The Biggest Investing Lessons Of 2024 To Take Into 2025 With Michael Batnick (EP.184)

0:28We all need to make smart decisions with our money. partner at Ritholtz Wealth Management and co-host of two of my favorite podcasts, Animal Spirits and the Compound and Friends. Michael has always been a prolific content creator known for giving sharp, direct, unfiltered market insights that deliver a ton of value while also making for really fun conversation. And so when I invited him to the show, I thought it'd be interesting to dive into some of the major themes and headlines of 2024. So we are exploring interest rates, the Fed's impact, the tech market's concentration within US markets, Bitcoin ETFs, and where markets might be headed in 2025.

1:11Along the way, Michael also has some pretty interesting perspectives on why individual stock picking isn't worth all the hype. And I think throughout the episode, whether you're an advisor looking for context to share with your clients, or a do-it-yourself investor, just curious to hear our take on what happened in 2024, I think you are going to love this episode. As always, there are detailed show notes that you can find by visiting thelongterminvestor.com. But without further ado, let's get into my conversation with Michael Batnick.

1:47Michael Batnick, welcome to The Long-Term Investor. Thank you for having me. I could not think of a better guest to have today because what I want to do is talk about the year that we're just about to finish up, 2024. And one of the things that you've gotten in the habit of the past few years, and I'm guessing you're going to do it next year, is that you make some predictions. And I know you're not thinking you're going to perfectly predict the future and profit off of it, but maybe just tell our listeners a little bit about what you're thinking behind doing those are. All right. A few reasons.

2:20Yeah, you're right. I'm not necessarily acting off of these predictions. I do it because it's fun. I do it to hold myself accountable. I do it as a reminder of that predicting the future is impossible. And let's be honest, I do it because it's content. And I've got a podcast and it gives me something to talk about. If I was not in this industry, if I was not creating content, would I do this? Certainly not. Yeah, that's fair. And so you're managing director at Ritholtz Wealth Management. I should probably back up. There's some of this is in the intro, but for those of you watching us on Cheddar or on YouTube.

2:47You had the managing director of Ritholtz Wealth Management. They're from basically the very beginning. Co-hosts of Animal Spirits, co-hosts of The Compound and Friends. You guys have a lot of other spinoff shows, so I'm not really doing you full justice. But one of the things that I appreciate about what you and your colleagues do is you do put out a view constantly. And the end message is typically something like stay the course. And I always feel like there's a lot of value, not necessarily in every single advisor having their finger on the pulse of the market, but at least the firm having somebody there to do that.

3:20And sometimes I think that advisors these days as investment strategies have rightfully so become more passive or rules-based, I'm not sure that investors really place that much emphasis on knowing what's going on with markets. I mean, how do you feel about that? Well, the number of CFA charterholders sitting for an exam versus the number of CFPs has completely flipped as well it should because the days of alpha or selling alpha or let's be honest, delivering alpha are a thing of the past if they were ever a thing at all. And they used to be a thing. Let's give credit where credit is due. But the value that advisors deliver to their clients, in my estimation, or at least in my opinion, is, okay, I've worked hard.

4:03I've saved money. I've got goals. Am I going to be able to do those things? And what is the best way to implement those strategies? At a high level, that's what we do. And the investing component is but a small but important piece of it. Yeah, definitely. If you look at like a pie chart of what people in our profession did 20 years ago, you know, is almost all investing and no planning. Now the pie, I would say is more planning than investing. I always feel like even though the messages stay the course, having a sense of history, having a sense of putting context into things is very valuable. And so to all the advisors listening today, you're going to get to use Michael's insights on 2024 to help you write your year-end newsletters.

4:42So they're just going to straight rip you off here. And I thought I might run through some headlines from the past year, just kind of get some of your instant reactions. That sound good to you? Sure. What's happened? All right. So I'm going to start in January. The Fed held rates steady at the January meeting. They're saying there's concerns about inflation, which remained above target, but was showing signs of cooling. I sort of remember going into the year, and maybe your memory is different, that everyone was pricing in like six or seven rate cuts. In that January meeting, the Fed's like, hold your horses.

5:11Inflation's still a little high. And we saw bond yields go up, bond prices go down. I don't know, for me, when I think about a lot of that period of time, as well as even now, to me, it still feels like people are really anchored to that zero interest rate period. And I just don't see interest rates settling back where people are anchored. How are you making sense of what the Fed is doing today and what your memory was of back then? So going into 2022, it was consensus that the Fed was going to manufacture a recession. And despite their best efforts, they weren't able to do it because we were flush with cash.

5:46And in that scenario, we're not going to not spend. And so they jacked up interest rates in hopes of slowing down the economy, cooling inflation. Everybody was bearish. And the financial markets had a really tough year. Of course, bond prices got destroyed, not giving ballast to a 60-40 portfolio, but dragging it down, right? As interest rates went up, fears abound and tech stocks got crushed. And 2022 was a really tough year. I think people forget. They act as if it's been up only, and this has been a really easy one-way bull market, and it just could not be far from the truth. And then heading into 2023, so we had the low in October 2022.

