WEBVTT - Joel Greenblatt on Relative Value Investing (Podcast) 0:00:02.200 --> 0:00:06.800 This is Master's in Business with Barry Ridholts on Bloomberg Radio. 0:00:07.280 --> 0:00:11.360 This week on the podcast, I have an extra special guest, 0:00:11.680 --> 0:00:15.920 the return of Joel Greenblatt. Joel is a former hedge 0:00:15.920 --> 0:00:21.200 fund manager. He started Gotham Capital in and put up 0:00:21.239 --> 0:00:25.920 just insane numbers fifty percent a year after all expenses 0:00:26.400 --> 0:00:30.960 for something like seven eight nine years in Gotham was 0:00:31.000 --> 0:00:35.000 closed to outside investors. That essentially became a family office, 0:00:35.000 --> 0:00:37.760 and he ran that through two thousand and nine. He 0:00:37.920 --> 0:00:41.080 was one of the early investors in Michael Burry's hedge 0:00:41.080 --> 0:00:44.360 fund Michael Burry, made famous by both the book in 0:00:44.400 --> 0:00:47.560 the movie The Big Short, and he's now running Gotham 0:00:47.600 --> 0:00:51.440 Asset Management, which has put together a number of really 0:00:51.479 --> 0:00:56.440 interesting mutual funds, including a sort of value weighted SMP 0:00:56.600 --> 0:00:59.680 five index that has beat the index for a couple 0:00:59.720 --> 0:01:03.520 of year is running. It is not a traditional price 0:01:03.640 --> 0:01:07.160 to book sort of value based tilt. It's all about 0:01:07.560 --> 0:01:12.720 future cash flows and moats and relative growth and value. 0:01:12.880 --> 0:01:14.720 Really the best way to think of it as a 0:01:14.760 --> 0:01:19.199 relative value tilts to the index. It's done really well. 0:01:19.319 --> 0:01:22.360 I always find Joel to be a fascinating guy. He 0:01:22.480 --> 0:01:26.280 understands the world of value investing better than most. His 0:01:26.360 --> 0:01:30.600 track record is simply outstanding, and he really has nothing 0:01:30.640 --> 0:01:33.760 to prove, nothing to sell. He's just a fascinating guy 0:01:33.840 --> 0:01:37.520 who's shot the lights out repeatedly. So, with no further ado, 0:01:38.040 --> 0:01:44.640 my interview with Gotham Asset Managements Joel Greenblasts. This is 0:01:44.840 --> 0:01:49.400 Masters in Business with very Ridholts on Bloomberg Radio. My 0:01:49.560 --> 0:01:52.840 special guest this week is Joel Greenblatt. He is the 0:01:52.920 --> 0:01:57.240 principal and co founder c i O of Gotham Asset Management. 0:01:57.520 --> 0:02:00.400 He's been an adjunct professor at Columbia School of Business 0:02:00.440 --> 0:02:05.400 since He is the author of numerous best selling books, 0:02:05.440 --> 0:02:09.320 including You Can Be a Stock Market Genius and The 0:02:09.440 --> 0:02:13.080 Little Book That Beats the Market. His newest book is 0:02:13.160 --> 0:02:19.120 called Common Sense, The Investor's Guide to Equality, Opportunity, and Growth. 0:02:19.680 --> 0:02:24.720 Joel Greenblatt, Welcome to Bloomberg, Thanks Perry. So let's start 0:02:24.760 --> 0:02:28.320 a little bit with the book common Sense. What first 0:02:28.320 --> 0:02:32.160 of all, what motivated you working in finance to write 0:02:32.160 --> 0:02:36.720 a book about opportunity, growth and equality? Seems to be 0:02:37.240 --> 0:02:41.120 a little different than your traditional value investing or is 0:02:41.160 --> 0:02:44.200 it sure? Well, I'm a capitalist. I'd like it to 0:02:44.200 --> 0:02:48.080 to work well in investor in general has a certain 0:02:48.080 --> 0:02:50.760 way of looking at the world. And there are a 0:02:50.760 --> 0:02:54.600 lot of problems that capitalism has led to or the 0:02:54.639 --> 0:02:57.360 way at least we implement it. And and so there 0:02:57.400 --> 0:03:00.600 are certain things that seems fairly reasonable to me to 0:03:00.680 --> 0:03:03.440 suggest of tweaks we can make to the way the 0:03:03.480 --> 0:03:06.360 system works now to make things better for everyone. And 0:03:06.400 --> 0:03:09.440 so you know, most people don't write this book from 0:03:09.480 --> 0:03:12.440 the perspective of a long term investor, and and so 0:03:12.480 --> 0:03:15.200 that's what I did here, and I hope it brings 0:03:15.200 --> 0:03:19.520 another perspective to solving some of these problems, particularly the 0:03:19.520 --> 0:03:22.200 ones that are very important to people now, including inequality 0:03:22.200 --> 0:03:26.760 and opportunity. So let's dive right into issues of opportunity. 