Rick Rieder: The Market Doesn’t Care If You’re Right

0:00From Morgan Stanley, this is Hard Lessons, where iconic investors reveal the critical moments that have shaped who they are today. You'll hear about two out-of-consensus calls, one that was on the money and one that wasn't.

0:14Rick Rieder:I think this market has become much more of a gambling institution. You see everybody lined up on one way, and then, you know, being a contrarian and going against consensus has become much more, I think, profitable. Today on the show, Rick Reeder, Chief Investment Officer of Global Fixed Income and Head of the Global Allocation Investment Team at BlackRock. He helps to oversee$2.7 trillion in assets across global bond and multi-asset markets. Rick is an influential voice on interest rates, inflation, and market structure, and Chairman of BlackRock's Firmwide Investment Council. So much of what drives valuation is emotion.

0:52Rick Rieder:And markets go down five times faster than they go up. People tend to make money slowly, and they lose it quickly. He sat down with Seth Carpenter, global chief economist and head of macro research at Morgan Stanley. It actually has been a while since you and I sat down and talked together. Good to be here. Thanks for having me on it. They met at the Campbell, inside Grand Central Terminal. Listen in to hear how Rick built early conviction in EV technology, the key qualities he looks for in a CEO, and how the 2008 crisis taught him that having an exit plan can matter more than being right.

1:29You've been at BlackRock now for 17 years?

1:31Rick Rieder:17 years, yeah. That's a long time. Hard to believe. Hard to believe. You started in 2009, which in some ways feels like a very different world than where we are now. What's it been like, that journey at BlackRock? So, first of all, I remember coming out of 08, which was unbelievably stressful, the most stressful of my career, certainly, and I think a lot of people's career. And then I remember in 09, like I had started a hedge fund and all my partners were discussing, should we go to BlackRock or not? And I remember saying this place could be the epicenter of finance or is the epicenter of finance at the time or one of them, but not thinking that the firm would grow to the scale it did.

2:09Rick Rieder:We were right before the acquisition of BGI and iShares, which has transformed part of the transformation of the ETF industry. And to think about over$14 trillion in assets, and when I joined, we were a tiny fraction of that. And it's become a pretty amazing place. So it's been fun. And by the way, I found that this industry is pretty funny about how every year there's finality, and then we transition to something very different. And you're seeing that play out again. There's always a lot of reinvention that's going on. you did say epicenter, which I think is a useful word because there's always a discussion how many billions of dollars of assets under management.

2:46Did you think you'd be able to talk about trillions of dollars of asset under management?

2:51Rick Rieder:No. In fact, by the way, I did an event at, I chair the board of our charter schools in Newark, New Jersey. And I did an event and I asked the question to people, I said, they talked about how much we manage. And I said, does anybody know how many zeros and trillions? And then somebody gave the answer and I really didn't know. And I I had to actually do, I actually had to think about it and say, oh, hold on. I got to actually think about how many zeros. And it was actually a funny thing. But no, I mean, and when you think about, you know, the sheer scale of it and, you know, certainly in the portfolios I run, we're like maniacal about precision in each of them.

3:23So it doesn't feel like untenable.

3:26Rick Rieder:It feels very manageable in terms of that scale. Do you think the sheer size of it is part of the secret to success? You know, there are some benefits that come alongside of it in terms of the amount of flow we see across different asset classes, seeing thousands of situations. The odds statistically are just better that we can look at so many different things to make. And by the way, not that I make all the right decisions or many of them, but it is the ability to actually look and say, OK, that makes sense and see relative value in places that you wouldn't even think. Like, you know, why should the dollar yen trading here relative to where swaps are trading and like being able to put the pieces together?

4:03Rick Rieder:and think about regime and with the ability to actually look across different asset classes, I'm a very much bottoms-up person. And if I can understand or try to understand, like this is happening here and this is happening in this region and this is happening in this part of the cap stack and the raising equity for this, it gives you the ability to actually try and build the puzzle effectively. I want to try to draw wisdom out of you and dissect a little bit that process that you go through with your team. So when you think about your career, are there places where you have been out of consensus and it turned out you were right?

