How Not to Invest — with Barry Ritholtz

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Speaker 2 Episode 340. 3400 code for the Virgin Islands in 1940.
McDonald's McDonald's was found.

Speaker 2 A true story, just last week, I saw this ridiculously hot guy spank his son for throwing his fries on the ground. So, I threw my fries on the ground.

Speaker 2 Go, go, go!

Speaker 2 Welcome to the 340th episode of the Prop G-Pod. What's happening? The dog is back from Austin.
That's right. Came in last night and is in New York for a few days before heading off to Tulum.

Speaker 2 South by Southwest is wonderful. I love Austin.
I think that people have a tendency to sort of stereotype all of Texas.

Speaker 2 I just think that's like trying to stereotype all of Europe or, I don't know, the Democrats trying to stereotype all of Latinos and thinking that they look at every issue through their identity.

Speaker 2 I love Austin and just very much enjoy South by Southwest. I pony up to the proper hotel.
I pony up to the bar and I was a little bit drunk and a little bit high. I took an edible, see above.

Speaker 2 It was a Sunday night. And I found this really hot guy and I said, you know, I have an enormous dick.
And he said, I don't like big dicks. And so I leaned in and asked, well, do you like liars?

Speaker 3 That's good.

Speaker 2 That's good. Anyways, I'm back in New York.
And I am going to, what am I going to do? I was just on PBS of all places.

Speaker 2 talking about the Trump administration. I'm going on with Anderson Cooper tomorrow, here to see some friends, going out to the new clubs, the new membership clubs.
It's crazy.

Speaker 2 There's one opening every month. I'm at the stage in my life where I like that because I want an easy plan B just to roll up and not have to,

Speaker 2 I don't know. I kind of just want to be in places that 10 years ago would not have me as a member.
So I enjoy it, but there's one opening every week.

Speaker 2 They're definitely all going to put each other out of business. And the downside to all of this is that we continue to sequester the 0.1% or the 1% from the rest of the population.

Speaker 2 And that is, it's never been a better time to be rich. It's just, if you're wealthy now, you can go to these amazing places with curated, a curated crowd and always get in.

Speaker 2 And I think it's sort of, I kind of miss, what should I say, I miss, like rolling up to a place in New York and not being sure if you were going to get in, but everyone sort of had a shot.

Speaker 2 Now, granted, if you were hot, you had a much bigger shot or if you knew who was throwing the party or the club promoter. Quick story.

Speaker 2 One of the club promoters I met in the early 2000s when I moved to New York and I was single, I wanted to go to hot places with people much hotter and much younger than me, pretty much everybody.

Speaker 2 And I got to know this guy named Scott Sartiano as he was sort of a club promoter. And then

Speaker 2 so you got to know Scott if you were, you know, a guy like me, douchebag, trying to hang out with wealthy men and young, attractive women. Scott basically went to Argentina.

Speaker 2 And then had sort of an awakening and returned to his Christian roots and decided that he wanted, that his kind of life was void of meaning and decided to go to Africa.

Speaker 2 And we started getting messages and emails from Scott. He was on this thing called the Mercy Ship where they did surgery on kids.

Speaker 2 And he was there as a photographer, sending back images that would help raise money of kind of before and after these surgeries from these wonderful medical personnel donating their time, their treasure, and their talent to try and do basic surgery on children living in poverty.

Speaker 2 And then he came back and he said, you know, I have this idea. I want to raise $5,000 for my friends friends and go back and build a well.
And he did that.

Speaker 2 And he said, I can bring safe, potable water to 400 people. And then he came back and said, okay, I did that.
I want to raise $15,000 and build three wells.

Speaker 2 Anyways, fast forward about 20 years later, I think Scott's going to raise $120 million this year and has brought...

Speaker 2 safe drinking water to literally millions of people.

Speaker 2 And it kind of reminds me, or it takes me back to what is the silver lining that I continue to have to remind myself of as I struggle with anger and depression and have a tendency to see things

Speaker 2 kind of as a glass half empty, if you will.

Speaker 2 And that is the number of people spending time helping people they will never meet, either through nonprofits or special interest advocacy, whatever it might be, is the highest it's ever been in history.

Speaker 2 For the first time in my life, I'm sort of triggered by what's going on. I've always been able to sort of disassociate from the news.
I'm self-absorbed and indulgent.

Speaker 2 and was just focused on me all the time and whatever was happening in D.C. or across different

Speaker 2 groups, I didn't really care. One, because the majority of the prosperity was crammed into my group, essentially white heterosexual males.

Speaker 2 Think about the tailwind I've had. And I'm not being humble.
I'm a fucking monster. I'm really talented.
I'm hardworking.

Speaker 2 But if you look at America from when I was born, 1974, 64, to about 2000 and call it 14,

Speaker 2 before like young men kind of became the enemy, according to everybody.

Speaker 2 Essentially, you had all of the prosperity of the most prosperous economy, economic model in history, kind of the 50 years between the 60s and the 10s or the odds in the United States.

Speaker 2 And almost all of that prosperity was crammed into a subset of America of about a third of its population, specifically straight white males.

Speaker 2 So think about just literally the category five hurricane winds that have been in my sales. And this isn't guilt.
This isn't, I don't even think this is that kind of progressive.

Speaker 2 It's just, It's just data. America grew its GDP faster in those 50 years.

Speaker 2 And I think the rest of the world, maybe with the exception of China, if you took out China, we had more GDP growth, more income, more prosperity than the entire world combined if you took out China.

Speaker 2 And all of that prosperity was crammed into one-third of its population. I mean, it's just, as I think about it, it's just extraordinary.
Anyways, back to Scott.

Speaker 2 Here's a guy who decided rather than trying to draft off of the alcohol abuse and need to feel social and the midlife crisis that I've been going through for the last 40 years and promote clubs that attracted those types of individuals that he was going to try and plant trees the shade of which he would never sit under.

