WEBVTT - Barry Ritholtz: Use Your Disillusion I 0:00:05.440 --> 0:00:08.240 Welcome with trillions. I'm Joel Weber and I'm Eric Belserness. 0:00:10.840 --> 0:00:12.480 Do you know who Barry Ritt Holds is. Yeah, a 0:00:12.480 --> 0:00:14.800 little bit kind of a big deal here. He's been 0:00:14.800 --> 0:00:17.960 around for a while. He's a money manager, a Bloomberg 0:00:17.960 --> 0:00:21.320 opinion columnists, and he's also a fellow podcast host. His 0:00:21.440 --> 0:00:25.159 podcast Masters in Business is literally a crash course in 0:00:25.200 --> 0:00:27.920 business with some of the biggest names in everything from 0:00:27.960 --> 0:00:32.360 finance to banking to managing money. Yeah. Absolutely, he's one 0:00:32.400 --> 0:00:35.520 of the most interesting people. He runs an advisors shop 0:00:35.600 --> 0:00:39.320 that is cutting edge and in a couple of ways, 0:00:39.800 --> 0:00:42.040 Rid Holts Wealth Management. You know, I'm on Twitter and 0:00:42.080 --> 0:00:44.640 a lot of those guys are very popular. Their blog 0:00:44.680 --> 0:00:49.320 posts are really great. And Barry is very honest and 0:00:49.800 --> 0:00:52.839 a lot of real brutally honest and he's not afraid 0:00:52.920 --> 0:00:55.600 to answer any question, even if it's about advisor fees 0:00:55.640 --> 0:00:58.160 and whatnot. And I've seen him operate on Twitter and 0:00:58.200 --> 0:01:01.880 he'll take on anybody. He'll answer anything. He's just very 0:01:02.000 --> 0:01:04.040 vocal and obviously he's used to interviewing people, so I 0:01:04.040 --> 0:01:06.080 thought it'd be interesting to interview him. And I know 0:01:06.200 --> 0:01:08.039 he's a big E T F user. That's the that's 0:01:08.040 --> 0:01:09.919 the cool part because he managed I mean, he manages 0:01:09.959 --> 0:01:12.160 a lot of money, is he and his team, and 0:01:12.200 --> 0:01:15.000 he has some really important views about e t s. Yeah, 0:01:15.040 --> 0:01:17.200 when someone goes out and says E t F serve 0:01:17.280 --> 0:01:19.200 the devil, he tends to be on the other side 0:01:19.240 --> 0:01:21.840 of that. And I've noticed that because he's using them. 0:01:21.880 --> 0:01:23.840 I mean, he has real people's money in e t 0:01:24.000 --> 0:01:26.600 F so he better believe they're they work and they're good. 0:01:27.080 --> 0:01:29.280 So we asked him about e t f s passive. 0:01:29.360 --> 0:01:32.640 He'ses some active while he's not persuaded by thematic e 0:01:32.720 --> 0:01:34.240 t f s, even if he likes the industry. I 0:01:34.280 --> 0:01:37.240 thought that was interesting. And also just this this low 0:01:37.280 --> 0:01:41.040 cost migration that advisors are loving in the asset management 0:01:41.080 --> 0:01:44.040 side but hasn't quite hit the advisors side, and that's 0:01:44.400 --> 0:01:47.200 a third rail issue. But he'll he he took it 0:01:47.240 --> 0:01:49.320 on and he was not afraid to talk about He 0:01:49.400 --> 0:01:52.360 wasn't afraid to talk about anything we hit on. I 0:01:52.400 --> 0:01:59.720 think God, uh, portfolio management, trump, p F trump trade everything, 0:02:00.120 --> 0:02:01.960 And you know when you talk about being honest about 0:02:01.960 --> 0:02:04.000 those things, he really is that way in his columns 0:02:04.040 --> 0:02:06.320 and on Twitter, and so are the people he works 0:02:06.360 --> 0:02:08.440 with so we asked them, you know, as an advisor 0:02:08.440 --> 0:02:12.119 with clients, has that helped and has it ever hurt? 0:02:12.760 --> 0:02:15.040 I thought it was interesting. So what we're gonna call 0:02:15.080 --> 0:02:18.560 this episode because we actually have so much material, it's 0:02:18.600 --> 0:02:21.720 like a double album. It's a double podcast, so the 0:02:21.720 --> 0:02:25.600 white album I have one even better. Use Your Disillusion 0:02:25.720 --> 0:02:29.320 one and two. And I say that because Barry talks 0:02:29.360 --> 0:02:32.960 about disillusion being the reason a lot of money has 0:02:32.960 --> 0:02:35.480 shifted over to passive in the past ten years. Sidebar 0:02:36.240 --> 0:02:38.720 guns and Roses. Use your Illusion one or two? Which 0:02:38.760 --> 0:02:42.079 is your preferred I can't remember, probably the one with 0:02:42.240 --> 0:02:45.280 Don't Cry. That's probably my favorite song from that whole thing. 