What can I Chillians.
I'm Joel Webber and I'm Eric Belchunas.
Eric a friend of the show who's also on Bloomberg Radio and does podcasts here like Masters in Business. That's a new book. His name is Barry Whittholts and the book is How Not to Invest.
Yeah.
No, he's one of a kind. He was on this show, I don't know, a couple of years ago.
We've had him on the podcast at least twice, but he was.
The only one where we had to do a double episode because it was so long. Yeah, and so use your disillusion, use your dissolution one and two, and this time we definitely got a like you could see, we could have gone on and on and on. He's so interesting. This book is chock full. It's basically called How Not to Invest. I read it and found a bunch of passages that were really interesting, some funny lot of Malcolm Gladwellian kind of little factors.
In there that are metaphors for the market.
Just a lot to unpack and chew on.
Also, we're going to disclose that this interview was recent and there have been a lot of things happening in markets of late What's interesting about Barry, though, is he's seen a lot of stuff, so he can kind of go a little bit more high altitude. So this is actually maybe the perfect year to be talking about a book like this. Joining us on this episode Barry Ritholtz, co founder, chairman and chief investment officer of Ritholt's Wealth Management, this time on Trillions, How Not to Invest?
Berry, welcome back to Trillions.
Well, thanks for having me.
So this book is not small.
I think it's like approximately it's more than an inch maybe less than.
Two inches thick.
It's deceptive. There's a few one hundred end notes, and the chapters are really short. They're page and a half two pages, three pages, so there's a lot a blank space. I had to argue with the publisher not to start each chapter in the middle. I made them started at the top of the page. Otherwise it'd be like, you know, Barbarer Streisan's photobiography being nine hundred and fifty pages long. So not your first book. Not my first book. The last one was Bailout Nation, was fifteen years. I crank
them out, every fifth sequel to this twenty four. There's no stopping that time.
I possessed you to write How Not to Invest.
So you know, it has been a while since the last book, and in between, we just happened to launch a firm and have been growing it over the past, you know, twelve years, and I've had a number of friends and publishers and people kind of noticing me to do another one. And my answer was, we've had hundreds of thousands of books over the past century telling people what to do, and most investors are still pretty mediocre.
And you know, I came home one vacation between Christmas and New Year's, those few days to kill before everybody goes back to the office, and I just started thumbing through some old quarterly calls and market commentary and research notes, and it seems like every other thing I wrote was debunking some nonsense or another. And you know, I just happen to start channeling Charlie Ellis, who wrote Winning the Losers Game, where he compared tennis to investing, and it's
two games in one. Instead of trying to score points, how about just make fewer errors and you come out way ahead.
All right?
So, this book, as Eric mentioned, filled with hot takes. We've got a few that we've plucked.
And we want to discuss them with that all right, By the way, I don't think they're hot takes because everything in there I've kind of discussed, granted in much much shorter format.
Some stuff like the Cisco Fortune cover. I first wrote about that in the year two thousand to Crickets, So it might have been a hot take then, but nobody knew.
Who would appreciate your humility. We're gonna call him.
If we went to an RIA conference, these would not or bogel Heads conference, these wouldn't be necessarily hot takes. But inside a media apparatus as big as Bloomberg, a lot of these are somewhat controversial and definitely challenge a lot of the things you hear out there.
For instance, number one, number.
One, nobody knows anything. This is what you say.
Your one of your favorite qutes from William Goldman, who's a Hollywood guy. I think he directed The Exorcist.
No, he is a scriptwriter.
Scriptwriter.
He won two Oscars, one for All the President's Men, the other four I'm drawing a blank on it. Maybe it was Butchcasting and The Sundance Kid. He wrote The Marathon Man and famously wrote The Princess Bride, which later became a Rob Ryner cult favorite. A buddy mine gave me a copy of that book decades ago. I loved it. And when I moved my blog in two thousand and three from Yahoo GeoCities to six apart Type AD, I
needed a name. And his new book had just come out, William Goldman's new book, and it was called The Big Picture, and I'm like done.
