Animal Spirits Podcast - The Worst 401k Advice (EP.39)

Episode Date: July 25, 2018

The pie chart heard around the world, why concentrated gains in the stock market are nothing new, becoming a millionaire in your 401k, the worst 401k advice we've come across, the Vanguard of hedge funds, why value investing has performed so poorly this cycle, why so many millennials regret buying a house, the coming shortage of elderly care, inherited hindsight bias and much more.   Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Animal Spirits, the podcast that takes a completely different look at markets and investing, hosted by Michael Batnick and Ben Carlson, two guys who study the markets as a passion and invest for all the right reasons. Michael Battenick and Ben Carlson work for Ritt Holt's wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritt Holt's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritthold's wealth management may maintain positions in the securities

discussed in this podcast. Welcome to Annal Spirits with Michael and Ben. So last week, I finished watching all the new season of comedians and cars getting coffee. And the one that exceeded expectations for me was Alec Baldwin. He actually came off better than I thought he would. And him and Seinfeld had a good rapport. Did you watch that one? Not yet. Okay. I really liked it. And I was kind of surprised because I didn't know how likable he would be. But Seinfeld had a great quote about him. He said, you're the kind of person who everyone has an opinion about. Nobody's neutral about you. And when I heard that, I immediately thought of the pie chart heard around the world that you sent out last week. And I know you've already talked about this a lot. You did a video

with Josh on and you were to post about it, but we kind of have to talk about it. So you put out a pie chart that shows five large tech companies, Apple, Amazon, Google, Microsoft, and Facebook, how the collective market caps of those five stocks are bigger than what, the bottom two 182 stocks in the S&P 500? That's right, then. Okay, and you put it in a pie chart, which seemed to trigger a lot of people. So this thing went uber viral. It got retweeted, I don't know, what, 5,000 times or something?

What's the total tally? That's a lot. A lot. It got a ton of impressions, and it caused a major panic on Twitter, which I don't know why, because you and I've been talking about this for a couple weeks now, and I completely understood what you were trying to show, but a lot of people did not. So why were people so open arms about this?

from your perspective. I understand why. I think because typically a pie chart shows a whole and the people that misunderstood felt misled and then got angry because they felt like I was being misleading. But if you actually took the time to read the 240 characters that I wrote, it was quite clear. I think maybe it would have been more effective if I wrote the top five equals the bottom 282. Maybe that would have been more clear, but certainly it was not my intention to mislead anybody. I don't know what I would have got from being misleading. A lot of people said that they put you in jail immediately for a chart crime on this. I didn't see it that way. And I think it's because you and I've been talking about this for a while now. So a couple weeks ago, I were to post on the concentration in the stock

market and CNBC had a graph that showed that Amazon, Netflix, and Microsoft and Apple account for like 98% of the gains in the S&P 500 and more than 100% of the gains in the NASDAQ. And so we started looking at some stats, and you actually gave me a good idea, you figured out that Amazon has added like 285 billion in market cap alone this year, which that gain of Amazon is bigger than the smallest 40 stocks in the S&P 500. So we were looking at funny things like this just to show, the point of this wasn't to show that things are getting crazy in the markets and these big companies are taking over. The point was to show this is how things work in the stock market in a market cap weighted index. Particularly in an index fund, and I think that's why maybe people

felt such a visceral reaction because to see it portrayed this way was sort of eye-opening. Like, wait a minute, you're telling me that Hershey and whatever, all these smaller companies don't matter. They don't move the needle at all. And I'm here to say, yes, that is what I'm telling you. They don't move the needle. Correct. In the S&P 500. But I also looked at my piece, and this was as of two weeks ago, so the data might be a little stale. But small cap stocks are up 10% this year. Midcaps are up 6%. And microcaps are up 13%. But those microcaps make up like one to two percent of the entire index if you did a total stock market return fund. And so again, yeah, those are never going to move the needle in a market cap weighted index. But I think that's what

triggered a lot of people here is because there are so many people that are anti-index fund and they use this as point number one to why this should be because you're having these handful of large companies move the needle. But that's just the way that things always work with this. Yeah, a lot of people are like, oh, diversification or this won't end well or whatever, whatever. Let's move on. Yeah, we don't need to beat this dead horse anymore. But you guys, got a few good replies from some people too, didn't you? Oh, yeah. Let's beat this dead horse just one moment longer. So Adam Butler sent a chart showing that 25% of the volatility, SMP 500 is explained by eight stocks, which cumulatively

contribute the same volatility as 364 other stocks. So I thought this was interesting. And this is basically the 80-20 rule is everywhere, especially in market cap weighted indexes. And the other one is from Nate Garaci or Garaci. I'm sorry, I'm not sure to pronounce his name, but he did the same thing showing ETFs. And he showed that the AUM of the top five ETFs is just about as big as the ETFs as 125th to 500th biggest ETFs. Right. Yeah, those top five carry the whole weight.