Speaker 2 And what's so impressive about his firm, Charity Water, is that

Speaker 2 he brought so much innovation in the nonprofit sector. I think the nonprofit sect, I would argue the nonprofit sector is one of the worst-run sectors in the world.

Speaker 2 I find that the majority of it, not the majority, is that fair? A lot of it is virtue signaling and basically let's throw parties and give people a sense that they have purpose in their lives.

Speaker 2 And they end up spending almost as much money as they raise such that they can have a brunch in a windowless hotel room somewhere in Palm Beach and feel good about themselves.

Speaker 2 And they don't, they're right, but they're just not that effective.

Speaker 2 And I found that Scott is both right and effective and spent a lot of time on things like design and an app and doing incredible content marketing. And he's just very savvy.

Speaker 2 He takes some of his biggest donors each year to Africa and obviously gets them very invested in the project.

Speaker 2 He spends the majority, the vast majority, runs a very lean organization of the money that goes in.

Speaker 2 He does something called the Well, where a small number of donors cover all of the overhead such that he can legitimately raise money and say all of it's going to wells.

Speaker 2 Anyways, there's tremendous innovation there.

Speaker 2 And it strikes me more than anything that what is it about as you get older, the void, if you're filling a certain void and you're fortunate to have to some level of economic security or you don't have a lot of economic dependence around trying to find some sort of purpose or help others.

Speaker 2 And one of the things I have found that helps me when I'm feeling down is to start thinking a little bit about trying to be in the service of others, whether it's either giving a little bit of money away to a charity, volunteering somewhere.

Speaker 2 I don't do a lot of that. I'm generous with everything but my time.
But trying to get out of your own headspace and focus on other people.

Speaker 2 And I have found that people who generally are in the service of others are the happiest.

Speaker 2 And it's very anthropological because if you think about what's going on in your almangala or wherever it is that decides if you're happy or if good or bad cholesterol should be flushed into your system to either make you die faster or live longer, you essentially have a security camera on in your brain that's keeping track of your value add to the species.

Speaker 2 So that's the bad news. The good news is it's very grainy.
It has very low resolution, so you can fool it.

Speaker 2 So when you're on a stair master or you're lifting weights or CrossFit, it's under the impression that you're hunting prey or building housing and it decides to let you live a little bit longer.

Speaker 2 If you are doing a crossword puzzle that thinks, oh, you're making important decisions for the clan or the tribe, we're going to let you stick around for a little bit longer.

Speaker 2 If you are caring for other people, the physical act of caring for children and other people or being concerned about other people or being social, which it mistakes for caring for other people, it again secretes a hormone that clears out the bad cholesterol and decides to let you live a little bit longer.

Speaker 2 Back to me, when I first moved to New York, I was pretty much just leaving my cave for food and sex or an attempt to have sex. And I was sequestering from everybody.
I'd gone through a divorce.

Speaker 2 I'd left the Bay Area. I hated technology.
I hated VCs. I wasn't even that big a fan of my kind of cohort or community out there.

Speaker 2 And I basically said to my ex, you can have almost everything, including our friends. I'm out.
I still don't go back to San Francisco much. I think I'm traumatized the wrong word.

Speaker 2 Just didn't enjoy that part of my life very much. And moved to New York and immediately started kind of sequestering from everything and kind of thinking, okay,

Speaker 2 I'm going to just be selfish and be on my own. And something kicked in and immediately, I immediately figured out, okay,

Speaker 2 if I do this, I'm going to die. If I continue this, I mean, being totally selfish and going out and having an amazing time in New York with a little bit of money, it was a really

Speaker 2 meaningless and empty kind of existence. Now, as far as meaningless and empty existences go, it was pretty good.
But I definitely realized I'm probably going to die in my 50s if I continue to do this.

Speaker 2 And I worry that a lot of young people are being convinced mostly by technology that they can sequester from society and have productive lives. And that's just not true.

Speaker 2 You lead a very unhealthy life. Especially men who don't cohabitate with someone else have a life expectancy of like a decade less than people who do.

Speaker 2 Let's get back to the regularly scheduled program. In today's episode, we're speaking with Barry Ritholtz, the co-founder, chairman, and chief investment officer of Ritholtz Wealth Management.

Speaker 2 He's also the host of Masters in Business, the most popular podcast on Bloomberg Radio.

Speaker 2 We discuss with Barry his new book, How Not to Invest, the Ideas, Numbers, and Behaviors that Destroy Wealth, and how to avoid them. I love Barry.
I think he's got a great brain and he's a good guy.

Speaker 2 He actually, him and his wife actually adopt dogs. How can you not like a guy that does that that adopts rescue dogs?

Speaker 2 And his partner, Josh Brown, who's on CNBC, you know, like 11 hours a day, he's literally the Joe and Mika of CNBC, has kind of this fantastic, pragmatic approach to the markets.

Speaker 2 And I like the way these guys approach investing and wealth management. And I always learn a lot from them.

Speaker 2 And they're sort of, I think they're sort of a throwback to the initial kind of alternative investments community where they're kind of these Long Island guys that just keep it very real, but really enjoy their conversation.

Speaker 2 And I find that they're really

Speaker 2 sober and honest.

Speaker 1 and

Speaker 2 give great advice. They're not going to tell you like which stock to buy.
They're going to tell you about diversification. They're going to tell you about low-cost

Speaker 2 ETFs and index funds and how you build wealth slowly, which is kind of the best way to build wealth in the sense that,

Speaker 2 like I've always said, I know how to get you rich. That's the good news.
The bad news is the answer is slowly. Anyways, I have a lot of respect for these guys.

Speaker 2 I generally think they're good fiduciaries for other people's money. And I think they're avoiding what is the biggest grift in history.
And that is this general myth.