6:21And I remember, and I've said the story, but it bears repeating, I was in a room full of investors and I said, hand up if you think that was the bottom. Nobody raised their hand. Hand up if you think there's going to be a recession next year. Every hand in the room went up. And so everybody was positioned for 2023 to be a really rough year. And lo and behold, tech stocks bottomed December 30th or December 31st. And it was up only. And a lot of that is because the narrative changed. Why? Because the facts changed. We had chat GBT and this whole wave of enthusiasm of something that was completely unforeseen and unpredictable and probably did save us from a recession or a longer bear market.

6:54And so 2023, you had all those things. And as we looked forward to 2024, we said, okay, now mission accomplished. We landed the plane. And I say we, I mean the consumers. I think we didn't crash just by their best efforts to do so. And we were up, what, like 20-something percent in 2023. And who had on their banking card that we were going to be up 29 % in 2024? Not me and not many other people either. You look at like the average Wall Street strategist had a negative price target for the year, which is unheard of. I think that's literally never happened before. And so when everybody was on one side of the ship, it steered a different direction.

7:28So to your point about interest rates and anchoring to Zerb, I don't really get that sense. I think that a lot of misallocation and damage was done in that era. I think we're seeing some of the side effects from that still today. But the interest rate trajectory is interesting, probably more so from the view of the housing market more than the stock market at this point. If you don't own a home, you're upset. If you do, maybe you don't really care unless you want to move. But I mean, in general, I feel like the Fed has in interest rates in general have probably gotten more attention from the average investor or I should maybe even say average consumer than normal.

8:01I mean, if I'm looking at what the Fed did in 2020 to present, where we had a crisis, unlike any of us have really lived through, you know, a crisis of health, not just financial markets, shut down the whole economy, all the things to inflation. You know, I came out of school probably a similar time as you and there wasn't inflation. 3 % inflation is super normal, but people like any inflation are freaking the heck out. So I mean, in your perspective, if you were going to grade the Fed on how they've done since the pandemic through the present, what kind of grade are you giving them? Yeah. So I think that the Fed has a very difficult job, very important job, but I don't think they did a great job.

8:38I don't think that history will be too kind to them. In my estimation, they were very late to raise rates to identify that the inflation was more than transitory. And at a time where we had the Inflation Reduction Act and all that fiscal stimulus and then the mortgage bond buying on top of all of it when housing prices were going up 20 % every week, it seemed, and this is not revisionist history. Josh and I were young about this at the time. What are they doing? Do they know something that we're not seeing? It seems very apparent that they should not be doing what they're doing. And then after that, they were way too late to cut rates.

9:10And so I think that they tried to crash the economy and they couldn't. And then they kept us above what I think was an appropriate level for too long. Now, listen, it's easy to be an armchair quarterback, right? So I don't want to be too, too hard on them, but no, I don't think they did a great job. Yeah, I'm with you. And the history books, I mean, I don't know. If a history book says they were six months late and you're looking at a 20-year period, is that late or is that good enough? I'm not enough of a Fed student to know truly. I mean, well, also they will get credit for the AI that had nothing to do with them.

9:43I think that honestly saved the market. And so had we had a hard landing, but we'll never know the alternate paths. Well, so that's a good transition. As I look at headlines, all right, so the Fed eventually cuts rates in March 2024, but NVIDIA, chip maker for all things AI, hits record high at about the same time. I think in March, and I was looking back at one of my blog posts, just seeing like, I think this was the point in time where the common investor probably had not heard of Nvidia or understood the difference in types of chips. You know, when they thought chips, they just thought of like what Intel was making.

10:19But at this point in time, people are like, wow, there's some big returns. Obviously you get that hindsight buys. Obviously this was going to be a big deal. Let me ask you this. If you have cash today, are you buying Nvidia? I'm not buying Nvidia. No. I mean, you already own five or 6 % in the total market index. If you're an investor, you own Nvidia and you are certainly exposed to Nvidia. Interestingly, Nvidia, the stock put in a top a couple of weeks ago, but if you look at it relative to like its competitors, if you divide Nvidia by SMH, that certainly looks like a blow off top, meaning like it went vertical, vertical, and it has since pulled back sharply.

10:55Whether or not that comes to fruition and that was like a local top or a longer term top, obviously who the heck knows. That's not a game that I necessarily play, but I embarrassingly enough, I never bought Nvidia the individual stock and I do buy individual stocks for myself in one of my IRA accounts because I enjoy it. It gives me entertainment. It gives me, again, content for the show. I'm under no delusion that I'm going to beat the market or that it's going to impact my financial livelihood at all. But it's something that I love to do. So I do it. Well, so let me ask you this. I know, well, I shouldn't say I know.

