My friend Barry Ritholtz has spent his career being an astute market observer, investigating behavioral finance and data analytics. He runs Ritholtz Wealth Management which has been named ETF Advisor of the Year, Financial Times Top 300 Advisors, and one of America’s fastest-growing RIAs. He’s also the host of Masters in Business, Bloomberg Radio’s most popular podcast (50+ million streams/downloads), which he started way back in 2014.
In his new book, How Not To Invest, Barry emphasizes how avoiding rookie mistakes can significantly help you do better financially. He blends engaging stories with data-driven insights, and explores overlooked aspects of behavioral finance, psychology and the market. Reading his book is like having a casual drink with an experienced, wise, and honest friend.
I hope you enjoy this conversation as much as I did. We’ve shared some highlights below, together with links & a full transcript. As always, if you like what you hear/read, please leave a comment or drop us a review on your provider of choice.
— Jim
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Highlights
The Winner’s Game and The Loser’s Game
I've been playing tennis for about 10 years, and most people are amateurs.
Tennis is [actually] two different games. The winner's game is the game that the professionals play. You score by hitting aces, by just kissing the line, by slicing, by hitting with power, by putting the ball in all sorts of challenging places with all sorts of swings that require a lot of technique and expertise. Professionals win tennis by scoring points. The rest of us, the 99 point whatever percent of us amateurs, that's not how we win a tennis game. We actually lose by making unforced errors. And so, if you just make fewer of these unforced errors... if you just stay within your own skill set and don't try and do much, let the other person beat themselves, that's how amateurs win games.
Panic is the enemy - have a Plan B
“You know what? I started on a trading desk and the most interesting thing I learned from the senior traders, one was a former Army ranger, one was a Navy SEAL, another was a Marine jungle combat instructor, and these guys used to tell stories, literal war stories about the prep they did before they would go on a mission. And they literally map out everything that happens. And what do you do if this goes wrong here? There's a plan A, plan B, Plan C every step of the way. But the thing that the SEAL had mentioned that I found so fascinating was your gun jams in a firefight, what's your plan B? How do you deal with it? How much time do you take to try and fix it? When do you abandon the weapon? And what is your emotional state? If your reaction is panic, you're going to get yourself killed and your teammates killed. But if your reaction is, "Hey, mechanical things break. I have another sidearm, I have another piece. I could grab this weapon." Panic is when things go bad and you don't know what to do, but if you have a plan A, plan B, plan C and you are prepared for the emotionality of the moment, they just say, "We just do our jobs and keep moving towards the objective.”
The Stock Market Does Not Care About You
But when we think about the past and we think about the future, the past is just tinged recollections and faulty memories with the rosy glow of nostalgia. And the future is a lot of our hopes and dreams and wishful thinking. And those two elements dramatically impact how we think about money, risk, and time. And so, "Gee, I really want to buy that big house on the beach, I really want to take that vacation, I really want to do this and if only I could find that stock that will be a 10 bag or I can afford to do this." We impose our desires and our wants on the market and ask it to do things it really doesn't do. I like to tell clients you have to learn how to time travel. And the way you time travel is not getting into H.G. Wells time machine or a TARDIS and travel somehow always back to London. But just picture yourself, what's the world going to be like in 15, 20 years? What are your financial needs are going to be like?
Compounding is Nothing Short of Magic
“I tell a story, two guys going off to World War I. One invests $1,000 in the broad stock market index. The other buries $1,000 in mason jars. A hundred years later, their great grandkids access that money. And yeah, if your great-great-grandpappy buried the money, well, $1,000 a hundred years ago was a fortune. $1,000 today, yeah, it's lost 96% of its purchasing power. But when I ask people to guess what $1,000 invested in the market a century ago, is people say a million dollars, three million. It's more than $32 million. And when I tell the story going forward, if you buried $10,000 today, what's it worth in a century when you tell people $320 million, they absolutely will bet you money that that's impossible. And it's just the Rule of 72!”
Books Mentioned
How Not to Invest: The Ideas, Numbers, and Behaviors That Destroy Wealth - And How to Avoid Them; by Barry Ritholtz
Winning the Loser’s Game; by Charley Ellis
How We Know What Isn't So: The Fallibility of Human Reason in Everyday Life; by Thomas Gilovich
Transcript
Jim O'Shaughnessy:
Well, hello, everyone. It's Jim O'Shaughnessy with yet another Infinite Loops. Today I have my good friend who... I think I've known you for most of my adult life, Barry. Barry Ritholtz, the chairman and CIO of Ritholtz Wealth Management, one of the hottest wealth managers out there, host of Bloomberg's Master in Business. I think it's probably one of the most popular business podcasts out there.
Barry Ritholtz:
Certainly the oldest.
Jim O'Shaughnessy:
Certainly the oldest.
Barry Ritholtz:
It was coming up on 11 years and over 550 episodes.
Jim O'Shaughnessy:
And, you're also one of the first bloggers. 2003.
Barry Ritholtz:
Actually, 1998 was the blog-
Jim O'Shaughnessy:
No way. Really?
Barry Ritholtz:
... on GeoCities. And, to tell you how old I am-
Jim O'Shaughnessy:
Wow.
Barry Ritholtz:
... I had to teach myself HTML to be able to post. And, back in the nineties, it would take me 20 minutes to write up my notes that I want to post and then two hours to code it. You literally are doing it open, paren, A equals H-R-E-N and if there was a space in the wrong place, everything would break. And when Six Apart reached out and said, "Hey, we have this new block software called Typepad. It's WYSIWYG. You don't have to do any coding," I'm like, "All right. I'll check it out." And suddenly, two hours a day magically were... That's why one of the reasons I pushed back on the, "We've seen no productivity gains from technology." This used to take me hours and now it's seconds. I don't know what you guys are doing wrong, but I don't believe you're measuring productivity correctly.
Jim O'Shaughnessy:
Well, that leads us into why we're talking today. You have a fantastic new book out which, I love the title because this could be the infinite book, right? You're on Infinite Loops. It could be an infinite book, How Not To Invest. Essentially make fewer errors, make more money.
Barry Ritholtz:
Yeah. This comes back from an idea from two of my favorite Charlies, a sentence that isn't said, I don't think, ever. So, you go back to the 1970s, and I know you are a market historian and a data junkie, as am I, but Charley Ellis was on the board of Vanguard, he ran Greenwich Associates, he was chairman of the Yale Endowment, like a serious player in the history of markets. And, he wrote a paper in the seventies that eventually became a book, and the book was, Winning The Losers Game. And, he draws the comparison... It's festooned with all sorts of charming, wonderful sports references because Charley is this charming, wonderful person.
But, my favorite sports metaphor he uses is tennis. And, I've been playing tennis for about 10 years, and most people are amateurs. The 0.01% of tennis players who are professionals, Charley makes the conclusion there are two different games. Tennis is two different games. The winner's game is the game that the professionals play. You score by hitting aces, by just kissing the line, by slicing, by hitting with power, by putting the ball in all sorts of challenging places with all sorts of swings that require a lot of technique and expertise. Professionals win tennis by scoring points.
The rest of us, the 99 point whatever percent of us amateurs, that's not how we win a tennis game. We actually lose by making unforced errors. We double fault on a serve, we hit it into the net, we hit it wide, we hit it long, we hit it with not enough spin so it just bounces right up to the sweet spot of our opponent's swing. And so, if you just make fewer of these unforced errors... If you ever take any of the performance driving classes, it's kind of the same thing, if you just stay within your own skill set and don't try and do much, let the other person beat themselves, that's how amateurs win games.
And, Ellis draws the parallel to investing. Everybody's trying to find the next Nvidia. Everybody wants to tap out before the tariff sell-off starts and then jump back in at the bottom. And, the reality is, that's not how you win as an investor. As an investor, stay out of your own way. Don't make any mistakes. Let the market work for you and you'll be fine. Compounding will take care of itself as long as you don't get in the way.
