Animal Spirits Podcast - Michael's Worst Investment Ever (EP.127)

Episode Date: February 26, 2020

On this week's episode, we discuss the impact of the coronavirus, ramifications of the asset management mergers because of commission-free trading, why the top 1% isn't static, why bond yields are so low, cashing out your 401k to pay for business school and more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. 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 Rithold's wealth management may maintain position, and the securities discussed in this podcast.

Welcome to Animal Spirits with Michael and Ben. It is Monday morning, 11.30 Eastern Time. S&P 500 is down 2.8%. Fears with the coronavirus. Spreading. All right. Little perspective. This is the 260th time that the S&P 500 has fallen 2% or more since 1990.

over that time, stocks have gained 1,640%. So what am I saying? I am saying that this happens all of the time and not to minimize what's going on in China with the coronavirus and around the world because it could certainly get a hell of a lot scarier before it gets better. This is an interesting thing. We're only 4% off the highs, 4%. We're not even at pullback tax.

territory. So in other words, if we were falling because CPI came in hot or there was a bad ISM print or whatever, I don't think it would, quote, feel as bad as it does, but because we're falling on fields of a global pandemic, this has people understandably so a little bit excited. I think in terms of market catalysts, isn't this almost a best case scenario? Because a lot of times this stuff happens and we have no idea why. In September or October 2018, stocks fell 3.3% in a day. I looked at it back then and there wasn't really a reason for it. Actually having a reason while this reason comes with its own set of uncertainty, isn't it kind of nice to actually have a reason though, a catalyst? Because eventually that catalyst ends. Well, yes. You would hope

that this certainly ends at some point in the not too distant future. I think that's a good way of putting it, because when stocks fall for no reason, people's antennas go up big time. It's like, what am I missing? Right. And then they start guessing and what news is about to come out. What is the market discounting? So obviously, we have no incident onto the coronavirus.

I do for this show, kind of. Okay, go ahead. I did this a while ago, but if stocks continue to fall and we get a 3% down day, I look, that happens roughly four times a year since 1928. It's pretty rare. And obviously, those days cluster doesn't happen four times every year, but I'm I was going to say this probably, it probably goes stretches years without one four percent down day. Right. So they obviously cluster. But that's on average. It's like three point six of those a year. So it does happen, although it's fairly rare.

what do you got on the on the i've been reading for the last week the great influenza and i have to say this book scared the ever-living crap out of me and it's kind of makes me feel good that this stuff we get through it but so this was the 1918 Spanish flu pandemic which it's always been called the Spanish flu because that's where the news reports really broke out for the biggest cases but apparently it traces back to a soldier in kansas some small town in Kansas. I don't know how they were able to find patient zero for this all the way back then in 1918. But the reason that this thing got so crazy was because we were in the onslaught of people going to World War I from the U.S. and it spread throughout all of these training camps in the U.S.

as they were getting ready to fight. And then they all went overseas and just spread it around the world. So listen to this. They got into in the book, it's by a guy named John Barry. And I think it came out in like 2006 or 2007. So it's a little old. But they actually talk about the coronavirus in here because all of these different strands. Do you know where flu comes from? I have no idea. It originates in animals. So like this one is the great Spanish flu was birds. It could be from pigs. It's kind of bizarre. And when it jumps from an animal to human, that's when it mutates and goes crazy. And so here's how he describes this 1918 flu. It was as if the virus were a hunter. It was hunting mankind. It found man in the cities easily, but it was not satisfied. It followed them

into towns, then villages, then individual homes. It searched for him in the most distant corners of the earth. It hunted him in forests, tracked him in jungles, and pursued him onto the ice. The way that he describes the flu in this book made me realize that this thing is freaking, I guess it kills, according to CDC, anywhere from 12,000 to 60,000 people annually in the U.S. And most of those people are young people or old people, and they end up having these flu-like symptoms that turns into pneumonia and then they die. But the way that he explains how the flu spreads, it's, he says one thing that makes influenza unusual, when a new influenza virus emerges, it is highly competitive, even cannibalistic. It usually drives older

types into extinction. And that's why people complain when they get the flu shot every year, but then they still get sick, that a lot of times it's almost impossible for the shot to take care of what you have. But he also, on the good side of things, he talks about the fact that not all pandemics are lethal. There's going to be the cases where it kills old and young people, but the one in 1918 killed actually mostly middle-aged, people in their 20s and 30s, because it was such an unbelievable strand. But most of the time, it kind of comes in, it wreaks havoc on people, it slows down businesses, and people stop doing stuff for a few weeks or a month, and then we kind of get back on the track that we were on and things, people move on.

And it's insane to me when you read about how this stuff works inside your immune system. He basically says the body's defenses cannot find it and kill it. It wasn't like there was this, in this book he talked about how the doctors are searching for a cure or some way to slow it. And it really wasn't the fact that it, that they found a cure or anything. It was just the fact that this is almost such a finance reason for this to stop. Guess what the reason was that this thing stopped. It started in January of 1918. It basically was gone by February of 20 or 1919. And he said the reason that it died was because of a reversion to the mean. That's basically the reason that it stopped. He said because if the virus kept going and getting

worse and stronger, all of humanity would have been gone, basically. But because viruses have some sort of equilibrium state, this thing got crazy. And then it went through people and people's immunity system got a little stronger and figured it out. And then all of a sudden it was just gone. All right. So investing implications. Well, the crazy thing about 1918 was stocks were actually up that year. And I think the biggest, which is crazy, millions of people are dying in war and they estimate millions of people died from this flu pandemic and stocks were up. I think the peak to trough drawdown was like 10.9% during this.

