Afford Anything - How Money Moves Through Markets

Episode Date: October 10, 2025

#650: Sarah Williamson is the kind of person who shapes the decisions that move trillions of dollars. She earned her MBA with distinction from Harvard Business School and holds both the CFA and CAIA designations, two of the most demanding credentials in finance. In this episode, she helps us understand how investing really works, who the major players are, how capital flows through the system, and why the incentives driving investors, activists, and asset managers often collide. Sarah spent more than twenty years at Wellington Management, where she rose to Partner and Director of Alternative Investments, after working at Goldman Sachs, McKinsey & Company, and the U.S. Department of State. Today she leads FCLTGlobal, an organization dedicated to helping companies and investors focus on long-term value creation. She is also the author of The CEO’s Guide to the Investment Galaxy. She explains why index funds now dominate corporate ownership, how Reddit and retail traders changed the market’s dynamics, and what it means when activists push companies to “bring earnings forward.” She also introduces a framework for understanding the “five solar systems” of investing, a map that connects everyone from day traders to trillion-dollar sovereign wealth funds. Whether you are a passive investor or simply curious about what drives the market, this episode gives you the clarity to see how capital really moves and why it matters. Key Takeaways Reddit and the meme-stock movement permanently changed how individual investors move markets Index funds now dominate ownership, creating both stability and new corporate challenges Activists often prioritize short-term profit over long-term innovation Sovereign wealth funds act like national endowments, investing with century-long horizons Understanding who owns what (and why) makes you a more informed, confident investor Resources and Links The CEO’s Guide to the Investment Galaxy by Sarah Williamson FCLTGlobal, a nonprofit that helps companies and investors focus on long-term value creation Chapters Note: Timestamps will vary on individual listening devices based on dynamic advertising segments. The provided timestamps are approximate and may be several minutes off due to changing ad lengths. (00:00) Meet Sarah Williamson: CEO, CFA, Harvard MBA, global finance leader (5:41) The five “solar systems” that organize the investing world (7:55) Reddit and the rise of the retail investor (16:25) Tesla, brand loyalty, and shareholder activism (22:57) How sovereign wealth funds invest for generations (28:57) Inside asset managers and their incentives (41:56) Activist investors and the tension between short and long term If you want to understand the real power dynamics behind modern investing, from Reddit traders to trillion-dollar endowments, don’t miss this episode. Share this episode with a friend, colleagues, and your cousin who is obsessed with latest meme stocks: https://affordanything.com/episode650 Learn more about your ad choices. Visit podcastchoices.com/adchoices

If you own index funds, you're a shareholder in hundreds of companies, but you might not realize that the other investors who own those same stocks have completely different goals than you do. Some want the companies to succeed. Some are indifferent, and some are actually rooting for them to fail. Today, we're going to map out the entire investment universe, everything from sovereign wealth funds to Reddit traders, from activist investors to sell side analysts. We're going to map out this universe so that you understand who's driving the markets where your retirement money lives. You're going to learn why your index funds can sometimes feel like a roller coaster based on trades that are happening at the edges. You're going to discover why the investors who own your stocks might not actually care whether or not those companies win. You're going to cut through the jargon, private equity, hedge fund, investment banker. who are all of these players and how do they work in concert to impact the markets?

We're going to decipher all of this today. And you're going to leave with a clearer understanding of how the investment universe works. Our guest is Sarah Williamson. She has an MBA with distinction from Harvard Business School and holds a chartered financial analyst and also the chartered alternative investment analyst designations. She was an M&A investment banker at Goldman Sachs. She worked at McKinsey. She served at the Department of State.

She spent two decades at Wellington Management, rising to partner and director of alternative investments. She serves on the boards of two publicly traded companies, Evercore and EXL Service. And she chairs the board of the Whitehead Institute for Biomedical Research. She's the CEO of FCLT Global, a nonprofit that's dedicated to mobilizing companies and investors to create long-term value. She's a member of the Council on Foreign Relations. and she's the author of a book called The CEO's Guide to the Investment Galaxy. That book creates a framework in which the investment universe is divided into these solar systems, and every solar system has a series of planets around it.

And when we create that framework, that Linnaean classification system, we can better understand who the players are and how they all fit together. So to help us make sense of a galaxy of investors, Here is Sarah Williamson. Hi, Sarah. Hi. Welcome. Thank you for being here.

I'm so happy to be here. Thank you and for inviting me today. The world of investing can be a little confusing and opaque. I think a lot of us hear these terms thrown around hedge fund, asset manager, PE, but it's hard to have a framework of how all of this fits together. And so I'm hoping that today you can help illuminate that. But before we get to that, I'd like to first ask you about the difference in, incentives between investors and people who run companies? Yeah, so everyone I've met who's running a

company is really trying to build a great company. And it might be a small business. It might be a big corporation. But most people who lead businesses are builders. They're trying to come up with a new product or enter a new market or beat their competition or whatever it might be. Typically, they're really thinking about what's their strategy, how do they beat the competition, how do they serve the customer, how do they hire employees, all of those things. that you would think about in running a business. And oftentimes they assume that the investors are thinking about that as well, because, of course, they think about them sometimes as being on their team. And everybody on their team is focused on these same goals. But the challenge is that the

investors have very different timeframes and very different goals. So most investors are measured against either a benchmark like the SP 500 or something like that or against their peers. They're not really doing what investors sort of used to do, which is take a blank piece of paper and think about a company and think about its strategy and its management team and decide to buy the stock or not. That's not the way most money is invested. And so what that means is you can get very strange incentives where a shareholder of a company doesn't really want that company to do well or has a time frame that is days or weeks versus a company that has a time frame of years. And so they really have very different incentives and very different time frames. And that's often very confusing to leaders of businesses. Does this happen both up and down the chain?

So, I mean, at the high end, you've got publicly traded companies and big institutional investors. But at the small dollars end, you've got maybe some small local Main Street business that has a handful of private investors. Would that difference in incentives also exist at that local level? Yeah, I think there's a real spectrum. So if you think about a classic sole proprietorship, let's say you own a business and you manage the business. Okay, there is no difference between the owner and the manager. So obviously they have the same incentives. The bigger you get and the more disintermediated you get, the more that that changes. So if you had just two or three investors, maybe it's pretty close. You know, maybe they're really rooting for you and trying to make you successful and not thinking of you as just one of a portfolio. But most institutional investors for a publicly traded company, they own thousands of companies. So they're really thinking about it in a very different way. But I do think it's a spectrum from small to big and from closely held, either held by a person, a family, a few people, to very widely held, held by, you know, hundreds or thousands of investors. When you talked about the difference in incentives, you mentioned there's a difference in time frame, short term versus long term thinking.

