Animal Spirits Podcast - The Noobwhale (EP.15)

Episode Date: February 7, 2018

On this week's show we discuss the current market sell-off, the hidden risks in alternative investments, why women make better financial decisions than men 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 Batnik 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 Ritthold's wealth management may maintain positions in the securities discussed in this podcast. Now, today's show. Welcome to Animal Spirits with Michael and Nubewell Carlson, which we will address in just a little bit. So, Ben, I think it's fair to say that the period of calm that we've experienced in

the stock market for the last two plus years is. is over. Yeah, I think we've all been kind of spoiled the last few years. Stocks finally fell off, what, 4% last week? Or 4% off the all-time highs? Yeah, I think it's 4.8 this morning. Yeah, so you had some good stats in a piece this weekend that kind of summed it up. So why don't you tell me about some of your stats you put in your charts and your piece here. All right, so there's so many superlatives attached to this market. An interesting one, I think, is that the S&P 500 had been within 3% of its all-time high on an intraday basis, meaning for two straight days.

So in the last two hundred, two days, and I think this, I'm sorry, I don't really remember when this started, it doesn't matter. Stocks were never more than 3% away from their all-time highs. And to put this in perspective, the second longest streak was 115 days. So this is almost twice as long as the next longest street. We might never see anything like this again in our lifetime. I think this is a really good way to sum it up. This person on Twitter that I follow, Stockcats tweeted, so let me go.

at the street. The market goes up 7.4% in the first 18 sessions of the year, then pulls back 3.8% and everyone is freaking out. Yeah, it is kind of interesting how we just, we get lulled into this false sense of security, I think, and everything's great, everything's great. And I think people forget that, yeah, the stocks are up almost 8% through the year already. Like, you have to expect this kind of thing. They just can't keep going up every day forever. This is just how it works. Right. Even after the sell-off, stocks are up over 3% for the year. Yeah, but there's still up. Right. After years and years and years have nothing but going straight up. J.P. Morgan has a study that we've recreated it done on our own, but showing the average

entry-year drawdown for stocks is 14%. Last year was like a total aberration. It was, I think the max drawdown was like 3.2% or something really negligible. So if we had a 14% entry-year drawdown, that would take us to where we were in September of last year. It will put stocks down 7.5% year-to-date, and the headlines would be hilarious. And this is the kind of thing that happens even when stocks finish up. So like you said, the entry-year drawdown. down is 14% on average, but that's peak to trough. So, stocks can still finish up, even if they have these falls. So this is just a natural progression that happens in the market's been. It hasn't really happened yet in a while. So it's time. And again, even a three or four

percent correction is just, it's nothing. It's such a little blip. This is nothing yet compared to what we can see. I think what led to the hysteria on Friday, and history might be strong. Maybe the right word. I don't know that people were necessarily freaking out. I think I wrote something similar. Somebody called me out. But I think the appropriate word is people were excited. I was excited. I think everybody was excited because it's been so long we fell 666 points on the Dow, which obviously is not what 600 points used to be. But still, it was a lot of selling going on. And especially in the financial media and for asset managers, this kind of stuff excites a lot of us too. It's been, it has been kind of a boring market. So I think people just

their ears perk up a little bit and the higher the Vicks, the higher the clicks to quote Phil Perlman. So my short-term guesses about the market, are really bad. I think worse than most people. So I'll just put that out there. But if I had to predict what would happen, I would say that this 4.8% decline is really not much at all. So I would guess that we got to bounce on a roll. But like I said, I'm horrendous with short-term market calls. Okay, so short the market is that you're telling me. What I'm trying to say is if you followed us out of stocks last week. We did pretty much top ticket. I think we should give ourselves credit for that. We more or less called it. Wait till you see the whites of their eyes. We're not quite there yet.

Right. Okay. So moving on a little bit in the nerdy world of endowments, I created a little bit of a stir last week. So I've done this a couple times now where the big thing in the endowments and foundations world is they love to do peer performance reviews. And I said this in my piece. And one of the reasons is because benchmarking all of their alternative investments is really difficult. So the hedge funds, private equity, venture capital, all this stuff is really hard to do. So these funds, what they do is they look to see how everyone else around them is doing. And that's how they gauge. their success, which is completely bananas. You know, we would never tell one of our clients that's retiring, look at your neighbor's portfolio to make sure you're doing okay, but that's basically what these people are doing. Anyway, so every year, this place called the National Association of College University Business Officers, Kubo puts out a piece for the performance of the college endowments. There's like 800 of them, so they break it down by different sizes and types and then the whole community. And for a time, these endowments were considered some of the greatest investors on earth. They're always called

