The Compound and Friends - Stack the Odds in Your Favor (with Rich Bernstein), Dow Jones new high, measuring happiness (with Tony Isola)

Episode Date: March 12, 2021

On this week's episode of The Compound Show, Josh talks with veteran market strategist Rich Bernstein of Richard Bernstein Advisors about why long-term investors have a probabilistic advantage over short-term traders and why his firm focuses on top-down economic themes when constructing portfolios. Tony Isola of Ritholtz Wealth stops by to talk about the kind of happiness and success that cannot be measured in numbers. Be sure to leave us a rating and review if you're enjoying the show, it goes a long way! Obviously nothing on this channel should be considered as personalized financial advice or a solicitation to buy or sell any securities. See our disclosures here: https://ritholtzwealth.com/podcast-youtube-disclosures/ Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Congratulations. We went from a passive investing bubble to to become 100% of the stock market, no one would ever make an active decision again, and passive investing leads to communism. Anybody remember that piece? One of my favorites. Or socialism? All right. Either way, this is the story we were told. Passive investing was driving a bubble in the stock market because every dollar coming into Vanguard and BlackRock into their S&P 500 index products was pushing up the same five stocks, Amazon, Microsoft, Apple, Google, blah, blah, blah.

And those stocks were the only reason the market was up. And they were like tent poles holding up the whole circus. And as soon as those stocks went into trouble or stopped rising, the market was f***ed. That's what we were told. Remember? Well, that didn't turn out to be true because the FANG stocks that were allegedly driving the whole market higher and were a bubble that was building an even bigger bubble around them, they stopped going up around Labor Day. They topped six months ago, give or take, not the stock market. Yesterday on the New York Stock Exchange, we had 394 new 52-week highs. On the NASDAQ, we had 431 new 52 week highs. So you had like 800 new 52 week highs.

And I'm looking at the list and I don't see the FANG stocks. I'll tell you what I do see. On the NASDAQ, I see companies like Banco ZK, new 52 week high. I see, let's take a look here. I'm not going to do too many of these, but I want to give you a little bit of a flavor of what's going on. I see Cracker Barrel. Is Cracker Barrel a reopening stock, right? People for road trips go there, I guess. I don't really know what that's about. I'm from New York. Dave & Buster's Entertainment. I'm not sure what industry group you would put that in. I think it's in the skeeball industry. So Dave and Buster's, happy new 52-week high.

Not a FANG stock, by the way. There's about, I don't know, 50 or so banks on the NASDAQ. Most of them, their name starts with the word first. 52-week highs for bank stocks all over the place. All over the place. iHeartMedia, new 52-week high. What do you know? Johnson Outdoors, JetBlue, Kaiser Aluminum,

Kraft Heinz, we can go, Land's End, we can go alphabetically. Then you look at the New York Stock Exchange. It's much the same thing, okay? You had a 52-week high this week in Alcoa, Amerisource, Bergen. These companies have absolutely nothing to do with each other. Eagle Materials, okay?

It's really widespread. It's all over the place. Ford Motor, Foot Locker. It's too many names for us to go through right now, but you should take my word for it. It's every industry group. His 52-week high is all over the place. And it's not just the top five stocks or the top 10 stocks. Small caps have been explosive since the start of the year.

Small cap value, small cap growth, mid caps are on fire, rocking. That's what's going on right now. So this whole conceit of there being five stocks pushing up the whole market, being fed by index money, and everything is passive, and companies aren't going to be competitive with each other anymore because they're all getting money at the same time from the same ETFs, all bullshit. Sorry. Sorry. It wasn't true at the time. I probably wrote a dozen blog posts challenging that in 2018, 2019. It wasn't true then, not true today either. So it's really important that we take a moment and consider this idea that the Dow Jones made a new all-time record high this week above 32,300. And that is being

accompanied by an explosion in the number of new 52-week highs on the New York Stock Exchange. An explosion. There's no other way to phrase it, okay? You have Chevron making new highs. There are some very large stocks that are not tech stocks, but then you've got hundreds of small caps and mid caps every day joining the party.

So I think logically, this is what you would want to see. If the Dow is making new highs, I think we would want to have like thousands of stocks accompany that, right? So that's literally what's happening. So I guess the passive bubble didn't end the world this time, right? Sometimes the meteor misses earth. Very sorry to say. What's the other thing that was going to blow us up? Interest rates and inflation. Let me tackle that really quickly.

The yield on the 10-year settled down this week. We're about 1.55%. Not only is that not high on a treasury, actually it's at the low, low end of a very well-established 10-year trading range for the yield on the 10-year. So we haven't even gotten toward anything even approaching normal yet. OK, so rising rates were not the threat that they were made out to be to stocks. By the way, I'm old enough to remember in 2018, the yield on the 10-year was double where it is today. It was about 3%.

All right. And actually, right before the pandemic, the yield on the 10-year in February of 2020 was about 2%. So we're not even there yet. My partners, Ben and Mike on the Animal Spirits podcast did this really great rant about what if inflation is actually good partners, Ben and Mike on the Animal Spirits podcast did this really great rant about what if inflation is actually good? And Ben just goes on a tear. And what they're basically saying is one aspect that gets lost in the conversation about inflation is that many lower income and middle income households have a lot of debt and inflation deflates the cost of paying that debt or the cost of carrying that debt. So actually, inflation is good for people who have borrowed money at a fixed rate. So that's number one. Number two, if we're getting wage inflation, that's actually the good kind of inflation. Wage inflation was missing for like

10 or 15 years from, let's say, the turn of the millennium on. And arguably, that caused a lot of the income inequality that's led to most of the political problems we face in this country. Okay? So having wage growth, which we have, is actually a good kind of inflation. The Fed's explicit target for inflation is 2%. We can't even hit that. Can't even hit that. Let me give you the numbers. We got February CPI this week, Consumer Price Index. It rose 0.4% over January and 1.7% over February last year. So that's the headline number. On a core basis where you take out gasoline, you take out food, actually prices only went up 0.1% from January to February and about 1.3% February over February. So year over year is 1.3% core CPI. It's nothing. It's nothing. You had big oil price bounce, which led to higher gasoline prices.

That's it. That's all that's going on. We're not Zimbabwe yet. Any minute now, but not yet. So that was supposed to be the next thing that would blow up the stock market. And actually it didn't. And the rise in rates on the 10-year has moderated this week. I still think it should be higher given what economic growth is going to be and given all the stimulus in the system. But if it were higher, that would not be catastrophic, obviously. Well, you would think obviously, but not obvious to everyone. So the passive bubble didn't work to blow up the market, blow up the world. Sorry.

