Brutally honest guide to not losing money in the market

If you could tell me something in the next 15 minutes that would make me a better investor, what's with the first point you would just hammer into my head? Oh my God, put the (beep) phone down, stop trading. ♪ I feel like I could rule the world ♪ ♪ I know I could be what I want to ♪ ♪ I put my all in it like no days ♪ ♪ All for the road ♪ ♪ Let's travel never to keep back ♪ So, I think the interesting place to start is we've had a few different people from the school of investing wisdom come on. Sort of the value investing genealogy. And me and Sam, although we are not investors, we're definitely like entrepreneurs first, and then investing as a sort of hobby sport type of thing. We're so attracted to it. We love the sort of investment wisdom, especially your version, which is the aw-shocks common sense version of investing, which is less about how to be super smart and do advanced things and just how to be less stupid than you already are, and don't worry, you'll be fine. And so, I'm excited to talk to you. You have a cool story. You started off really in the content game and the media game, blogging back in geocities early on with podcasting and built a large investment advisory shop called, named after yourself. I think you guys got to what-- - That was a place holder, by the way. That was not supposed to be permanent. Like, let's just call it Ritholz for now, someone else said, and we'll find a better name, and then we never found a better name. The background is, go to law school, do really well, hate being a lawyer, a client is running, a trading desk that was a predecessor shop to E-Trade. And so I started on a trading desk and found it was just mayhem, it was just random and volatile and I was more fascinated by why the people around me, some days were killing it, some days were getting killed. Like, what's going on with their process? And that sent me down the rabbit hole of behavioral finance. It just was the only explanation I found as to why the same person could be doing really well one week and applying the same process gets you'll lack the next week. It's decision making, it's emotions, it's cognitive biases. - Can you explain your Christmas tree analogy for constructing a portfolio? - Sure, that's really easy. So we know that historically, very few people beat the index on a regular basis. In any given year, less than half of active managers beat their index. You take that to five year, it's something like 21%. You take it to 10 years, it's less than 10%. One out of 10 people. - So that includes like huge firms. - Who's everybody? - Got it. - In a active mutual fund, ETF, hedge fund, whatever. And then go to 20 years and it's a handful of names, you know, Peter Lynch, Juan Buffett, et cetera. So if the core of your portfolio is a broad index, you know, you can't get alpha, meaning outperformance, if you're not at least starting with beta. And when we say people don't beat their index, it means not only are they not getting with the market, it gives them, they're getting less than that. So forget beating with the market gets, they're not even getting with the market gets. So pick a number of 50, 60, 70% of your portfolio is that core. And by core index, I mean, US BroadBase Market Indexes, Vanguard's VOO last week became the first ETF over a trillion dollars. And that's just a super low cost, broad index. You wanna own some overseas stocks, that overseas indexes, that's fine. Now the tree is the garland, the decoration, the lights, the tinsel, that's whatever stink of your own, you wanna put on your portfolio. So if you like momentum, great, add that. You want a little more tech. However you wanna decorate it, you know, we've looked at these assortments of different portfolios. They all more or less end up in a similar place, some are a little better, some are a little worse. They all end up traveling the index. If two thirds of your money is in a broad index, well, at least you know you're starting with that basis point. And hey, I think Japan is great. I'm gonna own EWJ or I think India is the next big country after Korea. So I'm gonna own that ETF. If you wanna have a little bit of decoration on the tree, that's fine. Just recognize you're aiming to outperform and the odds are very much that you're gonna underperform. So is this a little bit like would you do a diet? And they're like, yeah, we're gonna do a cheat meal on Sunday and it's not that the cheat meal is good for you. It's just that it's probably the only thing is gonna keep you on the guard rails of the other six days of the week being on track. Is that why you even have the decorations or would it just be better to be 100% in the passive index that's called a day? - So my cheat meal is the cowboy account. We have clients, listen, what's more fun, what's sexier than talking about investing in startups, investing in the hot new publicly traded technology. You look at all the things that we talk about, the media, television, print, web. It's never about own a broadly diversified portfolio of low cost indexes, rebalance every few years, seeing a few decades. Now what do you do with the other 23 hours and 59 minutes a day if you have to fill it with content? So all this sexy news, all this exciting stuff, that's 90% of the fire I always say. - Would that be the best finance channel? They just say that at the top of every hour and then they just play like home alone reruns for the next 59 minutes. And actually those investors would do way better than anybody watching. - I tell the metaphor of this little gardening channel and they have a tree cam, they plant a tree and it's just very bucolic and relaxing and it's just there and everybody is happy with it. And then the channel gets bought by private equity and now they got to sex it up. So everything becomes a fake conflict. That's the wrong tree for this area, too much water. You planted it too deep. No, it's not deep enough. It's not getting enough. And meanwhile the tree could not care less about what they're saying. It just quietly grows. And that is how I think of the media and the broad index say what you want, Vanguard and BlackRock have between the two of them have $25 trillion in assets