sophisticated. And I took a look at their numbers and they showed the one, three, five, and ten year numbers and showed that a simple vanguard portfolio would have outperformed nearly all of them and would have been the top quartile, which is the holy grill for some of these funds. It's kind of simple versus complex in the simple vanguard portfolio would have done just fine versus these endowments. And I'm guessing that your inbox lit up like a Christmas tree after writing this. I think I told you before I did it. You and I always share some numbers if we're working on something and I said I'm expecting a lot of feedback on this and caveats. I actually got an email from someone from Nakuba who did this study

and they're kind of questioning some of my methods. Basically, what I did is I took the simple Vanguard three fund portfolio, which is 40% U.S. stocks, 20% international stocks and 40% fixed income. That doesn't add up to 100. 40, 20, 40. Gotcha. Boom, roasted, back at you. So anyway, and I said a 60-40 portfolio really isn't representative of these funds because they actually lists their asset allocations in here. And I shared these numbers with you too, I think. So the funds that have over a billion dollars have almost 60% in alternative investments, which again is hedge funds, private equity, venture capital. And they only have 7% in fixed income and 4% in cash. And so honestly, a 90-10 mix of stocks and bonds is probably better. So I actually split the

difference. And I did 80% stocks and 20% bonds. And a lot of people in that kind of community called me out and said, this doesn't make any sense. Some of these alternative investments are in hedge funds, not just private equity. But the way that I look at risk, I think that actually a lot of these alternative investments are probably riskier than stocks. So did I take too many allowances here and overstep my balance by doing this? Are you asking me? Yes. Or the audience. Who else am I talking to? What are you thinking out loud? That was not a hypothetical. Sorry, can you repeat the question? I heard a great, you know Stephen Wright, the comedian. His greatest line was, what if there were no hypothetical questions? All right, anyway. So I used,

instead of doing a 60-40, which is a lot of people compare pensions to, I compared this group to an 80-20 portfolio of stocks and bonds. And where did it shake out? Well, the Vanguard portfolio was in the top quartile of all of these, but my point was a lot of the people in the hedge fund community especially say you can't compare hedge funds to stocks. And we've talked about this in the past. But I say in terms of risk levels if you're looking to benchmark a portfolio of alternatives, that in a lot of cases, a hedge fund private equity portfolio was way more risky than stocks, and it does make sense to benchmark them that way because, okay, here's my little list I prepared. So when you have an alternative investment, again, private equity or hedge funds, first of all, they're opaque

and they're very hard to understand for the people who are investing in them, especially the boards and committees. They're illiquid. They use leverage. They short securities, which they say is for use for hedging, but most of the times it's used for making a directional bet like the market's going to go down. They use leverage, so private equity is stocks on steroids. Many hedge funds also invest in private companies, which a lot of people don't know. And one of the huge risks is manager risk. So we invested in a number of hedge funds in my old endowment fund. And every once in a while, these hedge funds, they would always say, we're going to spend more time with our family and shut the fund down, which is translation. We're not doing so well. And we're sick of dealing with

investors. And I have enough money to retire. And the crazy thing most people don't realize is, When these managers shut the fund down, that's when you realize how much illiquid crap is really in their portfolio, because you don't really know what their holdings are. So how long does it typically take to wind down? We would have some that would take 12 months, 24 months, 36 months, and you'd basically have to just sit there and wait for your money to come in slowly. And in the meantime, all the other hedge fund managers basically more or less know what's in these portfolios, and they front run them and trade against them.

It's not even that there's opportunity to cost that you're getting your money back slowly. it's that you could be getting less back every time you receive. Yes, and they say you can take a 30% haircut up front or wait for the money to come in and it could be the whole. And so you have to just sit there and wait and take it. And a lot of times, because these offering memorandums are like 800 pages made by their smartest lawyers in the world, you have no recourse to get that money back

because you've signed off on it. So it's like, do you want 70 cents on the dollar today or do you want to wait and hope that it turns into 90 cents or, oh, by the way, that 70 cents might actually turn into 30 cents. Exactly. And again, you have the opportunity costs in the meantime. And the other thing is these managers, especially in private equity, value their own holding. So volatility is a terrible measure of risk. And we've talked about this, too, that volatility as a measure of risk is pretty short-sighted. So my point is getting back to people question this, I think that you're taking

more than equity risk in these types of securities, which some people are compensated for that. Most are not. So anyway, and this is actually the article I wrote, I guess, a year or two ago, that got published in the John Bogle book that we talked about, the little book of Common Sense investing. Okay. And so every time I write about this stuff, someone on the other end of it gets a little upset and anger because I basically said most of these endowments shouldn't be using such a complex model of using alternative, illiquid, hard-to-understand investments, and they should

