The Compound and Friends - One Fifth of Investors Sold All Their Stocks: What Are Your Thoughts?

Episode Date: June 19, 2020

On the new edition of What Are Your Thoughts with Michael Batnick and Josh Brown:  - Bubble behavior in a market crisis is nothing new or unusual.  - Fidelity says 18% of investors sold out of all their stocks during the last few months, and a third of investors over 65 years old!  - With the Fed buying the investment grade bonds of Apple and Microsoft, do its critics have a point?  - What did we learn from this crisis?  - Eating at restaurants again - weird but satisfying.  - Does Michael watch movies just to torture himself? Plus, why Josh likes westerns.  - Apple's App Store facilitated over half a trillion dollars in commerce last year!  Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Hey everyone, it's your boy downtown Josh Brown. Welcome to the new and improved Compound Show. Historically, this podcast has been the audio segment of our YouTube shows, but I've made it a special project this summer and we're going to revamp the whole thing. So play the music and I will explain on the other side. Welcome to the Compound Show podcast. Each week, we let you in on some of the best conversations we're having about markets, investing, and life. Just a quick reminder, the hosts of this show are

employees of Ritholtz Wealth Management. All opinions expressed are solely their own opinions and do not reflect the opinion of Ritholtz Wealth. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Ritholtz Wealth. 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, here we go. Okay, welcome back. So here's what's going on. Going forward, the podcast will be posted Thursday night each week. So every Friday when you wake up, you'll have a brand new episode.

I'll be opening the show with my thoughts on everything going on in the markets and in the news, sharing some of the best stuff I've read or listened to that you might have missed. We're going to take some listener questions and try to answer the best ones. And the second half will be interviews. We're going to do what are your thoughts with Michael Batnick and whatever stuff that we've done during the course of that week. So you'll always have new content in the podcast. Again, posted every Thursday night for Friday morning and weekend listening.

I was listening to the founder and CEO of Spotify. His name is Daniel Ek. He was on Patrick O'Shaughnessy's show. And he was saying voice recordings or podcasts are the closest thing to real life of all the creative mediums out there. So what he's talking about is podcasts and listening to someone's audio recording is more realistic than a movie or a TV show because what you're watching on screen has been manipulated or you're only seeing the action from one angle or two angles. Whereas an audio recording, it's like being in the room with somebody who's talking.

So Daniel was telling the story about, I think he said he was in a recording studio listening to the playback of banter with John Lennon and Paul McCartney between takes from the recording of the Beatles White Album. And he got the chills because it was like being there in the room with John and Paul talking in between recording the songs and making jokes with each other. And you might have heard that before, but he was saying like just listening to that on high fidelity sound system was the closest to real life of any other, you know, more so than writing, more so than watching. So Daniel X making a huge bet on podcasts.

Daniel X making a huge bet on podcasts. Spotify bought the Joe Rogan Show, which is maybe the highest rated or the most downloaded podcast each week. And then he also bought the Ringer Network, which is Bill Simmons. And on the Ringer Network, they have three dozen other shows. Some of them are about sports. Some of them are about pop culture. But Spotify bought the whole thing. So he's basically going to build this premium podcast network behind a paywall and fans of Joe Rogan, fans of Bill Simmons and whatever else they acquire will become Spotify users if they want to continue to get that content. So it's been done before. Howard Stern did it with XM Sirius a generation ago. And I wouldn't be surprised to see a lot of the premium podcasts go behind a wall. Apple hasn't done it yet. So Spotify seems to have this space to

themselves and we'll see what happens. But my podcast will be available everywhere. Spotify, and we'll see what happens. But my podcast will be available everywhere. Spotify, Apple, Stitcher. What do I use? Overcast. So you'll be able to find it. But I think Daniel Leck is making a smart bet and I want to make the same one. So being able to talk directly to you guys and bring you exclusive interviews with all the people I know on Wall Street, people in the advisor and asset management community, people from the fintech space. We do these interviews on YouTube, but some of them can go longer and some of them will be exclusive just to the podcast. So it's going to be a lot of fun. And I think I'm going to learn as much as you learn just from having these conversations with people who really know what they're talking about, subject matter experts, professionals, business owners.

So I think it's going to be great. I have a lot of friends who run very successful podcasts, and they're having a lot of fun doing it. or Ted Seides at the Capital Allocators podcast. You probably know Michael and Ben. They work at my firm, but they run the Animal Spirits podcast. My partner, Barry, runs Masters in Business for Bloomberg, Meb Faber. There are so many,

and they've built these great platforms and relationships with their listeners and fans. And I want to do the same with you guys. And hopefully I want to be someone who can educate and entertain you each week. Okay. So that's what's going to happen going forward. I think you guys are going to love it. I'm going to put a lot of time and effort into this. And, you know, I'm never going to do a podcast just for the sake of doing a podcast.

