Ben Carlson: long-term investing still wins - even when it feels wrong

0:09Very, very happy to welcome two investing experts, Mr. Ben Carlson. I'm sure many of you have heard him or heard of him at the very least. You are with Ritholtz Wealth Management. You manage institutions there. You have a very fabulous podcast, the Animal Spirits Podcast. You are an author to it. We are here today for the most part to talk about your newest book, Risk and Reward, colon, How to Handle Market Volatility and Build Long-Term Wealth. Really, really happy to have you on the show. Been listening to you, reading you for a long time. So thanks for coming on the show.

0:47Ben Carlson:Thanks for having me. Talk to us. Maybe I'd be interested to hear, first off, if you could share with listeners how you spend your day, how you spend your day looking at the markets, understanding them, how you digest them, and then what led you to write this specific book at this specific moment? Yeah, I start my day reading the horoscope just to make sure I know what's going on there, alignment with the stars. Perfect. I think I do a lot of writing and the best way for me to do that is by doing a lot of reading. So I'm doing a lot of reading about what's going on. I pay attention to a lot of numbers and data.

1:22Ben Carlson:And I personally think the markets are just fascinating. I know that there's some people outside of finance who think like this stuff is just, it's boring numbers, mumbo jumbo. I think that like the interplay between numbers and feelings and emotions in human psychology, I think that the markets are just this like giant laboratory for studying human beings. I think it's like one of the best places to look at the different emotions that human beings have. fear, greed, panic, euphoria, all these different things that the markets can bring about. And so I really enjoy just following the market. So that's why I like talking about them.

1:58Ben Carlson:I like writing about them. Why you called your podcast Animal Spirits, perhaps? Yeah. Yeah. And on a daily basis, that's a lot of what I'm doing. I'm talking to our financial advisors at my wealth management firm. I'm talking to clients to get a better understanding of what they're doing. I'm creating content and actually a lot of that stuff you know dealing with clients and hearing their concerns and worries and what they're the problems they're trying to solve that's really good for me in terms of producing content because that's that's trying the stuff that I'm trying to think about like what are people actually worried about these days we're like regular people outside of finance what are they worried about so I've been writing my blog for a little over 10 years now and the whole point of me writing a blog in the first place I was I kind of got into a little little trepidation.

2:44Ben Carlson:It was right when financial blogs were kind of taking off in like the early 2010s. So I was reading Josh Brown and Barry Ritholtz, who I'm now working with. They were like some of the early, you know, blog people. And I just thought that there was a lot of negativity in the world following, coming out of the great financial crisis. And there was a lot of pessimism. And I guess rightly so in a lot of ways, because we had two huge stock market crashes and two recessions in the span of 10 years. There was a lost decade for the stock market. People were really nervous, like, oh my gosh, the financial system like almost ended.

3:13Ben Carlson:All these, you know, 100 plus year old firms went out of business and the government is backstopping and saving places. And there was I think there was a lot of people who just lacked faith and trust in the financial system. And I was getting all these questions from my friends and family about, you know, you're the finance guy. Explain this to us. What's going on here? So that's why I started writing my blog. And I've I'm always kind of like a Ben and Glasses half full kind of guy. Just I look for the more optimistic and I I look for the, you know, the good side in most things. and I just thought that there was a lot of pessimism, and that was the idea for the blog, and the book is kind of, I've received a lot of pushback over the years.

3:51Ben Carlson:You know, there's a lot of people who've taken on with, like, this whole idea of, like, long-term investing and thinking and acting for the long term, but I get all these people who, like, who look for exceptions. Well, what about this? Well, what do you think about this? Wasn't this a terrible experience? And I think for a lot of people, the whole idea of long-term investing is just, it doesn't make sense in this world, and I'm trying to prove that, no, even like if we open the kimono and show all the bad stuff, right? Like let's play devil's advocate to my own investing philosophy. I'm going to go through point by point and show everything bad that's happened in the last hundred years and why this form of investing still makes sense.

