Animal Spirits Podcast - Horizontal Support (EP.22)

Episode Date: March 28, 2018

Why investing is getting harder over time, why share buybacks get a bad rap, why life insurance is on the decline, two centuries of momentum and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, the podcast that takes a completely different look at markets and investing. 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. Just want to give a quick shout out to the great Jim Carrey who sold all of his Facebook stock on February 6th about 20 something percent ago. Way to go, Jim. Hats off to you. He actually might need some of those proceeds because his artwork isn't quite up to par to his stock picking skills. Did you see the picture of Mark Zuckerberg he painted? Yeah, it's not great. It looks like the little fat kid from the sandlot. Yeah. Anyway. Anywho. So investing used to be a lot easier. This is, I think it's probably easier in some ways and much harder in other ways. And so there was a tweet going around by R.O.I. Christie is her handle. And she's an institutional investor. Good follow Twitter. And she had a graph she put up that said a little food for thought. But in 1995, institutions could hit a 7.5% return target with 100% bonds, which was roughly 4% volatility. And the idea there is that you could get 7 to 8% in government bonds back in the mid-90s, which seems crazy today.

Yeah, during that decade, five-year treasury notes did 7.2% a year with 4.35% standard deviation. So basically what she said. So I wonder how many institutions actually did that. they would lock up. I'm sure, I'm sure very few. Yeah, very few. I'm sure that. Because stocks were, stocks were giving you, what, 13, 14% a year? Right, which, I mean, it's easy to look at that in hindsight and say, how easy was that to invest in? But when you have stocks tempting you to go into them. And so that's when a lot of these institutions, a lot of the studies show in the late 90s, they made a huge push into stocks and lightened up on bonds at pretty much the

wrong time, especially pension plans. I have a little bit of that in a couple of my books. Which is funny because right now, we're thinking like seven and a half percent unexpected return seems like insane, which is why they're making all this push into private equity and things like this, where just 25 years ago they could have gotten 7% just by parking into government bonds. Pretty nuts. Yeah. And so the idea here is that today, the hard part about investing is that you basically have to learn to accept some volatility if you're going to earn anything above the inflation rate. Or follow Jim Carrey. Or follow Action Alerts Plus Jim Carrey. So, I mean, the idea is, as investors, you basically have to

understand not only how volatility works in the market, but when it makes sense to take those risks and volatility and which ones pay better than others, which obviously is the hard part, I think, here, especially for institutions that have these bogies to hit, which we've talked about in the past is going to be really, really tough for a lot of them to meet their expected returns. And I think the biggest maybe unintended consequence of these days where we have low interest rates and higher than average valuations in U.S. markets is I think there's going to be more, I think it opens the door for more like fraud and deception and over promises from people in the financial services industry. Because a lot of people are going to want to hear,

they're not going to want to hear what they have to hear. They're going to hear what they want to hear. I don't know how Janet yelled and sleeps at night. Well, she's gone. It doesn't matter to her anymore. She's going to be getting paid a million dollars to give a speech, right? Something like that. True. It's the new Powell guy. So there's been a lot of talk lately on buybacks. Are they good? Are they bad, are they evil? And one thing that might be missing from the conversation was some good solid empirical data, which was brought to us by our friends at Alpha Architect. Jack Vogel wrote a really good piece. So just taking a step back, what companies can do. And I guess if the thinking is that buybacks are bad, well, then what else are they supposed to do with their excess capital?

They can reinvest it in the business and be uber successful like Amazon has done. But what does the data say, and the data says that over the past 40 years, low asset growth stocks have maintained a return premium of 20% per year over high asset growth stocks. So companies that have plowed a lot of money back into the business, just in terms of like investing in a basket of these stocks, that would not be a good investment strategy. By the way, before getting into this, I think Alpha Architect does a service to people like us who don't like reading through 30 and 40 page academic research. Basically the way that my mind works on this is I read the introduction.

And then I skim. More conclusion people. I always control F conclusion and then read the conclusion. So the fact that they go through and so if you're not following those guys, it's definitely worth it. They go through and they really summarize a lot of these academic papers and make them a little easy to understand. And this was actually kind of a new one to me.

So the idea is a lot of people would rather see companies invest in assets or research in development or investing for the future, a laught someone like Amazon and assume that that would make them better off and that would thus make their shareholders better off. But Jack is showing here, that's not the case. On average, firms who invest a higher proportion of their capital actually underperform firms who invest a lower proportion of their capital, which wouldn't seem to make sense. But the other way, if you flip it on its head, the way that I think about this, and I just wrote a piece for Bloomberg about this, it should be out probably by the time this podcast leaks, is, if you think about it.

