Bogleheads® on Investing Podcast 077: Aswath Damodaran, Dean of Equity Valuation - The Stern School
00:00:00.000 | [MUSIC PLAYING]
00:00:09.920 | Welcome, everyone, to the 77th edition
00:00:12.040 | of "Bogleheads on Investing."
00:00:14.360 | Today, our special guest is Azwath Damodaran,
00:00:17.520 | the professor at the Stern School of Business
00:00:19.440 | at New York University, where he teaches corporate finance
00:00:22.280 | and equity valuation.
00:00:23.760 | Azwath is best known among practitioners and academics
00:00:26.880 | as the dean of valuation for the many books, articles,
00:00:30.200 | and ongoing data he maintains on equity markets
00:00:33.000 | around the globe.
00:00:33.840 | [MUSIC PLAYING]
00:00:43.240 | Hi, everyone.
00:00:43.960 | My name is Rick Ferry, and I am the host
00:00:46.120 | of "Bogleheads on Investing."
00:00:48.120 | This episode, as with all episodes,
00:00:50.680 | is brought to you by the John C. Bogle Center
00:00:53.200 | for Financial Literacy, a nonprofit organization that
00:00:56.800 | is building a world of well-informed, capable,
00:00:59.720 | and empowered investors.
00:01:01.400 | Visit the Bogle Center at boglecenter.net,
00:01:04.880 | where you will find a treasure trove of information,
00:01:07.720 | including transcripts of these podcasts.
00:01:10.440 | I have a couple of announcements before we get started today.
00:01:13.240 | The YouTube videos from the 2024 Bogleheads Conference
00:01:18.240 | in Minneapolis, Minnesota are now
00:01:20.880 | available online at boglecenter.net.
00:01:25.120 | All of the sessions were recorded,
00:01:26.960 | and they're all available for free at the Bogle Center
00:01:30.400 | website.
00:01:31.320 | Second, we are very close to signing a contract
00:01:34.680 | to have the 2025 conference at a conference center
00:01:39.600 | on the Riverwalk in San Antonio the weekend of October 17th
00:01:44.040 | through the 19th.
00:01:45.400 | It's going to be a great conference
00:01:46.800 | at a beautiful location.
00:01:48.280 | I'll provide more information on future podcasts
00:01:51.160 | when it becomes available.
00:01:52.760 | Our guest today on "Bogleheads on Investing"
00:01:54.920 | is Aswat Damodaran.
00:01:56.840 | He is a professor of finance at the Stern School of Business
00:01:59.880 | at New York University, where he teaches corporate finance
00:02:03.120 | and equity valuation.
00:02:04.680 | Aswat is known in the investment industry
00:02:06.840 | and the academic community as the dean of valuation.
00:02:10.680 | He has written close to a dozen books,
00:02:12.680 | countless academic articles.
00:02:14.360 | He maintains a blog and maintains an in-depth database
00:02:17.680 | on equity valuations around the globe
00:02:20.120 | that you can access by searching for Damodaran online.
00:02:24.120 | Today, we'll be discussing his teachings, the risk-free rate,
00:02:27.720 | the equity risk premium, and even getting
00:02:30.080 | into how AI is changing finance and maybe changing all of us.
00:02:35.000 | So with no further ado, let me introduce Aswat Damodaran.
00:02:39.520 | Welcome to "Bogleheads on Investing."
00:02:41.600 | Thank you for having me.
00:02:42.920 | It's a real pleasure to have you.
00:02:44.280 | I've been following you for years, your books
00:02:47.680 | and teachings, your website.
00:02:50.680 | You've got a tremendous amount of information
00:02:52.680 | there on valuation.
00:02:55.000 | You're very open with what you publish.
00:02:59.080 | You want people to learn, and I commend you for that.
00:03:01.720 | It's a real pleasure to interview you today.
00:03:04.880 | Thank you.
00:03:05.680 | I want to start out with who you are, your background.
00:03:10.160 | I'm a teacher, and I describe myself as a teacher.
00:03:12.880 | And that's pretty much all I do.
00:03:14.680 | I don't consult.
00:03:15.640 | I don't do appraisals for a living.
00:03:18.040 | I'm not an expert witness.
00:03:20.040 | I'm a teacher.
00:03:20.560 | I teach.
00:03:21.760 | And that's my passion.
00:03:23.400 | I happen to teach corporate finance and valuation
00:03:25.800 | because it's an area which I find fascinating
00:03:29.040 | because it's an interplay between numbers and stories
00:03:32.000 | and understanding businesses, which I find fascinating.
00:03:35.560 | But I'm a teacher, first and foremost.
00:03:37.320 | That's how I describe myself.
00:03:39.600 | And talk about how you decided you
00:03:41.800 | were going to become a teacher.
00:03:43.640 | I was getting my MBA at UCLA.
00:03:45.320 | It was 1981, and I was short of money.
00:03:48.400 | I needed something to cover tuition for the next semester.
00:03:51.720 | And I took on a job as a TA, expecting
00:03:53.800 | it to be just one semester I'd be a TA,
00:03:55.840 | then I'll go do what MBAs do.
00:03:57.880 | That time, you know, go work for an investment bank.
00:04:00.080 | It was the start of the huge growth in investment banking.
00:04:03.560 | So I never expected it to be more than just
00:04:05.920 | that 15-week assignment of-- it was actually
00:04:08.840 | a quarter, a 10-week assignment.
00:04:10.920 | It was an accounting class, which-- and I don't even
00:04:13.480 | like accounting, for those of you who have heard me talk about
00:04:15.840 | it.
00:04:16.340 | It's not a subject I like.
00:04:17.880 | But I walked into that class expecting
00:04:20.280 | to do a TA discussion.
00:04:21.520 | And 15 minutes in, I didn't know what it was.
00:04:23.960 | I realized this was what I wanted
00:04:25.560 | to do with the rest of my life.
00:04:27.600 | I mean, I call these moments of grace,
00:04:29.520 | where essentially you get this signal of, hey,
00:04:32.600 | this is what you were meant to do.
00:04:34.040 | I'm convinced we all get our moments of grace.
00:04:37.040 | Most of the time, we're too busy to be watching for it.
00:04:40.000 | I happened to be lucky enough to recognize it.
00:04:43.360 | And I walked out of that class, said,
00:04:45.080 | I'm going to become a teacher.
00:04:46.720 | And I mean, I could have become a teacher in a high school.
00:04:49.440 | I could have become one of these teachers
00:04:51.280 | who teaches in five different colleges.
00:04:53.560 | But I'm also lazy.
00:04:55.080 | And one of the advantages of teaching at a research
00:04:58.000 | university is you teach three classes a year.
00:05:00.120 | That's your teaching load.
00:05:01.760 | And I said, that's the kind of teaching I'd like to do.
00:05:04.400 | Because then I can enjoy teaching.
00:05:05.800 | I won't burn out.
00:05:07.120 | So I walked up to the seventh floor of UCLA,
00:05:10.160 | which is where I was getting my MBA,
00:05:12.040 | into the finance professor's office.
00:05:14.280 | And I said, I'd like to get a PhD.
00:05:16.320 | And he asked me, why do you want to get a PhD?
00:05:18.400 | And I did not lie.
00:05:19.160 | I said, I want to become a teacher.
00:05:22.600 | To me, research is a means to an end.
00:05:24.600 | It's not the end.
00:05:26.160 | And I think he was good enough to be OK with it.
00:05:28.360 | A lot of professors have said, if you
00:05:29.900 | don't want to do research, don't do a PhD.
00:05:32.600 | But I did go on, got my PhD, taught for a couple of years
00:05:36.360 | at the University of California at Berkeley
00:05:38.320 | as a visiting faculty member, where I taught,
00:05:40.560 | I think, six different classes, ranging
00:05:43.280 | from traditional corporate finance
00:05:45.800 | class to the undergraduates, to a central banking class.
00:05:48.840 | And I knew nothing about central banking.
00:05:50.540 | I had to teach myself just enough
00:05:52.680 | to stay ahead of the curve.
00:05:54.480 | And it made me a dabbler.
00:05:56.480 | I understood that there were things in each class
00:05:59.120 | that I could draw on for the other classes.
00:06:01.220 | And I've always been a generalist.
00:06:02.680 | I remain one of the few people who
00:06:04.280 | teaches across the finance spectrum,
00:06:06.760 | because finance has increasingly become specialized.
00:06:09.600 | I came to NYU in 1986, and they haven't fired me yet.
00:06:12.920 | So I'm still there.
00:06:16.360 | You started writing books, oh, back in the 1990s, I believe.
00:06:21.240 | It was your first book.
00:06:22.560 | My first book was an evaluation book.
00:06:25.280 | In fact, it was a huge ego move to put my name on the book,
00:06:29.600 | because I remember the publisher said,
00:06:31.360 | why don't you put your name on the book?
00:06:33.020 | And I said, nobody knows who I am.
00:06:34.600 | Why would you want to do that?
00:06:36.680 | Could we put somebody who's better recognized on the book?
00:06:39.400 | He said, go ahead, put your name.
00:06:40.800 | And it's "The Modern Evaluation," 1992.
00:06:43.480 | I had still not been tenured.
00:06:44.920 | A dangerous thing to do if you're an academic
00:06:48.200 | is to write a book before you get tenure,
00:06:50.000 | because you're supposed to write papers that get published.
00:06:53.680 | So that was my first book.
00:06:55.360 | And then I added to it in corporate finance
00:06:58.120 | and investments, and so it kind of extended from there.
00:07:01.960 | And back in 1998, you published a book
00:07:04.600 | with the late Peter Bernstein.
00:07:06.480 | That must have been an interesting experience
00:07:08.400 | for you.
