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Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio. Hi,

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Speaker 1: this is Barry Ridholts. You're listening to Masters in Business

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Speaker 1: on Bloomberg Radio. Welcome to our season. We're very excited.

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Speaker 1: We have a lot of fantastic shows coming your way.

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Speaker 1: Before I tell you about this week's guests, let me

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Speaker 1: just give you a little update. We've been on hiatus

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Speaker 1: over the holidays, running a few repeats if you missed them.

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Speaker 1: We had Jeff Glenlock, Jim Chainos, Mark Cuban, and now

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Speaker 1: we're starting with a whole new run of new shows

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Speaker 1: beginning uh this weekend, which is January. Before I tell

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Speaker 1: you the details about this week's guest, let me just

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Speaker 1: tell you a little bit about what we have in

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Speaker 1: store for you some fantastic shows. Recording next weekend is

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Speaker 1: some guy named William Gross, formally of Pimco. Now with Janice,

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Speaker 1: we spoke, or we by the time you hear this,

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Speaker 1: we will have spoken for a couple of hours. We've

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Speaker 1: been going back and forth about this show. A lot

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Speaker 1: of really interesting stuff, enough material that it might even

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Speaker 1: end up being a two hour show. So that's fascinating stuff.

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Speaker 1: Check out that next week I'm heading out to Seattle

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Speaker 1: to interview Howard Marks of oak Tree Capital, really a

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Speaker 1: super value investor, and another phenomenal fixed income investor. Uh

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Speaker 1: Cliff Fastness of a q R is on our schedule,

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Speaker 1: as is Jim McCann of eight hundred Flowers, which in

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Speaker 1: response to a lot of requests. Hey, I love the

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Speaker 1: interviews and I'm learning a lot about finance and investing,

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Speaker 1: but what about things in non financial business. So Jim

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Speaker 1: is somebody we've known for a couple of years, and

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Speaker 1: he's a really fascinating character who essentially took a single

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Speaker 1: flowers shop and turn them into this fantastic, successful, publicly

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Speaker 1: traded company. We have a lot of other people queued

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Speaker 1: up from outside the world of finance. I think that's

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Speaker 1: going to be really interesting, including people from the arts

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Speaker 1: and and that could be a really intriguing conversation. Before

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Speaker 1: I babbled too long, let me tell you about this

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Speaker 1: week's guest. It's a special youth edition of Masters in Business.

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Speaker 1: Patrick O'Shaughnessy, author of Millennial Money, all about how young

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Speaker 1: people can make a fortune courtesy of their fifty year

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Speaker 1: investment horizon. You know, we tend to think of the

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Speaker 1: youth today as being really disadvantaged. They came of age

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Speaker 1: in the midst of a horrible financial crisis that burdened

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Speaker 1: with lots of student loans and and college debt. There

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Speaker 1: aren't that many great job opportunities. Patrick takes a very

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Speaker 1: contrarian position, which is the youth have the single greatest

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Speaker 1: advantage on their side, and that's time you get to

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Speaker 1: compound returns for fourty or fifty years. Most people don't

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Speaker 1: really start investing seriously into their forties or fifties, or

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Speaker 1: at least that's what Patrick says. And by that time,

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Speaker 1: you've given up so many decades of compounding, you've missed

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Speaker 1: out on so much that you're actually at a disadvantage.

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Speaker 1: Even if you're making very little money and putting very

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Speaker 1: little aside, you should still do it, says Patrick in

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Speaker 1: his book Millennial Investing, because of the miracle of of compounding,

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Speaker 1: and one it does two your returns. Essentially, you can

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Speaker 1: start later and put more money away, and you'll end

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Speaker 1: up with about as half as much as someone who

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Speaker 1: starts early, someone who starts in their twenties. So be

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Speaker 1: sure and check that out. Uh, with no further ado,

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Speaker 1: let me introduce Patrick O'schalnessy, principal at O'Shaughnessy Asset Management

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Speaker 1: and author of the book Millennial Money. This is Masters

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Speaker 1: in Business with Barry Ridholts on Bloomberg Radio. This week.

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Speaker 1: I have a special guest who is unique in two ways. First,

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Speaker 1: his name is Patrick O'Shaughnessy. He's the author of Millennial Money,

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Speaker 1: How Young Investors Can Build a Fortune. So this is

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Speaker 1: a special youth oriented version of Masters in Business. But

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Speaker 1: we have a couple of first with Patrick uh Patrick

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Speaker 1: is you're born in eighty five, right I was. You're

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Speaker 1: thirty yet almost thirty, just about to turn thirty in April,

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Speaker 1: so by far you are our youngest guest ever on

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Speaker 1: the show. And second, you're the first guest who is

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Speaker 1: the offspring of a previous guests co We we had

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Speaker 1: um Yale Hirsch and his son Jeff, but they were

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Speaker 1: on together, So you're the first um, first official progeny

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Speaker 1: of a prior prior guest, so that that makes you unique.

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Speaker 1: A little background about pat Rick um obviously born in

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Speaker 1: n five, not quite thirty, undergraduate at Notre Dame, surprisingly

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Speaker 1: degree in philosophy, not finance, but you ended up becoming

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Speaker 1: a chartered financial analyst. How did you find your way

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Speaker 1: to finance? So my interest in markets in general, and

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Speaker 1: finance even more generally really comes through human psychology. I

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Speaker 1: studied philosophy with sort of an unofficial minor in psychology,

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Speaker 1: just because I'm interested in how people act and how

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Speaker 1: people think. And I think that the stock market represents

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Speaker 1: probably the most interesting intersection of all the most interesting disciplines.

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Speaker 1: So I sort of backed into it through psychology. UM,

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Speaker 1: and that's what got me interested. And then from there

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Speaker 1: I went to, you know, the more traditional route studying

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Speaker 1: accounting through the c FA, etcetera. But it's people that

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Speaker 1: got me interested in marketing. And it certainly doesn't hurt

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Speaker 1: that your father is James O'shawna See, who wrote a

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Speaker 1: highly regarded book What Works on Wall Street and runs

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Speaker 1: the firm um Oceana Csset Management where or a principle,

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Speaker 1: I've been extremely fortunate UM. And I say that not

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Speaker 1: so much because I have a father who is a

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Speaker 1: well known investor, but more because of how he encouraged

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Speaker 1: me as a young person really just to love learning. UM.

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Speaker 1: It was never about this ratio or that ratio is

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Speaker 1: really just about loving to read, loving to investigate. So

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Speaker 1: that's the reason I'm so lucky, but lucky for a

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Speaker 1: lot of reasons. So let's talk about you as a

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Speaker 1: young person, because the theme today is going to be

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Speaker 1: the advantages of youth, the things that young people have

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Speaker 1: that they may not even realize that works so strongly

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Speaker 1: in their benefit. And who better to discuss it than

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Speaker 1: it's someone who is a not quite thirty and b

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Speaker 1: wrote a book about what millennials should be doing with

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Speaker 1: their money. And the funny thing about that is when

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Speaker 1: people think about this generation, the thought processes, they're living

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Speaker 1: in their parents basement. They don't have a lot of

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Speaker 1: economic opportunity. Jobs aren't plentiful, it's tough to get by.

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Speaker 1: And you took an extremely contrarian position and you basically said, hey,

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Speaker 1: you'll never have a better time to invest in your

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Speaker 1: life than when you're in your twenties and thirties, and

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Speaker 1: I'm going to write a book about it. Yeah. You know,

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Speaker 1: this is true of young people in general, but even

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Speaker 1: more so of the millennial generation, just because of what

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Speaker 1: they've witnessed. Three catastrophic collapses in the housing market, in

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Speaker 1: the stock market, um and we are as people tend

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Speaker 1: to be once burned, twice shy, and so we've got

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Speaker 1: this very negative view of the stock market. My goal

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Speaker 1: with the book was to sort of reverse how people

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Speaker 1: think about risk and make them realize that if you've

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Speaker 1: got forty years ahead of you, you have huge potential.

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Speaker 1: If you start very young, and dollar might turn into

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Speaker 1: seventeen dollars, whereas if you wait till forty, like most

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Speaker 1: people do, that same dollar on average turns into just

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Speaker 1: about five dollars. So, so let's talk about those three crises.

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Speaker 1: The dot com crisis, you have the housing collapse, then

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Speaker 1: we have the financial crisis. How has that impacted the

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Speaker 1: psychology of of your peer group, of the millennials. Well,

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Speaker 1: it's really part of our biological heritage. There's one of

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Speaker 1: my favorite writers is the anthropologist Diamond, who spent a

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Speaker 1: lot of time with indigenous people in Papua New Guinea.

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Speaker 1: And when he was traveling with them, one night they

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Speaker 1: were setting up camp and he wanted to set up

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Speaker 1: a camp below a tree, and they said, absolutely not,

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Speaker 1: we won't do it. And he was surprised because the

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Speaker 1: tree was fine, it was alive, it hadn't begun to

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Speaker 1: rot or anything. But they wouldn't do it. And he

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Speaker 1: realized that they take all sorts of extreme precautions against

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Speaker 1: even very low probability events, and he called this tendency

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Speaker 1: constructive paranoia. Human beings are very sensitive to even low

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Speaker 1: probability losses because negative things have a big impact on

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Speaker 1: our survival. Now that's great in a primitive setting, but

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Speaker 1: in the markets, the exact opposite is true. We say

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Speaker 1: better safe than sorry, which is how we tend to

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Speaker 1: act biologically, but in markets, typically the safer you feel,

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Speaker 1: the sorry you will be in the future. So what

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Speaker 1: works on the savannah doesn't work on the Wall Street. Absolutely,

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Speaker 1: and and that's just the way we're programming. We've seen

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Speaker 1: three catastrophic things that signal to us danger when you

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Speaker 1: look at markets, So that makes millennials more risk averse,

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Speaker 1: and they tend to run very low stock expo oosure

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Speaker 1: and absurd levels of cash in the portfolios they do.

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Speaker 1: And some of the most recent surveys show fifty or

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Speaker 1: more in cash for twenty five year olds, which is

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Speaker 1: just insane because of the power of inflation, you know

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Speaker 1: that the value that cash will slowly get stripped away

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Speaker 1: over time. Whereas they have very little in stocks, which

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Speaker 1: over the long, over four decades, have always been you know,

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Speaker 1: the most renuwerative successful asset class. Never never a negative

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Speaker 1: UM twenty year rolling period of equities in the US. UM,

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Speaker 1: you look at Japan. That's really the exception, isn't it. Yeah?

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Speaker 1: Internationally and there's some there's some extreme examples like Japan, Germany,

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Speaker 1: some of the World War two countries, But equities over

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Speaker 1: the longer term after inflation have been safer than the

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Speaker 1: more traditional bonds. In cash compounding, use the famous example

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Speaker 1: of the grain of rice on a chessboard. Describe the

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Speaker 1: advantage that twenty five year old has if they're looking

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Speaker 1: at a forty or even fifty year investment horizon. Well,

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Speaker 1: the thing about compounding that makes it hard to take

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Speaker 1: advantage of is all the great benefit happens at the

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Speaker 1: tail end of life, not in the beginning. So if

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Speaker 1: you're investing a thousand dollars now, you might only make

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Speaker 1: a few hundred dollars in returns, but the same rate

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Speaker 1: of return way later in life represents much bigger sums.

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Speaker 1: My favorite example of this is Warren Buffett. Everyone knows

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Speaker 1: him as the most successful investor out there. Um, you

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Speaker 1: know sixty billion dollar net worth. He was not a

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Speaker 1: billionaire until he turned sixty years old, and his superpower

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Speaker 1: was that he started when he was eleven years old

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Speaker 1: buying shares and the power of compounding. Now, he was

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Speaker 1: a great investor, but the power of compounding was what

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Speaker 1: led to his great results through time. The same is

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Speaker 1: true for young people today. Small a bounds invested now

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Speaker 1: can result in huge sums in our fifties and sixties. Patrick,

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Speaker 1: in the book, you discussed three factors that are required

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Speaker 1: in order for any young investor to succeed, and those

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Speaker 1: factors are be different, go global, and get out of

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Speaker 1: your own way. Let's let's discuss those in reverse order.

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Speaker 1: Let's start with get out of your own way. Sure,

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Speaker 1: I think this is actually probably the most important of

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Speaker 1: the three because strategy is one thing, but if you

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Speaker 1: don't stick to your strategy, you will be in trouble

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Speaker 1: in the long term. Investors tend to be their own

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Speaker 1: worst enemy, reacting emotionally at exactly the wrong times, both

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Speaker 1: in times agreed and in times of panic. So the key, really,

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Speaker 1: I think, is to get out of your own way

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Speaker 1: by making your investing program as automatic as possible, meaning

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Speaker 1: money from your paycheck or bank account is just automatically invested,

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Speaker 1: whether it be in your four oh one K retirement

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Speaker 1: account or just regular brokerage account, and invested for you

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Speaker 1: without you having to take action. Because the more opportunity

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Speaker 1: we have to interceed in the portfolio, the worst our

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Speaker 1: results are are likely to be. There's been a and

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Speaker 1: may have even been your dad who on the show

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Speaker 1: told the story that when Fidelity did a review of accounts,

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Speaker 1: the accounts that had been the most successful, ones that

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Speaker 1: people essentially had forgotten about, just left to the left

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Speaker 1: them alone, and those were the highest returning portfolios in

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Speaker 1: their whole book of business. There's an amazing you can

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Speaker 1: you can overcome all this by just making your investments automatic,

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Speaker 1: and for most people that's the easy solution. So four

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Speaker 1: O one K, it's really easy. Is there a way

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Speaker 1: to make it automatic with just a regular brokerage account? Sure,

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Speaker 1: you can set up with almost every company with whom

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Speaker 1: you might have an account, you can set up set

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Speaker 1: up an automatic transfer from your bank checking account into

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Speaker 1: your brokerage account pretty easily, and and that's probably the

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Speaker 1: most basic and effective way to do it. So once

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Speaker 1: the money hits how does that get disposed into a portfolio.