So every week we're going to have new stuff on there and I hope you love it. And I'm going to try to have as much fun doing it as possible. And hopefully that will come through. So coming up, we have the all new edition from this week of what are your thoughts with Michael Batnick and I. This week we get into the outrageous size of the Apple App Store. We get into a reason why critics of the Federal Reserve may have a point. I have an amazing statistic from Fidelity about how many investors dumped all their

stocks this spring, and there's so much more. So here it is. Welcome back to What Are Your Thoughts? It's me, Downtown Josh Brown. I'm here with Michael Batnick, a summer edition of What Are Your Thoughts? Our Favorite Game. I don't know what Mike wants to ask me about. He doesn't know what I want to ask him about. I have some ideas. You have some guesses?

All right. I guess we'll say. Okay. So I'm going to go first. I want to talk to you about something that I heard you and Ben talking about on your podcast, and I think you've written about bubble behavior during a recession or a crash. And you guys seem surprised that we had all these like mini speculative bubbles in the stock market. But I wasn't surprised because I always see this stuff in recessions and bear markets,

because I think it brings people out that love volatility. Why were you guys so surprised to see things like Chesapeake and Hertz and all of the Robinhood stocks? Why was that so surprising to you guys? Why are you surprised that we were surprised? I don't know. You've seen bear markets before. You're not 22 years old. I don't know. I remember in the 2008, 2009 bear market, the most actively traded stocks were not even stocks. They were triple leveraged ETFs.

FAZ. FAZ, TNA. Remember TNA? And TZA. triple leveraged versions of the VIX, small caps, bank stocks. Those were always in the most active column. And that was going on in 2009 when we were really at the bottom of the economy and people betting both. I just think volatility brings out gambling, not levels of the stock market. Yeah. Okay. Fair. Volatility absolutely brings out gambling. But last time and like no other time, actually, I should say, we never had a quarantine like this. We never had free commissions. You never had Portnoy, like a Portnoy-like figure leading the charge, Wall Street bets. You never

had all these things. So it was the perfect setup for this type of mania that we're seeing. And it is weird to see bubble behavior in a recession. It just is. I just don't think so. I think separate the recession from the bear market. I think there are always pockets of bubbles even in bear markets because people are betting on even volatility. I don't know. I think it just brings out speculators.

Here's what may be exacerbated at this time. Obviously, no sports. And it's the only game in town. So I think there's an element to that. I think more than that is the lockdown and people not having anything to do. Yeah, that's a good point. Right. So it's two things.

It's nothing to bet on and nothing else to do, and the markets are – So let me ask you a question. Do you think that there's any sort of signal here in terms of like a Portnoy top or anything like that? I think there's like an anecdote. I think there's an anecdotal signal just with trading volumes in certain stocks. And like maybe the Hertz Chesapeake thing from last week represents the apex of that. So basically, like people betting on the equities of companies that have already filed for bankruptcy and having those stocks go up 100, 200, 300 percent. Like that to me, I don't know if there's any data. I don't think we've ever seen anything like that.

So I would say like it's an anecdotal top for the speculative part of the market, but maybe not for the whole market. How about this? People are like, oh, what are they going to do when the airlines stop working or the bankruptcy stocks stop working? Then they'll trade VIX products or whatever is working, they'll trade. Yeah, I think that's my point. If you're looking for action, you will find it. It will exist somewhere, and then everyone will say this is a new bubble. Let's move on from the young traders to the older investors. An article just came out in the Wall Street Journal.

Is it about me? Data from Fidelity. Nearly a third of investors who are above the age of 65 dumped all of their stock sometime between February and May. How many? A third? A third. And if they look at all of their investors, 18%. That's rational because what if that third actually are living on that money and pulling that money out, they can't afford as much volatility as someone who's not living on the money. Rational, but correct? What are you saying? No, I'm not saying it's correct.

I'm saying if you are actively- Are you saying it's understandable? Yeah, of course it's understandable. No, it's beyond just rational. We don't know the financial circumstances of that third of the people that pulled all their money out of stocks. How about, fine, forget about that.

How about 18% of everybody? 18%. Sold all of their stocks. All. That's wild. It's impossible. There's no real great answer here. But what do you say to somebody now?

What does somebody do now? Hold on a second. After they sold. Hold on a second. 18% of all Fidelity retail accounts or a specific type of account? All Fidelity retail accounts. are the most accurate representation of what investors are doing, right? Maybe like them and Schwab, even more so than Vanguard, right? So we're saying that a fifth of investors cashed out of the stock market. I would never have guessed it was that high. During what months?