00:07:09.520 | Peter was a legend.
00:07:11.360 | Now, I miss what I called Renaissance men,
00:07:14.000 | people who could talk about different things,
00:07:16.920 | extend across disciplines.
00:07:18.880 | And we used to have quite a few of them,
00:07:20.540 | and Peter was a Renaissance man.
00:07:22.280 | He could talk about economics.
00:07:23.840 | He could talk about finance.
00:07:25.640 | He could talk about culture.
00:07:27.200 | He could talk about politics.
00:07:29.240 | And it was towards the end of his legendary career.
00:07:32.840 | It was not really a book that we co-wrote.
00:07:34.960 | We co-edited.
00:07:36.440 | So basically, we took other people's articles.
00:07:38.600 | We each had an article in there.
00:07:40.520 | So it was a co-edited book.
00:07:42.040 | It remains the only book I've worked with with somebody else.
00:07:44.880 | I've never co-authored a book, because I'm a control freak.
00:07:48.120 | But with Peter, I had no problems doing it,
00:07:50.600 | because I learned a great deal from working with him.
00:07:53.600 | OK, so so far, you're lazy.
00:07:56.160 | You're a control freak.
00:07:57.680 | And I also heard you say somewhere
00:07:59.960 | that you could never work for somebody else.
00:08:01.840 | Never.
00:08:03.120 | I'd be fired.
00:08:04.400 | You'd be fired.
00:08:05.120 | You wouldn't make it.
00:08:06.240 | Couldn't go into corporate world.
00:08:07.680 | No.
00:08:08.320 | With your teaching, you started out with these two bookends
00:08:12.240 | that you called them.
00:08:13.120 | One of them was corporate finance,
00:08:15.120 | and the other was valuation.
00:08:17.760 | They remain the two core classes I teach to the MBAs.
00:08:20.760 | I teach corporate finance to the first year MBAs,
00:08:23.040 | and valuation to the second year MBAs.
00:08:25.280 | And often, they walk into my office,
00:08:27.000 | say, what's the difference between your two classes?
00:08:29.080 | And I have to tell them the truth.
00:08:30.500 | It's the same class, taught from different perspectives.
00:08:33.960 | In corporate finance, we look at businesses
00:08:35.960 | from the inside out.
00:08:37.560 | In other words, you look at it as managers,
00:08:39.360 | as decision makers saying, how do I run a business?
00:08:42.360 | In valuation, you look at those same businesses
00:08:44.680 | from the outside in.
00:08:46.800 | So you have less control over the levers.
00:08:48.840 | So management chooses not to borrow money.
00:08:51.440 | That's what you're stuck with.
00:08:52.720 | You can't go in and change things just
00:08:54.360 | because you feel like doing it.
00:08:56.400 | I truly enjoy the corporate finance class
00:08:58.600 | more because I get to look at the levers
00:09:00.720 | and say, when does it make sense for a company
00:09:03.000 | to return cash to its stockholders?
00:09:04.640 | When does it make sense to buy back as opposed
00:09:06.600 | to paying dividends?
00:09:07.760 | Fundamental questions that we face every day
00:09:10.400 | when we look at news stories.
00:09:12.360 | So to me, the two classes are bookends
00:09:14.200 | because they represent two very different perspectives
00:09:17.480 | on value.
00:09:18.680 | Now, one talks about how do we change value as managers.
00:09:21.760 | The other talks about, hey, how much is something worth?
00:09:24.360 | And can I get it for a lower price?
00:09:26.880 | And we're going to get more into evaluation in a minute.
00:09:29.440 | But after a while, you also began
00:09:32.040 | to think about another area.
00:09:35.600 | And that was what you call investment philosophies.
00:09:39.760 | Now, Bogle has called it investment strategies.
00:09:41.720 | It's a little bit different.
00:09:43.280 | For us, philosophy is passive or active.
00:09:46.320 | But you use it in the phrase of different ways of which
00:09:49.280 | you can invest portfolios.
00:09:51.560 | In fact, I'm glad you brought up investment strategies as opposed
00:09:54.560 | to philosophies.
00:09:55.520 | I'll give you an example.
00:09:56.560 | A strategy is picking low PE stocks.
00:09:59.560 | That's a strategy.
00:10:00.760 | A philosophy is believing that boring companies get
00:10:04.280 | undervalued by markets because markets like excitement.
00:10:08.160 | Philosophies build on a market mistake,
00:10:10.880 | a belief about how markets work and don't work.
00:10:14.680 | Strategies are what you use to exploit that philosophy.
00:10:17.440 | So to me, the two are connected.
00:10:19.520 | But the reason I use the word philosophy
00:10:21.600 | is it started with observing that there
00:10:24.800 | are successful investors out there.
00:10:27.640 | People are successful in markets.
00:10:30.280 | But they don't all fall into the same bucket.
00:10:32.520 | So you've got the Warren Buffetts of the world.
00:10:34.560 | You've got the Peter Lynches of the world.
00:10:36.320 | You've got the George Soros of the world
00:10:38.360 | or the Jim Simons of the world.
00:10:40.320 | Very different ways of approaching the market,
00:10:43.840 | and they succeed.
00:10:44.680 | So there are two basic facts in markets.
00:10:46.800 | One is there are very few successful investors
00:10:49.360 | in the long term.
00:10:50.440 | This is a very tough game to make, which is one reason.
00:10:54.640 | I'm drawn to Jack Bogle because Jack
00:10:56.920 | recognised this very early on.
00:10:59.240 | He said, this is a very tough game to win.
00:11:02.160 | So why are you expending time and resources
00:11:05.560 | trying to win a game where so few people win?
00:11:09.000 | But those so few people who win, they don't even
00:11:11.480 | share the same characteristics.
00:11:13.440 | Some come from the perspective of,
00:11:15.280 | I'm going to buy companies that look cheap
00:11:17.400 | relative to what they already have on their books
00:11:19.800 | right now, value investors.
00:11:21.480 | Others come in with a philosophy of growth
00:11:23.920 | is what markets get wrong.
00:11:25.400 | So I'm going to go after growth companies.
00:11:27.440 | Still others say, look, markets are where you have to go.
00:11:29.760 | You have to tie markets.
00:11:30.760 | So basically, you've got Warren Buffett, Peter Lynch,
00:11:33.360 | and George Soros.
00:11:34.400 | They're already in terms of very different philosophies.
00:11:37.800 | And rather than say, this is the best philosophy, which
00:11:41.760 | happens to be what you will find if you walk into a bookstore,
00:11:44.400 | if there are any left, and you walk to the investing section,
00:11:47.800 | you will find philosophies blaring out
00:11:50.840 | that they're the chosen ones.
00:11:53.640 | It's one reason why I'm uncomfortable in Omaha,
00:11:56.200 | Nebraska, is because the investors show up there,
00:11:59.040 | old-time value investors think they're the chosen one.
00:12:01.480 | They have the high ground.
00:12:03.720 | And I don't think that's true, because there are hundreds
00:12:06.440 | of books on Warren Buffett.
00:12:08.280 | But if you look at all the people who've read those books
00:12:10.600 | and tried to imitate him, almost none of them
00:12:13.960 | deliver the same kind of returns.
00:12:16.120 | In fact, I'll wager, collectively,
00:12:17.640 | if you took all those investors who show up
00:12:19.440 | in Omaha every year, and you look at the returns
00:12:22.200 | that they've made on their investments
00:12:24.080 | that they've underperformed the Vanguard 500 Index Fund,
00:12:28.000 | even though they claim to be true believers.
00:12:29.920 | So I start with a different question.
00:12:31.480 | I said, look, there are a few successful investors.
00:12:33.880 | There are relatively few.
00:12:35.360 | There reigns a spectrum.
00:12:36.920 | What is it that they brought to the table other than luck,
00:12:41.120 | which we can never discount, that made them successful?
00:12:44.320 | So my investment philosophies class starts with that premise.
00:12:47.640 | There is no one right investment philosophy for everyone,
00:12:51.520 | but there's one right one for you, given your makeup,
00:12:55.120 | given what you bring to the table.
00:12:56.920 | And that one right philosophy
00:12:58.720 | might be to be a passive investor.
00:13:00.760 | One of the great things about investing
00:13:02.840 | is you can effortlessly beat the average active investor
00:13:06.160 | by putting your money in index funds.
00:13:08.000 | - And that's the philosophy of most Bogle heads.
00:13:11.360 | I mean, people have their, what I call,
00:13:13.400 | bingo money account, fund money account.
00:13:15.480 | They might use a Roth IRA or something
00:13:17.320 | and pick a few stocks.
00:13:18.800 | But generally, 90% to 100% of their investments
00:13:24.040 | are in just US stock, total market index fund
00:13:28.840 | and international stock index fund.
00:13:30.880 | A couple of bond funds or maybe just treasuries
00:13:34.320 | on the bond side.
00:13:35.160 | I mean, it's very simple, simplistic, low cost.
00:13:38.200 | But we always love to learn.
00:13:39.520 | So we're always interested in what everybody else is doing.
00:13:43.040 | We may not do that,
00:13:44.400 | but we're interested in learning about it.
00:13:47.360 | So this is the investment philosophies class that you teach.
00:13:51.080 | But most recently, your last book
00:13:54.040 | was on investment lifecycle.
00:13:56.240 | Let's talk about your interest in that
00:13:57.880 | and how you evolved into writing a book about that.
00:14:02.280 | - No, it's corporate life cycles.
00:14:03.560 | It's about how businesses age like human beings do
00:14:06.640 | and how they fight aging like human beings do.
00:14:09.800 | Which is, you know, you don't want to get old.
00:14:11.600 | So consultants and bankers tell you you can be young again.
