Animal Spirits Podcast - Goodnight Moon (EP.20)

Episode Date: March 14, 2018

The flash correction in stocks, why most people need financial advice more than investment advice, our children's book recommendations & 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. 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 Batnick. 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 Ritthold'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. Now, today's show. Welcome to Animal Spirits with Michael and Ben. On today's show, we're going to be talking to recently exited Secretary of State Rex Tillerson about his 401k rollover. Any suggestions for him?

He's got to diversify his energy holding, so I'm saying semiconductors. All right. Good idea. So really, today we want to talk about first a little market update because basically a few weeks ago, the market, the world was going to end, and now everything's fine. So you wrote a little piece this week about the NASDAQ 100 and a quick snapback rally it had. So what stats do you got for me? The market peaked on January 26th, and in nine sessions the NASDAQ 100 felt 10%. And then over the following 21 sessions, it got it all back and then some gaining 13%. So this sort of V-shaped pattern is not unprecedented. It's happened.

about a dozen times in the past. But looking at the chart, which we'll learn to in the show notes, what's very notable about the previous times that this happened was they were all at very significant points in time. So 1998 after the Russian financial crisis and then in the aftermath of the dot-com blow up, there was one, two, three, four, five, six pukin rallies. And then there was another one at the bottom in 2009. But when thinking about the most recent one, it's hard to ascribe a story to this one. So I think that's what makes this an outlier. It's not, I mean, people have talking about inflation and robots and the VIX blop and whatever, and rising rates.

So we were talking about this before I voted, and you just called it a flash correction, which I thought was a good way to put it. Yeah, the idea here is that usually during volatile markets or at the bottom of a bear market, you expect this kind of volatility, but you never expect to see it really, at least historically, when the market is doing well on an all-time highs. So it is kind of crazy and it just sort of happened. And so I guess we could blame the algos, but it's definitely not something that typically happens, which is a good lesson for the markets because just because something has never happened doesn't mean it's not going to. This is just how things work, I think. I mean, we're constantly finding stuff that has never happened before. That's the nature of markets. So I read one of the books I recently read, one of my favorite characters is Jack Reacher by Lee Child, I think I've mentioned on this show before. And they asked him to ascribe probabilities to some mission he was going on. And he said, this happens more than never and less than always. So it's like, that's like the range that I think about the markets too. So I thought that was a good quote.

So with stocks still pretty close to it are at all-time highs in many cases, the Wall Street Journal had a piece this week, and you linked to this, basically said Americans' net worth is now approaching $100 trillion when you count rising stock prices and property prices. It's pretty crazy. So it just passed the peak from 2007, I guess, must have been a couple years ago, maybe last year. and now this thing is just like the stock market at all-time highs. I know it's kind of nuts.

There is a ton of cash on the sidelines. Now, I'm not kidding. $9.2 trillion in checking in savings accounts and CDs. Out of that 100. Wow. So 10% in cash, basically. So when that comes flooding into the market, oh boy. Watch out. The funny thing is, is that everyone always worries about the debt that we're holding

in this country. but people never offset that with the assets. And so like you said, it's net worth, not just... Yeah, when I tweeted this, people were like, well, what about the debt? And I didn't respond because it's just not worth it. But it says net worth. That's assets minus liabilities. And yes, liabilities did increase by $208 billion.

But the value of household real estate increased by $500 billion. And household net worth in the stock market increased by $1.3 trillion. And I would say that probably the most... disappointing data point in this article, and this is a theme that we've spoken about previously, and we'll probably continue to talk about. The share of wealth held by the top 1% rose to 39% in 2016, up from 30% to 1989. And unfortunately, this is probably not going to reverse anytime soon. Yeah, it's kind of interesting. The difference between the haves and have not, so there was a piece on CNBC this week, and it was just a retirement survey by this go-banking

Rates.com, which I don't know how much to ever ascribe to these surveys, because they interview a few thousand people and they try to say they try to say it's the entire you know labor force or people in america but but whatever they basically said how many people do this survey this is probably 10 000 people or something so i mean so out of 300 million are good enough yeah close enough it's that's close so so they said less than and they say americans they say less than nearly half of americans have less than 10 000 stash for retirement why do you put americans in air quotes because it's only 10 000 people got it okay so it's not all of america We just talked about this.

I'm sick. Give me a break. Also, by the way, they can't see the air quotes because it's on the podcast. And so they also said 65% said they don't make enough money to pay their bills every months. And then the rest of it was, you know, why aren't you saving for retirement? And 40% of the people said, I just don't make enough money. You know, the other 25% said they're struggling to pay their bills.