4:38Rick Rieder:So maybe I'll start with describing, like when you say the wisdom, I actually don't think I should be characterized as having wisdom because you have to do immense amounts of work. For me, at least, there's no innate, distinctive skill set. I just think you try and put all the pieces together and then have conviction about it. But I will tell you, I'm not very good at, you know, some people are like, you're in it, you have conviction, and then you double down if people don't believe in it. I'm not very good at that. I think, though, what I've been able to do is look at things like technology. I am a huge fan, geek, in terms of technology.

5:14Rick Rieder:I never forgot when EV cars came out, and there was this, you know, they're not going to work, the battery's too expensive, it can't compete. You have these huge players that are entrenched in gas-powered vehicles, and it can't work. And I remember doing all the work and looking at that it wasn't really an auto business. It was an energy business. And actually, if you think about an energy business and you think about, is it efficient? Can you create real scale around it? And you get a sense for like, gosh, this thing could work. and it fits a whole lot of things in terms of where people are, whether it's environmental or it's at its sheer, it's a more efficient engine theory.

5:56Rick Rieder:But I remember on TV seeing people talk about, oh my God, it's so ridiculous. And like everybody knows it's ridiculous. And there were people shorting them. You know, I have no problem describing my conviction, but there are times that I have to say that people thought I was so dumb that I just wouldn't even talk because I wouldn't want to describe it. But I stayed in it. I will say there were times that I said, you know, I got to reduce. Maybe I don't have this right. But that was a really big one for me because it was, you know, this pipe dream of this thing. And you had like a transformative technology.

6:30Rick Rieder:And then it exploded higher and then it's leveled off. But I'll tell you, just getting in early on these things and thinking through. And, you know, a little bit I remember hearing about was Peter Lynch and how, you know, he would try things. For me, it's huge. Like, I remember first driving when I was like, oh, my God, it's fast, it's clean, it's quiet. I'm like, this is a better product. And I do it with, like, everything. The same thing when I remember when the Mac first came out and I remember when the AirPod came out. And, like, this works and this is distinctive. But to me, it's like, okay, then you understand what's the TAM of the market, what's the size of the market.

7:08Rick Rieder:how can you bring costs down over time? What's your cash flow on the backside of it? So there's a really disciplined, humble process that you just described, but there's also a bit of a lonely process being sort of all by yourself sometimes and everybody else saying that maybe you're crazy. What do you do in those moments when it feels a little bit lonely? So I would say 99 % of the time, it's all about collaboration and team. I actually think on those situations, it's actually not because everybody tends to move with the consensus, myself included, most of the time, virtually all the time. But then you just got to stay in there.

7:47Rick Rieder:Some people who are different, who maybe have your view that are also out of consensus, and you check yourself a lot with those people. And you say, okay, what are we missing? What do we have wrong? And then I like to read a lot of people with a different perspective. And like, why do they think this makes no sense or what have you? So I tend to go with people that are aligned on the view and then the people who aren't really try and studied it and then try and get confident. But like I say, I've learned over time that we're not in the business of being right. We're in the business of generating return for clients.

8:18Rick Rieder:And what happens is the market perception can stay wrong longer. And I remember studying in school the efficient markets thesis. I actually think they should throw that out because that is so far from the truth. You know, I think markets are wrong a ton, but you've got to survive. And you could be out of capital by the time the markets get it in theory right. So anyway, I try and stay in it. I'm not very good at doubling down when people go against me because, you know, your confidence goes. But I try and stay in what I have and then, you know, try and develop the thought deeper and like this is going to work.

8:53It's funny. I think it was Keynes who was at least attributed for saying the market can stay irrational longer than you can stay liquid. And that makes it super tricky. Do you find it more helpful for you to read people who have sort of the same general view so you can corroborate what you're thinking? Or is it more helpful to find people who disagree with you so you can pressure test and find out where you might be wrong?

9:15Rick Rieder:You know, a situation when you're very against consensus, you try and I try and read a lot about the people who are aligned on the view. and you know one thing you learn is everybody tends to move together and I think social media has made this even more intense. Everybody moves in the same direction and you know I found maybe just from being old or doing this for a long time there is a time when you see like everybody's moving and price has moved and then now like okay now it's and now it's time to go the other way and I think this market has become much more of a gambling institution and you see everybody lined up on one way and then you know being a contrarian and going against consensus has become much more i think profitable and um particularly when the news flow is so intense like it's been a pretty good trade the market goes one way and just fade it then it goes the other way you fade it and you realize you're staying on the line of a trend yeah and i have to say though if basically the whole market is in one place it is harder to make money that way because it's all already in the price and so where you're going to be there but there are probably some times where you have gone gone through, done all the same thing, dotted your I's, crossed your T's, and still ended up not having the trade work out.

