Animal Spirits Podcast - The Lump Sum (EP.23)

Episode Date: April 4, 2018

On this week's show we discuss if we would you rather collect $1 million now or $1,000 for the rest of our lives, how the world has changed since 2008, the single best investment trait to compound capital 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 from two guys who studied the markets as a passion and trade for all the right reasons. Here's your host, Michael Batnik and Ben Carlson. Welcome to Animal Spirits with Michael and Ben. David Shawl had a good tweet last week, letting us know that the first quarter of 2018 was the first quarter since the third one in 2008, where the S&P 500 and Barclays, U.S. aggregate bond index, both had negative total returns. So for investors in a traditional 60-40 portfolio, there was nowhere to hide. And you run some numbers on this before.

This is a rare occurrence, but it's something that happens. So the numbers you gave me, so you said since 1976, which was the inception of the Barclays Ag, which is something of a total bond index, 9% of the time, or 15 times out of 169 instances, these two have been down together. So this is just something that happens. It's unfortunate. It's kind of painful for investors. But if you're measuring your performance over a quarterly period, every once in a while, you're going to be disappointed. Yeah, and I went back a little bit earlier to 1926 through 1975 before the index was created to look at what happened. And pretty

similar story. It happened 12% of the time that stocks and bonds both fell for a quarter. So again, this is just part of the deal. It's not too likely, but it has happened before. It will definitely happen again. And the good thing for most investors is that they probably follow you into shorting Tesla. and that kind of made up for it on the other end, right? Yeah, and by the way, if you did, it's not yet time to take that off. I will let you know. Okay. A favorite pastime for a lot of people is daydreaming about what they would do if they won the lottery,

all the different things they would buy, you know, how much they'd pay in taxes, all this other stuff. There was a story in The Guardian that was pretty interesting, and it has a good personal finance angle. And so there was a woman, she's 29 years old, and she has the... How old I miss that? 29 years old. Okay.

She basically had the option of earning $1 million. now or $1,000 a week for the rest of her life. And the question was, what should she do? Should she take the lump sum now or take the annuity where she'd have automatic income every week for the rest of her life? And what did she say? She decided to take the $1,000 a week, I believe. Okay. You and I decided to run some numbers on this to see what makes sense from a financial perspective. By the way, you and I trying to figure this out was hilarious. It was like the scene in Doolander when Owen Wilson and Ben Stiller, like, jumping around the computer like a bunch of monkeys.

It's in the computer? Yeah. So anyway, so what we did was we looked at what happens if you take the lump sum million dollars right now and let's assume that you get 6% for the next 60 years, let's just say. She's a young person. Or if you got $1,000 a month and we're earning 6% on that. So the mathematical, the spreadsheet answer is to always. take the lump sum because even going out 60 years, the million dollars compounding at six

percent leaves you far, far, far, far ahead. But obviously, this is not just a spreadsheet sort of answer. And they said over about, it would take about a 30 year period to reach a million dollars in real terms. So after you're adjusting for inflation, it would take about, I think we'd figured out 19 or 20 years to reach a million just in total on a nominal basis. Right. But that's assuming that you just sit in cash. And yeah, so I think the idea here is that because of the time value of money, taking a lump sum is pretty much always going to be the right option on a spreadsheet, but how many people at age 29 are going to be able to sit on that money and invest it wisely and not completely just blow through it all? Yeah, probably very few. I'm guessing that's part of the

reason why. But the other interesting part of this article that I found pretty cool was, so they said there was a 2016 study that found lottery winners and neighbors often ended up in financial difficulty because they tried to keep up with them. So there's a lot of studies out there that show lottery winners often have a hard time and a lot of them are broke within a few years because they just blow through all the money and make poor decisions. But even people who live next to lottery winners end up in financial ruin because they try to keep up with them and keep up with the Joneses. I thought that was kind of interesting. Yeah, that was a good one. So there's a big article in the Wall Street Journal last week, why are states so strapped for