Speaker 2 that there are certain individuals and funds that can outperform the market over the long term. They can't.

Speaker 2 And in exchange for fooling you into thinking this, they're going to charge you onerous fees, which over the medium and long term are going to create an underperformance relative to the market.

Speaker 2 And they've always been very sober and honest about that.

Speaker 2 So anyways, with that, please stick around for our conversation with Barry Ritholtz, co-founder, chairman, and chief investment officer of Ritholtz Wealth Management.

Speaker 2 Barry, where does this podcast find you?

Speaker 3 I'm sitting at 731 Lex in my regular podcast studio at Bloomberg.

Speaker 2 I think you were some of the first podcasts I ever came on at Bloomberg. I mean, I remember coming in there seven or eight years ago.
Yeah, you're a great interviewer. So

Speaker 2 let's bust right into it. Your book, How Not to Invest, is out next week.
In it, you group common investing mistakes into three kind of three buckets, bad ideas, bad numbers, and bad behavior.

Speaker 2 Break these down for us.

Speaker 3 Sure. So first, we have a century of books telling us what to do.
And despite, I don't know, tens of thousands of books, most people are still pretty mediocre investors.

Speaker 3 So I took a page from the two Charlies, Charlie Ellis, who compared investing to tennis. Most people are not professional tennis players.
Professionals win by scoring points.

Speaker 3 Amateurs lose by unforced errors.

Speaker 3 And if you just bring that approach to investing and say, rather than try and find the next NVIDIA or jump in and out of the market before and after the next crash, how about we just make fewer mistakes?

Speaker 3 And it turns out that puts you 90% ahead of everybody else. And the other Charlie is Charlie Munger, who in his inimitable fashion was asked, are you and Warren smarter than everybody else?

Speaker 3 Is that why you're so successful? And Munger responded, no, we're just less stupid. Less stupid is better than smarter, at least in investing.

Speaker 3 So when I was trying to put the book together, I just started thinking about all the errors I had come across over 30 years, and they neatly fit into we believe things that aren't true.

Speaker 3 We don't understand the numbers that drive the markets, the economy, investing, and then we engage in behavior that is super self-destructive.

Speaker 2 You mentioned that you never planned on becoming a wealth manager, but we're driven by frustration with Wall Street's practices.

Speaker 2 What are some of those practices that are kind of potentially put a money manager or Wall Street not on the same side as its investor base.

Speaker 3 So I didn't go to business school. I went to law school.
And a big part of the legal education is understanding your fiduciary obligation to your clients, your ethical obligation.

Speaker 3 Something similar applies to accounting, to the medical practice. Doctors have a similar obligation to their patients.
And yet, money is so important

Speaker 3 to our safety and security and financial well-being, our retirement,

Speaker 3 what we pass down to our children and to our philanthropy. But the rules were such that there's no greater obligation to you from traditional financial practice than you get from a used car salesman.

Speaker 3 It made no sense to me. Wait, you just can't misrepresent that the transmission is bad.

Speaker 3 And other than that, it's an arm's length transaction. That never made any sense.
You can just do what you want to do with the client, harvest their organs, sell them on the black market. That's fine.

Speaker 3 It simply was inconsistent with all the other professional relationships we had.

Speaker 3 And following the financial crisis, which I more or less got the top and bottom right, lots of people started throwing money at me. I wasn't comfortable referring those people to other places.

Speaker 3 And I wasn't comfortable even at the firm I was at at the time, because they were a little bit, you know, it's called a hybrid model, a little bit of a fiduciary, except when it's inconvenient, then they swap hats and suddenly they can just be a broker and maximize profits.

Speaker 3 And it was really out of just absolute frustration. All right, we can't turn these people loose to the wolves.
Let's see if we can give them a, provide a service that puts them first.

Speaker 3 And, you know, over the past 20 years, Wall Street has slowly drifted in that direction. It's still not quite all the way there, but it's much further along than it was 10, 15 years ago.

Speaker 2 So I want to put forward, and by the way, Barry and his partner, Josh, and I get together, not regularly, but we do get together and they kind of save me for myself.

Speaker 2 I want to throw out a couple of theses around biases or some of the things that have haunted me in terms of investing and have you comment on them and then just some general structural

Speaker 2 impressions or thoughts. The first is that your emotions are your enemy.
And that is, when I get hurt really badly, I'm just like, I can't take any more pain. I want to sell.

Speaker 2 When I do well, my greed lands get going and I start thinking about levering up with margin because I start believing I'm actually good at this. And I find, and I have to check myself.

Speaker 2 I think of that Seinfeld episode where George Costanza decides to do everything that he instinctively, he does the opposite of what he thinks he should do and his life gets much better.

Speaker 2 I feel like your emotions and sometimes your instincts are your worst enemy around investing. What are your thoughts?

Speaker 3 So think about why we even have a limbic system and an amygdala and an emotional response to external input.

Speaker 3 Humans now dominate planet Earth. Wasn't always that way.

Speaker 3 We're soft, chewy, delicious creatures without fangs or claws or armor. So

Speaker 3 we're super vulnerable. And we developed a series of subroutines that allowed us to not only stay alive, but adapt and eventually dominate the planet.

Speaker 3 And what kept you alive on the savannah is your fight-or-flight response, the ability to quickly identify a potential threat and respond in the most effective way.

Speaker 3 That turns out to be great if you're a biological organism that's constantly under threat, but making risk-reward decisions in the market,

Speaker 3 it goes right to Danny Kahneman's thinking fast and slow. Thinking fast keeps you alive.
Thinking slow is how you make money in the markets. And emotions,

Speaker 3 your limbic system are clearly part of that thinking fast. I love the quote from Dr.
William Bernstein, former neurologist and doctor who became an investor.

