Barry Ritholtz: Use Your Disillusion I

of the most interesting people. He runs an advisors shop that is cutting edge and in a couple of ways, Rid Holts Wealth Management. You know, I'm on Twitter and a lot of those guys are very popular. Their blog posts are really great. And Barry is very honest and a lot of real brutally honest and he's not afraid to answer any question, even if it's about advisor fees and whatnot. And I've seen him operate on Twitter and

he'll take on anybody. He'll answer anything. He's just very vocal and obviously he's used to interviewing people, so I thought it'd be interesting to interview him. And I know he's a big E T F user. That's the that's the cool part because he managed I mean, he manages a lot of money, is he and his team, and he has some really important views about e t s. Yeah, when someone goes out and says E t F serve the devil, he tends to be on the other side

of that. And I've noticed that because he's using them. I mean, he has real people's money in e t F so he better believe they're they work and they're good. So we asked him about e t f s passive. He'ses some active while he's not persuaded by thematic e t f s, even if he likes the industry. I thought that was interesting. And also just this this low cost migration that advisors are loving in the asset management side but hasn't quite hit the advisors side, and that's

a third rail issue. But he'll he he took it on and he was not afraid to talk about He wasn't afraid to talk about anything we hit on. I think God, uh, portfolio management, trump, p F trump trade everything, And you know when you talk about being honest about those things, he really is that way in his columns and on Twitter, and so are the people he works with so we asked them, you know, as an advisor with clients, has that helped and has it ever hurt?

I thought it was interesting. So what we're gonna call this episode because we actually have so much material, it's like a double album. It's a double podcast, so the white album I have one even better. Use Your Disillusion one and two. And I say that because Barry talks about disillusion being the reason a lot of money has shifted over to passive in the past ten years. Sidebar guns and Roses. Use your Illusion one or two? Which is your preferred I can't remember, probably the one with

Don't Cry. That's probably my favorite song from that whole thing. But um, there's a I don't know half of it is good. The other half of its number two This weekend trillions, Use Your Disillusion one and two with Barry Barry Evan ridd Alts go how did you become who you are? Um? So I'll share a deep, dark secret with you guys. And nobody believes me when I say this, but it's really true. A lot of what I do

is just because I'm entertaining myself. So Daniel Boston is the Librarian of Congress for former Librarian of Congress, and he famously once said, I write to figure out what I think, and besides that hour all the bars are closed, unquote, And that's really true. You don't understand your own thought process. You don't know what you really think until you go through the entire process of putting it on paper, figuring out. Here's my intro, here my supporting points, here's my conclusion.

We have a very muddled internal dialogue. Most people are not crystal clear about their viewpoints and their positions. It's why people are so easily influenced. They don't really know what they believe. There's a handful of things that they're probably pretty deeply as constant, their personal spirituality, their religion, some of their ethics. However, a lot of what they think they believe it is very squishing and so often ill defined. So writing really helps you figure that out.

And what started with the blog was frustration with the nineties and two thousands media, which I thought the financial media. I thought the financial media was pretty mediocre and in a lot of ways punctuated with excellence, but a lot of really terrible stuff. So at most major newspapers, um, someone would get hired for the economics beat because it was terrible, and they would send them to all right, you're gonna go to the Treasury and you're gonna get

this report. This comes out at eight o'clock. And then you know on Friday, you're gonna the first Friday of the month, you're gonna go do non farm payroll at the labor to point. And they used to actually go to these places and they would write these terrible things

about what happened. Most people who are language oriented don't frequently have the math skills to keep up with that um, and they don't understand things like causation, and they don't understand so so you ended up with these things that most of the time don't matter UM, but occasionally are important and we're frequently wrong. And so the entire blog

The Big Picture began as a pushback to that. Just by I would read something and it would frustrate me because I knew it was either wrong or to the average investor misleading, And the same thing was true with the podcast. I used to pull my hair into my head. There would be some fantastic person on if Choose your Poison, Bloomberg TV or CNBC or Fox Business or Fox News before they had Fox Business or CNN, bisy this and they would do this terrible interview, what's your favorite stock?

Where's the dal gonna be in a year? Hey? When is the Fed gonna cut rates? Or rates? And I'm like, wait, this guy is brilliant. He wrote the seminal white paper on fill in the blank? Who is he? How did he get that way? So the podcast, if the blog, was pushed back to financial media. The podcast, which just celebrated its fourth anniversary. Is that the is that like the Wood anniversary? I don't know. It's two hundred plus interviews,

many of each last twelve eighteen hours. Things like that, and it's it's the podcast was pushed back to the electronic media's refusal to have and I shouldn't say refusal, the rarity of a very good interview with people who are intelligent and accomplished and have a unique perspective and have something to say. Who cares what their favorite stock is? They walk out of the building, it's already stale. Asked them something that's evergreen and important. How did you get

into the managing money? So I started as a trader a few decades ago, and that was a ton of fun. Um. You make a lot of money, some months you lose a lot of money. But it was really, really interesting, and eventually I came to the conclusion that it was fair as far as I was concerned. The compensation ended

up being fairly random um. But most fascinating to me was the guys on the desk around me, And it was back then it was all guys, and this person is making money this month and this person isn't, and then you flip it, and that sent me down a rabbit hole of why performance exists and how people some people dwell and some people don't, and the entire behavioral finance UM rabbit hole opened up to me in the

mid nineties. But I went from there to research. It was became an assistant to a technology strategist at a firm that no longer exists. It was ended up being brought by Oppenheimer, and then eventually became a market strategist.