So in this overall section, there's a really cool thing on the Beatles Jrol where Ed Sullivan turned them down twice.
I didn't know that.
And then after they were on the Ed Sullivan Show, which is how they made it, and you know how they got exposed in America. All the papers were basically like criticizing them. They're like, you know, this isn't going to last, that they aren't good. He's basically laying the groundwork that Hollywood misses a lot, the music industry misses
a lot, financed misses a lot. Then he goes into people like Larry Summers and Michael Burry, which I thought was interesting because Burry had that one big call, but then you listed about ten other times he was yeah, and you know, you talk about how nobody knows anything.
I mean it just.
Elaborate a little bit like sure what that really challenges a lot of the whole complex.
Well, stop and think about Wall Street training program, of which there are fewer and fewer these days. It's about a year long training program at least it used to be, and about a week of it is modern portfolio theory and acid allocation, and then fifty one weeks is essentially advanced sales training. And there's this very much fake it till you make it attitude. I mean, we've all kind
of been there. You walk into a room, it's filled with people who have been doing this longer, no more than you, and nobody wants to say I don't understand this, I don't know. So that in finance is pretty endemic. But when you step back and objectively look at what do we really know, when do we know it, what do we know about the presence, it's pretty clear most
of us are pretty misinformed about the present. What we recall are mostly you know, rose tinged nostalgia in the past, and what we're looking for is, you know, one part guess work, one part wishful thinking. And so when you use the examples of how many studios passed on Raiders of the Lost Ark Star wars Et. The list is endless. When you look at squid Games couldn't get made for ten years. John Wick, despite a stellar cast and the guys who did the stunts and special effects on the Matrix,
which was a giant franchise. Canna Reeves had to write a check out of his own pocket to finish the movies. I'm assuming he got points. This is now a two billion dollar franchise. Nobody wanted to make it, nobody wanted to show it. People had no idea what was going on with it. So I am probably the wrong messenger for the concept that finance and investing requires more humility than we bring to it. But as you're reading all these things, it's pretty obvious that we really don't have
a good idea of what's happening now. We know even less about what's coming next month and next year. Is such a long period of time that randomness disrupts even the most thoughtful forecast. Think about who was forecasting a
pandemic in December twenty nineteen. Who was forecasting either double digit losses in stocks and bonds in twenty twenty two, the fastest five hundred basis point increase in FED hikes, the Russian that this is just one year, the Russian invasion of Ukraine, the Gaza attack, and the response of Israel to Haamad, Like nobody was talking about these things happening, and so whatever your forecast is, it's really easy to
be derailed. And if your investing requires you to see the future, you're in trouble.
So when I was writing my ETF book, I had this same premise. I was like, and I asked your colleague Josh Brown, who you work with, and he's on the other channel.
We won't name the channel.
But I said to him, why, you know, why even have a media like a TV station at all, like if all of it means nothing, And he said he basically said something like, well, look, if you turn on ESPN just because they say, you know such and such, this player is washed or this team is not good, nobody's acting on that. It's just basically like more information entertainment. Yeah, it's basically somewhat entertainment. And that's the general idea behind a lot of financial media. It's just to give you
information around these things, but not necessarily investment advice. That was his take, because I did find he has the same opinion, but he also goes on and talks about stocks, right, and.
He talks about stocks in his personal accounts. It's not how we manage money. We're not stock pickers. So essentially, you know, you go back to when I was a kid. Once a week on Friday night was Lewis Rukeiser for an Now.
Yeah, Wall Street Week.
That was it.
That was the entirety of the financial media escape. Yeah, you had the Wall Street Journal and you had barons on weekends. I remember sitting out in my backyard at the picnic table with a cup of coffee, thumbing through barons because hey, I was starting on a training desk and I wanted to learn what the hell was going on. When you're young, you consume everything, and as you get older and older, you learn to filter everything and just
select the best of what you can select. So you know the concept that it's just entertainment, if that's all it is. Then you got to wonder why the advertisers are getting such big bucks. The reason we went at one point we were peak financial media landscape when they were I want to say four so there was CNN, CNBC, Bloomberg, Fox Business, CNNfn to say nothing about a whole bunch of other shows, And now we're down to two and
a half three channels. You know, I kind of liken it to somewhere between ESPN seven and the Weather Channel. If you're really into Australian rules Rugby, you know where to find that.
