Animal Spirits Podcast - The Closet Indexer (EP.18)

Episode Date: February 28, 2018

Takeaways from the latest Warren Buffett shareholder letter, the potential baby boomer retirement crisis, how millennials should think about retirement and much more. Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

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

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

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

This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this podcast. Now, today's show. Welcome to Animal Spirits with Michael and Ben. On today's show, we're going to lead it off talking about the greatest closet indexer of all time came out with his annual letter over the weekend. Ben, what were your thoughts on the Buffett letter?

I was, like, taking a step back from, I mean, the letter was okay, but, like, the numbers are sort of mind-boggling after a certain time. Like, since 1965, he's grown the book value of Berkshire Hathaway by 2.4 million percent. And so my theory about the internet is that nothing is properly rated anymore because everything is over or underrated because it's all just talked about too much. Like, is it possible that Buffett is now gone from being extremely, like, properly rated in the past to underrated again now? because like the last five or ten years he hasn't really done that well. Is he underrated because he's so overrated? Yeah. No, just because he, I feel like people have kind of forgotten because he hasn't done

as well in like recent years. Like the last decade his return numbers aren't so swell and people are, people think it's cool to be a contrarian and pick apart Buffett now. And I feel like he's almost gotten to the point where he's almost underrated again because the numbers are so staggering. So it is just, I think, kind of mind-boggling to me. Yeah, it's hard to say whether or not Buffett is the best stock picker. of all time. But without a doubt, he is the greatest wealth creator of all time. And he's also the

greatest fulksie, quote, machine of all time. Yeah. So in the last five years or so, he's done, when I say he, Berkshire Hathaway has basically matched the returns of the S&P 500. But I think to say that he has become a closet indexer is the height of stupidity because he's not managing a mutual fund. Right. Great. It's a diversified set of businesses. Some of them public in his stock portfolio, but a lot of the businesses they now own are private. And so, yeah, it's not the same thing. So, yeah, the letter to me was just so, it was much shorter than his other ones were, but for goodness sakes, give the guy a break. He's 90 years old. He's been doing this for 50 years. I don't think that anything that he could have done would have been good enough for the people that like to be the knee-jerk Buffett Contrarians. No, but so the biggest thing that he really touched on, the bulk of the letter was talking about his bet with protege partners, which is the hedge fund. They did a 10-year bed in 2007, and Buffett took the S&P 500, and then protege partners picked five fund of funds, fund of hedge funds. And then the winner got to donate the money to the charity that they invested. And Buffett kind of took a victory lap and showed how he basically crushed the fund of funds. They did five of them. And they actually showed the performance of each, each fund of fund in the letter. And my takeaway from this was, you know, obviously hedge funds have had a difficult time in recent years. But I think for all of the institutions that are invested at hedge

funds, when you look at these return numbers and how much the S&P 500 has crushed them, and we've talked about this in the past, it's maybe not an Apple's-stableness comparison. But, but anyways, these things are going to be a huge sore thumb sticking out on the returns of these institutions for a long time since the returns have been bad for so long now. And, And we said that maybe hedge funds aren't dying, the slow death like people thought they are, but it's going to be tough for these funds to hold on to these hedge funds when they see these return numbers and they look at their returns on a quarterly basis. What do you mean exactly?

These institutions that hold hedge funds check their performance all the time. And so if they're looking at the longer term numbers, they're not going to just get better overnight. These long-term numbers are going to be there for a while, looking terrible. Oh, got it. So even if they have a really good one, it's going to take a while for the ship to turn around. Yeah, which people judge on past performance, which doesn't make any sense, but that's the way it happened. So it's just going to be a huge, you know, sore spot on the

books for a lot of these funds when they look at the performance. Yeah, so there was five in here and the average annual gain over the 10-year period was 2%, 3.6%, 6.5%, 6.5%, compared to the SP 500, which did 8.5%, which is around equal to its long-term average return. But what was really interesting to me was that the bet started in 2008 when the S&P 500 lost 37% and all of these funds came out ahead. Like every one of these five funds beat the S&P pretty handily in 2008 and then for the remaining nine years just couldn't catch up. And one of the funds actually fund D shut down. A few things that stood out to me on this letter was when you look at the interest that he has in these public companies, it's just sort of crazy. Like he owns 17% of American Express.