So there's this dichotomy between the rich people getting richer and maybe the poor people getting poorer in a lot of ways. And the other really fascinating story I read this week. So Politico had a... Hold on. Before you move on to that. So this data point was also in the Wall Street Journal article. The savings rate for 2017 fell to 3.74% down from 6% a year earlier and 7% in 2015. That's nuts. 3.74%. So it's mostly just gains and asset prices that are driving up the net worth. Right. not savings yeah interesting so the other fascinating piece I was alluding to was they had political had a expose on Dave Ramsey and a lot of people have heard of Dave Ramsey maybe a lot of people haven't but I was shocked by these numbers so he is a

personal finance guy who has a I think it's a daily radio show and it's all across the country and he has 13 million listeners a week and they said he's the number three rated talk show personality in America behind only Rush Limbaugh and Sean Hannity This blew my mind. Yeah, I had no idea. I mean, what everyone tells you is that no one cares about their finances. And all this guy talks about is personal finance with a little, you know, religion and politics sprinkled in. But for the most part, he's trying to help people get out of debt and pay their bills and get their finances in order.

And to me, what this really, the lesson for me from this story was really that it's kind of a luxury for people who get investment advice and look at this stuff like us. So I think the fact that we nitpick this stuff about smart beta and passive versus active, like if you're even having that conversation, you're already in a great place, in a better place than the majority of people out there who really just need to figure out how to pay down debt and not lift paycheck to paycheck, which is kind of what he's trying to do to help people. One of the interesting things that I took away from it was how much psychology affects not just investing, but also personal finance. So one of the things that he talked about was how clearing each debt, no matter how small,

creates the motivation needed to tackle the bigger ones. And I thought that was a really interesting thing that makes intuitive sense that I just never really spent much time thinking about. Yeah, so he calls it the debt snowball. And basically the idea is you pay down your debt so you like clear a hurdle. It's like a small win that can then be snowballing to bigger wins. And it doesn't make any sense on a spreadsheet because you're supposed to pay down your highest interest paying debt first. But psychologically, it helps when you actually see something be paid off and then you can move on to the next one and the next. So yeah, it is kind of interesting how that works. So some of his investing ideas have been just skewered by people in the finance

industry because he says... I'm not familiar with his investing ideas, but I saw that. What is it? He basically, he says you should expect to receive 12% a year from your stock market returns and you should only invest in growth funds and just a little inside baseball. Instead of using the geometric average for returns, he uses the arithmetic average, which actually is around 12%. And he's saying that means you should expect to earn 12% of your stocks. So a lot of a lot of financial advisors kind of look down on his investment views, and obviously that's a little out there. But I think the point is that if he can get these people who are in huge amounts of debt to even get to the point of thinking about investing the markets, I guess that's a win.

But it is kind of odd how he, how those two views are kind of opposing words. But it sounds like he's dealing more with people that don't necessarily have the means to begin investing and he's more helping on the personal finance side. Exactly. But yeah, so if he gets them to that point and helps their personal finances and gets them out of debt, I think that's a win. So, yeah, totally. I totally agree. Well, do you agree with his invest in ideas or not? Yeah. He's worth $55 million, according to this article.

Yeah, that's crazy, huh? He has a whole network of financial advisors. I knew a guy who worked for one of them, actually. And he, so eventually when his readers do get to that point, he has his own network of financial advisors that sort of hawk products and financial plans for him. Well, I hope they're not incorporating a 12% expected return into their financial plans, but all in all looks like he's doing some pretty good work. Yeah.

So there was an article that you shared with me, rise and shine, why bond investors still shouldn't fear rising rates. And this is a topic that comes up over and over. We get tons of emails about the bond question. And there was some really good plain English stuff in here that I wanted to share. They say, and this comes from Sellwood Consulting, they say that rising rates are a double-edged sword, slicing principal value from bonds already owned, while paying higher coupons on those not yet purchased.

I think that's like a really great way to put the bond discussion. Yeah. And the funny thing is that we've heard from perspective and current clients and people who read our stuff. And there are a lot of people out there who are more nervous about rising rates in the bond market than they are about a crash in the stock market, which is crazy. I mean, there is a lot of sort of misinformation and misdirection out there about what rising rates means and a lot of scare tactics. But yeah, this article does a good job of putting it together. So what they did is they looked at different scenarios. And they found that since I think 1990, they found the average bond yield of the aggregate bond index, which would just be similar to like a Vanguard total bond market fund. They found the average interest rate on that was 4.8% versus the current yield, which is closer to 3%. And they looked over three scenarios to figure out what would have to happen, what would happen to the gains or losses in the aggregate if we went back to average. So why don't you walk us through those a little bit? If bond yields moved from 3.1% to its long-term average of 4.8% in even increments over the next 10 years, then this portfolio

would earn 2.8%, 0.3% per year lower than the current yield, which is 90% of the return that investors would have earned had rates not changed at all. And they say, and I agree, which is hardly a disaster. Yeah. So slow move up to rates that even if got close to 5%, yeah, you'd still earn close to 3% on your bonds. Not quite the current yield, but you know, not bad. And they went through some other scenarios and they tried to figure out what would be the sort of worst case scenario. And the worst case scenario is, of course, if bond yields go nowhere and then spike at the very end and you lose a huge amount of principle.

