The Compound and Friends - Chinese stocks soar, the New Nifty Fifty, how Acorns taught 7 million people to save and invest

Episode Date: July 10, 2020

On this episode of The Compound Show, Josh discusses this summer's huge rally in Chinese stocks, and the implications for investors when Europe and Asia seem to have done a better job addressing the pandemic. Vitaliy Katsenelson joins to talk about the problem with paying any price for growth stocks. Noah Kerner, the founder and CEO of Acorns joins Josh for a discussion about how he's taught 7 million people how easy it is to start investing at any age, with any dollar amount. Subscribe to the podcast and make sure to leave us a rating and review on iTunes, Spotify or Google. Ratings help a lot! Thank you! Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey, guys, it's JB. Great to be back with you this week. We have so much to go through today, plus a couple of great interviews with subject matter experts. Hang tight. Let's do the music. Welcome to The Compound Show with downtown Josh Brown. Josh is the CEO of Ritholtz Wealth Management. All opinions expressed by Josh or any podcast guest are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussed in this podcast. Okay, I have a couple of big interviews for you this week. First up,

we're going to talk with my friend Vitaly Katzenelson of IMA. Vitaly is a deep thinker. He is a dyed-in-the-wool contrarian. He pulls absolutely no punches about the growth stock craze currently dominating the stock market. Vitaly is basically like, look, no matter how great of a company it is, you're probably going to get either cut in half from here or see a decade of no returns when you buy stocks that are selling at 30, 40, 50 times earnings. He says it flat out. And it doesn't matter how great of a company you're buying or what their growth outlook is. And I think he makes a pretty compelling case that there are some investors out, not traders, some investors out there who are taking risks that they are unaware of.

And if you have this history of, you know, great growth, quote unquote, great companies in the 1960s and the 1990s, and you understand what the aftermath of that was, you might be doing things a little bit different with your portfolio. So I want you to stick around for that. Vitaly is great. You're going to love him. I also have Noah Kerner. Noah is the founder of Acorns.

Acorns began as this app where you could round up the amount of small change you had coming to you from an online purchase and have it rolled automatically into an investment portfolio, like very, very low cost, a dollar a month or something like that. But if you, let's say, bought lunch at Chipotle on the app and it was $9.21, they would round it up to $10 and put that remainder into a portfolio, which literally we're talking about pennies or acorns, if you will. But the contention was, look, if you don't do this, all that money, you just end up spending it anyway.

And if you do do this on a regular basis, it's not going to make you a millionaire overnight, but it's the beginning of a portfolio that you might otherwise be putting off until you get older and you have more disposable income. So I thought it was kind of a cool hack. It was like a kind of a thing where people who didn't even know they could be investors were able to become investors. And Acorns now has 7 million users. So they're doing something right and people clearly like the service. So we're going to talk to Noah after Vitaly. And I think both are really interesting, really entertaining, bright guys. So stick around for those. Today, I want to talk about international stocks versus US stocks, because just purely looking at the charts, it looks like

we could be at some sort of a turning point here. And I say that with a grain of salt, because there have been several moments in the recent past where we thought maybe a turning point would be in hand and has not happened yet. But I think this is really interesting. Here's the question. What if investors in some country stock markets are being rewarded because of the way that country handled the pandemic so far, and then investors in other country stock markets are being penalized because of the way that country handled its pandemic response. And so the first thing I want to talk about is Europe. And then we're going to get into Asia, which is where the real fireworks are happening right now.

Europe's interesting. They did a better job than we did at their pandemic response. So Italy was like this massive shit show that commanded the attention of the entire continent and the world. And I think there were some factors specific to the Italian healthcare system and the population in the most heavily affected area. And I think they also, they were caught by surprise. They just happened to have been one of the places, the ski resorts in the Alps, happened to have been one of the places, the ski resorts in the Alps, happened to have been one of the places where COVID struck first and people weren't even thinking about it or looking for it. So there was this confluence of events that made Italy look really bad initially. And then as the

virus spread throughout the continent, various governments took various actions to get very serious about the response. And by and large, they did a pretty good job. Like Germany is almost back to normal. They're making BMWs again. Even like England initially, they were like, ah, we'll see what happens. Don't worry about it. And then they did an about face and the prime minister himself was infected and they squashed it. So I have a friend in London,

I was on the phone with him last week. He was saying his kids were back in school. We have no schools open where I live. And we don't even have confirmation that schools will reopen in the fall. I hope I'm wrong about that. I hope it definitely happens. But I haven't heard anyone in New York or New Jersey say definite. It's definitely happening. So it would be a nightmare if it didn't. But this is a year of nightmares. So I don't even know if I'll be that surprised. But Europe has handled it better than we have. And as a result, there's a market watch story talking about some of the chief strategists, for example, BlackRock Investment Institute put something out. Barclays put something out.

Basically, they're saying, quote, mobility in Europe has rebounded quickly and is now on par with the level in the US. This bodes well for a pickup in activity, especially it comes with a lower risk of infection resurgence in our view. And these are quants that work for ETF firms. So of course, we should trust their views on the lower risk of infection. But anyway, be that as it may, in Europe, you're basically buying stocks that are anywhere from a third to two thirds less expensive than their US counterparts in terms of the overall index or indices. There are a lot of reasons for that. Obviously, US has technology giants. Europe just has a handful of big tech companies, and that's fueled a lot of the rise of US stocks.

Okay, fine. Put that aside. The outperformance over the last decade has been startling. the outperformance over the last decade has been startling. The Stocks Europe 600 benchmark index, which is like the European version of the S&P 500, has earned 8.1% over the last 10 years. The S&P, that sounds pretty good, right? The S&P 500 has done 14.2%. Now, if you take out technology stocks, I promise you, US probably looks more like Europe, but you can't, right? Technology stocks are now 27% of the S&P, and they've been growing as a percentage of the index throughout the decade. So you can't remove them.