cash? And there are two big reasons. So we're going to spend a little bit of time on this. So there was some amazing data in here. So 22 states face budget shortfalls in 2017. And this is something that I really didn't realize. Nearly 70 million Americans, about one-fifth of the population, depend on Medicaid for health coverage, including more than 28 million children. Yeah, so basically, and this is not something that's going to improve by any means

as the baby boomers continue to retire. And we have 10,000 baby boomers retiring a day. These numbers are just going to get, they're just going to continue to rise and rise and grow on top of one another. this kind of gets back to what we've talked about with pension contributions that that's a huge issue for these municipalities. But healthcare spending is just dwarfs these on the chart that we can put in the show notes. You can see Medicaid spending is, you know, multiple times the size of pension contributions even. So if you take the two of those, pension contributions and Medicaid

spending, which are really putting the harding on states, two-thirds of the additional dollars raised since 2008 have gone to pensions and Medicaid. So it's really quite disruptive. And the lawmakers have some really tough decisions to make. And of course, nobody wants to cut Medicaid. So there was a politician in Michigan. I think it was a senator, but I'm not exactly positive. So the quote, he and lawmakers looked for savings elsewhere as they wrote the state's budgets in 2012. And eventually, they agreed to cut $22 million from higher education, $452 million from K through 12, and $105 million from statutory tax revenue sharing with Michigan cities. So this is a problem that's not necessarily down the road.

It is affecting people today big time. So this will be a downer for my kids in school in Michigan, huh? I think this kind of gets back to what we've talked about before, where I just see in the years and decades ahead it's going to be younger generations versus older generations. And it's kind of, you're already seeing it somewhat with these Parkland kids where they're scolding the older generation saying, shame on you, why should we have to take this up?

And I think that's going to happen with all this government spending as well. Why should we pay all this money for your health care and your retirement and none of it goes to us? So I think, and I don't think that any politicians are going to want to make any changes. You know, obviously this one person did, but how many politicians want to step up and do that when all of the majority of their voters are older? Right. So maybe that's just going to change as younger people come into the voting demographic. So they were talking about Medicaid that when LBJ created it in 1965, the cost of the cost of, just wasn't an issue because, quote, people used to go to the hospital to die back then. And since

1967, the state and local share of Medicaid has grown at a compound annual rate of about 7% exceeding the 3% annual growth in their tax revenues adjusted for inflation. So again, this is just an enormous, enormous issue. And I don't know what the alternative is or what the solution is, but I like the Churchill quote. He said something along the lines of Americans will always do the right thing after exhausting all options. So, this is the kind of thing where the candle get kicked down the road until people have to really make a decision and the politicians have to make a decision. And then hopefully, you know, there would be some sort of balance struck between helping out people who need health coverage

and helping out those in other government services. But again, I don't know what the solution is. So it's the solution. I mean, there's a few options. Cut some of these entitlement programs, which is going to be really, really, really devastating to millions of Americans, raise people's taxes, borrow more, you know, issue more debt. I mean, And yeah, this seems like a big one. Definitely one of the things to worry about. So there was a good infographic in the Wall Street Journal last week called How the World Has Changed since 2008, and they kind of walked through a bunch of different steps of the banks and the economy and the stock market and how things have changed since the financial crisis.

And I think the most depressing thing to me about reading through this was the fact that there's just so many things that haven't changed. The banking sector is still very concentrated. The one that got me was, I think the best book hands down about the crisis was The Big Short by Michael Lewis. I mean, that's probably one of the best finance books ever written. And the whole crux of his argument was that one of the biggest problems with these subprime mortgage bonds was the credit rating agencies. And they have in here that says 94% of the industry's revenue for credit rating was still earned by three firms as of 2016. So all those big worries about those credit rating agencies, and they're still the only ones that are getting paid by these people. So that was interesting to me how that just hasn't really changed at all.

