Motley Fool Money - Wharton Professor on Risk and Returns

Episode Date: January 14, 2024

Ricky Mulvey caught up with Jules van Binsbergen, a finance professor at the University of Pennsylvania’s Wharton School, to talk about market sentiment, savings goals, and how to prepare for periods with lower rates of return. They also discuss:  Disconnects between the real economy and financial markets, Whether the US stock market is merely a “lucky survivor,” And the dangers of institutional thinking – in investing and academia. Tickers discussed: NOK, BTC Host: Ricky Mulvey Guest: Jules van Binsbergen Producer: Mary Long Engineer: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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It's certainly true that stock markets have been supported in their returns by these secularly declining interest rates because lower interest rate implies higher valuations. But the question is, for how long can you keep that up? And so if we are gradually slowing down in our economic growth, is it possible that we can have these very high stock returns from here on forward because the level of stock returns is in equilibrium tied to the growth rate of the economy. I'm Mary Long, and that's Jules Van Binsbergen, a professor at Wharton who studies asset pricing

and the history of markets. Ricky Mulvey caught up with Van Binsbergen to talk about the good news about high valuations, the problem with glide paths, and why the world needs more Galileo's. Before we get to that conversation, a quick note that we're off tomorrow for the holiday. To make it up to you, today's show runs a little bit longer than usual.

We hope you enjoy the conversation and the long weekend. Joining us now is Jules Van Bensbergen. He's the co-host of the All Else Equal podcast, one that I particularly enjoy. I find myself engaging with it, learning from it, disagreeing with it, and sometimes he's also the Nippon Life Professor in Finance at the Wharton School at the University of Pennsylvania. Jules, welcome to Motley Full Money. It is great to be on the show. Thank you so much for having me.

Let's start. So we're going to tackle some big questions about how much you should say. how risky your savings should be. But first, I want to touch on some research that you've done because I think it's especially pertinent right now where we see a lot of investment firms, investment banks, starting the year with these large-scale market forecasts. And they turn out to be very wrong, spectacularly, the majority of the time. And you've done research on basically measuring economic sentiment throughout centuries

and how that can actually act is a predictable. measure. So for folks who are less familiar with the research, how powerful is economic sentiment is a predictive measure for the labor market and business cycles? So indeed, what we did in a recent paper, which is called almost 200 years of economic sentiment, what we looked at was about 13,000 local newspapers. And we just tried to find out from the tone that was used in those newspapers, what the level of economic sentiment also across regions in the United States look like. And of course, you can then aggregate that to get sort of a national level of economic sentiment. And one of the things that we found particularly interesting was that that economic sentiment did seem to have

predictive power for GDP growth, so something like the business cycle indeed. And we also found that of the components of GDP that add value, say for capital versus labor, it was mainly operating through the labor channel and not so much through the capital channel. And that was, to some extent, surprising to us. It wasn't the result that we necessarily expected. It also implied that we didn't find that much predictive power of this level of economic sentiment, this measure of economic sentiment for, say, stock returns or something like that. It seemed to really have predictive power for business cycles in the labor market, even over and above, and that was somewhat interesting, what forecasters, professional forecasters were saying. So,

We could beat professional forecasters. Our economic sentiment measure is a leading indicator of the GDP forecasts that these professional forecasters produce. And I know you looked over decades and even century, over a century, but I think that played a lot into what happened last year. You know, so many, so many people, so many professional economic forecasters started the year, oh, we're going to have higher interest rates. The market has, the market's done really well.