because they've dominated low-cost indexing. And I think the financial crisis was very much the last straw for mom and pop investors. Now you have a new generation of people on draft kings and Robinhood speculating but everybody who's over 40 kind of lived through this and said, you know what, I'm going to take my ball and go home. And by ball, I mean capital and by home, I mean BlackRock and Vanguard. And before '08 '09, Vanguard was under a trillion dollars. They're like $11 or $12 trillion. BlackRock is 13 or 14 trillion. Like these are giant, giant firms. And so that's kind of what happened. That's the base core. And the tree just keeps growing. What's the biggest return when your clients has had via their cowboy account? - So we've had people that have had some Bitcoin when it skyrocketed. We've had clients that had a lot of Tesla that blew up, you know, in 20 and 21. And it exploded, heading into the pandemic. Though people that in their account had like, Teladoc and Zoom and Peloton, and they just exploded, but what always happens, it's so hard to sell something 'cause most of our cells, like I own Dappel, when the iPod, not iPhone, iPod came out, who was $15 a share, 13 cash, there's no downside. And it tripled, it went up to 45. And I thought I was a genius selling it. And then it proceeds to gain another 9,000%. But we've seen that, you know, one of my favorite stories in the book is the CEO of Peloton wasn't getting especially great advice. And one point on paper he was worth $2 or $3 billion. And just leveraged himself to the health, bought a whole bunch of stuff. Then of course, as the pandemic starts to, as the vaccine starts going around and we start to see the light at the end of the tunnel, Peloton crashes. He must have taken a whole bunch of stock loans against that capital, had a $60 million place and he's tamped in, had to sell that, was just liquid dating everything. And just, you know, it's always a shame when you see that. I mean, how many disasters do we have to live through before you realize any stock can go to zero? So anytime you're trading an individual name, the odds, Hendrick, Hendrick, Besenbinder at Arizona State, business school did a couple of studies and he basically found out that the entire value in the market comes from between one and two percent of stocks. So what are the odds? 50 to 100 to one? That the company that you love so much that's won up so much this year is going to do it for another 10 or 20 years. You want to hear something funny Sean? I, we did a podcast with Lloyd Blankfein the other day, you know, the, yeah, he's got a book out. Yeah, he's, it's great book and he's, you know, for the lesson, he's the former CEO of Goldman, he's a big shot, a great guy. He told me, I was like, you're retired. What do you do now? He's like, I love to day trade. He was like, he goes, in fact, I knew I was gonna do this podcast for two hours and it kind of made me anxious 'cause I'm always grabbing my phone to look at my stocks and so I had to put all my orders in advance in preparation 'cause I'm not gonna be available. And he's like, right now, I wanna look at my phone right now. And then after the podcast, I was like, well, what do you get to do now? He's like, well, market's closed, so I don't have anything else to do. I guess I'll walk home and I don't know how his portfolio, he said 70% of his net worth. I think he said that, I don't quote me, but something like that is in his pickings. And so he said he's doing good, but it was just so funny. And what's interesting is that I'm sure he's doing great. If anyone's gonna do great, it's probably someone like him. That said, it's like even if you're a Titan of Initiary, you're on top of the world, you know everyone, you're a who's who, there's probably a world where he's gonna make every single mistake, the same mistake that an 18-year-old degenerate Robin Hood trader is going to make. And I find that's interesting that we all still do these things. - Lloyd, listen to me, put the (beep) phone down, stop trading. 70% of your net worth should be in munibons, paying you a huge tax-free yield. You wanna dick around with a few million dollars, knock yourself out. But if you're actively trading 70% of your net worth, which is a couple of billion dollars, I am disappointed to tell you that you're making the biggest risk adjusted mistake of your career and the schmuck that used to run Goldman Sachs should know better. Stop day trading. - Looks like I'm not invited to, I'm not invited to Shabbat dinner anymore, so thanks Barry. - Oh my God, I hope your memory, your numbers are wrong. So here's the fascinating behavioral side of that. (beep) - On the show, we have spent hours talking to some of the best investors alive. Well, lucky for you, the team at HubSpot, they have pulled out the principles that matter most and turned it into a very simple, easy to read, wealth guide. It's 35 principles from the top investors. We're talking guys who have been on the pod, like Howard Marx, Moniche Pabrai, Morgan Housel, Kathy Wood, and a ton of others. So these are all their frameworks, their mental models, their rules, basically how to play the long game and how to avoid ruin. You can get it in the link below. (upbeat music) - We see this all the time, I mentioned the clients. Hey, do I buy a Ferrari or not? The folks who are, and I mean this in all seriousness, to Lloyd, people who a guy like him works really hard his whole career, constantly striving and saving and investing and putting money away and accumulating stock options. And going through all this, it is really difficult. Even for people who are masters of the universe, billionaires, to recognize and just stop and say, I won, hey, I won, I don't have to put this much capital at risk because over the decades, I have just seen that story play out and end badly. Hey, I'm sure Lloyd will be fine. He doesn't have to take financial advice from little on me, but anybody who walks into the office with a giant portfolio, the challenge is, how do we convince you that you've won and how do we make you create a portfolio that is highest probability of reaching whatever your goals are? And PS, if your goal is just more, well then you're gonna be disappointed both in