00:14:14.200 | So you try to do an acquisition, enter a new business.
00:14:17.200 | And it's a structure I've used in my corporate finance,
00:14:19.520 | my valuation, my investment philosophies class
00:14:21.600 | as long as I've taught it.
00:14:22.680 | So this is not a new topic.
00:14:24.640 | It's a structure that I've used in all my classes
00:14:27.240 | that I find incredibly useful in understanding
00:14:29.920 | why companies behave the way they do,
00:14:32.280 | especially as they age.
00:14:34.080 | So corporate lifecycle book is about tracking
00:14:36.680 | that aging process and how companies change
00:14:40.440 | or they should change as they age.
00:14:43.040 | The kind of decisions they make,
00:14:44.720 | what they should focus on as companies should change.
00:14:47.720 | And as investors, there's a lesson there as well.
00:14:50.600 | Is I'll give you an example.
00:14:51.880 | You know, you buy into old-time value investing.
00:14:54.920 | Old-time value investing says you should buy a company
00:14:57.600 | for less than what it has as assets on its books.
00:15:01.680 | So you look at the Ben Graham 12 screens
00:15:03.720 | for finding a cheap stock.
00:15:05.360 | It's about looking at what a company owns
00:15:07.240 | and saying, I want to buy it at 50% of that value.
00:15:10.240 | Good luck finding it, but that's what you're looking for.
00:15:12.920 | If you adopt that strategy or you go with that philosophy,
00:15:17.600 | then you know where you're going to end up with the lifecycle.
00:15:19.480 | You're going to end up with a lot of mature
00:15:21.440 | and declining companies in your portfolio.
00:15:24.960 | You're going to end up with the Kraft Heins or Coca-Cola's,
00:15:27.560 | the three M's of the world,
00:15:28.840 | because those are the companies
00:15:30.080 | we have a chance of doing it.
00:15:31.560 | You're never going to be buying Palantir or even Facebook
00:15:35.560 | or definitely not Nvidia
00:15:37.720 | because it'll always look expensive to you.
00:15:40.240 | Now you have to be okay with that.
00:15:42.160 | I mean, we know what Warren Buffett's biggest lament
00:15:46.240 | has been over his lifetime,
00:15:47.720 | which is he never invested in tech when it was young.
00:15:51.880 | I mean, Bill Gates was one of his best friends
00:15:54.240 | and he never invested in Microsoft along the way.
00:15:56.600 | I know the investor now, Berkshire Hathaway,
00:15:59.000 | invested in Apple finally in 2017,
00:16:01.480 | but by that time, Apple was a mature company.
00:16:04.280 | But the reality is that's a feature, not a bug,
00:16:07.240 | of the Buffett investment philosophy.
00:16:09.680 | It's one of the side costs of focusing so much
00:16:12.720 | on what's on the ground right now
00:16:14.880 | is you're never going to buy a growth company.
00:16:17.520 | And the problem with that is we might be entering a century
00:16:20.440 | where the cost of not having growth companies
00:16:23.120 | in your portfolio could be catastrophic.
00:16:25.720 | Let's take an example.
00:16:27.000 | In the last 15 years,
00:16:28.520 | if you didn't own any of the Fangam stocks
00:16:31.640 | or any of the Mag 7, as they're called now,
00:16:34.640 | the chance of you beating the market became minuscule
00:16:37.280 | because those seven companies by themselves
00:16:41.040 | have accounted for 15% of the increase in market cap
00:16:44.840 | of all US stocks, 7,000 stocks,
00:16:47.360 | in the last 15 years have come from the seven companies.
00:16:50.360 | If you don't have those seven companies in your portfolio,
00:16:52.640 | how the heck are you going to beat the market?
00:16:55.440 | Conversely, if you're an index fund investor,
00:16:59.000 | you benefited, right?
00:17:00.000 | Because all you have to do is buy the index,
00:17:01.720 | you're going to get those seven companies.
00:17:03.600 | So it's actually made the case
00:17:04.840 | for passive investing even stronger
00:17:06.920 | because if you're an active investor
00:17:08.640 | and you end up with a philosophy
00:17:10.440 | that leaves those companies out,
00:17:12.880 | you're going to have a tough time beating the market.
00:17:15.200 | - I was reading a stat that said 25 years ago,
00:17:18.160 | they listed out the top 10 companies on the S&P
00:17:22.320 | and the only one company that's still in there is Microsoft.
00:17:25.960 | All the other nine companies are gone.
00:17:27.880 | They've rotated out.
00:17:29.080 | So the kind of the glory of passive investing
00:17:32.200 | is you know that your portfolio
00:17:34.040 | is always going to hold those top 10 stocks.
00:17:36.960 | - Yeah.
00:17:37.800 | - Okay, I want to move a little bit here
00:17:40.400 | and begin to ask you some questions
00:17:43.240 | pertaining to what you teach.
00:17:45.760 | So this is Valuation 101
00:17:47.560 | and I want to go over some terms
00:17:49.760 | so that everybody understands where they come from.
00:17:52.720 | First, what is a risk-free rate?
00:17:55.320 | - It's what you can make guaranteed.
00:17:58.320 | So take your whatever brokerage account you have.
00:18:01.240 | I'm sure everybody in the audience has some money in cash.
00:18:06.160 | What's the highest rate of return
00:18:08.800 | you can make guaranteed on that cash?
00:18:11.320 | I'll tell you what it is for me.
00:18:12.400 | I go into the treasury auction.
00:18:14.520 | You can actually buy T-bills directly.
00:18:16.800 | I don't put my money in money market funds,
00:18:18.640 | but you know, you could do that.
00:18:19.760 | You get pretty close.
00:18:21.240 | And I feel almost certain,
00:18:24.640 | in fact, let me take the almost out.
00:18:26.040 | I feel certain that six months from now
00:18:27.960 | when I cash out my T-bills,
00:18:30.280 | I'm going to get that 4.7 or 5%
00:18:32.880 | I was promised when I invested up front.
00:18:35.560 | It's guaranteed.
00:18:36.720 | The one catch there,
00:18:38.120 | it's assuming that the U.S. Treasury will not default.
00:18:41.760 | And for a century or more,
00:18:43.560 | we've assumed that that's true.
00:18:45.520 | One of the shakier things about
00:18:47.400 | what's happened in the last 10 years
00:18:49.120 | is the U.S. government has walked up,
00:18:51.400 | walked to the precipice of defaulting,
00:18:54.240 | mostly for political reasons, not economic reasons,
00:18:56.760 | because that, you know, you've got to put the debt limit,
00:18:59.480 | you've got to increase it, Congress has to vote on it.
00:19:02.280 | So there's this residue of doubt now
00:19:04.880 | on whether the U.S. Treasury is truly default free.
00:19:08.000 | But for something to be risk-free,
00:19:10.200 | it's got to be default-free and guaranteed.
00:19:13.320 | So it can't be a corporate bond.
00:19:15.320 | It can't be a government bond if the government can't default.
00:19:18.400 | So it's got to be as close as you can get to that.
00:19:20.960 | U.S. dollars, that's going to probably be
00:19:24.040 | a Treasury bond rate.
00:19:25.280 | I use longer-term rates if you want to lock it in,
00:19:27.800 | compare it to stocks.
00:19:29.320 | So it becomes the number you compare
00:19:31.280 | to what you can generate on stocks,
00:19:32.880 | saying, "Should I be investing in stocks?"
00:19:35.400 | So even if you're a bogelhead and invest passively,
00:19:38.640 | one of the decisions you've got to make
00:19:40.240 | is how much money do I invest in my equity index fund
00:19:44.160 | as opposed to, and this is the decision that drives that.
00:19:48.120 | - You talked about T-bills.
00:19:49.560 | Other people use the 10-year Treasury.
00:19:52.440 | Other people use TIPS.
00:19:54.360 | - I would use the 10-year Treasury.
00:19:55.600 | I don't use T-bills.
00:19:56.480 | And the reason is very simple.
00:19:58.080 | Stocks are a long-term investment.
00:20:00.120 | So it's not that the T-bill is not risk-free,
00:20:02.120 | but it's risk-free for three months or six months.
00:20:04.880 | You're comparing investing in equities,
00:20:06.680 | which is a long-term investment choice.
00:20:09.120 | You want to compare it to something that's long-term.
00:20:11.760 | The reason TIPS doesn't even enter the equation
00:20:14.560 | is the return on stocks is a nominal return.
00:20:17.920 | TIPS are a real return.
00:20:19.360 | You're comparing apples to oranges.
00:20:21.480 | If you want to convert what you expect to make on stocks
00:20:23.960 | into a real return, take out the inflation component,
00:20:27.000 | you can compare to TIPS.
00:20:28.520 | But you can't compare to T-bills
00:20:29.960 | because the duration is mismatched
00:20:31.680 | and you can't compare to TIPS
00:20:33.320 | because you're comparing a nominal to a real.
00:20:35.480 | So I use 10-year T-bonds,
00:20:36.960 | and that's the easiest of all numbers
00:20:39.080 | to pull out of the market,
00:20:40.000 | know exactly where it is at every point of every day.
00:20:43.840 | So it becomes my comparison point
00:20:45.560 | for should I be investing in equities in the first place?
00:20:49.240 | - So now we get to the equity side,
00:20:51.400 | and we've all heard the term the equity risk premium,
00:20:55.960 | which you have gotten this name as the Dean of Valuation.
00:21:01.160 | And part of this is you monthly come up
00:21:04.040 | with the equity risk premium.
00:21:06.920 | So first define what an equity risk premium is.
00:21:11.920 | - Okay, right now the T-bond rate is 4.4%.