0:03:26.880 --> 0:03:29.840 By page count, almost half the book, maybe even more, 0:03:30.560 --> 0:03:34.520 is about education. So let's start. Let's start there. You 0:03:34.520 --> 0:03:38.200 you started a not for profit charter school in New 0:03:38.280 --> 0:03:41.280 York City in two thousand and six. Why did you 0:03:41.320 --> 0:03:43.960 do that and what did you learn? Well? Sure, well, 0:03:44.000 --> 0:03:46.600 the reason I did that is if you look at 0:03:46.600 --> 0:03:50.680 the statistics, if you are black, Hispanic, low income in 0:03:50.760 --> 0:03:54.240 one of our major urban centers, maybe the top fifty, 0:03:54.800 --> 0:03:56.960 your odds of graduating college right now are one out 0:03:56.960 --> 0:04:01.240 of a limit. We know that college graduates earn more 0:04:01.320 --> 0:04:04.520 than high school graduates. High school graduates earn thirty more 0:04:04.560 --> 0:04:10.840 than dropouts. But that's that's huge, and it's not from 0:04:11.240 --> 0:04:13.480 lack of ability, and at least that's part of the 0:04:13.520 --> 0:04:16.600 reason that I got involved in the charter school space. 0:04:16.680 --> 0:04:20.440 Everyone has choice if if you have any kind of 0:04:21.160 --> 0:04:25.880 money in our system and you don't like the school 0:04:26.000 --> 0:04:28.640 in your neighborhood, you can move to a neighborhood with 0:04:28.680 --> 0:04:30.680 a good school, or you can send your kids to 0:04:30.760 --> 0:04:34.680 private school. If you don't have means, you get what 0:04:34.760 --> 0:04:37.479 you get and you don't have a choice. And the 0:04:37.520 --> 0:04:41.040 idea behind charter schools, which just to define them, are 0:04:41.800 --> 0:04:46.159 publicly funded schools run not by the district, meaning run 0:04:46.160 --> 0:04:51.679 by independent operators. And it turns out that the charter 0:04:51.760 --> 0:04:54.720 schools in states where they have high standards of who 0:04:54.800 --> 0:04:58.120 gets to open one and who gets to keep running 0:04:58.120 --> 0:05:02.520 one or obviously if they're closed if they're not doing well, 0:05:02.520 --> 0:05:05.480 those tend to be the states like New York, Massachusetts, 0:05:05.560 --> 0:05:08.600 and California where the charter schools do well. And so 0:05:08.680 --> 0:05:11.640 the idea was to set up a charter school in 0:05:11.640 --> 0:05:14.720 New York City and it's always okay or it's been 0:05:14.720 --> 0:05:17.800 done before. To open one school and put a lot 0:05:17.839 --> 0:05:20.920 of resources into it and make sure that it works well. 0:05:20.960 --> 0:05:23.000 And the idea behind this one was to do something 0:05:23.000 --> 0:05:25.880 replicable and the big hareat Decious goal when we got 0:05:25.880 --> 0:05:29.200 started was to open not one school, but forty schools. 0:05:30.080 --> 0:05:32.800 My business partner John Petrie and I hired a woman 0:05:33.200 --> 0:05:37.599 Eva Moscowitz, who is the CEO UH and founder of 0:05:37.640 --> 0:05:40.400 the Success Network that I'm involved with, and today we 0:05:40.440 --> 0:05:45.360 have forty six schools and kids. And last year, according 0:05:45.400 --> 0:05:48.320 to the state tests in math and English UH, those 0:05:48.320 --> 0:05:54.240 twenty kids in all low income neighborhoods minority neighborhoods outperformed 0:05:54.320 --> 0:05:57.960 every wealthy district in the state, including Scarsdale, Great Neck 0:05:58.000 --> 0:06:00.640 and all the other tops UH just stricts in the state. 