Everybody should bank on 100% chance of a recession. things will cool off. And then where do we end the year, which is that the labor market still looks all right. It's cooled down in a recent report. But the NASDAQ and tech stocks are up 50%, which I don't think any of the forecasters, the experts, would have expected based on the sentiment at the time. No, that is so true. Although I think that particularly since COVID, we are in a particularly complicated environment, right, where there are a whole bunch of different things that are interacting with each other and we're all trying to find out which one of these factors is going to dominate. So certainly, we just came out of COVID where we had an unprecedented level of support

and economic support. People build up lots of savings. Those savings had been building down and people were wondering whether the level of spending could be kept up yes or no. The Fed started raising interest rates and interest rates, higher interest rates generally means lower valuations, also to fight inflation. And then at the same time, we have this sort of long-term growth driver, that is artificial intelligence, that is starting to sneak in and starting to actually provide quite some good news. And then the question was, well, which of all of these competing forces was going to win out in terms of how optimistic people would be going forward in terms of the stock market? And as you said, the investors came together, they traded, and they came up

with increased valuations, which I think for long-term growth might be somewhat good news. And to tell you the truth, that was news that at least for me was long overdue. I was really hoping that we would get some revival and long-term growth expectations because they'd been pretty poor recently. Yeah, there's definitely a swing to pessimism. I think one overall takeaway from your research on that, though, is that for a long-term investor, for the average investor, it ultimately does not matter how they, their family, even the masses care about the economy in a particular moment.

to make a guess about what the stock market will do. One level deeper, why do you think that is? Why is there that disconnect where sentiment shows us what the real economy will do, but not necessarily the financial markets? Well, you can also, you're presenting it a little bit as the glass half full. You can also have empty, but you can also present it as the glass half full, right? Which is that sort of the forecasting power that our sentiment measure has for growth is already incorporated in stock valuations. And if it's already in the price, then that means that it won't

have any more predictive power for returns going forward. So that is the glass-have-full sort of interpretation of our results, that if investors are properly taking into account the effective sentiment also in GDP growth and labor markets going forward, then the lack of predictive power for the stock market would be a result of it. So the lack of predictive power for the stock market is not a bad thing in that sense. It's a good thing. It means that information. already in prices. Does that make sense? Well, I agree. And I also do think it's a good thing because it says that the crowd can be wrong. If they feel bad, that might not necessarily, it's an argument against trading in and out of investing. Yes, although the question now is, what do you define as

the crowd? Right? And so what we are measuring in our paper, which I think is very important, and it's also important to make this distinction, is really the tone of newspapers and 13,000 of them, meaning that the way that the news and economic news is reported, that that varies over time. And there is another crowd, which is the crowd that collectively sets prices in the stock market, right? And those two crowds don't necessarily have to be the same thing. So to give you another, which I thought was one of the most surprising findings in the paper,

was that the overall tone of news reporting since the 1970s has essentially been on a downward trend for 50, 60 years. It's been really bad. And so the question is, why is reporting becoming increasingly more negative? And what does that say about our news reporting? And so we also found that that negative news reporting was not so much related to economic news per se. It was if we just did the analysis on all newspaper articles, including the ones that didn't cover economic news. We just saw the downward trend of negative reporting across the board. It didn't matter what sort of the topic was across all topics, across the entire body. We saw that there was this downward trend. And it was also not even that related to any

particular state. It was just that across all states in the United States, we just see this long downward decline in the optimism that people have in their news reporting, which I thought was interesting, because I think a lot of our mood and a lot of the way we interpret the news, be driven by the way it's reported. And if there's this downward trend in it because people want to, you know, sell newspapers by reporting negative news, it may be something that we should be wary of. Or get attention. And negative bias in reporting will get more attention. For sure. The way that most people or many people plan for retirement in the United States is through a 401k. And the primary investment vehicle that people use in a 401k is a target date fund. I would say,

Not, I would say. It's because it's a default option in many cases. You have some beef with the target date funds, which are a way of sort of you pick a date of retirement. You have risky savings at the beginning. And then slowly it becomes less risky as more bonds enter the portfolio. Seems to work for a lot of people. But what is your issue with target date funds? Well, I wouldn't say that I necessarily have a big issue with it. I just do think it's important that we also discuss the potential downsides of it and what. it implies, right? So let's start with the first one, which is there's a glide path or a so-called glide path that these funds have. The glide path implies that early in your age, early when you're young, you put a lot of your money in stocks and then gradually as you get older, that stock allocation is slowly built down and the bond allocation is going to be increased. Of course, and I've done a lot of work on that too, you need to be careful what exact bonds you're going to put in your portfolio because long duration bonds are actually very risky too.

