Prof G Markets - Your Brain is the Worst Investor in the Room — ft. Scott Nations

Episode Date: January 16, 2026

Ed Elson is joined by Scott Nations, President of Nations Indexes and author of “The Anxious Investor”, to break down why human psychology often leads to poor investment decisions, and what you can do to counteract it. He also shares his views on the boom in options trading, explains whether or not he believes we’re in a bubble, and outlines what his number one risk is for 2026. Check out our latest Prof G Markets newsletter Follow Prof G Markets on Instagram Follow Ed on Instagram, X and Substack Follow Scott on Instagram Send us your questions or comments by emailing [e-mail] Learn more about your ad choices. Visit podcastchoices.com/adchoices

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Markets are bigger than us. What you have here is a structural change in the world distribution. Cash is trash. Stocks look pretty attractive. Something's going to break. Forget about it. Welcome to Prof G Markets. Scott is still away.

He will be back on Monday, but we have a great interview. Today, we have been spending a lot of time this year thinking about how to invest in 26. We've been hearing the bull case. We've heard the bear case. Still, it is hard to know what to think. So today we are talking to someone who spent his whole career studying this stuff. He's also written a book on how to invest in uncertain times.

He's also written another book about U.S. market crashes. So we're very excited to speak with him. We're going to get into it now. This is our conversation with Scott. Nations, President of Nations Indexes, and author of The Anxious Investor. Scott, thank you very much for joining me on Profi Markets. Thanks for having me. So a lot we want to get into here.

I want to start with some concepts from your book, and then I want to sort of think about how we can apply these ideas to markets and how we can think about investing in 2026. But let's just start with your book. The opening line from The Anxious Investor is. quote, the human brain is ill-suited for making wise investment decisions. I love that. Why is the human brain so bad at making investment decisions? The simple explanation is that investing is relatively new and evolution is not. And so human beings evolved when they faced very different

decisions versus, you know, what should I do with my portfolio or that sort of thing? And let's face it, that for 100,000 years when humans were on the savannah, they had to become loss averse or risk averse, two different things, but they're related. Because the cost of making the right decision or the benefit for making the right decision would be relatively small. You might get that night's meal. But the cost of making a wrong decision could be catastrophic. And so we've evolved and we've been socialized in ways that just are not really compatible with making great investment decisions. And as I was writing the book and researching the behavioral biases that we all display, it dawned on me that of the 14 or 15 I talk about in the book, none of them, not a

single one, Ed, makes you a better investor. They all make you a poorer investor. They all hurt investment returns. And so that's why that is the case, because these biases were created hundreds of thousands of years ago in some cases. But unfortunately, investing is relatively new. The piece of data that you point out, and this is from Vanguard, which I find fascinating, is that behavioral biases, these biases that you talk about, on average, they reduce returns by 150 basis points per year. So that's minus one and a half percent because of whatever these evolutionary behavioral biases built into the human brain are. What are some of these biases? You mentioned loss aversion, risk aversion. What are some of the really bad ones that's

screw invest is up the most. There are a couple that are just particularly fascinating to me. Now, I spent 25 years as a proprietary option trader at the Chicago Mercantile Exchange. So trading for my own account, trading for my firm's proprietary account. And so I've seen all of these biases in action. I will say this. One of the ones that, as a proprietary trader, you have to really disabuse yourself of straight away, is the disposition effect.

And it's one of the most insidious but also common biases. Let's define our terms. The disposition of that is the tendency that all investors have to sell their winners and hold their losers. And there is some research which quantifies the loss that most investors experience by falling for this. That is, by selling their winners and holding their losers. And the reason I say it's insidious is because it's so easy to rationalize what you're doing. You're looking at your portfolio. You don't want to sell something to raise some money.

And so you say, well, this one's done really well. So I'm going to sell it. And I'm not being greedy. Pat myself on the back. I'm not going to be greedy. So I'm going to go ahead and take my big win there. On the other hand, you may be looking for something. And you say, you know what, this one's a loser.

