Animal Spirits Podcast - A Committee of Geniuses (EP.50)

Episode Date: October 10, 2018

The rise of social media in finance, reflections on the humble beginnings of this podcast, the case for investing in bonds, more hedge funds closing, your children are eating your retirement savings, the myth of short-termism by public companies, Amazon's minimum wage, Fed cartoons, the relentless bid and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, the podcast that takes a completely different look at markets and investing, hosted by Michael Battnick and Ben Carlson, two guys who studied the markets as a passion and invest for all the right reasons. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. clients of Ritthold's wealth management may maintain positions in the securities discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. John Authors left the Financial Times after nearly 30 years. And on his

way out, he wrote something about one of the transformative experiences he had during the crisis of 2008. He spoke about how he went to Citibank and took out money only because he had a big lump sum coming in with the sell of his apartment, not necessarily because he was making a call on money markets or anything like that. And he didn't report it because he felt a responsibility not to stroke the flames of panic. So he wrote about this and he spoke about how social media has just changed everything and what it would have been like if social media was so prevalent back in 2008 as it is today. So he wrote, the rise of social media has redefined all other media. If the incident in the city branch were to happen today, someone will put a photo

of it on Facebook and Twitter. It might or might not go viral. But it would be out there without context or explanation. The journalistic duty I felt to be responsible and not ferment panic is now at an end. This is dangerous. It is kind of interesting because so much of the media world these days is centered around their personality. And I mean, how much of Twitter these days is just focused on media and things that happen in the media. So it is kind of crazy to think about how much that landscape has changed even in the finance world. A lot of this stuff that we used didn't really exist during the financial crisis. I mean, there was blogs and such, but not to the degree that there are today and certainly not people using social media

to talk about the markets. So it's completely changed the way that we interact with the finance world. Instant analysis was more like a few hours later rather than truly instant. Yes. I mean, everyone's opinion and analysis and data and actuallying and backlash and backlash to the backlash is now out there immediately. And in some ways, it seems like the reporters these days have to inject their personality a little bit into it to stand out from the crowd because there's so much reporting of it going on now. You can't just have just the drab facts and then go on from there because someone else will do it differently. Yeah. And he said something that was interesting that I could certainly, maybe I can't have thoughts with, but I understand where he's

coming from. He said, now almost everything in the paper that expresses an opinion carries a photo. Once my photo appeared above my name on the old short view column, my feedback multiplied maybe fivefold. That's pretty insane. And I wonder if I'm guessing that the feedback for the most part it was negative. I don't know. I guess I don't see the correlation there, but I guess when you kind of personalize it and make it so people know you, it changes things. And I think that that certainly rings true from my experience. I mean, I think when you write about your personal life, it helps people to not sympathize with you, but really understand your position more. And so I think in a lot of ways, I think it kind of kind of help or hurt you. But I think for

us, it actually helps a lot to talk about your own, you know, what you're going through and what you're thinking. Well, you think because if you're, if you open up, people are less likely to be a ruthless asshole? Well, I think it just helps, like, garner more trust in people when you talk about yourself and what you're doing and how your own experiences have shaped you. And I think it's easier to write that way, too, because you're not just being such a robot. You're actually talking about how these things impacted you. Right. By the way, can you hear this construction in the background? No. Okay, perfect. But isn't that on every NYC podcast there is? Yeah. And a couple sirens later. So this is our 50th podcast episode, which is kind of amazing. Does it feel like

it's been a year? It is pretty bizarre. It seems like we just kind of started. But I think it's technically really like our 75th, if you count all the ones that didn't, that are still on the cutting room floor. So when we first started doing this, you and I just kind of said, you know, we talk all the time. Let's make this into a podcast. And then we tried to do it. And we like, it just didn't work because we didn't know what we were doing, right? It's, It's talking on, just talking in general is harder on recording. It's harder than it sounds. Well, yeah, well, of course.

But I guess the transition between John authors and us and why we're talking about him before us is because I feel like certainly blogs and podcasts have, without a doubt, change the financial media landscape. Definitely. Yes, it's much easier for someone to be heard these days from any sort of small corner of the market. You can find your own niche. you can start your own blog and a lot of people who ended up starting blogs now right for a lot of

these publications for Business Insider and Bloomberg and all these things. So it is, it has changed things and sort of democratized a little bit. And in a lot of ways, I think it's definitely good for us because there's, there's no shortage of, you know, context data and analysis. It might be harder for for other people to sort of sift through the firehose of information. But yeah, it certainly changed the way that we, I certainly never would have thought this route would have been open for me or that I would have gone down this route. You told me this five or six years ago. Yeah. So when we started, you and I speak on the phone probably 15 times a day, depending on what's going on. And Patrick O'Shaughnessy gave us the push to do this. And I'm really glad that

he did, you know, for obvious reasons. This has been really wonderful experience for us. But when we first started, we weren't sure at all which direction we were going to take it. And so we probably left maybe a dozen episodes on the cutting room floor. I don't even think we got through like a full 30 minutes because they were so bad that we were literally laughing. And I remember vividly one of the first episodes that we tried to do was something, we tried to like turn a blog post into a podcast. So it was something along the lines of 10 things that we learned about personal finance.

