(upbeat music) - Welcome to Bogleheads on Investing podcast number 39. Today, our extra special guest is Barry Ritholtz. Barry has been writing about Wall Street for more than 25 years. He's the host of the Bloomberg Masters in Business podcast and the CEO of Ritholtz Wealth Management. (upbeat music) (upbeat music) Hi everyone, my name is Rick Ferry and I'm the host of Bogleheads on Investing.

This episode, as with all episodes, is brought to you by the John C. Bogle Center for Financial Literacy, a 501(c)(3) nonprofit organization that you can find at boglecenter.net. Your tax deductible contributions are greatly appreciated. Today, our special guest is Barry Ritholtz. Barry has been around Wall Street for more than 25 years.

He's worked at several different capacities as a corporate lawyer, trader, research analyst, writer, book author, host of Bloomberg's Masters in Business podcast and the founder and CEO of Ritholtz Wealth Management. I've known Barry for many years and when I came up with the Bogleheads on Investing podcast idea, I contacted Barry and he generously gave his time to give me all the technical background on what I should be doing and how to launch.

I think you're really going to enjoy this conversation with Barry today. We're going to be talking about a lot of topics, including investment strategy. During the podcast, I asked Barry to give us his views on active management, market timing, cyber currency trading, and a few other investment related topics.

This is not a debate about those topics. It's an opportunity to learn what our guest knows and what he thinks. So with no further ado, let me introduce my extra special guest, Barry Ritholtz. Welcome, Barry. - Thank you for having me, Rick. - First of all, we'd like to wish you a happy 60th birthday, which was recently.

Congratulations. - Thanks. - You're five years away from Medicare. - Yes. So people say congratulations, and really all I've done is avoid getting hit by a bus when crossing the street. (laughing) - Okay. - Can I tell you the best part about being 60? - That you're not 70?

- Well, no, it's finding out all these people who are younger than me, but look terrible. (laughing) And I'm not going to mention names, but a handful of people said, "Wow, I'll be there in a couple of years." And I'm like, "Really, dude? I thought you were like five years older than me." - Okay.

Secondly, I personally owe you a debt of gratitude because this podcast was fashioned after your podcast, Masters in Business. And when I was getting started with this, the first person I contacted for pointers was you, Barry, and you gave me a lot of great pointers, so I really appreciate that.

- My pleasure. You know, after 400 of these or so, you get to be not too terrible at them. (laughing) - So let's find out about Barry. I want to talk a lot about what's going on with your column and your blog and your business and so forth and your Masters of Business podcast, all 400 of them.

But before we get to that, I want to go back further so that people know who you are, a little bit about your background, sort of far back as you'd like to go, and we'll go from there. - Really good in science and math in high school. Managed to coast through that, go to college and suddenly learn, "Oh, you really got to work to do this." It's very competitive.

So I end up, after a couple of years of applied mathematics and physics, switching to political science and philosophy, finish school, don't know what to do, go to law school, and when I actually go to register for the bar, that's when I learned that I didn't graduate. And after a convoluted series of legal sleight of hand, managed to graduate college and law school the same day.

And, you know, practiced law for a couple of years, loved law school, didn't really like the practice of law. It was just granular and filled with minutiae and, you know, no pun intended, I'm a big picture sort of guy. And so ended up, when the opportunity came along, to join a firm that a friend was running that turned out to be the predecessor firm to E-Trade.

I did that, became a trader, and why don't we stop there? 'Cause that brings us, you know, to the mid-90s. - Okay, well, before we even get that far, we have to dig into some of the more interesting aspects of you. And you were a member of the Stony Brook equestrian team, and you successfully competed in the national championships back in 1981.

- So I am at Stony Brook. I switched to poli-sci from, you know, no more double physics lab and no more insane applied math homework. And I find I have myself a little bit of time. And one day I'm reading in the campus paper that Stony Brook has a competitive horseback riding team.

And I'm like, "What?" And not just competitive, but, like, consistently national ranked for, like, years and years. So I wandered down to the barn. I'm not exaggerating. It's like a 20-minute walk from campus. And I start talking to them. Tell me about the team. What do you do? What do you have to learn?

So I joined the riding team, and it was just fascinating. It was a whole different sport, a whole different set of rules. And, you know, horseback riding is incredibly expensive and challenging area. But as a student at a state school, I got to ride for $5 a week. And if that sounds cheap, even back in 1980, that was cheap.

So it was just great. And I did that for a couple of years and just loved it. It was a blast. - Well, that's cool, though, that you did that. - It was fun. - That's interesting. - It was a lot of fun. - Yeah. You went through law school.

You did well. You were a cum laude, 3.56, and you became a lawyer eventually. And you were in corporate law, too. - So when you're at any decent-sized firm, whether you're doing corporate law or antitrust or litigation, and you're entry-level, you're in the library, you're in the stacks, you're just putting together research memos so the partners who are actually doing the real legal work, you're saving them a lot of research and a lot of writing, and you're giving them some groundwork.

And it's really a grinding, tedious existence. And I kind of recognize that I wasn't motivated enough to become a partner in a law firm to do that for seven to 10 years. It's like, now look, the seven to 10 years are gonna go by no matter what you're doing.