So concentration in all things, more or less. And my biggest takeaway here was, it was just funny to me how mad people were getting, but ignorance is bliss almost in a lot of ways because we have so much data now. I think people in the past don't realize that the market has always been like this. And you showed some data like that in your post that people would have bothered to read it, that the concentration in the top five or ten stocks has always been like this. And it's actually better now than it was in the past. It's more spread out than it was.

In the past, it was even worse. So I think in a lot of ways, information without context, this just can be a killer for people and whatever. Sticking with the theme of people getting quite triggered, Felix Salmon tweeted last week, I'm sorry, this is two weeks ago now, the most you can contribute to a 401k is 18K per year, or $0.018 million, which I've never seen put that way. To get to $1 million in a 401k, you need to take a pretty crazy amount of risk. It's not a healthy goal.

And I think it was probably the latter two sentences that really set people off. There's a lot of backlash to this one. And yeah, so I ran some numbers on this because I was curious. and there really aren't that many people who have a million dollars in their 401K. And I think one of the biggest reasons for that, which is kind of obvious, is the fact that not many people stay at the same job their whole career. And so a lot of times people have money in a 401k, and then they'll leave the job and leave it in there or roll it over and start a new one.

So Fidelity actually said out of their planned participants, there's like 157,000 people who have saved at least a million dollars in their 401K, which is only 1% of their total retirement participants. And I think Vanguard had similar numbers. But my point was, just looking beyond the numbers and to what you can save, just putting aside a little bit of money in a 401k over many decades, you don't really need to have Herculean investment returns. So I looked at someone starting age 30 and maxing out their 401K, which is probably not very

realistic for much of the population. But if you did that, you'd retire at age 65 with a million bucks with a 2.2% gain. And so people sent me some emails and said, well, what? What about the employer match and what if you are a dual income household? That shouldn't that be easier? And of course, it should. But the funny thing is, if you start saving at age 30 and you're saving for 35 years, it only takes roughly $28,000 a year with absolutely no growth in your portfolio to hit a million dollars.

So the point is saving lots of money from an early age is a good way to build wealth. And you don't really require much from the markets to if you want to get that magical number, which people also actually meet on and said that it's not going to be. as much in the future. But anyway. Yeah, what about Japan, bro? Yeah. And so I did get an interesting little history lesson from someone sent me this blog called Don't Quit Your Day Job, and he looked at the complete history of the 401K contribution limit. And it's kind of interesting because, so it's actually done a really good job of keeping up with inflation. So the limit was $10,000 or so in 1999, and now it's $18,500. The interesting thing I found was when it first came out in the late 1970s,

the max limit was actually $45,475, and it took the government until 1986 to realize that we're just giving this huge tax break to people who can afford this, and they ratcheted it down to $7,000, and it's slowly gone back up from there. So, anyway, we'll include that one in the show notes. Yeah, this is a good chart. My biggest beef with the 401K thing is, well, first of all, not enough people have one or have access to one. The other one is that the fact that the IRA limit is much lower, and I don't know why those

two aren't in the same, same wavelength and have the same limit when the IRA max is just $5,500, I suppose. Well, the worst take, Felix is safe because the worst take of all time on 401Ks comes from James Alutcher, who, if I recall correctly, I remember reading this piece and thinking to myself, I'm never reading another word that this guy writes. I think the argument against investing in a 401K was because you don't know what stocks and mutual fund managers are selecting. Does that ring a bell?

His post was titled, Why Your 401K is a scam. So that was pretty bad. That's very hot. The funny thing is, is that taking financial advice from wealthy people like this who have had success as an entrepreneur is often like the worst thing you can do. There's just a lot of people out there who have struck it big and are just horrible at telling other people what to do. I had the lottery, and here's why you don't need to do the responsible thing.

Exactly. Don't go to college. Don't save retirement. just create a really high-valued business, and you should be fine. Yeah. Okay. So anyway, becoming a 401k millionaire, not impossible, but very hard for a lot of people because saving from early age is tough, maxing your 401K is tough.

One of the stats in here from Vanguard, I find this hard to believe, just 4% of people earning below $50,000 a year max out their 401K. And I read that as, what do you mean just 4%. That's a really high number. How can you possibly max out your 401k if you're earning less than $50,000? My guess is that parents are subsidizing their income. Right. That could be it.