And it was very scripted and we just started cracking up because it was such garbage. Yeah. And we realized like if you try to script this kind of stuff and you're not an actor, it's going to turn out horribly. And it did. So we were trying to read and then we realized, why don't we just talk like we're having a conversation, which is what we wanted anyway. And that seemed to work out much better. But yeah, there was a lot of them that I think we had a couple months of give and take before we were actually ready to go and put this out there. And I think we're glad we did. But yeah, it's been 50 episodes almost a year. And yeah, I think we're pretty thankful for all the people that listen. And we have really great audience because we get tons of comments and feedback and people that call us out if we're wrong or set us questions. And it's been, yeah, it's been, it's been fun. And then we try to do the recording side on our own, and I can barely plug in the microphone half the time Ben has to tell me to turn my bike on. So that was- Our technical expertise is not

exactly there. So if we, yeah, we outsource this to Matthew Passy, who does an amazing job of editing this for us. And he's the one who puts together the intro and without him, this would be, it wouldn't work. Yep. Yeah. So Matthew's been great. So thank you everyone for listening. Leave us a review on iTunes. We've got some good ones so far, but that's our, That's our one to ask for the week. Okay. Fair enough. That'll be nice.

All right, that's enough petting in the back. So one of the reasons that I wanted to start the podcast is because you and I talk about this stuff and bounce ideas off each other. So I want to do that now. So something that you and I talk about quite a bit is when we're going to write a blog post, we will bounce ideas off of each other. So I want to bounce ideas off of you for something I'm going to write this week. So I want to make the case for owning bonds and not in the diversification sort of way,

but it seems like a lot of people these days that there's a big piece in New York. times this weekend about how bond rates can kind of control the economy and have a big impact on stocks and what happens in inflation and all these things. And it seems like the prevailing view these days is it's possible the 10-year treasury could go to four or five, six percent. And we've seen a lot of scenario analysis on what that means. And that's obviously not good for the bond market and potentially not good for the stock market. Boring. I know. I want to make the case for the other side. So let's say the Fed has been raising rates for what two years now. What happens if they raised rates just to lower them again. And everyone has caught flat-footed and we do see a

slow down on the economy. Is that a case for owning bonds in Michael Bannock's tactical portfolio? So you're not talking about for diversification benefits or income. You're talking about because price may rise again. Yeah. Let's say in the next two to three years, we do have a downturn. The Fed has raised rates a few times. Maybe they get up to, I think it's two and a quarter now. Let's say they get up to 3%. The economy slows because of the Fed raising rates or for some other reason there's a black swan or what have you that happens every five minutes. The global economy slows down. The U.S. catches a cold. We have a recession. The Fed has to then lower rates again. And then simultaneously, right, people are selling stocks, buying bonds. I'm not saying that will happen,

but isn't that feasible that could happen? People are preparing now for a rising rate environment and right when that happens and things are going to take off, you know, inflation isn't as high as people thought. The economy slows. Is that a case for bonds? I'm going to put a little more meat in the bones on that, but that's what I'm thinking. Well, yes, anything is possible. And this has been an interesting rising rate environment. So the 10-year went from 1.37% in July 2016 up to 3.2% today. And this is pretty much like the bearish catalyst, right?

This was the Fed has taken away the punch ball. They're going to raise rates. This is going to put the brakes on the economy. Stocks are going to fall, et cetera, et cetera. But actually, the NASDAQ 100 is up 70% over that time since July 2016. The S&P 500 is up close to 45%. And bonds as measured by the ag are down 2.5%. So it really is sort of amazing how this played out.