It leaks. Well, that's not a, what, that's not a hip enough phrase? Drops. Drops. Okay. Sorry, yo. So the basic idea that I have, especially for larger cap firms, the stock market is a high bogey to beat.

So if you're trying to beat 6, 7, 8, 9, 10%, whatever it is, as a return target, which would be what you'd get from the buybacks, hopefully, that's a tough hurdle to hit when you're trying to invest internally. and a lot of larger firms might not be able to invest that successfully in their own property, plant, equipment, research, development, whatever. Jack dug through a paper that showed the return of an equal weighted portfolio of low growth versus high growth, and high growth, meaning that they plow a lot of the money back into R&D and things like this.

And the low growth baskets, on average, did 26% versus high growth, which did 4%. So Amazon is the exception. I mean, there's a lot of companies like one of the examples that, you know, one of the examples that Jack gave was General Motors. And they said that GM spent $67 billion while ending with an equity valuation of $26 billion. And I think this was in the 80s. We'll put this in the show notes.

To put that into context, the equity value of Toyota and Honda combined was $21.5 billion in 1985, meaning that GM could have bought Toyota and Honda and would still have $40 billion to spend. Wow. I wonder what the returns for GM would have been in the 80s if they hadn't bought all the shares back.

Obviously, there's no counter examples or other timelines we can go down, but that's pretty interesting. My impetus for writing my piece was the fact that there was actually Democrats were trying to put a bill in place to ban buybacks, which seems odd because in my mind, buybacks and dividends are almost interchangeable from an economic perspective. And our friend Jake, the pseudonymous blogger at Economic, wrote a great explainer about this. I won't try to go through this whole piece, so we'll link to it.

in the show notes, which you can find at either of our websites. And he kind of goes to show that stock buybacks and dividends are more or less the same thing. So if you just replaced buybacks with dividends and all the headlines that show how buybacks are so horrible, it might change the way you frame this discussion. Yeah, I think, I mean, yes, I agree. And there is a ton of nuance there that we'll get into in a second. But Ed Borgado had an interesting take on this. So he said dividends and buybacks are not the same thing. Taking a distribution from your business is a fundamentally different economic calculation than using excess cash to buy out some of your partners. And I would say maybe it's not a different economic calculation. Maybe it's a different

psychological calculation. But he ends with calling buybacks, returning cash to shareholders, conflates capital allocation choices. True. It kind of changes the choice from company management to the end investor. And I guess the great thing about dividends is that the end investor actually has a choice of what to do with that cash flow. And I think a lot of people like that intrinsic hard cash flow in their pockets to be able to show that businesses actually have it on hand. And so the other data I dug out was from Michael Mobison when he was at Credit Suisse, and he showed capital deployment across all different capital allocation decisions from companies going back to 1980. And the interesting thing to me was, first of all, M&A activity,

mergers and acquisitions, dwarf both buybacks and dividends by a large amount. The other thing was M&A and buybacks are both very cyclical. The volatility of the numbers from year to year were huge, whereas things like R&D and dividends are very stable in terms of how volatile they are and sort of very static and slowly rise. So I think that's part of the reason people have such a hard time wrapping their head around buybacks because they're cyclical. And so a lot of times when markets are high, companies are buying back more shares.

And when markets are low, they take their foot off the gas a little bit and buy back fewer shares, which doesn't make sense. sense in terms of thinking in terms of like a countercyclical investment strategy. Yeah, so that's probably why there's a negative stigma around them. This reminds me of the quote that is supposedly credited to Mark Twain, who knows if you said it or if you got it for somebody else, but a banker is a fellow who lends you his umbrella when the sun is shiny but wants it back the minute it begins to rain. That's kind of like what buybacks are. So it's sort of an eye roll when people think about them. But people think, you know, it's sort of the availability bias. You think about

companies that have brought back large amount of shares like IBM that have done them absolutely no good, but empirically looking at the data from Jack Vogel, well, the alternative is that they can plow that back into the business, but that's not a good strategy in the aggregate either. So a lot of interesting points in this discussion. Definitely not black and white. So there was a good piece this week, institutional investor magazine, basically on Whitney Tilson, who is a hedge fund manager who recently closed up his shop and closed up his fund. He had a hedge fund called Case Capital. And supposedly in the early 2000s, like a lot of hedge funds, he had a lot of success. And leading up to and following the crisis, hasn't had as much success. And it was a very

