We Study Billionaires - The Investor’s Podcast Network - TIP180: Legendary Investor Bill Miller on Stocks, Commodities, & Bitcoin

Starting point is 00:00:00 You're listening to TIP. Hey, how's everyone doing out there? So on today's show, we have one of the biggest names in finance, Mr. Bill Miller. In the past, Bill has been named the greatest money manager of the decade by Morningstar and part of the Power 30 by Smart Money, and he's a member of the All-Century investing team by Barron's. When Bill was the chief investment officer for Lake Mason, he managed over $75 billion. And today, Bill is the owner of Miller Value Partners. And I think you're really going to get a lot out of this conversation because we talk about

Starting point is 00:00:33 the recent pullback and the global equity markets. We talk about commodities and we even talk a little bit about cryptocurrencies. And so I have no doubt you guys are going to enjoy this conversation with the extremely intelligent Bill Miller. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right. So I'm here with Bill Miller. Always such a pleasure to have you on the show, Bill. Thank you so much for taking time out of your very busy day to be with us. It's always just such an honor to have you here. Oh, thanks. Thanks, Preston. And happy to do it. You do a great show. Thank you, sir. Thank you very much. Well, the story that I think everybody's talking about is this inflation growth, the bond sell off, the tax cuts, a little

Starting point is 00:01:37 over a year ago, whenever we talked, it was probably about 14 months ago, you had suggested that you agreed with Ray Dalio and some other guys that were saying that they thought that the bond market had hit his bottom in the summer of 2016. And you even told us on the show last time that you had a small short position on bonds. And so far, that has been an incredible call. And I'm kind of curious how you see that continuing to mature. Do you think that that trend is going to continue? Or do you see it kind of hitting a peak at this point? Yeah, I still have the short position. It's bigger now.

Starting point is 00:02:11 But I think that it all depends on the date. It all depends on inflation and economic growth. And the trends that we see or that I see are that it's likely to be the case that both of those certainly inflation is likely to have some upward pressure on it over the next couple of years. And bonds are still too cheap in the sense of yields are too low. But bond yields are too low, in my opinion. And I think that they're going to have to move higher.

Starting point is 00:02:37 But over the next couple of years, they could move into the force. And I think that, you know, I think Europe, by the way, is about 12 to 18 months behind the Fed. So I'm actually probably going to put a reasonably solid short position on a German two-year in the not too distant future. I think that's going to move up to about where our two year is in the next two years. You said you think it's going to potentially go up to 3.3% on the yield by the end of the year. Did I hear that correctly? Well, I think that we have the direction is higher on the yields. I don't have any special insight into exactly how high when I look at the inflation numbers that we see. And the Fed still isn't at

Starting point is 00:03:19 its inflation target. And typically, again, when inflation starts up, it tends to move fairly slowly in the first couple of years. So I think that I think the bond bear market will be benign. But we got to, I think, we got to three, I think around three and a quarter in 2013. during the taper tantrum. And that's a reasonable target, I think. Interesting. So in the past, we have seen the Fed say one thing and then do another. And most recent back in 2016, when you sold a 50% correction, and all the talks about tightening stopped and they become a lot more accommodating. Do you think that if we should again experience a significant correction, that we will see a similar pattern of them becoming

Starting point is 00:04:02 a lot more accommodating once again. I think the Fed has been fairly clear that they are what they call data driven. The question is how do they assess the data, how do they weight the data back when the market sold off in 2016, in the first six weeks of that. That was because of what people thought were legitimate concerns about China, about Russia. Stan Fisher talked about four tightenings in 2000 in that particular year. So I think that the market got spooked by. by those macro things. But I think the Fed is unlikely to change its approach to the gradual tightening

Starting point is 00:04:40 as long as the data is consistent with what I think we're seeing right now. So, I mean, I don't see any risk to recession. And I think we're in a global synchronized recovery. But I think that the real question is going to be the inflation rate. So our real rate is going to be moving higher. So let's equate this to the stock market then. So last time we talked, you said the impact of rising rates on the stock market was highly dependent on the speed at which that bond sell-off would occur. And based on that idea, do you think that the speed of the bond sell-off is making equity ownership concerning right now? So we've seen the 10-year move, I don't know, what, 30, 40 basis points just in the last month or two? I mean, it's moving pretty fast. So I'm

Starting point is 00:05:21 kind of interested in hearing whether you think that it's moving a little too quick. The broader picture, and I think probably what ended that very long period of very low volatility in the 15 straight months of the market is that we're shifting to a regime where the rest of the world is probably going to be moving where the U.S. is right now in the sense of the easy money, the QE that we see, especially in Europe, is going to be ending, I think, this year. And we're going to be moving into a different monetary regime, one that's going to be much less accommodated than we've seen in the past. And I think that'll probably lead to greater uncertainty and probably a return to what called normal volatility in the overall market and not the extreme

Starting point is 00:06:03 quiet that we've had. In 2013, recall that when we had that taper tantrum, that was the first year since the 2008 crisis that we actually had money go into equity funds. And the market was up 30% that year. And that was because people were actually starting to lose money in bond funds. And I think that we're close to that right now. We've actually seen, we actually shockingly saw inflows into our, into our main equity fund during that decline, which is very unusual. Some people could say that's, you know, that's complacency. I think it's people have actually seen with that particular fund whenever it has a, you know, a sharp pullback. It's typically been a good buying opportunity.