Speaker 3 He said, your entire level of success as an investor is determined by your limbic system. If you can't get that under control, you will die poor.

Speaker 3 And that is really quite the warning about emotionality and investing.

Speaker 2 You've actually been an advocate and have been pretty vocal about saying investors are better off buying index funds rather than trying to pick individual stocks.

Speaker 3 And yet

Speaker 2 you're a money manager and you make fees

Speaker 2 trying to find alpha, I think.

Speaker 2 Help me reconcile why you tell your clients not to just go invest in Vanguard.

Speaker 3 Well, we're big Vanguard investors. We're Vanguard, Wisdom Tree, BlackRock.

Speaker 3 Our approach is a combination of core and satellite, where the heart of the investing are pretty broad indexes.

Speaker 3 U.S. total market,

Speaker 3 ex-US developed, some emerging markets. The idea is: look at, this is a perfect example.
We're recording this towards the end of the first quarter, and

Speaker 3 the US is up a percent or two. Europe is up 15%.

Speaker 3 So when you're diversified over a long period of time,

Speaker 3 different parts of the world are going to do better or worse. And that's the core.
That should lock the beta in for your portfolio. Beta being take what the market gives you and be happy.

Speaker 3 The satellite are all the things you do around that. So if you believe in momentum or value, or maybe you like technology or India, or, you know, there's a thousand different variations.

Speaker 3 Think of it as the Christmas tree is the core index. The garland and all the ornaments are the stink you put on your portfolio with those satellite things.

Speaker 3 However you want to flavor it, you could do that.

Speaker 3 There are some other technologies and some other things that we really like that helps us find tax alpha.

Speaker 3 And we're also big believers in what we call advisor alpha, which is what can we do to prevent investors from hurting themselves.

Speaker 3 So we have a very simple tactical model that we put a small percentage of the portfolio in. And its purpose is not to generate alpha.

Speaker 3 Its purpose is to prevent people from touching their real money when things get hairy, as we've seen the past week or two.

Speaker 2 We don't learn this lesson, but whenever I've met with you and Josh, you guys is drilling home. And that is people, I think one of the most underappreciated strategies

Speaker 2 for a risk-adjusted return and also limiting your emotional downside is diversification. It's so boring.

Speaker 2 And yet I just don't think most of us really think about how powerful it is and really add up our assets and say, okay, if I've got 90% of my wealth in my home and my vacation home, that's probably not a great idea.

Speaker 2 Or if I've got, at some point, U.S. growth will slow down or U.S.
tech growth.

Speaker 2 My two biggest mistakes, I've been wealthy three times, which means I've lost it all twice. And the reason I lost it all twice, and it was hugely emotionally and mentally trying,

Speaker 2 was I didn't appreciate the power of diversification. I was always highly levered to US tech.
And so, what do you know? In 2000 and 2008, I was no less a person or no dumber. I just got wiped out.

Speaker 2 Talk about the power of diversification and why we just naturally don't learn that lesson.

Speaker 3 Sure. So,

Speaker 3 there are two emotional impediments to being and staying emotionally diverse.

Speaker 3 Invest wise diversified the first is being diversified means there's always something in your portfolio that's not doing well you know the past couple decade it's been uh europe europe has wildly underperformed suddenly europe is now doing much much better than the u.s value has done really poorly over the past decade in large part because of the shift in markets away from hard industries and towards uh intellectual property.

Speaker 3 And value, at least as historically described, hasn't adjusted.

Speaker 3 So when you're looking at your portfolio and why is my emerging markets doing poorly and why is this value sleeve underperforming, it's very easy to get frustrated and walk away from that.

Speaker 3 The second factor is we all have a tendency to tack into, to lean into whatever's working. So for the past decade, technology has been great, just as it was in the 90s.

Speaker 3 But at a certain point, those things come to an end.

Speaker 3 Every cycle turns. Every bull market ends.
Every bear market ends. Every period of economic expansion eventually hits a recession.

Speaker 3 And so one of the free lunches, and there aren't many on Wall Street, one of the free lunches is occasionally rebalancing towards a core set of allocations so that one part of your portfolio doesn't run amok and suddenly half of your exposure is to or more is to technology.

Speaker 3 We regularly see people come into the office who 10 years ago took a flyer on NVIDIA or Apple or Amazon, and they're paralyzed because three quarters of a not insubstantial chunk of wealth is one company.

Speaker 3 And that single stock risk

Speaker 3 not everything is gonna be a lehman brothers and go to zero but look at general electric you know

Speaker 3 the one of the most beloved stock cisco of yeah oh cisco i have a whole chapter on

Speaker 3 99 to 2001 lost 90 of its value right it was single digits people forget uh amazon was trading for single digits so you give up you willingly give up potential upside in a single stock stock because for many, we have no minimums in the firm.

Speaker 3 So we have people with $50,000, we have people with 50 million. When you hit a certain point, you have to recognize, hey, I won.
There's no reason to take all this additional risk.

Speaker 3 Let's trade off upside in exchange for steady, ready gains without the possibility of a 90% collapse.

Speaker 3 We'll be right back.

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Speaker 2 A couple more theses. You've talked about index funds and fees.
I still don't think the market is really cognizant of how much of your return fees will eat up.

Speaker 2 And I would argue, and I'll put forward a thesis that the alternative investments community, and I would say a good 50% of my friends are in this community, who recognize the most extraordinary gains relative to their talent.

Speaker 2 And by the way, they're exceptionally talented, but from kind of 1995 to 2015, I think that 20-year period will be remembered as the period where a small group of people made more money on a risk-adjusted basis than any sector in history.

Speaker 2 I had friends who were good, hardworking,

Speaker 2 work at hedge funds, and the good, hardworking people in other industries were making $200,000 to $2 million a year, and they were making $20,000 to $30 million a year.