open and honest take about the travails of being a portfolio manager and not performing well for your clients. And this was, there was a lot of really good stuff in here. But it's kind of crazy how the biggest takeaway for me was how a lot of these hedge fund managers really try to show how they're sort of masters of the universe, but on the inside, they're all just freaking out about keeping up performance and keeping up the looks of being a huge financier. Yeah, it sounds absolutely exhausting. And I don't think that these guys take their responsibility lightly. I think like there's a lot of misconceptions. And of course this exists, but like these guys just driving Maserati's and Bentley's and sort of lounging on the beach.

but I think that these guys are, you know, at least the good ones, are just totally obsessed and consumed, and it takes over their life. One of the things that he said that I thought was really interesting, Tillerson's returns have been floundering since 2010. He says he trailed the SP 500, and in 2017 he had lost almost 9% on the year by the time he shut down his fund. Quote, in an ironic twist, I always built my friend to survive the worst storm, but it was a nine-year bull market, complacency, and sunshine that took me out, end quote.

that is a pretty, pretty honest of him. And a lot of the stuff he says is a different way of saying a lot of the stuff I heard from hedge funds. I remember back in 2010, 2011, the hedge funds that we'd talk to that either we invested in or were looking at the endowment fund I worked at, I mean, these guys back then were starting to freak out, like maybe the way that we did things in the past just doesn't work anymore. And maybe people, you know, a lot of it ended up getting blamed on the Fed and monetary policy, but I think a lot of it was the fact that some of these guys just have a hard time accepting that things have changed and the old fundamental way of doing things that

they used to just don't work anymore. And part of that I think is just because there's so much more competition now. And so the easy way of doing things back in the 80s and 90s when it was more of a wild west atmosphere, a lot of those things just don't work anymore, unfortunately. I wrote about this a week or two ago when Alfred Winslow Jones set up his hedge fund, I guess in the 40s or early 50s, all he would do was go long and a basket of cheap stocks and short a basket of expensive stocks and nobody else was doing it and he crushed it. And now long short is one of like, you know, the most sort of basic corners of the hedge fund world and it's just a really, really tough pont to swim in. Yeah, so there was another kind of along the same lines.

I've written a lot about hedge funds over the years. I kind of have a love, hate relationship there. But one of the crazy things about the hedge fund space is the fact that people assume, in that area that you get what you pay for. And it's a lot of that line of thinking pervades institutional investors, high net worth investors, family offices. They get this feeling that if they're paying higher fees and they have really rich managers, that they must be doing something better for them. So I was actually talking to a friend in the business this week who just started raising

fund for a new capital for a new fund. Hey, before we get to that, I just have a quick question that I don't think I ever asked you. Did you, were you guys invested in any funds that? absolutely crushed the market. We had, yes, we had a fund that was up probably 20% 2008. And the crazy thing about the fund was it wasn't like it was the greatest thing in the world to them that happened. The funny thing was, there were so many other funds doing terribly, they got used as the ATM

because so many of these big institution, endowments, foundations, pension plans were bleeding elsewhere and had to meet like private equity capital calls, that this fund that had done so well for their investors was not getting more money put in. They're having more money taken out to meet liquidity demands elsewhere. So they were like, they were like the bonds inadvertently. Yeah, a little bit. They were like the, they kept calling it. We were like the ATM for everyone and it made no sense. So all this money got taken out when things went well. And then of course, a few years later, people saw the track record and they poured a bunch of money in. And then, then of course, performance lagged. And so yeah, see how we saw. It's just the performance chase

is pervasive everywhere. It doesn't matter how big the fund, how small the fund, what type of investor. It's just, it's, it's, it's, it's really, really bizarre how it works, especially in this space. And the thing is, these funds are constantly fundraising. Like, they have people who that, I mean, that's their only job. And a lot of the people that I worked with, I'd see them at different funds over the years, because they would come in, it's like, it's like a sales job, like a sales temp job. Like, you have two to three years to fundraise, go through a rolydecks, pull everyone out you can and then it's like you hit your bogeys we'll give you a bonus and you move on to somewhere else so anyway so this this new friend of mine that uh is raising a fund is coming from

outside the asset management world so it's no idea how it really works and they're meeting with with investors and they can't believe the fact that they they've set up this fund with it's kind of like an LP structure private equity like where the way that that usually works is you pay a management fees call it one to two percent and then the you get your performance for you which is usually 20% of the profits. What they wanted to do is really align with shareholder interests and not even have a performance fee because they think they'll just make all their money

by investing their own capital in the fund. And so the crazy thing to me is that the guy told me, as they're raising assets, they keep telling all these investors, we're going to waive a performance fee and not even have a huge management fee because we think we can make enough in returns to make up for any of the costs and performance, we'll get it that way.