Jim O'Shaughnessy:
Yeah. And, the challenge that I always have, Barry, is, you and I have been saying this to people for 30 plus years-
Barry Ritholtz:
Sure.
Jim O'Shaughnessy:
... and yet human OS seems to be impervious to much of this, what we think of as, self-explanatory information data. I mean, literally data. We have more than a century of data that proves your points, proves my points. And yet we are always constantly... Even ourselves, right? I'm human. You're human. We have the same problems with falling into traps, with thinking, "That's true of everyone else, but not me. I am the only exception." How do you deal with that?
Barry Ritholtz:
I wrote up a story the other day that it had come up because I started getting all the March Madness advertisements. And so, I've been a big Knick fan my whole life. I came of age, basketball wise, during the Larry Bird, Magic Johnson era, which was followed by the Detroit Bad Boys and then of course the Bulls and Michael Jordan. And, I always thought the New York Knicks, of which I am a big fan, never got a fair shake from the refs. And the Patrick Ewing, Charles Oakley, Mason, Starks era, they were always on the verge. They never could get past Jordan. It always felt like the refs gave Jordan, "How many steps was that, ref? Four steps to the..." And, I always used to be so frustrated, so infuriated. And then, one day, somebody who I was a regular on CNBC with, I met in the green room, like I met you, big Joe Besecker of Emerald Asset Management was a big... I keep saying St. John's, but it's not St. John's. He went to a school like that and he is a big alum and donor so he gets fabulous tickets to the NITs, which take place at The Garden. And so, he invites me to a game.
And, all this has to do with our own biases and our blind spot as to our biases. And so, I'm a professional basketball fan. I'm a Knicks fan. I went to a state school. I didn't go to North Carolina or Michigan. I could care less. I could not care less about college basketball. I have no skin in the game, don't care about the outcome. But, hey, I'll see a game from the fifth row. That's awesome. My seats were up in the boondocks for the Knicks, section 205. "Wait, center court, five rows back, where do I sign up?"
So, I go with Joe to see this game, and he's a big guy with a booming voice and he is just haranguing the refs all game. "Ref, that's a foul." "Not really. The hand is part of the ball. That's not a foul." "Ref, travel." And I'm like, "Joe, two and a half steps on a layup, that's given." "Charge. That was a charge." "Joe, the guy was still moving. He wasn't planted. That's not a charge. You got to be there and own the space. You can't jump in front of someone."
And on and on this is going. And suddenly, I have this sinking feeling, this realization that, "Oh my God, I am this bad when it comes to the Knicks and I'm objective here because I don't care who wins." And, not only am I recognizing my own bias blind spot, but suddenly I realized, "Man, I've been operating in this world that's wholly delusional and completely of my own creation. And what else do I think I'm right about? What else am I biased about that I simply have no idea that I'm clueless?" And so, I want to say that was like 2011, 2012, something like that. And, it was very eye-opening because, up until that time, it was everybody else.
You're a hundred percent right. Well, first of all, frequently when clients call up freaked out about something, it's usually either bad information or a fundamental lack of framing or context. And, I don't know if you remember this, sometime about a decade ago, I don't know who first started putting this chart out, but it's like, "How are we going to get by? Look at the New York Stock Exchange margin levels. They're at all time highs." And, it's like, "Well, where's the rest of the context? What do you mean?" "Well, here's the chart. If we put the value of the market and the margin debt at the same time, they just track each other."
So, in 2014, all the memes, "NYSE margins are at an all time high..." Yeah. So is the market. That's how it goes. And so, it's so easy to spot these things in other people and it's so hard to spot it in yourself. And, to some degree, that was the thinking behind the book. "Hey, if I could get people to spot some of the silly things that I do and other investors do and billionaires do, maybe it'll be a little easier to recognize those mistakes in yourself."
Jim O'Shaughnessy:
Yeah. And, sometimes I think we would both feel like Don Quixote, right? Tilting at windmills. Because, I remember conversations and, as you know, they're almost always when markets are at extremes, right?
Barry Ritholtz:
Right.
Jim O'Shaughnessy:
The dot-com. I remember everyone telling me, " Jim, what are you doing investing in these bricks and mortar companies? They are history. I mean, you're crazy." And then, of course, the great financial crisis comes along and, Barry, I'm not kidding, I had one of our most devout advisors... This guy could do our pitch at my old company, O'SAM, better than I could do, honestly. Go down, Ari Rosenbaum, who you know-
Barry Ritholtz:
Sure.
Jim O'Shaughnessy:
... "Jim, you really got to come down with me because I think he's shaky." And so, I'm walking-
Barry Ritholtz:
He's broken.
Jim O'Shaughnessy:
I'm walking into his office, Barry... This is February of '09, okay? So, you know what happens afterwards, right?
Barry Ritholtz:
Sure.
Jim O'Shaughnessy:
I'm walking into the office, he's got a beautiful office in D.C. He stops me. He's sitting at his desk, he just puts his hand up and he goes, "O'Shaughnessy, I know that briefcase is filled with all sorts of charts and tables about why I should be getting really crazy long here. I don't care. It's different this time."
I mean, literally, Barry, every one of the faults that lead us to these horrible decisions and it was just like literally here was a guy who was about as devoted to the process as I was and then decides, " Let's throw the towel in." How do you and your colleagues at your shop, how do you stop your clients from doing this?
Barry Ritholtz:
So, there's a couple of ways to bring people to a head space where market turmoil doesn't affect them the way it used to. So, the first thing is proactively. Meaning, if the first time you're calling your client to have a conversation about, "Hey, markets don't just go up, they go down also." If the first time you're calling them is 10%, 15% into a correction, well, you are already late. So, rule number one is be proactive.
Rule number two is, manage people's expectations, especially when you have a great year. So, you know me, I'm not big on making forecasts and predictions. We don't do that, but we do a quarterly call for clients and, "Here's the broad overview of the markets and here's the broad overview of the economy, and here's what all this means for your portfolio and here's one last tidbit to think about." But, in January of this year, when we did the Q1 call, rather than make a market forecast, what we tell people is, "Hey, admittedly, small data set of years where the market is up 20% to 25% plus, for two years consecutively. Really only happened a dozen times and a big chunk of that is the '96 through 2000 but, historically, what this means is sometimes the market's up, sometimes the market's down following this, but generally it means just lower your expectations for this year. Hey, we just had two great years that are roughly the equivalent of four or five years in a bull market. We could go sideways for three years. You're still above the historical average so let's just ratchet down our expectations. Don't think about 20% plus gains for a third year in a row. Think more along the lines of plus 10% to minus 10%. That's the historical range you should be thinking about."
But, if I came to you at the end of '22 and said, "Here's the deal, two consecutive years plus 25, 2 consecutive years flat to minus 10%, would you sign on for that?" You would say, "Hell, yeah." So, the second thing is managing expectations.
And then, the third thing is just showing people, here's what market history looks like, and here's how often you can expect it. "Down 5%, down 10%, down 20%. And, by the way, down 30%, back up the truck. And, even if we end up down 50%, that's your second leg in. But, understand that, unless you are late sixties and about to retire, especially if you're under 30, 40, 50, hey, this is an opportunity. If you don't need the money for 15, 20 years, well, hey, you've been complaining about chasing these, how expensive everything is. Now they're on sale, down 20%," not that we're there yet, but we want people to think about major selloffs as an opportunity, not as a, oh woe was me moment. And as long as they go into that. You know what? I started on a trading desk and the most interesting thing I learned from the senior traders, one was a former Army ranger, one was a Navy SEAL, another was a Marine jungle combat instructor, and these guys used to tell stories, literal war stories about the prep they did before they would go on a mission. And they literally map out everything that happens. And what do you do if this goes wrong here? There's a plan A, plan B, set plan C every step of the way.