If you duration match bonds may actually be riskier than equity, but that's an entirely different story. What is more important is to question, where does this glide path come from? Who's computed it? How do we know that it's optimal? And one thing that we did for one of the pension advisory committees at the University of Pennsylvania was to simply ask from all the providers that offer these glide paths to just put in one graph what all the glide paths look like.

And what you'll see is that across different target date funds that are being offered by different providers, there is quite some variation in what that glide path looks like, even though it's the same retirement year, the 2045 one or the 2015 one and so forth, if you just put all of them next to each other for all the different dates that people can retire on, you look at what the glide path looks like across providers, it's no consensus. And so who's right? what is the right glide path that you're supposed to use? Many people, particularly through their default option, pick one.

And so you're just essentially being defaulted in one of these glide paths. There's even some academic research that are used that the glide paths make the downward slope and glide paths make no sense to begin with. They should never have been downward sloping to begin with. And early academic research under restrictive assumptions came to the conclusion that they should look the way they look, not even just the level, but the shape. But even that shape is under debate. And so is it more an historical accident that we all ended up with all these target date funds with all of these different Glythe paths?

Or is there something good about it in the sense that despite all of its shortcomings, we're still fine and it's better that people go for these target date funds compared to, say, the alternative that they have? And I certainly think that for certain investors that might be true. I mean, it is true that there is a group of people that on their own wouldn't diversify very well. They would put all of their retirement savings into one company, sometimes even the company that they work for. So, for example, think about Nokia. If you and work for Nokia and you put all your retirement savings into Nokia stock, because you couldn't imagine a world without Nokia and suddenly, Nokia essentially doesn't exist anymore, at least its market value,

took such big hits that you lost and your job and your retirement savings in one shot. And so there is a group of investors for which I think putting them in these target date funds, might be better, but not all people are the same. And so when we talk about these glide paths, it's not just that different providers have different glide paths that they offer, but different individuals, depending on how risk-averse they are, should have a different profile of how they should invest their money over their life cycle. And so to just force people into one of these options and say, oh, this is it because this is

your default option. And whether you like it or not, and it happens to be this provider versus another provider, this is the path that you're stuck with also has downsides. And so we face a tradeoff here. There's certainly a mistake that we make by offering that glide path to that person. The counterfactual could be worse or could be better depends on the individual. Yeah. And there's also a case. So it's not just, usually it's not just a target date fund or put a bunch of your savings in the company stock for retirement. Often you're given a menu of options in terms of what funds, what riskiness, how much risk you should take. And the best.

benefit of a target date fund, and I'm saying this more as a devil's advocate, is that, you know, maybe most investors aren't going to make the best decision for themselves. Maybe they would go a little bit less risky than they should be, or they're not going to pick, you know, the most optimal funds with the lowest fees when they're presented a menu of options. Yes, that's true. Although I largely agree with that statement, though target date funds aren't quite the cheapest because the fact that Glythe-Platte has implemented does imply higher fees. And if you would do that yourself, you could already save some money. So that is sort of a counterargument to that one.

I do agree with you that certain people might not know very well what is the optimal investment for themselves. And to tell you the truth, that was always one of the more, to use an old-fashioned word, paternalistic arguments for defined benefit plans, right? Which was, let's manage the pension for these people because they don't know how to do it themselves, which of course means that there's a lot of responsibility. that. And I do think that that responsibility needs to not be taken lightly. It's a very big responsibility because you are, you then better do a better job for those people than they otherwise would have. Otherwise, your your existence as a fund cannot be justified.

