32.340 | They're tiny and not related

00:34:34.480 | to anything that's publicly traded.

00:34:36.520 | Hey, what's doing well?

00:34:38.040 | Well, it was Netflix and Apple and Amazon and Microsoft

00:34:42.440 | and Zoom and Google and Facebook

00:34:45.400 | and all the big tech companies,

00:34:47.360 | and wait a second, these are global companies

00:34:50.260 | that allow everybody who was stuck at home

00:34:54.000 | during the pandemic to work remotely,

00:34:56.660 | and not only are they not suffering,

00:34:58.480 | their business is up significantly from the previous year.

00:35:03.480 | Well, of course they're doing well,

00:35:05.200 | and so the next step, and again,

00:35:06.960 | my secret weapon, Michael Batnick,

00:35:09.640 | runs through all the different sectors

00:35:11.780 | and subsectors of the S&P 500,

00:35:14.480 | and we end up looking at things

00:35:17.080 | on a market cap weighted basis.

00:35:18.640 | So the big six, the FANG,

00:35:20.360 | or I don't even know what you call them now,

00:35:21.560 | that Facebook is meta, the mama stocks,

00:35:26.280 | those companies are like 25% of the S&P 500.

00:35:29.920 | You look at airline stocks, they're less than a percent.

00:35:33.760 | Hotel stocks, they're less than a percent.

00:35:35.920 | Even the vertically integrated energy companies,

00:35:40.840 | because gasoline sales were down,

00:35:43.240 | even those stocks are like one or 2%.

00:35:46.320 | In fact, you could take,

00:35:48.000 | I think it was the bottom 50 sectors

00:35:50.280 | out of a few hundred sectors

00:35:52.820 | when you break them down into the,

00:35:54.520 | not the seven big industry groups,

00:35:56.200 | but the subsectors and sub-subsectors.

00:35:59.140 | If you eliminated the bottom 50 sectors

00:36:01.560 | from the S&P 500, right,

00:36:03.800 | hospitality and entertainment and all these things,

00:36:06.900 | it turned out to be 6% of the entire value of the S&P 500.

00:36:12.900 | And so that makes perfect sense.

00:36:15.780 | It turns out the market is rational.

00:36:18.580 | The big cap technology stocks

00:36:20.980 | that were thriving and global in nature,

00:36:23.640 | they were doing really well.

00:36:25.460 | And all the little companies,

00:36:27.660 | and they were either not public or so small

00:36:32.180 | that it was almost irrelevant to the S&P 500.

00:36:35.860 | And so when you look at it in that way,

00:36:38.380 | it makes perfect sense.

00:36:40.340 | Now, when you look at your local dry cleaner

00:36:42.380 | and the little antique store that had to shut down

00:36:45.580 | and they're closed and out of business,

00:36:47.180 | and yet the market goes higher and higher,

00:36:49.260 | that makes no sense.

00:36:50.700 | But those aren't even market cap weighted.

00:36:53.440 | Those are just, wow, that's a shame

00:36:55.700 | that those companies went out of business,

00:36:57.660 | but that's not the same as

00:36:59.820 | why is the market going higher and higher?

00:37:02.100 | And the answer was big companies were doing really well

00:37:05.700 | and your local neighborhood shops are not in the S&P 500.

00:37:10.040 | Now, so basically, like I said, news is equal weighted.

00:37:14.520 | We get hit with all of this.

00:37:16.360 | And it's like, this is terrible.

00:37:17.560 | This is horrible.

00:37:18.400 | How can the market be going up

00:37:19.560 | with oil prices going up and so forth?

00:37:23.760 | The bottom line is that it's just not a big factor.

00:37:27.520 | But the news makes it,

00:37:29.960 | you get the same amount of the news

00:37:32.320 | about all of these other things

00:37:33.920 | that are not really a factor in the cap weighted index,

00:37:37.460 | because they are a big company.

00:37:39.200 | Maybe we should be paying attention

00:37:40.560 | to what's going on in Google.

