Animal Spirits Podcast - Individual Alpha (EP.35)

Episode Date: June 27, 2018

Why household equity allocations are near all-time highs, why Robinhood could be the bank of choice for Millennials, financial planning for inconsistent incomes, 10,000 baby booms retiring every day, perspective on market valuations and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, the podcast that takes a completely different look at markets and investing, hosted by Michael Batnick and Ben Carlson, two guys who study the markets as a passion and invest for all the right reasons. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritthold's wealth management may maintain positions in the securities

discussed in this podcast. Welcome to Animal Spirits with Michael and Ben. I'm staring at Ben trying to untangle his headphones. This is new. Yes, this is new because we're actually in the same room. For those of you don't know, usually we're on opposite ends of the country kind of, I'm in the Midwest and Michael's in New York City. And today, we're both in Dana Point, California for our EBI West Conference. That's right, Ben. We are. Indeed. So chart from last week from Ned Davis Research, households have $23.5 trillion of equity holdings. That is 40% of total household financial assets, and thus it is higher than the 1968 and 2007 peaks. Not quite as high as the 99 peak, but what do you make of this?

Well, I think the craziest one here is the fact that in the 80s, household equities ownership was down to like 14%, which is, that's just crazy to me. That's a good point. One of the stats that I repeat over and over is after the 74 bare market, there was 22 consecutive quarters of outflow I think until 1982. Okay. And I guess that's what this chart represents. Yeah. Well, I think the idea here for a lot of people is you see the prior peaks before and the fact that we're back to those levels means must mean doom. Well, right. But the also thing is that I think people overestimate, and I'm certainly guilty of this, how they're going to behave in the next bear market. Yes. But we underestimate how absolutely paralyzing and

debilitating and psychologically traumatizing a bare marketist. Did I say traumatizing twice? That was a lot of actions. But I mean, this chart is just a really great visual of that. But it's really, of course, we think that we're going to be the exception. But I always say that stocks don't go down and then people sell. Stocks go down because people are selling. I think the other thing here is the fact that they're trying to show that 40% of household financial assets in stocks might be a scary level. But doesn't that seem low to you for now for the fact that people are living longer. People like need their retirement savings to make up for a shortfall in. Come on, people. I doubt 24,000. Let's bowl up. Yes. What? I'm not, I guess we were talking

this earlier. We're not exactly clear what financial assets are. So I would think that real estate is part of this. Yeah, I guess it's hard to say. Look, I imagine it's, someone can actually assign this if they want, but I imagine it's stock, bonds cash, and it says it's adjusted for pension funds, but. So you don't think real estate is included in a financial asset. I think it is. Okay. Which would explain why 40%. I think the fact, I think that there's just, just a lot of bonds in cash in the world. And I think that is the majority of what's driving this. All right. So, there are a lot of bonds on the sidelines. Yes. So Robin Hood is in talks with regulators to offer bank products. And a few, a few interesting things in this, in this article for

Bloomberg. Robben has more than 4 million U.S. consumers using its free stock trading platform. And now it's in talks to offer other bank services. And the company is valued at $5.6 billion, which seems pretty high. But why not? We talked about this last night. night after dinner. And I guess I don't really understand how they make money. I actually use Robin and I wrote about it a little bit. I just opened up a brokerage account with them probably two, three years ago just to try it out. It is a really cool little service. It's just an app on your phone. It's really easy to trade stocks. It's free. Having said that, it's free. And obviously what they're trying to do here is build up a ton of users and then charge them

more later, I think. And I know that they do charge some people for leverage. They actually have like a, instead of charging a percentage, they charge a flat fee to borrow money. Do they do advertising? I doubt it, but they have a huge valuation. I think the idea here is that people are hoping they'll become the banking service for millennials. And I guess that's probably why it has such a lofty valuation. And I actually could see that. Yeah, I'm sort of bullish on this company.

I mean, admittedly, I don't know very much about it, but I like the idea because I think that a lot of younger people have no loyalty to Bank of America in Wells Fargo. As a matter of fact, they probably prefer not to bank with them. So if they can have Robin Hood or just, I guess this is just like, where corporations are going. And they started trading crypto on here. I'm sure they're going to just offer a ton of stuff down the line. I don't know how you do a lot of that just in an app-based world, but I suppose that's how a lot of young people are used to doing things these days. Yeah. So maybe I guess I'm agnostic on evaluation because I don't know, but I'm bullish on

like the idea of this type of company. Correct. I think too. I think it's an interesting idea, but I wouldn't be, I guess, surprised either way that valuation continues to climb or it just gets slaughtered. So one article that I saw this year, I think this was from Reck and Thaler over at Morning Star talking about collective investment trust, the invisible giant. And I have to admit, I've never heard of a collective investment trust of you. I've heard of it. I thought it was kind of something from a bygone era, but it's huge still. And I think the idea, I looked it up a little bit. The idea behind it is if you pool a bunch of assets together from, say, a large company who has retirement funds, then by having more money in there, you can negotiate lower fees.