I'm just making that point. So now there's this idea that Europe is about to get very aggressive with things like fiscal stimulus. And it also looks like they're getting closer to being a true monetary union. I don't know what the right phrase is, but historically, Germany has not been willing to use its own credit to backstop other European banking institutions. Whereas here in the US, we have like this federal, you know, we have FDIC and they don't really have, you know, they have kind of the worst of both worlds in Europe where, yes, European sovereigns can issue bonds. And, you know,

there's kind of safety in numbers there because there's like this implicit bailout that will happen if any of these countries get into a lot of trouble. Look at the credit spreads and the difference in yield and how those spreads have collapsed over the last 10 years, obviously, as the economy has gotten better. But also, as investors have come to realize, they're not really going to let Italy default. They're not really going to let Italy default. They're not really going to let Spain default. Like Germany and German banks and the European central authorities, they're not actually going to let that happen. And so you've seen spreads go from like, you know, in some countries like Greece, you've seen like 30% to 2% the difference in, let's say, an Italian sovereign bond over a German sovereign bond. It's almost indistinguishable now compared to what it was a decade ago.

Now they're making noises that Germany might put itself up as like backstopping deposits at banks and they're getting – they look like they're getting closer to this kind of federalist financial system, which I think would benefit them frankly if they did it. And of course, culturally, it wasn't popular. But like even three, four years ago when Brexit was at its peak, the mania over Brexit and they had the vote, we were really thinking that the European Union was about to be blown apart. But outside of Brexit and some extremists winning some elections in a few countries, it actually now seems that they're getting closer to a true monetary union. And if they pass

some sort of massive fiscal stimulus, that'll be another step in that direction. So I thought that was interesting. And the valuations in European stocks are what they are. I think the discount is maybe not warranted anymore. If European countries, by and large, have done a better job at keeping people paid, have done a better job at keeping people paid. And if you look at how they handled the economy in the pandemic, they didn't do like payroll protection shit.

They just basically took over the payrolls. European countries, the governments are paying workers. They've taken that away off of the shoulders of the businesses. They're literally just directly making payments to workers in the place of the employers. Now, I don't know how they back away from that. And I don't think that's going to be popular in America as an approach, but it is an approach. And there's this creeping kind of sentiment now that, you know, Europe, Europe has gotten some things right in this pandemic. And as a result, they're back to business. They are less susceptible to rollbacks because of resurgences in cases.

In the meanwhile, look over here. We had 60,000 f***ing cases yesterday. We're at 3 million cases in the United States. And not only is it not slowing down, in a lot of places, it's accelerating. So you could say, well, the average age of these new cases is 33 years old, and the ventilation rates are down, and the death rates are down. Okay, all true. But I don't feel like that's getting us back our economy. It's not getting me back into New York City where I belong. I'm still sitting in a guest bedroom every day. I don't know if it's getting – it didn't get my

kids back to summer camp and now we're all ready to kill each other. So the fact that this resurgence is younger people and it's less extremely ill people. That's great. But I don't think that that's getting the economy back. And now let's talk about Asia because Asia seems to have done the best. I don't want to go down the rabbit hole of, well, you can't trust their data and the Chinese are lying. I don't want to get into that stuff. Let's just talk about the Asian response.

They did real shutdowns. Culturally, they seem to have been more obedient when the government said put on masks. They did it. They were already accustomed to wearing masks in many places like Hong Kong and Taiwan. They didn't have to be told twice. Places like Singapore, when the government says something, they do it. I'm not saying that's better or worse. In America, we tend to be more individualistic. We tend to argue things more.

Some would argue it's a more democratic system and there should be debate. I don't know. Maybe in this situation, you just believe the authorities. Like maybe in this situation, when they stand on the podium at the White House and Dr. Fauci and Dr. Burke say masks help, even though it's an about face from them having said don't wear masks. I know that happened too. But when they say masks help, maybe just listen. I don't know. So they listened. They listened in Asia.

They did true lockdowns. They may have been more heavy handed than we could have been here for various reasons. But in the end, let's talk about the Asian stock market. Specifically, let's talk about China, which was where the disease originated. But we are now the epicenter. We are the eye of the storm. And here's what's going on with international stock markets. And it's a huge about face.

And here's what's going on with international stock markets. So, and it's a huge about face. So, over the last five years, Asia Pacific has underperformed the US total stock market by 39%. That's massive. And Europe has underperformed by 49%. So, that was then. Here's what's going on this summer. First things first, let's look at VWO, which is Vanguard's Emerging Markets Index, has had an absolute monster summer.

So first, we'll go back to April 1st. Back to April 1st, Vanguard Emerging Markets ETF, Vanguard Emerging Markets ETF, which is VWO, is up 29.14%, almost 30%. The US total stock market over the same period of time, April 1st through yesterday, up about 22%. So almost 50% outperformance. Europe's up, I think, 18% in that time. And Pacific is up 16%. When I say Pacific, basically I'm saying like Japan, Hong Kong and Japan. Huge outperformance since April 1st when it became apparent that they had done a better job in China and in South Korea and in other areas of the emerging world than we had

done in the United States. Now you could say, well, that's correlation, but not necessarily causal. All right. I don't know about that. Maybe it is, or maybe it is, maybe it isn't. Let's look at a little bit more recent history. Let's just look at what went% since the start of June through yesterday. That 16% is versus Europe up five, United States up three. So since June 1st, a fairly arbitrary short-term timeframe, US stocks are substantially lagging, emerging markets, and lagging to a decent degree, European stock market. And for me, I really do feel that that's a virus and pandemic story. I don't think it has anything to do with a growth rate of the overall GDP. I think it's just about the recovery and the odds of resurgence and where things have been tamped down and cleaned up and where they haven't. So let's address the elephant in the room. VWO, that Vanguard Emerging Markets ETF that I'm talking about, it's almost 44% Chinese stocks. So what's really driving the

performance there is China. Chinese stocks, I put this on my blog on Monday, even I was surprised. Chinese stocks hit a five-year high on Monday. So the highest levels they've been at since the summer of 2015, which is pretty remarkable, pretty remarkable. And what makes it even more remarkable is the fact that this is happening as US investors run away from Chinese stocks for various reasons, right? For various reasons. But this is from my friend, Brendan Ahern. Brendan is one of the founders of Craneshares, which is an ETF company that specializes in Chinese equity ETFs.

