Animal Spirits Podcast - Hedge Fund Myths & Casual Investing Advice (EP.11)

Episode Date: January 3, 2018

On today's show, we discuss what to do if you've been sitting in cash during the bull market, go through Ben's latest portfolio changes, do some myth-busting about hedge funds and 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 Batnik. I can say that I was never driven by money. So you were trading three times leveraged ETFs for the love of the game. Exactly, man. I'm a purist. But anyway, and Ben Carlson.

This is true. I do not drink coffee. I've never been on Facebook. I've never done fantasy football. Oh, one last thing. Michael Batnick 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 Rithold'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 have a very special guest, Satoshi Nakamoto. He's not actually on the show, but he's always with us.

So we're going to start out the show today with a question that came in from a reader. and that is, in light of young investors hoping for a crash, referring to a piece that I wrote a week ago, which we'll link to, I wonder how you would respond to someone who has been on the sidelines for some years out of necessity coming to you for advice. Whether this person is a friend or a client, would you be comfortable telling them not to wait any longer and get in? And how does this person's time horizon affect how you approach your answer? This is a good one. And I feel like probably once every three months since I started blogging, which would be, I don't know, early 2013. I get a question from someone like this saying, hey, I've been in cash. What should I do? Should I dollar cost average into the market? Should I put it all in? And as usual, anytime you're talking about these types of situations, the answer is it depends, obviously. But there is no right or wrong answer. The simple market dynamics would tell you that three out of every four years stocks are up. So historically, you'd always be better off just putting it all in. But that completely misses the point of human behavior.

regret and all these other things. So there really is no easy solution here. But what do you say if someone asks you this question? Oh, this is a tough one. I would run the other direction. I hate these type of conversations because people are looking for a silver bullet. And in this situation where he was on the sidelines for some years out of necessity, I guess that's a special situation. But if you were not on the sidelines out of necessity and you were on the sidelines because of the Cape ratio or whatever fears you had about the market, that is a conversation that I would absolutely hate to engage in because I hate giving casual investing advice. It's one thing to talk to a client about this, you know, to dedicate a few hours behind

our strategy and why we do what we do, but to just give like a 30 second soundbite for why somebody should put all their money to the stock market or into a portfolio, not just stocks, obviously. It's just a shitty conversation to have that I don't enjoy. The way that I approach is always like, you know, investing is inherently a form of regret minimization. So what is going to make you feel worse? If you put all your money in today and the market crashes tomorrow, or if you slowly put it in dribs and drabs over months or quarters or years or whatever it is, and the market continues to rise. So figure out which one of those or maybe put half of it in now and do half of it dollar cost averaging. Again, there's no

right or wrong answer, but the thing is just to have a plan of attack and what you're going to do because no matter what happens, you're going to regret something and you're never going to perfectly time it. So get that out of your mind from the get-go. And we've spoken about this a lot, the problem with these all-in or all-out decisions, if you were all-out because you thought Trump was going to crash the market, or you thought stocks are too expensive, or you thought that we were overdue for a pullback or whatever the hell you thought, imagine watching 2017 play out, there was not even a 3% correction, no opportunity to get in at lower prices, and the market went up 20%. Right. The whole, I'm going to wait for a 5 or 10%.

pullback sounds great until we have a 2017 or 2013 where it doesn't happen. And if you can't buy on the way up, what makes you think that you're going to be able to buy on the way down? Right. I totally am of the mind of rules-based. I'm going to put it in the 15th of every month or whatever it is. And you can allow yourself some flexibility to say, if the market does fall 10 or 20 percent, sure, put a little more in if you want.

But I think you have to make it rules-based to take the decision out of your own hands. Yeah. But let's just say that you are waiting for a 20% pullback. and you said, I will not invest until stocks fall 20% from their highs. What if we go four years without that happening? That now will leave you damaged emotionally and psychologically for the rest of your career,

you're investing in lifetime. You will never get market returns. Yeah, it's tough. And so in full transparency on this podcast, since we're sort of putting it all up there and we've talked about our own portfolios before. So I made a portfolio change this year in the last week or so to my portfolio.