But it was just an intimidating, unpleasant view of your 20s and 30s, and I just couldn't bring myself to do that. And so when the opportunity came to hit the eject button from the legal profession and enter finance, I jumped at it. - And you were a trader at one time, and were you trading your own account, or were you trading other people's accounts?

Tell us about that. - You're trading three things. A, if you have your own capital, you get to trade that, but I was young and relatively broke. B, you're trading other people's money. And lastly, you're trading the firm's order flow. So you can either go to the market and just execute the trade in the market, or if an order comes in and you think there's an advantage to trade around that order or take the position yourself and buy it cheaper or sell something and try and cover the trade at a different price, you had the ability to operate around that.

And it's how you really learned how the market worked, more than trying to buy 10,000 shares of X and then sell it a point higher later in the day. - Did you have your own clients? Were they giving you money to manage? - In the beginning, it was mostly firm clients, and then every now and then someone would say, "Hey, I have some money.

"Do you want to trade this for me?" I was a very inconsistent trader. I found I would make money some months and then give it all back the next month. And in fact, that volatility of my own P&L, as well as, you know, you're sitting on a trading desk, there's eight guys or 10 guys in a row.

And I was always astonished the guy on my right would be making money one month, while the guy on my left was losing money. And then the next month, their roles reversed and suddenly the previous month's loser is killing it and the previous month's winner, whatever he touches goes to hell.

And between that sort of volatility and my own inconsistent trading kind of sent me down the rabbit hole of behavioral finance in the mid '90s, before all the cool kids were doing it. 'Cause I couldn't find a rational explanation for why Shecky on my left was doing well this month and Bob on my right wasn't, they seemed to be doing the exact same thing.

And over time, you kind of learn, it looks like they're doing the same thing, but they're actually doing different things from an emotional, psychological perspective. And that had an immense impact on their trading success. - You know, it's interesting that one of the very first people that you interviewed was Jack Schwager, who wrote a book called "Market Wizards," interviews with top traders.

And in fact, you interviewed him recently as well. And I listened to that interview and he was talking about people who give money to traders and who does well with it and who does not. Could you comment on both of those interviews, the very first one that you did and then the more recent one?

- So the first book that Schwager wrote, "Market Wizards," ostensibly, it's about trading. But as you work your way through the book, really, it's a behavioral finance book. That was the first book I read about trading. "Market Wizards" is all about things like discipline and understanding stop losses and risk management and overconfidence.

And as you go back and reread the first book, and you'll be astonished, some of the traders are futures traders, some are bond traders, some are stock traders, some are derivative traders, all these people in different fields. The key takeaway I got from that book was the single biggest variable with the largest impact on your results that is within your control is your own behavior.

That was the big takeaway. And not only did I find the book fascinating, but in the back of my head when I was first pitching "Masters in Business" to Bloomberg, "Market Wizards" was very much on my mind. The thought process was, hey, let's find some of these really successful people, accomplished, intelligent people who have put together not just a track record, but a methodology and a philosophy that will be beneficial to the listener and have an intelligent adult conversation.

I don't wanna ask them what their favorite stock is. And I wanna ask them when the Fed's gonna raise, where the market will be from here a year from now. I wanna ask them, who are you and how did you get that way? Tell me about how you started to come up as a research analyst and a writer and how that evolved into doing the "Masters in Business" podcast.

I tend to be very scattershot, easily distracted, lack of focus. And in my saving graces, I have a degree of self-awareness of my lack of organizational skills. And so to compensate or overcompensate for that, I would each day write down, here are the earnings that are scheduled to be released.

Here's the various economic releases that are coming out. Here are a series of stocks that are on the precipice of a breakout or a breakdown. And I just put together like a whole run of things that I thought were really interesting. And then I would tape it to my computer monitor.

It started out like three by five cards and then it became the bigger four by six cards. And then eventually it was a full page. And once it became a full page, people had asked me, "Hey, can I make a copy of that?" And what started out being Xeroxed and circulated around the office, started getting faxed around town.

And then eventually it became a Yahoo GeoCities thing. I would take all my notes and post them online. Not that anybody was paying attention back in 1998. And then eventually it became a pretty substantial email list which eventually became the blog, eventually became the big picture. And street.com was 2002, three, four.

The Washington Post started publishing me 2010, 2011, something like that. And then Bloomberg started in the fall of 2013. A lot of this just began because, hey, I'm really disorganized and I need to get my act together each day and just have a sense of what's going on. And writing it out, typing it out was just a useful exercise.

- Well, I'm just amazed that when I read this email that you send out and the weekend reads and all of that, how in-depth you get. You must be reading constantly. - Yeah, there's a surprising method to the madness. When I first began in the industry, I thought my role was to be an omnivore and consume everything there was.

And eventually you kind of learn addition via subtraction and information hygiene becomes really important. There's a handful of pretty well-known writers and other media personality that I think are hot death warmed over, that they're consistently wrong or when they're right, they're lucky or they're right for the wrong reason.