4:26Ben Carlson:And so that was the idea just to like, you know, it's kind of a, I look at like the risk and reward as like the yin and yang. I say that they're attached to the hip. That's what I wanted to show that like, despite all the nasty risks out there, like the reward is still worth it for long-term investors. We've been talking a lot recently on this podcast about the private credit sector and how it's coming up against the banking sector. And you just talked about the great financial crisis. You talk about it in the book. Also, a lot of comparisons being made to what's happening in the private credit sector to the great financial crisis.

5:00We had Samuel Smith on talking last week about how that very much is not the case. You know, he's a big he's a big bullish guy on Blue Owl specifically, and he was laying the case for why the banking establishment or banking institutions or those that run banking institutions are so down on the private credit space. Any thoughts to share about that discussion and also contextualizing, I guess, bear markets with great big bear markets and where bearishness has you most worried?

5:36Ben Carlson:It is interesting that the whole private credit space seems to be an outcropping of the financial crisis, right? A lot of the banks pulled back from that type of lending. So the private managers stepped in and now they're doing it. I think the biggest difference between what happened in 2008 and now is just like these loans are like long. These loans are not like an event. It's more of a process. So even let's say that the people who are worried about the credit quality of these loans, and I can't really speak to the credit quality because that's just not my expertise. and these loans are a little harder to understand, right?

6:07Ben Carlson:Well, let's say that the credit quality does go bad. It's not like these things on one day are all going to go under, right? And all these companies are going to go bankrupt. It would be more of like a death by a thousand cut. So that's where I think the analogy goes, even if you thought the worst of these investments, I tend to think that these private managers have so much money and they have so much incentive to make sure that this stuff works out. It's hard to see this being this sort of car crash scenario. That's kind of where I fall on it. Obviously, I think the biggest thing, if I'm like tying it back into my book, is that the biggest mismatch we've seen and why you're having all of these people pull money out and look to redeem is like an asset liability mismatch.

6:46Ben Carlson:And I think my whole point of my book, one of them, I hope people get from it, is just the fact that when you make an investment, one of the most important things you can do is define your time horizon. And obviously, there were a lot of advisors who put clients into these funds who did not do that because all this money came rushing in and at the first sign of trouble and some bad headlines, all the redemption requests started. And frankly, I think a lot of the advisors should be kind of ashamed that they did that because these should be five, seven, 10-year holding periods for these types of funds.

7:19Ben Carlson:These should not be something you jump into and out of every time you worry. They're illiquid for a reason. And so that asset liability in this match, I think is like the biggest problem with these funds that these are these these loans are meant to be held, right? They have to kind of mark them to market and provide an NAV and tell clients how they're doing. But because of the nature of these, these funds that they're private, that like these are loans that are meant to be held to maturity, right? And I think that's the thing that that people got in trouble to here. And why there were so many people freaking out is just that they didn't have that mindset going in.

7:55Because you manage the institutional side at Ritholtz, I imagine you're also very much in touch with the retail investing side. What would you say are the two things, I guess, you hear or the things that you hear from each of those groups? Like during this time when there's a lot of volatility and it's kind of hard to understand and also maybe when it's like very bullish and exuberant.

8:19Ben Carlson:One of the things that I will say and doing this for a couple decades now, is that I think just being part of this industry, retail investors used to get a bad rap. Mom and pop used to be this derogatory term, like, oh, the mom and pop investors, they don't know what they're doing. And I think it's absolutely true that the retail DIY investing crowd has gotten better at what they do. I think that people beating them over the head for the past 20 or 30 years about the, don't run out of the burning building when the stock market goes down, I think people have gotten better. And you've seen that in all the bear markets this decade.

8:53Ben Carlson:Like when things go haywire, people are buying. The flows show that the money is going in, not out. Which is kind of funny because a lot of it means that the professional investors are probably selling. So I do think that retail investors have gotten better. We have people coming to us who are DIY investors who have been very successful investing their money. They come to us not because they necessarily need help investing money. They need financial planning help. They need help with estate planning, insurance and taxes and all these other things. So yeah, I think a lot of people have gotten the message that we don't freak out and panic anymore when this stuff happens.

