Animal Spirits Podcast - Stocks Are Not Bonds (EP.31)

Episode Date: May 30, 2018

The risks involved in concentrated stock positions, why factor investing is so hard, the limitations of historical market data, the myth of the marshmallow test, the downfall of ESPN, Michael's book of the summer 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. If you followed us into the 100-year bond, Argentinian short in the past weeks, we're going to take some money off the table and put it into Italian two-year bonds. Apparently, that's the crisis de jure. Apparently Italian bonds, two-year bonds plunged the most since the euro came into existence because people were worried it could leave the common currency. I'm still trying to catch up on the Cyprus crisis from a few years ago, so I'm kind of behind on this one. Yeah, this is like 2011 all over again. Which, yeah, I feel like, do we have to start learning central bankers' names in Europe again? I refuse. Then we forget. The market forgets about in two months. Okay. We'll see where this goes.

So a reader shared with us an amazing thread on Reddit. And the title is, my dad has $1.8 million worth of GE. What should he do? This is roughly 90% of a stock portfolio. I wanted to diversify a few years back, but he's held the stock for years and it's quite stubborn. He's 67 years old and is retired for GE within the next year or so. He will then receive a pension. So this got 124 comments and the first one was, leave and B, it makes sense to me, with $1.8 million at a close to 4% yield, he is getting an additional $72,000 on top of the pension he will be receiving. And a lot of people echoed these thoughts that, you know, why would you sell it?

It's $72,000 a year. It sounds pretty good. By the way, that first comment says it's already down near all-time lows. Yeah. The comments are gold. But anyway, I said to the guy, oof, and then he responded that, check the date. So the date on this was, it just says eight months ago. So we're going to say it was sometime in September 2017.

So that $1.8 million is now just over a million dollars. And since then, actually very just about two months after this post, GE cut their dividend in half. So stock in half, dividend in half. So it's still yielding around three and a half percent. But on a million bucks, that's like $35,000 a year, down from $72,000. Yeah, and that, yeah, so that yield is the same yield, but the amount has been cut in half. So it's, yeah, that people that think dividends on stocks are just going to be there always. It doesn't make sense.

It doesn't, that's not how it works. So we like to say that a stock is not a bond because it's not, you know, the dividend is not promised to anyone. It's, this is tough. I wonder if this guy held the stock still. Well, probably. And it's really hard just sort of giving this casual advice, like to your dad or a friend, because this is a life decision, right? This is like a hugely influential life decision. So now what does the kid say to his dad? I mean, what can he say? But I think there's a lot of lessons here.

One is, for God's sakes, don't have 90% of your net worth in one single stock. And I don't care if it's general electric or Apple or whatever. It doesn't matter. This is a really good lesson of the dangers of hyper concentration. And then the other is that, to your point, stocks are not bonds. All these people that said he was going to be receiving $72,000 a year. Well, that has now been cut in half. It kind of reminded me of the financial crisis when the bank stocks blew out these huge dividend yields. I remember Bank of America at one point. This is before the stuff really hit the fan was yielding like 10 or 12 percent. People said, oh my gosh, this is a huge, huge opportunity. And of course, the dividends all got cut. The stocks plunged further. So it's like there's this

idea of it would be great if you could just retire and live off of the income, dividend income or bond income, but it's kind of unrealistic if you're not paying attention to total returns. And the other part here is the fact that if this guy had close to $2 million in GE stock, he already kind of won the lottery in some ways. And it's like, so the old adage that you concentrate to become wealthy but diversify to stay wealthy, so it's like eventually you have to take some of those chips off the table. Again, I agree with you that trying to have 90% of your net worth in any single stock is very risky.

But let's say you did that. And some people do win the lottery and get lucky that way. at a certain point, you know, you have to just cash it in a little bit and take some risk off the table, especially if you're retired. Yeah. Yeah, pretty incredible story. So AQR has a piece out last week talking about small cap stocks, and I forget the title, but it was basically like the myth of the small cap premium. And this was very academic. And it basically said that small caps outperformance is not alpha. It's really just beta and it can be explained away. So I think the take way was that was not that you shouldn't own small cap stocks. They are diversifier. They do behave

differently in large cap stocks. They have offered a higher return, but at a higher cost, right? Like, there has been much more volatility in small stocks. So one of the things that they do to isolate these factors is that they go long the cheapest and short, the most expensive. And they do that across five different areas. They do that with momentum, with profitability, with betting against beta, which is basically long, low beta and short high beta. and they do it with small stocks. And no matter what the metric they used, whether it's the sharp ratio,

the T-Stad, or anything else, the size factor by far has the lowest of the five factors. And what they were getting at is that why does small-cap stocks get the most attention when it has the weakest efficacy of all five factors? By the way, nice usage of the word efficacy there. I was actually thinking, did I say that right? I think that's right.

