Animal Spirits Podcast - Animal Spirits Unleashed (EP.01)

Episode Date: November 15, 2017

Both Ben Carlson and Michael Batnick joke that we probably talk to each other more than we talk to our own wives. Michael lives and works in New York while Ben lives and works in Michigan so the two are probably on the phone with each other a minimum of 5-6 times a day. We also hold simultaneous conversations with one another through direct messages Twitter, quick hits on Slack, text messages, email, and occasionally Skype. The majority of the time we talk about different research we're looking at, what we've been reading, crazy things going on in the markets, irrational things being said or done by investors, ideas for writing material, dad talk, what's going on with our own investments or personal finances, TV shows/movies/comedy specials we like or dislike and much more. So, like everyone else on the planet, we've decided to start our own podcast called Animal Spirits with Michael & Ben. 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. I hate the people who talk about it all the time, so I didn't want to be one of those people. From two guys who study the markets as a passion. Can I count on you to talk me off the ledge partner? Yes, and that's what this podcast is for. And trade for all the right reasons. That's my due diligence. I'm in. Dude, if you're in, I'm in.

A line of thinking is the higher the volatility on an asset, the higher the volatility on the opinions. so I feel like you have crazies on both sides. Here's your host of Animal Spirits, Michael Batnik. I can say that I was never driven by money. So you were trading three times leveraged ETFs for the love of the game. Exactly, man. I'm a purist. But anyway, and Ben Carlson.

This is true. I do not drink coffee. I've never been on Facebook. I've never done fantasy football. Oh, one last thing. Michael Batnik and Ben Carlson work for Ritt Holtz 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 Rithold's wealth management may maintain positions in the securities discussed in this podcast. Now, today's show. So one of the things that I'm most, I would say, curious about is social media has given a platform to everybody, which is amazing. But wouldn't you love to know how some of the people you follow invest? I'm very curious.

Are people saying one thing and doing something completely different? I think probably so. What do you think? Yeah, that's a good question. Someone wrote this a while ago that they would actually pay money to see how each different Twitter handle

is allocated. I think that's probably not a bad idea because it's easy to talk a big game on social media about how you would or wouldn't do something and how you would handle the markets, but it's a completely different ballgame to actually put your life savings to work

and actually do something with it. Yeah, if I was hiring somebody to manage my money, I don't know that you could do this legally or whatever, but I would basically like demand to see their account statements to make sure that they were investing in a similar fashion to what they were preaching publicly or to what they were telling me to do. I think it's also a good way to just know what the inherent biases are. So just to put all the cards on the table, like how do you actually invest? Not that it clouds your judgment at all, but I think just knowing where people stand can help you make reasonable decisions about their

view of the world. Yeah, and I would, tell me what you think about this, but I would venture to say that financial advisors, which is what we are, their personal accounts probably underperform their own client accounts over time because they're telling their clients to do one thing. And I'm speaking very generally. Like, for instance, I'll confess right here that my son was born in February of 2017. And I don't think I funded, I don't think I started funding his 529 until like, I don't wait that long, but like May maybe, because I was hoping for a correction. There I said it.

I did. So if your son doesn't go to college, then he can blame your marketing timing skills. Right. But how absurd everything that we write goes against market timing and waiting for a correction. And here I am for money that cannot be touched for 18 years. and I was waiting for a better entry. Like, how absurd. That's pretty good.

Okay, so this is probably one of the questions I get more than any other from people who read my stuff is, you know, how does your personal portfolio look? I think people understand the way that we think philosophically because we write a lot about this stuff. And if you've read any of our stuff, then you know what we generally think. But I think it makes sense to discuss how we personally allocate our capital. So beyond your market timing skills in your Sons 529, what's your general portfolio disposition? Let me go back to a little bit of history here. So I am fully invested in stocks. And when I say fully, that's not actually true. I have six months in cash. God forbid something happens. But in my brokerage account, I have about a fifth of my money or there so in the tactical model.

that we went on for our clients. And then the other 80% is in stocks. And right now my Roth IRA, which is a small piece, is in gold. But anyway, so let me just back up here. So I have an interesting story in terms of my history investing in the stock market. So I don't really have a history with the stock market. I didn't care at all. I was much more into sports growing up.

