Animal Spirits Podcast - Big MIstakes (EP.32)

Episode Date: June 6, 2018

Michael's new book (Big Mistakes: The Best Investors and Their Worst Investments), how he came up with the idea for the book, where the value & momentum premiums come from, why investing is all about expectations & overreactions, Mary Meeker's new tech deck 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 Batnick and Ben Carlson, two guys who study 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. Today, by the time this airs, it will be June 6th, 2018, and you will be a published author. So Michael's book, Big Mistakes, The Best Investors and the Worst Investments. Is that on Kindle now, comes out on hard cover as this airs? So I remember you told me about this idea when you first started, which was what, 12 to 18 months ago probably? It's been a while since you started. this process. The first time that I thought about it, I think was the summer of 2016. Okay, because I remember you told me the idea and I thought it was a great idea because there's all these books out there that focus on what to do to emulate the greatest investors out there. So why did you come up with this

idea? Because I don't think I ever asked you at the time. How did you first come up with this idea to show the other side of things and show mistakes from the greatest investors? So I told Josh, I have a great idea. I'm going to highlight the best investors and I'm going to pick out their best investment ever. And Josh goes, no, no, no, no. Right about the best investors and their worst investments ever. And then I was like, oh, of course. It's so obvious. Oh, I didn't realize that. So you actually wanted to do the opposite and the mistakes. That would have been a mistake. Okay. And so you go through how many different investors in the book? 15 plus myself. Okay, plus yourself. And so was it hard for you to put down on paper your own personal investing journey? Obviously,

you've talked about it a lot on this show. But was that hard for you or was it more cathartic or what was the feeling there? Yeah. I would say the latter. I am an open book when it comes to that sort of thing. I'm not embarrassed or anything like that. So I definitely found the cathartic. That was one of my favorite chapters because it was also the last thing that I wrote. So it was like, all right, I'm here. I'm done. Okay. So out of all these people you wrote about, what was your favorite one to research and write about? Because personally, I enjoyed like the Mark Twain chapter. Yeah, that was good. Because it was a lot of stuff I didn't really know before. There was two books that I read. One of them was by a guy named Richard Zax, and it was a really good story about Mark Twain. I forget the title. And then I read another one. And I'll look for these in the show notes. Another one about like something about Teddy Roosevelt and Mark Twain. No, you know what? I read three books about Mark Twain. He was a really, really interesting guy, I mean, to say the least. And he was an awful investor. All of his mistakes were behavioral. He couldn't stop. And he kept digging himself into a deeper hole. And he was distracted by all these shiny objects. Like, he was.

was just obsessed with entrepreneurs and investors. And some of the best investment quotes of all time come from him, actually. Right. And the funny thing to me was that he not only made terrible investments, but he missed out on some huge ones, too, that he was offered, that he turned down. I just remembered. Now you said that, I think he said no to Alexander Graham Bell with the telephone. He's like, yeah, I'll pass. And then some guy, he went to Europe. He came back and some no-nothing investor gave him a few bucks and basically retired rich. And Mark Twain had one of the greatest quotes ever. He was so bitter about that when it happened. I'll dig it up and I'll look to it in the notes. So other than the stuff that made it in the book, what is some of the

stuff? Because I know you researched this for a long time. I think that the research process for these things probably last longer than the writing process in most cases. I think it did for me too. But what were some of the either investors or the stories or data research that like didn't make it to the cutter and floor? There's three investors that I was close to writing about. I just was like sort of done. I had to draw the line somewhere. George Soros, I forget exactly which one of his bad investments I would have picked. Julian Robertson, his story was very similar to Druck and Miller who got... Oh, from the tech bubble. Yeah, from the tech bubble. And then lastly, David Einhorn wrote a client letter in 2015 where everything he did turned to shit. It was just like he couldn't

do anything right. So those are the three that didn't make it, but almost did. Okay, so save those for the sequel, Big Mistakes, Tokyo Drift. So I did a book a few years ago and it feels like it was forever go. So I think I've kind of forgotten the pain and stuff. But what was, what was some of like the best and worst parts about writing a book? Because I have my own feelings on this. I want to hear what you think about the whole process of writing a book and what that was like. I felt a lot of pressure. And it was really self-inflicted. And I don't want to be too dramatic. But I sort of felt like it was like a cloud hanging over me because I wasn't, I wasn't really in touch with my editor that much. What I was doing was I would finish a chapter, send it off, finish a chapter, send it off.