And I just don't want those people in my thought process. And so there are a number of publications and a number of folks that I have found to be very click baity, but useless. So they get removed from the source. And at this point, like in the morning, I open up 50 different tabs and I work my way through them.

And I open up far fewer late in the afternoon, but after doing this for 25 years, 20 years anyway, you find that it takes a sentence or two and you can quickly identify if something is terrible. There's also a run of folks from Jesse Eisinger to Morgan Housel, to Derek Thompson, to Jason Zweig, to Dan Gross.

I probably have about 30 people, Mike Hiltzik at the LA Times, that anything they put out, I'm absolutely gonna read 'cause it's so consistently good. And so once you have your team of all stars, suddenly it becomes much easier. And the trick of 10 is that it forces you to really curate, to really make difficult decisions.

So when I said there's a method to the madness, on any given day, the weekends are a little different 'cause I try and do something. Saturday is long form and Sunday I go on my way to look at really terrible policy decisions or errors. 'Cause I don't wanna look at them all week, it's so negative, it's such a buzzkill.

But on Sunday it's like, all right, here's all the terrible stuff, go to church and beg for forgiveness 'cause all you people are just awful and here are the things you did. So I kind of push all that negativity to Sunday. But during the week it's pretty much, starts out with a broad market or investing concept.

Sometimes it'll be something about trading or some specific ETF or product or something like that. If I find something on retirement, 401Ks, that kind of works its way there. Very often I'll put something industry related in the fourth slot. Real estate is a big part of the world, so when there's an interesting real estate story, it shows up.

Then comes whatever technology or venture capital or new trend shows up. If I find something interesting involving either behavioral finance or information hygiene, something that makes people think carefully about what they're consuming, that'll find its way in. I leave the last two or three slots for a rotating mix of science or the last spot, sports, music, entertainment is a slot.

Every now and then there'll be an interesting article about politics and what I mean by that is not the partisan bickering nonsense, but when I find something that, I love when someone forces me to rethink my views or uses data to challenge an underlying belief. So this is a perfect example.

Terry McAuliffe bet on voters hating Trump. Turns out they dislike Democrats more. Like that sort of flip where the obvious theme gets turned on its head and in an unexpected way, I'm fascinated by that. I'm pretty convinced that all of us just live in a world of our own biases and illusions and confirmation bias.

And anytime I have the opportunity to prove to others or myself, hey, this deep fundamental thing you believe is wrong and here's proof. Now go rethink your entire world philosophy. That's useful, not just as a person, but as an investor, it forces you to not take anything for granted and to carefully think about what you assume and what you believe is true.

So if one of our listeners today decided they wanted to start to get this information from you on a daily basis, how would they do that? So go to rithults.com. You can scroll through to any of the reads and you'll click on a signup sheet. I just actually told someone today that because of inflation our free newsletter has doubled in price.

And so you can sign up for two times the regular free price. That's a good Boglehead price, by the way. We like that. You also wrote a book called "Bailout Nation, How Greed and Easy Money Corrupted Wall Street and Shook the World Economy." Tell us about the book. Why did you write it and what it's about?

So another really long story I'll try and make short. Bill Fleckenstein wrote the book "Greenspan's Bubbles" and that did really well for a business book. And so when McGraw Hill came back to him and said, "All right, Bear Stearns just went belly up. Let's write about them." He was like, "Thanks, but no thanks." And they asked him, "Well, who's covering that?" And he goes, "Oh, that's easy.

Rithults has been screaming about Bear Stearns for months. Go talk to him." I ended up turning them down, I don't know, eight times. And every time I turned them down, I would give them an excuse. And each time they would address that excuse. And so that turned out to be really fortuitous because at the end of the year, when McGraw Hill was unhappy about the manuscript I gave them that had a very critical chapter about S&P Ratings Agency, a McGraw Hill company, well, I had already gotten final edit in my contract because I said to them, "I don't need to work with you.

I got a very large platform. Why do I need to write a book for you and have you muck it up with your editors? I know what I want to say, leave me alone." And they're like, "Oh, we'll give you final cut." That was kind of like the last objection.

Again, long story short, I pulled the manuscript. I gave them an updated chapter on McGraw Hill, which was much less hysterical, hair on fire, the world's coming to an end, and much more data-based and calm, which coincidentally had the unintended consequence of being much more devastating to S&P than the original, like it would have been very easy to say, "Oh, this guy's crazy." The rewritten chapter was, "Oh, that's a lot of data.

Ooh, those guys did what? Oh, wow, that's just terrible." So I made it far less histrionic and more factual and data-driven, and it made it more devastating, and they refused to accept that one. And so I pulled the book, put it up for auction, and it ended up, Wiley ended up buying it.

It turned out to be a successful partnership. We sold a decent amount of copies. I don't remember the exact number, but it was somewhere north of 30,000. Again, for a business book, is really pretty good. Then eventually, let's circle around to your master's in business, which I think you've probably become the most famous for in many ways because of the guests that you interview.

And one of the Bogleheads was asking, "Can you talk about your most memorable guests?" Good, bad, or indifferent, but they were the most memorable. So I'll give you a good one and a bad one. Well, let's start with the bad one. The bad one was somebody who had written a book and had kind of become famous, but he had just continuously blown up, like made a fortune, blew up, made a fortune, blew up.