It hasn't done very well. But, again, pat myself on the back. I'm going to be patient. I'm going to be patient, and so I'm going to hold on to my loser. But Professor Terry O'Dane at Cald-Berkeley is the one who's quantified the damage does to your portfolio, and he shows that over time, the winners that you sell will outperform the losers that you hold. What about if it could happen the other way where maybe, I mean, I don't know if this is a bias that affects investors as much as perhaps the disposition effect, but, you know, oh, the line's going up,

therefore, it must be continuing to go up forever as an example. Or the lines going down and so, oh, no, that's a bad thing. That's a red flag. Is that another bias that we see in the markets or is that less of a problem? That is certainly the case. And there are several biases at work here. One is, say, availability. So if you hear about the fact that, for example, Google just became a $4 trillion

company market cap wise. Well, that was in the new. So now if you're looking to buy something, Google will be top of mind for you, whether or not it's, you know, had a really great run and you think, oh, it's top of mind, so I'm going to buy it. And so that is certainly the case. But there are other biases that kind of intersect here. One would be hurting. Investors love to buy what everybody else is buying. In the pit, you learn that that's absolutely the wrong way to go.

but investors love to buy what other people are buying. So if they're piling into meme stocks like AMC or GameStop or Google or something else, it's done really well, then they love to get into it. They love to follow the herd. There's a social aspect to it, particularly with meme stocks. And so those are all biases that will ultimately generate inferior returns. One of the biases that you talk about, which I find really interesting, is this. idea of fantastic objects. It's fantastic spelled pH. And basically this is this idea that people will

buy stocks not necessarily because it's a good stock or because they've looked at the financials or whatever it is, but because they want to feel connected to the people who are behind that stock. So the example would be like in the 90s, you're buying Apple because you love Steve Jobs and you want to feel some sense of connection to Steve Jobs. Can you talk more about this one? I find this fascinating and always seeing this today. You've explained it perfectly. It is a situation where people, investors, are enamored of some well-known founder or business executive.

Often they're iconoclastic. They're often a little bit outside the box. They break the mold a little bit in 1999. in that period, Steve Jobs, Bill Gates, would have been the two perfect examples. And, yeah, people buy either the product or the stock because they get this sense that in doing so, they're closer to physically, emotionally, socially closer to Steve Jobs or Bill Gates. And so they buy the product, they use the product, or they buy the stock. And obviously, Bill Gates wants you to buy a Windows computer.

He wants you to use Windows. He wants you to use a bunch of Microsoft software. But he doesn't know that you're doing that. He doesn't know that you're on the stock. Not certainly particularly cares about that at this point. But people do fall for that. And the poster child right now would be Elon Musk. He is, he's in the news.

He's econoclastic. He does things very differently. Marches to his beat of his own drummer. whatever you want to say about him. But, you know, he builds a neat car, and people feel like if they buy a Tesla, they're a little bit closer to him in sympathy with him. And often they feel the same thing about the stock. If they buy Tesla stock, then, you know, maybe it's the Peter Lynch thing from so many decades ago.

You know, it's what I'm buying what I know. Well, you don't really know. But you like the story. And that's fine. And so you buy the stock. One thing it's so difficult about markets and about investing, I mean, those people who are buying Tesla stock because they like the story, because they like Elon Musk, they want to feel closely in, which I think is definitely true. And I think it is a problem. But they've been rewarded at the same time. They've done pretty well if you were a big fan of Elon Musk, and then it turns out a lot of people are a big fan of Elon Musk. Even if that is the primary force driving the valuation of the company, I'll get hate for saying that. But let's let's imagine it is, you're still being rewarded. And I guess this is the thing that I struggle with markets is it's all stories in a lot of ways. I mean, stories are what drive markets. Stories are

what drive valuation. I mean, there's obviously fundamentals too, but increasingly, stories seem to be what determine price. And so it sounds like part of the idea of eliminating your biases is to eliminate your susceptibility to stories. But at the same time, that's the whole ballgame. So how do you think about these concepts? How do you think about the difference between, I guess, narrative versus numbers, which wins in which situations? How should I think about stories when I'm investing? Sure. It's easy for an investor to say, I don't, it doesn't matter why. Yeah, Maybe I am falling for this and I buy Tesla stock because for all the wrong reasons that Scott's just enumerated. But it works.