And I think that there's, you know, I'm making numbers up here, but there's a 30 to 40% chance here that I think we could see a huge melt-up in stocks. I don't think that's the – I don't think investors want that. I don't think we want to see another bubble. Some would say we're already in one. I don't really agree with that quite yet. I think if anything, investors have just been forced into bidding stocks up. But I think there's a slim possibility that we could see a huge melt-up. And so from my personal portfolio, I put more money into our trend following approach that we have. And part of the reason for this is, is again, it takes those decisions out of my hands.

And it's a rules-based formulaic approach to following markets if they go up and then trying to go into bonds when the uptrend is broken. And I've kind of come around on this idea about trend following. I was always this more of a buy-in-holder, bogelhead type investor when I first started. And so earlier this year I wrote a piece called My Evolution. an asset allocation. And it's probably by far the most email readers I've gotten. Yeah, you got a lot of shit for that one. Yeah, well, some people said, hey, it's great. And some people said, you know, what are you doing? This is, this is antithetical to long-term investing. And I think

it's really hard for investors to carry two competing ideas in their mind. So my portfolio has a piece of strategic asset allocation and a piece of tactical asset allocation. And so, you know, you're one of the people that really sort of educated me on this. So I don't, in the most general terms, explain what trend following is and sort of why it, quote unquote, works. So the simplest way that we think about this is that rising prices attracts buyers and falling prices attract sellers. And it's really that simple. And I don't really care how you measure the trend if you're using something like a moving average, whether it's daily, weekly, or monthly, or whatever you're using, or if you're using, or stocks higher than they were last month,

or stocks higher than they were relative to bonds last month, whatever you're using, as long as it's a rules-based system, even if it's not, quote, unquote, optimized or the best, you know, system out there, I think it's really important to have an emotional release valve, even if we don't think that this will outperform a buy-and-hold approach over the long-term, because if you can't arrive at long-term returns because there's a 60% decline in the middle, then who really cares what long-term returns are? So what we're trying to do is acknowledge the limitations that we have as human beings and understand that yes, if you buy and hold, you're going to do better than pretty much everybody else. And the reason for that is because buying and holding is really, really, really

difficult. Yeah. The thing that I like about it, that behavior release at all, but also it kind of diversifies you across market environments is something that I, you know, so we've had pretty much a straight up rise for the past five or six years. There's no way that's going to continue forever. And that doesn't mean that volatility has to rear its ugly head, you know, immediately just because we had such an easy year. But I know eventually it'll come back. It's, you know, these things are cyclical, even though the cycles can last longer than most people think. So that's part of what I'm trying to do is not only the behavioral thing and keep me invested, but diversify across different strategies as well and not have all that, all my eggs in that one basket of just a simple

strategic. Yeah, I think that you and I have read enough about market history and how people have responded to panics, that we're not delusional to say that we're different. I doubt that I can watch. If I was 100% invested in the stock market, I just don't think that I would be able to sit through a 50% decline. And part of it is, too, where you are and your investing life cycle, like I said before, you know, I thought it was actually relatively easy for me to keep investing during the crisis. But now that I have a much larger portfolio, I like the idea of having some protection and decreasing some volatility in my portfolio and having some sort of backstop. And I think that that's something that we've talked about for older employees.