And the funny thing is, is that all the investors are showing dissatisfaction, with that approach because they think they want to quote-unquote align incentives and they want to be charged a performance fee, which makes zero sense. So they're trying to offer investors a good deal, but investors are kind of skeptical thinking that doesn't make any sense. Yeah, I'm just shaking my head. I got nothing. That's nuts. Yeah. So that's just kind of the way that things work in that world. And it's really backwards in a lot of ways. And these people again coming to me from outside the world of finance going, why are people like this? And it's funny. There's just

the stigma in that space of you get what you pay for, which in investing, it's the opposite. You know, you get what you don't pay. That's the, what's the, is that the vocal quote? Yeah. So I guess some people would rather, would be intrigued by the fact that somebody has the chutzpahs but a charge three and 40, like they must really know what they're doing. Yeah. It's all, it's just all a big, big story. And I think wealthy people assume, because in other areas of life, that happens that it must translate into investing, which it obviously doesn't. So I was reading an article. in the Times this week. I figure what the title was, but the gist of it was that a reporter

came into some money and they didn't really know what exactly to do with it. So what they decided to do was have a horse race between a humid advisor and a robo advisor. What do you think about this? We've gotten this a few times in the past from prospects as well. I think it definitely make sense if you're a consumer of anything to to really kick the tires and figure out what it is you're getting out of any service or good. I do a lot of research on this stuff too, obviously. But the idea of trying to go two different directions and split your money up and then compare performance after a year or 18 months is just kind of a silly way to manage your funds because you're creating the wrong incentives either internally for yourself or externally

for the people you give your money to. If you tell somebody that you're doing that, well, then they're incentivized to swing for the fences. Yeah, and Barry wrote a piece about this a couple years ago, and I remember he said, we had a prospect come to us one time, and they said, we're going to give our money to four different managers and check the performance. And after we see, after a year or two, whoever has the best performance, we're going to give all the money to, which is a perfect way to introduce outside risks that are totally unintended into the process. Because if you tell a manager or a financial advisor that you're going to give all the money to the person who performs best. That means they're going to swing for the fences. If they lose and you lose a bunch of money,

they don't care they're going to lose their money anyway. But if they win and happen to luck out and have good performance over a short time period, they're going to get it all. So it just creates a weird incentive structure. Yeah. And even if you didn't tell the person what your motivations were, a year or whatever the time period was, it might as well be a second. It's not enough time to judge performance or process or anything like that. And unfortunately, when you're dealing with this type of process, you are, it is really a big trust-based thing. You know, you have to try to figure out whether the person on the other end is going to do what they tell you they're going to do. Are they over-promising and are

they going to under-deliver? That's not an easy thing to know because how much of it is skill and how much of it is like. And so this gets to the idea that we always talk about about process over outcomes. Like, it's really hard for people outside the world of finance to judge a good process between one advisor and another. And so I think it really comes down to, you know, how much can you trust the person on the other end? Especially over such short period of time. One of the interesting things that she said was they fired the money manager because it got personally jargoned them and sort of was condescending and made them feel like inferior and was talking down to them. So she said, getting personal, it turns out, was a two-way street. The algorithm never schmooze,

but it also never insulted. We fired the bank, moved that money to the RoboVi, and have been satisfied since. And maybe for them, it will work and it'll help, but I think investment performance is rarely the way to judge that, especially over a short period of time. Yeah. So another article in the journal, do most people need life insurance? Do you have any life insurance? I do.