Speaker 2 And then that came to an end, or it's slowly but surely, I I would say the majority of them are even out of the business over the last five or 10 years.

Speaker 2 They've stayed in the business, but their AUM has gone from, you know, $3 billion to $300 million.

Speaker 2 And my thesis is that the alternative investment sector could best be described, that's mutual funds, hedge funds, as San Francisco real estate. And that is expensive but bad.
And that is.

Speaker 2 The returns have been in stocks that everybody knows. So no one's going to pay you $2 and $20 to buy NVIDIA.

Speaker 2 And they've been left trying to find alpha in

Speaker 2 a narrow part of the market, and they've just vastly underperformed.

Speaker 2 I think the analysis shows if you added up all the people on CNBC who come on and pitch stocks, they have underperformed the SP by the amount of their fees.

Speaker 2 Isn't this arguably one of the biggest grifts in economic history, the alternative investment community?

Speaker 3 The Financial Times called the hedge fund a scheme to transfer money from naive investors to savvy managers. And I think that overstates it a little bit.

Speaker 3 You know, the golden age of hedge funds was pre-reg FD, where you could have an information edge, and before quants were really everywhere,

Speaker 3 to say nothing of the few quants that really put up killer numbers in the 80s, 90s, and 2000s, right up to the financial crisis. Jim Chanos has a wonderful quote in the book.

Speaker 3 When he started in the 1980s, there were 100 hedge funds, funds and they all create alpha. Today, there's 11,000 hedge funds, and more or less those same 100 are the ones that generate alpha.

Speaker 3 So my thinking on alternatives has evolved. If you can get into

Speaker 3 the elite hedge funds, the top, let's call it decile, the DE Shaws of the world, if they're willing to take your money.

Speaker 3 And it's their money-making fund, not their secondary under, any hedge fund that's successful always rolls out a, you know a plan B for the masses and it never does as beautifully as the first one does.

Speaker 3 Yeah, that's a great opportunity.

Speaker 3 What we've seen since the financial crisis and the era of zero interest rate has been a shift in assets instead of flowing into hedge funds and and they're still going in to some degree.

Speaker 3 It's three trillion dollars. They have moved to private credit and private equity.
And that seems to be the alternative that

Speaker 3 if not generating alpha over and above what the market does, at least they can make a plausible case that it's not correlated and it's diversified. We're not putting money into publicly traded stocks.

Speaker 3 We're not putting money into bonds.

Speaker 3 We are buying credit and or private companies and therefore under

Speaker 3 exposed to the equity markets. At least that's a plausible argument.

Speaker 3 I'm not so sure I fully buy into all of it, but it's a better argument than I'm going to aggressively trade on a leveraged basis public equities.

Speaker 2 I still can't help but stockpic, and I want to put a couple of my core theses out there and have you respond to them. One is regarding what you said about Europe.

Speaker 2 And every year, at the end of the year, I make a bunch of predictions. One of my predictions in

Speaker 2 November of 2024 was that we were finally going to see the flows, the rivers reverse. And that is, someone told me that if you added in debt, the U.S.
market accounted for 70% of the world's value.

Speaker 2 That it was just, if it's just equities, it's 50%. But if you add in debt, the total value of the world, if you put a price tag on it, is represented 70% of that is the U.S.

Speaker 2 And I thought, okay, if I could buy the U.S. for $70 or the rest of the world for $30, I would buy the rest of the world for $30.
And so I've started rotating out of U.S.

Speaker 2 growth and into value, some in LATAM, some in China, and some in Europe. And I read that U.S.
growth is at 98%, meaning on a scale of 1 to 100, it's only been more expensive 2% of its history.

Speaker 2 And this is about a month old, so I'm sure it's changed, but European value was at 2%, meaning 98% of its history had been higher. So granted, this is just stock picking on a more metal level.

Speaker 2 But doesn't the U.S. just generally speaking, and I'm curious if you're telling your clients this, just look overvalued?

Speaker 3 So let's start 30,000 feet and drill down.

Speaker 3 First, you have that itch,

Speaker 3 and

Speaker 3 the advice we always give people with that itch is set up a separate cowboy account, put 5 or 10% of your money into it, and pick stocks to your heart's delight. Who cares?

Speaker 2 5 to 10, I do 30. 5 to 10 percent?

Speaker 3 All right. Well, you know, you're risking another 2,000 and 08, 09.
If you blow up 5% or 10%, who cares? It hurts, but it's not fatal. So that's number one.

Speaker 3 Number two,

Speaker 3 sometimes stocks are expensive or cheap for a reason. You could look back for the past 15 years,

Speaker 3 other than really briefly after the financial crisis. It's hard to say U.S.
stocks have been cheap anytime in the past 10, 15 years. They're expensive for a reason.
It's the highest profit growth.

Speaker 3 It's the best, or at least it was up until the craziness we're dealing with now with tariffs and

Speaker 3 all sorts of other potential risk raisers. But when you look around the world,

Speaker 3 Europe has a structural problem and has had that problem for a long time. We have a lot of advantages.
We have the reserve currency.

Speaker 3 You know, it's not a coincidence that all of the big tech companies primarily start here. I have a vivid recollection of a business trip in 2000 to London and Brussels.

Speaker 3 And in the U.S., during the dot-com collapse, you walk down the streets in Manhattan, the fear was palpable. Shit, if I get fired, I lose my health care.
My kid can't get that surgery.

Speaker 3 Cobra is crazy expensive. I'm screwed.
In Europe, it was kind of like, well, I got unemployment. My student loans, I don't have student loans.
My education is paid for.

Speaker 3 my retirement is paid for, my healthcare is paid for, all right, so we have a recession, who cares?

Speaker 3 The flip side of that is you don't get the, you know, the, the Larry Ellisons, the Bill Gates, the Steve Jobs in Europe the way you get them here. So

Speaker 3 sometimes stocks are cheap for a reason, and they can stay cheap for far longer than we would expect.