Yeah, well, another, and sorry of this is so the present, but about a fifth of U.S. jobs are in occupations where the median income is below the poverty line. Yeah, and they showed, too, how wealth inequality has really changed since 2007. So in 2007, the top 1% had about 34% of the wealth in the country. Now it's closer to 39. and the bottom 90% had it close to 30% in 2007, and now it's closer to 23%. So a lot of the policies that have really just made this wealth inequality thing, the gap has just gotten even wider. And that's, I mean, in 10 years or so.

No, it's nuts. So there was a stat, the six largest banks have paid at least $110 billion in penalties related to the crisis. Where the hell does that money go? That's a good question. I'm guessing somehow it goes to the Fed or the Treasury. but I don't know. I'm assuming it's used to manipulate the stock market.

Good one. All right. Thank you. Anything else in this graphic? No, I think that's it. Why don't we move on to you getting actual lead by a state senator? Yeah, this is filed under the, this doesn't happen every day type of thing. So last week we spent a lot of time in this show talking about stock buybacks and actually

mentioned that I had written a piece for Bloomberg. And I think it came out probably as we were taping the show. And the piece came out that same day. and I quoted a senator from Wisconsin by the name of Tammy Baldwin. She's the one who introduced a bill to ban stock buybacks. And my piece for Bloomberg was kind of going against that bill. Now, when I write a piece for Bloomberg or any other publication, I obviously don't choose the headline.

So I'm guessing she was probably irked by the headline because it said lawmakers don't understand how stock buybacks work. And so her response on Twitter, well, I say her response. It was probably a response of one of her staffers. was, hey, I know how they work, and I know they're not benefiting the thousands of workers losing their jobs while investors are making out like foxes in the henhouse. Boom, roasted. Yeah, it does seem like stock buybacks, and not to believe by the point, we'll move on quickly, but are awfully political. So there was a good article that you share with me. I'll just read one line,

quote, if paying excessive CEO salaries is the most malign use of corporate funds, stock buybacks may well take second place. Conventional wisdom is that CEOs buyback stocks to manipulate the short-term stock price. They fund the buyback by cutting investment that so firm value suffers in the long term. As Senator Elizabeth Warren argued, stock buybacks create a sugar high for the corporations. It boosts prices in the short run, but the real way to boost the value of a corporation is to invest in the future, and they are not doing that, end quote. And Jack Vogel showed us last week that is factually inaccurate. But what we said last week was that people, you know, revert to the availability buyers of companies like IBM and GE that had really unsuccessful buyback

programs. And Ben, we even got an email. Maybe you guys are too young to remember Cisco in the 90s. And it's like, dude, you're proving our point that you think of these giant multi-billion dollar stock buybacks that didn't work without considering what the evidence suggests. And the evidence suggests that stock buybacks are not evil. And it's still early on the year, but this is the most email that I've gotten from a piece this year. And it is kind of amazing. The people who are against my piece and against that stuff never cite data. It's always an emotional argument. And the people who kind of, the piece that you referenced, the author of that had sent me that he was a professor from the London School of Economics, I believe, and he wrote that piece about why by-box

aren't the worst thing in the world. And that was totally backed up by data. So I think it's just people inherently have these ideas about how the world should work, and they don't try to back up their arguments with data. Now, I think you could make the argument that maybe they should pay more attention to stakeholders than shareholders. But this, as the piece references, it's not like the fact that they're taking a line-by-line item and deciding we're going to pay these people this much and then pay this much for stock buybacks. It's kind of whatever's left over they use for buybacks or other investment decisions and then they can kind of pull the levers from there. It's not a one-on-one decision. So speaking of like

annoying emails and angry emails, this one was terrific. Somebody said to you, I buy stocks for a revenue stream or as a speculation, which is pretty hilarious. When an organization has profits, it should distribute them to the stockholder or reinvestment the capital to grow the organization and increasing stock value. Again, just words with no evidence behind it. Stock buybacks are a Ponzi scam that defrauds the investor of his returns. You are a sycophant. Your article is propaganda. Ouch. That's pretty rough. And thank you from Rusty, my number one fan. That was very kind. All right, moving away from Rusty, I saw a terrific chart crime this week. I sent this to you, and you just had a laugh, but you thought it was the price of Bitcoin with the price of the