I'm not the only one. And if I'm not the only one, and the same could be true for, you know, GameStop during the mean phase, I can make a bunch of money. And isn't that where, isn't that really what matters? And that's absolutely true. And, you know, I remember being in the pit. And there were times when you knew the pit was all one way, and it didn't really matter what the next print was 60 seconds later. If you know which way the pit is leaning, then that's half the battle. And so it's easy to say, well, you know, yeah, maybe it's crazy to buy Tesla stock because Elon is a kind of clastic.

But if it works, it works. The problem is that it works until it doesn't. Yes. And then when it doesn't, we still hold on too long because we have confidence in the company or the founder. And we hold on, we hold on, and we hold on. And we go through a series of stages, a little bit like the Kubler-Russ stages of grief. And it's only when we've gotten disgusted with ourselves that investors pull the plug sell, and that's often at the bottom.

So, you know, there's no way you can look at Tesla and explain away the premium that that stock brings, the multiple that that stock demands compared to the rest of the world automotive business. So, you know, if you want to buy it because you love Elon, then, okay, go ahead. But I think you're setting yourself up for a dynamic that will not work out in the long run. Yeah, I mean, it seems as though because of these biases and because, you know, I think the example of, okay, Google's in the news a lot, I'm thinking about Google more and now I'm inherently biased towards Google just because of this kind of arbitrary fact, which is I've been reading about it a lot. I keep on seeing the name. It makes me think that we can't quite trust our instincts, or maybe instinct is the wrong word, but we can't, quite trust our brains all the time. We can't trust our view at any given moment. And that leaves us with the question of, okay, then what should we trust? And I guess I would put that forward to you as a highly experienced investor and also as a trader, someone who has been in the pit who's been in

this game for a long time. What do you trust then? If you can't quite trust yourself, or maybe there's a way to trust yourself? Who are you supposed to trust if you can't rely on your own brain? I think one thing to do is to develop a process, tweak the process, and then when the process works, tweak it a little bit more improved, but start to rely on the process. And you're professional athletes talking about this all the time. And so if your process is, oh, boy, Google just became a $4 trillion company, let me buy 100 shares. Well, that process probably needs more than a little tweaking. Yes. But, you know, Warren Buffett probably put it most distinctly when he says that in the short term, the stock market's a voting machine. Lately, people have been

voting for Google. They've been voting for Tesla. But in the long term, it's a weighing machine. That is, it's objective. If you were to ask somebody to name, say, the 20 companies in the S&P 500, there'd be tremendous overlap between the stocks that everybody names, and they're either the biggest stocks or the ones that have been in the news. But, you know, that leaves about 480 stocks that may be great investments that just don't get any attention, that people just ignore. And if you're going to limit your investment universe to a tiny fraction of things that are available, then doesn't it seem like you're going to underperform versus somebody? who's looking at the entire universe of stocks.

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You want to have a broad understanding and a broad base of knowledge. You want to understand what's happening. So you want to be listening to other people, but at the same time, you don't want to be following other people just because that's what other people said. You don't want to just be the sheep in the herd. So as an investor and as a trader, how have you, experience that bias throughout your career? And are there any processes you employ to prevent falling susceptible to that? This goes hand in hand with another bias, and that is availability. So people tend to, and this is related to some of the other biases we've talked about already, if a potential

investment is available to you, available to your mind, your memory, then you're going to tend to invest in that. And so you just have to ask yourself, I think you just have to have a fearless conversation with yourself. Why? Why is this top of mind for me right now? Is it because my next door neighbor or the guy across the street or somebody else mentioned it or I saw that it has rallied a bunch? Is that why it's available to me? Or is it available to me because I think, given the news, that oil field services companies are going to do well. And then I look at the top two or three or four oil field services providers. And that's a very different process. And so I think you have to, again, tweak your process,

but also be honest with you. Why am I thinking about this now? Why am I doing this now? And if you can have that conversation with yourself, then I think you're going to end up being a better investor. I do think this is also applicable to life in general. It does seem as though we can't quite trust our emotions from any moment to another. And so the only real way to get anywhere is to have some process or maybe some list of values or some set of principles that you always return to. And then you can sort of figure out whether this is the right decision or the wrong one based on what you've already written and thought through on your own.