And they pool these together. It's almost like a separately managed account, I guess, unless someone tells me differently, that they pool together and they can put it in something like an index fund structure. And there's different, so they can pay less based on how much assets are the plan. So they have some buying power. And he was saying that by the end of this year, it's going to be $3 trillion in these, which for comparison sake, US ETFs are like $3.5 trillion. So these things are enormous.

Yeah. Which I think is another one of the reasons that the whole index ETF thing hasn't completely overwhelmed the market. I think people forget the retirement assets in a lot of ways and just how entrenched they are. like there's really not ETF options in a lot of 401Ks that's just not an easy thing to do so I think the reason that mutual funds

are still probably going to define is because they're so entrenched in those types of plans where people are just constantly putting money in Yeah and it's going to take a generation maybe more for that to shift I mean obviously mutual funds are not going away And I think that's one of the reasons that something like this is probably so big

because it's just something people are constantly putting money into So there's a good story in the New York Times a few weeks ago about dealing with an inconsistent income. And this is kind of interesting topic from a personal finance perspective. And they actually, they actually talk about very wealthy people and they actually profile like Clay Thompson of the Warriors, which is not really very, you know, relatable for a lot of people. But it's interesting from like an entrepreneur standpoint or someone who has inconsistent income, like how do they plan on things like budgeting

and saving and handling their personal finances when income comes in, you know, in big chunks, and sometimes it doesn't come in at all over a certain time. So this is an interesting story. They interviewed a guy who gives advice to these type of people that have these inconsistent incomes, and one of the things that he said that was really interesting was, quote, what I realized is you cannot scare the one in a million guy who already beats the odds. You can't give them the stats about athletes going broke because they say, that's not going to be me.

Everyone already told them they weren't going to make it. Right, and that's just like a matter of being young and making a ton of money. You can't tell these people anything. Right. And I was kind of pointing to this, too, as it's not just beyond these athletes. It's really tough if you're dealing with that from just a regular person perspective and how you deal with inconsistent income. So this could be people who sort of work on their own and don't really have a consistent paycheck they're getting. So how do you plan for that? And how do you deal with inconsistent income? I guess it's kind of like people who receive bonuses or just extra income. How do you plan for something like that in your own finances and not just blow it all when it comes in? Yeah, it is interesting. People feel differently about different sources of money. Like a bonus is sort of like has money. Yeah. You're just more likely to spend it. One of the golfers said that he is concentrating on saving and having enough insurance and being prepared for the finish demands of being a father. Quote, if you're short of money, it puts a lot of extra pressure on your game. And I thought that was really applicable to people that trade for a living. Oh, yeah. That's a good point. Right. Like it just screws with you mentally. Yes, which can then impact your trading ability. And then, yeah, there's so much pressure on you. Yeah, that's got to be a tough leap to make where you finally reach that point where you say, I'm going to trade for a living, and this is going to be how I make money. That's just an added element in there of the emotions, which is kind of like... I thought that I was going to do that. I was like, if I could just make a hundred thirty percent

a year, then I'll be fine. Right. And how long were you just trading, right, for a year or two, right? I think about two years, yeah. Right. And that was kind of your job. Right. And I mean, that's what you, like, it probably makes you push things a little more too, right? And make more trades or try to, like, try to improve your performance by doing something. Yeah, and imagine you have to feed a family? Yes. Yeah, that's, that's tough. So there's another one in New York Times the past week, and they did a survey for us.

And it's kind of interesting, speaking of the sort of entrepreneurial lifestyle, they set a new survey of people who have built significant wealth on their own, found that money has actually brought them a lot of happiness. And what they find is that people who kind of create the money themselves and start a business can be more content with that money than otherwise. So it actually is a form of happiness for them, creating a lot of wealth on their own instead of just inheriting it or building it,

getting lucky, I guess. Yeah, there's a huge bridge between wealthy people that did it on their own versus like next generation that grew up with it. Yes, which it's interesting from our business perspective because there are definitely a lot of people who are coming into the financial advice giving industry and they've spent their entire lives building a business

and then they're selling out of it or handing it off to the next generation and getting this huge chunk of money and for them it's kind of difficult to let go of that control because their whole life they've been it's been built up to this moment and they've done this business and then they have to turn the keys over to someone else

to make the financial decisions in their life which is not always an easy thing. Yeah. All right, here's a statistic that gets thrown around every day. 10,000 baby boomers are turning 65 every day. Which means then the next step and the fact is that 10,000 baby boomers are going to be retiring every day for the next.

I think that's at, what, 18 years or something? Can that even be? It sounds like such a ridiculous number. You were trying to call this one out. I can't do the math in my head, but so there's close to 80 million baby boomers. All right. Hold on a sec. We're going to cut in with a little bit of...

