Ben Carlson on Why It’s Better to Avoid a Strikeout Than to Swing for a Home run

0:10Ben Carlson:Ben Carlson

0:30That was Ben Carlson, author of the Wealth of Common Sense blog, co-host of the Animal Spirits podcast, and the author of the upcoming book, Risk and Reward, How to Handle Market Volatility and Build Long-Term Wealth. I'm Robert Brokamp, and today is part two of my conversation with Ben, during which we discuss the risks of investing in individual stocks, market valuations, balancing saving for the future versus enjoying life today, and the career advice we give our kids. We've been talking about the performance of broad asset classes here, right? Which you can get exposure to through a low-cost index fund.

1:04But what about individual stocks, which a lot of our listeners own? Because even though the U.S. stock market has always recovered from every downturn, not every stock does. How do you approach investing in individual stocks?

1:16Ben Carlson:Yeah. And I highlight the work of Hendrik Bessenbinder in here. And he's a professor at the University of Arizona State. And he talks about the fact that over the long haul, the concentration of the U.S. stock market is probably more than you'd think. His definition of long-term is even longer than mine probably. He's looking at like 100 years of data. And he says, basically, 60 % or so of the companies fail to keep up with T-bills or cash, right? Over the very long term. The other 30 % and change, kind of more or less keep up with that, maybe a little better. And then something like 4 % of all stocks account for all the gains.

1:47Ben Carlson:So it's the big ones you know, Apple and Exxon and Amazon and Google and NVIDIA. and these huge stocks from a market cap perspective have given investors all their gains over the past hundred years or whatever. And his point is, there's a lot of different ways to look at it. The one way to look at it is if you own just one of these winners, you're probably set. All of your other losers, you can offset all of them. So if you're an individual stock picker, as long as you have, again, that intestinal fortitude to stick with a long-term winner like that, that can pay off a lot of bets. And it's almost like a VC portfolio, a power law.

2:17Ben Carlson:if you owned apple for about 20 years it didn't matter how bad you did in your other portfolio picks like that one offset all the losers i think that back to the diversification piece casting a wide enough net helps too that you want to make sure that you are able to get some of these winners right and have them in your portfolio in some way and so that's the diversification piece is if you happen to miss out on a lot of these big winners it's gonna be tough and the other thing is obviously he's looking at 100 years of data so a lot of these companies that ended up going under and not making it, you could have gotten fantastic returns for one, two, three, five, seven years before these companies petered out, right?

2:55Ben Carlson:We're seeing now some huge brand name stocks, Nike and Disney and some of these really well-known companies that are doing really poorly right now, but owning them historically could have given you fantastic returns, right? So the timing of the ownership too, and sort of when you get in and get out, obviously that can matter too. But my personal takeaway is just like casting a wide enough net to make sure that you own these winners and finding a strategy that sort of forces your hand to hold them and not give up on them. Because it's easy to buy. I think it's easy to sell for an investment, right?

3:25Ben Carlson:I think the holding is the hard part for a lot of people. Because no matter the company, no matter the index, no matter the asset class, you're going to have drawdowns eventually. And then you question yourself, do I lean into the pain and buy more? Do I sell it here and try to just recruit my losses elsewhere? I think that's the hard part for people is just knowing when to get in, when to get out and when to like really hold still and not do anything. Talk about investing in the stock market. You just talked about buying and selling. The buying is, of course, with whatever you decide to buy something or with your 401k contributions, the money's always going in.

3:56But then there's the decision about the selling. In your book, you bring up valuations to a degree. You mentioned how high they got during the dot-com bubble and way higher during the Japanese bubble. And these periods usually follow some pretty good years with some pretty good returns. and right now the CAPE ratio at the third highest level ever partially thanks to the S &P 500 returning 13 % a year over the past 15 years good bit above average so is there a point where you think investors should say you know things are getting a little pricey perhaps I should take some chips off the table and is now one of those times I think that is a very intelligent sounding argument

4:32Ben Carlson:that like basically never works and the hard part is Peter Bernstein talked about this in his book against the gods. I really leaned on him heavily for the ideas of mean reversion. And he said the hard part about mean reversion is when the mean is moving. It's a moving target, right? And I think you can make the case that the valuation, especially for the US stock market, has been a moving target over time. It's slowly but surely moved up over time. And the thing is, to your earlier point about this time is different, this time really is different because there's just more tech stocks than there were in the past and they're more efficient.

