WEBVTT - Masters in Business: OSAM Patrick O’Shaughnessy (Audio) 0:00:03.240 --> 0:00:08.440 This is Masters in Business with Barry Ridholts on Bloomberg Radio. Hi, 0:00:08.640 --> 0:00:11.399 this is Barry Ridholts. You're listening to Masters in Business 0:00:11.400 --> 0:00:16.600 on Bloomberg Radio. Welcome to our season. We're very excited. 0:00:16.640 --> 0:00:20.400 We have a lot of fantastic shows coming your way. 0:00:21.000 --> 0:00:23.479 Before I tell you about this week's guests, let me 0:00:23.560 --> 0:00:27.800 just give you a little update. We've been on hiatus 0:00:27.800 --> 0:00:31.400 over the holidays, running a few repeats if you missed them. 0:00:32.040 --> 0:00:36.440 We had Jeff Glenlock, Jim Chainos, Mark Cuban, and now 0:00:36.440 --> 0:00:39.680 we're starting with a whole new run of new shows 0:00:39.720 --> 0:00:45.800 beginning uh this weekend, which is January. Before I tell 0:00:45.840 --> 0:00:48.120 you the details about this week's guest, let me just 0:00:48.240 --> 0:00:50.159 tell you a little bit about what we have in 0:00:50.360 --> 0:00:56.320 store for you some fantastic shows. Recording next weekend is 0:00:56.400 --> 0:01:02.320 some guy named William Gross, formally of Pimco. Now with Janice, 0:01:02.760 --> 0:01:05.600 we spoke, or we by the time you hear this, 0:01:06.120 --> 0:01:08.840 we will have spoken for a couple of hours. We've 0:01:08.880 --> 0:01:11.640 been going back and forth about this show. A lot 0:01:11.680 --> 0:01:15.480 of really interesting stuff, enough material that it might even 0:01:15.720 --> 0:01:19.680 end up being a two hour show. So that's fascinating stuff. 0:01:19.760 --> 0:01:22.800 Check out that next week I'm heading out to Seattle 0:01:22.880 --> 0:01:26.800 to interview Howard Marks of oak Tree Capital, really a 0:01:27.040 --> 0:01:32.520 super value investor, and another phenomenal fixed income investor. Uh 0:01:32.560 --> 0:01:36.759 Cliff Fastness of a q R is on our schedule, 0:01:37.360 --> 0:01:41.640 as is Jim McCann of eight hundred Flowers, which in 0:01:41.760 --> 0:01:43.920 response to a lot of requests. Hey, I love the 0:01:43.959 --> 0:01:47.319 interviews and I'm learning a lot about finance and investing, 0:01:47.840 --> 0:01:52.400 but what about things in non financial business. So Jim 0:01:52.480 --> 0:01:54.840 is somebody we've known for a couple of years, and 0:01:54.880 --> 0:01:58.880 he's a really fascinating character who essentially took a single 0:01:58.880 --> 0:02:03.280 flowers shop and turn them into this fantastic, successful, publicly 0:02:03.280 --> 0:02:06.280 traded company. We have a lot of other people queued 0:02:06.360 --> 0:02:08.959 up from outside the world of finance. I think that's 0:02:08.960 --> 0:02:12.840 going to be really interesting, including people from the arts 0:02:12.880 --> 0:02:17.239 and and that could be a really intriguing conversation. Before 0:02:17.240 --> 0:02:19.919 I babbled too long, let me tell you about this 0:02:19.960 --> 0:02:24.440 week's guest. It's a special youth edition of Masters in Business. 0:02:25.200 --> 0:02:30.919 Patrick O'Shaughnessy, author of Millennial Money, all about how young 0:02:30.960 --> 0:02:34.959 people can make a fortune courtesy of their fifty year 0:02:35.080 --> 0:02:38.120 investment horizon. You know, we tend to think of the 0:02:38.160 --> 0:02:43.480 youth today as being really disadvantaged. They came of age 0:02:43.480 --> 0:02:46.880 in the midst of a horrible financial crisis that burdened 0:02:46.880 --> 0:02:50.640 with lots of student loans and and college debt. There 0:02:50.720 --> 0:02:54.760 aren't that many great job opportunities. Patrick takes a very 0:02:54.800 --> 0:02:59.919 contrarian position, which is the youth have the single greatest 0:03:00.080 --> 0:03:03.799 advantage on their side, and that's time you get to 0:03:03.880 --> 0:03:08.200 compound returns for fourty or fifty years. Most people don't 0:03:08.200 --> 0:03:12.079 really start investing seriously into their forties or fifties, or 0:03:12.080 --> 0:03:14.440 at least that's what Patrick says. And by that time, 0:03:14.480 --> 0:03:18.079 you've given up so many decades of compounding, you've missed 0:03:18.120 --> 0:03:20.880 out on so much that you're actually at a disadvantage. 