I don't think we're contending with a hyperinflationary meltdown just yet. That didn't work yet either. We'll see what's next. But that's where we stand right now. New record high on the Dow, expanding list of companies and industry groups, making 52-week highs in the market, very, very modest growth in inflation, both month over month and year over year, and a 10-year treasury yield that still is at epically historically low levels and nowhere near approaching what it would normally be in an economic expansion. And now we're reopening. And let's talk about reopening. Those are the stocks that are leading the market now. So it's not the fangs. It's not cloud computing. The stocks that are working now are the let's get back to our live stocks. And that is exactly what

should be taking place. I was looking at a chart of Expedia yesterday. I want to punch myself in the face for not buying it. It's like 165. You could have bought as much as you wanted this past fall at 60, 70. And if you were smart enough to recognize, of course, people are going to start booking trips, then you would have done that. I didn't do that because I was busy, I don't know, listening to rap music or whatever I was doing. So then I was looking at last night, this company Bumble. I don't give financial advice on this podcast, but I think this is a stock that we all have to follow. The ticker is BMBL. So Bumble smoked their earnings last night. It was their first report as a public company. And Bumble is a dating app, and I think it's a reopening stock. So it's about a $12 billion

market cap. They gave guidance. They're going to do 700 something million in revenue this year. Company would be profitable now if they weren't blowing out their marketing and technology spend, which is exactly what they should be doing, right? The Bumble app is absolutely on fire. And I think the CEO, her name is Whitney Wolfhard, I think she was saying something like, this moment in time, there has never been more pent up demand for people to be able to get out and go meet people for obvious reasons. And I think this company is perfectly positioned. So I don't own it. I wish I did. I think the stock's going to do well. I think it's a company that has the ability to take this brand and

expand it in meaningful ways internationally. And that's what they're working on right now. First of all, Whitney Wolfhard is the youngest female CEO in history to bring a company public. And it's just this amazing story. The company was founded in like 2014, and now it's worth $12 billion. And they're working on two other things that are not dating related but make perfect sense to me. In an increasingly online world, people are looking to make friends and people are looking to meet business contacts. So there's Bumble BFF and Bumble Biz to enable users of the app to do both of those things. So Tinder is the biggest company in the space. It's owned by Match Group. Bumble

is rapidly gaining on them, not just in North America, but all over the world. And what's different is that on Bumble, women make the first move. So that's, I think, a very intelligent way to approach online dating. And I don't know anything about it. I'm very far removed from the online dating scene. But that makes intuitive sense to me that this would be a very popular service. And now there's a publicly traded vehicle to play that. So I'm keeping an eye on this name. I don't own it. I'm not telling you to go buy it. I just think this has the potential to be a massive, very important brand worldwide as they execute.

So congratulations to Bumble on your first report as a public company, beating expectations, giving great guidance. And we're going to see more of this business in the future for sure. All right. Today, we have a great show. I have two guests. We're going to talk to Rich Bernstein. Rich is the CEO and CIO of Richard Bernstein Advisors, which is a pretty big registered

investment advisory and asset management firm. And Rich founded it in 2009. Prior to that, he had made his name on Wall Street as the chief investment strategist at Merrill Lynch. So Rich Bernstein's been on Wall Street for almost 40 years. And I read him all the time and I learned so much from him. He's got this celebrated career as an analyst. He was voted to Institutional Investor Magazine's All-America Research Team 18 times. He's one of only 57 analysts inducted into the Institutional Investor Hall of Fame. So he's the real thing. And I had a really great conversation with him about Boomer Knows Best. So Rich put out this really great piece about long-term investing versus short-term investing

and putting the odds in your favor and why it's so important for investors to look past all the speculation in the market right now and to understand the probabilities of actually succeeding and what it takes to do that. So you guys are going to get a lot out of that. And Rich is terrific. We also talked to Tony Isola. And Tony's a financial advisor, works at Ritholtz Wealth. He's got a kick-ass blog called The Teachable Moment.

And Tony was writing about happiness last week. And we had a really great conversation about the type of happiness that can't really be measured by net worth or SAT score. So we're going to talk to Tony. Then we're going to talk to Rich. Really appreciate you guys jumping in for this week's show, having so much fun putting this together for you each week. And if you like it and you're feeling what we're doing, by all means, go ahead and leave a rating and review wherever you're listening. So Apple, Spotify, whatever. Because ratings and reviews are really important for the podcast algorithms

to determine which shows are good and providing value and which shows are just whatever. And so if you think this is a good show, tell people about it. The best way to do that is with a rating and review. All right, that's it for me. Duncan's going to hit the disclaimer and the music. I'm going to talk to Tony. Then we're going to talk to Rich Bernstein and hope you guys enjoy. The Compound Show with Downtown Josh Brown. How you doing? What a fun financial podcast on Wall Street. We're helping millions of people to make smart decisions,

grow wealth, and secure the bank. 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. Tony, we figured out your computer problems. You're on brand new equipment with brand new software. You look like a new man. How are you feeling? Thank you. Enormous stress at first, but now I feel like a weight has been lifted off my shoulders.

So now we can go ahead. So I can't imagine you with enormous stress. I read this post that you did last week, and I was thinking about you as like one of the least stressed out, happiest people I know. Well, thanks. What am I missing? Well, it's just like, it's just more like for 99% of the time I'm like that, but like something like this, it was like this unique circumstance and that tends to bug me more.

But to be honest, I was much calmer than I would have been 20 years ago. So that's, that's a good thing. So you've, you've melt, you've mellowed. Oh yeah. I have, I am. If this is you mellow, then I'm terrified too. Yeah, no, I am. I am so mellow right now.

You cannot even believe. So I want to talk about measuring wealth using a scorecard. And you ask in the title of your post whether or not that's a good idea. I already know you know it's not a good idea, but I think it's an interesting discussion you go through. The whole thing starts with a Seth Godin comment, quote, you go through. The whole thing starts with a Seth Godin comment, quote, in the face of the difficulty the system has in measuring things that don't measure, we create proxies, things like popularity as a proxy for whether a work of human creativity has worth or not. And then you get into SAT scores, bank accounts, how much weight we can lift, net worth, on and on.

Why do you think that we have these shorthand measurements for happiness? Do we have to just all agree on something? Is it possible that we just have no measurement and we can live that way? I don't think we can. No, I don't think so either. But I think the reason why we have it is it's just easy. Look at this guy's bank account. Look at how many shares Apple has. Look at how many cars you have. It's so easy to count these things. And that's the reason we count them is because they're countable. And quite frankly, the things that are really, truly important in your life are very difficult. It's very difficult to achieve peace of mind.

are very difficult. It's very difficult to achieve peace of mind. And there is no end. There is no end, right? Like you're constantly striving to get that peace of mind. So why would people want to measure it? A, you have to really work at it. B, you get no final result. So it's, you know, it's like school. Well, do you, you know, we have a really creative, funny kid who has these great interpersonal skills and will probably be like a CEO of a huge corporation when he gets older because he's terrific at organizing people and stuff. But what are they grade him on? His SAT score, right? Your kids are going through this now. What grade are the boys in?

They're both seniors and they're, you know, they're applying to colleges and stuff. But Dean and I, like, I've and I, I'm just very mellow. I just know this is a long journey. And quite frankly, again, I'm not measuring them now. Their brains are not even developed, right? They're 18-year-old boys. I guess what I'm asking is like they're at a private school and I actually had the honor of spending the day with them in their class, being part of something that you do each year, financial literacy week, which was so much fun. And the kids were great.