00:37:42.000 | But should we be even paying attention

00:37:44.600 | to a gas pipeline company or not?

00:37:48.200 | Maybe not.

00:37:49.080 | It's certainly, it's not gonna affect your index fund.

00:37:53.440 | So that's exactly right.

00:37:55.300 | I just used this expression today

00:37:58.040 | and I'm gonna repeat it 'cause I just love it.

00:38:00.920 | The days are long, but the decades are short.

00:38:04.240 | That is the fascinating expression

00:38:08.420 | that sums up how humans experience time.

00:38:12.440 | We live in the here and now, right?

00:38:14.260 | Our memories are these fallible,

00:38:18.100 | you know, nostalgic, tinged,

00:38:20.860 | air laden re-imaginings of the way the world was.

00:38:24.860 | That's the past.

00:38:25.860 | And the future is some combination of wishful thinking

00:38:29.740 | and hopes and dreams and imagining how it's gonna be.

00:38:33.980 | But neither of those really are relevant.

00:38:36.120 | We exist in the here and now, in the moment,

00:38:39.800 | and that's why these day-to-day just distractions,

00:38:44.160 | just, you know, it's noise

00:38:46.040 | and people get so sucked in by the noise.

00:38:50.400 | Okay, we're gonna drill down more now

00:38:52.680 | into portfolio management.

00:38:55.120 | And so all the next topics that I'm gonna talk about

00:38:57.480 | are going to be portfolio management topics.

00:38:59.640 | So maybe you could give us, you know,

00:39:01.880 | a couple of minutes on each one of these

00:39:04.180 | as I hit these topics.

00:39:05.620 | So the first one, a 70/30 portfolio,

00:39:09.100 | 70% stocks, 30% bonds is the new 60/40.

00:39:13.640 | In other words, you know, the 60/40 of 60% stock, 40% bonds.

00:39:18.140 | Do you think that people need

00:39:19.440 | to have more equity exposure now?

00:39:21.940 | So there's two factors that are driving this.

00:39:25.340 | Interest rates are part of it.

00:39:26.980 | Bonds serve two purposes in a portfolio.

00:39:29.500 | One is to throw off some yields,

00:39:31.780 | and the other is to provide some ballast

00:39:34.980 | to offset the volatility of equity markets.

00:39:37.820 | And so you're not getting the yield

00:39:40.820 | that we're used to on the bond side.

00:39:43.260 | And so you have to take a little more risk

00:39:45.280 | in order to generate similar returns.

00:39:47.780 | And one way to do that is 70/30.

00:39:50.460 | But that's only one of the two factors

00:39:53.140 | that I think are most important in driving this.

00:39:55.380 | The other factor is that for the investor class,

00:39:59.380 | and I can't believe I have to use that preface,

00:40:02.500 | but for most of the people who are saving for retirement

00:40:05.540 | and have a 401(k),

00:40:07.320 | their lifespans have continued to extend.

00:40:11.860 | And mid-80s is really not uncommon anymore.

00:40:16.340 | I mean, not everybody gets to live to 100,

00:40:18.540 | but the old days of having a life expectancy of 72,

00:40:22.540 | those are long behind us.

00:40:24.260 | And you have to make sure your money is going to last you

00:40:29.500 | throughout the entire retirement.

00:40:33.160 | And people generally are working later.

00:40:36.300 | They may be working, throttling back to part-time,

00:40:39.060 | but they're working later in their lives.

00:40:41.420 | Their retirement is more active.

00:40:43.700 | They're doing more things and spending more money

00:40:46.460 | in that part of their life.

00:40:48.500 | And then the cost of healthcare has just continued to go up.

00:40:52.520 | And so the way to achieve the short returns

00:40:56.460 | that seem to be rational for that group of folks

00:40:59.980 | is not to go too far out on the credit curve

00:41:02.920 | or the duration curve or the risk curve,

00:41:05.100 | and not to go 90/10 or anything crazy,

00:41:07.520 | but to move from 60/40 to 70/30

00:41:11.700 | is a pretty reasonable shift,

00:41:15.580 | because today's 70-year-olds

00:41:18.380 | are really the 60-year-olds of 30 years ago.

