Dave Nadig on Exchange-Traded Funds

And so if it sounds like just too idiots talking about really interesting stuff in great detail, and me probably speaking more than I usually do during the podcast, well that's probably because it is. Um. Dave is really a fascinating person with an incredible depth of knowledge about well. He's probably best known as the E T F guy, and we literally talk about during the show. I got tagged to present to the SEC about their new single stock product, and my answer was, well, I get all

my information about this from nating. Why don't you speak to him? And they said, we already do. But he also has an incredible death of knowledge about market structures, about what people get wrong about thinking about systems, about what we get wrong about humans and capitalism and finance, and I find Dave to be really just an intriguing, fascinating guy, full of great humility and insights. And I

think you'll find this conversation to be really fascinating. With no further ado, my interview with vertifies Dave noting, let's start in thees when you were at Barclays, which eventually becomes black Rock, I shares tell us about what you did at Barclays. Oh, I mean mostly I got coffee at the beginning, you know, and I joined, Uh, they gave me the hypho leading title of Managing Director of

Corporate Strategy. What it really meant was I was picking up little businesses nobody else wanted to pay any attention to through all the acquisitions they were doing so. For a while I ran Wells Fargo's four O win K business because they had acquired that as part of Wells Fargo Nico Investment Advisors when we did the Barkley's acquisition. When Barkley's acquired Wells Fargo Nico, I then spent most of my time in Asia shutting down Barkley's Dessert Wed businesses,

which were brokerage shops in Australia and Singapore Hong Kong, Japan. UM. So I went around and sort of did some rationalization. They basically sent the young kid out to get his you know, you know what, handed go go go fire a bunch of you know, Japanese salaryman that that had to be a crazy experience being in Australia and Japan in the nineties. It was. It was bonkers, and I was very To be clear, I was young and incredibly stupid. Now I'm just older and slightly less. Isn't that a

little redundant I say this. I say this not to mock the young, but to reflect on my own youthful indiscretions and stupidity. The story of growing a career is recognizing how little you knew every previous five years, Yes exactly, that five year review was like, wow, I had no idea what the hell I was doing? Now I know, and then you find out you really don't. So I started. I started there. I was lucky enough to be on the edges of a product which became webs, which became

I shares Um. I was absolutely not somebody driving the train on that. I was the one reviewing, marketing copy and you know, doing presentations to groups of institutions about how to use the darn things. Who was driving the train on that Oh my gosh, there were so many, I mean, you know, success as a thousand fall others at this point. And the folks that I mean, so the people I was working with on the Wells Fai Niko side because this was a joint project with Stanley

and other folks like that. UM, I was working with Don Lusk and Patty Donne Fred Grower were sort of the main group. Blake Grossman was the chief investment. He stuck around at you know, post into b g I for the rest of his career. Um. And so that was that was the crew that was really doing the hard work there. And then you know the Morgan Stanley side. I was working with folks like Joe and Hill who you know, um, Marian Stanley one of the quants there. UM and then of course all the folks who were

coming in from the Amex like Nate Most. I mean, it was it was a pretty big group of Jim was he there at State Street? Um? After that was that was Jim Ross was at State Street a little bit after that when that was but that was you know, when the Spiders build out this was very much counter to to spy having been launched. So we were the

other side of the fence from that. Even though AMX was the key, you know, AMEX was the glue holding it together because they figured out a lot of the how to do creation, redemption, and how to handle book. So let me fast forward a couple of years. You end up at et F dot com, which clearly is a or at least at the time was a dominant force in the E t F space when a lot of the world of finance looked at ETFs a little scans, a little skeptical like yeah, And that was really Jim Wyant.

He started something called the Index Universe with Stephen Showen Fell somebody else you know in the industry UM who's now working for I believe Market Beckers in Texas UM. And you know, they they had this vision of understanding that E T S which at that point we're still largely institutional vehicles early two thousand's right. I mean there were some advisor pick up, but you had to be kind of on the front edge of finance or a quant or running your own models, which in two thousand

three was not that common. Um they had the vision there that oh no, this is where all the wealth management is going to head um and built a business which eventually, through you know, acquiring the right names in you or else, became et F dot com. And then we, you know, we myself, Matt Hogan, Jim Wyant, a bunch of other folks built that business up into a you know, pretty respectable, chunky business that had a big conference and a huge data but I was focused almost exclusively on

the data side. Um. And then we broke that into pieces so that that was solved though, wasn't it broken? So when you say broke into pieces, acquires in a positive way. Yeah, Like the pieces ended up being worth more than the part, which is not uncom not uncommon at all, especially when you're bolting together businesses that do in fact have silos themselves. So the data business was a natural fit for facts that which needed usc t F data. So Elizabeth K Facts is a is a big,

big operator on that. And now they're now there. I think that that we re license the data that I helped build over a verify right, I mean they are now I still think the go to source for primary et F data, So that business continues to run over there and and you know, and now here I am at Vertifi doing largely a lot of the same work, also pushing a big conference that we're excited about Exchange

in Miami and Florida. We're gonna talk about Vertifi. We're gonna talk about Exchange, which is one of my favorite events every year. It's always a blast. Um when you were running the conference beforehand. The old conference, this was at the Diplomat Hotel in Hollywood, Florida, was always late January early February, which occasionally went interview with my vacation schedule. But you know, to get out of New York in February and spend time with three thousand people and just

absolutely a list speakers. Um, you know, Derek Jeter and Go Go I remember, um Joe Montana. Like the sports figures were always fascinating, but so too were the finance figures. You would people that were very much rock stars in that space. Yeah, and that was that was an interesting time. I think that's sort of the ten years pre prandemics are between GFC and pandemic whatever we're gonna call that window.

It's not a lost decade. It was a great decade, but in that window, like the I mean you were on it to the conference circuit was lit. There was there was a really interesting finance relevant event every other week at least all year long. Well, keep in mind what was going on back then. So first you had the rise of ETFs. You had a radical expansion of passive. My my theory is post Great Financial Crisis, mom and

pop said, you know, we're done playing this game. We're just gonna put the money, let Mr Market do his thing, and we'll find out how we did when we get ready to retire. Um. But you had that, you had e t F you rise a passive, but you also had this incredible I'm reluctant to call it PTSD, but following the financial crisis, there was this pervasive negativity that

lasted years and years and years. And to run around and say, hey, markets are positive here, you need to be more constructive because down fifty is a fantastic reset. That was kind of a lonely voice for a few years. I think that's a big part of why you had the hard metals people doing a lot of stuff. You had the rise of crypto. I mean, think about that crypto. Crypto is where that enthusiasm went everybody who was finance adjacent, tech positive, growth oriented, all of them went into crypto

in that window, in that to GFC two pandemic window. Huh. That that makes a whole lot of sense. So there's a lot of other things I want to get to with you, but before we do, there's a quote of yours that I think is a great leaping off point

for more discussion. Finance is a problem that has been solved. Yeah, so you know, when we think about finance, particularly when we think about investing, which is what we spend most of our time talking about, right, how to how to take your wealth and turn it into more wealth through all of these tools out there from you know, I, P O S two derivatives. Um, how those pieces fit together is no longer a mystery. I mean that's really the core of it. Um, the academic side of how

to build a portfolio. We can argue about the details, right, and certainly we could have a whole conversation about you know, Okay, well, this combination of interest rates and inflation and expected returns on equities is different, and so maybe we need to adjust. But the tools to do that are largely baked Anybody who has the curiosity and the basic intellectual capacity to

learn about the markets can become a fairly sophisticated investor. So, if you're an advisor, and I spend most of my time talking to the wealth management institutional business, if you're an advisor, you should not be spending a lot of your time trying to add alpha through understanding investing better than the rest of the market. That is a mug's game, right, So don't try to solve that problem. It's largely solved.