When I say he, Berkshire Hathaway, 3% of Apple. 7% of Bank of America, 9.4% of Coca-Cola, 9.9% of Wells Fargo, 100% of Geico. And when you look at this, he has about $100 billion in unrealized gains. Not bad. Yeah, it's real money, I think, right? Yeah, it is kind of crazy to look at this list. And again, it's so concentrated for such a large amount of money. And a lot of these have been held for so long because he shows the shares and when they bought them. And it is pretty crazy. So the thing that I was thinking after reading this, and you talked about how Buffett kind of mailed it in, which I guess makes sense. I suppose after that long you can do that. But like what happens to Berkshire when he's gone? Either when he dies,

which is kind of a morbid thought, or when he just steps aside and let someone else take the reins. Does the stock get crushed 10% or 15% on the day that happens? Or does this get baked into the price eventually? And maybe that's part of the reason Berkshire hasn't been performing as well lately. I think the stock opens down 8% and it closes only down 3% on the day. The first move is a head fake. Yeah, I mean, I don't know. I don't think it's going to necessarily get crushed. It's not as if Berkshire's trading at a huge premium to its book value.

I think it's like one six or one seven. I don't know. What do you think? Yeah, and a lot of people think that there is sort of a Buffett premium baked in. But I guess the hope is that he's set it up enough where it just runs in its own without him and it doesn't need him. But I still think people kind of panic in some ways. And I feel like even if you know this is coming, it's going to be hard for investors to sort of not, just to ignore that.

Similar to what we said about Bitcoin being the majority is held by so few people. I think the same case could be made for Berkshire Hathaway that there's so many people that will never ever sell so that the day-to-day price action might be controlled up the margin by the marginal buyer and seller. So maybe the people that are inclined to sell will do so on the first few days. I don't know. That's true. But what strikes me as the most fascinating thing about Warren Buffett, like his real superpower,

Whether or not he's a great stock picker of all time, I guess is definitely very debatable. But his superpower is being able to truly stomach stock market volatility, which he has proven to do time and time again. And I think that's probably the most important characteristic for any investor. And he included a table where he showed four times the value of Berkshire Hathaway got crushed. And not once did he sell his stock. I'm pretty sure Buffett copied me in this because I did a blog post about this a couple years ago where I showed the worst losses. So I'm pretty sure he just copied my data. But I think the craziest thing is that the worst loss Berkshire ever suffered was in the 70s, actually. It wasn't the dot-com bubble and it wasn't the great financial crisis. It lost almost 60% in the mid-70s, which is kind of crazy. But yeah, and guess what? He just sat through them. And that's like the biggest thing that people don't realize is like just that having that patience and that mental fortitude to hold on your stocks when they get crushed.

Like, that's one of the biggest parts about being a stock investor. And how about this? So from June 98 to March 2000, Berkshire lost 49%. And I'm pretty sure in March, well, I'm positive, in March 2000, stocks peaked. Right, that was like the peak. So he got cut in half as stocks were absolutely ripping. And then from 2000, the bottom until 2003, he destroyed the market. but his mental fortitude is nothing short of extraordinary.

I think that's probably his most admirable quality. And then we, I mean, we've spoken about this in the past, how people praise Buffett and, you know, just worship at his altar. And I think that he has done a lot of amazing things for investors and created thousands of millionaires. Obviously, and I think we have spoken about us previously. His personal life has left much to be desired. He was not a particularly good father and maybe not the easiest person to live with, to say the least. but he has been obviously a tremendous ambassador for investors over time. Yeah, I think in that the book Snowball, his biography,

he didn't really come out in the greatest light from a personal perspective, at least from my read of it. So I think people that just worship him, you know, and think he's the greatest person in the world. There's always more to the story than that, but certainly in terms of being an investor, it's hard to beat. Yep. So moving on, Bloomberg wrote an article,

talking about what happens when stocks and bonds might fall. I forget the title. But anyway, they said, quote, the economy has changed and investors can no longer rely on a diversified stock bond portfolio to provide protection in times of market volatility, according to J.P. Morgan asset management. And I took a look at this because it does feel like on days that the market has fallen this year, bonds have not really cushioned the blow at all. And the major takeaway for me is that diversification does not always work over, you know, a three-month period. But,

But they are right that bonds have not provided a cushion when stocks felled this year. Yeah. Let's see. Well, yeah, the obvious thing here is that interest rates have been rising. And as rates have been rising, stocks have been falling. So bonds and interest rates, you know, are inversely correlated. So as rates rise, bonds will fall. And I think your point where you show on your graph, which will include in the show notes,

that the percentage of days where stocks fall more than a half percent and bonds close negative is the highest has been since the, you know, since you looked at the data, going back to the 90s, which is kind of interesting. This goes back to 1989, and there have been eight days that the S&P 500 fell at least half a percent this year, and on all but one of those days, so in seven of eight days, bonds also fell, which is unusual. Obviously, we're only, you know, two months through the year, but the next highest is like 60 percent.