00:21:15.680 | So today if you put your money in a 10-year T-bond,
00:21:17.920 | assuming the U.S. Treasury is default free,
00:21:20.960 | you can make 4.4% guarantee.
00:21:23.760 | I come to you with the S&P 500.
00:21:25.360 | Let's keep it an index where we at least know
00:21:27.880 | that we're talking about the same thing.
00:21:29.480 | I want you to take your money out of the T-bond
00:21:32.120 | and put it into the S&P 500.
00:21:34.280 | The question I'm asking you is how much higher
00:21:36.440 | would the expected return need to be for you to switch?
00:21:40.040 | Why does it have to be higher?
00:21:41.520 | Because the T-bond you're guaranteed that 4.4%.
00:21:44.280 | With the S&P 500, it's not guaranteed.
00:21:46.960 | You'd need to earn more than 4.4% to move your money.
00:21:51.520 | How much more is your equity risk premium?
00:21:54.880 | So you can already see that this is a number
00:21:56.760 | that'll vary across people.
00:21:58.360 | If you're risk-averse and you're worried about risk,
00:22:01.560 | you might say, "I need 6% more than the T-bond rate."
00:22:04.280 | Your neighbor, who's much more risk-taking,
00:22:06.400 | might say, "I'll settle for 3%."
00:22:08.640 | So you can already see that this is a number
00:22:10.720 | that'll vary across people.
00:22:12.440 | And I'm trying to estimate it for the entire market,
00:22:15.600 | which is millions and millions of people.
00:22:17.880 | So this sounds like an incredibly difficult task.
00:22:21.760 | And for the longest time, people gave up on it.
00:22:23.600 | They looked backwards.
00:22:24.480 | They said, "Over the last 70 years, I'd have made 5%.
00:22:27.200 | Therefore, that's my equity risk premium."
00:22:29.440 | But that's like driving 80 miles down a highway,
00:22:31.800 | looking in the rear-view mirror.
00:22:33.040 | It's not going to end well.
00:22:34.840 | So starting about 30 years ago, I'd said,
00:22:37.120 | "Look, I'd like to figure out what the market is demanding
00:22:40.320 | as an equity risk premium."
00:22:42.400 | It's not a formula or an equation.
00:22:45.000 | It's basically an internal rate-of-return calculation.
00:22:47.680 | I know what you paid for stocks.
00:22:50.000 | I can see what the expected cash flows are for stocks.
00:22:53.160 | The S&P 500 is the most tracked and followed index.
00:22:56.440 | I can see the expected earnings.
00:22:58.040 | I can come up with the expected cash flows.
00:23:00.400 | If I know what you paid for stocks
00:23:02.000 | and the expected cash flows,
00:23:03.160 | I can solve for what discount rate
00:23:05.000 | makes the present value of the cash flows
00:23:07.400 | equal to the level of the index today.
00:23:10.040 | It's the way we compute yield to maturity on a bond.
00:23:12.560 | I do that at the start of every month.
00:23:14.480 | At the start of December of 2024,
00:23:17.880 | that number was 8.25%.
00:23:19.800 | You're saying, "What the heck does that even mean?"
00:23:22.320 | If you bought U.S. equities at the start of December 2024,
00:23:27.320 | a week ago, two weeks ago,
00:23:29.640 | you were building in an expected return of 8.25%.
00:23:32.840 | Uncle, what you hoped you would make,
00:23:34.200 | what you prayed you would make,
00:23:35.280 | the very act of buying at that price.
00:23:38.480 | The T bond rate on that day was 4.18%.
00:23:42.120 | You were earning 4.07% over the T bond rate.
00:23:45.680 | Are you happy with it?
00:23:46.600 | If you say no, you know what the answer to that is, right?
00:23:50.000 | You shouldn't be putting your money in equities
00:23:52.280 | because you want a higher return.
00:23:53.440 | So every discussion about stocks,
00:23:57.320 | whether they're in a bubble,
00:23:58.240 | whether they're too high or low,
00:23:59.800 | can be reframed as a discussion
00:24:01.840 | about what do you think a fair equity risk premium is.
00:24:05.240 | If you think it's 6%,
00:24:07.120 | you should definitely be out of stocks.
00:24:09.040 | If you think it's 2%,
00:24:10.400 | you should be doubling down on stocks.
00:24:12.800 | But the number is the number.
00:24:14.120 | It's what you're paying right now.
00:24:15.720 | That 4.07% becomes the benchmark
00:24:18.480 | for what the market is demanding of you.
00:24:21.440 | - When you're looking at the expectation of return,
00:24:24.640 | how does growth factor into that,
00:24:26.920 | the growth of our earnings and growth of the economy?
00:24:30.000 | - Yeah, so you have expected earnings,
00:24:31.840 | but earnings can't be paid out as dividends.
00:24:34.600 | Or put differently, it can be paid out.
00:24:36.400 | If you paid all of the earnings out as dividends,
00:24:38.560 | you're reinvesting nothing.
00:24:40.320 | If you reinvest nothing, you can't grow in the long term.
00:24:43.600 | So if I take earnings and treat them
00:24:45.680 | as expected cash flows from buying stocks,
00:24:49.000 | the only growth rate that's compatible with it
00:24:50.960 | is a 0% growth rate.
00:24:53.120 | So here's what I do.
00:24:53.960 | I take earnings, I build in expectations of growth,
00:24:56.560 | and then I pause and say,
00:24:58.000 | well, how much are companies reinvesting
00:25:00.240 | to deliver that growth?
00:25:01.760 | And with the S&P 500, it's observable.
00:25:03.920 | You can look at what companies are putting back.
00:25:06.160 | So the growth enters into the equation in two ways.
00:25:09.040 | One is a growth rate in earnings.
00:25:10.520 | That's a good side.
00:25:12.240 | But it also enters your cash flows
00:25:13.720 | as what you're reinvesting to deliver that growth.
00:25:16.640 | That's a bad side.
00:25:17.520 | The net effect is what shows up in my equity risk premium.
00:25:21.200 | - And you do this monthly for the U.S. market,
00:25:24.600 | but you also do it for markets all around the world.
00:25:27.480 | And you put this on your website.
00:25:29.200 | - And there's a reason I do that.
00:25:30.400 | There are no U.S. companies anymore.
00:25:32.400 | They're multinationals that happened
00:25:34.400 | through the accident of history to be U.S.-based.
00:25:37.720 | Coca-Cola is Atlanta-based,
00:25:40.280 | but it gets 60% of its revenues outside the U.S.
00:25:43.960 | Why does that matter?
00:25:45.000 | Your risk as a company doesn't come
00:25:46.840 | from where you're incorporated.
00:25:48.200 | It comes from where you operate.
00:25:50.560 | So if you're looking at a multinational,
00:25:52.280 | I need to know what the equity risk premium is for Asia,
00:25:54.800 | Africa, Latin America to value Coca-Cola,
00:25:57.560 | to value GM, to value Tesla, to value Apple.
00:26:01.880 | Almost all of the data you see on my website,
00:26:04.640 | I created because I needed it.
00:26:06.520 | It was completely selfish.
00:26:08.560 | And once I estimated for myself,
00:26:10.600 | I said, what's the point of keeping it to myself?
00:26:13.000 | It's not like this is rocket science.
00:26:15.200 | This is not some secret I want to keep from everybody.
00:26:18.320 | So that equity risk premium data
00:26:20.760 | by country reflects what I started doing 30 years ago
00:26:25.080 | because I was valuing U.S. companies with foreign exposures.
00:26:29.240 | I've increasingly started valuing foreign companies as well.
00:26:32.160 | And there it becomes incredibly useful.
00:26:34.280 | If the growth in the next decade is going to come from India,
00:26:37.680 | don't you need to track
00:26:38.880 | what the Indian equity risk premium is doing
00:26:41.360 | as frequently as you can to value Indian companies?
00:26:44.400 | So I think we have no choice.
00:26:46.320 | Globalization, whether we like it or not,
00:26:48.520 | is here to stay, in investing, in valuation,
00:26:52.600 | in corporate finance, and we need to be ready for it.
00:26:55.600 | And that becomes one of the ingredients you need
00:26:58.800 | to deal with country risk across the globe.
00:27:01.240 | - We have the U.S. equity risk premium,
00:27:03.920 | as you said, is a little bit over 4%.
00:27:06.240 | So, you know, somebody who's investing
00:27:08.280 | in a total stock market index fund
00:27:09.840 | who may have a little bit of a few basis points of fees,
00:27:12.040 | call it 4%.
00:27:14.040 | - Yeah.
00:27:14.880 | - What is it outside the U.S.
00:27:16.240 | if you were going to combine all of these countries together?
00:27:19.080 | What should we be expecting from international stocks?
00:27:22.200 | Is it different than 4?
00:27:23.560 | - In Northern Europe, you're going to get about 4.
00:27:25.880 | Why?
00:27:26.720 | Because they're mature markets.
00:27:28.440 | And if the equity risk premium in Northern Europe
00:27:30.560 | was significantly different from the U.S.,
00:27:32.880 | let's say 6% in Germany, here's what would happen.
00:27:36.120 | Money would leave the U.S., go into German stocks,
00:27:38.720 | push prices up, and push returns down.
00:27:41.720 | So across economies that are mature,
00:27:44.040 | the U.S. equity risk premium becomes this number
00:27:46.960 | that ties together those markets.
00:27:49.400 | So if I'm looking at Germany,
00:27:51.120 | I'm looking at Scandinavian countries,
00:27:53.360 | I'm looking at Australia, I'm looking at Singapore,
00:27:55.520 | I'm looking at Canada,
00:27:57.000 | I'm using the 4% as my equity risk premium.
00:27:59.960 | But if I'm going to Brazil, or India, or Indonesia,
00:28:04.080 | or parts of Africa to invest in,
00:28:06.240 | my equity risk premium needs to be higher.