You can go get some turnkey asset management program as an advisor, you could get somebody's model portfolio, or you could hire some you know, three c f a s and do it yourself. But it shouldn't be your primary focus. Your primary focus should be solving the much harder problem, which is actually working with human beings. Right. The advice part of being a financial advisor is the hard part. That's the part where you should earn the money. We're kind of upside down and how we compensate and how

we think about markets. Right, some advisor that's out there and can say, oh, I've generated one percent alpha for the last three years in my model portfolio, everybody's going

to talk about that. But when you talk to that same advisor and they say, yeah, you know, they are these five families I've worked with for ten years, and because I've worked with them, generations of wealth are going to be preserved and these feel philanthropical exercises are going to be put forth like that's the real success story. I don't need to tell you that that's your business, right, that's the real success story. And that's much harder than investing,

really really quite quite interesting. You have to explain to me the name of this firm. I've given you grief about this. What is edify? Alright? So well, the shortest answer about how to think about that, if I is where morning start without a ratings business? Right, So like a financial think tank. Yeah, we're in the business of sitting in between asset owners, financial advisors, institutions, retail and asset managers right the black Rocks, State Streets, Pimco's of

the world, and helping them understand each other. What I spend most of my time doing is helping advisors understand the thousands of crazy ideas the asset management comes up with every year. And then I work with the asset management community to help them understand the hundreds of thousands of financial advisors and institutions who may or may not be interested in any of those products whatsoever. And so what that entails is a lot of good data understanding

what both sides want of each other. It understands. It means having to understand markets, because if you're gonna understand the asset management industry, you need to understand well why you're managed. Future is part of the conversation here today but not six months ago, and it means spending a lot of time talking to individual advisors and investors who

are out there trying to do the real work. So that's where vertify sits the company, like the meet and the bones underneath it brands folks know on et F trans et F database. We recently emerged with Advisor Perspectives, which is the largest advisor newsletter in the country. So we've sort of cornered a market on this dialogue between asset managers and financial advisors, and it goes both ways. We also do a lot of polling with financial advisors.

We meet them at conferences, we do surveys of them, We track their behavior as they're doing research using our data and analytics tools, and that lets us really get an interesting picture of Hey, what are advisors thinking this week? Well, we can kind of tell you because we know what they're researching. We know you know how they answered pole questions last week, we know how they answered a survey two weeks ago, and then we write about that. We

produce fifty odd pieces of content today. So here's the question. Are your clients the advisors or are your clients the institutional asset managers? Or both? Both? Is the real answer? I think the way to think about this is we're a business to business organization in terms of where you know, if you're gonna look at the revenue lines, but with b TWOC responsibilities, right, we take our relationship with the

financial advisor very very seriously. In my position, that's really almost exclusively what I focus on, all right, And this leads me to a question that I never in a million years thought I would get to ask on this show. But what the hell is the financial futurist? Your title is a financial futurist? Yes, who came up with that? Who? What are the responsibilities? What does a financial futurist do?

Like I expect you to be in one of little storefronts with the red light people to win financial and I hand you a card to the glass Madame Zolof with the turban on in the whole night Year, it's like big thank you here and I think it's actually a dude in the movie, but it is neither here

nor there. Um. So look about a year ago. I had a conversation with the senior management of the company as we were putting Verified together, right, and we would you know, one of the things we use as a hook when we talk about the company is we're trying

to turn it from an industry to a community. What we mean by that is that we focus on finance a lot on rules, regulations, process operations, none of which matter at all, and we've often just ignore the fact that they're human beings at the end of this equation. Now that's changed because of a lot of what's going in behavioral finance, and I think that's great. I don't think it goes nearly far enough. I think human centered organizations are always going to win, So we really tried

to skew the organization towards that. So with that context, I said, here's a bunch of stuff I want to write about, which is the stuff we've been talking about, how the markets work, how people it into them. And I literally just started putting adjectives and nouns on piece of paper, trying to figure out, like, well, how do I describe the work that I think I should be doing and that hopefully people find at least entertaining, if

not valuable. Uh and a little from column A little column B. You know, I've spent most of my career writing and thinking about finance. Most of what I've done has been taking an understanding of the status quo, which is very brief because next tomorrow it's gone, and trying to help people understand what that means for next week, in the next year, and the next decade, to position products underneath it, like a t S in two or model portfolios in two thousand, or direct indexing in two right,

really trying to focus on that. Now it would be tokenized asset management. It's like, you can see these things if you're paying attention, but it's super easy to get really excited and spend lots of money chasing them. Having some context is important. So you mentioned direct indexing. Let's go there because I always disliked the broad context of direct indexing as how it was done previously. I couldn't stand the fifty pages of stockholdings every month or every quarter.

But I give you credit for the person who kind of turned me around on that. I don't want to say it was ten years ago, but it was probably like five years ago, maybe a little longer that you pointed out there are a lot of things you can do with direct indexing in terms of and you were

way ahead of the software. You had talked about things before it was available, that you could tilt towards a variety of e s g. Things, Hey show me companies where the board has at least two women on it, or you could tilt towards value where you could tilt towards small cap, or you could use it for tax lost harvesting or philanthropy. And you kind of opened my

eyes up. Full disclosure. We work with O'shanna Sees Canvas, which was recently purchased by Franklin Templeton, and we're the largest client to that about a billion of three billions in at But I give you credit because if you hadn't opened my eyes to the advantages of what you can do with that. Um, we might not have stepped as aggressively into it as we did. I was primed two and receptive to see the things that were possible. So full credit to you. Now tell us about what

is tokenized financial investments? Well, so you know, if you think about right now, I have a million dollars I want to put the work I wish I have a hundred thousand dollars I want to put to work. I have lots of different ways I can get that number to go up, and ultimately, let's be honest, that's what you care about. As an individual investor, I have a hundred thousand dollars, I would like to have a hundred

and ten thousand dollars? How do I get there? And right now we throw it into the stock market, and we effectively use a tokenized system, right, I mean, nobody really carries shares around anymore. You want, you gotta led your entry at seeding company down on Water Street, right like, It's it's all just this fiction that we've created to keep track of notional ownership, and then we built this

enormous infrastructure around it. So now we have payment for order flow and seventeen market centers and you know, reagaan MS judging who what has to get broadcast to who. When we made all this up, I think it's really important to remember this is fiction. We just created the system out of whole cloth. You can trace why, and there's lots of reasons, but you could invent another one.

Inventing another one is what crypto has done. If you're in Europe right now, for instance, and you open up an account at ft X dot d E, which is you know f t X is European business in Germany, you can trade Tesla, but not as a stock. You can trade what is effectively a fungible token, right, a unit of Tesla. You and I can trade that in the ft X closed ecosystem all day long, with no trading costs, no settlement, no slippage, no nothing. It's a

bearer instrument. It's like me handing you a pencil. You just now have the pencil and I don't, and the legal claim is the fact that you've got it and I don't. That's scary for all sorts of reasons, but it's also incredibly powerful because if you imagine that world where instead of it being this closed ecosystem in Germany.

It's just sort of how global markets work, all of a sudden, almost any beta, any risk, any ownership stake that you want, as long as you can get two people to agree on what the tokens mean and how they unwind, to unlock some sort of underlying value, we can do all sorts of crazy stuff through the crypto rails that we could never have done before. You want to put together a portfolio, Great, here's a smart contract.

It owns these fifteen other tokens that happened to be stocks that can be managed in real time by the contract itself. Creation redemption literally just becomes buying the thing redemption of right. You can create the TF on the blockchain. People have already done this. This is not news. Um. There's a thing called the set product all call. You can create a portfolio with a set of rules, and you can even put in a fee of how much you want to get paid because you came up with

a smart contract. And there's hundreds of thousands of these things out there already, so the rails for doing it. The smart to the people talking about ethere and being the world computer, right, there's real truth to that. There's work being done by a computer there to keep track of ledger entries and to move those ledger entries around, which is the entire stock market. It's moving ledger entries around.

So we're recording this on the same day that Matt Levine's Business Week Right dropped, like this is the second time in Business Week's history where one writer has written the entire book issue right. It's like fifty words, and it begins by saying, everything in the world these days

that reflects ownership is a data database. You remind me of that in what you were talking about UM at FTX, which really raises the question if everything is a database and the blockchain is a public and verifiable, transparent database. The pushback to crypto continues to be, hey, it's been around for fifteen years, how come it isn't doing anything yet substantially? Why is it still so experimental and so small? And I honestly don't know how to answer that. It's regulatory,

That's the literally the one word answer is it's regulators. Um. The thing that is keeping the entirety of normal markets from collapsing and being replaced by free crypto software is that their rules that won't let that happen um and their rules that are there for a very good reason, right.