There is a difference in what you're being measured against. So investors might either track a benchmark, or compare that company to its competitors. There are also investors who will invest in the competitors. So you might invest in both Coke and Pepsi, for example, as well as investors who are betting not necessarily on a company, but rather on the market as a whole. So they have a thesis that consumer spending will increase and therefore they invest in any and all companies,

a wide array that benefit from generally, increased consumer spending. Right. So if you think about an index fund, for example, which many people own, they would own Coke and Pepsi because they're both in the index. So they don't really care if Coke does better or Pepsi does better. They generally want them both to do fine, but they're not choosing one or the other. And so if you were running Coke and you go to work every day trying to be Pepsi, I'm sure it's more complicated in that, but in simplistic terms, and then you realize that your investors own Pepsi as well, it feels funny. It feels like they're not really on your team. And to your point about factors, as we call them, if you are wanting to bet on the U.S.

consumer, there are lots of ways to do that, but one would be to buy Walmart stock, for example. A stock like that can move around based on views on what the consumer is going to do, which may or may not be related to any actions that the company itself is taking. And that's obviously a big company, but they're small companies that get played in the same way. So I think that as a person running a business, it's always important to ask yourself, why does my shareholder own my stock? It might because they think I'm great, but there are probably a lot of other reasons that are more true. And then what would change their mind on that? Why would they go the other way? Let's break down the world of investors. So you have a framework that you've created in which there are five solar systems.

And each solar system has a number of planets. Can you walk us through the five solar systems, those five top-level categories? Yeah. This book that I've written is called The CEO's Guide to the Investment Galaxy. You and your listeners may remember the Hitchhiker's Guide to the Galaxy where... Don't panic. Yes, don't panic. They fly around, they land on different planets, and they try to figure out what sort of creatures

are going to be on that planet before they get there. You know, are they friend or they foe? So we're trying to do this in the same. same vein for the investment community because the investment community often is very opaque and it all sounds like the same thing. The five solar systems that we've broken this into. So the first are asset owners. These are people who could be individuals, they could be families, but they could also be pension plans, sovereign wealth funds. They are the ultimate shareholder. They're the ones who really own the money. It's their money. At the end of the day, it's their money. So we think of them as

asset owners. The second group we think about is asset managers. Their job is to manage money, usually for the asset owners, so they don't own the stock, really, but they make decisions on it, and their business, they do this for a living, their business is to manage money for others. So their clients are the asset owners. Then we have what we call control investors. And these are people who are investors, but could also take control of the company. So that would be things like private equity, venture capital, things where they could be also running the business at some points in time. Then we think about the commentators and intermediaries, and that would be the sell side who writes reports about a company, the financial press, who talks about a company.

Those sorts of people take up a lot of the airtime and a lot of the attention of business leaders, but they're not shareholders. And so you have a different relationship. And then the last one, think about is the regulators and the exchanges, the people who set the rules. And those are extremely important to understand so you don't run afoul of them. Right. I want to dig into all five of those. But let's start with asset owners because the majority of people who are listening to this fall under that category. Let's begin with retail investors, individual investors, who are the people listening to this. Yeah. So we think about two, and again, it's, everybody is different, but we're trying to put them in category. So we think about two.

different kinds of retail investors. One, we think of as mom and pop retail investors who are buying and saving for the future. So they're trying to save for their retirement or their children's education to buy a house, whatever that is. And they tend to be the retail investors we think of. Perhaps they've got some association with a company. Maybe they used to work there or they do work there or somebody in their family work there. So they tend to be closely tied to a particular company. They know what they own. They care about it. they really are shareholders in the classic sense of the word. Then we think more of the trading type. So the meme stocks, the Reddit crowd, right? And they are probably less interested in holding that company for a long

time because they like the business and respect the business and, you know, perhaps use the brand or whatever it might be. They may be trading on their apps, whatever it might be. So we think about those as two pretty different kinds of shareholders, but they're both shareholders. The other ones that fall into that category are families, family offices. So a lot of companies, big and small in this country and around the world, are owned by families. They may be the founder or the founder's family, and that's a really important part of ownership. But then we have some of the more institutional ones that people may be associated with and not even know. So one is the pension plans, the local pension plans. We call them hometown heroes. And they tend to be pension plans for firefighters,

teachers, people who work for the state government, something like that. They're very important. We think about the endowments and foundations, so the big universities and foundations. Our name for them is the iron fist in the velvet glove because they're trying to do well in order to do good, right? They're trying to make money to pursue research or educate people or something. And then the really important ones that I think a lot of people don't understand are the big sovereign wealth funds and global pension plans, which we call the quiet giants. Most of the very largest investors in the world fall into that category. And they are not American. They tend to be located all over the world, mostly in countries that have had trade surpluses or oil surplus.

or other things. And they have a huge influence on the market, but they don't talk a lot. So they tend to be a little bit behind the scenes. Okay. I've got some follow-up questions about sovereign wealth funds that I'll ask in just a moment. Before we get there, though, the pension funds, the endowments that you talked about, are these significant enough to be market movers? I know high-frequency traders can be market movers because they can infuse so much volume into the market that a stock can really wiggle without any big fundamental changes just because a bunch of high-frequency traders have become interested in it. Does that same thing happen with endowments and pensions, or do they move so slowly that they don't shake the market too much?

I would say they shape the market, but not shake the market. How about that? So the high-frequency traders tend to shake the market, right? They, as you said, money in, money out, money here, money there. Typically, the endowments and the pension plans don't trade like that. But they definitely shape the market in that endowments in the U.S. have often been considered smart money. So what they do, others tend to follow. And then the pension plans, particularly the public ones, disclose what they do. Almost all of them have to disclose publicly what they do. And so because they disclose what they're doing, other people can follow along. So I'll give you an example that applies to both of them, which is both endowments and pension plans over the last decade or so,

decade or two, have really shifted their assets into private equity. And that doesn't shake the market on a, you know, this minute, this today, but it clearly has changed the way the market works, such that private equity today is such a big player relative to public equity. And it wouldn't have been that way if you didn't have these big institutional investors sort of leading the charge. They're not going to move markets today or tomorrow, but they will. move markets over years. That makes sense. In terms of the mom and pop retail investors, you know, we've been seeing since the 90s more and more mom and pop investors move into index funds. Does that have market shaping implications insofar as just massive amounts of money

are now going into these passively managed index funds as compared to actively managed mutual funds? Yes, the retail investor has really moved into index funds. And for good reason, which is they're inexpensive. You know what they're going to do. They do what they say. They do it. It says on the cover. And for most retail investors, that gives them the broad exposure to the market that they're looking for.

