The Truth About Market Timing, Crashes, and Long-Term Investing with Ben Carlson

0:00Ben Carlson:Don't be surprised by what happens. Just don't be surprised that you are surprised. I think that's the point of studying history is that things can go way lower than you think possible and things can also go way higher than you think possible because human emotions are the thing that like pushes it. So this decade is a great case in point, right? Who would have expected a pandemic would have totally like shut the economy off like two months, right? Or about like six months later, the stock market would be back to all time highs. And then we'd get 40 year high inflation and all this stuff that's happened.

0:28Ben Carlson:And despite all that stuff, the stock market is still having a pretty good decade. You're tuned in to the Investing for Beginners podcast. Investing for Beginners podcast. The show for the long-term investor. We cut through the noise to focus on what works. Compounding, discipline, and the conviction to buy wonderful businesses and stick with them. Your path to financial freedom. Start now. Welcome to the Investing for Beginners podcast. Have another fun episode for you today. One of the OGs of our industry. It's great to finally talk and meet with you, Ben. So we got Ben Carlson, CFA. He is the Director of Institutional Asset Management at Ritholz Wealth Management.

1:15Thanks for joining us today, Ben.

1:17Ben Carlson:Glad to be here. You have just finished up writing a really cool book. By the time this goes live, it will be out there and available. So it's called Risk and Reward. The first question I have for you is, so what's the secret to investing? Because you've been doing this for a long time. So please just give us the secret. Give us the magic formula. Just between us. No one else is listening. OK. The funny thing is, I do think a lot of people get into the game and especially people. I work in the wealth management industry and I think people, they know like, Hey, listen, I know that there's no like secret path to overnight success, but I think a lot of people who have a decent amount of money go, but seriously, tell me, what is it?

1:58Ben Carlson:Right? Like just between you and me, what is it? There's gotta be like this Holy grail. And I guess just three years and years of studying different strategies and dealing with different portfolio managers and funds. And, uh, unfortunately there's, there's just like no easy route So unless you win a lottery, hit the lottery, right? And you put your money into something, it shoots to the moon. And we see a lot of those stories these days. But unfortunately, you don't see the other ones of the people who tried to do that. And then they lost all their money, right? They went broke. And so my secret is that there really is no secret.

2:31Ben Carlson:And that's kind of the point of the book, that a lot of it just takes time. And you slowly but surely build up and compound and compound. And that's the way that most people can build wealth. if your strategy is put your money in this thing and hope it goes up a lot, the lottery ticket strategy, not a very high probability of that being successful for a lot of people. No, historically has not been and not likely to be moving forward. You have a lot of cool data and insights throughout the book. I was hoping we could start on, maybe there are people who are tempted to jump in and out of the market or think that they have some sort of edge on shortcutting this idea of just staying invested for the long term.

3:21What kind of things have you dug up to kind of prove that wrong? Because we kind of all know by now that is not the way to go.

3:29Ben Carlson:Have you ever tried to time the market before? Is that something you've ever given a shot at? Yeah, I mean, everyone has, right? Yes, everyone has. Let's say you just get a bonus from work or something. You're sitting on money and you know the thing you should do is just probably invest it right away, right? And not overthink it. But then you go, well, what if I put this in and then the market falls out of bed? I'm going to feel like an idiot, right? And everyone has this thing in the back of their head that goes, you know, it's going to be just because I do this that then something bad is going to happen.

4:00Ben Carlson:And so, like, the whole, you know, origin of this book and part of my blog taking off in the early days was I just, I heard all these people say, you know, we finally hit new all-time highs after the 2008 crash. It took until 2013 to hit all-time highs, right? It was a long time in between all-time highs in the stock market. And we barely had all-time highs before that in 2007. So we went a number, almost a decade and a half with a handful of all-time highs in the stock market. Nothing like the market is today, which seems to happen way more. And so I said, what if you just, you held for the long-term, but you only put your money in at the peaks right before a huge crash.

4:34Ben Carlson:And there've been a handful of huge crashes over the years. And the ones that were in the back of my mind at that point were the 2008 crash and then the dot-com bubble blowing up in the early 2000s. And I said, what if you just put your money into the peak that you held onto? And I did this story about a guy named Bob who did this. And the results were shocking to me in the moment. I think they've been shocking to people who read the piece. And it was this whole thing of the power of long-term investing. So even if you make a mistake, but you keep your money in and invested, the compounding can still be pretty powerful.