Yeah. So this is, this is where I would go in with my actual planning and I'm happy to, happy to have a Wharton professor break it down. I think that the vast majority, so I'm in, I'm in my late 20s. And if I had a target target date fund, then some of that money would be in bonds. And my personal savings, I do have a little bit of bond funds, primarily because it's a sort of for me, it's a defensive investment with higher interest rates right now. But putting that aside, I don't think for most retirement savings, the money, and we've said this at the Motley Fool, the money that you need in three to five years, a lot of that money should be in riskier investments or perceived riskier investments in the stock market itself. So with a glide path, the problem is that you're slowly introducing more

bonds into one's retirement, when in reality, and this is sort of the shape that you mentioned before, maybe all of that money should be in equities, except the money you need in three to five years, perhaps to buy a house or for an emergency fund. And then as you get to retirement, that becomes more in cash out of the stock market, as you need to prepare for living expenses in the event that the stock market has a 2008 style crash, your first year of retirement, and you need that money for your life. Well, so yes, that's, that's, that's, That's fine that you make that argument. I just want to make you aware of the implicit assumption that you made when you made that argument.

That's why I'm making it to you. I love it, which is that you are relying a lot in what's called intratemporal diversification, which means that if you can stay in it long enough, it'll all work out. That's sort of what you're assuming about the stock market. And so maybe one interesting paper for you to think about is a paper that I wrote with a colleague of mine at the Wharton School, Jessica Wachter, and one of her PhD students, Sophia. where we asked the question, well, is the U.S. stock market really a lucky survivor or has the return, is the equity risk premium or this extra return that you get for investing in

stocks? Is that truly fully an expected return, a higher expected return that people also thought they would get? And the reason why I'm saying that is there are many stock markets that once started and no longer exist. So that means that you put your money in that stock market and there is no point. where you can say, as long as I stay in it long enough, it'll all work out. Those stock markets ended, whether it was due to communist regimes or whether it's due to other political tensions

that happened around the world. And so there is a little bit of what we call a survivorship bias in the stock markets that we're observing today. The reason why we're all talking about the U.S. stock market is because the U.S. has been such an unbelievably lucky and successful economy in the world. Right. Now, so we need to figure out, is that skill or is that luck that the U.S. ended up where it ended up? Obviously, there have been many moments in history where it was quite ify. It could have gone, things could have gone differently, right? Particularly risky situations being the USSR and the U.S. and other global crises could have ended up differently. They didn't. And so I'm fine with you saying if I can wait, I want to, I have some intratemporal

diversification, so I'm happy to stay in it and I'm staying in it for the long run. Stocks for the long run is a perfectly fine argument, but don't assume that everything will work out in any case. There's still risk there that I would like you to think about. Yeah, I think that's completely fair. And also one of the stocks for the long run arguments of Schwartz and Siegel is that one should have more investments in international equities. And that might be similar to the case you're making right now.

Yeah, the international diversification. Yeah, which is also important. Yeah. Going to the part about how much to save then, you've said that on your show, it's a good savings target for 20 to 30% of your income for a general savings target. I've heard the 20% rule. I haven't heard that move up to 30%. And that seems for most people, that's going to be a huge percent of their income. But why is that for how much to save?

Why is that a good sort of goal to aim for? No, let's first start with that what we do on the podcast is we first say that 10 is probably too low, then we move to a benchmark of 20, and then we discuss circumstances under which it might even be justified to do 30. But I do think that if people would be willing to even go to 20, I think that would already be much better. And I think that the most important thing to think about is we are in a lower rate of return environment today than we were before.