What that means, though, is if you think about it from a company's point of view, most companies in this country, the first three shareholders on their list, the biggest three shareholders on the list would be index funds. They're holding them because they're in the index, not because of something they've. done good or bad. So it makes it very hard for them to connect with their shareholders because those shareholders are not evaluating their strategies and their outlooks. So that push of the retail investor into index funds has definitely changed the market. And I think it's not uncommon for individual investors to have index funds and then maybe, you know, a handful of stocks of companies that they know for some reason. And I think that that makes quite a bit of sense because you have diversification, but then you're also invested in something that perhaps

there's a tie to in some way. Right. Given you mentioned that for a lot of these companies, it's harder for them to connect with their shareholders because the shareholders aren't evaluating that company as an individual stock. Does that give them some level of immunity or protection from shareholder activism? It doesn't give them immunity. So a great example of this. A great example of this is Procter & Gamble. So they had an activist a few years ago. And Procter & Gamble, of course, they are a consumer-oriented company. So they're Cincinnati-based. Cincinnati base. They know how to market, you know, tied or, you know, their own stock or whatever it is. An activist came in and tried to take over the company, and they did a very good job using the tools of marketing to reach their

retail shareholders because those are tools that they know. Most companies are not as good at marketing. as P&G. And so they oftentimes, the retail investor is hidden in street name. So it says, you know, Fidelity or Schwab or or Merrill Lynch or whatever. It doesn't say their name. And so they have a harder time reaching those shareholders when something does happen like an activist comes in. So one of the things we think about for companies is who are your retail shareholders? And how do you figure out how to market to them in a more consumer-oriented way, and particularly names that are sort of household names will have a higher percentage of retail shareholders, typically, than a company that is more esoteric or more technical in some way.

Yeah, that's interesting that you say that. So we recently had one of the co-founders of the Motley Fool on this podcast. One of his pieces of advice when it came to individual stock picking was to buy companies that you know and like and support. So my follow-up question, to him was, well, wouldn't that bias your selection toward consumer-facing brands? And he said, yes, that's fine. His thesis is yes, and I don't have a problem with that. Go ahead and embrace that bias and go for it anyway. I think that if a retail shareholder has a connection to that company, they own the car, they like the CEO, they buy their product, they are retiree from that company, so people have worked somewhere.

They are biased in some way, but that's also maybe makes them feel closer to the company and more knowledgeable about the company. So that's a good way to think about owning a few stocks. My own view is that's not a good way to think about owning your whole portfolio because you would have a very imbalanced portfolio unless you were, you know, you really knew every industry, which is very unlikely. So I think that that combination of an index fund, so you have a little bit of everything, and then maybe a few things that you know and love, it makes some sense.

Right. You mentioned that retail investors can get broken into two categories. There's the mom and pop investor, and then there's the Reddit crowd. Can you talk about the history of the Reddit crowd? Why do you think this has emerged as a cultural phenomenon? I mean, it's easy to say it's because the Internet exists. but there were Yahoo chat forums back in the 90s, and we weren't seeing this in the 90s. Why now?

So I think there's been a gamification of a lot of things. To me, the Reddit crowd is a bit of the gamification of the stock market. And there are a lot of people, professional investors as well, who talk about the market more like a casino. I'm going to make a bet on this. I'm going to double down. I mean, there's sort of those words that you hear that are typically associated. with gambling. And so to me, the fundamental distinction between the two is investing in something because there is value there, perceived or not, but that there is value that should, because there's

earnings, there's brand, there's company, there's some value there that ultimately will turn into cash flow, real value, real economic value, versus the other idea, which is to buy something because somebody else will buy it from you, a trading mindset. And so the investors, the ones that want to buy something because they think it's going to grow value, tend to be the more traditional mom and pop. They hold it for a long time. The others tend to want a stock to move very quickly because, of course, they want to sell it. They're not going to hold it for a long time, so they want to sell it. So that's how you get into this Reddit talking up a stock or leaning, you know, in the GameStop or whatever, leaning against the hedge funds.

And so it's kind of fun. Just like going to a casino can be fun, but it's not about investing in value-creating businesses. And so I think that's the real distinction between the two. And the other thing that I find interesting about the Reddit crowd is their approach is, seems to be largely, look at what's being shorted and then everyone just pile in to something that is, you know, one of the most shorted stocks. So you see Blackberry, AMC theaters, GameStop is the famous one, but, you know, Nokia, all of these companies that are heavily being shorted, there's a group pile in into that. First of all, prior to the meme stock phenomenon, was that a viable

trading strategy that was ever practiced by anyone else? And is there a qualifying investment thesis behind that? So there is. I mean, we call short sellers the skunk at the picnic. You don't because they're the ones who show up and say something's wrong here. The traditional short-seller would look at a company and say something's off. They're cooking their books. They are not really selling as much product as they say they're selling. They tend to be deep into the accounting. There's some accounting anomaly.

And so traditionally, a short-seller would start selling a company short that they thought was cooking the books in some way, shape, or form. The way that you short a stock is that you have to borrow it. Somebody is long that stock. They lend it through a securities lending program, and the short seller borrows the stock, sells it. And then when the stock falls, if that works, they buy it back at a lower price and then return it to the person who lent it to them. So that's how they have to make money. Borrow, price goes down, sell, give it back. So there are a couple of things that get short sellers in trouble.

one is if they can't borrow the stock. If no one will lend them the stock, they can't short. But the second, and what the Reddit crowd really is keying off of, is that when you've borrowed a stock, the clock is ticking because you're paying interest on it. And it's usually quite expensive. So there's really no such thing as a long-term short. It's very hard to be short for a long period of time because it's very costly to just sit there. And if the stock starts moving against you, let's say you borrowed it, you know, at $100 and you're think it's going to go to 50 and it goes to 110 or 120, then that's a short squeeze. And so what happens then is that those people who are short, they get a margin call. They have to buy it back because they can't afford to be short. And so as they buy it, they drive the price up and then it gets worse and worse and worse. So that's what has been effective in the Reddit crowd, which is if they see a lot of short sellers in a stock, they can then start driving the price up, which makes the Short sellers drive the price up and then it sort of feeds on itself, if you will. And there's nothing wrong with that. I mean, there are, you know, people in the markets are always trying to play

off against each other. But I think that the concerted ability to get a lot of different people to pile into a stock at the same time is what the Reddit crowd has figured out how to do. Yeah. And they've done that more effectively than anyone else. Yeah. And I think they've made, there are some short sellers who've left the market. There's some short sellers who've left the market. There's some short-shelers who will think twice. So it's always good to have people with different opinions in a market. That's what makes a market. We're going to take a break to hear from the sponsors who make the show possible.