0:02:45.360 --> 0:02:48.360 But um, there's a I don't know half of it 0:02:48.400 --> 0:02:55.600 is good. The other half of its number two This 0:02:55.720 --> 0:03:02.079 weekend trillions, Use Your Disillusion one and two with Barry 0:03:04.000 --> 0:03:07.880 Barry Evan ridd Alts go how did you become who 0:03:07.919 --> 0:03:14.240 you are? Um? So I'll share a deep, dark secret 0:03:14.280 --> 0:03:17.840 with you guys. And nobody believes me when I say this, 0:03:17.919 --> 0:03:21.280 but it's really true. A lot of what I do 0:03:21.520 --> 0:03:26.320 is just because I'm entertaining myself. So Daniel Boston is 0:03:26.360 --> 0:03:29.920 the Librarian of Congress for former Librarian of Congress, and 0:03:30.000 --> 0:03:33.440 he famously once said, I write to figure out what 0:03:33.560 --> 0:03:37.200 I think, and besides that hour all the bars are closed, unquote, 0:03:37.560 --> 0:03:40.920 And that's really true. You don't understand your own thought process. 0:03:40.960 --> 0:03:43.440 You don't know what you really think until you go 0:03:43.520 --> 0:03:46.880 through the entire process of putting it on paper, figuring out. 0:03:47.200 --> 0:03:50.240 Here's my intro, here my supporting points, here's my conclusion. 0:03:51.000 --> 0:03:54.960 We have a very muddled internal dialogue. Most people are 0:03:55.000 --> 0:03:59.200 not crystal clear about their viewpoints and their positions. It's 0:03:59.200 --> 0:04:01.760 why people are so easily influenced. They don't really know 0:04:02.680 --> 0:04:05.560 what they believe. There's a handful of things that they're 0:04:05.600 --> 0:04:11.040 probably pretty deeply as constant, their personal spirituality, their religion, 0:04:11.520 --> 0:04:14.920 some of their ethics. However, a lot of what they 0:04:15.000 --> 0:04:19.000 think they believe it is very squishing and so often 0:04:19.040 --> 0:04:23.279 ill defined. So writing really helps you figure that out. 0:04:23.720 --> 0:04:28.640 And what started with the blog was frustration with the 0:04:28.760 --> 0:04:34.120 nineties and two thousands media, which I thought the financial media. 0:04:34.760 --> 0:04:39.599 I thought the financial media was pretty mediocre and in 0:04:39.640 --> 0:04:42.520 a lot of ways punctuated with excellence, but a lot 0:04:42.520 --> 0:04:47.480 of really terrible stuff. So at most major newspapers, um, 0:04:47.600 --> 0:04:50.640 someone would get hired for the economics beat because it 0:04:50.680 --> 0:04:53.159 was terrible, and they would send them to all right, 0:04:53.200 --> 0:04:54.920 you're gonna go to the Treasury and you're gonna get 0:04:55.200 --> 0:04:57.800 this report. This comes out at eight o'clock. And then 0:04:58.320 --> 0:05:00.720 you know on Friday, you're gonna the first Friday of 0:05:00.720 --> 0:05:02.919 the month, you're gonna go do non farm payroll at 0:05:02.960 --> 0:05:05.520 the labor to point. And they used to actually go 0:05:05.600 --> 0:05:09.080 to these places and they would write these terrible things 0:05:09.120 --> 0:05:14.359 about what happened. Most people who are language oriented don't 0:05:14.720 --> 0:05:17.880 frequently have the math skills to keep up with that um, 0:05:17.960 --> 0:05:20.839 and they don't understand things like causation, and they don't 0:05:20.920 --> 0:05:24.080 understand so so you ended up with these things that 0:05:24.279 --> 0:05:27.640 most of the time don't matter UM, but occasionally are 0:05:27.680 --> 0:05:32.120 important and we're frequently wrong. And so the entire blog 0:05:32.839 --> 0:05:36.360 The Big Picture began as a pushback to that. Just 0:05:36.440 --> 0:05:39.120 by I would read something and it would frustrate me 0:05:39.160 --> 0:05:42.680 because I knew it was either wrong or to the 0:05:42.720 --> 0:05:47.279 average investor misleading, And the same thing was true with 0:05:47.360 --> 0:05:49.440 the podcast. I used to pull my hair into my head. 0:05:49.720 --> 0:05:54.480 There would be some fantastic person on if Choose your Poison, 0:05:54.520 --> 0:05:57.919 Bloomberg TV or CNBC or Fox Business or Fox News 0:05:57.960 --> 0:06:00.760 before they had Fox Business or CNN, bisy this and 0:06:00.839 --> 0:06:03.920 they would do this terrible interview, what's your favorite stock? 