investors as well. It's much easier to sit through a bear market when you're younger. But when you're an older investor and you're retired and you're not sure when exactly that bear market is going to end, having this not only behavioral release valve, but market release valve that can protect some of your capital, that's a huge benefit. To go back to the readers question, there's so much that goes on to answering these questions in terms of ability, willingness to take risk, cash flows, things like that. And then just client education is a really long. process. We go through a lot of calls, a lot of back and forth, making sure that they fully understand what we're trying to do. So to just give somebody, you know, 30 second advice, like it just,

it just doesn't work. I'm really, I'm really low to have those conversations. And the big piece about our trend following approach that we use, it's the biggest part of it is setting expectations. And so, so there's a lot of people out there who claim to have the silver bullet for you that I'm going to sidestep the next fair market and I'll get you back into the bottom. That just doesn't work. So it's really about setting expectations of here's when this does quote-unquote work and here's when it doesn't. Now, can we live with when it doesn't and pay those whatever insurance premiums that we have to pay along the way? So yeah, so that expectation setting is a big part of it.

So anytime that anyone tells you that they have the perfect solution, it doesn't exist. When we were looking at this, this is where the phrase that I always joke about came from, the worst 10-year performance for any back-test is the next 10 years. And the reason why I said that is because our back tested strategy has ridiculously amazing returns looking backwards, but we're very careful not to just show that, but to show people the actual monthly returns because there are months when this thing just gets destroyed. So it's easy to look at a 20-year track record and say, I want all of that. But when you look under the hood, there's no free lunch. And with this strategy, that's certainly the case. And I think the reason that a trend-felling approach hasn't really taken on as much as some other approaches is because value investing is very easy to understand. It's pretty intuitive by a dollar for 50 cents. But momentum is harder for people to understand because it's admitting it's pretty much all behavioral. We're telling somebody to buy stocks because everybody else is and to sell because everybody else's. Right. It's like the Isaac Newton, an object in motion stays in motion

until it doesn't. So that's kind of the idea behind momentum. And for me, that style of investing never came intuitively and I had to really coach myself and learn and again get over my own cognitive dissonance of having two competing strategies in my portfolio at the same time that could offset one another and complement each other and that's the whole point of it I think it's great to diversify not just across asset classes but across strategies as well so I think that's enough that's enough for a commercial for us so let's talk about a piece that that was floating around this week that Jason Zweig wrote yeah and if by the way if we go into a bear market from here this, we can use this as our timestamp. So Zweig actually wrote this piece. I think it was an old

speech he gave that he updated on his website. And he talked about the market crash of 1973, 74, which is one that a lot of people don't pay much attention to. And you wrote a really long piece on this last year, I think, about how it's kind of the bare market that no one ever talks about. So why don't you tell a little bit about what happened then? And the speech, Jason, said that since the beginning of 1973, the Dow had lost 44% of its value, as badly as it had done in the first 14 months of the Great Depression, and that was through October. And one of the really horrific things about this bear market was that this cyclical bear market was in the context of a much larger bear market.

So stocks had peaked in 1966, and then they had a crash. They had a bear market in 1969 when the go-go stocks crashed, and then the market roared right back, and it came back through something called the one-decision stocks. So it wasn't any of these high flyers anymore. It was companies like General Electric and IBM and stocks that you couldn't pay too high a multiple for, and Disney and Xerox, and they were trading at 70 and 80 times earnings, McDonald's, companies like this, and then there was a wicked crash that also came with inflation. Roger Lohenstein said, I think this was in the Buffett book, but I don't remember exactly.

He said, quote, the market collapse of 1973, 74 has been oddly ignored in the annals of investing, yet it was truly epical and on par with the 1930s. So some of the statistics that I pulled when I wrote a piece called the Worst Bear Market that nobody talks about. So if you look at a chart of 1973 alone, there was 11 separate bounces of at least 5%, which is just brutal. It's like pouring salt on the wound because false hope is just psychologically devastating. And I found a piece, a quote from the New York Times, here we go, quote, the broker took a sip of cold coffee and grunted. You know the trouble with this market, he said, the persisting grinding away of prices.

