Observations on the Market & Investing
So. We're here with Barry Ritholtz founder. And chief investment officer of Ritholtz wealth, management also. Bloomberg. Contributing. Editor, or columnist. For Bloomberg view and host of masters, in business, the. Iconic, business. Podcast for, Bloomberg so let's, kick it off yesterday. Finally. Feels like the markets, are showing, us that they are in fact cyclical, give us some background, your view on what is happening in the markets sure. 2017. Was an unusual, year we had extremely. Low market. Volatility, we had crazy high political, volatility but. That's a whole nother conversation. We. Had very very few days where the market was up more than 1% of them more than 1% very. Very unusual for, a year to have that, little volatility. That, all seemed to change at. The end of January come February. Everybody. After the fact looks for a narrative, explanation, I, think. The simplest, explanation, is markets, just ran too, far too fast on. Investor. Enthusiasm. For the tax cuts for global, economic growth for, profits. But, just to put this into context. The past, four months the markets ran 14%. A good. Year on average for the past century is, 8 to 10 percent so, when you're up better, than 50% more than an average year, in, a third of a year that just means you have to eventually, come back to more, normal levels and that's what this seems to be there's, just regression to the main that last five, years we have a decline of 20%, or more so if we wake up the end of 18 and the markets are at, 20,000. Or 18,000. Wouldn't it just be well of course they, are yeah it's strange it wouldn't be a stranger case that the markets got a 30,000, versus 20,000, I know this, is normality. Markets, go up and down that's what they're supposed to do we usually see a couple, of 5% pull, backs a year we really didn't see that for a while, 10%, pull backs every other year, haven't, had that happen, in quite a while either so at a certain point things, just I'll give you a perfect example when. You look at the long-term trend, of the market that's driven by a lot of things like. Economic. Recovery. Corporate. Prophets. Demographic. Changes, we got so far ahead of that trendline that, if we simply just pull back to a normal trend, line of growth you could be at 20:20 2000, on the Dow and that's, normal, two-sided, markets are what they're supposed to do up and down and, what do you're obviously in the business of trying to identify alpha, when if you look at the rest of the year make the bullet case make the bear case I, have. No idea what's gonna happen and I never try and guess I try, and tease out what's. Really going on in the, underneath. The the headlines. Because if you understand, where you where we are today it, gives you a much better sense of. Positioning. Yourself to where we're going to be in the future as opposed to I'm. Gonna guess that Bitcoin. Will be fill. In the blank fifteen, thousand ten thousand, five thousand, rather, than do that we look at you mentioned mean regression, we look at long term valuations. Long term trends, of various. Asset classes we, know from all the academic, literature over. Long periods of time value. Outperforms, growth small cap outperforms, large, cap having, a diversified, portfolio including. Overseas, holdings. Reduces. Your risk for, a us-centric, event, like we've seen this week so, rather than try and guess hey we're gonna move our chips on the table like this and either, be right or wrong we, kind of put a bear hug around the entire world asset. Classes and say. Wherever, the market goes we will participate, in the upside, somewhere. But, also recognizing. We're, also gonna participate in the downside, what asset class globally. Is, undervalued right now so. US stocks are fully. Valued, or expensive. When we look at Europe they're, cheaper. Or closer, to fair value I, wouldn't say they're dirt, cheap but. They're much cheaper than us are somewhat cheaper than the US and then. Emerging, markets, and by, the way we've been saying this now for about two years, emerging. Markets are by, and large the, cheapest, so. Potentially. Underweight, US, stocks overweight, emerging, markets, and Europe, you when, you walked, in here this morning you talked about how average, investors underperform. Not only the markets but, their portfolio, so, fast, data, point so, people yet. To alpha. And beta beta is what the market gives you alpha is that out performance. Which. Is exceedingly, rare and very, difficult to do over extended, periods of time some, people say, impossible. Stock, picking stop, picking market, timing. Complex. Hedging, there's a whole bunch of different ways that that, it could be done and. The people who do it are the all-stars the, problem, is that it's not that that skill, deteriorates. It's that whatever that unique skill, is, markets. Kind of figure it out. Exactly. And so a. Lot, of people and have, decided we're, not going to chase alpha, we're going to accept the beta because, what we've seen over time is as you try and outperform, the market you, often, end up not, only outperforming.