00:41:23.640 | - Is a 3% withdrawal rate the safe number now,

00:41:27.480 | or is it still 4%?

00:41:28.640 | - You know, one of the interviews I did

00:41:32.680 | was with William Sharpe,

00:41:34.420 | and he called this the most challenging question

00:41:38.600 | in all of finance.

00:41:40.560 | And he said, you know, we use 4%

00:41:43.240 | 'cause it plus or minus seems to work,

00:41:46.000 | not that there's any mathematical basis for it.

00:41:50.120 | It's not a terrible number.

00:41:52.240 | I don't know if the 3% number is,

00:41:55.960 | it clearly would give you a longer runway

00:42:00.680 | on that drawdown,

00:42:02.280 | but if you can't live on 3%,

00:42:04.680 | well then, you know, you may not have a choice.

00:42:07.200 | I'm relatively comfortable with 4%.

00:42:13.280 | I haven't seen anything conclusive

00:42:16.080 | that says 4% is problematic.

00:42:18.840 | So for now, I'm gonna stay with that,

00:42:22.240 | but I certainly think somebody will eventually

00:42:25.920 | come up with a number that is more defendable

00:42:29.160 | and mathematically valid.

00:42:30.720 | And if someone were to say to me,

00:42:32.200 | listen, I'm concerned about running out of money

00:42:34.760 | in my retirement and 4% is too much,

00:42:38.440 | 3.5% is not a terribly unreasonable number.

00:42:42.500 | - So the next question, and Aboglehead had this question,

00:42:47.160 | is active versus passive.

00:42:50.320 | How do you feel about A, all active,

00:42:53.560 | B, all passive, or C, somewhere in the middle?

00:42:58.240 | - So the problem with all active is pretty obvious.

00:43:02.800 | First, you don't know who the good active managers are

00:43:06.320 | until after the fact.

00:43:08.200 | And even if you started investing

00:43:10.680 | with some of the best active managers in the world,

00:43:13.920 | there's no guarantee

00:43:14.760 | that they're gonna continue that streak

00:43:17.000 | very few of them have.

00:43:19.360 | But a handful of people have done

00:43:21.320 | really, really well over time,

00:43:23.320 | and more so than can be explained by mere luck.

00:43:27.040 | There are some really skillful managers.

00:43:30.080 | So that's the first issue.

00:43:31.960 | The second issue is clearly cost.

00:43:34.360 | When you look at a lot of active managers,

00:43:36.820 | some of them aren't consistently outperforming,

00:43:40.080 | and so they don't justify the cost of entry.

00:43:43.940 | And lots of them are closet indexers.

00:43:46.240 | And so, you know, come for the high fees,

00:43:49.440 | stay for the beta-like performance.

00:43:51.280 | That doesn't make any sense.

00:43:53.080 | However, I interviewed recently Robbins Wiggleworth,

00:43:56.640 | who wrote the book Trillions,

00:43:58.100 | and basically gives the history of indexing.

00:44:00.760 | And it's kind of interesting

00:44:01.760 | that he throws certain firms like DFA

00:44:05.840 | into the index basis, so into that pile.

00:44:10.320 | And so, I don't know.

00:44:12.260 | I think if you're gonna have a value or a momentum

00:44:15.560 | or a small cap or a quality bias,

00:44:18.400 | to me, that decision seems to be a little bit active.

00:44:22.000 | But if you wanna have 25% of your portfolio

00:44:25.180 | with that sort of bias,

00:44:28.400 | I can't say that's the worst thing in the world.

00:44:30.660 | You're putting a little money at risk

00:44:32.440 | on the possibility of outperforming,

00:44:34.720 | but you're paying a low fee,

00:44:36.600 | and there's a lot of academic research that supports it.