So in 99, in 1999, there was a lot of days where bonds didn't cushion the blow, but stocks and bonds. So if you extend this a little bit, I'm actually, I just turned in a piece to Bloomberg today, so this is hot off the presses. I was trying to figure out do stocks diversify bonds on a little bit of a longer time horizon. So bonds have fallen 16 times since 1928. This is using the 10-year treasury on a calendar year basis, and stocks were up 13 of those 16 years. So I think there is something to say for the fact that stocks, you know, it's kind of an asset allocation thing where money has to go somewhere. We've talked about this before. And I think that's over the longer term, that kind of helps cushion the blow if one of these two does fall, that there is

some give and take between them where one will sort of help on the other falls. And even when they do fall, I think bonds aren't going to crush you when they fall. And so I think you're looking at smaller losses than you'll see in stocks as well. So we're recording this on Tuesday morning. The S&B 500 is down 80 basis points and BND is down 33 basis points. So again, another day that, you know, the day is not over, but stocks are down almost 1% and bonds are down as well. Do you want to pause, you're quick to do some hedging trades? Oh, I did that yesterday. Okay.

I'm always hedged. Good. So I wrote a piece this week about the huge conundrum we have when trying to save and invest for the future and enjoy ourselves right now and talk about how there's always extremes. And so you have these people who, they save 80% of their income at a tarb by age 30. Then you also have these other people who never save anything and they get to their 50s or 60s and they're sort of out of luck. So the Atlantic actually had a piece about the older crowd.

in kind of what happens to, you know, older people who haven't saved any money. And they gave some stories, and they talked about people who are living just off of Social Security. They're in their 50s and 60s. I haven't saved anything yet. And I pulled a few stats from the article that I thought were interesting. So they said two-thirds of Americans don't contribute any money to a 401k or other retirement account. That's based on the Census Bureau. One of the other ones, about 12.4% of the population, age 65 or older, still in the workforce. That's up from 3% in 2000.

And the other one was the median savings in a 401k plan for people between the ages of 55 and 64 is just $15,000, according to the National Institute on Retirement Security. So, again, the stats are something like 8 to 10,000 baby boomers are retiring a day for like the next 17 or 18 years. And obviously a lot of them are ill-prepared for retirement. And this kind of this article shed some light on what that looks like. And unfortunately, it's not very good where people are having to work into their 70s. 80s potentially and really cut back in their lifestyle. And health care costs are so ridiculous as you get older. Yeah. And so I looked at this. Like long-term care insurance is like bankrupting, a lot of insurance companies that didn't properly plan for this. Yeah. And so the way I look at it,

I've said before, it's not really a retirement crisis. It's an expectations crisis. So a lot of people are just going to have to really understand that their retirement is not going to be what they thought it was if they haven't saved anything. But one thing I did look at a while ago was the fact that if you're, it's really hard to become a saver if you've done just a spender all your life and you haven't put anything aside. But even if you're, say, you're 55 years old and you have 10 years to retire and you haven't saved a dime. So I look to what happened and a lot of people will take that to me and they need to shoot the moon and take a bunch of risk in their investments to make some money once they start saving. But I actually looked at the data and found that

if you're saving for 10 years, doubling your savings rate is actually better for your bottom line than doubling your return. So I looked at what happens if you save 10% of your salary and you get an 8% return. You get a much larger balance if you save 20% of your income but only get a 4% return. So for people later in life that have a smaller time horizon, the compounding effects aren't as great, so it's more how much you save. So hopefully once the kids are out of college and you've sort of gotten your home paid off hopefully or something like that and you try to start saving at a later date, you actually have the means in a higher salary. or hopefully, not all is lost if you really sort of ramp it up later in life.

Yeah, but the problem is the people that aren't saving, a lot of them just can't save because they don't make enough money. And this was floating around this week. I think the biggest, the best personal financial advice is to make more money, which is obviously sort of arrogant and tugging cheek and whatever, but not everybody has that ability to do so. Yeah, unfortunately, there's always going to be a segment of the population. And I think these days it's probably, I don't know, 30 or 40 percent that just can't

or won't or don't have the ability to save, unfortunately. It's probably just never going to happen. So is this going to, like, come to a head? Is there going to be a revolt? Or are people just going to be moving in with their children? Like, we see all of these statistics. And I guess it's happening around us every day. Maybe, you know, we don't deal with it quite yet.