I was a huge Knicks fan and a Giants fan and pretended to be Yankees fan. And I had very little interest in tech stocks in the late 90s, even though I was old enough to know what was going on. I just, I didn't care at all. I knew nothing about it, didn't want to know anything about it. But my parents got divorced when I was, when I was young, I guess I was like around 60 years old or so. And so my mother had to go back to work.

And she had never had a job at all. So she got a job probably doing like secretarial work, making very, very little. money. And in 1996, her brother, my uncle, who was an accountant, got a stock tip. That's how it all starts, right? He got a stock tip. Is this like old school boiler room, someone called him? No, not at all. No, this was like, I think a dear friend of his told him, now he might have got him from a boiler room, but I doubt it. Yeah. But so the stock was Seljean. And in 1996, I mean, I'm sure there's no way, it was definitely not a billion dollar company. It was probably under $100 million, and split adjusted, I think he bought it for like six cents or something

like that, and he put $130, and he put like $15,000 in it for my mom or something like that. And that was the first time I heard about the stock market because Seljean is one of those rare lottery type stocks. And the irony is that I write all the, the time about how even if you found the next lottery stock, you wouldn't have the stomach to hold onto it because these stocks crash multiple times along the way to massive gains. And Seljean did just that. And amazingly, my mother held onto it and her brother held onto it, not knowing anything about its future at all.

And my mom turned $15,000 into like close to a million or something like that. So when did you learn about this money? Probably when I was like 15-ish, I'm guessing. I guess I heard it at the dinner table and didn't really think much of it. And then when I turned 18, I think it was my 18th birthday, I asked her to buy call options for me in Seljean. You were 18 years old wanting to trade call options. Yes. I don't think I knew what a call option was at age 18.

Well, neither did I. But she was, but it wasn't her. It was basically her brother showed me a matrix and I was like, oh, this one. And it doubled in money, and then I took that money, and I bought more calls, and it went to zero. And so that was my first experience on the stock market. But it wasn't like love at first sight. It did not get me hooked, which I'm kind of surprised about it, but I guess I had other things on my mind at the time. So it's just, it's funny that, well, funny is not the right word, but it's interesting that I spend so much of my time talking about the fact that the next Microsoft, you're not going to find it.

And even if you do, you can't hang on to it. But I do remember. So my mother was diagnosed with cancer in mid-2000s, early 2000, something like that. And so she knew that her time was limited. And she knew that this money was going to be passed on to myself, my brother, and my sister. So there was a lot of talk around when Seljean crashed from like, I'm making this up, 70 to 35, something like that. Like, holy shit. Like, what do we do?

And I just remember like sort of having those conversations, not that I was like had any profound insight at all. I had no idea what was going on. And I don't remember. So she did sell it before she passed and I don't remember where or when or what the thought process was like. But she just wanted like some peace and closure that that money would be there for us when she passed. So in 2011 when she did pass, I inherited a third of that money and was basically like I had no idea what to do with it. I was in the bathroom trading three-time levered

ETFs with it. So why do you think that you immediately latched on to being a trader because you were going to get rich? So it's funny. I never really thought about being rich when I grew up and I'm able to say this

because I'm not rich. People that say that, huh, you know, I was never doing this for the money. They only say that when they were doing it for the money. Either when they're doing it for the money or when they have millions of dollars. Nobody who's struggling

to pay the bills is saying, Listen, I was never driven by money. But because I am far from a millionaire, I can say that I was never driven by money. So you were trading three times leveraged ETFs for the love of the game. Exactly, man. I'm a purist. But anyway, so I got very, like I did. Sorry, just to back up, just a sec.