SP 500. It was even worse than that. It was the price of Bitcoin overlaid with the forward PE of the S&P 500, which I guess the forward PE moves along with the stock price, but the kicker was really the wording of this. Let's see. The price of Bitcoin, and this was from a Bloomberg article, the price of Bitcoin is worth watching. Morgan Stanley analysts, including Michael Wilson wrote in a report Monday. While we do not expect this relationship to continue to hold so tightly, we do think it will be hard for price to earnings to move significantly higher or lower without a commensurate move in the digital currency. What? This is so. bad. We'll put this chart in the show notes at our websites, but it's just, it's not even

apples to apples. This is just two things in a completely different world. It's a ratio versus a price index. And also, anyone trying to overlay prices of cryptocurrencies with the stock market, it's just no way. Just get out of here. That's so bad. I thought it was a bad chart when it was comparing the S&P 500 to Bitcoin. But this is the price to earnings ratio of the S&P 500 to Bitcoin. And of course, I mean, hey, there's a circle on here and a rectangle and a little bit of red and a little bit of blue. So I'm sure it looks good, but I can't believe that people pay for this type of research. So last week, we pointed to a Jeffrey Patak tweet about how the contra fund was bleeding assets. So he took that 10 steps further and looked at funds that were beating the

S&P over the last 36 months by 1% by 1.5% and he found that even funds that are crushing by 1.5% per year over the last three years are experiencing outflows. So this is not just a cherry-picked fun. This is just across the board. Even the winners are bleeding, which is really something else. Okay, so last night, Patrick O'Shaughnessy, sorry, Ben, I'm talking fast. Do you have anything to add there? I'm going to give my Charlie Munger. I have nothing to add to that one. All right, so last night, Patrick O'Shaughnessy had a really, really interesting poll on Twitter. He said, you are trying to turn 10 million of your own money, no clients, into as much as possible for the next 20 years. You get one of these traits and just above average on the

rest. Curious where people think individual edge might lie. So this went totally haywire, got over 6,000 votes already. So the choices were 170 IQ and not crazy, elite programmer, the world's best Rolodex, or can read seven times faster and retain that information. What was your choice? So my choice was the world's best Rolodex, which seemed to be tied for something else, for the reading faster. Where do you shake out in this? I don't see how reading faster and retaining knowledge can really improve your skills as an investor. So if you read through the opinions, this was a really polarizing debate. So the way that I like to think about these things, if you're trying to have like the best investor in terms possible,

Like, I, my comparison to that is not just Buffett, but like the people at Renaissance. And so, so maybe for that, maybe I'm, I'm not playing this game correctly, but for them, isn't it kind of like a scientific mindset? And I think they have kind of a combination of one and two where crazy, crazy, smart people. And maybe they are, maybe part of the reason is they are crazy, because a lot of the stuff they do, the relationships they find don't make sense economically. and then they are elite sort of programmer data people because it's all quantitative. So maybe for me it's kind of a combination of one and two actually. Yeah, you know what's funny?

Because those are the two of the two. So the 170 IQ got by far the least amount of votes, just 11%. So I think that people were of the mind that it's not necessarily the smartest people that are the best investors. I chose the world's best world decks because I just assumed that that meant like insider information, which is an edge that just has been seemingly eliminated. or access to like the best deal flow or the best smartest people. So if you're not the smartest person yourself, knowing the right people can help me.

And then I also thought that if you have the world's best Rolodex, then you know the elite programmers and you know the people that can read seven times times. Maybe I was overthinking it. But I don't think there's any one right answer. But I think having insider information, the way that I interpreted it was probably the best source of alpha. Or if you want to take the last one, I mean, haven't ever seen like the infomercial for the speed reading guy that can like just put his hands over the page and read the book? I don't know. I just don't see how that's going to help make you a better investor. I tried speed reading. Like I read the Tim Ferriss thing. Well, you basically are a speed reader. No, I'm not. I spend a lot of time reading, but I'm not like a fast reader.