So this is from an article from Investors.com. And they gave this stat because it's for this new ETF. And so this is from Investor Business Daily. And this new ETF said it aims to provide a steady 7% a year payout to retirees. And that's kind of where the stat came from. And the meaning behind it is a lot of retirees are going to have a hard time figuring out how to withdraw money. And then this ETF is going to provide a steady return stream to these people so they have their spending taken care of. All right.

breaking. I can't do the math, but somebody, check this. 10,000 turning 65 every day? Yes. All right. Well, this gets back to a conversation that has had all the time where I think that one of the many reasons why people are less concerned with beating the market is like when you're 42 years old, you probably view investing a lot differently than when you're 65 at 42, maybe beating the market appeals to a lot of people. And then once you have done everything that you needed to do when you save money, you're much less concerned with still beating the market and you're much more concerned with spending and taxes and everything, like the real things, which is basically, am I going to be okay?

But what do you think about the idea behind? So it says this ETF, it's called Strategy Shares NASDAQ 7 handle index ETF, which is kind of weird. It rolls right off the tongue. Yeah, it's kind of a bizarre name. But it says this ETF says it's the first design to pay investors, a consistent monthly distribution. That distribution should equal 7% of the fund's net asset value at the end of the year. So, and it's basically going to take like a 50-50 approach to stocks and bonds. And I think use a little bit of leverage to make it a little more doable in terms of getting that 7%.

And by the way, I think people hear leverage and they're like, oh, this won't end well. But leverage can be used responsibly. Correct. So I don't know exactly how they're doing it, but I'm just saying like leverage in and of itself is not always like a death now. So it's kind of like a, I guess it's kind of like a risk parity. It actually says the allocations are at 70% to bonds, 30% to stock. So obviously the leverage will be coming on the fixed income side to get that interest rate higher. And then the underlying is, so it says the NASDAQ 7 handle index is composed of the Dorsey-Rite export portfolio and the core portfolio. And I'm not sure exactly what that is. But a quote from the article is, the distribution is not a dividend. It's a

consistent payout that investors can rely on. All are part of the distribution may consist of return of capital. So that means if dividends, fixed income and capital gains don't pay the fund distribution and may be funded by the capital investors pan. So if I had to guess, I don't think this is going to be a big hit, but I don't think it's a terrible idea if you have to sort of trick investors into returning their own capital. I think that's one of the reasons why annuities, even if they're not the greatest products on earth, people, it's like, it's really powerful psychologically. The funny thing is you wonder how many people will get that 7% and then just reinvest it, like getting back to the point of letting go up control, like how many

investors are actually going to use that as spending or if they're just going to just continue to invest it in their in their funds and not even use it for the way it's supposed to i also think that just generally speaking when people see a new idea the first the knee-jerk reaction is like it sounds really smart to shit on everything yes but i don't know i don't think it's like the worst idea i've ever seen yeah it's obviously it kind of comes down the devils and the details and can they pull it off but and if you're optimistic on something it makes yourself vulnerable to being dunked on later, right? Like, there's no, there's no downside to saying something stupid, and then it works out. Right. Yeah, so I don't, I, I, I'm, except for Krugman on the

internet, I guess. Yeah, I, yeah, that was, that was just a little, so there was a good one by Cliff Azins this week at AQR. We, we talk about Cliff a lot, but he, I think he's probably the, the best quant out there in terms of communication and writing, and he's just really good, and he kind of did a little bit of introspection and a piece for AQR this week, and it was about two studies from his own team. And they kind of called into question a lot of the stuff that he's held high for a lot of years. And one of them was the CAPE ratio and maybe it doesn't have as much predictive power even over the long term as people thought. And another one is about the small cap effect and whether small cap stocks really do upperform over time.

Yeah, I think there is a ton of nuance in here. I don't think that I can be convinced that on average, high valuations lead to lower average returns. But as we've seen recently, I think that it's ridiculously difficult to act on that. So I think like preparing yourself mentally for lower returns is always a good thing. And if you're pleasantly surprised that we have been for the last year is great. But I think that just generally speaking, like the more you pay for a future stream of earnings, the less you're going to receive. So actually, as I spoke at a conference I was at, This must have been 2010, 2011 probably, and he looked at all the numbers, because they do a lot of work on this, and he said, listen, we're in the 95th percentile of CAPE ratios. This is not a good place to be. And six or seven years later, stocks have done great. So it is, it's really hard to use them even over a period like that, where it's not that. That's a decently long-term period, I guess you could say six or seven years. And I think Cliff said something that, like, what would give him pauses if you were in the

105th percentile. And obviously, that's tongue-in-cheek because that does not exist. But he's saying, like, it would have to be so over the top before he would maybe say, all right, it doesn't make sense to invest here. And I'm putting words in his mouth. And the takeaway here, my part was he said, I think it's very healthy thing. If we, not just AQR, but the investment field, continue to question all the old results, not accepting anything as canon, which...

I think we do that, like, not to pat ourselves on the back, but we say all the time There have only been three 30-year non-overlapping periods of which we have good data. Right. That's not, I mean, it's just, and I think Jason, is why I said this, that the past is N equals one. Yes. Right. That's all we got. Right.