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Speaker 1: So there are certain services that do it for you. Um,

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Speaker 1: this is kind of the cutting edge of the meeting

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Speaker 1: of Silicon Valley and Wall Street where their software that

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Speaker 1: they've built that just automatically handles it all for you.

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Speaker 1: There's a number of companies that do it. The biggest

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Speaker 1: of them is a company called wealth front Um. There

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Speaker 1: there are a number of other great options that people

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Speaker 1: can research, but they handle everything for you once the

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Speaker 1: money is there, and then you don't have to do anything.

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Speaker 1: That's that's great. I know Bennements is a competitor. There's

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Speaker 1: personal Capital. There's about a dozen of those. We have

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Speaker 1: our own version of it. There. There's a lot of

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Speaker 1: different monies that do that. By taking the human element

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Speaker 1: out of it, you're removing the emotion, you're moving the

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Speaker 1: people being in the way of their own interests. Yes,

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Speaker 1: an emotionless investing process will always be better than one

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Speaker 1: that involves too much people. So now let's go to

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Speaker 1: the second point, which is go global. Obviously referring to

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Speaker 1: the home country bias that we see all all over

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Speaker 1: the entire investing world. Yeah, I call it portfolio patriotism.

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Speaker 1: It's this it's this tendency to prefer companies whose CEO

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Speaker 1: as we know, whose products and services we use and

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Speaker 1: so on. We just like the familiar, and we don't

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Speaker 1: like investing in companies that we've never heard of. Unfortunately,

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Speaker 1: that ignores a wealth of opportunities abroad, and very often

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Speaker 1: some of the best opportunities and the cheapest opportunities are

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Speaker 1: outside of the US. So I encourage investors to build

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Speaker 1: a very global diversified portfolio because there are countless examples

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Speaker 1: of individual country stock markets. Japan is probably the most

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Speaker 1: current and extreme example, having law long periods of time

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Speaker 1: where they do badly, but an equal weight to balance

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Speaker 1: global portfolio has has really never had a twenty or

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Speaker 1: thirty year run of negative performance, even after inflation. Um So,

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Speaker 1: I think that a balanced global approach is better than

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Speaker 1: just buying stocks in the country in which you live.

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Speaker 1: We're speaking with Patrick O'Shaughnessy, author of Millennial Money. Now,

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Speaker 1: the third points, or really the first one in your

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Speaker 1: list is probably the most challenging one, which is similar

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Speaker 1: to the Apple slogan think different. You're saying be different, yes,

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Speaker 1: and and this is really a point that is addressed

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Speaker 1: specifically at those trying to outperform the market. It's a

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Speaker 1: hard task to do and for most investors. If I

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Speaker 1: met one on the street, I would say that simple

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Speaker 1: index funds are a very good option to get started

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Speaker 1: for those that are interested in in owning individual stocks

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Speaker 1: rather than just owning the entire market. I think that

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Speaker 1: there are certain ways that if you are consistently different

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Speaker 1: in these key ways, you can outperform the market over

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Speaker 1: the long term. These are things like buying stocks at

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Speaker 1: very cheap valuations, buying higher quality companies that themselves earn

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Speaker 1: strong returns on their investments, Buying companies that are definitely

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Speaker 1: not meddling with the books, that have real cash earnings,

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Speaker 1: not quality earnings, high quality earnings um. And it's also

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Speaker 1: important to look at recent trends in the market over

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Speaker 1: the last say, three to nine months. Companies that are

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Speaker 1: the falling daggers sometimes are best avoided. So if you

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Speaker 1: can buy high quality, cheap companies that the market is

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Speaker 1: just beginning to notice, and do that very consistently through time,

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Speaker 1: that has been a strategy that historically speaking, has worked

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Speaker 1: very well better than the overall market. The key is

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Speaker 1: that you have to be different, and we're gonna come

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Speaker 1: back to the checklist that you've created in order to

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Speaker 1: be different. But when you end up taking these three

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Speaker 1: bullet points, um, get out of your own way, go global,

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Speaker 1: and be different, what are those portfolios end up looking like?

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Speaker 1: So depending on whether or not the investor is is

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Speaker 1: choosing to be very different than the market, it'll end

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Speaker 1: up looking quite distinct. You might have always global holding,

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Speaker 1: because that's a key part of it. But typically if

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Speaker 1: you're a young person the vast majority in equities, you

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Speaker 1: might have imbalances in terms of the market sectors. You

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Speaker 1: might own a lot of consumer stocks but no energy stocks,

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Speaker 1: something like that. You have to have a willingness to

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Speaker 1: look very different and not care what's going on in

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Speaker 1: the market. Only care what's going on obviously to the

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Speaker 1: benchmark or the SMP five hundred exactly. And you know,

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Speaker 1: two thousand fourteen it was a hard year. The SMP

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Speaker 1: five beat everything else. Um, So you really have to

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Speaker 1: have that intestinal fortitude to ignore when you're losing to

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Speaker 1: the overall market. But but the combinator, the combined portfolio

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Speaker 1: will still be well diversified globally and within the US

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Speaker 1: side of things. What sort of names we do you

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Speaker 1: tend to look at I know they rotate on a

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Speaker 1: regular basis, but you're really talking about high quality companies

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Speaker 1: at a relatively low valuation. Yeah, one of I'll give

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Speaker 1: one example that's pretty representative of these ideas, which is

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Speaker 1: Cgate Technology. It's a hard drive manufacturer. Um, we've owned

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Speaker 1: it for about five years and it's been one of

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Speaker 1: the best performing hold in our firm's history. It was

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Speaker 1: a classic value story where everyone said it's going out

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Speaker 1: of business. Hard drives is dinosaur technology, it's all moving

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Speaker 1: to the cloud. Um, this industry is going out of business.

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Speaker 1: Super cheap valuations, high quality earnings, they were aggressively repurchasing

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Speaker 1: their own shares, they were investing in themselves. Um. Those

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Speaker 1: are all great things to look for in a company,

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Speaker 1: and that would be a kind of a common profile

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Speaker 1: the name that that we like. Let's talk about one

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Speaker 1: of the biggest trends in investing today, the idea of

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Speaker 1: active versus passive indexing. In the book, you start out

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Speaker 1: by saying, you know, if nothing else, passive indexing is fine,

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Speaker 1: but I think you could do better address that if

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Speaker 1: you would. Sure, I think that you know all the

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Speaker 1: all the original arguments in the book trying to compel

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Speaker 1: young investors to get going are all based on just

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Speaker 1: owning the overall market simple passive indexes that you don't

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Speaker 1: have to do anything, you just own a slice of

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Speaker 1: global business. I think that that is a great way

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Speaker 1: to get started, and for the average investor, that's probably

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Speaker 1: the best solution. They don't have to think about it much,

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Speaker 1: they don't have to spend time researching companies anything like that.

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Speaker 1: I do think that for the sort of the second

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Speaker 1: level investor that wants to get deeper into the weeds,

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Speaker 1: that there are ways to beat the market. You just

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Speaker 1: have to do your research and do your work and

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Speaker 1: stick to some really proven key principles. So my my

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Speaker 1: opinion is kind of twofold. It depends on the individual investor.

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Speaker 1: For most people I know that aren't in this business,

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Speaker 1: I advocate simple passive index funds because they're cheap. We know,

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Speaker 1: they do very well over time, they have good tax

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Speaker 1: friendly returns um and you don't have to know much

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Speaker 1: about the markets to participate in their growth. You're just

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Speaker 1: buying into the global business universe and letting it do

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Speaker 1: its thing and getting out of the way. Yeah, all

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Speaker 1: of a sudden you've got millions of people working for

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Speaker 1: you effectively, and that's that's kind of a powerful concept

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Speaker 1: and not trying to pick which the winners will be,

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Speaker 1: just participating in the entire thing. But there are some

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Speaker 1: issues you have with passive investing, which is similar to

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Speaker 1: issues that Rob are not has raised, and um your

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Speaker 1: dad has raised and other people. And it has to

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Speaker 1: do with the problem with selecting stocks based on market

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Speaker 1: cap waving. Yeah, so we we think of market cap

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Speaker 1: as a factor like any others, like price to earnings

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Speaker 1: or something simple like that. This is an interesting study

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Speaker 1: if you broke the market into ten groups equal groups

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Speaker 1: of names. So let's say there's three thousand stocks or

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Speaker 1: so in the market, three names in each group, and

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Speaker 1: the division was based solely on their size. So the

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Speaker 1: number one group was the three d biggest stocks, Number

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Speaker 1: ten the three hundred smallest, and you ran that simulation

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Speaker 1: over the last fifty years. The only really interesting thing

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Speaker 1: you would find is that the biggest group, the three

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Speaker 1: hundred largest stocks or so, have underperformed the rest of

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Speaker 1: stocks by between two and three percent per year on

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Speaker 1: an annualized basis. So names that have done the best

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Speaker 1: over the long term go on to actually underperform. We

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Speaker 1: would argue that the index based strategy is just to

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Speaker 1: buy big cap stocks, and then that doesn't make much

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Speaker 1: sense that you can do better from a strategy perspective.

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Speaker 1: Where indexes have it right is how disciplined and consistent are.

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Speaker 1: Talk a little bit about this. Something in the book

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Speaker 1: I found fascinating, which is only buy stocks with the

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Speaker 1: letter C as an example of what one of the

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Speaker 1: flaws in cap weighted indexes yees. So if all you

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Speaker 1: did every year was by every name in the market

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Speaker 1: that started with the letter C, honestly, you could do

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Speaker 1: it just about any letter and the result would be

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Speaker 1: the same. You would outperform the market on paper. And

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Speaker 1: the reason for that is that it excuse you away

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Speaker 1: from just the biggest names and just create sort of

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Speaker 1: a random sample of companies that that tended to actually

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Speaker 1: do better than the biggest stocks overall. So kind of

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Speaker 1: a funny exercise, it is, certainly wouldn't advocate anyone do that,

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Speaker 1: but but it's it's powerful to show that just a

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Speaker 1: random sampling will do better, an equal weighted random sampling

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Speaker 1: than than just a market index on paper. I suspect

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Speaker 1: we're going to see an E T F in the

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Speaker 1: not two different future called E T F B E

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Speaker 1: D f C E t F D just just stocks

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Speaker 1: of those letters because someone will someone will end up

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Speaker 1: um buying it. So so now let's talk a little

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Speaker 1: bit about when you're not buying indexes, when you're putting

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Speaker 1: together a portfolio, how do you deal with the behavioral

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Speaker 1: issues that you mentioned throughout the books throughout the book

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Speaker 1: in terms of how investors get in their own way. So, really,

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Speaker 1: we think the solution is to make your approach completely

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Speaker 1: model based, meaning you design a model that selects stocks

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Speaker 1: for you based on proving key ideas, attributes the common

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Speaker 1: stocks that have been successful share and then you stick

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Speaker 1: to that model through thick and thin. And I can

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Speaker 1: promise you because value stocks are a big component of

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Speaker 1: what we do that very often you'll look at the

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Speaker 1: names coming out of your model and say, wait a minute,

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Speaker 1: this can't be right. This stock is terrible. It's the

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Speaker 1: cgate technology of five years ago. Uh, you know, it's

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Speaker 1: the leisure stocks of five years ago when people said,

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Speaker 1: no one's ever gonna do anything for fun again. They're

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Speaker 1: just battening down the hatches. So it forces you to

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Speaker 1: own some uncomfortable stocks, which is why we think you

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Speaker 1: just need to take humans out of it, make it

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Speaker 1: a model based approach. Only that's so funny. My my

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Speaker 1: favorite war story about reaction to stocks when the first

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Speaker 1: Apple iPod came out. I've been a Mac fan boy

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Speaker 1: for forever. I got my hands literally the first week

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Speaker 1: the iPod came out, and oh, I get it. The

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Speaker 1: Sony Walkman for the digital era. This is gonna be huge.

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Speaker 1: Apple at the time was fifteen bucks, thirteen cash. I

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Speaker 1: showed this to a dozen people. The reaction was uniformly, dude,

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Speaker 1: what are you talking about? Things? Out of business? Ah?

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Speaker 1: And I learned that when you get that oh reaction,

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Speaker 1: pay attention because it means all the worst part of

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Speaker 1: the stock is out of the price, and all that's

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Speaker 1: left is either out of business or a lot of upside.

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Speaker 1: With Apple turned out to be a lot of upside.

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Speaker 1: I love the phrase the cave you fear to enter

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Speaker 1: holds the treasure you seek, and that is often true

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Speaker 1: in the stock market, as it was with Apple. In

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Speaker 1: our earlier segment, we discussed a variety of different factors

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Speaker 1: that go into approaching markets correctly as a young investor.