So of course, Brendan has a horse in this race, but a very smart guy. I've known Brendan for, I don't know, close to probably close to 10 years now. And he calls this rally happening in Chinese stocks, one of the most under-owned rallies ever. Here's Brendan quote, US investors have redeemed $1.2 billion worth of US listed Chinese equity ETFs, which represents 7.23% of assets year to date. So in other words, 7% of all the assets that US investors have in Chinese stock ETFs have been pulled out. And that's why they're rallying. So back to Brendan, this is despite the median China equity ETF being up 13.8% versus the S&P 500's year-to-date decline of 2.65%. And then he gets into broad EM. So broad emerging markets, things don't look much better. Investors

have redeemed 10 billion of US-listed equity emerging market ETFs, which is 6% of all of their assets. The three largest emerging market ETFs have lost a combined $14 billion in flows year to date. So US investors are still liquidating exposure to emerging markets, to China, and that's as they are starting to substantially outperform. And of course, we're talking about a short period of time. It'll be really interesting to see what the second half brings. Do these trends continue? It would be the first time in a long time that you'd be able to look back at the end of the year and say, thank God I was internationally diversified. Because I got to tell you, it's been years and years and years since anyone's done that with a straight face. So is this the year we're owning the European stock market,

the Japanese stock market, Chinese stock market, other emerging countries? By the way, India is having a great summer too. It's not just China. But is this the year where all of a sudden you look smart and you're rewarded for owning stocks outside the US? It's too soon to tell, but that would be a very interesting outcome of the pandemic era. It would be a reminder that the United States won't necessarily handle every crisis as well as other countries. crisis as well as other countries. And that would be a new argument for a very old concept of owning stocks internationally. It would be a new paradigm through which to look at the benefits of owning stocks in other countries. I think the consensus has become the opposite in recent years. And Jack Bogle, before he passed away, one of the main points he would

repeatedly hit on is, yes, I have international exposure. I get it in the form of the revenue and earnings that come into my US stocks from their foreign operations and subsidiaries. So he's basically saying, I don't need to own a stock that's listed on an exchange in Saudi Arabia or Indonesia or France or whatever, like I will get the benefit of the foreign operations of my blue chip US company holdings. And there's truth to that. And it's always funny when he would say that because, of course, that's the opposite of the house view at Vanguard. They sell a lot of international stock ETFs. So I'm sure they cringed every time they heard him say it publicly, but he said it and he said it a lot and he put it in his books. And the recent evidence, the recent history of stock market performance has kind of backed that

up. Again, Asia Pacific underperforming by 40%, Europe underperforming by 50% over the last five years. It's hard to look at that recent history and argue. But when you pull back your charts longer, you do see those benefits. But the recency bias affects everyone. So we know based on all of the data that we've seen from Vanguard and other large brokerage firms that have done these studies, we know the home country bias in the United States is alive and well. Investors in other countries have it too. But I think US investors on average have 85% of their equities are US stocks. And the United States stock market accounts for, I think, 57% or 58% of the global equity opportunity by market cap worldwide. So

we know that the typical US investor is substantially underweight international stocks. It has not hurt them in the last five years. I think that most portfolios managed by professional financial advisors would probably have a higher allocation to international, but I think it would be very rare to find any financial advisor who is materially underweight US and materially overweight international, especially emerging markets. I think that's almost like a tide too strong to swim against for a financial advisor because you have to then answer to clients almost every week. I saw the S&P made a new high. Why isn't my portfolio? So if that trend reverses and investors rediscover the opportunities overseas, the good news is there are cheap stocks.

And I'm not going to say the Chinese stock market is overly cheap because like here, they have these technology giants that seem to go up every day. But there are cheap stocks in Europe. There are cheap stocks in Japan. There are cheap stocks in China. There are cheap stocks in the United States too. But I think there's a much bigger opportunity to own more reasonably valued assets away from the S&P 500. And if investors end up rediscovering that, I think it's a net positive for portfolio management going forward because it's been a really long time. All right. That's my rant on international stocks.

I want to get into the Vitaly interview. Vitaly is based in Denver, extremely thoughtful guy. The two most interesting things we talk about, the first is this concept of the new nifty 50. And it's the FANG stocks that we talk about all the time that have come to dominate the market. But there are secondary and tertiary growth stocks that some of them are selling 30, 40 times revenue.

We don't even bat an eye. Stocks seem to go up every day. And I think Vitaly makes this really important point about at a certain point, you're buying a stock that can't go up no matter how good the future is for the underlying company because it's just completely divorced from reality. And a really great history lesson about the mid-1960s. And you had a lot of investors at that time exhibiting similar behaviors, what we have now. So we'll do that.

We'll get into Noah. Thanks so much for checking back in with me this week. I hope you love these interviews and we will bring more of them to you in the future. But for now, here's me and Vitaly Katzenelson. Hey, guys, it's Josh Brown. I'm here with a friend of mine. His name is Vitaly Katzenelson, and he is the blogger behind Contrarian Edge, which is one of my favorite sites. I look forward to the email alerts all the time.

Vitaly wrote something about one decision stocks. Is there any such company that you just automatically buy no matter what, no matter what the valuation is? I think you know what we're going to say, but let's get into the parallels between now and the nifty 50 stocks of the 1960s. For those of you who are watching, who are younger and don't have this history as part of your repertoire, you are going to learn a lot. So stick around. We'll get into it with Vitaly in a moment. Okay. First of all, good to see you, my friend. You are in, are you in Boulder or Denver? I'm in Denver. I'm in Denver. Denver. How are things in Denver? Everything's good? It's sunny. It's terrific. Okay. So good to see you. The last time you and I talked, I think we had dinner together in Denver, right? That's right.