So the paper is called fact fiction and the size effect, and I think there's a lot to unpack here because one of the biggest things I think a lot of people don't understand when they look into these factors is how academic and quantitatively oriented these studies really are. So like you said, they do long, short studies. I don't think a lot of people even realize that when they're looking at these size quote-unquote premiums. And from my standpoint, I guess I never really attributed alpha to investing in small caps. I always kind of assumed if there was a small cap premium, then it was because you are taking more risk,

because smaller stocks have more risk. They could go bankrupt. There's more of them. They're illiquid. So I always kind of assumed that you were getting paid to take more risk. And if anything, that's why small caps could have given you a better return. And AQR has written a lot about this, and they actually show that just some simple screens for quality and value can actually, you know, immensely improve your, returns in this space. But I think a lot of people probably don't understand a lot of the

quantitative research and academic studies behind these kind of things. Yeah. One of the things that they said that I liked was, so the size premium on its own is significant, but adjusting from market beta and when there's an insignificant. Again, this is very nerdy. They're not, they're not saying that the premium has not existed. They're just saying it was not alpha. It was just beta in disguise. And you have talked, you and I have talked about this a lot internally about small caps. And I think if you're investing in factor, any sort of factor with the impression that you're going to easily outperform the market, it's really not a good way to approach the world, even if it has done so historically. So the way that I look at these things is,

even if small caps return exactly the same as large caps over the next whatever your investment horizon is, 10, 15, 20, 30, 40 years, if they give you diversification benefits and you can rebalance into the pain, whether it's in small caps or large caps or momentum or quality or whatever it is, then I think that they deserve a place in your portfolio, assuming you can hold them for the long term. But just simply putting your money into one of these factors and assuming you're going to get this premium, I think is really kind of, it's kind of a false way to look at the world these days because there's just so much competition and everyone knows about this stuff now. Yeah, if only it were that easy. So another thing that they did in here was they looked at multiple

ways of measuring small cap stocks beyond just market cap. So they said that multiple measures of value produce more stable value portfolios that deliver higher sharp ratios, higher information ratios, and more robust returns. The same is true for momentum. And as with any systemmatic process, unless theory dictates prefer one metric to others, an average of sensible measures is generally the best, most robust approach. While this is true for all of the other commonly used factors, it does not appear true for size. So we'll look to this in the show notes.

But they look at book asset, book equity, sales, and employees, and PPD, which I guess is property, plant the equipment, and it just does not hold up. So I thought that was pretty interesting. And then lastly, they show that a lot of the returns in small cap stocks has come in January. Have you ever seen this before? The January effect in small cap stocks? Yes. And are you a buyer here? Are you a believer, I should say. In things like seasonality. I believe that this data is accurate. How about that? Yeah, that's fair. I don't know that I believe in it going forward and I don't know that I believe in enough to like alter the way that I would construct my portfolio. So you're not only going to invest in small caps in December from now on.

Yeah. Yeah, soon it'll be like the November effect. Yeah, it'll go back to Thanksgiving. I just, I think, I mean, in some ways, I think that there probably is a little bit more opportunity in the smaller area of the market because from my perspective, a lot of the larger institutional investors can't play in that space because it doesn't move the needle. And if they invest too much money into those assets, then they can't really. invest in, say, some of the really small stocks, like microcaps or something. So I think that there

is something to be said for the opportunity in that space. If you know where to look and you don't have those liquidity issues, but I think for investors investing in something like a smart beta fund in small caps, assuming they're going to outperform going forward, I think that's a hard stance to take, you know, just for accepting that. So this reminded me of a post that I wrote a few years ago, and I read a piece called The Myth of 1926, which was written by Edward McQuarrie, and it says, how much do we know about long-term returns on U.S. stocks? And this was really, really eye-opening. And one of the things that really shocked me was how small-cap stocks did in the Great Depression and how much this skewed the data. So first of all, there are some issues with crisp data

and talking about like why 1926 is a starting date for anything. That was arbitrary. And They will admit that that was an arbitrary date. They wanted to go a little bit before the Great Depression. So he says that the key... Sorry to interrupt you, but the crazy thing about that crisp data, which was some research done by some researchers at the University of Chicago, it wasn't really put together until the 60s, I believe. Yeah. And before then, they didn't really have anything to go off of for historical market data, nothing this extreme or robust, I should say. So he says that the key limitations to understand are, one, the crisp time frame, which begins in 1926.