431
00:22:53,400 --> 00:22:56,000
Speaker 1: But you took it a step further. What you said

432
00:22:56,119 --> 00:23:01,480
Speaker 1: second level investing beyond indexing, and you created a checklist

433
00:23:02,040 --> 00:23:06,960
Speaker 1: for identifying stocks that have five key characteristics that you

434
00:23:07,000 --> 00:23:10,359
Speaker 1: think make for the best sort of portfolio that people

435
00:23:10,520 --> 00:23:13,639
Speaker 1: can in fact do themselves. Yes. Yes, So so we

436
00:23:13,680 --> 00:23:15,400
Speaker 1: can go through each of the five, which I think

437
00:23:15,400 --> 00:23:18,199
Speaker 1: I have very compelling reasons each. The first is that

438
00:23:18,240 --> 00:23:21,119
Speaker 1: you want companies that are very oriented towards their shareholders.

439
00:23:21,200 --> 00:23:23,320
Speaker 1: What I mean by that is they send lots of

440
00:23:23,359 --> 00:23:26,720
Speaker 1: cash back to equity and debt stakeholders in the company there,

441
00:23:26,720 --> 00:23:30,040
Speaker 1: So that means retiring debt, buying back shares, an issuing dividends,

442
00:23:30,040 --> 00:23:33,040
Speaker 1: paying dividends. Yes, and so you want to favor those stocks.

443
00:23:33,040 --> 00:23:35,240
Speaker 1: And you want to avoid stocks that are just issuing

444
00:23:35,240 --> 00:23:37,399
Speaker 1: a ton or raising a ton of new capital. So

445
00:23:37,520 --> 00:23:40,280
Speaker 1: secondary equity offerings, you know a lot of new debt,

446
00:23:40,520 --> 00:23:42,960
Speaker 1: those tend to be bad science historic. What about the

447
00:23:43,000 --> 00:23:45,479
Speaker 1: companies that generate a lot of stock options and have

448
00:23:45,520 --> 00:23:47,520
Speaker 1: to issue stocks to cover that. How does that fit

449
00:23:47,560 --> 00:23:49,040
Speaker 1: into that? So you've got to make sure you look

450
00:23:49,040 --> 00:23:50,840
Speaker 1: at the net number. So you want to look at

451
00:23:50,880 --> 00:23:54,080
Speaker 1: total buybacks and total issuance and net those numbers out

452
00:23:54,080 --> 00:23:56,199
Speaker 1: against one of other to account for any sort of

453
00:23:56,200 --> 00:23:58,960
Speaker 1: issuance that's for stock options, that would be a bad

454
00:23:59,040 --> 00:24:03,000
Speaker 1: thing issuance for stock. So shareholder yields greater than five percent?

455
00:24:03,440 --> 00:24:07,160
Speaker 1: Is uh? The first bullet point. Second bullet point return

456
00:24:07,200 --> 00:24:10,159
Speaker 1: on invested capital. Yeah. So the key idea here is

457
00:24:10,200 --> 00:24:12,360
Speaker 1: that this is sort of a measure of a company's quality.

458
00:24:12,440 --> 00:24:15,119
Speaker 1: You want to invest in company whose own investments are

459
00:24:15,280 --> 00:24:18,040
Speaker 1: are yielding great returns. So if a company takes its

460
00:24:18,040 --> 00:24:20,920
Speaker 1: cash that it's raised through equity and debt, makes investments

461
00:24:20,920 --> 00:24:23,800
Speaker 1: in property, plan, equipment, whatever its investments are, depending on

462
00:24:23,840 --> 00:24:26,520
Speaker 1: its business. You want businesses that are great at earning

463
00:24:26,600 --> 00:24:30,280
Speaker 1: high returns because those filter through two investors. So a

464
00:24:30,359 --> 00:24:33,640
Speaker 1: return on invested capital that's very high relative to competitors

465
00:24:33,640 --> 00:24:35,960
Speaker 1: has historically been a good sign. So you want to

466
00:24:35,960 --> 00:24:39,160
Speaker 1: focus on companies with good return on capital. All right,

467
00:24:39,320 --> 00:24:45,040
Speaker 1: And the third bullet point operating cash flow greater then

468
00:24:45,119 --> 00:24:48,520
Speaker 1: reported profits. Yes. So the bottom line number that everyone

469
00:24:48,600 --> 00:24:52,200
Speaker 1: still pays attention to is earnings EPs. That's the number

470
00:24:52,200 --> 00:24:55,600
Speaker 1: that makes headlines. Far fewer investors are focused on real

471
00:24:55,760 --> 00:24:59,359
Speaker 1: operating cash flows. We want real, not manipulated earnings, and

472
00:24:59,359 --> 00:25:01,680
Speaker 1: there are a lot of ways to make earnings look

473
00:25:01,720 --> 00:25:04,840
Speaker 1: better than they are. Maybe it's growing your accounts receivables,

474
00:25:04,880 --> 00:25:08,240
Speaker 1: or messing with your inventories, or just blowing up your

475
00:25:08,280 --> 00:25:10,840
Speaker 1: asset base. There's lots of ways to do it. We

476
00:25:10,880 --> 00:25:14,119
Speaker 1: want to focus on companies that have real, strong, consistent

477
00:25:14,600 --> 00:25:17,639
Speaker 1: operating cash flows that are at least as high as

478
00:25:17,680 --> 00:25:19,960
Speaker 1: their earnings, hopefully a lot higher. So how are you

479
00:25:20,000 --> 00:25:22,679
Speaker 1: measuring that? How are you looking at actual cash flows?

480
00:25:22,880 --> 00:25:25,399
Speaker 1: So it's very simple. On the statement of cash flows,

481
00:25:25,440 --> 00:25:27,880
Speaker 1: there's three different kinds. You just look at the operating ones,

482
00:25:27,960 --> 00:25:30,439
Speaker 1: ones that are coming in on a net basis as

483
00:25:30,480 --> 00:25:33,439
Speaker 1: a result of the company's normal business activities, and you

484
00:25:33,480 --> 00:25:36,240
Speaker 1: compare that with the company's reported net income. A simple

485
00:25:36,320 --> 00:25:39,040
Speaker 1: check is just to say we want companies cash flow

486
00:25:39,240 --> 00:25:41,760
Speaker 1: higher than their earnings. This would help you miss the

487
00:25:41,840 --> 00:25:44,880
Speaker 1: endrons of the world, the adelphia's the world comes, all

488
00:25:44,920 --> 00:25:46,800
Speaker 1: of which would have would not have passed this does

489
00:25:46,880 --> 00:25:49,800
Speaker 1: It doesn't make sense to have earnings higher than cash flow.

490
00:25:49,960 --> 00:25:52,320
Speaker 1: It doesn't make sense because that means it's coming from

491
00:25:52,320 --> 00:25:56,159
Speaker 1: something like accounts receivable. You your earn engineered. It may

492
00:25:56,160 --> 00:25:58,479
Speaker 1: not be fully engineered, but it means that the earnings

493
00:25:58,480 --> 00:26:01,200
Speaker 1: are not coming from real cash. It's coming from cash

494
00:26:01,240 --> 00:26:03,080
Speaker 1: that you think you'll receive in the future. All right,

495
00:26:03,160 --> 00:26:07,040
Speaker 1: So that was bullet point checklist number three. Number four

496
00:26:07,359 --> 00:26:10,760
Speaker 1: enterprise value to free cash flow less than ten x.

497
00:26:10,800 --> 00:26:12,520
Speaker 1: How does that work. Yeah, it's a fancy way of

498
00:26:12,520 --> 00:26:14,480
Speaker 1: saying you want to buy cheap stocks. You want to

499
00:26:14,480 --> 00:26:17,600
Speaker 1: buy companies trading at low multiples. I like free cash flow.

500
00:26:17,680 --> 00:26:19,480
Speaker 1: You can use earnings, you can use book value, you

501
00:26:19,480 --> 00:26:22,199
Speaker 1: can use sales. They all work. The important point is

502
00:26:22,240 --> 00:26:24,200
Speaker 1: that the less you pay for stocks, the more you

503
00:26:24,240 --> 00:26:26,879
Speaker 1: will earn from them in the long term. Very easy

504
00:26:26,920 --> 00:26:29,080
Speaker 1: to say, much harder to do in practice because it

505
00:26:29,119 --> 00:26:32,280
Speaker 1: often points you towards some contrary bets places that the

506
00:26:32,280 --> 00:26:35,120
Speaker 1: market is worried about. But value is key. If there's

507
00:26:35,160 --> 00:26:37,760
Speaker 1: anyone lesson from this list that people take away is

508
00:26:37,800 --> 00:26:40,680
Speaker 1: to focus on paying as little as possible for earnings,

509
00:26:40,720 --> 00:26:43,640
Speaker 1: for cash flow, for sales, etcetera. Let's look at the

510
00:26:43,760 --> 00:26:48,200
Speaker 1: last factor, which is really kind of interesting. You describe

511
00:26:48,200 --> 00:26:51,320
Speaker 1: it as a momentum factor, but I'm gonna say it's

512
00:26:51,359 --> 00:26:54,960
Speaker 1: not a momentum factor. It's really a avoid dogs factor.

513
00:26:55,240 --> 00:26:58,800
Speaker 1: Because what you your bullet point is your checklist point

514
00:26:58,880 --> 00:27:03,760
Speaker 1: is s x month momentum that's in the top three

515
00:27:03,880 --> 00:27:07,000
Speaker 1: quarters of the market, which is a polite way of saying, hey,

516
00:27:07,119 --> 00:27:11,360
Speaker 1: avoid that bottom quarter. Yeah, there's there's honestly no special

517
00:27:11,359 --> 00:27:14,200
Speaker 1: magic to that particular cut off point. The real key

518
00:27:14,280 --> 00:27:16,760
Speaker 1: is that we know from market history companies that have

519
00:27:16,880 --> 00:27:19,359
Speaker 1: been doing the absolute worst over the last six months

520
00:27:19,400 --> 00:27:21,480
Speaker 1: or so tend to continue to be dogs for the

521
00:27:21,560 --> 00:27:24,520
Speaker 1: next year, and that by avoiding those companies you can

522
00:27:24,560 --> 00:27:27,960
Speaker 1: avoid what people often call value traps um things like

523
00:27:28,000 --> 00:27:30,080
Speaker 1: that wait for the wait for the trend to be

524
00:27:30,240 --> 00:27:32,840
Speaker 1: established a little bit more before buying in. That can

525
00:27:32,840 --> 00:27:35,320
Speaker 1: be a nice addition to just about any strategy. We're

526
00:27:35,359 --> 00:27:40,000
Speaker 1: speaking with Patrick O'Shaughnessy, author of Millennial Money, describing the

527
00:27:40,080 --> 00:27:43,680
Speaker 1: checklist that young investors should use in order to put

528
00:27:43,720 --> 00:27:48,440
Speaker 1: together their own active portfolios if they already have a

529
00:27:48,440 --> 00:27:51,000
Speaker 1: passive portfolio and want to take it to the next level.

530
00:27:51,240 --> 00:27:54,800
Speaker 1: So let's let's go overall five of these shareholder yields

531
00:27:54,840 --> 00:28:01,159
Speaker 1: greater than five, return on invested capital greater than operating cash,

532
00:28:01,480 --> 00:28:06,200
Speaker 1: greater than earnings, enterprise value to cash flow as less

533
00:28:06,200 --> 00:28:09,720
Speaker 1: than ten x um, and then six month momentum in

534
00:28:09,760 --> 00:28:13,560
Speaker 1: the top three quarters. This is really a version of

535
00:28:13,760 --> 00:28:17,000
Speaker 1: the great Warren Buffett quote, which is I'd rather buy

536
00:28:17,000 --> 00:28:20,160
Speaker 1: a wonderful business at a fair price than a fair

537
00:28:20,200 --> 00:28:23,159
Speaker 1: business at a wonderful price. This isn't rocket science. These

538
00:28:23,200 --> 00:28:26,720
Speaker 1: are common known, common sense investing principles just put into

539
00:28:26,760 --> 00:28:29,200
Speaker 1: a rigorous model, and they work very well together. You're

540
00:28:29,200 --> 00:28:34,280
Speaker 1: buying shareholder friendly companies, high quality earnings, very attractive prices

541
00:28:34,320 --> 00:28:36,880
Speaker 1: in this case, and the market isn't selling them off,

542
00:28:37,200 --> 00:28:39,320
Speaker 1: you know, in droves over the in the recent past.

543
00:28:40,000 --> 00:28:42,800
Speaker 1: So let me push back a little bit of this.

544
00:28:42,840 --> 00:28:46,680
Speaker 1: So this sounds a little complicated, although you're saying, if

545
00:28:46,960 --> 00:28:50,200
Speaker 1: if I subscribe to a AII, I could have most

546
00:28:50,240 --> 00:28:54,240
Speaker 1: of this automated. What does this generate? What sort of output?