Okay. How did it shake out from your Tim Ferriss speed reading course? No, I didn't take the class. I just read an article. What are you laughing at? Nothing. It's just, anyway. Anyhow. So last week, I went out with friends and I was sitting at a bar drinking a goose island. IPA, and I went on Instagram, and I saw an advertisement for Goose Island. And I'm certainly not like a tinfoil hat type of person, but you think it's possible that Facebook, Instagram, whatever Amazon, I mean, we know Amazon is listening, but do you think it's possible that they literally are listening to conversations?

I wouldn't put it past them. I mean, that's what the, we have an Amazon Alexa now, the Echo, and I'm sure it's just sitting there listening to everything we do. once in a while it'll just chime in and we'll kind of be like oh my gosh this thing is totally listening to us when we didn't even think about it so maybe this is another reason why i didn't get on facebook because i don't want to have my beer recommendations come through but can we backtrack a little bit this is another thing i'm anti uh i'm anti i pa okay what do you think about that's fair why i'm not a hop guy i don't i think it's i don't need like the quadruple hops i don't need to drive my ship from

india all the way to the americas and have my beer make it there that way so i go single hops, but what beer do you drink? I'm more of like an amber or a lager, but I just, sorry, that's just not me. I know it's very going at the grain here because that's all there is these days, like your watermelon infused quadruple hop IPA, but not for me. All right. Just put it out there. So another story that I've got to share. So a few weeks ago, we were in Los Angeles and we took clients out to dinner and I swiped my card and it was quite an expensive bill. And then the next morning, I went out to breakfast, and my 885 bill got rejected because of fraud.

Thanks, Chase. Ouch. So they saw that you spent in a different state, and then they put a lock on your card. Yeah, but my dinner from the previous night didn't get flagged. Really? Huh. And then my breakfast, which was a few bucks, did. And did you call and complain?

I did not. What am I going to complain about? Leave a Yelp review. I left the Yelp review. Well, how do you, then all of a sudden it just worked, later or how did they get the red flag off of there? No, you just, they send a text to your phone. Oh, okay. I got you.

Well, you'd think if the social media companies can know exactly what you're doing and buying that the bank company should know as well and be able to understand when you're traveling and when you're not, right? You know, I love the fact that they do that. I just thought it was funny that they missed the big dinner meal and then they flagged me for breakfast the next morning. That's what I'm saying. So someone actually stole my data from my credit card a few weeks ago.

Really? And instead of running up, this happens to me all the time. Instead of running up like a huge bill on my account and going shopping, they charged a monthly subscription to Hulu, which I don't have. And so I called Hulu, and they said, yeah, someone from Texas used your information, and that's how they do it these days. They do little charges here, and they're hoping people won't notice them. I would never notice that.

Yeah, I don't know why I did, but I'm more, you know, I'm a little more anal with those things on my money. But anyway, all right, recommendations for the week. What do you got? So there was a New York Times article last week about the Jersey Shore show, which I was shocked to learn that you were a viewer. The original, yes. Is the new one out yet? I probably won't watch it.

I'm not going to watch it. I don't know if it's out or not, but something crazy in that article jumped out of me. They had 9 million viewers an episode. Yeah, I was one of them. I probably watched the first two or three seasons. And, yeah, I have no shame. I will admit, I watch trashy reality television every once in a while. I used to, I'd say.

Not anymore. I don't have time for that anymore, but I used to. That was good infotainment. Not infotainment, entertainment. Okay, so I was sort of like, I thought I was over Silicon Valley. I didn't watch the premiere the week of, but I watched it last night, the first episode, and it was amazing. I'm back. Oh, really?

Okay, because I was going to give up on it. Okay, yeah, no, me too, but watch it. At least the first episode, the first episode was very promising. Okay, so on Friday night, I was going to watch Atomic Blonde, which I did, but I was, like, sort of half paying attention. I was like on Twitter and reading or whatever. Because I just assumed that I think it's from the same director as John Wick. So I assume that it was just mindless killing, but it lost me. I had no idea what was happening.