Well, that could be anybody, I mean. Not at this level. It's one thing to say, "Oh, look, I got $100,000 in my 401(k). "Oh, it's 25,000." It's something else to say, "I'm worth tens of millions of dollars." And it's like, "Shit, where'd it all go?" And do the same thing over and over again.

And when I had a conversation with him, he spoke in a normal cadence. I thought that would be a pretty interesting interview. And instead, each question was greeted with a heavy sigh, and a, "Ahh, let me, uh, uh-huh." And then he would answer the question. And so a 90-minute interview was about 45 minutes of material, and 45 minutes of someone that it seemed like a cry for help.

And maybe 15 minutes into the interview, I have the producer in my ear going, "None of this is usable. "Let's just throw him out and be done with it." But what we eventually did was just edit out all of those gaps, and it became what sounded like a normal interview.

But when you're experiencing it, it was just like, "Do I need to call "a mental health hotline? "Is this person a danger to himself?" I mean, I guess I forced him to think about things he hadn't thought about for decades. And so it was really, so that was the worst one.

The best one, and I'm gonna call out Mike Batnick about this, 'cause he gave me so much grief about this. About five years ago, I thought, on the 15th anniversary or so of September 11th, it would be worthwhile to interview the special master from the 9/11 Fund, Ken Feinberg.

And he's a lawyer, he's kind of public. It's been a long time since 9/11. He hasn't really been out talking about it. Maybe there's something interesting here. - Just to clarify, this was the person who had to decide how the money was going to be divided from 9/11? - The congressional $8 billion allocation to the victims of September 11th, right.

So we do the interview, and two weeks later, it goes live. And on that Monday, Mike walks in. He's like, "I can't believe how wrong I was. "That was amazing. "There were several moments in that interview "where I wanted to cry and just give him a hug." I'm like, "Right, the guy is just amazing.

"It's an amazing story." And then five years later, now there's a movie, and there's this, and there's that. But that was just one of the most astonishing, just to be able to just gently nudge him along through discussing all these different things. And of course, he's very intelligent. He's very articulate.

He has an incredible breadth of, not just experience, but empathy. And as a lawyer, there's a very specific formula that you basically operate off of when there's an accidental death and there's civil litigation. There are all these different factors. Yeah, there's pain and suffering, and there's this, and there's that.

But the prime driver is the economic loss of future income to family. And I know that's kind of crude and blunt, but that's what's evolved over hundreds of years. And so you end up with this really insane story. I'll give you one. It's a little disturbing, but he tells the story of the bond trader who jumped from the 105th floor of the World Trade Center, so he didn't burn to death, and lands on a fireman, and of course they both die.

Now, the bond trader is making a million dollars a year, and the fireman is making $100,000 a year. Why are their lives worth so different amounts? And he had to come up with a way that got everybody, all of the families, all the estates, to buy into. And talk about an impossible Solomonic task to split that baby.

This guy is a true American hero who took on a impossible, thankless task and did it as well as anyone could have possibly hoped for. A great and horrible story, right? - Yes, I remember that story. I remember that. Let's go on to other masters in business, because you've done 400 of these.

I guess my question on this whole thing, you're interviewing all of these people who are the top of the top in their industry, and some maybe who aren't so top, like me. You interviewed me one time. But other than that, I mean, does this any of all of this help, let's say a person who's trying to trade their account, trade their portfolio, outperform the markets, if you will.

Does any of all of these interviews help anyone do that? - That's an interesting question. When there is the opportunity to sit down and have an adult, thoughtful conversation with someone who has been incredibly successful, both in finance and investing and in life, there are lessons to be learned there.

Basically, it's like a bookshelf, a library of 400 books about everything from behavioral finance, to investing, to technology, to venture capital, to psychology, to go down the whole list. Hey, of those 400 books, if you can't find a little something that makes you a little smarter, a little more thoughtful, a little more aware of your limitations, and teaches you how to take better advantage of your skills, you're doing something wrong.

I mean, there's no magic bullet, but dear Lord, Howard Marks and Ray Dalio and the head of fixed income at Double Line and PIMCO and the head of private equity at Blackstone, and just go down the list. There's so much to learn from these people. And I mean, I used to say, I'll let you in on a little secret but I've said this enough times that it's no longer a secret.

I do these for an audience of one. I do this for myself 'cause I have the opportunity to get a Richard Thaler or a Danny Kahneman, and I'm gonna spend 90 minutes sucking as much knowledge out of them into me. And anybody who's listening should be able to figure out something.

Think about Bill McNabb. I think I interviewed him three times. Or Jack Bogle, to say the least. Bogle was a fascinating conversationalist and he plowed straight through for 90 minutes. That's just an astonishing, astonishing moment in time. And I know for a fact that there's something to be learned from these because I get emails all the time from business school professors who assign these out as class projects in MBA classes.