Every time you think it's going to improve, you raise your head and then get it handed back to. to you on a platter. This is why I think that actually like a quick, huge crash is much easier to stomach than this sort of drawn out, because this happened over a number of years. And like you said, inflation was the big, so Zweig said, you know, in the 10 years ended 1974, stocks earned like 1.2% annually. And that was when they were earning 4% or 5% dividend yields, I think. But after inflation and taxes and expenses, you probably lost 4% or 5%, which is just, you know, over 10 years. Yeah, so he was comparing 74 to 99, and it was obviously very prescient, and it was just the inverse of what was going on.

So in 1974, at the bottom, the Cape ratio was down to 8.3, which was as low as it had been since 1942. And it's just funny how some people want to invest at lower valuations, but they're really just fooling themselves because at lower valuations, nobody wants to invest, and that's the whole point. Stocks get cheap because nobody wants them. And to delude yourself, to think that you're going to be the one that stands out, raises their hand, and says, that's it, I'm buying.

and I'm buying in size, it's just totally psychotic and self-delusional, in my opinion. What was the reason that this 70s bear market was so overlooked? Because there just wasn't this seminal moment, like the dot-com bubble or the real estate bubble, like, why was this one so overlooked? I think because it often gets lumped in in the 66 to 82 secular bear market, there wasn't a single, you know, down 15% day. And it wasn't marked by, you know, a 300 multiple on 100 different stocks. So, yeah, McDonald's and Xerox and Disney were trading at 70 times earnings, and there wasn't

like one thing that burst in the bubble. It was just a persistent grinding of higher consumer prices and lower asset prices, which is pretty much as bad as it gets. Right, which, again, is probably why it was so tough. And that's why this led up to that death of equities piece in magazine cover from Business week where people basically gave up on stocks, you know, by the end of this thing, which was five or six years later. Yep.

All right, so John Reckenthaler over at Morningstar has a really interesting article up called Have Stock Investors Become Smarter? And in the PCS, what happens to the volatility and points to something that Matt Levine said that it has been transferred to Bitcoin? And then Reckenthaler argues that it's because economic volatility has actually ground to a halt. And I think he had a really interesting line in there. Quote, it is certainly true that a greater proportion of institutional assets is invested passively, such that those funds portfolio managers will not be tempted to sell into a declining

stock market so that they can outperform the bear. However, it would be rash to claim that institutional investors were once prone to hurt behavior using trading rules that led to unanticipated ripple effects, but now these problems have been solved, end quote. What say you? Yeah, it is interesting. A lot of people are trying to figure out, like, what is causing this low volatility. I'm sure it's just a number of factors no one really knows, but it is kind of interesting to put it with the economic dichotomy because, you know, they always, people always say, especially over the short-term intermediate term, the stock market is not the economy, but it seems like both are very low, you know, there's no volatility in either of these days. But yeah, I agree.

I think these things just ebb and flow and volatility probably got too high in 2008 and early 2009, and now it's gone back the other way. And we had this low volatility period in the mid-2000s as well, so it's not like it's that out of the ordinary. I think these things just, they happen and people extrapolate and volatility is gone until it isn't basically. Yeah, I don't really have a good, answer for this? Like, why are stocks not going anywhere? I have no idea. Yeah, I don't know. I think people just extrapolate what's recently happened and it just sort of slowly grinds and grinds and then something happens or nothing happens and people just decide they're looking for a reason to sell or panic and the uptrend is broken. But yeah, I wouldn't be able to come up with a good reason for this.

This is his reasoning for it is as good as any, but again, I agree with his conclusion that I don't think investor behavior has completely changed and things are all rosy because, you know, like you said, when markets are going up, it attracts buyers and markets going down, it attracts sellers. And I don't think that has changed at all. Yeah. And when somebody screams fire in a crowded theater and people run for the exits, I don't think that that's, I don't think that part of the market has been eliminated. I mean, state the obvious. So you shared an article with me this week that's near and dear to my heart.