0:06:04.440 --> 0:06:06.560 Where's the dal gonna be in a year? Hey? When 0:06:06.640 --> 0:06:10.239 is the Fed gonna cut rates? Or rates? And I'm like, wait, 0:06:10.440 --> 0:06:13.440 this guy is brilliant. He wrote the seminal white paper 0:06:13.480 --> 0:06:16.160 on fill in the blank? Who is he? How did 0:06:16.160 --> 0:06:19.760 he get that way? So the podcast, if the blog, 0:06:19.880 --> 0:06:23.760 was pushed back to financial media. The podcast, which just 0:06:23.920 --> 0:06:28.080 celebrated its fourth anniversary. Is that the is that like 0:06:28.160 --> 0:06:32.080 the Wood anniversary? I don't know. It's two hundred plus interviews, 0:06:32.640 --> 0:06:35.920 many of each last twelve eighteen hours. Things like that, 0:06:36.279 --> 0:06:40.520 and it's it's the podcast was pushed back to the 0:06:40.600 --> 0:06:44.839 electronic media's refusal to have and I shouldn't say refusal, 0:06:45.240 --> 0:06:50.360 the rarity of a very good interview with people who 0:06:50.760 --> 0:06:54.159 are intelligent and accomplished and have a unique perspective and 0:06:54.200 --> 0:06:58.279 have something to say. Who cares what their favorite stock is? 0:06:58.320 --> 0:07:01.039 They walk out of the building, it's already stale. Asked 0:07:01.040 --> 0:07:04.680 them something that's evergreen and important. How did you get 0:07:04.720 --> 0:07:08.360 into the managing money? So I started as a trader 0:07:09.279 --> 0:07:13.680 a few decades ago, and that was a ton of fun. Um. 0:07:13.800 --> 0:07:15.680 You make a lot of money, some months you lose 0:07:15.720 --> 0:07:18.280 a lot of money. But it was really, really interesting, 0:07:19.040 --> 0:07:22.960 and eventually I came to the conclusion that it was 0:07:23.000 --> 0:07:27.520 fair as far as I was concerned. The compensation ended 0:07:27.600 --> 0:07:31.320 up being fairly random um. But most fascinating to me 0:07:31.520 --> 0:07:33.600 was the guys on the desk around me, And it 0:07:33.680 --> 0:07:36.040 was back then it was all guys, and this person 0:07:36.160 --> 0:07:38.760 is making money this month and this person isn't, and 0:07:38.760 --> 0:07:40.880 then you flip it, and that sent me down a 0:07:40.960 --> 0:07:44.520 rabbit hole of why performance exists and how people some 0:07:44.560 --> 0:07:48.040 people dwell and some people don't, and the entire behavioral 0:07:48.080 --> 0:07:51.720 finance UM rabbit hole opened up to me in the 0:07:51.760 --> 0:07:56.120 mid nineties. But I went from there to research. It 0:07:56.280 --> 0:08:00.400 was became an assistant to a technology strategist at a 0:08:00.480 --> 0:08:02.880 firm that no longer exists. It was ended up being 0:08:02.920 --> 0:08:06.840 brought by Oppenheimer, and then eventually became a market strategist. 0:08:06.920 --> 0:08:12.000 And so the first twenty years of my career I said, 0:08:12.520 --> 0:08:17.480 turned down money, listen, I can't compromise the objectivity I 0:08:17.600 --> 0:08:21.640 have and in doing my research or so, I foolishly, 0:08:23.160 --> 0:08:26.760 But eventually it became clear to me that when I 0:08:26.800 --> 0:08:29.320 would refer people to other Oh this guy you want 0:08:29.400 --> 0:08:31.160 Muni bonds, Go talk to him all you want to. 0:08:31.840 --> 0:08:34.240 It dawned on me one day when I referred to 0:08:34.240 --> 0:08:37.079 somebody to a Muni bond specialist. The person came back 0:08:37.120 --> 0:08:39.360 to me and said, so tell me about this private 0:08:39.360 --> 0:08:42.800 placement there they're talking about. And I suddenly had a 0:08:42.880 --> 0:08:47.839 tremendous insight. Oh my god, I have massive reputational liability 0:08:47.880 --> 0:08:51.560 and probably legal liability if I send someone, not getting 0:08:51.559 --> 0:08:54.440 paid for it, never asking for a dime, but thinking 0:08:54.480 --> 0:08:57.440 I'm doing the right thing by sending people to And 0:08:57.640 --> 0:08:59.800 at that point it was like, all right, that's it. 0:09:00.240 --> 0:09:05.480 I'm I'm done making those sort of idiotic risk decisions 0:09:05.520 --> 0:09:08.880 folding people to other people. Congratulations, you're the first client 0:09:08.880 --> 0:09:11.800 of the Ridoltz Group. And and that's how that began. 