So take everything with the big grain of salt. Yes, there are no, if then, rules in the markets. There's no models that can forecast exactly what's going to happen. But if the Dow closes below 24,000 today, watch out. By the way, I think we also need to talk about the fact that you, use your life events in terms of where the Dow was. So last night at dinner, you said that your son was born at Dow 19,000. I made that up. I just a joke. I don't really know where the Dow was when he was born. But we had a really good idea. But I do know where Amazon was.

Yes. Instead of Michael measuring his son's height on the wall in his house, he's going to measure it by Dow points. If the Dow is not above 40,000 by the time he's 10 years old, I will consider myself a failure as a parent. That's pretty true. All right, so Jack Vogel wrote a similar post to Cliff, just talking about trusting the process with reference to Sam Hinky and what he did with the 76ers. And it's really great. We won't really get into all the details, but what went to in the show notes? But one of the things that he, that Jack showed that surprised me was that value has a much

higher standard deviation than momentum strategies. Did you know that? I would have assumed momentum would because especially when there's a turn, momentum stocks, like the volatility just kind of kills you. So, no, I had not seen it. So he showed the S&P 500 and then the value stocks and high momentum and value by a large amount. It's like, what, 30% higher maybe? Side note, let me just jump in here for a sec.

So when I was trading and I was shorting stocks and whatever I was doing, but I was much more likely to short a winner. Okay. So I try and pick a top, to short Amazon, short something that was going. up because by valuation right but if I had to do it over I would think that shorting value stocks is a much right like because a lot of none of these no stock wants to be value right value is thrust upon them because they're busted businesses and people are selling them for good reasons so I would much rather going forward I would much rather short a stock that's on the 52 week low list than on the 52 week well now that now that I think about it I guess maybe the reason behind the fact

that momentum has lower valuations is because you have more turnover and so you're cutting your losers quick. And so that decreases the valuation. Whereas with value, you're really holding for long term. You have to just sit through all that stuff. So yeah, shorting value on like an intermediate time frame or doing the opposite. And by the way, let me also point out that me saying that I would short value, it sounds very topy. Yes. All right. The growth trade is over. It's time for value to take the baton. Let's go value. All right. So sticking with Cape ratio and bloggers and I cannot pick did this really good post about how the trailing 12 months, and this is a study the Vanguard did, the trailing 12-month predictability is actually much higher than probably people

would have thought. Do you see this? Yeah, so I had not seen the vanguard until he mentioned it, but so a lot of people use, again, back to what Cliff was talking about, the Cape ratio as a way to figure out how stock's going to do. And actually, they found that there's actually a pretty good relationship between the Cape and just the trailing 12-month PE ratio, which a lot of people say is kind of noisy and such short term that it really wouldn't have much predictive power, but it's actually closer than people would think. So did you say, I might be repeating what you just because I spaced that for a second. But do you say that the correlation of trailing 12-month and Cape was very high?

More or less. Okay. Yeah, and then it dropped off after the great financial recession, and really after the dot-com bubble, I suppose, and it hasn't been, hasn't held up since. And he's got a chart in here that shows the Cape ratio versus the trailing 12-month PE ratio, and they're pretty close over time, actually. There was a huge spike in early 2009 because there was basically no earnings in the SB 500

after all the bank write-downs and such. So that kind of, if you would have looked at the trailing 12-month PE ratio, it would have been like 150 or something. And anyone would have said, you would have probably said, let's short the market on valuation. Oh, absolutely. But it was, it didn't make sense. And it immediately, a few months later, dropped back down and came back down to Earth. I probably would have been shorting on double-dip years. Yeah, that's true.

So, yeah, it's, again, there's no easy modeler way to put this, but this is an interesting piece for investing nerds who want to kind of go through these different valuation models. Yeah. So Estimise in the news. So Lee Drogan created this company called Estimize. He was actually at our EBI East Conference in New York last year. He's a really sharp guy. And it's kind of interesting. He actually said he built the idea from Estimize around Philip Tetlock's work, who, if you haven't read that, book Super Forecasters. He's done probably more work than anyone over the past 20 or 30 years on the forecasting ability of experts. That was a memorable book for me. Some of his books, he's written three or four books

and they're all really good. And his whole thing is just the fact that experts are, it's basically a coin flip between the people who are experts on geopolitics, economics, the markets, they're not very good at predicting the future. And what Lee decided to do with Estomize is get as many contributors as he can for investors and asset managers and they try to do like earnings releases. And they put different weights on the people who make these guesses. And if someone does well over time,

they're weighted more highly in the model. And it's actually been shown, what does it say? The estimates are 15% more accurate than consensus measures than just taking whatever else says as a whole through Estomize. Yeah, it's a killer idea, and it seems to be working out really well for the company and for people that are using the product. And it kind of gets back to the, I think a few weeks ago,

you mentioned taking the average, right, of the different people in the class when Greenblatt was trying to explain how the market works. If you just take a single estimate from one person, it doesn't really help you that much. But if you take the collective hole and what he's done is take that hole, but then try to weight it in a different way for people who have actually shown an ability to know what's going on in these stocks. Yep. And sticking with wisdom in the crowd.