0:06:00.680 --> 0:06:03.440 They would be the number one district. What's the lesson 0:06:03.520 --> 0:06:07.039 from that? What can we learn from charter schools and 0:06:07.200 --> 0:06:10.960 bring to public schools that are under performing well. I 0:06:10.960 --> 0:06:15.640 think the biggest lesson would be that it's not lack 0:06:15.680 --> 0:06:18.280 of ability that the kids aren't successful. The kids can 0:06:18.320 --> 0:06:21.120 do it. If you have high expectations, the kids can 0:06:21.160 --> 0:06:24.680 meet them. They just need the right supports and charters, 0:06:24.680 --> 0:06:29.040 of course have some advantages over the district schools. They 0:06:29.360 --> 0:06:31.680 get to select their teachers and keep the ones that 0:06:31.760 --> 0:06:34.520 they think are doing a good job. They can pivot 0:06:34.640 --> 0:06:38.240 quickly to to only do what works or to improve 0:06:38.320 --> 0:06:40.600 things that aren't working, and they can do that very quickly. 0:06:41.520 --> 0:06:45.080 We spent more time in school at our charter than 0:06:45.520 --> 0:06:50.599 the district schools, so that's an advantage and big advantages. 0:06:50.640 --> 0:06:53.760 Parents choose to come, and so it's good to have 0:06:53.920 --> 0:06:56.159 the support of the parents, and that is an advantage. 0:06:56.400 --> 0:07:00.400 In your book, Common Sense, you highlight p. S. One 0:07:00.440 --> 0:07:04.680 seventy two one of the country's best public school. It's 0:07:04.760 --> 0:07:09.760 run by Jack Spatola. What makes him such a special principle? 0:07:10.360 --> 0:07:14.440 Why is that public school not a charter school? Why 0:07:14.560 --> 0:07:19.560 is that succeeding so well versus the average public school 0:07:19.760 --> 0:07:23.560 in any big city. Right, So, the book, as you suggest, 0:07:23.680 --> 0:07:26.679 is not just about charters. It's about good schools anywhere, 0:07:26.720 --> 0:07:31.960 giving good choices. Right, the the kids with the lowest 0:07:32.400 --> 0:07:36.320 UH family that meets, the families with the lowest means 0:07:36.520 --> 0:07:39.520 UH don't have a choice. So it's how can we 0:07:39.640 --> 0:07:42.000 make their district schools better? How can we give them 0:07:42.080 --> 0:07:47.800 choice of a good, good school choice, and they're certainly 0:07:47.840 --> 0:07:51.760 good district public schools. One that I highlight, as you suggest, 0:07:52.160 --> 0:07:55.840 Jack Jack Spatolas, the principal, he just retired for PS 0:07:55.880 --> 0:07:59.360 one SWO in Brooklyn, had to tell you how good 0:08:00.600 --> 0:08:02.520 a really good school can be. And this is a 0:08:02.600 --> 0:08:08.520 district school. Uh. Of the kids, Uh past the math 0:08:09.080 --> 0:08:13.680 exam and past the English systam and in most other 0:08:13.720 --> 0:08:18.360 schools is below. But that's not the special thing. The 0:08:18.440 --> 0:08:23.040 special thing is that that passing math and passing English. 0:08:23.600 --> 0:08:26.680 What are the statistics for the students with disabilities at 0:08:26.680 --> 0:08:31.480 that school? Wow? So in other words, kids without disabilities 0:08:31.520 --> 0:08:33.920 did less than half as well in the in the 0:08:33.960 --> 0:08:36.600 regular district schools. That tells you how good that school is. 0:08:37.000 --> 0:08:42.560 The English language learners passed the English exam at his 0:08:42.679 --> 0:08:46.280 school PS one seventy two in the regular district schools 0:08:46.440 --> 0:08:49.840 with nine, so ten times better. What can be done 0:08:49.880 --> 0:08:53.520 with the school, like Spatola is like PS one two 0:08:54.200 --> 0:08:58.560 that can be ported over to regular public schools. Of 0:08:58.600 --> 0:09:01.720 course that's the right question. Uh. And if you ask 0:09:01.840 --> 0:09:05.400 Jack Spatola, the principle, he would say, having high expectations 0:09:05.440 --> 0:09:09.120 for every child, just keep looking. If something doesn't work 0:09:09.120 --> 0:09:11.120 for a student, find something else that that doesn't work, 0:09:11.160 --> 0:09:14.280 find something else, and keep working. But it's high expectations, 0:09:14.400 --> 0:09:18.560 expecting that each child, including students with disabilities, including impish 0:09:18.600 --> 0:09:21.400 language learners, can do the job with the right supports. 0:09:22.320 --> 0:09:24.720 So he would say that, but I would say that 0:09:24.880 --> 0:09:27.880 only one principle can be the best principle in the state. 