0:03:21.320 --> 0:03:23.760 Even if you're making very little money and putting very 0:03:23.760 --> 0:03:26.960 little aside, you should still do it, says Patrick in 0:03:27.040 --> 0:03:31.840 his book Millennial Investing, because of the miracle of of compounding, 0:03:31.840 --> 0:03:36.080 and one it does two your returns. Essentially, you can 0:03:36.160 --> 0:03:39.320 start later and put more money away, and you'll end 0:03:39.400 --> 0:03:42.360 up with about as half as much as someone who 0:03:42.400 --> 0:03:45.040 starts early, someone who starts in their twenties. So be 0:03:45.080 --> 0:03:48.320 sure and check that out. Uh, with no further ado, 0:03:48.560 --> 0:03:54.080 let me introduce Patrick O'schalnessy, principal at O'Shaughnessy Asset Management 0:03:54.440 --> 0:04:02.160 and author of the book Millennial Money. This is Masters 0:04:02.200 --> 0:04:06.080 in Business with Barry Ridholts on Bloomberg Radio. This week. 0:04:06.120 --> 0:04:10.280 I have a special guest who is unique in two ways. First, 0:04:10.400 --> 0:04:15.640 his name is Patrick O'Shaughnessy. He's the author of Millennial Money, 0:04:15.680 --> 0:04:18.479 How Young Investors Can Build a Fortune. So this is 0:04:18.520 --> 0:04:22.160 a special youth oriented version of Masters in Business. But 0:04:22.520 --> 0:04:26.240 we have a couple of first with Patrick uh Patrick 0:04:26.560 --> 0:04:30.279 is you're born in eighty five, right I was. You're 0:04:30.600 --> 0:04:33.760 thirty yet almost thirty, just about to turn thirty in April, 0:04:33.880 --> 0:04:36.839 so by far you are our youngest guest ever on 0:04:36.920 --> 0:04:41.680 the show. And second, you're the first guest who is 0:04:41.839 --> 0:04:45.720 the offspring of a previous guests co We we had 0:04:45.960 --> 0:04:49.160 um Yale Hirsch and his son Jeff, but they were 0:04:49.200 --> 0:04:53.960 on together, So you're the first um, first official progeny 0:04:53.960 --> 0:04:57.400 of a prior prior guest, so that that makes you unique. 0:04:57.440 --> 0:05:02.040 A little background about pat Rick um obviously born in 0:05:02.160 --> 0:05:08.280 n five, not quite thirty, undergraduate at Notre Dame, surprisingly 0:05:08.880 --> 0:05:12.440 degree in philosophy, not finance, but you ended up becoming 0:05:12.560 --> 0:05:16.159 a chartered financial analyst. How did you find your way 0:05:16.200 --> 0:05:19.440 to finance? So my interest in markets in general, and 0:05:19.800 --> 0:05:23.279 finance even more generally really comes through human psychology. I 0:05:23.279 --> 0:05:26.760 studied philosophy with sort of an unofficial minor in psychology, 0:05:26.800 --> 0:05:28.880 just because I'm interested in how people act and how 0:05:28.880 --> 0:05:31.960 people think. And I think that the stock market represents 0:05:32.000 --> 0:05:35.880 probably the most interesting intersection of all the most interesting disciplines. 0:05:36.160 --> 0:05:39.200 So I sort of backed into it through psychology. UM, 0:05:39.240 --> 0:05:41.320 and that's what got me interested. And then from there 0:05:41.360 --> 0:05:43.640 I went to, you know, the more traditional route studying 0:05:43.839 --> 0:05:46.800 accounting through the c FA, etcetera. But it's people that 0:05:46.839 --> 0:05:49.320 got me interested in marketing. And it certainly doesn't hurt 0:05:49.360 --> 0:05:52.960 that your father is James O'shawna See, who wrote a 0:05:53.400 --> 0:05:56.719 highly regarded book What Works on Wall Street and runs 0:05:56.760 --> 0:06:00.600 the firm um Oceana Csset Management where or a principle, 0:06:00.839 --> 0:06:03.680 I've been extremely fortunate UM. And I say that not 0:06:03.800 --> 0:06:05.760 so much because I have a father who is a 0:06:05.760 --> 0:06:09.000 well known investor, but more because of how he encouraged 0:06:09.040 --> 0:06:11.719 me as a young person really just to love learning. UM. 0:06:11.760 --> 0:06:14.039 It was never about this ratio or that ratio is 0:06:14.080 --> 0:06:17.359 really just about loving to read, loving to investigate. So 0:06:17.440 --> 0:06:19.599 that's the