Speaker 3 98 is kind of a warning. So that's number one.
Number two, I'm not a fan of putting money into China because they basically say if you're not a local Chinese investor, you're a second-class citizen.

Speaker 3 And I think the numbers are from 1989 to 2023. You're essentially flat in China.

Speaker 3 I mean, you missed two of the greatest bull markets in history and China gave you nothing because the B shares don't trade the same way the A shares do.

Speaker 3 And there's a lot of friction, unlike in the US So I know everybody seems to think China is the big winner It turned out the way to get exposure to China was not through putting money into China but buying Australia who some who supplied a lot of energy a lot of commodities a lot of things to China and did really well on a much more steady basis without the governments the Chinese centrally planned government putting a thumb on it but the other aspect and you and I have talked about what I'm about to say before,

Speaker 3 most investors never find their edge, right? 90 plus percent of us, we have some idea as to what's going on, but really not a full understanding.

Speaker 3 We're overconfident, we're arrogant, we suffer from all the Dun and Kruger effects, and so we make bad decisions. But some of us, and I include you in that group, have an edge.

Speaker 3 You have an expertise, digital marketing,

Speaker 3 content creation.

Speaker 3 Look at your successful history on the entrepreneurship side.

Speaker 3 If you can trade your expertise for entree into some of these alternatives where you're getting a, hey, let's swap, I'll swap my, not charge you a fee and you don't charge me a fee, that's a tremendous advantage that you should be very comfortable taking advantage of.

Speaker 3 When I, you know, I first found you because of your presentation on The Four, which eventually became the book, The Four.

Speaker 3 And it was clear to me that you had a huge insight into these companies, even as late as the early 2010s.

Speaker 3 I would say, check yourself and say, do I still have the advantage that I had when I bought these companies at a fraction of where they are today?

Speaker 2 Let me ask you this. There's two big exogenous factors that I think

Speaker 2 you have to acknowledge and maybe adjust for. And I'm curious how you're adjusting your clients' portfolios of these two opportunities, risks, whatever you want to call it.

Speaker 2 The first is the Trump administration and all that brings kind of, you know, America first. generously or tariffs, however you want to frame it.
And two, AI.

Speaker 2 How are you adjusting your clients' portfolios based on those two factors?

Speaker 3 So let's start with AI first. You know, and you and I are not that far apart age-wise.
So we've lived through the financial crisis.

Speaker 3 We've lived through the dot-com implosion, what happened with the internet. I think we're both old enough to remember when computers, desktop computers first came out.

Speaker 3 And there's this sort of land rush. And by the way, this has happened with every technology.
Go back to telegrams, radio, telephones,

Speaker 3 computers, internet, AI is no different. There's a rush to try and find the winners, the NVIDIAs.
But what ends up happening is

Speaker 3 we're not a dot-com company, but every modern company today has a website, has email, uses business intelligence and connectivity to make themselves more efficient, more productive, more profitable.

Speaker 3 So with AI, the thought process is, is NVIDIA too expensive? Is it too cheap? When does Netflix and its and Microsoft and Apple, when do those companies achieve full value, over value? I don't know.

Speaker 3 I have no idea. People have been betting that it was over for forever and they've been wrong.
To me, what makes AI so exciting isn't the Magnificent Seven.

Speaker 3 It's the other 493 companies in the SP 500 that every single one of them is going to be using artificial intelligence to make themselves more productive, more efficient, more profitable.

Speaker 3 And that's the upside. Sure, NVIDIA is a $3 trillion company.
Is it going to be a $4 or a $5 or a $6 trillion? I haven't the slightest idea.

Speaker 3 But I can tell you the rest of the SP 500 is going to benefit from AI and become much more productive. So

Speaker 3 that's your second question first. The Trump issue is kind of fascinating because

Speaker 3 there are two sides to this, and you have to be able to hold two conflicting thoughts in your head at once. The first is, if I'm investing for retirement, generational wealth transfer, philanthropy,

Speaker 3 I'm thinking out 10, 20, 30 years. I'm certainly thinking out beyond 2028.
And so you have to kind of tune out the noise and look past all of the craziness that's going on today.

Speaker 3 But the flip side of that, and I've never met a one-handed economist. It's always on the one hand and on the other hand.
But the flip side of that is there can be no doubt that risks are rising.

Speaker 3 This is a piece I put out last Monday, and we identified seven areas where the possibility of risks, they're still low, but they're higher than they were

Speaker 3 before January 20th. And that includes the risk of a recession, the risk of a contraction in the economy,

Speaker 3 the risk of a volatility spike, which we've already seen. We're now over 23, which is a big, relatively

Speaker 3 higher number, not high enough to say, gee, I got to start buying with both hands, but it's above where we were. That was kind of steady.

Speaker 3 I'm concerned about the risk of the rule of law. I don't understand this nonsensical

Speaker 3 strategic crypto reserve. The

Speaker 3 world using the U.S. dollar as a reserve currency of choice has been called America's exorbitant privilege.
Why on earth would you do anything to put that at risk? Samuel,

Speaker 2 why is it put at risk with the Bitcoin reserve?

Speaker 3 Why would you want to create an alternative to the dollar and endorse that?

Speaker 3 If you have an asset that's enormously valuable,

Speaker 3 you don't want to do anything to screw that up. And arguably, I try and think of Bitcoin as like a large tech company.
It's halfway between

Speaker 3 Facebook and Google, to put it into context. At like a trillion, seven, trillion, eight, it's right in between the two of them.

Speaker 3 Although Bitcoin came out a year or two after the iPhone, the iPhone is ubiquitous and indispensable. We're still waiting for Bitcoin to actually become

Speaker 3 an actual functionality. But back to the question about Trump and tariff and layoffs that the federal government, you know, we're sort of in a wait and see.