And I guess that was said a year ago. Yeah. And let me tell you something. That is so funny. You brought that up because one of their friends is going at that school is going to Providence and he wants to get into this career because of that week. Oh, that's so cool. We were talking about it last night. His friend, Jack, he's like, yeah, he, he, he loved you guys. He wants to, like, he thought that was like the greatest thing. And he, to be honest, he's not the best student in the school, but he'll probably be really good at this

because he found something he liked, you know, so much more important to have an affinity for something you're going to go after rather than be the smartest person. Absolutely. So your boys are going through this period of their lives now where a lot of parents and, you know, we give financial advice to parents who are in this position. I don't want to say they think it's the end all be all, like what school their kid gets into. But it's like one of those milestones in a parent's life that like it feels really big at the time you're going into it. And it might have really big ramifications. But you you're like I think you're seeing beyond that and you're saying I don't know what the

optimal college situation is. We won't know till later. But i know my kids will end up being okay because of everything i've taught them and and their values and their creativity and their skills yeah and and also like i don't know i just finished ron leber wrote a book about this about you know call and it's it's it's so good and so timely and one of the things the cost of college or something yeah yeah i think mike mike and ben might might have interviewed him or reviewed it or something. Yeah. And one of the things he talked about, which I was a big believer in, is mentorship at the college. And sometimes you can go to a very big university and they're literally paying these professors to write research papers, not to deal with the kids because that's where the money comes from.

So the interpersonal aspect, I think, is very important. And it's just life, right? Like if someone mentors you or mentors, you know, it's, but I think, again, the scorecard factor gets in there, right? Like, oh, let's make sure they get into a college that had like a 90% rejection rate. It's like, I don't know. Do I want to send somebody like to a college that just enjoys not letting people get an education? You know what I'm saying? Like, I think,

but these numbers, these status numbers, they might look good and there might be some validity to them, but I think that people like to use them again because it's easy. And are they really researching that college and what the kids really need that that's like, what does the data show that they'll be happy in their career? How about that? So SATs and university acceptance is like one way that we just take a number and assign it to a kid. Because to your point, you have kids with these amazing interpersonal skills or creative skills. There's no way to measure it.

So what can we measure? And it's that. Can I tell you a brief story about when I was teaching? We used to have a class and I would teach a class and it was called an inclusion class because we had all the kids that were, you know, they were in like a special education class, but they would bring them out for one or two periods a day so they could mainstream. It was more for like social things. You know, the kids weren't going to get, we knew that they weren't going to get good grades and stuff. But so I would always like, I like those kids. I found those kids like had the best personality. So what I always say, yeah, I'll have one, two, whatever, whatever you want to do with me, send these kids in. I remember like having some kids and I would give them jobs. Like I remember this one kid, he was kind of like Duncan.

He was like, Mr. Tech, you know, he couldn't, you know, really write very well. He couldn't, you know, pass tests. But I literally made him like the chief technology officer of the classroom. And like when my smart board, like I would just like ask Sam, you know what I mean? Like, and the kid like felt so good about it. And I was like, why are like they looking at this kid? Like we're doing him a favor by letting him like socially interact with these other kids. When, when this kid gets older, I'm telling you, he's going to, he's going to go places. I don't care. I grew up to be Jack Dorsey. Who knows? I don't

know what, you know, but my point was, you know, if we were just measuring, right, like his SAT or whatever his class rank was like, who cares? He did. He was indispensable. I was like, you know, dude, I didn't get I didn't ever. I didn't go through one year in school where I had like, quote unquote, good grades. Right. Not even not even a single year. Like I had decent SATs, which is why I got into college. But my and it's not my grades weren't bad Like I had decent SATs, which is why I got into college, but my, and it's not, my grades weren't bad because I didn't care. It's just, I was so focused on things

that I was not being graded on. Yes. And even the things like they're grading you, it's like, okay, sit in a cubicle by yourself. And if you don't know an answer, guess, and you have to memorize it. Like, that's not how the world works. It's like, I don't know how to set up this crazy Zoom thing or whatever that was going wrong. I'm going to ask Duncan. I'm not going to read a map. You know, I'm going to find somebody that knows more than me. And that's how the world works.

But when you think about how those tests are, it's illogical. Like the world is a combination of self-reliance and collaboration. And no one who succeeds can succeed without being good at both of those things. Right. And you're certainly not supposed to be memorizing things, right? Especially in the age of Google, it's almost better to not know anything if you're in an environment where you can look up anything in two seconds. I agree. But again, it's easy. Oh, look, there's 500 kids in the graduating class. Where did my son graduate? Like, you know, my 11 year old was studying about ancient Egypt and he's so worried.

So my boy is like stats oriented. He can watch the NBA All-Star game and tell me how many rebounds every player on the court is averaging this season. So he's consumed with, you know, when did this pyramid get built? Like what year? And I asked him, why were the pyramids built? And that part, he's like, I don't, I don't really know. I'm just trying to remember if it's a thousand BC BC or 2,000 BC. All right. So let's pivot into wealth because this idea of measuring people based on one number or a couple of numbers, it extends throughout the rest of our lives. So this is you. I'm going to quote you.

I'm going to quote you to you. You're saying we need data. We need to analyze data to chart goals. The problem is we often ignore what's important because it doesn't fit into a spreadsheet. Are we building our bank account to compete with neighbors or to provide peace of mind? Is our spending a mindless pursuit of a temporary dopamine rush or is it focused on what brings lasting joy? All these hard and fast numbers, how much did you spend this month? Well, that's not the point. No.

The point is what did you spend it on and would you do it again if you had the option because it brought you joy? Right. Okay. So I feel like a lot of what the role of the financial advisor is in the modern era, especially working with high net worth people, which is not all that you do. And we'll talk about that later. But when you work with a wealthy family, part of this is like helping them attach qualitative

information to the quantitative information. So you can spend X amount, but what do we want to spend it on? And why should you do it today instead of 10 years from now? So can you talk a little bit about how you, how you managed to be very data-driven in the advice you're giving, but relate it to people's lives so that they actually take the advice? Absolutely. The way I relate it is, is like, look, you know, cause a lot of our clients that do have a lot of money are obviously older, right? Usually, you know, you live longer compounding all that stuff. And I tell them your most important aspect now is time, right? That's it. Everything's time, because unfortunately my time is limited. All of our time's limited, but you know, we have to really start thinking about that. So if there's anything that really bothers you, that you hate to do, and you could certainly afford to outsource it, that's what we need to

do with your money. Before the pandemic, I don't like being crowded on a plane. I don't like the people kicking my chest. So how about you get a first class or business class ticket? Guess what? You can afford it. And all of those little things that enhanced these little things in life that you could just pay for, it's well worth it because now that precious time is not being wasted by you being stressed or aggravated. It's weird that people need permission from a financial advisor to do little things like that,

but they do. Oh God, they call me, I'm telling you, I spend so much of my time telling people to spend their money. That's basically most of my meeting is spend this. This is your vacation budget. You're not spending. And they'll literally call me up sometimes like, I want to have extra. Don't you listen? I'm trying to tell you that's the whole point of this money. Why did you accumulate this money? If you're not going to enjoy yourself or more importantly, like your inheritance, for example, like you could have a living inheritance, right?

Why do you have to wait? You have to accumulate all this money and you die and people get the money. You don't know what they're going to do with it. They might marry someone that you hate or whatever. Like, let's give it out while you're alive so you can enjoy this. Don't you want to manipulate your children's lives while you're alive? Why do you want to wait till after you're gone for the manipulation? No power. Yeah. So, you know, but it's, I think to your point, dealing with high net worth people, I find

like a lot of the people tend to just be normal people that end up because they listen to advice about compounding and low cost and all the things we tell them. And they have this money, but they still have the mindset of a person that doesn't. Yeah, they're not Gordon. They're not Gordon Gekko. Chris Venn, my partner, Chris, talks about this all the time. It's like you've got now boomers who for 30 years, they were it into their head, save, save, save, save, save. And they actually listened and the markets did their part. And now these people have millions of dollars.