excludes more than 50% of the historical record of widespread large-scale stock trade in the United States, which goes back almost 200 years and two. For more than 50% of its time frame, the crisp data set excludes the majority of stocks trading in the United States, especially the smaller and more vulnerable enterprises. Putting these two facts together, we must say that crisp provides comprehensive price series data for less than 20% of the total U.S. stocks trading record aggregating cross-time period and type of stock, end quote. And one of the things that shocked me about this was if you go back to the early 1930s and you, look at like the smallest decile of returns. And July and August of 1932, the smallest

decile did 50 percent and then 120 percent. And then again, in 1933, it did 58 percent in April and 104 percent in a month in May 1933. And reading this piece, you can easily explain that away. So it's important to note that only large cap stocks can be listed in the New York Stock Exchange in that time period. So there were no small cap stocks. These questions, quote unquote small cap stocks were large cap stocks that were beaten down into small cap submission. Okay, so here's a quote. By the end of July 1932, the month the Dow Jones Industrial Average bottom out, 80% of all New York Stock Exchange stocks in the bottom decile had bid prices less than or equal to $1 per share,

while the bid-ask spread for these prices averaged 135% of the bid price. And here's the emphasis. This is crazy. It would be folly to mistake bid-ask bounce in deep value. penny stocks measured from the bottom of perhaps the greatest stock crash in U.S. history for evidence of the long-term outperformance of all small stocks versus all large stocks across other common periods. But that is the risk we run where we fail to recognize crisp sampling bias against the

inclusion of truly small stocks prior to 1962. That's pretty clear. And plus, you would have been trading in bucket shops at that time with Jesse Livermore or something, right? Like, the idea that you could actually easily access these stocks is kind of laughable, which is another reason why. I think I kind of doubt the premium for this stuff existing going forward because in the past, you just couldn't access.

It was too liquid. The spreads were too big. It was just too hard. So I wrote a piece about the small cap premium fast-wording a little bit. And so this was actually in stocks for the long run by Jeremy Siegel. And he actually found that one of the huge reasons that small-cap stocks have a large outperformance going way, way back is because in the 1970s, they actually changed the ERISA laws, which made it easier for pensions to diversifying to small caps.

So the majority of the premium actually came in that period, too, where you have this 1975 to 1983 period that small caps enormously outperformed because pension funds all piled into the space in that kind of increase their returns from that space going forward. Yeah, so, I mean, all of this historical data is really interesting, but I think it has to be taken with a grain of salt. And to your point, like earlier, when there was a historical data, doesn't the nature of this data becoming available change its usefulness going forward? I mean, I would think it has to.

Right. I think the fact, the way that investors experience markets, I think, changes the way that they invest going forward. The fact that we know markets have always come back from a crash probably changes the way that we think about long-term buy and hold investing. If we would have been doing this podcast in 1950 after staring at the Great Depression and that 90% crash in the eye, would we still have the same feelings about investing as we do now? No. Okay. So, yeah, so it completely changes the way that. So I think, yeah, it makes sense to take historical data with a grain of it with a huge, huge lump of salt and just understand that it hasn't always been as easy to invest as it is these

days. So sticking with some myth busting, I think anyone who's read a personal finance blog, book article has probably come across this marshmallow experiment at one point in their life. So it's called the Stanford marshmallow experiment. Have you ever read it about this? I don't, I honestly can't remember. I thought about that when I read this, and I'm sure I have. I'm looking it up right now. I would bet I would bet good Bitcoin that you have. Have you written about this?

No, definitely not. Okay, you haven't? Okay, I'm going to search this on you too. So the Stanford Mushmallow experiment was a series of delayed gratification experiments in the 1960s and 70s. Sorry. Sorry, I have not. Yes. Yes.

I thought for sure I had. Get back to it. So it was this research done by some Stanford University professors, and they took children and put them in a room and they basically offer them immediate reward now or two rewards if they waited. And they think it was 15 minutes and they offered them a marshmallow or a cookie or something. And they found that the children and they followed these children throughout the decades and they found that the children who were able to wait for that bigger reward later had done better in life. They had better test scores. They had better educational attainment. They were

healthier, all these other things. And so the idea was, well, if you can just delay gratification, you'll be set for life because this is what this study showed and because the study took so long it was decades in the making it's kind of hard to really disprove it because the you know the facts are there but actually there were a group of researchers who did and they did this in the 1990 I guess and they found there were maybe minimal effects of the kids with delayed gratification that did this so they did the same exact study but once they kind of accounted for family back ground and the environment and their cognitive ability and how the kids were sort of hardwired, there really wasn't much of variation of achievement over the decades. So this was kind of