What about today? Big disclaimer. Stocks were down 40% in 1917. And again, this is during World War I. So it's obviously context dependent. It's impossible to say right now, obviously. I think you said, well, we're only four. 4% from the highs. I don't know if that's a good thing or a bad thing. Maybe this X has an

excuse for people to sell. But again, I think in terms of avoiding all the human costs and everything else involved here, isn't this a good thing if people decide that we're going to have a slowdown and sell off because of this? Because this is something that will likely have a start and end date. And again, the uncertainty involved in it is we don't know how bad it's going to get. And it could easily get worse because stopping this thing is really difficult. Here's the other thing that was very mind-boggling from this time period. And so because we were just getting into World War I, the U.S. government did not want to get people upset. So Woodrow Wilson was the president at this time. He never once spoke in public about this year-long flu pandemic, which was

the worst one in history of the world. No one from the federal government ever mentioned this happening. So back then, they tried to sweep it under the rug, and there wasn't really this, all the resources were being diverted to World War I, and so all the nurses and doctors and everyone that they had for medical staff was there for the war, so no one could really fight this. So the hope would be that we're obviously something like this. It would take a lot for this to happen again. But he basically said, you get a handful of these every century, and there's not really much you can do about it, except try to stop the spread. So I would say probably the worst thing. Obviously, we don't have solid advice for every individual listening. Probably the worst thing

that you can do is decide to go all out, pay taxes, whatever, pay capital gains, and then wait for the dust to settle. If you really are very worried and you can't help yourself and you feel like you have to do something, maybe like sell a little bit, right? Take like a little bit of risk off the table if you have to. But this idea that you should go from either all in to all out to back to all in when the coast is clear. And then you're going to do this again and again and again for the rest of your investing life is ridiculous. So it's not don't do anything. I guess going forward probably if you're scared, you are probably taking too much risk to begin with. So someone emailed us today and they said, hey, my brother is thinking about literally selling everything. What advice would

you give someone like this? And I think what you're saying is avoid the extremes because that is just a way to play head games with yourself. If you're going all in or all based on something that you have no idea what the path is going to be on this thing. And if you're thinking that way all the time, that is just no way to invest because your psyche can't handle that over the long term. Right. So let's just say your steady state is 50-50. And this has you really shook. Okay, fine. I get it. I'm not going to tell you how to feel. Maybe instead of going to 0% stocks and 100% bonds and cash, maybe you go from 50-50 to 40-60, 30-70, whatever you have to do. But you have to avoid this all-in, all-out mentality.

Use this as a way to recalibrate what your risk targets should be because, again, stocks, they're down a lot today, but they're not down a lot from the highs or from where we just were. They're basically back to where we were in January or whatever. So it's not like it's that big of a deal. So yeah, if you want to panic a little, panic a little now, but do it again within the context of a plan. Don't just go out and say, I'm going to figure it out later because no one ever does that. No one panics and then figures out the better time to buy later. It doesn't work like that. Anyone trying to handicap what this is going to do. My takeaway from this book was it's basically impossible. This thing could go away tomorrow or it could get worse, but I'm hoping the fact that we have more readily available communication systems and people can be warned in advance. That would help, but trying to understand this thing and predict what's going to happen seems like a fool's errand to me. But here's the thing that I don't really appreciate about this thing from the finance crowd. It seems like there's a lot of people that are almost cheering this. thing on to crash the market.

Icky. Yeah, it's kind of a, I mean, you know how those people are, probably. They're the ones who've been cheering for a crash for the last 10 years. But yeah, if anyone wants to learn about this, I highly recommend this book. I've been reading it for the last week and equal parts interesting and terrifying. But I guess this is just something we live with. Let's move back to what we usually talk about. So, Morgan Stanley bought E-trade last week.

Thoughts? I don't know if people saw this one coming. but we've talked about here about the fact that the individual investor has been the big winner of the fee wars over the past couple of decades, and now it's time for the finance industry to step in. Doesn't this kind of seem like the low-cost brokerage firms won, though? The fact that e-trade is getting bought out for a premium, they beat the old-school brokerage firms, and this is them waving the white flag and saying, okay, we've been enough. It's time to take your customers from you?

Yeah, maybe. Some numbers involved. So E-Trade had five million customers, $360 billion in assets. Morgan Stanley has 15,500 advisors. So you would think that that $360 billion and five million retail accounts at E-trade is going to be fertile ground for Morgan to swim in. Yeah, I assume they're just trying to buy their customers. Obviously, this doesn't guarantee that they're going to be able to take them over. But I'm sure their hope is that they can take over many of them. I just think we're going to see tons of asset management mergers and buyouts and marriages in the years ahead because of this fee war stuff. I think people are going to overreact. We're talking before about how Robin Hood, there's no way they're worth

what they were worth before after all this stuff happened. I think someone is going to massively overpay for Robin Hood. It might be worth it in terms of like the valuation. So Goldman or J.P. Morgan, Bank of America, maybe even like, I don't know why a place like Fidelity wouldn't buy Robin Hood. Someone is going to massively overpay for them and that customer base, don't you think? Yeah, I think so. They're going to try. I just think we're going to see a ton of this in the years ahead of these marriages between different asset management firms. And I think a lot of them won't work out. This e-trade thing to me from Morgan Stanley, I don't really see the point. Unless you're just, except just buying customers, I don't see how this doesn't get a big right off in 10 years or