just keep it simple and low cost and not try so hard to keep up with the Joneses. But you can't be surprised. I'm sure you would expect to see the simple portfolio, at least be in top quartile after are such a long bull market. Yes, definitely. And especially it's U.S. heavy. And so I put not put some of those caveats in my piece. And that definitely makes sense. I just think it's surprising because these are typically known as some of the best fund managers or investment offices in the world. And I mean, it has been a tough environment. And my point is maybe these vanguard numbers don't hold up over the next decade. But I think the days of these endowments being the greatest

investors in the world might be behind them. Sticking with this, just for one more second to put a ball in this, there was a really good conversation last week on Meb Faber's podcast with Dan Rasmussen, and he was talking about how private equity is God's gift to investing. So he had a really great quote. I think Crescent did a recent survey of these institutions, and they asked, do you think private equity will outperform the public equity markets by 4% or more, 2 to 4%, less than 2%, or even with private equity. And they didn't even bother to ask whether it would underperform because it's such an outlandish idea. Forty-nine percent of institutional investors believe that private equity

will outperform the public market by 4 percent a year and another 45 percent believe it outperformed by two to four percent. So 90 percent of institutional investors believe that private equity is basically God's gift to investing. Yeah, and that's one of the reasons that I think endowments won't be as good anymore because they had first mover advantage in these spaces. There are some of the first ones to invest in hedge funds and private equity, and now everyone's there. This was an awesome podcast, by the way, for people who are really interested in this stuff. You and I have done some work on microcrops in the past. I mean, we can talk about that in the future.

But Dan's stuff that he said with the Mab, he backed it all up. He was obviously biased because he's talking about his own book of investing in public market, private equity portfolio. But this was really good and really interesting. And he said it way more eloquently than I could the fact that private equity is not going to do what it did in the past because there's just so much money there. And it can't just continue to do it just because people assume, going to outperform in the future. So sticking with a similar topic, there was a piece put out by research affiliates. It kind of gets to this manager of managers approach, which doesn't make sense for financial advisors to select a group of money managers for their portfolio on their

client's behalf. And research affiliates is a fund company. They have ETFs, some separately managed strategies as well, but they basically came on the side of, no, it doesn't make sense for financial advisors to select managers, they should find other ways to add value. So I went to the Forbes 100 financial advisor list just to see what type of advisors are on this list. And they are all, not surprising, they're all at wirehouses. So the top ones are Merrill Lynch, UBS Private Wealth, Morgan Stanley Private Wealth, Merrill Lynch again.

And these financial advisors are managing huge amounts of money, all well into the billions, and a lot of them with account minimums in, I don't even know how many figures, figures? One of the reasons I think why that is, it's kind of a self-fulfilling prophecy. A lot of these big, huge warrior house places, they tell you the reason that you invest with them is because they have access to the best managers. And so that's why they think that they can do it. And of course, research affiliates, their data shows that doesn't really add up. Yeah, so we know how hard it is to pick financial managers that will outperform consistently or over long periods of time because the ones that do outperform over long periods of time don't

necessarily have consistent outperformance. So in the article, they said, quote, Cornell, Shu, and Nini, getting, I'm sorry, I don't know how to pronounce it name, have documented mean reversion of mutual fund performance, finding that when measured by trailing three-year performance from 1994 to 2015, top decile managers on to perform the bottom decile managers by 2.3% a year, end quote. So there is some serious mean regression going on in mutual fund world. And one of the things that research affiliate said was, quote, we found that the most commonly marketed services is manager selection, which was listed by 39 firms.

but I think that this is sort of the old, not sort of, this is the old way of doing it. It used, right? Like, it used to be, we're going to pick the best stocks, and then we're going to pick you the best mutual fund managers, and now it's, we're going to pick you the best ETFs. But that is a game that is really what an advisor should prevent clients from doing, a game that they should not participate in themselves. When I think in the hierarchy of like investment difficulty, obviously everyone kind of knows at this point now that picking stocks is really hard to do.

but picking someone to pick stocks on your behalf is probably even harder, I think, in my mind, because the money managers are very good at what they do. They have very good sales and marketing teams, and the times that you want to invest with them are after they've had good performance. The times you want to get out of them are after they've had bad performance. And it's not just retail financial advisors either. I talk about this in my book, Organizational Alpha. There's a study done by institutional investors.