When we return, I'm curious about sovereign wealth funds. What are they and how do they drive the markets? That's coming up next. The holidays are right around the corner and if you're hosting, you're going to need to get prepared. Maybe you need bedding, sheets, linens. Maybe you need serveware and cookware. And of course, holiday decor, all the stuff to make your home a great place to host during the holidays, you can get up to 70% off during Wayfair's Black Friday sale. Wayfair has Can't Miss Black Friday deals all month long.

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That's what being a fifth third better is all about. It's about not being just one. thing, but many things for our customers. Big Bank Muscle, FinTech Hustle. That's your commercial payments, a fifth-third better. Welcome back. So what is a sovereign wealth fund? So a sovereign wealth fund is essentially an endowment for a country. Sovereign wealth funds in the world tend to be countries who have generated a lot of surplus. The most common is through oil. So they've discovered oil, they've made a lot of money on oil, and they know that at some point, the oil is going to run out. And so rather than spending all the money right now in the, you know, generation or two who happened to have

been alive when the oil was discovered, they put it away into a fund. And so the idea is that then they can develop their economies and build for the future and help generations in the future, who may not even be born yet. So rather than sort of, you know, one generation hitting the lottery and then not worry about future generations, the idea of a sovereign wealth fund is to be an intergenerational fund and spread that wealth over time for the citizens of a country today and tomorrow. When did these come into existence? Are these a relatively new phenomenon?

I believe the first one was Kuwait. I'd have to check that up, the Kuwait Investment Authority, which came into existence maybe 40 years ago, 30 or 40 years ago. So they're relatively new. The Singaporeans have one. This has been around about 40 or 50 years. So let's say 40 or 50 years is when they have come about. But mostly it has been through oil surpluses or trade surpluses. Those are what drives excess cash more than a country needs at that time. So they put it away for a rainy day. What level of risk do you? they take inside of these funds? Are they picking and choosing stocks across the global market? They vary based on who they are, but the large ones tend to be very sophisticated. So they are the

largest funds in the world. Most of them have built up very strong staffs. And they invest a lot in technology. If you'd walk into one, you feel like you're in an investment firm. It doesn't feel like a government office. It feels like an investment firm. And so they invest in all. And so they invest in all sorts of asset classes, whether it's real estate, whether it's publicly traded securities, private equity, whatever it might be. Just like a big university endowment, these are much bigger, but just like a big university endowment, they would be investing across the spectrum. They would do some of that themselves, typically, directly, and they would hire managers to do it for them in other places. What is the distinction between that versus a country holding some

stocks on its balance sheet. So for example, the U.S. just took a 10% stake in Intel. A state-owned company is different. So states do own companies. There are a lot of companies in the world that are partially owned by countries. Airlines are common. Other sort of infrastructure can commonly be owned. And the difference there is typically they're owning that for a social policy reason, a political policy reason. They want to, they think it's important for security to their country or they're trying to build jobs or something like that. It has something to do with the policies they're trying to get done. Whereas the sovereign wealth funds are really investing like an investor. They are investing to make a return for the future. They're not worried about,

you know, how many people work there or what it is. They're really, as a general rule, an investor like anyone else, they just tend to be very large and very large. long term. And so for the average person listening to this, you know, a mom and pop investor, as we think through our own retirement plans, our 529 plans, to what extent does knowledge about this ecosystem and the way it all works together? How should we incorporate that into our mental frameworks? Let's say you're investing your 401K. So where does that go? Typically, if somebody is investing a 401K, it goes to a mutual fund company who is then invest. that in markets, they would be competing with all of these other types of players, whether

those are pension plans, sovereign wealth funds, retail investors. And so to me, it's a bit about, it's sort of, you know, what is the journey of the money, you know, it's kind of, where's it going, and who are they competing with in the market? And so if you think about maybe 50 years ago, the market was made up mostly of retail investors and a few professional investors, and now it's the other way around. So most of the money is being managed by professional investors. They may be investing on behalf of mutual funds or pension plans or sovereign wealth funds or whatever it might be, but they are doing that as their job professionally, 24 hours a day. So I think it's always important when you walk into a marketplace to know what sort of entity

might be on the other side of the trade. And it will almost always be a professional investor today. As an individual, what that tells me is that it's harder and harder to compete if I were to try to make my own individual decisions. It's sort of for me, and maybe this is my own confirmation bias, speaking, but it reinforces the case for index fund investing. It does. And that's why index funds have been so helpful for retail investors in particular, because if you're wandering into a marketplace, I mean, it's like any other market. If you wander into a market and the prices are unclear, you're probably not going to get the best price. So far, we've been talking about one of the five solar systems, which is the asset owner solar system. This actually seems like a perfect segue to the next solar system, which are asset managers. So the asset managers are ones whose job it is to basically buy and sell stocks. I mean, other things too, but we'll focus on equities on behalf of somebody else. The biggest one is the index fund. And so, of course, what they do is buy a little bit of everything and hold it.

And so they don't make decisions about buying or selling stocks based on the outlook of the company. They do vote. They have proxy votes, and that's very important. They take that very seriously. But as long as something's in the index, they will hold it. And they only trade when money comes in and out of them. So that's the first one. And they're sort of permanent capital, right?

They're just there. The next one we think about are the active asset managers. And so this is what you would typically think of as a, fund manager, and they, you know, might be at a Fidelity or a Wellington or whatever it is, where they've got a professional investor who is deciding to buy a particular stock or sell a particular stock. And I think the important thing to understand about them is they're almost always measured against a benchmark. So the way they build portfolios is they start with the index and then they overweight or underweight relative to the index. So they don't start with a

blank piece of paper, but they really think about trying to lean into the stocks they like, but they may still hold the stocks they don't like because they're in the index. So you get a very strange phenomenon where somebody is underway to stock, but still a shareholder. So in other words, they're rooting for the company to do badly, even though they own the shares because they own less than the index. So this is where you get into these funny incentives. So there are index funds. they're the active, big institutional managers, and then we think of a few others that are boutique investors, and that would be somebody like Warren Buffett. You know, they're, they're doing something very different. Or a lot of the smaller managers, they're really,

they're trying to, we call them Sears and have a little picture of the owl. They're trying to see the future in some way. And they're really thinking about the company and trying to pick companies. Would Kathy would be an example? I guess I'd have to put her in the mutual fund category because she's still benchmark relative, but she's not a benchmark hugger. She will take bets that are quite different from the index. She's not staying close to the index. So those are the series. We talked a little before about the short sellers. Those would be in that category. And then there are the hedge funds. There are a lot of different kinds of hedge funds, but as a general rule, the ones that are called pod hedge funds are essentially groups of lots of pods.