something. Well, a lot of the do-it-yourselfers are at e-trade for a reason. So maybe they don't want the help of a Morgan Stanley advisor. However, there's a whole other what was called a crown jewel in the Wall Street Journal article. One part that maybe was glossed over is that E-trade is really involved in, it looks like, executive compensation plans or stock compensation plans. So Morgan Stanley already moved it to that space last year. They bought a company called Solium. So maybe there's more to it than just the retail side. That makes sense. Yeah, they're trying to swim upstream in some of these companies. I just, I don't know, I think this stuff is going to continue to happen, but I also think it's a move towards more of the wealth management side

and away from the old school commission picking stock side of things. I think so many baby boomers are retiring in the years ahead and already are retired that this move into wealth management from what used to be just picking stocks and brokerage. I think that move is just going to continue to gain groundswell because people just need financial advice. And I think that's kind of what they're trying to do, too, is transition people from owning a few stocks and picking stocks here and there to having a full comprehensive financial plan or wealth management service. And here's all these other products we can sell to you as well. Well, I think you're right about the fact that we will look back on Schwab going to zero as a watershed moment for the entire

financial services industry. There was an article in Bloomberg about buying frenzy at TD Ameritrade in Schwab. What does watershed mean? Have you ever thought of that before? I know it's meaning, but actual, why watershed? Yeah, what's a watershed? You can't keep, I mean, all right. No idea. Send us an email. I just found out what Bedfellos means.

That's true. I'm asking the wrong person. So Bloomberg had a piece piggybacking off of this. Mama Pop, on an epic stock buying spree with free trades. And maybe I should be surprised. This one surprised me a little bit, but they showed that discount brokerages trading volume has just exploded in the last year, especially since they went to free. And it's basically doubled from a million trades to two million.

more or less, and this is between E-Trade and TD Ameritrade. Some of this, of course, people are going to say, oh, it's mom and pop going crazy and overtrading. The other thing is they actually interviewed someone, and this person said, hey, before, I wouldn't invest anything until I had $1,000 or $500 or $2,000. Now, anytime I have a little bit extra money, I put it in it because I don't have to worry about finding a minimum. So maybe there are some good aspects of this, and it's not all badly behaved investors that are just overtrading. Again, I shouldn't be. surprised by human nature, this surprised me a little bit. I figured the $3.95 or $6.95 or whatever it was

before wasn't that much of a hindrance to people. Apparently it was. Yeah, I'm with you. That surprised me as well. So like they said at Charles Schwab, the daily dollars traded has increased 74% since they cut the fees. So people are taking advantage of this. Whether they're completely eating up their fee savings in behavioral is remains to be seen. But it's, well, you know, it's interesting. It looks like they are responding to price cuts because if you look at this chart over trading volume, you see it trending higher over time, but then there's a noticeable leap that had to be a commission cut. And then it slowed down a little bit and then boom, explode it again. Was that some technical analysis on this chart? I think that, yeah. Is this a triple top?

Double top? No, no, no. Blue skies ahead. Fibonacci. All right. A bunch of people sent us this after we talked about incoming equality last week. And we've actually talked about this before, but the question from a lot of people was, okay, income inequality and wealthy inequality has gotten worse over the years, but it's not like it's the same people in those cohorts over time. The people in the 1% back in 1970 aren't the same people who were there in 1980 and 1990 and now, which is true. And someone sent us some research from Cornell University, and this said that over 50% of Americans find themselves among top 10% of income earners for at least one year during their

working lives, and over 11% of Americans will be counted among the top 1% of income earners for at least one year. Some 94% of Americans who reach the top 1% of income status will enjoy it for only a single year, and 99% will lose their top 1% status within a decade. There's a lot of turnover in here, and it does make a lot of sense when you put it this way. It's not the same people, and obviously there's family fortunes that get passed down and people that don't completely wreck it, but I was thinking back to when I first started. My first job out of college, I think I was making $36,000 a year. I probably had a negative net worth for at least the first eight to 10 years of my career because taking out a mortgage and paying back student loans and taking out car loans

and I was saving into the teeth of the crisis. So for a year and a half, everything I saved in the stock market just continued to go down. I had a negative net worth for a long time until things finally built up and I was able to save money and make a little more. So speaking of mortgages, It looks like I was a little early on my refi. Okay, interest rates are going down for treasuries, but our mortgage rate is going to continue to go down. That's the question. I assume so.

I don't know how close they track, but I don't know what sort of the delay they're on. I mean, I assume they track it fairly closely. We got a ton of feedback. Yes, that's probably the most feedback that I've seen on a topic in a long time. People have very strong opinions on paying off your mortgage or not. Yeah. So one of the comments that I got over and over and over again was, why would you lock in 15 years? That leaves you with no flexibility. With the 30 year,

you can have a flexibility of not locking yourself in case money gets tight. And you could just put the extra money that you would have. You could just do that manually and keep the flexibility. My response to that is I don't want the flexibility because if it exists, I'm probably going to spend that money. Yeah, you're going to figure out a way to talk yourself out of it, probably. Right. So I understand both points. I don't think there is a right answer. Again, this is not necessarily a spreadsheet question. Obviously, you want to be cognizant of what the actual math is, but I think it's more than just that. I did not hear from one person, I did a follow-up piece of this in my blog. I did not hear from one person who said,