Speaker 3 Will these things withstand judicial scrutiny? Do they actually have the authority to not spend money that Congress authorized?

Speaker 3 There's a lot of questions, but you can't just completely tune everything out. You have to be aware we're seeing risks rise.
We're seeing the possibility of recession increase.

Speaker 3 I'm not a giant fan of the various Federal Reserve GDP

Speaker 3 real-time measures before you get the quarterly update. But the Atlanta Fed's GDP now just printed yesterday negative 2.8% for Q1 GDP.

Speaker 3 That's the first two months or so of data imply that we're going to be in a contraction when all these tariffs and all these layoffs get calculated in Q1. That's obviously a substantial risk.

Speaker 3 You just can't tell how much of this is negotiating, how much of this is going to go in effect. We're recording this 12 hours after the tariffs went into effect.

Speaker 3 The first time they were postponed, I'm hoping,

Speaker 3 a little wishful thinking on my part, that this will be negotiated away. But in the meantime, you know, the market's still within 5% of its all-time highs.

Speaker 3 It's a little early to panic, but it's not too early to say, gee, this is starting to get a little more volatile and a little more choppy.

Speaker 3 And lots of areas that have been pretty, you know, sedate and operating properly are now starting to tick up. They're still low, but they're much higher than they were four weeks ago, six weeks ago.

Speaker 3 We'll be right back.

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Speaker 2 We're back with more from Barry Ritholtz.

Speaker 2 So, I can't help it. I want to talk about individual theses

Speaker 2 looking for alpha and get your response. I'm wondering, I'm trying to find the silver lining and basically America abandoning its allies with respect

Speaker 2 to Ukraine and ignoring 80-year-old alliances with huge economies in Europe. And I'm obviously laying bare my political bias here, but it just seems insane to me.
And

Speaker 2 the silver lining I see is that Europe is about to substantially increase its military spending.

Speaker 2 And I see that possibly as a form of stimulus, not only economically, but it might inspire a decent amount of technology spillover into the private sector.

Speaker 2 If you look at Israel's spending on the military, obviously the U.S. is spending on military.
I would argue that on the whole, you could argue in addition to the actual defense

Speaker 2 buttressing, it's been in many ways good for the economy long term.

Speaker 2 I think of basically the most valuable companies in the the world have just built a thick layer on top of technology innovation that originally came out of the defense sector.

Speaker 2 Do you think that there's a possibility, and this is me trying to talk myself into the fact that Europe becomes a union again, spends more on military, and that it kind of ignites through stimulative impact and kind of a inspiration in its tech sector, that Europe might become a union and this might kind of set off not only leadership where they kind of command the space they own largest economy in the world take as a whole but it might be a starting gun for kind of a bull run in europe yeah or am i just am i just painting a story to make myself feel better here

Speaker 3 so we have a tendency to think of the world in black and white and and we've you know binary terms and it's never that clear-cut it's always nuanced and complex and so

Speaker 3 You're touching on a couple of really interesting things.

Speaker 3 So let me caveat this by saying I am neither a defense expert nor a foreign policy expert nor a geopolitical expert.

Speaker 2 Don't stop me, Barry. Stop being so fucking measured.
Just make declarative statements.

Speaker 3 Well, that's where I was going with this,

Speaker 3 where I was going in one direction, but pretend we're on the BBC. Just say shit like it's God's gospel.

Speaker 3 So, so the funny part about what you're saying is this chapter in the book called Epistemic Trespass, and experts in one area have a tendency to believe that their expertise.

Speaker 3 In fact, it was Professor Dunning who turned, introduced me to Nathan Ballantyne at Arizona University

Speaker 3 who's the expert on epistemic trespass. What happens when people with legitimate expertise in one area bleed over to another? And the answer is exactly what you would think.

Speaker 3 They're terrible in those adjacent spaces. But all that said,

Speaker 3 I think the nuance of the realignment is such that Europe has been skating by under the NATO alliance and the American leadership and umbrella.

Speaker 3 And while it certainly appears to be an unforced self-error, you know, your own accidentally own goal by giving that up, the United States giving that up, it is going to make Europe much more cohesive, much tighter.

Speaker 3 And whereas we used to be the counterpart, the offset to the Soviet Union, now Russia, Europe is going to become that. So that's the first part.

Speaker 3 The second part that's kind of interesting is an amazing article in the New York Times yesterday about not only how bloody and horrific the war in Ukraine has been, but how over the course of three years, the casualties, the injuries and deaths are now 70% inflicted by drones.

Speaker 3 The old regime of tanks and artillery and

Speaker 3 expensive aircraft has moved to a totally different type of warfare. It's no longer Lockheed Martin.
It's now Palantir. It's that sort of shift.
And so

Speaker 3 whereas we have all of these legacy issues,

Speaker 3 Those other

Speaker 3 companies and to some degree, the new European alignment are not stuck with that. And so it potentially can kick off a whole new wave of innovation, not just in defense, but other areas.

Speaker 3 We see it in the U.S. We see it in Europe.
I can't imagine the United States is going to sit by and let Europe sell all these expensive, profitable weapons to everybody else.

Speaker 3 They'll have a lead if we back off. And so it's really hard to judge how any of these things are going to work out.
There's always ramifications and unintended consequences and reflections.

Speaker 3 It's not just that I think

Speaker 3 I don't know what's going to happen geopolitically, but it's never clean and neat. There's always so many variables, which is why predicting the future has become all but impossible.

Speaker 2 A thesis, I want you to respond to this. We talked about this when we were at dinner.

Speaker 2 I've determined that the 0.1% all want to live in a handful of places: Dubai, London, New York, Palm Beach, Aspen, some in LA, and then I'm sure there's one city in Asia I'm missing.