Starting point is 00:06:42 But I would expect that the overall direction, the path of least resistance for stocks is higher this year unless that that pace of interest rate increases, you know, moves very quickly. You recall that during the 1990s, had a huge bull market, and the 10-year average 6% that whole decade. So, you know, 2.8 or 2.9% is not a lot of competition for stocks. Yeah, no, I remember you addressing that last time, and it was a fantastic point. It's like, if we could get to 6% on the 10-year back then and go to a PE ratio way higher than where we are now, what was it 35 back then? I think the median, the median PE, well, it all depends.

Starting point is 00:07:20 The S&P, you know, P, you know, P, got to get to very high, very high levels in the late 1990s. So I guess, Bill, is this your way of saying that this recent pullback, this 10% pullback that we just saw that was very abrupt, was a buying opportunity? I think, I think any pullback in market history is a, you know, is a buying opportunity in the sense of lower prices are generally better for long-term investors than higher prices and higher valuations are. But this type of pullback especially is, you know, I think, have to distinguish between, you know, between, I call them, you know, technical, cyclical and secular declines in the market or things that are caused by that. So this decline is just purely, I think, the fact that we had an extremely low volatility period. And then we also had 15 straight months of the market going higher. And that made it vulnerable to any, I think, any type of dislocation.

Starting point is 00:08:11 So, yeah, and, you know, eight or 10 percent decline in the market. You normally see that every, you know, every 12 to 15 months. And I think that's, this one is perfectly reasonable, given the underlying conditions, I think, are very solid. And valuations again, I think for the overall market, you know, call it 17 times now in this, in this pullback, are not demanding when you look at where rates are. Interesting. So, Bill, recently the White House announced this 1.5 trillion fiscal spending plan. And even though it's not effective as of today, the market still anticipates more growth and in turn higher rates. So what are your thoughts on the magnitude of this?

Starting point is 00:08:52 Do you think that this goes to the narrative of an even higher bond sell-off or how do you see this effect, if any? Well, if the supply of bonds is going to be, I'll just say the supply of government security, so it's bills and notes and bonds is going to be considerably higher. Yeah, that other things equal would mean that the prices would be lower. You know, you also have this, I think, a point that's been raised by, especially by Ricardo Caviaro, MIT, that one of the things that precipitated the 2008 collapse was a shortage of safe assets and that the Wall Street, you know, engineering wizards got around. And if there weren't enough AAA assets, they're going to make, they're going to create some. And I think that, I think there's a lot of truth to that in the sense of, especially with the new liquidity requirements for banks and high quality asset requirements.

Starting point is 00:09:44 There's a lot of demand out there for, you know, for what are perceived to be safe assets. So, yeah, other things equal, a trillion five in deficits would lead to, would lead to higher bond yields and lower bond prices. But I don't think it's, I don't, first of all, it's a ways off. And then second, we have to surplus in January. Obviously, that's going to be temporary. But I don't think it's going to be material to the overall supply demand picture. What would be material to prices would be inflation rates. So you're talking about how the banks in the U.S.

Starting point is 00:10:14 are well capitalized. A lot of the changes from the 2008 crisis really kind of made those assets a whole lot safer than they used to be. But when we look over to Europe, we see organizations like Bridgewater that has a fairly substantial short position on Italian banks and some other locations. Do you have as much concern as some of these other people that are put in their money where their mouth is and saying that these banks over in Italy and the rest of Europe are as risky as they think? I think it depends on the individual banks and the conditions in the individual countries. So we actually have in the hedge fund, we've had a position in Credit Suisse for the past year or so, because I think the CEO is doing a good job. They raise capital. They're only any capital issues.

Starting point is 00:11:00 The strategy is sound. But I think on a case-by-case basis, that certainly can be the case that there's weakness. Deutsche Bank doesn't act well in the overall market, for example. Interesting. So let me just shift gears here a bit. We have people like Jeff Gunlock who we follow really closely here on the podcast talking about how commodities might be the place to be here in 2018 and onwards. And he's been very vocal about it.