9:25Ben Carlson:And I think that's one of the reasons the market didn't go down more. Because I think there's a lot of people who are beating their head against the wall going, I don't get this. There's a war in the Middle East. Oil prices went crazy. The trade-off Hormuzes closed. Oil markets are in disarray right now. Supply and demand, it's all over the place. Why did the market only go down 9 %? I think there's a lot of people who rightfully are questioning, this doesn't make any sense. And I think 20 years ago, maybe the stock market maybe would have fallen a lot more. But I think investors have learned and become a condition to not panic as much anymore.

9:59Ben Carlson:And I guess the second part of your question is, what do I worry about? I guess the one concern there, even though people have gotten better at, people used to say the stock market is the only store that goes on sale and people run out of the door. right? Like the fact that people don't do it as much anymore, my biggest concern would be that there is eventually some sort of complacency. When there is like a real risk, a real sort of financial crisis moment, not just like a boy who cried wolf thing, are investors too complacent? And do they think that it's going to snap back right away when in that case where we have like a more prolonged bear market and it's more painful than people think?

10:31Ben Carlson:That'd be my one concern right now. So what do you say to that? What do you say to that concern? Is there something that assuages you or is there something that furthers your concern as you look to how investors, because it does very much seem that almost everything is priced into this market. Yeah, it is. Or even like the more volatile, the more priced in it is. Yes. No, it is funny how, I mean, the markets are just happening. I think this is one of the hard parts too, is that markets are just happening faster and faster than ever. These cycles are speeding up. And I think it's really hard to wrap your mind around how far, like the, I think it really started in the pandemic when the stock market kind of looked over this valley of like, we shut the economy off.

11:10Ben Carlson:And I remember when the stock market first started rallying in like October or sort of April and May of that year. And everyone said, this is a dead cat bounce. There's no way that that was it. Like this thing is not getting better. There was no vaccine yet at this point. There was, I mean, people were, you know, the economy was still in tatter. People were at home and the stock market kind of looked over this and saw like the trillions of dollars as government spending and said, all right, fine, we're off to the races. And I think a lot of people were just like in a state of disbelief. And I think that seems to be a lot of the case in a lot of these downturns is like disbelief that it could happen this fast and the market could move so quickly and decide to be more forward looking.

11:49Ben Carlson:But I think the other side of that could be that we could have, because there, you know, we have these impulses to move faster. Like you could see more like flash crashes in the market, right? Where you have these like huge air pockets where things go down faster. The COVID one was, I think, the fastest 30 % bear market from all-time highs in history. That was a whatever, black swan one-off event kind of deal. But I think those moves the other way could happen as well. What are your thoughts about how the economy is moving on its own and then along with the market or how those are influencing each other?

12:26Ben Carlson:One of the things I talk about in the book, I did a whole chapter about the stock market versus of the economy. And one of the things that I've learned is that there are so many people who are smart and well-rounded about what's going on in the economy. And basically none of them can predict what's going to happen with it. There are more ways to slice and dice economic data than ever before. It's not just like the headline number anymore. You can get so granular on economic data of this specific, what goes into this number, all the different variables that go up into this number and what groups it's impacting.

12:56Ben Carlson:And it's kind of insane how much access to economic data we have now. And everyone still got it wrong in 2022 about the fact that there's going to be a recession. And so the way that I look at the economy now, the US economy is so big and dynamic, it's, I don't know,$30 plus trillion, that it's kind of like turning a battleship. People think that it's going to be like the stock market where all of a sudden, one day, it's just going to fall. And I don't think the economy really works like that. unless there's some exogenous event, like a pandemic or like some crazy financial crisis, it seems like the economy slows in stages and grows in stages.

13:35Ben Carlson:It doesn't just happen in one fell swoop. And I think that's the problem most investors have is they try to equate the economy and the stock market and think all of a sudden, okay, here we go. This one data point shows me that this is happening. And there's just been so many head fakes. I mean, if you think about it, the COVID recession was technically one or two months. And it wasn't a real recession because we threw so many trillions of dollars at it. You know, people lost their jobs were, in some cases, paid more to stay home than they were to go to the job. Small businesses were given loans.