It's ESPN plus now, I think, right, yeah.
But the Weather Channel is when there's a storm a coming, we all flick to the Weather Channel. And that's what financial television has really when their ratings go up, when everything is clicking for them, it's in response to a storm. Always ask yourself a simple question. Anybody who's sharing financial advice with me, what are they selling? If you don't ask that, then you're a little gullible and a little naive, which, by the way, I very much was early in my career.
Well, disclaimer, because you are selling something other than a book too, so.
And I put that in the book.
Yeah.
I actually out myself as hey, listen, I run an asset management farm, I have a podcast, I have a blog. I want your time, attention and money. It's pretty straightforward, but I try and be honest about it and say here, it's right here. It's very public. Now. Our business model is a little weird because we're very on Wall Street. It's like, hey, you could do it yourself. Here's how knock yourself out. And the point oh one percent of you that don't want to do it yourself. We don't
have any minimums. We're happy to take your cash and and we have some other things we do along with it, tax and estate planning and all the fun bells and whistles that go around wealth management. But essentially everything we produce in the firm individually is all here's how to do it better than you've been told.
And you know this He kind of stole thunder from the second point, which is he says the majority of what the media turns out is irrelevant.
Let's dig into this a little bit.
We've hit this.
Yeah, well, the word is a ephemeral. It's ephemeral, and that means it has a very short shelf life.
One of the areas I was fascinated by, and I see this a lot, is denominator blindness. Yeah, this is a really interesting concept about purposely leaving out the denominator to make it sound more sensational.
So if you hear somebody a company laid off ten thousand workers, what does that mean? Is that a lot or a little? Is it a regional company with thirty thousand employees laying off thirty three percent of your staff is giant? Is it Walmart? That means one person every five stores is losing their job, which probably happens every day randomly anyway, So you need the context. Then you know. There are some really funny examples of denominator blindness in
the book. So the three things I always talk about layoffs, stock sell offs.
We'll talk about that for a minute. So the Dow in points thing, which drives me crazy. Stock sold off five hundred points today. Well, if it's the S and P five hundred, that's a ten percent drop, and.
Holy cow, that's a giant whack. If it's the Dow, it's less than a half a percent, and you know that's normal daily trading.
Why do we care about that?
Do you think that they purposely leave it out in order to get the clicks?
Is it ignorance or clickbait?
I'm not quite In the full Conspiracy X files, there are no such things as coincidences. But you know, as you know this, I always have to tell this to people when you write a column. Sponsored for all these things except the headline, right, The editors write the headline, and so the editlers want there to be reads, they want there to be clicks. No one is going to read the headline zero point one percent of Walmart's employees.
Were let go.
Nobody's going to read that. But ten thousand people fired at Walmart is a big headline.
And this is something I.
Deal with that.
You're coming for me as the as an editor here.
So there's a lot of subtext going on here.
I know you should see that. Okay, Going back and forth between these two guys, it's really.
We also have three words, the most important words in investing?
What are they?
According to Barry? And I think I agree. I don't know.
I remember interviewing you once, I don't know, make ten years ago when I first met you really something like that, and you said something. I'm like, yeah, this guy's on I love this, he goes. He goes, I said something about this dichotomy of having an opinion but then also saying but I really know, and he said, but saying that the future is inherently unknowable. You will not get you on television, right, just you can't go on there
and say I don't know. And so there's this motive to not say I don't know.
Yet.
I think at the end of the day, a lot of people would admit they don't know and the future is unknown.
So I think that's a given. By the way, are any of these hot takes that are controversial yet? I don't think any of these are.
It's elegant bs okay.