And they showed the excess returns before hiring a manager, like one to three, years out was like 5 to 10% that they outperformed by and then after they hire these people they had underperform by about 3 to 5% and so it's just a huge performance chase which is really hard because it's hard to justify saying I'm going to hire this manager because they've been performing terribly but I think their process is going to come back right and that's what you should do probably but it's hard to do so you invest with the best ones and again these places really pay up to this access quote unquote I have access to the best firms the best money manager managers come invest with us and you've got access to them. And that access these days does not matter

as much as it used to. In the past, maybe that did help. But now any single investment strategy under the sun can be had for cents on the dollar. So I don't think that access thing holds water anymore. Van Gogh did a recent study. I think 10-year performance. I think these numbers are pretty close, but I'll double check it. We'll put in the show notes. 14% of mutual fund managers outperformed over the last 10 years. And of those 14% that did outperform, something, like close to 80% of them underperform for three or more years in a row. So even the ones that have really good long-term track records go through periods of underperformance, and it's really difficult in real time to know which ones are going to come back and outperforming, which

ones are just going to be the other 86%. And one of the things that research affiliates said in the article was, quote, we found that advisors face tremendous challenges in overcoming such client biases, end quote, in terms of like buying high and sound low. But I would argue that advisors have these biases on steroids because they are just feeding off their. clients' conversations with them. Right. Yeah. And it's even harder sometimes. And I think this is something that we try to think about too because it's easy to say, oh, retail investors or clients are terrible investors. They always mistime things. But advisors are no better in many cases. So if you're building a process

or a portfolio or an investment plan, you have to account for your own biases too and figure out ways as the person making those decisions to avoid the mistakes. And a lot of times it's probably different mistakes. I think for professional investors, the biggest mistake is probably assuming they're too smart and being overconfident, whereas retail people might have some other different biases that trip them up, but you're not any better of an investor just because you're professional these days. Yes, totally right. A line from the article that I liked was, quote, perhaps the biggest value an advisor can add is to save clients from themselves by eliminating their negative alpha, end quote, but I think that really starts with the advisor and eliminating their own negative alpha before they

you do it for other people. And I love that idea of negative alpha because simply getting rid of the bad stuff is much easier to do probably than hitting home runs and shooting the lights out. So I think that's a great way to put it. And by the way, going back to sort of put a bow on this whole topic, I said I received a lot of hate mail for my Vanguard performance piece, but I did receive one piece of glowing praise and that was from Vanguard. So they liked what I put out. So that was kind of nice. All right. Let's move on to some Noob Whale stuff. So, Ben sent me this tweet in a direct message, and he just wrote W-U-T. So I was very eager to scroll down to see what this was.

So Ben had a snarky tweet about Bitcoin, which I'm going to give this tweet a 4 out of 10. No offense. Okay. That's fine. Hey, hey, the social media people do not, they don't lie. This one's got a lot of retweets. Okay. So I guess I was in the minority.

All right. January client letters. Ben writes, dear investors, on second thought, starting a crypto hedge fund at the start of January wasn't the greatest timing. We will be shutting down the fund to spend more time with family and starting a new fund at lower prices. Thank you for your confidence in us. And tweet. This was on Friday after Bitcoin had declined 60% or more from its all-time high, so it's been pretty rough. There had to be some hedge funds that started in late December, early January, right? Take it easy. Take it easy. I don't know what I'm saying. That's just the worst timing in the world. Okay. And then talk about the response that this one guy gave me. Obviously not understanding I was being sarcastic. This one guy and it's obviously a guy because they're all guys in the Bitcoin world. And perhaps it's a slight exaggerationable. We'll get to there in just a second. Okay, here it goes. Don't blame the market. It's not its fault. You suck and didn't hide out in ETC or BTS like the rest of us trying to fish this bottom before we explode higher. You got noob whale on your forehead, bro. This is the greatest response ever. I don't really have any follow-up, but just nub whale on your forehead, bro, is pretty good.

Yeah, and I must be out of touch because I've never heard the term nub-wale before, but I'm going to take it as a term of endearment. Yep. So Bloomberg had a piece recently on all the males in Bitcoin land, and they went to a strip club at a conference, and they brought females there, and it was just a total debacle. They say that a 2015 survey indicated that more than 90% of Bitcoin users were male, and then last year the price search,

transform Bitcoin into a more mainstream investment, but January survey found that men made up 71% of users, so still quite dominated by males. And in the article, there was something that was only a douchey guy would say, quote, the great thing about crypto, one man wrote in response is that enthusiasts can tune out women. I don't even know what in the world that's supposed to mean. He goes on to say, blockchain is going to decentralize and reveal the truth about everything, including human biology. Obviously, none of them have a wrap. or logical argument, let's stop arguing and just fucking code them out of existence. Oh, my God. Okay, I didn't even read this. That's pretty bad. Obviously, these articles, it's always easy to find