Of course I do. Yeah. Did you get it when your son was born or right after? Yes. Okay. That's kind of when I did it too, right after my daughter was born. Well, maybe before I went and got it too. It sounds like just looking at the data, less people are getting them than they used to.

according to a 2017 report by the Federal Reserve Bank of Chicago, 60% of households had life insurance in 2013, off from 77% in 1989. Why do you think that is? I'm sure a lot of it has to do with the fact that people don't save a lot of money in the first place, so I'm sure life insurance for a lot of people falls under that category, which it probably shouldn't. I don't think that insurance really falls under your retirement or savings needs. I think insurance really is about risk and not building up a nest egg. So there was an article by Peter Orszag at Bloomberg view a few weeks ago too. He kind of gave some similar data. So he says in 1965, Americans purchased 27 million policies individually or through employers. The population was 50% larger in

2016, but still 27 million policies were sold. So basically, it's fallen. It's stayed the same, but population is exploded and not as many people are buying it, which is bizarre because in my experience, it was really cheap. And so, I mean, especially for people with families, I think it's kind of a no-brainer. I think I pay $22 a month for term life insurance. I don't know what the rates are today. Yeah, but you have a six-pack. What does that mean? Your rates are lower. Oh, yeah. Well, doesn't everyone just lie and say they're perfectly healthy? So there was two guys in the article. One of them was pro-life insurance and one of them was anti. And I think the pro arguments were pretty commonsensical. You know, not an investment, but if you have a family, I don't, I think

it's irresponsible not to have life insurance. As a matter of fact, this hits close to home because my wife's father passed away at a very young age, and he was severely underinsured, and the chances of him dying were whatever, one in, you know, $400,000, but he died. And this, like, really affected their family and uncles and grandparents and affected everybody. And it's something that financially, like, we're still dealing with. It's a huge, huge, huge problem.

So I think to say that you don't need to be insured because the chance of you die. dying is pretty silly. As a matter of fact, the person arguing against life insurance sort of said something like this. So two points that I thought were very, let's say, less than intelligent to be nice. He said, most people are very likely to outlive their coverage, which makes their rate of return on the policy zero. In fact, they will be getting a negative rate of return due to all the money that they

spent on being insured over their life before the policy ended. And then he goes on to say, in short, with these policies, the longer you live, the lower your internal rate of return. So why not just invest the money in a high-performing index fund instead? Yeah, that's a, yeah, that's, see, and the thing is, I think maybe psychologically, it's, it's kind of a morbid thought to have, especially when you're young and it doesn't matter what your health is. No one really thinks they're going to die and leave their family in the lurch, but I mean, it's just, that's just one of those things. Again, I don't, I don't think you compare it

to index funds or investing or rate of returns. This is just more of a huge risk thing that you're taking care of with your family, you know, and who cares if you're throwing those premiums away. Right. Yeah, I mean, you're throwing, you don't hope to die. you don't hope that it pays off. I started at an insurance at an insurance company, and life insurance, at least especially whole life insurance, was the answer to everybody's problems, even if there wasn't one. So, like, you told me a story about one of your friends who was single probably never going to get married and have kids was pitched life insurance. Yep. Yeah, we had a family member who was single and probably Eternal Bachelor and was pitched life insurance

from an agent. And he said, what do you think? And I said, why would you buy life insurance? You're single. You have no beneficiaries. Oh, okay. So I think a lot, there, maybe there's a lot of misunderstandings about it for some people. Well, it's not just misunderstanding. They're deliberately intentionally misleading. So when you look at these illustrations, not knowing much about how like math works and investing works, if you see these dividend payments like and what the policy cash value can be in 40 years, it's like, holy shit, that's a ton of money. Yeah. Well, yeah, if you, you know, $10,000 compounding at 4% for 40 years is a lot of money. The fact of the matter is you don't need to spend $10,000 on a life insurance policy to get 3.5%. You can very easily put

that money into a term life policy and then put the rest into an index fund. Yeah, I think the big takeaway is don't get too fancy with it. That's my, that's been, I'm not an insurance expert by any means, but I think keeping things fairly simple is always my go-to. So certainly back to our talk earlier about how hard it's getting in the markets. You wrote a piece in the last couple weeks about GMO and the fact that they've, when we've talked about them before, that's Jeremy Grantham's shop. They're pretty bearish, I'd say overall for the next seven years on what's going to happen in the market. And I think that there's a lot of people out there who've been bearish for a number of years

now, but haven't really backed it up with their investment portfolio. There's an article in the Financial Times a few months ago, and they called these people plastic bears, people who are bearish on the market, but then don't really back it up. And they just say, you know, don't worry when things hit the fan, we'll get you out. That's also known as a bear 2.0 for the new wells out there. Yeah. So there was actually, I think this was shared to us from Jeff Battack from Morningstar on Twitter. he shared with us GMO's asset allocation strategy that I think it's called their benchmark free fund

and so tell me a little bit about how this fund is set up and how it is showing their sort of skin in the game from some of their views okay so this is a huge fund there's well over 10 billion dollars in here and I got to say I give them a ton of credit for putting their money where their mouth is they break this up into equities alternatives fixed income in cash and it's basically a go anywhere fund right yeah and they are going anywhere in their equity regional wage ratings, they are just slightly underweight the U.S. They're at 7%. And emerging markets, they are 63%.

