The Compound and Friends - Adam Sandler’s Personal Finance: What Are Your Thoughts (with Josh and Michael)

Episode Date: January 7, 2020

On a new edition of What Are Your Thoughts, Josh Brown and Michael Batnick discuss the hottest topics in finance and investing:  * Is there any such thing as the optimal time to rebalance your portfolio?  * Is Instagram ad targeting weirding you out or doing you a favor? * Vanguard started the year off slashing commissions on options trades and mutual funds. * The median IPO has underperformed the stock market by 20 percentage points this decade! * Josh says 'Uncut Gems' starring Adam Sandler is actually a personal finance movie. * What was the biggest surprise of 2019?  * Bill Ackman delivered a 58% comeback performance in 2019, how'd he do it?  Let us know what your thoughts are on these topics, we love your feedback and comments! Happy New Year!  1-click play or subscribe on your favorite podcast app   Subscribe to the mini podcast on iTunes or Spotify    Enable our Alexa skill here - "Alexa, play the Compound show!"   Talk to us about your portfolio or financial plan here:  http://ritholtzwealth.com/   Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, I'm downtown Josh Brown. Happy New Year. Welcome to 2020. The first, the first, what are your thoughts of the year? I'm here as always with Michael Batnick. Michael doesn't know what I'm going to ask him about. I don't know what he's going to ask me about. Stick around. Let's see what's going on. All right, I'm going to go first. Nick Majuli wrote about rebalancing important, rebalancing within an asset class. Corey Hofstein just did that big piece about rebalancing between asset classes. I wanted to ask you two things about this. The first is, isn't the takeaway on rebalancing not so much that there is a silver bullet, like this is the exact right time and right amount, but just that you want to stick to doing the same thing consistently.

And even if it's not optimal, that's better than moving your rebalance around throughout the year. Is it like, would you say that's like the big takeaway with these things? Well, it depends who we're talking to, but I think the first thing that you said is correct. There is definitely no silver bullet rebalancing. We did this work years ago. Rebalancing timing luck is definitely a thing. Right. So it matters. Right. I don't really have a doubt. Well, so it has an effect. Yeah, absolutely. But it could change.

Like, in other words, you could look at the last 30 years and say, if you just rebalance in July, turns out that's better than August, September. Like, you can do that. Or you can say the optimal number of rebalances over the last 30 years has been two a year. So I would say it matters, but it's out of our hands for most people. Right. It's almost like a lucky thing that happens. But so then you don't want to keep changing what you're doing. Well, I think people like Corey that have the chops to really engineer something can

probably take a stab at it. Right. But for most people watching this, they should step away. Second part of that. Why do you think there's so much interest in rebalancing? Is it because so many financial advisors have settled on the idea that they're doing asset allocation and they're not doing individual stocks? So maybe this is something they could say, here's where we're different. Here's our rebalancing strategy.

I don't think there is a lot of interest in it. I think the only reason why there is some interest is because Corey writes about it. Corey, Nick, you've written about it, Ben is, I mean, we talk about it. Yeah, but it's not a hot topic. Okay, all right, what do you got? I wanna talk about Instagram targeting. Instagram targeted?

Targeting. Targeting, okay. I don't know if you noticed, but when you open Instagram, now on the bottom it says from Facebook. I think that's a new thing. Yeah. So Facebook targeting.

Yesterday somebody sent me an image in San Francisco. It's a giant billboard. And the picture of the billboard is a woman with an afro. I'm a bald man. I don't know if you noticed this. Yeah, you are. So I was on Instagram. I put this picture on Instagram and I scrolled down.

But you posted it as a post? Yes. Okay. What were you trying to say? What was the post? Unrelated to the hairstyle. No fee for a negative balance, I'm in. It was like a billboard.

It was like an LOL top thing. I got it. Got it. The next image that came up on my feed was some sort of athletic wear, whatever, because that's what I've been buying lately on Instagram. A man with an afro. Right. So you showed it to me. Holy cow.

So you were blown away by the fact that there's an algorithm reading the content of the picture? Yeah, like I don't know if I should be blown away, but I was. I'm still pretty blown away by that. Um, I mean, I assume that they did that because if someone's posting pictures of a product, they might want to buy a product. And obviously a person is not a product, but so then on the flip side, how come telephone companies or these robocalls can't figure out how to target properly? Because I just got a voicemail before we pressed record. The voicemail was in Asian. I don't know what language it was.