But I think the idea here is not to say that bond investors shouldn't be worried about rising rates because I think it will add volatility to that asset class that we haven't seen in past decades. But the idea that you're going to get crushed in your bonds is something that people should probably let go of because the idea here is that if rates rise, eventually that's a good thing. So it's kind of a short-term pain for long-term gain. So yeah, exactly. So these are two scenarios they presented where bonds can earn zero percent over the next 10 years. One is that rates don't go anywhere for nine years. And then in the

final year, they rise by 4.5 percent, which will give you a 0 percent nominal return for 10 years. Or yields rise every year by 1.85 percent, a total of 18 and a half percentage points over a 10-year period. Both of these, especially the latter, seem highly unlikely but possible. I think that this is a result of stocks treating investors so well. All of the risk, or 90% of the risk from your portfolio, especially behaviorally, is going to come from stocks. A bad year for a bond portfolio is a bad half hour for stocks. Right. So I think people need to rein their expectations a little bit on bonds for sure from what we've seen for the past three or four decades. But that doesn't mean the end of the world. And you'll still get a little bit of something. You'd just not be the same sort of yields as you had before. So I think the simplest way to set your return expectations for bonds, especially high quality ones like treasuries or total bond fund would just be take the current yield. And that's pretty close to your return of the next five or ten years. Corey Hofstein wrote a really good piece about this a few months ago. And there's a misunderstanding that, people think that bond returns for the last 40 years were so great because rates were falling. Bond returns were so good because rates were so high. Yeah, I think he said, 70% or 8%.

Yeah, 80% of the return came from not falling rates, but from the initial starting yield. Right. If you start at 10 or 12% on your bond yield, you're going to do pretty good no matter what rates do for over the long term. So similarly, rising rates are not necessarily going to kill you. Now, nobody wants rates to spike 4% over. night, but that's highly unlikely. It should not be the base case. Right. Yeah. So if that happens, then that's tough at the initial outset, but then guess what? Now you have rates that are four and a half percent higher, so your future returns are going to be better from that point as well. So speaking of simple investments, Coinbase this week announced that they are doing a crypto index fund, which is kind of interesting. And of course, the term index fund has been so

overutilized and stuff that it's hard to tell what it is anymore. They're partnering, they're partnering with Vanguard on this, right? Yeah, right. Yeah, this is what Bogle wanted. So it's kind of interesting to me. So Coinbase, I think, the way that I see it, I mean, they have the first mover advantage. They're the first ones there to sort of offer this infrastructure to people and make it easier for people to actually trade in this stuff. And I think they're just going to cash in as much as they can until someone else comes

and tries to sort of steal the throne from them. Because they're charging a 2% management fee on this, and it basically holds four different cryptos that are in there. So like Bitcoin, Bitcoin, Cash, Ethereum, and Lightcoin. And, I mean, the fees on this thing are, it's already pretty high to trade for them. I think that that's one of the reasons I think that someone is going to end up coming in and undercutting them unless they're able to sort of build out such a huge user base that's impossible. But someone like Robin Hood that will charge zero fees is going to do this better. But the funny thing to me is the fact that all the people in the crypto space are so anti-establishment and anti-Wall Street.

But this is, this seems like something a bank would do. Like, Coinbase is turning into the Wall Street of crypto, right? Am I wrong on this? No, you're not wrong. So it's just interesting to me. And the other thing I think that indexing sounds like a great idea, but it doesn't work very well outside of stocks and bonds. Like indexing a hedge fund is a terrible idea.

That's why hedge fund of funds usually do so poorly. And indexing cryptocurrency is a terrible idea because it's still such the Wild West that any sort of index reconstitution or rebalancing is just going to be hugely ripe for front running and just shady stuff going on. Yeah, you see this in the Russell. 2000, what's it going to be like in crypto land? Yeah, I just, I, this sounds great to people who like, like the idea of indexing funds and making it easy for them, but I think this is, this is not a great idea. And speaking of crypto, John Oliver had a hilarious segment this

week that I highly recommend. And Patrick O'Shaughnessy spoke to somebody who's involved on his podcast. That was also pretty entertaining. He actually, he actually, the guest actually called crypto a rational bubble. Oh, yeah? Okay. I guess that makes sense. Well, he actually made a really good point that I never thought about, was that bubbles are really great in the sense that they attract a ton of capital and provide the foundation for what comes later, even if there is a washout. Yeah, that makes sense. I did like the John Oliver quotes. He actually spent his entire show last week tonight on cryptocurrencies. And he started out, he said everything you don't understand about money combined with everything you don't understand about computers, which is a pretty good way to explain it for the layperson. So there was a, there's been a lot of news about Amazon getting into financial services. The Wall Street Journal reported that Amazon is in talks with large financial institutions to explore a new checking account like product that it could offer to retail customers.