And so the first twenty years of my career I said, turned down money, listen, I can't compromise the objectivity I have and in doing my research or so, I foolishly, But eventually it became clear to me that when I would refer people to other Oh this guy you want Muni bonds, Go talk to him all you want to. It dawned on me one day when I referred to somebody to a Muni bond specialist. The person came back to me and said, so tell me about this private

placement there they're talking about. And I suddenly had a tremendous insight. Oh my god, I have massive reputational liability and probably legal liability if I send someone, not getting paid for it, never asking for a dime, but thinking I'm doing the right thing by sending people to And at that point it was like, all right, that's it. I'm I'm done making those sort of idiotic risk decisions folding people to other people. Congratulations, you're the first client

of the Ridoltz Group. And and that's how that began. And that was just about a decade. You still had that first client, Yes, still do. And how many clients do you have to I want to say we work with about five hundred families a little under and we're up to about nine hundred million dollars. We're just shy of a billion, and we're just shy of five years, which will September is our um champagne party anniversary. Can I tell you something. We discussed that internally in the

office and decided it was a bad look. And instead, I know this sounds like hokey and self serving, we decided that the whole New York office is going to go volunteer somewhere on that anniversary. I know that it sounds it sounds artificial, but it really isn't. Because this industry is somewhat notorious for a lot of um back padding and we're all guilty of it, and I'm I'm we would like to avoid that sort of that sort

of luck. All right, So, Barry, we invited you on this podcast which is about e t F s because I've seen you right about e t F s. You you speak at many of the E t F conferences, You've talked about investing in them. Just talk about, you know, as an advisor, what E t F have done for your business and how you use them. Sure, so, there are a couple of really obvious, simple advantages of e t F s. Perhaps first and foremost is the tax structure is vastly superior to most other things. And and

that's number one. Number two with e t F s if you're dealing, we set up an online this is already a couple of years old. We set up an online I hate the term robo advisor, but an automated UM solution that is low touch, low cost, and it it trades essentially commissioned free at t D using all of these ETFs from various names like Vanguard and black Rock and State Treat and and what have you. And that that circle of of commission free stuff is always changing,

but we don't change the portfolio reflected regardless. You can set up a well diversified portfolio, not with two million dollars, not with two hundred thousand dollars, but with you know, twenty dollars. That wasn't possible pre e t fs. It didn't make sense to buy five thousand dollars worth of mutual fund given the costs and the price breaks and what have you. But you can do that with with e t fs. When it comes time to rebalance or what have you, you can you can make those sort

of changes very easily. And what's your e t F index fund active mutual fund balance in in a typical portfolio or in that nine million dollars in firm assets. How's that allocated? Roughly percentage? So I don't want to misspeak because you're you're us three things, So let me

give you a broad overview and then we'll drill drill down. UM. So we typically believe in a broad, globally diversified, low cost asset allocation model, and we use dimensional funds, Van guard uh So, Wisdom Tree funds, UM basically all the all the names you would know, and you don't need a million funds to be really diversified. UM are we between ten and fifteen gives you pretty much the entire

world ten and fifteen holdings UM. Some of the portfolios we have UM or all A E t f s. We have a tactical portfolio we use which isn't the typical tactical portfolio. It exists. It's rules driven, it's pretty basic quantitative strategy. But the idea is, if your holdings is in a portfolio that gets out of the way for the fat part of a thirty or forty market collapse, then you could leave your real money alone and not try and market time. Not that this market times, but

it's basically a trend following system. And the idea is if the market really has a wild hiccup. Well, your average seventy percent stock bond portfolio with a slug in the tactical, it ends up looking like fifty fifty. And so if you can't withdraw withstand a draw down in your portfolio, which is what a fifty fifty portfolio should do in a crash, um, then you shouldn't be in equities.

What are you telling clients now that this is the fat part of the economic cycle that we're hitting on all cylinders, that when you come out of an economic um crisis, out of a financial credit crisis, that you tend to have a long, slow recovery. By the way, this isn't us saying this. I've been writing this in on Bloomberg and elsewhere for you know, pretty much the

whole run. Um. You look at the research from Ryan Hart and rogue Off, it's pretty clear um week GDP week, consumer UH spending, soft job creation, soft wage gains, weak home price appreciation is what typically describes the post credit crisis recoveries. This has been playing out with some variables pretty close to that script, which implies that this cycle will go much longer than most people believe. Um. I've I've been reading people call for a recession I don't know,

just about twice a year for the past ten years. UM, It's hard to see anything on the immediate horizon that is a threat. The feed is tightening, but they're tightening from very low levels with very low, small amounts of inflation. Now, all these can change. Maybe the tariffs put through push through a lot of a lot of inflation, maybe some other uh saber rattling causes a problem. So typically an external shock to a strong economic recovery or a strong