And each chapter took me, I don't know, about three weeks. And my son had just been born in February of 2017. So there's just. just a lot going on in my life. And I remember actually coming back from EBI West in California, I was sitting with Morgan in the Delta Lounge or something like that. And I got an email back from my editor. And I hadn't heard from her in a while. And she said something like, you're on track. Everything's great. Just keep going. And I almost cried. It was like such a sense of relief. It was like sort of an emotional experience. It was just, it was a lot. It was a long time. Yes. I've had a lot of conversations with you about this. And I feel like it was every once in a while,

you'd say I really have to buckle down. I think you probably spent a lot of time at start your local Starbucks writing this thing. Is that correct? It was pretty much like every weekend. Like I, I put in a lot. And one of the things that was like sort of, oh, was towards like the 10th chapter or so, it was just like from start it from scratch again. And it was like, oh man, like I have to read this book that I already read and like be very, very laser focused because I'm looking for certain things in there. So it was a lot. I think probably the best feeling was when I got the cover back, the back cover, and I saw the endorsements from Bethany McLean, Jim Channes, Jim O'Shaughnessy, and Morgan Housel. That was like a wow. That was a very, very proud moment.

I think a lot of people don't realize this, but especially for nonfiction books, I guess, because that's the only experience I have writing is if you count the hours up, you're making way less than minimum wage for something like this. It's just a lot of time and effort, and it has to be something that you're really passionate about if you're actually going to go through it and do it. I never really thought about the money. Actually, I think we spoke about this. I literally didn't even read the contract. So I don't know. You know what? I still haven't looked because what's the difference. But I don't know how that works. So I would guess if I made it, if I make a dollar

an hour, that would be like good. It's just something you have to do more out of. It's a labor of love. But anyway, I read an early copy. I kind of talk to you about it along the way. It's great. Everyone should go out and buy it. Big mistakes. The best investors and the worst investments. One last thing that I want to talk about with the book. So I got the hard cover on Wednesday. And Robin opens it up. And she's like, oh, the preface. So she's reading it to me. And she reads this. You might buy a particular stock after it doubled only to see it head south after your purchase or worse. You will throw in the towel on a lose only to see it double in the next 12 months. So I said to her, wait, what did you

just say? And I grabbed the book out of her hands. And I'm reading this. And I said, you will throw in the towel on a lose, only to see it double. And I'm saying on a lose, On a lose. No, that's not proper English. And that was the very first, like the first line of the book. It's the fourth sentence. So, obviously, my heart sinks. This is Wednesday night during halftime or something with the Cavs game. And I go to my manuscript.

And the last thing that I sent to my editor says, on a loser. So I'm sort of freaking out. I'm like, wait, what? So I sent her an email. Oh, my God. How did this happen? I didn't sign off in this. She responds back to me at 1045.

I'll look into it. And then at 2.45 in the morning, when I woke up the next morning, I see an email from her. I'm so sorry. This was my mistake. I'm not exactly sure what happened. I was really upset. Like, I understand typos happen. It's the fourth sentence in the book. So anyway, I'm slowly coming to terms with it. It's not the end of the world. It doesn't, like, out of all the typos I could have happened, this is as innocuous as it possibly could have gotten. But what are you going to do? It should happen. You have mistakes in the name of the book. Exactly. How many times did you read this thing? I can't tell you how many times

I read mine and my editors read it and I had a bunch of other people read it and there were still, I think, three or four mistakes to the book that people constantly email me about to this day. So if you see that mistake as I did, please do not email me. Thank you in advance. It'll be like one of those baseball cards with like a little error on it that gets fixed and it'll be worth more in the years ahead. Yeah. So let's move on. It was funny because last week Josh and I did a video and Josh is like, if I never have to see it on the smart beta panel, like what else has loved to be said? And funny enough, last week, probably a few hours after after you guys did that video.

Sorry, Patrick and Jesse and Chris. The pseudonymous blogger, Jesse Livermore, Patrick O'Shaughnessy and Chris Meredith came out with one of the most epic posts I've ever written about value momentum and what actually drives their returns. And I was so excited reading it. I felt like a child again. Like it was just, we all know why value works, why it gets mispriced, but to see exactly how and why it works.