debunking that study. And so I feel like my whole personal finance life is a lie. Anyway, I think this just gets back to the idea of how hard it is to recreate some of these behavioral experiments. I think obviously the original idea still applies that delaying gratification is good for your finances, but I think it's never quite as easy as finding a single variable like that. And that's going to totally affect the outcomes of your life. I would have taken the marshmallow right away. Oh, sure. I have very little patience for things like. But the thing is, I have little patience for a lot of things in life. Like, I hate driving in traffic. I'm so impatient in traffic, but I definitely am more of a long-term investor. I don't think that that side of my life

has affected the one side it's affected the other. So I read this book earlier this year. I'm calling it now. You're going to bail in the next spare market. Okay, y'all, I'm out. So I read this book earlier this year. It was actually recommended by Michael Mobeson. It was called Behave, the biology of humans at our best and worst. And it was by this doctor named Robert Sapolsky. And he went through like every behavioral study in the book. And he like compared it to brain activity and how you were born and hardwired. And he kept coming back to the fact. that there's not one variable that impacts how you're going to react under certain stimulus. It's how you were born. It's the environment you're in. And it's kind of the situations that you're in.

So it's kind of a combination of everything. You can't just say this person was born this way, so they're going to act a certain way and do things this way. Or this person was put in this situation. So that means they're automatically going to do it. There's so many little variables that affect the outcomes where certain things can be amplified and exaggerated based on your personality. But there's There's no simple path for everyone. Speaking of simple, our friends over at Newfound Research had a really good post last week. Talking about separating ingredients and recipe and factor investing. And we talk about, like, you know, value, momentum and profitability just, like, very whimsically.

Nice. Keep going. Yeah. But there's a lot. Have you been reading the dictionary lately? There's a lot more to it than that. You know, momentum can mean different things to different people. And so I think Justin wrote this.

So one of the things that he said was holding all as equal, simpler is better because simple processes have fewer degrees of freedom and therefore are less susceptible to being data mined. And this is so true, the whole piece is worth reading. But if you take a look at three of the momentum ETFs that have been around since late 2016, so there is an ETF from Fidelity, the momentum factor ETF. There's one from Spider, State Street. It's also 1,000 momentum ETF. And then there's one from I shares, MSCI USA Momentum Factor ETF. And the spread of these is gigantic. So Spiders momentum, ETF is up 19%, Fidelity is up 32%.

And I shares is up 45%. So just how you define momentum has a huge impact on returns. I like the idea here. They talked about portfolio construction. I think this is something that maybe a lot of investors probably don't pay attention to. And they say portfolio construction is a lot like cooking. there are two equally important elements, the ingredients and the recipe. And the idea they were talking about the ingredients are kind of how you select investments and the recipe is the set of rules to change those into allocations. And I think a lot of investors get bogged down in the details in trying to figure out the correct funds to use and the correct factors to use. And they don't really try to think about how to bring it all together in terms of an overall investment plan or asset allocation. And so I think this idea of portfolio construction and risk management kind of is an afterthought to a lot of people and maybe an overlay where instead that should be the original,

thought process behind everything is how you structure it and how you how these these moving parts all all work together not just on their own individually yeah so think about the investor that bought the state street momentum ATF just like you know they were looking for momentum exposure whatever and didn't really understand what they were getting into and not that they could have predicted even if you were given the rules you couldn't necessarily have predicted which one was going to be the best performer but if you did a little bit of homework at least you know to like commit to it right you chose one of the fact, one of the funds and you're going to stick with it. So there's, there's a lot more to it than just looking at the label. And understanding why these funds have different performance and

because they're set up certain ways. They have different rules. So I think that's, that's kind of the main point about all this factor stuff we're talking about. I think trying to jump in and out of certain factors or rules and change it up all the time is just a terrible way to invest. And so I think that's, you know, in a lot of ways, I think this ETF picking is the new stock picking for people. It's kind of a hobby. So I think just, understanding what you own and why you own it is really essential because it's always going to be easy to look for something that does a little bit better. And if you can't stick with this stuff for the long term, it's, it's never going to work. The worst thing that somebody could do if they own

the State Street Momentum ETF would be to sell it and go into the Ishares one that has performed twice as well. Because you would expect some re-inversion in this space where the rules are defined. It's not somebody like, you know, changing things up. The rules are what they are. And I would expect, you know, I think it would be much, much better to invest in the worst performing than best performing momentum ETF. I think what you're trying to tell me is we should create a fund of momentum fund ETF, one that holds all the momentum funds, and then we can just call it an index fund. Yeah, there you go. So there was a good article this week in ESPN. We've hit a lot of topics in the past about how many athletes are broke. And I think the numbers from an SI article a few