I paid off my mortgage early and I regretted it. Everyone who said that they had done it early said that they really appreciated the fact that they did it and it gave them more flexibility and it gave them a little less stress financially. There's no right or wrong answer. The people who said you shouldn't do it and you should save 30 years and borrow as much as you can, for them, that's probably the right situation. They are probably right, but there are no right or wrong answers. And there were people who had very strong opinions both ways on this. I think there's going to be a floor on mortgage rates. I think the banks are going to keep propping them up, especially if the housing market continues to do well, where those rates are going to be more

driven by supply and demand than the interest rates on the treasury bonds. Because the 30-year Treasury is now trading at what, 1.8% or 1.9% in 15-year mortgage? mortgages are still three, I think that spread is going to widen, and the banks are going to have a line in the sand. They're going to keep it above. Maybe I'm wrong. I'm not a mortgage expert I have to see. I wonder how that happens. In other words, are there laws around how far the mortgage rates can deviate from, say, the tenure or whatever it's based on? The laws of the market, I suppose. But obviously, banks can't openly collude and say like, pss. Right. Nobody go below two and seven eighths. There you did it again, two and seven eighths. I did it again. Yep. But I, I

think a lot of it has to do with supply and demand. If there's enough people that want mortgages, then the banks don't have to entice them with continually falling rates that are continued to go lower. So I think you could see a situation where treasuries go much lower than mortgage rates do. I think the spread could actually get wider, assuming people continue to buy houses. Here's a prediction. Somebody will let us know what the deal is because obviously we have no idea. So if you are in the space and you know the answer, please email us to Animal Spiritspot at gmail.com. All right. So I don't, this is going to be rough. I feel bad just being so negative because somebody took the time to wrote this, but this was the worst article that I've read in a while. Did you read

this, Ben? Yeah, I looked it over. Okay. It was called How Millennials can make the Fed's job harder. So here's an actual quote. A young generation of aggressive savers could leave central bankers with less room to cut interest rates, which they have long done to boost growth in times of economic trouble. In other words, young people that are such great savers, I guess specifically the fire crowd, are going to change the course of the central bank. I mean, what? I thought people have no money. This is one of those arguments like, what if everyone indexed? And so this is the idea if everyone decided to go to fire and save all their money and become frugal, then what would happen to the economy? Here's another quote. There's a paradox to thrift. Saving, even if virtuous on an

individual level can cause economic trouble and mass. If ambitious cash stockpiling were to catch on, it could exacerbate secular stagnation. What is this person talking about? Here's a prediction that I'm 100% confident about. This country is never going to have a glut of savers. That is never going to happen in the history of our nation. I mean, isn't one of the talking points that we keep coming back to over and over is that people aren't saving enough, they're not making enough? And this article took the complete opposite side, like, listen, people who don't make enough money, stop saving too much money. I'm not worried about there being too many fire people.

So there's around 600 billionaires in the country. Do you think there are more or less people that are financially independent and retired early? More for sure. I mean, there's more than 600 fire blogs of people who are in the age of range of 30 to 32. Then there are 600 billionaires. So unless they're all. lying. I'll take the over. But what would you consider retiring early? Not just to fire people, but what would you, if you had to, for your own self? I mean, in the past, people would say 50 was

relatively young. I guess there's different levels. Like, I don't know. 50 is young. I think 55 is kind of young. Obviously 40 is super young. I don't know that I have like a line in the sand here, but this was an interesting survey from the article. Of millennial workers with an active 401k, 43% expect to retire before the age of 65. Spoiler, that's not going to happen. I would say more people will be working past the age of 65 or past age of 70 than retiring before. I think so many people in the young cohort will be working much longer than retiring earlier. I'd be linked yet.

Man. If ambitious cash styling were to catch on, it would exacerbate secular stagnation, I can't even believe this. How funny it would be if Jerome Powell talked about fire people at the next three? Fred Reserve meeting, right? I don't see that happening. All right, question for you. I put this out on Twitter the other day. So the trailing 12-month inflation rate is now higher than every single maturity of Treasury bonds from 30 years down. So I looked at 30, 20, 10, 5, 2, whatever. The trailing inflation rate is higher than any of those numbers. And that's just reported inflation.

Right. Yeah. Real inflation is way higher. Why is this the case? Real inflation is higher than the 30, the 10, the 5, the 2 combined. And all mortgage rates. So is this something that bond demand is just ridiculously high? Is deflation coming? Is the Fed manipulating everything? Why is this the case? And before you answer this, people said to me, well, of course, real rates have always been negative historically. And I look back. So this is going back to 1871, which is Schiller's data. Roughly 20% of the time since 1871, real rates have been negative. So that's even in the late 70s, early 80s, when nominal rates were double digits, inflation was higher than interest rates on bonds. So real rates were actually negative. So this isn't something that's completely new. It happens one of every five years, and it's happened. I looked since World War II, 14% of the time. So it happened more before then. But it's not completely out of the realm of possibility.

But how do we explain this? I mean, is this just a demographic shift where baby boomers are just buying all the bonds they can? And it almost doesn't matter. I think it's the Fed and it's demographics. I think it's that simple. Okay. Pushing back on the Fed manipulation thing. The Fed tried raising rates in 2018, long.

term rates didn't care. They stayed the same or they went lower while short term rates were coming up. So how can you blame that on the Fed? If the Fed is raising short term interest rates and the long end of the curve is not cooperating, don't you think that's one of the instances where you can say the Fed doesn't control everything? They don't control everything, but they certainly are a player on the field for sure. Yes. Okay. Is this the case where demand from baby boomers and the way demographics are set up now, these bond yields are going to remain depressed for years and years to come, if that's the reason. I don't know, but actually, I wanted to talk about the fact that you ticked off a lot of

people on Twitter, and I got to be honest, I'm not surprised. I saw that one coming. How did I do that? Well, you sent a pretty obnoxious tweet about people that have been wrong, people that have been bearish. Oh. Were you surprised at the feedback? I don't think it was obnoxious.