And at 75, they're like, should I do this? Well, when the fuck are you going to do it? Exactly. That's what I tell them. It's not going to be more fun. Yes. That's what I tell them. It's not going to be more fun. Yes. That's what I tell them, you know? And, and, and it's like, it's such a, I just find it funny because I think if like people kind of that weren't inside this job and

you told them that they'd be like, what are you talking about? Rich people don't want to spend their money. Like that seems like a weird problem, but it actually kind of is a problem in a way, you know? Well, it's a life satisfaction problem, which is why I get so much from talking with you and Dina. And I think the way that you guys run your practice, you know your clients so well, and they know you so well. And oftentimes it seems for me, from the outside looking in as like the CEO of the firm,

but every time I hear about something where you guys are working with a client or a prospective client, it seems like you're where you guys are working with a client or a prospective client, it seems like you're almost living a parallel life with that client. And there's so much about each other's families and lives that you guys can both relate to. And the client knows the advice you're giving is really coming from a genuine place. Yeah. And I think it's very good because like I, we, we work together. So I work with Dina all the time and she's, you know, extremely empathetic person and she's a really

good listener. So, you know, I could come in with like, I'm usually the bad cop and she's, and she's the good cop. When you're the bad cop, is that like, is that like somebody's portfolio? That's not yet a client you're looking at it and you see a lot of excess risk taking or you see sloppiness like yeah i mean someone like you know or or just people you know in in you know if they're going to talk about you know investing in a way you know about basically i just shut it down like the daily the daily movements of the market and who the president is like, I just shut it down. You know what I mean?

I just like it. And I think sometimes they want, they need that. They need like, they need someone to tell them that this, they kind of know in their hearts, it's really not that important, but they need someone to really tell them instead of, you know, engaging this, this constant, because it never ends then. instead of engaging this constant, because it never ends then. So I'm pretty good at shutting down irrelevant conversations that I, and I try to be fair about it.

This is one of the worst things as a financial advisor. One of the worst forms of malpractice is to play into these fantasies. Yes. When a client says, I'm really feeling good about biotech this year. Right. To be like, okay, let's amp up the biotech exposure by 3%.

You're encouraging a mentality about investing that's a fantasy and it's going to get worse. Yeah. And I'll be honest with you, Josh. We rarely talk about returns. You're on track for your goals, right? That's all that matters. That's all that matters. You want to quibble about one or two percent. Again, shut it down. That's not what you hired us for. You hired us to make sure you could achieve your financial goals and you're

doing it. Be happy. Part of having the credibility, though, to shut it down is when your gains are better than the overall market, either because you took less risk and your portfolio fell less than the market in a bear market, not beating your chest and just saying, look, this is going to happen. There are going to be periods where we look better than any given benchmark and periods where we look worse. We have to not focus on that. Absolutely.

We had so many clients like at the end of year, calls and say, oh, you know, you guys did so great for us. I'm like, we didn't do anything. The market went up. And if the market goes up, you're exposed to the market in such a way, you're going to make money.

What we do is keep you from doing dumb shit. That's what we do. But so I think there was an expectation last year that we're in a pandemic and a recession and everyone's losing their jobs. And I think a lot of people just said to themselves, even if they didn't take action early in the year, they said, all right, well, I guess my portfolio is now.

Oh, absolutely. So I think they were like just surprised by the fact that the world didn't fall apart. Right, Right. And, and, and, and I think also like getting back into that pandemic, that was important because it was a great time to put things in perspective, right? Like, yeah, it sucked. The market was going down and stuff, but you know what? There's people freaking dying. They don't even know what's causing this. You know, people are losing their jobs. This is like really horrible. And if you have like three or $4 million and you lost like

10 or 15% of your money, that kind of sucks. But in the big picture of life, let's, let's really focus. Right. Like, so we tried to like, not just blow it off, but like, you know, how's your health? Are you healthy? Well, you, you won, you know what I'm saying? And this is going to get better. So again, you could feed into that like priorities, right? Is that really your biggest priority right now? We told you bad stuff is going to happen. We set up a plan beforehand. We don't know what the bad thing is going to be, but you're prepared.

We'll come out on this on the other side. We'll be perfectly fine. But what about the other stuff? Are you sick? Do you have friends that are sick? Are your friends losing their jobs? And I think when you start talking to people about that, they're not going to be, well, emerging markets are down 30%. You know what I mean? It's just a stupid conversation, right? All right. So I want to

get into this piece at RIA Intel. And this was written by Greg Bartalos. And it's very good. And it's based on a paper that I think you yourself read. But basically what they did, the authors of the paper, it looks like they are a combination of academics from Winthrop, William Patterson, and Shepherd University. So they said that, quote, our research indicates that RIAs, which is you and me, provided great value to their clients during the COVID-19 market crash, consistent with prior literature in this area of investment performance on subsequent client wealth. Quote, investors tend to shift wealth from risky to safe assets in volatile and declining markets. Advisors, however, manage client behavior effectively, ensuring that they didn't panic when stocks swooned in 2020.

Our findings show that clients working with RIAs tend to sell less and buy more during a market downturn. And that's exactly what played out, I guess, a year ago this month. So talk a little bit about what you take away from that. I know you're not surprised by it. No, no, I'm not surprised by it. But I think some of it too is like, you have to have some like street cred because like there, I have clients that we went through the tech crisis. We went through the banking crisis. Now we went through the COVID. So if like, I say something to them, right.

20 year relationship. Yeah. It's like, you know what? Like we've been through a lot of crap together. So it's like, you know, I'm not just giving you like a snow job or something. But I think one of the things that was so important, what they said in the paper was that you have to now talk about positive things, right? Because when you put it on the TV, I would tell people during this time, like, okay,

what are you watching? CNN, there's a split screen. One screen is counting deaths, right? And red numbers. And the other screen counting deaths, right? And red numbers. And the other screen is showing the Dow collapsing in red numbers. And you're going to stare at that all day. How do you think that's going to make you feel? And the third screen is how many SPAC IPOs are coming up.

Yeah, whatever. Yes. So it's madness, right? So that's not helpful at all. And it's designed, you know, bad news attracts eyeballs. We all know that. So what I would try to do is talk about the good things. And I think one of the things you had mentioned it in, in one of our calls, which I was total backer and believer of, it's about how things are going to get better, right? You know, one day they're going to say we expected 300,000

people to get infected today, but it was only 250,000. So the market is going to turn. Like, I think you had to like frame things like, look, this is baked in and we already know everyone, everyone has put the worst case scenario out there. The odds of that happening are probably not going to happen. And as soon as things just stop getting worse, you're going to see this start to get better and just constantly reinforcing with the positive things. And again, you have a diversified portfolio. If your portfolio made up of these low cost index funds that invest in global capitalism goes to zero, that is the least of your problems.

Trust me. I think though clients aren't worried about zero. I think what they're worried about is like, this is just my guess. I think when you're in a pandemic, which no one we know has ever lived through and the recession that's caused by it or that we deliberately caused to fight it or whatever's going on. I think the worst case scenario that clients envision is like that they're going to need to use that money because they're going to lose their income. Either their business is going to close or they're going to get laid off and they're going to need to use that money when it's in a severe drawdown, which is why the value of financial advice becomes so important in these moments.