So you'd have a small team that has a certain amount of money, a certain amount of risk that they can manage, then they're taking all sorts of different risks. And then the hedge fund as a whole is aggregating those all back up. And so if you think about a lot of the high-frequency traders would go into that category, they are people who, as a general rule, move markets, shake markets, and move a lot of money very quickly. For an individual investor, the skill, assuming that you want to find an asset manager, you want to choose, let's say, an actively managed mutual fund for a portion of your portfolio, how does one develop the skill of choosing the right manager? How does one develop the skill of knowing what distinguishes a good manager from a mediocre one? So I think the first thing is fees. It's very important. It's hard for a manager to overcome their fees. because if on average the market returns the market, then you pay fees. You've got to be quite a bit above average to come out ahead. So I think the first thing that I always think about is what are the fees and are those fees fair and why are they there?

If there are hidden fees or fees on the front end, fees on the back end, fees here, there, and everywhere, I would try to stay away from those. I think the second thing that a individual needs to think about that most institutions don't is taxes. There are funds that trade less, generate lower tax bills, have a after-tax return that's closer to their pre-tax return, and there's some that everything is a short-term gain, so you pay full tax on it, or there are embedded gains within a fund. So taking a look at that because, again, a pension plan doesn't pay taxes, but, you know, you and I pay taxes. So the first thing I was thinking of is fees. The second is taxes. And then you get into thinking about what, What kind of manager are you looking for? Something very stable, like a balanced fund or a target date fund or that's the sort of set it and forget it kind of thing, all the way to a particular industry that you think such and such industry is really going to outperform.

So I think then what's the objective? Is it to be the ballast in your portfolio? Or is it to be the spice? And I think that's an important question. So let's assume now you've looked at the fees, you've looked at the taxes, you know, what role this thing is supposed to play, then I look at the experience and the track record of both the manager and the company. And so if it's a manager and a company that has generated good returns over long periods of time and treated their clients well, then that's obviously a good thing. If it's more of a fly-by-night operator, then that's something to stay away from. But if I take a look at the track record and they've had a positive track record, I mean, my gut reaction is that I'm afraid of reversion to the mean. Yes.

Right? Yes. It is true that there's reversion to the mean from the positive side, but what the math shows you is very rarely is the reversion to mean from the negative side. Because often the negative ones are they don't know what they're doing or the fees are too high or something else is going wrong. And then what happens is they just go away. They go out of the data set. So you have survivorship bias. What's left is the ones that actually survived.

Right. So it is true. you can get reversion to the mean, particularly if you are, you know, investing, say, in an industry fund that's just done really well, but maybe that industry goes out of favor. And so that definitely can have, but reversion to mean almost rarely happens the other way around, at least over a reasonable period of time. So in other words, the great can become average, but it's rare for the below average to rise to average. That's right. What do you make of the argument that when asset managers have only a very small amount of money to manage. They have an easier job and can often do a better job. But once they

get a huge pot of money to manage, then that huge pot of money curtails them and they end up doing a worse job. And therefore, their own success in attracting capital can actually be the very cause of their downfall. That is typically true. Usually what happens is you have somebody starting out, they've got some great ideas, different way of looking at the market, whatever it might be. They have a small amount of money. Nobody notices them. They can do whatever they want. They're under the radar.

No one's following them. No one's ganging up on the other side against them. They can trade anywhere they like. Once they gather more and more assets, and of course for different investment styles, how big is too big, varies. But the traditional pattern is that institutional investors actually buy how much. high and sell low. So they buy managers that have performed well, and then they sell them when they've performed poorly, which of course is not what you want to do. But typically, a manager that's done well gets a lot of capital. And then at some point, it just gets to be too much. And either they're

not as nimble as they once were, or they feel like they have too much to lose. They start hugging the benchmark. And then you've got a very high-priced index fund, which is not a good investment. it doesn't always happen. There are exceptions to that rule, but as a general rule, that is true. Of the five solar systems, we've talked about the solar system of asset owners and the solar system of asset managers. In terms of what's left, there's a solar system of commentators and financial pundits. There's the solar system of regulators. And then there's one other. What was the other one? Control investors. Control investors. So we think of these as if the asset managers, if the asset managers,

are really just managing portfolios in different ways, but that's their job. Control investors are people who are managing portfolios, but also sometimes end up managing the company. So, for example, an activist would go in that category. So they do raise money from their clients, but what they're often trying to do is change the strategy of a company or change the board of a company. So the people we put in this category are the activists, the private equity firms, the venture capitalists, private credit, and even other strategics, as they're called, so other companies, because sometimes companies own other companies, and they obviously would know how to run a company. So all of those players, rather than just analyzing a stock and buying or selling it,

they're investing in the company usually with some sort of plan to make it better or do something with it. And so it's not just money, it's money and a plan. Okay. So I notice private equity is a planet under the solar system of control investors, but hedge funds are a planet under the solar system of asset managers. Can you elaborate on the distinction between the two? The hedge funds typically are buying and selling securities quickly. Sometimes they don't even think about the company. It's just a Q-Sip, as it's called. It's just a dot, right? It's just a dot. And so they are really thinking, about the security and how's that security going to perform or some combination of securities. Whereas a private equity firm, they actually are buying the company. You know, they own the

company itself. They're not buying just shares. They buy all or part of the company. I think the reason that they're very different, and if you meet them, they're very different types of people, a private equity firm, and we call the private equity manager, the alpha dogs of the investment universe, because they're kind of they buy and sell, they do deal, they sit on the boards, they hire and fire CEOs. They run the companies. That is very different than sort of the hedge funds, which we call chess players in a vest, which is they're just buying and selling and their computers and buying and selling.

So very different characters, very different personalities, very different timeframes. And private equity, they tend to hold companies for about five years or so before they flip it to another buyer. Who buys from them? Is it other private equity firms? These days, it is usually other private equity firms. So private equity firms sell to private equity firms. They call it a sponsor to sponsor deal. It happens all the time. They can also sell to a large company, you know, another company that wants to buy a company. And they can also sell to the public markets. They can take something public, but the huge bulk these days is one private equity firm buying or selling from another private equity firm. With these control investors more generally, are they often buying large but privately held companies, or are they taking companies that were once publicly traded and making them private? What did the asset look like before they took control of it?