Okay. And you paid? Possibly. All right. Well, next one's on me. Okay. So you wrote this post about the Nifty Fang. And you basically talk, I mean, everyone knows the names at this point, but you're talking about Facebook, Amazon, Apple, Netflix, Microsoft, Alphabet. These stocks have essentially become one decision stocks. And valuations for them have gone up quite a bit over the last five years, and especially this year. And they almost seem like you can say to people, you're just paying any price for the stock, why? And then they could say back to you, well, that's what I've been doing and it keeps working. So why wouldn't I? And I think what you got into in your post was the parallels between now and this period of time in the 1960s, where there were companies that were

perceived as being as dominant then as the companies we're talking about are now. What was the main point that you're trying to make here? Yeah, so I think the main point I wanted to make is this. If you are in 1973, the year I was born, and you look back six, seven years, and you look at Coke, at McDonald's, at Procter & Gamble, at Philip Morris, at Avon, every time you did not buy those stocks before then, they went up.

And those companies, a lot of them were actually capital asset-like companies like McDonald's, right? They don't own most of the restaurants. So they have an infinite return on capital, just like Google's and Facebook's to some degree. If you look at Coke, Coke may sell, you know, Coke is not the one who is actually bottling those products. They only sell syrup.

And so it's extremely capital light model. So if you look at those companies in the 73, you know, before 73, if you look back and every time you bought those stocks, you would have made money. And every time you didn't buy those stocks, you look like an idiot. Until 1973. From 1973 through 1980s, and I'm talking about 1982 and 1984,

those companies were basically what I would call war in the sideways markets. They basically went up and down. At times, they went down as much as 50%, 60%. So if you bought in 1973, at times you were down 50% or more. You had 10 to 12 years to get your money back. And the point I was trying to make is this, that the price you pay does matter.

The reason nothing should be one decision because it implies that the price you pay for a company doesn't matter. It does. You can have a great company that is tremendously overvalued, and therefore, it's going to be just a bad investment. You may love the product, but the asset is overvalued. I want to give you just a couple of data points, which I thought were fascinating. In 1973, McDonald's had revenues of $583 million, which was up basically in 1966, they were only $41 million. So previous seven years, they went from $41 million to $583 million. Now, fast forward 10 years.

In 1984, their revenues were $3.3 billion. So they went up 5 or 6x. Still, right? The stock price was flat. So you fundamentally could have been right, paying for whatever multiple you paid for McDonald's in the early 70s. And you said, well, I'm willing to pay up for McDonald's because they're going to grow like crazy. You would have been right. And you would have made no money in the stock. Exactly. Exactly.

Okay. And so the companies you talked about, actually, so if you look at the Fend stocks, right, they all trade about not an insane valuation. But, you know, in the past, it would have been insane. But, you know, 28, 30 times earnings. The companies actually warm even more than them are the ones that don't trade on earnings anymore. They trade based on revenues because they make no earnings. And this would be like Flossie and a whole bunch of other companies like that. Zoom, Datadog.

Exactly. There's probably 30 of them that we could rattle off right now. I know exactly what you're referring to. And so those companies, like you would call them super, super nifty 50s or whatever, because some of them are phenomenal businesses. But the problem, and some of them dominate that space, except they are so expensive that people don't want to say, they traded 2,000 times earnings. They would say, well, they traded 40 or 50 times revenues. So I think those are going to be even worse performers over the next five to 10 years. When you're buying a stock at 30 times revenues, you're basically saying, I don't intend to own this stock for long enough for the company to catch up to that multiple.

I'm bait. Like, I think there's you're almost implicitly saying, look, I'm buying the stock because it's going up. I really don't care what the multiple is. Like once something is 30 times revenue, you're basically saying you're not even looking at that. You're just trading the price. Would you agree that that's a lot of what we're seeing right now? Absolutely. You're not just this is actually this is kind of a David Portman point. Right. you're just trading the price. Would you agree that that's a lot of what we're seeing right now? Absolutely.

This is actually kind of a David Portner point, right? So just because you're buying stock does not make you an investor. Because you might as well be a gambler. When you're an investor, you basically do research and you're buying an asset. The same way you would be buying a gas station, the same way you would be buying a private company. That's what investors do. People who buy tickers just to sell them tomorrow for a higher price, those are basically degenerate gamblers. And in fact, you know, those people worry me even more than people that go into casinos because when you go to casino, you know that you're there to gamble.

Yeah. People who buy in stocks and sell them tomorrow, whatever, speculate, a lot of times they don't understand that they're actually gambling. And therefore, they're going to spend a lot and they're going to lose a lot more money in the process. Okay. So let's go into some of the stuff that you were saying. And I think this is an important point. The 60s parallel, I think, is really interesting because it's the last time that you had companies that were 14.5% of the S&P. It was AT&T and General Motors. Those two stocks were like almost 15% of the whole market. Right now, we have five stocks that are 22% of the market, which you really have to go back to the 60s to see anything like it. Maybe 99, there was a moment there too. But when you think about the companies that were dominant in the 1960s, there was a story

to be told for why valuations didn't matter and you should just buy them. And to your point, you say that there's always a germ of truth that starts out that line of thinking. So you're talking about McDonald's, Coca-Cola, Disney, IBM, Avon, Xerox, Philip Morris, Procter & Gamble. These were companies that had the world at their feet. They could do anything. They were expanding overseas. They were becoming conglomerates and getting into new industries. They were growing revenue.