0:09:28.800 --> 0:09:35.160 It's probably Jack. It's very hard. It would be wonderful 0:09:35.160 --> 0:09:38.000 if the average principle could be this good, and we 0:09:38.040 --> 0:09:43.800 should strive to get there. But it hasn't happened. Uh. 0:09:43.800 --> 0:09:47.320 And I just point out that good charter schools, you know, 0:09:47.360 --> 0:09:51.080 with still you know that where kids poor and minority 0:09:51.160 --> 0:09:55.240 kids outperform the wealthiest districts, and a school like Jack's, 0:09:55.320 --> 0:10:00.440 where even the kids with disabilities are crushing it point 0:10:00.440 --> 0:10:03.079 out that the kids can do it. So the ten 0:10:03.120 --> 0:10:07.920 out of eleven who are not graduating college, it's not 0:10:08.440 --> 0:10:11.560 from lack of ability. And so the question I posed 0:10:11.600 --> 0:10:13.680 in the book is what can we do for them? 0:10:13.720 --> 0:10:16.240 Because they can do the job. They can do the job, 0:10:16.360 --> 0:10:18.959 and so that's what I used them for. It's a big, 0:10:19.080 --> 0:10:24.000 big question you're asking, how do we move this? Uh, 0:10:24.040 --> 0:10:27.360 you know, Jack's success across the districts, and one of 0:10:27.360 --> 0:10:30.760 the sad answers is that not everyone can be Jack Spatola, 0:10:31.600 --> 0:10:33.720 but of course he should be studied, and so a 0:10:33.760 --> 0:10:36.679 real question should be why isn't what he's done studied 0:10:36.720 --> 0:10:39.880 even more? And it's not. So that's a little sad. 0:10:40.000 --> 0:10:43.240 But right now it doesn't look like those ten out 0:10:43.240 --> 0:10:46.480 of eleven are being serviced. What can we do about that? 0:10:46.559 --> 0:10:48.680 Is what I read about in the book. Let's talk 0:10:48.679 --> 0:10:52.439 about one of the solutions. You write about alternative credentials. 0:10:53.160 --> 0:10:57.360 What are they and how would they work? Uh for 0:10:57.360 --> 0:11:02.600 for students coming from these disadvantage neighborhoods and schools? Yes, 0:11:02.679 --> 0:11:06.520 so I I call it alternative certification. So I point 0:11:06.559 --> 0:11:10.160 out the ten out of eleven that the current system 0:11:10.200 --> 0:11:13.640 isn't working for, and I write in the book, uh, 0:11:13.720 --> 0:11:16.320 you know, I once posed this question when Tiger Woods 0:11:16.360 --> 0:11:19.120 was at the top of his game to my students 0:11:19.160 --> 0:11:21.160 at Columbia. I said, you know, how do you beat 0:11:21.200 --> 0:11:24.680 Tiger Woods? And my answer was don't play him at golf? 0:11:25.520 --> 0:11:29.640 And the idea that I uh suggest in the book 0:11:29.720 --> 0:11:33.480 is something I called alternative certification. And so I'll give 0:11:33.480 --> 0:11:36.360 you an example Let's say you want to work in 0:11:36.440 --> 0:11:42.520 the HR department at Microsoft. What I'm suggesting is Microsoft 0:11:42.679 --> 0:11:47.400 should simply specify which tests, courses or certificates in lieu 0:11:47.480 --> 0:11:51.080 of a college degree that they would consider when judging 0:11:51.600 --> 0:11:55.520 applicants for a high paying job in that particular department. 0:11:56.360 --> 0:12:00.360 So these these things could include a simple literacy asked, 0:12:00.760 --> 0:12:05.360 an online course certificate program, or even a game based test. 0:12:05.640 --> 0:12:10.600 UH Embolists, together with Mackenzie, has created game based tests 0:12:10.640 --> 0:12:13.559 that measured decision making in critical thinking skills. So it 0:12:13.679 --> 0:12:16.200 doesn't have to be a standard test. There's a lot 0:12:16.280 --> 0:12:19.520 of different ways you can test for talent. And so 0:12:19.520 --> 0:12:21.560 what I suggest in the book is that leading companies 0:12:21.600 --> 0:12:26.079 like Google, Microsoft, Amazon, JP, Morgan, UH, they wouldn't have 0:12:26.160 --> 0:12:30.120 to create these tests or courses or administered them. What 0:12:30.160 --> 0:12:33.280 they would do is merely make public a list of 0:12:33.280 --> 0:12:37.440 which tests, which courses, which certificates would be considered in 0:12:37.520 --> 0:12:42.080 lieuisver college degree when selecting candidates for specific jobs. What's 0:12:42.080 --> 0:12:45.160 the