It was so impressive. So I'm so happy that they decided to take this up. And I think that they're going to be doing more of these pieces in the future. The best thing about this is beyond all the great data and research is the fact that they wrote this piece with an anonymous person on Twitter. Like, would this ever have happened 15 or 20 years ago? Yeah, good point. On Wall Street, where the fact that this person has been writing for a while and obviously

has proven through the research and writing how good he is. But it's just funny to me, like that's just part of the internet culture we're in now that this would actually fly these. days, which I think is great because the research speaks for itself. If I could sum this up, the 20,000 words up in just a few minutes, this is what I took out of it. What they did was they spoke about the problems that are created by turnover with respect to decomposition. So if you measured like attributes and where performance is coming from, you get some funky results. But they found by looking under the hood is that these businesses do suck. Their

prospects are deteriorating, the fundamentals keep getting worse, but the stock price has more than discounted all this, in the aggregate, of course. And they did find that all of the growth is coming from multiple expansion. Now that these businesses are getting better, but it's all coming from multiple expansions. So one of the charts that they showed was just really a chef's kiss is they showed how the multiples expand before the business starts to stabilize and recover. And just to see this broken down was so, so good. And they also get into like the risks of value long term. The idea behind value investing is really the fact that the expectations are way worse than they should be.

So the market is kind of right in the way that they price things and the fact that they beat down these stocks. But in a lot of ways, it's already been priced in. And that's why value goes out to help perform. So you would think that maybe the value premium that has existed, over long periods of time, and again, it certainly doesn't deliver every year, even every decade for that matter, is at risk of maybe being arbited away because the market does a better price of pricing these stocks, and there's not as much left to exploit. I think that's probably fair, but I think that a lot of this is so behaviorally driven that it's not going to completely go away,

but it might just become a lot harder. You might have to go longer periods of time without seeing it like we have the past decade plus. And I think the good thing about this piece is that they look at both value and momentum, which are kind of polar opposites in terms of definitely the time horizon in terms of how you should implement these factors. And the way that they work, it's completely different ends of the spectrum. So I think it's really hard for a lot of investors to accept both of these ideas together, the fact that they could both work. And I think that's one of the reasons that diversification of these types of strategies is so important because you almost have to have competing ideas in your head and allow that to have a functioning diversified portfolio.

Yeah, totally. One of the things. that was interesting about this momentum side was so with value, what they do is, and they just kept it very simple, they used a price to earnings ratio. And they sort it by quintile. So first cheapest, second cheapest, third cheapest, and the most expensive. And they show that, here's a quote, the difference suggests that momentum is doing a better job of identifying growing companies than glamour, which is pure expensiveness. And then they say, the lesson for investors is that if you want to find companies that are going to experience strong upcoming growth in their businesses, you should look for companies with strong recent returns, not companies trading at

high valuations. Empirically, strong recent returns are a much better predictor of future growth than simple expensiveness, which is interesting because a lot of people have said like the phrase only price pays. And in this case, it's right. Like just using strength as a much better predictor of returns going forward than like a high valuation metric. I also liked how they talked about how both of these premiums in the past rely on mistakes of other investors. So of course, it's the only way that you can win as an investor in outperformers if someone else loses. And they talked about how value, the mistake happens at the beginning because markets underpriced stocks in momentum, it kind of happens at the end when things get too stretched.

So I think the whole idea of investing, the way that this sums it up to me, which is, I think the whole point of this piece is that investing is really based on overreactions and expectations. So if you can understand those, that the market tends to overreact in both directions in good in bad times and investors misprice things because they have unrealistic expectations. That's kind of the way things work in the markets. So it's kind of an analogy for the markets overall as well, not just value and momentum. The thing, when I got done reading this, I just was like blown away and it was just further evidence of how smart the market is and just the fact that there's people like Patrick and Jesse and Chris doing this sort of work every day and showing how it works and

why it works and dissecting it. If you underestimate how hard it is to beat the market, you are an idiot. Like, if this doesn't humble you, I mean, good luck. Yeah, exactly. And yeah, there's plenty of other people out there like this that are constantly looking at this stuff that, yeah, in the past, they weren't putting this stuff out there. It's much more easily accessible now for other people. So let's move on to another big thing on the internet this week. Mary Meeker does her internet trends. And we pulled out a bunch of slides that we're going to hit on really quickly and we'll link to all these in the show notes. First one that I thought was really interesting was how quickly smartphones went from zero to 100. And obviously as the base gets

bigger and bigger, the year-over-year growth has crashed. So it was grown by huge amounts in the beginning. And now it's basically saturated. It went from zero to almost one and a half billion in one, two, three, in six years. And now it's sort of going sideways. Yes, this is a cool chart. And it's kind of a, it almost gets back to our stuff about like ESPN last week. Obviously smartphones and ESPN are going in different directions. But at a certain point, you get this law of diminishing returns. She also showed internet penetration. And the thing is amazing to me in a lot of these charts on technology is that they don't go back that far. A lot of them go back to like 2000. So she's showing global internet users now at about