Now, it says from February 20th to May 15th. So I'm sure that all that 18%, whatever, you know, a portion of them sold after the rebound, a portion of them saw stocks rise. So they didn't all sell the low, right? Correct. Yeah, exactly. I think that's an easy conclusion to draw, but that's not, we don't have data there. Here's what I'm going to tell you. The one third of people over 65 is very understandable because within that group, there are people who are probably trying to save a business. Within that group, there are people who are maybe taking 4% or 5% out of that capital each year to pay for their lifestyle.

what you're doing, you can't tolerate a stock market that sells off 50% if you're living on that money today. It's obviously the type of behavior that's indicative of people that need the money for the most part. I don't think all one third sold just because they were scared. But a big portion of them certainly sold because they were scared. Because let's say that you're 65 to 69. How much, what percentage of stocks do you think are in your portfolio anyway? It's not like these people, and I have no data here. Yeah, so if you went from 40% stocks down to zero,

that's not rational. That's fear. Well, that's why God sent financial advisors into the world, as Nick Murray would say. So those are people that are either. By the way, that quote, that quote's a bit.

It's a little much, whatever. It's a little much. Nick's my guy. If you, I think if you had a financial advisor, you probably didn't cash out all your stocks. And if you didn't,

it doesn't mean you did cash out all your stocks, but if you did, maybe you would benefit from having like somebody to bounce things off of. And if you're on like one of these email advisory platforms at a place like Fidelity or whatever, but you're somebody that's prone to panic, it might not be the best fit for you. You might be better off with a person to talk to because I think most investors who actually had someone to talk to probably didn't. I'm just making this up, but this is my guess based on knowing people and seeing this before. If you had a second voice in your ear besides your own voice and someone who's a little bit more emotionally detached, you probably didn't cash out all your stocks.

So that's why I make that comment. That's why I make that comment. What percentage of people who cashed out, let's say on the way down, are able to wipe the slate clean and come back into the market objectively without any baggage? None. Time has to pass. Let's say you sold last week of March, first week of April, which was totally understandable. Like if you took yourself to zero and you said, I'll get back in when, when things calm down, well, things calm down and the market's 40% higher, uh, uh, 40% bounce off that low rather. So like now you can recognize things that are more calm, but you can also recognize that you're going to be buying back in much higher. And it's really, really hard to do that. Like, I think it's almost, I think it's

almost impossible. Like I would have trouble doing do that. I think it's almost impossible. I would have trouble doing that. So I think if you're... Look, this is what separates rules-based investing and a strategy planned in advance from somebody who just makes moves based on how they're feeling. And just because you're rules-based doesn't mean all your buys and sells are going to look good, but there's a rule that's determining what you'll do in advance. If you're just like, I really feel like I should be in cash, then right now you're not saying I feel like I should buy back in. You're saying I feel like I should wait, and maybe you'll get another chance. It's hard.

I think the mentality is probably like, watch, I'll get in the market. I'll get back in. It's just my luck. It'll go down again. And get in the market. I'll get back in and just my luck will go down again. And so let's say that they do get back in. The first 3% down day, they're out. So let's say that you got back in last week and we had that really awful day. Stocks were down 6%. Right. You can probably panic out that day too, no? Because I think that- Last week, oh, the Dow down 1800 points. You're like, I can't believe I just bought. You're gone.

Past behavior is the best indicator of future behavior. I think we all know that to be true. All right, what do you got? So the last thing I'll say on that, Barry and I started working together in 2011, which was like two years removed from the bottom of the stock market. The first three years of us onboarding clients, I would say like two thirds of them

were people who were sitting in cash. Like they got out, some of them early, so they didn't get killed or some of them lost a lot, but they were almost like almost everybody was in cash still. And they needed somebody to do it for them. They couldn't bring themselves to buy back in. They needed someone to tell them, give me your money and I'll do it. And thank God, you know, they found someone, whether it was us or another advisor. All right. Here's what I want to ask you about. I'm like not, you know, like I don't dwell on all the Fed criticism. Like I'm not one of those people that buys into all the conspiracy theories. But I think in this moment, we are really seeing the Fed way overstep its purpose, its bounds, and do things that are just so far away from what we traditionally thought of as

their mandate. I want to read you something Peter Bookvar put out this morning. And he's like a Fed critic, kind of like a, you know, let's have less regulation and we'll need less intervention kind of guy, but he's reasonable. He's talking about the Fed buying investment grade bonds. They're literally buying LQD directly, which is what they're doing right now, which is wild, by the way. So he's saying the Fed is directly making investments in Apple and Microsoft bonds by doing that. The LQD, the index backing it and what the Fed is buying, they're buying Anheuser-Busch, Goldman Sachs, CVS, Wells Fargo, Verizon, Visa, Comcast and Berkshire Hathaway. Why do we need the Fed doing that? Like it's some sort of an emergency.