There was like plot lines and twists and covert ops. It's more like a, it's kind of like a female James Bond from what I hear. Yes. So if you're going to watch that, make sure that you're watching. Pay attention. You pay attention. It's not a movie to watch while you're doing something else. By the way, how many movies or TV shows do you have where you never pick up your

phone. Zero. Actually, the only thing that, yeah, zero. I watch Homeland pretty closely, but pretty, even that still, I have my phone. Yeah, same. I can't do it. Okay, I hesitate to recommend this because there's enough anti-Semitism in the world, but there was a documentary that I'm not finished with on Netflix, called One of Us,

and it's about Hasidic Jews and, like, people that left, and the culture and what they go through and it's just holy shit it's like otherworldly what what goes on there what's that one on it's on netflix okay and uh lastly ted side he said a podcast where kay he interviewed him and i thought was great really honest and candid and one of the things that ted said that was like really profound i thought was he was talking about like how people view you a certain way and he said the public perception of what my personal balance sheet might be like is not what it really is, which at times is a very difficult thing personally. Wouldn't it be nice to have as much money as everyone else seems to think I have? This was really good. And yeah, the peer pressure

angle of being a hedge fund manager, I guess it's something a lot of people don't think about, but that is really interesting. So you know, that made me think like, there's some people that would rather make $40,000 but have people think they make $100 versus make like a hundred and people think they make only 50. I think there's some studies out about this. I've maybe written about this in the past, but everything is a relative world. It is kind of of crazy. People would, yeah, would rather have other people think a certain way or, or they'd rather make more with people on a relative basis than an absolute basis, which, yeah, doesn't make much sense. So I watched the first episode of Barry, which is the new show on HBO with Bill Hader,

and I'm a huge Bill Hader fan. Did you listen to the recent podcast with him and Bill Simmons? Yeah, it was great. Yeah, really good. The show is funny. It's not, it's not what I thought about at all, what it would be, but he plays a guy who came back from, like, Iraq or Afghanistan as a war hero, but then he is kind of bored so he becomes a contract killer and then he's kind of going through a midlife crisis and doesn't know what he wants to do anymore so he joins an acting school and it's really funny so it's like a combination of like spy thriller killer

kind of stuff and then funny bill hater like dry humor and I think he's hilarious so that was I that's definitely going to be worth watching a couple books for this week I read a book called I Contained Multitudes by Ed Yong and science was never my subject in high school or college and this is kind of a science book, so really kind of surprised me. It's basically a book about all the bacteria in the body and in the world, and people think that bacteria just kind of makes us sick and is bad for us,

but it's about how many millions of bacteria out there that actually helps us. So this is really fascinating in a subject that was way outside of my usual purview, so that was pretty good. And I also, since everyone is hating on Elon Musk and Tesla right now as they get destroyed, I think the book Elon Musk by Ashley Vance, the biography is worth reading because you really get a sense of how much he really pushes stuff to the limit and how close he's come to seeing companies get bankrupt over time. You will agree that his tweet this weekend was pretty foolish.

Oh, yeah. I mean, that's definitely going to be used against him in the future. But, I mean, he was so close to failing in the past and going bankrupt that, I think I did it right up over this afterwards saying, like, nothing would surprise me anymore, whether his companies all change the world or they go out of business and he tries to start something new. And then one other podcast recommendation, there's a new one, one by Adam Grant called Work Life. And it's all about, like, team dynamics and understanding

personalities in the workplace. And I wrote a piece about trust this week about that. So that's, that's another one I recommend. I missed your piece, but I enjoyed his, his book, Originals. So I'll check it out. Yeah, he's very good. It's a very, like, published and polished podcast, much like this one, where it's just totally professional all the time, and it's great, entertainment, you know, anyway. So that's a, that's a good one. So this week's episode was pretty light on the finance stuff. We'll be back on the horse next week. Thank you for listening. Email us at Animal SpiritsPod at gmail.com, and we'll see you next week. 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 Rithold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholds wealth management may maintain positions in the the securities discussed in this podcast.