But there's a lot of really scary shit going on out there. Well, it's funny. The millennials, they say, are living in their parents' basement too long. So maybe they'll all just then they'll turn around and the baby boomers are moving in with them when they buy a house. But I think there is going to be sort of this class. warfare between generations where the older generations are going to have it put a huge burden on the younger generations and taxpayers in terms of, you know, help from the government

and the younger people aren't going to want to fit that bill in a lot of ways. So I think there is going to be, and we talk about this with a pension crisis, where governments are going to have some tough choices to make in terms of, you know, a lot of their money is going to be going to these things, and it's going to be hard to justify that in a lot of ways if they're cutting back in other areas. I don't know what the answer is. everybody wants to be fiscally conservative until it's till it affects you so moving from boomers in retirement to millennials there was an article in the new york times millennials are saving for the future

if they can afford to and there was six or seven people on this panel and i thought that a lot of them gave really good answers to one of the questions what does retiring mean to you so i thought that we could just talk about this for a little bit morgan said retirement for me is saving up as much as I can so that by hopefully 60 at the latest, I have enough money to live off for a good 20 years, maybe somewhere warm. I think that's like the traditional thing of, you know, when people think about retirement. That was probably the most like, you know, the most standard answer. Kirk said it's not a one and done moment in my life in my mind at all. It's going to be more like a slow fade of reaching a point where I'm financially independent enough to make whatever

choice I want about how I spend my time. And that's pretty much how I think about retirement. And I think the young people definitely probably think about it differently these days than their parents' generation did. I had a conversation with some friends about this a few weeks ago, and it was interesting to hear the answer. Some people want to retire, like in their mid-50s or 60s and just completely cut it off. Other people are looking at it. This is kind of the way I view it, and I'm sure my views could change over time. But I think our lifespans are increasing, so I don't want to be bored for 30 years and not do anything. So I think it would be hard for me to just cut off and not do anything.

But like you said, it's more about having the financial security to be able to. do what you want and not work in a job that you don't like, I think that's more freeing than anything. So just having the freedom to, to, you know, do the work you like and enjoy and not have it be something you're forced to do just to keep yourself afloat. And that's exactly what Garrett said. He wrote, retirement to me is just not having to work. Not necessary that you won't work, but there's no necessity for it. So getting to the place where financially you can afford not to work, but chooses to do so anyway is I think probably the ideal scenario for most people that they're working because they find purpose and meaning in what they're doing

rather than just trying to put food on the table. Which I think is a great way to frame it, especially when financial service professionals are trying to get young people to save, the worst way to do it is to tell them you need to have X amount saved by 30, 40, 50, 60, then you're going to tear at age 65 and you'll have enough to do 4%, and blah, blah, like that doesn't work. It's more about showing them, you know, you need to have freedom so you can work on your side hustle and you can do something else with your life and you don't have to do the nine to cubicle job every day. So it's more about that's the way to get young people to save is to show

them it's more about financial security and freedom than it is about moving to Florida when you're 65 or whatever. There was an article that from Bloomberg talking about the share of home sales to first-time buyers. And this strikes me as like a really, really big deal. They wrote first-time buyers rushed into the market last year, making 38% of all U.S. single-family home purchases, the biggest share since 2000. I don't know if this got enough attention. Well, it's funny because a few years ago, people were worried that millennials were never going to grow up and they were all going to never buy houses and they were just going to rent and never buy cars. And of course, as happens with everyone, as you get older, your responsibilities change and your view of the world

changes. And of course, young people are going to buy houses eventually. I think it's just been pushed out because young people today go to school for longer than their parents did and they don't get married at such a young age. So they're not looking to buy a house at 19 or 20. It's probably more in their late 20s or early 30s, which is the way it worked for my wife and I. We didn't buy a house until a little later. But so I think the idea that millennials were never going to buy a house was kind of laughable because it's just this happens to every generation. And so I think this is actually a good thing.

And I think it's actually getting probably harder for millennials to find housing in some ways because I think their tastes are much more refined than their parents' generation. So they don't want the starter home. They want it to be decked out because they've been watching HGTV and stuff. But I think, yeah, I think this is good news from an economic perspective. So there's another story sticking with housing. so many people are leaving the Bay Area that a U-Haul shortage is jacking up prices. And somebody tracked the costs of renting a U-Haul from San Jose to six cities,

Las Vegas, Phoenix, Portland, Oregon, Nashville, and Atlanta. And in every model, the price of renting a truck outbound from San Jose was at least double the amount of renting the same vehicle in the opposite direction. That's crazy. So there's like inflation even in U-Hauls on the West Coast. Yeah, I guess, I mean, at some point, It just, the numbers that we're seeing and the anecdotes that we're hearing about from out of Silicon Valley are just like totally, totally insane. So there was one from Business Insider recently, too, that said the household income required to buy typical home in San Francisco is now more than $300,000.