your portfolio and your life. - You mentioned something about selling and I thought there was two interesting things in your book about selling. One was about panic selling and the data around what happens with panic selling. The other was that, there was some study about hedge fund managers where their buys were actually good but their sells were terrible. And I wanted, can you explain those two ideas around selling? - So again, a lot of behavioral finance research behind this, it turns out that people panic sell into a market crash, something like a third of them never return to equities. So let's just use either the 2020, 34% pandemic sell off for more likely the 0809 57% market crash. Imagine selling down 57%, not getting back into equities and watching 15% a year compound over that entire period. It's shocking. So you take a million dollar portfolio, you're out at like 450,000 net worth. If you never would have sold it, it would be worth 10x today. It would be 4.5 billion. And to be fair, you are getting a percent or two up until 2022. Now you start to get 4% in a money market, 3.7% today. But that doesn't compare to a 10x and it doesn't keep up with inflation. So that's the first data point that's shocking. Panic selling to a portfolio, one of three people never get back into equities. - The hedge fund, the buys are good but the sells are worse than just if they sold at random. So I love this study. It's by Alex Eamis, who is a University of Chicago professor. But they did this study where they looked at all these buys. And my explanation is the buys a rational spreadsheet database, the sales row is emotional. But the clever thing that Professor Eamis did was, hey, how can we tell how good these sells were? I know instead of selling the company that the manager wanted to sell, let's randomly pick anything else that's in this manager's portfolio when sell that instead. And it turned out that the random sells outperformed the manager selected sales by something like 150 to 200 basis points. Maybe it was even more, it was some crazy amount. And it's like, it makes sense that the buys are thoughtful and logical. But the sells very often are emotional, impatient. Sometimes the stock doesn't work out right away. People sell it even though the underlying thesis was correct. Sometimes something else, bright and shiny comes along and you gotta sell something. So you have money to buy that. It's an amazing data point and it just goes to show you, most of our decision making is bad. And so one solution, make fewer decisions. Hey, can I, I'm gonna pick a friendly fight with you. Sure. So you say by low cost index funds, I'm on board with you. Anyone who's listening to this pot knows you're speaking my language. But why would I pay you a fee then to do that? You don't have to. The our whole business model from day one has been, so we've been writing in public myself and my partners. Hey, you could do this yourself. You don't need anybody. You just need put together a broad portfolio of low cost indexes, manage your own behavior, stay out of your own way and check in on it once, twice a year. That's it. And there are a bunch of people who said, well, I like the advice, but I have a little more complexity in my portfolio. I have tax issues, I have state issues, I have whatever I need some help with this. We don't have minimums. We set up different levels of, we have two digital platforms, one for under a quarter million dollars and one for a quarter million to a million. But our whole line of bullshit has always been, do it yourself, you don't need our help. And it turned out something like 0.01% of our readers said, I don't have the time, I don't have the discipline. I'm not interested in this crap. I pay someone to do my taxes. I pay someone to mow my yard. I'm gonna pay you guys to manage our, our money. I did a post a couple of weeks ago about organizational alpha. And if you beat the market by 50 basis points or are below the market by 50 basis points, clients could not really care less about that. However, if you manage to quarterback their finances in a way that our tax team has done a great job minimizing capital gains taxes, we use a couple of complex products. And I always think simple is better than complex unless it really solves a sticky problem. So direct indexing really helps with that. Sam, do you direct index or do you know what that is? Yeah, I know what it is, I don't do it. Sean's, people make fun of me very on the show because I am a very strict, like at this point, it's a little bit like 90, 10 equities and bonds. But I don't even think you need the 10. You got 30 years before you need the money. Why drag the portfolio down with bonds? Which bottom is somewhat controversial? It just helps. It's a mostly emotional decision. But direct indexing, it's summarized as instead of buying an index fund, you have a program that basically buys the stocks of the index. Right. The components of the index in the same proportion. It seems like over the course of, like for example, the way that my personal finances are set up, I don't intend, I live off my income. I don't ever intend to sell my direct or my index portfolio in case, I guess I would sell an emergency. But why would I do direct indexing if I don't intend to sell it? I love that question. So you guys have both sold startups and ended up with substantial capital gains. And so in any given year, even when the markets are up, there's some 20, 30, 40% of stocks that are down. And of that group that's down, there are some that are down substantially. So if you have, I think is 700 or 800 positions, the S&P 5. 