But the thing that the SEAL had mentioned that I found so fascinating was your gun jams in a firefight, what's your plan B? How do you deal with it? How much time do you take to try and fix it? When do you abandon the weapon? And what is your emotional state? If your reaction is panic, you're going to get yourself killed and your teammates killed. But if your reaction is, "Hey, mechanical things break. I have another sidearm, I have another piece. I could grab this weapon." Panic is when things go bad and you don't know what to do, but if you have a plan a, plan B, plan C and you are prepared for the emotionality of the moment, they just say, "We just do our jobs and keep moving towards the objective."
And that attitude is incredibly insightful and helpful to say not only do you have to intellectually anticipate the ordinary course of events where markets will fall 3, 4% in a day, 20% in a quarter, but you have to imagine what your emotional state will be. So when it happens, you kind of recognize, "Oh, we planned for this. I knew this could happen and it is happening. So here's what I'm going to do. I've already got rid of the stuff I thought was speculative and junky. I'm sitting on a little bit of cash. Hey, down 20% I'm a buyer and down 30% I'm a buyer again." And so if you go in I'm going to take advantage of this once-every-five-year opportunity that presents itself.
So a lot of it is getting people emotionally prepared, making them think in terms of opportunistic investing, adding, rebalancing into equity when it falls a certain amount. But then lastly, thinking about the downside as not a negative but as a positive. And it's funny because you learn that financial literacy has a really short half-life and you have to constantly drum that in because if you educate somebody, a year later, a lot of that's kind of faded. "Hey, I kind of remembered you said something about how often a down 10% happens, what are we supposed to do?"
And our advisors, God bless them, they are deep into that. They spend a lot of time. Josh had a really great comment in the morning meeting today, "This sort of environment is where advisors earn their keep. It's where advisor alpha comes from. You prevent someone from panic selling at the worst possible time, you've earned your fees for the next 10 years." The interesting, and again, I know you're such a historian, the word capitulation, which is often used to describe bear market lows, it literally means surrender. How do bottoms get made? When enough people throw in the towel, "I can't take the pain anymore, I uncle." When you give, that's how bottoms get made.
And there's a section in the book that talks about the crazy thing about bear market bottoms is a little over 30%, almost a third of people who sell, panic sell into a bottom, never return to equities, which is just shocking. And just think about what that means for those families retirements 10, 20, 30 years hence.
Jim O'Shaughnessy:
Yeah, it is such a sticky wicket. I used to, when I started my career, I was going to publish these books, say, "Here's a level playing field, here's how you can do it. You can do it yourself." And then I had years and years of experience that taught me, you know what? I'm going to change my advice. I'm going to tell everyone get a financial advisor. Because literally I was watching people who were big fans of the books. They liked the strategies, everything, and literally throw in the towel, capitulating, throwing the towel in.
So somebody picks up your book, How Not To Invest, and maybe they're young, maybe they don't have enough yet for an advisor, how would you guide them? Take me through how they can use the book to maximize their ability to not screw up in all of these situations.
Barry Ritholtz:
Sure. So it's an old joke, a gambler's joke, the worst thing that can happen to someone who steps into a casino for the first time is that they win. And similarly, the worst thing that can happen is the first time you buy a stock and it goes straight up.
So I want them to understand some of the basics. And our whole business model is we give great advice away for free. And hey, if 0.1% of you don't want to do it yourself, which you can, you could do it yourself. If you're a little thoughtful, spend a few minutes a month and manage your own behavior, you're great. If you don't want to do that, if that's not of interest, we're happy to do it for you.
But the basic concept is have a broadly diversified portfolio that at least the core of it is low-cost broad indexes. You could rebalance those every couple of years. I think if you're in your twenties, thirties, forties, you really don't need fixed income unless you're so risk-averse and are going to be so panicked every time we get a month like this. It's a drag on returns for a 20-year-old, it's a necessary part of the portfolio for a 50, 60, 70-year-old, although 60/40 seems a little high when rates are as low as they've been for a 50-year-old.
But that's the first thing. Have your core portfolio. I don't care if it's SPI or VTI or VOO or pick your favorite broad index. And then if you're enthusiastic about, I know you're a fan of momentum, I'm a fan of small-cap emerging market value. There's a lot of little ways you can hang ornaments on the tree. "Hey, India seems to finally be making economic progress. Let's buy an India ETF." So the 50, 60, 70% of your portfolio is just broad-based, low-cost indexes.
And we've been looking at Europe as a perennial laggard. Right now, the US seems pricey enough and Europe seems cheap enough. If you want to add a Europe ETF, go ahead. And the idea is that all these little things give you an opportunity to express your perspective or not. Like whether or not you think the Nasdaq-100 is where you want to be for the next 20 years or not, putting 5% of a portfolio when the rest is pretty broad-based, when you're looking for 8, 10, 12% a year over long periods of time at a very low cost basis, adding a little flavor to that if it keeps you from doing something silly with the rest of the portfolio is fine.
And then your next goal is to continue to add to that, to dollar-cost average into that over the course of your career. And then the most important thing is to not interfere with the market's ability to compound. That's the great gift of the market is there aren't a lot of guarantees in life. Over longer periods of time, and I feel comfortable saying 20-plus years, I used to say 10-plus years, but '66 to '82, 2000 to 2013, 10 is a little tight for the worst-case scenarios. But over 20-year periods, compounding works miracles.
And by the way, if you continue to dollar-cost average, as some people did from 2000 to 2013, and the stories abounded in '66 to '82, think about how frustrating that must have been for the 13 years between the dot-com implosion through the mortgage bubble, through the financial crisis, through the flash crash until 2013 when all the indices surpassed their previous highs and you've been making no returns and then suddenly it explodes upwards, because you're just slowly buying over time and nothing's really happening and it's going up, it's going down, it's stuck in a range. And then once that breaks out to a new bull market, as it did in March 2013, you're off to the races and 10 years later you, depending on how you invested, you five, six, seven Xed your money. And the money is made during the bear market, the gains aren't realized until the subsequent bull market. All bull markets pull gains forward from the next decade. And people forget about that.
So my advice to those folks are stay out of your own way, let the market work for you. If you insist on picking stocks or market timing or whatever stuff you want to do, do that in a small basis, but leave your primary investment dollars alone to operate with the highest probability for successful outcomes.
Jim O'Shaughnessy:
Yeah. And I've often said good investing is simple but not easy. And it's that part where I just continually try to come up with ways, and you're very good at this like you've just done, to get people to not be hyperbolic discounters.
When the TV news is screaming at you, "Tariffs and the Nasdaq is down 13%," it just automatically kind of shuts down the prefrontal cortex, goes right to the emotional center of the brain, and people are often forgetting all of this very, very straightforward advice. Is there any kind of process? I'm a huge believer, as you know, in process over individual outcomes. If you can follow a process and through thick and thin, you've got to make that deal with yourself, you're going to be ahead of 90-plus percent of everyone out there doing hit and miss. When you're first chatting with a potential client, do you have a sense, do you have a sense of, "Okay, this is going to be a great client," or, "Oh my God, this is not going to be a great client"?
Barry Ritholtz:
So, so very often the recency effect colors everything everybody says and does. And so you end up with, hey, this is why it's so hard to really find out what someone's risk tolerances are because what just happened over the past three months affects how they're looking forward. If we're in the middle of a rampaging bull market and we're up 20% for the year, "Oh no, I'm fine with risk. I'm very tolerant. It doesn't affect me." The market, I mean we're barely off the highs. That's what's so amusing. Have that same conversation with someone today with Nvidia down a trillion dollars in market cap. "No, no, I'm a very conservative investor. I'm very risk-averse. I want a moderate portfolio." And so that's the challenge is trying to figure out who they really are and what they'll put up with.