I get those too. It's in Chinese. So all the time. Yeah. How come they're like 30 years behind? I think those robocalls are like low-rent operations. And you're comparing it with Facebook, which is like a $700 billion corporation. And so one company has the resources to analyze the composition of a picture and show someone something similar.

And one company is just like, let's spread. Right, yeah. So what's next for Facebook, Instagram? Because I can't open Instagram anymore without buying something. They've, they know me so well. So that's like the double-edged sword is there are people like, Oh, Instagram spying on me. It's like, dude, you spent two hours on there a day. They give it to you for free. It's my personal shopper. Yeah. And what would you rather see? Like, do you want to see an ad for tennis rackets? If you've never posted anything about tennis before?

Wouldn't that be a waste of your time to look at that ad? At least they're showing you stuff that you buy all the time. Like, I don't know. It's okay. Like, that's the reality of the world we live in. Don't be upset about it. Vanguard started the—all right, so let me back up. The last Barons of the Year was— I think it was a cover story about Vanguard.

And the gist of the article was, is Vanguard losing its edge? I just want to read you one really quickly. Yet its castle is now under siege. Its low cost advantage is being eroded by advances in technology, industry consolidation, heightened competition. by advances in technology, industry consolidation, heightened competition. Index funds are so inexpensive across the industry

that Vanguard's prices are no longer the lowest. And then they go on and on. Competitors are circling, Charles Schwab, et cetera. So Vanguard started off the year, like five days later, cutting commissions on options trading

and I think mutual fund trading to zero. On the brokerage platform. On non-Vanguard products. On everything. Because Vanguard, their products were always for, I believe, commission free. Yeah, now it's everything on their platform you want to buy basically is nothing. Did Vanguard react to the Barron's article? Like, was this something they were going to do eventually?

And then the Barron's article kind of prodded them into dropping this on January 3rd or January 2nd. I don't think they moved that quickly. We saw Fidelity, TD. We saw them all react to Schwab within a week. Yeah, I think that Fidelity and TD had the red button ready for whenever it was going to occur. Right. So they planned ahead for this. I don't know that Vanguard's going to react to what Barron's Barron's. So on options trading, this was the last thing that you could charge money for in the world. As a brokerage platform, whether you're a huge investment bank with a brokerage arm or a discount broker, options were the sizzle. And so many commercials on financial television are options related because there was a margin there. You could charge $24 and then it was $12.

But like there was something. With options, you're gambling and there's no, like the entry fee is like irrelevant, right? You're trying to like triple your money. You're trying to put $2,000 into something that could be worth 10,000. So 24 bucks, who cares? So you don't care.

But I don't think that people on Vanguard's platform are trading options, do you? Well, that was surprising to me unless they're doing covered calls. Yeah, I mean, I'm sure that goes on. Yeah, right. I don't think they have as big of an options speculator business. So this in the article surprised me

that more than $2 trillion of Vanguard's funds are held through intermediaries. More than $2 trillion? What's an intermediary? Financial advisors? Yeah, yeah. No, that's not surprising. Why, you were surprised by that? Well, not. No, that's not surprising. Why? You were surprised

by that? Well, not necessarily just that, but the second part of that was it's the fastest growing part of their business. That surprised me. That financial advisor is using Vanguard funds. Yeah. No, I guess I'm not surprised by that either. But iShares has been

crushing it lately, so they don't have it to themselves. Anything else? No. What do you got? Let's talk about IPO performance. You gave me some stats yesterday. Yeah, I was shocked by this one. So you gave me the median, and I was like, well, what is the average? And your retort silenced me.

Yeah. Okay, so the median IPO performance over the last, what did I say, 10 years? Yeah, since 2010. I think from 2010 through the end of 2019, the median IPO performance was 20 percentage points worse than the market itself. So then I said, what was the average? And the average basically tracked the market. And then you said?

Yeah. And now the average is not as bad. And the reason is there are 2% of IPOs that do 200% or more. So it's like a market. It's so much worse. It's lottery tickets. But your point was you're not buying a basket of IPO stocks, so you really should use the median. Right.