So Drew Dixon, who is on Twitter at Albert Bridge Capital, I believe, wrote something that was sort of similar to this. He wrote, how many buy side and sell side analysts need to do the work before information is being assimilated by the consensus marginal investor? Upton Sinclair once wrote, it is difficult to get a man to understand something when a salary depends upon us not understanding it. And it is true most investors and analysts don't want to hear the following. But it is at least possible that it doesn't take many investors at all or much capital to fully assimilate information into a stock price. The whole sell-side analyst world was pretty bizarre to me. That's what I had my first taste of the investing world there. And I interned when I was a senior in college at a cell-side analyst shop. And this is the kind of place where, each analyst has one or two industries they cover, and they know everything there is to know about these individual companies. They meet with company management. They're constantly on the road. They're

going to conferences. And then all of their buy and sell signals are horrible. They know everything you could ever want to know about a company. So it ends up being the fact that they don't want to put a sell on one of these companies because that's what they're getting all their good information from. And so the signals aren't really that helpful, but the information might be because they actually do have the ear of some of these corporate management, even though the information has to be disseminated to everyone these days. But it's, what I always found is that when you get in such a small niche like that, that they have no, like, idea, there's no, there's nothing to compare it to. So there's no relative way to look at the world. So they're just looking at this one space

and they're not thinking about the rest of the world. And so I think a lot of times they, they have like blinders on when they're, where they're thinking of these companies and industries. What's the point? Wait, is there a point there? No, the point is that I think you can almost get too specialized with these things sometimes in terms of like he's saying there's so many of them that they almost end up becoming not that helpful. I took it as like people are worried about price discovery and stuff, but he's saying that, I think, that it doesn't really take that many buyers and sellers to set, you know, relatively accurate prices.

Right. And so I think that the fears about price discovery are so overblown. Like Amazon, for instance, trades on average 4.7 million shares every single day. How wrong. I mean, obviously, we could look back in 12 months, 24 months from now and say that the price today was wrong. But in real time, it's really hard. And think about like the real estate market. Maybe this is a bad example. But how many buyers and sellers does it take to come to an agreement on real estate? And how many comps are in the neighborhood? I don't know, 30 houses. If that, yeah. And none of them are the same. Yeah, it is kind of, and if you read some of the historical books in the market that we read, you read about in the 20s and 30s how there was 10 million shares being traded today or something. And I mean, it's constantly gone up over time. And that's always the funny one to me is that people say, like, this rally doesn't count because it's on low volume. Like, what does it, what does it matter how many trades there are in a certain day versus the market, the direction of the market? Why should that, why should that matter? So Toby Carlisle shared a really interesting tweet, an article, and here is a quote. So this is talking about medicine. Plocebo effects wrote on the coattails of a more important issue, regression to the mean, and that is most sick people get better eventually.

This is true both for diseases like colds that naturally go away and for diseases like depression that come in episodes which remit for a few months or years until the next relapse. People go to the doctor during times of extreme crisis when they're most sick. So no matter what happens, most of them will probably get better pretty quickly. This was a stunning sort of revelation, I thought. Well, yeah, the idea is it's not necessarily that the placebo effect works. It's the fact that most people get better, right? Yeah.

But don't you, do you think that there is a mental component there at all that when you give someone medicine that it, if it changes there, you don't think that that. Yeah, maybe. I have no idea. I'm not a lawyer, but that's a joke. Hey, yo. I just thought that that was, that this was really interesting, that the placebo is nothing, the placebo effect is nothing more than the regression to the meat. There's just like such a sort of like, well, of course it is, right? Right. There's so many, there's so many examples like this

where it was, that was the kind of thing that Connman figured out with the fighter pilots, right? Yes, exactly. It was just that the ones who did really well on one day, they'd come back down to earth the next and it was. Yeah, it had nothing to do with how aggressively the instructor was chastising them. Right. For their failures. It was just they came back down to the average. Yeah. Or conversely went back up to it. So let's move out to something more important. Yes. How about this survey?

Yes. We had another survey. We can include this one in the show notes. And this was from S&P. State Street. Okay. And they wanted to know the top concerns of investors. And the top one is geopolitical international trade tensions.