547
00:28:54,320 --> 00:28:57,040
Speaker 1: How often do I have to change this? Is? This

548
00:28:57,120 --> 00:29:00,600
Speaker 1: is not exactly a set and forget portfolio. How much

549
00:29:00,640 --> 00:29:03,360
Speaker 1: work is involved in managing this? It is not set

550
00:29:03,360 --> 00:29:05,480
Speaker 1: and forget And that's why really I highlight that it's

551
00:29:05,520 --> 00:29:07,680
Speaker 1: for that second level investor that wants to do a

552
00:29:07,680 --> 00:29:10,240
Speaker 1: little more. You can still manage it with as little

553
00:29:10,280 --> 00:29:13,640
Speaker 1: as one to two times per year touching the portfolio.

554
00:29:14,160 --> 00:29:15,840
Speaker 1: So it's not going to require that you trade all

555
00:29:15,880 --> 00:29:18,000
Speaker 1: that often. In fact, every stock you bi should be

556
00:29:18,040 --> 00:29:20,720
Speaker 1: held for at least a year for tax purposes. So

557
00:29:20,760 --> 00:29:23,400
Speaker 1: it's a slow moving strategy. If you want to just

558
00:29:23,440 --> 00:29:28,000
Speaker 1: rebalance every December thirty one, you could do that quite effectively,

559
00:29:28,080 --> 00:29:30,520
Speaker 1: and it wouldn't require all that much work, maybe half

560
00:29:30,520 --> 00:29:33,520
Speaker 1: an hour at the computer with your with your brokerage

561
00:29:33,520 --> 00:29:35,760
Speaker 1: account open. So what do you get for all this work?

562
00:29:35,880 --> 00:29:39,640
Speaker 1: What's the net long term returns of this sort of portfolio?

563
00:29:39,880 --> 00:29:42,240
Speaker 1: So the returns have been outstanding in the past, and

564
00:29:42,280 --> 00:29:44,200
Speaker 1: of course you know you can never expect the past

565
00:29:44,240 --> 00:29:48,320
Speaker 1: to repeat itself exactly. But this sort of concentrated portfolio

566
00:29:48,400 --> 00:29:51,040
Speaker 1: I recommend about twenty five stocks or so by these

567
00:29:51,080 --> 00:29:55,320
Speaker 1: different measures, UM has yielded honestly crazy results. It's it's

568
00:29:55,320 --> 00:29:58,080
Speaker 1: performed by about n outperformed the market by about nine

569
00:29:58,120 --> 00:30:01,640
Speaker 1: percent on an annualized basis over the last fifty years. Now,

570
00:30:01,680 --> 00:30:04,800
Speaker 1: of course that doesn't include trading frictions or or taxes

571
00:30:04,880 --> 00:30:06,680
Speaker 1: or anything like that, so you need to reduce that

572
00:30:06,760 --> 00:30:10,200
Speaker 1: number in your mind. But this combination has been powerful.

573
00:30:10,240 --> 00:30:13,400
Speaker 1: Now buffets out performed by significantly more than that on

574
00:30:13,440 --> 00:30:16,640
Speaker 1: an on an annualized basis. But that that that number

575
00:30:16,680 --> 00:30:21,240
Speaker 1: is a pretty good starting point a year for fifty years.

576
00:30:21,280 --> 00:30:25,200
Speaker 1: That's compounded obviously in an O eight oh nine. A

577
00:30:25,240 --> 00:30:28,760
Speaker 1: portfolio like this is does this get shell act as

578
00:30:28,760 --> 00:30:31,080
Speaker 1: bad as the market or are you buying cheap and

579
00:30:31,120 --> 00:30:33,960
Speaker 1: it doesn't fall as much? It's it gets shell act.

580
00:30:34,000 --> 00:30:36,760
Speaker 1: It's a long only portfolio. It's a stock portfolio, so

581
00:30:36,840 --> 00:30:38,800
Speaker 1: you can expect it to be more volatile. It's not

582
00:30:38,840 --> 00:30:41,120
Speaker 1: some magic bullet. It will have long it can have

583
00:30:41,160 --> 00:30:43,680
Speaker 1: a five year period when it's underperforming the market. The

584
00:30:43,760 --> 00:30:46,360
Speaker 1: key is really sticking with it. Of course, we've had

585
00:30:46,760 --> 00:30:50,960
Speaker 1: a pretty remarkable fifty year periods in US actually markets,

586
00:30:50,160 --> 00:30:53,000
Speaker 1: and yeah, it's been it's been a great sample in

587
00:30:53,040 --> 00:30:55,680
Speaker 1: which to test a strategy like this. Um So, my

588
00:30:55,800 --> 00:30:58,600
Speaker 1: goal is not to anchor people on which is a

589
00:30:58,640 --> 00:31:02,040
Speaker 1: tremendous return, but rather to show them that it's possible,

590
00:31:02,080 --> 00:31:05,520
Speaker 1: through a rules based strategy to outperform a market based

591
00:31:05,560 --> 00:31:08,400
Speaker 1: on some you know, well proven principles. And the advantage

592
00:31:08,400 --> 00:31:11,760
Speaker 1: about performing isn't just a couple of percent a year.

593
00:31:12,120 --> 00:31:16,080
Speaker 1: It's it's talking about youth. We're talking about millennials who

594
00:31:16,160 --> 00:31:20,600
Speaker 1: have a multi decade UH time horizon. How does that

595
00:31:20,720 --> 00:31:23,560
Speaker 1: compound over thirty or forty If you get ten percent

596
00:31:23,640 --> 00:31:26,480
Speaker 1: or nine percent, just out performing by three or four percent,

597
00:31:26,560 --> 00:31:28,640
Speaker 1: what does that do for you over thirty years. I mean,

598
00:31:28,640 --> 00:31:30,840
Speaker 1: if you're investing, let's say you're maxing out your four

599
00:31:30,840 --> 00:31:35,400
Speaker 1: O one K or putting some similar amount dollars a year,

600
00:31:35,440 --> 00:31:37,760
Speaker 1: which is hard, very hard for for many young people.

601
00:31:37,800 --> 00:31:39,960
Speaker 1: Let's say you're putting five thousand dollars a year away

602
00:31:40,480 --> 00:31:42,960
Speaker 1: that the difference in two or even two or three

603
00:31:43,000 --> 00:31:46,200
Speaker 1: percent out performance can literally mean millions of dollars by

604
00:31:46,200 --> 00:31:48,560
Speaker 1: the time you're sixty five or seventy years years down

605
00:31:48,600 --> 00:31:50,920
Speaker 1: the road, forty years down the road, because it's peanuts

606
00:31:50,920 --> 00:31:54,240
Speaker 1: in any given year two or three percent, but that compounds,

607
00:31:54,280 --> 00:31:57,000
Speaker 1: like the rice doubling on the chessboard that you mentioned earlier,

608
00:31:57,200 --> 00:32:00,600
Speaker 1: to significant sums and big gaps over the term. So

609
00:32:00,680 --> 00:32:03,840
Speaker 1: it's it can be very renumerative. We've been speaking with

610
00:32:03,920 --> 00:32:09,480
Speaker 1: Patrick O'Shaughnessy, author of Millennial Money and principle at O'Shaughnessy

611
00:32:09,560 --> 00:32:13,000
Speaker 1: Asset Management. If you want to hear more of this conversation,

612
00:32:13,120 --> 00:32:16,479
Speaker 1: be sure and check out our podcast extras there at

613
00:32:16,480 --> 00:32:21,760
Speaker 1: Bloomberg dot com and at Apple iTunes. My regular daily

614
00:32:21,800 --> 00:32:25,240
Speaker 1: column is at Bloomberg View. You can follow me on

615
00:32:25,240 --> 00:32:28,920
Speaker 1: Twitter at Ridholts or check out my blogged at Ridholts

616
00:32:28,960 --> 00:32:32,400
Speaker 1: dot com. I'm Barry Ridholts. You're listening to Masters in

617
00:32:32,480 --> 00:32:38,880
Speaker 1: Business on Bloomberg Radio. All right, welcome back to the podcast.

618
00:32:39,000 --> 00:32:41,760
Speaker 1: This is the fun part of our show where we

619
00:32:41,840 --> 00:32:43,920
Speaker 1: let our hairs down and have a little bit of

620
00:32:44,200 --> 00:32:47,640
Speaker 1: a drink and discuss things that we can't talk about

621
00:32:47,640 --> 00:32:50,160
Speaker 1: on the radio. Um for those of you who are

622
00:32:50,400 --> 00:32:53,400
Speaker 1: joining us for some strange reason. Halfway through the podcast,

623
00:32:53,760 --> 00:32:58,120
Speaker 1: I'm Barry Riholts. My guest is Patrick O'Shaughnessy. A little

624
00:32:58,120 --> 00:33:01,400
Speaker 1: background about how Patrick and I know each other. I

625
00:33:01,440 --> 00:33:04,440
Speaker 1: actually know Pat's dad for I don't know. It's got

626
00:33:04,440 --> 00:33:07,360
Speaker 1: to be like ten years true story. I don't know

627
00:33:07,400 --> 00:33:10,560
Speaker 1: if he ever told you this. Our old office, I

628
00:33:10,600 --> 00:33:13,400
Speaker 1: want to say ten years ago was like Park and

629
00:33:15,520 --> 00:33:18,560
Speaker 1: fifty was right diagonally across from the Walldorf and I'm

630
00:33:18,560 --> 00:33:21,280
Speaker 1: in a Starbucks on Park, right near the old bear

631
00:33:21,320 --> 00:33:24,840
Speaker 1: Sterns building. And it was right as he was extricating

632
00:33:24,920 --> 00:33:28,040
Speaker 1: himself from bear Sterns a few years before the clap.

633
00:33:28,040 --> 00:33:30,400
Speaker 1: So I want to say that's like oh five, oh six,

634
00:33:31,160 --> 00:33:33,640
Speaker 1: it was seven when it was all said and done. Okay,

635
00:33:33,680 --> 00:33:36,320
Speaker 1: it was the machinations had begun. So it was it

636
00:33:36,440 --> 00:33:39,720
Speaker 1: was literally about nine or ten years ago, and we're saying,

637
00:33:39,720 --> 00:33:42,840
Speaker 1: I'm having coffee with a friends and he's at the

638
00:33:42,880 --> 00:33:45,920
Speaker 1: next table having coffee. At that time, we had both

639
00:33:46,000 --> 00:33:50,000
Speaker 1: been doing Bloomberg's c NBC, Fox whatever and had seen

640
00:33:50,040 --> 00:33:52,320
Speaker 1: each other around and we just kind of looked at

641
00:33:52,360 --> 00:33:55,000
Speaker 1: each other and he goes, you're and I go, you're

642
00:33:55,840 --> 00:33:58,000
Speaker 1: And so we just started schmoozing, and we were very

643
00:33:58,000 --> 00:34:02,160
Speaker 1: sympatical about a lot of things UM, evidence based, rule

644
00:34:02,240 --> 00:34:05,040
Speaker 1: driven investing, looking at data, looking and so we just

645
00:34:05,080 --> 00:34:08,600
Speaker 1: struck up a conversation and started emailing and stayed in

646
00:34:08,640 --> 00:34:11,239
Speaker 1: touch over the years, and I've had him speak at

647
00:34:11,239 --> 00:34:15,640
Speaker 1: our conference. We've we actually have some UM money with

648
00:34:15,640 --> 00:34:19,400
Speaker 1: with your dad, and so when you've came along and

649
00:34:19,480 --> 00:34:23,120
Speaker 1: he introduced us, it was kind of interesting, was like, well,

650
00:34:23,120 --> 00:34:26,440
Speaker 1: what's this young turk gonna do. This young punk having

651
00:34:26,480 --> 00:34:29,239
Speaker 1: to follow a dad who wrote one of the most

652
00:34:29,320 --> 00:34:33,480
Speaker 1: seminal books on quantitative investing. And I gotta tell you,

653
00:34:33,480 --> 00:34:36,520
Speaker 1: you did a really nice job first book. This is

654
00:34:36,640 --> 00:34:39,920
Speaker 1: really you know, I have a blur full disclosure. I

655
00:34:39,960 --> 00:34:42,520
Speaker 1: have a blurb on the book and I say, if

656
00:34:42,560 --> 00:34:44,760
Speaker 1: someone gave me this book when I was in my twenties,

657
00:34:44,800 --> 00:34:47,160
Speaker 1: I'd be a billionaire today. Yeah, maybe a little bit

658
00:34:47,200 --> 00:34:49,920
Speaker 1: of hyperbole. Maybe not. Um, someone that starts very young

659
00:34:50,040 --> 00:34:52,239
Speaker 1: might have might have those lucky results. But yeah, it's

660
00:34:52,280 --> 00:34:54,719
Speaker 1: it's been. It's been a great relationship. And I'd say

661
00:34:54,719 --> 00:34:56,920
Speaker 1: the other thing that we really share. What I've enjoyed

662
00:34:56,920 --> 00:34:59,720
Speaker 1: about your writing is the psychology aspect of it of markets.