Yep. Because again, many of our clients, you know, they're in their 60s and 70s and we have it set up. So there's always a good slug of their money in treasury bonds. And I always, when we, you know, from the beginning, I always told them, look, the market could literally be terrible for seven or eight years. And we could simply, you could always, if you ever needed a big slug of money and didn't want to, you know, uh, you know, sell at ridiculously low prices, it doesn't matter. I, I constantly tell people that even before the pandemic. So I think that was helpful during the pandemic because many, many clients, you know, said that. And treasuries did what they were supposed to. Exactly. Exactly. And, and. And a lot of my clients,

they're not as sophisticated, but they'll say, yeah, I know you would always tell us you have half your money in bonds and stuff. So like it was again, you can't just all of a sudden become this different person during these times. Right. You have to lay out some of these things ahead of time and constantly reinforce certain principles. So then when it, when this stuff goes down, you know, it's not the first time they heard it, right? Like, oh yeah, you told me that. And, and then things start to make sense and people calm down. If you're telling them new things in a moment of panic, they're almost going to be like,

wait, what? I don't understand. If you're just repeating things that they've heard you say many times, there's a better chance that they will accept that what you're saying is the truth. And to be honest too, I also feel certain people we called more than others, but I don't want to change who I am. If I start calling you now every day, they're going to think something's wrong. Do you know what I'm saying? That's not the way we communicate in such a way like, yeah, bad things happen, good things. But if all of a sudden I'm going to be constantly, Oh, you, is everything okay? Is everything okay?

They're going to be like, well, what's wrong, you know? So I think there's a middle ground. So this is from, this is from this research report. I say, quote, we found that RIAs communicated frequently with their clients during this period, reporting positive financial news even during extremely volatile trading days. They did so even during extremely negative return days. I don't even know. How do they know that? Were they like reading Twitter? I guess as a firm, we're communicating with clients like every single day.

Yeah. But it's also different. Not a great example. Most of those people who are reading like a lot of things that we put out aren't clients. You know what I'm saying? So I think it's kind of a little different. I'm talking about like my,

and it's a way you communicate. Like I would put some things on Facebook, like a chart, a simple chart to show like the long-term market. Some people I'd call, some people, you know, I would actually see in person. But my point is, I think to dramatically change. Also, people start to think maybe there is something wrong then.

So there has to be that that. Why is Tony? Why is Tony panic? Why is he freaked out? He never freaks out. Like, why is he freaking out? Like, I think that would literally if I ever said to them something like, holy shit, like this is a, like, I don't know, that would be the worst possible thing. But again, you need to respect their feelings, but constantly reinforce what we hope

that we've reinforced through the years. That's really what it's a process. So Ben and Mike have been talking about this on Animal Spirits. They're like, kind of like debating, they're not really debating each other, but they're almost debating themselves. Like have investors gotten smarter? Is that part of the way the markets behave these days? Because the assumption was I was doing media in like March and April. People like, whoa, most of the phones must be ringing off the hook. I'm like, I got to be honest with you. Now, anyone that's calling is like asking how they could put more money into their account. Yes. Yes. And I honestly think that was like nine out of 10 phone calls were like, I want to invest more. Yes. Okay. Yes. So that's so flip a coin or a gun to your head. Is the average investor who's been around for 20 years now wiser post dot com bubble,

post great financial crisis. They saw the market recover twice. Did they go through this particular moment with a little bit more maturity and wisdom because they bought the dip really fast, Tony. Oh yeah. I think so. And I think it's just like the way everything just seems to be happening so much quicker.

And there's these constant things that are happening. Like everything is just speeded up. So I think it was like a natural progression that they, you know, like their reaction was kind of quicker, right? They came to the conclusion sooner that maybe this isn't going to be forever. And maybe this is a good time to buy. And I just think with the constant coverage of news, the way we're saturated, they're constantly used to bad stuff happening all the time. And, you know, their, their money has grown pretty well over the last 10 years. How do you even shock these people with what they've seen since, since, since the year 2000, we, I'm, you know, nine 11 Taliban, like, how do you even scare these people

anymore? But, and then the important thing is, let's look at your portfolio from like 2007 to like now. And even though all these terrible things have happened, you've been okay. And I think maybe that's starting to, you know, some people are starting to get that a little bit. Right, the last 10 years,

I think the S&P compounded at 14% a year, which is amazing. It's insane, yeah. And this, despite all the crazy shit that's gone on. So, okay. But that's normal. I think also you have to tell people like, it's not crazy. The world is crazy. The world is filled with crazy, irrational people. And even though it seems like, like it's abnormal, but it's normal to have crazy stuff go on. And maybe that's also kind of sinking in a little bit. The problem is we just hear about everyone's village idiot.

We just like it used to be you had your own village idiot. You lived in a town and there was one insane person and you saw them every day and you got used to them. But now on social media, you hear about them from every town in the country because they're being reported on. I agree. So I want to leave it there. And Tony, we want people to check out your blog, which of course I read all the time and I absolutely love. And the blog is called The Teachable Moment. Plays off the fact that you were an educator and you still are in many ways. And now, of course, you're a financial planner and an educator with you still are in many ways. And now, of course, you're a financial planner and an educator with the blog.

So everybody check out TonyIsola.com, which is a Teachable Moment blog. And what else do you have going on these days? You're doing a lot on Facebook. Our Facebook group, it's almost 2,000 members now. It's amazing. Yeah. And we built it organically. members now. And yeah, and we built it organically and we're trying to provide, you know, just general advice that, that, you know, it's for teachers, but quite frankly, it's really for anybody who wants to understand the basics of how to handle money. Cause we're going to link to it,

but it's teacher money matters. And it's a, it's a private group. So you have to ask to join. And the reason we do this is because there's a lot of scammers. Like I've declined a lot of people, like insurance people try to get in people, you know, selling Nigerian, whatever they're selling, you know, all kinds of crazy people. So I could see their profile. So it's so if people join, they know it's all teachers. So you rejected about 50,000 people in this 1800 that made it. Yeah. Well, I wouldn't say that many, but yeah, there's definitely some shady characters. And what you put, what you're basically doing is people are throwing questions

on the timeline in the group and you or Dina or both of you are popping on video and answering their questions. It's amazing. It is. And a lot of times they're answering. We have some people on who are kind of being mentors to the other teachers because they kind of know what's going on and they kind of feel important, you know, like to say things and they're great. They help out. And it's more, to be honest now,

it's more of a community. So we're trying to build this community where people have like a place where they can go and they can trust people to expose them. You know, they're not giving us all their personal information, but money is a personal thing. And, you know, people want to talk about their in debt or their kid's college and things like that. So we're trying to make it like a safe, safe place. It's an amazing thing you've built organically and people feel comfortable asking you guys questions and you're giving them helpful guidance. And I predict that 1800 people will turn into thousands of people as time goes on.

And it'll happen organically. It'll happen slowly. And you guys are going to be their go-to people that when they have a question that's bothering them or keeping them up at night, they know that you'll give them the truth. So I love that. I love that you guys are doing that. You're so you're such naturals at doing that. And I watch the content, too. And it's you guys are questioning. All right. So so we'll send people to Tony Isola dot com and the teacher money matters group on Facebook. Yeah. And Tony, thanks so much for joining us today. the Teacher Money Matters group on Facebook. And Tony, thanks so much for joining us today.