Now, of course, it could have gone very differently. But this is sort of a, on the one hand, on the other type of thing. Well, to sort of pat us on the back and maybe the whole blogging community, anyone who looked at the data saw that in a rising rate environment, stocks actually tend to do pretty well. And I ran the numbers on this. And I think the average was like 40% rise every time the Fed has raised rate since the So you said stocks are up 45%. So it's actually pretty well within historical boundaries of what happens. So people assume. So this is a case where history actually was a guide. Right. So I mean,

a few years ago, people were saying, if rates do rise, guess what stocks tend to do pretty well when rates rise? And they have. But now it's kind of like now that we've gotten to that place and stocks have done well, now what? I think it's a lot of people are thinking. So it now costs more money to borrow than it did a year and two ago. But on the other hand, it also is a better deal if you're lending money, which is essentially what you're doing when you own bonds. Yes. Right. Everyone who's in bonds right now, they've seen their bond funds fall, but they've gotten a raise as well because yields have risen, so their expected returns are higher. So you're taking, with these rate increases, you're taking one step back with price, hopefully to take two steps forward with total return. Correct. And to get back

to my bond blog post I'm going to write, you could get a double whammy of now falling rates from higher levels, and that's my tactical bond call, which I'm not really making it, but, all right, we'll see. But that could be, I'm giving it plus or minus 27 months. Okay. Wait, plus or minus 27? How could it be minus? That's fair.

That's fair. All right. So two stories this week, similar themes about hedge funds closing. One of them, Criterion Capital Management, which is a $2 billion fund, their long-only portfolio grew by more than 850% since an open 16 years ago. beating the S&P by more than 550%, which is pretty wild. That is like absolute dominance. And I guess, and this is not taking anything away from them at all, but this fund, I guess

16 years ago was 02 when value and hedge funds really had their day in the sun. So I was wondering, why are people unhappy with them? Because all their performance was front-loaded? Yeah, I don't know the details. And then in another one, Highfield's capital management, this is a $12 billion fund. and the guy said, the guy, and I mean the founder, I forget his name, he said, done correctly, money management is an all-consuming 24-7 pursuit. After three and a half decades of sitting in front of a screen, I realized I'm ready for a change, to which I say good for him. Right. And then that's translation for, I'm shutting down the fund to spend more time in my family, aka I'm going to start a new fund in 12 months under a new name.

By the way, so there's 11,000 hedge funds these days and like every name has been used in the book. Like, if you shut down a fund, can someone else take that name and use it again? It's like a Twitter account. Right. Yeah, hop on that thing. Yeah, I don't know. But I guess, so what happens, like, what do the investment committees do when they're, when funds are closing down and they're getting their money back? Like, were you ever in a position where a hedge fund that you were invested in closed and gave the money back?

Many times. Probably four or five different times. And a lot of times, I think I've mentioned before, it takes a while to get the money back. So you actually have some time and due diligence. And a lot of times these institutional investors are constantly doing due diligence on other funds and kind of have some waiting in the wings. But it can take, depending on when they wind down and how they wind it down, some of these funds, they don't want to telegraph because a lot of the other funds are like vultures and will pounce in their positions and make it harder for them to unwind. So it depends how long they have that unwind and how liquid or illiquid they are. But it can take months sometimes even, you know, over a year to get that money back depending on what the terms are. So it really is. kind of case-by-case basis and how quickly they make this decision. But it can take some time. Barry Riddholtz wrote a post this morning, and he quoted, he was at an event with some big names in the industry. And Cliff Asniss said, you can have a committee of 10 geniuses that proves collectively to be a moron. He was talking about the investment committee. Yeah, that's pretty good. I'm sure he's

dealt with that many times, which I've always talked about how making a group decision. In a lot of ways it's better because you get a diversity of thought and opinion. But in some ways, it just makes your life way, way harder because people aren't always on the same page and people are coming at it from a different knowledge perspective. So somebody tweeted this two weeks ago, and I forget who it was, so I apologize. But it was an article in the New York Times about when Julian Robertson closed Tiger. And he didn't stop investing. He kept at it, but he was just closing the hedge fund. And this was in March of 2000, so literally at the top. And the article wrote, or read, I'm sorry, he has essentially decided to stop driving the wrong way down, the one-way technology thoroughfare that

Wall Street has become. And this is a pretty amazing piece from the article. It is not lost on Mr. Rodbertson that many of the same stocks he had been betting against in recent months, internet shares, technology stocks, and other beloved new economy stocks have been in free fall since Tiger's shutdown became public. In the last four training session, the NASDA composite had lost 10.2%. If we had been in business this week, it would have been one of our best weeks ever, he said. Wow. I don't know if there ever will be a better market environment for headlines than the dot-com bubble, right? Because there was so much euphoria and the good thinking on the one side, and then it all just ended. And then it like just swiftly came down