economic cycle doesn't really affect it. But when you have an economy that's starting to falter, doesn't take much of a shove to send it sprawling. So far, the economy has been very robust and has with withstood a series of I'm not going to be politically correct, I'm just gonna say a series of ill thought out, um economic actions by this administration that in a weaker economy, would have caused a recession. They're just fortunate that they inherited

a very strong economy. Otherwise we would be looking at something far less. I would be far less sanguine about what was going on in d C. If I wasn't confident enough that the economy me was robust. There's a lot of people you talk about this sort of economic bullmarket that we've been seeing for quite a while. There's a lot of chatter out there, and you've heard it, You've actually written about it that oh, it's this Russian

too passive, that's just blindly lifting all these stocks. And look out, when the passive bubble pops, everybody is going to be uh running back to active. What's your take on all this is somebody who uses passive? Does any of that breakthrough to you? Right? Well, we use passive and active. Um. I think the bulk of most people's portfolio should be mostly passive, and I think if they want to throw an overlay of value or small cap

or whatever, that's perfectly fine. The passive indexing versus active management debate has been frighteningly ignorant, shockingly self serving. Some of the stupidest crap I've ever read about finances come out of it. Indexing is Marxism? Do you remember that nonsense? Of course, it's a bubble that's gonna crash everything. How is indexing about? So let's let's put this into context. First,

indexing began forty years ago. And despite the obviousite obvious advantages of low cost, low taxes, low turnover, no specific benchmark other than the benchmark the SPH, the pursuit of alpha typically leaves to not even achieving beta. So the intellectual underpinnings of this have been around for literally decades. It was only in the past ten years that this blew up. And so when you look at the context

of this, why why did this blow up? And and I'll give you five reasons, And I think this helps explain why it's not a bubble, it's not Marxism, it's not the end of capitalism. It's first of all, you go back to the late nineties yearly two thousands, scandal after scandal after scandal, the I p O spinning scandal, the analyst scandals, the accounting scandals, that one after another aftern that's before we get to Bernie made Off in all the Ponzi schemes and everything else, and then the

dot com collapse. I think at a certain point, the mom and pop investor says, you know, I've played this game and it doesn't seem to work for me. Right. That's before high frequency trading made um individuals feel like the market was skewed against them. Um. But as we say in our office, the solution to high frequency trading is low frequency trading. If you're not an active trader,

that doesn't affect you. So that's number one. Number two, you had a series of giant market crashes, the dot com collapse, then the housing collapse, then then the Great Financial Crisis, then the commodities crop collapse. It seems wherever investors went hunting for alpha, they got their heads handed to them. And at a certain point, the mainstream investor says, you know what, screw you guys. I'm taking my ball

and going home. And so for them who have to be invested if they want to retire, it made sense to say, I'm not gonna pay commissions. I'm gonna pay an eight dollar fee to buy an index at t D or Schwab or wherever, or go robo or go robo um or you know, I've been promised this out performance, but when you actually do the math, the performance isn't there. Uh. The brokers end up capturing the lion share of of

whatever upside there is. If you Jim Chanos said on on Masters in Business, you know when he started his hedge fund thirty years ago, there were three hundred guys creating alpha, all guys back then. Now there's eleven thousand funds and it's the same three hundred people creating alpha. So unless you're fortunate enough to be in one of those funds, you're paying a lot for underperformance. And I think again the public is kind of figured out they're

not in those funds, they don't access to it. And then the fourth, and I think the most most important thing is behavioral finance has become so ubiquitous and so well understood that the average person says, you know, I'm full of um my own biases, and I'm emotional, and I don't necessarily have the discipline to do this the

right way. So they've begun to recognize rather than try and play that game, I'm just gonna buy an index and seeing forty years, Well, this is all what's fueled why we have a podcast called Trillions about et f s. Right, Why do people even need advisors? Why not just do the robot thing that you have for So there's three part answers to that. First, some people don't even need

robo advisors. They can do it themselves. I spoke it years ago and an a a ii um events And this wife comes up to me with her husband and tow and says, tell my husband, he's an idiot. So I turned to the guy and say, sir, you're an idiot. Now that I've called your husband idiot, why do you think he's an idiot? And she says, he keeps buying all these stocks that are collapsing. I go, stocks like Lehman an a I g or No, he bought Disney

when it fell, and he bought JP Morgan. Ma'am if he has the I go, are you panicking and selling? He's now? I buy one at here, I do one entry when it falls x percent, I do a second entry here. I only buy quality companies without a lot of debt, and a lot of them. Ma'am, he's not an idiot, I go, I write, he's doing fine. You could now. You need to be disciplined, you need to be thoughtful, you need to spend a lot of time. The person had been retired since his mid fifties. He

loves this, and he's he was. He goes, I beat in the market four out of the past seven years, or something like that. And when you missed, he goes I was right there. Okay, so I said the wife, ma'am, I don't want to He's doing a good job. So

that's one person, But that's not the average investor. The average investor doesn't have the time, doesn't have the discipline, doesn't have the emotional balance to not get sucked in to the vortex when everything gets hairy and things are flying over your head and everything on the news is the world is ending. Some group of people. Uh, the robo advisors are perfectly valid for listen, I want a simple portfolio. I don't care what you have to say.

