Animal Spirits Podcast - Nobody Wants to Listen to Your Podcast (EP.13)

Episode Date: January 17, 2018

On this week's show, we offer career advice to a young person starting out in finance, discuss our rules for writing effectively, talk about the craziest story we've read on the crypto craze and more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, the podcast that takes a completely different look at markets and investing. I hate the people who talk about it all the time, so I didn't want to be one of those people. From two guys who study the markets as a passion. Can I count on you to talk me off the ledge partner? Yes, and that's what this podcast is for. And trade for all the right reasons. That's my due diligence. I'm in. Dude, if you're in, I'm in.

A line of thinking is the higher the volatility on an asset, the higher the volatility on the opinions. so I feel like you have crazies on both sides. Here's your host of Animal Spirits, Michael Batnik. I can say that I was never driven by money. So you were trading three times leveraged ETFs for the love of the game. Exactly, man. I'm a purist. But anyway, and Ben Carlson.

This is true. I do not drink coffee. I've never been on Facebook. I've never done fantasy football. Oh, one last thing. Michael Batnick and Ben Carlson work for Ritt Holtz wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management.

This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. Now, today's show. Welcome to Animal Spirits with Michael and Ben. We're going to start out with the reader question that we got this week. I'm a level three candidate in the CFA program and would love to hear your thoughts

for someone entering today's finance industry given the massive threat of automation. Not necessarily looking for specific advice here. Just curious as to what you guys would do if you were entering the field tomorrow, fresh out of school. Would you get the CFP or CFA if you had to do it all over again now? Yeah, this is a good question. I actually gave a talk to a local college here. I talked to them once a year to one of their finance investment classes, and they asked me something similar. And I think I would probably do things a little differently now.

So I've been in the industry, I don't know, 12 or 13 years. And, you know, I think the CFP, CFA thing is kind of an interesting one, I think there's going to be a lot of change coming to the investment management world. So I think there's going to be a lot of consolidation in the automation thing is interesting. So I don't know what I would do if I had to do it all over again, but I think knowing what I know now, I think there's going to be a higher demand for people that have a CFP than the CFA going forward because people are going to need advice instead of investment recommendations. I totally agree, especially for young people.

There is a much higher demand for young advisors because the average advisor is close to 60. So I would say that for me personally, I think I would still do the CFA because that's just where my skill set lies. I'm much more comfortable analyzing data than I am talking to clients. But if I were to give like generic advice, if you are a people person, I think that professionally you'll do much better going for the CFP than for the CFA right now. Yeah. In terms of thinking about careers and automation, I don't think it's something that, you know,

robots are going to take everyone's job in finance, but anything that can be automated. will is kind of our way of looking at the world. So I think if you're trying to get a job, you have to figure out how to help people and give good advice and communicate better. So I think those are the kind of things that are not going to be able to be automated because that's just interpersonal skills. So I think if you think in that, in those terms, that's helpful. But in terms of young people, there are so many different areas you can go into in finance. So I think trying to pigeonhole yourself one way or the other one you're just starting out is kind of tough because there's just so many different routes you can take in evidence, you can take in firms.

And so I would just be fairly open-minded and realize that this industry could take you anywhere, really. Yeah, that's a good point. So where you start is certainly not where you finish. And I wouldn't necessarily keep my eye on the final destination because when you're young, you have no idea. Like when I first started, I didn't even know what the job opportunities were. I didn't know the different jobs that even existed. Yeah, me neither. You have no idea who you're going to meet, what your path is going to take. So I think that This is really a question that you have to ask yourself. Do you want to work with clients and help them develop financial plans and get into

a lot of the human side of it? Or are you more comfortable with numbers? And I think that's a really good way to think about the CFP versus the CFA. Yeah. And I think when you're young, too, you really want to hurry up and get to your dream job right away, which is always kind of tough because you're struggling. And a lot of times you're working for people that you don't want to work for or companies that want to work for.