So here's a little pushback that I thought was kind of fascinating. Someone asked me, A client asked me, so the whole COVID nineteen thing. Was that a design biochemical biowarfare weapon that escaped the lab? Or was it something that trans species hopped from the wet market? And I perfect teachable moment. I'm like, not only do I not have the slightest idea, I'm aware that I have no national security clearance, so I don't know what those guys know.
I'm not a virologist, I'm not an epidemiologist. But here's the important thing with.
But I did watch financial television this morning.
Right, I stayed at a Hampton's Inn. But why do you feel that anybody outside of a tiny sphere of experts should even profer an opinion about that. It's not just that you don't know, because if you remember during the pandemic, we had this rotating cycle of fake experts. Right, First you're an expert in vaccination, then you're an expert in constitutional law, then you're an expert in war strategy. Then you're an expert and it's like, here's an idea.
I understand the American school educational system is built on standardized testing, but you're not obligated to have an opinion on everything. And I really like the way Warren Buffett describes it in you could stand at the plate with your bat on your shoulder. There are no cult strikes. You could just wait for your pitch. I think that includes when you go on TV. You don't have to and you are an expert in a given space, you don't have to engage in epistemic trespass and opine on
areas of which you have zero expertise. I do annual MEA culpers every year. And here's what I got wrong. I can't tell you how often when I get something wrong, it's because I kind of ventured out of my area where I have expertise and allowed myself to wander into areas where really I have no business speculating or a pining and that is a relatively rare perspective in finance.
I also think I don't know, in my opinion, if you brought it out to politics, religion, there's so much A little I don't know goes a long way towards just soothing a lot of division, like people get stuck in these rigids and it just creates all kinds of friction. I think, so I don't know to me is almost like a philosophical outlook that I think is very positive.
Go back to Socrates, go to Aristotle. I think was Socrates who said the only thing I know is how little I know. And so that's three thousand years ago. None of this is new, which just sort of placed in a different context. And when you look at the example I like is Therahnose, when you look at how many people from outside of medical field devices biotech were on their board, none of those guys had any clue what was going on, and how are they capable of
identifying if it's a fraud or not. They just saw the coverage everybody relied on everybody else's. You know, they must have done their due diligence, and apparently nobody did.
There's another quote that was in this section. I don't think it's totally really, I don't know, but it kind of is a little bit. It's from Eddie Elfenbeinin, who's a famous thought picker and has an ET. Anyway, he says, somebody says this or market, This market reminds me of nineteen eighty seven. The response is, really, you think the market will return thirty fivefold over the next thirty seven years?
That's your voice.
No, that's Eddie saying it, but he couldn't. It's irresistible. I see why I had so good right That.
Reminds me of right now.
There's a lot of like ugh, and I'm like, I think a lot of people have settled into not selling, and I think the Bogel give him a lot of credit. Vanguard cheap index funds. People can get married to that product and they're like, you know, I can't market time, and if I do, I'll sell the and they just like the hell with it. And I'm not going to
go to an active manager. So the passive money which you are a part of Never Sells, and I think has seen through some of this stuff and is like, yeah, I don't really care what you say.
And I think the passive money found its way to Blackrock and Vanguard not because of an emission of I on. No. My pet theory and you could see it post financial crisis is think about the decade leading up to the GFC. So you had the analyst scandal and the IPO scandal, and you had all these crazy things going on. That's before you know, the financial crisis, and before Madeoff and all this stuff, and it just got to the point where it felt like mom and Pop took their ball
and went home. And by ball I mean money and by home I mean Vanguard. That's kind of Hey, you know what I need to invest for the future. I'm saving for buying a house, paying for the kids, college, retirement, whatever. But I don't want to pay high fees and I'm not confident that anybody who's picking stocks for me is doing a good job. So I'm just going to own the whole market see in thirty years.
By the way, that was he gave me that quote for the bogal effect. You got like olies, but goodies.
I think that was not so it's you know that's in my book, which I interviewed him saying the same thing about four years ago. But real quick, yes that's true. And you see the our team has this phrase called the vanguard put.
Uh huh.