Or, again, they're looking at individuals and that household. That's almost a 40% savings rate for someone earning $50,000. People who can do that, that's unbelievable. Yeah, and they also say 11% of people who make 50 to 100K max it out, and then 32% of people making over $100,000 max up a 401k. So obviously, one of the big things here is, yeah, how much you make. The income is kind of the big part that a lot of people don't realize. So Morningstar had an article last week talking about liquid alts, and these are just kind of mutual funds that act at like hedge funds. And they found that they said this was kind of interesting. Basically, if you blindly bought a managed futures, multi-alternative, long short equity or market neutral fund over the past five years, there's about a 33% chance that fund no longer exists. So the turnover in these things is pretty massive. And obviously the performance hasn't been so great in these things. So I'm sure that they're pretty quick to pull the rug out front of themselves on these. But,

they kind of found that besides AQR Blackstone and J.P. Morgan, basically no one is doing anything in the liquid alt space. I think one of the most difficult things that we've learned in the last few years is that people in theory want not not correlated assets. They want negatively correlated assets, but only in a bare market. Yes. Right. And it just, no such thing exists, obviously. And the problem with a lot of these products is not necessarily the product themselves that are flawed, it's that investors can't hang around. It's really hard to stay invested in these during a bull market. And when you need it, you've already dumped it. Right. The sharp ratio doesn't sell very well when stocks go up by double digits every year. Yeah. No one cares about

that when stocks are going up. The risk adjusted of returns are great, but it's only up three percent in the last decade. And the problem is a lot of them just don't understand what they're getting into either, which is one of the reasons that I think quantitative funds have done the best. So Morningstar also says, in 2016, for example, AQR's alternative strategies gathered $9.6 billion of net inflows. The rest of Liquid Alternative funds had combined net withdrawals of $6.8 billion. So in some ways, this is AQR is like the index fund of Liquid Altz and makes a nice segue into this piece by the FT, which called AQR the vanguard of hedge funds.

And they give a nice little shout out here. What do you think about this idea of AQR being the vanguard of hedge funds? I think it's a, it sort of makes sense, but I think part of it doesn't make sense in the sense that Vanguard sells itself, right? Nobody needs to be sold on two basis point S&P 500 index fund. Hedge funds conversely need to be sold and people want to be sold on the fact that this is the next best strategy. So I mean, I think it's a decent comparison. What do you think? This is much more your world than mine. And the title of this piece was this was Robin Wigglesworth wrote this for the FT, and he said, can factor invest and kill off the hedge fund? So I actually saw Cliff

Asness, who is the founder of AQR. He spoke at a conference in institutional conference. Can we say friends of the show? Sure. Why not? Everyone's a friend of the show. He follows us on Twitter, so that's got to be worth something. So I saw Cliff Asnes speak. This must have been 2010, 2011. And he kind of made the point to all these big institutional investors in the big name hedge funds, why are you paying $2.20 for these things when it's just factor exposure that we can create for you quantitatively for much, much cheaper? So he was saying this, I think really before they even got into these funds in a large way, I think they were just getting them started at this point. And obviously it's worked pretty well because they have over $200 billion in assets their

management. I'm not sure what the breakout is between institutional and retail there, but for some reason, I feel like institutions, although they should be looking at this kind of stuff, because they can actually understand it. It's liquid. They know the evidence. behind it, I think it's perfect for a lot of them. I think a lot of them won't make the change because it doesn't have the same mystique as an illiquid hedge fund run by a genius who you don't really know exactly what's in the portfolio, but they could make this asymmetric bet. So I think that it makes a lot of sense in theory that institutions should be really just funneling money into this stuff, but I think a lot of them probably won't be able to because that would be

almost admitting defeat in some ways. Yeah, I'm sure that Cliff has a lot of fans in the hedge fund the world. He's shining a light on an area that has been kept dark with, what is the word I'm looking for, with a lot of purpose. Like, hedge fund managers do not want you to know what their sources of Edge are. And they don't want their alpha broken down into SMB and HML and momentum and all that sort of stuff. Like, they're masses of the universe. So he is sort of demistaking what they do. Yes. So my other funny one in this article was one of his original partners, at AQR, talked about meeting him for the first time at the University of Chicago. And this is when he was Professor Eugene Fama's teacher assistant.

And this is Jackaloo, who I guess is one of the founders of AQR. And he said, that guy, Aznes, is ridiculously smart. He's probably smarter than the professor. But the thing is, he knows it. He can be really insufferable at times. And that was his original take on Aznes, which I thought was pretty funny. But if anyone has a shot to be the quote-unquote vanguard of hedge funds as them, the fact that there are still 11,000-ish hedge funds around and $3 trillion in capital,

makes me think that there maybe never will be a vanguard of hedge funds. But I don't know. I guess I wouldn't rule out Vanguard themselves, rolling out some alternative ETS or something someday and try to steal that piece of the market. But I just don't think it's possible in a lot of ways to even get there. I sort of wonder like what Cliff thinks as he reads this piece where it says like his net worth is $3.6 billion. There must just be like a very strange thing to read about yourself. Yes. I can't remember the exact quote. And I'm going to have to track it down where someone asked him, what does it feel like to be a billionaire? And he said, he quoted some movie and he said, it doesn't suck, which is pretty funny.