I was trying to be funny. I, yes, obviously maybe it came off a little obnoxious and people who were, I just said something along the lines of I've been wrong for seven years calling for a correction. It's obviously the Fed's fault and stock buybacks and all this other stuff. And I also blame me, Lecunis. Yeah, I was joking. I was poking the perma bears and some people weren't very happy with it. And I understand why these people are unhappy because they seem like they're general unhappy in their lives because they're permanently bearish and pessimistic all the time. But some people are. some of the responses were quite hilarious. I've been bearish for the last 10 years in my writing, but in my personal account, I've actually been levered long, which is the biggest lie or you're the biggest plastic bear there is. I don't know. Maybe I should just leave these people alone. Obviously, they're never going to be happy until the whole system is that. Or how about I'm only bearish because I'm worried about the next recession hurting the little man. Yes, right. It's in their conscience. And I wrote a piece basically saying, the market has always been rigged or manipulated. or there's always been something wrong with it. Markets have never been completely perfect. There has never been a time where someone hasn't taken advantage of the little guy since markets were started in like the 1600s. And if you think that this period is all of a sudden different because we have

central bank intervention, you really have to pick up a history book because there's always been something wrong with markets. And it's always going to be this way, unfortunately. I don't really disagree with you. I don't tweet like that because I don't really want all the smoke, but whatever you do tweets like that too okay no i don't i am very intentionally i don't poke the bear all right sometimes i just i have to because i see these other tweets from these people and plus i have one foot on the bear camp you know that's true you're 5% zero hedge i can empathize all right here's a tweet tom cruz is holed up at the five star gritty palace in venice after mission impossible seven is forced to halt filming after outbreak of coronavirus oh tc if anyone's going to stop the coronavirus it'll

be Tom Cruise. That should be part of his next movie. All right, so Joe Davis, who is the head economist at Vanguard, was on with Meb Faber last week on his show, and it was a really great conversation, really long one. We've talked about the fact that this is the longest expansion in history, and I think the National Bureau of Economic Research data goes back to 1850 in terms of recessions, and so I've looked at that data before saying that this is the longest one in history. He took it back to 1840, which is before Enber had the numbers, and said, that actually the longest recession-free period in the U.S. is 16 years from 1841 until 1856, which is surprised. This is like post-Civil War, and they had this debt-de-leveraging cycle from the 1830s

that economic growth was relatively steady and there was low volatility, which really surprised me that they actually had a period like this back then. So technically we have a few more years to reach the longest expansion in history. All right. You heard it here. Speaking of podcasts, I want to give a plug to Ted Citees and Dan Rasmussen. That was an excellent conversation. Did you listen to that? Yeah.

If you would have listened to me, I talked about it last week in the podcast and we talked about private equity. Did you? Go back and listen to our show last week where I mentioned it. Yeah. It was a good discussion on private equity. Well, I take a recommendation. Very good recommendation. Survey of one.

Does Michael listen to Ben during the podcast? 45% of the time. All right. CNBC, 50% of Americans don't know how to diversify their investments. So this was a JD Power survey. That's a weird one. Okay. What was the question? 50% of Americans said they didn't know whether buying a single company stock usually provides a better return than investing in a mutual fund. 35% couldn't answer the question at a 2% interest rate. How much would $100 be worth in five years? I don't expect anybody to know those answers. The first one, I actually kind of agree with because

50% of Americans aren't invested in the stock market to begin with. So doesn't that make sense when you look at the math? No, because you think 100% of investors know what diversification is? Oh, that's true. Okay, so this is just people who are investors. But I agree that a lot of people probably don't understand whether a one stock is riskier than the overall stock market or a mutual fund that's diversified. I completely believe that. And I think a lot of people in the investment industry, probably don't realize that so many people don't understand something simple like that because they just assume everyone knows everything. So I was looking at the charts today, energy stocks are getting just obliterated.

Like OIH, which is the oil service companies, like I guess Schlumberjay and Hallibur and stuff like that, that ETF is in an 83% drawdown, like, oh my gosh. But in terms of the single stocks being riskier, so you think about some of the giant names of the past and present. IBM, General Electric, Exxon, I think is down almost 50% since it's high in 2014. So, yes, obviously, I mean, it's obvious to us that individual stocks are much, but everyone knows the don't put all your eggs in one basket saying. That's true. Not a lot of people know what that actually means. That's true. All right. So Darren Ravelle tweeted a few weeks ago, NBA teams values averaging over $2 billion for the first time.

Most valuable teams, number one, the Knicks. so let's talk about your own personal bear market here yeah this is not good all right so during the finals when all the talk was heating up about duran coming to the nix i decided to look into buying season tickets because it takes a while there's a huge demand so it takes a while to get really good seats so i figured all right why not put my toe in the water i'll move up over time the market for resale is really pretty good in new york because there's always tourists coming so I figured I would get, I don't know, 80% of my money back and I would go to a few games and it wouldn't cost me that much money.

But what I didn't know was that there's a fee to even get the season tickets. So it's called like a bank. So you pay a few thousand dollars, but you get to use it. It's not like a PSL where you just pay the money. It's just gone. All right, put that to the side. So I was able to get half a season because believe it or not, there's no full season available. Thank God.