663
00:34:59,760 --> 00:35:02,440
Speaker 1: I think think that really at its base, that's what

664
00:35:02,520 --> 00:35:05,640
Speaker 1: this is all about, is figuring out what incentivizes people,

665
00:35:05,680 --> 00:35:08,440
Speaker 1: what motivates people, and in many cases, trying to do

666
00:35:08,480 --> 00:35:11,279
Speaker 1: the opposite and do that consistently. So you know, it's

667
00:35:11,280 --> 00:35:14,640
Speaker 1: funny because I began my career on Wall Street as

668
00:35:14,680 --> 00:35:16,640
Speaker 1: a trader. I didn't go to business school and went

669
00:35:16,680 --> 00:35:19,920
Speaker 1: to law school. Love law school, hated being a lawyer,

670
00:35:20,200 --> 00:35:23,400
Speaker 1: and when the opportunity came in the early nineties to

671
00:35:23,480 --> 00:35:27,600
Speaker 1: jump into finance, I jumped at it. And the training

672
00:35:27,760 --> 00:35:31,200
Speaker 1: essentially consisted of being shoved in the deep end of

673
00:35:31,239 --> 00:35:34,279
Speaker 1: pool and being yelled yelled at all, right, swim and

674
00:35:34,360 --> 00:35:36,200
Speaker 1: either you learned to swim or you drowned. It was

675
00:35:36,280 --> 00:35:39,800
Speaker 1: that sort of training process. But I had a different

676
00:35:39,840 --> 00:35:44,000
Speaker 1: background like you. Um, I had a philosophy background, but

677
00:35:44,040 --> 00:35:46,239
Speaker 1: I also had a lot of math and science, and

678
00:35:46,320 --> 00:35:49,040
Speaker 1: so I was always looking at wealth. Here's the hypothesis,

679
00:35:49,120 --> 00:35:52,880
Speaker 1: let's either validated or disprove it. And all the stuff

680
00:35:52,920 --> 00:35:57,120
Speaker 1: you hear on trading desks, most of it is just

681
00:35:57,440 --> 00:36:02,399
Speaker 1: nonsensical myths that don't end up to close scrutiny. Why

682
00:36:02,480 --> 00:36:05,280
Speaker 1: is this stock going up more buyers and sellers? That's

683
00:36:05,280 --> 00:36:07,560
Speaker 1: sort of nonsense, and you talk about a number of these,

684
00:36:07,840 --> 00:36:12,000
Speaker 1: but that's what led me down that path of Uh,

685
00:36:12,040 --> 00:36:16,040
Speaker 1: the explanations I'm being told make no sense whatsoever. There's

686
00:36:16,080 --> 00:36:20,319
Speaker 1: got to be a better reason why humans behave this way. Yeah.

687
00:36:20,360 --> 00:36:23,400
Speaker 1: I think really the only persistent advantage in markets is

688
00:36:23,520 --> 00:36:26,720
Speaker 1: understanding investor of psychology, because that's not going to change.

689
00:36:26,760 --> 00:36:29,400
Speaker 1: That's kind of the one factor that just doesn't change

690
00:36:29,440 --> 00:36:32,560
Speaker 1: through time. We always react the same way to similar stimuli,

691
00:36:32,840 --> 00:36:34,920
Speaker 1: and if you understand that, you can do really well.

692
00:36:34,960 --> 00:36:37,479
Speaker 1: You can build a successful strategy. And so I think

693
00:36:37,520 --> 00:36:40,600
Speaker 1: the background in psychology, like when we're interviewing people, my

694
00:36:40,800 --> 00:36:42,799
Speaker 1: I always sit up a little taller when someone's got

695
00:36:42,840 --> 00:36:46,240
Speaker 1: an interesting background like that, because it brings a unique

696
00:36:46,280 --> 00:36:49,879
Speaker 1: perspective to markets that's evergreen, that will always work. UM.

697
00:36:49,960 --> 00:36:52,600
Speaker 1: So I'm fascinated by the you know, million studies that

698
00:36:52,600 --> 00:36:55,240
Speaker 1: show just how terrible we are, how we're just finding

699
00:36:55,280 --> 00:36:57,320
Speaker 1: fake patterns all over the place all the time and

700
00:36:57,600 --> 00:37:00,800
Speaker 1: chasing them around. Um. You know, we're concer instantly foolish

701
00:37:00,840 --> 00:37:03,440
Speaker 1: with our money. And the good news is that for

702
00:37:03,520 --> 00:37:07,520
Speaker 1: some active investors that creates persistent opportunities to exploit UM.

703
00:37:07,640 --> 00:37:09,200
Speaker 1: And you know, that's why, that's why we had that

704
00:37:09,239 --> 00:37:12,239
Speaker 1: model based approach, because we can hope to consistently exploit

705
00:37:12,480 --> 00:37:16,360
Speaker 1: you know, behavioral misspricings. It's fascinating it It's almost gotten

706
00:37:16,360 --> 00:37:20,640
Speaker 1: to the point where behavioral finance and and behavioral economics

707
00:37:20,800 --> 00:37:24,560
Speaker 1: has become too accepted because when I first started exploring this,

708
00:37:25,320 --> 00:37:28,759
Speaker 1: I want to say, twenty years ago, there wasn't a

709
00:37:28,760 --> 00:37:31,880
Speaker 1: lot of writings that were out there. Dick Faler had

710
00:37:31,920 --> 00:37:35,560
Speaker 1: a couple of books, Um, Thomas Gilgovich up in Cornell.

711
00:37:36,520 --> 00:37:39,080
Speaker 1: You know, it was before the commons of the world

712
00:37:39,239 --> 00:37:41,480
Speaker 1: and the Shillers of the world had won their nobels.

713
00:37:41,880 --> 00:37:45,520
Speaker 1: So early on you had a hunt for information that

714
00:37:45,640 --> 00:37:50,840
Speaker 1: explains why people were irrational. And the funny part about

715
00:37:50,920 --> 00:37:55,279
Speaker 1: that is the fundamental premise of economic I am loath

716
00:37:55,360 --> 00:37:59,520
Speaker 1: to use the word science, is that humans are rational

717
00:38:00,000 --> 00:38:05,399
Speaker 1: if it maximizing economic actors when they're not not even close. Right.

718
00:38:05,680 --> 00:38:09,120
Speaker 1: And you mentioned Kenneman who who wrote my favorite, probably

719
00:38:09,200 --> 00:38:12,480
Speaker 1: my favorite psychology book, Thinking Fast and Slow, which isn't

720
00:38:12,480 --> 00:38:14,880
Speaker 1: just about investing, but it's a great investing book without

721
00:38:14,880 --> 00:38:18,239
Speaker 1: really meaning to be. He has a term called cognitive mirages,

722
00:38:18,360 --> 00:38:20,759
Speaker 1: which means even though you might be aware of all

723
00:38:20,800 --> 00:38:23,520
Speaker 1: these ways you're being irrational, that doesn't stop you from

724
00:38:23,520 --> 00:38:26,680
Speaker 1: being irrational in the future. It's very, very hard to

725
00:38:26,719 --> 00:38:30,480
Speaker 1: overcome our biological imperative. Anyone that thinks otherwise should try

726
00:38:30,480 --> 00:38:33,839
Speaker 1: buying some value stocks because it's very hard to do so.

727
00:38:33,920 --> 00:38:37,600
Speaker 1: So psychology is it's very hard to overcome. It's you know,

728
00:38:37,640 --> 00:38:40,360
Speaker 1: if you understand that, you at least have a shot

729
00:38:40,440 --> 00:38:43,759
Speaker 1: of saying, hey, am I doing something wrong here? What

730
00:38:43,760 --> 00:38:47,360
Speaker 1: what should I be doing? Instead of what I'm actually doing? Yeah? Sometimes,

731
00:38:47,440 --> 00:38:50,160
Speaker 1: you know, I I often wonder if some sociopaths would

732
00:38:50,200 --> 00:38:53,360
Speaker 1: be better investors in the average human. There's a studies

733
00:38:53,400 --> 00:38:56,240
Speaker 1: that show that. Yeah. An awesome, awesome study called Lessons

734
00:38:56,280 --> 00:38:58,960
Speaker 1: from the Brain Damaged Investor where a research or at

735
00:38:59,000 --> 00:39:01,440
Speaker 1: Stanford by the name of but Shiv had two groups

736
00:39:01,600 --> 00:39:05,200
Speaker 1: play a very similar the same investing game twenty rounds

737
00:39:05,200 --> 00:39:08,080
Speaker 1: single dollar bills. Every round was you can choose to

738
00:39:08,120 --> 00:39:10,319
Speaker 1: invest your dollar, hand it over and I flip a

739
00:39:10,320 --> 00:39:12,560
Speaker 1: coin that comes up heads, you get two dollars and

740
00:39:12,560 --> 00:39:15,080
Speaker 1: fifty cents that comes up tails. I keep your dollar.

741
00:39:15,280 --> 00:39:16,920
Speaker 1: The other option is you just hold on to your

742
00:39:16,920 --> 00:39:19,400
Speaker 1: dollar and wait two fifty versus the Well, no, why

743
00:39:19,440 --> 00:39:21,480
Speaker 1: wouldn't you give a dollar every round? Well, of course, right,

744
00:39:21,520 --> 00:39:24,160
Speaker 1: so they explained to the participants, the math is basic.

745
00:39:24,239 --> 00:39:26,239
Speaker 1: The expected value of each coin flip is a dollar

746
00:39:26,280 --> 00:39:28,759
Speaker 1: twenty five. You should play every single time. That would

747
00:39:28,760 --> 00:39:31,480
Speaker 1: be the smartest strategy. So the two groups were these

748
00:39:31,560 --> 00:39:34,279
Speaker 1: a normal group of everyday people and the second group

749
00:39:34,360 --> 00:39:37,040
Speaker 1: who all had brain damage to a very specific part

750
00:39:37,080 --> 00:39:40,319
Speaker 1: of their brain, the limbic system that controls emotions, specifically

751
00:39:40,400 --> 00:39:43,399
Speaker 1: fear um, and so these people couldn't feel fear like

752
00:39:43,600 --> 00:39:45,840
Speaker 1: the average person could. So they had them played this

753
00:39:45,880 --> 00:39:48,240
Speaker 1: game and they tabulated the results, and here's what they found.

754
00:39:48,719 --> 00:39:52,800
Speaker 1: The brain damaged players played of the time. They weren't perfect,

755
00:39:52,800 --> 00:39:55,080
Speaker 1: they didn't do the pent which would be the best strategy,

756
00:39:55,120 --> 00:39:59,040
Speaker 1: but they played of the time. The normal brain patients

757
00:39:59,160 --> 00:40:02,239
Speaker 1: only played fifty seven percent of the time, and the

758
00:40:02,360 --> 00:40:05,160
Speaker 1: reason for that was just one thing after a loss,

759
00:40:05,200 --> 00:40:07,560
Speaker 1: meaning after they invested their dollar, they lost the coin

760
00:40:07,600 --> 00:40:11,279
Speaker 1: flip and lost their dollar the next round, which wasn't

761
00:40:11,320 --> 00:40:13,200
Speaker 1: shouldn't be it's a coin flip, it's not influenced by

762
00:40:13,200 --> 00:40:17,040
Speaker 1: the previous round. They only played of the time. So

763
00:40:17,160 --> 00:40:20,440
Speaker 1: after a loss again we talked about it on the

764
00:40:20,520 --> 00:40:23,200
Speaker 1: earlier part of the show. After a loss is when

765
00:40:23,200 --> 00:40:26,359
Speaker 1: we get extra sensitive, which is which is exactly backwards, right,

766
00:40:26,360 --> 00:40:29,839
Speaker 1: classic risk aversion is that you feel losses twice as

767
00:40:29,920 --> 00:40:32,560
Speaker 1: much as you feel the benefit of a game. And

768
00:40:32,600 --> 00:40:34,799
Speaker 1: this is this is a this is a in you know,

769
00:40:34,800 --> 00:40:38,040
Speaker 1: a study example showing exactly that that when you take

770
00:40:38,160 --> 00:40:40,480
Speaker 1: the emotional part of our brain out, we don't make

771
00:40:40,520 --> 00:40:42,880
Speaker 1: these same mistakes. And there's countless ow there's examples, but

772
00:40:42,920 --> 00:40:45,279
Speaker 1: I love that one because it's it's amazing that we

773
00:40:45,360 --> 00:40:48,879
Speaker 1: make such a clearly irrational decision. The researcher told him,

774
00:40:48,880 --> 00:40:51,200
Speaker 1: that's in irrational, wrong decision and they still they still

775
00:40:51,239 --> 00:40:55,680
Speaker 1: did it, so pretty amazing stuff. That's fascinating. We talked

776
00:40:55,719 --> 00:41:00,359
Speaker 1: a little bit about automated investing, well front benement, lift off,

777
00:41:00,600 --> 00:41:05,440
Speaker 1: personal capital. There's so many of them. Uh, there's still

778
00:41:05,760 --> 00:41:08,799
Speaker 1: a teeny tiny percentage. They get a lot of press,

779
00:41:08,880 --> 00:41:12,160
Speaker 1: but there are tiny percentage of of the investable assets.

780
00:41:12,160 --> 00:41:16,560
Speaker 1: Do you think this is gonna expand into something more significant?