For private equity, there tend to be three or four big categories. One is it could have been a division of a bigger company, so that a big company decides to sell off a small division that would often. and go to private equity. It could have been a founder-led company. So somebody founded it. They built it, but they're ready to retire or whatever it might be. So they would want to sell it. Sometimes they're taking things private out of the public market. There are definitely examples of those, but most of them they're buying it from another private equity firm. So it was held by one private equity firm and then it's held by another private equity firm. You mentioned earlier activist investors who

want to change the strategy of a company. What are some examples of strategic changes that activist investors have pushed for? I think they really fall into a couple of different categories. One is changing the balance sheet. If there are companies that have too much cash on their balance sheet, for example, an activist might want to come in and lever it up and pay that cash out to the shareholders, make it run more leanly. So that would be one, which would be changing the balance sheet in some way. Another is the activist somehow thinks that the company is being undermanaged. They think the board is asleep of the switch. The management team is not doing, not maximizing the opportunities that they have. So they want to come in and change their strategy in some way. Typically, that means

changing the board. Typically, that means changing the CEO. And those first two, you know, reasonable people can argue both sides. I think the third one that happens, unfortunately, a lot of times is this phrase of bringing earnings forward. So activists in general don't have as long a time frame as a pension plan or somebody who's saving for their retirement. And so in a lot of companies, you can take out a lot of costs that are being invested for the future. So a simple example would be research and development. If today you're putting a lot of money into R&D because you hope that in the future you discover a great drug or whatever it might be, well, you could really raise the earnings of that company today by cutting out that R&D. What happens, of course,

then, is you get an earnings pop today, but you've robbed the future. That is where a lot of the tension comes in around activists, which is, do they have a better strategy or are they just bringing earnings forward and taking it now instead of waiting? And so, Since they tend to have a shorter-term time frame and a higher target return than most pension plans or other retail investors or institutional investors, they're not aligned usually with those long-term holders. And this goes back to the conversation that we had right at the open of this show, which is that sometimes the investor has a very different time frame in terms of the different incentives that an investor has as compared to the management team of a company. the investor has a very different time frame often. Yes, and different investors have different time frames from each other. Like, you know, Warren Buffett has quipped that his favorite holding period is forever.

There are some people want to hold something forever. There's some people want to be in and out. So very different timeframes within the investment community, which are not aligned with one and other sometimes. Yeah, and I think he got that from Philip Fisher, who was a growth investor of all things. Probably the last person I would expect to say something like that. All right, so we've covered at this stage three of the five solar systems, asset owners, asset managers, and control investors. Let's go to what to me is the most fun solar system, only because this podcast would be an example of it.

And that's the financial commentators, financial pundits, financial media. Can you tell us about that? Yeah. In the sort of intermediaries and pundits section, we put the financial press. we call, you know, market-sabby reporters. We put the sell side, so the, you know, the sell-side analysts, the investment bankers. So all of the people that are kind of, you know, they're not shareholders, but they get a lot of the airtime. And a lot of the things that company management do in particular are because of those people.

You know, the press can report all the time on, you know, hitting and missing earnings, which makes, you know, not a lot of sense. or can make a company sound good or bad, and companies can like to go on the shows about companies, or they can be scared of them because, you know, obviously the press can say things that are good or bad. So the financial press, I think, is very important, and it really does affect the decisions people make. And the other really important one there is the sell side. So we think of, as I'm sure you know, and your listeners know, companies typically have quarterly calls with, quote, they're investors, but they're actually not investors on the call, typically. It is the sell-side analysts. And the sell-side analysts work for investment banks and write up research reports on

companies and typically say buy or sell or have an earnings target or whatever it might be. And they are often confused by management teams with actual shareholders. But remember, they don't own stock. So we refer to them as weather forecasters because, what they're doing, like a weather forecaster, is they're gathering all sorts of information, trying to put it through their models, et cetera, and try to figure out what the future will hold, what's going to happen in the future. So that's what their job is, and it's an important job, but they're not actually investors, and they're often confused for that. And the other thing I remind companies is they have a fiduciary duty to their shareholders. They don't have a

fiduciary duty to the financial press or to other commentators. Right. Right. So a sell-side analyst is their job essentially to be the weather forecaster that's making a call as to where the company is going and then build a case as to whether or not those holding should be sold? That's their job on the cover. I think in this country, the way that the analysts have traditionally been paid is by generating

trading volume. The way that trading works has worked. It's changed in a few places. particularly Europe and it's affected around the world. But in the U.S. traditionally what happened is investors would get the sell-side research essentially for free, and they would say, oh, the research from this company is really good. And then at the end of the year, they would talk to their traders and say, we're going to allocate our trading to that company because they did really good research. So the trading was sort of used to pay for the research. And it still is in some places.

the Europeans changed the rules so that they said essentially you have to write a check for the research and a check for the trading. You have to pay for these two things separately. You can't mix them together. And so a lot of global investors because just the record keeping and making mistakes around the world is too costly started doing that too. And so what happened there was the amount of research fell dramatically when people actually had to pay for it. And so now what's happened is a lot of the cell side research. is directed at people who trade a lot because trading is what generates their revenues. So if you're writing for somebody who's trading all the time, you would write something different than if you were writing something for someone who was going to buy a stock and hold it for a long time. So the challenge is to make sure for an individual investor that that research is aligned with their objectives. And if their objectives are find good companies and buy them and hold them for long periods of time, some sell side analysts still do that, but that's not their bread and butter anymore. Wow. So essentially that change in policy triggered an outcome in which high-frequency traders are getting served more so than long-term investors.

The high-frequency and the big hedge funds. Wow. Wow. What role do investment banks play in all of this? Yeah. So the investment banks that we think of the advisor. the advisory side of the investment banks are usually there when there's a big transaction. So a merger, for example.

So they're often the matchmaker between somebody who wants to buy a company, somebody who might want to sell. What they typically do is they understand who's who and what their objectives are and what they're trying to accomplish in a particular industry. And then they would know that, you know, this little company wanted to sell itself and it would be a good fit for this big company or whatever it might be. So they put those together. They're also the ones who take companies public.

So if a company wants to go public, they're the ones who marshal them through that whole process. So essentially, if it's a big decision like a merger or a take public or a take private, the investment banks will be the advisor. They'll be in the board room for that big decision. Okay. So they're your sounding board. They're the sounding board, right? They're the advisor. They're the sounding board.

And then they also know how to execute the transaction. So they know how to get it done. if a company says, yeah, we want to go public, they know how to get that done. I want to move to the fifth solar system, which are the regulators, and would stock exchanges also be considered part of this universe, this solar system? Yes. Yeah, so we think about regulators, exchanges, the lawyers, they're really important in the financial markets. And a lot of people don't think about them all the time. But the rules that the exchanges, for example, put in place drive a lot of how companies behave.

how trading works. They're the ones who make it safe to trade and fair to trade. So those are extremely important places. And they started, you know, hundreds of years ago now in the late 1700s in this country, to set rules about trading so that if you trade with somebody, you would know they'd actually settle. They'd actually deliver what you said you were going to buy because there's a lot of trust in trading. So, you know, things don't, they don't settle immediately. You have to trust that the person is going to turn back up with the stock in three days or one day, depending on what it is. So they really set the rules. And they set rules around governance. They set rules around all sorts of things. And they keep markets fair. And different markets around the world behave differently.