500 is 500 you look at the bottom death style the bottom 10% of stocks and All right, this this small cap biotech is down 40% I'm gonna sell it and replace it with something that looks very similar another small cap biotech that's down in the same space I Harvest that loss the portfolio value doesn't change the way the portfolio Shaint trades doesn't change but if you do that every year you could pick up 75 85 basis points in Q1 of 2020 when the market was down 34% oh, Seanacy did research study on direct indexing their study said that it was 400 plus basis points of losses Harvest did and replaced with very similar companies and when the recovery happened it it matched the performance of the index because effectively It's the same thing so founder stock IPO stock sale of a business inheritance High concentration positions every now and then someone comes in and says hey, I have a 10 million dollar portfolio when I've owned fill in the blank Apple for 15 years and now it's 90% of my portfolio How do you get them out of that position without paying a giant cap gains tax and so this has been like a very effective way to To do that. It's not for everybody. It adds complexity. It adds a little bit of cost not much but some But it's definitely useful for that for most people. I don't think it's necessary Hey, let's take a quick break. You know that feeling when strategy is done the brief is written everyone's aligned and you realize someone still Let's sit down and actually create all the content that someone is usually you and it's due tomorrow Well the breeze assistant from HubSpot can help it works right inside HubSpot You can draft campaign copy blog posts emails all in your brand voice all using your actual customer data So you don't create just content you create content that converts Check out HubSpot.com the agentic customer platform for growing businesses Can I see a bunch of stories sure I want to I want to do a story time thing because the cool thing about you is you've been doing the Content game for so long and so I know you've met some incredibly interesting people I want to do a little rapid fire bit sure of all the people you've had in the podcast or interview at conferences Or or through work who's the person who you think our listener should research and someone like someone you admire So you mentioned Ray Dallion and Howard Marx those are obvious. I'll give you I'll give you a couple of really interesting names Richard Barton is this former Microsoft employee who who founded Expedia and Zillow and just one crazy company after another He's got this crazy framework. I think Sean and I have talked about it his whole I think I'm summarizing this correctly Sean. I think he said His whole career is taking messy data and Organizing it or I think even said I I free the data Yes, he calls it give the power to the people. It's basically take data that exists that is just not Transparenately easily structured and available and make it transparent easily structured and available And so if you look at what he did with housing, you know the housing data That's the MLS data. He made it more easy to access through Zillow They did it with Expedia He did it with Glassdoor and it's the same thesis. He's just played out in like four, you know plus Different companies at this point. I'll give you a couple other names that are a little below the radar even though they're they're all Kind of known to the industry I Think David Rubenstein of the Carlisle group could be the best human being I've ever met in my life That guy's awesome. Have you seen the show Sean? Yeah, of course I'm just saying is it I didn't know he was such a legend. I just thought he's an interviewer because I just only ever seen him doing interviews I didn't realize he was a founder of Carlisle It's just he's like a he's a hit I knew him as like a historian. He has these amazing books I'm reading one of his books on Washington and Lincoln and the rest of the presidents I I don't even think of him as a money guy So he started out in the DC area when Carlisle started and he would put together these Off the record conversations with experts in spaces that were being debated by Congress and then he would invite a whole bunch of congressmen and senators and staffers from both sides and the idea was This isn't partisan. This is political isn't political This is just a way for you guys to hear from an expert who you may not come across and why did he do that was he was in politics? No, he just wanted the Congress of the country he lived in to be better informed and make better more knowledgeable But with he a big shot when he did that no he was Carlisle tiny little company that was specializing in a Telecom and that's why they were based in DC and eventually expanded to everything else so later on his career he super becomes wealthy and The Washington monument starts falling apart the cement starts cracking. It's a couple hundred years old and Congress being paralyzed and incompetent He's an idiot and a congressman, but I repeat myself is the Mark Twain quote quote they couldn't get their shit together So he steps in and says to Congress. Hey, I'm gonna fix this See if you idiots can get around to passing I'm just gonna patch it up see if you can do a permanent fix and I'd appreciate if you pay me back one of these days and He basically guilted them into fixing all the national monuments This was in like the 80s and 90s and then he's a kid who grows up in Baltimore and Baltimore as a city That's having a hard time. He buys the Baltimore Orioles Promises the city that it will not move over the next 20 years And I think he said and I'm gonna keep the beer and hot dog costs the same for the next 10 years Not what you think of when you think of as private equity what personality attributes You think made him great as a business person because he sounds like a a warm and lovely guy But he's in PE which is not particularly a warm and lovely industry He is really really good at finding a Space that is being ignored by the rest of the market and Not just ignored but undervalued so telecom wasn't sexy in the 80s There was some post Reagan deregulation and it kind of got ignored for a while So I'm not just like the the big names, but the you know the block and tackling or all of the fundamental pieces just the ability to It's not even see around corners. It's identify a spot that the markets have missed Was he prolific in his extracurricular activities in the in the upswing of the business or was this like a post wealthy thing? I think I think they were on parallel tracks. I don't want to do that So I just heard of Carlisle by the way Carlisle has $500 billion a UM. How does you know? Think people in a way they'll they'll get there someday How does one do that like did you know when he was younger? How on earth do you do? I met him I met someone