I mean, there's a ton of stuff to be learned here. You just have to be thoughtful and approach the topics with a little skepticism. I'm not gonna tell you that everything said by every person is gold and is guaranteed to make you money, but if you can find some useful information, some ideas, not the usual TV, buy this, sell that, 'cause that's got a shelf life of about 30 seconds, but things about methodology and how to create a mental model that allows you to deal with certain changes in the market, or how to deal with adversity and brush yourself off and keep going.

Or one of the things I love about the Ray Dalio interview, his whole career is based on recognizing, oh, I'm wrong and I'm gonna be wrong frequently. How can I take these strikeouts at bat and become a better hitter? Like, his entire career is expect to be wrong, but if you just leave it there, you're gonna be wrong regularly.

If you expect to be wrong and then learn something about why you were wrong and what you should do differently next time and incorporate that into your thinking process and incorporate that into the way you invest in trade, and so each time you're wrong, it should make you a little better, I mean, that's gold, Jerry, gold.

I don't know how somebody can hear any of that conversation and not come away better for it. Well, thank you, Barry. I mean, you get into these interviews and you start asking questions, and it's always fascinating to listen to some of the answers because it's just so insightful. Gotta kind of move along here to something that you said, and I twisted it a little bit, quite frankly, but I was listening to you, I can't remember, you were on a podcast somewhere.

You were talking about news and the dissemination of news, and you were talking about how a lot of news has way too much weighting in people's minds than it's actually worth, and what I took away from that was that news is equal-weighted, but the stock market is cap-weighted. Sure, so there are two things that speak directly to that philosophy.

One was a series of pieces I did for the Washington Post about signal-to-noise ratio and how to get more signal and less noise, and generally, this is part of that evolution from omnivore to very selective, Michelin star-rated restaurant consumer. When I was younger, I would eat anything. When you're older, you're kind of like, oh, maybe I should be a little more selective, and so what ends up happening is you really become choosing in what you consume in terms of information, so that was sort of the setup, and that was a couple of, you know, five years ago.

Last summer, the summer of 2020, so I do these quarterly calls for clients, and we try and keep it under a half hour, you know, two or three dozen charts, and we just click through a lot of them, and basically, a lot of this comes from questions from clients and advisors, and most of it is nonsense we hear on TV and elsewhere.

Like, a perfect example would be stagflation. You know, more recently, people are talking about stagflation. Well, go back and look at the data, and the 1970s and the 2020s are not even remotely similar on any of the data points that would relate to that, so over the summer of 2020, when the market was, you know, not only off the lows set at the end of March, but by August, it regained the previous highs and kept going, the question we kept hearing over and over again is, you know, I look around, and the economy looks terrible, and yet the market goes higher and higher.

This doesn't make any sense. I'm really perplexed, and I want to liquidate my portfolio, so we looked into this and said, okay, let's see how realistic this assessment is, and so when you look around your neighborhood, you see a bunch of restaurants and a bunch of dry cleaners and a bunch of retail stores, and they're all doing really poorly in the middle of a pandemic, but for the most part, none of those companies are publicly traded.

They're relatively, not just small business, I mean, they're really small businesses. They're tiny and not related to anything that's publicly traded. Hey, what's doing well? Well, it was Netflix and Apple and Amazon and Microsoft and Zoom and Google and Facebook and all the big tech companies, and wait a second, these are global companies that allow everybody who was stuck at home during the pandemic to work remotely, and not only are they not suffering, their business is up significantly from the previous year.

Well, of course they're doing well, and so the next step, and again, my secret weapon, Michael Batnick, runs through all the different sectors and subsectors of the S&P 500, and we end up looking at things on a market cap weighted basis. So the big six, the FANG, or I don't even know what you call them now, that Facebook is meta, the mama stocks, those companies are like 25% of the S&P 500.

You look at airline stocks, they're less than a percent. Hotel stocks, they're less than a percent. Even the vertically integrated energy companies, because gasoline sales were down, even those stocks are like one or 2%. In fact, you could take, I think it was the bottom 50 sectors out of a few hundred sectors when you break them down into the, not the seven big industry groups, but the subsectors and sub-subsectors.

If you eliminated the bottom 50 sectors from the S&P 500, right, hospitality and entertainment and all these things, it turned out to be 6% of the entire value of the S&P 500. And so that makes perfect sense. It turns out the market is rational. The big cap technology stocks that were thriving and global in nature, they were doing really well.

And all the little companies, and they were either not public or so small that it was almost irrelevant to the S&P 500. And so when you look at it in that way, it makes perfect sense. Now, when you look at your local dry cleaner and the little antique store that had to shut down and they're closed and out of business, and yet the market goes higher and higher, that makes no sense.

But those aren't even market cap weighted. Those are just, wow, that's a shame that those companies went out of business, but that's not the same as why is the market going higher and higher? And the answer was big companies were doing really well and your local neighborhood shops are not in the S&P 500.

Now, so basically, like I said, news is equal weighted. We get hit with all of this. And it's like, this is terrible. This is horrible. How can the market be going up with oil prices going up and so forth? The bottom line is that it's just not a big factor.

But the news makes it, you get the same amount of the news about all of these other things that are not really a factor in the cap weighted index, because they are a big company. Maybe we should be paying attention to what's going on in Google. But should we be even paying attention to a gas pipeline company or not?