Like in what way is that facilitating anything right now? So they were buying, they were buying $300 million worth a day of bond ETFs. Yeah. Why do we need that? And now they're going to be buying, they're creating like a custom index or a broad-based index, I should say, where they're going to be buying bonds directly. But they're going to be buying outstanding bonds. Through BlackRock. But they're going to be buying outstanding bonds. So I almost would more understand if they were buying direct from the companies where they were like,

okay, we need to provide direct liquidity. But in the secondary market... The companies that are investment grade don't need capital directly from the Fed. That's the definition of investment grade. But they're also buying companies who lost their investment grade status as a result of this. Right. So Peter's basically saying JP Morgan can take treasuries on its balance sheet, put them up as collateral, and buy some of these bonds out there that are yielding 7%, 8%.

put them up as collateral and buy some of these bonds out there that are yielding 7%, 8%. The banks should be doing that, but we regulated them out of that business. And that's why it falls on the Fed to rescue fallen angels. But then going a step higher, what is the transmission mechanism by which the Fed buys Apple bonds right now? In what way does that facilitate anything in the real economy? Well, I guess by doing that, they don't want to discriminate and be like an active market participant where they say, okay, we're going to buy Caterpillar, but we're not going to buy Honeywell. We're going to buy Microsoft. We're not going to buy Apple. So I understand-

That argument is lost on me. I don't know. I don't get it. You want them to be acting like gunlock out there? I mean, let me ask you this. What if they had rules? What if they only bought the bonds of companies whose debt payments are higher than their cash flows, which are the definition of fallen angels? These are companies that actually need it. Reasonable. What is the downside? The downside is market distortion, people not trusting the system. Too late. Asset price inflation. We can go on and on. I know, too late. All right. What do you got? This is a big question. I'm not really sure what I'm looking for as an answer, but what are some

of the lessons? What did we learn with the fastest bear market ever, the most ridiculous bounce ever? Are there any tangible takeaways, not so that we can be better prepared for the next time, but just broader investing lessons? What did we learn as investors? No, as epidemiologists. Well, I learned a lot more lessons about business than I did about investing this year. But what did we learn as investors? I think we learned that nobody knows anything.

You just had the fastest bear market in history. It took 20-something days for the stock market to lose a third of its value, which has never happened in history before. Absolutely nobody saw that coming. Absolutely no one. And then immediately following, you just had the best 50-day rally in history with a 39.6% gain for the S&P, immediately following the fastest bear market ever. There are people writing commentary now saying, did we even have a bear market? Or was that just a panic? That's literally what people are saying because of how fast both halves of that took.

So nobody saw really either one coming or for the reason they came. So what did we learn? That quite frankly, you can read as much investment commentary as you want and it'll educate you as far as what people are thinking, but you will never read anything that will prepare you for the real shit that goes on. And I think you have to like get comfortable with that. That's why you earn 7% a year in stocks versus 4% a year in bonds, because you're taking

that extra risk. And so you just have to learn to live with it. And if you can't, you know, maybe investing is in for you. I don't know. That's my takeaway. Why? What did you learn as an investor from this? Is there something tangible that you can take away from this that you didn't already know? When the stock market goes down 35% in 21 days, the Fed will step in. The Fed stepped in before it was even done. I mean, I don't know. I guess, yeah, I think you're right. It's just relearning lessons that- The Fed stepped in in November. The Fed started doing QE in November. With the repo stuff? Yeah, dude. What do you think that is? The Fed is buying assets in November already. We had Fed intervention in the bond and cash markets three months before the top of the market. It's endless.

That's the point I was trying to make before. All right. Whatever. I went to a restaurant for the first time, I guess, since February over the weekend. Where'd you go? It's a little weird. I guess since February over the weekend. Where'd you go?

It's a little weird. So we were on my friend's boat and we stopped at like an outdoor place on the water. Like we pulled the boat up to the dock. So we ate outside. The waitresses had masks. You had to wear a mask to go into the building to use the restroom. But you could sit at the table without one. And they brought plastic silverware, like in individual packets. So like a plastic knife and fork, but everything else was, oh, and drinks were out of plastic cups, but at this place they might be anyway. But everything else was totally normal. And it was nice. Like we left a huge tip. You know, this poor girl is walking around with a mask on her face.