in the peak. And we saw the other side of that. So that period just kind of boggles the mind in a lot ways. So I'm not suggesting that tax stocks are in a bubble that we're in a bubble, but certainly there are, you know, it's easy to draw a parallel between what we're seeing today and what we saw in March 2000. It's also amazing from that article that it said he had a 25% annualized return versus a 17.5% for the S&P, which is just, God, it's unreal. So clearly the wind was at his back in a favorable environment, but he destroyed the index. Right. So pretty impressive. relative basis. But I guess the parallels that I was suggesting are just like, obviously, Fang stocks have been basically the only thing working, or not the only thing, but, you know,

just certainly driving the bulk of the gains and investors getting tired of underperforming. And yet a few big closures last year, like Perry Capital was a big one. And I think there was a few others. Right. The Fed has outlawed fundamental analysis, apparently. So CNBC had a story this week that I really don't know what to think about it. I'm still trying to wrap my mind around it. So they did a study that showed the amount of money people spend annual. on their children, and their adult children, and it's $500 billion, and then they found the annual contributions to retirement accounts is $250 billion. So people are spending double the amount of money on their adult children as they are giving to their retirement accounts. And they

said that $500 billion includes, it does include undergraduate education and everyday living expenses and things like groceries, cell phones. That just kind of boggles my mind, too, that these parents are paying for their adult children's cell phone bills still. But I don't know, I still can't wrap my head around these numbers. Well, I know, I mean, a lot of people were helped out by the parents coming out of college with apartments and stuff, which I think is, like, you know, not a terrible thing. I mean, it's one thing if you're paying all the bills, but, you know, I mean, I hope. And, of course, being a parent, like, I get it.

I totally, like, you're not just going to shun your children, but obviously maybe we should blame the kids for the retirement crisis, is that we're saying. So this is actually a big report that Merrillich sponsored. I forget the person, you know, I forget the company that ran it. But this survey included more than 2,500 respondents. And I don't know if you saw this, but I put a few more slides in the dock. 72% of parents say they have put their children's interests ahead of their own need to save it for retirement. And 63% of parents report having sacrificed to their financial security for the sake of their children.

So I think this is the, you know, maybe it's not smart, but I don't think this is terribly surprising. So I read a book. I'm actually going to talk about it in my recommendations, but I want to just just give a stat real quick. And it was called the overspent American. And it talks about it actually, the book was written like 99 and talks about how our consumerism culture has changed since basically in the 80s and the 90s with a big turning point.

And it said between 1979 and 1995, the average spending in America did grew by like 30 or 40 percent. And what drove this? The internet? More or less, it was like the ability to compare yourself to other people and not just like your neighbors. Okay. And it's really,

it's kind of an interesting book because it talks about a lot of things that have just been like hyper-magnified since the internet took off in social media. So even then in the 90s, people were thinking about this stuff, and now it's even easier to compare yourself to other people. Yeah, that's interesting. When I said the internet, I wasn't even talking about comparing yourself to other people, which is certainly a big driver in terms of people trying to keep up. I was just talking about the internet has made it so much easier to buy things, specifically

Amazon. Ah, yes, that's true. And it feels like funny. It's like monopoly money. You never feel like you're spending money when you use Amazon. Could just click a button. Right. By the way, I didn't even know this was a survey.

So does this count as our survey of the week then? Yeah, we're actually pro this one. So they showed the faces of parenting, and they broke it into infant toddler, elementary, high school, and adult. And they also broke it down by most rewarding, most challenging, and most expensive. And what really stood out here were two things. The infant toddler was by far the most rewarding part of parenthood. So let's enjoy this while we got it. So it's only downhill from here?

Yeah, exactly. And then the most challenging was elementary high school. I can definitely see that. I'd say to my wife all the time, like, I'm not going to be able to personally. handle kids being jerks or bullying or getting in fights or breaking up with like that stuff on I'm not going to be able to handle that well. Yeah, same. And then the most expensive, and this is interesting, most expensive by far was adults. Oh, really? I guess that makes sense because that's, they really are probably subsidizing them in many ways. Although actually, you know what? I reported

that wrong. I'm sorry. So within these three buckets of infant, toddler, elementary high school and adult, they gave you three different choices. So do you see what I'm talking? Do you see what I'm showing? Oh, okay. I got you. Okay. Yes, that makes sense. So it's by, okay, but then it becomes most expensive. Okay. I guess within the adult section, 40, more, most expensive. Yeah, 45% reported as most expensive. 29% said it was most rewarding and only 12% said it was the most challenging. So, hey, I guess in 25 years, things will become really easy for us. All right. Well, I mean, that's the time when parents should be able to spend or save, I should say, like, if you need to catch up on retirement savings and you have foregone that because of your, kids, when they're out of college and going into the working world, that's technically when you should have a lot more money because you're not, they're off, they should be off your budget and you don't