0:09:11.840 --> 0:09:13.920 And that was just about a decade. You still had 0:09:13.960 --> 0:09:16.880 that first client, Yes, still do. And how many clients 0:09:16.920 --> 0:09:19.320 do you have to I want to say we work 0:09:19.440 --> 0:09:22.600 with about five hundred families a little under and we're 0:09:22.760 --> 0:09:26.720 up to about nine hundred million dollars. We're just shy 0:09:26.760 --> 0:09:29.000 of a billion, and we're just shy of five years, 0:09:29.760 --> 0:09:36.360 which will September is our um champagne party anniversary. Can 0:09:36.400 --> 0:09:39.880 I tell you something. We discussed that internally in the 0:09:39.960 --> 0:09:44.319 office and decided it was a bad look. And instead, 0:09:44.840 --> 0:09:48.360 I know this sounds like hokey and self serving, we 0:09:48.480 --> 0:09:50.520 decided that the whole New York office is going to 0:09:50.600 --> 0:09:54.160 go volunteer somewhere on that anniversary. I know that it 0:09:54.320 --> 0:09:59.360 sounds it sounds artificial, but it really isn't. Because this 0:09:59.440 --> 0:10:03.600 industry is somewhat notorious for a lot of um back 0:10:03.679 --> 0:10:06.360 padding and we're all guilty of it, and I'm I'm 0:10:06.400 --> 0:10:10.080 we would like to avoid that sort of that sort 0:10:10.080 --> 0:10:12.920 of luck. All right, So, Barry, we invited you on 0:10:13.120 --> 0:10:16.240 this podcast which is about e t F s because 0:10:16.280 --> 0:10:18.120 I've seen you right about e t F s. You 0:10:18.120 --> 0:10:20.320 you speak at many of the E t F conferences, 0:10:20.800 --> 0:10:24.840 You've talked about investing in them. Just talk about, you know, 0:10:24.880 --> 0:10:27.840 as an advisor, what E t F have done for 0:10:27.880 --> 0:10:31.040 your business and how you use them. Sure, so, there 0:10:31.040 --> 0:10:35.120 are a couple of really obvious, simple advantages of e 0:10:35.240 --> 0:10:39.280 t F s. Perhaps first and foremost is the tax 0:10:39.320 --> 0:10:43.640 structure is vastly superior to most other things. And and 0:10:43.800 --> 0:10:46.520 that's number one. Number two with e t F s 0:10:46.920 --> 0:10:49.599 if you're dealing, we set up an online this is 0:10:49.720 --> 0:10:51.440 already a couple of years old. We set up an 0:10:51.440 --> 0:10:54.679 online I hate the term robo advisor, but an automated 0:10:55.240 --> 0:11:00.040 UM solution that is low touch, low cost, and it 0:11:00.040 --> 0:11:04.680 it trades essentially commissioned free at t D using all 0:11:04.720 --> 0:11:08.160 of these ETFs from various names like Vanguard and black 0:11:08.240 --> 0:11:10.319 Rock and State Treat and and what have you. And 0:11:10.440 --> 0:11:14.520 that that circle of of commission free stuff is always changing, 0:11:14.520 --> 0:11:18.640 but we don't change the portfolio reflected regardless. You can 0:11:18.800 --> 0:11:23.600 set up a well diversified portfolio, not with two million dollars, 0:11:23.600 --> 0:11:26.160 not with two hundred thousand dollars, but with you know, 0:11:26.280 --> 0:11:30.440 twenty dollars. That wasn't possible pre e t fs. It 0:11:30.480 --> 0:11:33.440 didn't make sense to buy five thousand dollars worth of 0:11:33.559 --> 0:11:36.840 mutual fund given the costs and the price breaks and 0:11:36.880 --> 0:11:38.600 what have you. But you can do that with with 0:11:38.720 --> 0:11:41.200 e t fs. When it comes time to rebalance or 0:11:41.200 --> 0:11:43.800 what have you, you can you can make those sort 0:11:43.800 --> 0:11:46.679 of changes very easily. And what's your e t F 0:11:47.160 --> 0:11:51.240 index fund active mutual fund balance in in a typical 0:11:51.280 --> 0:11:55.280 portfolio or in that nine million dollars in firm assets. 