And it talks about our hedge funds dying. And it was this piece by Stephen and company, which is a company I'm not familiar with, an asset manager, I guess. But they're making the case that people who are really down in hedge funds and saying the hedge fund industry is over and have gone a little overboard. And I completely agree. I have had a number of years of experience in the institutional world in the hedge fund space. And I see these articles all the time about hedge funds are dying because their performance has been so poor. But the way institutional investors allocate capital,

and these are huge funds that control trillions of dollars, you know, they're not listening to these headlines. They're continuing to put poor money into hedge funds, and they have been for years. I mean, there's still well over $3 trillion in hedge funds. So it's kind of like the active management is dying thing, even though there's $15 trillion there or something. It's, it just makes for great headlines and, you know, it doesn't really add up. So that, I think what really got it going in terms of headline news was when CalPERS said that they were eliminating their position in hedge funds, but didn't they have less and 1% of their portfolio invested in hedge funds anyway?

It was a tiny. I can't remember exactly what it was, but it was tiny. And yeah, Kelpers, people assume that Kelpers is the BL Endaw and institutional asset management world, but they're just the biggest pension fund in the country. You know, the endowments and foundations really control, I think, how most institutions invest. And if anything, those... Wait, what do you mean by that?

So, people assume that the pension... There's kind of this hierarchy. It's like a high school click in terms of institutional asset managers. and in one click there's pension funds and the other one there's these endowments and foundations and the endowments and foundations world definitely kind of sticks their nose up at the pensions which is kind of funny.

So they're the mean girls? Yes, definitely. They think they're the smartest people in the room and they think pensions only end up copying them. It's kind of funny. And in some ways it's kind of true but there obviously are some forward-thinking pensions and there's definitely a huge herd mentality

in the endowment space these days as everyone tries to copy Yale and to lesser extent Harvard. So, you know, and those endowments and foundations have continued to put money into hedge funds. And one of the reasons they have to is because of this career risk that it takes so long for these funds to make a decision because they have to go through their investment committee and their board members and get it signed off on. And so it took these institutional allocators a long time to convince these people that they needed to be in hedge funds. and then now the hedge fund performance has been so poor they can't just say all right we're bailing because that looks like they made the complete wrong decision and so it's often like turning a

battleship for these for these you know funds that when they make a decision it takes them a long time to reverse it and so they're kind of stuck in these hedge fund allocations for a while i think i don't think it's going to be turning you know as much as people think well there's a really good chart that this that this study referenced and it appears to be that the rush for the exits is not really much of a rush at all because there's a chart showing the average current allocation of endowment plans to hedge funds. And it's been really, really steady at between 18 and 19 percent for the last five years. Yeah. And the thing is, no one wants to get out of hedge funds during a bull market because it's that Murphy's law of what can go wrong will. So they assume

once they get out of hedge funds, then the market will crash and then they could have used them. So they don't want to be seen fighting that last war and then going all in on no law. long-only strategies. So, yeah, I don't think that the hedge fund community has that much to worry about. It's just basically the poor performers. And, you know, those are the ones where the money's going to flow out of. But there will always be new ones popping up and ones with good track records where that money will flow to. So obviously there's a little, there's a million different types of strategies. So what would you say, what do you think when people compare hedge funds to the S&P 500? Well, it obviously makes no sense, but it's kind of funny because when the hedge fund

world is underperforming, they say, wait, why are you comparing us to the S&P? This is ridiculous. And then when they're outperforming, they say, hey, look how great we're doing compared to the S&P. And it's kind of this thing where I think the investors in these funds, they're the ones who push for this type of, because there's no perfect way to benchmark a hedge fund. Because there's no good indexes. Most of the time, these indexes are full of funds that self-report, and there's huge survivor bias in these things, and there's self-reporting bias, and some of the worst funds drop out of it. And so there's no good bogey for these things. So it's hard for them to come up with something. Should they look at bonds or they look at