I mean, we have a lot of security laws in this country, not because we're obsessed with lawmaking, but because some bad stuff happened and we fixed it by breaking rules about it, right that, you know, going back to the twenties, actually going back to the fourteen hundreds, we have rules about how we engage in these transactions. And the rule of law is a big deal. How that interacts with this sort of bear bond instrument world where

literally ownership is the entirety of the law is unknown territory. Right, we have to rewrite how we think about intellectual property, how we think about property rights themselves, how we think about ownership and scrow and security is a huge one. Knowing your customers a big one. Anti money laundring. Those are real issues. So I don't want to I don't want to pretend that those aren't real issues, and they're going to take years to solve. This is not something

we're not gonna flip a switch tomorrow. But what I fear is going to happen is because the block is now regulatory, we're gonna end up in the world's biggest regulatory arbitrage race where you're gonna and we've already seen this. Their jurisdictions where you can kind of get away with doing anything to do in crypto and hey, I'm sorry, if you lost a million dollars, call interpoll, maybe they'll figure it out for you. Right, And then there's jurisdictions

like the United States, which are quite locked down. The problem is that if I'm right, if the world does move more quickly towards this and you start seeing capital follow it more than it even has already, you end up with this weird haves and have nots world where the United States actually ends up on the sort of butt end of innovation UM and plays catch up for the next twenty years, and another financial center will emerge where the I p O s are happening, where private

equity is is really congealing um, where interesting M and A activity is happening, and it ain't gonna be New York. I'd like to push against that. I'm kind of a fan of the United States. I wouldn't mind us leading here. I think you live here rules I I believe I do, yes, So you would like to see leadership from the U S and it. It just there. There's seems to be no interest in a crypto et F. What's that about? Well,

just Gary ginstlur, is that more institutional? Um? So the bitcoin ETF debate right, and gray scale is now suing the sec always a great move. Suing your regulators always work. They love it. They just say yes after you sue them. But here and there there. Yeah, So people have been trying to put bitcoin in e T F rapper frankly since bitcoin was invented um And the problem is it makes you have to define what bitcoin is because there's certain things you can put into a mutual fund or

et F rapper and certain things you can't write. You can't put a stake dinner in an e T F rapper. Their rules about it, and uh, nobody has been able to agree yet whether or not bitcoin belongs in those rappers. So we've ended up with these weird edge cases where the futures based products get approved, but the species based product, I mean, the specie products can't be and it's it's

an absolute mess. It's the front end of the problem we're talking about where crypt where cryptoregulation is actually the largest problem in the space. So let me push back a bit, because I became dramatically enamored of an idea of smart contracts and using them. Let me preface this by saying, I'm not a big fan of ticket Master and Live Nation, which is now monopoly. There are some just ridiculous fees and the whole thing is just an

egregious affront to free market capitalism. Hold that aside, but the idea behind smart tickets that if Taylor Swift says, I'm gonna put all of my concert seats on a blockchain, and so therefore I'm going to offer the first round to my hardcore fans who have been newsletter subscribers for years, and the next going to give to my junior fans, and then the last one I'll open to the public.

And by the way, built into this is if you decide to sell it at a markup, I get half of that markup, but in no cases canna be higher than X, and so you stop the you know, you basically demolish the entire um. Stub hub seek geek, absolutely egregious.

How do we use bots? You know, if they were just reselling tickets, it's one thing, But they seem to have gained the citizens, they buy all the tickets, buy the tickets first, and you know, there's a reason why artists offer their tickets at affordable prices to their fans, and these um rentiers in the middle are abusive. So all this comes back to, if the technology exists for that, why haven't we seen a major artist who was it?

Was it Pearl jam tried to buy Nobody seems to be able to come up with a way to do this. So the reason is because you know, when we look at how the corporate economy were works their investments that you have to make like the ticketmaster wins a great example because the technology to do that is trivial. We can stand them up on three of the computers here in this control room right now. That's the easy part.

The hard part is it's Madison Square Garden Friday night at seven o'clock and you have twenty five thousand people you have to get through the gate in the next hour to get to the Taylor Swift concert that's about to go live. That infrastructure having forty five guys standing there with the scanners going to the network confirming your ownership that this is the tip it has already been

used once, it hasn't been used twice. That and used that right now, every time I saw Hades Town and they don't even scan the ticket, you put your phone on it just it's not you're not even looking at that. If you are, find all of that is a whole bunch of trust. Infrastructure that says the digital signature coming off Barry Ridholt's wallet is the thing that says they

can go see Haydes Town. Right. That infrastructure is actually the hard part because implied in that is a whole lot rule of loss stuff like wait a minute, Barry and I show up at the same time with the same ticket, how do we determine which one of us is the one that actually got to go in? How do we determine which one of us owns it? What's the recourse if you stole it from me? In other words, if someone took a scan of that QR. That's the problem with enforcement and and the last mile of all

of these things. Right, This is the part that I always I sort of compare to blockchain solve that I've been told over and over again. Oh, bitcoin fixes bitcoin solves everything, Except it's not molecular, right, It's still digital. At the end of the day, most of the things we actually give a you know what about our molecular We want the coffee cup, we want to go to the space to see the event where sound waves propagate

through the air from another human being on stage. At the end of the day, you've got to have that interface between the virtual and the real. Otherwise none of this matters at all. And it's precisely that boundary that is the problem right now. So let's talk a little bit about a conference. I have participated in the t F Exchange over the years. Vitified just purchased this from Advisor Circles. I'm an investor in Advisor Circle, so I don't know any of all that, right, So full disclosure.

We're talking about something that I kind of have an interest in, or I used to have an interest in, but I'm still a participant in the event. Well, we'll see whether we get you an that's right, Listen. I always feel like more disclosure is better than less, So I'll let the lawyers sort that part, the part I pay attention to with the content. So let's talk a little bit about e t F Exchange. This has always been just a massive event you mentioned earlier in the

heyday of financial conferences. This I think was one of the biggest events I went to each year. Yeah, we probably need to point out that like this is in some ways the spiritual successor to the old inside et S event. That event is still going on, and I don't want to pretend that it doesn't exist. It is now owned by a big conference company named Informa, and they still put on those events. Wealth Stack was an event that you all used to do with them. That's

now part of that event. Again more disclosures. So Informa ran uh wealth Stack. We were partners with them for Wealth Stack, which ran one year and we were ready to do the next one when the pandemic hit. That's the only reason that everything got juggled. Everything got juggled, and then after everything reopened, their staff had left. It

was a whole craziness. The whole world sort of reset and so um we worked with Advisor Circle on future Proof, not with Informer because they were kind of they're in Europe and they were a little skittish when the US was reopening. But hold all that nonsense aside. Tell us a little bit about why have UH an E t F conference. You know is an E t F to settled area. Tell us a little bit about this event. Well, no, because E t F are where everything interesting in the

world is still happening. I think that's part of the part of the reason I'm still in the E t F business, although I don't have it in my title anymore, is that regardless of what you're trying to get done with that hundred thousand dollars you're trying to make go up, ETFs are probably the right answer under the hood in

terms of the structure. So whether you're trying to get managed futures from an active manager or you know, two month treasuries T bills, like the whole spectrum is now available in the close to three thousand et F s we have trading here in the US. It's like the mutual pun business back in the eighties, and so we have more ETFs. There are stocks just about getting close getting close well in in the world. It's like thirty

thousand actual tickers out there in the world. But the point is they're more E t F than you could ever possibly use in one portfolio. Most people probably only need a handful to accomplish whatever objectives they're going to do. But the reason why we have an event around it is because so much of the interesting innovation and finance happens through that structure. Because the et F structure lends itself naturally to this sort of movement of risk from

bucket to bucket in a very retail friendly package. It's sort of like the best thing we've come up with. It's like people ask, like, well, why are trains a certain width? Well, because history just sort of got us to this configuration where now everything runs that way and nobody's going to invent a new gage of train track. Uh. This of the rails that we have at the moment and probably for the rest of my career, the e t F still looks like the most efficient set of

rails anybody's figured out how to put down. So why have a conference about it? Well, Uh, largely because we want to get those interesting conversations going. My perspective on exchanges, I'm there to have interesting conversations, and when I'm talking to a bunch of financial advisors and a bunch of finance investment management types, that tends to be the most interesting conversation because you get the real human use in the room and you get the real human smarts in

the room, and that's when the magic happens. So, whether it's getting a bunch of folks on stage to have a really interesting conversation about you know, geopolitical concerns in Ukraine, or whether it's just being able to have a small breakfast with four five advisors and some academic where we

talk about behavioral finance, those are the interesting conversations. So exchange is really all about creating that sense of community between groups of folks, and some of that content that's on the stage and a lot of it isn't we learned that. I think at future Proof this is a community event. This is about people getting together and exchanging ideas, and I think that's a lesson we've learned from the pandemic, not just from that conference. People want to get together

and talk. You know. It's funny because financial conferences and maybe conferences in general, everything is based on an academic model, and people took the big lecture halls out as their frame of reference. Hey, a bunch of people on stage talking to a bunch of people in the audience taking notes. But the most interesting part of college wasn't necessarily the big lecture halls. It was the class let's out and you start to talk to people about, hey, could you

explain this. I don't understand what's going on? And then the subsequent conversations that's the really exciting driver, not you know, the panel of people telling you here's why interest rate is going to go up or down and what's wrong with inflation today. So based on that, let's dive a little bit into some of the innovations in finance and ETFs you reference. Let's start with active ETFs. Uh. They