And they say only 12% of households in the city could afford a median priced home. So it's just gotten so bizarrely expensive to live there. It's basically just, I think it's just going to be tech people and those tech millionaires who are going to be able to live there, which, I think in some ways it's going to be bad for them because they're living in some sort of this sort of bubble. And I think eventually it probably hasn't happened yet because technology's been so, I think, been so great, especially the last 10 years, we've gotten so many, you know, innovations that have helped. But I think eventually that makes them loose touch and it could hurt their business models because they start to lose touch with like the common people who they're trying to serve so that they're going to increasingly just try to solve problems for their rich friends in a lot of ways. Does that make sense? Yeah, maybe.

So, okay, here's my, here's my, this is my Adam Sandler theory that I've used before, but so Adam Sandler in his first few movies when he was young, I thought were some of my, you know, favorite comedy movies. And as he's gotten older. Wait, Billy Madison or Happy Gilmore? Which one do I like better? It's like choosing my favorite child or something. I don't know.

You can't, you can't put an answer on that one. Happy Go More from me. Happy Go More, yeah, you're right. Happy Go More. But so I think it's like after a certain point, my Adam Sandler theory is after you become so wealthy and out of touch with like common everyday problems as he did that it's hard to find things that are funny anymore because you're not dealing with the everyday pieces of life. So his movies have gotten worse over the years because of it. But you know what's weird? His movies, in my opinion, are unwatchable, but they still do really, really well, like financially.

Yeah, they actually do really well with like younger kids, I guess. They're the ones who like it now, but movie connoisseurs like us. Is that, yeah, is that an original theory, your Adam Sandler theory? Yes, I wrote a post about this. I probably wrote this, I don't know, 2014, so I'll put it in the show notes. And I even use some Rotten Tomato reviews for it, so you'll have to see. I actually got asked about this at a conference. Ah, and very empirical.

Yeah, right. Yeah, so that's my theory, though. The further you get away from, like, the common person and just you're out of touch, I feel like your sense of problem solving or even comedy can kind of go away in a sense. It is sort of interesting that tech is such a deflationary force, but there's wild inflation in housing in the tech community. Yeah, right. Yeah, it is kind of crazy. Yeah, it's kind of crazy. So the other big thing this week was the Credit Suisse yearbook came out, which is one of the best pieces of free research that comes out each year. And as we do for our loyal listeners all the time,

this is what I don't know 100 pages or so maybe it's pretty long so we go through this we pulled some of our favorite graphs and charts and they've used this one before but it is it is sort of crazy just to sort of review this they have a they have a chart that shows the relative size of the world stock markets at the end of 1899 through the end of 2017 and the one in 1899 it shows all the different countries and the u.s made up 15% of a global market cap the UK was actually the biggest at 25% Germany and France were almost a same size as the U.S. And now you fast forward, you know, almost 120 years to now and the U.S. makes up over half of world market cap. A lot of these other ones are much smaller. It just looks

like a different ballgame. It's crazy. How many people could have actually predicted that would have happened back then when the U.S. was basically an emerging market. Yeah, it is interesting. One of the charts that they had alongside this that I've never seen before was the evolution of equity markets over time. So we've all seen the pie chart before, but this goes and it shows you like through time, how big or small, the percentages have gotten. And what's really, what really, really stands out is the Japanese bubble in the late 80s, right? Like, exploded and then declined really quickly. The other thing here to remember, I think, it's easy for us to look back now and say,

of course, the U.S. has such a dynamic, diversified economy. Of course, they were going to be the winners and all this. But the winners write the history books. Like, isn't that the line they use? where no one could have predicted this would happen. So, like, trying to extrapolate that now the U.S. is by far the biggest stock market of the world and assume that's going to continue from here, I think it's just kind of foolish and to avoid something like global diversification because the U.S. was the winner over the last

century doesn't necessarily mean it'll be over the next. I have a David Spade theory for this. Oh, okay. Matching Sandler with Spade. What do you got? There's a, no, I got nothing. Okay. Oh, I thought you really had one.

All right. No, I really, I really have nothing. Okay. So, uh, another interesting one was long run emerging and developed market returns. And I was surprised to, to see that emerging markets underperform quite significantly, 1% a year for the last 120 years. Now, it's a 120 year chart, which is sort of ridiculous. But I guess one of the really interesting takeaways was they were pretty much neck and neck from

1900 to 1945. and then in the aftermath of World War II, there was a huge divergence where emerging markets just absolutely got crushed. And I think one of the big reasons is because a lot of the public markets went to zero. Yeah, they just basically went out of business. Yeah, you can see. It was right. You can see that where World War II was in that chart where it just drops off of a cliff. And since then, it looks like the emerging markets have actually closed the gap in a lot of ways. Yeah, I would say that if you started from 1950 to today, I bet you emerging markets crush.