I probably would have taken it anyway. And so we didn't get to rant, as you all know. we didn't get anybody. And at this point, there's not hatred to the Knicks. It's just apathy. Nobody cares at all. And so again, I went into this thinking I'd get 80 spend of my money back. I'm selling tickets for 35 cents on the dollar. This has been by far, by far, by far the worst dollar loss I've ever taken on an investment. You basically bought a three times leveraged S&P 500 fund at the top of the market. in 2007 and have ridden all the way down in hopes that the Fed would come to your saving grace that it never happened. Well, I feel like this was sort of inside of trading because James Dolan went on the Michael Kay Show.

Don't worry, we're going to have a great offseason. Not that I necessarily really believed him, but this is the most valuable franchise in the league, which is just horrible because there's no reason for him to sell. There's literally no reason. I'm laughing at the fact that you have to not only be a. miserable fan, but then you have to lose money in the tickets as well. That's just kicking you while you're down, basically. So I'm pretty sure that this is a one and done for me. My plan of having these tickets for the kids and blah blah, blah, blah, I'm not going to happen.

Oh, well. The best thing you could do for your kids would probably be to help them become fans of another team. Let's be honest. If I can get my kids to never become a Lions fan, I'll have won as a parent. All right, you posted this chart about this one surprised me, 733,000 cable subscribers bailed on Comcast last year. Pretty big. And it showed all these different companies, but you showed a lot of these companies stock prices are actually doing okay. So you looked at Dish and AT&T and Verizon and Charter and Comcast. Well, Dish is getting crushed because I guess they're just, I think they're just TV. But so what's going on is that broadband is still growing. That's not slowing down at all. You have to get your internet from somewhere. Even if you cut the

cord, you have to get your internet. And they've just raised prices to pretty much offset because a few bucks here, you're not going to cut the cord. If you're going to cut the cord, you probably would have. necessarily for a few dollars. I can't believe that one of these big tech companies hasn't just decided to give away the internet. Amazon or Google, I want that to happen. And then these stocks would crash probably, right? Just thinking out loud, like, what are some good short ideas? You would say, oh, cut in the court is a huge theme, secular, like let's short these companies. And it doesn't always work out that way. These numbers actually surprised me. I would not have expected that. So we talked a couple months ago about how Zillow is getting to home buying.

So they have their estimate where they estimate the amount of your home cost and they're doing this thing where they will come to you with the value of your home and they'll let you know when you want to sell it and give you an exact amount so you can lock it in more or less and don't have to worry about going through the sales process. Apparently not going so well. Zillow has lost money on each of the housing sales they've done are on average. So they're selling houses for an average of $320,000 or so. They're losing $1,500 for each sale, but when you account for interest expenses and holding costs, that's an additional five grand. So Zillow's home division lost $312 million in 2019 before taxes. So apparently not so easy to get into this game. And maybe it shouldn't be so surprising just because real estate is such a local market. So maybe this is a, maybe for a lot of people, this is a good thing where you can't have these big companies come in and take over because it is so hard to, to automate this stuff, it is such a personal market where maybe a big company can't come in and do this so easily. I don't know whether that's good or bad in terms of finding the right

prices for houses, but maybe the way things are set up now kind of sort of works. Yeah. Well, isn't Steve Eisman really bearish on Zillow for just this reason? I don't know. Are we still doing the biggest short people? That's still a thing? The biggest short I'm sorry, big short Well you know what's funny Zillow's down 9% today Whatever

But it's had a pretty good run So Zillow's up 66% Of the last three years So it's still doing okay Obviously this must be a really small piece of there This is a very volatile stock But I mean So yeah over the last three years

It's up whatever What did I say 65% And that's a 60% drawdown So not for the faith of harder A few weeks ago I wrote about the New York Fed has their annual report, or maybe it's quarterly, on the state of like the U.S. borrower. It was hard to find like really bad stuff to say. By and large, things are pretty okay. But it's funny because the Washington Journal ran a headline, credit card debt and

U.S. rises to record $930 billion. Serious delinquencies increased, particularly among younger borrowers. So this is just what it is when we say like a few weeks ago, I defended Ray Dallio saying how the media is just biased or report negative stuff. And that's, That's because the old saying, if it bleeds, it leads. So, again, I read this report, and it was, I don't know if glowing is maybe too strong, but like I said, it was good. And they picked out consumer balance sheets are doing much better than people assume. And this is a denominator of blindness again.

As long as the economy continues to grow, these debt balances for the federal government and for personal households is always going to rise. And when things are going well, eventually it's going to hit a record. It's going to be higher than it's been in history, just like the stock market. And so unfortunately, these things are just always going to be the case. But it makes sense that people would read that and get angry about it. Someone sent us this. This was a really honest email we got.