were looked at kind of skeptically a few years ago. Hey, e t f s are all that low cost passive indexing. Why do I want an active ETF? Well, the short answer is because if you're an active manager, it's the only way you're gonna get any customers. Right. So right, there's a bit of a there's just a bit of reality in that. I mean, at this point we're still something like ten twelve percent of the flows the assets

are are inactive. It's still a fairly small number. How much of that is just arc and Cathy Woods versus everybody a decent chunk. But remember a lot of the fixed income complex is actually managed right, most of the product I want to say most of the vast majority of this. Well, I mean there's like t LT you at the big treasury funds l q D and h y G, and those are sort of big betas and

fixed income, and that's where the biggest funds are. But if you get below that tier, you know all the Pimco of funds, anything sort of interesting being done at the short end, even like a lot of the short treasury stuff is technically actively managed because it moves so fast you couldn't possibly want to try to trade down

an index. And the academics have demonstrated that active actually creates worthwhile returns in bonds where it's certainly at least the evidence is a little stronger, a lot stronger than versus equities, where there's really no argument left. Yeah, So this is one of those things where my personal belief system tends to I have to check that at the door. The reality of the market right now is active management

is a thing in the E t F space. While it is still a fairly small part of flows, call it between ten and and a given period um, it's an enormous part of revenue because most of these funds charge more not judging five judge, so you know, they may only be ten percent of the assets, but they're more like of the revenue. And active managers are a big deal in the E t F space now. And I would also point out a lot of the ones that have been successful um and are continuing to gain assets,

whether not they're putting up alpha or not. I think it's always a tricky question. It seems like an easy one, but there's a lot of miss benchmarking that goes on this. Yeah, that's a great cheat, like we're gonna make a benchmark

much easier, and and and fixed income. This is really an issue because a lot of people just default to benching against the agg when they have no And you know, most people who are an active bond manager, like they're focused on credit, right, They're focused on a niche they've got, I am working on securitized stuff whatever. They're not trying to eek out fifty basics right right, They're not even owning the long Treasury attorney of that stuff. So the

Apple's Apples thing is a real issue. Putting that to the side. If you look at what Cathy Wood has done at the ARC team, right, they're they're interesting. Their performance has been awful, and their flows have been solid, meaning money is not leaving. Let me let me annotate that slightly, since their performance has been so I'm leading up to do went No one even came in second they I think she was plus one six when the

market from the lows. From the lows, the market was up six and I think it was up eighteen percent for the year. That just astonishing pattern of sort of high innovation growth managers. We've seen this several times, not just in the dot com era, though we played plenty of it. Then look you look over a long cycle and it's like, well they kind of did with the spire over ten years, but eve and with crazy up and down lone. Right, But if you look at that,

they've managed to hang onto investors. You look at things like um Andrew Beers DBMF, which is the pulling a billion dollars this year. Really, yeah, good for him. It's up three. I mean, that's why. But I also think it's a solid strategy. You know, it's effectively a quant model that's duplicating that sort of ct A style of

management has done very well. There are a lot of little pockets like that where you can say, oh, here's an active manager who's providing interesting beta that other people aren't really getting access to, and they're doing it in a in a you know, more useful and interesting way that there's also some story behind. You understand why you're doing it. Now, you understand what it means when rates go up another seventy bps um. That I think has

become pretty important. So as much as I'm personally still a pretty strong skeptic of active management, I mean, I understand the math and the odds are not in your favor as an active manager, but you have to be doing something both incredibly disciplined and incredibly well to have any success there. I think we're now in a market where we'll be able to pick those people out now. Whether they're coin flippers who just happened to get heads twenty times in a row or not, history will judge.

But there's demand from advisors, there's demand from institutions, there's definitely demand from retail, and there's plenty of supply and the asset management business side. So I remember, first of all, Andrew Beau was a previous guest. I find him to be really fascinating guy. If I recall correctly, he started doing hedge fund replications in an at I don't know how well those have done, but it wouldn't surprise me that managed futures replication given how much commodities have run

up and run down. If you're doing a trend following model, which a lot of the managed futures do, and I'm assuming he found a way to create that could be a giant winner. Yeah, and it has been right So that is, you know, a little bit of a lightning in a bottle of right place, right time. Maybe that fund was around for year or two before people paid any attention. How did the hedge fund replication work out? So most of the hedge fund replication products have not

done particularly well. Index i Q launched a bunch of those about a decade. The price you to execute, I meant, but the price you to run. But they're also there's there's also a mismatch. And anytime somebody says I'm going to replicate this unobtainable pattern of returns with this obtainable pattern of returns, because I can watch in the mirror and see what they're doing, and then replicated over here, I read all those academic papers. I understand where the

math comes from. I'm very skeptical about them. Not because I think people get the math wrong, because I think the world changes the leg the lag is deadly. You and I have talked about the world changes constantly. Right. In fact, you and I had a conversation that when you perceive the world, you're already perceiving it on a

leg because of how long it takes for life. Yeah, I mean, this is there the foundation of how I view, like, my financial futurist model starts with the premise that our understanding of how humans work is wrong to start with, Like, so just the nature of human existence we've all got wrong. So therefore any certainty you apply to anything else in the universe you've got to put with a huge grandness. We're gonna talk more about that in the bit. I

want to stick with each other. We no, no, I brought it up, but because it's so fascinating, So we haven't talked about thematic ets, biblical partisan. Our friend Perth Tolls Economic and then there's another one that does emerging markets. Dm c Y does emerging and developed market. I think that's the one, right, and that's got sort of a broader methodology. Per tolls, f R d M is just emerging markets ex. China, you know which is It's not just ex it's ex dictating you know which has worked out?

Really another one phenomen another example of an idea that right time, right place. This year has been another big But we we both know she spent you know, five to ten years in the trenches getting to the point for the overnight success. That's how it always takes ten years to be overnight. So the thematic stuff definitely interesting. I think mostly driven by advisors need to have stories

to talk to their clients about. That's not preservative. Well that's that's some of the stories though, and and my pushback on the thematics are all right, I can understand the concept behind what hims. If we invest in emerging markets but leave out the worst players like Russia and China that has worked out well this year, the ones where I only want to invest in republican or democratic companies, or I want to do these sort of biblical based investing.

They seem to be more emotional, and history has told us emotions or the enemy of good investing. Yeah, I'm not a super fan of most of that stuff. I do think that there's a place for thinking about stewardship, and again, part of my longer thesis on how the world works um corporate ownership. Who controls what companies do is probably a lot more important than who's elected in office.

We'll talk a bit about in the next But that's all that is, all that woke anti woke investing stuff that's applying these sort of emotional labels about the world to our investments. And I'm with you, I don't think that that makes a ton of sense. I think there's some threads there around voting that makes some sense, But most of that stuff I don't like how it's sold

more than I don't like how it's built. Where I think things get a little tricky is when it's like what I call headline funds, you know, electric cars, future food, work from home, valid approaches, but they're really so targeted towards well, is there going to be a big headline like work from home pandemic go right. They're really just headline bait. And I think those are interesting speculative plays for folks that do that for a living, but I

don't think they really belonging people's long term portfolio. I don't recall a whole lot of work from home ETFs. That's that's what is it now, it's already coming gone. So last e t F question, why on earth does anyone need a single stock e t F. So we've got a raft of these things that have come out. The SEC is I think going to clamp weight down

on them. The short answer is they don't. The use case for a single stock et is you either it's an access to leverage that you couldn't get otherwise two to one plus two to one is four to one, right,

works right? Well, well you could you can own a two to one or three to one single stock et F. You could buy it on margin, so you could go four or six to one, which is kind of against It's funny because I got invited to speak at the SEC thing and I'm like, you should speak today's nodding, and they said, yeah, yeah, we we already have him on his artist. I'm like, I swear I get my answers, so let cut out the middleman. Go talk to him. Yeah,

I'll be talking to them about that. So like they have a use case if you want to be get leverage and you don't want to use your margin account or you ran out of margin your margin account. That yeah, that's a narrow use case. More importantly, if you want to short something, right, so Testla Tesla Q is the one that's I caught, the only one that has any of the assets right now, and it's the short Tesla fund.

The biggest benefit of those and I can't believe I'm saying this out loud, is you can only lose all your money like that can only lose You can only lose all your money. That way do I sign up for that? That sounds fair as opposed to futures that theoretically you put up direct short and you can lose a direct shorting finding getting a locate and getting short theoretically you know, you have one really bad day and you can be out more than your account. Right, that's fair,

But we are splitting hairs. The short answer, Berry is they don't really have much of a use case for most investors. The fake a d rs like Roundhill it filed for like you know, get am Sung which doesn't have an a d R and you can trade it like it's an a d R. That one actually that would have some utility and I can't buy Why why not?