have to pay for college anymore. And then you can really supercharge your savings. But if they're still, you know, on your payroll, that's going to be tough to stomach because then you should be in your sort of higher earning years and play catch up a little bit. And then lastly, parents are of young children in terms of what life's biggest identity shift, getting married, getting divorced, becoming a grandparent, whatever. By far, the biggest identity shift is becoming a parent. And not having lived that long, I mean, for me, that was, I would certainly agree with that. Yes. It's, yes, definitely changed my perspective on a whole lot of things. Right. Like, getting married wasn't a huge thing because I was with my girlfriend at the time, now my wife for quite a long time. So, right. Although this

whole perspective thing, I'm sort of waiting for that to kick in. Really? See, for me, the biggest, mine well mine kicked in now that I have three and certainly didn't have one but just the the inability to focus and think about yourself is actually kind of like refreshing in some ways where like most of your time and energy is spent towards their survival or they're

making them happy and that actually is kind of nice to be like I can just forget about myself for a while and focus on them it is kind of refreshing in some ways I mean there's been moments of that but I guess because Kobe is only about a year and a half I'm still able to be sort of selfish with my time which I think is which I think is

pretty much coming to an end quickly. Yes, once you get into more sports and games and entertaining them and it's, yeah. So the New York Times had a piece last week and it's titled, I created the Burnack on YouTube and I was mostly wrong. Do you remember seeing this video? So this was in 2010. So this is what the story starts off with in November 2010 as the Federal Reserve embarked on its second round of bond buying. Omid Malikon uploaded a YouTube cartoon called Quantitative Easing Explained, which was critical of the central bank's response to the financial crisis. Within weeks, millions of people had viewed it. Here nearly eight years later, he says he got it largely wrong. And I remember when this thing came out and it was passed around. I must have got it emailed to me five or six times.

And it was just this cartoon explaining central banking and monetary policy. And it was more or less predicting the end of the world. But it was this cutesy little like Japan animation cartoon. And it talked about how Ben Bernacki was going to flood the world with dollars and hyperinflation was going to ensue. And this guy, to his credit, kind of said, you know, I was wrong, really didn't understand how quantitative easing works. And in a lot of ways, I think he's echoing what happened with a lot of people and not understanding how the Fed works. So he did admit what he got wrong. The funny part is that the end of it, he talks about how Bitcoin's going to save everything. So I don't know if he totally learned his lesson. But I mean, I remember when this came out and people were sending it around going, look at this. See, here's what the Fed's going to do. I mean, it's easy to look back on it now. But, I remember at the time, everyone was buying into this conspiracy stuff that the Fed was going to just print money rates. We're going to go to 15%. And hyperinflation was right around the corner. Yeah.

Anyway, it's worth watching now and kind of to laugh about. But I think in a lot of ways, the Fed gets, I don't know, probably too much, too much flack for not stopping some financial crises in the past and maybe not enough credit for what they did in this one after it happened. Because, I mean, they really have threaded the needle. That sounds like somebody, that's something somebody on the plunge protection team would say. Yes, but have they not kind of passed the baton a few times? And it's worked out, it had to work. I mean, 10 times better than anyone thought imaginable. Well, Dahlia called this the beautiful deleveraging. But he also said this is 1937. If it was 1937 and 2011, that means it's now 1944. And we should be expecting anyway. World War II should be getting over soon. Okay. So there was a piece in barons this week from Matthew Klein. And I was like these contrarians.

and ones where he showed some research saying that everyone's worrying about short-termism is nonsense. And so this one's called the short-termism critique of public companies is nonsense. And so he looked at research, and it's from Federal Reserve and the University of Michigan and a few other places. And they say companies with publicly traded shares invest proportionally far more than privately held businesses. The difference is particularly stark when comparing spending on research and development.

So people are worried that public companies are only spending on share buybacks, and borrowing and all these things and not investing for the future, but it actually says that public companies spend, invest far more of their money than privately held businesses investing for the future. Interesting. What? Because there's pressure to invest for the future more so with public companies? Oh, no, I think it's just people assume that companies only care about the next quarter and their earnings and they're not investing for the future. And maybe they should be more like some of these small privately held businesses, but that's actually not the case when you look at the numbers. So short-termism maybe is not as bad or as toxic as people, some people seem to think.