years ago were that something like 75 or 80% of all NFL players are broke three years out of the league. So we highlight this a lot and show how money can lead to a lot of people's downfall. But ESPN actually had the other side of the story. And they talked about Kevin Durant's investment holdings and a lot of them, the different warriors who are now kind of being taken under the wing by some venture investors in Silicon Valley. And they talk about how they're investing in early stage companies and venture capital. And there's no way to know if this will work out or not, but I think it sounds like these guys have really learned from some of the lessons of their predecessors. Yeah, this is, I forgot about this. KD signed a, Kevin Durant signed a

10-year, $300 million deal with Nike. Which is one of the reasons that these guys are able to all come together on the same team because they know they'll get money elsewhere. Whereas in the past, the contract was the majority of the money. And now, these guys are all walking brands and they can make money outside of their contract. And obviously, I'm sure that they still want to to make money from the team, but there's other ways of doing it. And so they talked about how he has, let's see, 30 companies that he invest roughly 250,000 to a million dollars in, and including online digital currency platform, Coinbase. So Kevin Grant is not a no-coiner. Never coin. Yeah. He also invested in Acorn and in all these different smaller companies.

It sounds like maybe more diversified. Obviously, it's hard to call yourself a diversified investor when you're investing in VC because you're kind of concentrated in a few winners and a bunch of them are probably going to go nowhere. But I think this definitely is probably a step in the right direction. And a lot of these guys are learning from the stakes of people that came for them. Sticking with sports, there was an article in the journal about ESPN and what's going on with them. So there's a chart showing the cumulative change in ESPN subscribers since the beginning of 2011. And they've lost about 16 million. And another chart, Sports Center, 6 p.m. viewers just getting cut in a half. I can't imagine that there's still people that even watch

that. I mean, I grew up on ESPN. I'd watch SportsCenter five or six times a day, like when you'd stay home in the summer or when you're sick from school, and you'd have to wait a half hour to see the top ten plays, which is unfathomable to me now because I just, I can't remember the last time I watched it. I just get all my sports clips from Twitter or the internet. It's just so much easier. And I think it's easy for people to look at ESPN now and say, oh, they totally miss the boat. they should have gone to streaming five years ago. I think this stuff happens so fast and people have an ingrained way of doing things that it's really easy to play Monday morning quarterback now and say they should have done

X, Y, Z, and now they're screwed. I mean, we are in a world where information flows rapidly and nobody wants to watch highlights from the day before. Like, I don't think that there's anything that they could have done. It's like a double-edged sword because while they're losing subscribers, the average annual payments tied to their four biggest long-term rights deals have more than doubled since 2013 to $4.7 billion. So it's a double whammy.

Yeah, so the only thing, the only reason I watch ESPN anymore is for the sports. All I watch is the games on there. And so I think that that'll be the interesting thing is what happens if they're starting to deal with bigger bidders besides CBS and NBC and ABC, and now they're forced to deal with Amazon or Netflix or Apple that wants more content on their platforms? And so actually the rights deals for these things go up and ESPN is forced to show out more money. So I think that's, obviously, they still make a ton of money.

If you look at charts in this piece, which we'll post on our website for the show notes, they're still making plenty of money. They're just not growing as they used to do, and they're shrinking a little bit now, but they're still making a lot of money. They make far more money than any other channel in the cable packages. By the way, would you ever cut the court? No, I mean, not today, just because I need ESPN and TNT, you know, for sports. And my wife, my wife needs Bravo.

That's the same thing my wife said. Yeah, maybe if it goes a la carte, which I don't know, I have no idea where, they're going with that. I just don't want to have to remember 17 different passwords to log into all my streaming accounts. So a good article in the New York Times over the weekend. By the way, I feel like we've hit a right of passage here. For every podcast in New York City, there's always a police siren in the background, and I think we just hit it. Yeah, we made it. It's like a right of passage. Since 2010, investors have pulled $181 billion from Fidelity's actively managed mutual funds. That's a lot. Crazy thing. So this is a piece from New York Times. The crazy

thing to me is, and it's kind of trying to show that fidelity is in trouble, their assets are still up over this time. So they have almost $7 trillion in assets under management or administration, including mutual funds and 401Ks. And so since 2008, they've more than doubled. So even though people are pulling money, we've talked about this before, the fact that markets are up has really masked a lot of that because it just continues to grow from market gains. So they're in a similar sort of similar position to ESPN where they're so entrenched, like what are they supposed to do and it's still a hugely profitable business. And this is a battle that they're probably going to be fighting for, you know, for the rest of our career.