So I do think it's great advice. I just want to think about how this all applies to the year 2026, where, I mean, we're going to see a lot of these forces at play. I'm going to just list a few of the forces that I think are going to be big this year, and which happened to be subjects on which you are an expert. So one is extreme volatility. This is something we saw in 2025. We had Liberation Day. among other things, that is likely to continue. To a potential bubble.

This has been a big topic of conversation that we've been debating with various people in this podcast over the past six months or so. Three, an explosion in options trading, specifically zero-day options trading, which we can get into. Also an explosion in retail trading and what that might do to markets.

And then finally, I would add in to this, the arrival of prediction markets, which kind of became sort of a big deal, but now they appear to be a really big deal. There are more, but I mentioned these ones because you're an expert in all of them. You run a volatility index firm. You're an options trader. You've written about bubbles. You've written about crashes. Which forces are the most significant in your mind right now? And how do you see it playing out in 2026? The one that's going to be most important. important to most people is the second thing you mentioned, and that's the AI investment thesis. I don't know if it's a bubble yet. But let's let's try and run down and I'll be real quick with each

one. So extraordinary volatility. We saw that in April surrounding Trump tariffs. Markets been very quiet, the last, was very quiet the last half of 2025. We know it doesn't stay that way. Volatility. And when I talk about volatility, I generally mean both implied volatility. that is the cost of options, how risky option traders think the next 30 or 60 days are going to be, and then realize volatility how much the market actually bounces around. So hasn't bounced around very much. It's done really well, more or less straight up. S&P gained about 17% last year.

So this is one of those things that it will stay quiet until all of a sudden it doesn't. And there's a really geeky word about volatility. volatility is heteroscadastic, meaning it'll stay low for a while, and then some shock will come along, and it will jump, and it will stay high for a while. The shock and the jump is going to happen. Tomorrow, don't know. Next month, is it next year? We don't know. But people have to be, have to have a portfolio that can, whether that sort of thing, that's not overly, not overly aggressive. I'm interested to hear why we've seen this transition in volatility over the past year. I mean, we had a very volatile first half of the year, primarily due to the tariffs,

and then gradually, as you say, it becomes less volatile. And actually what we're experiencing now are some pretty big geopolitical events, political events, that you would think would royal investors, would spark some activity in the markets, spite some volatility. But in many cases, that isn't happening. And one thing that we've been discussing this week, for example, this criminal investigation of Jerome Powell, which had a reaction from markets, but less of a reaction than one might expect in previous years, for example. As a volatility expert, I just want to get your views on why this is happening. Is it maybe the talk of vacations of markets? Why is it that, we're

seeing less volatility today. Well, and I think another perfect example is the incursion into Venezuela. Yes. When I read about that, it was on a Saturday morning, I thought, oh, boy, I got to watch the futures markets open on Sunday night. And the lack of volatility was really staggering. It really was. Why is that happening now? I think people have just gotten inured to the fact that even if markets sell off, dip buyers will come in. And among some of the people who just blindly come in to buy stocks when they're down, it's by the effing dip. And that's worked.

It's worked for years. It worked after COVID. It worked this April. And so I think people, they're just fearless. They're fearless now. And we have to, unfortunately, we have to learn these lessons all over again. We will have some sort of ugly debacle. and stocks will probably fall 20 to 25% from their highs.

And it's only then, though, people will learn the lesson, oh, yeah, you know, this does happen. You know, markets don't go straight out. I shouldn't always buy the dip just because I can buy the dip. It's interesting because on the one hand, people seem to get very worried when there's a lot of volatility. I mean, the VIX, it's literally people call it the volatility index, the fear index.