So there's the FED put the Trump put in the vanguard put. I think Josh calls it the relentless bid, the relentless bid. You're a vanguard investor, or, like it, you're an index fun investor. Can anything happen over the next you know, seven eight months that would get you to like take all your money out of the US stock market.
You know, the only time I've done that was the end of seven And I was pretty public about talking about we were short a bunch of companies. Is back when I was on an institutional shop, we were short a bunch of companies. Pretty famously got into a yelling match with Charlie Gasparino of being Shortlyhman Brothers. He did me a giant favor. Who you gonna believe, right, Altzer Dick Fault And it turned out that clip. I wish that clip was still around. But what made that kind
of unique is how unbelievably obvious. It was if you looked at it from just the right perspective, you had a squint, you had it was almost like a three D poster that you know, you had to catch it just right. If you looked at it from traditional things, Hey, the market was trending higher, profits were still relatively high. Yeah, there's some problems over real estate, but it's contained, so I would never say never. And we're not just so
you know, we're not pure index investors. First, you know, that should be the core, whether it's VTI of Vanguard Total Market or black Rock. Pick your poison and that's the tree, and you decorate it with ornaments and garlands, and some people like shareholders yield Momentum Japan, India. My favorite example is emerging markets small cap value. If you want to hang that on your tree, knock yourself out.
But as long as you know, you'll never get alpha, if you don't even get beata, And that's kind of why indexing should be. Pick a number fifty sixty percent of your portfolio. That's your core, and then whatever you want to do around that, knock yourself out.
I'm writing that quote town you can't get out.
Right, good, stop and thinking about that. Wait, you're trying to outperform the market. You're not even getting what the market's getting. You're underperforming. And by the way, I love the research, and I think the chart of use was JP Morgan's chart. I love the research shows showing not just that investors underperform the market, they underperformed their own investments, which sounds impossible, but it just means they're buying high
and chasing stuff. And you know, ARC, I think Kathy woods get is both overly fetted and gets a bad rap unfairly because she put up one of the greatest years in mutual funds and ETF history. It's not her fault that ninety two percent of ARC investors decided to buy after a three hundred percent move up. That she picked some great things and they went straight up. Everybody piled in late. That's human nature. That's not her fault.
Okay, the next hot take.
I tweeted this out. This's got a lot.
It's got a lot of people going, Okay, the dollar has lost ninety six percent of its purchasing power over the last century. That says, says idiots, you say, it's the most misleading claim in all of finance, and you say the dollar was not meant to be a store of value. It's a medium of exchange, isn't it. I put this out and I don't know if you know, Joel, but I've got more crypto followers these days. Yeah, and a lot of people did not like it. They were they said, oh, what's hold on?
I say, can you tell me people who have a vested interest in an alternative currency to the dollar are not happy with me calling them out on their BS sales? Pitch go figure.
This is my favorite reply.
Ready, I really like Barry, but I think he's institutionalized in a failing system.
Yeah, of all the things I've had people tell me I should be institutionalized, I get that. But here's the reality. By the way, let's start with a meme and then we'll go back to the past century. The meme really that I love, which shows up on TikTok Investors, which is fantastic.
I love that.
I love that fantastic feed is they show Kevin from home alone and if you remember, he goes to the supermarket by himself. Are you here by yourself? No, I'm eight years old. Do you think my mother would let me come here and he buys twenty dollars and fifty two cents worth of groceries In nineteen ninety, I think that's when the Year movie came out, and then the Goldbugs, the crypto people, a lot of people like today buy that same thing today is fifty seven dollars. And I'm like, well,
let me ask you the obvious question. It's twenty twenty five. Are you working, yes, So when you buy groceries, are using twenty twenty five dollars or using nineteen ninety dollars? Because why would you put fifty seven dollars away in nineteen ninety. I'm good going grocery shopping in twenty twenty five. That's number one. Number two. You talked a little bit about denominator blindness. Hey, if this is how much groceries went, Well, we work for a living and we buy groceries with
our wages. How have wages done over the same time. And as it turns out, wages have gone up about one hundred and ten percent of how much the groceries went up, according to BLS data. In other words, over the past thirty five years, the groceries have gotten a
little cheaper relative to the median income. But my favorite example there is if you would have instead of putting the twenty dollars and fifty two cents away to wait and come by it groceries in twenty twenty five for almost triple the amount you put it in the S and P. Five hundred, Well, guess what it's worth almost I don't even remember the number from the book, thousand dollars.