I've never seen something like this. Their takeaway has been emerging markets are pretty much the only relatively inexpensive place in the global stock market. And they've made a huge, so by comparison, they have over 60% in emerging markets, which from the global market cap is roughly 9 to 10%. I think that's what the share of EM. So they have a huge, huge, huge enormous overweight, which is a big career risk for, in a lot of ways. And they've really gone for it here.

Right. So they think that there are many areas of the market overvalued. So again, the U.S. is 50% of the global equity market. And they have it at, they have the exposure at 7%. They have almost 20% of the fund in cash. So if they end up being right, they are going to look really, really, really. really good. I think it's also interesting the fact that this type of Go Anywhere fund from an investor standpoint, you have to really have a lot of faith in the fund manager and portfolio

management team and process and really try to understand what you're benchmarking it against and how to assess the performance of something like this. That's not an easy thing for investors to do. If you're investing in GMO, you pretty much should know what you're getting. And if you're paying a fund manager to do something different than this. is exactly what you want to be paying for, in my opinion. Yeah, in theory, that makes sense, but I think GMO's history has shown when they begin lagging a few years, you know, into a raging bull market, money always pours out. So it never seems to work that way with a lot of their investors. They have a lot of Johnnycom lately, just like everyone else, I suppose. But that happens

when you have, you know, close to $100 billion in assets that are management. There's always going to be people who, for career risk reasons, are going to be chasing performance. So Corey Hofstein wrote a really good primer on momentum. which has been called by many the premier anomaly, two centuries of momentum. And one of the interesting takeaways for me, at least, was he spoke about, like, why was it ignored for so long, especially by the academicians? Did I say, did I pronounce it right? Is that a word? Yeah. Judges rule. Academics? Academics. The teachers. The academic magicians. Okay. So Corey wrote, speculative was a pejorative term. Even the title of the intelligent investor implied that any

investors not performing security analysis, we're not intelligent. And I think there's a lot to that that it might be dismissed because it's just sounds so easy. Let's like, wait, I don't have to, I don't have to know anything about the business, the competitors, the margins. I could just look at the 52-week high list and that's all there is to it. One of the reasons I think momentum kind of gets painted with a bad brush is because it's really a quantitative investment strategy and no offense to our quant friends, but a lot of quants of the past haven't been very good at explaining it very well. And I know there's a lot of quants now who are better at this. So Alpha Architect, we mentioned people like Corey and Meb Faber and Cliff Asnes are much better at explaining this stuff now.

But I think in the past, this is just not an intuitive concept. So I think the idea of momentum really is rising prices, attract buyers, falling prices, attract sellers. But it doesn't last forever, obviously. so people confuse momentum with performance chasing, which in some ways it is, but in a lot of ways it isn't. Well, it's smart performance chasing. One of the interesting data points, and there's a ton in this paper, so I highly recommend it. He looked at a paper from Griffin, G, and Martin, and they demonstrate momentum's robustness, finding it to be large and statistically reliable in periods of both negative and positive economic growth. I thought that was kind of interesting,

that most factors are going to be sensitive to the overall economy. And I think the idea here is the fact that this is very behavioral driven. I think that's one of the reasons I think a lot of people have a hard time wrapping their head around it because basically momentum thrives or works or happens because people make mistakes. And so people chase performance and people over and under react. And that's kind of why I think momentum is kind of impervious to the economic cycle, which is kind of hard to wrap your head around. And I think it makes sense if you just think about it like the opposite of value. Right. And Wes has done a study on like what's good momentum versus had price momentum. And I think that he compared, I think he called this like the boiling frog in

water. That slow and steady is a really, really effective way to capture this premium. But if you look at a stock that like gapped up 18 percent and would have positive, you know, price momentum over the last 12 months, that's not necessarily indicative of future returns. And his, if you want to do a deep dive on this, his book quantitative momentum is really, if you really, really want to understand this in a deep way, I think that's a great primer for a lot of people. So friend of the show, Eric Belchunis of Bloomberg, he's a great follow on Twitter. I think we've mentioned him before. He always has really great ETF and mutual fund stats. He is on a ETF show on Bloomberg, which you just appeared on recently. Is that correct? That is correct.