And I know that they've tried to make a late push into things like ETFs and index funds. And I mean, it's possible that they could sort of take a little bit of that money and have it go there. But I just don't think that that's in their DNA, especially since they're a family-owned company. I just don't see how that they're going to be able to pivot. And maybe they could do actively manage ETFs. But I think, like we said before, when we do have a sustained bare market, it's going to be really interesting to see how these actively managed mutual fund places, how things shake out because their flows, I think, are going to not only continue to go down, but really, I think

it's going to amplify. So not to pick apart her words too much, but I'm going to anyway. And this is Abilga Johnson, who's in charge of fidelity. She said, Peter Lynch captured the imagination of the American investing public in the late 1980s, and that was an incredibly powerful thing for us. Today, you are looking at a generation that is debt-heavy and wary of equities. Okay, that's BS because the $181 billion in ad flows is not coming from millennials. Right.

Yeah, if they don't have enough money, everyone always says millennials don't have enough money to invest. So she's blaming it on the younger generation then. I don't know. Okay, so Abigail Johnson is obviously worried about the younger generation, and we talked about this last week about how much anger there was over the Fidelity study about having two times your salary saved by age 35. There was actually a piece done by the St. Louis Fed this week that someone sent us, and they show how millennials are doing in terms of saving and assets and debt in 2016 versus Gen X in 2001 to show how they stack up. And in most of the

categories, they're doing much worse. So total assets, financial assets, retirement accounts, We'll put this chart in the show notes, but it's just trying to show that at the same point in time as the generation before them, millennials are doing much worse from a net worth perspective. And I think it's close to $50,000 on average less in net worth. It was like $150,000 for Gen X in 2001 versus less than $100,000 for millennials now. And the big takeaway was just that the financial crisis really hurt millennials in terms of growing their net worth. Yeah, I get nothing to add. What? No, you said it well.

You have to add a comment there. All right, I stopped listening. All right. So there was some criminal behavior on the internet this weekend, a chart floating around, inflation-adjusted S&P without including dividends. Have you ever seen this? Inflation-adjusted, but price-only? That was pretty bad.

The point of it they were trying to make is that buy and hold is not as easy as it sounds because they're showing on an inflation-adjusted price basis, the S&P 500 has gone nowhere for like 20 years, four different times. Yeah, this is pretty bad. This is a felony. And also, what's the big reveal here that stocks don't always go up every year or every decade? I mean, we're well aware that buying and holding is really, really difficult, which is why most people fail to beat a buy-and-hold approach. I don't know what this guy's trying to sell. I'm guessing he's probably been pretty bearish for a while. I don't know who he is, but it's, it's pretty bad. And anytime you show a price chart in terms of buying, holding, you don't include dividends. It's just because that's such a huge element of the long-term returns. It's, yeah, this doesn't. Yeah, that is a blood red flag. Like, right? And I think what is he trying to show that if you invest with us, you won't have these periods? I don't. Oh, yeah. Yeah, as if trading in a bare market is a walk in the park. Yes. Yeah, why would it, Listen, why wouldn't you just sell at the top and then buy one stock's bottom?

Like, why would you do anything else? Yeah, it's pretty easy. Yeah, you don't have to worry about this. So anytime you see one of these charts like this, yeah, make sure there's dividends included because that's such a huge part. Especially back in the day when dividends were four and five percent dividend yields. They're not the 2% yields they are today. That was an enormous part of your return. What did dividend yields get up to in the Great Depression at the bottom?

10% maybe, 8%. trying to not including those is just yeah that that's just trying to to trick someone so that's like showing hedge fund returns gross of fees nice yeah so there was flying around it's funny because anytime a hedge fund letter goes out they always say like please keep this confidential this is for your eyes only and these hedge fund letters always leak and someone someone leaks purging square holdings returns for must find leakers yes so this is bill actman's fund and they're showing the returns from the end of 2012, which was, I guess, the inception of this fund. And it's pretty crazy because it shows the gross returns.

I mean, this is only a three and a half year period, four year period. Wait, I can't do math. Six year period? Wait, what? I always think that 2012 was just a few years ago, but I guess we're in 2018. So anyway, this is five or six years ago. The gross returns for this hedge fund of Bill Ackman's was over 18%. The net return were less than 2%.