So when did your mother actually inform you about this money and say, like, this is, you know, this is kind of hopefully my little legacy to help you guys out? I don't remember. I really don't remember. But you knew about it. Yeah, yeah. And I think it was sort of always there. And it's crazy.

Like, my mom was so frugal with her money because she really didn't want to spend any of it that she was going to be leaving to us. She was an amazing woman. So she never really even touched any of that investment. Nope, never. The only thing that she did that was lavish was she bought herself a new Toyota in 2009, something like that. Such a great story. So I found, I'm trying to think like where my obsession, like when I was like, holy shit, this is my future. this is what I need to do.

I'm guessing it was like 2009 when I was studying for the CFA exam. So I had no education at all. So I guess I probably Googled like Best Investment Books and the Intelligent Investor was the first one that I read, hence the name of my blog, The Irrelevant Investor. And I remember reading the Mr. Marketpiece to my mom and I was so excited. Like, this is incredible. I thought I found my calling. And then I read like reminiscences and all, all that sort of stuff to get me interested.

and Brian Lund, who's on Twitter, I think this was early, 2010 maybe, posted a video of Jack Schwager from Market Wizards telling a story about reminiscences. And I was like, bingo, like, this is what I want to do. So that's what I did. I traded a lot. But this is, so this is kind of interesting. So in 2013, I would, and this was, there's a lot of good lessons in here. So one of the lessons is that, and I'm actually writing a chapter about this in my book, is I was, I was, was trading so much. And I didn't even think I was. When I went to TD Ameritree, they were like, oh, they rolled out the red carpet for me. And I was like, what's going on here? You're like the high roller at the casino with the free breakfast buffet? In 2012, I spent $11,000 in trading commissions.

Now, were you trading? I thought I was investing. Right. Now, were you trading like that entire piece of money? Like, that was what you were doing? Did you set any of it aside or did you trade it all? Nope, I traded it all. So you put the whole bankroll in your, TD account or whatever, wherever you put it. Yep. So I was buying like $60,000 worth of like Facebook and Amazon. And so obviously like the moves were gut wrenching because I was unemployed and this is the money that my mother left for me.

And I was to say that I was being reckless as a huge understatement. So the good thing was that I never took any big losses, like not a single big loss. I didn't take any big gains either, but I was very careful to cut my losses. So I was, as I was working for Josh and Barry, like obviously that stopped pretty much right away because I didn't have time to do that, nor did I want to because I was just, it was opening my eyes up to a different way of doing things. So I decided to start like just picking stocks. I don't even know what the hell I was doing, but like I would own. So here's a good story. So in 2013, I was pretty much fully invested, but my biggest position was Apple and I was short SPY.

probably about a quarter of my portfolio because I was paying for a wedding. I was getting married at December. So I was paying for a wedding. I was fully invested. And it's funny, 2013, the market was up 32%. I lost money. You were hedging out your wedding? I was hedging. Yeah. So anyway, so Apple was down 40% to 2013 at one point. I was in some agricultural stocks are awful. I was short as a hedge. So everything that I was doing wasn't working. And the rationale that I said to myself was, well, I can't risk this money for two reasons. One of them was I needed to pay for a wedding. And then the other was, I'm going to meet some money for a down payment in a few years. So the real lesson looking backwards is if you don't have the emotional

wherewithal to invest, don't fucking invest. Right? Like that money that I had in the market had no business being in the market. None. It should have been 100% in cash, but that was like the tuition that I paid to the market. In your portfolio today, you have, it sounds like the majority is hands-off in what we do for a lot of our clients, and then you have this other piece that kind of scratches that itch of your trading still. I really don't trade at all. That gold thing that I did was the first, like, trade that I've made. So after I bought my house at the end of 2014, or 2015, I haven't, so I've been fully invested since and I haven't done it. I haven't done it anything except for this gold thing.