stocks? So they look at a mix of them. And the hard part about that is most of the institutions invested in these things don't know what they're invested or why. Well, do the managers provide a valid benchmark? Not really because, again, there aren't many. And so they provide most of them in their quarterly letters, they provide like four different things. They'll provide the S&P 500 or the world stock market, the MSCI world, or they'll provide like a 6040 portfolio or just bonds. Yeah, and then they have these HFRI indexes where there's a million of them now where they have them by different type or by the overall. And again, these, they're, they're not very good and they're not very representative. But the good thing for the hedgeman community is that it's kind of an easy hurdle to jump over because these things are so bad and littered with, you know, poor performing funds that it should be relatively easy to beat it.

But it's not like these benchmarks are investable. So it's not a very, you know, if we look at our CFA Institute benchmark guidelines, it probably should be investable and these most certainly are not. So it's kind of a tough place for them to be. It's like what do they compare themselves to? And that's part of the reason why knowing what you're getting into in these funds is so important. And I think that's why a lot of investors don't have to do with them because they really don't know why they're in the first place. So what do you make of the long short space specifically becoming increasingly difficult to earn their returns? Well, that's kind of where the Hedgeman community got it started

is in Long Short, and that's where a lot of people went to, because, you know, we can go along the best performing socks and short, the worst performing ones, and we're going to do much better. I just extract the pure alpha. Yeah, of course, pure alpha. And then they all do the same thing now. And it's definitely, there was a chart by Bloomberg a few weeks ago where it showed that Long Short is not nearly as large of a piece in the hedge of community as it was. And so it used to be, you know, more than half of the assets now.

It's like a third, but it's still probably where the most well-known investors. are in that space. But now there's all these other different kind of funds, macro investing funds and trend following and statistical arbitrage and distressed. And there must be 10 different categories for hedge funds now, which makes it hard to lump them together because they're also different. But the long short ones, I think, are probably the easiest way to compare to the S&P, or probably should because they're looking to, you know, gain some sort of market exposure. But I guess it really depends on, you know, how much they're willing to give. But that's kind of the space that a lot of them got into initially. And those funds have had such a hard time

because any fundamental shorting for the last seven or eight years has not gone well. So they've had a rough time. And the other reason the hedge funds have had so much trouble is because people don't realize in the past, when you short a, when you short a security, you get cash back. And in the past, they could take that cash and invest it in a money market and earn three to five percent. Well, now you're earning nothing basically on that. So you used to have that little buffer of cash that would actually earn something for you, and now you don't. So, yeah, the hedge fund space, I think, has a lot of headwinds still. Yeah, and even if they were long only, the 2 and 20 fee structure is just so hard to overcome.

Yes. So the S&P 500 total return this year to 22%. And if you slap 2 and 20 on that, then that knocks it down to 16%. And to reach the mark of a 22% net of fee returns, a hedge fund charging 2 and 20 would have to have gained 31%. All right. It's such a huge bogey to get over

right from the start. Just to, like you said, just to match the market if that's what you're trying to do. And so I always reference this quote from Ray Dalio from Bridgewater from a few years ago, but he said, you know,

there's, he compared hedge funds to pilots. He said there's 8,000 planes in the air, but 100 really great pilots. And that's probably a good way to think about hedge funds is that there are some really good ones, but there's a bunch of mediocre ones who are not going to do very much for you.

And unless you can get in those really good ones, you're going to be sorry for. your performance in these things. Yeah, that's a really good way to think about it. Morgan Housel said a year or two ago that there were more hedge funds than Taco Bells. That's good. They both give you indigestion.

Ho! Okay. Moving away from bad jokes and hedge funds and into bond funds. So this is a topic that gets discussed all the time about whether you should hold individual bonds or bond funds. And I think there's a lot of misunderstanding out there. And Vanguard has a really good way to think about it, something that I had not thought of. So here's a really valid point for why somebody would hold individual bonds.