Starting point is 00:11:24 I'm curious what you think about that statement, but also how you see commodities in general. The commodities super cycle is over. And I think that lasted as they tend to do, you know, over five, six, seven, eight, ten years. You know, commodities in a global synchronized recovery, demand for commodities is going to go higher. You know, if you look at the CRB index, for example, it's been rising. You know, it bottomed, I think, in 2015. It's been kind of on an irregular path higher. So I wouldn't disagree that the commodities will, you should catch a bid in here.

Starting point is 00:11:59 Again, it all depends on which, you know, which commodity. I think oil, for example, has probably, you know, seen a peak in the mid-60s. we got in the low to mid-60s, because you've got the U.S. shale production is rising very rapidly right now. But I think each commodity has its own supply demand cycle. Just so people understand your thought process when you would think through investing in a commodity, it really just goes straight to supply demand. I know that's what Jim Rogers suggests that the best way to invest in commodities is you've got to really understand that global supply and demand. Would you agree with that? Yes. I think, you know, most investors in commodities are most

Starting point is 00:12:37 traders and commodities are chart-oriented and highly focused on the trends, short and intermediate term trends. And I think that's because the commodities can tend to be extremely volatile and you can put a lot of leverage on if you want to. So, you know, getting the right side of that is those trends is important. But at the end of the day, the price is set by supply and demand. So the last time we had you on the show, we asked you about a book you would have recommended and you suggested the reminiscence of a stock operating.

Starting point is 00:13:07 and having read that book, the approach is very similar to momentum investing and how you can be on the right side of a trend. And similar to what you just described there with investing in commodities, I'm just curious how much of that type of approach you mix into your own investing approach because I know that you're a very hardcore value investing, deep value investing kind of guy, but do you use moving averages and those kind of things to help manage the risk of maybe catching a falling knife? Well, yes, I would say also with respect to the reminiscence of the stock operator, I thought that, I think that is a tremendously valuable book, but not because of the way in

Starting point is 00:13:48 which Jesse Livermore necessarily invested or traded in the short run on a momentum basis. It's much more, I think, important from the standpoint of market psychology, behavioral finance, those kinds of insights that are important. And again, I think the most important thing in that entire book is his point about the big money is made in the big move. So most people aren't really thinking about that. They're thinking about much shorter term, much shorter term moves. But to get to the questions that, you know, my son who works with me just got, he's got a CFA, but he just got his CMT, his chartered market technician designation too. And I think when we think about charts or we think about momentum, what we're really thinking about is trying to, what we think charts do is they help you,

Starting point is 00:14:33 visualize fundamentals and they help you visualize the supply demand balance at a price. That, I think, is valuable to take into consideration. And when we do, we do use that. We don't make, you know, investment decisions based purely on a, you know, on a chart pattern. It's based on fundamentals, but we use that, we use that supply demand as evidenced in the charts to maybe help our timing from time to time. And again, it also helps us to understand if the, if the, if the, stock there or whatever we're buying is bond is consistently moving against us. And we think the fundamentals are positive. We have to go back and take a look again at the fundamentals to make sure we haven't made a mistake. That's very, very interesting. And I don't know if it's too

Starting point is 00:15:17 much to ask or if you would share this with our listeners. Could you be more specific about what's techniques you use? Do, for instance, use moving averages? Yeah, you know, it's a combination of moving averages, we look at the 10 day, I tend to look at the 10 day, the 50 day, and the 200 day to get a picture of that. And what you know also is because other people tend to actually make decisions on moving averages, you can get a sense about where they're coming in. You know, if you look at, if you look at, you know, 10% corrections or corrections to the 200-day moving average, I think something like 80% of those things going back 20 years have gone through that 200 day and an undercut low before

Starting point is 00:16:00 before bouncing. But yeah, we will look at that. And usually then if something like Bitcoin, when it went through the 10 day on the upside, that against, because so many people are using that to time those, especially the crypto assets,

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Starting point is 00:20:31 Back to the show. So the whole Bitcoin piece is just red hot with discussion on the media, with everyone. And you have been a person that I've read about in the news relating to crypto. So I'm kind of curious to hear your position on this because we read a book, Stig and I read a book about crypto back in 2015. and after I had read the book, I took a small position in crypto just because I thought it was, I just thought it was interesting. You have evidently also taken a position back in 2015 is what I read. And this has been a tremendous position for you.