So from a company's point of view, most American companies would list either on NASDAQ or the New York Stock exchange. But if you were a company in the U.K., you could list in London, but you might also want to list in New York. I've been reading articles about how the London Stock Exchange is having problems because everybody wants to list on the New York Stock Exchange, even companies that are based in the U.K. Yes. So what's happened is not just the U.K., but around the world, the U.S. has the largest capital markets in the world. So there are a lot of companies in whatever country it is around the world who could list in their local market, but the U.S. market is just much bigger. So they will either just list in the U.S. sometimes, or they'll do a dual listing. They'll be listed in their

local market and listed here, which is good for U.S. investors because we get to see companies from around the world. It does mean they have to generally report in line with what the U.S. regulations are and so on. But there's still companies that are, you know, operating. We're wherever they're operating. But the U.S. has become very competitive in terms of listings for companies globally. People don't just list at home anymore, no matter what country they're from. Walk me through this because I still think I'm fundamentally not understanding. If I was the CEO of a company that was about to IPO and I had my choice of which stock exchange to list on, and let's assume that I'm not running a U.S.-based company, I'm running a company based in,

just for the sake of this example, we'll make them European-based. They're based in Brussels in honor of the UN being in New York the week that we're recording this. They're based in Brussels. I've got my choice of where to list. Why would I choose New York over London or Tokyo or anywhere else? So usually the things you think about are the disclosure requirements. So what am I required to disclose and that can be different kinds of accounting? You think about the governance requirements, different people in different countries have different requirements about who's on your board, you know, how many independents do you have and all of those sorts of things. But the main thing is you think about what will my cost of capital be and how many investors

am I exposed to who might be interested in my company. So what sometimes happens is a company that is well known and use your Brussels example, if it's really well known in Belgium, maybe they'd be better off listing there or in Amsterdam or wherever it might be, or the UK. But if they're really a global company, or if they're a company, you know, who people a lot of other places would know and be interested in investing in, maybe they would be better off listing somewhere else. Because if they can be part of the big flows in the U.S., the big indexes in the U.S., then money will flow in, their cost of capital will be lower. And mostly companies are trying to list in a place where they can have robust markets, where they can maybe issue more shares going forward, you know, if they want to do a merger or issue a secondary offering, whatever.

And so they're looking for the depth of the capital markets. And the U.S. capital markets are just much deeper. So London, for example, competes for listings around the world. So if there's a company from, you know, another country that London would probably compete with Hong Kong and Singapore and New York. and other places, companies now really have a choice. They don't just have to list on their home exchange. Let's talk about the other side of this. We've talked about stock exchanges, but regulators, there's the SEC. Who are the other dominant players? And how do they play a role in shaping markets? So the SEC is the biggest regulator in the U.S. There is the equivalent of the SEC in essentially

every other market in the world. And their job is a combination of, investor protection and capital formation. So they want to protect investors, particularly retail investors, particularly investors who, you know, might take advantage of by large investors or professional investors. So they really focus on investor protection, on the one hand, but then also capital formation because they want companies to be able to get capital, raise money so that they can expand their businesses or whatever it is that they need to do. So the SEC is in this country always trying to balance. those two things and set out the rules of the game. Now, inevitably, some of these rules have been around

forever and they really don't change much and, you know, they try to find people if they break the rules and they, you know, committing securities fraud or something like that. But then inevitably, politically, you know, one party will be in power and they'll emphasize something and then a different party will be in power and then they'll emphasize something else. So most of those rules stay the same over time, but they will vary some based on politics and who's in charge. Let's go back to the example of imagine your CEO, but in this case, we won't be based in Brussels. We'll be based in Kentucky. You are the CEO. You are the founder of a company. Walk me through the journey of a CEO as we take our space shuttle around this solar system.

There are a lot of interesting journeys that CEOs take, depending on the age of the company, the stage of the company. So let's take your example. You've got a small company. You started in your garage. You came up with some product. It's doing well. Early on, you probably, your first stage, probably you had just friends and family money. You somehow got some money and you got started. The next stage was probably venture capital money. So you got too big for your checking account and you went out and you found some real investors. Maybe they were angel investors really early stage, sort of seed investors, or then what happens as you get bigger, you go through a series A, series B, series C. So you go through these various series as you get bigger. And now let's say your

company is big enough and you're ready to go public. So then what happens? And not all companies go public, but that's the traditional path. So you're ready to go public. That's a really important journey for a point in that journey. So what we try to help CEOs understand is if they're going to go public, what is the world that they're entering into? So the public markets are very different, of course, than the private markets. And journeying into that, you don't want to do that blind. So it really requires a number of things to think about. One is the governance. So to be listed on one of these exchanges, like we talked about, you have to have a certain number of independence. You can't just to have your friends and family on the board anymore. You've got to have people who are

representing the public shareholders. So they have to be independent from you as a CEO. You have to think about which exchange should go to be listed on. So maybe it's, you know, if this is an American company, it's probably one here. But if it was from somewhere else, you know, what choice do you make? And then you really have to think about that investment bank and who's going to take you public because whoever buys your shares on the IPO, So, ideally, those are people that you want along for the ride for a long period of time, not people who are just going to flip it right away. So really thinking about what do I need in terms of amounts of money, but also who do I,

who I want on the journey with me and then targeting some of those large shareholders. Those could be the people we talked about before, the asset owners, the sovereign wealth, funds, the pension plans. It could also be the big asset managers. So I think that when a CEO goes through these critical points, like taking a company public, really thinking through how they do that, who they have along for the ride is a really important part. So that's a journey. Another journey is if a company needs to pivot. Another journey is if a company wants to go private, that's when your path through all these planets really matters.

And to that question of who do you want on this journey with you, and it's sort of a vote. a question that I asked earlier when I asked about how to select a good asset manager, but this I think is a bit broader. How do you choose the who? How do you separate, you know, there's that ask who not how? How do you distinguish the who's who of who should be along that journey with you versus who's not going to provide great advice or is only going to provide middling advice? So I think the most important thing is the timeframes, matching the timeframes. So if you have a company that's going public, what can happen does not always happen, but what can happen is that if you pick not the best investment bank, they will just sell your shares to the hedge funds at a low price, and the hedge funds will keep them for, you know, a matter of days, and then hopefully the shares go up, and then they'll turn around and sell them to somebody else. And so what that means is then they get that IPO pop, and they're very happy with the investment bank because the bank made the money.

but you've completely lost control of who's on your shareholder roster versus going to somebody that you think would hold that for a long period of time. Because inevitably, what happens with the company is things go well and then maybe things don't go well. And the research shows very clearly that having long-term shareholders who will help a company see a strategy through, even if there's bumps, really adds a lot of value to the company over time and that having short-term shareholders, is costly because then you have to go, you know, find new ones or maybe you pivot away from a strategy.