10:26Maybe the consensus was right for a reason. When you think through those experiences where it hasn't panned out, what comes to mind?

10:33Rick Rieder:The ones where I didn't get it right come right to the fore. And it's, you know, because I think you learn much more from when you got things wrong. You tend to forget or hope that part of what you've trained for your whole life, you're going to get more right than wrong, hopefully. But I remember, I don't know, I could give you, I don't know how many, including like with bonds, the coupon, the maturity was something 20 years ago. In fact, including one where I studied, it was early in my career, I was right out of school. And I figured I must be right on this. I could buy more. And it was an incredible lesson that like the world thinks I'm wrong.

11:06Rick Rieder:You've got to get out or you've got to reduce your size to the point that it doesn't ruin your one security, ruin your whole career. But that was lesson one. That was like, you've got to manage your risk. You've got to manage your size. And then, you know, it's a small industry and everybody gets a sense you're in a bad spot. Not a good place to be. Not a good place. And it's a pretty vicious industry. Like when people think you're on the wrong side. Sort of taste the blood in the water. Oh, my God. And they can press you. And so anyway, that was early on. But I remember also a technology one where it was the same thing.

11:35Rick Rieder:Like I knew the technology was good. I remember Peloton. And like I got in. I was one of the original owners of it. I remember it was more personal. And I got in. It was incredible. And I watched the technology. and then COVID hit, which was a fortunate situation for it. And then the thing exploded to the upside. And then, you know, you get more bought into the ecosystem. And it's one of those things, like, it's very hard when you think, like, you had the right perspective on it. And then all of a sudden it starts to go the other way. And there are a lot of people who say, why it went the other way.

12:04Rick Rieder:Listen, I think there were a few things that I learned during that in terms of how do you manage cash flow? You grow too fast. People say it was COVID. You know, maybe there's a little bit of that. But stop loss is a pretty healthy thing to do. And you hold your conviction. I really believe in this, that I have this theory that you believe three out of four times, you're right, you're right, you're right, and then, okay, time to move on. But this industry, I mean, it is very much, one situation can hurt you in such an extreme way that I believe in this, particularly on the bond side, diversify, make sure you've got, and I believe in the odds.

12:41Rick Rieder:Like if we can get in liquid assets, get it right 60, 65, 60 % of the time, in illiquid, if you get it right 70 % of the time, on the fixed income, like I feel like doing it more times than not, just do it like a casino. Yeah, a lot of large numbers. Yeah, and just keep doing it that way versus making, but in equities, and the reason why, I remember the big ones were in equities, is you can have explosive wins and losses, and those are the ones you gotta be really thoughtful about. But you've got to cultivate the ones that you're winning on and the ones that you're wrong. Make sure you're just scaled to the size that you can absorb.

13:16Let me push on that a little bit more because you did talk about the price trajectory for Peloton. And there was a time where it was exploding. And you said you held on to it. So I manage a whole team of analysts. I'm an economist by training. And one of the things I try to teach my team is that if you're on the buy side, there's a term for getting the analytics exactly right but getting the timing wrong. It's called being wrong. Right, right, right. So for you with this Peloton trade, do you think it was that you were wrong or do you think it was just timing?

13:48Rick Rieder:I mean, I quite frankly thought the company could have reversed course, could have changed course. They didn't. And I think they were slow to change course. And I will say one thing that I've learned more than anything else, particularly with equities, coming from a credit background, you look at cash flow, interest coverage, collateral, hard asset coverage, and you think about all the metrics And with companies, you know, you think about their business model, how they generate cash flow. But the one thing that I learned is the person running your company is a huge deal. Not just the person, but the team that runs a company.

14:21Rick Rieder:Because invariably, companies evolve, the industry evolves, technology evolves, and you've got to pivot. And like some of the most successful companies, I mean, I would say most of them, started as something very different. and then they pivoted to something and they got into a thick vein of opportunity, whereas they probably started in something that was a good idea at the time, but then they had to change. And now I spend more time with CEOs and getting a feel for it. Do they know the numbers? Do they know the business? Are they good operators? And for equities particularly, that to me is like the whole gig.