But I think part of it for me was, and it's easier to look back now, but I was figuring know how to not do things a certain way in some ways. So I think when you're young, there's a lot that you can learn on the job where you figure out this is what I don't want to do or this is how not to do something. And I think that there's a lot of value in that too. Yeah, that's what happened to me. So I graduated in 08 and I got a job at an insurance company. And I mean, I thought it was great at the time. There was a lot of people around me making a ton of money. It was a very high energy, a very seductive place to work. But I quickly realized that I hated cold calling. I hated the idea that whole life insurance was for everybody. So

It was not a pleasant time, but it was a fabulous experience in hindsight. And the good thing about any of these designations, whatever you want to do, if you put in the time and effort to do one of these things, it shows an employer that you're capable and you're willing to learn a little bit more and go for something. So I think whatever route you choose, depending on your personality or what sort of jobs you want to get into, I think going one of those routes, whether it is the CFP or the CFA or any other designation, is probably a good thing if you're looking to hop around a little bit because, you know, employers look kindly in those things.

Yeah. I reread a book this week called Nobody Wants to Read Your Shit by Stephen Pressfield. And he made a really good point. I think the title of the section was everybody has to work for Charlie. And I hope I didn't just completely make that up. So he worked in advertising for a long time and he wanted to be a writer. And advertising was certainly not his dream job. But he said, quote, Ridley Scott worked in advertising.

So did Seth, Ejit Ray, and Scott Fitzgerald, and Salomon Rushdie, and hundreds of others who went on to produce immortal stuff in the real artistic world. It's okay to work for Mr. Charlie once in a while. We can't all be Bob Dylan or Neil Young, end quote. Yeah, that's great. He's a great author. He actually wrote The Legend of Bagger Vance, if you've seen that movie. When I actually wrote my first book, I asked some people for people who had written books

before for some advice on what to do and how to think about it. and one of the pieces of advice I got was read Stephen Pressfield's The War of Art, which was a really good book. And you actually wrote a piece this week, some advice for aspiring writers, which I thought was interesting. It's kind of funny because we write for blogs, I don't always think of myself as like an author, even though technically we are. Like, I would never describe myself as an author to someone. I actually, I had that draft up for about two weeks because I was like, I don't know, I was like a little bit uncomfortable at giving advice because it's not like I'm some terrific writer, like, far from it. But it was well received. I'm happy

I wrote it. Yeah. So what's some of, give some of the broad overstrokes of your overview of your some of your advice here for young writers. So nobody wants to read your shit is probably the best advice that a writer can get. And, and the takeaway from that is just be respectful of the audience. Stephen Pressfield said that it's a transaction between the writer and the reader. So respect their time. So some of the things that I thought were important is less is more, keep it short. The first thing that I do, so there's so much good content right now. It's, it's so important. it's impossible to be with everything. And it seems like even great quality has a half-life of like 11 seconds these days. So you really have to hook your reader very quickly. And so the

first thing that I do when I open a new piece is I scroll down to see how long it is. And if I'm scrolling for more than three seconds, I'm probably not going to read it or I'm going to get to it later, maybe. So keep it short is really important for me. And again, this is just my opinion. I think that there's some people that really love long-form pieces and there's some really and long-form writers out there. But this is just sort of generic advice for writers that are beginning. Do not send it to people that you respect that you would like to share it with, at least early on, because you only have one chance with a stranger. So when you start out, like when I started writing, it was really bad. And I was happy that I had a long runway because

nobody was reading me. So it didn't really matter. So the first few years, I was just kind of practicing. Yeah, I get questions for people a lot about how do I build an audience? And people want to just make that huge leap right away and not really put in the time or effort, which of course makes sense. We're sort of this instant gratification society or whatever. But yeah, I agree. If you're going to send something to someone else, don't just ask them to share with their audience they've already built, which is a great way to get a bigger audience because if someone already has built an audience and they like your stuff and share it, that's great. That's how my stuff got shared originally. But it wasn't for a long time after I was writing that I finally had the guts to send

it to some other people and say, hey, you've written about something like this in the past. find this interesting. So yeah, wait until you can actually help them and give them some good thoughts or ideas before you just send it out and say, hey, help someone out, please. I'm trying here. You need to actually help someone else if they're going to help you, I think. So what do you think about, like I used to struggle with thinking that everything had to be like a home run, but not everything has to be a masterpiece. Now, I certainly wouldn't publish like, you know, a piece of shit either just to get it out there. But I would really not worry about having everything be of Shakespeare and quality.