these other noob whales who will say stupid stuff like this, but yeah, that's cringe-worthy. So there's obviously a lot of really smart people that have crushed it with Bitcoin, that have been earlier adopters, that do it with integrity, that aren't peddling bullshit. And if I was one of those people, seeing something like this would make my blood boil because it's like they're on your side, but they are just doing it the wrong way. There was an article over the weekend in the New York Times making a crypto utopia in Puerto Rico. And a quote from that is, and these men, because they are almost exclusively men, have a plan for what to do with the wealth. They want to build a crypto utopia, a new city where the money is virtual and contracts are

all public to show the rest of the world what a crypto future looks like. Blockchain, a digital letter that forms the basis of virtual currencies has the potential to reinvent society and the portopians want to prove it. And I say portopians or portopians because they're doing this in Puerto Rico. Yeah. I mean, obviously, it's easy to find the bad apples. And I don't know how this- Well, you don't have to look too far. No, but it seems like these profiles are coming out once a week now or so where these, like you said, it seems like it's young men who are brainwashed by this stuff. And again, maybe they're right and some of this stuff comes to fruition, but it just seems like it's just, it is a very cultish in a lot of ways. So Bitcoin is now at $7,200. It's

65% off the highs or something like that. And you never want to see people lose money. But I guess these lessons have to be learned the hard way. The thing that upsets me and a lot of other people out there is all the charlatans that were really praying on people's ignorance. Unfortunately, that will never not exist in this world. They're always going to find something. And unfortunately, it was, it was Bitcoin this time. And I actually thought that I said to myself, I was going to buy it if there was a 90% wipeout. So I was thinking like, oh, I'll buy Bitcoin at 2000. Mind you, I've never bought a Bitcoin. So I just thought like that was the place where I was going to do it. And then today, I was like, hmm, wait a minute. Maybe if it gets to $6,000 I'll buy it. And then I was

like, oh, stop it, stop it, stop it. I don't need, if you are going to be in the game of trying to catch a bottom, I would much rather be late than early. So I have no interest in buying Bitcoin here or even at $4,000. I also think it's going to take time for the washout. So if it bounces here on V's up to 30,000, whatever, I'm totally fine with missing it. I miss it in the past, and I certainly might miss it in the future. But I think it's going to be interesting to watch as it has been for the last several months and years. And not being involved, you can kind of laugh when it falls, right? Yeah.

No? I try not to take pleasure in it because it's just... That's true. I feel bad because I feel like this... People keep saying, well, there have been so many wipeouts in the past for this, and it's always come back. The problem this time around is there has to be the most amount of dollars lost this time because all the people who've gotten in the last couple of months after seeing the huge gains. The wipeouts that occurred in 2012, and I don't know what years it was,

like that was people that were really in the know, people that were just trying it out with a few dollars. Like now you saw so many unfortunate stories about people just being irresponsible, which like I said always happen. So I don't like to root for this thing to crash because I have no skin in this game, so I didn't make money on the way up. I'm not making money on the way down. It's just certainly fascinating to watch.

And hopefully like you said before, this is people losing hundreds of dollars, not tens of thousands. That would be the hope. I hope it's not. That's not the case. So it's interesting that Bitcoin has attracted a lot of males. Our friend Daniel Crosby did a tweet storm this week about women on Wall Street. A few good data points that he had. In terms of skill, women are better investors than men on average. False stop. They save 0.4% more and have 0.4% annual returns that are better than men. That comes from fidelity. outperformance grew from 0.4% in an up market to 1.3% in a down market. That comes

from open folio, which is not surprising because women are much less emotional when it comes to money. Like you and me and other men get very excited and our adrenaline starts pumping and we don't, for whatever reason, obviously there are, I don't know, if genetic is the right word, there's some predisposition of men to do really stupid shit. Well, the other thing is that the studies all show that men are much more confident and like to gamble more, which doesn't make a whole lot of sense when you're talking about your life savings. And so I think that's part of the reason why males are probably attracted to something like Bitcoin. But yeah, this is interesting. And I think we've talked about this

before, but the stat I heard earlier this year is that the threshold of assets this year for the first time I think passed where women now have more control of the assets in this country than men do, which makes sense in a lot of ways because women live longer than men, so they're going to get the assets. And I think it's kind of an underserved market in terms of the financial advice community where there aren't very many specialists on that topic and there probably aren't enough women in the game either. They had a story in the financial planning magazine a couple weeks ago. I think Michael Kittsis wrote it that only 25% of CFPs, which is certified financial planners, are women and they're doing their best to try to get more women in the space, but