Starting point is 00:21:07 What originally got you interested in this? And then I would be curious to kind of hear your thoughts on the recent run up and run down in Bitcoin specifically. Sure. Well, I forget when I first became aware of this. it wasn't in 2008 or nine when it was, you know, down at, you know, pennies on the, pennies on the dollar. There's somewhere in the 2000, I'm going to say 14, probably 2015 time frame. And I then read Nicholas Popper's Digital Gold, which I thought was, you know, a useful

Starting point is 00:21:39 picture in a history of the, you know, of it. And then I heard Wences Casares who give a talk on Bitcoin. And he was, I thought, very convincing about it in the sense of understanding. understanding what its potential could be under a set of circumstances. And once this is view was that you just don't see this kind of technological development with this kind of potential come along very often. And he thought it would be useful for people to put 1% of their liquid net worth in it and understanding that anybody could afford to lose 1% of their net worth.

Starting point is 00:22:17 And I thought that was good advice then. I think it's good advice now. Bitcoin is unusual in that it's much less risky now than it was 10 years ago or five years ago because the ecosystem has been, is building out. We've got a lot more, you know, I'd say it's on a much more firm foundation than it was when it was a bunch of, I'd say, libertarian, anti-fed people and techno geeks. But I think it's still, it's the very early days, as I've told people when they tell me that I've been a Bitcoin believer.

Starting point is 00:22:51 I'm not a Bitcoin believer. I'm certainly not a Bitcoin evangelist. And I'm not even a Bitcoin believer. I'm a bit, but I have a Bitcoin observer. My cornerstone observation is that Bitcoin is following a very classic path for disruptive innovations that have exceptional secular possibilities going back to, you know, printing press, railroad boom, electricity, radio in the 20s, you know, and then more recently, obviously the Internet, the Internet.

Starting point is 00:23:20 Boom. And when I, again, I'm an investor in Bitcoin. I'm not a trader in Bitcoin. And so the decline for me was, you know, it was costly because I have a decent position in Bitcoin. But it's, to me, this is something I'll pay attention to if something happens fundamentally that is, that can halt or reverse Bitcoin. And that can, that could be regulatory or it could be technological. Or when it reaches a price that I think begins to discount the potential. out there. But, you know, it's, I consider it right now probably, just to go back to Nathaniel Popper's book, the best thing I think of it as is an uncorrelated store of value the way the gold is. What do you think the potential is for the market cap of something like Bitcoin? Is the market cap comparable to gold? Well, gold is, you know, gold is about seven, seven and a half trillion or thereabouts. So I would, I would think that something in the, a perfectly, reasonable thing given the way technology penetrates and the way some of Bitcoin's advantages over Gold are. Something in the $700 billion range would be, you know, would be certainly

Starting point is 00:24:31 reasonable. That's what 10 times, sort of seven times probably where it is or six times where it is right now. But you know, you couldn't rule out. I certainly couldn't rule out 100,000 of Bitcoin or even 500,000 of Bitcoin, depending on how it evolves and how the use cases evolve. The thing to remember about Bitcoin. And also, I think if your listeners look up Brian Arthur on the internet and read some of his work on path dependence and lock-in in technology, but one of the points that Brian makes is that technologies, once they reach a certain level of penetration, superior technology really can't do much about it in the sense of there's, you have inferior technologies all the time, going back to the query keyboard, you know, on a typewriter, or more recently

Starting point is 00:25:17 when the internet was getting going, people pointed out that the TCIP protocol was a really, really a bad and problematic thing. And I remember Bill Gates saying that, you know, that they can develop much better protocol than that and a much more effective, but it didn't matter because that had already won. Same with the beta and VHS. So the fact that Bitcoin is, you know, has a lot of issues with it, doesn't mean that it won't actually fulfill what many people think it could do. And understand also because it's open source software, anything that the community really does 51% community decides is something to have, then they can create it. So right now, you know, one of the problems with Bitcoin is the speed of the transactions and the cost of transaction. But this new lightning

Starting point is 00:26:02 network, which has been developed, it looks like that's going to solve that problem. So I think that there's, it's a very complex area and having a strong view one way or the other is likely that I think make you biased when it comes to evaluating what's happening. Yeah, that's a really important point. So you're looking at the, your argument is really the network effects and that the fact that once these network effects really kind of set in, you think that it has, you know, you're still holding and you still think it has upside potential, but you're holding those beliefs fairly loosely.

Starting point is 00:26:35 And you think that that's probably one of the most important parts, probably for somebody investing in this, is that they don't get too pulled in one way or the other, that they keep their mind open to the possibilities of how it could turn out? Yeah, absolutely. I mean, I've been kind of surprised at the, I'd say, the strong views of people who, of very, you know, very eminent people in the financial community, the very strong views they have about, you know, it doesn't engage my emotions quite the way it apparently does other people.