Not Outperforming. But, missing, the beta and underperforming, in fact huge swathes of active, managers. Underperform. And that's before we get into expensive, fees that. Has resulted in Blackrock, being six trillion dollars, Vanguard, being five trillion dollars, of assets, these are the big indexers. And so, people are starting, mom-and-pop, are starting to wise up to the fact that hey, you know if I just owned a, broad. Portfolio. Of. Global, assets, and low-cost, funds or ETFs and, I rebalance, once a year and I take what the global market gives me that's, probably, gonna, outperform, what, 90% of my peers are doing people have figured this out, but. Only a small, I would say about 20%, of the investing public has figured that out so. Hedge. Funds underperforming. The SP by the amount of their fees we. Plus thence plus some plus some and then we've seen an enormous reallocation. Of capital, out of active management into, passive, the black rocks the Vanguard's, low-cost. ETFs. Every. It seems like everyone's, on to that now does that mean potentially we're about to enter another great era of stock picking as volatility picks, up and you have to actually find. Value, places, there's no doubt that as more and more people move to passive, it, creates an opportunity for true, active, managers, Bill, Miller who had the streak that lasted 15. Years of outperforming, the, market every year has, pointed, out that what. Is purported. To be active management is really, closeted, indexers, people hugging the benchmark, hey, you don't get fired for just doing a little better or a little worse than then, the market, what, you really if you want to participate on the active, side you, want to find managers, who have what's, described, as large, active. Share meaning their. Portfolios. Differ significantly from. What, the, benchmark, is and you're, either gonna win a lot or lose a lot with that strategy but, you're not gonna pay up for somebody who's essentially, essentially, giving you benchmark. Returns and and that's a different, thought, process, because it reflects, a reality, that most people really. Don't want to believe but it's true if you, want potential, upside you, must be willing to accept potential, downside, risk. Is a two-sided, coin as, investors, have learned over the past week but, you've said there's a certain behavioral. Economic. That. The brain is actually a little bit of our emotions I should say as an enemy and say, more about that that we tend to us and we underperform, our assets, and in, the market place is is emotional. Knee-jerk or gag reflex, so so there's a study, done every year by Dow bar that looks at average, investor, returns and, and some, of the things they've discovered, is there's. A tendency for, investors. And and this is starting to attenuate a little bit we saw a ton of it in the 90s but it still exists today people. Are attracted by bright, shiny objects, and so when you have a fund. Manager who's, shooting. The lights out that month that quarter maybe even that year, they, go, on TV they get the magazine, cover all of a sudden they're a hot name money. Just pours, into their funds, after. It's had this giant run-up that's. Probably, the worst time to buy something when you want to buy it is after it's had a horrific, sell-off. There but the process, is still valid, so, people. Confuse. Outcomes. With. Process, it's, very difficult to separate skill, from luck and very, often when people are chasing, some of these hot. Look. At bitcoin is a perfect example if. You own it at five cents or five dollars or even five, hey, that's a fantastic trade, you've done well but everybody who piled into this, speculative. I don't, know currency, technology, I don't know what you want to call it at. 12,000. 15,000. 19,000. You, know you're just rolling the dice this, morning, it was trading under six thousand dollars and that. Still seems like a pretty. Rich number, but, we. Don't, tend to go out and hunt these things when they're unappealing. And low, value, we, tend to chase, the hot new thing and. Bitcoin. Is a perfect example of how, there. Was an article in The Washington Post Bitcoin. Is my retirement, plan really. That. You're, gonna be eating cat food that's a horrible, idea maybe. It works out maybe it doesn't but, you might as well go to Vegas, it's the same sort of speculative, risk and the. Tendency, that people have is to not make investments. We're.