They were growing earnings. They were becoming beloved consumer brands. And as a result, people were paying 50 times earnings for these companies. So I don't think we're at quite that extreme with Microsoft, Apple, Google, right at this moment. But you could see things heading in that direction, right? In the article, I referred to a table that basically, there were expensive Nifty 50 stocks, and those were maybe 50 to 60 times earnings. And there were cheap, in quotes, Nifty 50 stocks and those were 50 you know maybe 50 to 60 times earnings and they were cheap in quotes nifty 50 stocks and they were maybe 28 30 times earnings neither group you

you basically if you bought either group expensive stock with cheap stocks you basically would not have made any money it's just the question for how long it was it okay years or 12 years etc this is the point i want no this is this, you know, is really want to stress this point. You look at Microsoft, you look at Google, all, you know, it's, you know, those are global companies, right? And the, can you, you could argue that Mike, you know, the, the world is the oyster for Microsoft or Google, right? Yeah. The point I want to stress is this, that was the same case for McDonald's and Coke in 1970s, right? McDonald's was a very young company then. I don't know how many stores they had, but I promise you that was in

hundreds. Now they have, I don't know, 30,000. And so was Coke. It hasn't conquered the world yet. So I understand the canvas is very large, but still all the growth could be already priced into the company. Right. So you point out Coca-Cola. This is your words. Coca-Cola was as great a company in 1974 as it was in 1972. But the stock was still down 50% from its high in that two-year span. Coca-Cola was 47 times earnings in 1972.

So in other words, you were right. Coke is a great company, but you have to separate the company from the stock and what the stock's going to do prospectively into the future. So that was this moment, the mid-70s, where the brakes were just slammed on this, I guess it was probably an eight-year rally, right? 65 into 73, something like that. Yes. What is going to be the thing that changes the current trend with the large growth and technology stocks now? Does there have to be an event or can it be subtle and gradual at first? And then all of a sudden people look up and say,

hey, wait a minute, I haven't made any money in these stocks in three years. Like how exactly do you see that playing out? There are a couple of things. And actually, kind of interesting, I wrote the book, it falls into the book I wrote about the little book of sideways markets, which kind of talks about the psychology of that. A couple of things. First of all, if you talk about the big FANG stocks in general, first of all, they are very large already. So the low large numbers are already kicking in to some degree, right? So it's more difficult to grow revenues when it's $150 billion

than when it was $30 billion or $10 billion. So the growth rate will naturally slow down. And Google is constrained by this size to some degree of advertising market. So in the past, it was taking market share, for instance, from the non-digital companies. Well, it's already killed them. So that's point number one.

Point number two, I think those companies, as they got larger, they get a lot more scrutiny from the government, and we are seeing that because they become more powerful, which basically puts brakes on the growth somewhat. Another point is that they all have benefited from kind of the bubble that has kind of developed in the VC space. Because, you know, as a venture capital market, you know, was getting this crazy soft bank money, As the venture capital market was getting this crazy soft bank money, the small startup would get millions of dollars and VC would tell them, grow. And so they would hire engineers. That's fine.

But then they would also spend a tremendous amount of money on advertising and Google and Facebook, et cetera, to get customers. So some of that… And cloud services. Yes. Right? So definitely there was some revenue coming from sources that are not sustainable. Yeah. So I think you're going to have an actual growth slowdown in revenue growth. And you're probably going to have a higher margin.

Margins will probably be under pressure. And so you're going to see earnings slowing down. And then suddenly you say, well, do I really. And so that's, you're going to see earnings slowing down. And then suddenly the, you say, well, do I really want to pay 30 times earnings for this? You know, and then,

you know, that's, he starts compressing and that's, and so the PE was, that was a tailwind. And this is the key, right? The price to earnings,

when it went from low, you know, from 10 times to 30 times, it's actually supercharged the return for these companies. When it goes from 30 times to less, you know, is it 20, 25, or 15, then guess what? That's going to subtract from earnings growth. So you end up like it's like the company, like it's very difficult for you

and I to talk about 1960s in 70s. You and I were born in 70s. But you were around 1999 and you remember like walmart was a phenomenal company in 1999 right and like you had to own walmart and then from 1999 to i don't know five years ago you basically did not make any money if you bought it right and they grew earnings but it didn't help exactly because it was it was coming down from a multiple that was compressing. No, that's exactly right.

And so I think that is the point that most people don't appreciate today. And this is why it becomes one decision. You just buy, but you look at the company. You don't look at what is the company worth, which is the fair value. Right. So now one thing we didn't get into here, let's put aside Walt Disney and and let's put aside coca-cola and mcdonald's and procter and gamble because um despite the fact that you lost a lot of money in these names in in the 70s they survived they survived and on a total return basis if you held on to them for you know a decade or so you ended

up starting to make money again right and you you did a really good job pointing out how long you had to wait to get back to even. Walt Disney, you had to wait 13 years from 1973 to break even. Altria, which we know is Philip Morris back in the day, you had to wait seven years to get back to even. You had to wait 12 years in Coke. But then there's this other category of companies where they really never emerged again. It's not that they went away. They just became obsolete. Polaroid, Kodak, Avon, they were shells of their former selves. And it's hard to imagine saying that Apple could one day be obsolete or Microsoft or Alphabet, and maybe

they never will. But that's like Facebook. There's like another possibility out there as well. In addition to waiting a long time to make your money back, some of these companies could vanish. No, that's absolutely right. I think that's the point. People forget. You're right. How could Microsoft possibly go away, right? It's very difficult for us to imagine, and Google, et cetera. But then if you were in 1978 or 73, you looked at Kodak or Xerox or Avon, and at that time, you could not have imagined that those companies would either go away or basically lose their relevancy. What might be different now from then is the monopolistic power that the current giants enjoy and just the enormous oceans of cash. It's hard to compare Alphabet to Kodak. It's not that Kodak wasn't dominant.

It's that at its peak, they were never as profitable as an internet advertising model, and they never generated cash at that rate or stockpiled that much cash. So I think that's kind of where the analogy breaks down a little bit. These companies have enough capital to reinvent themselves 10 times. And I think they have to be willing to. Reinventing yourself is very difficult. So Xerox, like arguably, just think about Xerox for a second, right?

Xerox was basically the reason why there was Apple, right? Because Steve Jobs, you know, Xerox had the best Palo Alto research. Exactly, right?