But I have found a lot of success in getting people to understand the broader context. And I'll give you a great example since you brought up television and tariffs and all the stuff that's on TV today. Most of what we see in financial television and financial media, it could be prints, newspapers and magazines, it could be radio and of course the infinite more of the internet and social media and TikTok and Instagram and all that stuff, think of what the world was like. And I love having this conversation with a 20-something or a 30-something who just assumed the media world is the same as it always was. Like, "Let me explain to you what happened before you were born. There was one financial television show on, it was 30 minutes once a week on Friday night. It was Louis Rukeyser who would come out in a very grandfatherly way, tell you what happened that week, tell you why most of it was just noise. And then he would bring a guest out and talk about a specific thing. And that was it. It wasn't 24/7 constantly being pushed to you."
And then some years later, FNN, Financial News Network merged with, I don't remember the other merger, and that was the birth of CNBC. Not long after that was Bloomberg Radio and then Bloomberg TV, and then CNNFN, which has since gone away. And then Fox Business, which isn't nearly as available as Fox News is. And so we barely need one financial channel. Why do we have four financial channels? Because if you are investing for retirement or generational wealth transfer, or even you have a newborn baby and you're saving for their college in 18 years, who cares what happens on a random Tuesday? It's not, "Hey, you know what? January non-farm payroll in 2022 is irrelevant if your kid isn't going to school until 2040 or if you're not retiring until 2050."
We are so immersed in the here and now we lose context of... I'm a big watch guy, but not for the reasons you would think. I became a watch guy as a kid because I was fascinated by the concept of time. So we see each other because photons, the particle that carries light, that part of the electromagnetic spectrum bounces off me and hits your optic nerve and you see something. We have yet to discover chronons or time particles. And the philosophical argument that's been made by some people is that time is a completely human concept that does not exist outside of human consciousness. There is the here and now and that's all that's ever existed. It has progressed, measured by the relative positions of different things as the universe expands. But when we think about the past and we think about the future, the past is just tinged recollections and faulty memories with the rosy glow of nostalgia. And the future is a lot of our hopes and dreams and wishful thinking. And those two elements dramatically impact how we think about money, risk, and time.
And so, " Gee, I really want to buy that big house on the beach, I really want to take that vacation, I really want to do this and if only I could find that stock that will be a 10 bag or I can afford to do this." We impose our desires and our wants on the market and ask it to do things it really doesn't do. Instead of just saying, "Hey, there's the here and now and 20 years from now, that here and now, future Jim, future Barry will need money to live on in retirement." I like to tell clients you have to learn how to time travel. And the way you time travel is not getting into H.G. Wells time machine or a TARDIS and travel somehow always back to London. But just picture yourself, what's the world going to be like in 15, 20 years? What are your financial needs are going to be like?
And I jokingly tell my wife about nighttime Barry and morning Barry. Every morning, morning Barry is thrilled that nighttime Barry set the coffee maker so that when morning Barry rolls out of bed at five o'clock, there's hot, delicious steaming coffee. And that's an eight, nine-hour difference. If you can plan ahead nine hours, well can't you plan ahead 10, 20 years?
You can even make the argument that this administration, as wacky and crazy as all these things are, if you don't need money for 15 or 20 years, yeah, this is going to be a very volatile ride. Tariffs are on, tariffs are off, tariffs are on. The implication that a lot of this is sort of hard to understand the reasoning and very, very variable, hey, you got to look past 2028 and think about I don't need this money until 2034 or 2042. And so the next five or 10 years is not relevant to me.
Jim O'Shaughnessy:
What do you think about... Another thing that we have seen, I think some of it very good, some of it really not great for investors is over the last 10, 15 years, there has been a huge amount of innovation both in terms of things that you can buy, for example, ETFs. They've been around longer than that, but they were a real improvement, in my opinion, for most people because of the way taxes got handled, because of all of that. And then things that we did that you were one of our... You actually were our first-
Barry Ritholtz:
That's right.
Jim O'Shaughnessy:
... advisor to give us great advice where we build custom portfolios and it turns out, we were chatting about it the other day, we thought, everyone at OSAM thought it was going to be, "Oh, people are going to be delighted that they can customize their portfolio or if they're anti-smoking, they can get rid of all the tobacco stocks." And then when we saw it actually being used, what was number one with a bullet with number two way below, number one was tax alpha, tax management. I think that's a great innovation. What are some others, both good and bad, that you see and give me your views on them?
Barry Ritholtz:
Sure. And by the way, the genesis of this section in the book comes from the very amusing quip from former Fed Chair Paul Volcker who said, "There's been no innovation in finance other than the ATM." And while there was some elements of truth to that 25, 30 years ago, it clearly is no longer true. And I'll give you a handful of my favorite examples.
So first, it's not just ETFs, but it's the ability to explore any aspect of the world that you think has a possibility of being an interesting investing. And there's already some sort of ETF. I don't care if it's a micro-cap sleeve or a momentum sleeve or a emerging market small-cap value, somebody has already done that. It's already out there. So that's number one.
Number two, and this is a double- edged sword, is the ability to trade for essentially free. Now, you and I both know that there's a little bit of a spread and there is no free lunch. There is a cost to it, but it's become, spreads have narrowed. I started on a trading desk where regularly there were... And back then it was fractions. It wasn't even decimals.
Jim O'Shaughnessy:
I remember.
Barry Ritholtz:
And it was eighths and quarters and halves. We used to joke, "Look at the spread. You could drive a truck through that." And you can make money if it was a stock that was 24 x 25. I'm a buyer at 24 and an eighth and I'm a seller at 24 and seven-eighths. And you would get filled and eventually the market shrinks those spreads. Now the spreads are tiny, so you're not paying up when you want to buy or paying down when you want to sell. And the cost for execution is next to nothing. In fact, since you brought up Canvas, I think we were one of the... If we weren't the first, we were certainly one of the first clients.
Jim O'Shaughnessy:
No, I think you actually were the first.
Barry Ritholtz:
We were the first, and I think we may still be the largest.
Jim O'Shaughnessy:
I think that's right too.
Barry Ritholtz:
We're 1,000,000,005 out of almost... Our last ADV was five. Really, the next ADV will probably have a higher handle on it. But we're about 25% of our assets. And via the old way of doing tax-loss harvesting was kind of modest and kind of routine and you were just taking the average of all your funds. The beauty of direct indexing is you get to open up the wrapper, reach inside, take the bottom 10, 20% of the worst performers. Even in a year where the market's up 15%, you have a handful of stocks that are down 10, 20, 30% or more, sell those, replace them with something that quantitatively looks very simple, "Hey, it's this size, it's this sector, it's this valuation. Find me something similar."
And so capturing those losses on paper, but replacing it with something very similar, it's been a game changer, especially for people who are sitting on... If you're in any of the, forget even Magnificent Seven, it's like the top 50 stocks, you're sitting on massive gains. Founder stock, IPO shares, low-cost basis, inherited stock, employee stock option plan. If you get someone an extra 50 basis points over the benchmark or you underperform by 50 basis points, people kind of shrug it off. But regardless of the size of someone's portfolio, and if you say, "Hey, we managed to reduce your ordinary income tax versus the capital gains that you have by 50,000 or $100,000," oh my God, it's the greatest thing since sliced bread. Nobody is happy sending a big check to Uncle Sam.
Listen, you have this windfall and it takes a little of the joy out of it that 20-plus, about 4% goes to Uncle Sam. And if you have the ability to say, "By the way, you have all these unrealized losses that we were able to realize on paper without affecting your portfolio, and now your million dollars in capital gains from all the Nvidia you've sold is only going to be 750,000. So we've saved you, do the math, $80,000 in taxes," they're like, "This isn't crazy Wesley Snipes sort of stuff. This is not..." "No, no, this is all IRS guideline-approved, black letter law. The IRS has signed off on this. Everybody's happy with this. This is just straightforward." So that's another innovation.