Thoughts on this? Well, the worry was, this was in investment news and the worry from people in the financial advisory industry was that this is just Amazon's gateway into index funds, ETS, Robo Advisor. But I actually think that the banks should be more concerned about Amazon getting into this than financial advisors because his whole, what's his, Bezos, his favorite line, like your margin is my opportunity. So how much margin is there in Black Rock and Vanguard? I mean, in Charles Schwab, the fees are now negligible. They'll probably be free in a few years. So how much margin is there

really in the indexing in the ETF space? I was also thinking, why would they want to go into the security space where there would just be more government oversight and regulation on a company that's already probably not too fond of that? So I actually use the Amazon credit card. So I think if they did like a checking account and a savings account and they could offer a little bit better rates than other people like. So the Amazon credit card, it's basically not, they don't even have an actual card. It's just like in the cloud or something.

I actually got the credit card. Did you? Okay, you got it. But I don't even know why I have it in my wallet. I only use it for Amazon purchases. Right. I think that's the only way you can use it, right? No, no.

So you get. So, okay, so I, is this the one where you get five percent off of every purchase at Amazon? Yes. Okay. I didn't know that you could actually use it at other places. You can't see this on the podcast, but I'm showing that on Skype. Okay. That's definitely not the one I have. That's a Visa one. Mine is just an Amazon credit card. Look, Amazon Prime. I'm going to have to pull mine out and figure it out the difference here. So I received 5% off at everything I buy at Amazon and I can only use it at Amazon. And so I think if they got into that checking and banking and they just hooked it all up because you never have any idea how much you're spending. Like it's just a click of the button every time. So if they got into banking, I think that the banks would be the ones that would be. more worried than people in a financial advisory business for this stuff. Speaking of banking rates,

we spoke about this previously, but cash is coming back. It's making a comeback. Well, one point five percent on savings. I actually found the other day, for the first time since 2008, the one-year treasury note, like 12-month T-bills, is yielding over 2 percent, which is pretty crazy. I mean, it's not great, but it's way better than it was. Right. Which is getting back to the bond thing, that's actually something that is something of a hedge against rising interest rates is cash. What is cash? Yeah, because there's no duration risk in cash if you're in something short term if rates did continue to rise, something to think about.

So there's a story in Bloomberg the past week about Bridgewater and Ray Dalio, and it seems like Dalio's number one job over the past like 12 to 18 months has been refuting stuff that's put about in in the media. And so there were some stories saying that Bridgewater is betting huge against European stocks and it was like $20 billion or something of their 160. And they went on to Bloomberg and basically said it's not as big as it seems. It's not what you think, you know, the position sizing and the way it things looks. It's not, that's just one side of the trade. This could be hedging thing. It's not like we're shorting $20 billion with nothing of an offset.

And it's kind of interesting way to look at hedge funds because you see these stories all the time. George Soros is buying puts. Ray Daly was betting against European stocks. Warren Buffett is is sitting on huge piles of cash, get out now. And there's always way more nuance to it when you're dealing with this much money in these types of investors. Because you can never really see all the positions they hold or why they're doing it or what their reasoning is. And so it just doesn't ever make sense to trade on these type of headlines. Yeah, this is like pornography for bears whenever headlines like these come out. And I think they're especially dangerous for the average investor that see something like this and is prone to making bad decisions based

on headlines. This is one of the easiest ways to do something not so wise. And yeah, guess what? Bridgewater has $160 billion. It doesn't matter what they do. You probably shouldn't be following them because they have a totally different set of guidelines and risks and time horizon and ideas. And with leverage, nobody knows what their actual positions are within the overall portfolio. Yeah. So this is a good segue into some listener questions. So we got a bunch of them again this week. We wanted to get to. So Dahlio actually started what was called the all-weather portfolio. And he did this, I think after he built up some capital and wanted to figure out a way to do an easy, simple portfolio that his family could follow and invest in when

he was gone. And Wealthfront, the Robo Advisor, actually just made a foray into the risk parity world as well. And so we actually got a question from a listener on this who said he's a wealth front investor and really didn't understand it. So he said, I read through the rationale for it, but I didn't fully understand it, but given that they're already using an algorithmic approach, you know, does this make sense? Until Wealthfront made the announcement recently, I hadn't heard of this approach. So I'm starting to educate myself on it to see if there's something to take into consideration with my other investment strategies. Is risk parity just a small thought in the industry?