Because there are reasons we have a d R rules, right, That's part of the reason that you have to go through the process of getting a depository receipt listed is that the then rules about what that means in terms of voting and ownership and reporting and all that jazz. Why doesn't Samsung trade as an a d R on the New York Stock Exchange. I don't understand that because they don't want to go through the process because they just don't care. Well, yeah, I mean they'd have to

do reporting that they don't mean. I'm guessing a little bit because I don't live in their boardroom, but you know, they have reporting that they'd have to do they don't want to do. They've got American investors they don't want to have to talk to. You know, they've got requirements that the Nisy would put on them. Why would you bother? And and also you end up in the situation we have right now with Baba, where you end up with the I mean, Bob is not an a d R,

it's a it's a it's a direct list. But you end up with this issue where you've got multiple jurisdictions governing a country and comes right, especially anything out of China these days are really problematic. Alright, I said, no more E t F questions. I got to ask you the mutual fund question. And you and I again have

talked about this in the past. If mutual funds were a brand new product, would they be approved in Absolutely they would not tell us because the E t F structure is inherently more tax fair, and that sounds like a weird no. The problem with mutual funds, if you want them today is that the pitch would be, Hey,

we're gonna pool our investors, but for tax purposes. If you sell out, you can take care of your own stuff, but we're gonna book that gain over here with all of these other investors, send them all of a check, and make all of them restate your base at their basis. Because you decided you want out on a Tuesday and tax exactly. That's that would be a nonstarter today, end of day price, which by the way, works great in

a four oh one K. Yeah. So it's like I I try not to spend a lot of time imagining how I think the world should be today and spend more of it trying to focus on the word the world is today and might end up. We have mutual funds now. They're not going to go anywhere because they're baked into our retirement system. They're a better fit for that specific purpose than E t f s because of fractional shares. There's no economic innsenter for anybody to change any of that. So I'm gonna die and my four

ownk is going to be in mutual funds. That's probably what's going to happen right whenever, whether that's tomorrow or forty years from now. I don't think mutual funds are going away because there's no reason for anybody to usurp it. Unless we literally throw out the forty Act and rewrite the securities laws of this country, the mutual funds going to exist. Channeling Ray Dalio's quote, it's the role of the investor to deal with the world as it is.

I'm a huge fan of that quote. Fascinating. So let's talk a little bit about a quote from you that I'm perplexed about, and that is the ants here to every question starts at the beginning and gets just as detailed as you need it to be until you've satisfied the need. What does that have to do with finance? Well, look, the world is infinitely complex, right that I think we

can get down that it's not black and white. It's not black and there bumper stickers on the answers to our problem to get like, to get really like neurophil philosophical about it. As human beings, we walk around looking for affordances. And what that word means is like we look for the handle on the cup, and we said, when we see a cup and there's a handle on it,

we can say, oh, I've seen this before. I understand that's a thing I can grasp, and I understand how my hand works, and so now I can get the cup of coffee. If all we're trying to do is drink the coffee, that's as far as we need to go, right, we get the affordance that allows us to work in the environment that we're in. Our model of the universe doesn't have to be perfect. It just needs to be good enough to get us through the day. And it's

going to be imperfect. That's the other thing I think that is an important thing for anybody who's in the business of dealing with human beings for a living around emotional subjects, which is the job of financial advisor understanding that, Oh, everybody lives in their own little interpreted reality where some people understand the molecular structure of the cup and some

people literally just having their head. Oh handle coffee, drink, and both of those are okay, depending on what your purposes. What does that have to do with finance. Well, in finance we approach that constantly. The markets. Just think about we talk about the markets. Okay, do you understand the markets well? Yes and no, right, yes, you understand the basics of like what's going across the ticker and what

your clients need to do. Do you really understand at a really detailed level exactly how payment for order flow impacts capital requirements at the dtc C. No, you don't need to. It's not important to what your job is until something breaks right, and so part of my job as a financial futurist is to go down a lot of those rabbit holes so that when when the world blows up and everybody's like, payment for workflow is the worst thing in the world, I'm not starting from square

one saying what does pfo F stand for? I've already understood. Okay, here's the mechanics of how this go. What am I missing? I haven't looked at it in eight weeks. Maybe the world change, so I can do the update to get current. But I'm not starting from scratch every day, and I hopefully that's some of the value. So funny you mentioned

understanding what's going on when the world breaks. The book I love to give to younger people who are getting started in markets is tim Mets is Black Monday, because even today, most people have no idea what happened during the eighty seven crash. And it's exactly as you've described. It is the logistics, the plumbing, the day to day operations that you don't realize that every decision that's made has ramifications deep into the future for how markets operate.

I'll give you one little weird side note on that. So seven, I was twenty one years old or something like that. I was living in Hollywood, California. I had a little tiny bit of money invested, maybe five grand that my grandfather had given me in a Smith Barney account or something like that. You know, seven happened, pretty much lost most of it whatever, But I became fascinated

at that moment by what the hell just happened. Years later, literally four or five years later, I've gone and gotten an m b A. I'm studying investment finance in the back of my head constantly, I'm like, I want to understand what that, So I read everything about it. I end up working for Well's far Unico in the very early or something like that, Low and Behol. I started going through stacks of stuff on portfolio insurance because they were a huge writer that at the time and index provider.

So it's like, and I had never at that point, I had not been down that rabbit hole. There was no Internet to go search on that. Now I had access to all of these internal documents about like what was actually going and the ne of it was hidden. It was all part of congression, the giant SEC report that came out afterwards, and and it was just anyway. My point is, it's fascinating to understand. To me, it's fascining to understand how the pieces actually work versus how

we think they work, because they're never the same. One of the things in the book that was always so vivid to me, and I'm sure I'm gonna misquote this, But they used to run the prints from the Chicago futures pits into the floor of the New York Stocks Change, so you could see how the futures were trading, and marry that with portfolio insurance, and suddenly it's a vicious

cycle downwards as it just be. There is no bottom and that, and that's how you end up with a down day on on the Dow when it should have been you know, a run of the mill correction. But part of the reason that's so interesting is that the mechanics of that are now gone. The world doesn't work that way anymore. But people are the same, right, They like Neanderthals are pretty much doing the exact same emotional by sell you know, green fear trade off in that cycle.

And so what happened in eight seven was a cycle that was had you know, I don't know, had had a cycle time of twenty minutes. Now it has a cycle time of twenty milliseconds. But at the end of the day, you still have people making those decisions. So another quote of yours is history tells us mostly about what people did when faced with a specific set of constraints and inputs. How does that affect traders and investors

in market. Well, so you know you do this on your podcast, right, you talked to a lot of very professional, very successful people. That's why it's called Masters in Business. Right. The challenge with that is, I think it's very easy to get hung up on the thing that they did, not why they did it, and what they needed to

be able to do it. So we look back at assignments, right, people who were wizards of Wall Street, and we were so, you know, we Revere Warren Buffett, right, and we said, like, you know, and people write books about them and all these things, and often what they end up looking like is hero worship. The more interesting question is that, Okay,

Buffet's been really successful. Instead of trying to figure out what is it about Buffett that was better, I think it's much more interesting to look at, well, okay, what was the pond that he was fishing in, who were his who were his colleagues, what were his information sources, What kind of capital constraints did he have or what lack of capital constraints did he have versus competitors. That's what makes him an interesting story. Now, of course he

wouldn't be successful. He wasn't also sharp and brilliant and good at his job and good with people. But I think it's much more interesting to look at those decisions as sort of contextual reactions to their environment, as opposed to revering them as like what we should all invest like Warren Buffett. No, we should all have the perspicacity to invest like Warren Buffett when presented with that exact

set of situation. It's about process. And one of the things I really go out of my way to avoid is the classic survivorship bias, because that's why one of my favorite questions is always what do you know today that you wish you knew to only five years or so ago when you started, Because I want to give people an opportunity to say, oh, I mess this up or I didn't know this otherwise. It's that's the criticism

of you know good too great. Here are twelve companies that did fantastic in the eighties and nineties, and then you look forward a decade and half of them are either out of business or gone or wildly under performing the market. Yeah. I think that's exactly the point. Um, So I I get very skeptical of hero worship I'm

much more interested in understanding decision making. So, like you know, in terms of like great business books, I'd rather focus on like Choices, values and frames by Ken min Tversky versus anything Mountain Gladwell has ever written. I thought you're gonna go with money Ball? Well no, but like, actually money Ball is a great counter example where that's a