who worked for him and I said hey tell your boss He's stealing my gig at Blumberg. What the hell? I've been doing this podcast since 2013 You know say he comes in and big puts in and takes the video version of it and it I was joking It got back to him and I got an email and I said once you come on the show. Let's talk about your career So he did what about the other end of the spectrum? You know finance and money attracts a lot of other people who will Say things that are either you know inaccurate or bad advice that you know maybe self self-interested advice You know, who do you think has done some damage to the space? Put a lot of bad advice out there or a bad philosophy that is Not one that somebody should follow even if it is popular or visible So those people don't get the invites to show up on the podcast I've been having an ongoing fight with zero hedge Zero hedges is that a blog or is that up community? I mean it's a it's a it's sort of a cross between Reddit and a blog It's it's got a lot of contributors Eventually they tapped into Bitcoin and to gold and you know that that was their their argument Listen the the there's a Ted sturgeon quote in the book Sturgeon was a science fiction writer in the 50s and he used to get the question How come so much of science fiction is not good and his answer was 90% of everything is crap and so that's become sturgeon's law and so most of the stuff you see In print on television on social media On substack most this stuff isn't worth the time or effort to get it You know people sent me subscriptions to stuff all the sign. Hey, I sign you up for my Substack you unsubscribe me block me. I didn't ask you to do that stop sending me your digital shit And the reason for that is simply this you know My mom taught me never take candy from strangers and that includes Research writing commentary opinion before I read something from somebody who I'm not familiar with It's a research lift to decide is this person worth the time effort energy? What's their track record? What's their process? Did they just get lucky once and that's it or do they have a Defensible approach to this have they lived through a few cycles? Have they seen ups and downs? Do they have a good temperament or every day like Friday where Nasdaq is down 4% they run around with the hair and fire. This is the big one. It's all over. Like if they have that sort of attitude, I don't have room for them. I think you would probably, Jesse, you have an opinion, either positive or negative on the, what's his name, the wrist ad port ad guy. I forgot his name is. Oh my God. Kaisaki. He's been, he's a chapter in the book. And I never read the book. I didn't know anything about him. Um, and my colleague Ben Carlson does a post about some of this is like 10 years ago about some of his tweets and they're terrible. Sell, sell equity, sell this, sell that like he is just super bearish. The whole 2010s. And then my favorite tweet of his, which I reference in a chapter in the book on him was 2018. Get out of US housing, US single family home market. The financial crisis was the warning shot, sell housing. And ironically, there has never been a better time in recent history to buy single family homes in the US. And when I, someone asked me the question they said, well, how could he, he have known the pandemic was going to happen and all these things happening in housing. And that's the point. That's right. He couldn't have known. What are you telling me? You're defending his shitty forecast by saying he couldn't know the future. That's why you don't make forecasts. You don't know the future. And the takeaway from this is all of Wall Street, all of finance has a humility problem. And I say this, I have a lot of my biggest mistakes in the book. I famously passed on or infamously passed on Robin Hood in 2014 at an $80 million valuation. An app that lets millennials trade for free. That is the dumbest idea I've ever heard in my life. Aside from the fact that it's totally off brand with the indexing thing, millennials don't even have money. What is, if this is, you know, payment for order flow, the dumbest idea I've ever heard, my buddy Howard Linson made $100 million on that investment. And I'm an investor in other things Howard has done. And I was just like, oh, so stupid. So I'm not just saying everybody is dumb and I'm smart. I'm as dumb as everybody else. But at least I'm kind of aware of it and starting to, from the place of, we all need a little humility because we don't know what's going to happen. We barely know what's happening today. Our recollection of what happened yesterday is always tinged with a little glow of rosy nostalgia. Our expectations for the future is mostly hopes and wishful thinking. Like the whole human condition requires a little more humbleness in admitting how little we know about what's going on. Help me a little bit here. I love, like you have this post that I love. It's called nobody knows anything. And you basically like say this one's about SpaceX, but the premise of a lot of your posts is like gold men, whatever, the big, the big shots, they make these predictions. And the truth is, it's just so hard to forecast. And you said that 90% of information out there is garbage. Right. What's your 10%? Who can I read right now and get my information from whether it be news or evergreen stuff that is the 10% in your opinion? Sure. So I'll give you my list. But the caveat is the process of you figuring out who should be on your list is very helpful going through the process, thinking about it. What do I need? What do I need help for? So let me throw out a bunch of names. We want the whole information diet. Yeah. And by the way, obviously my whole team is a big part of this. Josh Brown, Michael Batnik, Nick Majouli, Ben Carlson, Blair, Duke Hasney, go through the whole list. There's a lot of us writing. So I don't want to just talk about my group. It's a little too self-promotional. Let me talk about others. So let me start with just broad economic analysis. It's hard to do better than Ed Yardini. He is very thoughtful, very data driven. He's been very constructive and bullish during this market. He very constructively said, hey, you know, the US has had a great run. We're