Lessons on Investing, Market Crises, and the Power of Staying Calm With CNBC's Bob Pisani (EP.208)

0:29We all need to make smart decisions with our money. the senior markets correspondent at CNBC and author of the book, Shut Up and Keep Talking. And I ask him to share many of his unique perspectives and his vast experience covering markets directly from the floor of the New York Stock Exchange. As you will learn from our conversation, and if you happen to check out Bob's book, Bob has watched the New York Stock Exchange evolve significantly from a bustling trading floor filled with thousands of traders and brokers shouting orders to today's quieter, technology-driven environment. And I think his daily presence at the exchange not only provides us with a real-time analysis and market insights, but also offers unique perspective on the broader transformations in trading, in investing, and just in market dynamics over the years.

1:20In this conversation, Bob shares his insights from his tenure at CNBC, delves into pivotal historical market events and provides valuable perspectives for investors seeking a deeper understanding of market behavior and long-term investing strategies. As always, you can find detailed show notes at thelongterminvestor.com. And at the top of the episode description, you will see a link to sign up for exclusive updates, offers, and even bonus chapters of my new book, The Perfect Portfolio. And now, here is my conversation with CNBC's Bob Pisani. Welcome to The Long-Term Investor. I'm Peter Lazaroff.

2:05And today with me is the one and only Bob Pisani, senior markets correspondent for CNBC and author of Shut Up and Keep Talking, Lessons on Life and Investing from the Floor of the New York Stock Exchange. Bob, I've seen you on TV for years. This is a huge pleasure for me. Thanks so much for joining me today. Peter, pleasure to talk to you. I'm in the basement of the New York Stock Exchange where I have been since 1997. That's a wonderful place to work and be and work for CNBC for 35 years. It's just been fantastic. Well, take us back to 1997. I know that you didn't come into this business as a markets guy.

2:41What was it like when you stepped onto the NYSC floor for the first time? Well, I had been the real estate correspondent from 1990 to 96, became the stocks correspondent in 97. And when I came on the floor, I didn't know it, but this was the very height of the whole New York Stock Exchange and really the height of the 1990s. When I came on the floor, there were 4 ,000 people on the floor doing open outcry. That means brokers screaming at the specialists. And they did 80 % of the volume on the floor, 80%, 4 ,000 people doing 80 % of the volume. Today, thanks to technology, there's 200 people that do maybe 15 % of the volume.

3:17So a lot of big changes down here. But the basic core, the idea of providing an efficient place to trade stocks hasn't changed. I mean, you've witnessed the shift from brokers shouting on the floor to electronic trading algorithms. I mean, I guess, what do you feel like are some of the most profound changes in how markets function and how investors even access them? A couple of things I've seen is obviously electronic trading from, as you mentioned, open outcry to now essentially we're matching orders on computers. So the floor still exists. You still can do trading on the floor. The other thing is be decimalization.

3:51So in 96, when I was first down here before I became a stocks correspondent, they were trading in eighths. The spread was 12 and a half cents. And in 1997, it went to a 16th, which is a six and a quarter. Imagine how profitable it is when your spread is 12 and a half cents. And then it went to a penny in 2000. So there was an extremely profitable business. And obviously, the profitability dropped dramatically. But that was a good deal for investors. Going to pennies saved a lot of money for people. The other thing I think that was important that I saw was the birth of ETFs and passive investing.

4:21It was very hard for investors to invest with the market up until Jack Bogle introduced the first investable index fund, Vanguard's S &P 500 fund in, I believe it was 1974 or five. But prior to that, it really was very difficult. And what people realized and market historians and people who are professionals realized is that it's very hard to beat the markets. In fact, it's almost impossible over many, many years and that you want to stay with the market. And the birth of ETFs in 1993, the first S &P 500 ETF came out, made it easy for people to just own the stock market. That tremendously continuously helped investors because it was low cost and they didn't have to worry about what stocks to own.