Yeah, they had a great chart. Like that one five-year period throws everything off. Right. Yeah, which is something. And I think it's another reason to think why markets are a lot safer these days than they were because we're not going through a war every five years. Famous last, famous last words. Yeah, I know.

Yeah, a war is going to start tomorrow. But they had a cool chart in here that showed the performance of different countries and the world during the different wars. And so they showed World War I and then they showed the Great Depression and World War II and all these different things, which is kind of interesting. The one that stuck out to me was all, every stock market around the world in World War I got crushed, except for Japan, was up like 66% during World War I, which I just kind of a interesting fact, I never knew. Now what? Yeah, from 1914 to 1918, the U.S. lost 18% on a real basis, but 1915 was the best year ever for the Dow.

Stocks were up 86% that year. So that's pretty nuts. Even despite an 86% gain in one of those four-year periods, that stock still got hammered. How did Vanguard value funder doing that time? Don't even ask. Okay. Another thing that stands out is on the bottom part of this chart, there's a column,

I'm sorry, that's a row, not a column, longest runs of cumulative negative real returns, and France, Germany, and Japan have all experienced 50 plus years of negative real returns. So when people say stocks for the long run, I think that's something that you and I, pretty much ascribed to, but there's no guarantees. There is risk involved. I mean, 50 years is an entire life of investing. And that's just the reality of it. Nothing is promised. There's, there's no, nobody can tell you that you're going to be compensated for the risks that you take. Which is one of the reasons you don't want something of a home country bias. You want to be diversified because you don't want to be stuck in that one country that sees horrible real returns

over a long period of time over a number of decades. That's the whole point you diversify in the first place so you don't have to live through one of these because hopefully you're not they're not all going to happen at the same time if if it did happen you know in a few instances but then they show the world and from 1910 to 1931 the world had negative real returns which was a 22 year period what do you you know like tough that's the way it goes sometimes yeah unfortunately yeah that's the risk part of the equation so you also picked out a good one that showed the the average asset allocation of ultra high net worth individuals which is kind of interesting, and it kind of shows financial assets makes up a smaller piece

than you'd think, so it's only about a quarter of it, and that's stock, bonds, cash, and stuff. So, real estate makes up another big piece, and then personal businesses makes up another big piece. They all make about 25%. The 24% of real estate, that's excluding homes. So that's like real estate investments. Primary and second homes is 16%. But, yeah, I thought maybe the thing that didn't surprise me is personal business is 23%. Yeah, that seems, I think people, if you've ever read the Millionaire Next Door book, you know

that a lot of the people who fall into that category own their own business. And we have seen in our own business where a lot of people come to us and they're trying to diversify away from that because their whole life savings has been, has been, you know, built up in their own business and they want to diversify away from it or cash out in some way. It is kind of interesting. So let's move on to some of the articles that we saw this week. I saw this in Mashable, and it just made me think that the Fed is way behind the curve. Coffee addicts, this phone will change your life. There's a phone case that makes a shot of espresso.

I don't know. Is that like Ponzi coin? Is it just, is it just a joke? How does that work? Somebody actually thought this was a good idea. Did you see this video? No, I didn't look at the video.

I just saw the headline. You could pour coffee from your phone case. I wouldn't trust myself because how do you get it in there in the first place? Yeah, I don't know. See, this is why I don't drink coffee. because I don't want to mess up my phone. Smart. Okay, an article from the Wall Street Journal, there was a lot in here. The title was, investors zeal to buy stocks with debt leaves markets vulnerable. So one of the things, and there was a lot going on in here. One of the things that

they spoke about was margin debt, which is often a topic of conversation. So they say that the growing loan balances have caught the attention of Wall Street's watchdog. Finra in January published an investor alert after the total value of margin loans broke $600 billion for the first time. So I don't know who they were alerting, but also in the article, it says that- I never got the alert on my phone for that one. Yeah, I didn't get it. Net margin debt was 1.3% of total value of the New York Stock Exchange last year, eclipsing the previous peak of 1.27% in the tech bubble of 2000. So $600 billion is a huge number, but we talk about this a lot, denominator blindness.