Okay. And at this point, do you think that your portfolio strategy is set and it's let's forget it basically? Oh, God, I hope so. So that's where I am today. I have no desire to read the tea leaves. I think it's like the most fun thing. I miss trading, but I was fucking bad at it.

And it's funny because like every once in a while I have to really remind myself, like, dude, you're not good at this, don't do it. But then, like, there's always, like, doubt. Like, maybe you are good and you just didn't give yourself a fair shake. Like, maybe you should try again. But I, so I think there's nothing wrong with trading. I encourage people that are interested in it to do it with the piece of their money. Because if you want to do it, then just do it.

It's your money. I don't think you should be with all of your money. But let's say that you've got 5% of your portfolio that you trade with. Big deal. If nothing else, it'll be a reminder that trading is really, really hard because over the long term, it's highly unlikely that your trading account is going to beat your, you know, your steady sort of buying whole asset allocation model. See, I never really had the trading thing never really got to me.

I was always... You don't even drink coffee. This is true. I do not drink coffee. I've never been on Facebook. I've never done fantasy football. Yeah, I am a gambler. Like, I quit gambling when I was 21 because I was out of control.

Yeah, see, I was always the guy who'd go to the casino with a certain amount of money in my pocket, and once it was gone, I was done. I was never like the guy who goes back to the ATM. six times. Yeah, no, you're a keeper. I was the opposite of you. So the trading gene never really hit me. I was always going to be the Warren Buffett concentrated value investor.

I must have read 15 books on Buffett after I read the first one, like within five months. How'd that work out for you? Well, I mean, it was a great environment to do it because I first started really having money to invest in, you know, 2007, 2008, 2009. I didn't have like a big chunk to start with, and I was slowly building it up. And so the idea was that I was going to, you know, be this long-term investor. And I probably, it was probably a wash for me between one big winner and a bunch of losers. But I just realized the more, I think this is more from the professional side of things is that we would be constantly meeting with money managers at my old job. And I would see what these people were doing as far as how their process worked and how many people they had and how, and still, how horrible their results.

could be. Like these people, this is all they did. They would travel to meet managers and suppliers. And I mean, these people put so much time and effort into all this stuff. And they still were terrible at stock picking. Or maybe not terrible, but they couldn't beat the market. And so after like viewing so many of these different money managers and hedge funds that had such a hard time doing it, I just kept thinking to myself, like, why, what is my edge here? Why should I keep doing this? And that's when you found timber. Yes. And that's when I decided to go into leveraged reeds. No. And so I just decided that it just didn't, so I slowly but surely just kind of weaned that off, like the stock picking side of things. So what do you do now?

So, I mean, my, when I moved over to Ritholz in 2015, I moved all my assets over and my assets are invested pretty much just like our clients for the most part. So I'd say if you had to break it out, it's probably a third of funds in sort of low-cost factor-based investing funds, a third in low-cost index funds and say a third in our trend following model, which is something that we can get into in future episodes, our sort of tactical model, but that's for another day. And then I do have my own brokerage account where I will invest in some more high-octane concentrated strategies, something along the lines of, like, West Gray's Elf Architect funds.

So I like some of those because they're a more concentrated sort of factor exposure. But, like, your turnover is effectively zero? My turnover is pretty low. I'm just sort of a buy and hold. And I have something of a barbell portfolio in that I have risk assets on one side that I know I'm not going to touch for decades. And then I have cash assets on the other side where I'm planning for specific events. Vacations. I, you know, I have the children's, all my kids' college funds that are, you know, invested in the markets as well.