00:28:07.880 | Why?
00:28:08.720 | Because I'm exposed to more risk that is country-specific.
00:28:12.200 | So it's a very simple exercise.
00:28:13.720 | You start with the U.S. premium,
00:28:15.320 | you assign it to what you think are mature markets,
00:28:18.760 | you know, mostly AAA-rated, mostly safe.
00:28:21.480 | And then you attach an extra premium
00:28:23.600 | for countries that you think are riskier,
00:28:25.240 | not because, you know, you're being paranoid,
00:28:28.760 | but because you know there'll be shocks in these markets.
00:28:31.640 | You can't do this after the fact.
00:28:34.240 | You've got to bring in your expectations of risk
00:28:36.800 | before the fact, build them into your pricing.
00:28:39.360 | So when that surprise happens,
00:28:41.400 | you've got some fat you've built up
00:28:43.440 | that you can use to burn off.
00:28:44.880 | - I want to get into your views on factor investing,
00:28:50.160 | quantitative analysis.
00:28:52.520 | And to you going, "Hum, hum, hum."
00:28:55.840 | - Yeah.
00:28:56.680 | - You know, there's this debate.
00:28:57.800 | Oh, it's mispricing.
00:28:59.880 | No, it's risk.
00:29:01.480 | I want to hear your views on this.
00:29:03.400 | - It's funny because many of the people
00:29:05.160 | who are so-called factor investors
00:29:08.160 | come to the game with contempt for academic finance,
00:29:12.000 | which is efficient markets, who cares about it?
00:29:14.720 | You know, the birthplace of factor investing
00:29:17.080 | was a paper by Gene Farmer,
00:29:18.680 | who's essentially the father of efficient markets,
00:29:22.160 | and Ken French.
00:29:23.320 | That Farmer-French paper came up with the first two factors,
00:29:26.840 | market gaps, small cap companies on higher returns
00:29:29.480 | and large cap companies,
00:29:31.000 | and low price-to-book companies on higher returns
00:29:33.320 | and high price-to-book.
00:29:34.520 | That was 1992.
00:29:36.480 | In the decades since, as data has proliferated,
00:29:40.120 | the number of factors that seem to make
00:29:42.320 | these excess returns higher than they should
00:29:45.120 | has also multiplied.
00:29:46.680 | It's called the factor zoo at this point.
00:29:48.760 | There are dozens and dozens of factors,
00:29:50.560 | all of which on paper seem to beat the market.
00:29:54.480 | But here's my problem with it.
00:29:56.080 | First, Farmer-French, in their original paper
00:29:59.480 | on market cap and price-to-book,
00:30:02.320 | didn't claim that this was a sign of market efficiency.
00:30:04.680 | They said this is a sign
00:30:06.040 | that our models for risk and return are flawed,
00:30:09.120 | that there's something about small companies
00:30:11.040 | that makes them riskier
00:30:12.120 | that we're not capturing in our models.
00:30:14.760 | So they actually took the paper to mean
00:30:16.720 | that markets are efficient,
00:30:17.880 | we were just not capturing it in the risk.
00:30:20.280 | But the people outside took those same papers
00:30:22.640 | and said, let's create a small cap fund.
00:30:24.440 | Let's create a value fund.
00:30:25.920 | Saying that'll beat the market.
00:30:27.960 | But let's take that and run with it.
00:30:29.680 | Let's assume factors actually work,
00:30:31.800 | that they deliver higher returns.
00:30:33.680 | It's not a case for active investing.
00:30:35.920 | It's a case for buying low-price-to-book stocks
00:30:38.160 | or small companies.
00:30:39.720 | So here's what's happened in the last 20 years.
00:30:42.160 | You had active investors start small cap funds
00:30:44.520 | and an index fund of just small cap stocks.
00:30:47.200 | And guess what?
00:30:48.040 | The index fund beat the active investors.
00:30:50.920 | So-called value investing
00:30:52.320 | that beat the market in the last century,
00:30:53.920 | almost all of it came from buying low-price-to-book stocks.
00:30:57.200 | In the last 20 years, you had index funds
00:30:59.160 | that are value index funds
00:31:00.360 | that buy the low-price-to-book stocks without any cost
00:31:04.080 | and they beat the active investors.
00:31:06.120 | To me, the promise factor investing
00:31:08.040 | is even if factors deliver these excess returns,
00:31:11.240 | I can get them effortlessly
00:31:13.400 | by buying an index fund around those factors.
00:31:16.320 | It's not a case for active investing.
00:31:18.440 | It's a case for more nuanced passive investing.
00:31:21.960 | Don't put all of your money in the S&P 500 index fund.
00:31:24.560 | Spread it out across a value index fund,
00:31:27.400 | a growth index fund, an emerging market index fund,
00:31:30.480 | and you will be beating active investors
00:31:32.440 | in each of these spaces.
00:31:34.320 | I have another reason why I am wary
00:31:37.040 | when an active investor says,
00:31:38.440 | "I'm an active investor and I invest based on factors."
00:31:42.160 | Now, I was saying, if you bring nothing to the table,
00:31:44.480 | you should expect to take nothing away.
00:31:46.920 | So if you're an active investor
00:31:48.040 | and your claim to fame is,
00:31:49.720 | "I can find low-price-to-book stocks
00:31:51.760 | "and earn high returns in equity,"
00:31:53.680 | the Bruce Grunwald approach to picking stocks,
00:31:57.040 | my response is, "Why do I need you?
00:31:59.640 | "I could get, in today's day and age,
00:32:01.560 | "I could get an AI to do that for me.
00:32:03.720 | "It'll cost me absolutely nothing.
00:32:05.720 | "Why would I be paying you 100 basis points
00:32:08.680 | "or 150 basis points to do something
00:32:10.880 | "that I can do effortlessly?"
00:32:13.000 | So first, I'm not sure the factors
00:32:14.880 | actually deliver excess returns
00:32:16.480 | because much of that factor excess return
00:32:19.680 | comes from looking at US data going back to 1927.
00:32:23.360 | And if you look at US data going back to 1927,
00:32:26.440 | there's a cleavage in the middle.
00:32:27.960 | 1927 through 1980 looks very different
00:32:31.560 | from 1980 through 2024.
00:32:33.920 | Take the small-cap premium.
00:32:35.960 | Huge between 1927 and 1980, almost 7%.
00:32:40.400 | Since 1980, there's been no small-cap premium, none.
00:32:43.560 | It's zero, it's gone.
00:32:45.680 | Value investing, low-priced-to-book stocks
00:32:47.680 | delivered higher returns than high-priced-to-book stocks
00:32:50.320 | in the last century, 1927 through 1990, maybe even 2000.
00:32:55.000 | The last 24 years, low-priced-to-book stocks
00:32:58.040 | have underperformed high-priced-to-book stocks.
00:33:00.520 | We might be chasing mirages out there with these factors,
00:33:04.160 | charging people for chasing them
00:33:06.200 | and not delivering any returns.
00:33:08.440 | - Once these papers are published
00:33:11.240 | and fund companies and asset managers
00:33:15.600 | start piling into these strategies,
00:33:17.920 | doesn't it change the dynamics of the market itself
00:33:20.360 | and change valuations?
00:33:22.320 | - Less so with factors than with specific event studies.
00:33:25.960 | For instance, there are studies that show
00:33:28.200 | that when a company gets added to the S&P 500,
00:33:31.600 | it gets a jump in price.
00:33:34.520 | That's an indexing effect.
00:33:35.720 | It's an event study.
00:33:37.360 | Those event studies, once people agree
00:33:40.360 | that there is an event effect,
00:33:41.800 | seem to disappear very quickly
00:33:43.280 | because then people say, "Okay, if that's going to happen
00:33:46.080 | "and I know that Tesla is going to get added
00:33:48.160 | "to the S&P 500 next week,
00:33:50.040 | "I'm going to start buying Tesla before it actually happens."
00:33:53.400 | It's less so with factors because I'm convinced
00:33:56.400 | that at least between 1927 and '80,
00:33:58.640 | there were good reasons why small cap companies
00:34:02.160 | earned what looked like excess returns.
00:34:04.720 | Information on them was difficult to get.
00:34:07.400 | There were all kinds of corporate governance issues.
00:34:10.120 | Transacting on them.
00:34:11.600 | I'm old enough to remember when I had to call a broker
00:34:14.560 | to buy a stock.
00:34:16.560 | And if you tried to call a broker
00:34:18.600 | to buy a small NASDAQ stock in 1980,
00:34:21.840 | the hoops you had to jump through,
00:34:23.280 | the costs you faced were insanely high.
00:34:26.560 | One of the things that changed
00:34:28.440 | is we live in a very different world.
00:34:30.080 | And maybe the reason the small cap premium has disappeared
00:34:33.840 | is I can go to the SEC website,
00:34:36.160 | pull up the last 20 years of financials
00:34:38.120 | for even the smallest company,
00:34:39.800 | and I can trade effortlessly through my broker's house.
00:34:42.560 | Slightly higher bid-ask spread.
00:34:44.600 | But the difference has been small and large companies.
00:34:47.120 | From an investor perspective, I've narrowed.
00:34:49.440 | And if they've narrowed,
00:34:50.280 | maybe the small cap premium has disappeared
00:34:52.440 | for a good reason.
00:34:53.840 | So some of these factors, I think,
00:34:55.600 | had good reasons for the original premiums.
00:34:58.080 | They were not excess returns.
00:35:00.240 | They were returns for something that you were facing
00:35:03.120 | that you were not capturing in your models.