0:11:55.280 --> 0:12:00.560 How's that allocated? Roughly percentage? So I don't want to 0:12:00.600 --> 0:12:03.440 misspeak because you're you're us three things, So let me 0:12:03.480 --> 0:12:07.839 give you a broad overview and then we'll drill drill down. UM. 0:12:07.880 --> 0:12:13.080 So we typically believe in a broad, globally diversified, low 0:12:13.160 --> 0:12:17.920 cost asset allocation model, and we use dimensional funds, Van 0:12:17.960 --> 0:12:23.360 guard uh So, Wisdom Tree funds, UM basically all the 0:12:23.440 --> 0:12:25.880 all the names you would know, and you don't need 0:12:25.920 --> 0:12:30.120 a million funds to be really diversified. UM are we 0:12:30.640 --> 0:12:34.240 between ten and fifteen gives you pretty much the entire 0:12:34.320 --> 0:12:39.160 world ten and fifteen holdings UM. Some of the portfolios 0:12:39.280 --> 0:12:42.920 we have UM or all A E t f s. 0:12:43.640 --> 0:12:46.760 We have a tactical portfolio we use which isn't the 0:12:46.800 --> 0:12:51.719 typical tactical portfolio. It exists. It's rules driven, it's pretty 0:12:51.760 --> 0:12:56.360 basic quantitative strategy. But the idea is, if your holdings 0:12:57.000 --> 0:13:00.800 is in a portfolio that gets out of the way 0:13:00.920 --> 0:13:04.640 for the fat part of a thirty or forty market collapse, 0:13:04.960 --> 0:13:07.080 then you could leave your real money alone and not 0:13:07.320 --> 0:13:10.600 try and market time. Not that this market times, but 0:13:11.280 --> 0:13:14.680 it's basically a trend following system. And the idea is 0:13:15.400 --> 0:13:19.600 if the market really has a wild hiccup. Well, your 0:13:19.640 --> 0:13:25.960 average seventy percent stock bond portfolio with a slug in 0:13:26.000 --> 0:13:29.360 the tactical, it ends up looking like fifty fifty. And 0:13:29.440 --> 0:13:33.760 so if you can't withdraw withstand a draw down in 0:13:33.800 --> 0:13:37.600 your portfolio, which is what a fifty fifty portfolio should 0:13:37.640 --> 0:13:42.320 do in a crash, um, then you shouldn't be in equities. 0:13:42.440 --> 0:13:47.360 What are you telling clients now that this is the 0:13:47.360 --> 0:13:50.400 fat part of the economic cycle that we're hitting on 0:13:50.400 --> 0:13:54.680 all cylinders, that when you come out of an economic 0:13:55.320 --> 0:13:59.480 um crisis, out of a financial credit crisis, that you 0:13:59.559 --> 0:14:02.000 tend to have a long, slow recovery. By the way, 0:14:02.040 --> 0:14:05.520 this isn't us saying this. I've been writing this in 0:14:05.720 --> 0:14:09.560 on Bloomberg and elsewhere for you know, pretty much the 0:14:09.600 --> 0:14:12.120 whole run. Um. You look at the research from Ryan 0:14:12.200 --> 0:14:16.440 Hart and rogue Off, it's pretty clear um week GDP week, 0:14:16.440 --> 0:14:22.800 consumer UH spending, soft job creation, soft wage gains, weak 0:14:22.920 --> 0:14:28.200 home price appreciation is what typically describes the post credit 0:14:28.240 --> 0:14:32.600 crisis recoveries. This has been playing out with some variables 0:14:32.600 --> 0:14:35.880 pretty close to that script, which implies that this cycle 0:14:35.920 --> 0:14:40.280 will go much longer than most people believe. Um. I've 0:14:40.400 --> 0:14:43.560 I've been reading people call for a recession I don't know, 0:14:43.680 --> 0:14:47.479 just about twice a year for the past ten years. UM, 0:14:47.520 --> 0:14:51.200 It's hard to see anything on the immediate horizon that 0:14:51.320 --> 0:14:54.160 is a threat. The feed is tightening, but they're tightening 0:14:54.200 --> 0:14:59.000 from very low levels with very low, small amounts of inflation. Now, 0:14:59.040 --> 0:15:02.280 all these can change. Maybe the tariffs put through push 0:15:02.320 --> 0:15:05.480 through a lot of a lot of inflation, maybe some 0:15:05.560 --> 0:15:10.640 other uh saber rattling causes a problem. So typically an 0:15:10.640 --> 0:15:14.680 