And I think it's hard to argue against that. We saw long-term interest rates come up a little bit for a bit. And then over the last couple months, again, all the way back down to around 4, maybe even just under 4%. And that is a pretty low rate of return in nominal terms for bond investments, because it means that the real rate of return in the long run that you can make after inflation is subtracted is just maybe 2% or so. And so the idea that if you just put away 10% of your money, you're then invested and risky,

which means that you're not even sure that you're going to reach the target that you won, but at least on average, you think you can reach it. And then you can just put it away in a stock market of 11, 12% per year and everything will work out. And that's a bit of a risky proposition to go for. The math doesn't quite add up. And so it may be better to increase that savings rate. And then depending on how risky your investments you want to make and you may, may want to go for a higher savings percentage. Now, that said, there's another argument that I want

to add to this, which I think is important, which is the following. If everybody would decide to start saving more, right, that might actually depress in equilibrium the long term rate of return even further. Right. So maybe, and that comes back to our first option value of retirement argument, And maybe one thing to start thinking about is, hey, maybe that 65 number was picked because it was the life expectancy at the time. And maybe I should think about ways in which I can just work longer in something that is not so terrible for me to do. I would actually say, but that's my personal bias, perhaps, that for many Americans, they're actually quite disappointed after they retire. I mean, work has huge benefits too. It provides social structure.

It provides social contexts. And so I think that giving up a job has other costs as well. And so obviously the savings percentage that you need, you can make that lower by simply deciding to work longer and retire when you're 70 or 75. And so the savings rate is definitely higher than 10% given the rate of return environment that we're facing now. And so I think people should just decide what their retirement problem looks like. But one thing that I think they should be careful of is that there are still financial advisors

that are working with realized average past returns in their financial planning going forward. They will still use, they will say things like I've met with them and they made these arguments to me. They said things like the stock market has returned 12% in the past. So I see no reason why it wouldn't keep doing that going forward. And I think that's tricky. But when you're talking about the plan of putting, you know, assuming a historical return, and we've seen that with markets where there very rarely is a, very rarely do you get,

what is it, a series of years where it's 11% return, 11% return for the S&P 500. But don't you have enough of a statistically significant sample size to use that and then project 20 to 30 years down the road? What's the issue with that? The issue with that is what I would call something that's called secular trends, right, which is this idea that, and I think a lot of people are not quite so aware of this, right? I mean, let me give you a simple example. We have economic growth data from something that's called the Madison database going back to 1300.

Now, we can debate a very long time about what the quality of that data is and whether we should trust it and how it is exactly measured and all of that. I'm perfectly open to all of that criticism. But one thing that that database at least says or shows is that between 1,300 and 1,800, we had a 500-year spell of essentially no economic growth. And then something magical happened, which was the Enlightenment, the Industrial Revolution. And then we had 170 years of quite impressive and population growth and economic growth. And then in the 70s, very gradually, both of those started to start. slow down what a lot of people call secular stagnation.

And so it's certainly true that stock markets have been supported in their returns by these secularly declining interest rates because lower interest rate implies higher valuations. But the question is for how long can you keep that up? And so if we are gradually slowing down in our economic growth, is it possible that we can have these very high stock returns from here on forward? because the level of stock returns is in equilibrium tied to the growth rate of the economy. And so this is the reason why I was so happy with that at least now with AI, we are starting to see the first signs of positive economic growth news.

So it's still way too early to see what the long-term consequences of this are going to be. But I hope that long-term growth rates will start to come back up again a little bit. Right? Because in developed countries, we have long-term growth, expectations of maybe one or if we're at the high end, 2% or something, those are not very high economic growth rates. And so with low growth rates, it's tough to support high returns going forward. So low growth rates, low interest rates, low stock returns, that is that low return environment

that I think we should at least plan for for that scenario so that we're not surprised that if that is what occurs in the long term. which I guess one of the arguments for that would be the declining population growth in a lot of developed countries. Yes. So for example, I think if you look at Japan, Japan peaked its population in 2010, according to the United Nations. They will have roughly half the population left by 2100. That country will have been caught in half. I think that Europe will, in the current forecasts, will lose over 100 million people. China is going to lose multiple hundreds of million people between now and 2100, also because of the one child policy. I think that the main continent in the world that's still growing fast is Africa.