Yeah, and I think a part of it is what you're trying to get out of your writing, too. So part of it for me is I've learned that writing is really helpful for me personally, as far as getting my thoughts together and gathering, you know, what I really think about something. So I think putting stuff down and writing on a consistent basis actually is part of my routine now. So for me, I don't mind writing quite a bit. And if every piece isn't the masterpiece, that's okay. Others are looking to write something, you know, few and far between and looking for the highest quality thing. But that's what's always funniest to me is that, you know, I write a

blog. I don't have an editor and people say, hey, you have a typo here and make it sound like it's the end of the world. But it's like that stuff doesn't, you know, really matter to me. It's, it's more the message in getting things right as far as the messaging goes and communicating effectively and that sort of stuff. So, yeah, I don't think it has to be, everything has to be a masterpiece. But I think the biggest thing that you talked about was just finding your own voice and really writing more conversationally, I think, works better than trying to. to make it sound like it's from an academic journal that no one will be able to relate to? I actually just remembered when you said that the very first thing that I did was I wrote about

the insurance company that I used to be at. And because I was reading so much of Josh and because I looked up to him so highly, I basically was trying to play Josh Brown in my first post and it was awful. So yeah, it was it was cringy. Yeah, it's good to read other people, but definitely Yeah, find your own voice in your own little niche and not try to simulate what if someone else does because that's impossible. So the craziest story I read over the weekend was this crypto crackout story from The New York Times and it was a crazy headline. I can't stop listening to Coin Daddy. Yeah. It's called everyone is getting hilariously rich and you're not. And the craziest picture is this guy wearing like a white mink coat and he's got gold shoes on.

And he says he's a crypto rapper, and he's got this crazy hat on. It's this story is just, I mean, obviously for any of these things, I'm sure with any of these sort of manias, you can pick out the worst of the worst or whatever, or the weirdest stories and go with it. But this thing is just bonkers. Actually, the New York Post just tweeted that the Bunny Ranch is considering accepting Bitcoin. I would have preferred that the Bunny Ranch demands payment in Bitcoin for it to be a true sign

at the top. This story is basically about all these 20-year-olds in California who, For, I mean, and good for them. They put a ton of money into Bitcoin and Ethereum and all these cryptocurrencies, and they're all millionaires now. It says this one guy put $400,000 in Ethereum when it was at 80 cents, and now it's, what, over a thousand. So he's made hundreds of millions of dollars. But he talks about, he gives these quotes as this 20-year-old who's got no world experience. And he says, the entire world is reorganizing itself if we can get rid of our armies because for the first time he'll have people saying, I want to vote for a global order. It's the internet waking up. It's the internet grabbing its pitch for. that's the blockchain. So he's like, he's, he's one of these cryptocurrencies are going to overthrow all the governments. And my sort of take from that was that these guys are all going to need to see a therapist someday because they're, the money has just completely gone to their head. And they're, I mean, obviously you find this stuff with all these different kind of manias, but it's, uh, this story was just bananas, I think. Yeah, I don't really have like

anything to add. It's just nuts. I just love the, the headline. Everyone is getting hilariously rich and you're not. It's, it's like the ultimate. And getting people to worry. And of course, this thing came out and four or five days later and everything crashing. Yeah. So we always say that you'll never know which magazine marked the top. But man, this seems like a worthy contender. And if it did, it would be it would be very poetic if this was, if this was the peak, because that was, that was amazing. So yesterday, the pseudonymous blogger Jesse Livermore wrote a really good piece. He's been dormant for a while. So it's good to see him back in the game. And he shared a really interesting chart how state and local pension funds