And so they said they've been investing in the stock markets is 2013. And with a 4MK through work, when SPC took off this week, SPCE, which is the Virgin Galactic, Richard Branson's stock, is gone crazy. And that's the new Tesla, I guess, for the week, if we're going to throw it in there. He said he had the right idea to sell out of his raw for $40,000 and buy some stock, make a quick book. It proceeded to drop 10%. So he was in the whole $5,000, said that he lost two days of productivity at work, couldn't take his eyes off of it and sold right before it rose 23% and made back from this principle. Fast forward the next day, it's up 10% again. This time he decided to invest his

whole Roth in it. Can't explain why he did this, he said. This time he lost $25,000 and sold it before got even worse. Finally called his brother and said he couldn't trust himself anymore and his brother was a financial advisor and gave control. This was a very honest email, and it almost sounds like someone going to the casino and trying to make their money back. It shows what the forces that the stock market can make you do these things that you probably normally wouldn't otherwise do with large amounts of money. It feels like a game, right? I learned a lesson about myself this week that even someone has disciplined and informed about the markets as myself can fall into the trap of speculative mania. So I wrote back to him that this $25,000, he's going to look back as

a very valuable investment. Obviously, I'm sure it hurts a lot. But this is the thing that, like, people who, when you first open an account, you think that you're smart or whatever, it's not just about that. So I bang my head against the wall trying to do this multiple times. This person realized early. It took me, I don't know, not that long, maybe two years to figure out that, like, you either have it or you don't. And when I say it, I mean the, the emotional wherewithal to control yourself, to not chase, not revenge trade. And like I said, some people have it, but most of us don't. The temperament required to do that and not get into these situations is really difficult.

And yeah, hopefully this is tuition paid for this person. They learned a good lesson and can move on and get that out of their system. Or alternatively, carve out a really tiny piece of their portfolio. And if they want to do this kind of stuff, have fun with it, but just don't touch the rest of it. and don't go all in or all out with big pieces of your 401K, your Roth, which in 20, 30, 40 years is going to have to be a big part of your savings. All right. I've got listener questions.

Got mixed feedback and whether it makes sense to fund business school my 401K savings, since higher education expenses can now be withdrawn penalty-free, but I would still have to pay taxes on it. I thought this could be interesting discussion for the podcast. 28, entering a top 10 MBA program with a goal of being hired into an investment banking associate program around graduation. I only $200,000 for tuition and living expenses over the next two years. It doesn't make sense to use the $80K I have saved in my 401k for tuition since there's no penalty for withdrawing.

Interest rates on loans seem to run in the 5 to 9% range. So after I wrote my mortgage piece, a few people said, all right, do this for student loans now. And it doesn't make sense. So this would effectively be paying off some of your student loans early, but it's a swap from retirement accounts. This is a tough one. What if she splits the difference? It just does a little. I think that's probably not a bad.

way to do the regret minimization framework where you're not going to go all in or all out. If rates really are that high, so 5 to 9% range, that's in the range of what you get in the stock market if you're investing for the long term, although in a tax deferred basis. And with student loans, you can write some of that off on your taxes as well from the interest that you pay. I think the good thing is, if you're going into a top 10 MBA program, that's typically a good sign. You're going to get a good job.

And she says she's actually fairly confidential. She'll have a decent salary on the other side of a banking. program see how things go you could always like if you say if you use a little bit of it and save the rest and after you get out you figure like I really want to pay this off so then you could pay the rest off and and see what kind of job you get what how much money you're going to be making because you obviously really don't know so giving yourself some flexibility I agree that you was probably not a bad way to do it now that we're thinking it through I think that makes sense to not do 100% one way or the other because there's a lot of variables in here but I think she's on the right

track. All right, I am currently looking to buy an apartment in the D.C. area since I'm frustrated with spending nearly $36,000 a year on rent, without anything to show for it. I have a decent amount of savings right now, close to $20 down payment, but collecting very little interest on it and also have no debt. We're thinking that moving back to New York within the next three years. Do you think I should just forget about buying since we'll eventually move and just invest the savings I have? Okay, I have a strong opinion here. I would forget about buying. I did the math on this for my apartment when I bought and sold it. and it was cheaper than renting, but not as much as you would think.

And if you might be leaving in three years or less, I would say, I understand that it makes you sick to think that you're just throwing out the money. But with such a short window, I just, there's a lot of upfront costs, obviously, closing costs and all that sort of stuff and potentially repairs that leave you on the hook. Like, I just don't know that it makes sense to do that. I typically would say for buying stocks, I would say if you're going to own them for, if you're going to be an investor and you have something coming in three to five years, that's a good cutoff point for don't invest in stocks. Put it in something safer is my typical rule of thumb. But for a house, it's even different because stocks, the transaction costs are pretty

minimal. With the house, you're talking about realtor fees of 6% closing costs, which could be four to five grand depending on where you live, any other ancillary costs of moving and filling the house. So in that short of a time, turning it around, in the first three years, the majority of your mortgage is going to go towards interest costs and not paying down principle. So even if you have a little bit of appreciation, it's more than likely going to get eaten up. Unless you can get a five-year mortgage at one and three-eighths. Nice fraction. You're really rolling the dice here on hoping that home costs go up. And so I think that throwing your money away on rent thing sounds good in theory. But again, you're also paying property taxes and interest expense. And that's a

game for a turnaround. I think you have to thread the needle to make it work financially. It's a lot of headaches too, owning a house and buying a house and then going through the selling process, turning it around right after you buy. You really have to understand what you're getting yourself into if you're going to do that. You guys often say that we should see what our financial advisors are invested in to see if they put their money where their mouth is and invest as they advise. I decided to ask my advisor. He said 20% is invested in the market in the same manner as he advises his clients and his retirement accounts. The other 80% is invested in real estate. His explanation was that his income and business are tied to the market. So he lacks any diversification if the market tumbles and his

income will be way down. So he might have clients that leave or his investments get slashed. What do you think? Does this make sense? Should this disqualify him as a financial advisor? Well, it's good that he was being honest with you. And I understand his logic that he wants to be hedged because he has so much exposure to the market. He's like leveraged just via his business. I don't think that disqualifies him. If they're giving you good advice, I don't know. What do you think? I think, yeah, it has to be if they're not going to be invested in those same things