So Africa is currently, I believe, at one and a half billion will grow to something like four, if I remember correctly. So that country is very fast growing in its population. The rest of the world is already declining or will soon start declining. So on that happy note, what's the average investor to do? You know, I have mostly stocks in my 401k in my personal savings account. Should I be looking for those emerging markets? India would be an emerging market, which is difficult for the average investor to go towards. But the BRICS countries, there's also the option of real estate investment trusts.

So maybe I'm not just relying on the stock market. I can include real estate in them and looking for those, would you suggest looking for those alternatives outside of the stock market? Yeah, definitely, I would look internationally and also at alternatives outside the stock market, and I do think that many people have. I mean, I think that you see a very large interest of pension plans, of institutional investors, and others that are all trying to diversify across different investment opportunities. I mean, one of the reasons I think of the rise of private equity is also related to this. I think people are evaluating all the possible asset classes that they can find in trying to find

where the growth opportunities are. And I think that search is in itself a good thing. It may be possible that for certain asset classes, this can lead to certain bubble-type behavior where people get so overly excited about a particular new financial innovation that they bid up the price of certain things to very high levels. But I do think that this overall search for innovation and growth across sectors and across the world, I think, is a good thing. Yeah, I do worry about private equity, which you mentioned, I think, and you've expressed these reservations on your show. That's something that grew quite a bit with a low interest rate environment

because you have companies that are taking on a lot of OPM, taking a lot of other people's money, investing in smaller firms, loading them up with debt. And then not in every case, but in a lot of cases, they're looking for, let's say, three to seven year turnaround to, if not sell, put the company in a position to sell. The question now becomes a lot of investors, years are looking for interest rate cuts. Let's set that aside and assume you have somewhat

higher interest rates for longer. The debt becomes more expensive and maybe the assets, the businesses that they've purchased may need to be repriced. Maybe they go down in value and then what happens? No. So, and I think in the episode that we have on the podcast with Eric Zinterhofer, we need to talk about this indeed. And that is one of the upsides, I think, of stock market trade, firms is that you can view the stock market as this constant barometer that is constantly measuring any updates to valuation, anything that happens to the firm, anything that happens to interest rate, anything that happens to market-wide conditions. And there's this constant consensus mechanism. Doesn't mean that that consensus mechanism is always perfect, but it does seem that I think

having that consensus mechanism and being able to add that to your information set is better than not having that. And so once we rely on particular parties valuing a private equity company and doing that very infrequently, inevitably implies that even though, say, public valuations for certain things already go down, that means that you won't see that in the private equity sphere necessarily. Now, as you said, it is true that growth firms have recovered quite a bit this year. And so we'll see what that implies for private equity companies, because I do think that that a lot of these private equity investments share a lot of features with these long duration growth type investments.

And so it may be possible that in the end, by just waiting it out, they won't have to mark it down as much, right? But I do think that that's a bit tricky because in this particular case, they locked out and therefore much of that revaluation did not necessarily have to happen or not as much. generally I think it's important that prices will reflect what current valuations actually look like. And so in that sense, let's wait and see, let's see what markets will do in the coming year. And let's see what the private equity companies indeed are going to do when these valuations do come due. Now, one particularly tricky issue there is the following, right?

When we think about risk and when we think about putting things in our portfolio, we care a lot about the diversification process. properties that these investments have. And diversification, how we measure it, is how the valuation changes correlate with each other. So if I don't observe those valuation changes because people are not doing the valuation, you can make it look like it's a fantastic diversifier, even though in fact it isn't actually such a great diversifier that investment relative to the other investments that you hold. It's just that you make it not observable, that you don't observe the co-movement and that you therefore think it's a great diversifier. And so that's another tricky thing that is very hard to determine for private equity.