But it was good at, but it was horrible at monetizing that research. So like, and I really don't want to go after Google here, but it was horrible at monetizing that research. So like, and I really don't want to go after Google here, but you may argue that Google may have the best research on a self-driving car, but we don't know if they can monetize it or not. So I'm, you know, so it's a, it's, it's very difficult to reinvent yourself. So again, I'm not saying Google is going to go away,

but what I'm saying is you need, you need to think about those companies on the back of your mind as well. So I want to ask you what the implications of this are for investors, because I understand one takeaway could be overweight your portfolio to value stocks and underweight your portfolio to the best companies in the market that are selling 30 times earnings. And do that because there either will be some mean reversion trade or it'll almost be like a risk management measure where you won't be overweight the most expensive, overloved stocks. I understand that that could be a potential takeaway. But the counter argument to me is, well, if the big stocks get in trouble, it's probably

going to hurt everything, including the economy. So I'm not sure that there is a portfolio construction answer to this puzzle, but maybe you disagree with that. Well, so this is a perfect segue to this topic that's very dear to me because I think this is one of the most interesting analogies that came up lately.

I call it the Fisher Random Chess Stock Market. Chaos. Chaos. So you know traditional chess. That sounds good. How much money can I wire into this chaos portfolio? So anyway, so if you think about it, right? So the, you know, normal chess, right?

The rules have been around for thousands of years, right? And then about 20, 30 years ago, Bobby Fischer came out with this, popularized this game called Fischer Random Chess. It's this, everything's the same except one thing. Every single game, every single game, the first rank where the queen, king, and other pieces are, it's randomized.

So if, you know, the king used to be in the middle and queen in the middle, they could end up being on the side. Okay. So here's the interesting part. When you play chess, you basically have three periods to the game. There is the beginning of the game, mid-game, and end-game. If you are a serious chess player,

you're going to spend hundreds and maybe thousands of hours of studying open positions, you know, kind of beginning game. Okay. And in the beginning of the game, you basically barely thinking about it because you already practice this so much that you know how to respond to almost any move your opponent makes. So it's almost very mindless. Okay. The, and then, you know, when you get to mid game and end game, you know, it's, you know, it-game, it's a lot more thought required. So what I would argue is that today VR environment, if you're approaching today's stock market or today's environment as if VR is just another recession, you may be playing a wrong game.

Because right now, you and I, or probably almost anybody who's alive, has not faced a pandemic of these proportions. The last time something like this happened, you had to go back to 1918. So it's 102 years ago, right? And this was a different environment, different economies, et cetera. So my point is this, every time you make a decision today,

you've got to be very different. You're going to think very carefully about the plate, that you are not make a decision today, you've got to be very different. You're going to think very carefully about the plate, you know, that you are not doing, you're not making a decision from the playbook that may not be,

does not apply to today's environment. So again, let me give you an example. I totally agree with that. I totally agree with that. Like, like go airlines, like,

you know, like, like, and this is an interesting point. Warren Buffett was one of the largest shareholders of airlines, right? And here's the interesting part. And then he sold it in March, right? What's interesting about this, two weeks before he sold them, he bought more of them.

And I would argue what he was doing at first, he was following just traditional recession playbook. You know, cyclical assets, recession, you buy them, then three years later, two years later, things normalize, you make a lot of money. And that's what probably he was doing first.

And then he realized that's the one playbook. Okay, so he has to rethink every move as if he knows nothing. But he doesn't sit tight while he's rethinking. He wipes the slate clean. Yes. And he takes massive losses, massive.

Yes. Even by Berkshire standards. I was joking around. I was saying, the guy's just listening to Bill Gates too much. But maybe that'll turn out to be prescient. The airlines had a huge rally after he sold, and now they appear to be giving back a little bit every week. It's too early to tell, back a little bit every week. It's a, it's too early to tell, right? Because the, and, and,

and the, the point I want to make about this Fisher random chess is that like the pieces have been completely rearranged. And so if you're playing, you know, you know, the playing this game as if it's a normal game of chess is very dangerous. So,

um, Playing this game as if it's a normal game of chess is very dangerous. So I had to rethink completely my portfolio from scratch during this crisis. So I think this is what everybody should be doing as well. So people who are saying Buffett lost his touch, et cetera, well, usually Buffett has the last laugh. Historically, that has been the case. I hope he has time to have the last laugh this time. All right. Listen, I want people to read more of your stuff. I think you are incredibly thoughtful. I learned so much reading you. So your blog is contrarianedge.com. And people should subscribe to your email list. And I know one of the things that you send out,

in addition to your very thoughtful investment posts is classical music recommendations. And I know you include a lot of art in your stuff. And I just I love getting it. It's really great. The classical stuff people can read on my favorite classical.com. And we have a kind of a poor man's podcast on an investor.fm where basically somebody reads you my articles. So if you don't want to strain your eyes, but you want to strain your ears, then you go to investor.fm, where basically somebody reads you my articles. So if you don't want to strain your eyes, but you want to strain your ears,

then you go to investor.fm and somebody, a guy just reading my articles. All right, listen, you're the man. I'm glad you're happy. I'm glad you're healthy. It's great to see you. Josh, it's my pleasure. Thank you.

I owe you dinner. I hope New York reopens and you can get back and see me sometime. Absolutely. All right. Hey guys, let us know what your thoughts are on the conversation Vitaly and I had. We love your feedback. Go ahead and leave us any ideas that you have on these topics below in the comments section.

Go ahead and subscribe to our channel if you have not already. Visit his blog at contrarianedge.com. And we will be back very soon. Okay. Hey guys, it's downtown Josh Brown. I'm here with a very special guest today, the founder of Acorns. His name is Noah Kerner. Noah's got a really hot business. Everyone's talking about it. You probably read about Acorns at least once a month, some new initiative they're trying. They are, in my opinion, one of the best up and coming investor apps out there. I think they're doing some really interesting things. And I'm really excited to have Noah on the show to talk about a new product they're launching. So stick around.

I think you're going to love it too. Okay. So first of all, Noah, it's a pleasure to meet you. For people that don't know what Acorns is, what's the elevator pitch for the app? So Acorns is the easiest way to save and invest for your future. We take all the friction out of the process. We allow you to do things as simple as invest, spare change, or make a recurring investment in your future. We also make it super easy to save for retirement. Now, as of today, we're making it possible to invest in your kids in as little as 60 seconds. So that's really what the product is. It's the easiest way to save and invest for your future.