So people are like, well, why would you use the median because it makes it look so much worse? It's like, no, the median is a more realistic way to think about how an individual investor would buy IPOs. There is no individual investor who can get access. Even if they said, I'm going to put $10,000 into every IPO that comes out this year, you probably couldn't. And you're certainly not doing it at an equal weight or cap weighting. Right. So the average IPO performance is irrelevant to the investor. All right. So what's the median is like, hey, I'm going to take a shot on a few IPOs this year. It's fucking worse than the lottery. So I looked at, there's an ETF for this,

the Renaissance IPO ETF. I don't know how it's weighted, but it came onto the market in October 2013. And it is up 63%. Since 2013? That's not good. S&P 500 is up 113%. So it did half the performance of the S&P 500. Yeah. Well, you're cherry picking. Why? I don't know. Okay.

I just feel like people are going to say that. Well, here's why this is relevant. There are still financial advisors, mostly who work at wire house firms, who are daily engaged in underwriting and bringing IPOs and secondaries and things that the investment bank is underwriting, bringing those to their high net worth investors as almost like, this is why you keep your money with me. So I would say- Because I can get you into IPOs. It's terrible. That's a tiny, tiny piece of the advisory assets. Would you say it's much bigger than I think?

No, it's a tiny piece, but it's a big part of what they sell as their value add. Got it. Still, you think still? Depends. If there's a hot IPO, then yes. I feel like sort of- This year, probably no.

I feel like after Facebook, that might've went away. You would say that, but then people could point to some massive winners that came out of the gates and worked out. There haven't been a lot lately. The high profile IPOs of last year were a bust. Lyft was a bust.

Uber was a bust. WeWork ended up not happening, although that would have been a bonanza. Slack. Slack was a bust. Peloton. Peloton blew up. Right. So depending on the year and how well the high profile deals did, that's when you would hear people crowing about, oh, look at all these IPOs I get you.

It turns out the median IPO does terribly. So when people say it's a stock picker's market, it really is an IPO picker's market. You have to really be in the right name because if you just take a shot on a bunch of them, it's very hard to do it. What do you got? Oh, it's me. I wanted to talk about Uncut Gems. We talked about the movie itself. I don't know how many people in our audience have seen it, so let's not do any spoilers. But it's a personal finance movie, I want to say.

Okay. It's a personal finance movie. All right, make the pitch. My big reaction, and I don't know how many personal finance movies there are, but that's the overarching theme of the movie. Because it's not about anything. It's a character study. But what it's really about is a guy who's living beyond his means. And obviously, it's a very exaggerated version of that. and I both grew up knowing people from Long Island, commute into the city, work in the

Garmin Center, work in the Diamond District, work on Wall Street, living like 10 times above what they could really afford. That's the story. Okay, good point. When I was a child, I had no concept of what people's parents did for a living. Right. I thought that the car they drove meant how much money they had. So did I. Which I think is what most children assume. I think that's what my kids think right much money they had. So did I.

Which I think is what most children assume. I think that's what my kids think right now. Yeah, I think absolutely. So Howard Ratner, for instance, drove an S-Class Mercedes. Yeah. Giant house and couldn't pay his bills. There's a scene where he puts his dad into a chauffeured car, but I don't think that's his dad's car. It was his father-in-law.

His father-in-law. He like puts him into a chauffeured Bentley. Yeah. Oh, I assumed that was his father-in-law. His father-in-law. He puts him into a chauffeur Bentley. Oh, I assumed that was his father-in-law's car, but you might be right. No, I think he hired the car just for that one event. The best description of that movie that I heard was from Cousin Sal. He said that the entire movie was like the last 30 minutes of Goodfellas. It was pure anxiety. I found it very uncomfortable.

The script itself, the way that they shot it, like the up close, everybody talking over each other. It was a very uncomfortable movie. But don't you feel like they captured New York that way? Isn't that what it's like to be, not in a diamond showroom, but like with 10 New Yorkers all talking over each other a mile a minute.

It felt very real and then my actually my friend adam he said he's like it was okay i didn't love it why the entire movie like i wanted the xanax i'm like but that was what they were trying to do to you they nailed it they so they nailed it he's like oh well i don't like that all right i got it all right right. See you. Okay. What was, take a second, what was the biggest surprise for you in 2019? Stock, asset class, like in terms of in the market? Well, besides like the performance. I don't know. Just go.