Starting point is 00:27:08 I'm trying to look at it dispassionately and critically. So let me ask you this because to hold, because I mean this went clear up to 20,000. We saw the price go down to I think it was 5,000, 6,000 just recently. And now it's back up to 10,000. I mean, this is like the wildest roller coaster ride ever. How are you able to manage your emotions in this so well? Because you said that it's just down to the fundamentals. If the government changes their position on it or from a technological standpoint, something

Starting point is 00:27:39 changes, then you'd be a seller at that point. if not, you're just going to continue to ride the wave, even though the wave is like a cat five hurricane. So I'm kind of curious. The question is, is how do you manage your emotions through something like that? Maybe because I was dropped on my head when I was a baby, so I don't have that that visceral reaction that many people do. I've always thought that, you know, lower prices made assets more attractive, other things equal, and higher prices made them less attractive. But, you know, Amazon went down over 95% in three years. But it turned out fine. And I think that the real question for me on this kind of stuff is Buffett has made a comment that with respect to

Starting point is 00:28:21 stocks that if you can't stand to see your stocks drop 50% peak to trough, then you probably shouldn't be in stocks because they can do that. And I think that's the same thing with Bitcoin. It's volatility has been greater for all kinds of different reasons. But in Bitcoin, I'd say if you can't, If you can't stand to see it drop 70 or 80%, then you probably shouldn't be in it. And I think most people that kind of trade these things trade them exactly wrong, which is when they'll buy them on a spike or they won't buy it when the price is flat and going sideways for a while. They wait until it goes up and then they buy it, and then it probably goes higher because they

Starting point is 00:28:56 don't buy it at the exact top. Then when it drops below their purchase price, they sell it. So they're always buying high and selling low. And I think that with respect to me, I have no ability to know exactly how much of the, of the psychology around Bitcoin represents froth that needs to be corrected. When I get asked, when I get to ask about the Bitcoin correction and how low it would go, my comment was it'll go low enough to shake out all the people that don't really understand what they're doing and are afraid of losing money.

Starting point is 00:29:24 And once they're gone, it'll start back up again. Yeah. And that's that, you know, that was apparently somewhere in the, you know, under 6,000 range, did that and now it's now it's going up for a while. Interesting. So it comes down to the fact that the investment, the reason that I, that I bought it at, you know, my average costs around $350. The reason I bought it then was based on the long-term right tail of that distribution.

Starting point is 00:29:49 And that hasn't changed at all. The price has changed a lot. So the gains aren't as great as they would have been. Everybody got at $350. But this works. $10,000 will be a, you know, a perfectly acceptable. price to get in that. So for me, the concern, well, I don't know if it's a concern or if it's a good thing or what, but let's say that Bitcoin's successful. Let's just go down that path for a second

Starting point is 00:30:12 and say five years from now, Bitcoin price is $50,000 to $100,000 per Bitcoin. And this is global money at this point. And it's global money that's easily exchanged around the world, and it's a fixed monetary baseline. Do you see loans? Because I mean, at that point, everyone's going to want to be using Bitcoin, especially if they could drop the transaction fees, which I know that they're promising with the Lightning Network that that might be a possibility that these transaction fees go down. I mean, this is going to be a drastic change to economics around the world as we know it, because who's going to want to use the dollar if the central banks or the euro, if the central banks are just printing? I mean, you've got a supreme currency here if this

Starting point is 00:30:59 would actually happen. I mean, I just, I don't know what that would look like. And I think that it's going to be a drastic transformation that I think no one really can comprehend if that is a true statement. I'm kind of curious to hear your thoughts on some of that. I think that it's unlikely that Bitcoin would ever challenge any of the reserve currencies precisely because it's a, It's got a fixed supply of it, and it's got a fixed schedule by which it's issued that changes every four halves every four years. So that in itself makes it, you know, so every other currency in the world has some form of deflationary aspect to it. And in the sense of over, you know, long period of time, I mean, the Fed wants the dollar to depreciate by about 2%, you know,

Starting point is 00:31:47 2% a year to have the inflation rate, you know. And with Bitcoin, having, um, the exact opposite. So what Bitcoin does, if it, if it, quote, works as money is it deflates hard assets and it deflates anything that's priced in its terms. So if Bitcoin again works the way that I think some of the evangelist think is what happens as you hold it is the price of food, cars, houses, everything drops relative to Bitcoin. So it deflates all those other goods and goods and services. I think the problem with that is, and it's been pointed out, I think by by monetary theorists is that that kind of bakes into it then this, this behavioral paradox to where you could theoretically reach a point where nobody wants to sell their Bitcoin, right? So it just goes

Starting point is 00:32:34 it goes just hyperbolic or parabolic up. And then so it can't be used for transactions because no one wants to transact in it. But then at some point, what happens is it reverses and then it collapses. So it has built into it much higher volatility than anything. that usually would be thought of as money. But the idea that the volatility by itself makes it not money is, is, you know, ridiculous on its face because you can look at the Venezuelan Bolivar and see what's happened to it. And it's volatility or the German mark in the 1920s or the Zimbabwe. Zimbabwe, they're extraordinarily volatile. They just happen to be collapsing all the time. Yeah. But they were money in legal tender in those countries. There's efforts underway. I think,