5:01You essentially owned the S &P 500. You own the vast majority of the market. The other thing I think that's really important is the birth of behavioral finance. And I saw this in the 90s because behavioral finance attempts to show how individuals are really behaving, not how they're supposed to behave. There were models that went back hundreds of years that human beings acted rationally. You bought low and sold high. That was the whole idea. Buy low, sell high. Well, it turns out studies have indicated they don't. They buy high and sell low. They panic. And so the study of why they panic and why they act irrationally became known as behavioral finance.

5:35And it's really deepened our understanding of markets and why some stocks get ridiculously overpriced on stocks that ridiculously underpriced. So I would say the birth of electronic trading and decimalization, the birth of ETFs and passive investing and the understanding of consumer behavior through behavioral finance. Those are the big three things that I've seen in the last 35 years. So many strings to pull on. Before I get into some of the bigger philosophy ideas, you're mentioning some of what I consider to be like the plumbing of markets. Do you think that retail investors even understand how much that has changed or do you think it still mostly remains behind the curtain.

6:15Oh, it's mostly behind the curtain and it should be. I mean, look, Arthur C. Clarke, I grew up reading science fiction in the 60s and Arthur C. Clarke and Isaac Asimov were my heroes. And Arthur Clarke, who wrote 2001, A Space Oddity, once said, any sufficiently advanced technology has the appearance of magic. Think about it. You are able to sit at your home, press a button, say, I want to buy 100 shares of IBM, and the order gets executed in a sub-second interval, you get a confirmation. It's kind of a miracle if you think about it. Yet there's a very elaborate, long, decades-long process of development in hardware technology, development in software technology, development in what we call market structure technology that had to come together to allow that to happen.

6:56I know a lot about the history, but most people don't care. And why should they care? I don't know all the intricacies about how a plane flies, but I know it flies. There are engineers who know. I know a lot about it, but I'm the markets reporter. Airplane engineers need to know about it, but I don't need to know exactly how a plane flies or an automobile works or how nuclear fission or fusion works, but they do. So yes, it's changed dramatically and most of it's still behind the curtain. And what people care about is when you push the button, the thing works. The car starts, the stocks get traded, and that's far and away the most important thing.

7:31That's a great point. You've already mentioned so many things, so many trends that have come and gone, But I've heard you said, and I know that you say in the book, that most investors still fall for the same two traps, stock picking and market timing. As someone who's been observing markets as long as you have, why do you feel like these mistakes persist even among professionals? You know what it is? Humans have a need to try to figure out the future. So you can tell people there's a problem. There are certain parts of the future that are fundamentally unknowable. Gee, and if you really just keep pounding away on that, somebody might say, okay, so there's some parts of the future that are unknowable.

8:09But because people have this need, this innate need for planning, this is somehow embedded in our brains. This is a part of our brain. Why do we need to feel like we want to plan? Because we need to figure out what the future is like. Well, this is one of the characteristics of having higher level brain functions in general. Humans are able to plan. Why is planning important? Planning is important to help for our survival. Humans who were able to think about where their next meal might be and not just eat this and not think about the future, like maybe I need to store some corn somewhere. People who weren't able to plan die.

8:43So the ability for humans very early on to develop a bigger brain that enabled long-term planning, that's ensured our survival. So part of that is the ability to try to think in the future. And so people want to know what's going on. Am I going to have enough food for next year? OK, well, we don't necessarily have to worry about that. Well, will I have more money next year? What will my job look like next year? So this drives this desire to try to figure out what the future is like. Unfortunately, stock market prognostication, in fact, guessing about what's going to happen in the future in general is a really, really difficult game.

9:20And we can talk a little bit if you want about why it's so difficult to predict the future. But it's important to understand why people want to predict the future. It's natural. It's a part of the planning and survival process. It's also important for people to understand you don't have as much control as you actually think you do about that. Why don't you tell me more about that? Because even the smartest analysts and economists will miss the mark pretty often. Right. So I'm trying to make this succinct because there's three chapters in my books about this. Basically, the idea is why is everybody so bad at predicting the future?

9:53By the way, it's not just retail investors. We make jokes about them. We call them dumb money, which I think is offensive to retail investors. But there is very good evidence that it's not just retail investors are bad at guessing the stock market. Professional investors are. We know professional fund advisors have a terrible track record. Ninety percent underperformed their benchmarks after 10 years. Ninety percent. We know that professional analysts and professional strategists employed on Wall Street have terrible records. The Federal Reserve has a terrible record of predicting simple things like where the inflation rate is going to be one year from now and what the GDP is going to be one year from now.