So there's more investing for the future than people realize. I'm sure that this article will put that argument to bed. Yes. We'll wash our hands of it. And we'll talk about it next week again. So Amazon, in the news, again, raising their minimum wage to $15 an hour. And this is going to affect 250,000 current employees and 100,000 seasonal employees. And the company said that it will start lobbying Congress for an increase in the federal minimum wage,

which is set nearly a decade ago and is still currently $7.25 an hour. Bezos said, we listen to how our critics thought hard about what we wanted to do and decided we want to lead, which all sounds great and I hate to be such a cynic, but is this really, like are they just moving from one pocket to the next? So as part of this changes, they are doing away with incentive pay targets and they're canning their restricted stock unit program. In other words, I guess, is this just what Cliff would say, is this just virtue signaling? In some ways, but it's also them getting ahead of things in a lot of ways. And I think that, I mean, a lot of these other places are going to have to pony up and do this exact same thing. So I think in a lot of ways, they just got ahead of the curve. And all these other companies are probably going to have to start matching them. So you think this wasn't in response to maybe no slack in the labor market and wage inflation? Oh, and he also even said, thank you Bernie Sanders for getting this ball rolling. Because they, I mean, they want to avoid regulation at all costs because that, I think, is the only thing that could bring Amazon. down at this point, don't you? I mean, maybe I just called the peak in their stock price,

but it seems like the government stepping in is one of the few things that could really stop Amazon from just destroying the whole consumer sector. Yeah, I agree. It says that the median annual salary for Amazon workers worldwide was $28,000 last year, which works out to about $13.70 an hour. So it already was relatively high when you compare it to the federal minimum wage. Yeah, I just, I think he's setting the bar that other people are going to have to, follow them and getting some sort of first mover advantage. And there's obviously, I think, a political, big, huge political element involved here. And they're going to, I'm sure, do everything they can to make sure other companies are going to have to pay just as much.

So Charlie Bellello had a great tweet this week. He wrote, S&P 500 earnings are expected to increase 26% this year, which is sort of wild. If that expectation is met and the SP 500 ends the year at current levels, its PE ratio would go from 21.4 to 18.3. and it would be the first year of multiple contractions since 2011. So you looked at this more than I did, but it would be kind of interesting to see that earnings increase that much to see what it would do to the Cape ratio because 2008 will finally drop off for 10 years.

Is that right? Yeah, I remember when I looked at it. The Cape went from, what is it now, 20s? I don't even know what it is. Low 30s, I believe. It's over 30? It's gone down a little bit. Yeah.

So I think that when I looked, it knocked maybe two points off of it. So not necessarily the game changer that people might be expecting. Right. But, I mean, one of the worries people have had with evaluations is, of course, this means potentially lower stock returns. I don't think a lot of people have thought what happens if fundamentals actually catch up a little bit and bring things back down to Earth that way or if markets just go sideways

for a while. But I read this stat too, and it kind of shocked me a little. And another good tweet this time from Beespoke. They showed a chart of the S&P 500 and they broke it down by decile. So the largest 150 and the next largest 150, and the largest 150 stocks are down 0.5% in October, whereas the smallest 150 stocks are down 4.25%. And it's pretty much a linear increase with every smaller bucket, stocks are doing worse and worse. So you're worrying about this divergence? Is this the end? It could be.

It is kind of funny because on the one hand, you worry when small caps are leading because, well, that's the riskiest segment of the market that's leading things. higher. And then when large caps lead and small caps are falling, you start worrying, well, this is a harbinger of things to come. I'm going to actually, you there. Nobody worries when small stocks are leading. No, I've heard that before. I think, I just think that you can't, because, well, it's the junkiest of the junk and this can't last. So I feel like there's always, I mean, you can do this both ways as well. I think there's just, it's, it's always difficult to, but you're right. This is certainly a pretty uniform decrease. The smaller you get, the bigger the decreases, all of which my point is, I don't know if it means anything. No?

All right. Anyway, do you have a chart of the week here or nothing? That was my chart of the week. Okay. My chart of the week was also a tweet. Okay. All right. We got a bunch of good listener questions this week. Question for the podcast next week. How does the Fed undwining its balance sheet affect the bond market? I honestly have no idea. I'm still not quite sure. Exactly. exactly what QE was. All I know is that people thought once QE was done, the market was going to crash, and it hasn't happened yet. I mean, it really depends how quickly they do this stuff. I don't know. When did the Fed first raise rates? Was it December 2016? Yes, I believe that was the first hike. And if I recall correctly, didn't the Dow go up like 250 points that day?