Very Bad at conceptualizing, the, long long, run like, 30 years from now what happened on a given Monday in the market is gonna be pretty irrelevant but. How you maintain, your, portfolio. And how you think about risk is what's going to determine your. Outcome the, other thing we all tend to do it's. Very easy to get caught up in all, the flashing, lights and noises, and you know CNBC. And Bloomberg, has the screens with all these things it's. A video game I. Don't, remember who I'm stealing this quote from but. The, expression. Stocks, really get in the way of your long-term investing. Says. A lot about how we behave, as humans so you're a wealth manager I'm going to give you a couple scenarios and you tell me how you would loosely, speaking allocate, their funds. I'm a 25, year old making a good living in New York any. Of these people, who. Can save a few thousand, bucks a year or maybe three thousand five thousand, and starting to think about hopefully, long term what. Do they do just an ETF what. Do they do obviously they can incur more risk than most of us what what do they do so they should be a hundred percent equity portfolios, they, should be rooting, for a stock market crash because. If markets, fall 20 30 40 50 percent. They're looking out 50, years 25. Year-olds are gonna be retiring, 5060, years from now they're, not it's not 55. Or 68, and all equity, is Lokar, for, today right global, portfolio they, could do a bunch of four, or five low-cost, ETFs. You, have us, you, have overseas. Europe. You have emerging, markets if they, want to own a tech, fund because, they relate to technology, why. Not it's certainly something you could do more volatility, but it doesn't matter when. They turn, 50. They might want to shift, that 80%, equity, is 20% bonds. What, that does is give them a little ballast, when the market goes up and down and now, they're closer to retirement they don't want to think about gee, a 30%, drop is really a lot of money and as, they get older they move more towards a traditional. 60/40. Portfolio but. The, old rule of you take your age -, a hundred whatever and that's how much bonds you should have is is out the window when, you're young you can have a lot of risk as long as you don't allow your emotions to get in the way I can't, tell you how many people in the spring of 2009. After. Holding on through a 57%. Collapse. And equity prices finally throwing the talents said I can't, take any more I'm out and that, pretty much is how crash. Bottoms, get made. 27. Coming out of business school you, are, thinking, about, financial. Services thinking. About media thinking, about tack you're, just an economic animal.
You'd Like most 27 year olds you're not entirely sure what you want to do with your life but you know you want financial security, or you want to ride. An upswing, which sector, do you think holds the most promise first so I I'm. Not looking to duck the question I want to give you a fuller answer I think you need to do three things as, a recent, graduate you. Have to understand, that you're a free agent there's no longer and I think everybody of that age understands, that but. That means you need to build your brand and that's a combination, of media and social and self-awareness. If you, don't understand, the basics, of coding if you can't do if. You can't build a basic website if you can't work with Excel you're an enormous. Disadvantage. From. Your peers and then, finance. Tell you you run a company I run a company we're not even five years old that. Has been an immense learning, curve in everything, from compliance. To payroll to legal to accounting, if. You're coming out of business school you should understand, the details, of running a business because. Your, life is really going to be your business and whether, or not it has an LLC or an S corp at the end of it having. Those financial, skills and having those social. Technology. And media skills are an, important, part of your future success you're, a perfect example I, guess I'm a perfect example understanding. Finance, understanding, media understanding, technology goes. A long way to getting, to you as a, future. Employee or entrepreneur. And without. All three of those skills you're. Really at an enormous disadvantage, so, series of questions try to try. To bring, down all screens and just just go with your gut in terms of an answer recognizing, none of us have a crystal ball and of. 18 markets higher or lower slightly. Higher. Cryptocurrency. Bitcoin. $6,000. Now above, 10 less than a thousand what you think is know let's say above, 20,000. Less, than a thousand, which you think is more like a bit less than a thought less than a thousand I cos a new means of financing small, companies, are fraud, well. There's been a lot of fraud in it so far so saying fraud isn't a big leap. There's, an issue with IPOs. And how few companies are coming public, that, needs to be tweaked a little bit I see. I was going away or gonna be a source of financing, for small companies, the. Recent history suggests, that they're not long for the world unless. There's, a major change, got it you know it's a it's a Viper's nest of. 2017, more money Maurice and I see ya then IPO or capital, yeah that's amazing I know it's crazy I first, joined our company a. Year. Ago would have said Apple now I'm leaning towards Amazon a company. That's going to be the poster child for this, bubble, one, or two stocks that you think could just go, down 80%. I'm. Waiting for Sears to go out of business okay, that's that's, I've been waiting for oh, I kicking, a horse can I tell you I waited. Eight years for a blockbuster go, out of it banks died usually slower than they're suppose much slower it's amazing, I think. I don't, know when it happens but I kind of think Facebook, becomes the next mice, per le you think Facebook, could be MySpace any others that you think could go down 80% we'd, say well of course it did I won't be surprised, to see some company, get cut in half, yeah I'm scandals, yeah, on a on a sexual, assault sexual harassment, scandal what's. Shocking to me about Fox News is how long that went on without. Anybody. Finding out about it and they're a public, company. That. Might have led to the sale all right that could have been he could oh it certainly was a factor, we better hit that bid but while there's still a bit to hit yeah, sure, so, you're.