Just to show you how much the world has changed. And let me again reiterate, the free trading and on apps like that have gamified trading, like Robinhood, I think that's a negative. Just go back and look at all the 2020 and 2021 Instagrams, and I love the Twitter feed, TikTok investors, and you see the incredibly reckless, irresponsible things that people say without any guide rails, without any gatekeepers. And unfortunately, it got so bad that the IRS literally had to put out a list of things that aren't true. If it turns out that if you're out on a boat in international waters on April 15th, you still got to pay taxes. That's bad advice. And that's sort of crazy crap. The IRS literally put out 42 things or 39 things that are not true that keep showing up on social media.
I linked to, I think it's a footnote, the actual URL in the book, but there's so much of this has really become positive. First, your ability to just, I told this story the other day when we used to do our quarterly updates to clients, we'd have to print out everybody's results. Then you'd have to print out a run of labels, sticky labels, and then you got to, god-damn, make sure the right account goes to the right person. And it was like a week of work. And now everybody can see their actual performance year-to-date, week-to-date, tick by tick, since inception, versus benchmark. It's just software. It's easy as pie. Moving money has become much easier. I rebuilt a truck down in Colombia to send money internationally. It used to be expensive and time-consuming. And now there are apps like World Remit or Remitly where you can move $10,000 at a time. And again, it's IRS compliant, it's Know Your Client compliant. It checks all the boxes it's supposed to.
The other downside of all this progress is we are continually playing catch up and playing defense in the arms race against cybercrime. And the fact that we've moved everything online, people sometimes forget how dangerous a place it can be. So that's another form of education where you're constantly saying to clients, "Here's a password. Here's the safe word." If we get a phone call and someone says, "Transfer all this money over here, blah, blah, blah," there are certain things they have to do for that to happen. And it just continually gets more and more stringent. We're constantly educating people.
I just put up a link, I don't remember if it was today or yesterday, but teach your parents who are targets of scammers and fraudsters anytime they get an unsolicited phone call from somebody that ask them for information, say, "What company are you calling from? Great, I'm going to look up the number and call you back." And even something as simple as that. I got a phone call from my bank the other day and I'm like, "Hey, why are you calling me?" Well, we saw some activity on your account. "I'm like, great. The number on the back of the credit card, is that where I can reach you?" "Yes." Hang up, call them back. "Hey, can I have so-and-so in this department?" And it's just simple things like that.
So whereas there are just endless innovations in terms of software, the trading, and it is a golden age for investors. You can get exposure to not just the local market, but an international market for hundredths of a basis point. It costs you nothing to trade. No minimum at most custodians. You can do all these things, it's so easy, just make sure you are aware of the risks that are the other side of the double-edged sword, the XX trading for free trading or the fact that you can so easily see your accounts and access money and move it means you have to be extra vigilant against fraud and scams.
Jim O'Shaughnessy:
Yeah, they've even got some voice cloners now. And-
Barry Ritholtz:
Really. For you and I who have such public voices, everybody, and same with my partner Josh, everybody in the firm is told that if you get an angry call from me or Josh insisting you do something, call the other one and find out if it's bullshit. Because half the time these are public figures and AI, you can make them say anything.
Jim O'Shaughnessy:
Yeah. And I've had that demonstrated and it's really freaky.
Barry Ritholtz:
A little scary.
Jim O'Shaughnessy:
An acquaintance called me with my voice.
Barry Ritholtz:
Oh really? The old scam was calling grandma, "Grandma, I got arrested. I need money for bail. Mom and dad aren't answering." That was literally an email scam and now it's a voice scam.
Jim O'Shaughnessy:
Yeah, and it's funny because I'm always trying to think countermeasures, how are we going to defeat the grifters and the scammers? Because they're very clever and it's the preying on the weakest part of society that just boils my blood.
Barry Ritholtz:
100%.
Jim O'Shaughnessy:
It's like these people have scraped and saved, invested and then all of it goes away. And I think that's really good advice for your clients.
I was thinking as I was listening a little earlier, you started on a trading floor.
Barry Ritholtz:
Yeah.
Jim O'Shaughnessy:
And how was your transition from a trader mentality, which requires a really different kind of skillset, than an investor mentality. Walk me through that transition. Did something happen?
Barry Ritholtz:
Sure. It was gradual. First, I love being a trader. And back in the nineties they threw everybody in the deep end of the pool, whoever didn't drown, "Hey, you're a trader. Congratulations."
Jim O'Shaughnessy:
Exactly.
Barry Ritholtz:
I don't really think of myself as particularly self-aware. I tend to think of myself as a little more oblivious than that. However, I'm the-
Jim O'Shaughnessy:
Welcome to the club, by the way.
Barry Ritholtz:
And listen, we all have our own neuropathies and some of us are a little more neuro- atypical than others. But you want to learn how to use your personal advantages and disadvantages to best effect. And one of the things I was fascinated by was why does all these guys, and back then it was all guys, on a long desk, and there were rows of them, why do the results vary so much from person to person and even from month to month? So he's killing it this month and the next month he can't trade his way out of a paper bag. This guy's making a ton of money this month.
And so I got really lucky, in, I want to say it was like '96 or '97, I read a book from Cornell Professor Thomas Gilovich called-
Jim O'Shaughnessy:
Yeah, great book.
Barry Ritholtz:
How We Know What Isn't So. Certainly the first two-thirds of it is just a deep dive into why we make all these emotional errors and why that's so, you call it the EOS, I call it the wetware. Why is evolutionarily built into our operating system? And I want to say that book was like '91 or '93, probably the first major book on behavioral finance that was published, unintentionally about behavioral finance. So I learned how to ask different traders, "Tell me why you like this position. Tell me why you keep adding to it as it goes up." Or do you remember the MicroStrategy collapse in the late nineties when-
Jim O'Shaughnessy:
Yeah. Yeah.
Barry Ritholtz:
... there was a fake note, someone figured out how to get Yahoo to publish bullshit notes and the stock got collapsed and I watched this guy just keep buying the whole way down. The company comes out, "It's a fake. This isn't us." And the guy who actually released it eventually got arrested and the stock was like 120 and it had fallen to 20 or 30, some crazy number, and it recovered to 60 or 70. There still was some stink on it, but the guy who was doubling up and tripling up all the way down, I was fascinated by his risk taking and "Hey, what happens if this is true and it opens up and it's down 20 from where your last buy?" He's like, "I'm out of the business. Hey, do you really want to engage in that sort of existential risk taking? Does that make sense?" He goes, "Well, at the time I wasn't thinking about the risk."
Oh, all right, so wait, you're on a trading desk. You're not only executing orders for the firm, you are trading on behalf of your own P&L and you're doubling down and doubling down? And this is the start of the transition where it's like, oh, I could blow up and I'm out of the business. I don't want that much risk in my... It's bad enough that I'm up 100 grand one month. I'm down 75 grand the next month. My wife is like, "I'll take less money, but steady. Can we do that?" And I'm like, "Not if I stay on the trading desk." So the decision was made. I moved into research. I worked for a guy named Larry Hart who was a former software programmer at the predecessor to Lucent, Bell Labs. This was at Prime Charter, which eventually became part of Oppenheimer. By the way, I work at places, I leave, they immediately get bought. It's like, "Oh, that Ritholtz is gone? Great, now we could buy you." And it happened like three times in a row.
So Larry Hart would write these just deep technical research pieces into various companies. And one day one of the brokers came up to me and said, "Listen, we love Larry. We don't understand a word he says. Pick one or two of his favorite stocks and can you translate this into English so we can..." I want to say this is '97 or '98. So the two stocks I had picked were single digit stocks that I thought, hey, maybe these could double. And one was EMC at about seven buck, ran up to $82. And just like, hey, just think about storage for Amex, Chicago Board of Option Trades, and I forgot what the third thing was. They do all the digital storage for all the transactions they have. Oh, okay, big iron, we get it. And then AOL, the entry ramp to the internet in the 1990s, and again, under $10. And just being able to have that conversation about...