reason I'm so lucky, but lucky for a 0:06:19.600 --> 0:06:22.200 lot of reasons. So let's talk about you as a 0:06:22.240 --> 0:06:24.839 young person, because the theme today is going to be 0:06:25.600 --> 0:06:29.839 the advantages of youth, the things that young people have 0:06:30.080 --> 0:06:32.640 that they may not even realize that works so strongly 0:06:32.680 --> 0:06:35.520 in their benefit. And who better to discuss it than 0:06:35.560 --> 0:06:38.880 it's someone who is a not quite thirty and b 0:06:39.600 --> 0:06:42.760 wrote a book about what millennials should be doing with 0:06:42.800 --> 0:06:46.000 their money. And the funny thing about that is when 0:06:46.040 --> 0:06:50.960 people think about this generation, the thought processes, they're living 0:06:50.960 --> 0:06:52.960 in their parents basement. They don't have a lot of 0:06:53.000 --> 0:06:57.960 economic opportunity. Jobs aren't plentiful, it's tough to get by. 0:06:58.000 --> 0:07:03.320 And you took an extremely contrarian position and you basically said, hey, 0:07:03.440 --> 0:07:05.680 you'll never have a better time to invest in your 0:07:05.720 --> 0:07:07.920 life than when you're in your twenties and thirties, and 0:07:07.960 --> 0:07:09.840 I'm going to write a book about it. Yeah. You know, 0:07:09.920 --> 0:07:12.360 this is true of young people in general, but even 0:07:12.400 --> 0:07:14.760 more so of the millennial generation, just because of what 0:07:14.840 --> 0:07:17.920 they've witnessed. Three catastrophic collapses in the housing market, in 0:07:17.960 --> 0:07:20.840 the stock market, um and we are as people tend 0:07:20.840 --> 0:07:22.920 to be once burned, twice shy, and so we've got 0:07:22.960 --> 0:07:26.160 this very negative view of the stock market. My goal 0:07:26.200 --> 0:07:28.440 with the book was to sort of reverse how people 0:07:28.440 --> 0:07:30.920 think about risk and make them realize that if you've 0:07:30.960 --> 0:07:34.000 got forty years ahead of you, you have huge potential. 0:07:34.040 --> 0:07:36.200 If you start very young, and dollar might turn into 0:07:36.200 --> 0:07:38.880 seventeen dollars, whereas if you wait till forty, like most 0:07:38.920 --> 0:07:41.320 people do, that same dollar on average turns into just 0:07:41.400 --> 0:07:44.760 about five dollars. So, so let's talk about those three crises. 0:07:45.000 --> 0:07:47.880 The dot com crisis, you have the housing collapse, then 0:07:47.920 --> 0:07:51.640 we have the financial crisis. How has that impacted the 0:07:51.680 --> 0:07:55.520 psychology of of your peer group, of the millennials. Well, 0:07:55.520 --> 0:07:58.120 it's really part of our biological heritage. There's one of 0:07:58.120 --> 0:08:01.040 my favorite writers is the anthropologist Diamond, who spent a 0:08:01.040 --> 0:08:03.960 lot of time with indigenous people in Papua New Guinea. 0:08:04.040 --> 0:08:05.960 And when he was traveling with them, one night they 0:08:05.960 --> 0:08:07.720 were setting up camp and he wanted to set up 0:08:07.720 --> 0:08:10.120 a camp below a tree, and they said, absolutely not, 0:08:10.200 --> 0:08:12.160 we won't do it. And he was surprised because the 0:08:12.160 --> 0:08:13.920 tree was fine, it was alive, it hadn't begun to 0:08:14.000 --> 0:08:15.960 rot or anything. But they wouldn't do it. And he 0:08:16.040 --> 0:08:19.240 realized that they take all sorts of extreme precautions against 0:08:19.240 --> 0:08:22.680 even very low probability events, and he called this tendency 0:08:22.800 --> 0:08:27.400 constructive paranoia. Human beings are very sensitive to even low 0:08:27.440 --> 0:08:31.040 probability losses because negative things have a big impact on 0:08:31.040 --> 0:08:34.120 our survival. Now that's great in a primitive setting, but 0:08:34.160 --> 0:08:37.080 in the markets, the exact opposite is true. We say 0:08:37.080 --> 0:08:38.880 better safe than sorry, which is how we tend to 0:08:38.920 --> 0:08:42.480 act biologically, but in markets, typically the safer you feel, 0:08:42.480 --> 0:08:44.560 the sorry you will be in the future. So what 0:08:44.640 --> 0:08:47.439 works on the savannah doesn't work on the Wall Street. Absolutely, 