I don't want to speak to you. Uh. Once a quarter, send me an update, and once a year tell me if I'm on target form my plan. I mean, doesn't that actually breed good behavior though one would think, But again, that's not the average investor. The average investor. Whenever you do a survey asking people what their risk tolerance is, what you get is not their risk tolerance. What you get is how the market behaved over the prior ninety days.

If the markets falling, they're really conservative and they don't want to take a lot of risk. When the market screaming higher, listen, I'm aggressive and I can withstand, So it doesn't tell you anything. So you really have to be aware of what people say isn't very often what they do. And then there's another group of people who are running businesses or owning companies, or very busy in a professional career, and they know they don't have the

time or energy or discipline or focus. And besides, they would rather spend their time and energy on their own business than dealing with their own four oh one K, their employees for one k, setting stuff up for the kids. Some people have generational wealth and issues. Some people want to give money to philanthropy. Some people want to make sure that when they sell a business that they don't max out their taxes. That there's a ton of things

that require some expertise. And that's the typical advisor client that gets what they pay for. You know, if someone says, listen, just buy me an S and P five hundred, why would those people pay, you know, an advisor for that They don't need that. The issue becomes the complexity which is out there, the the discipline to manage your own behavior and what you need in terms of various services real quick sidebar. There's a you know, a pot e

t F, there's a cybersecurity ETF, robotics. These them ets have risen a little bit. A lot of people blow them off, but a lot of the stocks they hold are young. There won't be in the big index is for a while then most people own Is there a case for them? Do you ever get tempted by some of these more speculative areas, Yes, there's a case for them. No, I'm never tempted by them. But like you know how

Google had the big earnings recently. Um, and then everybody on Twitter does this thing where they quote people who said Google is not going anywhere. I feel like those are the same people who pooh poo like a pot et F because they're like, oh, it's a joke. Um, I don't think it's a joke. But it's just speculation. Correct. But if Google was sort of uh waved off back then or looked at is maybe high flying or speculative.

Shouldn't things that are speculative today be taken more seriously to get your claws into that young industry or young stock as opposed to waiting until it's an adult and finally makes it in the SMP five hundred, Alex, I'll take survivorship bias for one please. So you're telling me about Google today, but you're not mentioning pets dot Com or Cosmo or any of the other thousands of pieces of crap that came and go. Remember Google was like

the twenty six search engine. I was a beta tester er for Google back in the you know, eighteenth century, and I remember playing with it for a day in sending an email to the person who invited me, this is interesting, how can I invest in your company? Was that like a Yahoo dot Com email? I don't even know it was a OK? It was dialing right that crazy era. So let's separate the pot et fs from And a buddy of mine runs a cannabinoid wellness and

health hedge funds described buddy, uh, this is somebody. Todd Harrison is somebody I'm friendly with. Never indulged in in any leafing material with him. Um, but he's a person whose office was right near the World Trade Center during nine eleven, had horrific survivorship guilt. They put him on the usual opioids and depressants. He hated what it did to him. He said, I'm not who I used to be.

Eventually found his way to some legal medical Like there have been medical marijuana legal in New York for really really specific diseases. It's not like quote unquote medical marijuana when it was in California, where m hey, dude, I'm having a hard time sleep open. Oh here's some weed that that is not what New York was. And look at look at what's taking place state by state. Does anybody doubt that fifty years from now medical regular marijuana

is sold over the counter like beer. How about twenty years from now, how about ten years from now? At a certain point, it's clear we can't incarceraate millions of people for weed and pay millions of dollars billions of dollars to drug companies for things that may or may not work. Oh and thanks for the opioid. Sessions would like to speak with you now, you know Sessions. So this whole crew is a temporary setback to the relentless

march forward of progress, not just politically, technologically, sociologically. So you sound like you understand the pot industry, the growth and all this. This is a great example high right now, no high on life. I can say it. But it's a good example because we do talk about the ETFs in the show a lot. But as an investor out there, w E d s on. But say you're listening out there, m J is the ticker. It's a diversified basket of pot Starry Jane. It could have been better, but I

think we need how does nobody up something? Well, I think the issuers didn't want to go too far and like really irk the sec by like doing a touchdown dance with the ticker. But the ticker ticker makes a big difference. But here's a case where you know the industry you bought you kind of sound like you're, um, I'm intrigued by it. But but but as an investor, what stops you from trying to get an early foothold

in using say diversified basket like MJ. That's a great question. Well, first of all, I have you know the the old joke is the second mouse gets the cheese. The settlers, the early settlers are the ones with the arrows in their back. Um, I don't I don't know, I don't know if m Ben Franklin type stuff right there. So the question we we mentioned, we mentioned Google right, So is this the first group of stocks? Is this the

second group? Like? How many? How many dog pile and go and what were some of the other out of Vista? How many of these other mediocre search engines do we have to go through before Google comes along, executes better, has a broader vision, can do all that chance they need to do. So maybe m J is a home run, or maybe it's a speculat piece of graphic goes nowhere. I have no way to tell that. So you have an aud advantage to some extent because of being media savvy.