5:04Ben Carlson:And I just tell people with the market timing thing is tempting as it is. I know it's so tempting for everyone. It's hard because you have to be right twice, right? You get out of the market, you sell, then you wait for a better entry point to get in. And I'm not saying it can't be done and no one's ever done it. Of course, people have. But like the psychological toll and the brain damage it takes to do that, you're thinking about it all the time, right? Well, geez, I did get out, but the market fell 10%. What if it falls 20 %? Maybe I'll just wait. And then it falls 20 and you go, well, what if it falls 30?

5:35Ben Carlson:And that's what happens to a lot of people is like it becomes like this addiction. It's like a cash. Holding cash is like a gateway drug to like the ill effects of market timing. I've never heard it described that way, but that's so perfect. It's like an obsession with just this one pile of money or this one trade you're making. Yeah. And if you look at it in context of your whole portfolio for a lot of people, it's like, is it really even a meaningful amount? I mean, some people do go to all extremes, but again, I think spending 90 % of your time worrying about 5 % of your portfolio is probably not going to move the needle for a lot of people.

6:12Ben Carlson:And that's the thing I think you have to figure out is can you withstand the psychological toll? And the hard part is I've seen people who get this right. I had a colleague in 2007 who got out of the market right as things were bubbling up and getting bad and was sitting in cash the whole time. And then she thought, I can do this again. And she tried to do it every year after that and was wrong every single time. So it's like sometimes the worst thing that can happen to you is when you're right. You do one of these things you probably shouldn't be doing and you get it right and you go, oh, I can do this again.

6:46Ben Carlson:That was easy. So that's the tricks these things play with. your, it's like head games. Is this one of those things that's really hard to convince people of in asset management? Yes. A lot of times it requires like paying your own tuition, right? It's, it's some people and not everyone, some people can like learn from the mistakes of those who came before them and they're perfectly content doing that. Like I, I, you're good. I get it. It makes sense. Other people, I have a friend in the investment management industry who has clients come to him and say that, you know, I want to be a client of yours.

7:20Ben Carlson:I've, I've gotten to know you and he'll say, you're not ready for me yet. You need to go out and make some mistakes on your own and then come back. And for some people, you have to like pay the market gods or tuition before it makes some mistakes before you realize like, Oh, okay, maybe I should think of a simpler way to invest. And you have to, some people just have to try it. They have to like touch the hot stove before they can come to a better way of doing things or a different way. Yeah. Makes sense. You have a chapter called the worst crash of all time. Can you can you speak on that? Like, how can we learn from that lesson?

7:58Ben Carlson:So, yeah, that was the Great Depression. And I'm pretty hopeful that we could never go through something like that again. Not even just the stock because the stock market fell like 86 percent. Right. It was it was awful. But the economy, we have 20 % plus unemployment for many, many years, and the economy was just decimated. And they didn't really have a backstop. There was no financial backstop. That was before Social Security existed and unemployment insurance existed and a lot of these things. So people were kind of on their own. And I think we've kind of learned 2008 could have been worse if the Fed hadn't learned their lessons back then about trying to juice the system and get things back.

8:41Ben Carlson:But that doesn't mean you can't have severe crashes. We had just the start of this century, we had a 50 % crash and a 60 % crash, essentially. So even if it's not the end of the world, we can still get really, really bad crashes, and the system can kind of implode. But my point of that was, even with all of that nasty crash, the long-term returns of the stock market include that. So over the past 100 years, the US stock market is up roughly 10 % per year. And that's inclusive of an 86 % crash, which is kind of insane to think about. 86 % of your money in the stock market was gone, and you still get 10 % per year.

9:22Ben Carlson:So if you just remove that, I think your return jumps from, like if you started in 1932, after the crash is essentially over, then your return goes from 10 % to almost 11 % per year. So it adds a decent amount, but it's not like a total game changer, even with an 86 % loss. So it's kind of crazy. No one has a 100-year time horizon, obviously. But my point of the book was, even if you look at the worst 30-year periods in the stock market, and that is from September 1929 when the Great Depression happened. And I've read a ton of books in the Great Depression. It's a fascinating period of time. Andrew Ross Sorkin just had a new one out called 1929.

9:58Ben Carlson:It was really good. But the 30-year return from that point, investing right then, the peak of the market, just like Bob, the world's worst market timer, you would have gotten an 850 % total return over 30 years, almost 8 % per year. Even from that, inclusive of the—it's kind of crazy how powerful the stock market can be over the long term, even with the worst possible case scenario you could think of. It's really insane the way history works like that. But what led you to read about the Great Depression and everything? I'm curious, was it part of the book or were you just something you just wanted to learn more about?