It's 1.3%. So I understand that it's an all-time high. But I think context is really important here. Yeah. Well, I've looked at this before, too. Margin debt at all-time highs means the market's probably at all-time highs because it typically tracks the market. So it's not a leading indicator. It's kind of a coincident indicator that just follows along with the market.

So if the market's at all-time highs, there's a good chance margin debt will be too. And the thing that always gets me about articles like this is I understand where, you know, where they find retail people to comment on being blown up. Like this one guy says, I was so bullish that I went. went all in. When the market recovered, he had to deposit $2,500 into his account to satisfy a margin call. The next day, the market ripped higher and I breathed a sigh of relief. Okay, I get it.

That's a nice anecdote. However, how do they find people like this that will go on the record to talk to the Wall Street Journal? Harvey Hajian, a 35-year-old financial advisor from Toronto, has been investing for more than a decade, assumed stocks would continue to grind higher this year. Okay, quote, all of the... the strategist agreed the market would go up, said Mr. Hadjan. I was in denial, he said, after he realized he lost about 600,000 Canadian dollars, and he was doing this investing in SVXY. Why would you say that to a reporter? The way that I look at this, I think people just love having publicity. Like, you remember the show Cops? I think it might be still be on. Like, all the people-

That's the greatest reality show of all time. So all the people that they arrest have to sign a waiver showing their face, otherwise they have to blur it out. But they all show their face. Like, why would you do that? That's, like, the same thing. Like, I think people just, whatever it is, they want, they're 15 minutes and they want. So I'm sure if anyone from the Wall Street Journal calls them up, they're happy to talk. But it makes no sense why you would out yourself as a financial advisor for making irrational decisions on behalf of your own account or your clients. Like, there's no upside there.

The quote, all of the strategists agreed the market would go up. Like, oh my God, what does that have to do with anything? Yeah, good luck with that. Yeah. Another one, TD Ameritrade to allow trading via Twitter. Good idea, bad idea, or best idea ever. How exactly is that going to work? I don't know. They said we have to go where our customers are. A lot of people consume their news on Twitter and the new offering is about making trading more accessible and easier. So I don't know exactly how the mechanics of this work. I think like maybe you DM a TD bot or something. I don't know. Yeah. I mean, they must be trying to keep up with places like Robin Hood that are making it easy to, to do it on your phone. Yeah, I don't see why you need to make it that easy to trade.

But if someone's asking for it, I guess someone will always do it. But I don't see the need. I think emotions are running high enough on social media as it is that putting trading into that mix is probably not a great idea. Wait, I don't understand what happened. I tweeted the order in. No, no, that was a sub-tweet, actually. I didn't really mean to buy Apple.

I was being facetious. If there should be a hedge fund that shorts all the orders that go in through Twitter. Yeah, seriously. That would be interesting, so you could track it a little bit. I'm sure that there are ways that they do that, but that's not a good idea. Did you see this thread from David Peril on career advice? Yeah, he's a pretty good follow on Twitter. This was interesting. So a lot of good stuff in here. The favorite thing that I got from it was from Seth Godin, who said, you don't get paid what you deserve. You get paid what other people think you're worth. I've always liked the one that is like don't necessarily follow your passion, figure out something you're good at and it'll turn into your passion.

Yeah, I never really got good career advice. I never really asked for career advice. I don't know. Yeah, I mean, a lot of people just figure out like trial by fire and just go through and there's nothing that really changed their life. But yeah, he's just like, I don't know. I'm skeptical of the whole life advice industry. I think a lot of the stuff you just have to figure out on your own. You mean two quotes and one book isn't going to change your life? Okay. Any good recommendations this week? One more thing, actually. Somebody emailed me asking why Schwab charges so much for Vanguard funds and what they should do about it. And I actually came across this myself because now that rates have started to go up, I put a lot of the cash that I had into New York municipal bond funds, which are yielding on a tax equivalent yield almost 5%, which is pretty darn good.

and I wanted to buy Vanguard's New York Municipal Bond Fund on Schwab, and I saw the commission was $79, and I could not believe it. So I called Schwab, and they said, yeah, that's like what it is. So I was going to start a Vanguard, open a Vanguard account, but that was sort of like a hassle, not the easiest thing to do. So I just bought NYF. So basically it's just competition and they don't want another fund provider on their platform. Yeah. I mean, Schwab has a lot of index funds that are basically like free. I think they're like, they might even be less in Vanguard. I think their four basis points. They didn't have a New York municipal bond fund. I'm sorry, I had to buy the I shares ETF, but that's crazy. $79. It's 2018. Yeah, so Schwab has already built a wall.