Or for folks like you deep in the industry, is it even a topic of discussion? What do you think about this approach to managing money? I mean, we don't talk about this internally that often, but what is the default? So let's say that you have $100,000 in the Wealthfront 500. what happens to your money? How much of it goes into this risk parity product? I think they said they're going to start out like 20%. I could be wrong. I could be totally off on that. I guess I'm not sure. But this garnered a lot of headlines and a lot of pushback from people in the industry that were sort of scratching their head about it. I think the big thing here

to think about is the fact that robo advisors for the most part are funded by venture capitalists and they need to start making more money to see returns for their investors. And this is a way for wealth front to charge fees on one of their own products so they can put in their client portfolios. Now, they do have an opt-out, I guess, for this. But as anyone who studied psychology knows, if you allow people to opt-in versus opt-out of something, it leads to totally different results because people are typically lazy with their choices. So anyway, it's just another piece of a portfolio within their overall strategy. The other question is, does something like risk parity deserve to be a standalone allocation in a overall portfolio, or should it be a

piece of a portfolio. And I don't think I've ever seen it before where it's used as just a piece like this. Right. It's usually, it's sort of similar to the permanent portfolio. It's usually not a sleeve. It's like a, it's a mindset, a philosophy of investing. Yeah. And so people who don't who'd understand risk parity is just a way to invest in a diversified portfolio. So it's stocks, bonds, commodities, you know, diversified globally could be using different types of bonds, like international bonds, emerging market bonds. And the way to think about it is the idea behind it is that you want to have your volatility all be equal. So let's say historically stocks have a volatility of 15%. Bonds have a volatility of 5%. The way that it works is they want to make those equal.

So they use a little leverage to make bonds a bigger piece of the portfolio. So now bonds are three times as big. So they have a volatility of 15% to match stocks. And the idea is that because they're different types of assets, they'll perform differently in different environments. And then they'll offset one another. And it'll kind of give you high returns from the bonds because you're some leverage. So I guess the question is, so we actually mentioned this earlier on the show that probably 90% of the volatility of an overall portfolio, depending on how its construction is going to come from stocks. My question, I guess, is why is that a bad thing? Why would you want to volatility weight your portfolio? Yeah. And this, it's much more of an academic

exercise, I think, that it's a lot of quants really like this idea of doing that. But obviously, you know, whether you like risk parity or not, I think the biggest thing here is that it seems like Wealthfront might have dropped the ball on how they rolled this out and how they explained it because if we're getting emails from people with their clients that don't understand it, you know, this stuff is easy for us to understand because we read about all the time. But if it's something that normal investors can't understand, it's going to be hard to sell that message, I think. I also think that this is not that big of a deal. It got maybe overblown because of Wealthfront's history with not being so kind to financial advisors

and being extremely dogmatic about index funds and their tax loss harvesting. So I think that this is just an opportunity for people that might have a gripe to poke some holes in what they're doing. Yeah, that's what it seemed like. Okay. So another listener question. So I currently work at hedge fund in Chicago and I'm beginning to feel somewhat stuck in my career. Do either of you have any advice how to reset career-wise or do you have any experiences

similar to mine? I'm interested in your perspective. And if you think of any particular options that are better than others, something like an MBA or a CFA, etc. So what do you think if someone who wants to restart their career in the asset management industry? Well, when I restarted my career, I was out of work for two years. So I don't know if I'm necessarily the best person to answer this question. So you restarted your, what do you laugh at?

You restarted your career. So why don't you share some thoughts on this? Yeah, I think one of the great things about the asset management industry is that there are so many different ways you can go. There's so many different avenues and types. So I think my advice to people is usually like don't pigeonhole. yourself and think you have to work in a certain type of job or industry. I think there's a lot of different ways to do it. And trying to find a new job is obviously never easy because a lot of times it come down to networking, getting to know people. So I think it depends, you know, how your network is.

If you wanted to try something like an MBA or CFA, I think that's probably not a bad idea to sort of shake up your resume a little bit if you're not happy with your current job. Yeah, my way of resetting my career was to start blogging, which is a weird way to do it, obviously, and it wasn't really my intention that was going to lead to something else in my career. And it did. But I think it's just the idea of having an open mind and getting to know people in other aspects of the industry and talking to people and figuring out what other jobs and roles that are out there. Yeah. So in that sense, I would say that probably the best advice is to get lucky. And that sounds ridiculous. But if you put yourself in a position to get lucky, I mean, probably the best way to do that is to surround yourself

with more people. And the MBA lends itself to that much more than the CFA does. And here's the thing that I like as far as networking. I've never been a big small talker or networker. That's not my personality. But the thing that you have to remember about people is they love talking about themselves. So if you talk to someone from a different company or within your own firm who's in a different position, just ask them about themselves. And they love to talk about themselves and their experience and how they got to where they're at. And that's a good way to build a network and sort of understand how different career paths work. And then maybe, you know, they will, oh, well, I know so-and-so at a different company. They can give an introduction. That's kind of a simple

way to get out there and take people to lunch and coffee and get to know people in other areas of the industry. My next question, around inflation assumptions for college and health care expenses. Do you guys think the cost of education will eventually plateau or decline? Can we really expect to assume that college tuition is going to increase at 3% to 5% per year? Same thing with health care costs. Again, that inflation is real, but is there a lot you draw when trying to figure out how much to save for certain expenses?