that you are going to be in, there should be a pretty good explanation for it. And, I mean, anyone in the financial services industry could say this that they're too tied to the stock market and what's going to happen there. I think as long, again, as you say, this person is giving you good advice and you trust them, I think that's probably all that matters. I think the big red flag would be if they're telling you to invest in a portfolio of these certain products, whether it's mutual fund or index funds or ETFs or even individual stocks, and they're investing in something completely different in terms of the market in that

way. So if they're using other types of strategies and they're using all hedge funds and private equity in telling you you should do something different, that's probably more of a red flag to me than this and someone who has their money in real estate. But a lot of it depends on what type of advice you're getting from that person. All right. Recommendations. So it pains me to say I was very much looking forward to the Hunter series on Amazon Prime with Al Pacino and a bunch of other people who I don't know. Actually, Saul Rubenek is in it. He makes an appearance, the guy from true romance and other things. And it's just not that good. I think I'm going to bail. The trailer looked good. I'm on the third episode. Like, the acting is pretty weak, very weak, and the story is not great. So I love the idea. It's just. don't really like the execution. So maybe I'll watch the third episode. And if people think it's good, I'll come back to it, but I think I'm going to stop that. So I've been like all in on the World

War II stuff. This weekend, I watched the pianist with Adrian Brody. You ever see that? Pretty good. He won an Academy Award for that, right? He did. And I believe it won best picture also, 2002. It's not like a movie that I'm going to like pound the table on you must see because it was long. It was, I guess, obviously not exciting. It's about the World War II. So I guess that's to be expected, but it was definitely a very good movie. And I'm also reading a book around that time period called The Devil's Chess Board. And it is about Alan Dulles and the history of the CIA. And it's eye-opening and frightening. I read a book a year or two ago called Legacy of Ashes. Yeah, you're a big CIA guy now, huh? Which was the history of the CIA. This

one is more of a biography on Alan Dulles. And what a frankly terrible person he was. He was basically I mean, maybe this is too strong, but sort of a spy for the Nazis in ways. And he was a lawyer on Wall Street. And then he went to Europe. So he had a lot of connections with the Germans. They told the story in that book, a story that I've heard just offhandedly in my life. I think a lot of Jewish people have heard this, that Franklin, that FDR sent away a ship of Jewish refugees trying to get away from Europe. And he basically sent them back. And so you ever hear that before or no. No. So that is true factually, but there was a lot more to it than just what I've heard. So I was really glad to read that story. So anyway, I'm only 100 pages

in, but I'm like all in on this stuff. I think it's so fascinating, all of the espionage stuff and all of the pretty horrible things that we've done in our history, like in terms of government surveillance and all that sort of stuff, just pretty eye-opening. So that one I would highly, highly recommend. That's it. All right. Besides the great influence of book, I've been reading the MVP machine by Ben Lindberg, and it's basically the sequel to Moneyball, and it's saying, okay, the quantitative stuff is out of the way, what's next in baseball. And this made me realize why it was so easy for the Astros to cheat, because they're talking about how they're taking these new cameras they have.

They can hone in just on a pitcher's index finger and realize which spot of the ball it's coming off of when they're throwing a certain pitch, and they can watch it in slow motion, and over and over again until they get their finger in the perfect place. They get these things down and they're talking about how the new thing is not only the quantitative stuff, but helping people improve and changed into different players based on the stuff that they do. And so they're talking about actually molding players, and it's not more about player development, which is interesting. But it's also just made me realize how easy it is to cheat because the technology is so much better these days,

that I'm not surprised that these baseball players have been cheating for so long the last few years doing these things because the technology is just so much better. I also read Life Isn't Everything, which is a Mike Nichols book. He's a guy who did The Graduate and Birdcage and Regarding Henry and Working Girl. A lot of it was a little over my head and before my time, but the whole chapter about the graduate with Dustin Hoffen and how that came to be and how he was this unknown actor living with Gene Hackman and Robert Duvall in the 1960s. Just they're all broke and not big into acting yet.

How did you find that book? I can't remember who. Someone mentioned on a podcast. Do you know that he's Rachel Nichols' father, he was Rachel Nichols' father-in-law? Okay, maybe that's from Bill Simmons. He mentioned it on that. And I read that. And it's, the book is worth it alone just for the whole chapter on the graduate, which is a book, a movie I saw probably in high school or college. I never saw that movie. It's very weird, but it definitely worth watching. And I watched before sunrise this weekend. What's that? That's Ethan Hawke. And he goes and he meets a French woman in Vienna and they walk around and they have this one magical night in the 1990s. And they did two sequels of it. And they just meet each other and then they never see each other again. Or that's that. That's the end of the first one, at least.

And sometimes movies from the 90s are ruined by technology. These days you say, oh, home alone would never happen today if there are cell phones. But this is actually one where because social media and cell phones didn't exist, it actually makes the movie better. And it's like you're romanticized for that time a little bit. I've seen that movie before, and I'm a big fan of that one. What was it called? Before Sunrise.

And then the next one is before sunset. And then they do a third one called Before Midnight. And they follow these people on their journey as they get back in touch with each other over the years. It was like a one night, one day they met, and then they had this romantic exchange, and then they parted ways and went back to where they lived. Sounds like when you and I first met. Something like that. And it takes place in Vienna, which is my favorite city in the entire world. All right. Animal Spiritspot at gmail.com. Send us an email. We'll talk to you next week.