Okay. So there are a lot of investing apps, but yours is very different. What you're basically doing is you're allowing people to make their regular purchases on their phones, on different apps, different e-commerce, things that people do. And then originally, the idea was like there's always spare change left over and they can round up and have that money automatically be contributed to an investment account for them. And I know that things have come a long way since then. contributed to an investment account for them. And I know that things have come a long way since then. But that's the general idea is that people don't need to start out with $50,000 in order to become investors. They can start small with whatever they have now and small numbers add up. Hence the moniker of the firm Acorns grow into Oak Trees. So talk a little bit about how far you've come since that initial concept and how people are using the app today. Yeah. So we've opened up over 7 million accounts

to date. And to your point, we started with this idea of spare change because it's really easy to understand. Everybody's got it. You've got it in your cup holder, in your couch, in your pocket, whatever. So the idea that you could invest something as small and simple as spare change, and that, like you said, that will start to add up over time, that was the genesis. And we believe that changing behavior is incredibly difficult. So if you can tap into something that people already have, already understand, and then make it really easy to take that to a sort of a new level, that that would be sort of the entry point. And to your point, broadening access for people,

for most Americans or most people around the world, it's very difficult to participate in this system called capitalism. And it's very difficult to get engaged in investing. How do I do it? I don't know what to do. I don't know what to select. I don't even know what this is. So I'll take you through the process of being a customer because I think that's a really easy way to understand it. So when you hear about Acorns, you download the app, you go through a couple easy steps. You link your bank account so that we can make deposits or you can make withdrawals if you want. You say, I want to turn on roundups, which is the feature we were talking about, which allows you to automatically invest spare change. You tell us some information, we select a portfolio for you, a diversified portfolio of stocks and bonds, and then you're immediately set up to start making these things we call micro investments.

And from there, there's all these other things you can do to contribute more to your saving and investing, right? So recently, a year and a half ago, we launched a full bank account with a card that rounds up in real time. There's a feature that allows you to automatically set a percentage of your paycheck to move into your investment and your retirement accounts. It just makes it really easy to save and invest as part of your life. And one of the biggest culprits in this sort of epidemic of the lack of savings epidemic in america is overspending so our our approach to everything is how do we help you save and invest as much as possible and in this in the spending area the way almost every company in in financial services oriented is to get you to spend more because they make money off

of your spending in our case it's let's help's help you spend smarter. Let's find ways to help you spend less so that you can save and invest more. And that's kind of the general philosophy. So customers are paying you between $1 and $3 a month, depending on which of the services they're using. Is that right? One to five. One, three, and five. Okay. So for $5, I'm an Acorn customer paying you $5 a month, which even for someone that doesn't have a lot of money, it's not that much considering what they're getting, obviously. But what do I get? spare change, make recurring investments. You get a retirement account where we automatically select the account for you and make it easy for you to contribute. You get a full kids account, so you can invest in as many kids as you have. And by the way, you can invest in any kid. It doesn't need to be your kid, a neighbor's kid. If you're a godparent or whatever, you can invest.

You get a full bank account with all these features that help you save and invest, no fees attached to it. Really simple kind of beautiful design. You get bonus investments and rewards and you get a whole financial literacy offering. We sort of talk about it as a financial wellness system because there's all these products that help you get more financially healthy. Okay. So the kids' accounts, they're going to be UGMA, gift to minor accounts or UTMA. But the signup process, I was playing with your app before. It's so seamless. It doesn't feel like you're sitting in a conference room at a brokerage firm filling out paperwork. It feels like you're just signing onto any app that you

use to do anything. So you guys have put a lot of thought and time and effort into the UI. And I think that pays off with the generation that we're talking about. for the customer. I mean, that's the focus. We talk about making big decisions small, don't make people do math. The history of financial services is an exercise in people figuring out math or acronyms or whatever, right? And I don't understand how to do these things myself. So it's like, how do you reduce things to the simplest form and make a wonderful experience for people? I mean, one of my favorite parts about the Acorns Early product, the kids account product, is we have this dynamic screen called the potential screen that shows the power of compounding. And it allows you to see, okay, if you change your contribution level, either the amount or the frequency, you can see how much that changes your

future over time. And like some of the statistics are pretty staggering. So if you were to start as early as birth, let's say you're about to have a new child. And the day the child is born, you decide you're going to contribute $5 a day into Acorns Early. When the child turns 18, the account transfers to that child. And let's say the child takes it over and stays committed to that $5 a day. By retirement, assuming an 8% compound return rate, you'd have four to four and a half million dollars. Okay. Now $5 will become much, much easier to contribute each day, five years from now, 10 years from now because of inflation. Correct. It's so easy to do. And I just, I love the Warren Buffett thing that compounding is the eighth wonder of the world. I just don't think most people understand that when you invest money, your money grows on top

of itself. And it's such a wonderful phenomenon. It's like, it's like everybody needs to understand how this works. So you can, you can save your way to wealth, but it's very difficult to save your way to wealth. Right. So you can give people like these illustrative examples. The one I like to use is placing the piece of rice on the chessboard and then doubling that and doubling that. And I think by the time you get to the last square of the chessboard, you have more rice than has ever been produced in the history of the world. And there are a lot of examples of that. But all right, so let me get into this with you a little bit. So you launched this early thing, income inequality, wealth disparities throughout society.