All right. And so he always has some great stats to show. And he actually showed the Fidelity Contra Fund, which is one of the larger funds that Fidelity Investments has, has actually been one of the few active mutual funds that has performed well. And basically, it's crushed the S&P 500 and its peers in recent years, but it's seeing huge outflows. And so he said that it had $15 billion in outflows over the last 12 months, even though it's outperforming the S&P 500, which kind of shows how powerful the shift to low-cost investment funds is that even active funds that are outperforming are seeing outflows. So Jeffrey Patak slid in with a pretty interesting actually that a third of this was just shifting between a different share class. But still, we'll share the chart. This

thing has destroyed since the beginning of 2017. And still, so let's call it $10 billion of legitimate outflows, which is kind of nuts. And it's kind of crazy that low costs in a lot of ways have sort of trumped a performance chase, which is kind of hard to do, I think, psychologically for investors. Usually you think performance chasing is everything, especially short-term performance. And it hasn't been the case here. So one of the running themes we've had on this show is the fact that real estate prices in Silicon Valley are just off the charts. And I was going to say bonkers, but someone tweeted me the other day and said that I used the show bonkers too much on this show. So I'm looking for a different adjective. So if anyone has any ideas.

This is avocados. Yeah. Yeah, that's good. This is cantaloupe. So there was a great sweet. You just ruined my joke. Did I? Okay.

Wah, wah. Sorry. So there was a tweets from the other day by a game. Al named Sally Kuchar, and I think she lives out in California, and it was flying all around Twitter, and she basically went through a lot of the different cities in the Silicon Valley area to show how crazy things have gotten. So she said, some of the stats I picked out, based on 43 homes sold in the last 30 days, the median sale price for a home in Palo Alto is $3.1 million, and the average down payment was 30% or close to a million dollars.

Wait, do you think money's coming out of the NASDAQ stocks because real estate is up so much and therefore the shares prices are going down? Just a theory. Maybe there's cash on the sideline for real estate now. Cash is returning to the sideline. Ah, yeah, cash is returning to the home. Okay. The other one, even in a place like Oakland,

that is much more affordable, supposedly. They said the median sales price in Oakland was 735,000, with an average down payment of 34% or like 250 grand. And then she says that the median household income in Oakland is like $57,000. So this is why it's so. expensive to get you haul out of there. So I want to ask you a question. So these prices and stats are insane. How does this compare to buying a house in like Manhattan or somewhere in the

New York area? Is it anywhere close to that there? Is this just on another level? No, I don't think that I think that this is apples and desk chairs, like nothing, nothing alike. Okay. It's just, I mean, seeing these stats, it's kind of like one of those things that you keep thinking it has to and it has to end, and it just hasn't happened yet. And I just can't imagine how, quote-unquote, normal people will continue to be able to live in these areas. Yeah, it's, it's avocados, man. I don't know.

Okay. Are we going to make that one happen, like, New Boil? No, it's not. Okay. So this week, you were giving me some quick technical analysis. So we're going to do a new segment called Michael Explains Technical Analysis to Ben. So why don't you tell... No, we're not.

This is a one-time thing. Okay. Well, this is a running thing between the two of us. And you can kind of explain technical analysis to me because I'm a new will as far as technical analysis goes. Okay. And so am I. And I think that it gets a bad rap in some circles because people tend to just overdo it and really abuse it. And I think that fundamental analysis would get the same sort of snide remarks if it was more public because some of the stuff is just sort of silly there too. But anyway, so I called you yesterday and I was like, hey, do you see, are you looking at Tesla? And you said, of course I wasn't. No. No, of course you weren't. So what I said was that, so I'm a believer in horizontal support. So in other words, if you just, if you knew nothing and you looked at just a price of Tesla, look at, hey, hold on, I got a dad joke. Isn't horizontal support the name of a Stormy Daniels flick? Hey, oh. All right. Anyway. Not bad. Not bad. All right. So if you knew nothing and you were just looking at a daily candlestick, a daily candlestick chart of Tesla, you would see that several times,

Maybe half a dozen to it doesn't. Explain to me again, what is a candlestick chart? Okay. So a candlestick chart is a really good way of just showing the behavior of buyers and sellers because what it does is it shows you the opening price, the close price, and the high and the low. Okay. All right. So what you would see looking at the Tesla chart is between 290 and 300, like I said, a dozen times going back to April 2017, buyers stepped in. So, so demand met supply several dozen times. That's an exaggeration. But anyway, the point is once that level is breached and buyers don't show up, especially like the more times the level is tested, the more susceptible or vulnerable that comes to a break, which is what we're seeing

today. So I might see Jim Carrey a short Facebook and raise him a short Tesla. Whoa. You heard it here, folks. All right. That was Michael explains technical analysis to that. Thank you very much. This will not be a recurring theme. Don't worry. All right. Any good recommendations for this week? Why don't you start?