They write, quote, a portfolio of individual taxable bonds can be tailored for very specific objectives in which an investor has complete control over the selection of specific bonds or types of bonds. The benefit of control is most apparent in situations where an investor wishes to match the maturity and face value of a bond with a known future liability. end quote. Most investors are not doing this. Most investors are holding individual bonds because they think that if they are holding the individual bonds when rates rise and they could hold them to maturity and get their money back, not understanding that bond funds can do the exact same

thing. And so Vanguard has a really good way of explaining why that thinking is sort of bunk. And what they did was invert it. So if holding individual bonds protects you better than bond funds when rates rise, well, then shouldn't it? stand to reason that holding individual bonds when rates fall is better than holding bond funds, and that is not the case. I'm sorry, that's a mathful, but let me just quote Van Gogh one more time here. The hold to maturity myth typically surfaces only when interest rates rise. Reversing the expectations may underscore the flaw in the myth. When interest rates fall, an existing individual bond can be sold at a premium, which would lock in the gain in principle. On the other hand,

holding the bond to maturity would bring the investor only to par value with no gain in principle, But selling the bonds specifically to get the premium has no economic benefit because the investor will be reinvesting their proceeds in lower coupon bonds, which leaves him or her with the same yield to maturity in either case, end quote, boom. What do you think? Yeah, this is another one of those concepts that people have a really strong opinion on, which is kind of crazy. So I wrote about this a couple years ago about some misconceptions about individual bonds and bond funds. And I got so much email from people on this that were hardcore one way or the other. And the thing is, if you own a bond fund, you just own a portfolio of individual bonds. It's the same thing. It's just in a different structure.

And so I agree with you. If you're holding those to maturity and using them for a specific reason, if you are going to pay for your kid's college fund in five years and you own a five-year bond so you know that money in principle will be there then, that makes sense. And I think a lot of the people that really worry about this and want to hold individual bonds are retirees who want to make sure that their money is going to be there. But yeah, there really isn't a huge difference between. to, and you can't really ever completely get rid of risk in these things. It always just

shifts a little bit. So the difference between a bond fund and individual bonds, you could change your risk profile a little bit, but you could also increase your complexity by trying to hold individual bonds. So at the end of the day, it's probably not going to make a huge difference on your returns. And again, it's maybe another psychological component to investing. I mean, not to mention the obvious cost involved in just buying individual bonds. Yeah, it's much harder to do in trading in, yeah, trading in bonds is not as easy as trading in stocks and you can incur much bigger fees from the spreads you pay. And so it really comes down to knowing what you own and why you own it. And it's harder to diversify an individual bonds

than just simply buying a cheap bond fund to doing it yourself. So there are certain instances, of course, where it makes sense. But people who think that there's a huge difference between the two, it really is not the case. Yeah, maybe I would grant the fact that it might be a psychological crutch because you could see the individual bond. So perhaps there's something to that. And then another risk to bond funds potentially is if there are a lot of redemptions all at once, and then the manager has to sell a lot of the bonds and maybe push down the value. And I can't prove this, but I feel like bond fund flows are much less susceptible to poor performance. In other words, if bonds get crushed and they fall 3% or 4% in a month, it's not as if investors are going to run for

the exits like they would in the stock funds. Right. Yeah. It's just a hunch that I don't really have data on. But speaking of flows, Urban Carmel tweeted this from sentiment trader, and this was really surprising. Last two weeks, and I guess this was on December 22nd, last two weeks, largest outflow from equity funds on record, August 2011, only one that is close. And that is mutual fund flows with ETFs. That really shocked the hell out of me. So I asked Urban, what did he make of that? And he pointed me to a piece that said, quote, domestic equity ETFs and mutual funds have had outflows for eight months in a row. And that is not the typical behavior of indiscriminate bulls.