781
00:41:16,719 --> 00:41:20,319
Speaker 1: Is this a millennial sort of thing or is this

782
00:41:20,440 --> 00:41:24,480
Speaker 1: the sort of situation that um, it's gonna be a

783
00:41:24,520 --> 00:41:27,359
Speaker 1: little niche and it's not gonna go anywhere beyond that. UM,

784
00:41:27,440 --> 00:41:30,600
Speaker 1: I think that it will probably consolidate there. As you mentioned,

785
00:41:30,600 --> 00:41:32,359
Speaker 1: there's a lot of them out there, and they do

786
00:41:32,400 --> 00:41:35,200
Speaker 1: different things and they have different strengths and weaknesses. But

787
00:41:35,239 --> 00:41:38,600
Speaker 1: I think the core idea here, which is make investing

788
00:41:38,680 --> 00:41:42,440
Speaker 1: automatic and extremely easy, and use software to do all

789
00:41:42,480 --> 00:41:44,040
Speaker 1: the things that we say we should do but then

790
00:41:44,040 --> 00:41:47,719
Speaker 1: don't actually do. Manage our taxes, make regular investments, don't

791
00:41:47,760 --> 00:41:50,319
Speaker 1: monkey with our portfolios. It just does it all for

792
00:41:50,360 --> 00:41:53,760
Speaker 1: you for for fairly affordable fees. I think that concept

793
00:41:53,840 --> 00:41:56,000
Speaker 1: is here to stay UM and and some of these

794
00:41:56,080 --> 00:41:59,279
Speaker 1: companies will be wildly successful and their software companies. Uh,

795
00:41:59,320 --> 00:42:02,640
Speaker 1: they've got a course strong financial people at the companies.

796
00:42:02,640 --> 00:42:04,760
Speaker 1: But you know, I know Adam Nash, who's the CEO

797
00:42:04,840 --> 00:42:06,839
Speaker 1: of Wealth One pretty well. I've I've spoken to him

798
00:42:06,840 --> 00:42:10,040
Speaker 1: a number of times, and the guy is is a smart,

799
00:42:10,160 --> 00:42:13,480
Speaker 1: shrewd software guy with a sort of finance as a

800
00:42:13,520 --> 00:42:17,280
Speaker 1: secondary skill set. And it's They've built a pretty incredible product.

801
00:42:17,320 --> 00:42:20,279
Speaker 1: And I think that those sorts of automated solutions will

802
00:42:20,320 --> 00:42:23,120
Speaker 1: stick around, and they will be very good for millennial

803
00:42:23,120 --> 00:42:26,000
Speaker 1: investors because that solution is way better than you know,

804
00:42:26,040 --> 00:42:28,719
Speaker 1: calling your broker looking for a tip um like you know,

805
00:42:28,760 --> 00:42:31,960
Speaker 1: say my dad's generation did more commonly, That's just not

806
00:42:32,040 --> 00:42:34,120
Speaker 1: a great way to invest. This is smarter and I

807
00:42:34,120 --> 00:42:36,759
Speaker 1: think it will last makes a lot of sense. Let's

808
00:42:36,760 --> 00:42:39,960
Speaker 1: talk a little bit about bubbles and global investing. We

809
00:42:40,160 --> 00:42:44,920
Speaker 1: hinted and alluded to the Japanese situation, but it seems

810
00:42:45,000 --> 00:42:51,839
Speaker 1: that bubbles are a function of our post War War

811
00:42:51,880 --> 00:42:55,040
Speaker 1: two era. We've had We've had the nifty fifty in

812
00:42:55,080 --> 00:42:58,319
Speaker 1: the late sixties that ended a twenty year run from

813
00:42:58,360 --> 00:43:02,200
Speaker 1: forty six to sixty six. We've had the dot com bubbles.

814
00:43:02,200 --> 00:43:06,279
Speaker 1: We've obviously seen problems in Europe we've We've seen the

815
00:43:06,400 --> 00:43:09,960
Speaker 1: Japanese bubble in eighty nine, then the housing boom and

816
00:43:10,000 --> 00:43:13,600
Speaker 1: bust in the US. Is this just the nature of

817
00:43:13,880 --> 00:43:17,400
Speaker 1: capital markets? They go through these sorts of periods. It is,

818
00:43:17,440 --> 00:43:19,680
Speaker 1: And again I think it's rooted in psychology. You've got

819
00:43:19,719 --> 00:43:22,520
Speaker 1: these melt ups towards the end of these major bubbles,

820
00:43:22,560 --> 00:43:24,960
Speaker 1: you know, the famous ones like the Tulips, the Dutch

821
00:43:24,960 --> 00:43:29,200
Speaker 1: Tulips mania and south Sea crisis, etcetera. It happens over

822
00:43:29,239 --> 00:43:32,000
Speaker 1: and over again, and the charts all look the same, right,

823
00:43:32,040 --> 00:43:33,839
Speaker 1: and you can take away the stories and you've got

824
00:43:33,840 --> 00:43:36,520
Speaker 1: all identical charts. Japan is probably my favorite. I was

825
00:43:36,560 --> 00:43:38,680
Speaker 1: a big Michael Crichton fan growing up, and he wrote

826
00:43:38,680 --> 00:43:42,399
Speaker 1: a book about the Japanese corporate takeover of America, which,

827
00:43:42,400 --> 00:43:45,719
Speaker 1: in hindsight sounds so silly Sun. What was the Land

828
00:43:45,719 --> 00:43:47,560
Speaker 1: of the Rising Sun or something something like that, and

829
00:43:47,719 --> 00:43:50,680
Speaker 1: Rising Sun maybe just maybe just that shorter title. And

830
00:43:50,880 --> 00:43:53,240
Speaker 1: so when I dug into the history of the Japanese market,

831
00:43:53,320 --> 00:43:56,000
Speaker 1: I was just fascinated. What was going on just blew

832
00:43:56,000 --> 00:43:59,880
Speaker 1: me away. In the whole markets trading at ninety times earnings,

833
00:44:00,160 --> 00:44:02,560
Speaker 1: there were certain industries trading at two hundred and fifty

834
00:44:02,600 --> 00:44:05,200
Speaker 1: times earnings. I love using the example that if you

835
00:44:05,200 --> 00:44:07,880
Speaker 1: apply that multiple to you know, an enterprising youngster in

836
00:44:07,880 --> 00:44:11,160
Speaker 1: your life who makes who has lemonade stand and makes

837
00:44:11,160 --> 00:44:13,839
Speaker 1: fifty dollars a day every year, Well, by that math,

838
00:44:13,920 --> 00:44:16,200
Speaker 1: that that little lemonade stand would be worth about six

839
00:44:16,239 --> 00:44:19,400
Speaker 1: million dollars with a similar valuation. And so there was

840
00:44:19,480 --> 00:44:22,800
Speaker 1: just crazy stuff going on. Uh, and everyone was terrified

841
00:44:22,840 --> 00:44:25,359
Speaker 1: that in America that the Japanese were going to take over.

842
00:44:25,480 --> 00:44:28,280
Speaker 1: They bought Rockefeller Center, they were taking all the crown

843
00:44:28,360 --> 00:44:30,800
Speaker 1: jewels of America back to Japan. And and and there was

844
00:44:30,840 --> 00:44:34,480
Speaker 1: even one potentially apocryphal story of them overpaying by two

845
00:44:34,560 --> 00:44:36,400
Speaker 1: hundred million for a big landmark. It might have been

846
00:44:36,400 --> 00:44:38,719
Speaker 1: the Exxon Building or something like that, just to set

847
00:44:38,760 --> 00:44:41,560
Speaker 1: the record for the highest price paid. That's a good

848
00:44:41,640 --> 00:44:44,800
Speaker 1: use of shareholds of money, is to say we set

849
00:44:44,840 --> 00:44:47,879
Speaker 1: the record. We we overpaid the most for a building. Yeah,

850
00:44:47,920 --> 00:44:50,960
Speaker 1: I think. I think the bottom line is that bubbles happened. Um,

851
00:44:51,520 --> 00:44:54,239
Speaker 1: they happen in large part because of human psychology, which

852
00:44:54,239 --> 00:44:57,560
Speaker 1: won't change. And then in the future, when something feels

853
00:44:57,680 --> 00:44:59,719
Speaker 1: really enticing and you want to be a part of it,

854
00:44:59,760 --> 00:45:03,239
Speaker 1: like you know you might have, or in real estate

855
00:45:03,280 --> 00:45:05,799
Speaker 1: or whatever. The more recent examples are just stay out

856
00:45:05,800 --> 00:45:08,000
Speaker 1: of it. Yeah, you might miss out on some great

857
00:45:08,000 --> 00:45:10,319
Speaker 1: short term gains, but we know how bubbles end. They

858
00:45:10,360 --> 00:45:13,359
Speaker 1: all burst, So just ignore your emotions as much as

859
00:45:13,400 --> 00:45:17,239
Speaker 1: you can. You know, when we started seeing chatter of

860
00:45:17,520 --> 00:45:21,040
Speaker 1: China taking over the world, I'm old enough to recall

861
00:45:21,200 --> 00:45:24,440
Speaker 1: the Japanese taking over the world, and like, geez, this

862
00:45:24,560 --> 00:45:27,839
Speaker 1: sounds awfully familiar. That Chinese have been around for five

863
00:45:27,880 --> 00:45:31,640
Speaker 1: thousand years there, they've perennially been a threat. Why would

864
00:45:31,640 --> 00:45:33,960
Speaker 1: we think that this time they're gonna be any more

865
00:45:34,000 --> 00:45:38,320
Speaker 1: successful than they've previously been. It just felt so similar

866
00:45:38,800 --> 00:45:41,239
Speaker 1: to the sort of oh, the Japanese were taking over.

867
00:45:41,400 --> 00:45:44,480
Speaker 1: It really felt the same. My favorite history book Market

868
00:45:44,520 --> 00:45:47,560
Speaker 1: history books a book called Devil Take the Hindmost, which

869
00:45:47,640 --> 00:45:49,920
Speaker 1: chronicles kind of all these ones that we've mentioned. There's

870
00:45:49,960 --> 00:45:52,520
Speaker 1: a great chapter on Japan. It goes through tool Mania,

871
00:45:52,760 --> 00:45:55,759
Speaker 1: tons of other examples. But it is amazing that it's

872
00:45:55,840 --> 00:45:58,640
Speaker 1: just the same pattern over and over again, never learning

873
00:45:58,640 --> 00:46:01,560
Speaker 1: from history, uh, always making the same mistakes as those

874
00:46:01,600 --> 00:46:05,359
Speaker 1: before us, because we can't help ourselves. Well, some people can,

875
00:46:05,520 --> 00:46:09,040
Speaker 1: and some people can but to be honest, the vast

876
00:46:09,120 --> 00:46:13,360
Speaker 1: majority of people, when when the animal spirits are running,

877
00:46:13,800 --> 00:46:16,799
Speaker 1: they're they're joining the herd. It's it's the example I

878
00:46:16,880 --> 00:46:19,520
Speaker 1: love to give and in a presentation is now. I

879
00:46:19,560 --> 00:46:22,400
Speaker 1: don't know if you in your youth this was on television,

880
00:46:22,400 --> 00:46:25,360
Speaker 1: but when I was a kid, Sunday Night's Channel seven,

881
00:46:25,960 --> 00:46:29,440
Speaker 1: Mutual of Omaha's Wild Kingdom, I mean, that's today it's

882
00:46:29,480 --> 00:46:32,920
Speaker 1: the Discovery Channel and Animal Planet. But back in the

883
00:46:33,000 --> 00:46:37,520
Speaker 1: days of broadcast TV, when Marconi had just recently invented radio,

884
00:46:37,760 --> 00:46:42,040
Speaker 1: that's all we had. Animal Planet didn't exist. Mutual of

885
00:46:42,040 --> 00:46:46,640
Speaker 1: Omaha's Wild Kingdom was the closest thing, and every show

886
00:46:46,960 --> 00:46:50,440
Speaker 1: began the same way. It's a vast sea of of

887
00:46:51,560 --> 00:46:54,919
Speaker 1: meat on the hoof over the Savannah's million you'd see

888
00:46:54,960 --> 00:46:57,920
Speaker 1: these and they zoom in from the aerial shot and

889
00:46:58,040 --> 00:47:01,520
Speaker 1: you'd go from the earth black with will to best

890
00:47:01,560 --> 00:47:04,400
Speaker 1: I mean just and you'd eventually get to our heard

891
00:47:04,440 --> 00:47:08,080
Speaker 1: of a small herd of a few thousand whatever it

892
00:47:08,160 --> 00:47:13,800
Speaker 1: was Zebras gazelles. So usually the gazelle and invariably one

893
00:47:13,920 --> 00:47:18,479
Speaker 1: gazelle wanders off from the herd, and then they show

894
00:47:18,520 --> 00:47:21,640
Speaker 1: you the picture of the lions and the tall grass,

895
00:47:21,680 --> 00:47:25,279
Speaker 1: and who gets eaten but the gazelle that's not part

896
00:47:25,280 --> 00:47:29,040
Speaker 1: of the herd. And I think that is the evolutionary

897
00:47:29,120 --> 00:47:32,640
Speaker 1: basis for why there is safety in numbers, why there

898
00:47:32,719 --> 00:47:36,080
Speaker 1: is comfort in doing what everybody else does, even when

899
00:47:36,080 --> 00:47:38,640
Speaker 1: we know it's not right for us. There's good reason

900
00:47:38,680 --> 00:47:41,360
Speaker 1: we're programming the way we are because it's it's we

901
00:47:41,440 --> 00:47:44,640
Speaker 1: survived right. And the unfortunate thing is that culture and

902
00:47:44,680 --> 00:47:47,560
Speaker 1: cultural constructs like markets just evolve a lot faster than

903
00:47:47,560 --> 00:47:50,399
Speaker 1: our biology. So we can't evolve to keep up um

904
00:47:50,440 --> 00:47:53,279
Speaker 1: with the evolution in culture, and that puts us out

905
00:47:53,280 --> 00:47:56,319
Speaker 1: a disadvantage. And so that my my suggestion is if

906
00:47:56,320 --> 00:47:58,719
Speaker 1: you just remove yourself from the equation, all of those

907
00:47:58,760 --> 00:48:01,480
Speaker 1: problems will go away. If you don't, you're gonna spot

908
00:48:01,520 --> 00:48:04,000
Speaker 1: fake patterns, you're gonna see things that aren't really there,

909
00:48:04,440 --> 00:48:06,080
Speaker 1: and you're going to create all sorts of problems. So

910
00:48:06,160 --> 00:48:07,720
Speaker 1: just get out of just get out of the way

911
00:48:07,920 --> 00:48:10,600
Speaker 1: and remove yourself from the equation. You talk about the

912
00:48:10,600 --> 00:48:14,719
Speaker 1: difference between human software and human hardware, and you alluded

913
00:48:14,719 --> 00:48:18,480
Speaker 1: it to that, and that this last statement, the repeat

914
00:48:18,560 --> 00:48:22,000
Speaker 1: the quote that you actually had in the book about that. Yeah. So,

915
00:48:22,000 --> 00:48:24,960
Speaker 1: so my point was that human hardware, our biology and

916
00:48:25,000 --> 00:48:27,840
Speaker 1: all the reactions that we have because of our biology,

917
00:48:27,960 --> 00:48:30,800
Speaker 1: evolves a lot slower than our software, which is our culture.