10:31It's so bad that Jay Powell, the head of the Federal Reserve, has said, when asked about why the Fed is so bad, said, we have a lot to be humble about. So what's the problem? Well, it's not just amateurs. Everyone's bad at this. There's two fundamental problems. The first is biases. There are biases that infect our brain, that they literally infect our brain, and it throws your judgment off. So a simple bias is overconfidence. You might be overconfident in your ability to predict the future. You think, oh, my stock market picks are up in the last three months. I'm a genius. Therefore, I will continue to be correct.

11:05That's a bias. That's going to get you in trouble. There are other kinds of bias, recency bias. Oh, I was right last week. Therefore, I'm going to be right next week. In the book, there are dozens of biases, and this is very widely studied. There's whole books on different kinds of biases that have been created. So these biases collectively throw off your thinking away from what actually happens. The other thing is a little more profound, and it has to do with the complexity of figuring out the future. So I'll give you a quick example. Pick something easy, a caterpillar analyst. So here's a guy.

11:38All he has to do is sit there and analyze what caterpillar is doing. This is a big machinery company. They make earth-moving equipment and things like that. You'd think his job is simple. One, predict Caterpillar's earnings one year from now. And two, based on this, predict where the stock price might be one year from now. You'd think, how difficult could this be? It's one stock, OK? It turns out it's ridiculously difficult. It's ridiculously difficult because the number of variables are enormous. Number one, there's the macro environment. Caterpillar could be affected by a global downturn in the economy.

12:09It could be affected by something that's going on in the politics between China and the United States. Think about all the things that could go wrong in the global economy that can affect a big global company like Caterpillar. Secondly, there's micro things. There are things like competitors out there that may eat into their market share. Then there's things on the managerial level. The CEO could take ill and literally have to resign. You might think, well, what's the chance of that happening? Actually, the chances are very high because management changes occur all of the time. Therefore, this guy is sitting there, I'm a caterpillar, and it turns out the number of variables this guy has to deal with between now and one year from now with just this one company are enormous.

12:50It's so big, it's almost like trying to predict the weather three weeks from now with very primitive computer equipment. You can't really do it. You can't model it correctly. So this is the problem. We are bad at predicting the future because we get infected by biases that throw off the correct way to look at things. And secondly, the sheer volume of potential information that goes into making up this analysis is so enormous, we can't really model it very well. And when you realize this, you throw up your hands a little bit. You don't say, oh, I can't do anything. I don't know anything. We're all idiots.

13:22You have to say what you want to do is really just stay with the markets and understand the historical trend. The market is up historically. You may not know if it's going to be up in the next six months or the next year. You don't know. But you have to give a little amount of control of that. But once you do, you know what happened to me? When I finally figured this out, and this was 20 years ago, I spent 10 years pulling my hair out. Why is everybody so bad at this? It's crazy. When I finally understood it, I relaxed a little because it wasn't my fault. And it wasn't like I couldn't find the one guy in the world that was the best guy who was never wrong.

13:59There is nobody. They don't exist. I used to say the search for the Wizard of Oz is futile. You calm down, you get a lot more humble. when you understand these things. Listening to you speak now reminds me of the Richard Feynman quote, imagine how much harder physics would be if electrons had feelings. And you mentioned all these variables that go into the market. A topic I love to talk about is the market as a complex adaptive system, which we'll dodge for now. But I think what you've highlighted is that we ought to accept that forecasts are full of noise and bias. And so how do you feel like the average investor should be thinking about headlines and market outlooks?

14:38I think investors should always pay attention to the headlines, but that doesn't mean you have to do something. Jack Bogle, who's the founder of Vanguard, the man who probably had the biggest influence on my whole outlook on the markets, I had many conversations with him, he used to say, don't just do something, stand there. Meaning most of the time, it's best to have a plan and stick to it and don't do anything stupid. Imagine if you were to try to trade around this recent market chaos, you would have pulled your hair out. You probably would have lost money and maybe significant amounts of money.