Starting point is 00:33:20 I think the folks at the MIT, you know, cryptocurrency lab are trying to devise a, you know, a coin, which is, I think they call it trade coin, which actually can be an alternative to the reserve, the reserve currencies and a better store of value and everything else. But I do think, as Susan Attey at Stanford said, that Bitcoin can be a threat to, you know, the Venezuelan Bolivar, are any of these countries that have their own currencies that aren't reserve currencies, and that countries like Argentina, where, you know, they've seized your assets, they've inflated you out of assets of banks, they've inflated you out over the decades. Bob Schiller, I think at Davos, Bob Schiller pointed out that he was in Lithuania,

Starting point is 00:34:08 and the Lithuanians were bullish on Bitcoin because they said, you know, you talked to many of them whose families, when Russia took over Lithuania, the government seized their bank accounts and they said that if you own stocks, then you were sent to Siberia. So, but you were all, you were wiped out, which can't happen if you get to an internet connection or you have a, you have a phone and Wi-Fi, you can move those assets, those Bitcoin assets, quick. Very interesting and very interesting hearing and value investor talking about Bitcoin like that. So, Bill, recently you gave an incredible, incredible, generous donation to Johns Hopkins University

Starting point is 00:34:45 of $75 million, specifically to the philosophy department. How has philosophy influenced your investment approach? And could you please elaborate on your thought process about philanthropy? Yeah, I didn't go to business school, so I don't have that business school training. And I think that with philosophy, the great benefit to me of philosophy, in addition to being, I think, personally enriching, enriching my life. But the analytical techniques and the critical reasoning skills that are part and parcel of philosophical analysis are absolutely what is, you know, what are incredibly valuable

Starting point is 00:35:29 in capital markets, especially when you think about most people in capital markets suffer from some kind of confirmation bias to where once they've made up their mind on something, then the way they weight evidence and the way they look at things and feel like they have to defend it is it's just a natural psychological tendency. And it's not that everybody has got that tendency because everybody does, but I think if you're, if you spend several years in graduate school and philosophy, they pretty much knock that out of you because that's not,

Starting point is 00:35:56 that's not the way that the reasoning process works in, in philosophy. And so when you, when you have people with strong opinions on things, whether it be like Bitcoin or Amazon for so, for so long, typically means that, that those reasoning skills can probably provide some insight that, that can't be provided elsewhere. You know, the Austrian philosopher, Ludwig Wittgenstein,

Starting point is 00:36:17 talked many times about crisscrossing the land, in his philosophical investigations, about crisscrossing the landscape and looking at problems from many different perspectives and angles. And then even more practically, I'd mentioned somewhere that with respect to Bitcoin, I had gotten some insight from a book by a very eminent philosopher named John Searle, who's out at Berkeley, and he wrote a book called The Construction of Social Reality, and it deals with, you know, things like money, marriage, property rights, things like that that he considers socially constructed, and he contrasts those with things that he calls brute facts, which are facts that are true no matter if there are any people at all, like the earth is 93 million

Starting point is 00:37:02 miles from the sun, whereas, you know, that doesn't depend on people, but monetary systems do. I learned in philosophy from studying William James and John Dewey and Charles Sanders' purse that the true false dichotomy is not often very helpful. I found Searle's book, whether what he said, whether there's anything he said in it, which is truth at a philosophical standpoint, it was very useful to me and underlie, and illuminating Bitcoin. And so William James talked, that's what the American pregnant is focused on, was, you know, truth as usefulness.

Starting point is 00:37:34 and truth is part of a long-term quest and not something which is externally sort of immaculately conceived. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer. VANTA automates your compliance process and brings compliance, risk, and customer trust together on one AI-powered platform. So whether you're prepping for a stock two or running an enterprise GRC program, VANTA keeps you secure and keeps your deals moving. Instead of chasing spreadsheets and screenshots, VANTA gives you continuous automation across more than 35 security and privacy frameworks. Companies like Ramp and Riter spend 82% less time on audits with Vantta.

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Starting point is 00:40:59 com slash income. This is a paid advertisement. All right. Back to the show. Amazing. So with all that said, there's all these cognitive biases out there. I don't know if you've ever seen this chart that the Visual Capitalist website put together, but they tried to list all these different cognitive biases. It was a really cool chart. In fact, we'll throw it in the show notes of this interview so people can look at it. But I'm curious what you're, you've been around new investors. We got so many listeners of the show. that are fresh out of college, or they just completed an MBA.