hire for passing these things? That's when the whole 0:12:45.160 --> 0:12:48.080 ecosystem was developed. Sorry, well I was going to ask, 0:12:48.120 --> 0:12:51.240 what's the response been like from corporate America? Well, you know, 0:12:51.280 --> 0:12:53.480 the book just came out. So I'm very hopeful, and 0:12:53.520 --> 0:12:55.600 one of the reasons I'm talking on your show, Barry, 0:12:55.760 --> 0:12:59.080 is to get this idea out there. UH. It's already 0:12:59.120 --> 0:13:02.600 starting in ways, but the idea behind it is once 0:13:02.679 --> 0:13:06.160 there's a buyer. In other words, all these big, big 0:13:06.160 --> 0:13:09.000 companies have to do is make the list public what 0:13:09.040 --> 0:13:12.640 we will consider in lieu of a college degree, and 0:13:12.679 --> 0:13:17.240 then UH, the whole ecosystem hopefully will develop of supporting 0:13:17.280 --> 0:13:21.920 online resources and tutoring services UH would develop to help 0:13:21.960 --> 0:13:24.880 applicants pass these tests and courses and meet the new 0:13:24.920 --> 0:13:28.200 demand from these top companies. The great thing about this 0:13:28.280 --> 0:13:31.000 is none of it would require government involvement and the 0:13:31.040 --> 0:13:34.120 cost would be much much lower than the current systems. Now, 0:13:34.160 --> 0:13:36.440 you might ask, what do you do for students with 0:13:36.520 --> 0:13:41.960 disadvantaged backgrounds from disdvan advantaged backgrounds, and I would assume 0:13:42.000 --> 0:13:43.960 there would also developed as long as there was this 0:13:44.040 --> 0:13:46.680 demand at the end of the day for passing these courses. 0:13:47.080 --> 0:13:49.839 Is that there would also be prerequisite courses that would 0:13:49.840 --> 0:13:54.040 develop as well, whether online or in person, teaching, and 0:13:54.080 --> 0:13:57.440 supporting resources that would all be rated like Uber drivers 0:13:57.440 --> 0:14:01.000 and Airbnb rentals. Once again, none of it would require 0:14:01.040 --> 0:14:04.840 government involvement. They wouldn't be setting standards. Uh, they wouldn't 0:14:05.000 --> 0:14:09.040 need government funding. Now this is already starting. Google has 0:14:09.040 --> 0:14:13.040 already created six months certificate courses in a few technical areas, 0:14:13.920 --> 0:14:15.960 which if you pass, they'll consider your for a job. 0:14:16.520 --> 0:14:19.840 But I'm suggesting something much simpler, where companies just set 0:14:19.920 --> 0:14:23.200 standards of which existing tests or new tests that they 0:14:23.240 --> 0:14:25.920 would look at, our courses or certificates that you could 0:14:25.920 --> 0:14:28.520 receive that they'll consider. So I think it would really 0:14:28.600 --> 0:14:32.000 jump start this whole sort of runaround, you know, in 0:14:32.000 --> 0:14:34.680 other words, don't play him and golf, run around the 0:14:34.760 --> 0:14:37.560 current system because it's just so unfair. This is what 0:14:37.640 --> 0:14:40.680 the ten out of eleven could try to pursue without 0:14:40.720 --> 0:14:44.200 any government assistance. It's not ideal, it's not first choice. 0:14:44.240 --> 0:14:46.680 Of course, we want great schools and we could keep 0:14:46.680 --> 0:14:49.480 working at it. But this is something these major corporations 0:14:49.480 --> 0:14:53.680 can do right now. Set these standards, and then hopefully 0:14:53.800 --> 0:14:59.320 this whole ecosystem will get going. Quite fascinating. Let's talk 0:14:59.480 --> 0:15:04.400 a little bit about too big to fail banks. You wrote, 0:15:04.640 --> 0:15:10.400 quote banks are almost wired to get into trouble unquote. Explain, Well, 0:15:10.400 --> 0:15:14.080 it's pretty straightforward. You know, money is spongible, So who 0:15:14.160 --> 0:15:19.840 pays the most of depositors, who lends money to borrowers 0:15:19.960 --> 0:15:25.040 the cheapest and with the easiest terms is who wins? Uh? 0:15:25.160 --> 0:15:30.560 The industry is competitive and it's very leveraged, So pretty straightforward. 