I give there's a lot of volatility happening. That's a bad thing. But on the other hand, as you say, it's almost more concerning if there's no volatility in a situation like this, because it almost tells me people don't care or they're not even bothering to price in whatever downside risk there might be as a result of invading another country or threatening the Fed chair with a criminal investigation, whatever it might be. would you agree with that? I mean, one thing that I often try to figure out is why is it important to look at volatility and understand it, how can it actually help us as investors? I guess would you agree with my framing that I just laid out?

I would, but I would put it this way. And I've talked about this on Twitter for the last, say, four or five years when we've seen the price of options, That is implied volatility spike. And it'll try to do this without being real geeky. But there were times in the past, let's say two decades ago, if we saw, say, the VIX spike and spike meaningfully, it would take weeks or months for it to come back to a more normal level. That's not the case anymore.

There are now so many people that are rushing into cell volatility, that is sell options, whether it's for their own account, or one of these, the mammoth number of ETFs that are now engaged in volatility selling, that we're now to the point where if the VIX spikes on Tuesday, it's going to be very, very, very close to normal, back to normal, by Thursday or Friday. Just the legion of people who come in and sell these volatility spikes because it's always worked in the past. They want to sell options when they're really expensive. And it's the first cousin to buy the effing dip. Instead, this time they're talking about sell the spike in VIX. And it will work until it doesn't. Some people will really be hurt. And that's when we'll learn the lesson all

over again. We will get to the bubble, but just continuing down this thread here, this dynamic that you're describing of a lot more, this huge inflow of options traders who are trading off of this volatility, which is itself becoming almost its, it's its own industry. Something happens that gets people anxious and you see a lot of movement and activity, and then people go in there and try to scrape as much money as they can. And we're seeing a lot of this in the zero-day options market, which grew to 59% of total options volume in 2025. In other terms, these are the shortest term options available to traders. So I guess as an options trader, what do you make of this explosion in options trading that we're seeing,

specifically really short-term options? What does it tell you about the state of the markets right now? Yeah, I think there are, let's say, three things going on that have, that drive this explosion in option trading. One is that options can be a great tool. And I like to point out that, you know, if you buy a stock or you short the stock, then, you know, your payoff profile is, it's a 45-degree line. On the other hand, if you add options to some sort of equity position, then you can create superior, completely different, but superior payoff profiles by combining the two. And it took a while for people to really understand that and to grasp that and to come on board. It also helped that all of the online brokers now charge zero commissions.

So if you were dubious before, you have less reason to be dubious now and you might try your hand at option trading. And then the gamification of zero DTE options. That's an analogy to the meme stock craze. I'm not a huge fan of zero DTE options because of that. The things that really make options, a neat vehicle, they kind of break down when you're talking about zero DTE options. It's more of a bet. It's more of a speculation.

I understand why it's happening and you can't ignore it, but I'm not certain it's going to be good for very many people's portfolios. Well, it seems that it is another part of the gambling trend at large in the stock market and in the options market. I mean, it seems as though whether it's zero-day options, also perpetual futures, which we've been starting to hear more about, these basically no expiration date futures, where you can get like 20 to 100 X leverage,

and they're exploding right now, especially on decentralized exchanges, specifically in crypto, and obviously we've got the means stock craze, obviously the prediction markets as well. Are you concerned that this could lead us to some, I mean, obviously a lot of people are losing money probably on these trades, is my assumption.

But could this create something larger? Is this a larger problem than people perhaps think it is right now? Yeah, that's interesting. So the book that I wrote before the anxious investor was a history of the U.S. in five crashes. I write about the five modern American stock market crashes. And one thing I write about there is that each one is attended by a new novel financial contraption that injects leverage at the worst possible time. So in 1987, it was portfolio insurance. What could be better than portfolio insurance? Well, the way it was actually executed was horrible because it just drove the stock market nearly down to zero. the guy responsible for running portfolio insurance for the biggest portfolio insurer, at one point said, nope, I'm going to stop because if I sell everything I'm supposed to, I'm going to drive the market down to zero. That was his quote. In 2008, it was mortgage-backed securities.