Starting point is 00:41:32 What cognitive bias do you think tricks a lot of new investors the most? Well, first of all of them trick investors, and everybody is subject to them to one degree or another. The two that I think probably combined to create the most problem are the recent, a recency bias and myopic loss aversion. So what happens is people, in recency bias, as you know, people overweight the most recent information. And a lot of times that information is price action and not fundamentals. But even when it's fundamentals, they'll tend to overweight it if it's negative or positive for that matter.

Starting point is 00:42:09 So you get extremes on both sides. And then the loss aversion kicks in because, you know, it takes the coefficient of loss for most people is two to one. And so they have to have twice as many gains to offset a certain level of loss. And more importantly, they feel the pain of a loss losses are twice as painful as the same amount of gains. And so you put those two things together and it causes people to overreact dramatically to declining prices and especially if they're appear to be fundamentally, you know, fundamentally driven. And you see that over and over and over again. And one of the things that, you know, there's a study done of credit default swaps after the financial crisis because that was what people were, you know, keying in on as how risky were bonds

Starting point is 00:42:53 because what were the credit default swap selling at? And what? What were the credit default swap selling at? What was the implied probability of the bond going under? And then after the whole thing was over, and the markets had recovered, the academics looked at it. And the credit default swaps had almost no predictive power with respect to defaults. They overestimated the defaults radically because we were in a financial crisis. And when the financial crisis ended, then those probabilities completely reversed. I think that the most important message that I could tell investors, new investors,

Starting point is 00:43:24 especially, is that the economy grows most of the time, and stocks go up most of the time. And so the risk to people's financial wealth long term is not the drawdowns that you get during the occasional correction or even a recession or even a financial crisis. It's being underinvested systematically in equities during the periods when the market is going up, which is most of the time. stocks have gone up 75% of the time, 75% of the years since 1950, and the economy's grown 77% of the years since 1950. So if you had a probability of doing well 75% of the time, you had a casino that had a 75% edge, you wouldn't be worried too much about the few times that you lost.

Starting point is 00:44:13 But people are obsessively concerned, I believe it's because of a recentcy bias and loss aversion with those losses that they take during, you know, three months, six months a year or even two years. So let me ask you this. Do you feel that a person who's trying to protect against systematic risk, meaning the whole credit cycle kind of evolves and starts to crash? Do you think a person that's trying to protect against that? Is that a fool's game or is that something that you can actually hedge against by using moving averages or some other metric that you think would be important like a or when the bond yield curve inverts or something like that? I'm kind of curious to hear your thoughts on it. I think the question you have to get clarity on is what exactly are you trying to protect against.

Starting point is 00:44:57 And so once you can definitively say this is what I want to protect against, then you can come up with instruments that will, you know, that will probably do that in one fashion or another. And all the things that you mentioned, you know, have roles to play depending on what people are, what people are trying to do. So I think that I think if you're worried about, you know, steadily rising inflation, that, That's, you know, you want floating rate bonds. You don't want fixed rate bonds. If you're worried about deflation, then you want fixed rate long-term, you know, bonds of one sort, one sort or another. So it all depends on that. I think that, again, though, that I think that people way are way too sensitive to volatility and perceived risk.

Starting point is 00:45:39 One of the things that we've done in our funds is that believed that it turned out to be correct, that what would happen with the financial crisis, when people would become a risk and volatility phobic, if you could just make one decision in 2008 or nine, it would be whatever the market thought was the riskiest thing, buy it and put it away. And that would do really well over the next 10 years, which it's done. So in continuation of your point about the recency bias,

Starting point is 00:46:07 have you heard a very popular belief out there in the markets, but where you also discounted the magnitude of what's being said? Whenever I hear sort of extreme predictions or predictions given with great emotion and emphasis, I would tend to believe that those are probably wrong. Extreme things don't happen very often. And also that having a dogmatic opinion in the market is a very risky and dangerous thing to do. One of the things that always annoys me when I hear it is when people say, well, the easy money has been made. and I hear that a lot in defending after something has gone up a lot.

Starting point is 00:46:46 But I've never, really, I've never heard anybody say there is easy money to be made doing this. And so, you know, all those people that use that locution, I want them to tell me when there is easy money to be made. Because ordinarily, that's, you know, I probably seen that easy money has been made in this, in this bull market, probably beginning, you know, six months after March of 2009 and repeated repeatedly over the next eight or nine years, the easy money has been made. So I'm curious, what book would you say would you recommend for cognitive biases for people that are listening to this? Oh, I'd say probably, you know, Danny Kahneman's thinking fast and slow is, you know, a very good assessment of, a very good assessment of that.