All right, I'm here with Rich Bernstein. Rich, this is so exciting for me. I don't think you and I have met face-to-face in person anywhere, but I've been reading your stuff so long that I feel like we have. And I think you do a really great job. Are you writing weekly or monthly? What's the frequency?

Well, Josh, you Josh, these days we tweet several times a day, not with the success of the former president, but we do tweet several times a day and we write a monthly between the three of us, the three senior people at the firm. It's about once a week, more or less. Okay. But each of us writes monthly. Okay. So your latest piece is what made me reach out to you because I thought it was very well done. And you're basically saying it's titled Boomer Knows Best. And we'll link to this in the show notes and everybody should be reading Rich Bernstein stuff. But you're basically saying building wealth is a slow process and you're trotting out some very important stats that I

think the new investors who've come along in the last year probably have not been made aware of. And even some people who have been investing for a long time, it's a good reminder of why we do things the way we do them, even in periods of time where the market gets very excited. So where I wanted to start was, this is great. You're saying the best risk reduction tool is time. The longer you're invested in an asset, the better prospect for positive returns are. And that almost applies almost universally. So could you speak a little bit to that? Sure. So Josh, this is something that I've championed for, I don't know, 15, 20, 25 years, is that time is on your side. And I never understood

why people want to day trade when the probability of being successful when you're day trading is roughly 50-50. It's a little bit better than flipping a coin. It just makes no sense. However, as you extend your time horizon from a day to a week, a week to a month, a month to a quarter to a year to three years to five years to 10 years. Every time you extend the time horizon a little bit further, what you find is the probability of losing money goes down. Yes. You're talking about, you've got this 54, 46 chance of making money holding stocks in any one given day, which is effectively a coin flip.

And then these are your numbers. You're talking about extending the time horizon from a day to a year. The potential for negative returns drops by 15 percentage points from that 46 down to 31. And then over 10 year stretches, the S&P 500 itself, you got about a nine in 10 shot that you're up over a decade. Which seems to make a lot of sense that one would try to look for the 90% probability as opposed to the 50-50. Now, let me put on my sideways hat like a 22-year-old who's just stumbled into trading this year and say to you, I understand what you're saying. However, I just doubled my money in three weeks in Chinese electric battery companies, why on earth would I be shooting for an average

annual return of 7% nominal? To me, that's where the disconnect is. And it's undeniable that the bigger risks you've taken over the last year, the more those risks have paid off and with the more frequency. So how do we have a conversation with this generation if this is their formative experience? Right. No, that's a very important conversation to have. Look, the way to think about it is that economies do not change minute by minute. Right. We all know. Imagine if the Wall Street Journal put out a headline tomorrow that said nothing changed. Who would buy the paper tomorrow if they saw that headline? Nobody would. So there's always something changing and it's always made to be incredibly exciting. However, the reality is that economies do not change that rapidly. It's like watching

paint dry. And so as you extend your time horizon, what's actually happening is you're investing for fundamentals. What that also means is you shorten your time horizon, you're investing more on noise. And so I think what people forget and what a lot of new investors are forgetting is that we are in what's commonly called the momentum phase of the market, where what becomes attractive is what's going up. And there's really no reason it's attractive other than it's going up. And when those markets are around, it's a lot of fun. It's very exciting. Everybody loves it. The problem is finding a moment the market is not hard.

Determining when it's going to be over is the hard part. Growth stocks are easy to find. They're hard to determine when you should sell. And that's what I don't think we've hit yet for a lot of these younger investors. I completely agree. So I wanted to ask you, Rich, I wanted to ask you about the horse race. So I thought this was really interesting way to think about longer term investing. So you're saying, what's the difference between the stock market and a horse race? Many investors think of the stock market as a horse race, gambling or gaming. Individuals use the term bet when placing trades.

And then of course, options amplifies everything. You've got trading apps that blow a whistle or a trumpet. And individuals transacting that way are forgetting that for at least a brief moment, they're becoming a partial owner of a company. It's not a magic trick. Look, I hit buy and this thing went up. But I think a lot of people now have been conditioned that that's the way to invest. But you think about investing differently, but within the same construct of it being a horse race. So could you describe a little bit what you mean by that? Sure. So Josh, I used to teach in the grad school at NYU. And one of the questions I used to ask the MBA students every semester was what's the difference between the stock market and the horse race? And one would hope that an MBA student would know the difference. They never did. It was always incredible for the reasons you say. We use the terms, you know, all that kind of stuff.

But here's the way to think about it. When you buy shares in a company, you become a partial owner of that company. And as a partial owner of the company, what you care about are the earnings and the cash flow of the company and how the growth of the company will increase the earnings and cash flow, which will increase the value of your shares as a partial owner, just like in a business. If you ran a business and you wanted to sell the business, you would hope the business would become more profitable. You could sell your business for a lot more than you put into it. That's what equity investing is actually about. So it's not a horse race, right?

It's not like I'm betting Seabiscuit in the seventh, right? That's not what's going on here. What happens is it's almost like you're buying the horse, you're training the horse, you're hopefully winning a lot of races, you're winning a lot of purses, and then you put the horse, you're training the horse, you're hopefully winning a lot of races, you're winning a lot of purses, and then you put the horse out to stud. And the earnings and cash flow that come from the horse through time are the way you should think about stocks. It's not that there's one race and you're betting on the race. It's the business of the horse itself, buying the horse, training it, getting the money, putting it up to stood.

What are the earnings and cash flows associated with the horse? So it's owning the horse, not betting on the horse. Right. Nobody would buy a horse to have it run in one race where they bet on it. Exactly. There's a whole ecosystem that's got to take place for that horse to be a good investment. Exactly right. And it takes more than 30 seconds in a race. Okay, so I want to switch gears a little bit.

And just this idea to become your parents, I thought this was, you know, it's very easy to make fun of boomers, but most of my clients are boomers because that's who has most of the wealth in this country still. That won't always be the case. But one thing this generation did right, people screamed at them to save money and a lot of them listened. And then

people screamed at them to hold and not panic and not sell. And a lot of them listened. And now they're in a really good place because they heeded that advice. So following their footsteps, maybe not the worst thing for somebody who's in their 20s or 30s. No, you know, and Josh, I think we all go through this. I mean, I remember when I started in wall street and I was, I don't know, 24, 23, whatever. And you know, the, the old guys kind of seemed like old guys, right. And perfectly frank, you know, a lot of times I thought they didn't get it. And then through time, I began to realize that, gee, things were kind of happening the way they said it would. And not the way I said it would. It was kind of like, wow, how did that happen? And so it's almost you got to put your ego aside. You have to get rid of that and realize that

other people know more than you. They've been through multiple cycles. They see this and you can learn from that. And I'm I mean? And I'm not quite sure why people don't understand that better. Let's put it that way. Yeah. So people in my firm are relatively on the young side, but I think what we try to get across is that of course things are different. Of course the market changes, but human nature doesn't. And that's how, that's why cycles repeat and they don't always repeat in the exact same way. But the inevitability of people getting excited when things are rising and then people becoming terrified when they stop rising like that's that's thousands of years old. It's not even hundreds of years old.