So are the prediction mark, could that be the prediction markets this time? I'm not sure they're going to have the opportunity to get big enough to really cause a problem. But, and you can say what you want to about options or futures. But when I became a member originally in the Chicago Board of Trade, they hammered home the point that futures markets were there to help people hedge risk, whether it's your wheat farmer or your flour mill or you're an insurance company and you need exposure to the S&P 500 or whatever. That's not going on with the prediction markets. Nobody has a risk to hedge if they want to bet on what happens in Venezuela over the next 30 days.

They don't have that. That's not a risk that they need to hedge. And so it's, yeah, it's gamification. And worries about insider trading abound now. Worries that people are not really reading the details of the contracts. So they don't really understand what they're betting on. And then it's a bet. It's not an investment.

It's not a hedge. So I understand why people are enamored because they're new. And these things are timely. They're available. They're salient. And so the biases run away with us because now we think we have an opportunity to bet on something that's top of mind for us. And our biases run away with us. What do you think about the fact that they're now getting pretty significant institutional backing? I think the most important example would be intercontinental exchange, which owns the New York Stock Exchange. They last year, earlier this year, made a $2 billion investment into Polly Market. So when I look at what's happening in the backing that we're seeing of these platforms, and, you know, I feel like most of us agree that it's gambling.

I feel like most of us agree that it's not really investing or it's closer to gambling than it is to investing. And yet it does seem that we're all on board that it's just going to happen anyway. Do you think that that is the case? I mean, you don't want to infantilize investing. and say, no, you're not allowed to bet on stuff. But I don't know, at the same time, there seems to be a lot of risk involved here, a lot of downside, and people could get burned.

I mean, what do you make of the fact that it seems that America has decided this is fair game? We do this as a society, and as you pointed out, we don't want to tell people, we know what's good for you. And so to the degree that somebody wants to make a reasonable wager for entertainment purposes on Monday's national title game. I'm like, okay, but to the degree that somebody tries to convince us that we can fold something on polymarket about some geopolitical event into a portfolio of stocks and bonds,

that may be a bridge too far. What about ICE investing in polymarket? you know, it's, they think that there's something there. They think it will continue to grow. They may see other opportunities. For example, there may be the opportunity to do something that is more strictly financial. Where will the S&P 500 be at the end of the month? Will the Federal Reserve cut rates before the April meeting?

For most people, those are not hedges. And if you want to hedge that, there are better venues than a prediction market that's going to be zero. or 100 at the end of the day. And that's why I say they're not hedges. If it's zero or 100 at the end of the day and there's nothing in between, that's not a hedge. That's a bet. And so ICE sees some upside. They see some opportunity.

Okay, even if you're not a fan of crypto, you have to admit that blockchain is a tremendous opportunity. And so you might want to invest in a blockchain company. We'll be right back. And for even more markets content, sign up for our newsletter at profiteymarkets.com slash subscribe. Support for the show comes from Vanguard. As we step into a new year,

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We're back with Profty Markets. Let's talk about the bubble, the potential bubble. this has been kind of dominating conversation. What is your view on this? Do you believe we are in a bubble? Are we not in a bubble? How do you think it all unfolds in 2026? If you've been paying attention in, say, finance for the past 12 months,

you know that AI is going to say has the capacity to change things fundamentally. I'll go further. I believe AI will change things fundamentally in finance in the next five years. Are we in a bubble? In 1999, if you looked at some of the valuations for those internet businesses, you know, a lot of them were losing money, and they were still trading on $100, $200, $300 a share. Another paper that I wrote about in my book is in 1999, the average jump, if somebody just added dot-com to their company name, even if they had nothing to do with the internet,