Speaking of suck, let's talk about real quick, Patrick O'Shaunas, he did a second quarter letter, and he broke down what's going on with value and growth, and he broke it down to two periods of time. One is from June 1965 to June of 2010, and the other is from June 2010 to today. And obviously in the last decade, value has done really bad, but there are reasons. And one of the main reasons is that the holding period EPS growth that you've seen in value from 65 to 2010 was 7% and that has collapsed to 1.76%. So there is no manipulation going on. It's not just that the multiple of growth stocks are going up and the multiple of value stocks are compressing value companies have sucked and therefore their stocks have suffered as well. I thought this was a really good way to break it down. Without time stamping or saying this time is different, what are the odds that the technology world has completely changed the value factor in a lot of ways?

Well, I joked a little while ago that Amazon has disrupted fundamental analysis. Right. Like, I don't necessarily believe that, but the odds of that potentially happening, it's got to be something you consider. I think you a little bit believe that. Maybe I do. I don't know. I don't want to be the guy that says Buffett has lost it in 1999. But the funny thing is, is the arguments for value sucking wind don't seem to make a lot of sense. A lot of them are the fact that, well, all the computers doing factor investing now have made it so these stocks aren't cheap anymore. But wouldn't that mean value would outperform in that period? If everyone's rushing into buy these value stocks, that would mean they should

be doing much better. Well, like Patrick displayed, it's not a giant mystery. These businesses have not done well. So I certainly think that technology has hurt. them. But I don't think like it's a growth investor versus value investor story. I think it's really as simple as these businesses are not doing well. I hate to use the word perfect storm because it's used too often in financial markets, but it could be the case where this is a perfect storm. This is the perfect storm of perfect storms. Yeah, I think there's just a lot of stuff. Plus the fact that a lot of value ends up tilting towards financials and this is a good way to visualize what the attribution behind it is. So if you have been a value investor, it's worth reading Patrick's piece because it really

kind of shows you why this is happening and doesn't really offer you any assurances that it's going to end anytime soon. But this is a good way to kind of break it out and show why it happened. Time for survey time of the week. So this one is in Bloomberg and they asked people what their primary source of stress was. And they found that 70% of Americans listed the state of the nation as their biggest stress above both money and work. And they said almost 70% of Americans feel a sense of news fatigue, according to the Pew Research Center. That is late cycle stuff right there. That is a late cycle survey. 23rd inning. It's just interesting to me that I'm sure if you asked this in 2008 or 2009,

money would have been number one or the economy and work would have probably been number two. So it is kind of funny where things have been going a little better and it gives people a reason to worry about other stuff. My big thing, I think pretty much, I don't know, probably four or five years ago, I completely gave up watching cable news. I just deleted it from my entertainment field. I'd say it's probably made me 10 to 11% happier in life. Just getting rid of that type of news. And I just do all my news through social media now.

That's probably part of the problem is that people just watch too much news these days. Well, you could argue that social media makes it worse. It amplifies the news. True. If you don't have a good filter on social media and you're just looking for things that will outrage you, it's a good place to find it. So I guess that's true. I shared this one of you before when you said you don't believe it.

And it's probably true that people probably say, this because it makes them sound smart or outraged. But I'm sure people are a lot more worried about money and work than they are about state of the nation. This goes to the core of why we're an anti-survey podcast. I just don't think that people answer surveys truthfully. I think they answer it the way that they think they should answer it. Yes, that's fair. The same thing with market surveys. You look at what they're doing and not what they're saying. Just because we like surveys so much, we have another one. This one's from CNBC. Roughly four and 10 millennials felt that they made a poor financial choices when it came to purchasing their home. And so a lot of

millennials are regretting buying their first house. And they say part of the problem seems to revolve around the fact that they had a down payment. And the problem was one of the three millennials dipped into their retirement savings to pay for their home. So of course they regret buying a house. Wait, why of course? They dipped into their retirement savings to pay for their house. So they overextended themselves. Don't you think that's not a wise financial move to dip into your retirement savings to pay for a down payment? All right, fair. I think that's probably where it's coming from, the fact that they dipped into the retirement savings, they could have had more money saved for a while longer. I think one of the big reasons for probably a big problem

of this, and I wrote about this, I don't know, maybe a year or two ago. I think buying a starter home is probably one of the worst decisions you can make as a young person, just because I know all the extra costs that go into buying a home. And I think a lot of people, young people assume the narrative is I need to get married and immediately buy a home and they either stretch for something they don't, they can't afford or they buy something that they, what? Sorry, I just, this funny gift caught my attention. David Stern. Somebody just tweeted this to us, David Stern, spitting out water.

About what? I don't even know what they replied to. Anyway, so I'm thinking about buying. What percentage of the podcast are you actually paying attention to me? 85, at least. All right. All right. I'm thinking about, so we're probably moving back to Long Island next year.