3.6 billion, which is more than 50% of the population. And it went from 24% in 2009 to 49% in 2017, which is pretty amazing. And so I don't know if you look at this as a good thing or a bad thing, the fact that half of the population has internet access and half of them don't, I guess is kind of a how you want to look at the world type of thing, but the trend is definitely going in the right direction. Yeah. And this was like, wow, we have it pretty good. Like half the world doesn't even have internet. I mean, obviously half the world, you know, a lot of people don't even have food, but. And the fact that obviously to pair it with the first chart on smartphone usage, I think a lot of people, the smartphone is their, their access to internet

these days because they have this little supercomputer in their pockets. Then she did something about voice, how there's a threshold for human accuracy, which is close to 95 percent, and how Google voice got there in just a few years is pretty sick. That is pretty amazing. Think about how many times you tell a person, like, what did you say? Like, people get mad if their phone doesn't get it exactly right the first time. But how often do you say something where someone doesn't understand or hear exactly what you're saying? You have to repeat yourself. It happens all the time, but people want the computer to get it perfectly right. But the fact is that they're already almost there. One of the things that I heard Kahneman talk about in terms of like cybersecurity in the future,

what he's worried about is how easy it's going to be for machines to pick up somebody. his voice and to, you know, the president declares war or something like that and have like a fake message. Well, and changing videos, too. Think about when they create a video that's fake and it looks real. That is pretty scary. So they talked about, she showed some good stuff about Amazon echo in here too. You have one of these at home, correct? So I do have it, but I only use it for like set the timer and play music. What do you use it for? We only use it for music to. Occasionally, we'll ask about the weather. And it says here that it has 30,000 different skills, which I don't know what that entails, but half of it is probably just listening to people.

But, yeah, we use it just for music. Are you trading on Alexa or not yet? No. If you tell it to short Amazon stock, do you think it tells you no? Alexa, cover my short. Yeah. But I do think the whole idea of voice being like the next big thing, I totally agree with that, just to make your life easier.

I think there's a lot of different ways that that can be taken. Another cool chart shows Facebook's annualized revenue per daily, user. This is pretty wild. In the first quarter of 2015, they were doing $16 in revenue per daily user. And today it's up to $34. Holy moly. So this is definitely not me in those numbers, but because I still don't have a personal Facebook account. But we do have an Animal Spirit's Facebook account, which you and I have talked about wanting to do more stuff with. So take a look at that if you haven't yet. And we're going to be doing some more stuff on that. One of the things that's amazing about some of the giant companies, like Facebook and, I'm

sorry, Apple and Amazon and Netflix, you pay for. But something like Facebook and Google, Google, what do we pay them? Right? I mean, it's all coming from the advertising dollars and these are like 500 plus billion dollar companies. Yeah. Well, attention is the currency with them, I guess, and people give them a lot of attention. Hashtag quote. Hashtag motivation Monday. She showed a good one here about the top technology companies, how much they're spending on R&D and CAPX, which is something that we've talked about a lot in terms of the difference between these big, huge companies just buying back their shares and not investing for the future. But all of these companies I've seen massive gains in spending for R&D and in CapEx. And especially, they showed year-over-year

change for Amazon, Apple, Google, Intel. All of them are double-digit gains year-per-year in these Cap-X and R&D. Pretty wild. Amazon, Google, Intel, Apple, and Microsoft spent $77 billion on R&D and CAPX last year. How much did they spend on shared buybacks, though? Because it totally offsets it. Well, speaking of shared buybacks, well, and sticking with this, they showed the R&D and KAPX as a percent of revenue compared from today versus 2007. So in 2007, these technology companies were spending 13% of their revenue on KAPX and R&D. And today, that's 18%. So 18% of their revenue, not their gross profits, of their revenue, is going back into the future.