So that's just, and of course, the S&P in that time did almost 115%. It's kind of mind-boggling if you, as an investor, see that. Not only have the overall gross returns been pretty terrible in comparison with the stock market, but they're pretty much gone from the fees. Amazing. Yeah, I mean, I don't know. Obviously, looking at these things on a relative basis is always tough, especially over a

shorter time period, and he's had a harder time than most. but when you see that kind of difference for the fees, when the fees eat up 90% of the returns, that's kind of hard to stomach as an investor. Yeah, just incredible. We'll post this in the show notes. So Christine Benz from Morningstar has been there for 25 years and she just wrote some of the things that she's learned, the lessons that she's learned. And the one that stuck with me was investing is overrated and how, you know, listen, if you're not doing the really important things like, saving money, the best investing in the world is not going to save you.

This is a really good piece. By the way, I'm a huge sucker for these pieces, like things I've learned 10 years, 15, whatever it is. This is a really good one. And she talks about how less is more and how being complex is. But yeah, I agree with the investing thing. That's something we've talked about. So actually it was approached by someone.

I gave a talk in Chicago last week. And I was approached by someone afterwards and they kind of were looking for advice for their daughter about what she should go into. She's in college and she wants to go into finance. and they said, do you think she should go the CFA route or maybe more of the CFP route? And I actually said, I think people should, young people, if they don't know what they want to do, we should probably focus more on the CFP route because I think there's a lot more people out there who are going to need financial advice going forward than investment advice, even though both of us are on the CFA side of things.

Yeah, I totally agree. And then Christine also said that similarly, if you've done really well saving, you can underperform you know the index and you're you're probably going to be just fine right nobody's life goals are to beat the sb 500 yeah exactly yeah she and she yeah great point it's a high savings rate is like a huge margin of safety in your life so she says if your savings rate is high enough and you start early enough you can make up for some lackluster asset allocation investment selection choices and i think that's a great that's a great point if you want to give yourself a margin of safety for some mistakes because guess what everyone makes mistakes in their portfolio a high savings rate can make up for a lot

of that it would be great if there was a book for that yeah funny So speaking of books, did Josh sub-blog us? Yes. Well, it wasn't even a sub because he mentioned us my name. So Josh Brown, our colleague, Fearless Leader, has a post called Combating Fombi. It's an acronym. And so he said he starts off his piece, and the time it takes you to read this blog post, Michael and Ben will have read three books each.

The average CEO will have read eight books, and Patrick O'Shaughnessy will have read 10 books. So he was trying to make the point that there is this, this idea these days that there's so much to read out there that some people could be have the fear of missing out in terms of books and we get this question all the time because in our recommendations every week we usually lead with a book review or a book and I think you you probably read more than I do but Josh makes the point that the reason people like us are able to read so much is because we have younger children and that is giving us more time to read where he has his kids are a little older and he has more he has more activities

for them to do. So what do you think about Josh's theory here? 100% valid. I mean, right? Like, I'm home all the time. Where am I going? Right. Yes. I have three kids. You know what a nightmare it is for me to get out of the house with three kids and how long it takes? But I think the other part of it, people ask us all the time, how do you have so much time to do this? I think part of it is two priorities. And I think that's one of the things I learned having kids is that so many other things in my life that I used to spend time on or prioritize just, I just completely gone now. I can't remember the last time I sat down from start to finish and watched an entire football or basketball game. I used to do that all the time in my younger days.

Okay. So I'm still in that mode. I haven't missed a giant game in years, and I watch every single, I've watched like 90% of the playoff games, which obviously will not be sustainable once my, once Kobe gets a little bit bigger and I'm going to have more kids. But for now, Kobe goes to sleep at 7 o'clock. If it's not, if there's not basketball on, I don't watch other TV. So I have, I don't know, a couple hours each night. I'm on the subway each morning. I'm walking my dog. So I have a lot of time on my hand. So I totally agree with Josh. Like as your kids get older, obviously you prioritize time with them more than with a book for sure.

Yes. Yeah, in the same way. And my productivity on the weekends, like in terms of writing and reading is non-existent because my kids and it's kind of keeping them busy and stuff to do. And that's what I want to do with my time. So it's more, I'm the same with you. I'm kind of a night owl in terms of when I get things done. But yes, I think those priorities will shift and change.