starting to see signs of overseas doing better. He's just been a solid, solid guy. He's been doing it for 40 years. He started it Deutsche Bank, really solid. It looks like Ed Yardini is paid, right? That's not a free one. Yeah. Ed Yardini is paid. If I want to look at market dynamics and structure, that's Sam Row. Sam Row, you could do the free version. You could do the full version and is a little more expensive on the behavioral finance side. It's tough to beat Morgan Housel. He just is a great storyteller. Really gives a lot of insight with that. Real estate is Jonathan Miller. I've been tracking Jonathan forever. I'm friends with him personally. Here's a guy that really understands what's happening with both residential real estate and the state of prices in the industry. As you go further and further into the weeds, so Jim Chanos for all things short selling, Michael Lewis for all things Wall Street culture and psychology. He is a new book coming out in the fall on Doge. I'm really looking forward to it. By the way, Michael Lewis is one of these guys that you think you have an idea of who he is from his books. Then you hear him speak and he is just hilarious. Dick Thaler is the other one, Richard Thaler of Chicago on the real hardcore research on behavioral finance. There's so many people. I'm leaving so many people. I thought to them capital. The Twitter handle hasn't made the list so far. There's actually some academic research that has found neuro atypicals do better at market timing because they are not subject to the same social pressure and emotional trading. Speaking of SpaceX, have you read the story in his biography of Elon's quick foray into finance? His internship? What happened? There's a great story. I'll try to call it off top of my head here. He's in school in Canada. He starts cold calling to get an internship or to get a job. He calls the CEO of some investment bank or some bank out there. He goes and he gets a job. He's supposed to be doing whatever he's doing. He starts going really deep on South American oil companies or something like that. Something where there was a political issue and he saw almost like a Buffett style thing where he's like, look, they've completely mispriced. These assets are mispriced. They're trading at the wrong levels because even in the worst case scenario, you're safe. Then there's all the upside of if it actually gets opened up or whatever. He pitches the guy and the guy's like, okay, go find out what we can do. He calls, he's like, hey, I'm Elon Musk and I would like to place an order or trade. How much volume can I do? They were like, you could do whatever you want. He's like, so I could buy five million dollars of this right now. They're like, son, you could buy 50 million dollars of this if you want. So he goes back and he tells us, he, hey, I think we should make this huge trade. Then basically it gets shot down for just like because they were just risk averse. He sees that it would have played out well and he just decides like, this whole thing is stupid. I'm never going to work for other people because I presented a completely logical argument and it got shot down for illogical reasons. I just never want to be in that position again. Also, I should just go build things instead of do this financial engineering stuff. I should go do actual engineering and he leaves and he never, never comes back. He was a failed retail stockbroker. Is that what you told me? There's no financial engineering there. He had no track record. He was a rookie. Why would anyone listen to him? That's, that's the amazing thing. You look back at Warren Buffett in 1967. I think half the people who, who heard his pitch would like, yeah, why do I want to listen to this guy? I started out as a math and science student at Stony Brook, I'm your graduate. The outgoing department chair, a mathematics department chair was this guy named Jim Simons, leaves to form Renaissance technologies, the most successful hedge fund in all of history. If you were to met this guy in 1979, you, you would say why this guy looks homeless? Yeah. I saw him. He looked like he was, he looked like a messy student and he was smoking sigs all the time. He kind of looked like a filthy animal. You would think this guy, I'm like, I'm not giving this guy my money. He's going to smoke it. Sean, what do you, what do you pull it up? You break it out the textbook. I got the story. All right. This is about Latin American debt. Banks had made billions and loans to countries such as Brazil and Mexico. They could not be repaid. The Secretary Nicholas Brady had packages of debt obligations and something down that's Brady bonds. Yes. Exactly. They were backed by the US government must believe they would always be worth at least 50 cents on the dollar, but some were selling as low as 20 cents. He figured that Scotiabank could make billions if they bought these at a cheap price. So he called the trading desk and he asked, you know, the stuff I said, he thought to himself jackpot. This is a no lose proposition. I run until Peter the CEO about it. The bank ends up projecting the idea. They said they already had too much Latin American debt. He said, wow, this is insane. Is this how big banks think? He goes, it was a good thing. It gave me a healthy disrespect for the financial industry. And that gave me the audacity to eventually start or became PayPal. - He didn't really start PayPal. He started a competitive product and eventually it was merged to PayPal, but let's not let that get in the way of the story. All right, so he had a good idea. - Did you have a lot of enemies? - A few. - I have no choice. I can't help it. - You just came here spitting fireman. Like, you don't know about it. - Someone says something that's bullshit, I can't help, but I know discretion is the better part of valor. But when people are out there saying stuff that is nonsense, that ultimately leads people to lose money. - Do you think you ever have to get security? - No. Listen, if someone wants to meet Dad, I would have been dead a long time ago. That's not a, and who wants to live their life that way? - Wait, what did he say that makes you think you need security? If I'm who, the guy Kawasaki will come. - No, man, no, not