This is a good question. You and I both have kids that were planning outside of the college, assuming that's still a thing in 18 years. And this actually hit me square in the face when I was reading Ed Thorpe's book. I forget where he went to school, maybe Caltech. I don't remember exactly. But his all intuition was like $300 a year for room and board or something like that. So I looked at the numbers and inflation compounded it like 15% per year for school and board for wherever he went. That literally cannot continue.

Right. But it doesn't seem to be slowing down, does it? No. I talked to my dad about this a while ago. And he said, people were saying this in the 90s, too. Like, there's no way these costs can continue to rise like they have. And obviously, there's at a certain point that's true. I think it gets, getting back to that idea of inflation, I think is an interesting one when you try to financially plan for things.

And so this is something that we put into our financial plans for clients as well. It's like, you know, in a lot of ways, you're just guessing, you know. So I think it airs to be on the side of being conservative and assuming inflation is going to continue to be high. And that gives you this margin of safety if it's not. But on the other hand, both of us are paying for daycare right now. Like, if we can afford daycare, we should be able to afford college. Like, sending your kid to daycare is basically like the tuition for an in-state college, right? Yes.

So we just have to talk our kids into going to public schools and then we can already afford it because we're paying for it right now, basically. I guess what's really shitty about this conversation is that if education continues to inflate the way it does, it's going to only widen the income inequality gap. because there is a limit at what people can literally afford, but there's seemingly no limit on what the top, you know, 2% of people can afford to pay for their kids. My hope would be that technology figures this out and makes it much, much cheaper and gives some competition to the universities in terms of education and provides people better sources of, you know, education,

which is kind of tough because then you don't have the social aspects of, which is probably the best part of college. But that big only hope is that somehow the technology industry figures out how to give a cheaper, more efficient education, you know, for higher education. Okay, we got one more question here. I'd appreciate hearing your perspective on currency hedging international equity and bond holdings and specifically whether double the management fee on an ETF for a hedged version makes sense in the long term for a buy and hold portfolio. Thoughts. This is a topic that gets a lot of attention and a lot of passionate people on both sides of the argument. I think that this is

the type of thing where there's not really anything wrong. I would say that you probably have to know yourself and do what's right for you. And if you're the type of person that's going to feel regret one way or another, an easy solution is to hedge half of it. So put 50% of your portfolio in a hedge product and 50% in a plain vanilla. Wisem Tree has pioneered a lot of work in this space. And they actually have an article that they wrote recently saying that many people believe that the difference between having and not having currency exposure comes out in the wash over longer periods. The data supports this and that the average difference is quite small on a rolling 10-year basis and the standard deviation of this difference is just 2%. So yes, over longer periods of time,

it has come out in the wash. But we say this all the time that nobody actually lives in 10-year increments. It's more like three months at a time. So I don't really have too strong of belief one way or the other. I just think that whatever is right for you is the most important thing. In Wisdom Tree is definitely a good source on this. So our friend Jeremy Schwartz is really passionate about currency hedging and has written a lot about it. He talks about it on Twitter a lot. the way that I look at it is is pick one and stick with it. So don't try to go in and out and don't try to change because every time you do that, you're just chasing performance probably.

So if you want to hedge your international equity exposure, do it and stick with it. If you don't want to hedge and you want to see some currency fluctuation, have that be part of your diversification benefit, then do it. But just don't try to jump in and out and change all the time. And I think this brings up another point is does it even make sense to hold international bonds because that adds another element of risk to your portfolio? and a lot of people would say no, because why would you expose yourself to currency exposure in the lower risk part of your portfolio?

Pretty much all international bonds, maybe that's a stretch. The majority of international bonds are hedged, hedge their currency exposure. Yeah, or if you do, you better have a plan for how to do it because that's an added risk element to bonds that a lot of people don't think about. Right, because in that case, it's similar to stocks and bonds. If you buy international bonds, then like 80% to 90% of the volus coming from currency movements, not bonds. Right.

So I saw something that I thought was pretty interesting from Mark Cuban, said one of the great lies of life is to follow your passions. And he said that it's bad advice because you may not excel at what you're passionate about. And there's like a lot of space for debate here. I think a reasonable person would say, you know, if you're passionate about basketball, like you're not necessarily LeBron James. But so what do you think about this advice? I think this is probably, I definitely agree with this personally because I It's not like I was a person who was passionate about investing and following the markets. I knew nothing about the markets until I was probably a senior in college. I mean, never followed it. Like the tech bubble was going on, I had no idea. I did not follow this stuff. I was not reading about it. I didn't read the Wall Street Journal.