918
00:48:31,400 --> 00:48:34,319
Speaker 1: Things like markets are are the best examples economies, things

919
00:48:34,400 --> 00:48:36,839
Speaker 1: like that. Um you might have heard of the term meme,

920
00:48:37,120 --> 00:48:40,439
Speaker 1: the cultural units of cultural evolution that can just move

921
00:48:40,440 --> 00:48:42,520
Speaker 1: a lot faster because it doesn't require you wait from

922
00:48:42,520 --> 00:48:46,160
Speaker 1: generation to generation to make incremental changes. The problem is

923
00:48:46,239 --> 00:48:49,480
Speaker 1: they're at an imbalance today. We're not designed to survive

924
00:48:49,520 --> 00:48:52,359
Speaker 1: and thrive in our current environment. We're designed to We're

925
00:48:52,400 --> 00:48:53,960
Speaker 1: kind of stuck in the Stone Age, if you will.

926
00:48:54,760 --> 00:48:58,040
Speaker 1: We're optimized for that environment in most ways, and we

927
00:48:58,080 --> 00:49:00,399
Speaker 1: did really well. Obviously you can see the result to that.

928
00:49:00,600 --> 00:49:02,759
Speaker 1: We just haven't changed much, even though the world has

929
00:49:02,840 --> 00:49:04,960
Speaker 1: changed a great deal, and now often it does us

930
00:49:04,960 --> 00:49:07,680
Speaker 1: a disservice because we make all these crazy, irrational decisions.

931
00:49:07,960 --> 00:49:11,399
Speaker 1: You mentioned a book Devil Takes the Hindmost. The book

932
00:49:11,440 --> 00:49:15,040
Speaker 1: I'm reading right now is called Last ape Standing, and

933
00:49:15,080 --> 00:49:18,360
Speaker 1: it's about the evolutionary process. At one point in time.

934
00:49:18,880 --> 00:49:21,960
Speaker 1: Over the past let's call it four million years, there

935
00:49:22,000 --> 00:49:24,840
Speaker 1: have been approximately at least that we have a fossil

936
00:49:24,920 --> 00:49:29,799
Speaker 1: record of sixteen various species of humans, and why did

937
00:49:29,880 --> 00:49:34,240
Speaker 1: we as a group of humans survive when others didn't

938
00:49:34,239 --> 00:49:36,640
Speaker 1: make it? And had to do with our adaptability and

939
00:49:36,719 --> 00:49:39,920
Speaker 1: our big brains and and our ability to walk up right,

940
00:49:39,960 --> 00:49:42,799
Speaker 1: and a lot of other factors that are great for

941
00:49:43,040 --> 00:49:47,920
Speaker 1: surviving in an ever changing world that requires adaptation on

942
00:49:48,000 --> 00:49:51,200
Speaker 1: the fly, The ability to work with tools, the ability

943
00:49:51,239 --> 00:49:54,600
Speaker 1: to adapt to changing conditions. All those things are great.

944
00:49:55,040 --> 00:49:58,440
Speaker 1: All those survival traits are great, but they have nothing

945
00:49:58,480 --> 00:50:02,600
Speaker 1: to do with making you know, intelligent capital allocation decisions

946
00:50:03,080 --> 00:50:05,839
Speaker 1: in a system like the capital markets and the big

947
00:50:05,920 --> 00:50:08,520
Speaker 1: I think the biggest of those tendencies is this loss

948
00:50:08,520 --> 00:50:10,920
Speaker 1: of version that we've we've referred to a few times

949
00:50:10,960 --> 00:50:13,399
Speaker 1: that were twice as sensitive to losses. If you think

950
00:50:13,400 --> 00:50:15,719
Speaker 1: about the kinds of errors that we could make ten

951
00:50:15,760 --> 00:50:18,239
Speaker 1: thousand years ago, Let's say we were walking we saw,

952
00:50:18,440 --> 00:50:20,480
Speaker 1: you know, a russell at a russell in the grass

953
00:50:20,560 --> 00:50:23,040
Speaker 1: or something. One type of error is we could get

954
00:50:23,080 --> 00:50:25,799
Speaker 1: alarmed and and and overly defensive and it could turn

955
00:50:25,800 --> 00:50:28,160
Speaker 1: out to be nothing. Call that a little insurance policy

956
00:50:28,200 --> 00:50:30,800
Speaker 1: that you take heed you didn't need to, but you did. Anyway.

957
00:50:31,160 --> 00:50:33,560
Speaker 1: The second mistake you can make is that you say, oh,

958
00:50:33,560 --> 00:50:36,560
Speaker 1: it's nothing and it's alliance. Right, And guess which one

959
00:50:36,560 --> 00:50:39,120
Speaker 1: of those two people survived. Well, it's not who survived.

960
00:50:39,120 --> 00:50:41,160
Speaker 1: It's of those two people, only one of them are

961
00:50:41,200 --> 00:50:46,480
Speaker 1: passing their jeans along the risk aversion. Hey, they managed

962
00:50:46,520 --> 00:50:50,239
Speaker 1: to be around long enough fifteen or twenty years back

963
00:50:50,280 --> 00:50:54,520
Speaker 1: then to to actually have progeny. The people who ignored it,

964
00:50:54,600 --> 00:50:57,799
Speaker 1: who didn't have that risk aversion, they were lunch, Yeah,

965
00:50:57,800 --> 00:50:59,640
Speaker 1: and it makes perfect sense, and it just doesn't work,

966
00:50:59,640 --> 00:51:01,920
Speaker 1: and Mark it's and that's too bad. But if we

967
00:51:01,960 --> 00:51:04,000
Speaker 1: know about it, at least we can adjust to it.

968
00:51:04,480 --> 00:51:07,320
Speaker 1: So I would be remiss if I did not address

969
00:51:07,360 --> 00:51:09,799
Speaker 1: something that you spend a long time talking about in

970
00:51:09,840 --> 00:51:14,840
Speaker 1: the book, which is inflation and the erosion of purchasing power.

971
00:51:15,120 --> 00:51:17,800
Speaker 1: We didn't get to it on the on the broadcast portion.

972
00:51:18,320 --> 00:51:20,960
Speaker 1: Let's let's you had a quote that I really liked

973
00:51:20,960 --> 00:51:23,320
Speaker 1: in the book. You know, when the Ford Model T

974
00:51:23,520 --> 00:51:26,840
Speaker 1: first came out, it costs two hundred and sixty dollars

975
00:51:26,880 --> 00:51:30,160
Speaker 1: that today buys you a single tire. Yeah, a nice tire,

976
00:51:30,200 --> 00:51:32,440
Speaker 1: but a single tire. And and that just shows the

977
00:51:32,440 --> 00:51:34,480
Speaker 1: power over time. It's sort of like death by a

978
00:51:34,520 --> 00:51:37,760
Speaker 1: thousand cuts. In any given year, Inflation is is hardly

979
00:51:37,800 --> 00:51:41,160
Speaker 1: ever massive, other than say the nineties seventies when it

980
00:51:41,200 --> 00:51:43,919
Speaker 1: got to double digits. But even if inflation is two

981
00:51:43,920 --> 00:51:46,719
Speaker 1: percent per year or three percent per year, it's sort

982
00:51:46,719 --> 00:51:49,280
Speaker 1: of a hidden tax acting on you behind the scenes

983
00:51:49,320 --> 00:51:51,839
Speaker 1: that you never really realize until you look back over

984
00:51:51,880 --> 00:51:54,560
Speaker 1: a lifetime. We mentioned I'm twenty nine years old. Since

985
00:51:54,600 --> 00:51:57,439
Speaker 1: I was born, the purchasing power of the dollar back

986
00:51:57,480 --> 00:51:59,920
Speaker 1: then has about been cut in half. So inflation has

987
00:52:00,040 --> 00:52:02,239
Speaker 1: slowly eroded the value of a dollar just in my

988
00:52:02,400 --> 00:52:05,319
Speaker 1: shorter lifetime, I will continue to do so. So the

989
00:52:05,400 --> 00:52:08,839
Speaker 1: key is to position yourself in assets that do well

990
00:52:08,960 --> 00:52:12,719
Speaker 1: on top of inflation, inflation plus inflation plus and And

991
00:52:12,760 --> 00:52:16,400
Speaker 1: the problem is that all of the assets, especially for millennials,

992
00:52:16,400 --> 00:52:18,799
Speaker 1: that we think of as the safest, that will take

993
00:52:18,840 --> 00:52:22,640
Speaker 1: cash as bonds, sure T builds, whatever, whatever you want

994
00:52:22,640 --> 00:52:25,480
Speaker 1: to look at, are in fact the most dangerous over

995
00:52:25,520 --> 00:52:28,919
Speaker 1: the long term because inflation kills their return. So cash,

996
00:52:28,960 --> 00:52:31,839
Speaker 1: let's take T bills net negative real return. Let's take

997
00:52:31,880 --> 00:52:34,840
Speaker 1: T bills for example. Once you get to ten twenty

998
00:52:34,920 --> 00:52:37,160
Speaker 1: thirty year holding periods, and you look back over the

999
00:52:37,239 --> 00:52:41,160
Speaker 1: last hundred years or so. About of those twenty or

1000
00:52:41,200 --> 00:52:45,200
Speaker 1: thirty year holding periods, cash actually has a negative real return,

1001
00:52:45,280 --> 00:52:48,319
Speaker 1: meaning after you take inflation out of the equation, you

1002
00:52:48,400 --> 00:52:51,040
Speaker 1: lose purchasing power, and that's what people think of as

1003
00:52:51,080 --> 00:52:53,879
Speaker 1: the safe asset. There was occasions when over those long

1004
00:52:54,000 --> 00:52:56,680
Speaker 1: term periods, long term bonds again some make people think

1005
00:52:56,719 --> 00:52:59,480
Speaker 1: of as safe on a real basis loss more than

1006
00:52:59,520 --> 00:53:02,720
Speaker 1: forty per cent over a thirty year period, and that's crazy,

1007
00:53:02,760 --> 00:53:05,560
Speaker 1: that is not that is not a safe place for

1008
00:53:05,560 --> 00:53:09,240
Speaker 1: your money because inflation was slowly working against it. Meanwhile, stocks,

1009
00:53:09,320 --> 00:53:11,960
Speaker 1: even after inflation, have never even had in the US

1010
00:53:12,080 --> 00:53:14,839
Speaker 1: a twenty year period of negative real return. So even

1011
00:53:14,920 --> 00:53:17,240
Speaker 1: if you had invested on the eve of the crash

1012
00:53:17,280 --> 00:53:19,920
Speaker 1: in ninety nine and then done nothing and came back

1013
00:53:19,960 --> 00:53:22,200
Speaker 1: twenty years later, you still would have eked out a

1014
00:53:22,239 --> 00:53:25,000
Speaker 1: positive six percent return. It's not a great return, but

1015
00:53:25,080 --> 00:53:27,720
Speaker 1: it's positive, and the same cannot be The same cannot

1016
00:53:27,760 --> 00:53:30,600
Speaker 1: be said of cash and bonds over the longer term.

1017
00:53:30,800 --> 00:53:33,200
Speaker 1: So inflation is key to pay attention to, and we're

1018
00:53:33,200 --> 00:53:37,520
Speaker 1: talking about the pernicious compounding effects of even something as

1019
00:53:37,560 --> 00:53:40,000
Speaker 1: low as two percent over the course of thirty or

1020
00:53:40,000 --> 00:53:43,440
Speaker 1: forty years. You know, we as kids, we used to

1021
00:53:43,480 --> 00:53:46,560
Speaker 1: make fun of my father and our parents, who always

1022
00:53:46,640 --> 00:53:49,319
Speaker 1: used to give us the story. Listen, when I was

1023
00:53:49,360 --> 00:53:52,400
Speaker 1: your age, for a nickel, we could go to the

1024
00:53:52,440 --> 00:53:55,320
Speaker 1: movies for a quarter, we could go to the beach.