Your whole team is just you. Guys are especially candid and entertaining. I mean I think you're at the tip of the spear in that regards. Then at the back end there's these asset managers and advisors will call them traditional. Um, you never hear from them. If you do, you get like a research report that's been vetted by fifteen lawyers. It feels late and milk toast. Yeah, you know what I mean? Um, is this Twitter and this sort of Um, what's the word I'm looking for? Social media? Or is

this the future? Or do you think it will sort of live over here in a more compartmentalized and the tradition will will will stay because they do have a ton of assets, or is it all gonna slowly switch over? Where you fear the Fidelity portfolio manager um, you know, debating you over Jeff Sessions on Twitter. So the answer to that is yes and no. I don't see Fidelity, Vanguard, black Rock, Goldman, Sachs, Morgan, Stanley Schwab. I don't see them as occupying the space we do. Now they'll they

all have started blobs of some sort. Many of them have podcasts. Go down the list of some of the stuff that we do, some of the media we do. But you know, keep in mind, you have to be you have to recognize the history of this. The blog started because in the eighties you had to have gone to a rights the right school, you had to work for the right firm. Otherwise you're not getting on TV, you're not getting on radio. Um. And so it was it was there were gatekeepers and walls and the rest

of us were sort of voiceless. That began to change with the Street. Dot Com was sort of a and the Yahoo message boards. There was a broad democratization of media and discussion and debate about investing. The problem is Yahoo message boards were filled with fake news that was

really fake news. Long as we're saying things that were wrong, for shorts were saying things that were wrong, and everybody the search for the truth um was fought and and the old expression is a lie gets halfway a one in the world, while the truth is still putting on its shoes. So what avengely that evolved into was And I described the signal to loss ratio in a number of columns over the years. I've written about this a lot. But at a certain point, people no longer read mast heads.

They read specific um writers. So at the Wall Street Journal, it's Spencer Jacob. It used to be jesse Eisener, he's now a pro publica. At Slate and elsewhere it's Henry Grayber and it's Dan Gross. I mean, I give you a list of a hundred people at at Bloomberg, they're a hundred people I follow. So what started happening is the precursor to social media began when if you're paying attention, you start to notice, Hey, this person is right a

whole lot more than they're wrong. I'm gonna pay attention to what what they say and that eventually has become so from Yahoo message boards to the street dot com to really cherry picking the best writers to social media. People kind of figured out that it's not a monolith that you can pick out writers who are better than others who have something to I mean everything. Morgan Housel

rights I devour because because he's spectacular. Um, if you're interested in Donald Trump, then you must read every column that Tim O'Brien writes because he has insights that nobody else, having been sued by Trump and documents. This brings up a good question, which is, have you ever had a client upset about something you tweeted, maybe political or or whatnot? Does that ever bite you? Um? It does? But you know, I wish I could say we were so brilliant that

this whole thing is by design, But it's not. So. The typical Wall Street adviser is very much right of center, not even right leaning. They tend to be politically and financially conservative. I don't know why. It just kind of has happened over the years. Maybe that's a result of tax policy, I'm I'm guessing, But you know, I think of myself as fistially conservative and socially progressive with a

libertarian streak. That means, but by the way, I love harassing my libertarian friends who I accused of being cowardly hypocrites. So wait, the government can't get involved in euthan asia or weed, but they can get involved in birth control and abortion rights. You have to be intellectually consistent. Let's say you write that, and there's a libertarian cline ever called say Barry, come on man, stop um. So we've

we've had conversations with people. We've had conversation with people who have said, gee, we wish you wouldn't weigh in. So let me back up a little bit. So the we do a monthly letter or quarterly letter, and and when occasionally special events happens, we'll do it the night before the election. In I write, I write my quarterly letter, and I leave the last paragraph blank because I know enough about random outcomes that I know I don't know what the what the final results will be in the

pulse have been really close. But but the basic premise of the column was the of the monthly letter was presidents get way too much credit for when things go right and way too much blame for when things go wrong, And you really have to go out of your way to screw up royally for a president to impact uh a market and so gee, you could look at some of the stuff Nixon did between Watergate and and some of the other and and Vietnam. You could look at