14:58So getting into those levels of details, though, Does it help you differentiate between possibly pivoting to seize opportunities that exist? That seems like a good thing. Another version of the world is somebody who can't stick with their core competencies and they're always chasing the next shiny object. I mean, what gives you the ability to sort of sift through the details to come up with that kind of distinction?

15:19Rick Rieder:So, you know, I would say a couple of things. I would say, particularly in technology, there are people who have the acuity to actually think about where's the world going and then they adapt their business to that. And then there are people that, like you say, are all over the map. They're disorganized and they're trying to do too many things or catch the hot trend and they're behind it. But I found there's some really unique people over time that I've studied who are just really good at finding, like getting their companies positioned before the wave comes their way. Like there's some people are tips of the waves and, you know, they could talk at a high level, but it's the ones who are in a mess to understand, like, what's going on and how do you adapt?

15:59Yeah, I mean, it sounds a little bit like some of what you were describing about your own process where you said, I don't know if there's wisdom. I just try to get down to the details, build things up from the bottoms up, learn as much as possible. I think that skillset is actually pretty transferable across lots of different endeavors.

16:17Rick Rieder:I'll tell you one thing, I've just been terrible at my whole career. Like I've tried every year to think about, okay, we've got to divide and conquer. Like reading, there's so much analysis and research and so many smart things to read, that if we divide and conquer, you take this, you take this, and I failed at it my whole career, that I feel like that I got to read as much as I can. And I don't know, I do these monthly calls and I feel like we have a great team and we brainstorm. And then I got to get in a room and I got to think through it myself. And hopefully AI can just do it for me. But my guess is I'm still gonna use AI to help me think through it all, but just me being able to absorb more faster.

16:56Yeah, no, my strongly held forecast is that AI is going to serve all of that up to you, but you are still going to go through everything and meet it yourself. I think that's totally right. I think so.

17:05Rick Rieder:But in theory, though, the decision, which I think is more in theory, the decision-making process should be more efficient because you're just bringing, and I found that as humans, you can think on only so many planes. Like when I look at our portfolios and think about risk, if you can think multidimensionally and think about what technology allows you to do for stress testing, scenario analysis, putting different pieces together, or improve, like that, that I think is going to be hugely valuable. Yeah, help flag the areas where you really need to devote your attention and sort of leave the other things behind.

17:33I think so. So when we talked about being out of consensus, you said comes to mind right away all of the times where you've made some mistakes. And apparently you learn best right after having made a mistake. And I always assumed when I was in elementary school and my mother would say that to me, it was to make me feel better and to sort of solve it in my ego. But apparently it's science. It's curious to hear from you when you think back over all of your career, which of those lessons were the hardest lessons?

18:01Rick Rieder:The financial crisis was, I think, one, two, and three for me. And because I had started a hedge fund, because when you think about the financial assets, when everything correlates to one, we had some leverage on it. And then all of a sudden, like everything correlated to the downside. So just to be clear, starting a hedge fund during the financial crisis. Yeah, a few months before, which I thought was actually a good time because things were becoming volatile, interesting, etc. I didn't anticipate the cavalcade of events that happened after that. But then starting it, we had a good business and things were going well.

18:32Rick Rieder:And then all of a sudden, like the world was disrupted in an incredibly, I think, surprising way, unexpected way in terms of what policy went, etc. But I'll never forget the stress that that provided. I mean, there were some days I'd walk into the office and we'd walk through a long causeway. and I remember I would walk in and say, this is going to be so hard, this is going to be so hard. And I'd try and pump myself up until I got to the door, and it's like, it's still hard. And I'll never forget that. I mean, I'll just never forget that, period. But, I mean, like you say, it teaches you so much in how you think about it.

19:05And I will say to this day, thinking about liquidity,

19:08Rick Rieder:thinking about leverage, thinking about, you know, you can write, and I find so many people in this industry write tail risk. And, you know, people don't think you're ever going to hit that tail. But the way I think about, like, gosh, what if the incredibly unexpected happens is going to take me out? But I've had to fight my entire career to actually think through, okay, that's probably not going to happen again tomorrow. We've got to be in a business of investing. We've got to be in a business of generating return. We've got to be in a business of taking risk. And so you've got to think about, okay, what's my escape hatch?