Maybe not. It's certainly, it's not gonna affect your index fund. So that's exactly right. I just used this expression today and I'm gonna repeat it 'cause I just love it. The days are long, but the decades are short. That is the fascinating expression that sums up how humans experience time.

We live in the here and now, right? Our memories are these fallible, you know, nostalgic, tinged, air laden re-imaginings of the way the world was. That's the past. And the future is some combination of wishful thinking and hopes and dreams and imagining how it's gonna be. But neither of those really are relevant.

We exist in the here and now, in the moment, and that's why these day-to-day just distractions, just, you know, it's noise and people get so sucked in by the noise. Okay, we're gonna drill down more now into portfolio management. And so all the next topics that I'm gonna talk about are going to be portfolio management topics.

So maybe you could give us, you know, a couple of minutes on each one of these as I hit these topics. So the first one, a 70/30 portfolio, 70% stocks, 30% bonds is the new 60/40. In other words, you know, the 60/40 of 60% stock, 40% bonds. Do you think that people need to have more equity exposure now?

So there's two factors that are driving this. Interest rates are part of it. Bonds serve two purposes in a portfolio. One is to throw off some yields, and the other is to provide some ballast to offset the volatility of equity markets. And so you're not getting the yield that we're used to on the bond side.

And so you have to take a little more risk in order to generate similar returns. And one way to do that is 70/30. But that's only one of the two factors that I think are most important in driving this. The other factor is that for the investor class, and I can't believe I have to use that preface, but for most of the people who are saving for retirement and have a 401(k), their lifespans have continued to extend.

And mid-80s is really not uncommon anymore. I mean, not everybody gets to live to 100, but the old days of having a life expectancy of 72, those are long behind us. And you have to make sure your money is going to last you throughout the entire retirement. And people generally are working later.

They may be working, throttling back to part-time, but they're working later in their lives. Their retirement is more active. They're doing more things and spending more money in that part of their life. And then the cost of healthcare has just continued to go up. And so the way to achieve the short returns that seem to be rational for that group of folks is not to go too far out on the credit curve or the duration curve or the risk curve, and not to go 90/10 or anything crazy, but to move from 60/40 to 70/30 is a pretty reasonable shift, because today's 70-year-olds are really the 60-year-olds of 30 years ago.

- Is a 3% withdrawal rate the safe number now, or is it still 4%? - You know, one of the interviews I did was with William Sharpe, and he called this the most challenging question in all of finance. And he said, you know, we use 4% 'cause it plus or minus seems to work, not that there's any mathematical basis for it.

It's not a terrible number. I don't know if the 3% number is, it clearly would give you a longer runway on that drawdown, but if you can't live on 3%, well then, you know, you may not have a choice. I'm relatively comfortable with 4%. I haven't seen anything conclusive that says 4% is problematic.

So for now, I'm gonna stay with that, but I certainly think somebody will eventually come up with a number that is more defendable and mathematically valid. And if someone were to say to me, listen, I'm concerned about running out of money in my retirement and 4% is too much, 3.5% is not a terribly unreasonable number.

- So the next question, and Aboglehead had this question, is active versus passive. How do you feel about A, all active, B, all passive, or C, somewhere in the middle? - So the problem with all active is pretty obvious. First, you don't know who the good active managers are until after the fact.

And even if you started investing with some of the best active managers in the world, there's no guarantee that they're gonna continue that streak very few of them have. But a handful of people have done really, really well over time, and more so than can be explained by mere luck.

There are some really skillful managers. So that's the first issue. The second issue is clearly cost. When you look at a lot of active managers, some of them aren't consistently outperforming, and so they don't justify the cost of entry. And lots of them are closet indexers. And so, you know, come for the high fees, stay for the beta-like performance.

That doesn't make any sense. However, I interviewed recently Robbins Wiggleworth, who wrote the book Trillions, and basically gives the history of indexing. And it's kind of interesting that he throws certain firms like DFA into the index basis, so into that pile. And so, I don't know. I think if you're gonna have a value or a momentum or a small cap or a quality bias, to me, that decision seems to be a little bit active.

But if you wanna have 25% of your portfolio with that sort of bias, I can't say that's the worst thing in the world. You're putting a little money at risk on the possibility of outperforming, but you're paying a low fee, and there's a lot of academic research that supports it.

Or if you wanted to, if someone said to me, "Hey, I wanna have 10 or 20% of my portfolio "in Fidelity's Will Danhoff's fund "or Warren Buffett's, Berkshire, "or go down the list of some of these people "who have just put up incredible numbers for decades," I wouldn't object to that.

I think that's reasonable. Now, if you wanna put all of your money into one fund, that seems imprudent. And if you wanted to go 100% active across six different managers, it seems like that's a recipe for expensive underperformance. You know, 100% indexing is the easy way. And so somewhere in between, you know, even Vanguard is, what, 25%, 30% active now?

So I'm okay if someone wants to have a reasonable amount of their portfolio in active equity or factor-based equity. And it has to be very long-term. I mean, this is not a trade going into some sort of a factor fund. Somebody's gonna go with a small-cap value tilt. And so it's gotta be a 25-year thing.