have allocated their capital between fixed income and equity, which we'll share in the notes. And what you see is basically it starts in 1952, and it's a steady rise higher in equity and less in fixed income. And actually, the blue shade looks sort of like the S&P 500. Well, the crazy thing is basically these pension funds in the 50s had zero allocation to stocks. They were all fixed income and part of it was that's what they were mandated to do so there was this thing called the prudent man rule the prudent investor rule which was set up way back in the day and basically it was kind of like a precursor to fiduciary rule and sorry if someone just fell asleep listening to this but anyway basically what it said was you have to take care of your capital and always have

principal preservation and so these pensions would just invest all of their money in bonds and they thought stocks were too risky. And so in the 50s and 60s, basically these pension funds had no money in stocks. And it's just slowly crept up over time to now it's close to 70% of the money is in stocks. And these funds are still having a problem reaching their goals. Well, in 1952, when this chart starts, the DA was still below its peak in 1929. So nobody wanted anything to do with the stock market. There was a really good book by John Brooks called the go-go years. And in it, he talks about the fact that in the 1950s, the price for a seat on the Florida New York Stock Exchange was where it was in like the 1910s or something crazy like that.

Yeah, no one, yeah, that's why it's so good, I think, to read financial history just to get a better sense of what was going on in the markets. It's easy to look back and see like the historical returns from those decades. But to get a real understanding of how people invested and how people actually thought about the markets, it just shows how crazy things have changed over time and how different they are now versus then. It's just, it's a completely different ballgame. So obviously structural changes in the marketplace. And Livermore says, quote, as the chart makes clear pension funds allocations to equities have increased dramatically over the last several decades. This shift is likely to be one of the primary reasons that equities are more expensive

today than they used to be in the past. When a large market participant undergoes such an extreme change in its preferences, the impact is bound to show up in prices and valuations, end quote. I pulled out an old Peter Bernstein quote, who was one of our favorite investment thinkers of all time, and he talked about an interview that I found earlier this earlier last year. He talked about how he said he came into the industry in like 1951, and he said, and no one in his generation was interested. Like you said, following the Great Depression, no one wanted anything to do with stocks. But he talked about how there were laws in place that you couldn't have more than 35 percent

of personal trust in stocks. That was like a law that was in place. And in New York State, you couldn't own any common stocks in the pension plan because of if you were trying to be a fiduciary. So it was just people didn't think of stocks the same way as they do now. They were much, much riskier looking back then than they are now. In 1954, when the DA was approaching its 1929 peak, I think Congress called in Ben Graham to ask him, like, what was going on and are stocks about to crash? And what did Graham say? It was actually really good.

Well, it's worth, it's worth reading if you never have. I'll share it with the show notes. So one of the things that Livermore did in this piece was he asked, if the S&P 500 stays at its current valuations indefinitely to the future, what return will it likely deliver? And he did some really neat stuff, and he arrived at just under 6% nominal return. And the whole point was that if you're getting 6% in stocks and over the next 10, 20 years, and we know what we're getting in bonds roughly, the idea that pension.

funds are going to hit the 7.5% boge seems highly unrealistic to state the very obvious. Right. Yeah. Especially if they're all, you know, heavily allocated to U.S. stocks. And so I think actually 6% nominal returns from here for the next decade, I think would be a pretty good thing for investors if that happened. Yeah, I'd sign up for that. I think the worst case is obviously, you know, he's giving the best case scenario. So the worst case is much worse than that, obviously. So, yeah, so I think, again, we've talked about this in the past, this is one of the reasons these pensions are really making a push to alternatives. Hopefully they'll also make a push to foreign markets, which we think offers a little more value than