0:08:47.559 --> 0:08:49.720 and and that's just the way we're programming. We've seen 0:08:49.840 --> 0:08:53.360 three catastrophic things that signal to us danger when you 0:08:53.400 --> 0:08:56.680 look at markets, So that makes millennials more risk averse, 0:08:57.240 --> 0:09:00.320 and they tend to run very low stock expo oosure 0:09:00.800 --> 0:09:03.800 and absurd levels of cash in the portfolios they do. 0:09:03.880 --> 0:09:06.599 And some of the most recent surveys show fifty or 0:09:06.679 --> 0:09:08.920 more in cash for twenty five year olds, which is 0:09:08.960 --> 0:09:11.440 just insane because of the power of inflation, you know 0:09:11.520 --> 0:09:13.800 that the value that cash will slowly get stripped away 0:09:13.800 --> 0:09:16.480 over time. Whereas they have very little in stocks, which 0:09:16.600 --> 0:09:19.480 over the long, over four decades, have always been you know, 0:09:19.520 --> 0:09:23.240 the most renuwerative successful asset class. Never never a negative 0:09:23.559 --> 0:09:27.480 UM twenty year rolling period of equities in the US. UM, 0:09:27.720 --> 0:09:30.240 you look at Japan. That's really the exception, isn't it. Yeah? 0:09:30.280 --> 0:09:33.600 Internationally and there's some there's some extreme examples like Japan, Germany, 0:09:33.679 --> 0:09:35.679 some of the World War two countries, But equities over 0:09:35.720 --> 0:09:38.680 the longer term after inflation have been safer than the 0:09:38.679 --> 0:09:42.840 more traditional bonds. In cash compounding, use the famous example 0:09:42.960 --> 0:09:46.800 of the grain of rice on a chessboard. Describe the 0:09:46.840 --> 0:09:50.560 advantage that twenty five year old has if they're looking 0:09:50.600 --> 0:09:53.800 at a forty or even fifty year investment horizon. Well, 0:09:53.800 --> 0:09:55.880 the thing about compounding that makes it hard to take 0:09:55.880 --> 0:09:58.400 advantage of is all the great benefit happens at the 0:09:58.400 --> 0:10:00.320 tail end of life, not in the beginning. So if 0:10:00.320 --> 0:10:02.760 you're investing a thousand dollars now, you might only make 0:10:02.800 --> 0:10:05.720 a few hundred dollars in returns, but the same rate 0:10:05.760 --> 0:10:09.760 of return way later in life represents much bigger sums. 0:10:09.800 --> 0:10:12.240 My favorite example of this is Warren Buffett. Everyone knows 0:10:12.320 --> 0:10:14.960 him as the most successful investor out there. Um, you 0:10:15.000 --> 0:10:17.720 know sixty billion dollar net worth. He was not a 0:10:17.760 --> 0:10:20.880 billionaire until he turned sixty years old, and his superpower 0:10:20.960 --> 0:10:22.920 was that he started when he was eleven years old 0:10:22.960 --> 0:10:25.640 buying shares and the power of compounding. Now, he was 0:10:25.640 --> 0:10:28.240 a great investor, but the power of compounding was what 0:10:28.320 --> 0:10:30.280 led to his great results through time. The same is 0:10:30.280 --> 0:10:33.160 true for young people today. Small a bounds invested now 0:10:33.280 --> 0:10:36.520 can result in huge sums in our fifties and sixties. Patrick, 0:10:36.640 --> 0:10:40.840 in the book, you discussed three factors that are required 0:10:41.880 --> 0:10:44.840 in order for any young investor to succeed, and those 0:10:44.880 --> 0:10:49.480 factors are be different, go global, and get out of 0:10:49.480 --> 0:10:53.320 your own way. Let's let's discuss those in reverse order. 0:10:53.640 --> 0:10:56.360 Let's start with get out of your own way. Sure, 0:10:56.520 --> 0:10:58.600 I think this is actually probably the most important of 0:10:58.640 --> 0:11:01.320 the three because strategy is one thing, but if you 0:11:01.360 --> 0:11:03.640 don't stick to your strategy, you will be in trouble 0:11:03.679 --> 0:11:06.160 in the long term. Investors tend to be their own 0:11:06.160 --> 0:11:10.040 worst enemy, reacting emotionally at exactly the wrong times, both 0:11:10.040 --> 0:11:13.160 in times agreed and in times of panic. So the key, really, 0:11:13.200 --> 0:11:14.960 I think, is to get out of your own way 0:11:15.000 --> 0:11:18.720 by making your investing program as automatic as possible, meaning 0:11:18.760 --> 0:11:22.360 money from your paycheck or bank account is just automatically invested, 0:11:22.440 --> 0:11:24.480 whether it be in your four oh one K retirement 0:11:24.480 --> 0:11:27.600 account or just regular brokerage account, and invested for you 0:11:27.640 --> 0:11:31.160 without you having to take action. Because the more opportunity 0:11:31.200 --> 0:11:33.760 we have to interceed in the portfolio, the worst our 0:11:33.760 --> 0:11:36.960 results are are likely to be. There's been a and 0:11:37.120 --> 0:11:39.120 may have even been your dad who on the show 0:11:39.200 --> 0:11:43.360 told the story that when Fidelity did a review of accounts, 0:11:44.040 --> 0:11:46.880 the accounts that had been the most successful, ones that 0:11:47.000 --> 0:11:50.600 people essentially had forgotten about, just left to the left 0:11:50.600 --> 0:11:54.400 them alone, and those were the highest returning portfolios in 0:11:54.559 --> 0:11:57.480 their whole book of business. There's an amazing you can 0:11:57.559 --> 0:12:00.880 you can overcome all this by just making your investments automatic, 0:12:01.000 --> 0:12:03.439 and for most people that's the easy solution. So four 0:12:03.480 --> 0:12:06.160 O one K, it's really easy. Is there a way 0:12:06.200 --> 0:12:10.480 to make it automatic with just a regular brokerage account? Sure, 0:12:10.520 --> 0:12:12.600 you can set up with almost every company with whom 0:12:12.640 --> 0:12:14.560 you might have an account, you can set up set 0:12:14.600 --> 0:12:17.480 up an automatic transfer from your bank checking account into 0:12:17.520 --> 0:12:21.000 your brokerage account pretty easily, and and that's probably the 0:12:21.040 --> 0:12:23.760 most basic and effective way to do it. So once 0:12:23.800 --> 0:12:27.360 the money hits how does that get disposed into a portfolio. 0:12:27.600 --> 0:12:30.040 So there are certain services that do it for you. Um, 0:12:30.520 --> 0:12:32.400 this is kind of the cutting edge of the meeting 0:12:32.400 --> 0:12:35.120 of Silicon Valley and Wall Street where their software that 0:12:35.160 --> 0:12:37.600 they've built that just automatically handles it all for you. 0:12:37.600 --> 0:12:40.199 There's a number of companies that do it. The biggest 0:12:40.240 --> 0:12:43.520 of them is a company called wealth front Um. There 0:12:43.520 --> 0:12:45.560 there are a number of other great options that people 0:12:45.600 --> 0:12:47.680 can research, but they handle everything for you once the 0:12:47.720 --> 0:12:49.800 money is there, and then you don't have to do anything. 0:12:50.440 --> 0:12:53.520 That's that's great. I know Bennements is a competitor. There's 0:12:53.920 --> 0:12:56.960 personal Capital. There's about a dozen of those. We have 0:12:57.040 --> 0:12:59.439 our own version of it. There. There's a lot of 0:12:59.480 --> 0:13:03.360 different monies that do that. By taking the human element 0:13:03.360 --> 0:13:07.120 out of it, you're removing the emotion, you're moving the 0:13:07.160 --> 0:13:09.880 people being in the way of their own interests. Yes, 0:13:09.920 --> 0:13:13.000 an emotionless investing process will always be better than one 0:13:13.040 --> 0:13:15.440 that involves too much people. So now let's go to 0:13:15.480 --> 0:13:19.440 the second point, which is go global. Obviously referring to 0:13:19.520 --> 0:13:23.520 the home country bias that we see all all over 0:13:23.559 --> 0:13:27.439 the entire investing world. Yeah, I call it portfolio patriotism. 0:13:27.440 --> 0:13:31.200 It's this it's this tendency to prefer companies whose CEO 0:13:31.240 --> 0:13:33.680 as we know, whose products and services we use and 0:13:33.720 --> 0:13:36.080 so on. We just like the familiar, and we don't 0:13:36.120 --> 0:13:39.400 like investing in companies that we've never heard of. Unfortunately, 0:13:39.400 --> 0:13:43.480 that ignores a wealth of opportunities abroad, and very often 0:13:43.520 --> 0:13:46.319 some of the best opportunities and the cheapest opportunities are 0:13:46.360 --> 0:13:49.520 outside of the US. So I encourage investors to build 0:13:49.520 --> 0:13:53.599 a very global diversified portfolio because there are countless