It better be, 'cause the past decade, small-cap value has just stunk the joint up. Okay, let's go to the next thing. Tactical asset allocation. I mean, is it possible, I'm not gonna say possible. It is always possible. But is it probable that someone can outperform in either risk-adjusted or nominally by timing the markets?

It's a really complicated answer. Short answer, a handful of people have had to put together a good track record. Real-world answer, the value of tactical, at least as we do it, is not to outperform the market. The value of tactical is to have a small slug of money that, from a behavioral finance and emotional perspective, allows you to leave your real money alone.

And so, perfect example, we were talking about 60/40. If you have a 60/40 portfolio for 4/5 of your investable assets, and then you have a tactical portfolio for the last 20%, and it doesn't have to be great, it just has to be pretty good, so that in an environment like last year, it doesn't have to get out at the exact top, it doesn't have to get in at the exact bottom.

But if in 2020, let's say you missed, rollover started somewhere in the middle of February. If you got out of the way for most of March, and you missed the April re-entry, and you didn't get back in until May, you're gonna underperform the S&P. But if that portfolio goes to 80% bonds or 100% bonds during the month of March when the S&P fell 30%, and you left the rest of your portfolio alone, 'cause you could rationalize it by saying, all right, I was 70/30, now I'm 50/50, and down 30% means my portfolio's down 15%, I could live with that, and then eventually you get back into equities on a rule-based system, it will have served its emotional release valve purpose.

I don't know a lot of firms that behave that way. Rit Holt's Wealth Management does. That was the whole thinking behind creating our own in-house tactical. Have it be a trend-based system, have it be rules-based. It's not Barry rubbing his chin saying, now's the time to get in, now's the time to get out.

So having a rules-based system that operates as a release valve, you don't have to miss 57% down in '08, '09. But if you miss 30 or 40% of it, people feel like they've done something, they're not just frozen in fear, and all right, I'm gonna ride this out with my long-term asset classes, 'cause I know equity will eventually come back, and this makes it a little less painful.

Now my personal trading account, that's nothing but Bitcoin and leveraged 100 to one, that's crushing it. I'm sure it is. All right, let's go on to the next thing. One of the big areas of investing these days is ESG, Environmental, Social, and Governance, which is, to people who have been around a while, social responsible investing, only with some extras added on.

People who go down this path, should they expect better returns, worse returns, same returns, higher fees? Barry, what do you think? - So ESG is complicated, it's a little challenging, and I'll give you one example is, if you have a low-carbon portfolio, not a lot of energy or oil stocks, well, when the price of oil was falling, the ESG portfolio did well, because those stocks did poorly, and here we are, oil back over 83, so the oil stocks themselves are doing well, and a low-carbon ESG portfolio is gonna underperform relative to that.

So I think that's the wrong way to think about it. I think the right way to think about it is, first, you can use ESG as a screen to eliminate potentially risky companies, especially on the governance side. The higher-ranked governance companies tend not to have the sort of me-too moments that so many other companies with poor corporate governance have found themselves getting into.

So that's number one. Number two, thanks to software products like Canvas, which is something we use, and direct indexing, you can really fine-tune the S&P 500 and say, I don't want gun stocks, I don't want any companies that don't have at least one woman on their board of directors, and I don't want any companies that subsidize gambling or alcohol, or whatever is your personal preference.

And so the ability to be far more granular and specific today than the early days of socially responsible investing really allows people to be specific. No animal cruelty, okay, let me pull that out of my index. The ability to be that fine-tuned, that specific, is really, really impressive, and I think for some people that's a great way put your money into the market in a method that reflects your values.

And I think you just have to be willing to accept that maybe there's a performance cost, maybe not. Okay, this is the big one now. This is the last question before we wrap it up. Cyber currencies, Bitcoin, Ether, all of these. First of all, your overall comments about coins or cyber currencies as investments, and then if so, if you think they belong in a portfolio, how do you do it and how much?

So really, really good question. So first, it's challenging to look at a new technology come along and slowly develop a foundation and develop an infrastructure and develop an ecosystem around it and ignore it, right? I mean, as much as I respect Warren Buffett, when he said in the mid-90s and then again, you know, in the late 2000s, I don't really understand the internet or technology and I'm not investing there.

Well, good for him for sticking to his knitting, but he eventually became a huge Apple investor and left ungodly amounts of money on the table because what are you telling me? Apple is a value stock in 2013, but it wasn't a value stock in 2002 when it was $15 with 13 cash and it just had to introduce this newfangled iPod, which was the forerunner of the iPhone.

So I always want to avoid the mistake of that's complicated, I don't understand it, and I'm not gonna take the time to learn about it and become a smarter investor. So you really want to avoid that sort of, hey, you kids get off my lawn attitude. So that's number one.

Number two, the crypto coins, as opposed to blockchain and the technology around it. So generally speaking, crypto coins are a commodity and commodities are speculative trades, not really long-term investments. However, there are people clamoring to put money into this. My problem with things like Bitcoin is it's trading for trading's sake and the speculation around it seems to be far too much in a subgroup of this.