And I was talking to my dad the other day and I was to say how I don't want, what are you laugh at? The David Stern tweet. It's a great gift. That's pretty good. And I was saying to my dad that I don't really think I want a big house. I think I want like a small manageable house because an extra $1,500, $2,000 in mortgage payments, I don't think that I will be happy with a bigger house.

I just don't think it's worth it. And then I was like, but I guess it depends what's on the market. And I guess we'll see, you know, and I guess it just depends. I could be swayed either way. And I guess what this all boils down to is the fact that like going from an apartment to a house is a huge leap. And for me personally, I don't really know what type of house I want. So I think that I might have regrets or I might be super happy, but I think that not having any

experience living in a house as an adult with like kids and stuff makes it sort of difficult and leaves a lot of room for regret. There are a lot of things you don't consider. Like our first house we bought, the yard was way too big and the landscaping was horrible for me and I did not want anything to do with it. There's so many things that go into owning a house that you don't realize. And that's why I think a lot of young people would probably be better off staying, renting or an apartment for a while until they figure out exactly what they want because I don't buy

the idea that I don't want to pay someone else's mortgage. Yeah, so that's one thing that I haven't considered. Like I have not given a second thought to landscaping. I know that there's like a ton of costs involved with buying a house. Like all the rooms need to be furnished and all that sort of stuff. But there's a bazillion things that are so far off my radar because I've never done it before. Yeah. So it's that and then the fact that I think a lot of young people want to buy a starter home and then move up to another home in a few years and there's a lot of transaction costs involved in that as well. And you pay a lot of interest up front on a mortgage. So I think it doesn't really work out that well trading up either, you know, unless you really thread the needle.

Well, in two years, you can survey me and I'll tell you what regrets I have, if any. All right. That sounds good. But that's a pretty small sample size, but we'll see if it makes the a sample size of me. Yes. Yeah. So the New York Times had a story last week, about a four-day work week, which really sounds like a life hack book. What was the Tim Ferriss one, four-hour work week? This is pretty close. They actually found that a New Zealand firm is letting its employees work four days a week while being paid for five days a week to experiment to see if they could get people to be a little happier. And they actually found that reducing the work week hours from 40 to 32 increased the productivity.

And they found that there was a 24% improvement in work-life balance. And people came back to work energized. I don't know where they came up with the number 24%. That sounds like a faulty survey again, maybe. Can I just interject here? I was just thinking about something. Okay. The reason why sometimes I tune out is I think I'm making my listening experience of the podcast that much better.

So sorry, it's very selfish. Are you saying you're an active listener? Yeah. Is that you're trying to say? Well, you know I listen to the podcast. I get many laughs because this is all new to me. I'm hearing it all for the first time. And you know what?

You're pretty funny. At least once a week, you slack me the day the podcast comes out and said, hey, that was a pretty good joke. I didn't even catch it in retirement. But anyway, I don't know. So this is just saying that people working fewer hours could actually increase their productivity at work. The problem with this is that I feel like you're never really away from work these days because your smartphone is always on you and it's impossible to get away from email and text and slack and all that other stuff. Yeah, working or even staying home is not the same as taking off. Right. Yeah. So maybe this works for them. And maybe this actually is better for more of an argument for along people to work from home more often than coming to the office all the time, which I think.

is probably makes sense, but I think trying to get people to work less, unless it's more of a manual labor job, I think that's going to be tough to pull off. So there was an article over the weekend in the Wall Street Journal. America is running out of family caregivers just when it needs the most. And three pretty eye-opening statistics in here that I think all of us can relate to like knows either a grandparent or somebody that was in an assistant living home or just needed general help. One third of middle-aged adults are heading toward their retirement years as Singles. Between 1990 and 2010, the divorce rate among adults ages 50 and older doubled. That means fewer spouses are available as caregivers. And lastly, today an estimated 34.2 million people

provide unpaid care to those 50 and older. These caregivers, about 95% family and long the backbone of the nation's long-term care system, provide an estimated $500 billion worth of free care annually. Wow. This speaks to the, like, if someone can figure out how to get robert, lots to take care of for the elderly. It's going to be like a trillion dollar business. I only I said it half kidding, but that's pretty crazy. 95% of them are family. That's insane. So I guess paying it back, right? I mean, there will be some issues. Like, I think Medicaid covers some costs when you have gone through all of your assets. But just getting old generally, like especially getting old and when you're not healthy, it's really just a really lousy fact of life.