George w Um, you could look at Carter. You could see a number of presidents who their worst decisions probably pressured the stock market. On the other hand, you know, a rip roaring market doesn't care uh eighty two to two thousand. You know, I don't. Clinton got impeached, the market left and it kept going. Uh. The same thing with Bush. Bush cut taxes, He did this, he did that, and the market imploded. So it's almost as if the

markets don't care about this, which is a theme. But the last paragraph of of the letter was which I wrote the next morning, was Hey, many of you have enjoyed tremendous gains over the since the market bottomed in March o nine, and many of you have expressed concerns about things that all good libertarians are in favor of, like equality of marriage, or or the environment or this or so take your ill gotten tax cuts which are likely to come out of the recent election of Trump,

and don't be afraid to spend the money, uh with some of your favorite causes. If if you're unhappy with the social programs that come out of this, feel free to put money into whatever you on. And that rationality that basis in reality politics matters much less to markets. Hey, does this affect discounted cash flow? Does this effect profits? Then it's just background noise. It's not relevant. Where we're starting to see the early signs that that might be

changing is the trade warren Tariffson. Eventually, I think tariffs could assuming the adults don't get back in charge, it could eventually push through and cause more inflation and close the fete to Titan sooner, which leads to crimping of credit, which leads to her session, which leads to the market correction. That is what I think as a higher probability worst case scenario, as opposed to the terrible Black Swans, or

as opposed to Everything's great forever. You know, two years out, three years out, if we make a number, if we continue to make a number of bad decisions, and I will say the tariffs are really not well thought out. The twelve billion dollar aid I think exports of they want to cover the cost of trade war. Wait, why are taxpayers paying for this? How are we winning If taxpayers are paying for the negative impact of tariffs, this sounds like a terrible idea. And if we keep doing that,

it's gonna send inflation higher. And if that happens, it's not a good thing. So some people don't like that. Our clients are all self selecting. Our clients come to us because they more or less agree with us. Half our conversations begin. My guy at fill in the blank is a jerk. You guys seem to be making sense.

So if if one out of twenty people say I don't like what you wrote about the president, Hey, you should be more concerned with what he's doing to soybean prices because you live in the Midwest, then you should be concerned about me complaining about the By the way, you notice how the Chinese are very, very um strategic in how they issue there their counter tariffs. It's like, we're gonna you. You want to play this game, Fine, we're smarter than you. We're gonna mess with your base.

Have at it um active pass if he said, and he is active a little bit. We've tended to see in the flows that active fixed income mutual funds are still taking in money, not a lot, but their treading water. At least it's active equity that's getting just total blood bath. Um does that a line with what what you feel with active? Do you go active on the fixed income

sid you think there's more value? So well, the a the academic data demonstrates that active fixed income is a winner versus passive because if it's passive, you're buying everything good, band and different. With active, you get to choose your price, you get to choose your duration, you get to choose your quality. Even within the same Hey, I want you know, B plus plus to end up and I want five to ten years then with this and I want that. So the data is active fixed income is superior in

excess of the cost. So there's that. Last a year ago we swapped out a passive bond funds for a active bond funds and the overlap and holdings was something like sixty or eighty percent. I'm doing it for memory, but the twenty or that was different. I don't even think it was. I think it was less was enough to make a big difference in the performance at the same risk level. So the tradeoff is you're paying a little more, but you're getting more. Uh so, ay, that's worthwhile.

Active versus passive, I think is the wrong way to look at it. It's expensive versus cheap. Morning Star did a study, I want to say it was twenty one. What the morning Stars know? What high costs to low costs? I mean, that's the big trend. But but let's go to fixed income active. First of all, do you use the et F structure or the mutual funds? Mutual funds you do? Why? Well, the holding periods are much longer

so you don't run into the tax situations. And to be honest, a lot of the better mutual funds active, I want to say it, make sure I'm getting us right. Active mutual funds don't have a less expensive parallel e t F. If you remember when Pimco we no longer own but Pimco when they rolled out the e t F s, they were more expensive than the mutual fund because they didn't want to see a mass of outflux, although it was cheaper than the A class. So if

you're a retail you got a bad deal, right. So it's priced right in between the I and the a What a coincidence Gunlock did the same thing. Yes, because it makes sense to do that in the in the when you're choosing a fixed income active fund um. I know costs is important for you. How important is cost versus sort of the record of the fund. So it's a holistic approach. You have to look at everything. My favorite morning Store research report and remember they lledge funds

on the basis of their Star report. If you can only look at one thing when reviewing a mutual fund, says Morning Star. It turns out cost is the most important thing if you are choosing amongst five star funds versus cheapest funds, choosing the cheapest outperformed the five star approach. I give them credit not only for publishing that, but not taking it down and revisiting it every few years. Uh So, cost is really really important over long periods

of time. The compound makes a tremendous Compounding makes a tremendous difference. There's a Vanguard study about you know, the average Vanguard. I think it's like seventeen basis points at whatever it is. It's some ungodly cheaper thing. The typical act of mutual fund used to be about one quarter over a thirty year period. It's an immense It's like thirty difference in total returns compounded over that. It was just massive, So cost matters. I don't care as much

about recent performance as I do the process. It has to be defendable, it has to be rational, it has

to make sense, and hopefully be repeatable. You know, my favorite example in the world of hedge funds is UH, Paulson and Co. So when John Paulson had the greatest trade ever bidding against the mortgage collapse, in the subprime and derivative collapse, I think he was a like a five billion dollar fund or whatever, and following the collapse he swelled up to thirty or forty billion dollars and then proceeded to underperformed for a good number of years.