they're just kind of having a hard time. The first experience that I had thinking about the sort of thing was when I first started with Barry, it was 2012. And one of his first, his friends who was an economist was in the office, and I was picking his brain, talking to him, and I said, so how do you invest? And he looked at me, and he laughed. He's like, me, my wife invests for us. He's like, you crazy. I wouldn't do that. Yeah. Oh, interesting. That makes sense. Yeah. So Crosby concludes with, women are less likely to hold a losing investment too long, wait too long to sell a winning investment, buy a hot investment without adequate research, and hold an overly concentrated position. But for all this, women are widely seen as less

competent when it comes to money. Eight out of 10 women have experienced negative stereotypes about their investing acumen, according to American funds. And just 9% of people surveyed expected women to outperform men. And I think the big takeaway here is just that if you're making investment decisions as an organization, it makes sense to have greater diversity of opinions in the way that you do things. I don't think the point here is women should be running all the money in the world, and maybe we'd have better results if they did. But I think the point is definitely that you need to have more diversity in the leadership ranks and in the decision-making ranks. Yeah, and it's hard because we don't have any women's CFP at Red Hills Health Management.

It's not for lack of trying. There's just, unfortunately, there is a serious shortage of women in the financial industry. And the talented women out there are in high demand as well. Right. Yeah, so excellent career choice for young female listeners. Yeah, I agree. Why don't we go over some of the stuff that was in KKR's, PDF. What do you say, Ben? Yeah, that sounds terrific. KKR is a large private equity manager who's now

branched out into some other asset management games, but they put out a 2018 outlook that was really, really well done. And this is, again, our service to you, the listeners, we go through these 50-page PDF so you don't have to, and we pulled out some of the best graphs and some of the best pieces of information for you. So we'll just run through this really quickly and have one or two comments about them. We'll put them in the show notes. So the first one is a 36-month correlation between the S&P 500 and U.S. 10-year yield and why 36 months? Well, that's rolling three years. I'm not sure what it looks like if it's five or six, but let's not get back down in details. And this chart goes back all the way to right after the Civil War. Wow, this is a long one. And you can clearly see

up until 2000, the stock price versus bond yield correlation was mostly negative. And it has not been the same way since. Yeah, it's positive. The other point to make here is that when you look at like a long-term chart and you see a correlation between stocks and bonds, it's pretty negligible, I think. But the other thing here is this thing facilitates wildly. It's up and down and up and down, and so the correlations are constantly changing. Yeah, and if you look over shorter time periods, it's even more all over the place. Yeah, it's interesting now that they've been positive for a while together, but the regime changes are quick, and they move up and down pretty quickly, and it's all over the place. So it's not just, there's not one relationship between them. They

change constantly. Sticking with stocks and bonds, this is a really, really good one. Annualized standard deviation of past 36 months' returns. It shows stocks and bonds, and it says that stock and bond volatility are now on par. And this seems unsustainable in our view. And I think I would agree with that. So this is actually looking at long-term bonds, which are the most volatile. And I think both of these are kind of unsustainable, where from the current rate levels, that means that bonds aren't going to have as much of a fallback with yields. So any movement in rates from these low-yield levels is going to be higher volatility. And obviously, stock volatility can't say this low. So I think we should expect higher volatility in both of them. It's a second half story, right?

Third half. Okay. I think we're going to do some work on this for the next episode. But rates are screaming higher. Would you fair to characterize it as a scream higher or is it a steady grind higher? I mean, they've been going since, what, they bought them in July of 2016. They're up 10 year yields up over 100 basis points. That's pretty good move. So it's a scream. It's a pretty good move. But bonds are not getting, quote, unquote, crushed. I mean, they're certainly falling, but U.S. bonds, like AGG, for instance, is down 1.7% year-to-date. And I think it's like maybe 4% off its size. Like you said, they don't crash as much in bonds even when you see drastic moves.

So you and I've talked about this off air before that we're trying to figure out a good definition for a bond bear market, which we haven't really come up with yet. Yeah, and looking at this, and we'll come back to what we were talking about in just a minute. But you know the last time the S&P 500 and Barclays, aggregate bond index had a down year in the same year? It never happened, right? Never happened. Yeah. You called my bluff.