examples 0:13:53.640 --> 0:13:57.240 of individual country stock markets. Japan is probably the most 0:13:57.400 --> 0:14:00.719 current and extreme example, having law long periods of time 0:14:00.720 --> 0:14:03.040 where they do badly, but an equal weight to balance 0:14:03.080 --> 0:14:06.640 global portfolio has has really never had a twenty or 0:14:06.800 --> 0:14:10.520 thirty year run of negative performance, even after inflation. Um So, 0:14:10.559 --> 0:14:12.920 I think that a balanced global approach is better than 0:14:13.000 --> 0:14:15.400 just buying stocks in the country in which you live. 0:14:15.880 --> 0:14:19.960 We're speaking with Patrick O'Shaughnessy, author of Millennial Money. Now, 0:14:20.000 --> 0:14:23.120 the third points, or really the first one in your 0:14:23.160 --> 0:14:27.320 list is probably the most challenging one, which is similar 0:14:27.360 --> 0:14:32.000 to the Apple slogan think different. You're saying be different, yes, 0:14:32.160 --> 0:14:34.360 and and this is really a point that is addressed 0:14:34.360 --> 0:14:37.480 specifically at those trying to outperform the market. It's a 0:14:37.520 --> 0:14:40.000 hard task to do and for most investors. If I 0:14:40.040 --> 0:14:42.000 met one on the street, I would say that simple 0:14:42.040 --> 0:14:44.400 index funds are a very good option to get started 0:14:44.720 --> 0:14:47.600 for those that are interested in in owning individual stocks 0:14:47.680 --> 0:14:50.480 rather than just owning the entire market. I think that 0:14:50.560 --> 0:14:53.480 there are certain ways that if you are consistently different 0:14:53.520 --> 0:14:56.440 in these key ways, you can outperform the market over 0:14:56.480 --> 0:14:59.240 the long term. These are things like buying stocks at 0:14:59.360 --> 0:15:03.680 very cheap valuations, buying higher quality companies that themselves earn 0:15:03.760 --> 0:15:07.360 strong returns on their investments, Buying companies that are definitely 0:15:07.400 --> 0:15:10.240 not meddling with the books, that have real cash earnings, 0:15:10.520 --> 0:15:14.160 not quality earnings, high quality earnings um. And it's also 0:15:14.160 --> 0:15:16.160 important to look at recent trends in the market over 0:15:16.160 --> 0:15:18.800 the last say, three to nine months. Companies that are 0:15:18.800 --> 0:15:21.800 the falling daggers sometimes are best avoided. So if you 0:15:21.840 --> 0:15:25.000 can buy high quality, cheap companies that the market is 0:15:25.080 --> 0:15:29.240 just beginning to notice, and do that very consistently through time, 0:15:29.760 --> 0:15:32.760 that has been a strategy that historically speaking, has worked 0:15:32.840 --> 0:15:35.080 very well better than the overall market. The key is 0:15:35.120 --> 0:15:37.320 that you have to be different, and we're gonna come 0:15:37.360 --> 0:15:40.520 back to the checklist that you've created in order to 0:15:40.560 --> 0:15:43.720 be different. But when you end up taking these three 0:15:43.760 --> 0:15:47.720 bullet points, um, get out of your own way, go global, 0:15:47.920 --> 0:15:51.320 and be different, what are those portfolios end up looking like? 0:15:51.680 --> 0:15:54.160 So depending on whether or not the investor is is 0:15:54.240 --> 0:15:56.480 choosing to be very different than the market, it'll end 0:15:56.560 --> 0:15:59.960 up looking quite distinct. You might have always global holding, 0:16:00.040 --> 0:16:02.120 because that's a key part of it. But typically if 0:16:02.160 --> 0:16:05.280 you're a young person the vast majority in equities, you 0:16:05.360 --> 0:16:08.040 might have imbalances in terms of the market sectors. You 0:16:08.120 --> 0:16:10.720 might own a lot of consumer stocks but no energy stocks, 0:16:10.760 --> 0:16:13.000 something like that. You have to have a willingness to 0:16:13.040 --> 0:16:15.080 look very different and not care what's going on in 0:16:15.120 --> 0:16:17.680 the market. Only care what's going on obviously to the 0:16:17.720 --> 0:16:20.760 benchmark or the SMP five hundred exactly. And you know, 0:16:20.760 --> 0:16:22.600 two thousand fourteen it was a hard year. The SMP 0:16:22.680 --> 0:16:25.840 