00:35:05.280 | And I think those factors have shifted
00:35:07.160 | because we live in a very different world as investors,
00:35:10.360 | and we're capturing that in our returns.
00:35:12.360 | - Well, thank you for that discussion.
00:35:16.160 | I appreciate it because the Bogleheads
00:35:17.440 | are always talking about,
00:35:18.760 | should we follow factor investing?
00:35:22.720 | How smart is smart beta?
00:35:24.200 | And so forth.
00:35:25.040 | I mean, these come up all the time.
00:35:26.360 | I do want to get into another area
00:35:28.480 | that you have discussed frequently.
00:35:31.360 | In fact, you wrote a book on it.
00:35:33.400 | It's "The Difference Between Equations and Models
00:35:37.480 | and Stories."
00:35:38.920 | You have come to a medium between the numbers
00:35:43.920 | and the stories.
00:35:45.680 | There's earnings, there's dividends, cash flows,
00:35:48.680 | and then there's a lot of things out there that don't,
00:35:50.760 | but they still deserve a value.
00:35:52.640 | So can you talk about this whole area?
00:35:54.760 | - I mean, it's really the recognition
00:35:56.560 | that when you value a business,
00:35:57.760 | you're always telling a story.
00:35:59.400 | It's a story about that business.
00:36:01.120 | It might show up as numbers.
00:36:02.200 | It's growth and margins and reinvestment.
00:36:04.960 | But one of my pet peeves with valuation
00:36:08.080 | as it's evolved has become financial modeling,
00:36:10.600 | an Excel spreadsheet.
00:36:12.280 | I've seen equity research analysts take a company
00:36:15.240 | and have the working capital requirements.
00:36:17.480 | Easy to do on a spreadsheet.
00:36:19.400 | And my response is,
00:36:20.680 | have you ever worked at a retail business
00:36:23.000 | where you've tried to have inventory?
00:36:24.760 | What does that mean?
00:36:25.680 | Are you going to take four of the eight colors out?
00:36:28.080 | Are you going to have fewer items?
00:36:30.440 | There's a cost involved here that you're not factoring in.
00:36:33.760 | What telling a story forces you to do
00:36:35.920 | is think about what it is that you need to do
00:36:38.480 | as a business to deliver that 5% extra growth.
00:36:41.320 | Where's that growth going to come from?
00:36:42.640 | What are you going to do?
00:36:43.880 | So connecting stories, numbers,
00:36:45.640 | makes you more disciplined in how you approach companies.
00:36:48.760 | You can't just arbitrarily raise the growth rate for Nvidia
00:36:52.000 | to get to the price you want to.
00:36:54.080 | Because the question I'm going to ask you is,
00:36:55.560 | where is that additional growth going to come from?
00:36:57.520 | The entire AI chip business is going to be $500 billion,
00:37:01.280 | and you're giving Nvidia $700 billion in revenues.
00:37:04.160 | Where's the extra $200 billion going to come from?
00:37:06.640 | So it makes you think about businesses
00:37:09.080 | that underlie your spreadsheets.
00:37:10.600 | And that makes you more restrained
00:37:12.240 | in changing numbers you don't like
00:37:14.280 | to get whatever value you want to get in your valuation.
00:37:18.200 | So I want to move into areas that have no cash flows,
00:37:22.680 | commodities, gold, fine art, Bitcoin.
00:37:27.360 | How do you put a value on these things
00:37:29.480 | when they have no cash flow?
00:37:31.240 | You can only price them.
00:37:32.840 | I make a big deal.
00:37:34.360 | And my valuation class,
00:37:35.560 | they get sick and tired of me doing this.
00:37:37.880 | Do you want to value something
00:37:39.280 | or do you want to price something?
00:37:40.360 | To value something, you need cash flows that come from it.
00:37:43.880 | You can value a gold mining company,
00:37:47.000 | but you can't value gold.
00:37:49.560 | You can value Coinbase
00:37:51.760 | because it's a transaction-based company
00:37:53.760 | and there is revenues you get from the transactions,
00:37:56.320 | but you can't value Bitcoin.
00:37:58.000 | You can only price it.
00:37:59.360 | What's price driven by?
00:38:00.760 | Demand and supply.
00:38:02.640 | What's demand and supply driven by?
00:38:04.560 | Mood and momentum.
00:38:05.600 | I mean, look at what's happened to Bitcoin this year.
00:38:08.320 | You could point to a series of events
00:38:10.080 | that have caused the price to go up above 100,000,
00:38:13.120 | but it's mood and momentum.
00:38:14.800 | It's a pricing game.
00:38:15.640 | There's nothing wrong with it,
00:38:16.880 | but recognizing you're playing a pricing game
00:38:19.320 | will make you more honest about what you're doing.
00:38:21.600 | You cannot be an investor in Bitcoin,
00:38:24.920 | but you can trade Bitcoin.
00:38:26.280 | So when people say, "I'm going to add Bitcoin to my portfolio,"
00:38:29.600 | I say, "Okay, go ahead."
00:38:30.640 | But remember, that's your pricing component.
00:38:32.600 | There's no intrinsic value.
00:38:34.440 | It's going to be based on demand and supply,
00:38:36.560 | and you've got to get really good then
00:38:38.000 | at detecting shifts in mood and momentum
00:38:40.760 | and getting ahead of the game.
00:38:42.320 | So I have lots of respect for traders.
00:38:44.360 | They play the pricing game,
00:38:45.880 | but it's a very different game
00:38:47.520 | than one that tries to assess value
00:38:49.640 | and base decisions based on value.
00:38:52.360 | - And what about venture capital
00:38:54.680 | or companies that might have just gone public,
00:38:57.160 | say quantum computer companies that have no,
00:39:00.560 | I mean, they have revenue, but they've become profitable.
00:39:03.160 | You're talking 10 years down the road.
00:39:04.800 | I mean, how do you value that?
00:39:08.400 | - Making a lot of estimates, right?
00:39:10.120 | There's no difference between valuing a Coca-Cola
00:39:12.320 | and valuing a Palantir.
00:39:13.600 | The difference is that you don't have
00:39:15.720 | the crutch of past data.
00:39:17.320 | You don't have the crutch of knowing
00:39:18.600 | what the business model is in making your estimates.
00:39:21.520 | In both cases, the future that drives value,
00:39:24.080 | not the past, but in the Coca-Cola case,
00:39:26.640 | you have a lot of past drawn.
00:39:28.400 | It gives you a way of justifying your estimates
00:39:32.240 | and pointing to something when something goes wrong
00:39:34.800 | because, you know, I base it on past growth rates.
00:39:37.000 | Don't blame me.
00:39:38.120 | You don't have that luxury with a young growth company.
00:39:41.200 | That makes people uncomfortable.
00:39:43.600 | So you know what happens.
00:39:44.480 | They don't value these companies,
00:39:45.760 | including the people who claim to value the companies.
00:39:47.960 | People like VCs, they price companies.
00:39:50.280 | How do they price them?
00:39:51.360 | Price per user.
00:39:52.560 | Market cap per subscriber.
00:39:54.360 | Basically, they're pricing on a metric
00:39:56.680 | where they hope to sell to somebody else
00:39:58.480 | based on the same metric.
00:40:00.320 | Nothing wrong with it, but it is what it is.
00:40:03.760 | - Price per click, I remember.
00:40:05.520 | - Price per click, exactly.
00:40:07.960 | - So you yourself, when you invest,
00:40:10.680 | you have a portfolio of about 40 individuals
00:40:15.680 | stocks that you buy.
00:40:17.200 | I'm not gonna ask you what they are
00:40:18.400 | because we don't want to go down that road,
00:40:20.360 | but I'd like you to talk about why you have this portfolio
00:40:25.360 | and what is your interest in doing
00:40:28.040 | a little portfolio management on the side for yourself?
00:40:31.600 | - I love investing.
00:40:32.480 | I love companies.
00:40:33.440 | I love understanding them.
00:40:34.680 | I don't do it because I hope to beat the market.
00:40:37.640 | I follow the Hippocratic oath.
00:40:39.280 | I try to do as little harm to myself as possible.
00:40:43.480 | Now, what does that involve?
00:40:45.160 | I don't trade very often.
00:40:46.760 | I add probably two or three companies,
00:40:48.880 | maybe four in a big year to my portfolio.
00:40:52.440 | I sell maybe two or three companies,
00:40:54.560 | maybe four in a big year.
00:40:56.840 | I am not constantly tracking the market.
00:40:59.480 | I'm not trying to get ahead of an information announcement.
00:41:02.640 | So I try to trade as little.
00:41:04.760 | I mean, let's face it.
00:41:05.600 | One of the lessons we've learned
00:41:06.920 | from looking at active investing
00:41:08.920 | is the more activity you have,
00:41:10.680 | the more difficult it becomes for you to beat the market.
00:41:14.200 | So I try to be as passive as I can much of the time.
00:41:18.360 | Second, if at the end of the next 40 or 50 years,
00:41:21.640 | and I've said this before,
00:41:23.640 | on my deathbed, you came to me and said,
00:41:25.400 | look, based on what you did over the last 50 years,
00:41:29.520 | you delivered half a percent less
00:41:31.800 | than you could have made investing in index funds.
00:41:34.440 | I'd be completely okay with that.
00:41:36.480 | I don't feel righteous in this.
00:41:37.760 | I don't feel I deserve to get an excess return
00:41:40.520 | 'cause I did all the right things.
00:41:42.440 | I do it because I enjoy it.
00:41:43.920 | And I do it in a way where I don't think
00:41:45.800 | I will trail the market by three, four, five, 6%
00:41:49.560 | in any given year because that's not my strategy.
00:41:52.600 | Notice I have 40 stocks.