that nerd. But I'm just saying that when you deal with big numbers and you have a big audience and you're dealing with people's money and stuff, sometimes I think of the risk reward of just having someone around you when you go to the city. - No, but he cares. - I got bad news for you. Nobody cares that much about me. I'm not that important. And look, here's the reality. - Well, that's not the ability. I mean, that is impressive, but what's, I mean, you have a microphone, you have an audience. - So in the modern world, it's a cacophony of voices. No one voice is dominant and Elon Musk bought Twitter. And so his voice is amplified. When you look at the value he's created over the years. All right, so whatever the PayPal merger ended up being, and then Tesla and now SpaceX, he doesn't have to exaggerate. This guy has changed the world, right? Tesla completely changed the automobile industry. SpaceX completely changed a number of industries, aerospace, the concept of getting anything into Earth orbit, satellite, I mean, he's had such a giant impact. You don't need to polish the hegeography. You're accomplishment speak for themselves. So I have to burnish my crappy undergraduate and graduate career. I don't have that much to brag about. From then, when I see a guy like that, like he didn't found Tesla, he joined Tesla later. His genius was recognizing, oh no, what you need to do is sell a car that's just miles away from everybody else and don't think like a traditional car company. This is a technology appliance, not an internal combustion engine. Like I give him credit for the stuff he's done. That's move the needle. I'm not a fan of the SpaceX IPO, but I sure as hell don't want to bet against him. He's just proven himself time and time again. You know, he's a tough guy to be on the opposite side of the trade front. (upbeat music) - Today's podcast is brought to you by my friends at Mercury. They make the world's best banking product. I think you know this already. I use Mercury for all of my businesses. I think I have like maybe seven or eight businesses. We use Mercury as our business banking across all of them. And now they actually just launched a personal banking account. So I have my personal account there. I moved off of Wells Fargo and Chase. I'm just all in on Mercury. Why? I like products that are easy to use. I like products that get me and the problems that I have. So like, it's really easy to make a joint account with my wife. Very easy to spin up virtual cards. One click and I get savings yield. It just has all the stuff that I need in one place. So if you're looking for the best banking product on the market, it's definitely Mercury. I will fist fight anybody who disagrees with me on that. Go to mercury.com/personal and learn more. Mercury is a Fintech, not an FDIC-insured bank. Banking services are provided through Choice Financial Group and call them NA members FDIC. (upbeat music) - I wanna go back to the bragging question. - Sure. - I wanna, because I know you've been doing this forever. I've listened to your podcast and read your blog. But I still wanna know as an entrepreneur, the business. So can you give a short answer to just some of the numbers about how big the firm is? - So the last 80V update we did with the SEC was December 31st. That was $7.6 billion. But when we launched in 2013, that was the start of the third best 15-year run in history. - Does that mean it's a $50 million of your company? - We don't, because we're private. We don't disclose our revenue and stuff. But we averaged somewhere around 70 basis points in terms of our fees. When we were a billion dollars, we had like 35 people. The typical billion dollar group at a big bracket firm is two salespeople, a sales assistant, and someone helping on portfolio. So that would be four people. We were almost 10X that. So we've always been building as if our growth rate is gonna continue. And we've been growing about 30% a year since we launched. - So you said you famously called the housing crisis. And from what I understand, there's an interesting story there. - So first, and this is so dumb, my mom was a real estate agent. And so in '03, '05, we were having all these conversations about how weird the real estate market was. And the normal cycle is, come out of recession, the economy begins to expand. And when I'm looking at all that data, pre-financial crisis, nothing lined up with what you typically see. It was very much a backwards real estate driven economy. In other words, instead of real estate being the beneficiary of an expanding economy, more hires, better income, it was the opposite. And so anytime you bought a house, you could refinance a few years later at a lower price. And some people were doing home equity lines of credit and taking cash to subsidize their lifestyle. Because in the mid 2000s, middle class workers hadn't really seen raises above inflation for decades. And so people were spending the equity in their homes. And so I started hunting for some data and for some academic research. And in 2006, Ryan Hart and Rogoff did a white paper that eventually became the book, this time is different, 800 years of financial folly. And the white paper said, when you have a bubble driven by credit, on average, we see real estate dropping 32%. And I used that as a leaping off point to say, all right, I'm too lazy to do all 500 S&P stocks, but let's look at the 30 Dow stocks. And what does a 32% drop in real estate mean to their business, to their revenue. And long story short, I kind of spitballed a price of 6,800. How contrarian of a belief was that? All the stuff I had been writing about, housing and subprime and derivatives, it was all up on the blog. It was all very public. So, you know, I spent about a year being the dumbest man on Wall Street, which was kind of fun. All of '07, it's like you're obviously an idiot. And even the piece that talked about 6,800 said, look, the market isn't an uptrend. We continue to see multiple expansion. You don't put on a short, you don't get out of stocks if you're an institutional trader until that trend line breaks. And that trend line didn't break for solid year and change. So I spent a year being pretty much the dumbest person on Wall