But you know what this really tells me? Tech bubble 2.0 is out of control. Why? Because this number shows it's higher than 2007. And anything higher than 2007 must end badly. If you overlay this with the margin debt. Yes, you've got about 25 RTs on Twitter. We were just talking about this before, that this is pretty amazing and surprisingly low.

E-commerce versus physical retail. So, e-commerce is a percent of retail stores. It's under, it looks like it's around 13 or 14 percent. Which is pretty amazing. I honestly, as often as I can, I try to never go to a store anymore. I probably do 95% of my shopping online now. I hate going to a physical, but obviously, physical retail is still worth the majority of people shop. Yeah, that was a good one. All right, a not so good one. So there's a chart showing the

personal savings rate. This is going back to 1968, so I guess the last 50 years, personal savings rate going from the middle left to the lower right, the wrong direction, and debt to annual income going the opposite way. So people aren't saving and their debt is expanding. So yeah, debt to income ratio is almost 25% from about 15 and personal savings rate down from, call it 12% to 3%, which is kind of sad. So I guess the debt is driving personal savings rate down? Yeah, people kind of assume, I think, over time that they could make up for saving by taking on debt, which is kind of a double whammy of, it's like compounding against you.

And I think one of the reasons is because of these healthcare costs. Yeah, so she put another chart in that shows health care costs, and it's gone since the late 90s from 14% to 18% for your insurance premium term. of the proportion that people are paying. So people are paying a higher proportion. And look at the absolute dollar amount. It looks like it went from like around 2000 to over six. Yeah, almost seven, yeah.

I mean, that's a lot. So then finally the last one, and we'll kind of move on, but we'll share a lot of these in the show notes and we'll put the whole slide because I think it's what 350 slides or something. She puts us out on an annual basis and it's pretty crazy. But she shows the daily users of Slack has gone from basically zero in 2013 to over 8 million. And this is a huge one for us internally in terms of, we use it for both work and place. We have some private ones that we use. And I think Slack is, it's such a simple service.

It's just a simple messaging service. But the way that they did it and the way that they set it up, it's really invaluable. And they show a 32% decline in email usage for companies that use this. Hold on. I think this was a survey. So just FYI. Oh, okay. Then we better not use these numbers because we're an anti-survey podcast. But if it wasn't a survey, But for some anic data here, I mean, our internal email usage has just Slack has basically replaced it. There's no like annoying reply else anymore because we're using Slack instead. So anyway, we'll find all those in the show notes. We'll include that whole deck if you want to go through all those graphs.

So I'm reading a book about Bezos and Musk and the Space Race, which I'll get to later. But there was an article that they mentioned where somebody called Amazon, Amazon. And this was in 1998 and Mary Meeker estimated at the time that, 8.7 million of Amazon's 11 million shares in the float are shorted. This is in 1998. 1998. I wonder if they were able to hold on because obviously. Well, it did crash. Right. It crashed, what, 95% throughout the tech bust, something like that. But you wonder how many of those were able to hold on to that? So obviously, people didn't really foresee Amazon's bright future at the time. And then another thing in there that was not just emblematic of the time. Do you remember

this company at home? No. All right, me either. Okay. They say it's a high flying startup that offers internet connectivity for cable TV customers had a market cap of $5.6 billion, even though the last 12 months revenues aren't anemic $12 million, giving it the highest price to sales ratio of any of the 46 internet stocks on our table, the price to sales ratio was $453. So what I did was I looked at the Russell 1000 today. I'm not adjusted for inflation, assume they're 73 companies with a market cap of between $5 and $6 billion. The average and median price to sales ratio is 4.8 and 2.1, and the highest is like 100, something like that. So this thing was trading at a price to sales ratio of 453. Wow, and it's probably bankrupt now. Oh, I'm sure. I think the price

to sales ratio of Amazon is, I don't even know what it is. I think Apple and Google, I think, are single digits. I don't know what Amazon is. I think it's probably not that high. Yeah, that's pretty amazing. So the big thing we talked about last week was Italian bond yields had shot up, and I think they're already backed into negative territory, which kind of tells you that a lot of it was probably driven more by fund behavior than actual economics and fundamentals. So there's this hedge fund called Field Street Macro, and this was in Bloomberg, and they lost 50% in their fund based on losses from these Italian bond yields. And I don't know if they were doing some sort of relative value trade or what, but it kind of boggles my mind that it's always

hedge funds, and I'm using hedge in quotes here, that tend to get slaughtered like this. And so You know, of course, long-only funds can get slaughtered, too, if the market goes down. But it's just kind of funny to me that it's always hedge funds that get killed in these kind of things, which kind of proves to me that, as Cliff Asnes said, in a lot of his research, hedge funds don't really hedge. And more than anything, they're making directional bets on different investments than actually hedging out their exposures. Well, according to the Bloomberg article, it says the fund which wagers on macroeconomic trends.