00:41:53.800 | I don't have four or five
00:41:55.200 | because I believe concentration
00:41:57.560 | is violating the Hippocratic oath in investing.
00:42:00.680 | Because when you put your money in four or five stocks,
00:42:02.880 | in a great year, you might be up 200%.
00:42:05.040 | You could have something to boast about at cocktail parties.
00:42:08.320 | In a bad year, you could lose 40%.
00:42:11.120 | I'd never enter with a position
00:42:12.920 | that's greater than 5% of my portfolio.
00:42:15.640 | I'd never let any company in my portfolio
00:42:17.800 | exceed 15% of my portfolio,
00:42:19.880 | which means I've got to shed some winners.
00:42:21.880 | I've sold in video over the last three years.
00:42:24.600 | And people say, "Aren't you upset about the fact
00:42:27.200 | that you've left a lot of money in the table?"
00:42:29.000 | Not in the least.
00:42:30.760 | Because I have to play the game I came to play.
00:42:33.400 | In my game, if I let a company
00:42:35.240 | become more than 15% of my portfolio,
00:42:37.560 | I risk violating that do-no-harm oath that I took
00:42:41.240 | when I started the active investing path.
00:42:44.240 | - So I want to talk about a portfolio
00:42:45.920 | that is very common for the Bogleheads.
00:42:48.280 | And I just want to get your initial reaction to it.
00:42:50.600 | It's called the three-fund portfolio.
00:42:53.040 | Let's say that you've decided your asset allocation
00:42:56.960 | between stocks and bonds is going to be
00:43:00.280 | 60% in stocks and 40% in bonds.
00:43:03.880 | So the three-fund portfolio would be
00:43:06.680 | 40% in a total U.S. stock market index fund,
00:43:11.320 | 20% in a total international index fund,
00:43:15.120 | and then 40% in a total bond market index fund.
00:43:19.920 | What do you think about that?
00:43:21.480 | - The only thing I would take issue with
00:43:23.080 | is that mix staying the same for everybody.
00:43:26.960 | - Granted, yes.
00:43:28.040 | - If you're 25 years old,
00:43:29.600 | I'd expect that mix to be more equities, less bonds,
00:43:32.600 | simply because you don't need that income.
00:43:34.400 | Why pay taxes on income you don't need?
00:43:36.760 | I would tilt it more towards equities.
00:43:38.960 | - Yes.
00:43:39.800 | - And as you get older,
00:43:40.840 | assuming that your spending levels exceed
00:43:44.360 | your social security income or something,
00:43:46.240 | I might alter it.
00:43:47.480 | But I think that three-fund strategy
00:43:50.200 | is very close to what I follow with my own kids.
00:43:53.200 | To show you how much the line on active investing
00:43:57.600 | is drawn within my household,
00:44:00.120 | I invest actively the portfolio that my wife and I maintain.
00:44:04.320 | For each of my kids, I've managed their money,
00:44:07.080 | but I increasingly have shifted their money to index funds.
00:44:10.880 | And I have probably five funds rather than three.
00:44:13.840 | So basically the U.S., I break it out into little more,
00:44:16.920 | 'cause my problem with even with the total stock market fund
00:44:19.320 | is you end up probably overweighted in large cap companies.
00:44:23.480 | So I want to get my own exposure across market cap classes.
00:44:28.320 | I know there are people who take issue
00:44:30.520 | with the international fund,
00:44:32.200 | because we know in the last 20 years,
00:44:33.840 | those international funds,
00:44:34.920 | and you can look at your own portfolio,
00:44:36.240 | have underperformed the U.S.
00:44:38.160 | And some people have concluded,
00:44:39.400 | therefore international investing doesn't make sense.
00:44:41.680 | They're missing the long-term part of equities,
00:44:44.440 | which is, hey, you win for decades
00:44:46.920 | and then you lose for decades.
00:44:48.240 | So I do invest my kids' money in international funds.
00:44:51.440 | And when they come back and say,
00:44:53.040 | "Hey, dad, why do you invest our money
00:44:54.560 | "in this international fund?
00:44:55.600 | "It seems to have earned only 8% of U.S."
00:44:58.000 | I tell them, "Look, it's law of averaging.
00:44:59.560 | "It's going to work out for you."
00:45:01.280 | So I think that's a good strategy.
00:45:02.920 | Keep it simple, because you've got life to live.
00:45:05.560 | I mean, that's one thing that bothers me
00:45:07.440 | about people who don't enjoy active investing,
00:45:10.200 | who still go out and try to pick stocks,
00:45:13.440 | taking the limited time they have.
00:45:15.040 | They don't enjoy the process,
00:45:16.880 | but they feel that they have to do it,
00:45:18.400 | because if they don't do it, it's like admitting failure.
00:45:21.160 | So I think it's actually a simple strategy,
00:45:23.120 | a good one, and one that won't get you into much trouble.
00:45:26.640 | - So now I need to know your view
00:45:29.600 | of the critics of indexing.
00:45:32.040 | And every year, it seems, a new critic
00:45:34.600 | comes out of the closet with a new study
00:45:37.160 | talking about how indexing is going to destroy the markets.
00:45:42.160 | When people all decide to sell at once,
00:45:44.400 | it's going to cause havoc.
00:45:45.720 | How do you feel about all of these studies?
00:45:47.880 | - Notice how the terrain has shifted.
00:45:49.760 | They don't even try to make the case anymore
00:45:52.520 | that you as an investor would be better off
00:45:54.400 | with active investors investing your money.
00:45:57.400 | They've given up on that, because you can't win that fight.
00:45:59.640 | That fight's lost.
00:46:01.320 | So now they have to point to macro concerns they have
00:46:04.560 | because of the push towards indexing.
00:46:06.560 | And they do have a point.
00:46:08.200 | It's really a question of whether you,
00:46:09.680 | as an individual investor, want to take care of the fact
00:46:12.000 | that the market might be becoming less efficient
00:46:14.920 | because of indexing, to which your response is,
00:46:17.680 | why do I care?
00:46:18.520 | I need to get my pension lined up.
00:46:20.720 | So first, you've got to be clear
00:46:21.880 | that much of the macro concerns
00:46:24.320 | are not going to convince somebody
00:46:27.080 | to move away from indexing because they're macro concerns.
00:46:29.760 | They're things about, and there are issues,
00:46:31.720 | I think, that we have to be clear about.
00:46:34.040 | It is true that the shift towards passive investing,
00:46:37.320 | that has been massive in the last 15 years.
00:46:40.160 | Active investors are in an existential crisis right now.
00:46:45.040 | It's adding to the momentum issue,
00:46:48.120 | which is it makes momentum a stronger force
00:46:51.840 | in both directions.
00:46:53.560 | Why?
00:46:54.400 | Because money flows to the biggest winners, right?
00:46:56.400 | Because it's based on market cap.
00:46:58.280 | So it is going to make momentum stronger in both directions.
00:47:01.720 | That's neither here nor there
00:47:03.480 | because momentum being stronger in both directions
00:47:06.080 | can benefit traders in the market.
00:47:08.240 | It can also mean that if you're an old-time investor,
00:47:11.880 | even if you're right about value,
00:47:13.280 | you've got to wait a lot longer
00:47:15.360 | before the price corrects to value.
00:47:17.560 | I've adjusted for that in my time horizon.
00:47:20.040 | I am willing to wait longer now
00:47:22.400 | because that's one of the side products of passive investing.
00:47:26.960 | So there are macro effects.
00:47:28.800 | I'm not sure whether they're good or bad,
00:47:30.320 | but there are macro effects
00:47:31.560 | that have come from passive investing.
00:47:33.600 | But it's not your job or my job to worry about those.
00:47:36.640 | I'm not going to invest actively
00:47:38.280 | because this will make the market more efficient.
00:47:40.600 | First, the link there is very weak.
00:47:42.600 | How does my investing actively
00:47:44.360 | make the market more efficient?
00:47:46.080 | And second, I don't see the payoff
00:47:47.720 | to my making the market more efficient
00:47:49.760 | in my pension that I collect out of my fund.
00:47:52.800 | So I think there are macro concerns.
00:47:55.480 | But I think if there are macro concerns,
00:47:58.160 | it's going to come through regulation
00:47:59.800 | that's going to affect you.
00:48:01.160 | And that is one of the things
00:48:02.480 | I would keep an eye out as a passive investor
00:48:05.560 | is you're going to see active investors go to the SEC
00:48:09.200 | and say you've got to rescue the market
00:48:11.320 | because passive investing is destroying it
00:48:14.360 | by adding layers or limitations to passive investing.
00:48:18.560 | And I would fight that every step of the way.
00:48:21.400 | But you can see it coming.
00:48:22.480 | That's the case they're making.
00:48:23.720 | They're not making the case to you and I
00:48:25.240 | as individual investors.
00:48:26.680 | They're making the case to regulators.
00:48:29.280 | - I see that more and more.
00:48:30.160 | Oh, these three big companies,
00:48:32.240 | Vanguard, BlackRock, and--
00:48:35.040 | - State Street.
00:48:36.200 | - State Street have too much power.
00:48:39.520 | They control boards.
00:48:40.800 | They are running our lives.
00:48:42.400 | And you begin to see more and more of these articles.
00:48:45.080 | And it is concerning because politicians
00:48:47.360 | can hone in on that.
00:48:48.320 | - And you know what, Larry Fink fed into that.
00:48:50.440 | I think that was one of my pushbacks on the ESG is,
00:48:53.760 | come on, guys, you got to stop.
00:48:55.280 | When you are the biggest passive investor
00:48:58.640 | in the world in BlackRock,
00:48:59.760 | and Larry Fink gets up there and says,
00:49:01.600 | "ESG is good for value."
00:49:02.840 | To begin with, that was false.