Is that you're telling me? Yeah. Interesting. That seems insane to pay that much for anything for trading. Yeah. So my favorite podcast this week was the Warby Parker founders were on how I built this. Did you listen to that? Yes, this was on my list as well. Sorry. That was good. It was good. You totally stole my thunder. Yeah, it was really good. I thought the coolest thing was. that they did this while they were in business school and they came in they lost in the semifinals of like the business competition like they put this out as a business plan and they lost which reminded me of like supposedly the FedEx guy when he was getting his MBA the guy who started FedEx Fred Smith is that his name I'm not sure if I got that right but he got a C plus when

he went to lay out with FedEx business plan in like the 70s for so I thought that was kind interesting anyway so I've seen these books in Barnes & Noble a million times and I never thought to get them because it's just a herculean effort. But I was in a used bookstore in Prospect Heights and these books were $9 each. So I took the leap. Edmund Morris wrote a three-part biography on Theodore Roosevelt. And it is so rich in detail, like every day of his life practically is in there. And it got me thinking about biographies. So I really love biographies. And sometimes a lot of people have the opinion that, like, biographies should be 300 or 400 pages shorter. Like, all the turnout biographies are like seven to a thousand pages.

Yes, I'm of the opinion of that they should be shorter. Okay. However, once you're done reading a biography that's 800 pages, you have such a intimate understanding of who the person was. And I suppose that's just personal preference. Like, maybe you don't need to understand every single aspect of the person's life. But the most recent biography that I read was Ulysses S. Grant, the turnout one. And I don't think that you could have accomplished the same thing in 300 pages.

Here's another example. I loved Roger Lowenstein's book on Buffett, making a capitalist. But I thought Snowball, which was double the length and didn't need to be, was far superior. Okay. See that. That's where we differ. Yes, that's where we differ. I like the other one better.

I think it's too. I don't need to know what his great aunt did in the 1900s, like, what her job was. or something. I always skip over like the first two chapters because it's all just stuff in their family that I don't care about, but maybe that's just me. Okay, any other ones? Nope, that's all I got. Okay, so how many presidents have you worked through at this point for biographies? Probably a dozen. Yeah, that's not bad. Okay, so my, let's see, I got a few different recommendations this week. My first recommendation is to watch the first season of Atlanta on FX. That was probably my favorite show last year, a new show, and that one comes out,

the new show starts this week, the new season, season two. I'm not sure. Well, it's on FX, so I'm not sure what streaming services it's on. And so maybe it's on Hulu, I'm not sure, but the first season was great. One of my favorite new shows. It's just very unique. And let's see. The other one, I got a couple partial recommendations because I'm not all the way through them yet. So I started reading Guns, Germs and Steel by Jared Diamond. Oh, I love that book. Okay. It's kind of like Sapiens, but I'm a little bit away through it. I can't blow through these 700 pages like you can. And the other one I started was called Behave by Robert Supulski. And this was actually a recommendation.

by Michael Mobeson on a podcast recently. It's like a 700-page book, and it has like every single behavioral study you've ever thought about, but it tries to look at what happens to the brain and the body before we make a decision. And so what is going on

in the different regions of your brain that may cause you to make a decision depending on your emotional state? So I'm just about a quarter over the way through it, but it's really, really interesting, and I think the brain is just fascinated in no end.

The other one, I'm reading The Wanted by Elvis Cole, uh or sorry what's that elvis cole is the is the character um so robert creus it's a detective series one of the better detective series i've read it started in the 90s and i'm probably on my 20 plus something book of it it's a great uh great detective one of like a private equity in l a you've read you've read 20 plus of these books and i've never heard you talk about that no i so i've got a few of detective ones that i've i've read since they they're probably go back to the 90s or 80s in some cases they they put out a new one every year and yeah it's so if you wanted to start the beginning of this Elvis Cole series. It's really, really good. It's him and it's, I mean,

it's your stereotypical private eye who's a tough guy, but he knows how to cook, and he's good of the ladies, and he has a, and he has a partner who's kind of shy and quiet, but beats up people, and it's, yeah, it's really good. So I've been reading the new one of that. And the other one, I like the A16Z podcast this week, where they talked to Ted Sarandos, who's the chief content officer at Netflix. That was a worthwhile, listen. Agreed. That's all I got. Yeah, that was good one. I love especially how they said that Netflix gets like seven to ten pitches a day from people. But I was looking at this weekend, and they must have had 30 or 40 new titles in shows, and it's just amazing how much content there is. It's getting very

overwhelming. It is. I don't know what to do. I need a two-time speed for my TV viewing. All right, thank you for listening. We appreciate all the emails and feedback that we've been getting, you can reach us at Animal Spiritspod.com. We will see you next week.