Right. So obviously they were a little on the wrong side of this one, but the fact that a fund could lose that much money being a hedge fund proves that they, that hedging is not part of their system. It's just, just because you go short something doesn't mean you're hedging anything. It could also mean that you're really making directional bets. And that's kind of what I always found in my time working with the hedge funds is the fact that a lot of them shorting weren't trying to offset long positions unless they were like systematic funds that were looking to arb something. they're really just shorting based on a market view that something is going to go down. And so it's a directional bet, not a hedge. So Bill Gross got roughed up last week. He was on the news. But by contrast, his fund fell fell for three percent. And I know it's bonds without leverage probably. So that's still a big

number, but pales in comparison to a 50 percent decline. But you know what we're setting ourselves up for here? Go on. The Bill Gross comeback piece in four months. So this is the Bill Gross gets slaughtered piece. And then in six months from now, mark it down, timestamp. We're going to have a have Bill Gross come back with a question mark. I'm going to say that there's going to be a Bill Gross analogy to Santa Claus. Okay. All right. That's taking it one step further.

So, yeah, he lost 3% in his unconstrained bond fund, which I guess I haven't been paying attention too much, but I don't think he's had nearly as much success as people would have hoped for with him going to a different fund shop with a smaller asset base because his fund was so huge at Pimpco. and it was almost like he could sort of do whatever he wanted and run his own type of hedge fund in an unconstrained way. And I guess it just hasn't really happened for him in the bond world. By the way, did you ever look into Gross for your big mistakes book? No, I didn't. I guess it's harder to have that enormous mistake in fixed income land.

It's just a little more boring, I suppose. The mustache was definitely a mistake. That's true. He got heard of that. And wearing the tie around his neck without tying it. Okay, so we've got a handful of listener questions we're going to get to this. week. So last week we talked about the GE story from Reddit about how someone's father or grandfather had 90% of their retirement fund in GE and what should they do. And so we got a question from a listener who had a similar situation. He says, hey, I'm facing a similar situation with my 92-year-old

grandmother and her $1 million of XOM stock, which is Exxon. These shares are close to 100% of her liquid net worth in addition to Survivor's pension from Exxon. And they want to know what are our thoughts on diversifying this money versus tax leakage. So basically, it's in a taxable account. You'd have to pay, let's say, a 20% tax loss by selling this. So how do you balance out taxes versus diversification? And so I actually took this to our resident tax expert, Bill Sweet, who's been on the show two times in the past, I think. And obviously, the one huge consideration here is time horizon. And the fact that she is 92 means she doesn't have a very long time horizon unless she's investing for the next generation. But I think one of the ways you want to think

about this, and this is kind of what Bill said he would do when thinking about this, is maybe not diversifying the whole thing, but at least diversifying a piece of it. So you know you're okay for shorter term goals and eating some of those tax losses just so you can diversify. It's probably not a bad idea for at least a portion of this. What do you think? For younger investors, we would, you know, maybe an exchange fund is an option. But for this person, I think, I agree. I think this is probably more just given her age. I think it's probably more of a personal finance question. Yes, definitely. Right? Like, what other money does she have because the heirs will get a step up when she passes? So I guess I would try to figure out what other income source she has and does she need

the money and where it's going? And yeah, I guess it's situationally dependent. I don't really have like a what should she do here answer. Yeah, but I think the time horizon is important on this one. And the fact that she's 92 years old means she doesn't have as long as the time horizon is someone who's much younger in the same situation. Yeah. How about this? If she was seven years old, I would say that the diversification is more important than the tax leakage. That's fair. Yeah. And do it over time. Take your time getting out of it. Right. And see if you could pair losses alongside of this. Although I guess if this is 100% of her net worth, she probably couldn't. But that's what I would do. True. Okay. Next question. As a pharmacist, I like to think I have a small edge in trading biotech

and pharma names. I'm sure many of your listeners have careers other than investing. What advice do you have for people trading companies in their own field? Yeah, I would say don't. I I mean, or do it and probably learn for yourself that there is no edge there just because you work in the industry? I think that the odds of having overconfidence in your own field is probably much higher. So I think the probability of seeing a mistake is much higher, especially if you're doing it on the side. So if you're not someone who specializes in this stuff, I think it's really tough.