Right. And that's where all the health care costs come in too. They always say that the majority of the health care costs when you're retired come towards the end and you're trying to extend life. And this is obviously not going to go away because people are living longer and I think they'll just need to be provided care much longer. So yeah, this is. I don't know if the 80, 20 rule applies here, but where 80% of the money you spend in your lifetime is in the last 2% of your years or whatever it is. For health care, yeah. It's definitely backloaded, I'm sure. The long-term care companies have had a huge problem with this because they underpriced how expensive this was. So a lot of these policies have blown up. A lot of these companies have

blown up. A lot of them are raising premiums. So a lot of people say that they'll just self-insure. So this could actually be a problem for the insurance industry. It actually is a problem. Like the long-term care market has had some radical underfunded liabilities. Wow. Okay. I didn't realize that. I'm sure that somebody will send us some information on this, but it's an issue. I wrote a piece last week on SUVs. There was a ton of really good discussion around it. of which came from Christine Benz from Morningstar, and she actually got into a back and forth with our CFO, Bill Sweet, about should you buy a new car, should buy a used car, and Bill kind of made the point that he buys two to three-year-old cars and keeps them humming. And she said that

she's always bought new cars. And she did a little reflecting in a piece, and the piece was called Can Hindsight Bias be inherited? And it was kind of interesting because she looked at a lot of the money decisions that she's made and how they were inherited from her family or her husband or or things she grew up with. This was really interesting to think about how much of your finance background and what you believe just comes from how you were raised and what you saw when you were younger. And a lot of it was things like she said, she only buys new cars, most of her investments going to stocks because that's what her father told her, don't take out any student loans. This was pretty interesting. Yeah, I love this. I really thought this was

such a great piece that I've really never seen before, but it's just sort of so obvious when you read it. One of the things that she said was I suspect that, homes are always a great investment advice that my parents impart was largely influenced by the runaway appreciation that many homes experienced in the 1970s. And this is just one example, but whatever your parents say, you're likely to adopt that sort of attitude or go the exact opposite direction, I guess, in certain cases. And this kind of thing pervades the markets as well, how much hindsight bias depends on what type of market environment you sort of cut your teeth in. And I'm sure a lot of people, you can tell they already have been scarred by the Great Recession

and probably some people, that their brain is just broken from. that, I think. All right, let's move on to some listener questions. We got one this week that I think sometimes you overestimate what people know, and this seemed like such, I don't want to say silly because that sounds pretty rude, but it seems so obvious to us, but it's obviously not obvious to a lot of people. So here's a question. If I have an ETF at an all-time high, should I sell and wait for it to go down and then we purchase, or what should my plan of action be? It is interesting because a lot of people assume that once an all-time high is hit, that the peak is going to be not too far behind and watch out below.

And this is kind of an idea of understanding how the markets really work. And one of the things that maybe new investors don't realize is that new all-time highs in the markets are fairly, they're just part of the way things work. And so you and I have run tons of numbers on this. So how many blog posts have we done about all-time highs over the years? Yeah, I actually Googled or I put all-time high into the search bar in our blogs and got a ton of responses or feedback, I said. should say. So one of the posts that I wrote, I quoted Paul Tudor Jones, who said, even though

markets look their very best when they are setting new highs, that is often the best time to sell. And I can't imagine that he actually believes this because Paul Tudor Jones, who is one of the most successful hedge fund of all time, launched his fund in 1980. And from 1980 until the time I wrote this piece in September 2017, the S&P 500 hit, the S&P 500 hit seven. 737 new highs, 737 new highs. And in hindsight only were three of them good selling opportunities. One was in August or whenever the highs were made of in 1987. The other was 2000 and then the other one was 2007. I think people get confused because the worst crashes, I guess with the exception of 1937, the worst crashes happened from an all-time high.

but all-time highs in and of themselves are not dangerous. Like, we've run the numbers on this, and if anything, stock returns over the next 12 months are even better after hitting new all-time highs. It took me a while to wrap my head around this, the fact that it's almost a better time to be investor when stocks are hitting all-time highs. Trying to understand momentum, and it's really counterintuitive to a lot of the stuff you hear. Well, because probably the first thing that we're taught in the market is to buy low and sell

high. Yes. Right? So it feels like you should be selling at an all-time high. But in fact, you probably should not be. And then let's just say that you were playing that game of selling it on an all-time high and then trying to buy back lower. First of all, just what a mental headache that is, taxes.

And of course, if you do happen to sell the all-time high, you're going to feel like a genius and then you're going to not get the re-entry right. And it just opens up a whole can of worms that most people don't need to deal with. It's one of those things where it seems like you should be worried about it. But especially if you have a really long time horizon, you're going to have plenty of new all-time highs over the course of your investing. life, it's something that you probably shouldn't worry as much about trying to pick them. And by the way, what about Bob? You like that movie? It was okay. It's one of those movies

where it kind of annoys you, how things keep going bad. But I mean, it's a classic with Bill Murray. So, I mean, different. How about you? Yeah, honestly, I don't really remember it. But let's get to Bob. Okay, so I wrote this piece in 2014. It's called What If You Only Invested at Market Peaks. And I did this story. And it's by far, and it's not even close. It's my most read blog post of all time. I still get, it still gets the most hits every single year. I put the story in my book as well. And I've got so much feedback on this piece. And I wanted to look back and see what would happen if a hypothetical investor just invested at market peaks.