How much diversification does it truly provide compared to comparable publicly traded companies that you may already have in your portfolio? I also worry with private equity, and this is somewhat biased, is you're going to start seeing a longer time where a lot of these smaller firms have been under private equity ownership, sometimes multiple private equity ownerships, where they've been designed to go through these five-year cycles. And ultimately, that can do a lot of damage, right? Where you have these firms that might not be able to grow like they should because they're constantly put through this lowering costs, upping margins, squeeze. And how many times can you make that turn work

before the whole thing doesn't work? I understand what you're saying. And I'm sympathetic to that argument. Let me just for the sake of it give you the other side of the argument, right? Which is this. this is also more generally an important argument to think about. Valuations in public markets, if we believe that investors understand that stock investments are long duration long term investments, will by definition B long term view type valuations. And so if you ask managers to focus on maximizing the stock price, that is not something short-term. That is actually something long-term because the value at which you can sell something to somebody else, if that other person also thinks about the long-term, then they will understand that

you doing short-term things that hurt the value of the company. They will pay you less for that company if you want to sell it to them. So the only way in which you can say, oh, certain investors are just short-term maximizing earnings or manipulating them, it's just so that you're that they can sell it to somebody else at a higher price, you need in that argument, the assumption that the person you're selling it to is not particularly bright and doesn't understand that you've been doing that. Now, there may be arguments and reasons for why sometimes you might believe this, right? But I also want to point out that particularly in public markets, right, the level of competition

that we've seen there between qualified people, the number of professional investors in U.S. markets that are currently trading against each other is off the charts. Whereas in the post-war period, still a very large percentage of stocks was held by individual households. At this point, the vast majority of corporate equities is held by institutional investors. And those pretty much are all professionals in the investment field. So the person you're selling it to would then have to be fooled, even though they're just as much of professional as you are. And so the same thing, then let's translate that to private equity. If the purpose is that you sell it to somebody else, the private equity, or you do an IPO,

if that's the exit strategy that you have in mind for your private equity investment, you will still have to convince the person who buys it from you that it has long-term value. And so if you've been churning it too much through these cycles that you're talking about, and therefore you've been hurting the value of the company, then the only way in which you could sell it at a high price is, again, if the person that you sell it to has misunderstood how it all works and that you can fool them. And so I'm always a bit wary of strategies that rely on fooling other professional investors. It may sometimes work.

I'm not saying it doesn't, but it's at least something to think about. No, and I think to your point of more professional investors being in the market, I think that's why, and I know we disagree on individuals owning stocks and the benefit of that, but But it is important if you're going to go that route and own individual stocks to keep a much longer time horizon than many of the professional players who have access to data and knowing who you may be trading against. Yes. No, no, no, no one who's on the other side, I think is important.

There's no question about that. So tell me a little bit about this. I actually have two questions for you, if I may ask them to you. Oh, all right. Go for it. So before we go there, there's one very important question that I have for you. and which other guests may have asked. I absolutely love the name of the podcast.

And I want to know from you how you came up with it. And then I'll tell you why I think it's so important that you pick this name and what value this name has. Motley Full money? Yes. Well, the Motley Fool. Why did you take the Motley Fool reference? So it goes back to the idea that the fools are able to tell you the truth that many others cannot. So in a court jester, the fool is often the one who speaks truth to power.

And you can often do that with a little bit of humor. I love that. And the reason why I'm asking you this is that I think particularly in the current environment and also in the current environment at universities, the idea that there are people that can just speak to truth without having to worry about getting their heads chopped off has never been more valuable than it is today. And so I think that's just wonderful. I also don't want to make the assumption for someone listening to the first time.

I did not make the name the Motley Fool. I was hired a few years ago. That was named by our co-founders, Tom Gardner, David Gardner, Eric Rydholme, they're the founders who are genius enough to come up with that. I work on the talky part. But no, I think it is important. And one of the benefits that I've had working here is one is not, you know, I'll give you an example.

Bitcoin was hotly debated more so a couple years ago than it was now. none of the people who work here were told to have a certain opinion. This is the message you need to send about Bitcoin. And I think that you have to have that in any university and also any type of investment firm. Otherwise, you're going to fall into institutional thinking that's going to go a bad way very quickly. And I think that's why I've heard a lot of the ways that some of the ways that institutional firms make investing decisions.