I think it's like six figures. In the percentage of return.
It's way way over what so cost is. And that's the whole point.
So how not to invest? M don't eat, just invest.
No, The point is, don't you know Joan Robinson, one of the most famous female economists of the twentieth century, said we study economics not to learn about the economy, but so as to not be fooled by economists. This is a classic example of all right, you have to show both sides. If you're showing me the consumer spending double entry accounting, you have to show me the earnings of income. But reality is, you get paid today.
What do you do with that money?
You pay your rent or mortgage, You buy food, medicine, clothes. Occasionally some entertainment, vacation, healthcare, and you pay your taxes and then whatever's leftover you invest in the market, You invest in your business. You invest, you don't put it away for a century. Yeah, because that's what a medium of exchange is. It was never supposed to be a store of value.
So the one pushback to that is some of the comments were, this is an elitist take because half of the country doesn't invest, and.
If most of the country doesn't invest, and so they're absolutely right.
I think out of the money printing in debt really is a if you owned thoughts, you've gotten totally rich. So some of the people consider a lot of the money printing was actually a regressive tax on poor people.
You're not gonna get a push So Number one my argument in Bailout Nation in the last book was there are these beautiful buildings downtown with these tall columns, and that's where all these banks should have gone to declare bankruptcy. The reason we had monetary repression and ZURP and everything else that came along post financial crisis was, hey, we just spent trillions of dollars bailing out the banks and all these things. Let's not cause them to run into problems.
We have all these assets on their balance sheet. If we normalize rates, I don't mean raise them, just normalize them, all this paper defaults and we have a problem. I think they're right. I advocated doing exactly that, taking these banks down. Uncle Sam does a prepackaged bank you sent all these However, here's where I'm going to push back a little bit on the elitist thing. You can't say to me investing in stocks as elitist, Buy golden bitcoin instead.
I mean, we're talking about keep in mind something like the top ten percent of Americans hold eighty seven percent of all the stocks and bonds. Right, It's only since the sixties that finance has been slightly democratized, but it's still a pyramid, and the top decile owns a lot. That said, if you want to say that there's inflation, you have to explain why you're going back one hundred years, right. It just none of it makes any sense if you just look at it for a moment and say, well,
I don't care. I don't get paid in nineteen seventeen dollars. I get paid in twenty twenty five dollars, and and I try and spend the money before it loses its value. I spend it, I invest it, I pay my taxes with it.
I don't know why they put him in a bitcoin person on TV and just hit the record button.
I'd watch that, by the way, ten seconds on bitcoin the way. And I think I mentioned this in the book. The way I try and contextualize bitcoin is it's a technology company, a little bigger than Facebook, a little smaller than Google. Suddenly, it's not a brand new asset class. It's not a new currency. It's a you know, it's a solution to certain types of problems that haven't become
widely adopted yet. I think that's a fair description. And I own some We own a little bitcoin in ethereum personally.
Hot take number five if you're counting.
Yeah, this one's a little we kind of cover this, but there's something inside of it that I want to bring up. Okay, so if you want to be there for the good times, you must suffer through the bad times.
Next.
Yeah, I mean most is an interesting word here. I kind of agree with you.
You know, Morgan Housel, who wrote your forward, had this great way to frame it of volatility and down markets are the price of admission. Yeah, because the other thing is, oh, well, I'll just time around it, which I just does anybody really believe that's possible. If you resign the fact that it market timing is almost impossible, then you have to just hang in there pretty much. And that's sort of the cost of admission.