And I think even people who do specialize in this stuff. So I spent my first formative years in the investing world, we're working for some sell-side analysts. And these people covered their own sector of the market or industry. And that was their only job to cover that one small sector industry. And I think you can almost get bogged down in too much details and too much understanding of what's going on there. And it can actually work against you in some ways when you don't see the wider world beyond your own segment. So I think just having that narrow niche and focus can actually be a problem when investing because you don't have anything to compare it to on a relative basis. And I would also say that in pharma and biotech, it's so dependent on

the drugs and approval and all those clinical studies, just because your pharmacists, that doesn't give you any added insight into what's going to happen in those cases. True. That's almost like an event-driven fund more than understanding the fundamentals and how it works. So I think, sure, is it possible you can have an edge there? Maybe, but I think that you open yourself up to a lot more possibility of having some mistakes. And if you think you have an edge, think about all the hedge funds that have specialists in this area, they might have an edge. I don't think just working as a pharmacist gives you an edge. Sorry to be so blunt. In the other way, we've talked about this with people who have a lot of their money in their own company stock, you're doubling

down and making your finances more tied to one concentrated industry through both your income and your investments. So that's kind of a double risk that you're taking by not diversifying more. I notice in my practice that clients are getting bombarded more and more frequently by news headlines of the next. That doesn't make sense. Oh, I think it was supposed to be next crash. Okay. Do you guys think that this is any real market impact going forward, increased volatility, quicker corrections, et cetera, or does the retail invest represent a small enough part where you think it's negligible? I've read about this a little bit, like, is technology speeding up market cycles? And I think in some ways, in terms of reactions, it definitely is. I mean, you can see this

when there are some headlines in the news that turn out to be false, that it actually kind of moves markets a little bit because algals are just jumping on this. stuff. Yeah, but that's not retail. No, yeah, and I think these things get corrected quickly enough. I think the retail investor, and we've talked about this before, the fact that investment professionals themselves are controlling more trading than ever. The retail has such a small piece of actual what's traded, and I think it's down to 5% or so from what used to be like 95% in 1950. So I think it is smaller. I think the fire hose of information definitely can increase the volatility, and it could increase what people are doing,

because they're trying to sift through so much information, but I don't know what kind of market impact it has from the retail crowd. We had another question for someone. We talk a lot about long-term investing, and they wanted to know what our definition of long-term, quote-unquote, would be in the markets and how we think about that. I don't have like a year horizon. I don't think 10 years is long-term. I think that it's like the rest of your life type of thing. Like, I think to me, the long term is today, between today and the time that I pass. That's how I think about long-term investing. Now, of course, I think the thing that really matters is how do you survive long-term, right?

Like, how do you actually behave for the benefit of yourself 30 years from now? Right. And I think part of it, too, is not just like what long-term meets to you philosophically, but what is your actual time horizon for each investment. And so I think a lot of people maybe just don't even take the time to think. think through this. But I think it can't help in some ways to think through something like any sort of tax deferred retirement account. Like you kind of have an idea of what the time horizon on that is going to be. And so I think that helps, you know, commit yourself to thinking in multi-decade periods

because you can't, you literally can't touch that in many cases if you're a young person. So a 401k or an IRA or whatever, or you shouldn't at least, you can pay a penalty for some of those early withdrawals. So I think it really depends on understanding what you're actually trying to get out of your money and what it's being used for. In terms of longer, I mean, I like to think something like investing in stocks, like if you're planning on spending the money in anything less than, you know, five years, it probably doesn't make sense to have any of that money in the stock market. I'm fairly conservative in that and think more in terms of like a barbell portfolio. But yeah, long term, I think is it really time horizon dependent on your situation. Yep. Okay.