You would have been great if you'd stuck with it. So I think it's really thinking about what is the timeframe that assuming the company does well, assuming things are, you know, sort of going according to plan, that people will stick around. And that's very important. Is that what happened with Airbnb, the IPO bump? Yeah, so they had a real IPO bump. And then, of course, COVID hit, which of course was not their fault, that it fell. And so it really depends when you bought that stock, whether you had done well or not. So a lot of people got an IPO pop, but then if you bought it after that and you held it for a long time, maybe you didn't do that well, because a lot of that money was taken at the beginning, you know, ideally you would reward the shareholders that

stick with you for a long period of time as a CEO rather than somebody who just comes right in and out. Right. But with more shareholders being index fund investors, would those index fund investors not be shareholders that stick with you forever? They are. Those will stick with you forever. But the interesting thing in public markets is that because those are not trading, they don't really set the price. So the people who set the price are the marginal traders. And that's why prices can move so much, even if so much of the stock is not moving. Because you can get to a point for, you know, some companies where very little of the shares, there's very little float. So a few people can really drive the price. Now, if you try to actually buy at that price or sell at that price with a large block, you probably couldn't do it.

But at least on the ticker, it looks like it's really flipping around. Wow. So it's just the little edges that actually create the noise. Yeah. Wow. It's the little edges that create the noise. That's right. Well, thank you for spending this time with us.

Where can people find you if they'd like to learn more? Yeah, thank you. So the book is called The CEO's Guide to the Investment Galaxy. And then the other place you can find us is that I lead a nonprofit called FCL. T Global, and our website is FCLTGlobal.org. We are an organization whose mission is to mobilize companies and investors to create long-term value. And the reason for this book, at least from our point of view, is that that connection

between the companies and investors is critical to really driving value for savers, on the one hand, who are trying to save for their retirement or their children's education or whatever it is, and for communities at the other end that benefit from companies that create new products that we like and employ people and all of those sorts of things. So we work in the middle, but for the benefit of the savers and communities. Wonderful. Well, thank you so much. We'll link to that in the show notes. Great. Thank you. Thank you to Sarah Williamson. What are three key takeaways that we got from this conversation? Key takeaway number one. There is a fundamental misalignment between what investors want and what a company's CEO or board of directors want.

CEOs wake up every day trying to beat their competition and build great products. But most institutional investors are measured against benchmarks or peers, not against whether or not a specific company thrives. In fact, they often own competing companies. In fact, if you're an index fund investor, then as an index fund investor, you do this. own competing companies. You own both Coke and Pepsi. So you don't care which one wins because you own the competition. Most investors are measured against either a benchmark, like the SB 500 or something like that, or against their peers. They're not really doing what investors sort of used to

do, which is take a blank piece of paper and think about a company and think about its strategy and its management team and decide to buy the stock or not. That's not the way most money is. invest it. There's a funny misalignment between the people who are managing and advising a company versus the people who are investing in that company. That's the first key takeaway. Key takeaway number two, the GameStop frenzy was not really about investing at all. In fact, it reveals something really important about two very different approaches to the market, because if you are a mom and pop investor saving for retirement or saving for your kids college fund, you're buying stocks because you believe that those companies will create value over time. You believe those companies are going

to create real earnings, real products, real growth. But the Reddit crowd isn't playing that game. They're buying stocks because they think that someone else is going to pay more tomorrow. In fact, they're identifying heavily shorted companies and coordinating to squeeze short sellers. So you're investing, as an index fund holder, you're investing and the Reddit crowd is gambling. Understanding that difference matters when you're building wealth for your family's future. And it matters in the heat of the moment when there's that social pressure because your cousin is texting you about how much money they made in the latest meme stock craze. The fundamental distinction between the two is investing in something because, there is value there, perceived or not, but that there is value that should, because there's

earnings, there's brand, there's company, there's some value there that ultimately will turn into cash flow, real value, real economic value, versus the other idea, which is to buy something because somebody else will buy it from you, a trading mindset. That is key takeaway number two. Finally, key takeaway number three, some of that price volatility that you see in your portfolio comes from marginal traders, a tiny fraction of shares actively changing hands. The value of your stable long-term index fund investment on a day-to-day basis can swing wildly based on the actions of a very small number of short-term traders, high-frequency algorithms, and hedge funds, even though they represent a small portion of total

ownership. It's the edges that are creating all the noise. So when you're watching, your 529 plan or your 401K bounce around, remember that the vast majority of those shares are sitting still because those are held by other long-term investors just like you. The interesting thing in public markets is that because those are not trading, they don't really set the price. So the people who set the price are the marginal traders, and that's why prices can move so much, even if so much of the stock is not moving. Those are three key takeaways from this conversation with Sarah Williamson. Thank you so much for tuning in if you enjoyed today's episode.

Please share it with your cousin who's obsessed with the latest meme stocks? That guy at the gym who works in private equity? Your favorite local pension plan manager? Share it with the cell side analyst who keeps missing their earnings predictions. And with the people in your favorite subreddit. And any and all sovereign wealth fund managers you might happen to meet. Share it with the coworker who day trades during lunch. Share it with all of these people and more, because that is the single most important thing you can do to spread the message of FAARE.

And from this episode, to spread greater financial literacy, to make the world of investing more clear, more digestible, more understandable. This is not stuff we're taught in schools. Unfortunately, this is stuff that we have to learn on our own because no one is going to sit us down in a classroom and teach it to us. We have to seek it out ourselves. And when we do, we become empowered to take charge of our money, take charge of our wealth, and by doing so, take charge of our lives. That's why this message is so important to spread. So if you got value from this, share this with the people in your life. That's the single most important thing you can do,

to play a role in developing a society of more financially literate people. So thank you for doing that. If you'd like to learn more, subscribe to our newsletter. It's absolutely free. Affordainthing.com slash newsletter. We have a course on rental property investing. It's called Your First Rental Property, and it is going to open for enrollment Monday, October 20. That's Monday, October 20, 2025. Mark your calendars.

Your first rental property opens for enrollment. You can find out more. And sign up for the waitlist by going to afford anything.com slash enroll. That's afford anything.com slash enroll. Thank you again for tuning in. I'm Paula Pant. This is the Afford Anything podcast, and I'll meet you in the next episode.