I feel like this could also just be like jitters. Yeah. Right. But the funny thing is, is that the investor's top concern. The second one is the end of the U.S. equity bull market. So of course they're one of their top concerns. is losing money. Or this might be the paradox of choice because there's a lot of things in here that are overlapping. Yeah. It's so. Like there's, listen to these different categories that are all

sort of similar. A yield curve inversion, an increase in inflation, the bursting of the bond bubble. The funny thing to me is that the one of the very bottom is spread widening and an increase in issuer defaults. Okay. So we could just bucket all this into Fed manipulation. Yes. But how many investors do you really think understand what spread widening means? well this one that chose it he's quite worried the one the one person michael santoli great tweet netflix now is a market value of 175 billion dollars the stock would have to surge another 28% to match aOL's peak market cap of 224 billion dollars in early 2000 aOL then had half the revenue and one-fifth the subscribers netflix has now there's crazy and then there's crazy so i really

love making the comparisons to the dot-com bubble maybe too much and i think think, I understand the, like, the people that say that, and I do agree with this, that just because we're not in the biggest bubble of all time, does not mean that stocks are not expensive? It is hard to, like, people anchor to that because it's so fresh in our minds, but, like, we'll probably never get back to something that crazy. I mean, it may be in something else, but the fact that, I mean, that was such a crazy time and so much was happening with technology, I mean, just the sheer numbers. Here's a good one that I sent to you last week.

So from 1995 to the top in 2000, Intel, Cisco, Microsoft, and Oracle went from $82 billion to $1.8 trillion. And right now, they're still below that peak. But that's a 2,150% advance, which is 81% a year. right nuts so i think that uh the comparisons again might be a little bit silly because one has nothing to do with the other stocks can easily go down 40% from where we are just and even if they're not as wildly valued as they were back then but uh it does i mean i don't know i like the perspective and you know what you know what i'm not afraid to say it it makes you feel a little bit better does it not that were not to 99 levels yet i take comfort of it that's what you're

hanging your hat on but i mean the thing is like i agree like Just because we're not there doesn't mean the markets can't get hit, but it also means like when they do get hit, that doesn't mean there's going to be a bunch of zeros or 90% crashes like there was back then. So there was higher highs back then and lower lows than we'll probably see when we get the shakeout this time. A Gallup poll showed, it says, how likely is it that you will ever be rich? And it's sort of what you would expect in the age cohorts, 18 to 29, 30 to 49, 50 to 64, 65 plus. It decreases dramatically. So 52% of 18 to 29, nine-year-olds think they're going to be rich.

It's all, and it was total number of adults was like a third, too. I think they're going to be rich, which is, this doesn't seem to make sense, but it's, yeah, the funny thing is, is that 10% of people that 65 plus think they're going to be rich, like, don't you think those are people that are already rich? Probably. Like, when you get to that age, hope, are you really holding out hope? Wasn't it, Colonel Sanders, he started KFC at like age 60 or something? Did it?

It was pretty late. Bogle started the index fund, that's 49, I believe. Was he? Yeah. Okay. You do your book? Hello. Brett to Ben.

So Ponzi schemes, they will never, ever not be around, unfortunately. And this one is particularly disgusting. I guess they all are. So I went to the SEC complaint, and Picoretto met with an investor from Austin, Texas, in February 2015. Because the investor suffered from dementia and was nearly 80 years old at the time, his daughter attended the meeting as well. Piccoretto convinced the elderly investors to put $250,000.

in percipients, described it as a real estate investment. And you know what happens next. The money was never invested in anything. And man, there are just scumbags all over the place. Imagine sitting across from an 80-year-old with his 25-year-old daughter in the room and, or not 25-year-old, however old is daughter, it doesn't matter. Just what? I know. The thing is, people who make these types of promises, and you feel bad because a lot of times I think it's, it's not just that people latch on to stories and promises. It's the fact about people to just, don't understand how this stuff works. Like, if it sounds too good to be true, it probably is. Like, a lot of people just don't get that. And the first good salesperson, they find that

sounds remotely smart, they hand their money over to them, which is, yeah, it will always be a place for hucksters and charlatans in this world because, especially with money, it's, it just seems easy to pran people's. And people want to be lied to. Yes. So there was an article in the Wall Street Journal this week from Chuck Jaffe about personalized index funds. And I actually heard about this too on a recent podcast with Meb Faber and Matt Hogan, who was the guy who's from Inside ETFs. And they were kind of talking about what is, what comes after ETFs? Like, ETFs aren't the final frontier.

There's obviously going to be. What? Sorry. So Phil tweeted a picture last night. It said dinner last night did not suck. And then some guy goes, looks like it did for the dude at the far end of the table on the right. is that me that's yeah oh i was having a tough time

they caught you at a cat the moment so we had dinner in laguna beach last night and it's probably one of the most beautiful places on earth and yeah i don't know i was looks like i was an introspective moment but you're just you're taking it all in all right sorry personalized index where was i yeah see this is what happens when we do a podcast in the same room you're all over the place yeah sorry rain you in um so they they talk about personalized index funds and the fact that that's like the next thing that's going to come for investors and it'll be easier than ever to just go through and create your own rules. And so if you wanted to do some screening for like an ESG or certain types of companies

or companies that have more women on their board or whatever it is, you could create your own index fund rules and have that be, you know, as much as different as, as much as alike or different as you want from the actual index. Yeah, I kind of like this. I mean, not that I think that investors, individual investors are going to like. like, you know, create individual alpha or anything like this. But it's just amazing what we are able to do today. So Ken Fisher this morning said amongst many things that he said, one of the things he said was just to get one screen ran on the New York Stock Exchange in the

70s cost 25 grand. Yeah, which is bonkers. And now you could do that on Y charts or probably any piece of software. I think motif was the one who first kind of started this, right, where you could create your own basket of stocks. And I guess it does make sense. My, I think it's kind of of cool that you will be able to do this someday. And I don't see why it won't happen because it's so much easier to trade fractional shares. And it might lead to a little bit more complexity. But I think I wonder what's going to happen or how often people will be able to pull these levers and make changes because anytime you change from the index, you're obviously going to have some tracking error. And people are going to see, well, wait, I probably shouldn't have done this.