external shock to a strong economic recovery or a strong 0:15:14.720 --> 0:15:18.440 economic cycle doesn't really affect it. But when you have 0:15:18.480 --> 0:15:21.760 an economy that's starting to falter, doesn't take much of 0:15:21.760 --> 0:15:25.440 a shove to send it sprawling. So far, the economy 0:15:25.480 --> 0:15:31.400 has been very robust and has with withstood a series 0:15:31.480 --> 0:15:33.920 of I'm not going to be politically correct, I'm just 0:15:33.960 --> 0:15:38.800 gonna say a series of ill thought out, um economic 0:15:38.840 --> 0:15:42.960 actions by this administration that in a weaker economy, would 0:15:43.000 --> 0:15:46.280 have caused a recession. They're just fortunate that they inherited 0:15:46.320 --> 0:15:50.440 a very strong economy. Otherwise we would be looking at 0:15:50.480 --> 0:15:54.880 something far less. I would be far less sanguine about 0:15:54.920 --> 0:15:57.840 what was going on in d C. If I wasn't 0:15:57.840 --> 0:16:07.200 confident enough that the economy me was robust. There's a 0:16:07.200 --> 0:16:10.120 lot of people you talk about this sort of economic 0:16:10.680 --> 0:16:13.680 bullmarket that we've been seeing for quite a while. There's 0:16:13.680 --> 0:16:15.480 a lot of chatter out there, and you've heard it, 0:16:15.480 --> 0:16:19.040 You've actually written about it that oh, it's this Russian 0:16:19.120 --> 0:16:22.200 too passive, that's just blindly lifting all these stocks. And 0:16:22.680 --> 0:16:25.360 look out, when the passive bubble pops, everybody is going 0:16:25.400 --> 0:16:29.120 to be uh running back to active. What's your take 0:16:29.160 --> 0:16:31.480 on all this is somebody who uses passive? Does any 0:16:31.480 --> 0:16:34.280 of that breakthrough to you? Right? Well, we use passive 0:16:34.360 --> 0:16:37.680 and active. Um. I think the bulk of most people's 0:16:37.720 --> 0:16:41.960 portfolio should be mostly passive, and I think if they 0:16:42.040 --> 0:16:47.400 want to throw an overlay of value or small cap 0:16:47.520 --> 0:16:53.280 or whatever, that's perfectly fine. The passive indexing versus active 0:16:53.320 --> 0:17:00.760 management debate has been frighteningly ignorant, shockingly self serving. Some 0:17:00.920 --> 0:17:04.160 of the stupidest crap I've ever read about finances come 0:17:04.200 --> 0:17:09.919 out of it. Indexing is Marxism? Do you remember that nonsense? 0:17:08.240 --> 0:17:14.160 Of course, it's a bubble that's gonna crash everything. How 0:17:14.320 --> 0:17:18.080 is indexing about? So let's let's put this into context. First, 0:17:18.640 --> 0:17:23.120 indexing began forty years ago. And despite the obviousite obvious 0:17:23.160 --> 0:17:28.840 advantages of low cost, low taxes, low turnover, no specific 0:17:29.160 --> 0:17:35.720 benchmark other than the benchmark the SPH, the pursuit of 0:17:35.720 --> 0:17:40.440 alpha typically leaves to not even achieving beta. So the 0:17:40.480 --> 0:17:43.919 intellectual underpinnings of this have been around for literally decades. 0:17:44.560 --> 0:17:48.080 It was only in the past ten years that this 0:17:48.200 --> 0:17:50.440 blew up. And so when you look at the context 0:17:50.480 --> 0:17:53.160 of this, why why did this blow up? And and 0:17:53.280 --> 0:17:56.200 I'll give you five reasons, And I think this helps 0:17:56.240 --> 0:17:59.640 explain why it's not a bubble, it's not Marxism, it's 0:17:59.680 --> 0:18:03.520 not the end of capitalism. It's first of all, you 0:18:03.600 --> 0:18:06.840 go back to the late nineties yearly two thousands, scandal 0:18:06.880 --> 0:18:09.560 after scandal after scandal, the I p O spinning scandal, 0:18:10.000 --> 0:18:14.080 the analyst scandals, the accounting scandals, that one after another 0:18:14.119 --> 0:18:16.119 aftern that's before we get to Bernie made Off in 0:18:16.160 --> 0:18:19.000 all the Ponzi schemes and everything else, and then the 0:18:19.160 --> 0:18:22.000 dot com collapse. I think at a certain point, the 0:18:22.040 --> 0:18:24.920 mom and pop investor says, you know, I've played this 0:18:25.000 --> 0:18:27.920 game and it doesn't seem to work for me. Right. 