Like my personal opinion is those things are at the root of almost all of our major problems in this country, whether we're talking about politics or health or protests. That's really the root of it is that, yes, we have somewhat equality. But in reality, some people are more equal than others because they're starting 300 yards ahead before the gun is fired. I think that what you're doing could be a solution to a lot of those problems if enough people adopt it. There was an article in The Atlantic the other day about baby bonds, and they were looking at white and black families and the disparity. A typical white young adult has a net worth of around $50,000. The typical black young adult is more like $2,900. We know what accounts for that 16-fold difference. It's compounded going back generations of institutionalized

policies that have made it that way, which is completely unfair. What if everyone did this for their children at birth and gave them this early start, this early seed being planted? and gave them this early start, this early seed being planted. So I assume you guys have conversations about that internally. I would love to see 50 million children start out with an early account. So I love what you're doing. What are your thoughts about curing income equality early rather than trying to fix it later when it's much harder to do? Yeah, listen, I grew up in the East Village in New York going to public schools. All the kids I grew up with, like they and their parents didn't understand this stuff. You know, you learn it in school. You don't even learn it in college unless you really decide to study finance, right?

So everybody that doesn't have parents that fundamentally understand this stuff is born at a disadvantage. And even people who have parents that understand this stuff, it's just difficult stuff to understand. If you can get kids as early as birth engaged in this process, the parents start contributing. And then as soon as it's possible, and we focus a lot on financial literacy content, and we're actually producing a lot of family financial literacy content for the parents and the kids. Start engaging in those conversations with your kids. You know, make it part of like the discussion at the dinner table. Even things like taxes, like, you know, who learns how to do taxes? We don't learn how to do that stuff. But people in

this country did not learn, and pretty much almost all of us did not learn what investing is. We didn't have the access to engage in it. We weren't offered the tools of wealth making that allow you to participate in it. And the knowledge piece is so important. I just think it should be a conversation that parents have with their kids when they're growing up. When I was a kid in elementary school, their kids, when they're growing up. When I was a kid in elementary school, I think they mentioned investing once. They had somebody come in and set up a stock market like trading game. And not that that's bad, but that's not really teaching what we're talking about. Like we're talking about the time value of money and compounding and growing wealth and saving rather than spending. And none of that was ever mentioned. It was like, pick a stock and we'll see what team made the most money after six weeks. It was like almost

the opposite of what kids should be exposed to. But I think that's a really good point. So you guys get lumped into the conversation with a lot of the other investing apps, even though what you're doing and what you look like is night and day. And not that it's a bad thing. I guess if people are talking about you, it's visibility. But you've got some pretty, I think, prestigious backers of your firm. You're not yet a public company. CNBC, which I'm a contributor to, they're an investor and they do a lot of content with you guys. What are your plans for the future of Acorns? Where do you see this whole thing going? If you think about what most financial services companies are, and that includes fintech companies, they're basically drop-down menus of options.

Get this account, get this card, get this mortgage, get this thing. I don't think it's too cynical to say the root of this stuff is these are business opportunities for companies, and that seems to be the primary focus. The primary focus of Acorns is the customer and what's right for the customer and what's right for the everyday American. And our belief is that saving and investing money for the future is the center. It's the most important part of your financial life and that everything else you do in your financial life should point back to that and should point back to optimizing your saving and investing potential. So in terms of what we're doing in the future, you're going to see Acorns expand more and more

and more, but everything we do is going to point back to that. And like I was saying before around spending, we got into spending, the spending category. In other words, we have a debit card and a checking account because how you spend so deeply impacts your ability to save and invest. Overspending takes away from your ability to save and invest. Spending smartly, spending within your means, taking a portion of your paycheck right off the table as soon as it hits your Acorns account before you spend it is the best way for you to self-monitor, self-moderate your spending. So that's why at the touch of a button, we've got this feature. It's like, boom, your paycheck hits 10% goes into retirement and investment accounts. And you don't even

have to think about it. Right. And you don't have to, and you don't have to choose because you chose in advance. Yeah. We're all overspenders. I think we all like, we all love to spend. We're all addicted to spending. You put things in front of us that we like. People have this natural proclivity for buying things. So I know for myself, the best way to stop me from buying things is literally for me to have a device that takes the money before I can even spend it. By the way, on the other side of the equation, the number one reason people don't save and invest enough is, I mean, it's pretty obvious, is because they don't earn enough. So that's also a big focus for us. How do we help people? You're going to see us do more of this, but how do we help people earn more money? How do we find those opportunities when you spend on the side, even from new job opportunities? Because the earning power is so critical. What does that look like in the

context of the Acorns app? How do you help people earn more money? We help you earn more investing capital through 350 partnerships with the Postmates, the Ubers, the Nikes, the Chevrons. When you go there and you shop, they invest into your Acorns account as a reward for shopping. We've also got opportunities to earn money on the side. So we've got a whole bunch of partnerships that allow you to earn money by doing things on the side at night when you're not at your full-time job, if you have a full-time job. So on demand, on demand work. Okay. And young people and young people love that. I mean, they're, they're looking to do that stuff when they can. Right. Right. But you, you know, you can see sort of where this goes. Cause again, think of acorns as our, our entire reason for being is to help you save and invest money. What are the things we need to

do to help you save and invest as much money as possible? That's what you're going to see us do. Okay. So helping people with their behavior, setting up tools in advance so that they don't have to think about every time they're about to spend money. And then if they can make more money, even better. I love all those things. I really appreciate you coming on. And I just wanted to tell you, there aren't a lot of companies focused on the birth of a child. Let's make sure their investments made. We know about 529 plans. We know that a decent amount of people make use of them. But for every one person that makes use of them, there are probably five sets of parents who just, the whole thing is Greek. They can't even imagine opening up an account, let alone funding it. They don't know what the rules are,

the tax ramifications. So just putting these options in front of people in an intuitive format, I think is going to be game changing for a whole generation of new parents and then their children as they come of age. So I just wanted to tell you that. I think it's great. We will keep in touch with you on this. And I want to hear from the audience. What do you guys think? Have you guys checked out Acorns for yourself? If you haven't, now's as good a time as any. Go ahead and leave us some feedback. Go ahead and like the channel if you haven't already. Subscribe. Go ahead and follow Noah on all his channels too. We will be back very soon. Thanks for listening. Check us out at thecompoundnews.com for daily investing and market insights. You can watch

all of our videos at youtube.com slash thecompoundrwm. Talk to you next week.