0:15:30.600 --> 0:15:35.040 Why thanks are wired to get into trouble? So what 0:15:35.080 --> 0:15:37.680 can we do to make these banks no longer too 0:15:37.680 --> 0:15:41.360 big to fail? How do we make them safer for 0:15:41.440 --> 0:15:45.520 both taxpayers and investors? Well, you know, in two after 0:15:45.560 --> 0:15:49.120 the two banking crisis, there are plenty of regulations, including 0:15:49.160 --> 0:15:52.680 dot frank, and it's made the whole system a lot 0:15:52.720 --> 0:15:57.119 safer than it was. But more regulations have very high costs. 0:15:57.280 --> 0:16:00.000 There's a lot of repercussions from a lot of regulations. 0:16:00.200 --> 0:16:02.840 You know, mostly only big banks can handle them. Smaller 0:16:02.840 --> 0:16:06.440 banks are dropping and closing like flies, and almost no 0:16:06.520 --> 0:16:11.120 new small bank charters are being applied for because small 0:16:11.160 --> 0:16:15.240 banks can't afford all these regulations. Also, under the system, 0:16:15.320 --> 0:16:18.880 banks are penalized for making small business loans. It hits 0:16:18.920 --> 0:16:22.640 them from the new risk factors. So corporate bank loans 0:16:22.760 --> 0:16:26.000 under a million dollars dropped by sev two thousand eight, 0:16:26.440 --> 0:16:28.800 And we know what's happened to new business formation, it's 0:16:28.840 --> 0:16:31.760 way way down. The other problem is we also have 0:16:31.840 --> 0:16:35.920 it solved too big to fail. The Mineapolis Feeds still 0:16:36.440 --> 0:16:38.440 came out with a study saying that it's still two 0:16:38.480 --> 0:16:40.920 out of three chance there will need another government bail 0:16:40.960 --> 0:16:45.200 out in the next century. And so we're hurting small 0:16:45.280 --> 0:16:49.800 businesses and small banks, and we have itself too big 0:16:49.840 --> 0:16:52.560 to fail with all these regulations. So I write in 0:16:52.600 --> 0:16:55.480 the book about I tell a story about in the 0:16:56.240 --> 0:16:59.800 late eighteenth century early nineteenth century, UH, the English used 0:16:59.840 --> 0:17:04.199 to shift their prisoners to Australia, and in one of 0:17:04.240 --> 0:17:10.280 the earliest trips about prisoners died along the way, which 0:17:10.359 --> 0:17:14.840 was horrific. And so how would you solve a problem 0:17:14.920 --> 0:17:17.840 like that. Well, obviously you could solve it with more 0:17:17.880 --> 0:17:21.240 regulations covering the medical care for the prisoners and food 0:17:21.280 --> 0:17:25.840 on board and safety and cleanliness, and put more government 0:17:25.880 --> 0:17:28.120 monitors on board. There's a lot of things you could do, 0:17:29.000 --> 0:17:32.320 uh to try to solve that problem. The other thing 0:17:32.400 --> 0:17:36.439 you could do is to change the incentives from the 0:17:36.480 --> 0:17:41.440 beginning and say to the ship captains, will pay you 0:17:42.119 --> 0:17:45.920 for the prisoners to get to Australia alive and well, 0:17:46.000 --> 0:17:49.439 and will penalize to you for those who don't. Right, 0:17:49.520 --> 0:17:53.000 So it's setting incentives up from the beginning rather than 0:17:53.040 --> 0:17:57.600 micromanaging all the regulation. And so I suggest sort of 0:17:57.600 --> 0:18:01.040 the same thing with banks. You know, and a restaurant fails, 0:18:01.440 --> 0:18:05.320 the economy doesn't skip a beat. It's not true with banks. Uh, 0:18:05.920 --> 0:18:10.280 the financial systems too big, it's too intertwined, and and 0:18:10.359 --> 0:18:14.719 we need to do something right now. We're really the backstop. 0:18:15.280 --> 0:18:18.240 We do have to bail out the banks if things 0:18:18.240 --> 0:18:21.800 turn bad, especially the biggest ones. And so one of 0:18:21.800 --> 0:18:24.160 the clear answers would be, if you know there's less 0:18:24.160 --> 0:18:26.439 than ten percent equity cushion in the banks. There have 0:18:26.480 --> 0:18:29.040 been a lot of things in Dot frank that, you know, 0:18:29.400 --> 0:18:33.159 go to risk controls, types of equity, things of that nature. 