00:44:39.820 | Or if you wanted to, if someone said to me,

00:44:43.480 | "Hey, I wanna have 10 or 20% of my portfolio

00:44:46.620 | "in Fidelity's Will Danhoff's fund

00:44:49.720 | "or Warren Buffett's, Berkshire,

00:44:51.640 | "or go down the list of some of these people

00:44:54.120 | "who have just put up incredible numbers for decades,"

00:44:57.440 | I wouldn't object to that.

00:44:59.280 | I think that's reasonable.

00:45:00.760 | Now, if you wanna put all of your money into one fund,

00:45:04.460 | that seems imprudent.

00:45:05.680 | And if you wanted to go 100% active

00:45:08.440 | across six different managers,

00:45:11.160 | it seems like that's a recipe

00:45:13.200 | for expensive underperformance.

00:45:15.960 | You know, 100% indexing is the easy way.

00:45:19.120 | And so somewhere in between,

00:45:21.600 | you know, even Vanguard is, what, 25%, 30% active now?

00:45:25.240 | So I'm okay if someone wants to have a reasonable amount

00:45:29.680 | of their portfolio in active equity or factor-based equity.

00:45:34.480 | And it has to be very long-term.

00:45:35.720 | I mean, this is not a trade

00:45:37.760 | going into some sort of a factor fund.

00:45:40.480 | Somebody's gonna go with a small-cap value tilt.

00:45:42.840 | And so it's gotta be a 25-year thing.

00:45:44.720 | It better be, 'cause the past decade,

00:45:46.560 | small-cap value has just stunk the joint up.

00:45:49.600 | Okay, let's go to the next thing.

00:45:51.200 | Tactical asset allocation.

00:45:53.520 | I mean, is it possible, I'm not gonna say possible.

00:45:55.720 | It is always possible.

00:45:56.840 | But is it probable that someone can outperform

00:46:01.840 | in either risk-adjusted or nominally

00:46:05.640 | by timing the markets?

00:46:09.840 | It's a really complicated answer.

00:46:12.120 | Short answer, a handful of people

00:46:14.360 | have had to put together a good track record.

00:46:17.480 | Real-world answer, the value of tactical,

00:46:21.720 | at least as we do it, is not to outperform the market.

00:46:25.720 | The value of tactical is to have a small slug of money

00:46:30.600 | that, from a behavioral finance and emotional perspective,

00:46:35.280 | allows you to leave your real money alone.

00:46:38.560 | And so, perfect example, we were talking about 60/40.

00:46:41.720 | If you have a 60/40 portfolio

00:46:43.760 | for 4/5 of your investable assets,

00:46:48.040 | and then you have a tactical portfolio for the last 20%,

00:46:52.280 | and it doesn't have to be great,

00:46:53.800 | it just has to be pretty good,

00:46:56.160 | so that in an environment like last year,

00:47:00.180 | it doesn't have to get out at the exact top,

00:47:02.900 | it doesn't have to get in at the exact bottom.

00:47:05.320 | But if in 2020, let's say you missed,

00:47:08.000 | rollover started somewhere in the middle of February.

00:47:10.760 | If you got out of the way for most of March,

00:47:13.560 | and you missed the April re-entry,

00:47:15.800 | and you didn't get back in until May,

00:47:17.640 | you're gonna underperform the S&P.

00:47:20.080 | But if that portfolio goes to 80% bonds

00:47:25.080 | or 100% bonds during the month of March

00:47:29.240 | when the S&P fell 30%,

00:47:32.240 | and you left the rest of your portfolio alone,

00:47:35.200 | 'cause you could rationalize it by saying,

00:47:37.000 | all right, I was 70/30, now I'm 50/50,

00:47:40.400 | and down 30% means my portfolio's down 15%,

00:47:44.360 | I could live with that,

00:47:45.920 | and then eventually you get back into equities

00:47:48.560 | on a rule-based system,

00:47:50.760 | it will have served its emotional release valve purpose.