And so he invested starting in 1970s. He invested right at the peak in 1973, 74, then he invested right before the 1987 crash, then he invested right before tech stock crash, and then right in October of 2007 before the great financial crisis. And holding on that entire time would have given this investor, like, you know, like 9% returns. It would have been not that much different than the market. I put some numbers in here. We'll put this in the show notes. But just sitting on the cash and investing the market right when they peaked and still holding on after that, you'd have done fine as an investor. So obviously

no one has that bad of luck. But when I ran the numbers on this, I remember not thinking it made sense. And I had to run it by a few people first just to make sure I was looking at it right. But especially if we're talking about investing a lifetime frame of multiple decades, market peaks will seem scary at the moment, but they really don't have as much of an impact as you think. I feel like this post sort of put you on the map. Like, this was huge. Yeah, this was probably my first viral blog post. I think it was in 2014. Okay. So I did a podcast on Friday that I really enjoyed because most of the podcasts that I've done on the book were sort of like question answer, question, answer. And it was just sort of that format. But the one that I did on Friday was

with this guy, Michael Samuels, who is a portfolio manager of an event-driven hedge fund. And so obviously he's in the business, and we had a really nice back and forth. And at the end, he asked me a bunch of questions. And one of the ones that he asked me was, if you had to buy a stock for somebody and tuck it away for the next few decades, what would it be? And I sort of froze. I didn't know what my answer was because I don't pick individual stocks. So I said Amazon.

And then when I left, I was walking to the subway. I couldn't stop thinking about it. At first, I was sort of embarrassed. Like, are you freaking kidding me? One stock for the next 25 years, you pick a $900 trillion. dollar market cap that's trading at 280 times earnings, like the most consensus answer ever. So I was thinking about it more. And one of the thoughts that I had was I think that thinking about stocks in terms of market

cap is really, really a bad, dangerous idea because that number and any of these numbers are so huge. Like you could throw out Netflix. Are you kidding me? A $165 billion company that just makes movies. And of course, you could have said the same thing at $50 billion at $30 billion. And so thinking about companies in market cap in their future is probably a really, really, really bad exercise. And then I thought, hey, you know what?

Maybe that wasn't such a bad idea. Maybe Amazon will stand the test of time. And sure, it's a trillion dollars today, but maybe it'll be $4 trillion in the future. So anyway, I was just running through that exercise in my head. What are your thoughts if you had to sort of play this game? I guess if you have to think of something that's going to be around for 20 to 25 years, it's probably not a bad way to play it. Like, what is still going to be here? because there's so many stocks and companies that will be gone in that time, probably right?

Either they fail or they get bought out and they don't survive anymore. So I'd have to think about it in terms of what are people still going to be interested in. I mean, in that sense, I would pick something like Nike or Disney maybe, something that has a really strong brand that I think will still be around. That's a tough question. I mean, I wouldn't want to pick something like Facebook or even Google because I don't know if they're still going to be around. So we asked this question on Twitter today, and a lot of people are saying Apple.

And to me, that was like an obvious one that I wouldn't pick because especially like to me, yes, the app store is huge. But at the end of the day, it is like a hardware technology company, right? Like the lion's share are from sales of iPhones. And is iPhone good to be the way we communicate with each other in 20 years? I have no idea. That's not really a bet that I would want to make. No, that's a good exercise. I would have a hard time answering that one as well.

But I would just have to think of something that comes to mind. Or you could pick from that list of 282 of the smallest, S&M. be 500 companies as well. Yeah, that's not a bad idea. Well, one of the things I think where I would settle is Berkshire Hathaway to me is like, I mean, Berkshire Hathaway bets on things that people will need going forward. And that's like basically the equivalent of an index fund at this point that's tax efficient.

Does it pay? Until the activists come and break them up. That's certainly a risk too. So anyway, I might just thought it was a really good exercise. I will link to the podcast and the show notes if you're interested in listening to it. I really did enjoy that. So I would recommend it. Ben, what recommendations do you have this week?

Let's see. I've been reading The Half Life of Facts by Samuel Arbisman. really interesting book about how quickly what we assume to be fact in science quickly becomes disproven within a number of years. And he goes through all these different fields in science. And there's so much in here that could be related to the markets. I'll probably write something about this. But things like physics and all these other types of science and like things that are, he calls them the half life for when they get disproven. And it's like 10 or 12 years on average that these things go from facts to know it's actually something else. It's a really interesting

way to look at things. How I built this with Steve Madden this week. Did you listen to that one? It was really good. I kind of forgot he was in the Wolf of Wall Street as one of the stocks that they pumped. And he actually went to jail for two to three years for getting into pump and dumps with the guy from Wolf of Wall Street, which, and he continued to run his company. And now it's like a $3 billion company.