14:06Ben Carlson:Everyone was kind of made whole at that point. So we haven't had a real recession. And if you can't be one that ended in 2009, that's like 17 years since we've had a real recession, which is kind of amazing coming out of the financial crisis when everyone thought they're going to happen all the time. So you wonder if like, are the risks building or is it just that these things are happening so few and far between because government intervention is so much more prevalent than it was in the past? What are the economic data points that you're paying attention to? And I think also to your point, it's getting harder to understand which data points to trust more than others.

14:43Ben Carlson:Yeah. Oh, yeah. I definitely agree with that. I think the biggest thing is So consumer spending makes up something like 70 % of the economy. So I think as long as the consumer is okay, the economy is probably going to be okay. And the consumer has been shown to be really, really resilient this decade. And frankly, it's pretty surprising the fact that 9 % inflation didn't derail everything. And consumers spent through that. And so we've had this huge rise in prices. I don't know what the cumulative inflation rate is this decade. It's probably 30 % or something. but on the other side of the equation you've had this these massive booms in the stock market in the housing market and i think that's one of the reasons the people still have jobs even though people are really concerned about the labor market and what ai is going to do to it people still have jobs and the asset prices for people who own stocks and houses which is you know roughly two thirds of the the country uh have had such great wealth gains that i think the consumer has just been fine spending through this.

15:42Ben Carlson:And I think it might be until we see like some serious job loss before the consumers decides to slow spending. If you were running the Fed, how would you handle this present moment? I guess I'm glad I'm not running the Fed. It's a tough job because you're dealing with these like external events. And you do wonder if we didn't have, you know, the tariff stuff and then the war stuff, would interest rates be a lot lower than they are? potentially. But so I think it's hard to, you know, when the when the war first started a few weeks ago, I guess a month ago or two at this point, some people were saying, well, oil prices rose so much, we have to raise rates, right?

16:23Ben Carlson:The Fed needs to raise rates. But I'm always kind of thinking, well, what good would that do? Because they would just probably lower them because this is not like an economic cycle thing. This is this outside geopolitical force that's going on. So I do think it's hard for the Fed to figure out what they need to look past and what, you know, what makes more sense to them in terms of the economy. So they're balancing on the one hand, like all this government spending and geopolitics on the one side, but then technology is kind of like AI should be deflationary, right? So it's like, which one matters more?

16:54Ben Carlson:This like potentially largest deflationary force of our lifetimes or all this geopolitics and government spending. And it's, it's kind of like, which it's a hard balance to strike, I think, right now. And when you look at all these layoffs happening a lot in, you know, companies that are going towards AI as opposed to human capital, what would you say about all these layoffs that you're looking at? How are you digesting it? I think the hard part is, and I think the bigger thing is not even the layoff so much as like, it seems like hiring has just slowed to a crawl, right? And it's kind of, I think one of the reasons this decade has been so hard for everyone is because everything is happening so fast.

17:37Ben Carlson:So we went from three or four years ago, maybe the hottest job market we've ever seen. Remember there was the wage growth data showing that if you left your job, your wage growth was way higher than people who stayed at a job. So we had that period where there was so much activity going on in the labor market, and people could name their own price and get higher wages just from changing jobs because the labor market was so tight. And now it's like the other side where we're like, okay, now no one wants to hire because what's AI going to do? Is it going to make us all more efficient? And I think the hard part is it seems to be right now at least the young people just graduating college or coming out of high school that are going to have the biggest issues there.

18:21Ben Carlson:Because a lot of it is, well, maybe AI can do a lot of the entry-level stuff for these people. And what does that mean? So I think that's the thing that concerns me most is what does this do to young people? And I think where we're going to probably see the biggest impact of AI in the labor market is going to happen like coming out of a recession. Because, you know, I think it's easier for companies to lay people off when the economy is in a downturn. And then you wonder, do they actually hire a lot of these people back or can AI replace some of these tasks? And I think that's where you're going to see the biggest potential pain from this.

18:55What does it do to young people who, for the most part, were in school and had school disrupted during COVID? Those young people have been through a lot. I heard somebody in the wellness space say something to the effect of, when people have dark nights of the soul, it happens when the change is happening to their lives at a faster pace than they can wrap their heads around, which very much feels like where we're at these days.