I mean, obviously, end quote. I wonder how much of this, and I wonder maybe this in the future, obviously, this is a big mountain. If you look at the chart, you can see a huge drop there. But I wonder how much of this, say, over the next 10 or 15 or 20 years, is going to be driven by baby boomers who need money to take it out of the market. And how long will it take millennials to overcome that and sort of be the other wave on the other side. So, so maybe this is something that will be a secular thing where we're going

to have a ton of outflows from equities for years to come. I don't know the answer to that. So, okay, so obviously the dollars invested in baby boomers 401Ks has to dwarf that of millennials. However, aren't millennials now the biggest piece of the population? Right, but they still don't, they haven't hit really their peak earning years. That's going to come. So that's what I'm saying. It might be some time until they have put enough money in. to really stem that outflow of baby boomers who are taking their money out. Not really having thought this through. I would suspect that the baton will pass nicely from boomers to millennials without a

crash coming because boomers are ripping their money out of the market. And by the way, it's not going to be baby boomers taking all their money out. It's going to be a very slow, deliberate, systematic withdrawal. This is another question I get all the time, and I've written about it probably two or three times now, is people think that the baby boomers retiring are going to, kill the stock market. But the problem with that is that the wealth is so concentrated in the hands of a few in this country that most of those people aren't going to even have to sell their stocks. So they're going to, they're holding this money for the next generation. So yeah,

I don't adhere to that idea that baby boomers are going to crush the stock market when they retire. And the thing is, and maybe I'm wrong about this flow thing because people are so, the majority of people are so underprepared for retirement, I think they're going to need to put more money in stocks to make up for it and try to sort of shoot the moon and make their money by taking more risks since they didn't save enough. Yeah, we've said that a lot. I wonder if that's just like that makes sense that people are going to need to take more risk in the stock market, but they're probably not going to. Yeah, or their risk will be taken at the inopportune times and they'll switch back and forth. And yeah, it's hard to say, but yeah, I definitely don't buy the thing that

the baby boomers are going to crush the market. But this is pretty interesting, like you said, it's not like money is just flowing into the stock market and people are showing euphoric behavior. Again, this is why I think maybe that melt-up situation I talked about earlier is going to be harder to come by. I just don't think people want to see another gigantic bubble. But it's going to? It's pot. I think I'm putting a 33% chance on a huge melt-up in the next five years. I pulled that number out. I don't know. But I just don't think people want it again. They're still too scarred from the prior ones. And that's why I think that this is the least

fun bull market in history because people just don't want it again. Yeah, so reading any good books or watching anything interesting? So we are three-quarters of the way through the second season of the Crown on Netflix. How is it? I think it's amazing. They've obviously spent a ton of money on this thing. It's a historical account of when Queen Elizabeth took over in the 1950s from her father who passed away.

and I'm not this huge historian on the royal family. So a lot of it is kind of new to me. And so I think it's probably an acquired taste because it is a little slow, but I think that it is excellent. It's really well-acted. And even though it's not like a thriller, they add some suspense in it. And it's sort of this historical drama that I think is well worth watching.

Any 2018 shows you're looking forward to? I don't know. I don't think that far ahead because I have three kids. So my TV consumption has been in a huge bear market lately. So how about you? No, my TV has been dry as well. Any good books lately? Yes, I'm reading The Prize by Daniel Yerging, the epic quest of for oil, money, and power.

And I'm surprised that I haven't seen this more because it's freaking awesome. It's a giant book, so maybe that's why I only just started. But so far, it's really, really good. It starts out with a lot about where they found oil in Pennsylvania and a lot about Rockefeller and the Samuel family and Shell and everything like that. It's just it's really, really good. Definitely put that on your list. Cool. Okay, that should probably do it for today's show. If you want to see the show notes, check us out. Go to my website. Check us out. Check us at wealth of common sense.com or Michael is at irrelevant investor.com. We both put show notes and links to

everything we talk about. You can email us at Animal Spiritspod at gmail.com and happy new year. Thank you.