15:06So most of the time, you need to be aware of what's going on, but don't need to do anything. I've had viewers call me up and say, I don't trade, Bob. I just watch my money. That's why I watch CNBC. I'm just watching my money. So most of the investors and many who watch CNBC, they're not necessarily active traders. They're watching their money. So the most important part of this investing game is, how old are you? How long are you going to live? If you are 30 years old, you're going to probably live to 100. That's 70 years. I'm 70 right now, almost. I am planning to live to at least 90. My actuarial friends say, that's wrong, Bob.

15:43You're probably going to live at 95. You have an outside shot at 100. Okay. But that's still 20 years, 25 years. That's a long time. There's usually not need for me to do anything today. I might want to slightly reduce my stock ownership, but I haven't done that either. So how old are you? Most important thing. What is your risk tolerance? How much of a drawdown can you take? Could you take 20 %? We almost drew down 20 % this year. Well, that's a little unusual, but that isn't unprecedented. It happens every four or five years, believe it or not. How long is your investing horizon? Again, if you're 30 years old, living another 60 or 70 years is a long time.

16:18The hardest part is just figuring out what's your tolerance and how long you're going to live. You don't know how long you're going to live, but I'm taking a guess of mine. I just told you. I'm probably going to be around another 20 years. And that means that I'm not necessarily very worried about what happens this year because I have a pretty long investment horizon. And even with that said, I have published what I own in my book. You can see it. I'm one of the few people that actually said, Peter, you get these people tell you, oh, I think the market's going to be over. They never say, what do I own?

16:47They never answer this question. But I do. And I'm mostly 70 % stocks, 25 % bonds, 5 % money market. I've been that way for a long time. I haven't changed anything this year. But that's just me. That's my risk tolerance. I'm not preaching that everybody else should do that necessarily. I have a higher risk tolerance than most people because I'm a little more aware of market history than most people. But understanding the risk tolerance, having a plan, talking to a financial advisor, this is what matters. Not thinking you can trade around markets and not trade around this market chaos. That's for darn sure.

17:21I think it's great that you provide the transparency around what you own as somebody who's on TV talking about these things every day. I've done the same for anyone who's interested, whether you're watching us or you're listening to us, you can go to howpeterinvests.com. You'll see everything. You'll see how I structure the balance sheet. You'll see my portfolio, which is shockingly simple. And I do feel like for people who are regularly commenting on the financial world, I feel like it's their responsibility to be at least a little bit transparent on what it is they are doing. And you mentioned Jack Bogle drilling in these ideas that time in the market is more important than timing.

17:59And whether you have 20 or 25 years left, Bob, some of your money is maybe for your heirs. And so in that sense, maybe your portfolio's horizon is even longer than that. And I think that's probably true of a lot of our viewers, a lot of our listeners. And so when you see a pullback like we're experiencing now, and we almost got down 20, we're down around 10%, let's call it. This isn't gonna publish for a couple of weeks, so who knows where we'll be. But in reality, these aren't really that unusual of a downturn. I mean, I think of the events that you were on the front lines for, like 9-11 or the great financial crisis or COVID.

18:35What shaped you most as both a market reporter and an investor? Yeah, in terms of emotional impact, when I was hired in 1990, believe it or not, the biggest thing was the downturn in some of the financial stocks. The Resolution Trust Corporation had been created. Reagan had deregulated a lot of the savings and loans, and there was a big crisis around that. And just as I was coming in, there was the Gulf War crisis, and that was pretty big. What happened for me that was really part of my DNA was the birth of the Internet. In August 1995, Netscape went public, and that was sort of the new shiny object.

19:11Everyone suddenly discovered it, and our ratings went up around the interest in the Internet. It was a big thing. We really rode that whole idea. And CNBC became very, very popular around investing on the internet. We also had people who invest at home. We had Charles Schwab accounts. You could do it online now. And DLJ accounts. And it really changed investing. Then we had CNBC, too. So you had this new media to watch the stock market. You had a new way of investing through your computer, which was a new idea. And you had a shiny new object in the internet, in internet stocks, to invest. When it blew up what we call the dot-com bubble in 2000, there was a significant group, a small group, that lost a bunch of money because they had all their money in simply tech stocks.