I'm going to go back and change it and see what I don't know if the negative reinforcement actually helps people. I think a lot of people just like, it just the light bulb never goes, comes on. Yeah. So, I mean, the paradox of choice thing comes into play where if there's so many different choices they can make and changes, that they'll be constantly tinkering and pulling levers when something doesn't work out in their favor, that it could. But I think the fact that it's going to be available, I think, is probably, I mean, there's just so much good things for investors these days. Yeah. All right. Let's get to the listener questions. I just finished reading Joel Greenblatt's a little book that beats the market and would like to hear your thoughts on his magic formula, providing, of course, you know what I'm talking about. We do. Maybe that's where Michael could stick his new found. cash after selling his gold too soon. I forget what the exact formula is, but it's, you know, its value, it's sort of similar to what. It's more or less high quality with high REOC, high return invested capital, and low, I think he uses like the price to EBITDA, or one of those sort of private equity, like value strategy. So I have no doubt that this will, that this is an adequate

way to invest for the next 40 years. I think that it's just like, end. the other strategy, it's probably not practical that you're going to stick with it, which is why we advocate for diversifying, not just across asset classes, but across strategies as well, because whatever you're doing, even the most died-in-the-wall value investors, are probably feeling the pain right now. And this is, I love this book, by the way. I think he provides one of the better explanations of, like, how businesses work. Yeah, he's like Buffett in the sense that he's really good. He's not the stock price. But he actually wrote about this or talked about this before and he said he created this screen from the little book that beats the market it

finds the highest ROIC companies it finds the lowest valued companies and I think you're supposed to turn them over once a year and you so you pick the bottom you pick the bottom 25 whatever you want and he he had people asking him after a few years like hey that's great you created this screen just do it for me because I don't want to buy these myself and I can pick through the list and what happens and they actually found that the people that just took the bottom 25 instead of going through the whole list of 50 and picking their own out did better than the ones who like went through and tried to pick and choose.

And I think even he said he tried to pick and choose and I think there was a biotech company or something like that where he thought it was a value trap and it went out to have enormous returns or maybe I'm getting that opposite. So if you're going to do something

that's a screen or quantitative one you got to stick to the screen. It's better to just not overthink it and try to tinker with it. It's just yeah, just stick with it. But again, I'm just, I just don't think that it's practical. Like Jim O'Shaughnessy tweeted recently

that you can, or he actually was talking to George Parks said you can, scream the secret sauce from the top of the buildings and nobody will listen to you. Right. Or the other. We won't be able to stick with it or something else will come along. Yeah, you could give it away. It just doesn't matter. Behavior, behavior, behavior. So maybe someone can create their own personalized index fund using the magic formula. How's that sound? Okay, one more question. My fascination and career close to the debt capital markets always makes me wonder why debt

isn't talked about more personal investing. Specifically, I totally feel like it makes sense to have high levels of leverage in the accumulation phase of one's investing life and then declining leverage levels over time. So this person wants to know if we think it makes sense to lever up your investments as a young person. Well, finishing the question, he said, I found this book about this recently in Reddit. Basically, it advocates for buying leaps on the SP500 or using max leverage in a low-cost brokerage account, like Interrata brokers early on a one's investing cycle. Not the worst idea I've ever heard. Again, it comes back to can you actually stick with it and hold and how much leverage do you use? And could you survive the occasional margin call when markets get

destroyed? I guess this all comes back to there are a million ways to skin the cat. And there's a lot of really reasonable ideas that we just can't execute on because we lack discipline. And I mean, there are pieces from academics that say they try to make this point of young people should be able to take on more risk and lever up a little bit because they have such a long time horizon. I just, I guess it depends on the, on the person in a lot of ways, but it's a tough, that's tough to do. One of the tweets that I saw this week, though, is really great is from Quanshin 1. Sochgen Global Alpha Index highlights.

One, proprietary blend of trend, valuation, and premium harvesting alpha. Two, covers every global asset class, equity file, FX, Commods, rates, credit. Three, strategy back test showing a 50% annual, I'm sorry, 15% plus Kager. And then since launch, the product had an actual Kager of negative 1%. And this is what comes back to, I always say the worst 10-year performance

for any back test is the next 10 years. It is kind of crazy. It will include a picture of this in the show notes, but they show the line where it stopped. And it just looks like the most beautiful equity curve leading up to it, and then nothing. Yeah, like, and there are no, there are no bad back test, right? There's not a backtest. The backtest graveyard is enormous because you just get rid of those and don't show them

What's your line? There's no such thing as a front test. Yes. Although I don't know if I stole off from somebody. I feel like I did. Okay. That's possible. Well, we'll copyright that one.