Starting point is 00:47:28 Yeah, I think, I mean, Ed Thorpe's book is fantastic, too. I would highly recommend that to people. I had lunch with Ed not long after the long-term capital management collapsed. And he said that he had looked at that. that and he said that the probability of ruin there was close as close to one as you could get. And not not he said because basically that the amount of leverage that they were that they were using. He said so he's and then the fact that those particular bets might have had a very high degree of probability, but it didn't take much to get them to go awry with that

Starting point is 00:47:59 leverage to send you right over the right over the cliff and he had nailed that one correctly. Yeah, he's, uh, wow, you talk about brilliant. Yes, you're, you're right, sir, very, very brilliant. But Bill, thank you. Seriously, thank you so much for coming on our show. It is such an honor to have you here. And just to kind of pick your brain for an hour is just very, very thankful for that. So thank you, sir. Oh, thanks. It's great. All right. So this is the point in the show where we're going to go ahead and play a question from a member of the audience. And this question comes from Lisa Wu. Hi, President is Dick. My name is Lisa. I'm a university undergraduate student. I really enjoy listening to a podcast and listen to them every week.

Starting point is 00:48:39 I just want to say thank you first for providing the society such a great opportunity to learn more about finance and the stock market. So my question is we all know about the baby boomers and we all know that they're approaching an age of retirement. So my question is, what do you think as the baby boomers, generation is approaching retirement as the capital gets released to the society, what do you think that effect is going to be on the stock market or the economy in general? Thank you. I think the bigger concern for that generation is just the lack of yield that they can get on their retirement. I think that for me, that's the bigger story. I think moving forward, you're getting, you know, 3% yield for somebody who's in retirement and they're trying to live off of that, I think is a

Starting point is 00:49:39 very big concern. I guess I try to sway my bias of the stock market is bound to crash when I say this. But whenever I look at some of the stats, you know, we're looking at 1.5 million Americans turning 70 just last year. And all the next 15 years, you'll continue to see something like that. And the thing is that generation have a lot of the portfolio in equities. We're talking upwards of 70%. And that's a lot, especially because, as Preston mentioned before, you don't have a lot of yield. So the stat I'm looking at here, and I guess you can find similar stats or they'll say less

Starting point is 00:50:19 or more, but here it says that the average boomer has only 136,000 safe for retirement. So whenever you have that kind of money or you don't have that kind of money, because it's not a lot to live off whenever you retire. I can see why you would take risk your investment. So you might keep being in stocks, even though what I think might happen is that a lot of baby boomers might look at higher yield opportunities, which will entail a lot of risk, especially in these times where the yields are so low. So if you say that the average person would need something like 45,000 a year, even lower than that, you would need a lot of yield for this huge generation that's all coming out at the same time to sustain a decent way of living. And just one thing I would like to add to this, and I guess something that might be even more concerning is if you look at some of the RAS mandatory minimum drawdowns for your timing plans, you know, your RAs and 401k's, 4-1Ks. you're forced to withdraw at least 5% of the value of the plan each year. And if a lot of people are forced to do that,

Starting point is 00:51:29 it's just going to have a significant impact on the market the way that I see this. Now, this is the trick. It's very easy to look at this story and say, this means that the market will crash. You're saying, you know, the price of the stock market, it's demand supply. This will mean that a lot of people are selling out. The price has to go down.

Starting point is 00:51:51 And why that is true, if you look at this, isolated, that's not necessarily what will happen. Because you have a lot of other players out there, they have a different opinion and a different incentive to take this in another direction. One thing might be that you have central banks, and they know that this is going to happen. So what are they going to do when everyone is just selling out? Okay, they might put a lot of liquidity out there. What is the government going to do? Well, they'll probably do a lot of fiscal policy and really grow the economy to spy.

Starting point is 00:52:21 growth. So it's one of those, this one factor isolated, yes, that should mean that we have a significant bear market, but it's only in isolation. So Lisa, awesome, insightful question. Thank you so much for recording it and putting it there on the show. To show you our appreciation, we want to give you our intrinsic value course that we have on our TIP Academy page on our website. This is typically a paid course, but we're going to give it to you completely for free just to show you our thanks. And for anybody else out there, if you want to get your question played on the show and get a free course, go to AsktheInvesters.com. You can record your question. It'll only take a minute, and we'd love to hear from you. All right, guys, that was all the Preston and I had for this week's

Starting point is 00:53:05 episode of The Investors Podcast. We see each other again next week. Thanks for listening to TIP. To access the show notes, courses, or forums, go to the investorspodcast.com. To get your questions played on the show, go to asktheinvestors.com and win a free subscription to any of our courses on TIP Academy. This show is for entertainment purposes only. Before making investment decisions, consult a professional. This show is copyrighted by the TIP Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP180: Legendary Investor Bill Miller on Stocks, Commodities, & Bitcoin

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