And the evolution is from trader to analyst to strategist and then eventually to chief investment officer where all the things we've learned over the years, let's just do less. Let's take what we know. Let's remove the speculation from investing. Howard Marx tells us delightful bit of math that the problem with active management, forget the fees. It's if your top 10 or 20%, then in any given statistically you're going to end up bottom 10% or 20%. There's no way around it. Your geography, your style, your investment focus, everything comes in and out of favor. And if you just take beta year after year, if you just get what the market gives you, after 20 years, you're in the top 20% just because you don't have that sequence of returns problem where one year you're minus 10% and the market's plus 30%, you can never recover from that. Even if the market's plus 10% and you're minus 10%, your hanging out on the bottom quartile just destroys those returns over time. It interferes with the compounding.
On the other hand, beta compounds and eventually ends up, if you give it long enough, 20 years, you're in the top quartile, 30 years are in the top decile, just by outlasting everybody who... Bill Miller beat the S&P 15 straight years and then in the financial crisis has a horrible year and drops from the top of the league tables to the bottom of the league tables. The beta, it's plain vanilla, it's boring, but to quote Paul Samuelson, who is Nobel laureate, "Investing should be like watching grass grow or watching paint dry."If you want some excitement, take 800 bucks, go to Vegas and have at it. But investing should be boring.
Jim O'Shaughnessy:
Yeah. And I just keep coming back to that because I've thought of many different stories, many different ways to explain that. And some of them land, most of them don't. And you know the sequence, right? It's like when markets are either flat or trending upward, everyone is like, "Oh yeah, absolutely. Oh yeah, I get that." I once did an experiment where I would ask people that we were managing money for to sign a letter that says, "Dear Jim, I realize that I'm saying all of this now, but that I probably will also call you in a panic when my portfolio is down more than 10%. You're going to remind me of this letter." And honestly, Barry, I had people, I stopped doing it because people got mad at me, but literally I had people put the letter down on my desk and say, "I didn't sign that."
Barry Ritholtz:
But you were proactive and a big part of success for any asset management firm or any advisor is not hiding under your desk when everything is red on the screen.
Jim O'Shaughnessy:
Totally.
Barry Ritholtz:
But being proactive. When we call clients like we are doing this week and saying, "Hey, we don't know where this ends. This is a quarter to a third of the way through, who knows?" But otherwise, the economy is doing fine, and even if all of this craziness causes a recession, it'll cause a mild... We don't see this as a Great Financial Crisis. We don't see this as... not as short as COVID, not as bad as GFC. But if somehow we body check the economy, strong economies can take a hit. And we've seen that over the past couple of years. You keep putting more and more burdens on the economy and it becomes susceptible to a shock.
So if we have a shock, yeah, maybe we end up with a modest recession. Three months ago I thought there was... I disagreed with Torsten Slok who said 0% chance of recession in 2025. I'm like, hey, it's never 0%, but okay, it's 5%. I'll give you that. I think the odds of a recession are still relatively low. But all this tariff mayhem and all this, I hate to use the word uncertainty, but the lack of consistency, the lack of an explanation to finance and to explain the basis of what does Canada have to do with our fentanyl problem? It's not where fentanyl is coming in. The confusing nature of this on again, off again, on again, off again set of tariffs has led to a situation where, hey, the odds of a recession, while still historically low, are appreciably higher than where they were on January 19th. So we feel like this could go on, it could end tomorrow, it could go on another six months, we don't know.
But just brace yourself because the fun of the past two years seems to be replaced with something that's a little more challenging. People are thrilled, even if it's bad news, they want to know that, A, the guy who manages their money is paying attention to this stuff, and B, being proactive. And we hear it, especially if a client has an account with you and somebody else, and, "Hey, how come every time the hits the fan, you're the only guys that call me?" Well, because we're not selling alpha. We know that this is what happens, markets go up and down. And it's why in the beginning of 2025, we said, "Lower your expectations for... When you have back to back 25% years, that's it. You've just gotten four or five years of gains in two years, expect a little rougher sledding than we've enjoyed." But that's the nature of this is that the market is discounting what's going to happen in the future. And so after two great years right now, the market's saying, "Eh, it's going to be a little harder."
Jim O'Shaughnessy:
That was the one rule I had at all of the various shops I either started or worked for, and that was when things are going badly, you are on the phone.
Barry Ritholtz:
Right.
Jim O'Shaughnessy:
Because-
Barry Ritholtz:
Even when things are going well, it doesn't hurt to say, "Hey, enjoy this. We hope this goes for another 10 years, but historically, these things tend to peter out in less time than that."
Jim O'Shaughnessy:
Counter-programming, right?
Barry Ritholtz:
Right. Exactly.
Jim O'Shaughnessy:
Things are really, really great. You give them the call and you say, "Hey, we're having fun too, but this is not going to last."
Barry Ritholtz:
This too shall pass. Right.
Jim O'Shaughnessy:
Yeah, this too shall pass, right? Over your career, you've written a lot of books, you've met a lot of really fascinating people. In your mind, who are some of the better investors that you've met over your career and what kind of characteristics, what kind of personalities did they have? Were they unified? Were they very different? I'd be really fascinated to hear your take.
Barry Ritholtz:
So I've done just about 550 Masters in Business podcasts and I've met a bunch of really impressive people. And they're all different in how they invest and how they think about money, in their personas, but there are some themes that seem to be pretty consistent with a lot of them. So let me just throw a couple of names out, because so different in what they do.
So I take a Howard Marks, who is a distressed fixed income investor and put up an amazing track record over the past couple of years, not only on the fixed income side, but when he comes out and occasionally criticizes the equity side of the market, you got to pay attention. Famously, his Amazon.com research piece in the beginning of 2000, January 2000, was Amazon.bomb that eventually got picked up by Barron's.
Jim O'Shaughnessy:
I remember.
Barry Ritholtz:
And man, was that timing perfect? And he's become a little more circumspect over the past year. Certainly if you followed his advice on things like NVIDIA, you're ahead of everybody else.
And then there's some other really fascinating people. Boaz Weinstein, runs a hedge fund, and he is constantly looking at intermarket issues and had found a way to make money investing in SPACs that people have overlooked. So if SPACs are guaranteeing... back when interest rates were 2% and SPACs were guaranteeing you 7% until they found their purchase, nobody was arbitraging that. He figured out there's a way to arbitrage that and made... Just a really bright, really insightful person.
And then when you look at the emerging manager side, there's a handful of smart young fund managers who have put together a pretty incredible track record. Now, their funds are small, they're less than five years, so it's hard to extrapolate, but I'm kind of fascinated by that. I've interviewed Steve Cohen once or twice, certainly an intriguing guy, Dmitry Balyasny, another really intriguing guy.
But here's the thing that I find so fascinating, every one of these guys, and it's not false humility. I could smell when I'm having someone bullshit me like that, but every one of them have talked about the role of fortuity and luck in life. And when someone like Howard Marks says, "I have a tremendous amount of gratitude for how lucky I've been," your initial response is, not for nothing, but you're really smart, you're really hardworking, you're incredibly insightful. And he said, "Everybody I went to..." I think he was Columbia Business School, "Everybody I went to grad school with was really smart, really hardworking, filled with insight. Intelligence and work ethic, that's just table stakes to enter the arena." He goes, "I've been really fortunate. Right place, right time. Certain things went my way. And there was this event and this meeting and this coincidence." And you and I had coffee by accident 20 years ago on a Starbucks that had an outdoor seating area on Park Avenue.
Jim O'Shaughnessy:
I remember, yeah.
Barry Ritholtz:
Who knows how the world is different if you and I just didn't have coffee the same day, right? Then we start, "Hey, don't we know each other?" "Yeah, you used to do CNBC, right?" Yeah, I remember just completely random stuff.