This isn't everybody. This is the group that I think is very visible, is the Lambo, gonna buy some Bitcoin and then I'm gonna make so much money, they're gonna go buy me a Lambo. Like that sort of approach to trading, not investing, to speculating, it's rife with problems and it has all sorts of issues.

And I think that is the sort of thing that you want to avoid. Now, if you are of the belief that, hey, cryptocurrencies and blockchain and the whole infrastructure around it is internet 3.0 and smart contracts and this new technology, this is an opportunity to get into the internet circa late 1990s.

Okay, so the way to do that is to create some form of an index. So you probably own some Bitcoin and some Ethereum is the next biggest coin and then another 10 or 20 coins after that. So you're not gambling on this is the dogecoin of the day or this is the, what was the one that ran up 260% before collapsing to zero?

That's just speculative nonsense. You don't wanna play that game. So rather than go for the lottery ticket, take an indexing approach. It turned out Jack Bogle was right about that. And if you wanna put 3% or 5% of your cash or your portfolio into that, I could live with that.

So 2017, we had a email come into the office. I bought a whole bunch of Bitcoin in 2010. It's worth $40 million today and I don't know what to do with myself. Okay, this guy's a truck driver. What do you wanna do with this? I don't know. He wants to buy an island.

I remember that ad, he bought an island. Right, that was the tow truck driver in the late 90s. But this was a Bitcoin investor in 2016 or '17 who reached out to us and said, "Hey, I have $40 million worth of Bitcoin, what do I do?" And there's no upside to telling people what to do 'cause if it works out, they're a genius and if it doesn't, you're an idiot.

And so I find that's a thankless task. So rather than say, buy this, sell that, I like to tell people, well, put this in the context of regret minimization. If you sell it and it goes up, how do you feel? I would feel terrible. What if you don't sell it and it crumbles?

I would feel terrible. All right, so maybe you might wanna think about selling half and holding onto half, but $40 million is a lot of money. Half of it, even after taxes, pays for your retirement, pays off your mortgage, pays your kid's college, pays their kid's college. That's a lot of money to just keep in the merry-go-round and take a risk that it collapses.

So a rational approach is to try and create an index of crypto. And if you give me a couple of months, I could probably cobble something together for you on this. - Okay, now, at the end of all of your podcasts, you ask various questions to your guests. And unfortunately, we're running out of time here, so I'm just gonna cut the three questions down to one question.

And then there's also another question that was really important to one of the Bogleheads, and I'll ask that one last. So here's the question that I think would be helpful. What advice would you give to a recent college graduate who is interested in coming into the investment industry? - So first, it's a fascinating industry, and it's in the middle of flux and it's very much changing.

So that's number one. Number two, if you decide you wanna come into this industry, I would tell them not to worry about their first job, that it's really a stepping stone, and that the most important thing that I've learned in my career is that you have to develop and build a skillset that will serve you no matter what job you have.

And you just keep improving and becoming better and better, learning more and more, developing more skills. Make yourself invaluable to your employer and to any employer who may wanna hire you in the future. And if you do that, you'll have a successful career no matter what you do. - And the very last question, and this is an important one, you often talk about coffee in your, when you write and when you speak.

And so one reader was just dying to know, is it drip coffee, Keurig, French press, auto-drip, perc, pour over? I mean, what is it? How do you make your coffee? - Wow, wow. So I have three main ways to make coffee. Most days, it's the Breville grind and brew, which beans on this side, water goes in the middle, there's a timer, it goes off at 4.30 in the morning.

So when I roll out of bed, 10, 15 minutes later, I have a fresh hot pot, freshly ground electric port drip into a thermos. And that keeps me going for like four or five hours. So that's Monday to Friday. On the weekends, I will grind up some beans and I love a good French press.

And then last year, I got the biggest, baddest, programmable cappuccino maker, also from Breville. That was an insane amount of money, but I had these points that were about to expire. And so I used that to order the coffee maker. So I know emotionally that I should not be taking points, credit card points and points.

Intellectually, I understand that all money is fungible and I should really be taking it in cash. But I do like taking in points 'cause it allows me to make these very irrational spending decisions and not feel bad about it. It was free, we paid for it with points. Part of my brain knows that that's completely wrong.

And the other part of my brain is just like, "Dude, just shut up and enjoy the cappuccino." - Well, Barry, it's been wonderful having you on Bogleheads Uninvesting. You've talked about a lot of things here. You gave us your opinion about how you would do things and that's all important for us to hear.

I wanna thank you on behalf of the Bogleheads and I hope you have a great weekend. - Oh, thanks so much, Rick. As always, a lot of fun. Let me know the next time you're in town, we'll grab another meal. - Sounds great, thank you, Barry. - This concludes Bogleheads Uninvesting, episode number 39.

Join us each month as we have a new guest and talk about a new topic. In the meantime, visit bogleheads.org and the Boglehead Wiki. Check out the Bogleheads new YouTube channel, Bogleheads Twitter, Bogleheads Facebook, and find out about your local Bogleheads chapter and tell others about it. Thanks for listening.

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