I knew nothing about the markets until I was kind of forced into it from a job opportunity. And so I had a lot of catching up to do. And so it wasn't something that I was passionate about. It was something that I learned to be passionate about because I enjoyed it once I started learning about it. Yeah. So he said that don't follow your passion, but follow what you're good at. And he said that nobody quits anything that they're good at because it's fun to be good, which I think makes a lot of sense. Yeah, that's not bad. All right. My favorite tweet storm of the week comes from Jeremiah Lowen. He basically spoke about the fallacious belief that gold is a very good

inflation hedge. It did do well in the few periods of extreme inflation. But if you look at the correlation since 1980, you'll see that it's actually negative, which is a very different story than what we hear from just headline numbers alone. So I will link to that. I encourage you to check it out. It was very interesting. Okay. And we snuck one more listener question at the end just before we go to our recommendations. And this is probably a question that we get more than any other from readers, listeners. And so we want to address it. So this says, I'm usually struck at how the volume you're able to get through each week. I can't tell if that it's because reading is a greater part of your job than most people or if you just manage time better. You've talked about

buying time and outsourcing more. It might be interesting to talk a little bit more depth about your routines outside of work in which decisions have yielded of the most benefit in terms of time saved or reallocated to higher priority things like family or health. So basically a lot of people always ask us, how do you guys find so much time to read and write and do podcasts and all this other stuff? So what do you think? What's your magic trick? And plus you read like 8,000 page books once a week. You know, it's interesting. We get this question a lot and it's almost like people are looking for like a shortcut right like yeah what's our secret and i think for me personally i've just got i've just gotten pretty good at allocating my time and i have two hours on almost two

hours on the subway each day i don't really like browse i mean i watch there are tv shows that i watch but i never browse i don't go to the gym so i'm suffering on the physical side but but there's no there's no there is no secret we only have 24 hours in the day like everybody else i think probably where the most, the biggest thing we could say on this topic is that our job allows for it. Like most people don't have the luxury where their job is to just read and learn and write. Like we're very, very fortunate in that respect. Yeah, there's a few things. Yeah, reading is part of our job. And I think one of the other things, especially just in the asset management industry, is the fact that we have a long-term investment philosophy. So we're not

on the phone all day with suppliers trying to figure out what's going on their companies. We're not listening to quarterly earnings calls. You know, we are pretty slow moving. in when we make decisions for our portfolios and we're very, very rules based in what we do. So I think that's part of it, too, that our investment philosophy allows for more outside interests. And the other thing, for me personally, I don't have a ton of hobbies. Like, this is, this is my hobby kind of, reading and writing. Like, I used to, when I was younger, I filled up my nights and stuff going out for drinks and having fun with friends. Like, now that I have kids, I don't do that stuff anymore. And my kids are in bed by 7 o'clock and I'm kind of a night

So I do a lot of my stuff then. But it is, yeah, and I think I definitely spend money outsourcing stuff that is not important to me anymore. So we pay for people to a cleaner house and do our lawn care and deliver groceries, which in the grand scheme of things isn't a huge luxury, but it every little bit helps, I think. And especially when you want to spend more time with your kids, those things are important to me. Yeah. Yeah. I mean, I don't, like I said in the intro to the show, I don't do like fantasy football.

I don't, you know, have, I don't sit down and watch a whole. No, you don't drink coffee. You're not a Facebook. When's the last time you watched an entire game from start to finish? You know, like I used to do that all the time, and now I have kids, never. So I think it's just, it's more about having priorities. I also find that I'm much quicker to pull the plug on a TV show I don't like, and I'm much quicker to skim a nonfiction book that I know part of it I won't find interesting.

If I'm reading a three or four hundred page book, I skim through chapters all the time. So I'm much easier to, you know, pull the cord and let go of something that I'm not interested in. than I was in the past. I don't read everything word for word. So speaking of reading, what recommendations do you have? Well, I created a little bit of a firestorm on Twitter last week because I said Good Night Moon is an overrated children's book because I read to my daughter Libby three or four books a night. And I got a huge flood of people who agreed to me and a huge flood of people who said I was an idiot. And so I wanted to ask you if you have any good children's book recommendations that you read to Kobe. Okay. So I totally agree with you. I read Good Night Moon a few

months ago and I was like up and armed. They rhyme moon with moon. It was awful. I I couldn't understand it. It was so bad. And Robin was like, calm down. It was, but I couldn't calm down because it was so bad. A lot of people told me it's because of like the cadence and the repetition. I don't know. It just, it didn't do it for me. Okay. So here, but here's another thing. So I do remember loving it as a child. So maybe it's one of those things that's really great for a three-year-old and really bad for a 33-year-old. Yes. But I've also found probably 80 to 85% of all children's books make zero sense whatsoever. They're just nonsense. So maybe that's just the strategy because none of them makes sense. My favorite children's books. So I hadn't read this

in a long time. I know it's cliche, but for damn good reason, oh, the places you'll go is like word for word, one of the best books ever. Yeah, that's pretty good. By the way, Dr. Seuss books are all pretty crazy too when you go read them. You get any other ones? Yeah. So my mother who passed away used to read to me The Giving Tree, and I had this, like, moment where the floodgates opened. It was, I haven't had a moment like this in, like, years, where I started reading the book to him, and my wife is sitting with me, and I literally couldn't get past, like, the third word. So the book, it probably took me, like, 15 minutes to even read it because I was crying the entire time. But maybe that's just because of my mom, but it's hard to be objective about that.