U.S. stocks. But, but yeah, his outlook here, especially if we're looking at a 60-40 portfolio, is pretty grim, which, you know, you shared some stats with me today about what a 60 portfolio has done over the past, whatever, four or five years. So why don't you, you fill us in on some of that? Yeah, so we were looking at this, just a plain vanilla 6040 U.S. portfolio. So 60% S&P.5, 500, 40% Barclays, aggregate, just the total bond index. And the last nine years for that portfolio have been positive. So it's sort of funny that we've been hearing about the death of the 6040 portfolio for probably the last three or four years. And at some point, the returns will not look like to pass, obviously, because the last nine years have been positive, averaging 11%

returns. And a 6040 portfolio has closed at an all-time high on a monthly basis for the last 13 straight months, which is pretty wild. So over the last nine years, bonds have given you just under 4%. And stocks have done close to 16%. So to say that that won't continue seems just like an obvious thing to say. And research affiliates has a post out where they are projecting 6040 portfolio real returns over the next decade at just under 1%. So the funny thing is, is that we always talk about the 6040 portfolio, but the joke is that no one actually invests in it. But it is a good proxy for, I think, and benchmark for these kind of things, because that's probably the close to the equity bond mix that a lot of these funds have. Something happened over the last few weeks that

hasn't happened since 2008. So two-year U.S. Treasury yields are now yielding more than the SP500. That's just dividends to interest. There's been a lot of talk over the last few years, how savers are being punished with low yields. You could also obviously make the counterpoint that if they at a diversified portfolio, they were rewarded with higher stock prices. But I think the message is that really people should be careful what they wish for because even though you've gotten, say, basically zero on short-term rates, on short-term bonds, bond funds indexes have done pretty okay. And if rates do rise, which is the idea behind fixed income, if you want income from your bonds, you want higher rates. But if rates rise too fast, well, then it's either going to derail the

economy somehow or make stocks less attractive going forward. Right. The whole punish the saver thing is kind of a misnomer too because the alternative is people have a lot less money in their portfolios than they do now. If you want higher dividend yields and higher interest rates, guess what? And lower valuations, that means that things haven't gone up as much as they have. So I guess in some way you could say that we've pulled some returns forward, which I guess always happens a little bit, but I think it'll be interesting to see if, and this is just short-term rates, because long-term rates haven't gone up nearly as much. That's why people are worried about this inverted yield curve, which is maybe a topic for another day. But I think it will be interesting

to see what happens if rates do continue to rise and stocks actually get some competition. People say, like, hey, I can get two, three, four percent in bonds. Why am I in stocks if I can get something a little safer here? I think money market funds are yielding like one and a quarter percent or something like that. So if rates continue to rise, then it's not that they're going to just kill bond prices. Maybe they will, you know, not maybe. They will hurt bond prices in the short term, but will improve total return of the long run. But it's the economy that people have to worry about, not just their bond prices. Right. Yeah. So if higher, like you said, if higher rates end up throwing us into recession, then, yeah, you'll have much more to worry about than what you're-

than lower bond prices. Yeah, exactly. So one more. listener question that will end with. If a 30-year-old client has the risk tolerance and emergency fund in place, is there any reason why their retirement assets should not be 100% equities? And this feels like a trap. Yeah. Well, I think that it seems like a no-brander to say that young people should have all their money in stocks. And I think a number of years ago I probably would have agreed with that, that of course it makes sense. But this is ignoring like part of the equation. So whenever you're looking at your risk tolerance, you're looking at your willingness, ability, and need to take risk, and obviously if you're a young person and you have

all these other things taken care of, you have an emergency fund, you know, you have all these other things figured out. Your ability to take risk is pretty strong, but your willingness to take risk usually has a much greater pull on what you can stick with. So it really depends on how much risk you're willing to take, I think. I would say that the most important thing before you invest is that you should have at least a few months of cash on hand. And I don't really care about missed opportunity costs in terms of what the three months or six months of cash could be in 30 years. That's irrelevant. I think you should always take care of yourself first. So have that in the bank. And then beyond that, for myself personally, I have most of my liquid money in stocks.