Doing Podcast, what do you see in terms of your own experience with that medium podcast, that's, been the most fun I have every week it's absolutely, fascinating, not only do I get to sit with people like you we're just really interesting, but. You get to hear from people that. That's one of the ways I've worked out of my own bubble I brought. In jeb. Bush's, campaign. Manager. The guy who Mike, Murphy who who, ran his pact rights arise. Bruce, Bartlett was. Reagan. Appointee. And. And, although, he's an interesting guy because, he's a lifelong conservative. But tapped out under bush and basically, said the Republicans have lost their minds I, try, and find people from outside, of just finance. So. But. The mediums taking up my cell there are those that one of the few kind of mediate, mediums. And media that is really on a hawkish so so, here's, the little. Secret that everybody, in finance ignores. At least in financial, media who. Wants, to sit on a couch and watch financial, television, what's your favorite stock what's the Fed gonna do where's the Dow going to be coming. Up after the next commercial is. Pretty, heinous. On the other hands, the, opportunity. To take a deep, dive with somebody who is, clearly. Successful has, something to say is. Thoughtful educated, intelligent and is willing to give you an hour or an hour and a half that's. Unbelievable. That the, podcast, started the. Reason I created masters. In business was, because someone. Who I was fascinated by would. Show up on a financial television. Show. They would get their six minutes, give, a few. Now. By dance and. Then they're off to the next one I'm like no bring that guy back for, an hour and let him talk what are you doing for conversation, and so so that's, Howard. Marks, Ray Dalio, Bill, Miller Bill. Gross Jeff gonna go down the list of these people, who are. Incredibly. Accomplished. But Bill McNab is now the chairman, of Vanguard. Was the former CEO David. Booth created, dimensional, funds advice yeah, there's a run of people, I'm coming, up on 200, now that. This. Show shouldn't exist, because. The producers, of television, should have figured this out, decades. Ago instead, they seem to think they're covering a football game with. The, you, know the graphics, and the sound effects and the in-and-out, stuff. Investing. Is supposed to be over the long term over decades, that. Fast fast fast stuff, is not. What. You should be doing at, least in my opinion and I, think other people agree. Not just this, has become the most downloaded podcast, at Bloomberg but. Also since. I launched this a dozen, similar, type podcasts, have come out some, with a narrower focus on technology. Or value, investing, or whatever, and that. That's, really fascinating if it's. Not only the golden age of television but. It's the golden age of podcast, and investing, if you want to learn about investing, I get. Emails all the time from business, professors, hey, I assigned, six of your masters, in business to my class for, for. An assignment this year I get, stuff from people I have to drive two, hours each weekends, and I, listen to a few of the podcasts, on the way we're back or just simply hey, my treadmill sucks, and you make that 45 minutes go by faster, good stuff Barry Ritholtz founder. And chief investment officer. Of Ritholtz Wealth, Management thanks. Very much Barry thanks for having me Scott. You.