Recommendations this week besides your own book? All right. Two podcasts that I really enjoyed, Malcolm Gladwell and Adam Grant Those are two smart guys That was very good I listened to that one too And Adam Grant Yeah I've mentioned his podcast here before But he's got a very good one

That just finished up It's called work life I never listened to his one actually It's pretty good It's all about like the office culture And how the different psychological forces around the working world Okay and then

So I listened to a few other Of Gladwell's ones He has a new season out I didn't really care for the semicolon one But I was bored to death by that one Yeah I listened to the whole thing but it never really turned for me. But the one about football and how much proof do you need,

I thought that was really compelling. I mean, he talks about that a lot. That was really good. I didn't finish this yet, but Andy Sandberg was on with Bill Simmons, and I think he's hilarious. Okay. Yeah, I did not hear that one yet. You fan of us? He's okay. I'm a... You're a hater guy. No. Yeah, I do like Bill Hater, but yeah, Samberg, I'm kind of indifferent to. He's funny at times and not funny at times. Maybe I will walk that back because I've never seen any of his movies. I just think that, like, he's a funny guy. I thought his music videos with like Justin Timberlake were always pretty funny on SNL. All right.

So there's a book that I got this week and I totally judged it by its cover. It's called the Space Barrens, Elon Musk, Jeff Bezos, and the quest to colonize the cosmos. By the way, the bookstores are perfect at getting you to buy books based on the cover. You do this all the time. I do. I have guilty. I do like a good cover. All right.

So the first sentence of this book is pretty killer. March 6, 2003. This was not how Jeff Bezos wanted. to die. And this was the story of his helicopter crash, which was pretty wild. I had never heard of that before. Okay. So this book is worth reading? I'm 100 pages in, so it's a little bit premature, but yeah, it's pretty good. This is all very, very new to me. Okay. Is that it for your recommendations? That's it. Okay. I don't have much this week. Twisted Prey by John Sanford is another one of my detective series that I've been reading for a while. I think this was this

28th one. I think the original was in like 1998. And this is about like a Minnesota detective. and he just follows crazy crimes that happened in Minneapolis. So this was another good one that gets released once a year. So add that to my collection of detective novels. Speaking of detectives, I don't know if you call this during the Gladwell podcast, but one of his sponsors is Audible, and he talks about going for a run listening to the Jack Reacher series. Yes, I did hear that with the Lee Child ones.

Yeah, it's pretty good. But have you ever done Audible books before? No. The answer is no. I can't really do it. It doesn't really translate to me like a podcast. I've tried it, and it just didn't. I have to read it myself.

Well, you saw Michael Lewis went straight to audio? Yes, I read that. And the picture of him was on a treadmill desk, which was kind of funny, I thought. But, yeah, his next book will be straight to audible and not be in book form. But it just didn't work for me. Maybe I've heard a lot of people who enjoy it, but I don't think it translates as well as podcasting. So my other, my podcast one I've been listening to lately is called Crazy Genius by Derek Thompson. Have you listened to this one yet?

Nope. So he's the guy who writes for Atlantic. he's probably my favorite writer of the Atlantic. He's really good. And he has... Name one other writer at the Atlantic. Okay, you got me. No, so this is all about technology and how it's impacting the world and how it's impacting us personally. And it kind of looks at both sides of technology is both good and bad.

And it kind of looks at each side of... So they had one on Amazon and they had one on our smartphones ruining our lives. And so it's pretty good. So he's probably four or five in. And I think he said it's just like a 10-part series. They're only about 20 minutes a piece. It's pretty good. And allow me to climb up on my high horse real quick, but I'm going to give an anti-recommendation for this week. Go on. So the last two weekends I've been traveling and haven't really had any time to read or be on social media or pay attention to the blogging world or really pay attention to the news.

And it's actually kind of a nice relief to just get away from it every once in a while. And I don't think I did this on purpose, but it was kind of nice to just leave it all behind. And all the happiness research we look at and money says that experiences are much better for your happiness than material possessions. But I think that that can be true for like reading too much and getting too bogged down and information as well. So just leaving it all alone and taking a break every once in a while. Amen.

That was me. I'm going to climb off my soapbox now. Okay. That's all I've got. And we also wanted to mention. So it's coming up pretty quick. June 24th through 26th, our EBI conference west in. in Dana Point, California.

If you haven't bought tickets yet, we actually have a discount code. If you enter in RWM 25, you can get 25% off tickets. We are going to be doing our first ever live Animal Spirits podcast from Dana Point, which should be fun. And there's also tons of great speakers for that. It's going to be fun. Yep.

So anyway, send us an email, Animal SpiritsPod at gmail.com. We'll talk to you next week.