So it turned out that that was a great trade, but it wasn't a repeatable process. We run into the same thing with UM mutual funds. Hey is this. There was one mutual fund we had that had a huge amount of mortgages in it UM and basically was outperforming the comparably risk based UH corporate it's and treasuries post financial crisis, but at a certain point, mortgage backs in a rising rate environment are not going to do well,

So you don't want to sit with that forever. So we ended up rotating out of that to UH a more focused corporate and investment grade bonds. So you're giving up a little bit of recent performance when you do that, but you're lowering your fees and you're making your perspective gains UH much better because it's a process that's not dependent on one specific asset class in one specific part of the economic cycle, which is before rates start to rise.

You're an advisor, you can see that low cost is sort of sweeping the advisor world, especially because the move to you know, being fiduciaries and getting a fee based payment model as opposed to a commission. But yet the institutional world still seems really really into sort of private equity hedge funds picking, hiring and firing external managers right and left. Where do you see that evolving? I think you wrote a column once talking about what pension should do.

Do you see that institutional world evolving more to like sort of your model, because it is interesting, like you especially like endownminds, Like we in Business Week we profile the small college endowment that's been all basically you know, indexed for you Yeah, that one did the best or one of the best. I mean there's always the outlier like Yale or you know, they crush it, but not for a while. But it's a great question of like, what happens to institutional money, why don't they do that now?

So so, first of all, let me preface this by explaining how much professionals love unsolicited advice. They love that. Second, you've already seen that begin to take place right there. There are a number of funds that move, have been moving, pension funds, endowments go down the list, have been moving at least part of their asset base. Look at Cowper's fired all their hedge funds. Took two years to unwind

that crap. But still this is not you know, they are not immune from the same trend that years ago. I went to a state pension fund in the Tri State area. They're quarterly, meaning I was invited to speak by someone there, and I listened to a parade of a dozen consultants explain why all the crap there in this year, which hasn't done well, is perfectly positioned to

do well next year. And now is not the time to sell this, to sell any of this stuff, And and everybody around the table was nodding their head, and I sat there just grinding my molars. And when I got literally the head of the table, whole giant rectangular place, I said, look, I prepared these really um smart, well thought out remarks, but it's clear that they will be

wasted on you. And I know I'm never going to do business with anyone in this room, So for five minutes, let's just pull the bullshit aside and give you the straight dope. None of these guys here know what the hell they're talking about. They are salesmen and they are really good at it, because halfway through their pitches, I'm like, wow, that's great. How do I get into some of that?

Oh wait, they've underperformed every year. You've had them for ten years and charged you a massive amount of money for the privilege. How stupid are you? How could you guys continue giving money to guys who are They're not just wrong, they're wrong and consistently wrong, and you keep buying the same line of bs every Hey, you know, it's it's like the someone's having an affair on their wife, and they keep saying to the level I'm gonna leave her next year. No, no, next year is when we

finally it's one. It's year after yearfter year they're selling telling you the same thing. They're selling you, the same bill of goods, and it's crap. And I can't believe people in this room with a fiduciary obligation to the pensioners are buying into this. So really, I'm on the wrong side of this business. I shouldn't be telling you

about asset management. I should be going to your beneficiaries and saying, let's talk about the subsequent litigation suing these idiots who have underperformed your portfolio because it keeps them, uh in high paying board seats. I can't explain why this is going on, but it's a parent um. It's apparent that all these promises are nonsense. When are you people gonna wake up and realize you're being sold a bill of goods. I'm sorry, that's not as as entertaining

as what I had prepared, but I just can't. I listened to a parade of nonsense and everybody around the table is nodding their head. Do they invent you back?

Never Well, it's funny. We we had bogelon we interviewed him for um uh this separate episode, and he was saying he was upset the I C I would not invite him to speak, and I said, I think what you're saying to this piece of people is just too There's definitely an internal conflict within the industry, and I think even within companies and within people of this move to lower feed caught goods. But if you're in the financial industry, you're feeding off of the higher costs revenue.

And I think as investors and people a practitioners, there's definitely some tension going on that he that he taps into. That's my theory on why he was not invited even though he's you know, clearly um warranted to know there's there's the only expert explanation for I C I not inviting him as cowardice. There's no other explanation. Listen, Apple taught us all about cannibalization, which the financial industry has

a real hard time with. Apple puts out an iPod for five dollars and it has to you know, ten meg's the next year, Apple says, here's what we're gonna do. We're gonna give you thirty megs and it's four hundred dollars, and the next meg, next year it's a hundred megs and it's two hundred dollars, and then it's a gig for a hundred dollars and nobody can catch them. That

was the iPod, than the iPad, than the iPhone. Could you imagine the average finance company saying, we know this is one and a half percent and it's underperformed, but here's what's gonna we're gonna give you, and now it's seventy basis points. It doesn't happen to their credit. A handful of companies, I'll include Fidelity in this, I'll include Schwab in this, have have lowered fees. State Street, black Rock have lowered fees on a number of their products.