5:03Ben Carlson:They're not like having to spend a ton of money on this property plan equipment that goes away really quickly, right? It's a lot of it is intangible assets and their margins are really high and they don't need as many employees as companies did in the past. And so Schiller's data goes back to 1871. Imagine comparing the stocks back then, right? These conglomerates and these railroad companies that had to have massive physical outlay of assets and it was hard work and it required a lot of labor and people in spending on that labor. And you don't need that as much anymore with tech stocks. So I think the fact that valuations have been trending higher actually makes sense.

5:38Ben Carlson:And you mentioned the 401k piece. I think that's another part of it. Barriers to entry were so much higher in the past to invest. Even when I first started out, I was telling someone this story recently. I wanted to buy a Vanguard index fund my first year out of college. And I couldn't because the minimum was $3 ,000. I didn't have$3 ,000. Now, there are no commissions. If you want to buy a stock, it's free at your brokerage. You can buy fractional shares. The minimums are effectively eliminate it, right? You used to have to go down to a brick and mortar place and fill out some paperwork and write a check and wait a few days and then invest.

6:10Ben Carlson:And usually you invest it based on whatever that broker told you to invest in. Now you can, on your smartphone, open an account, hook up your bank account, put some money in, invest within minutes. And so I think for young people, breaking down those barriers to entry has been great. And then you have this automatic investing revolution of money constantly going in, in 401ks, in brokerage accounts, in IRAs, having a consistent buyer of stocks, that has to change the shape of valuations as well. And that's something that's happened over the past 40 years or so. And I think even in the past 10 years, the reduction in costs and the ease of access to the market has to change the valuations.

6:47Ben Carlson:That's why I think trying to time these things, this is a long-winded answer to explain your question. Trying to time these things on valuations is very, because you have people who pick a line in the sand and go, all right, I'll buy when it gets back to the historical average of 16 times earnings or whatever. And then you realize, okay, that happened once in 2009 for like six months. And then it hasn't happened again since. Again, because that average is slowly but surely moving up. So I think trying to time based on valuations, it sounds really intelligent. Jeez, stocks feel really expensive here.

7:16Ben Carlson:I'm going to sell. You could have made that same argument for the past 10 years every year. So I do think that trying to do that, you can use valuations to set expectations, I think. I think that's perfectly reasonable. Valuations are way higher, as they should be because we've been in a long bull market. Maybe my returns will be lower in the future, but does it mean that you should all of a sudden turn off your contributions and sell stocks? And I think that's a harder proposition to get to for me. Support for the show comes from Fundrise. Investing in companies already in the S &P 500 can sometimes feel like you're being served someone else's leftovers.

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8:19But now, if you want, with Fundrise, you can take a seat at the table alongside the biggest names in tech investing. Visit fundrise.com slash fool to check out Fundrise's venture portfolio and start investing in minutes. All investments involve risk, including the potential loss of principle. Past performance is not indicative of future results. This is a paid advertisement. Toward the end of your book, you include 10 ways to lose money as an investor, and one is to fight the last war. And you explain in the book what that means, right? You know, hedging the big risk after it just happened, buying a black swan fund after the crash already happened, getting an inflation hedge after prices have already risen, basically looking in the rearview mirror for your investing decisions.

9:03What's the last war that you think people now might be at the risk of mistakenly fighting?

9:09Ben Carlson:Well, it's interesting. I feel like this decade has sort of replaced the great financial crisis, which is music to my ears because I worked in the institutional nonprofit space. And after 2008, everyone wanted to sell a black swan fund or a hedge fund or something that would hedge your downside risk. And it was fun. Everyone, all these big, huge institutions controlling billions and billions of dollars. That's all they want to do invest in, is these things that were take all the volatility away, hedge my downside, and they weren't concerned at all with the upside. There was no like, okay, what happens if things keep going up and working?

9:40Ben Carlson:It's like, no, this is career risk. I lost a lot of money. I'm not going to do that again. And that's when I learned about fighting the last world. Like, oh, I'm going to invest in what I wish I would have invested before this happened. If we could do it all over again, here's what I would have done. Now I'm going to do it again. And the last risk is rarely the next risk, right? So I actually think it's interesting because I think what investors have been conditioned to do now is the opposite of that. It's no, we buy every dip. We go in. And you saw that last year during the Liberation Day thing where the S &P fell in with 20%.

10:11Ben Carlson:In April, a ton of money poured in. It's funny. They've been beat over the head for so many years and decades of people telling them and people like you at The Motley Fool and there's people like me in a blog, hey, when stocks go down, you don't run out of the store because they're on sale, you rush in to buy. And it seems like people have actually learned. And so I make the case all the time that I think investor behavior has actually gotten better over time. I think people are becoming better investors, especially individuals. Mom and pop forever was this nomenclature you used to talk about an unsophisticated investor, right?