Nice job. I sent you the data before the show, didn't I? No. Well, the last time it happened with the S&P 500 in the 10 year was actually 1969, I want to say. So, yeah, it's been a long, long time since both have been down. And part of the reason for that is because bond yields have been so high. So even if rates rose in a year, the high. higher yield compensated for it, which it won't be doing anymore. So we could certainly see

both stocks and bonds down in a year. That wouldn't surprise me. Yep. Back to the charts. Okay, this is a really interesting one. It shows globally cross-asset correlations are back near post-crisis lows. This is bullish for asset allocators and macro investors, meaning that things are not all moving in the same direction, which to their point, that should be good for people that are macro thinkers that are able to effectively navigate the landscape. What do you think? It's a stock pickers market, I think. No, it's, yeah, this is interesting. I don't know what they used for this, but it definitely shows that you can show some differentiation by changing your asset allocation. And it looks like this thing never gets really that high either,

but it's cut in half from where it was in the last couple of years. So yeah, I think if you're truly active investor, maybe now is the time that you can actually show some differentiation, which means it probably won't happen. But I think that's the, that'd be the selling point for one of those people. Why don't you transition us onto the next try? I feel like I'm stealing all please. That's okay. So let's see. The next one...

I'll take it from here. Okay. No, I'm kidding. Go for it. Okay. Well, this is kind of funny. It seems that every active manager has been saying this for years, but it says, given low bond yields, the opportunity to beat a 60-40 portfolio is not extremely high,

we believe. So I think what they're trying to say here is that buy and hold is dead. Yeah, this is a good chart, though. It's showing five-year Kager of a 60-40 portfolio. And I'm guessing the upper and lower lines are like one standard deviation. So Kager, for those who are unaware, is compounded annual growth rate. That was a West Gray term right there. Yeah, so stocks and bonds have done extremely well.

So obviously they're biased, but I would agree with them that if there has been an opportunity, there might not have been, oh my gosh. This is a good time for asset allocators who are trying to outperform a 6040 portfolio. Throw in the towel. He's done. Yeah, but I think. People have been saying 60, 40 is dead for years now. And of course, eventually it will have a bad stretch. And of course, an active manager would say that, but it's interesting. And the other

one was that correlations across U.S. stocks, and this is large caps, are the lowest level in 23 years, which is another way of saying stock pickers are going to do amazing or not. Either way. What do you think about the stock pickers market thing? Is that a fallacy or does that actually exist? Well, the academic response, not that I am an academic, but from what I've heard them say is that it is always a never a stock pickers market, right? Because for every buyer there's a seller. However, I think that these charts are compelling. If correlations between the 500 S&P stocks are higher than normal, then it's going to be harder to differentiate yourself. If they're lower than normal, then you have a chance about performing. Now, conversely, what if you're picking

the wrong stocks? So I think that, like, you know, on its surface, the statement makes sense, but I think that it makes more sense that it is both always and never a stock pickers market because when correlations are high, you have less likelihood of picking the wrong ones, and when their correlations are low, you have a higher likelihood of picking the wrong ones because we know that gains in indexes are top-heavy. I also think it's harder to call yourself a great stock picker these days because it's so much easier to build a factor portfolio. So you can, instead of showing I picked the best stocks, you can say, no, you picked the best

small-cap value stocks. or no, you were in small cap growth or mid-cap value or whatever it is. So I think it's much harder to do that because you can slice and dice these things in so many ways. So proving your alpha is much harder these days unless you're really, really flexible and able to, willing to go anywhere and improve it by investing well over different regimes. Otherwise, just buy me a simple smart beta factor portfolio and call it good. Yep. So why don't we move on to the listener question and then we can wrap this up?

Okay. So we got a question coming in from someone who's talking, about, we talked about the need for holding more or less stocks in your portfolio. So he said everyone talks about planning for retirement later in life. But how should we think about planning for buying a home? He says he sold a bunch of stock this year because he thought there's a probability he's going to need the money for a down payment for a home. Didn't pan out, but maybe it will in a year or two. So he's basically just saying a young person, what do you think about having sort of an intermediate term goal? How do stocks fit into that? And so you just bought a house

a couple years ago. What do you think about this? Yeah. So I'm writing about this in my book. I think this is probably the biggest mistake that I've made over the past few years was that when I had short-term obligations coming up, so I had a wedding and a house that I wanted to purchase, instead of saying, all right, I'm going to need this money in two years, let's just go to cash or short-term bonds, something like that. I instead invested fully and like shorted spy against it, SPY against it, which is obviously funny and to look back on it, whatever, but that is obviously the wrong approach. So I understand that the opportunity costs and leaving cash in the bank, but man, if you need that money in five years or less, I think that it should be in pretty

much risk-free assets. Yeah, I can't offer specific advice because, like we talked about before, you could offer advice and say you should only be in cash and stock scream higher and you say, well, I could have made my down payment much bigger. But for me personally, if I know I have something coming up, we're planning on a vacation or a house down payment or something that's coming up. And I'd say three to five years, for me, that money is never going in the stock market because the risk is way too high. That it's not going to be there when you need it. The chances of something bad happening and that impacting you is much greater strain emotionally than making a few more dollars in helping yourself out a little bit. I just don't see the risk reward there.