0:18:27.920 --> 0:18:32.280 That's before high frequency trading made um individuals feel like 0:18:32.359 --> 0:18:35.680 the market was skewed against them. Um. But as we 0:18:35.720 --> 0:18:39.360 say in our office, the solution to high frequency trading 0:18:39.520 --> 0:18:42.000 is low frequency trading. If you're not an active trader, 0:18:42.240 --> 0:18:45.240 that doesn't affect you. So that's number one. Number two, 0:18:45.440 --> 0:18:48.760 you had a series of giant market crashes, the dot 0:18:48.760 --> 0:18:52.480 com collapse, then the housing collapse, then then the Great 0:18:52.520 --> 0:18:56.160 Financial Crisis, then the commodities crop collapse. It seems wherever 0:18:56.400 --> 0:19:00.439 investors went hunting for alpha, they got their heads handed 0:19:00.480 --> 0:19:04.120 to them. And at a certain point, the mainstream investor says, 0:19:04.119 --> 0:19:06.560 you know what, screw you guys. I'm taking my ball 0:19:06.600 --> 0:19:09.840 and going home. And so for them who have to 0:19:09.840 --> 0:19:13.719 be invested if they want to retire, it made sense 0:19:13.760 --> 0:19:17.879 to say, I'm not gonna pay commissions. I'm gonna pay 0:19:17.960 --> 0:19:20.760 an eight dollar fee to buy an index at t 0:19:20.880 --> 0:19:24.399 D or Schwab or wherever, or go robo or go 0:19:24.600 --> 0:19:29.840 robo um or you know, I've been promised this out performance, 0:19:29.880 --> 0:19:34.600 but when you actually do the math, the performance isn't there. Uh. 0:19:34.640 --> 0:19:37.679 The brokers end up capturing the lion share of of 0:19:37.760 --> 0:19:41.919 whatever upside there is. If you Jim Chanos said on 0:19:41.920 --> 0:19:44.399 on Masters in Business, you know when he started his 0:19:44.400 --> 0:19:47.560 hedge fund thirty years ago, there were three hundred guys 0:19:47.600 --> 0:19:51.119 creating alpha, all guys back then. Now there's eleven thousand 0:19:51.200 --> 0:19:53.800 funds and it's the same three hundred people creating alpha. 0:19:53.960 --> 0:19:57.360 So unless you're fortunate enough to be in one of 0:19:57.400 --> 0:20:00.240 those funds, you're paying a lot for underperformance. And I 0:20:00.280 --> 0:20:04.800 think again the public is kind of figured out they're 0:20:04.800 --> 0:20:06.760 not in those funds, they don't access to it. And 0:20:06.800 --> 0:20:09.760 then the fourth, and I think the most most important 0:20:09.800 --> 0:20:14.520 thing is behavioral finance has become so ubiquitous and so 0:20:14.600 --> 0:20:18.280 well understood that the average person says, you know, I'm 0:20:18.320 --> 0:20:22.479 full of um my own biases, and I'm emotional, and 0:20:22.520 --> 0:20:25.679 I don't necessarily have the discipline to do this the 0:20:25.760 --> 0:20:30.000 right way. So they've begun to recognize rather than try 0:20:30.040 --> 0:20:33.320 and play that game, I'm just gonna buy an index 0:20:33.359 --> 0:20:37.160 and seeing forty years, Well, this is all what's fueled 0:20:37.359 --> 0:20:40.000 why we have a podcast called Trillions about et f s. Right, 0:20:41.280 --> 0:20:43.800 Why do people even need advisors? Why not just do 0:20:43.880 --> 0:20:46.880 the robot thing that you have for So there's three 0:20:46.880 --> 0:20:49.880 part answers to that. First, some people don't even need 0:20:49.960 --> 0:20:53.119 robo advisors. They can do it themselves. I spoke it 0:20:53.320 --> 0:20:57.919 years ago and an a a ii um events And 0:20:58.000 --> 0:21:00.760 this wife comes up to me with her husband and 0:21:00.800 --> 0:21:04.040 tow and says, tell my husband, he's an idiot. So 0:21:04.119 --> 0:21:06.760 I turned to the guy and say, sir, you're an idiot. 0:21:07.200 --> 0:21:09.359 Now that I've called your husband idiot, why do you 0:21:09.359 --> 0:21:12.480 think he's an idiot? And she says, he keeps buying 0:21:12.520 --> 0:21:16.080 all these stocks that are collapsing. I go, stocks like 0:21:16.160 --> 0:21:18.879 Lehman an a I g or No, he bought Disney 0:21:18.920 --> 0:21:22.840 when it fell, and he bought JP Morgan. Ma'am if 0:21:22.880 --> 0:21:24.919 he has the I go, are you panicking and selling? 