10:39Ben Carlson:Oh, they're DIY mom and pop, retail investor. We're the pros. We know what we're doing. If anything, that's changed. The smart money, I think, now resides in retail in a lot of ways. But I think there are a lot of new investors who haven't experienced an extended bear market. 2022 was kind of a decent run-of-the-mill bear market. We were down 25%, and it lasted a year and a half to get back to the highs or whatever. But I think this extended, drawn-out, where you have all these dead cat bounces, and it feels painful, and you're down 35%, 40%, there are a lot of investors that haven't experienced that.

11:08Ben Carlson:So I think you see what happens when people run out of dry powder. Wait a minute, I bought all the dips. Now it's dipping again. Now what do I do? I think that's an interesting scenario to think about when we have an actual recession. We haven't had a real recession in 17 years. We had that one month period in COVID, which was essentially man-made. We turned the Nintendo off, blew on the cartridge, put it back in, turn it back on again, and we threw a bunch of money at us. So that wasn't really a real recession, even though unemployment went up. So I think that's going to be interesting to see how, I don't know what the psychology will be for people when we have a real recession and a real drawn out bear market.

11:41To of course invest, you have to save money and you've written a book about retirement and when I was starting out in my career in my 20s it was all save save save now that I'm getting older in my 50s I'm wondering about the balance there and I'm bringing this up now because you cited a cartoon in your book by Randy Glasberger it was basically a guy in a financial advisor's office and the guy says to the financial advisor explain to me why enjoying life when I retire is more important than enjoying life now. You've probably seen this in your life. I know I've seen it in mine where people save for retirement for decades and then something happens.

12:16They have poor health or they don't actually get the retirement they were looking for. They don't get to enjoy it. So for you as someone both who thinks about this stuff, has written a book about retirement and is in the financial wealth advice industry, what do you think is the balance there on enjoying life today versus saving for the future? Yeah.

12:35Ben Carlson:And I love that cartoon because it does perfectly encapsulate it. Like you, I was always an early saver. I think it was just the way I was brought up, my personality. I was frugal to a fault in my 20s and 30s. And it probably helped me get ahead in many ways. But I think that mindset can be taken too far. And I think the big change for me was having kids and realizing like, oh, they're not going to be young forever. And at some point, they're going to want to leave the house. They're going to want nothing to do with me, probably, right? Or when they're teenagers. So my wife and I had to make a concerted change of, no, we have to enjoy some of this now.

13:03Ben Carlson:What's the point of having a big nest egg when you're older and not enjoying it now. So I think there does have to be some balance. And working in the wealth management field, I've seen countless stories of people who ran a business their whole life. Great. We're going to sell the business. We're going to get a ton of money. Now we're going to enjoy ourselves because I've worked for 80 hours a week for 30 years. And we had a client who passed away not long after they sold the business. We had clients who were going to retire early and sail around the world. And one of them got cancer and passed away.

13:32Ben Carlson:And so I've seen these stories where you do all this planning and then life throws you a curveball, right? The old saying like, make plans and God laughs, right? So I do think that there has to be more balance and that getting older too, that that's been a big thing for me is just seeing this stuff, losing loved ones and dealing with kids and all this stuff that there does have to be some balance. And with our clients, we tell them the whole reason that you delay gratification is to enjoy it, right? So find ways to enjoy it, to find those things in your life that you're going to enjoy. it's not just about seeing number go up, right?

14:02Ben Carlson:Up and to the right. And I can never spend it. There's a lot of people who for 40 years, they scrimp and they save and they have this mindset and then retirement hits and they go, I can't see the value of this portfolio go down now. It's got to just keep going up. And you have to kind of retrain your brain to enjoy the money. So I do think giving yourself little pleasures along the way and prioritizing the things that matter to you and spending on those things, you have to make sure you do that along the way too. Because if you get too far along the way, it's hard to turn that mindset around. Let's move on to business and career advice because I sort of feel like I didn't have maybe a front row seat, but I was in the auditorium to see the growth of Ritholtz Wealth Management and your career.

14:39I was an early reader of Barrett Holtz's blog. I interviewed him way back in 2009. And I've been an early reader of your blog and listener to your Animal Spirits podcast, What You Co-Host with Michael Batnick. It's genuinely one of my favorite podcasts. So let's start with Ritholtz Wealth Management. What do you think is the secret sauce to the firm's success?