five beat everything else. Um, So you really have to 0:16:25.880 --> 0:16:29.680 have that intestinal fortitude to ignore when you're losing to 0:16:29.720 --> 0:16:33.600 the overall market. But but the combinator, the combined portfolio 0:16:33.800 --> 0:16:38.080 will still be well diversified globally and within the US 0:16:38.120 --> 0:16:40.840 side of things. What sort of names we do you 0:16:40.880 --> 0:16:43.200 tend to look at I know they rotate on a 0:16:43.200 --> 0:16:47.400 regular basis, but you're really talking about high quality companies 0:16:47.440 --> 0:16:50.480 at a relatively low valuation. Yeah, one of I'll give 0:16:50.520 --> 0:16:53.360 one example that's pretty representative of these ideas, which is 0:16:53.360 --> 0:16:57.200 Cgate Technology. It's a hard drive manufacturer. Um, we've owned 0:16:57.200 --> 0:16:59.000 it for about five years and it's been one of 0:16:59.000 --> 0:17:02.000 the best performing hold in our firm's history. It was 0:17:02.040 --> 0:17:05.160 a classic value story where everyone said it's going out 0:17:05.160 --> 0:17:09.520 of business. Hard drives is dinosaur technology, it's all moving 0:17:09.520 --> 0:17:13.320 to the cloud. Um, this industry is going out of business. 0:17:13.359 --> 0:17:17.800 Super cheap valuations, high quality earnings, they were aggressively repurchasing 0:17:17.800 --> 0:17:20.920 their own shares, they were investing in themselves. Um. Those 0:17:20.920 --> 0:17:22.880 are all great things to look for in a company, 0:17:23.040 --> 0:17:24.880 and that would be a kind of a common profile 0:17:24.960 --> 0:17:28.040 the name that that we like. Let's talk about one 0:17:28.080 --> 0:17:32.639 of the biggest trends in investing today, the idea of 0:17:32.840 --> 0:17:38.080 active versus passive indexing. In the book, you start out 0:17:38.119 --> 0:17:43.359 by saying, you know, if nothing else, passive indexing is fine, 0:17:43.560 --> 0:17:46.119 but I think you could do better address that if 0:17:46.119 --> 0:17:48.320 you would. Sure, I think that you know all the 0:17:48.400 --> 0:17:50.879 all the original arguments in the book trying to compel 0:17:50.960 --> 0:17:53.119 young investors to get going are all based on just 0:17:53.200 --> 0:17:56.280 owning the overall market simple passive indexes that you don't 0:17:56.320 --> 0:17:58.480 have to do anything, you just own a slice of 0:17:58.480 --> 0:18:00.440 global business. I think that that is a great way 0:18:00.440 --> 0:18:03.080 to get started, and for the average investor, that's probably 0:18:03.160 --> 0:18:04.880 the best solution. They don't have to think about it much, 0:18:04.880 --> 0:18:07.640 they don't have to spend time researching companies anything like that. 0:18:08.160 --> 0:18:10.359 I do think that for the sort of the second 0:18:10.440 --> 0:18:12.879 level investor that wants to get deeper into the weeds, 0:18:13.160 --> 0:18:15.199 that there are ways to beat the market. You just 0:18:15.240 --> 0:18:17.080 have to do your research and do your work and 0:18:17.119 --> 0:18:20.320 stick to some really proven key principles. So my my 0:18:20.400 --> 0:18:23.400 opinion is kind of twofold. It depends on the individual investor. 0:18:23.640 --> 0:18:25.720 For most people I know that aren't in this business, 0:18:25.760 --> 0:18:28.840 I advocate simple passive index funds because they're cheap. We know, 0:18:28.920 --> 0:18:31.560 they do very well over time, they have good tax 0:18:31.600 --> 0:18:34.280 friendly returns um and you don't have to know much 0:18:34.280 --> 0:18:36.639 about the markets to participate in their growth. You're just 0:18:36.760 --> 0:18:41.520 buying into the global business universe and letting it do 0:18:41.600 --> 0:18:43.800 its thing and getting out of the way. Yeah, all 0:18:43.840 --> 0:18:45.920 of a sudden you've got millions of people working for 0:18:45.960 --> 0:18:48.480 you effectively, and that's that's kind of a powerful concept 0:18:48.520 --> 0:18:50.479 and not trying to pick which the winners will be, 0:18:50.560 --> 0:18:53.640 just participating in the entire thing. But there are some 0:18:53.720 --> 0:18:57.359 issues you have with