It was pretty interesting. Neil Brennan on Netflix was amazing. So he's a stand-up comic. And he actually was the guy who was Dave Chappelle's writing partner for the Chappelle show. and he actually wrote, he said he wrote half-baked when he's 23 years old, which is insane to me. But this is probably the most unique stand-up comedy show I've ever seen because it was called three mics. He literally had three mics on the stage. And he said, this one is for one-liners. This one is for stand-up comedy and this one is for emotional stuff I'm going to talk about.

And he would give like a few minutes on each and then the lights would go out and he'd move to the other mic. And the best part of it was the emotional stuff. He like went through his whole life has been really kind of messed up and he's got depression and his dad was a terrible person and he talks about this stuff and it's not even funny. It's just like this guy opening his heart up and then he'd like interspers that with comedy and one-liners and it was really powerful stuff and I didn't know much about this guy. So it's really, really good. It's on Netflix. That sounds great. And finally, I took my daughter to see The Incredibles 2 this weekend. She's only four years old. So we were probably there for a half hour. It's a two hour long movie.

So for people that young, it's probably not quite, it's almost like a movie for adults because there's a lot of more inside, clever humor. And so I decided to give you some recommendations because there's so many movies you're going to watch like a million times. Like my daughter's tolerance for repetition is unbelievable. So here's some of my favorites I wanted to give you. And at a young age, what you have to really hit them with is anything with music. All my kids love music. So here's my favorite most rewatchable movies. My daughter's probably watched each of these, I don't know, a thousand times. I have Shrek, Frozen. Moana and Zootopia.

Milana? Moana. I never heard of that. It's a Disney one. Actually, the rocks in it. It's a Pixar one. So those are the ones my daughter likes that are some of my favorites because I've seen them all 10,000 times.

So you have to be ready for that coming down in the pipeline. Cool. Thank you. All right. Any other good ones for you this week? Let's just stay with movies just for one second. So we spoke about rewatchables. And I don't know why I was thinking about this movie, but I really, really enjoyed this one.

Have you ever seen the prestige? Yes, with Hugh Jackman? Yes. Or is that the one with Christian Bale? Yeah, no. both of them. Okay. So there's two magician movies that came out at the same time. The illusionist came out with Edward Norton. Yes. That's it. And that was not as good. The prestige was better. That was really good. Agreed. Yes. I yes. Okay. So I'm reading a book called Never Lost Again

by this guy named Bill Kilday. And it's about the beginnings of Google Maps. And that was a company called Keyhole that was acquired by Google. It's not quite as good as Creativity, Inc. But it's very similar. So two-thirds of the way done, and so far, it's really, really good. I had no idea that, well, two things. One, that the CIA has a venture capital arm called in QTel, and they were one of the original investors in this company called Keyhole. And the other thing was that CNN was an investor in this company and hugely responsible for their success. Actually, did they invest? I don't think they invested. Maybe they did. But they put Keyhole on TV during the Iraq War, and it crashed their website.

like when people were able to see what this technology did. I think about how that changed the world from, you know, like geo-coding, Yelp, Uber, Zillow, Trulio, it's hugely influential. I guess I would have assumed Google just created it in house. I never realized they bought another company to do Google Maps. That's pretty amazing. It's a really, really good story. I highly recommend.

And then there was Jay Williams with Bill Simmons was awesome. Hearing about the Jalen Weber beef was interesting. I didn't realize that it was that deep. Yeah, I listened to that one too. And the Denzel episode was great too. but he said New York fans love Spike and this goes to your Adam Sandler theory about celebrities being out of touch. I don't know what he's talking about. Do Nick's fans hate Spike Lee? This Nick fan hates Spike Lee. Okay. I can see that. Yeah. Oh, so you think Denzel just sat by him too many times and

he thinks people love him. He's been in LA for 30 years. I don't know what he's talking about. Yeah. I loved this story about him in Ray Allen playing one-on-one. Yeah. He got game. Yeah, so that was really good. So Bill Simmons and Barstool both did something recently about like what if Twitter was around? Yes, their favorite historical moments were Twitter. We were on that train first, were we not? Yeah, let's just pat ourselves on the back. All right, yes.

We beat Barstool and Bill Simmons to what do you wish Twitter would have been around for historically. Ben and I did a live version of Animal Spirits in California in June, and that's what we did. Historical financial moments and what if they existed? What if Twitter existed? All right. This is sort of a long episode, so sorry about that. Sorry for keeping you. Thank you for tuning in.

Thank you for listening. email us at Animal Spiritspot at gmail.com and we'll see you next week.