10:39Ben Carlson:You know, I think one of the things I learned when I got into this business is that there was a lot for me to learn. And since I didn't have a lot of experience, I realized that I just had to try to learn through market history, essentially. And I learned that there's like a lot of really important things you need to be a successful investor. You need to have the right temperament, of course, right? Not let your emotions dictate your actions. I think you need to understand math, like compound interest and exponential growth and how important that can be and how extending your time horizon is really helpful and your money can snowball if you just let it go.

11:16Ben Carlson:So I think having some sort of math background can help, not calculus by any means, but decent math. But you also need to understand market history and the way that the pendulum can swing from greed to fear and craziness and all these things. And so I think learning about the history of financial markets has been really helpful to me. It's not that I'm not surprised by what happens, but my first boss in the industry told me, don't be surprised by what happens. Just don't be surprised that you are surprised. I think that's the point of studying history is that things can go way lower than you think possible.

11:49Ben Carlson:And things can also go way higher than you think possible because human emotions are the thing that pushes it. So this decade is a great case point, right? Who would have expected a pandemic would have totally shut the economy off like two months, right? Or about six months later, the stock market would be back to all-time highs, and then we'd get 40-year high inflation, and all this stuff that's happened. And despite all that stuff, the stock market is still having a pretty good decade. And so I think that's the benefit of history is just it shows you that there's a wide range of results that can happen.

12:20Ben Carlson:And I think you just have to be open to both sides of the equation. That's why I call it risk-reward. It's a yin and yang, right? I think you have to understand the good parts and the bad parts go hand in hand. And you wouldn't necessarily get such great returns in the stock market over the long term if you didn't have these severe disruptions in the short term. And that's why I want to study those periods just to understand how freaked out were people back then? What did they do? How did they survive? And then you realize that the human nature element is the one constant across all these market cycles, the feelings you get from like a loss, big gains and big losses, those things never change.

13:00Yeah, it's, um, we're seeing it today. We saw it back then. Maybe real quick, um, before we move on, like investing for beginner show, we have a lot of people who might be looking into this whole personal finance investment kind of space and be very new to it. you said you did not traditionally have a background in this. So how did you get over that hurdle? What were some of the things that you tried that kind of have led you to where you are today?

13:30Ben Carlson:Yeah, part of it is, I think, like I said, paying your tuition and market gods and getting out there and investing some capital. I remember someone told me at the beginning when I was just starting out and didn't have a lot of money, like do a paper portfolio where you pick stocks and And but you don't get the same feelings as having actual money at work. Right. You know, if you go to a casino and you place a bet on roulette or blackjack or craps or something like the feeling you get inside you for, you know, 20, 50 dollar bet, whatever, not a lot of money. It's hard to replicate that feeling.

13:58Ben Carlson:So I think you have to put real money to work and try things yourself. I'm of the opinion that there's not like any one way for anyone to invest. There's a lot of different ways you can be successful. So you have to understand like your personality and what works for you. And so I think when you're first starting out, you might have to try a few things out. I know a lot of people who do totally different ways of investing, and they're all successful and they've made money because they stick to a strategy. But I think you have to try some stuff out to understand what works for you. There's just some strategies that don't match my personal skill set.

14:30Ben Carlson:I tried to be a stock picker. I read all the Warren Buffett books at first. I think everyone who gets into investing has a Warren Buffett phase. I'm going to be the next Buffett. I'm just going to buy when there's blood in the streets and be fearful when others are greedy and greedy when others are fearful. But I just realized that I'm not very good at following individual stocks and pouring through company reports. And it's just that's not my forte. And so I think you have to understand what interests you and then the stuff that you're not just predisposed to do. So I think some people are just made to do that kind of things and some people aren't.

15:02Ben Carlson:So I think you have to kind of understand and you might have to tinker a little bit and try some different things out. So yeah, I think that's really good advice. One of the things that I found like learning about everything is we have the economy and we all live in the economy. So each of our own slices of the economy almost feel like an inside edge or like we have some sort of insight on what's going on economically. But you make a point that the stock market and the economy aren't exactly always aligned. so you know as a beginner like how does somebody get past that and what do you mean by that i think that's one of the harder things to understand when you're first turning out is to your point like there's no true inflation rate that everyone will agree on that that does i think i've learned this decade is that um everyone has their own personal inflation rate so people see what the actual economic stated rate is and that's of course an average which takes everything into account.

16:02Ben Carlson:And people go, no, mine's not like that because I pay more for this and I pay less for this. And I think the same thing is true of the economy. Like your particular neighborhood or city could be doing really well, but the state you live in is doing poorly or vice versa. Your company could be doing really well or the economy could be booming, but you're in a place that the economy is not doing well. Like the housing market, for instance, when mortgage rates went way up, housing markets slowed down. Like I have friends who are realtors. I have friends who working loan departments for mortgages. They had more work than they could deal with in the early 2020s because everyone was refinancing.