Well, Josh, here's how we talk about the younger people in our firm. We always talk about being a Yankee fan that I am. We always talk about Derek Jeter. people in our firm, we always talk about, being a Yankee fan that I am, we always talk about Derek Jeter. No matter how good Derek Jeter got, he still took ground balls in spring training, right? He still practiced the fundamentals and realized that practicing the fundamentals was the key to success, right? And he did that all the time. And what we try to say to our more junior analysts is you have to master the fundamentals first. Once you understand the fundamentals and you master them, then you can go on to greatness.

But if you can't master the fundamentals, if you don't understand the fundamentals of investing, you're never going to be able to do it successfully for a longer period of time. And you're never going to have a career. So think of the Derek Jeter taking ground balls in spring training. That's the key. You just don't walk in. No matter how good you might be, no matter how good you might think you might be, you still have to practice the fundamentals. So I got to meet Jeter actually on the last conference I attended live in person was Inside ETFs in, I want to say, January of 2020. ATFs in, I want to say January of 2020. And their big keynote is Jeter. And they're like,

hey, Josh, we're going to let 50 people go up to the suite and say hi to him before he runs out of here as fast as he can. So there's a line of financial advisors to meet Jeter. And of course, everybody wants photos with him and whatever. I just wanted to talk to him about this thing he wrote at his website. He's a great writer. In addition to being a great baseball player, he's a great writer. It makes you hate him so much, but he is the man. All right. I want to switch gears and talk about the current environment because what seems to have happened over the last couple of weeks is either everyone all of a sudden remembered how sexy it is to have cashflow and they got bored of the greater fool game. So either we had this mass realization amongst all investors, or there was some merit to the idea that rising interest rates spooked people

out of growth at any price stocks or some combination of those two things. I'd love to get your take on what's happening right now. Sure. So, Josh, one thing I've tried to impart on our investors is to realize that the trough in the 10-year was actually back last summer. 50 bps last August. Right. And so interest rates started to go up. And what happens when interest rates go up? Well, we know that long-d duration bonds don't do well, right? 30 years, euros don't do very well when interest rates go up.

10 years, euros don't do very well. You know, you want to shorten the duration of your fixed income portfolio. Most people seem to know that. But for some reason, they don't understand that the same thing happens in the equity market and long duration equities get hurt as interest rates go up. Now, what do I mean by that? Let's take a very simplistic example for a second. Let's say you have a stock with a PE of 30. Very simplistic. Assume no growth. What you're

going to find is that that PE of 30 is discounting 30 years of earnings, almost like a 30-year zero coupon bond. Compare that to a PE of 5. That would say you're discounting five years of earnings. We know as interest rates go up, time horizons have to shorten because the value of those 30 years of earnings goes down. The discount rate changes. Yeah, exactly. That's all that happens. It's the same thing when you have a PE of 30 as you would when you have a 30-year zero.

So another thing, though, that also happens is the cost of capital goes up. And many of these long-duration businesses we're talking about are companies who the moment they come public, they're telling investors, we're going to have to raise money again. I'm thinking biotechs, electric vehicles. They're saying this is not the last race. So when the cost of capital goes up, that's another headwind for that part of the market. Without a doubt. And we've been in a very unusual period where money was essentially free. I'm sure everybody can name one electric vehicle company that's come to market more times than you can probably shake a stick. And that company has relied very heavily on free money to do all these things that they want to do. My argument has always been it's easy to be a futurist. It's easy to talk about going to Mars when money is free.

But when you have to pay for it and you actually have to start making rational decisions about where that money is going to be spent, maybe you might decide it should be spent here on Earth instead of on Mars. So speaking of Tesla, two things can be possible at the same time. Those two things could be Elon Musk is one of the greatest innovators, maybe of our lifetime, and has absolutely changed the world. And Tesla can remain a leader in this space forever. But it can also be true that the stock is not a buy. Because all of that and then some is, and I just put this together before I came on coincidentally, but year to date, Tesla equity is down 16%. Ford is up 45%. Nobody would say Ford is more innovative than Tesla. That's not how stock prices work. So I think that's another great lesson for the next generation, which is that, yes, it's easy to be a futurist when money is free. It's also easy to say,

that's the most innovative company on earth. Therefore, it's a buy. If only it were that simple. And I'm sure you've had these conversations with clients and advisors over the last couple of years and just try to get across them. Yes, we all agree these are fascinating new technologies. That doesn't necessarily equate to a great investment today. 100%. That's exactly right. I mean, the example that I give everybody, Josh, is the tech bubble, right? 98, 99, 2000. There were tons of promises made about what was going to happen over the next decade

and how technology would change your life and everything else. Those came out to be true. The vast majority of those came out to be true. However, from 1999 to 2009, the stocks went down on an absolute basis. And that's largely because the valuations were so extreme that you couldn't possibly make up into those valuations the cash flows that they had. The companies actually accrued over that time period. They were so overvalued. So to just say that it's a great story is not the way to invest.

I've always counseled analysts. I used to be a Marylandian. What I used to counsel our analysts was it's not the story that you should tell, right? That's what a reporter does. As an analyst, you should say, what is everybody missing? What have you found that everybody else has not? That's the investment information. It's not the story that, you know, to use the example you used about Tesla, it's not that Tesla has great innovative technologies. Who doesn't know that? It's the question of what have you found about Tesla that everybody else does not know? That's the investment information. So there was a moment in the last year where it felt like

Howard Marks' concept of first level thinking versus second level thinking should almost be thrown out the window because if retail investors had become the new force driving stocks, all retail investors ever do is react to first level thinking. So it was almost like a disadvantage to make a statement like Apple's a great company. That's first level thinking. Second level thinking is yes, but everybody already knows that. Right. But that got you in trouble because Apple stock doubled.

The multiple went to 35 times earnings by Christmas time. So it's like, thanks, Howard Marks. You kept me from adding to Apple. But now, again, a lot of that stuff now seems like it's being rethought, which is a healthy process. Now, I know you're very top down and you're a big macro thinker. And I get a lot out of your insights when you write about how what's going on in the economy relates to stocks. Do you ever get into a moment, especially recently, where you just say to yourself, a lot of the things that I used to

believe or a lot of the things I've learned just may not be applicable given what's happening here? I'm struggling with that kind of thing. I'd love to hear what your thoughts are. The way we look at it, Josh, is we say, look, we know there's, again, think about the Derek Jeter analysis taking ground balls. We know there's certain things that should work, right? And we know that that's going to happen. We know the probability of success is greater if you follow these general axioms of investing, if you will. And so when they don't work, what we try to do at our firm is figure out why are they not working? But you have to figure out what's causing that to happen, how long can it possibly last,

and what's going to make it unravel? Don't say it's the new age of medicine. Say, look, something's gone wrong. Why has it gone wrong? And how long can it go wrong for? Again, the basic fundamentals will not change. So sometimes that goes wrong in a month. You can figure it out and it changes in a month, sometimes the week, sometimes the year. When you say go wrong, you mean something is deviating from how things normally are? Yeah, yeah. Okay. Again, maybe it's a little self-effacing to say that the way we view the world is rational.