00:47:55.000 | I don't know a lot of firms that behave that way.

00:47:58.340 | Rit Holt's Wealth Management does.

00:47:59.700 | That was the whole thinking behind

00:48:01.800 | creating our own in-house tactical.

00:48:04.700 | Have it be a trend-based system, have it be rules-based.

00:48:07.520 | It's not Barry rubbing his chin saying,

00:48:10.380 | now's the time to get in, now's the time to get out.

00:48:13.120 | So having a rules-based system

00:48:15.520 | that operates as a release valve,

00:48:18.620 | you don't have to miss 57% down in '08, '09.

00:48:22.840 | But if you miss 30 or 40% of it,

00:48:25.280 | people feel like they've done something,

00:48:27.560 | they're not just frozen in fear,

00:48:29.880 | and all right, I'm gonna ride this out

00:48:31.840 | with my long-term asset classes,

00:48:33.640 | 'cause I know equity will eventually come back,

00:48:37.060 | and this makes it a little less painful.

00:48:39.460 | Now my personal trading account,

00:48:41.340 | that's nothing but Bitcoin and leveraged 100 to one,

00:48:44.260 | that's crushing it.

00:48:45.640 | I'm sure it is.

00:48:47.860 | All right, let's go on to the next thing.

00:48:51.060 | One of the big areas of investing these days

00:48:55.020 | is ESG, Environmental, Social, and Governance,

00:48:59.440 | which is, to people who have been around a while,

00:49:01.460 | social responsible investing,

00:49:03.660 | only with some extras added on.

00:49:06.760 | People who go down this path,

00:49:08.860 | should they expect better returns, worse returns,

00:49:12.140 | same returns, higher fees?

00:49:14.420 | Barry, what do you think?

00:49:15.660 | - So ESG is complicated, it's a little challenging,

00:49:20.820 | and I'll give you one example is,

00:49:23.980 | if you have a low-carbon portfolio,

00:49:25.980 | not a lot of energy or oil stocks,

00:49:28.300 | well, when the price of oil was falling,

00:49:30.300 | the ESG portfolio did well,

00:49:32.340 | because those stocks did poorly,

00:49:34.080 | and here we are, oil back over 83,

00:49:37.380 | so the oil stocks themselves are doing well,

00:49:39.900 | and a low-carbon ESG portfolio

00:49:42.680 | is gonna underperform relative to that.

00:49:46.140 | So I think that's the wrong way to think about it.

00:49:49.500 | I think the right way to think about it is,

00:49:52.680 | first, you can use ESG as a screen

00:49:55.540 | to eliminate potentially risky companies,

00:49:58.280 | especially on the governance side.

00:50:01.740 | The higher-ranked governance companies

00:50:05.500 | tend not to have the sort of me-too moments

00:50:08.860 | that so many other companies

00:50:10.780 | with poor corporate governance

00:50:12.420 | have found themselves getting into.

00:50:14.540 | So that's number one.

00:50:16.000 | Number two, thanks to software products like Canvas,

00:50:21.000 | which is something we use, and direct indexing,

00:50:23.820 | you can really fine-tune the S&P 500

00:50:27.300 | and say, I don't want gun stocks,

00:50:29.900 | I don't want any companies that don't have

00:50:31.660 | at least one woman on their board of directors,

00:50:34.500 | and I don't want any companies

00:50:36.680 | that subsidize gambling or alcohol,

00:50:39.980 | or whatever is your personal preference.

00:50:42.760 | And so the ability to be far more granular

00:50:46.740 | and specific today than the early days

00:50:49.480 | of socially responsible investing

00:50:51.860 | really allows people to be specific.

00:50:54.980 | No animal cruelty, okay,

00:50:56.300 | let me pull that out of my index.

00:50:58.580 | The ability to be that fine-tuned, that specific,

00:51:02.140 | is really, really impressive,

00:51:03.660 | and I think for some people that's a great way

00:51:07.900 | put your money into the market

00:51:10.660 | in a method that reflects your values.