So two things. First, I more or less got the top right of the financial crisis and then went on TV the day before the bottoms and said cover your shorts and go long here. And I'm the first guy to admit I can't tell if that was skill o'lock. You could ask me the same question thirty sixty nineties before after I would have given you the same answer,
at least in terms of the bottom. So if I'm not willing and I think a lot of people miss that, and if I'm willing to say I don't want to rely on my gut to sling billions dollars around.
COVID, I think was like everybody's like, oh, it's over. And then like if you sold in like late March, you got screwed. You missed the whole rebound because who knew that fed was? I mean, you don't know these things.
The most amount of pushback to any Bloomberg column I ever wrote was April first, twenty twenty, which was don't assume COVID end of the secular bull market and there was no great insight. I based this on something Gary B. Smithwork wrote on TheStreet dot Com in two thousand and one post nine to eleven. And if you go back and look at all the externalities that shook the market, everything from World War two and Pearl Harbor jfk assassination
to nine to eleven, what happens. Market's wobble, that's your emotional reaction. Some rationality comes back in, and then that sends them back to resume their prior trend. So when you have something from outside of the stock market, the economy, what have you, the assumption is, hey, we're still in a bull market. Why would you assume that this temporary setback. Now I spend a lot of time why twenty percent
is not a bear market? It's nonsense. So down thirty four percent wasn't the reason to be out of stocks, and that was a very fast down thirty four percent. But hey, you know, if you can look through and say it looks like a vaccine is coming, it looks like fiscal stimulus is coming. There's another side of this. Don't just assume this is over. That turned out to be a good call, But it really wasn't a call.
It was I don't know what happens next, but here's what happened every time we had something like this in the past. And the point was, if you can just put these things into context and take a deep breath, you know, you don't have to run around and have an emotional response. And every time we see a panic, it's a panic, is pure emotion. So I'm sorry to I've interrupted. I just wanted to. That was the most hate mail I've ever gotten, and it was delightful.
One point three percent of public companies in the United States account for all of the market gains.
Right, So there's two numbers in here. One is four percent. Three numbers four percent, two point three percent overseas one point something in the US you kind of have to take out a bunch of other but in shurance, non trades minority, right, that's why they did it all. Henry Bessenbinder from Arizona State University did this study looking at the difference between long term returns of stocks and bonds, and this was an accidental discovery that you know, most
stocks are not important. You have some that are up a little, some that are down a little, they cancel out. You have the ones that eventually go to the pink sheets. So we'll remove all those. You left with a tiny handful of stocks and the big drivers. If you don't own those, you were going to underperform only.
One point three. And then we're talking historical here.
That I think the data went back to nineteen I don't remember, it's twenty nine or fifty. It's in there somewhere.
Morgan Housel's book had something very similar, and I've heard this so many times, and this is I think one of the strongest cases for indexing.
Well.
Well, I was going to say there's no way, no way to get it right.
Well, that's not true. That's not true. There is a way to get it one. As we've seen the rise of quants and hedge funds, some of that school of approach is using model to identify stocks that are going to perform well in the future by looking for the traits that have performed well in the past. The problem with that is the assumption that the future will look like the past, and so sometimes it works, sometimes it doesn't.
There are two types of screening. You can either screen in for the stocks that are going to be in that one two three percent, or you could screen out the stocks that are the worst of the worst, in the bottom fifty percent, and either of those give you a shot at creating alpha. But still, despite that, the people who outperform the market few and far between. It
it's not a majority. Each year. When you look at a twelve month process, you go to five years, eighty three percent fail to beat the benchmark or the market. Ten years it's over ninety percent, And when you go to twenty years, it's virtually nobody. Net of fees, it's a handful of names that we know because they are the exceptions that test the rule. It's buffet, it's Lynch, it's go down the list of I don't know a dozen or two outliers.
Speaking of fund managers, one thing in here that I did not know, and I thought this was interesting, is fund managers are good at buying but bad at selling.
So you're saying this is the next hot take.
By the way, this is the next hot take.
It's based on a study you read, but I thought it was interesting because I hadn't really heard of it, And basically, they're good at identifying good stocks, they're just horrible at selling them, and random selling actually outperform their own funds.