But as far as cash holdings goes, that's for vacations and future things that we're planning on doing that I just take zero. risk with, basically. And I do, this is sort of a bombshell to you, since I've never told you this, but I do have a nominal holding in Bitcoin. I've never actually told anyone this before. I can't tell if you're serious. I'm dead serious. It's nothing to even discuss probably, but I made a purchase of this, and I hate the people who talk about it all the time, so I didn't want to be one of those people. And so my whole thing. Are you up like several thousand percent to your Bitcoin, you son of a gun? No, no, no, no. This is like within the last year. So this is not like, and this is such a small

amount. It's probably not even worth talking about, but I. So do you, you own like an eighth of a coin? Right. 0.0003 bitcoins. No. And so I just, I am, it's such a crazy place to me. I feel like, I don't, I don't usually get the sort of fear missing out thing. And it's gone. But yes, but this is like one of those things where you could get really, really extreme. things, and I feel like being part of that, it's like a call option. The crazy thing about that space to me is, my line of thinking is the higher the volatility on an asset, the higher the volatility on the opinions. So I feel like you have crazies on both sides. So you have one side of people saying, this thing is a fraud and it's going to zero. But then you have the other side

of the people saying, this thing is going to end world hunger and break out world peace. And it's, as with most things, it's somewhere in the middle. But if this sort of technology really does catch on, I just couldn't stand not being part of that. So I do have a nominal position there. All right. Well, since we're going there, I have something to tell you that you don't know. Okay. I just sold everything and put it all into Bitcoin. All right. Based on that? That's my due diligence. I'm in. If you, dude, if you're in, I'm in. Okay. Well, to top you, I just front ran that trade. No. And so again, it's a small piece, but I mean, my portfolio is just so hands off because I know that,

I can't make these sort of gut instinctual decisions. So my portfolio is so hands-off and model-driven and rules-based that I just, I don't even want to be a part of it because I know if I'm paying attention to the market and trying to make decisions on what's going on, most of the time it's going to be the wrong one. I have another confession to make. As of recently, probably the last few months or so, and I'm not sure why I started doing this, but I can't stop. I check my account every single day. Really? For no reason at all. And I don't do anything either, but there's something wrong with my brain. I think you have to do whatever you have to do, basically, because there are some people that just need that reassurance, and they won't do anything with it, and other people

who will take that ball and run and make terrible decisions and make a change every time they open it. Yeah, so let me ask you this other question. So we both have a lot of cash on hand, just, you know, God forbid anything happens, which is why I'm saying to myself, so I've got, I've got a lot of cash. I have money in our tactical model. Hopefully if something goes bad, we'll, you know, we'll sidestep some of it, hopefully, and then we have, I have the rest of my money in the stock market. For me, the thing that I'm most concerned about is not necessarily the right pieces, but where am I in terms of domestic and international? And I wonder about this, do you, like, are we fooling ourselves to think that we are going to be able to be long-term

investors? Like, is our portfolio going to look the same? So we're both young. So our stock to bond mix shouldn't change, whether we're 32 or 42 or 35 or however old you are, it shouldn't really matter. Is our portfolio going to look the same in 10 years? And if we have another stock market crash, are we going to be able to survive emotionally? I think I will, but I don't know. I've never done it before. I think about this a lot. I think one of the big mistakes most investors make is that they think in terms of percentages and not dollar amounts. So when I was, I actually made it through the crash. I made some pretty decent decisions in the crash

because I didn't have a ton of money yet. So for me to ramp up my savings in the crash and to start buying, I'm thinking to myself, I'm never going to see prices this low again, even if they go down another 20 or 30%. Hold on. Did you timestamp that? I don't remember seeing that on your Twitter feed. I think that was pre-Twitter, so I'll post-time stamp that.

And so just putting money into my 401k and my IRA and that sort of thing in buying during that time period was easy for me because I knew if I'm dollar cost averaging now, this money is, these are going to be the best returns I ever make in my entire life because I'm never going to, I'm not going to touch this money for decades. But what about if we get another one? So that's what I'm saying. So now I actually have some capital. I have more money saved. I have more money invested. You're right. It's going to be more painful because that 20, 30, 40% correction means more dollars loss, even though it's the same

percentage term. Can I count on you to talk me off the ledge partner? Yes. And that's what this podcast is for to talk each other off the ledge, right? Right. No, yeah, no, I agree. And I think that that's part of the thing that goes through this financial life cycle for people that they don't really take into account is that your perception of risk is going to change based on where you're at. So the idea is how durable is your portfolio for that, you know, next step if you're there, which there's no easy answers, as we know. If the market goes down, I mean, I'm going down with it. Right.