00:51:13.740 | And I think you just have to be willing to accept

00:51:17.320 | that maybe there's a performance cost, maybe not.

00:51:21.100 | Okay, this is the big one now.

00:51:22.220 | This is the last question before we wrap it up.

00:51:25.700 | Cyber currencies, Bitcoin, Ether, all of these.

00:51:29.900 | First of all, your overall comments about coins

00:51:33.620 | or cyber currencies as investments,

00:51:35.660 | and then if so, if you think they belong in a portfolio,

00:51:39.600 | how do you do it and how much?

00:51:41.100 | So really, really good question.

00:51:43.780 | So first, it's challenging to look at a new technology

00:51:48.060 | come along and slowly develop a foundation

00:51:52.220 | and develop an infrastructure

00:51:53.900 | and develop an ecosystem around it and ignore it, right?

00:51:58.300 | I mean, as much as I respect Warren Buffett,

00:52:01.940 | when he said in the mid-90s and then again,

00:52:05.780 | you know, in the late 2000s,

00:52:08.460 | I don't really understand the internet or technology

00:52:11.260 | and I'm not investing there.

00:52:12.780 | Well, good for him for sticking to his knitting,

00:52:16.820 | but he eventually became a huge Apple investor

00:52:20.220 | and left ungodly amounts of money on the table

00:52:24.140 | because what are you telling me?

00:52:26.580 | Apple is a value stock in 2013,

00:52:29.540 | but it wasn't a value stock in 2002

00:52:32.860 | when it was $15 with 13 cash

00:52:35.800 | and it just had to introduce this newfangled iPod,

00:52:38.620 | which was the forerunner of the iPhone.

00:52:41.180 | So I always want to avoid the mistake of

00:52:45.700 | that's complicated, I don't understand it,

00:52:47.900 | and I'm not gonna take the time to learn about it

00:52:50.020 | and become a smarter investor.

00:52:51.640 | So you really want to avoid that sort of,

00:52:54.260 | hey, you kids get off my lawn attitude.

00:52:57.060 | So that's number one.

00:52:57.980 | Number two, the crypto coins,

00:53:01.300 | as opposed to blockchain and the technology around it.

00:53:05.100 | So generally speaking, crypto coins are a commodity

00:53:08.780 | and commodities are speculative trades,

00:53:13.020 | not really long-term investments.

00:53:16.560 | However, there are people clamoring to put money into this.

00:53:21.560 | My problem with things like Bitcoin

00:53:26.020 | is it's trading for trading's sake

00:53:28.780 | and the speculation around it seems to be far too much

00:53:33.780 | in a subgroup of this.

00:53:35.380 | This isn't everybody.

00:53:36.340 | This is the group that I think is very visible,

00:53:39.380 | is the Lambo, gonna buy some Bitcoin

00:53:43.780 | and then I'm gonna make so much money,

00:53:45.300 | they're gonna go buy me a Lambo.

00:53:47.000 | Like that sort of approach to trading,

00:53:49.780 | not investing, to speculating,

00:53:52.180 | it's rife with problems and it has all sorts of issues.

00:53:55.940 | And I think that is the sort of thing that you want to avoid.

00:54:00.700 | Now, if you are of the belief that,

00:54:04.660 | hey, cryptocurrencies and blockchain

00:54:07.300 | and the whole infrastructure around it

00:54:10.140 | is internet 3.0 and smart contracts

00:54:14.140 | and this new technology,

00:54:16.140 | this is an opportunity to get into the internet

00:54:20.020 | circa late 1990s.

00:54:22.460 | Okay, so the way to do that

00:54:24.020 | is to create some form of an index.

00:54:27.340 | So you probably own some Bitcoin

00:54:30.540 | and some Ethereum is the next biggest coin

00:54:33.740 | and then another 10 or 20 coins after that.