Well, yeah. But I think the thing is like, you know, it's one thing to think, yeah, I can handle stocks because they're the highest returning asset that there is. But it's another thing to sit through losses and sit through a bare market. So it really depends. Can you actually sit through it? So my favorite quote on this is from Fred Schwed, who wrote the book, Where the Customer's Yachts, which is probably actually one of the funniest investment books ever. And he said, there are certain things that cannot be adequately explained to a version by either words or pictures, nor can any description I might offer here even approximate what it feels like to lose a chunk of real money they used to own. So I think that's just the hardest thing for young investors to

deal with is losing money, especially when they're all in stocks. But I would also make the counterpoint, and not the counterpoint, because he's absolutely right. But I think that investors at a young age can learn a really valuable lesson if they overestimate the risk tolerance because it's better to do that with a small amount of money and find out, oh shit, I actually can't sit there while my money loses 30% of its value or more. So I would say that it's probably not a bad idea just from a behavioral experiment to see how much risk you're actually willing to take with a small amount of money. True. Yeah. Make your mistakes while you're young and you have a relatively smaller nest egg as opposed to when you're older. Okay. Have you been reading anything

interesting lately, watching anything like that? Yeah, I read the most entertaining finance book I've read in a long time, read notice by a guy named Bill Browder. And on the cover, it says something like it reads like a John Grishman book and it really does, but it's true. This guy was a hedge fund manager in Russia when they opened up their stock market and then Putin came after him. And it's just, it reads as if it's a movie. But it's actually a true and very tragic story. So highly, highly recommend that. And then I also read another book this week that it was good, but I actually judged it by its cover. It's called the Island of the Blue Foxes. And I was slightly disappointed again because I'm an idiot. And I saw the ship on the cover. And I tend

to like these sort of survival stories. But it was interesting. It was about the story of, again, in Russia. They sent the most expensive scientific expedition ever undertaken. They sent all these people to discover America and Bering of the Bering Sea and the Bering Strait. It's the story of how he and his crew got shipwrecked in Alaska. So it was good, not fantastic. So it sounds like you're really into the motherland of Russia lately. Yeah, I was just thinking about it. Okay. So I reread skating to where the puck was the correlation game in a flat world by William Bernstein, which is just one of his small little Kindle books that he wrote, which I think is great in terms of, you know, asset allocation. So I listened to a great podcast this past week. So I mentioned

this one before, but there was a podcast called Origins by James Andrew Miller. And he's the guy who wrote the whole book on ESPN. It's like this 700-page-long book on the oral history of ESPN. And his podcast is kind of similar. And he did one on the show, Pardon the Interruption, or PTI, which I think is probably the, my favorite sports show of all time. And, It was kind of a behind-the-scenes look at how that show got started. And I think we kind of take it for granted these days because there's a million of these sports shows out there that they have people screaming and arguing with each other.

But PTI was way ahead of the game when it did that, you know, before all these other ones. And the interesting finance tidbit was there's a guy named Eric Riddholm, who is like the producer. And the idea behind the show was it wasn't really Kornhires and Wilbon, who are the stars of the show who really came up with the concept. It was all these people behind the scenes. And this Eric Ridholm guy actually got his start at The Motley Fool. which is like the stock picking finance website.

I actually knew that. Morgan told me a story about that one time. Okay, yeah. So he said he was the third employee at the Motley Fool, and now he's the producer at PTI. And they said they gave him a lot of credit for developing the show the way it's been and not just the host.

And it was a really interesting look, not only at the behind the scenes of how they got this cool sports show to go on, but also how to cultivate creativity within a business and how to let good ideas sort of germinate within an organization, so it was a really good on podcast. I really like that one. And the only other one, and we have to thank

a listener for sending this recommendation. I think we both listened to the podcast, Dear John. Oh, that was freaking awesome. Which was excellent. A listener emailed us on that one, and it was like a true crime story. There was murder and there was a con man and he was terrorizing these victims on the internet, and there's all these crazy

backstories. And so if you like true crime, I highly recommend that one. I plowed to that one pretty quick. All right. We really appreciate everybody taking the time to listen. We know there's a lot going on in the world, a lot of different options that you could be listening to instead of us. So thank you very much. We really do appreciate it. And we'll see you next week.