The Compound and Friends - The Only Two Scarce Resources Left on Wall Street

Episode Date: May 21, 2019

There are only two commodities left worth anything in the money management business. In an all hands meeting at Ritholtz Wealth, CEO Josh Brown explains... Enable our Alexa skill here - "Alexa, play the Compound show!" https://www.amazon.com/Ritholtz-Wealth-Management-LLC-Compound/dp/B07P777QBZ Talk to us about your portfolio or financial plan here: http://ritholtzwealth.com/ Obviously nothing on this channel should be considered as personalized financial advice just for you or a solicitation to buy or sell any securities. Please see this 3,000 word terms & conditions disclaimer: https://thereformedbroker.com/terms-and-conditions/   Subscribe to the mini podcast on iTunes or Spotify Enable our Alexa skill here - "Alexa, play the Compound show!" Hosted on Acast. See acast.com/privacy for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

Okay. Good morning, everyone. I wanted to talk today about what I believe to be the only two scarce resources left on Wall Street. So a lot of things that look like they were resources and look like they were scarce, it turns out aren't terribly important and not just in our business but around the world. I was looking at returns for commodities over the last 10 years as part of something that I'm writing and I was just completely blown away. I knew they were bad, but they are atrocious. The returns for any version of the commodity asset class, whether you're looking at one index that's dominated by oil or another index that equal weights and has a bigger emphasis on metals and on and on and on.

There's just – there seems to be no bottom and funds based on commodities have been decimated and the asset class has completely fallen out of favor. And there are many reasons for that, which I'm not going to go into, and there are many reasons why that possibly could reverse, although who knows. reasons why that possibly could reverse, although who knows. But just the point that a lot of things that seem to have been scarce or hard to get or an expensive proposition just continue to plunge, whether we're talking about building materials or we're talking about sources of energy or we're talking about the types of precious metals that people store as some sort of a hedge against either inflation or a broken financial system. But one – food commodities, anything to do with livestock, anything to do with feed, just one by one when you look down the list, all of these things are plunged in value. Every rally has been a false rally and you just continue to see this pattern of lower lows. And we could talk about central bank activity, flooding the world with capital.

But some of those things were meant to drive the price of commodities higher. We were told that that would lead to inflation. And in fact, it's been the opposite. Endless amounts of exploring has led to this stasis for energy prices where they can't make any kind of forward momentum. And you go down the list and I think when you think about the main driving force for that, it's technology. Technology is an anti-commodities bet. The two of them, in my mind, work opposite each other. Technology is always finding new ways to do more with less or to come up with alternatives for things that aren't great for the environment or for society.

And now we even have a digital currency that some say has put a lid on the price of gold forever. We'll see. We'll see. But that's now a common sentiment. There are some commodities in our business on Wall Street in the financial services industry that I think have been permanently disrupted by technology. And so one of the main ones I think is this idea of brand and marketing. I think when you talk about the 20th century Wall Street giants, the household names, these are companies that for decades have gotten by with full page ads and barons, sponsoring golf tournaments, running commercials during the NCAA basketball tournament. It's worthless. It's worthless. People have pop-up ad blockers. People have DVRs. They fast forward through commercials. When there are commercials on TV these days, what do most people, Erica, what do most people do when they're watching a show and a commercial comes on? Get up and leave.

Okay. What else? Instagram. Right. What do they do? They look at their phone. They look at their phone. They don't watch the, they're watching – they're looking at the phone during the show. I know I am. It's very, very, very hard as a brand to spend money and get any kind of attention, which is why you see this relentless parade of headlines. We now offer a mutual fund for three basis points. Oh, yeah? We're two. Uh-oh.