Yeah, I would say whatever you think the textbook says, it'll probably do the opposite. it. But the thing is, I mean, no one knows because this stuff has never been done before. It's so new. No one has a clue because, again, when it first happened, everyone thought the world was going to come to an end. And first they were pushing on a string and then they were doing too much and they were going to manipulate the market. And so it goes back and forth between they're doing too much and not enough. It is interesting that people say we're in uncharted territory and therefore, like implying that therefore this has to end really bad. We've never done this before. Right. That's what I would say. Let's take it. Let's pump the brakes and let's, you know,

let's reevaluate as it unfolds. Right. It could hold a lot of this until it matures and it'll just roll off. And then who knows? So I really, yeah, we don't know. All right. What is the proper asset allocation of funds in an employee sponsor to stock purchase plan? Should you cash out and reallocate to retirement funds at specific thresholds?

Purchase twice a year at a five percent discount. Let me rephrase this question for you. Let's say Rittholt's wealth management was a publicly traded company. and we had a stock option program, what is the highest that you would allocate to that company? Yeah, that's a good question. This is so, this is so, I guess you could give general advice, but it really is so specific on,

is this a really young company where putting 30% of your nest egg in it would be totally reckless? I don't really know if I have a great answer. I guess the risk is that if you're putting too much into the stock, not only are you risking your retirement, but you're also exposed in case anything goes badly with a company like your job could be gone. Right. Yeah, you're taking double risk. Yeah, if something goes wrong with the company. I don't know if I could ever put a minimum on it. I guess I'd have to try to figure out what my

maximum threshold would be. I mean, a 5% discount is nice to take advantage of, but... Yes. And I don't know what the rules are as far as cashing out and reallocating and what the tax implications and such are. So that obviously comes into it. But I mean, what do you think the max percentage you would go in something like this. And sometimes maybe you don't have a choice if you're higher up in the company and you have to have a larger percentage of your equity in it. But if you're at a large company like Pepsi or something and they have a shared discount and it's just part of your overall location. I would, I'm just going to 10%. That's what I would have said 10 to 15% and then I would trim back and use it as something of a rebalancing.

No, it's interesting. 15% seems okay. 20% seems insane. Yeah, that's fair. I agree. Even though there's It's like there's no distinction between the two. Doesn't, yeah, I probably wouldn't make. All right, I would love to hear your thoughts on the impact of opt-out versus opt-in 401K plans combined with pat the passive investing trend. Does this equate to a higher floor in the market during these sell-offs, especially with unemployment so low? So this is a really interesting question.

And I think Josh wrote about this a few years ago when he, something called the Relentness bid. So I don't know. I mean, this is an interesting thought experiment, but I guess maybe the answers we'll find out. I think this is certainly possible. What do you think? I think you have to take into account the structural changes in the market in terms of, I mean,

back in the day, it was just, it was harder to invest. And I think maybe this gets more to the question of valuations than anything. Like the costs were higher, the access was much harder to get into. It's easier these days. And the fact that we do have people investing on a regular basis and going into a target date or asset allocation fund, I think that has to have some sort of impact. Now, does that mean stocks won't fall? Of course not. But I think it may be, I don't know, in some ways, maybe it smoothed things around the edges a little bit. And I think because in the past they didn't have these, it's almost like a, you know, it's like a reinforcing feedback loop. So I think a lot of times it's, yeah, I think it has an

impact, but I don't think it means bear markets are outlawed. All right, let's go to recommendations for the week. I already mentioned this overspent Americans. And I don't know if I'd really recommend people read it unless you're really a personal finance dork like I am, but they're definitely were some interesting fact toys. And one of the reasons it's hard to read is because the numbers are so off because it's in the 90s. It's kind of interesting to look at how they started talking about inequality and all this stuff happening. But here's one of the stats that I thought was interesting. So it says they talk about how crazy it was that people's saving didn't really keep up with the bull market in the time. So in 1995, the median value of household financial assets was

a mere $9,9,950. By 1997, well under the stock market boom, nearly 40% of all baby boomers had less than $10,000 saved for retirement. So even with a huge increase in stocks in the 80s and 90s, it didn't really help people that much because no one was saving money and they were spending it instead. That was kind of the point. I also read The Wizard of Menlo Park, which is the book about Thomas Edison. Randall Strauss wrote it. Have you ever read this one before?

Or anything on Edison? I read The Last Days of Night, which I think is going to be a movie soon. Okay. I mean, it was very good. It didn't really paint him in the best personal light. He was kind of a jerk to his wife. One of the things I didn't read, so this was after he had basically done the phonograph and the light bulb, it said he was 35 years old. And for the rest of his life, he was devoted to attempts to make the inspiration that brought the phonograph and electric light return.