And I think what ends up happening is someone pitching an investment, is not necessarily trying to pitch the best investment. They're trying to pitch something that will please their boss. And in doing so, you end up having, it becomes much more difficult for an institutional firm to beat the market than I would say than an average person who has a level of interest and wants to put some time in to learning about investing. No, I think that. And what you're bringing up there is absolutely key.

I mean, even when we think about truth finding and finding out what's really going on, the incentive structure that is in place matters a lot. If you incentivize people to say certain things and not others, you will get the answer that you incentivize them for, regardless of whether that's the truth or not. And I think that is important in the investment world. It's also incredibly important in the academic world today. I mean, we need to incentivize people to be the Galilei,

galileys of the world, right? So that they can say exactly what is the, what is the least preferred thing to be heard at that moment in time. If it is the innovation that we need to hear about, no matter how unpleasant, it's the way that we move forward. And I think for investment decisions, it's absolutely key. To have a culture within the investment firm that you work for that people that feel that the investment choices that are made are poorly motivated and not very properly thought through, do you have a culture inside that allows people that disagree to just speak up and say, I think these investments make no sense. And here's why. And I think one of the benefits, I would say, of individual investing off that point is you can disagree with something.

And there is a market value result of whether or not you are correct. Yeah. And while one may not beat the market in the long term, that's a difficult proposition. I'm hopeful that I can do it over a 30-year period. I don't know. I think that investing teaches you to forces, it forces someone to confront their biases in a way that's especially important right now. Yes, agreed. Where you can fall into, whether it's a problem in academia, as you mentioned, it's a problem on the internet where you can fall into circles of people who think just like you really, really easily.

And the longer you spend there, the more comfortable you get. But it's ultimately a bad outcome for you and the people around you. Yeah, because actually finding like-minded people like yourself has never been, been easier as it is today. Yeah. And as it turns out, people have a huge preference for hanging out with the people that say exactly the same thing as themselves, even though growing as a human being implies that you should constantly be confronted with people that think exactly the opposite to what

you're thinking. And so, yeah. So the second question, you said that we disagreed on individual stock investing. So tell me, tell me where you think we disagree. I'm curious. That basically it's a bad idea for people to invest in individual stocks. they should diversify as much as possible by only owning something like exchange traded funds or spread out investments like that.

And so what are your thoughts on this? That I think it's not just a series of coin flips that you can identify, that people can identify great businesses and by holding them for extraordinarily long periods of time, thinking about time durations that professional investors don't have the luxury of participating in, they can ultimately find an edge with patients. a little bit of research in hopefully finding biases where the market may be pricing things. Yeah, although that I don't think we disagree at all. I think our point generally also in our papers with Jonathan Berg is you can only make money

if you have a competitive advantage, right? You can make extra rents if you have a competitive advantage. And that competitive advantage can exist out of many different things. One of them is the information, although a little bit of research is going to be tough, I think, the way you mentioned it because I think that if your competitors do a lot of research, you may still be behind on the ball. But what you're essentially saying is that if institutional investors don't have the competitive advantage of being able to be long term and you are being able to, you can be

long term, then that's your competitive advantage and that allows you to outperform. That is certainly a hypothesis worth exploring. And there's still a hypothesis. I think I still want to see some more evidence for that hypothesis that that's true. I mean, there are institutional investors that potentially also are long-term investors because they're not as one year constrained as, say, mutual fund managers or others are in their compensation structure. But it's still possible that there are people that have competitive advantages there. Yeah. And I know we're low on time. I want to thank you for joining me on Motley Full Money.

I really enjoyed the conversation. Thank you for, I love having a little bit of polite disagreement on the show. And that's where we learn and that's where we grew up. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy ourselves stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll be back on Tuesday.

See you then.