Okay, I got a bunch. So my wife and I watch Lady Bird, which I think is probably one of the better movies I've seen in a while. Very good. It's a perfect depiction of a teenage daughter and her mother, like the relationship they have. It's funny. It's kind of got some drama in it, and I highly recommend. That's one of the better ones I've seen in a while. Wild, Wild Country on Netflix.

I'm only one episode in, but it is wild to use a description that they use. It's a documentary about a cult that came into this small Oregon town in the 1980s. And the whole time, my wife and I were saying to each other, like, wait, what? This actually happened, and I've never heard of this before. It is just crazy. I don't even know how to explain it. Were they chartered market technicians? Yes.

Yes, it's very cultish. They were using head and shoulders patterns. my other recommendation that I gave before season two I said check out season one of Atlanta about three to four seasons three to four episodes into season two and it's definitely not hit the sophomore slump it's great hold on I just got to say that that that was a joke I know many CMTs and I love them good people you don't want to get hit up on Twitter from that so I really like Atlanta paper boy is probably my favorite new TV character and finally I just enjoyed the Tim Ferriss Daniel Pink podcast he's

the guy, the only book of his I've read is called Drive, which is about motivation. And he had a very cool podcast with Tim Ferriss talking about his process of doing speeches. He used to be a speechwriter for Al Gore and of writing books. So I highly recommend that. All right, the only thing I got this week, which has kept me very busy, is Legacy of Ashes. So I just want to read one excerpt from this. So this is about the history of the CIA. And I've never written in the margins in any single book, as I have for this one. All right, here we go. So this describes two ships, the Maddox and the Turner Joy, in the Southeastern Sea. Quote, the radar and sonar operators aboard the Maddox and the Turner Joy reported seeing

ghostly blotches in the night. Their captains opened fire. The NSA report declassified in 2005 described how the two destroyers gyrated wildly in the dark waters of the Gulf of Tonkin, the Turner Joy firing over 300 rounds madly, both ships taking furious evasive maneuvers. It was this high speed, gyrating by the American warships through the waters that had created all the additional sonar reports of more torpedoes. They had been firing out their own shadows. The president immediately ordered an airstrike against North Vietnamese naval bases to begin that night.

Wow. That's like something that you would see in like the naked gun or something. Yeah. Firing out their own shadows. That's hilarious. Yeah. So I highly recommend that. And then one more thing that I meant to speak about last week, but I forgot.

There was a really good podcast with Bill Simmons and Chuck Klosserman. Did we talk about this last week? I don't think so. But I'm a fan anytime Klosterman goes on with Simmons. I always listen to that. Okay. Okay, so two things that he said that I thought were really, really interesting. One was that Netflix has replaced novels, which is one of the reasons why people are so hungry for nonfiction.

That was like that. I think in a lot of ways it has for me. I used to read way more fiction books than I have, too. So I think TV has taken over a lot of that reading for me in a lot of areas of life. By the way, as we speak, Tesla's down 8%. This is textbook follow through to the downside. Obviously, Elon Musk or someone is listening to this podcast. All right.

Hi, Mr. Zuckerberg. The other thing about the classroom thing that I thought was really interesting, he said, he recommended it, and this will never happen. But one of the things that Twitter could do to make it a little bit less gross is if you charged people a dollar per follow, like he said he has a lot of people that just hate follow him and just call him an asshole, whatever, because it costs him nothing. But I think that's like a really good way to clean it up. Like, you know, nobody's going to pay somebody. Nobody's going to pay to hate follow. Yes. And a lot of it is the fact that that people are trying to figure out ways of

decluttering their life and not spending so much time in social media, that'd be a great way to do that and simplify and really narrow down, you know, your filter of that sort of stuff. All right. So that's all we got. Thank you for listening. We will see you next week when the show leaks. Bye.

Thank you.