1025
00:53:55,360 --> 00:53:58,520
Speaker 1: We could get two hot dogs, fries, a soda and

1026
00:53:58,600 --> 00:54:01,400
Speaker 1: still have money left over for a matten ae. And

1027
00:54:01,520 --> 00:54:04,640
Speaker 1: today all that stuff is fill in the blank. And

1028
00:54:04,760 --> 00:54:07,719
Speaker 1: the joke is, as you hit a certain age and

1029
00:54:07,760 --> 00:54:10,120
Speaker 1: you're not there yet, and I'm just about there yet,

1030
00:54:10,480 --> 00:54:14,239
Speaker 1: you could look back twenty thirty years and say, I

1031
00:54:14,400 --> 00:54:17,919
Speaker 1: remember when you know movies were a dollar fifteen bucks

1032
00:54:17,960 --> 00:54:21,799
Speaker 1: from a movie. That's crazy, it's it's but this is

1033
00:54:21,880 --> 00:54:26,560
Speaker 1: really a pernicious drag on returns that are not achieving

1034
00:54:27,520 --> 00:54:30,799
Speaker 1: any sort of nominal I'm sorry, any sort of real return. Yeah.

1035
00:54:30,880 --> 00:54:32,600
Speaker 1: Most of the time you hear the stock marketing long

1036
00:54:32,680 --> 00:54:35,200
Speaker 1: term returns ten percent, Well not really. Once you take

1037
00:54:35,239 --> 00:54:36,880
Speaker 1: inflation out of there, it's more like six and a

1038
00:54:36,920 --> 00:54:39,839
Speaker 1: half or seven percent, And that's a huge difference over

1039
00:54:39,880 --> 00:54:42,600
Speaker 1: the term. And and same thing with with cash or

1040
00:54:42,640 --> 00:54:44,920
Speaker 1: you hear maybe three percent, well not when inflation is

1041
00:54:44,920 --> 00:54:48,120
Speaker 1: four percent per year. For thirty years. Um, so it's

1042
00:54:48,200 --> 00:54:49,920
Speaker 1: it's behind the scenes, it's hidden, but you need to

1043
00:54:49,920 --> 00:54:51,879
Speaker 1: pay attention to how how does the fact that we're

1044
00:54:51,920 --> 00:54:55,439
Speaker 1: living in a deflationary era impact that? Or is this

1045
00:54:55,840 --> 00:55:00,000
Speaker 1: merely a temporary phenomena. Um. I am certainly no expert

1046
00:55:00,040 --> 00:55:02,920
Speaker 1: on on, you know, the drivers of inflation, and a

1047
00:55:02,920 --> 00:55:05,040
Speaker 1: little suspect that that anyone is. I don't know that

1048
00:55:05,040 --> 00:55:07,480
Speaker 1: anyone has a complete picture of what drives inflation over

1049
00:55:07,520 --> 00:55:10,040
Speaker 1: the longer term. I do know that once once we've

1050
00:55:10,120 --> 00:55:12,680
Speaker 1: left the gold standards and has been kind of moved

1051
00:55:12,680 --> 00:55:15,319
Speaker 1: to a global fiat money system, inflation has been the

1052
00:55:15,360 --> 00:55:19,120
Speaker 1: norm over longer periods of time because there's no real control.

1053
00:55:19,120 --> 00:55:20,880
Speaker 1: And I'm not an advocate of a gold standard or

1054
00:55:20,920 --> 00:55:23,000
Speaker 1: anything like that. Well, it made sense at one time.

1055
00:55:23,040 --> 00:55:26,000
Speaker 1: I can't imagine anyone really believing it makes sense to

1056
00:55:26,360 --> 00:55:30,319
Speaker 1: anyone without large gold holdings believing that going back to

1057
00:55:30,320 --> 00:55:32,759
Speaker 1: the gold standard makes any sense today. Right, But I

1058
00:55:32,760 --> 00:55:36,280
Speaker 1: think there's some compelling evidence that explosion in the supply

1059
00:55:36,360 --> 00:55:38,759
Speaker 1: of money can can lead to inflation over time. And

1060
00:55:38,880 --> 00:55:40,560
Speaker 1: I don't think we're going back to a gold standard.

1061
00:55:40,600 --> 00:55:42,960
Speaker 1: I don't think we should. But but with a fiat

1062
00:55:43,000 --> 00:55:45,920
Speaker 1: money system I think comes long term real inflation that

1063
00:55:45,960 --> 00:55:48,759
Speaker 1: will will be important for millennials. It's something that you

1064
00:55:48,840 --> 00:55:51,800
Speaker 1: have to recognize his reality, even two percent as a

1065
00:55:51,880 --> 00:55:55,720
Speaker 1: drag and have to plan around. And that means having

1066
00:55:56,120 --> 00:56:00,920
Speaker 1: a substantial slug of your investment portfolio in a equities

1067
00:56:01,000 --> 00:56:04,440
Speaker 1: and be global equities that meet the characteristics that that

1068
00:56:04,480 --> 00:56:07,000
Speaker 1: you described earlier. And that's doubly true for young people

1069
00:56:07,000 --> 00:56:08,920
Speaker 1: who have a long time ahead of them. They don't

1070
00:56:09,000 --> 00:56:11,440
Speaker 1: need this money anytime soon. That should be the goal

1071
00:56:11,480 --> 00:56:13,879
Speaker 1: as they're setting it aside and forgetting about it um

1072
00:56:13,960 --> 00:56:16,719
Speaker 1: and so that's doubly true for young people. Anything else

1073
00:56:16,719 --> 00:56:18,440
Speaker 1: you want to touch on that we haven't gotten to

1074
00:56:18,600 --> 00:56:21,400
Speaker 1: before I released you out into the Wild? This has

1075
00:56:21,440 --> 00:56:24,560
Speaker 1: been really great. I appreciate I appreciate the opportunity to

1076
00:56:24,600 --> 00:56:26,160
Speaker 1: come on the show. I love the show. I think

1077
00:56:26,160 --> 00:56:29,120
Speaker 1: we've covered good ground. I'm glad we had a the

1078
00:56:29,120 --> 00:56:34,279
Speaker 1: opportunity to talk about things that apply to millennials. You know,

1079
00:56:34,680 --> 00:56:38,200
Speaker 1: a lot of what we do on this show seems

1080
00:56:38,239 --> 00:56:41,280
Speaker 1: to be geared to people who are either professionals or

1081
00:56:42,000 --> 00:56:45,960
Speaker 1: have been investing for a while, or fifty something or

1082
00:56:46,320 --> 00:56:50,880
Speaker 1: sixty something year old and you know that blurb was

1083
00:56:50,880 --> 00:56:54,240
Speaker 1: was heartfelt. It's the sort of thing that I wish

1084
00:56:54,440 --> 00:56:56,759
Speaker 1: I knew about in my twenties. My four oh one

1085
00:56:56,840 --> 00:57:00,239
Speaker 1: K would be substantially large, or my investment portfolio would

1086
00:57:00,239 --> 00:57:04,200
Speaker 1: be substantially larger had I started even ten years earlier.

1087
00:57:04,239 --> 00:57:07,040
Speaker 1: This is the major bummer about investing is that everyone

1088
00:57:07,080 --> 00:57:10,400
Speaker 1: that's interested in it has squandered the advantage of youth typically,

1089
00:57:10,520 --> 00:57:12,640
Speaker 1: and that young people just aren't worried about it. They're

1090
00:57:12,680 --> 00:57:14,640
Speaker 1: not thinking about it. It's not in their minds. It's

1091
00:57:14,640 --> 00:57:16,920
Speaker 1: not a pressing concern. It's very hard to think a

1092
00:57:17,000 --> 00:57:19,720
Speaker 1: year ahead, let alone forty years ahead. Uh. The sad

1093
00:57:19,760 --> 00:57:22,520
Speaker 1: paradox is that the most potent time to start is

1094
00:57:22,520 --> 00:57:24,760
Speaker 1: when you're young. That's the time when people tend to

1095
00:57:24,800 --> 00:57:28,200
Speaker 1: care the least. What one last psychological study which is

1096
00:57:28,240 --> 00:57:32,400
Speaker 1: really fascinating, So people have a real hard time understanding

1097
00:57:32,680 --> 00:57:37,600
Speaker 1: time understanding their own mortality, understanding you have a finite window.

1098
00:57:38,160 --> 00:57:41,520
Speaker 1: They did a study I'm trying to remember the economists,

1099
00:57:41,600 --> 00:57:46,480
Speaker 1: last psychologist who did the study where they explained essential,

1100
00:57:47,280 --> 00:57:49,680
Speaker 1: here's what it's gonna cost to live, and here's your income,

1101
00:57:49,720 --> 00:57:54,120
Speaker 1: and they explained all these things logically and try to

1102
00:57:54,160 --> 00:57:57,000
Speaker 1: get people to say, hey, I'm willing to put this

1103
00:57:57,120 --> 00:58:01,800
Speaker 1: much money away every um month, and they ended up

1104
00:58:01,840 --> 00:58:05,720
Speaker 1: getting a relatively small amount. Then they use the software

1105
00:58:06,040 --> 00:58:09,080
Speaker 1: where they took a picture of their face and digitally

1106
00:58:09,160 --> 00:58:11,280
Speaker 1: aged it to show here, by the way, here's what

1107
00:58:11,280 --> 00:58:14,240
Speaker 1: you're gonna look like when you're seventy to eighty years old.

1108
00:58:14,720 --> 00:58:19,680
Speaker 1: The photo vastly more effective than logically explaining, and they

1109
00:58:19,680 --> 00:58:24,000
Speaker 1: would get people to commit far more monthly savings because

1110
00:58:24,040 --> 00:58:26,840
Speaker 1: suddenly it becomes real, Oh, I'm gonna be old one

1111
00:58:26,920 --> 00:58:29,160
Speaker 1: day in that working and I need to have some

1112
00:58:29,200 --> 00:58:32,520
Speaker 1: income to live on and not rely on Social Security.

1113
00:58:32,960 --> 00:58:35,400
Speaker 1: And it just goes to show you how easy we

1114
00:58:35,440 --> 00:58:40,080
Speaker 1: are to be fooled, manipulated, or nudged into doing the

1115
00:58:40,200 --> 00:58:43,560
Speaker 1: right thing. That was amazing. I had not encountered that study,

1116
00:58:43,600 --> 00:58:45,400
Speaker 1: and it's always fun to hear about a new one,

1117
00:58:45,480 --> 00:58:48,040
Speaker 1: and I think again highlights what we've been saying, which

1118
00:58:48,080 --> 00:58:51,400
Speaker 1: is appealed to emotion more than anything that you can

1119
00:58:51,400 --> 00:58:53,320
Speaker 1: get people to act. You know, show them a bunch

1120
00:58:53,360 --> 00:58:56,400
Speaker 1: of abstractions and numbers and software. It's not all that compelling,

1121
00:58:56,400 --> 00:58:58,760
Speaker 1: but say hey, here's what you're gonna have to gonna

1122
00:58:58,760 --> 00:59:00,000
Speaker 1: look like this is what you're really going to be

1123
00:59:00,160 --> 00:59:02,080
Speaker 1: dealing with, and all of a sudden they act that's

1124
00:59:02,080 --> 00:59:04,600
Speaker 1: an amazing study. Well, Patrick, thank you so much for

1125
00:59:04,640 --> 00:59:07,560
Speaker 1: coming by. It's been a pleasure having you. UM. We'll

1126
00:59:07,600 --> 00:59:10,480
Speaker 1: get this edited together and out on the weekend. For

1127
00:59:10,600 --> 00:59:13,120
Speaker 1: those of you, UM who want to check out the

1128
00:59:13,280 --> 00:59:16,200
Speaker 1: rest of the series, you can go to Apple iTunes

1129
00:59:16,680 --> 00:59:20,480
Speaker 1: all O. All previous Masters in Business are posted there.

1130
00:59:20,800 --> 00:59:22,600
Speaker 1: We have a great line up coming up with the

1131
00:59:22,600 --> 00:59:25,040
Speaker 1: rest of the year. I'm really excited about some of

1132
00:59:25,080 --> 00:59:28,240
Speaker 1: the names that that you'll see. Uh. In fact, coming

1133
00:59:28,320 --> 00:59:32,080
Speaker 1: up next week we have our interview with Bill Gross

1134
00:59:32,640 --> 00:59:35,680
Speaker 1: UH that will be posted in one or two parts

1135
00:59:36,320 --> 00:59:41,320
Speaker 1: starting I want to say January. UM. Check out my

1136
00:59:41,520 --> 00:59:44,680
Speaker 1: daily column on Bloomberg View. The blog is at Ridholtz

1137
00:59:44,720 --> 00:59:48,280
Speaker 1: dot com. Follow me on Twitter at rid Halts. I'm

1138
00:59:48,360 --> 00:59:51,600
Speaker 1: Barry Ridhults. You've been listening to Masters in Business on

1139
00:59:51,720 --> 00:59:52,680
Speaker 1: Bloomberg Radio.