But what are your thoughts on that book? Well, that's my favorite one that I, and I bought it for. for Libby and I try to read it to her every night and she like doesn't like it so I'm like no no we're reading the giving tree tonight she kind of likes it but it's not one of her favorite so she one of the ones that she liked early on was just it's called like mother goose nursery rhymes and it's all the old school nursery rhymes so it's like two or three pages for each and a lot of those are nonsense too but they're it's they rhyme and they like she can sing them and so just the old school nursery rhymes worked pout pout fish was a good one if you ever heard of that one you ever read the

gruffalo uh I haven't read the gruffalo yet another one favorite one is don't push that button. It's because it's kind of interactive. Like the whole books is telling the child don't push the button. Do they push the button? Of course they push it every time. And it's like, do not push the button. So that was another one. And then the other one is just Lama Lama Nighty Nights, one of my favorites because it's just about putting a kid to bed and trying to. So that's about it. And I got a ton of recommendations. So we'll see if anyone has any good recommendations for us. So lastly for me on the children's books, well, this is not a children's book, but I read it to my wife out loud when she was nursing just after he was born.

Louis wrote a book called Home Game, An Accidental Guide to Fatherhood. It was amazing. Yeah, I love that book. It's kind of an underappreciated one of his, too, that not a lot of people talk about. It's about his first few years as a father, yeah. All right, any TV shows or books for you besides that? Okay, so this week I read, so I love Michael Mopison, and for whatever reason, I never read the success equation, but I finally got through it this week, and it was pretty much what I expected. Very good. I also read Andy Dukes Thinking in Betts, which is very similar. Both good books. Okay, here's a very unfortunate D. Recommend. I really enjoyed the first two seasons of love.

And we watched the entire third season over the weekend. The first episode was hilarious, and then the next 11 sucked, in my opinion. Oh, really? Okay. So I'm about three episodes in, so it doesn't get any better. No, and I was so disappointed. I don't know if they just, they mailed it in or whatever. Like, I really was looking forward to liking it.

But I don't know. I didn't really see any other reviews, but I thought it, I, I just, it did nothing for me. Okay, interesting. Here's another new one for you. Check out, check out Sneaky Pete on Amazon. Just came out with season two. Okay.

And then, uh, that's a good one. Let's see. The other thing that I watched this week that I really enjoyed, I never heard of this guy. His name is God L. Malel. He had a Netflix special called The American Dream. So he's a Moroccan man who, I guess, lives in France. And, uh, so I checked him out on Twitter. He's got like seven million followers.

apparently mega famous across the pond. And he does this thing about just what it's like to be in America. It was hilarious. Highly recommend. Okay, pretty funny. I'll take a look. Okay. So I finished godless on Netflix this week. That's kind of on my high recommend list. The first two or three episodes, you don't really know what's going on. And it's a little slow and it's a lot of character building. But it's just a mini series. And Jeff Daniels plays the bad guy. And he's kind of the bad guy with a conscience who has a group of ruffians follow him around. And of course, the whole buildup is to the shootout at the end. end. Like you can tell that's where it's headed. And the last episode was just amazing. Like the shootout

scene, I'm not a huge Western fan, but I thought it was a really good one. The other thing, so my wife and I finally went to the movie theater for the first time in years probably. Oh, what you said? Have you heard of this movie Annihilation with Nelly Portman? Oh, I really wanted to see that. Okay, so we wanted to see that because it was the same writer-director who did X Machina. Yes. Have you seen that one? Which I think is probably one of the best movies of the decade. I loved that movie. We actually rewatched it after we saw Annihilation because we wanted to see it again. and that it aged well you've mostly only a few years old

but annihilation was good a little like mind trippy not worth seeing in the theater because they they didn't stick the landing on the ending so it was an interesting one and it was kind of like this alien stuff going on

and it was good buildup and then like the last 20 minutes I won't spoil it for anyone because it's kind of a twist ending but I thought the ending they didn't do right but it was still interesting and worth a rough you know I'm a sucker for aliens

oh me too anything sci-fi I'm in yeah so that stuff Yeah, so that's why we wanted to see it. So it was pretty good, but good, but not great. Okay. All right. Well, thank you, everybody for listening. We will see you next week.