Speaker 2 Do you think there's a strategy, or do you think it makes sense to invest? Or what I've been doing is I've been buying real estate in those places.

Speaker 2 Do you buy into this 0.1% strategy as an investment thing?

Speaker 3 Well, on the one hand, we just got the most recent data that says half of consumer spending in the United States are driven by the top.

Speaker 3 Yeah,

Speaker 3 it's bonkers. And, you know, when you have a certain amount of money, you become pretty price insensitive.

Speaker 3 I jokingly, if you've ever dealt with a contractor in the Hamptons, I'm assuming it's the same in Aspen. I know it's the same in Manhattan.
Crazy tax. There's a Hamptons tax that you're going to pay.

Speaker 3 Crazy.

Speaker 3 And that's the contractors know they can mark it up and say they want a part of that.

Speaker 3 That's on the one hand. What we talked about at dinner,

Speaker 3 and we've talked about this for years:

Speaker 3 the widening inequality, both on the wealth side and the income side. Although on the income side, it surprisingly got better post-pandemic with a lot of Keynesian fiscal stimulus.

Speaker 3 I mentioned unintended consequences earlier.

Speaker 3 We weren't all that far from a president,

Speaker 3 Bernie Sanders. That could have happened.
And as much as I see the far right sniping at AOC,

Speaker 3 it's completely understandable. We were never close to a president Elizabeth Warren,

Speaker 3 but I think a president

Speaker 3 AOC is a genuine issue,

Speaker 3 at least for the 0.1% you're talking about. And I'm not referring to the carried interest deduction or any of of the other loopholes.
I'm talking about: hey, guess what?

Speaker 3 There's going to be a new tax bracket. And if you make $10 million a year, there's an alternative minimum tax and you're going to pay it.
And so the risk with all this mania that we're seeing now is,

Speaker 3 and the risk with wealth inequality is when the backlash comes, I don't think the U.S. is ever going to become a socialist or communist regime, but we could go back to a 1950s or 60s era of taxation.

Speaker 3 That look, you look at the history of taxes over the past century, individual mom and pop citizens pay a much higher share today than they used to versus corporate America and the top 10, 1%, or even 0.01%.

Speaker 3 And don't be surprised if that pendulum swings the other way. I'm not smart enough to figure out an investment thesis for that five years down the road,

Speaker 3 but it's certainly a factor that should be considered.

Speaker 2 Perry,

Speaker 2 you've literally interviewed 500 of the most successful investors or influential people in the world of finance. I mean, you were sort of in this game of podcasting before it was cool.

Speaker 2 What are the two or three things you've taken away, not only around investing, but kind of life lessons?

Speaker 2 I have a few lessons or sayings that I've always held on to that have been nice guiding lights for me.

Speaker 3 What have those been for you?

Speaker 3 The single biggest one, which kind of surprised me, and I'm pretty alert to false modesty when people are bullshitting, blowing smoke up my ass,

Speaker 3 has been the role of luck and serendipity in people's lives.

Speaker 3 There were

Speaker 3 a group of fund managers who, as

Speaker 3 business school majors at Columbia, carpooled together. And it was like a crazy Leon Cooperman.

Speaker 3 And I'm trying to remember, one of them told me, like, these four guys who all would go on to become billionaires were carpooling together at school.

Speaker 3 And one of them had said, every person I went to school was as smart as me or smarter, was as hardworking or,

Speaker 3 but sometimes they just didn't catch that break where they're in the right place, right time at the right moment. and things just fell their way.
And it, you know, if you hear it once or twice,

Speaker 3 it's false humility. Stop.
When you hear it a hundred times from people who are just wildly, wildly successful, that's the first thing that really stood out.

Speaker 3 Like luck, really, hey, listen, hard work and smarts, those are table stakes. That's just what it takes to enter the arena.

Speaker 3 The second thing is, and this really took me a while to like the luck thing, I got right away. The second thing that really kind of surprised me is

Speaker 3 the concept of

Speaker 3 being grateful for what you have.

Speaker 3 And look, if you want to be miserable,

Speaker 3 go to Zillow, circle the area around East Hampton or Amiganset and click sold and look at the houses that sold for 25, 30, 35, 40 million. These aren't outliers.

Speaker 3 This is like every other fucking house is 10, 20, 30 million dollars. Your head explodes.

Speaker 3 And your first instinct is to say, what the hell am I doing wrong in my life that I don't have access to one of those?

Speaker 3 And then the second thought is, because you didn't get lucky there, you have a very nice house and a very nice car and a very nice this and that.

Speaker 3 Be grateful for what you have and stop comparing yourself to other people. There's always someone with a bigger boat.
If that's your measure of success, you're always going to be unhappy.

Speaker 3 Instead, not to get, you know, Zen on you, but if you

Speaker 3 count your blessings, appreciate what went your way, and be grateful for what you have, you'll be much happier and enjoy life more than, say, somebody who is, you know, pretty consistently comparing themselves.

Speaker 3 You know, hey, you were Bill Gates, you were the wealthiest person in the world, and then Elon Musk comes along.

Speaker 3 If there's always going to be somebody that's going to surpass you, that should never be your measure of happiness and life satisfaction.

Speaker 2 Barry Ritholtz is the co-founder, chairman, and chief investment officer for Ritholtz Wealth Management. He's also the host of Masters in Business, the most popular podcast on Bloomberg Radio.

Speaker 2 Barry's latest book, How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them, is out next week.

Speaker 2 This episode was produced by Jennifer Sanchez. Our intern is Dan Shallon.
Drew Burroughs is our technical director. Thank you for listening to the Profit Pod from the Vox Media Podcast Network.

Speaker 2 We will catch you on Saturday for No Mercy, No Malice, as read by George Hahn. And please follow our Profit Markets pod wherever you get your pods for new episodes every Monday and Thursday.

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