And let's say that this falls through and the person ends up not getting a house for whatever reason and you kept the money in cash for two years. Well, so be it. That's the way life goes. Okay. Right. So before we get into our recommendations for this week, we do have to say we're still kind of new to this podcasting game, so forgive us, but we've got a bunch of emails from people. We mentioned a lot of stories in the podcast. We mentioned a lot of podcasts and tweets and books. And every week, Michael and I both run some show notes on our website. So Michael is at the irrelevant investor.com. I'm at a wealth of common sense.com. And so if you want to find our show notes about everything we're reading and writing out and talking about.

We do a detailed list of everything on our websites. And so we just need to mention that a little more because we can get a lot of questions on that. And we're still trying to figure out this podcasting game. So anyway, end of housekeeping. What recommendations do you have for me this week? Okay. So this week I read Chaos Monkeys by Antonio Garcia Martinez. And Martinez was a data scientist who started at Goldman Sachs and left before the housing bubble to go to Silicon Valley. Really interesting book. I highly recommend it. And another thing that I watched this week. So there are old basketball games on the NBA channel, Hardwood Classics that I really like watching. And this particular game was 1981. It was the Sixers versus the Celtics. And boy, the game has changed. It was like really

eye-opening to watch. Dr. J couldn't shoot to save his life. Now, I only watched like the first quarter, to be fair, so maybe I'm going to get actual lead on this. No one shot three's back then either, right? Yeah, I would love to look at the date on this, but I'm sure the three points attempts were like a tenth of what they are now. But Dr. Jay was an incredible athlete who was just far superior to everyone on the court, but his defender was like five feet behind him. And I just feel like Russell Westbrook in that game or anybody would have absolutely dominated. Like they were missing open shots all over the place. They were dribbling funny. It was just, it really was like, holy shit, was Larry Bird even that good?

I'm waiting for your cape ratio comparison here. Yeah, no, I'm not, yeah, anyway, but that was just, like, stunning. Donald Dawkins was just, like, physically superior than everyone, but he just looked like a regular big foe in today's game. The diets weren't nearly the same. They weren't in the same shape. Yeah, it is kind of crazy how much that game has changed. They didn't have the nutritionist and all that stuff.

It's, yeah, it is kind of crazy. So my recommendation for this week, I'm going to go out on a limb and say this is going to be the best or my favorite show of 2018, even though we're a month in. So this is really good. I haven't heard much about it, but it's called Waco on the Paramount Network, which I think used to be Spike TV, and now it's been changed. And so this is a six-part miniseries on the Waco standoff in the early 90s, which do you remember with David Koresh, which I didn't really know much about other than the fact that

he was this weird cult leader in the out of the middle of nowhere, and the FBI sort of stormed the compound, there was shootout and a bunch of people got killed. That's about my extent of it because it was in the early 90s and I was still fairly young. But I'm only two episodes in, and it is amazing. This show is so good. So you know Taylor Kitch, did you ever watch Friday Night Lights? No. Oh, you never watch Friday Night Lights? Hard now. Okay. That's probably one of my all-time top favorite show, top five probably. So if you need a new binge on Netflix, Friday Night Lights, mark it down right here. You have to. So anyway, Taylor Kitch, who played Tim Riggins in Friday Night Lights, who's probably one of my favorite TV characters

of all time, lost a bunch of weight. He plays David Koresh. And then Michael Shannon, who was from Bordeca Empire, kind of the odd guy, he plays the FBI agent. And so they show both side, they show in the compound, in like this cult about what's going on, and it's nuts. And then they show from the FBI hostage negotiator side and them trying to track this guy and see what's going on behind these closed doors. And again, it's only two episodes in, but it's really good. I think it has a chance to be one of the best TV shows of 2018. You heard it here first. How did you find this show on the Paramount Network? I didn't even know the network existed, but I read a profile of Taylor Kitch in GQ and he talked about how this is like his passion

project to do this and it's crazy the stuff that David Koresh as this, he got these people to all believe that he was the second coming and these were very, very smart people in his compound that followed him and this gets back to the idea of like if you're able to tell a good compelling story and plan people's emotional biases you can get them to do pretty much anything. That's it. All right. We'll see you next week. Thanks for listening. Thank you.