And so it's one thing if you hear it once, if you have one experience. There is a little bit of survivorship bias and you only remember the coincidences and a million other times you go for coffee where you don't bump into anybody, you just forget about. But when you hear the same thing from a Ray Dalio, from Howard Marks, from just go, Lee Cooperman, just go down the list of these amazing people who have built... Bill Gross and Jeff Sherman over at DoubleLine and Jeff Gundlach and Jeremy Siegel and Jeremy Schwartz at WisdomTree. When you hear the same thing over and over and over again. David Booth who founded DFA and Richard Thaler, who just happened to take this class instead of that class showed up to hear a conversation from Tversky and Kahneman 40 years ago. Just crazy random stuff. You really have to acknowledge, hey, sometimes serendipity has a tremendous impact on where the world evolves to.
Now, there's a lot to be said for, I don't love the phrase creating luck, but being prepared for when opportunity presents itself. Because every now and then there's a situation where something happens and one person obliviously walks by. And I always wonder how many people bought lottery tickets that won and didn't even know about it. Just lost it. Because some crazy percentage of unclaimed winning lottery tickets.
Jim O'Shaughnessy:
Yeah, I know.
Barry Ritholtz:
And so you just wonder, is it just something as simple as someone not checking, forgetting? And so you see the same thing kind of happen in the real world where if you're prepared and you've done your homework and opportunity breaks your way, something happens that you're ready to take advantage of it. That's the combination of intelligence and hard work meets serendipity. And so after the 100th wildly successful finance person says, "Always be grateful..." Scott Galloway at NYU, who's by any measure wildly successful, his line is, "I was born a straight white male in the United States in the 1960s. Right there, I hit the lotto." Just being a citizen of this country is a huge, huge advantage versus two thirds of the rest of the world, right? Hey, it's harder in China, it's even harder in Russia, to say nothing of the rest of the Third World. You have some people in Europe who have done well and the average person in Europe, well at least they have healthcare and college and retirement paid for.
But we underestimate the impact of randomness, not just in our success, but in the markets, in the economy, in geopolitics. I think the reason year-out forecasts, people do so poorly with them is that they completely underestimate how often a random event, like a pandemic, like the Russian invasion of Ukraine, like the terrorist attack in Israel and then the subsequent war in Gaza. Nobody has this on their bingo sheet in December year ahead, "Look," but when it happens, it just totally derails everything that people had plans. Randomness.
By the way, people hate that. No one wants to be told so much of what happens in the world is completely random and not even remotely anticipatable, so you just have to be prepared for that to happen and understand.
The weird thing I find myself occasionally telling people is, "This is not your fault." This red on the screen, it's what the price... The hard part, the uncomfortable part is the cost of admission for the gains. It's nothing that you did wrong. It's just something you have to tough out for whatever reason.
It's not like Trump didn't tell us he was going to put tariffs in. He calls himself Tariffs Man. I think nobody expected it to be quite this on again, off again type of volatility that leads to down 4% days in the NASDAQ. But this is life in the modern world, and you have to take the good with the bad.
Jim O'Shaughnessy:
On that note, did you have times in your own investing career where you felt like, "Oh, man, this is it. I'm just going to throw in the towel, and I'm just going to do something else"?
Barry Ritholtz:
Do you recall the MCI-WorldCom merger? Does that-
Jim O'Shaughnessy:
Oh, yeah. Sure. Yeah.
Barry Ritholtz:
It was one of those days where half the office is out, and, "Hey, let the newbie... Let the rookie man the terminal." So, I'm watching all these positions for people because they got to go do something on a slow Tuesday or whatever it was.
I remember just Dave Faber came on CNBC, and he starts talking about it. And I just hit... I'm hitting buy, buy. None of my orders are coming back. And then suddenly all these confirms come back, and then the stock starts running up, and then it's halted. And my stomach dropped. And I'm like, "If this opens up down 10, I'm done. I'm out of the business." And not only did it open up because the news was confirmed after it reopened, I was so far over buying power. And this is back in the day of what we used to call Sneakernet, where at the end of the day you saved your blotter, your P&L onto a 3.5 disc, and you had to walk it into the head trader's office. That was Sneakernet.
But you can move trades around. And when everybody came back, I pulled a few guys, "Hey, I need to talk to you. Listen, I'm not having a good month. I can't take a loser from you. No, here's the deal. I got a big winner. I don't have room. I'll give this to you. You're going to handle the taxes and everything else. You're just going to give me... Here's 100 grand, give me 30, deal with the rest." He's like, "Done." I did that with a few people. That trade kind of paid for my first house.
But that was the moment where it's like, "I can't take a risk of the software buying more stock than I can legitimately afford." And if Faber came out and said, and Bernie Ebbers said, " This is a rumor. This transaction isn't happening," I'm teaching philosophy at some college somewhere.
Jim O'Shaughnessy:
Well, I would take that class because as I was going through your book, I was just thinking to myself, "Barry is really, at heart, a philosopher," because the way you approach everything, it's very, very thoughtful. I think, at the end of the day, if you have an underlying philosophy that makes sense to you, resonates for you, you'll be okay.
When I was younger, I was a real proselytizer, and, "This is the way. This is the future. This is what you've got to do." And then I realized that there were many more paths to heaven, but what underlay all of them was an articulated process that the person could feel comfortable maintaining.
One of the things that I find really interesting in the book is not only the underlying philosophy of it, but the way it is consistently applied. My wife was asking me once, when we had... All of our stuff was doing really, really well, and she's like, "Why aren't you happier?" And I said-
Barry Ritholtz:
Because I know how the movie ends.
Jim O'Shaughnessy:
Exactly. I know. I've seen the end of the movie. So, for me, the process turned to be quantitative. Right?
Barry Ritholtz:
Right.
Jim O'Shaughnessy:
For others... I had a good friend who was European, lived and traded in Vienna. He didn't like quant stuff, but what he learned was when he just felt himself getting overwhelmed, he immediately got up from his desk and went, put his gear on and did a mile or two-mile run.
But everybody that I've seen or talked to that really has done quite well has that underlying process that they follow. What are some of the techniques when you're dealing with people who you understand? You understand the way they look at the market. You understand all of that, but they're having a dark night of the soul.
Barry Ritholtz:
Sure. First, and this is just me kind of grown up a little bit, when Bailout Nation came out in 2009 or January 2010... I think came out at the end of the year in... Yeah, no, no, it was September 2009. I felt, as a fellow proselytizer, "Okay, people want to know how the financial crisis happened. Here it is." I didn't want to write this book. I was asked to write this book because I had been covering Lehman and Bear Stearns and all this other stuff.
Hey, it wasn't any one thing. It wasn't any one philosophy. It was a combination of low rates and a lack of gain in real income, and deregulation, and the Commodity Futures Modernization Act, and we weren't calling it ZIRP back then, but it was Zero Interest-Rate Policy, and all these plus a dozen other things. And all these things came together. And I was frustrated in '10, '11, '12. "Why are we still debating this? We figured this out. We know how this happened."
The new book, I'm like, "Hey, you know what? I understand there are people who are going to want to believe stuff regardless of whether it's right or wrong. They have their, I almost want to call it religious beliefs or deep ideologies about investing in markets, and I am not going to assume responsibility for bringing them to the Promised Land." You almost have to say... Not that I, "Here are the secret, and it's just for you who subscribe to my $5,000 newsletter." It's not that. It's like, hey, not everybody wants to hear what you're going to say. Not everybody is going to believe what I think is a cogent, intelligent, well-articulated argument for here's what you shouldn't do. And if you don't do this, and you do some of these things, you'll be just fine.
And more importantly, you won't be stressed about it because you'll understand that you're just fine. You'll understand how important having a good set of information sources are. That you shouldn't just dip into the fire hose of media nonsense, you should very carefully select who you know is intelligent and has a good track record and has a process that's worthwhile. And you could put them on your All-Star team, and it doesn't have to be any one masthead.