great narrative, it's a great story. But I think that the lesson some people get out of money Ball is, Oh, there was this one sharp kid in the right place at the right time, and he really did something amazing and got just enough people to pay attention and got really lucky. And isn't that a great story? Where they're real thing is okay, what is it about that environment that made a difference. This was somebody who focused on data when other people thought data was irrelevant. They got

nerdy when people were thinking it was hunch. The same thing happens in markets all the time. Right when people get nerdy but other people are focused on the emotions, there's often a real opportunity there, right, because now you're dealing with the system, not with the people. You've mentioned another book that I think is fascinating as history the right stuff tell us about what the right stuff has

to do with Yeah. So well again, So I'm glad you made that bridge because because I think Moneyball is an interesting example there. To me, Moneyball is interesting not for the like act like this dude, but as a character study to understand how human beings reacted there. So like, um in the right stuff, which was the example I

was using in the email I sent you. I'm like a lot of people my age and gen X fascinated by the Apollo Program and read everything and seeing every documentary and built all the models when I was a kid, right, I mean it was the Wild West. You're too young to have been called down to the assembly when one of theo I think the first Apollo landed on the Moon or c. Yeah, but I remember watching on TV as a kid, sitting on the couch, right, So like

very very real to me. Um, And so I felt like by the time I was sixteen, I felt like I had a pretty nerdy understanding of the Apollo Program. But then you start reading stuff like Tom Wolf and the Great Stuff. Did you read it or did you? Full disclosure, I watched the movie, I never know, I read the book. I read the book when it came out, and the reason I loved it again was not because it told me anything about how they made the landers.

It was because it was like, holy crap, this was an ego farm, Like this was a whole like that. It felt like Wall Street. Okay, here a bunch of extremely high performance, almost exclusively dudes with enormous egos who are going to work collectively to do something nearly impossible. That's why that's an interesting story. It could be about, you know, the Dream Team hockey, right. The fact that it was about these like super high performance people interacting

with each other for a common goal. That's what I think was interesting about it. And I think if you learned something from the Apollo program, it should be about that, not about like, well, government spending did this and we invested in No, no, no. This was about creating a community of people around a common goal. So you mentioned what we get wrong about markets. What else do we get wrong about the state of the world. Well, so much so. The most interesting thing I think that's markets

related is probably what's going on in economics. I'm a big fan of Oli Peters has run something called ergodicity economics from the Fine good city, because every time I look it up, it seems Google gives me a different, you know, reductionist. And so look with the caveat that I'm neither a mathematician or an economist, and neither are you either of those things. By training, um, fundamentally, we

assume certain things about how money and markets work. A big one is that when you average something over time, you end up with similar or answers to when you average things over populations. Right, So if you flip a coin a thousand times, we can come up with similar expected values too, if we have a thousand people flip a coin once. Right. The connection between those is the ergotic assumption, as I understand it, And if I'm wrong,

I'm sure people will send me hate mail. A lot of what we do in economics is based on that sort of fundamental mathematical assumption that that you don't have to worry too much about those things. The problem with that is that it's frankly not true. Something as simple as starting conditions. You can do this with just the

coin flip experiment. Right. If you and I flip coins, and you flip heads four times in a row top to bottom, and I just know I just randomly, you know, heads tales, heads tails, but we're betting a hundred dollars on each one. I will probably never catch up to you because you are your path dependency on those starting conditions of like you flip that coin heads five times in a row, you now have capital, you have opportunity, you can make smaller bets or lower Kelly number like

you get sort of stuff going on. And because I

flipped two tails off the beginning, I'm screwed. That is a non or gotic function, right, because that's not the same as saying, well, we're gonna have ten tho people go through that same experiment on average, everybody's gonna flip heads and tails about even so you're saying sequence of returns matters, and you're agreeing with Bill Sharp that that's one of the toughest problems in all of finances, absolutely, is how do you model draw downs and withdrawals in

retirement if you get unlucky or lucky in the beginning of your retirement. The implications are actually much more profound than that, however, which is that because we've set up capitalism, not just your portfolio, but global capitalism bakes these assumptions in we end up with things like runaway problems, which we see all over the place right the rise of the billionaire class. It is no longer the case in modern democratic capitalism that the best idea, best executed is

the one that will win. It's the best idea that's best executed, that also has very good starting conditions and access to capital, that's the one that wins. So another quote of yours, the here and now is never an accident. It's the result of myriad actions and influences, and understanding those influences provides important context for planning ahead. In other words, path dependency is enormous, and it's not just a function

of a single roll of the dice. It's the whole series, absolutely, And also from the advice perspective, part of the reason I put it that way is because boy, I just get this emotional reaction myself, Like I look at the market it's down five per cent, or I look at my portfolio value and it's not what it was six

months ago. It's so easy to get caught up in that regret of what happened and I could have done things differently, or if I had put this trade on on Tuesday, I would have made more money and have that dictate what you do today, and that is stupid. What you do today should be based on the markets today, and the markets today are not the markets that were there two weeks ago. When you didn't put on that

options trade. That would have been brilliant. So the ability to let did we talk about that option was not going I should have gone bigger. It's killing me and I'm looking at but you're hung up on this and the reality is like, and it's a rounding. A constraint you should have when you're thinking about your money today is what are the transaction costs of not being in

what I'm in right now? Because if the answer was zero, then every single morning you should start in cash and make a whole new set of decisions about what you're invested in today. If in a purely frictionless world, I said we were done with ETF, wasn't there a new ETF that wants to invest from the close to the open and spy night chairs. Yeah. See, I'm fascinated by people not understanding, Well, isn't that double or triple the

amount of time? Isn't that just time compounded? If we're open from nine thirty to four six and a half hours. The you're closed a lot more. You would think you would be up more over time, right right, Well, they except, of course, liquidity and sorts of other issues like that. But that's kind of interesting, all right. So the biggest question I saved four towards the end here, which is what do we get wrong about human beings? Oh? Boy?

I think there are a couple of big ones. And these are fairly recent revelations to me, Um, and some of them are slightly philosophical. I think recognizing the inherent unknowability of reality is an important first step. You know, you mentioned the two millisecond lag on on perception. Um annal Seth has a great book called Being Human or Being You. I always get it wrong. Um. He's the one who put forth the scientific proof that effectively we

hallucinate reality. Like what goes on in our heads is a model of the molecular world around us. Do we want to call that a hallucination or is it just our model of the universe? Well, like, if you imagine this coffee cup is here, right, you're already perceiving it delayed from its existence here space etcetera. And that can all get very woo woo and who cares, And so that's fine. It can be woo when he cares, but

you have to start from there and build up. And if you accept that fundamentally I cannot prove the table exists, then getting really worked up about Tesla earnings is even more ridiculous, right, because now, when you have an opinion about Tesla earnings, it's based on a set of information that is incredibly incomplete. I don't care whether you're the most storied Tesla analyst in the world. I don't care

if you're Elon Musk. Elon Musk on the conference call talking about earnings has no idea what's going on on the floor right now. For all he knows, his factory is burning down while he's talking. Right, So, we're inherently always wrong about the state of anything that we are asserting truth on. So it's about being less wrong when we're trying to make these assessments about I like to say the future is inherently known and unknowable. You're saying

the present is inherently inherent Yeah, absolutely unknowable. It's all probabilistic, right, And you know, fundamentally, you start thinking about quantum computing, right, Quantum computing largely ends up being about convincing yourself you're not sure right, because you can't actually measure this state of a cuban in real time because then the wave collapses and it's no longer a quantum computer. So managing uncertainty turns out not just to be a managerial tool

for guys who sit around and talk about money. It's actually the fabric of the universe is based on managing probability, not understanding certainty. So if you approach everything from that perspective that, Okay, whether or not I'm going to go on the subway to get down to the hotel, that there's an inherent level of uncertainty in that journey, and that I have to be willing to accept. It's like, okay, well, sixty of the time subway is going to be faster,

but here's all the things that could go wrong. Right time it's slower, and two percent of the time I'm going to get or whatever rights. So I think that that is, you know, there's a level of humility that comes from acknowledging the inherent unknowability of whatever is you think you're an expert on um. But at the same time,

I think thinking probabilistically. I mean, I think Jim O'Shaughnessy talks about, you know, learning how to think probabilistically and a probabilistic world is opposed to determinalistically, and that I think is very true. So, you know, learning to understand to think in bets. I think it is really Importanti Duke's book on this. I think it's one of the key pieces of reading people should have because it makes

it very human. Right, This idea of thinking and bets, thinking and probabilities probably the best thing online poker has ever done to the country. That's interesting, And now I know why you and I get along so well, because we both have the same belief system about how little is actually knowable and why probabilistic thinking is the only way to approach risk assets. Yeah, I mean, at the at the base, all beliefs are wrong right by definition.