19:55And what everybody learned from that is it's silly not to be diversified. You can't just own 10 technology stocks. It's too risky. And that's what a lot of people learned. And that was a little traumatic for a lot of people. After that, it was 9-11. And that was probably the most traumatic thing of my whole career because all of a sudden, a lot of my friends were dead. A lot of friends, people down here were dead. It smelled for a whole year. I mean, really bad down here. We're just a few blocks of the Old Trade Center. And it was very traumatic. There was a recession going on and I learned to meditate.

20:27Frankly, there's a chapter in my book about how I coped with it. And meditation taught me to calm down and adopt and learn to go with the flow. I know that's a cliche, but that's what it taught me. The next great event was the great financial crisis. And other than 9-11, that was the most traumatic event in my whole 35-year career. Because in March 2009, the market bottomed. And we didn't know this. We didn't know it was bottoming. But it was down over 50%, as you know, Peter, from the high to the low in 97 to 99. That was catastrophic for my generation. What was really traumatic was I saw people selling at the bottom.

21:01As I said, we didn't know it was the bottom. But when you're down 50%, there were still significant outflows from mutual funds in March 2009. You do not sell down to 50%. You buy, it's down 50%. So this is the point. Buy low, sell high. People don't do that. They buy high, sell low. This is when I got even deeper into behavioral economics because it didn't make any sense. And I remember sitting on the curb outside. I almost started crying because I knew people were flushing their savings and I knew they were selling their real estate in their second homes. And I said, my God, this is going to take years to recover from this.

21:35And it did. We did recover, fortunately, because of the great economic system that the United States has. But it was very traumatic. And I have to say, COVID was traumatic, but in a different way. That came out of left field, although people were saying the threat of a virus has been around for years and years. And yes, but that came out of left field. It was not a man-made problem. It was an environmental change. So I'd have to say, the thing you really learn about all these crises. When you're the reporter covering these things, what people want from you, when the world is just chaotic, what they want is a sense of calm.

22:12The world's on fire. They don't want you coming on TV acting like your hair is on fire. They want calm, rational analysis. Now, on days when the markets are boring or long stretches when it's boring, I like pointing out the things that are interesting, exciting. I play in the opposite way. But the most important thing that you learn as a journalist is to be a voice of reason when people are panicking. That's the thing that I constantly remind myself of. And even during this recent market panic, kept reminding people, long-term plan, don't do crazy things like think you could trade your way out of this market.

22:48Almost certainly you're going to lose doing that. You know what you do, Peter? You keep repeating the same things Jack Bogle taught me 30 years ago. I'm still saying the same things 30 years ago because they're true. You keep thinking, oh, my God, I keep saying this stuff over and over again. But there's a whole new generation that needs to hear that because a lot of them think, well, I'm smarter than everybody else. I can outsmart them. Well, maybe you can, but probably you can't. Great financial advice never goes out of style. And it's interesting as I listen to you describe some of the crises that stick out in your mind.

23:21When I work with individuals, when I work with institutions, they all seem to think that they They can handle volatility. And I think that they can. They can handle the losses. But what I've come to realize is that they can't handle the narrative. It's that narrative that they're afraid of. And when we look back in history, every crash looks like an opportunity. But in the moment, the crash seems like something you should fear. And I love that you mentioned people expect you to stay calm and clear headed on air because you really do. And I actually had a question written down to ask what your strategy for doing so is in these moments.

23:53Well, take a breath. number one. Number two, remind people that this too will pass. You get this recency bias where you think, oh my God, the market's down 5 % two days. Therefore, the market's going to be down 5 % tomorrow and the next day, but it isn't. This almost never happens. And in the few cases that it does, ultimately you have to ride that out as well. There's very few situations under which it is suddenly worth saying, all right, ladies and gentlemen, it's time for everybody to lighten up on everything. It's easy to say to professional investors who think they can trade around the market, who get paid to try to trade around the market to do that, but it's not generally good advice for anybody else.