Bob's Plumbing.com, if it's publicly traded, it would tend to jump the next day. That's clearly a bubble. What about AI? You know, if you look at some of the big names that are involved, whether it's Google or Nvidia, they're big names, but they make good money. P.E. ratio can be really high, so you got really believe the story. But, you know, we've not had a bunch of crazy IPOs of AI companies. And so are we in a bubble? I think we're in a little bit of a bubble, but this could be a bubble that we grow into. AI just has so much potential to change what we do, how we do it, that if you want to invest with a thesis that AI is really going to change the world in the next five years, I'm never going to try to dissuade you from that, although,

I would hope everybody would do it in a sensible way. Going back to your point that, you know, you've written this book about crashes, a history of the United States and five crashes. You say that there's always this some financial contraption that comes in at the totally wrong time. Portfolio insurance was an example. Mortgage-backed securities in the previous crash. Looking at, let's assume that maybe it's a bubble.

or that we have one in the next few years, what do you think the financial contraption would look like in the next few years? Or is there anything, are there any financial instruments that you find more concerning than others right now? Yeah, that's the question. And the other question is,

when's the next one going to happen? Yeah. And I'll be the first one to point out that, I am not a bear. The stock market tends to go up over time. I write about five crashes. And the first one happened in 1907, so that's five in well longer than a century. So they're rare, which is great because the crashes do tremendous damage to investor's psyche

and for a long, long, long time. People who live through the crash of 1929, even if they lived another 30 or 40 or 50 years, many of them just refuse to ever trust the stock market again. These contraptions, they inject leverage at the worst possible time. and mortgage-backed securities. At the time, they were invented, they were a wonderful thing, perfectly reasonable, great solution to a problem.

But now you do have to look around every once in a while and see if you can't find the contraption that could cause problems in the future. I don't think it's crypto because I don't think people will be able to get enough leverage in crypto. I don't think it's prediction markets because I don't think they can be big enough to bring down the entire, what is a $40 trillion U.S. stock market.

But one thing that could cause real problems is private credit for a couple of reasons is it's opaque, it's huge, and it has the potential to do a little bit like what long-term capital did in the late 1990s. And that is, if the problems in private credit get big enough, and again, it's opaque. We don't know how big the market really is, then it could come along and be sneaky dangerous for one of the big pillar financial organizations, whether it's a big investment bank or one of the big commercial banks. And if that were to happen, then again, we'd have something like what happened with long-term capital. S&P lost 14% in the month that year. So I think that's the real risk.

And again, largely because it's opaque. This seems to be the story that needs a lot more attention in 2026. I mean, I think that when we look at the possibility of there being a bubble, I compare it to what we saw in 99 in 2000, for example, where there was way more leverage on the biggest names. And so it was a lot more concerning. Also, the valuations were way higher and way crazy than we're seeing today. So I'm not that concerned about it right now, to be honest.

But the part where I do get a little concerned is a lot of the leverage is actually tied up in these private credit firms for which we know almost nothing about. Like, you know, META is building these data centers. And then we saw what happened with Blue Owl where they're not actually reporting the debt on their own balance sheet. It's being outsourced to all of these other private credit funds. And we don't really know where the debt even is. And once I started to realize that, suddenly I started to think, okay, well, we're trying to measure the leverage.

We have no idea. We don't have a clue. So it's almost moot to try to do that right now if you have this massively expanding industry that is private credit and which is new and which has caused some bankruptcies that we've seen. First brands would probably be the best example.

So I guess, I appreciate you bringing it up, and I appreciate hearing that it is a concern to you. How big of a concern is it to you? It is a big concern. Unfortunately, it's difficult to quantify now. Why is it a concern? Well, not only is it big, we do know it's big, it's opaque, but also these are often second and third-tier credit risks.