0:18:33.960 --> 0:18:36.359 But I suggest in the book that if we've brought 0:18:37.000 --> 0:18:40.320 if we set the incentives up correctly up front, so 0:18:40.359 --> 0:18:43.680 that you have twenty to equity, and what I suggest 0:18:43.760 --> 0:18:47.280 is a new type of preferred, not not common equity, 0:18:47.320 --> 0:18:50.040 but to increase that ten percent common equity to twenty 0:18:50.080 --> 0:18:53.680 or thirty percent using a new type of preferential preferred, 0:18:54.119 --> 0:18:58.920 where the preferred is deductible for the bank, it's tax 0:18:59.000 --> 0:19:04.160 free for the holders. So obviously it's helping the banks. 0:19:04.200 --> 0:19:06.359 But when things go back to the banks, if you 0:19:06.440 --> 0:19:08.879 now have thirty equity, anything that goes back to the 0:19:08.880 --> 0:19:12.440 bank's problems is like the restaurant failing. No one really cares. 0:19:12.480 --> 0:19:14.880 It's an equity holder, and I suggest the incentives are 0:19:14.880 --> 0:19:18.600 set up that both the board and management are incented 0:19:18.640 --> 0:19:24.240 by the combined value of the equity, and they preferred 0:19:24.720 --> 0:19:27.399 as if they're staple together is one security. So we 0:19:27.520 --> 0:19:30.560 set the incentives up correctly. You still have a leveraged 0:19:30.560 --> 0:19:35.280 return from the common equity portion, but if there's any problems, 0:19:35.359 --> 0:19:39.040 it would be covered by the preferred holders. It sounds 0:19:39.080 --> 0:19:41.760 like we're giving a bonus to the banks to make 0:19:41.840 --> 0:19:44.560 this deductible for the banks and to make a tax free, 0:19:45.359 --> 0:19:48.200 But actually we won't have too Big to Fail anymore. 0:19:48.200 --> 0:19:50.160 Will help plenty of equity, and they'll cover their own. 0:19:50.240 --> 0:19:53.840 The losses will fall where they should, the incentives will 0:19:53.840 --> 0:19:56.600 be aligned correctly. From the beginning, it's it's a pretty 0:19:56.600 --> 0:20:00.880 simple solution to a difficult problem. Right. That would require 0:20:00.920 --> 0:20:04.880 a little bit of legislation to both create that class 0:20:04.920 --> 0:20:08.280 have preferred, make it deductible to the bank, and make 0:20:08.320 --> 0:20:11.760 a tax free to the investors is and essentially you're 0:20:11.800 --> 0:20:15.439 asking the investing public to step in in place of 0:20:15.440 --> 0:20:18.800 the taxpayer to make sure banks have a big enough 0:20:18.840 --> 0:20:22.440 capital cushion. Right, we're already supporting banks for good reason. Right, 0:20:22.480 --> 0:20:25.080 we already support them so that depositors don't lose their 0:20:25.119 --> 0:20:28.520 money and we don't have another depression. So this is 0:20:28.560 --> 0:20:30.399 more up front way of doing it. If we're just 0:20:30.480 --> 0:20:32.399 a backstop that's going to have to back stup in 0:20:32.400 --> 0:20:36.280 a crisis, we're there, but it's kind of hidden here. 0:20:37.080 --> 0:20:39.240 We take care of it up front. Yes, we're giving 0:20:39.240 --> 0:20:42.919 a benefit just for the preferred but we're very upfront 0:20:42.920 --> 0:20:46.560 about it. And we then align the incentives exactly how 0:20:46.560 --> 0:20:49.200 they should be. That share hoopers, whether the preferred to common, 0:20:49.240 --> 0:20:51.679 will take all the losses, not the government. And this 0:20:51.760 --> 0:20:54.840 solves too big to fail because even if there's a 0:20:54.880 --> 0:21:01.520 major crisis and banks um lose their capital, it doesn't 0:21:01.560 --> 0:21:04.320 wipe them out. If I remember in the book, banks 0:21:04.359 --> 0:21:08.399 currently a running seven eight of capital reserve? Is that 0:21:08.440 --> 0:21:10.880 about right? They are? And I go, I go through 0:21:10.920 --> 0:21:13.080 the map, I mean, you know, with all the different 0:21:13.119 --> 0:21:18.119 risk controls, and and then there's uh subordinated debt that 0:21:18.320 --> 0:21:21.560 turns into equity now. But I argue in the book 0:21:21.560 --> 0:21:23.640 that we're not going to really pull that lever. We're 0:21:23.680 --> 0:21:27.159 not going to force some big bank to convert its 0:21:27.160 --> 0:21:29.919 subordinated debt into equity, even though that's one of the 0:21:29.960 --> 0:21:34.040 options we now have. And and that's because it will 0:21:34.119 --> 0:21:36.879 cause a crisis of its own. It will cause a cascade. 