The one basis point ETF. Now we're zero. Well, fuck you. Now we're two. Uh-oh. The one basis point ETF. Now we're zero. Well, f*** you. Now we're negative. We're going to pay you to invest in the ETF. Mike, am I lying? We saw that, right? I don't know where it stops, but what all of this has in common is attention seeking. And it's great. It's phenomenal for us. Great for our investors. Great for us as investors ourselves. It's terrific. And then you see the largest firms that do wealth management. And I get this thing from CityWire into my email inbox every morning. That's like the rundown of headlines from the previous day. And every single day, team with 470 million leaves Wells Fargo. Team with 600 million leaves UBS. The largest breakaway turned RIA ever, $5 billion on my friend Cheryl Penny's Dynasty platform.

It's one breakaway after another because those brands, not only are they no longer doing anything for the practitioners who are working under their banner. In some cases, the news flow is so negative that they actually act as a detriment. Imagine that. Imagine that, working at a firm where the reputation of the firm hurts your ability to work with clients or find new clients. So this idea that you can just act any way you want and then buy ads in a magazine and kind of paper over that activity, it's over. It doesn't work anymore. So I think the two most scarce resources in our industry right now are reputation and attention. So let's start with attention. Does anyone care what you have to say?

Probably not. Does anyone look at the marketing you're doing and saying, oh, that resonates with me? Probably not in a lot of these cases. Does anyone read the research that we're publishing morning, noon, and night? Probably not in some cases, right? Think about how much research is generated on Wall Street, the vast majority of which is meant to market the trading desk to the buy side to have them conduct trades. Or think about how much research is generated, price targets on indexes, et cetera, to get the chief strategist some headlines. None of that stuff is helping anymore. It's over. It's over. So attention has become a very scarce resource. It happens to be a resource that we have in spades. And the reason we have it gets to the second scarce resource, which is reputation. Do you do for clients what you say you do?

his reputation. Do you do for clients what you say you do? Can you actually help people? And when you do, do they spread the word? Do they tell other people, I'm really happy? My financial person doesn't know where the S&P is going to end next year and doesn't have 10 hot small cap picks for a ho, ho, ho Christmas. However, she is helping me understand how my money and my life work together and where I need to get to in order to do the things that are important to me, right? So having a reputation for actually helping people, having a reputation for not opening millions of fake accounts across the country or money laundering for foreign interests or whatever the latest scandal is on Wall Street. And we'll never run out. We'll never run out.

There will always be something. Being a firm that's not in those headlines, that's not a part of the problem, being a firm that's part of the solution for individual clients, earning that reputation day after day gives you that resource. And it's a very, very scarce resource and becoming more and more scarce as the industry consolidates and as the 20th century brands continue to blow themselves up in service of short-term quarterly earnings reports and executive compensation. So we now are in a situation where independent firms have the ability to build this reputation for themselves and they are. And they are.

A lot of the firms that we look up to in the RIA industry, they've built massive brands and they've built massive amounts of reputation. And that's phenomenal to see because you know they didn't do it with the old playbook. Let's just do whatever we want and then spend enough advertising that nobody will really notice or nobody will even care. That's almost a form of gaslight headlines, and do not report to shareholders their quarterly results and make moves within the business that force two last ones left in this industry are things that we think about all the time. I know that getting positive attention for the work that we're doing and building our reputation with clients and potential clients is everything. And the good news is we know exactly how to do this. We do it every day.

We do it every day. We do it every day. We do it with every meeting, every phone call, every interaction with clients that leaves them feeling better afterward. That's building reputation. One conversation at a time. All of the work that we do to educate the public, all of the work that we do to keep our clients informed about markets, to present context while others are panicking or saying disastrously unhelpful things, that is how we build attention. And if we continue to build reputation and attention at the rate that we are and we think about these things as scarce commodities, we are going to corner the market, ladies and gentlemen. Give that a round. All right. We're back to business. There's no more corporate offsites.

There's no more firm vacations. Now we work, okay? We're headed into Memorial Day weekend. Let's get as much done as we can. Let's talk to as many people as we can, and let's rock and roll. Thank you.