passive investing, which is similar to 0:18:57.480 --> 0:19:02.400 issues that Rob are not has raised, and um your 0:19:02.520 --> 0:19:04.679 dad has raised and other people. And it has to 0:19:04.720 --> 0:19:09.040 do with the problem with selecting stocks based on market 0:19:09.040 --> 0:19:11.560 cap waving. Yeah, so we we think of market cap 0:19:11.560 --> 0:19:13.919 as a factor like any others, like price to earnings 0:19:13.960 --> 0:19:17.040 or something simple like that. This is an interesting study 0:19:17.080 --> 0:19:19.840 if you broke the market into ten groups equal groups 0:19:19.880 --> 0:19:21.840 of names. So let's say there's three thousand stocks or 0:19:21.840 --> 0:19:24.240 so in the market, three names in each group, and 0:19:24.280 --> 0:19:26.639 the division was based solely on their size. So the 0:19:26.720 --> 0:19:29.120 number one group was the three d biggest stocks, Number 0:19:29.119 --> 0:19:31.919 ten the three hundred smallest, and you ran that simulation 0:19:31.960 --> 0:19:34.800 over the last fifty years. The only really interesting thing 0:19:34.800 --> 0:19:37.000 you would find is that the biggest group, the three 0:19:37.080 --> 0:19:40.639 hundred largest stocks or so, have underperformed the rest of 0:19:40.680 --> 0:19:43.480 stocks by between two and three percent per year on 0:19:43.520 --> 0:19:46.240 an annualized basis. So names that have done the best 0:19:46.280 --> 0:19:49.119 over the long term go on to actually underperform. We 0:19:49.119 --> 0:19:52.119 would argue that the index based strategy is just to 0:19:52.160 --> 0:19:54.400 buy big cap stocks, and then that doesn't make much 0:19:54.440 --> 0:19:57.160 sense that you can do better from a strategy perspective. 0:19:57.160 --> 0:20:00.240 Where indexes have it right is how disciplined and consistent are. 0:20:00.359 --> 0:20:01.960 Talk a little bit about this. Something in the book 0:20:02.000 --> 0:20:05.359 I found fascinating, which is only buy stocks with the 0:20:05.440 --> 0:20:09.199 letter C as an example of what one of the 0:20:09.240 --> 0:20:12.080 flaws in cap weighted indexes yees. So if all you 0:20:12.119 --> 0:20:14.000 did every year was by every name in the market 0:20:14.000 --> 0:20:15.840 that started with the letter C, honestly, you could do 0:20:15.880 --> 0:20:17.560 it just about any letter and the result would be 0:20:17.640 --> 0:20:20.040 the same. You would outperform the market on paper. And 0:20:20.080 --> 0:20:22.000 the reason for that is that it excuse you away 0:20:22.000 --> 0:20:24.000 from just the biggest names and just create sort of 0:20:24.000 --> 0:20:27.240 a random sample of companies that that tended to actually 0:20:27.240 --> 0:20:29.320 do better than the biggest stocks overall. So kind of 0:20:29.320 --> 0:20:32.320 a funny exercise, it is, certainly wouldn't advocate anyone do that, 0:20:32.960 --> 0:20:34.960 but but it's it's powerful to show that just a 0:20:35.119 --> 0:20:38.199 random sampling will do better, an equal weighted random sampling 0:20:38.240 --> 0:20:40.919 than than just a market index on paper. I suspect 0:20:41.000 --> 0:20:42.399 we're going to see an E T F in the 0:20:42.480 --> 0:20:45.399 not two different future called E T F B E 0:20:45.600 --> 0:20:48.480 D f C E t F D just just stocks 0:20:48.480 --> 0:20:50.880 of those letters because someone will someone will end up 0:20:51.359 --> 0:20:54.800 um buying it. So so now let's talk a little 0:20:54.800 --> 0:20:58.480 bit about when you're not buying indexes, when you're putting 0:20:58.480 --> 0:21:02.360 together a portfolio, how do you deal with the behavioral 0:21:02.400 --> 0:21:05.880 issues that you mentioned throughout the books throughout the book 0:21:05.960 --> 0:21:10.280 in terms of how investors get in their own way. So, really, 0:21:10.320 --> 0:21:13.240 we think the solution is to make your approach completely 0:21:13.320 --> 0:21:16.320 model based, meaning you design a model that selects stocks 0:21:16.320 --> 0:21:19.399 for you based on proving key ideas, attributes the common 0:21:19.440 --> 0:21:22.160 stocks that have been successful share and then you stick 0:21:22.200 --> 0:21:24.240