Street, starting in January, February, March of '08, Kudlow started having me on every week and then twice a week. And then it just got to be mayhem because, you know, nobody sort, I should say very few people sort coming. I recall being on CBC with Peter Bookvar and they literally, when we talked about, you know, the potential downside. And I want to say this was late '07, they literally, literally laughed at us. And I remember walking our offices were not that far. And I'm like, either we're really right or we're really wrong, but there's nowhere in between. - Do you guys remember the book Snowball about Warren Buffett? - Sure, absolutely. - I just started reading it. And the very first scene is basically Warren Buffett at the Allen Co conference, which is the who's who. So it's always like the hottest new kids, plus like the old guard in the room together. And at this time, it was all the best.com companies. And they're all there, thinking they're the hot shit. Sort of like how AI companies are now. They think they're the best. And Warren has this famous line, I think he says, "Only criticize a category, never criticize like a particular name and I'll compliment particular name." So he tries to be, the point is, he tries to be really polite about it, but he basically says, the dot com thing, it's gonna be bad. And if you look at like car companies in the 1920s, you would have thought that, you know how cars are gonna end. The place to be is in cars right now. We gotta start a car company. But of the 2000 car companies who launched right when the boom was happening, basically like three still exist and most went out of business and he basically said, this is what's gonna happen with dot coms. And he tried to do it very respectfully, but it was still very insulting to the audience because they were there. And I think he even made like a bunch of jokes. He was like, you guys, I think he even said something like, you guys all even have mischishes probably right now. You think you're the best, but it's gonna come. It's gonna come. And it's sort of interesting to figure out inside of someone's head when they see this one bit of data and they make this very contrarian bet. and how even Warren Buffett was quite nervous about that. He goes, "I know I'm going to be right, but if I'm not right soon, then I'm really going to look stupid here." And I think that's that behavior of making that call is actually quite fascinating. There's a famous technical trader from the 1920s and 19 teens called Richard Wycoff. And he wrote a book, "How I Trade and Invest in Stocks and Bonds." And if you would go back and read that book, everything he talks about just substitute AI for internet, for telegram, and dot coms for railroads. And it could have been written last year. It's over 100 years old. And it's as fresh as nothing ever changes. There's nothing new over the sun. Yeah, the technology is different. But what's the takeaway, which is that like a new stuff can get overhyped? Not can get overhyped. Always will get overhyped. Which isn't, by the way, a bad thing. That's a feature, not a bug. There's a great book called "Pop Why Bubbles Are Great for the Economy." And think about the dot com era. Think about all of the fiber that was laid. Global crossing and metramedia fiber. And hundreds and hundreds of millions of dollars, billions of dollars in fiber laid. At one point in time, I want to say it was like over $1,000 a mile. The dot com collapse comes. All these companies go belly up. And then the legacy cable companies and the legacy phone companies buy it up for pennies per mile. And because it was so cheap to own at that point, all the things that came afterwards. YouTube, Facebook, Instagram, all of the bandwidth intensive technology. Well, they wouldn't have been viable if it was $1,000 a mile to lay fat pipes. But for pennies a mile out of bankruptcy. And so I'm not predicting this is going to happen with AI. But it happened with railroads. It happened with televisions. It happened with radio, internet, electronics companies, semiconductors, internet, mobile cars go down the list. Every new technology that comes along seems to go through this process. Every new technology is innovative things that are not stuck with all the sunk costs and all the legacy platforms. And so they get to move forward faster, cheaper, better. So I don't know what who the winners in AI are going to be. But when we look back at it 20 years from now, look at the computer industry. HP, gateway, go down the list of companies that had billion dollar valuations and effectively went down to zero. You do the same thing with mobile phones. How's that Ericsson phone do you have? Are you going to replace it with the new Nokia? Oh, wait, nobody buys that shit anymore. Even Motorola. They're gone because between the iPhone and Android, everything else has been replaced. It's nice to talk to someone, Barry, who doesn't hold back. I think you're, you're, we thoroughly enjoy that. And, you know, Sean and I have been seeing your stuff pop up for years. We're happy we were able to talk. Appreciate you coming on. Shout out the book. Sure. How not to invest right over there. Hardcover, paperback. You know, the last book was bailout nation was 15 years ago. And I just, it was a slog. It was tough to write. This book was just a joy. It was so much fun to go back over all these conversations I've had and all this research I've done over the years and published one, knowing who the hell I was. You're a gem of a guy, man. We appreciate you so much. Well, thanks so much for having me. I really enjoy this sort of stuff. It's what keeps me going every day. All right, that's it. That's a pod. All right, let's take a quick break to talk about a podcast. Because if you're listening to this, you like podcasts. And what's better than one podcast? Another podcast. And let me tell you another podcast you should check out. It's called success story. If you like hearing about different success stories and hearing Q and A sessions with successful business leaders or hearing keynote presentations or just checking out conversations about sales and business and marketing tactics. This is a great podcast for you. So check it out wherever you get your podcasts.