00:54:37.140 | So you're not gambling on this is the dogecoin of the day

00:54:41.260 | or this is the, what was the one that ran up 260%

00:54:44.780 | before collapsing to zero?

00:54:46.540 | That's just speculative nonsense.

00:54:49.060 | You don't wanna play that game.

00:54:50.460 | So rather than go for the lottery ticket,

00:54:54.520 | take an indexing approach.

00:54:56.900 | It turned out Jack Bogle was right about that.

00:54:59.500 | And if you wanna put 3% or 5% of your cash

00:55:03.380 | or your portfolio into that, I could live with that.

00:55:07.460 | So 2017, we had a email come into the office.

00:55:12.180 | I bought a whole bunch of Bitcoin in 2010.

00:55:15.900 | It's worth $40 million today

00:55:17.860 | and I don't know what to do with myself.

00:55:19.780 | Okay, this guy's a truck driver.

00:55:21.940 | What do you wanna do with this?

00:55:23.680 | I don't know.

00:55:24.660 | He wants to buy an island.

00:55:25.780 | I remember that ad, he bought an island.

00:55:28.460 | Right, that was the tow truck driver in the late 90s.

00:55:33.020 | But this was a Bitcoin investor in 2016 or '17

00:55:38.020 | who reached out to us and said,

00:55:40.380 | "Hey, I have $40 million worth of Bitcoin, what do I do?"

00:55:44.100 | And there's no upside to telling people what to do

00:55:47.300 | 'cause if it works out, they're a genius

00:55:49.260 | and if it doesn't, you're an idiot.

00:55:50.820 | And so I find that's a thankless task.

00:55:53.100 | So rather than say, buy this, sell that,

00:55:56.420 | I like to tell people,

00:55:58.060 | well, put this in the context of regret minimization.

00:56:02.340 | If you sell it and it goes up, how do you feel?

00:56:04.500 | I would feel terrible.

00:56:05.780 | What if you don't sell it and it crumbles?

00:56:07.660 | I would feel terrible.

00:56:08.660 | All right, so maybe you might wanna think

00:56:12.420 | about selling half and holding onto half,

00:56:14.300 | but $40 million is a lot of money.

00:56:17.540 | Half of it, even after taxes, pays for your retirement,

00:56:21.380 | pays off your mortgage, pays your kid's college,

00:56:23.620 | pays their kid's college.

00:56:25.380 | That's a lot of money to just keep in the merry-go-round

00:56:29.140 | and take a risk that it collapses.

00:56:30.900 | So a rational approach is to try

00:56:33.980 | and create an index of crypto.

00:56:37.740 | And if you give me a couple of months,

00:56:40.780 | I could probably cobble something together for you on this.

00:56:44.180 | - Okay, now, at the end of all of your podcasts,

00:56:47.180 | you ask various questions to your guests.

00:56:49.900 | And unfortunately, we're running out of time here,

00:56:52.100 | so I'm just gonna cut the three questions

00:56:54.980 | down to one question.

00:56:56.820 | And then there's also another question

00:56:59.640 | that was really important to one of the Bogleheads,

00:57:02.620 | and I'll ask that one last.

00:57:03.900 | So here's the question that I think would be helpful.

00:57:06.940 | What advice would you give to a recent college graduate

00:57:10.780 | who is interested in coming into the investment industry?

00:57:14.340 | - So first, it's a fascinating industry,

00:57:16.860 | and it's in the middle of flux and it's very much changing.

00:57:20.580 | So that's number one.

00:57:23.840 | Number two, if you decide you wanna come into this industry,

00:57:28.580 | I would tell them not to worry about their first job,

00:57:31.380 | that it's really a stepping stone,

00:57:33.460 | and that the most important thing

00:57:35.580 | that I've learned in my career

00:57:38.740 | is that you have to develop and build a skillset

00:57:42.520 | that will serve you no matter what job you have.

00:57:45.820 | And you just keep improving and becoming better and better,

00:57:49.020 | learning more and more, developing more skills.