That's what's so crazy about it. So first, if you just stop and think about it, when you were selecting a stock, you were making a logical decision based on your expectations on products and revenue and profitability, and it's
a pretty reasonable thought process. When you're selling a stock, it's somewhat emotional because it's either oh, they're in trouble and I have to get out, or no, this is nothing, I'm not going to sell and you watch it collapse, or oh, these guys disappointed again, I've had enough, And
those all seem like very emotional decisions. And the way the study did it is they would look at each of these managers' portfolios and every time they sold, they would take a different stock in their portfolio and randomly sell it and ran the parallel portfolios. And it was worth I think it was worth about one hundred base points. Fifty to one hundred base points. That's a giant number when you're looking for seven eight nine percent a year.
It's bonkers. But they're surprisingly good buyers. They're just terrible sellers.
I get that.
I mean, but if you're like mostly the Vanguard crowd, you would be just like put money in and never sell. So why would you expect them to know how to sell?
You sell individual stocks. They don't know how to sell individual stocks. And I think that's pretty clear. The Vanguard holders or the black Rock holders, they sell when they need the money. They sell when they're buying a house or retiring or you know, generational wealth transfer, all that fun stuff. So it's pretty there are reasons to sell.
But the question is are you selling a fund or an ETF or you saying I'm going to sell x y Z. Usually they're selling XYZ in response to some external stimuli or suddenly, who's the new shiny thing at the dance. Let's sell XYZ and buy ABC.
Next hot take.
Politics and investing don't mix. I think you make a good case here. I remember, I just want to make sure we're clear that this is you agree with both sides of the coin, because I find that Let's talk about esgifman, I remember when the anti ESG ETFs came out.
You trash them.
It's like you were triggered over them and then but you didn't really talk about the esgtfs. I think they are the two sides of the same coin. It's active management disguise, and if you trash one, you kind of have to trash the other.
Oh you agree, totally agree.
But let me give you a little twist to that. Okay, So we're big direct indexers also primarily for people who have concentrated stock positions and they're managing around a potentially giant capital gains tax. And part of the reason this is the canvas product that was originally O'Shaughnessy. It's now part of Franklin Templeton, and I want to say about a billion five of our five and changes in that product, and we've gotten really good results. I was originally completely
wrong about it. I assumed that would be for to quote Meyer Statman, to have the investors' values be reflected in their portfolios, which is kind of what you I heard leading into that. Really the main request we get. I don't want guns. I don't want tobacco. That's the big twist out of that. But it's not and that's for I don't believe in these things. They're doing damage to the country, and I just don't want it, says
some people. By the way, if you talk to the folks at the Canvas Group, they'll tell you the portfolios they run for the New York Bishop's Retirement Planning, Like you can tune, Hey, we don't want any of board efficients or anybody that's paying for You could tune it with great precision and take out what you don't want in that. So there are ETFs like Blessed and MAGA.
It's Callie Cox's our market strategy. She ran a study and said, here's how much one hundred dollars invested in the market since nineteen fifty it under Republican presidents, under democratic presidents, and under all of them, and I'm doing them. It's a chart in the book. It's like fifty seven dollars under Democrat Republican pregnant presidents, and seventy two dollars under Republican presidents unles I'm gonna have, and like twelve
hundred dollars under all presidents. And so just making that bet seems to be really foolish. Another great study in there is looking at zip codes and seeing how people traded in response to presidential So you could tell us it a red or a blue zip code, and if it's a blue zip code and a red person is elected president, they move to cash. If it's a red zip code and a blue president is elected, they moved to cash. Partisan bias that hurts portfolios knows no party.
It's just human nature making bad emotional decisions.
Very else, how about to invest? Thanks for joining us.
On trillions, Thank you for having me, Thanks for listening to Trillions.
Until next time.
You can find us on the Bloomberg terminal, Bloomberg dot com, Apple Podcasts, Spotify.
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Hit us up on social I'm at Joel webershow at Eric Balcinis. Trillions is produced by Magnus Henrikson. Brendan Newman is our executive producer. Sage Bauman is the head of Bloomberg Podcast