And that's, I think that's in, but I think on the other hand there, the way that we've set up our portfolio, is I think it's almost harder to hold. And so you could have sold out in 2011, 2011, 2012, 2013 and missed out on 100% in gains. Yeah, I did. Or you could have, yeah, or you could have shorted SPY in 2013. But so, so I think it kind of goes both ways. Hold on. We're going to delete that part. Yeah. Yes. Sorry. Take out all manner of bad investments. That's a really, really good point is people always talk about putting themselves in a position to survive a bare market. But how do you survive a bull market, which is, you know, stocks have been in a bull market, way more often they've been in a bear market. So that's a question that people probably

don't ask enough. And that's, again, one of the reasons I have this sort of barbell portfolio is is I want to make sure that my short to intermediate term goals, you know, that money is going to be there when I need it. And those long term goals, you know, I'm going to have to accept market risk, unfortunately, which, you know, that's the way it works. But let's say you got scared of a big crash coming in 2012 and you sold out and you've been in cash ever since. You need the market to drop, what, 40% just to get back to that level that you sold out at. Right. So the opportunity cost is just as big both ways. Think about in 2016 from May to February when we lost whatever, 16% of the S&P and individual stocks are a lot worse than that. The Russell, I think, is up like 50% since

then, like how crazy is that since February 2016? If you thought that here we go again, like the tranquil markets we've seen is finally going to get a bit turbulent, it's been nothing but a slug run higher. Like, if I was still doing that sort of thing where I was

trying to figure out where the market would go, I guess maybe that's another reason why I look at the market as closely as I do. It's such a, it's a constant reminder that, holy shit, if you were trading, you would be getting annihilated. Like, I would be, my account would be, laughing at me if I was still

trading. Yeah, and I was always one of those people that thought when I quote unquote figured it out, which to me the idea of figuring it out is just figuring out what works for you, not necessarily finding the best strategy. But I've actually, you know, at that time I thought, well, why doesn't everyone do this? But I think

it really comes down to, you know, understanding yourself. So there was a great Bogel, John Bogle quote I just read recently. He said he's got a 50-50 portfolio and he spends half of his time worrying. He's got too much in stocks and half of his time worrying he doesn't have a enough. That's like the constant tug of war you're going to feel. And so I feel like there's a million different strategies that can work. It's just really, you know, you and I obviously

have very similar feelings about how to manage a portfolio. But I think it really depends on, you know, what is going to help you reach your goals at the same time as balancing out, you know, can I not freak out in the meantime? Yeah, I think Bogle stole that from Harry Markowitz. He said something similar. And by the way, we steal everything from everyone. So yes. But what, what Markowitz said was basically like he was trying to minimize regret, which I think is probably the most important thing that we can do because in terms of the spectrum of human emotions and cognitive biases that we have, I think regret is probably the most powerful one. So when we have somebody ask me, I've got a stock that I'm doing really great and like, when do I sell? And I say like,

well, of course, I have no idea when you sell. But here's a good way to think about it. If you sell half, you put yourself in a position to at least not want to punch you. yourself in the head if either of these two things happen. So let's say you sell half and the thing doubles. Great. At least you still have half of it. Right. If you sell half and it gets cut in half, hey, at least you sold half of it. It could be a lot worse. So I think that minimizing regret is a really, really good way to frame decision makings under uncertainty. Right. And avoid thinking in extremes. You don't have to be all in or all out. You're not a hedge fund manager. You know, you don't have to, you can be diversified and, you know, take different pain points at different times.

Yep. So different pain point at different times. I think that's a good way to wrap this up. So, does the market close higher or lower tomorrow? Same. It'll close the same exact level. Okay. Great. Join us next time at Animal Spirits. Thanks for listening.