It's 85 degrees out. But it was nice. We sat at the table for two hours. Nobody wanted to get up. I don't know. Have you been anywhere to eat? No. What's it going to take for you to go to a restaurant?

Are you mentally there yet? I just don't really feel like going. Really? Like you don't miss sitting down with another family or another couple from you guys do that a lot more than we do like it's we have to get a babysitter you know what i mean and we're not really letting anybody in the house yet and i really don't miss it i have no desire to like now where you were that sounds great like you're on the beach like that's nice but like would i go and sit in the lapiaiazza parking lot? Like, I don't want to do that.

So what, like side, sidewalk tables though. Nassau County lets all the restaurants do some tables outside, which they should have done years ago. I mean, that, that doesn't interest me at all. So I'm not, I'm not dying to go back to a restaurant. Okay. All right. We were, we, we missed it more than we thought we did. I guess what I'm saying.

All right. We missed it more than we thought we did, I guess what I'm saying. All right. What's up? So I don't know what's going on, but I'm starting to wonder if I even like movies. You know I love going to the movie theater. You like shitty movies. We know. But I mean- You like shark attack movies.

That's your thing. I do love Deep Blue Sea. But maybe I'm just on like a string of movies that's your thing I do love Deep Blue Sea but maybe I'm just on like a string of movies that I don't love like for example these are the movies that I've seen recently

did you see King of Staten Island no like I thought it was is that the kid from Saturday Night Live yeah like Bill Burr was incredible I thought it was like

a sweet story but it was just like boring and slow I watched Perks of being a wallflower you ever see that one the fuck you watching that for and then i saw where are you getting i'm just like getting that from hold on and i saw bullderm i never saw bullderm that's like a classic right um i all right so i like westerns i i like i like movies where it's good versus evil or it's really murky.

And I like movies set in a time and place where people had to be more independent and they had to save themselves. And I like morality tales. Let me just finish. That's what I would be. If I were you, I would just start watching the best Westerns ever made and stop watching the perks of being a wallflower. If you were you, you would watch those. No, if I were you, I'm teaching you something like the best Westerns ever made. No, if you were you. The perks of being a wallflower. If you were you, you would watch those. No, if I were you, I'm teaching you something that you don't know. You're not me.

Okay. Is. True. Is watching movies at home during this like changing how we. It feels like homework almost. No, it's a function of what movie. You got to watch a movie that you can just get totally lost in. If you're watching a movie and you have your phone in your hand,

you're not really, you're not really watching it. So true. I don't know. That's what I would say. All right, here's my last one. The app store.

So Apple very quietly became the first company in history to hit $1.5 trillion in market cap. I feel like there was a lot more fanfare when they hit a trillion. And then like very quickly, they added 50% more market cap during a pandemic, which is incredible. So they are saying today, this is a story of TechCrunch, that the App Store ecosystem in total, meaning every mobile app on the Apple platform, facilitated $519 billion in billings and sales globally last year. Holy cow. Think about how big that number is.

And then the $1.5 trillion market cap doesn't sound as ludicrous. That's half a trillion in commerce. So that's everything from people booking an Uber to people ordering groceries from the Target app and everything in between. What? So that money, 519 billion is a lot of money. Where was that money being spent prior to the App Store? Physical Walmart, physical Costco, physical supermarket, taxi cabs, paying cash, like get in a cab, take me to

the airport. Here's $30 cash like that. All right. So they're saying, listen to this. The study notes that because Apple only receives commissions from the buildings associated with digital goods and services. So in other words, they don't get a piece of e-commerce. If you're on the Target app and you spend $200, Apple doesn't get anything from that.

But they do get a piece of services and digital goods. For example? So they're saying more than 85% of the $519 billion total accrues solely to third-party developers and businesses. So they're getting a commission on some stuff, but not all. Out of that $520 billion, $268 billion of it was retail. And a lot of that includes traditional brick and mortar retailers. So I mean, a lot of stuff is getting thrown in there, but they're saying ride hailing apps like Uber and Lyft were $40 billion in sales. $40 billion. So what Apple has built basically is like a layer on top of the global

economy. And they're getting a commission on some and not on other. But they're facilitating half a trillion dollars in commerce every year. Then you can start to rationalize why this company is worth a trillion and a half dollars. Looks cheap. Because on that metric, it's cheap. All right, that's all I got. Let us know what your thoughts are on the topics below. Mike and I love to hear your feedback. We love when you guys play along.

We're always interested in your comments and suggestions. Go ahead and smash that like button for us. Subscribe to the channel if you have not already, and we will be back very soon.