0:21:24.960 --> 0:21:28.400 He's now? I buy one at here, I do one 0:21:28.520 --> 0:21:30.640 entry when it falls x percent, I do a second 0:21:30.760 --> 0:21:33.679 entry here. I only buy quality companies without a lot 0:21:33.720 --> 0:21:37.560 of debt, and a lot of them. Ma'am, he's not 0:21:37.640 --> 0:21:41.119 an idiot, I go, I write, he's doing fine. You 0:21:41.160 --> 0:21:43.760 could now. You need to be disciplined, you need to 0:21:43.800 --> 0:21:45.760 be thoughtful, you need to spend a lot of time. 0:21:46.600 --> 0:21:49.040 The person had been retired since his mid fifties. He 0:21:49.080 --> 0:21:51.920 loves this, and he's he was. He goes, I beat 0:21:51.920 --> 0:21:53.920 in the market four out of the past seven years, 0:21:53.960 --> 0:21:55.920 or something like that. And when you missed, he goes 0:21:55.960 --> 0:21:59.040 I was right there. Okay, so I said the wife, ma'am, 0:21:59.400 --> 0:22:01.440 I don't want to He's doing a good job. So 0:22:01.480 --> 0:22:05.119 that's one person, But that's not the average investor. The 0:22:05.119 --> 0:22:07.920 average investor doesn't have the time, doesn't have the discipline, 0:22:08.359 --> 0:22:11.840 doesn't have the emotional balance to not get sucked in 0:22:11.840 --> 0:22:15.439 to the vortex when everything gets hairy and things are 0:22:15.480 --> 0:22:17.840 flying over your head and everything on the news is 0:22:18.040 --> 0:22:22.199 the world is ending. Some group of people. Uh, the 0:22:22.280 --> 0:22:25.119 robo advisors are perfectly valid for listen, I want a 0:22:25.160 --> 0:22:27.560 simple portfolio. I don't care what you have to say. 0:22:27.560 --> 0:22:30.800 I don't want to speak to you. Uh. Once a quarter, 0:22:30.920 --> 0:22:33.919 send me an update, and once a year tell me 0:22:33.960 --> 0:22:35.960 if I'm on target form my plan. I mean, doesn't 0:22:36.000 --> 0:22:39.600 that actually breed good behavior though one would think, But again, 0:22:39.880 --> 0:22:43.479 that's not the average investor. The average investor. Whenever you 0:22:43.600 --> 0:22:47.120 do a survey asking people what their risk tolerance is, 0:22:47.520 --> 0:22:50.359 what you get is not their risk tolerance. What you 0:22:50.440 --> 0:22:53.080 get is how the market behaved over the prior ninety days. 0:22:53.400 --> 0:22:57.040 If the markets falling, they're really conservative and they don't 0:22:57.040 --> 0:22:59.040 want to take a lot of risk. When the market 0:22:59.119 --> 0:23:02.520 screaming higher, listen, I'm aggressive and I can withstand, So 0:23:02.680 --> 0:23:05.679 it doesn't tell you anything. So you really have to 0:23:05.720 --> 0:23:09.919 be aware of what people say isn't very often what 0:23:10.040 --> 0:23:13.240 they do. And then there's another group of people who 0:23:13.400 --> 0:23:17.959 are running businesses or owning companies, or very busy in 0:23:18.000 --> 0:23:21.240 a professional career, and they know they don't have the 0:23:21.320 --> 0:23:25.479 time or energy or discipline or focus. And besides, they 0:23:25.520 --> 0:23:28.280 would rather spend their time and energy on their own 0:23:28.280 --> 0:23:31.520 business than dealing with their own four oh one K, 0:23:31.680 --> 0:23:35.000 their employees for one k, setting stuff up for the kids. 0:23:35.080 --> 0:23:38.000 Some people have generational wealth and issues. Some people want 0:23:38.000 --> 0:23:40.960 to give money to philanthropy. Some people want to make 0:23:41.000 --> 0:23:43.760 sure that when they sell a business that they don't 0:23:44.040 --> 0:23:46.680 max out their taxes. That there's a ton of things 0:23:46.680 --> 0:23:52.720 that require some expertise. And that's the typical advisor client 0:23:52.960 --> 0:23:56.240 that gets what they pay for. You know, if someone says, listen, 0:23:56.240 --> 0:23:58.360 just buy me an S and P five hundred, why 0:23:58.359 --> 0:24:01.320 would those people pay, you know, an advisor for that 0:24:01.640 --> 0:24:06.040