14:56Ben Carlson:It's funny. I wish we could have looked back and go, you know what? From day one, this is how we plan for things to go. But I read Barry back in the day too. He was one of the first blogs I read. I read him during the Graf Hensler crisis and Josh coming out of that at the Reform Broker. I was reading those guys and they kind of inspired me to start writing. And I think the one, if there is a secret sauce, I don't think there really is because I think so much of, it's really hard to give career advice because so much of it is just happenstance and chance. And I look at my career and it could have forked off in three different ways that would have made one different decision.

15:23Ben Carlson:And I never would have thought that like for me even perusing content was even a possibility back in the day. So sometimes the timing just has to be right. But we all started writing because we enjoyed this stuff, not because we set out to like build a brand and start a company, right? I think people now see the potential benefits of it. And we get questions all the time from people like, hey, I want to start doing content too. And I want to build an audience. I want to build a brand and I want to do all these things. And I tell people like I went into this with zero expectations. I was not trying to build an audience.

15:51Ben Carlson:I was just, I had felt like I had, I needed an outlet. I had something I had to say. I was in a career path where I wasn't really, not that I wasn't enjoying it, but it didn't align with my values, my philosophy. I'm kind of a principled person. I think there's a right way to do things in a wrong way. And I wanted to do things my way. And so I was kind of butting heads with the organization I was with. And I thought, you know, I need an outlet. So I'm going to start writing. And it was kind of cathartic for me, but I did it because I enjoyed it. And if I didn't enjoy it, I never was stuck with it.

16:19Ben Carlson:because when I first started writing, no one was reading my stuff. But that also gave me a long runway to like get better at it because I wasn't very good when I first started. I think you can get better at this stuff, right? I was really bad at podcasting when I started, but we worked at it and tried to get better, you know? And I think a lot of these things, some people are just born with these kinds of things, right? Some people are born to be great writers. They're born to speak. I don't think I was born with either of those gifts. I think I had to work at it. I think that's something is for people that my only advice to someone is just put in the time and effort because a lot of people won't do that.

16:48Ben Carlson:And I think that's probably even more important in the age of AI where the shortcuts are going to be easier than ever. And I think if you actually do put the time and effort in and you can kind of stand out from the crowd, I think that's the way to do it. And it's funny, once we all decided like, oh, people are coming to us. And it's funny, when I started writing, I had these financial publications and financial advisors coming to me saying, hey, I like the way that you explain this stuff in plain English. Can I use this for my clients? I never thought of that when I first did it. The audience I had in mind was my friends and my family.

17:16Ben Carlson:I'm writing for my father-in-law and my mother so they understand this stuff. That's why I tried to speak in plain English and sort of not dumb it down, but just simplify and make these complex topics more digestible. And a lot of advisors were going, yeah, our clients, they're not finance people like us that are in this stuff all the time. They have regular lives. They're normal people. They don't have time. They need to better understand this stuff. And I think we just realized that in the financial services industry, you're not producing a product where you hand someone the widget at the end of the day.

17:46Ben Carlson:right? This went through our factory. We've built it along the way, all the steps. Here's your widget. It's a service that requires trust. In a trust-based, faith-based business, people want to work with others that they sort of like and respect. And communicating with people, whether it's through writing or a podcast or video, is a great way to build that trust. And that's what we learned. And again, we didn't have that figured out on day one. But once we did figure it out, we said, okay, what are ways that we can do this even better? I think that's what we figured out is just the trust factor.

18:16Ben Carlson:You kind of narrowed the window between a yes and a no from a client, right? Yes, this is a person or organization I work with. Now that I see what's behind the curtain, I don't really want to, but thanks anyway. So I think that's what we learned is just how important trust is in this whole process because financial planning is something that's just never done. You don't just hand someone a binder and go, here you go, go do it. It's a process. You got to make sure that you want to work with these people for the long haul. That's a long-term relationship too. Yeah, in a simple story, I was a financial advisor with what was then Prudential Securities.

18:46And the immediate people I worked with were good people. But otherwise, I was put in positions where I was encouraged to sell things that I didn't believe in. So I left and started working at The Body Full. I started as an editor, was not a great writer at the beginning, and then just improved it over time. And the podcast part is interesting, too, because I wrote literally hundreds of articles before I ever did the podcast. And then I would go to member events and people would always bring up the podcast because I think it's the personal connection, right? Yeah. Word is on a page. You have personality.

19:14We're the Motley Fool. You have a lot of personality in your articles, but it's not the same as that personal connection of having someone feeling like they're talking to you about their investments and it builds that trust.