0:21:36.960 --> 0:21:41.080 And that's what Neil Cashcarry argues too at the Minneapolis 0:21:41.080 --> 0:21:44.600 head and I agree with that. So if we make 0:21:44.680 --> 0:21:50.080 this new type of preferred available, it becomes strictly voluntary 0:21:50.119 --> 0:21:53.040 for the banks to do it, or are they obligated 0:21:53.080 --> 0:22:00.040 to change their capital structure to have UM cap it 0:22:00.119 --> 0:22:04.080 all in reserve with this new type of preferred share class. Right, 0:22:04.119 --> 0:22:07.600 So if they want to be free of certain regulations 0:22:08.640 --> 0:22:13.200 that are protective otherwise, they can issue this preferred and 0:22:13.280 --> 0:22:17.320 therefore take the risk themselves. Otherwise they'd be subject to 0:22:17.359 --> 0:22:19.359 a lot of restrictions on the type of loans they 0:22:19.359 --> 0:22:21.119 can make and things of that nature. So, which is 0:22:21.160 --> 0:22:24.760 stuff we're already doing quite fascinating. Let's talk a little 0:22:24.760 --> 0:22:29.600 bit about what's going on with young people today investing UM. 0:22:29.640 --> 0:22:32.240 What do you think of the rise of Robin hood investors. 0:22:32.640 --> 0:22:35.840 Is this a good thing or is this just board 0:22:35.920 --> 0:22:41.160 millennials at home without access to sports or socializing. Sorry, 0:22:41.160 --> 0:22:43.639 I don't think it's a great thing. I think it 0:22:43.760 --> 0:22:46.240 is good to be exposed to investing for most people, 0:22:46.280 --> 0:22:49.720 and to be thinking about saving for retirement. But I uh, 0:22:49.760 --> 0:22:52.199 you know, when we saw on the internet bubble, you know, 0:22:52.840 --> 0:22:55.679 you know, trade and the other discount brokers, most of 0:22:55.680 --> 0:22:59.240 those people lost a lot of money. I think you're 0:22:59.240 --> 0:23:01.320 speculating with out knowing what you're doing is not a 0:23:01.359 --> 0:23:04.560 great idea. And so you know, I wrote a book 0:23:04.560 --> 0:23:06.600 called The Big Secret, and I think you've heard me 0:23:06.680 --> 0:23:08.720 say it's still a big because no one bought that 0:23:08.800 --> 0:23:13.320 particular book. But it talks about the best performing mutual 0:23:13.359 --> 0:23:15.359 fund I wrote in two thousand eleven for the decade 0:23:15.400 --> 0:23:17.560 two thousand or two thousand and ten, and that one 0:23:17.640 --> 0:23:20.280 was a year when during a decade where the market 0:23:20.320 --> 0:23:22.880 was flat. Uh, Yet the average investor in that fund 0:23:22.920 --> 0:23:25.400 managed to lose eleven percent by moving in and out 0:23:25.400 --> 0:23:29.600 at all the wrong time. And that's because people are emotional. 0:23:29.640 --> 0:23:32.240 If you don't really understand what you're investing in, you 0:23:32.320 --> 0:23:34.360 pile in When things are going well, you pile out 0:23:34.359 --> 0:23:37.200 when they're not going well. When something's working, you put 0:23:37.240 --> 0:23:39.880 more in. When it's not working, you put less in, 0:23:40.440 --> 0:23:42.439 and you do you make all the wrong moves, and 0:23:42.480 --> 0:23:46.320 I think when things turn around for these investors, it'll 0:23:46.520 --> 0:23:49.359 end up not great. So you've been teaching for a 0:23:49.400 --> 0:23:53.280 long time, not only lecturing NBA students at Columbia, but 0:23:53.359 --> 0:23:56.640 you also UH teach a bunch of ninth graders at 0:23:56.880 --> 0:24:01.280 high school in Harlem. What's the difference between those two 0:24:01.359 --> 0:24:06.760 students and what do you try and communicate to each group? Sure, well, 0:24:07.560 --> 0:24:10.560 it's an interesting question. You know. I taught a couple 0:24:10.600 --> 0:24:14.520 of years of the ninth graders for a semester and 0:24:14.880 --> 0:24:18.280 I tried to at a very early age, explained to 0:24:18.320 --> 0:24:21.399 them the concept of compounding, and I actually put on 0:24:21.440 --> 0:24:26.320 the UH front of their UH little notebooks and a 0:24:26.440 --> 0:24:30.480 compound interest example where if you start saving an age 0:24:30.600 --> 0:24:33.800