Some companies will will choose a loss leader and say, even Goldman Success, what a seven or a nine basis point fund? Someone will come in and say, we'll lower this. I think the math was that ten years ago the cheapest funds in in uh just about every category was seventy percent of them were Vanguard. Now the cheapest fund in every category, I want to say it's thirty five

or Vanguard. It's not that they've raised their rates. It's that the Vanguard effect has driven everybody else, if not across the board, at least to pick one or two things and really slash the price on it. So it's very much challenging to get any industry. It's not just finance. Hey, this is your bread and butter. You should cut your fees fift and we cut our fees fift and when we were debating it, it's like, Wow, that's a big chunk of money. What's that going to do to our

gas flow? And we're a small, you know, not even five year old company. Imagine you're a forty year old company making billions of dollars a year and some consultant comes in and says you should slash your fees in half. Back to the e t F. As an avid user, what limitations do you think they have? So there's some

obvious ones and then some less obvious ones. The to me, the most obvious limitation is liquidity that as you get into some of the backwaters, some of the esoteric ones, you know, they have market caps of a hundred or two hundred million dollars and they trade by appointment, and and that's a little bit of a problem if the whole idea of of e t F s or that they trade, uh not just the tax aspect, but you can trade during the day and then it's so there's

no advantage there. So so that's number one. Number two, and just to clarify it, there's probably a thousand ETFs less than a hundred millions, so that's about half. So you as an advisor, you just sort of eliminate all those right off the bat. They become really challenging to work with. I don't want to say we eliminate them, but it's a factor when you're making a decision. Uh. Second, the entire process of bringing out an e t F

public to to that process is wildly complicated. Overly exp ends of the internal expense ratios that these fun small these small fund companies paying, they're pretty outrageous. And so it's the playing field does not level. There's a huge advantage to the black Rock state streets, van guards, etcetera.

I want to say the top three or top four are something like seventy of the a U M. It's something ungodly top three or se the U N. So if we want innovation, if we want creativity, if we want to try a bunch of things straight against the wall and see what sticks as an industry, I think the SEC needs to make that process a little less expensive, a little more streamlines. I had a front row. Well, they are right, the E t F role will do so. Now, on the other hand, we don't want a million or

fly by night bs C tfs. But it shouldn't be an impediment to a small firm with a good idea. Shouldn't say I can't do this because it's gonna cost me a million dollars. What would be your idea? Are good idea if you launched one for an E T F? I don't think there's a factor based E S G E t F out there, at least when you and

I had a conversation about this last summer. When I looked at it, I could not find a factor based UM B S G E t F. I thought that was interesting, Well, the problem with that M E S G isn't selling. And factors are seven hundred of our seven dred smart Beta. And you talked about not being you, weren't being you weren't moved so much by factory E T S. Would you be moved by a factor E

s G. No, that's what I mean. There should be a factor based E s G E T F and and but you know by the time this broadcast there will be one. But when we first spoke about it, and here's the thing about E s G, people have said, well, there's not a lot of motion towards that. When you look at the people who say they're interested in E s G investing, environmental, social and governance investing, they tend

to be millennials, and they tend to be women. And we are on the leading edge of a make up a number thirty plus trillion dollar generational wealth transfer from the boomers to the exers, and the millennials who consists of it will go to the wife, and then we'll go to the kids typically, And that's the people who say they're interested in E s G. So I think it's early to write off E s G. You disagree.

I do. And here's why you talk about boomers, right, nobody was more progressive than they were in the sixties. Why aren't they into E s It's the worst generation ever? Come on, they were all into this. Look. I remember Michael Stipe had the acid rain hat. We were all into it too. But but general, I'm saying every generation

is into when they're young. It seems to me there's so probably a and I don't want to say you get corrupt or you just stop caring, But like, is it take the kids, the soccer electricians coming about it, so you get busy? YEA, So is it not? Millennials are into it now. It's just whoever is young is into it, and then they get out. That's a good theory. I think that in the sixties climate change was a very abstract theoretical concept other than a handful of flat earther's.

Everybody now knows that climate change is real. It's like I wouldn't buy a place in in on the coast in Florida. Now I would rent because that's gonna be underwater soon. Now it might be a hundred years, it might be fifty years unless technology comes along with a magic little thing, and and sufficiently advanced technology is indistinguishable

from from magic. If we eventually come up a way to pull CEO two out of the atmosphere and to reduce the greenhouse effect, then all the worst case scenarios don't come to fruition, and I really hope technology solves that. However, right now it looks like this is gonna be an issue that the next few generations are going to have to wrestle with, uh long after we shuffle off this mortal coil. So I think this generation is more serious about it than the Boomers, the worst generation. We're in

the sixties. By the way, everything bad in the world you can blame on the Boomers. All the debt is blamed on the Boomers. The music was good STDs, I'll give you that, Okay, STDs. You can blame on the the movies in the sixties, with a handful of exceptions. Graduate unwatchable. Graduate is much later than that apocalypse. Now, the seventies was really the Golden Yes apocalypse, right, So

my my movie washing is thirties and forties, fifties. The sixties is a is a. There are some good movies, but it's a so you I blame most of bad things that happen on on the baby Boomers, of which I don't consider myself. I'm I'm in the valley between the exers of the boom. So that's it for episode one, but we're not done talking with Barry red Holtz. To keep listening, though, you'll have to go back to your favorite podcast op and find episode two.