I would say the degree to which sentiment turned 180 from December through June, like that six month span. So you end last year with a 20% bear market in the S&P 500, much worse overseas, believe it or not. And then by the midpoint of the following year, you're up like 20% and you're on your way to being up 30%. And it didn't seem like anything had really changed in terms of fundamentals, other than like the Fed reversed course. And that's it. Nothing else was

required. In other words, earnings were still down on the year. Everyone who had been bearish on the market in January of last year because of earnings, like we're going to have an earnings recession, earnings are going to be flat to negative. They were right. And it just was so irrelevant. And sentiment was the whole reason for it. So just like the ability of the investor class to just completely change its mind. Do you think there are any lessons?

It's still astonishing. Any lessons to be learned there? Because that is the lesson. Like even if you nail, even if you nail the fundamentals and the macro economic conditions, you still may be wrong on what prices do in reaction to those fundamentals. Totally agree. However, what if we were sitting here today and the market was down 20%? Would they have been right and right? Yeah, but we don't get to have a counterfactual.

I did this post at the end of the year called No Asterisks, or the beginning of this year. I was basically like, look. That was very good, by the way. So in other words, all of your rhetoric, the Fed, international central banks, taxes, the president's crazy, like all of the shit, buybacks, all of the things that you're doing commentary on, they're all in the pot. They've already been stirred into the pot.

Now, the market could change its mind about these things. But at the end of the day, it's not like you're introducing new dynamics that everyone's not aware of. And still, this is a decade with zero recessions, a handful of cyclical bear markets, no new secular bear market. And we did about 15% a year on average in the S&P, only one down year out of 10. Like that's what happened. And you don't get to say, yeah, but it's only because X. X, we all agree that X happened. Like that's all in the pot. So anyway, that was my rant.

I wanted to ask you about the Bill Ackman comeback just to finish out here. He did 58% in 2019. The most interesting aspect to me, and I want to ask you about this part of it, he kind of gives Buffett a shout out in his letter about the need to have, I think he calls it permanent capital. So 80% of his hedge fund is now owned by his publicly traded vehicle, which is called Persian Square Holdings. So in other words, he doesn't have to answer to 100% of the dollars, the investors in the fund anymore. So he can still do what he does best, which is like super concentrated, gigantic positions, swing for the fences, feast and famine. Like that's what he's always done.

And now he can do it almost with impunity because he's not answering to 55,000 different pension funds or whatever. So my question is, shouldn't this be the goal of every speculator who's going to be a professional, is as quickly as you can, get rid of investors you have to answer to? Well, I mean, that's very difficult, obviously. Only a few people have that luxury. But you're right. And Buffett has spoken about this, like they would rather have lumpy returns that are this big and smooth that are this big. And it's really, really hard to stick with an investor who's feast or famine. Buffett figured this out in 1969. He that are this big. And it's really, really hard to stick with an investor who's feast or famine. Buffett figured this out in 1969.

He liquidated his partnership. So it's almost impossible. I thought the interesting thing about the Ackman numbers was that nobody was really talking about it. I didn't really see much buzz about it. Well, that's part two. He didn't show up at Iris Zone. He wasn't on the circuit.

He didn't come on TV. He didn't do 500-page slideshow, you know, trying to convince people that he's right. Like, he bought Chipotle in 2016. It was up 100% by the midpoint of 2019. Crushed it. He wasn't out there trying to get other people to agree with him. Yeah. And I thought that that was, like, really cool to see that come back.

Because, you know, we don't root against anybody. You shouldn't be rooting against people. So he had a really, really, really horrendous run, and now it looks like he's turned things around, and he emerges on the other side with nobody to answer to. He started this Pershing Square Holdings thing, I think, in 2014. It came public. I think it's public in Europe. It's a publicly traded vehicle to house his hedge fund

among other investments. And that's now where the capital comes from. So that's like, for me, if I were a professional speculator taking big shots like that, I think the only way to do it

is to not have to explain your trades to people. So anyway, all right. That's all I got. Is that all you got? Done. Guys, do me a favor. Go in the comments and compliment Michael on his button down shirt.

He did that for you. You spoke. We listened. And this is Michael Batnick 2.0, fresh for 2020. Let us know what your thoughts are on these topics. We love your feedback. Most of your feedback. Go ahead and subscribe if you're not already.

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