16:34Ben Carlson:And then flash forward a few years later, and they've got nothing to do because mortgage rates are too high. And I think, yeah, if you extrapolated that and go, well, geez, my industry is in the doldrums right now, the rest of the economy must stink. I think there is a problem with taking your personal situation, your anecdotes too far. And the economy in the US is so big. It's like 30 some trillion dollars. And I say it's so big and dynamic now. It's like moving a battleship or turning a battleship. It takes a long time to move in either direction. It doesn't stop on a dime or move very quickly.

17:11Ben Carlson:And the problem is the general economic growth over time. The stock market kind of needs that. But if you look at what the stock market does versus what the economy does, the stock market is almost 40 % technology stocks. The economy is not 40 % technology. The economy is made up of many big businesses, but also a lot of small businesses. And so I think it can be a problem to try to use the economy to forecast what the market is going to do. And a lot of times, the market front runs the economy. Sometimes it's right, sometimes it's wrong. There's the old saying that the stock market has predicted nine of the past five recessions.

17:46Ben Carlson:Every time the stock market goes down, and people think, oh gosh, here's another recession. And we haven't had a real one since the great financial crisis, right? We had that little blip in COVID, but that wasn't like a real economic cycle. That was, you know, we shut everything down for a couple of months. And so I think that can be trying to take your cues from either the economy or take your cues from the stock market about what the economy is doing. I think that can be a mistake for people. And I have learned that just as smart as people are in this industry that follow this stuff and you can slice and dice the economic data any way you want these days.

18:20Ben Carlson:No one has it all figured out, like what's going to happen next to the economy and when we're going to go recession and when we're not. And so, you know, taking your cues from that, I think you just have to be very careful. Yeah. Speaking of just random facts, I saw GDP was released the other day, maybe a couple of days ago. And it's like we were actually a higher growth rate than a quarter or two ago. And I'm like, eh, like that's everybody. so focused on the stock market, it seems to think otherwise. And so along those lines, how much should investors be in tune with what's happening in the macro or the different economic indicators?

19:02I guess you're going to say, based on what you said just now, not much, but people have got to be asking you about these things, wanting to talk about it all the time. What do you say to clients and things like that? Yeah, certainly.

19:15Ben Carlson:I think it's fascinating to track the economy and understand what's going on. The hard part is the stock market is real time. It's repricing stocks and corporations right now. To your point, economic data, it's stale, but it can get revised up and get revised down. It's based on a lot of surveys. It's so big and dynamic that it's hard to wrap your head around and your arms around what's going on exactly right at this moment, right? Because this data is going to be, you know, recast like five different times. And it's funny, the National Bureau of Economic Research, they're the body that decides, is this a recession or is it not?

19:56Ben Carlson:And they have like six different variables they're looking at to determine, is this a recession or is it not? And most of the time, they don't claim it's a recession until it's almost over, right? It takes them like eight to 10 months to actually say, okay, this is a recession. And by the time they do it, it's like, oh, that was a recession already ended. And I just I think it's OK to pay attention to and understand like the trends and what's happening, because obviously the economy impacts things like interest rates and inflation. And it can impact earnings on different companies and the stock market as a whole.

20:27So, you know, if there is a recession, bad things are probably going to happen in the stock market.

20:32Ben Carlson:Right. It's not it's probably not going to be a good situation. I just don't think anyone has the ability to predict the timing of like if we. I could give you the date of the next recession, and you might not be able to profit on it because the stock market could front run it. And by the time the recession is already going on, the stock market could have moved past it and already started to move up because it sees the end of it coming. And that's the hard part. So I think in the 2008 financial crisis, the unemployment rate topped out at 10%, but it didn't happen until October of 2009, which is after the recession is already over, the unemployment rate kept going up and it finally moved down.

21:09Ben Carlson:The stock market bottomed six months before then. And so that's the hard part is a lot of times the stock market is trying to front run these things. And so I think even if you have this beautiful model of how the economy works, and some people do, I don't know that you can actually use it to time the stock market any better than anyone else. And that's the hard part about trying to use macro. Again, following the economic data, I think it's fascinating. You see how it impacts different groups of people, different segments of the economy, different parts of the country. I'm still not sure I've found anyone who's created a model that allows you to use it to profit off of it in the markets.

21:47Yeah, I've never heard of it. If you have, please let us know, because that would be quite valuable. So what about the people who are worried about a recession? I mean, you mentioned that, hey, the market might not even react the way you think. But what if they're just they don't like the uncertainty of bear markets just in general, and that makes it hard to stay invested? Can you shed some light or maybe give another perspective to encourage people there?