If I can't prove that I'm in this room, if I can't prove that fundamental reality is phenomenal logically true, I could prove the table is real by just accelerating your skull towards it. Rapidly. Does that disprove it? Or or am I being too literal and I'm not being sarcastic? You know, working with material objects is that where everybody falls down on this? The problem is like, what's actually going on when you're holding onto this table? Is just

a set of somatic inputs and visual inputs. So the way we perceive it is sufficient for our purposes, but objectively isn't really as a species, right, we have learned these affordances ways to interact with the environment. I am fairly certain if I hit a table, it will always be there. That is, of course not true when you

walk into a really well made illusion. It's not true when you put on a VR headset, right, So we're accepting this version of our perception as somehow phenomenal, logically real. But when we put on the VR headset, we have a brain space where we're like, well, I know the table is not really there. But then again, most people put on that VR headset and they fall down when they go to lean on the table that's not there. Oh is that true? I mean you've seen the video.

You've watched millions of these videos of people doing hysterically stupid things with VR helmets on, Well, it's when you look at them when you're not in the same exact and what they're idiots, No, they're not. They're perceiving a

different reality than you are. And their model got confused and thought that the table was real because they're so used to seeing a table and thinking the tables really And I still think of VR as kind of blocky and not you know, when the technology accelerates to the whole of deck from Star Trek where the differences and imperceptible, and it's like, then, how do you know what's real and what's not? And I'm not one of these guys who's like, we're all have been a simulation And I

don't want to go in that argument. Whatever I think they're entertaining. But my point is from a very practical, real world perspective, let's bring it back to dollars and cents. You have to have the humility of your convictions. Like I look at my Schwab account right now and I say, oh, I get the snapshot of reality what it is. It's

in these things right now. For reasons that I had good reasons to put him in the Emerging Markets Fund or whatever, But every day I should be asking myself whether that's still true, because the world changes rather quickly if you haven't noticed. You and I could do this for four hours, and in fact we have um on a canoe on a lake talking about this endlessly, but

we only have the studio for another few minutes. So I'm gonna jump to my favorite questions, but I'm gonna mix a few of these up, and they're not going to be the same questions I think, Um, the what are you streaming these days is getting a little long in the tooth if I'm asking about video, So I want to mix it up and ask you what music. I've been on a big music tare lately. One of the it turned out on Twitter one of my most engaged threads I've ever done, is I just heard of

post a new song, like every couple of days in there. Um, I'm a big believer that you have to be paying attention to the now if you want to have any of understanding the now. So I try to only listen to new music. Really doesn't mean that I don't occasionally toss on an old Bowie tune that I love or something like that. But four to six hours a day. I'm listening as much as I can to brand new music, and I tend to really listen to basically college radio.

Listen to college radio since nine three and I sort of never stopped. Now most of that is intermediated either through sirius xmu on sirius x where find podcasts are held like this one sometimes or various like remember blogs, they're big, big music, big music blogs back in the day, like Gorilla versus Bear Brooklyn Vegan. These guys are all still around um and they're amazing and they're incredible source of new music. And I think that we're in a

golden age of independent music. Like in the last two or three years there has been phenomenal There has been a number of articles about streaming has gone classic rock, thirty year old music, and new music has a really different called time being discoverable on all the streaming services. So if you want to discover new music, how do

you do that? So Grilla versus Barron brooklyn Vegan dot com, both of them are are blogs where every day, like literally, I think one of them posts here's the twenties six songs that were released today every day, and you can work with new music in the background. It's not terribly distracted. No, I mean I skip stuff I don't like. I don't want to pretend that I just like universally love everything. But you know somebody who's putting up a playlist that's

new music every week. You know, there's a top forty alternative charts that I listened to that's new every week based on college radio airplay. And so I'll just put down on repeats the same playlist to just keep it rolling repeat. But it's new stuff every single day. The stuff coming out of particularly like Philadelphia and Chicago in the new music scene, Um, all zoomers, like all kids

in their twenties, just amazing stuff. Like a couple bands of note, Um, wet Leg is one that I'm a big fan of, very much a sonic youth kind of ye Horse Squirrel out of Chicago again, a very sonic youth kind of vibe. Philadelphia, there's so many bands down there. Alex G just dropped an incredible album down there. Um you know Dead d e h D and other incredible

bands there. Chicago as well. But these little d i y music scenes in in a couple of major cities just unbelievable creative stuff, very a lot of it's very experimental, fourteen minute songs. I'm hearing a lot of alt rock and new synth, but not hip hop that list. I don't listen to a ton of what I would consider mainstream hip hop. Um, it's very distracting if you're trying to read or write exactly. That's that's the big issue.

Is that the lyrics, the lyric, that's it's important. Um. I will listen to hip hop generally on headphones, like sitting down in a chair with headphones on to listen, which I don't think that many people do, and I wish more people did. Um. But you know in that space like Run the Jewels, I'm a huge Run the Jewels fan, and that that's more like an indie hip hop artist. UM, so that kind of stuff is a

little bit more my jam. I was really into hip hop back in the eighties nineties era, but you know, not not at the level I know some of your boys are at a ridd um yeah, my my hip hop stop with Paul's boutique from the Beat. Yeah, I mean we're both which really which really is the ultimate for you? That's the peace I mean, but the law changed and you couldn't sample the way they I mean they sample beatles and Sergeant pet You couldn't do that

today without being sued. Well, the interesting thing is now in the d I Y community, in the in the sort of true indie community, that stuff is really rampant. But it's happening outside of the boundaries of the big record companies. Right. It's literally, you know, one artist in Philadelphia calling up another artist in Chicago saying, Hey, I love the beat you put down on that half made track you dropped on band Camp. Can I sample that

in my next thing? And that's happening like crazy, But they're not going back to the old blue note, you know, archives like the Beastie Boys got to not getting too

sample a whole lot of love. So it's funny. If I'm writing and I want some music on in the background, I'll go to a weekly show by John Pizzarelli called Radio Deluxe, and it's the classic American songbook from the thirties, forties, fifties and jazz, and I can have that operating in the background and it doesn't interfere with my ability to read or write. The songs are familiar, and it's more music. It's more music than lyrics. So the jazz side of

it allows me to function. I think what you're describing would be really hard to work with In terms of writ It totally depends on the kind of work that I'm doing in the moment. If I'm reading academic work, if I'm looking at red legislation, and and you know, reading news and catching up on Twitter, and I can listen to anything. If I'm actively taking the words out of my head and putting them on paper, generally I'm in complete silence. But I tend to compose in my

head and then write all at once. So I'll write something in my head for three or four days and then I'll put five thousand words out in thirty minutes. Yeah you me. Morgan Housel says the same thing, that the most important part of writing is the couple of days before you sea. It's usually the most important part of writing to me is the two hour walk at six am. That's the most important part of writing. Then I sit down at eight start writing, and then that's

the easy part. My wife makes fun of me. But if I'm giving a presentation that gets written in the shower and she's like, what are you saying in the shower. I'm like, I'm just rehearsing. I have to be moving. For me. It's there's there's a somatic company and that really helps the get the articular. So I normally ask about My second question is about mentors. So I want to ask this question because from Barclays to eat f

dot com to vitify, who helped shape your career? Oh my gosh, a million people you know, probably you know, not necessarily people who will know, but like, there was a a guy who was sort of my uncle growing up, who was a Vietnam being on VET mortar surgeon and blown off his hand and he was just sort of growing up in Lenox. He was an uncle of a friend of mine, and he was probably the model that I put in my head when I'm sort of like,

what would so and so do you know? It would definitely be Al robertson Um, who was a businessman of some note. But in terms of my direct career, you know, I look back at those early days at UM Wells Fargo, Nico, and for sure I needed to be taught stuff back then. UM and I give Patty Dunn and Fred grauer Um and Blake Grossman a lot of a lot of credit for that because I was very young, and they're all probably ten fifteen years my senior at the time, and

they were they were incredibly important. But um, Honestly, if I picked one person, probably Matt Hogan, who's ten years my junior. I've been working with him since nineties six or seven. He was a biotech analyst when I was running money. He and I just have stayed incredibly close over the years. And if there's like one person who I was like, if I had a business decision, like career choice, ethical quandary, something like that is a question,