I didn't realize he was so young when he did these things. I would have assumed he was older. Didn't he like invent inventing? Yeah, more. And he was like one of the few first celebrities of his day in that time. And that was another up right around the sort of gilded age where a lot of. of these rich people were really celebrities and he was one of them. And it was interesting, it was interesting to see how he went through this, but he, like a lot of very successful

people, his personal life was kind of in tatters. So it was kind of interesting to see the both sides of that. And then finally, I listened to this podcast called Afford Anything. The only reason I listened to it was because a lot of people were writing about it on Twitter was it was with Susie Orman, which I guess I've never really read any of her stuff heard about her. I mean, she's more of a motivational speaker than anything. But listening to her, I mean, she is a great salesperson, but a lot of people gave some pushback against it because she talked about, she was very anti-fire movement. She thought it was, she had some very choice words for the fire crowd, which is something we've talked about here. Why would you be anti?

It's just a personal choice. She, well, she said she's dealt with so many people over the years who have run into problems and they've had some catastrophic accident happen or healthcare costs. Okay, that's fair. She was, so she was throwing out all these numbers that people, like five million dollars is not going to be enough for people to retire on. And you're going to need $30,000 a month for home care. And she just seemed, some of her numbers and some of the stuff that she was saying was so out of touch with reality because she has hundreds of millions of dollars. It seemed like she's a great, she's great at selling, but her actual tactics were, I was a little like, uh, not that great. But it's kind of, it's worth listening to. So I'll put

a link in the show notes. What do you got? I was walking my dog the other day. And oftentimes my neighborhood people leave books on the curb. And there was four George Soros books. I wish I'd take a picture. Why do people leave books on the curb? I don't know. I guess just when they're done. It's a Brooklyn thing? Okay. Yeah. So it was the Alchemy of Finance, Soros on Soros, the crash of 2008, and one more that I can't remember. But so I grabbed the Soros and Soros one, which was written in 1995. Did you ever read this one? No, I actually never read his books. Okay. So I read The Alchemy of Finance, And that was really tough. Like that was just, that was dense and I don't know, not really for me.

But you asked last week if Howard Marks has done more harm than good for the average investor. And I'm only on page eight of this book, Soros on Soros, but I would say that he probably unintentionally falls into that category. So Byron, I can see that. Byron asked him, a lot of work has been done analyzing the success of money managers and it's been determined that asset allocation accounts for at least 80% of portfolio results, stock selection and other factors are only about 20%. Do you have a view on asset allocation? To which he said, no, I think what you say is probably correct because we make most of our money in macro,

and macro is the three-dimensional equivalent of asset allocation. It is more efficient because in the two-dimensional portfolio, you can allocate only a portion of your equity to any particular investment concept, whereas we can sometimes allocate more than 100% of our assets to our macro review. And I don't think that he means to come off this way, but I think that he's making what he does sound a lot easier than it really is. And people get so seduced by, oh, macro, global, you have a view on currencies and bonds and commodities. I remember the one his, it was in more money than God where his son said he complains when his back hurts that the portfolio value is going to fall. But I think part of it is really just that he knows that he's got positions on that

he shouldn't or something. And for people like that that are such geniuses, it's sometimes it's hard for them to really put in words how exactly they do stuff and explain it. Well, he, I mean, he basically said so. So, Byron, we asked a question about quantifying his risk, and he said, we try to simplify things. We don't have a real or scientific way to measure risk. People who are in the derivative business have very elaborate risk calculations. We are amateurs.

We live in the Stone Age deliberately so. By the way, it's a thin line between being a genius and being a kook, and I think that that deciding factor is your performance. So you could say all these things and you had terrible performance and people would think you're baddie. Right. But when you say him, when you have unbelievable performance like him, then it's a genius, which I guess that the number speak for themselves. Yeah. And what if there was a little bit of luck involved?

Yeah, it's possible. I guess. What if he lost one billion dollars shorting the pound? Right. Well, obviously, he's a skillful manager, but the big piece of luck is starting out your career with sky high interest rates and a cheap equity market. I would say, yeah, not to take anything away from what I've read, to me, his biggest source of edge was his flexibility. And to be able to decide on a dime that we're going to flip him short to long or whatever with billions of dollars on the line and really go for the jugular with billions of dollars separates him from mortals like the rest of us because... Right, which I never would have the guts to do. Yeah, right.

Like, you see a few thousand dollars sloshing around that you're like, your stomach is in your throat. I cannot even begin to imagine doing this with billions of dollars on the line. Yes, I agree. So, all right, well, thank you very much for staying with us for 50 episodes. We really appreciate it. And we will be back next week. You know what I'm going to be.