It's these people at Barron's, and these people at Bloomberg, and these people at the Wall Street Journal, and these people at New York Times, and the Atlantic, and the L.A. Times, and Vanity Fair, and this Substack, and that. I love TikTok investors on Twitter. It's just a endless stream of what not to do. And you put together your All-Star group. And when Jonathan Miller says, "Hey, housing has really become cheap," pay attention because he's got a 40-year track record of telling people when housing is way too expensive and due to come back down. Each area that I track, I have an expert in it that all they focus on is that space.
So, the proselytizing is no longer, "How come people are still debating this?" With a little age and gray hair and wisdom, I think the proselytizing goes to, "Not everybody cares what you have to say. Not everybody is receptive to this message, and some people just aren't ready to hear this. But there are enough people that this will help them over the long haul."
My favorite thing in the world were the emails that I got throughout the 2010s. "Hey, I followed you out of the market in '08. I understood what you had been writing about in '06 and -07. When you went back in March '09, I thought you were insane, but I held my nose and said, 'All right, we're already down 57%. How much worse can it be?' And thank you."
We've talked, though. You get emails and stuff like that, and so you kind of recognize, "Hey, I can't get everybody to understand what's in their own best interest, but some people will pay attention to this. Maybe some people will be somewhat entertained by it."
Bailout Nation was kind of a slog. It was heavy subjects. I, as an attorney, didn't understand why we weren't allowing insolvent companies to use those very handsome buildings downtown with the Roman architecture and the columns. Some people call them bankruptcy courts. "Why are we making everybody tough this out? If you blew yourself up, well, we have a process for that. Let's stick to the..."
And then aside from the fact that every other month another company would blow up, and I'd have to rewrite that chapter, this book was just a joy to write. It was so much fun. Michael Batnick, who rolls his eyes every time I tell a war story, it's like, "All right, tell you what. I'm going to take all these stories and put them in a book. And you can't roll your eyes on them because..." And other people who haven't heard them will find them interesting.
And the feedback that I find so interesting is, "I learn the most lessons about investing from things outside of investing." I can't tell you how often I hear that. So, when we talk about every movie studio passing on Star Wars and ET and John Wick and Raiders of the Lost Ark because even the experts, to quote Paul Graham, their expertise is made in a different world. They became experts in how the way the world used to be. Forecasting what moviegoers' taste is going to be five years forward, or forecasting where the stock market, which company, which sector, how the economy is going to be doing a year or two out, it's pretty obvious nobody consistently does that well. And if your portfolio success is dependent on your forecasting ability, you're in trouble.
He better option is let me at least have the core of what I do be beta, and I'm guaranteed this measure of success, and anything around the edges is just gravy. For us, that gravy is tax alpha, advisor alpha and the ability to educate people about what is real and what is not.
What made this book such a pleasure to write, it was really a joy to write after the slog of the last book, was just simply how much fun it was to go over all these stories that my guys have heard to death, they're tired of, and to put it in a context that made it fun and useful. And just Nick in my office, who Alex calls Nicky Numbers, he loved part two, which is all totally data-driven about how few stocks drive returns, and how frequently managers underperform, and even how investors underperform their own holdings, and on and on. That's the meat of the data part of the book, but I sandwich that in a soft, chewy, delicious bunch of stories in the beginning about media, and about how nobody knows anything, and how often we are all wrong about things in front of it.
And then the back half of it is... I didn't want to rewrite The Psychology of Money or Thinking Fast and Slow, so I tried to emphasize all the things that were very specifically under-understood, not well understood within the world of behavioral finance, like epistemic trespass. And a lot of people think they know Dunning-Kruger, but the irony is they don't. Which I've talked about that with David Dunning, and he's like, "Yeah, it's amusing how many people..." I didn't put this in the book. He had...
That's someone going back to the truck, but... Dogs! Hey, they're just doing their job, right?
Jim O'Shaughnessy:
Yeah, exactly.
Barry Ritholtz:
David Dunning tells a story about someone explaining Dunning-Kruger to him once, and I just thought that was hilarious. "And what do you do?" "Oh, I'm a professor of psychology at University of Michigan." "Oh, that must be fun. You must be familiar with Dunning-Kruger." "You could say that." It's just like, stories like that are just... And I'm sure I'm mangling it. He tells it much better than me.
But the ability to sneak the lessons in when nobody is looking, that's what made putting this book together so much fun.
Jim O'Shaughnessy:
Yeah, I think it's a great book. Beginners will learn a lot if they pick it up because you don't have to make all those mistakes.
Barry Ritholtz:
Right.
Jim O'Shaughnessy:
Barry points them out for you. But if you've been investing for decades, buy the book because you're going to see yourself in there. I certainly saw myself in there when I was reading it, so I highly recommend it to everyone.
Well, Barry, this has been enormously fun for me. I always enjoy talking with you. As you know, our final question here on Infinite Loops is we're going to make you the emperor of the world. You can't kill anyone, you can't put anyone in a reeducation camp. But what we are going to do is we're going to hand you a magical microphone, and you can say two things into it that are going to incept the entire population of the world, whatever their next day is, they're going to wake up and they're going to say, "Unlike all the other times where I had a great idea or two and I didn't do anything about it or act on it, these two things I'm going to actually start acting on today." What are you going to incept in the world?
Barry Ritholtz:
The two biggest takeaways that I think so few of us actually internalize... Even if we understand it intellectually, we don't emotionally grasp it. One is how important it is to be humble, to have humility. By the way, not something really associated with my brands, but as the book was coming together, it's like, "Man, we really know so little about today and nothing about tomorrow." If we all went about the day a little less cocky, a little more humble, everything we touched would be better.
It's not a false modesty. You're not professing your ignorance. It's just a recognition. There's lots of stuff we know, but there's even more stuff we don't know. And if we were aware of that, I think it would make us much smarter investors, business people, spouses, et cetera.
And then the second thing, and it's corny, but it's true, the cliches exist for a reason, is compounding is just so powerful. And the story I tell in the book... I've never been a fan of, "The dollar has lost 96% of its purchasing power over the past century." Like, well, you don't spend 1925 dollars today.
Jim O'Shaughnessy:
No. Right.
Barry Ritholtz:
You spend 2025. What's the other half of that equation? How much has your earning power gone up? It's double-entry bookkeeping.
But I use a metaphor. I tell a story, two guys going off to World War I. One invests $1,000 in the broad stock market index. The other buries $1,000 in mason jars. A hundred years later, their great grandkids access that money. And yeah, if your great-great-grandpappy buried the money, well, $1,000 a hundred years ago was a fortune. $1,000 today, yeah, it's lost 96% of its purchasing power. But when I ask people to guess what $1,000 invested in the market a century ago, is people say a million dollars, three million. It's more than $32 million.
And when I tell the story going forward, if you buried $10,000 today, what's it worth in a century when you tell people $320 million, they absolutely will bet you money that that's impossible. And it's just the Rule of 72.
So, Warren Buffett at 96 or 97, I don't even know how old he is now, has become so wealthy in the past seven years because the Rule of 72 and the doubling effect every... For him, it's like every eight years. Suddenly he goes from five million to 10 million to 20, 40, 80. If you live long enough, as he and Charlie have, what started out as a large fortune becomes an absolutely enormous fortune because of compounding.
So, my takeaway is start investing early, and more importantly, don't interfere with the market's ability to compound your money over time. Our biggest mistake is just interfering with the math of compounding. If we're a little humbler and allow compounding to work its magic, everything will work out.
Jim O'Shaughnessy:
Great advice, Barry. And the book is available everywhere. What is the release date again? Remind me.
Barry Ritholtz:
March 18th.
Jim O'Shaughnessy:
All right. I recommend everyone buy a copy. Really great chatting with you, Barry, and I'll see you soon.
Barry Ritholtz:
As always, a delight. Thank you so much, Jim.
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