All right. All right. Now, so we're at the EBI West Conference and Dana Point. Like we said, I think we'll take next week to share some thoughts because we're about half a week through the conference now and talk about some of our favorite speakers. Ken Fisher was character, I would say, more than I thought, very unconstrained. We'll talk about him next week and all the other panels and what we've been doing out here. And we're going to tape our own live animal spirits.

this afternoon. We're still kind of trying to decide whether we want to put it out there as a podcast or not. Let us know what you think about that. This is going to be very visual, so we're not sure. But that's something we're still playing around with. So, all right, what do you got for recommendations this week? Somebody recommended to me, the Scarlet Women of Wall Street, which is what the Erie Railroad used to be referred to. And I'm not sure if I would recommend it.

It's heavy, heavy, heavy, dense market history. But for people that are interested in that sort of thing, it talked about, The history of J. Gould and Jim Fisk and Daniel Drew and Cornelius Vanler built, and I didn't really know much about them. So I certainly got a lot out of it, but it wasn't the easiest to read. There was a really good article from Rusty Gwynn, I believe is his name, talking about mental toughness in the financial markets. I thought that was really, really good. I watched the Bill Simmons thing on HBO. Oh, for the NBA Finals?

Yeah, I think it was called Courtside or something like that. Was it any good? It feel like basketball, yeah. So one of my favorite parts was when he spoke to Mike Breen talking about that shot that Durant made in the, I think it was in the third quarter, that crazy shot that he had done the exact same spot in game three. And Bill Simmons said, like, what was the call? And Mike Breen sort of couldn't remember. It was really cool just to get it behind the scenes to look and him talking to Durant after the game.

I mean, I can't get enough of that stuff. And then lastly, Malcolm Gladwell had a podcast talking about immigration and all that was brand new to me, basically how a lot of the immigration is circus. that they would, particularly to Mexico, that they would come here, and then they would return home. And putting up borders has actually locked them in. It's made them be unable to leave. And if there were no border controls, I'm not advocating one or the other. But he was just saying that there would be a third less Mexicans in the United States and they're basically trapped here. That was interesting, how before people would go or come over to do work or sell something

and go back, and now there's not as much free flow. So, yeah, that was kind of interesting. So I got this week, Derek Thompson's crazy genius podcast I've mentioned before, but he had one called Why Haven't We Found Aliens? That sort of blew my mind. Did you listen to this one yet? I didn't. I don't know. I didn't love it. No? Okay. See, that kind of stuff just gets into my head and I can't stop thinking about it. And so the idea is like, if there really is intelligent life form out there, maybe we'll never find them or they'll never find us because if you approach a certain point of technological progress, you end up uploading your brain into software. It's weird. It's worth a listen. So I actually listen to you on one of these recommendations. on the flight to California I started reading Rocket Men about two-thirds of the way through by Robert Carson

and I think you called this one pretty good this is probably one of the best books I've read in a number of years and it's about the Apollo 8 mission that was the first astronauts to ever go around the moon no one had ever encircled the moon and it was the right so everyone remembers Neil Armstrong stepping on the moon but these guys

the three astronauts who did this Neil Armstrong and the other guys who land on the moon were their backups. So these guys I mean, these guys had to be some of the biggest badasses in American history, right? They were ultra smart. They were like the top of their class and everything. They basically went into space flying on a rocket that had never been tested before. It's just, I highly recommend it.

It's really fascinating. And there's so many really good nuggets. Like, they talk about the fact that these rockets need to go 17,000 miles an hour just to break through the Earth's gravitational pull. And a lot of the math behind it is they have to have the correct angle to, sort of slingshot and rocket around the earth and the moon that like pushes their path. It's really fascinating to me how they figure this stuff out. Yeah, I think I said that after I read that, that was going to be the book of the year. I think I'm sticking with it.

I mean, bad blood was amazing, but Rocket Men, no, but, Rocket Men was amazing. Absolutely, absolutely recommend. And my only other one for TV is I started watching the show Trust on FX. It was on a few months ago, but at DV Artemal, and it's about the Jay Paul Getty family who he was one of the, I think at one point he was the richest person in the world, and it's kind of a crazy eccentric billionaire family, and his grandson gets kidnapped, and it's just the whole story about that, and so it's based on true events. This guy, Jay Paul Getty, you like it?

Yeah, it started out really good, and slow down, and now it's picking up again. I'm halfway through, and I'm enjoying it so far. He's got a great quote. My formula for success is rise early, work late, and strike oil. Sounds like, yeah, he was, the way they made it. make him out to he was a really bizarre eccentric dude but it's uh it's it's pretty interesting so all right i think that's all we have we will try to share some thoughts on the conference from california next week send us an email animal spiritspot at gmail.com and uh thank you for

listening.