And so in the future, our recommendations are not going to be as many books. And there are probably more kid events or something. Like, I don't know. One more thing. I think that the more you read, at least for me, like the more excited I get about reading more books, it's almost become like an addiction. And I think that I'm just maybe like really curious because the more you read, the more you're like, oh my God, there's so many things that are really fascinating that I have

no idea about. So I almost feel like a kid in a library for the first time. Like you're looking at dinosaur books and all these sort of things that are like really exciting that you don't know about. That's how I feel about books. And I've learned, I've mentioned this before, but I've learned, especially in the last few years, to really hit the eject button really quickly on books that I don't like. Or I'll skim huge swath of book. And if I can just get one or two main points from a book without reading the entire thing word for word or if I read a book for a chapter and I can tell I'm not going to like the way this author writes or it's going to be too boring. I'm really quick to just pull the trigger and get out of there. All right. So your phone bay is on high right

now. I can tell. That's possible. Wait, what does it mean again? All right. So what do you got this week? So I don't have any book recommendations. So take that Josh. So my recommendations for this week. My wife and I recently caught up on the Americans. We had DVR the last season and just hadn't caught up because we've been watching other stuff. Did you ever get into this show? No, I never started. Okay, so I think they're on season six. It's a show about a group of Russians in the 80s who came to live normal American lives and be spies in the U.S. for the Russians. And it's kind of like the end of the Cold War. The first two seasons were excellent. The last two seasons have been kind of boring and almost lost me a little bit. And this is the final season. And their next

our neighbor is an FBI agent, who must be the worst FBI agent in the world because he didn't realize he had a family of Russian spies living next to him. But it's finally kind of a culmination, and there's one episode left. The finale's on this week. And I honestly think if they can stick the landing on the finale, it could be an all-timer for the show. Like, the last season has been so good. So I like the Americans. I enjoyed the A16Z podcast. That's Mark Andresen's venture firm. They put on a weekly podcast. It's always full of really good tech and business stuff. and they interviewed a guy named W. Brian Arthur, who apparently is the economist who is behind the idea of network effects. Wait, hold on. I have a question.

Yes. In the notes, you wrote W. Brian Arthur. That looks like you wrote with Brian Arthur. Is this named W. Brian Arthur? Yeah, that's what it said on the podcast thing, W. Brian Arthur. Okay, got it. Look it up. Quit trying to actually me. I'm going to send you the link of this guy. I had actually never heard of him before listening to this.

Here, I just put the link in the Google notes for you so you can see. So it was a great podcast on the idea of network effects. And that's a huge buzzword in Silicon Valley these days that a lot of people use. Yeah, you're looking it up right now and you know I'm right. Come on. Give me credit. Confirmed. His first name is actually W.

Yes. I didn't want to put two Ws in the, never mind. So anyway, listen to that podcast on network effects because that's a big buzzword a lot of people use. And probably a lot of people don't really understand what. it is. All right. So I only read two books this week, down from my usual 37. So Michael Lombardi wrote, he's from the Ringer. He's on the NFL Network, and he was the GM for the Cleveland Browns, and he was with the Patriots in 2014 when they won the Super Bowl off that Malcolm Butler interception. And I didn't realize what a huge career he had. He started with Bill Walsh,

and then he worked with Al Davis, and he worked with John Gruden. And if you are at all interested in football, I highly, highly recommend it. There's a ton of really awesome stories and behind the scenes sort of things. Like, there's a lot of stuff that we think about as fans that we just get wrong. So taking it behind the scenes look, it was really, really good. And we should mention that he's speaking at our conference next month in Dana Point, California, which I'm really excited for. True. Yes, me too. And then I read Bad Blood by John Carrieru of the Wall Street Journal. I'm going to say that is going to be the best book of the summer. Wow.

It was really, really incredible. I knew nothing about Theranos other than, like, you know, that it was a blood company and there was some sort of fraud going on. But she was really, by all accounts, pretty evil, you know, really just unbelievable. And I won't spoil it too much, but one of the craziest parts in this book, and there is a lot of them, is Rupert, Mavis. Murdoch invested $125 million into this thing, which was by far his biggest investment ever. And when this thing, when the fraud, when the scandal was exposed, a lot of the investors

naturally sued the company. He sold all of his stock back for $1 so that he could take a write off against other gains. That's impressive. That is one of the, that is probably one of the craziest things about this whole ordeal is how many people that were involved that are really well-known names and have a ton of money. Yeah, Bob Kraft, Carlos Slim, the Walton family. So this book reads like fiction. It's insane that the story is true. And just I cannot recommend it highly enough.

It was so, so good. Yep. All right, that's on my list. All right, we do have a Facebook page if you're interested in getting our blogs fresh every day. And please leave us a review at iTunes. We really appreciate it. And you can feel free to email us at Animal Spirit.

It's at, is it Animal Spiritspod? Animal Spiritspod at gmail.com. All right. See you next week.