00:49:04.720 | You are playing right into the hands of your critics.
00:49:07.560 | So in a sense, Vanguard has been very good.
00:49:10.840 | Notice how low key they are.
00:49:12.320 | They try to stay below the radar,
00:49:13.760 | which is the way you need to be as a passive.
00:49:15.880 | Don't make yourself a visible target.
00:49:19.040 | And I think that BlackRock learned from the ESG lesson,
00:49:22.280 | hopefully, and is going to crawl back into its space.
00:49:25.680 | But I think that they brought some of that on themselves
00:49:29.600 | with the relentless pushing of virtue investing
00:49:33.880 | as part of indexing.
00:49:35.040 | It should never be in there.
00:49:36.840 | You have a job, you have a fiduciary responsibility.
00:49:39.640 | Just do it.
00:49:41.480 | - Want to get into one more area, and that is AI.
00:49:45.120 | So AI is going to change the world, we're told.
00:49:49.760 | Maybe it already has.
00:49:51.000 | How is it going to affect us as investors?
00:49:54.000 | - For me, this became real about nine months ago
00:49:56.720 | when I was teaching my spring 2024 class.
00:50:00.800 | It was the 10th week of a 15-week class.
00:50:03.920 | I get a call from a friend of mine, Vasanth Dar,
00:50:06.680 | who teaches machine learning at NYU.
00:50:10.280 | So he calls and he says,
00:50:11.680 | "Aswath, we built a demoderant bot."
00:50:13.480 | I said, "A what?"
00:50:14.440 | He said, "A demoderant bot."
00:50:16.400 | He said, "It's an AI entity
00:50:18.120 | "that we've essentially fed every single post
00:50:21.080 | "you've ever written."
00:50:22.280 | And I'm verbose.
00:50:23.280 | I've written like 2,500 pages on my blog.
00:50:26.880 | I've fed it every book you've written,
00:50:28.720 | every valuation you've done, every YouTube video.
00:50:31.880 | And I'm a prime candidate
00:50:33.360 | because my entire life is out there online.
00:50:36.400 | And the AI entity had not just read it,
00:50:39.400 | it assimilated, remembered everything.
00:50:41.600 | I don't remember what I wrote 10 years ago,
00:50:43.400 | but my AI bot does.
00:50:45.320 | And then he said, "Look, we want to run a test,
00:50:48.160 | "a test where you give us 25 students from your class
00:50:51.720 | "who each individually value companies,
00:50:53.560 | "and we'll get the demoderant bot to value the company
00:50:55.720 | "to see who wins."
00:50:57.360 | He's not come back with the results yet,
00:50:59.160 | but I'm terrified.
00:51:00.280 | If he finds that the bot does better,
00:51:03.880 | then it's a signal to me that my days are numbered.
00:51:06.160 | That a bot can effectively do what I do.
00:51:08.920 | If he finds a bot doesn't do well,
00:51:10.760 | then everything I do is about teaching.
00:51:12.960 | So all my teaching is to not,
00:51:14.640 | if somebody's read everything I've ever done,
00:51:17.120 | watched everything I've ever done,
00:51:18.760 | is not able to value a company.
00:51:20.880 | But I wrote a post about that.
00:51:23.960 | And I wrote it from a personal perspective.
00:51:26.040 | I said, "I can see what the bot is.
00:51:28.240 | "I can see what it can do.
00:51:30.200 | "What can I do to stay ahead of my bot?"
00:51:33.440 | When I finished my valuation class,
00:51:35.280 | I said, "Each of you has a bot looking over your shoulder."
00:51:38.960 | And the question you've got to ask yourself is,
00:51:40.680 | "What can I do better than the bot?"
00:51:42.560 | Let's face it.
00:51:43.600 | If what you do in your job is mechanical,
00:51:46.360 | a bot's going to be better at you.
00:51:47.680 | A machine is always going to be better
00:51:49.240 | at mechanical stuff than you are.
00:51:51.360 | If what you do in your job is primarily rule-based,
00:51:54.320 | accounting, software,
00:51:56.800 | one of the reasons coding is so easy to turn over to AI
00:52:00.520 | is it's rule-based, right?
00:52:01.760 | You follow the same rules.
00:52:03.400 | A bot is going to be better.
00:52:05.240 | If you're so biased that I can see where you're going
00:52:07.840 | before you even start,
00:52:09.320 | a bot will figure that out and do it for you,
00:52:11.720 | which means a lot of appraisals and valuations
00:52:14.080 | you see out there become pointless
00:52:15.560 | because you know where the end game is.
00:52:17.480 | So I listed out these things that bots do
00:52:19.840 | that they can do as well as you.
00:52:21.520 | And I said, "If your job is primarily mechanical,
00:52:23.840 | "rule-based, and bias-driven,
00:52:26.280 | "a bot's going to be able to beat you, do it better."
00:52:29.560 | And then I asked a different question.
00:52:31.040 | What do we do as human beings
00:52:32.720 | that's going to be more difficult for bots to replicate?
00:52:35.720 | I talked about renaissance men,
00:52:37.280 | people who do a bunch of different things,
00:52:39.920 | maybe none of them really well.
00:52:41.720 | Now, people who are in multiple disciplines.
00:52:44.200 | We've become a world of specialists.
00:52:45.720 | We're setting ourselves to be botified,
00:52:48.480 | be more of a generalist, you know?
00:52:49.880 | So if you want to learn about markets,
00:52:51.640 | not just equity markets, not just about bond markets,
00:52:54.040 | think about price.
00:52:54.880 | So spread your interests widely.
00:52:57.560 | The second is the stories and numbers.
00:52:59.560 | If what you do in valuation is financial modeling,
00:53:02.240 | put numbers in an Excel spreadsheet,
00:53:03.920 | computer ratios, hey, I don't need you.
00:53:06.160 | A bot can do that.
00:53:07.920 | And the third is a little strange,
00:53:10.600 | but I talked about the importance of having an idle mind.
00:53:14.520 | I get questions every week
00:53:16.240 | from people who read my blog or read my book,
00:53:18.880 | and they say, "Can you give me more reading suggestions?
00:53:21.720 | "What should I be reading?"
00:53:22.880 | And my response sometimes surprises them.
00:53:25.240 | I said, "Read less, think more."
00:53:28.120 | Because we have so much stuff out there
00:53:30.320 | that we can fill every moment of every day
00:53:32.720 | that we're not thinking enough.
00:53:35.000 | Now, we're not using our reasoning muscles.
00:53:37.720 | Let's face it, we have a question.
00:53:39.600 | I don't know about you,
00:53:40.440 | but what's the first thing we're all trying to do?
00:53:42.560 | We go on Google search.
00:53:44.560 | So convenient, it's right there.
00:53:46.480 | And we become so used to that
00:53:48.280 | that we no longer reason our way to an answer.
00:53:50.880 | And a reasoning muscle, if you don't use it,
00:53:53.520 | will get flabby, and evolution will work its magic.
00:53:56.640 | And who knows, a generation from now,
00:53:58.400 | two generations from now,
00:53:59.720 | human beings might be unable to reason.
00:54:02.560 | But the other thing about having an idle mind,
00:54:04.440 | it's where these thoughts can connect.
00:54:07.920 | Thoughts that look disconnected can connect.
00:54:10.560 | I mean, think about Newton sitting under that apple tree,
00:54:13.680 | and apple falls on his head.
00:54:15.560 | If he'd been looking at his iPhone,
00:54:17.680 | he'd probably have taken the apple,
00:54:18.800 | thrown it to the side,
00:54:20.040 | and he'd have gone back to his iPhone.
00:54:22.400 | He had nothing to do,
00:54:23.360 | so he started thinking about why did the apple fall down
00:54:25.880 | rather than go up,
00:54:26.720 | and the theory of gravity came about.
00:54:29.160 | We make these amazing connections.
00:54:31.800 | Human beings can make these amazing connections
00:54:35.120 | that lead to insight.
00:54:36.600 | But you have to let your brain have that open space.
00:54:41.120 | And unfortunately, we live in a time
00:54:43.440 | where every moment of every day is filled up.
00:54:46.680 | I mean, I remember 30 years ago,
00:54:48.320 | standing in a line at the bank.
00:54:50.800 | You know, what you could do?
00:54:52.120 | Nothing.
00:54:53.280 | So you were idle-minded.
00:54:54.480 | Now you're standing in line.
00:54:55.720 | Everybody's looking at their iPhones,
00:54:57.240 | checking out their emails.
00:54:58.800 | We're not giving ourselves enough open space
00:55:02.040 | to think about things,
00:55:03.200 | to have those aha moments.
00:55:05.040 | We have insight.
00:55:06.680 | So I would encourage people to rediscover their humanity,
00:55:09.960 | because that's going to be your biggest weapon
00:55:12.800 | against the bortification that is coming down the pike.
00:55:16.160 | - Well, it's been wonderful having you on,
00:55:19.240 | Bogle Heads on Investing.
00:55:20.440 | Your insights are fantastic,
00:55:22.440 | and I really enjoyed this conversation.
00:55:24.720 | So thank you from all of us.
00:55:26.680 | - Thank you.
00:55:27.520 | Enjoyed being on.
00:55:28.360 | - This concludes this episode of Bogle Heads on Investing.
00:55:32.640 | Join us each month as we interview a new guest
00:55:35.360 | on a new topic.
00:55:36.440 | In the meantime, visit boglecenter.net,
00:55:39.360 | bogleheads.org, the Bogle Heads Wiki,
00:55:41.960 | Bogle Heads Twitter,
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00:55:47.600 | Join one of your local Bogle Heads chapters,
00:55:50.480 | and get others to join.
00:55:51.880 | Thanks for listening.
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