I get that. But what we're trying to do is say, look, there are certain basic fundamentals. And when those fundamentals go awry and they don't work, and in some cases you find it's 180 degrees, doing the exact wrong thing starts working, that's when you have to sit down and try to figure out, okay, is this really a change or is there something fundamentally going on here that's causing a kind of a difference between perception and reality? And very often what you find is there is a major gap between perception and reality. The one that what you find is there is a major gap between perception and reality. The one that I would argue right now is this kind of notion of a new era of innovation

and disruption. In our firm, we don't think there's any new era of innovation disruption. It's actually an economic environment that has caused those companies to lead the market, which has caused the marketing people to come up with these stories of new eras of innovation and disruption. But there's nothing really new going on. You know, I mean, is it really that much more disruptive than the telephone was to the telegram? Well, it's potentially. I mean, do we think that the distributed ledger and AI and developing a vaccine in one-tenth the amount of time?

Do we not think that those developments might have the potential to be as world-changing as the telephone? I think it's still open to the possibility, I guess. Absolutely. No, that's not the point. The point is not – from my point of view, remember, I don't really care about the story. I think a lot of these stories are probably true. I care about the valuation of the assets that are taking part in that story. And are the assumptions behind it realistic?

For instance, a lot of times people say they're the only game in town. There is no competition. Well, what happened to capitalism? If you're the only game in town, shouldn't there be more competition ahead? And how are you taking them to your earnings model? And how are you talking about them? A lot of times what you find is people say there is no competition. There never will be any competition. And company XYZ will have 25% market share in five years. That never turns out to be true. But we are in a moment where you have $5 trillion companies and they have plenty of competition.

It just feels as though the competition is hopelessly undergunned to seriously mount the challenge. And the only way I could picture the FANG name stumbling is if they compete against each other because they all have so many resources. Or what begins to happen in these situations is you start getting Washington involved. The big become too big. And all of a sudden you start hearing about antitrust. You start hearing about unfair competition. And that takes years, right? If you think about the AT&T breakup, that took years and years and years for it to come to

fruition. If you think about, you know, Standard Oil and the energy monopolies way back when, that took years and years and years to come to fruition. But you think about standard oil and the energy monopolies way back when, that took years and years and years to come to fruition. But maybe it happens again. I don't know. These companies seem like they're ready for it and they're very good at playing the game. Bezos bought a mansion in DC just to wine and dine people pre-COVID. It seems like nothing Washington could do to Facebook or Amazon would come as a surprise. Maybe not. But then it gets to your point. Do they start competing with each other?

Right. The notion that they buy all potential competition, I think, is ultimately quite damaging for them. Okay. So now we're in this situation where we've had this massive resurgence in value stocks and small caps. And part of me feels like that has nothing to do with the fact that they were undervalued and everything to do with the fact that they were leveraged to areas of the economy that went from being closed to open. So oil stocks leading the market this year, followed by regional banks. To me, that's not a value story. That's a story about gasoline demand and interest

rates both going up. How do you think about leading and lagging sectors? How important is that stuff in terms of your asset management? We are very big proponents of the business cycle. What we try to do is we try to figure out how long profit cycles are going to last, how dramatically they're going to last, how dramatically are going to go up or go down. And we look at that all over the world. And I think you're right. It's not for us. It's never value that drives our portfolio. We don't buy stocks because they're cheap. We buy stocks because fundamentals are improving. And then we look at the valuation. Right. Right. So it's fundamentals first, then value,

not value, then fundamentals. And the reason why we like to do it that way is in value investing, when value investing goes wrong, it's usually because value investors buy too early. In other words, a lot of value investors say, we'll buy early, but we'll be there at the bottom. That sounds so prudent,

but that we'll be there at the bottom says we're going to underperform for an extended period of time. Can you keep your clients through that period? Yeah, exactly. We're not willing to take that chance. Right. In many industries that people kind of left for dead, it really wasn't that they were dying industries. As you point out, it was they were shut down by COVID.

Right. When the economy stops, a lot of cyclical companies are going to take it on the chin. I don't think you need a PhD to figure that one out. And now the economy is coming back. So those same companies are now going to have very easy comparisons 2021 into 2022 as the economy begins to ramp up again. Cyclical, right? I always try to tell people that the cycle, by definition, is determined by cyclical. The question I get asked most often is, how long is that going to last?

Is this just a short-term cyclical rebound, or is it something that could last longer? Honestly, who knows? I don't really know who could figure that out and say, this cycle is going to last until next Tuesday at 3.15. I don't know who can actually do that. However, I would accept that there is a cycle going on and the cycle's rubbing up. And if it turns out to be longer, the fundamentals will tell us to stick with those stocks for a longer period of time. What are you telling people about 2021? Is it a typical economic expansion coming out of an atypical recession?

economic expansion coming out of an atypical recession? I think it is an atypical recession and we're coming out on steroids. Okay. Because we have, you know, we know the 2020, if you look at the change in monetary policy and the change in fiscal policy in 2020, it was the biggest combined stimulus ever in history. And it's just off the charts. And now we're getting more, right? So, I mean, we can all argue about whether this is the proper policy or not. I don't know.

President Biden has exactly called me up and asked me my opinion. So whether it's the right or wrong policy, who cares? They're doing it. And I think we're going to see just a massive boom coming out the other side that's bigger than people could possibly imagine. You have a lot of stocks now that are trading higher than where they were pre-COVID. And these are stocks that are directly involved in the reopening. And I think this is what frustrates the bears. They say to themselves, they look at a hotel chain and they say, wait, I don't understand.

These companies just lost a year of business and now their share price is higher than where it was before the pandemic. The market's rigged. The Fed is pumping up assets. In reality, what these companies basically did was they trained their shareholders to look through these three quarters of being completely closed. And then they liquefied themselves with secondary stock offerings, convertible bond offerings. They refinanced all of their debt at historically low levels. So it would make sense that their share price is higher because we are going to have a boom with this much stimulus.

But people really have trouble with that. They feel like somebody should get hurt or I should have had a better chance to buy the stock or something. You could see it bothers their sense of cause and effect. And the externality of that is they complain that something went wrong in the markets. So I mean, it's a fascinating thing to watch, I guess, right? Yeah. But a fascinating thing to watch, I guess. Right. Yeah. I think, yeah, no, I, but I think your, your point underneath what you just said, Josh is very important. Things are extraordinarily dynamic, you know, to think that companies were just going to sit there and take it on the chin, you know, and be victims of what was going on. I mean, I don't know too many CEOs who are willing to be victim.

You don't get to that seat by being a victim. Yeah. And so they did exactly what you said. They tried to adjust to this environment. They took advantage where they could. The idea was to hang on, right? And their hope was that there would be a vaccine. The vaccine would be successful.

And if they could hang on, they would come back to life as the cycle revved up again. And the risk, of course, to what we're talking about is for whatever reason, the vaccine proves impotent, right? That's the risk that's looming out there. But I think, look, if most scientists don't think that's going to happen, I'm willing to listen to the scientists. Rich, I just want to say thank you for all the great stuff you've been doing.

I continue to learn by reading you. And where can we send people who want to get some more information about Rich Bernstein Advisors or follow your research? What's the best place to go? So Josh, thank you. You've been very kind inviting me on and you've been very kind with your comments. Our website is rbadvisors.com. All right, Rich, you're the man. Thanks so much for doing this. Hopefully we talk again post-COVID. That would be fun.

That would be a lot of fun. Thanks, Josh. 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.