would be the first person in call. He seems to be a very sensible, thoughtful person and not given to you know, he's a main guide. I mean, that's that's what that's how he started in life. He was literally in college, got his guiding certificate in Maine. And we know what those guys are, right, that's the most practical people. God dang planet. How do you survive and not get trampled by an elk exactly or attacked by a bear when you're out hunting moose or bear. It's all about

reality there talk about recognizing reality. The penalty there for being wrong is death, right, it's not. My account is down six percent. It's a bunch of bears disembedstment. That's why I'm such a fan of being outside in general, honestly, is because like, if you're three miles in on the Appalachian Trail in the middle of the woods and storm

comes up, that's as real as the world guests. Right when you're at a cell phone coverage, standing in your sneakers in the middle of the woods, that's as real as the world gets. There's no bodies, there's no people, there's no stuff, there's no man made anything. That's base state reality. I've had this conversation with people who out on the water on boats. It's like, listen, you can't

flip on channel two and get the weather forecast. You need the marine forecast because if it's six ft swells and forty mile on our winds coming up, you need to know that and basically stay in the marina, not go out. Not oh, it's gonna be sunny out today. That's sort of Donning Krueger. Hey, you need to really know what you don't know and not assume you're good at this outdoors. Mother nature is a cruel mistress. There is no fooling around well. And I've run into this

all the time. I live in the woods up in the Berkshires in Massachusetts. I run into New Yorkers who come up to go hiking all the time, who were heading off cliffs, like I mean, it's just almost every hike that I go out, and particularly this time of year, it's so easy to get lost if you're not used

to walking around in the leaves in the woods. And just just this last weekend, I was walking around just on a trail and I was just like, what the heck are these people doing going over that ridge line. I'm like, hello, don't go that, don't go there. One more step is that do Yeah, they'll figure it out. Let's talk about books. We've mentioned a lot. Give us

some of your favorites and what you're reading currently. Oh boy, the most impressive book I've read in the last couple of years is The Matter with Things by Ian McGilchrist, which is fIF pages. It's fifteen under pages of neuroscience and psychology, I would say is probably the best way to describe. How do you attack a book? Like that. You don't sit down and start plowing through. Oh no, So, like we haven't talked about this, how to read a book? You know how to read a book? I think I

do because I read a lot of books. No, no, there's a book called how do the book? Okay, so let's talk about So how to read a book is something that I was handed when I was You need a pamphlet years old or something like that, and it basically outlines it's written in the thirties or something like that. It's a very straightforward system for breaking down a book. And it starts with like, okay, you have been handed a book. Here's what you do in the first ten minutes.

And it's not for fiction where you're worried about spoiling something. This is really for nonfiction. And there's a process they go through of like, okay, you read the first four paragraphs of the entry production. You go through and you read all of the chapter headings, and you know, usually through the table of contents to try to understand the flow. There's something you don't understand, go read the first paragraph of that chapter so that you now understand the flow.

Then go read the introduction to the concluding chapter, and by that point you should understand does this book have anything in it for me? Right? And in the in that modality, you probably reject half the books you open, right, you can. You can do that in the in the bookstore literally, right that what you're just it's funny you said that, because what you're describing used to be my bookstore route exactly. So that's at that would be a

level one read. A level to read is with whatever speed you want, you consume the available content of the book itself. So that's literally just reading the book. Now. I tend to do that very quickly. That kind of reading I can be very very quick with. And that's a level to read. I don't mean speed reading. I mean just turn pages, understand what, understand what's important. You're not going to read every single word on the page. We're gonna get the gist of every major point made

in the book. Right, You're doing your own spot. Unless it's a Bill Bryson or an Ed Chancelor, somebody who's writing is dense and deep and you really need to think about each sentence in each Yeah. Well, so even in the modality of how to read a book, a level to read even that you would let skip through a little bit, because the objective of a level to read is to understand everything that the book has to offer you, right, so like, what are all its key points?

Where it's you know, sailing, it's observations, where it's facts that you haven't gotten A level three read, which I can say I've probably done for ten books in my life. Is when you go through and every concept you don't understand, you go down the rabbit hole. They mentioned a book that you haven't read, you go read that book, and that's a very rare thing to do there. So on a book that's this big, the honest truth is you start.

I start at level one. Now. My level one read on the matter of Matter with Things probably took me a week because it's so just to go through and read the opening paragraphs of each chapter and read the conclusions and be like, nope, I didn't get that. I have to go back without actually reading the book. It probably took me a week. Then Tom Morrigan from KCP and I spent I want to say, three months. Tom has by the way of fascinating Twitter feed. He's phenomenal. Yeah,

and he's way out there on this stuff. He's my my sirpa on this sort of phenomenology and consciousness end of things. But then we we sort of we're going through it together, which helped a lot um and we would bounce ideas back and forth with each other and compare notes with where we were. And I did a full level to read that book over about a three month window, reading it every day. Give me one more book,

because we've talked about so many already. Uh, how about this, I'll go with a comic book, trans Metropolitan by Warren ellis my one of my favorite comic books. Could not be more relevant for the modern world right now. About a journalist named Spider Jerusalem covering the apocalypse in a major city, and it feels like it was written about today today. Interesting. Our final two questions, what sort of advice would you give to a college grad who thinks

they want to be a financial futurist? We'll probably inventive better title. But to do like the kind of work that I'm doing, the biggest advice I have is to be curious, right, never allow a good rabbit hole to go unexplored. We've had conversations about that phrase has come up. How much time do you spend down various rabbit holes.

I mean, I mean pretty much any time that I'm not doing something else, I'm like if I if I have something in front of me and i'm reading the time, it's something that is way deeper than it needs to be, because I really want to understand it at a core level. Okay, so let me fast forward. I actually by the time this comes out, this will be old news. But I did a blog post about how the FED is causing inflation.

The FED, by raising rates, is causing the CPI inflation prints to be higher because the crazy way BLS measures the cost of shelter. And the only way I was able to put that together, and I'm bringing this up because I know you'll appreciate it is because I lived in that rabbit hole during the two thousands. But I was arguing BLS is under reporting inflation because of we've

had that conversation. But that was in the two thousands, so the FEED had taken rates down too quickly, too low, and that led to a spike in the cost of shelter, which the BLS reports the inverse of. Fast forward twenty years years now, the FT is raising rates and that leads the b L S c P I to over report inflation because the way they measure owners equivalent rent because for many people a home is an asset, but if you're a renter and it's going up, how do

you measure that? And it's not this grand conspiracy, it's just a complex modeling problem, which, as you've described, we it wrong. Yeah, and I think that those are endemic. They're everywhere. I mean during the game stop run up, people were talking about, well we had to make cap you know, why did DTC have to have a capital call in Citadel? And this must be somebody buying Ken

Griffin's damn. And it's like, again, they're so easy to disprove that, but only if you've already spent a year down the rabbit hole of understanding capital requirements at settlement Bureau.

We all we all talk about our priors, but if your priors were down the rabbit hole, then you have a frame of reference to understand these complex endemically with the with the enormous caveat that everything you knew about financial markets now and so first in in the post, I cite something I had quoted from from I think it was a Cleveland Fed or Atlanta Fed. Look at

o we are. And then fortunately my my buddy and Victus said, hey, you know that the Federal Reserve and the maybe it was the Cleveland FED just did a piece on this like three days ago. So I was able to site like, oh, and here's the latest change that they're changing the they're the FED. Everybody is aware that this is a problem, that they're changing the way they measure this. But this all goes back to we're wrong, the models are wrong. We have have to get it right,

all right. Final question, what is it that you know about the world of investing today or the world today that you wish you knew twenty five years or so ago when you were first starting out. Oh well, I mean it's a beating a dead horse here, but that I was wrong and whatever the question is, the answer is I was wrong, right that that yeah, that that fundamental shift in my perception, which really only happened in

the last three or four years. The pandemic helped a lot to recognize the inherent fallibility of human experience and approach every conversation with the humility that that implies. If I could go back and beat that into my year old self I would do in a heartbeat. Fantastic, Dave, Thank you being so generous with your time. We have

been speaking with Dave Noddig, financial futurists for Vitify. If you enjoy this conversation, well, be sure and check out any of the previous four hundred and forty we've done over the past eight years. You can find those at iTunes, Spotify and now YouTube, or wherever you feed your podcast fix. We love your comments, feedback in suggestions right to us at m IB podcast at Bloomberg dot net. Follow me on Twitter at rid Halts. You can sign up from

my daily reading list at dhults dot com. I would be remiss if I did not thank the crack team who helps put these conversations together each week. Sarah Livesey is my audio engineer. A Tick of val Bron is my project manager. Paris Wold is our producer. Sean Russo is my head of research. I'm Barry Rid Halts. You've been listening to Masters in Business on Bloomberg Radio.