00:57:52.620 | Make yourself invaluable to your employer

00:57:56.140 | and to any employer who may wanna hire you in the future.

00:58:00.660 | And if you do that, you'll have a successful career

00:58:03.420 | no matter what you do.

00:58:05.260 | - And the very last question, and this is an important one,

00:58:07.600 | you often talk about coffee in your,

00:58:11.300 | when you write and when you speak.

00:58:15.180 | And so one reader was just dying to know,

00:58:19.580 | is it drip coffee, Keurig, French press,

00:58:22.500 | auto-drip, perc, pour over?

00:58:24.340 | I mean, what is it?

00:58:25.220 | How do you make your coffee?

00:58:26.420 | - Wow, wow.

00:58:27.780 | So I have three main ways to make coffee.

00:58:31.620 | Most days, it's the Breville grind and brew,

00:58:36.260 | which beans on this side, water goes in the middle,

00:58:39.620 | there's a timer, it goes off at 4.30 in the morning.

00:58:42.700 | So when I roll out of bed, 10, 15 minutes later,

00:58:46.100 | I have a fresh hot pot, freshly ground electric port drip

00:58:51.100 | into a thermos.

00:58:53.020 | And that keeps me going for like four or five hours.

00:58:55.740 | So that's Monday to Friday.

00:58:57.740 | On the weekends, I will grind up some beans

00:59:00.700 | and I love a good French press.

00:59:03.660 | And then last year, I got the biggest, baddest,

00:59:08.660 | programmable cappuccino maker, also from Breville.

00:59:12.840 | That was an insane amount of money,

00:59:15.940 | but I had these points that were about to expire.

00:59:18.900 | And so I used that to order the coffee maker.

00:59:22.060 | So I know emotionally that I should not be taking points,

00:59:27.060 | credit card points and points.

00:59:29.180 | Intellectually, I understand that all money is fungible

00:59:31.720 | and I should really be taking it in cash.

00:59:34.380 | But I do like taking in points

00:59:36.100 | 'cause it allows me to make these very irrational

00:59:39.060 | spending decisions and not feel bad about it.

00:59:41.700 | It was free, we paid for it with points.

00:59:44.660 | Part of my brain knows that that's completely wrong.

00:59:47.700 | And the other part of my brain is just like,

00:59:49.420 | "Dude, just shut up and enjoy the cappuccino."

00:59:52.220 | - Well, Barry, it's been wonderful

00:59:54.300 | having you on Bogleheads Uninvesting.

00:59:55.860 | You've talked about a lot of things here.

00:59:57.540 | You gave us your opinion about how you would do things

01:00:00.860 | and that's all important for us to hear.

01:00:03.060 | I wanna thank you on behalf of the Bogleheads

01:00:05.360 | and I hope you have a great weekend.

01:00:07.580 | - Oh, thanks so much, Rick.

01:00:08.740 | As always, a lot of fun.

01:00:10.340 | Let me know the next time you're in town,

01:00:11.900 | we'll grab another meal.

01:00:13.420 | - Sounds great, thank you, Barry.

01:00:15.620 | - This concludes Bogleheads Uninvesting, episode number 39.

01:00:19.620 | Join us each month as we have a new guest

01:00:22.100 | and talk about a new topic.

01:00:23.780 | In the meantime, visit bogleheads.org

01:00:26.580 | and the Boglehead Wiki.

01:00:28.260 | Check out the Bogleheads new YouTube channel,

01:00:31.380 | Bogleheads Twitter, Bogleheads Facebook,

01:00:34.220 | and find out about your local Bogleheads chapter

01:00:37.860 | and tell others about it.

01:00:39.540 | Thanks for listening.

01:00:40.540 | (upbeat music)

01:00:43.120 | (upbeat music)

01:00:45.700 | (upbeat music)

01:00:48.280 | you

Bogleheads® on Investing Podcast Episode 039 – Barry Ritholtz, host Rick Ferri (audio only)

Chapters