So if you're a AAA company and you want to borrow money, there are lots of ways you can do it very cheaply. if you're just a couple of notches above junk, then that's when you go into the private credit market. And so that's why it's dangerous. And the fact that we're just now becoming aware of the problem, I think, is a problem in and of itself. For example, most people in finance

and never even heard of portfolio insurance until the Wall Street Journal started writing about it in early October of 1987. Looking ahead to the rest of the year, any things, any themes that you think that we should be paying more attention to, perhaps that we're not talking enough about, anything that you're really focused on going into the year? Yeah, I think one thing to pay attention to is the fact that the Federal Reserve

is going to lower interest rates through the remainder of the year. Chairman Powell is going to lose the chairmanship this spring. The new chair is almost certainly going to have promised President Trump, that they'll drive to lower rates. I think they'll be able to do that. But I would make two points now. Rates should not be lower because if you look at the Fed's dual mandate, it's inflation of 2% or less.

Well, we learned today that inflation's at 2.7%. So the way that you bring inflation down is not to lower interest rates and allow people to buy even more stuff. Second thing is second part of the dual mandate is employment, full employment. that's generally considered unemployment rate of 5% or below. Well, the unemployment rate's 4.4%.

So lowering rates is just not appropriate for the current environment we're in unless you're looking at it from a political point of view. Second point about rates, the Federal Reserve has done way more damage, way more damage. And they did this in 2002 through 2006, and they did it in 1929.

They do way more damage when they keep rates too low for too long than they do when they hold rates steady or keep them even a little bit too high. So it is so easy, when money is cheap, it's so easy to borrow and rush out and buy a bunch of stocks. It sounds like maybe your biggest risk of the year,

which I think I'd probably agree with, would be inflation. I mean, that is the downside here is if we continue to lower rates. Also, I mean, we look at the inflation numbers that we're seeing because we have all of this data that we didn't get in October,

it's likely a lot higher and you look at any third party firm that's measuring prices, they'll tell you it's 3% or higher, which all makes me think, I mean, it makes me even more concerned about the inflation problem that we're trying to paper over it

with this data that you can't really trust right now, plus we've got this pressure on the Fed to lower rates, plus this 2% number, which is their stated goal, and it seems they just abandoned it. It seems, at least. Is inflation sort of your number one risk in 26? Inflation, yes, but not just what it costs to fill up your supermarket basket,

but what happens when rates are too low, then all sorts of assets get too expensive. And by too expensive, I mean expensive beyond fundamentals in a way that is dangerous. It doesn't matter if it's the stock market or the bond market or precious metals or crypto or whatever. I think that's the real risk because once these get to levels that are unsustainable, then if there's a shock or people start to backtrack a little bit or rethink, then you can get a really violent reaction. And that's the danger. And again, there's no way to reconcile the economic data we're getting and a Federal Reserve that's likely to cut interest rates by, say, 75 basis points through the rest of the year.

I just before we wrap here, you've had an incredible career as an investor, as a trader, you're also a writer. Any advice for young investors who are thinking about their portfolios this year? What would your advice be to young people today? Yeah, to young people today, it would be very simple. Max out your 401k, max out your potential IRA contribution, invest that money in a very reasonable basket of assets. If you're not yet 30, that's probably 70-30. If you're 30, it's probably 60-40. And by that I mean S&P versus bonds. And don't trade it. If it's an investment for the long term, don't trade it. Don't think you're smarter than the market because there are a number

of biases that convince people that they should be trading their retirement money or their investment money all the time. Don't. Leave it. Max out your contributions, but then leave it alone. And you'll be amazed the amount of money you'll have in 10 years. Scott Nations is the author of the anxious investor, as well as a history of the United States and five crashes. Scott is also the president and chief investment officer of Nations indexes, the world's leading independent developer of volatility indices and option strategy indices. Scott, really appreciate your time. Thank you. This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research team is Dan Shilan, Isabella Kinsel, Chris O'Donoghue, and Mia Silverio.

Drew Burrows is our technical director, and Catherine Dillon is our executive producer. Thank you for listening to Profugee Markets from Profit Media. If you liked what you heard, give us a follow and join us for a fresh take on markets on Monday. Support for this show comes from Odu. Running a business is hard enough, so why make it harder, with it doesn't. different apps that don't talk to each other. Introducing O-DU. It's the only business software you'll ever need.

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