19:22Ben Carlson:yeah yeah yeah no for a lot of people i think i'm sure it feels like the ladder has been kind of pulled up you know in front of them or the someone pulled it up behind them uh especially like if you just if you happen to miss out on buying a home because of your stage in life or you're in school or you're too young and uh then housing prices rise 50 or 60 percent and mortgage rates go from three percent to six or seven percent and you go well i'm never able to afford a house i think that add on the ai fears on top of that i do think for young people right now it's uh you're right it's it's it's very challenging and interestingly enough we've seen like an explosion this decade of young people investing in the stock market like the percentage of people under under 25 who are investing in stocks has increased a lot for past generations and i think part of that is people realizing like i need to invest more for the future but also if i'm not going to be able to afford buying a house for much longer i need to invest in something and so that money instead of going to say for down payment or something or going for a new house is going towards the stock market interest really enough.

20:25And probably coincides with the democratization of financial analysis and insight. And like to your point, how it used to be like, what, the market's going down, get your money out. Where now it's like people are starting to understand, no, this is when you get your money in.

20:40Ben Carlson:And the cool thing is too, that technology has made it easier than ever to invest. Like the barriers to entry have been broken down. It used to be a lot harder to invest. Now we have fractional shares. Yeah, no, it is. But zero dollar commissions and fractional shares and the ability to just link your bank account on your phone, invest right away after you put some money in. In some ways, those barriers have made it easier to just trade as much as you want. But I think it's also just the access for young people is easier than it ever was in the past. I remember when I tried to buy my first Vanguard fund 20 years ago, the minimum was like$3 ,000.

21:16Ben Carlson:Now there's no investing minimums anywhere, right? So I think that's a positive as long as people are developing the right habits. And also it feels like to your earlier point about how people don't understand the long-term nature of investing, it seems like those quick hits and the ability to get in and out so easily lends itself to that, would you say? Yes. And the more you trade, the more your emotions are involved. I talk about this in the book a little bit, but Jason Zweig wrote the book, Your Money and Your Brain, where he looked at the neurobiology of how money decisions impact the brain.

21:53Ben Carlson:And it's like, where are the synapses snapping off in your brain? If you lose money, what is it doing? What part of the brain is it hitting when you win money? And he showed, it's funny because the people who are getting into trading all the time and stuff, sometimes the worst thing that can happen is that you're actually right. So he showed that the brain scans of someone who is making money in the short term in the market is indistinguishable from someone who is high on cocaine or methamphetamine. And that's the idea that if you get one score in the market, you win, you go, oh my God, you made an option trade and the company reported great earnings and you have a huge victory.

22:29Ben Carlson:Then you go, I need that hit again. You don't just walk away. I need to do that again. And then you lose and you go, well, now I need to make the money back to break even. And that's where like the market can play head games with you is because it turns you into more of a gambler than an investor. What would you say about how gold has been behaving since the war, that it hasn't been behaving as a safe haven sector? What would you say about kind of things that are coming out in the face of the conflict, like like gold and also maybe energy names? How are you looking at those two spaces? is. It is funny how a lot of the ways that people used to view gold in the past have been kind of turned on their head this decade.

23:09Ben Carlson:So if you look back to the past history, and I've looked at this before, gold in the stock market tend to like trade off good and bad decades. Like gold did really well in the 70s and the stock market did really bad. Then in the 80s and 90s, the stock market did good and gold didn't really go anywhere. Then it flipped in the 2000s and gold did really well in the stock market had a lost decade. And then it flipped again in the 2010s. And now this decade for the first time in like 50 or 60 years, gold and stocks have both risen like at a good clip at the same time. And it's really weird because in gold used to have this thing where it would kind of track real interest rates in some ways, right?

23:45Ben Carlson:If real interest rates were lower, gold did better because gold doesn't pay a dividend or income or anything. And if real interest rates were higher, then that was bad for gold. But gold has actually done pretty well in the face of higher rates this decade. And it was doing really well before that. I think what happened to gold in the war was the returns were so strong going into it that it turned into like an ATM and when you what happens a lot of times is that flows might matter more than fundamentals and what happens is when people want to sell something when there's volatility and they want to just get out and raise some cash the first thing you sell is whatever has the best returns right for a lot of people that was gold because the returns have been so strong these past couple of years.