11:25Let me speak from my experience that when a stranger asked me about buying individual stocks, I'm usually like, hey, just put in an index fund, especially if I don't know them. It's really safe advice. But if you have a client coming to you, they know that you talk about individual stocks on the shows, on your blog. How do you talk people through investing in individual stocks, the expectations, the risks, et cetera? So I had a handyman in here the other day and he sees my screen and he goes, Lane, let me ask you something. You're in the market? Yeah, I'm in the market. If you had$50 ,000 to invest, what would you do?

11:55I'm like, well, I mean, give me more. What are you trying to do? He's like, well, just earn some income. I'm like, all right. Well, so let me tell you the scenario here. The risk-free, I point to the 10-year, is 4.2%. So if you're looking for income, you can get 4.2 % risk-free guaranteed by the US Treasury. And when I say risk-free, that means that you'll get your money, you'll get your interest payments, you get your money back. It's not risk-free in the sense of like there won't be price swings and inflation can't erode it away, but that's the benchmark. If you want more than 4.2%, because he's like, eh, 4.2.

12:22Well, if you want more than 4.2, there's all sorts of different risks that you're going to be taking. He's like, okay, okay. Yeah, that's not that interesting. What about like Tesla? I'm like, oh boy. So the question is, of course, like what type of money are we talking about? What are your objectives? If you are like a speculator gambler and this is like, listen, I do the right things. I eat my meat and potatoes, fruits and vegetables, whatever, my 401k. And I like to have fun and dabble. That's a completely different story. Now, I will never give individual stock advice. I've been there, done that.

12:48I can't see the future. I don't know about these companies any more than you do, right? If somebody is asking me. So I'll talk to them about like regret minimization and risk management. So we know from the data that, and this is from JP Morgan's agony in the ecstasy of the markets, we know that 40 % of all stocks in the Muscle 3000 experience a 70 % crash from which they never recover. We know that 2 % of all stocks, or maybe even less, are responsible for all the returns in the market over time. We know that most stocks don't beat inflation, don't beat treasury bills. We know that most stocks are not worth owning for the long run, even though we believe in stocks for the long run.

13:23So if we know all that, there's got to be some sort of acknowledgement that it's probably not a great use of your time or your money. And so just do with that what you will. So make it a small dollar amount. And like, if you say, hey, listen, and this is probably giving people too much credit, too much benefit of the doubt. I do this to remind myself why I should know index funds. Phenomenal. I do this to have fun. I do this to speculate. I do this to gamble for whatever reason, and it's 5 % of my portfolio, have at it by all means. Yeah. I like that point of view. I'm in a pretty similar point.

13:55I did when I came to PlanCorp swear off individual stocks and I got real tempted in 2020 when it looked like some things were going out of business. That's when it's actually hard to stay away. Day to day, I don't feel the temptation, but maybe it's because I'm too busy. But talking about temptation and I'm still looking through these headlines. And by the way, if you're listening or watching us, I'm going to put the whole like slew of headlines, even the ones I'm glazing over and not mentioning. I'm going to put them on the show notes at the longterminvestor.com. But how can we not talk about when the spot price Bitcoin ETF finally comes to market?

14:27You have been pretty well, actually, I remember listening to a couple of your shows and you were like super bullish on these being able to attract assets. And you were right. Looking back on these product launches, how do you feel like it's played into to Bitcoin or crypto as a whole throughout 2024? So Peter, I've never said this out loud, but it's kind of funny that my biggest conviction bet ever has been Bitcoin. And it's not even something that I necessarily like air quote believe in. I'm not one of these people that like self-sovereign store of value replace a dollar inflation edge. I don't believe any of that bullshit.

15:01But what I do believe is I do believe that they believe and I did believe and I still do believe that this was, for me, from the investment perspective, it was merely a supply demand story, an adoption story, period. And so I thought that the ETF passage was inevitable. And I didn't think that there was going to be a run up into that. And as a result of that, and I thought that this would feed on itself and that the institutions were coming. And so it was really, for me, it was nothing more complicated than that. Yeah, that makes sense. And I've published a lot on it, maybe not as much as you have.

15:35And I've been riding the fence the whole time. Like I haven't been willing to take a real view. I've been more like willing to poke holes in what I feel like are really dumb arguments for it. Cause there were a lot of really, really dumb arguments and they're still sort of are. And one of the things that was interesting. So I don't know if you remember Jason's why I get like an evidence-based investing conference forever ago that you guys were putting on. He had talked about like, yeah, it's probably worth nothing or a ton, you know, in between. And I had him on the show a few weeks ago and I was like, so what do you think?

16:03Is it worth a ton now? Cause a hundred thousand dollars, that's a lot. Like there are a lot of people who've made a lot of money. I do sort of worry about expectations for people who jump in now, but the ETF makes it simpler, at least less likely you're going to lose like a password or something. Yeah. Yeah. I mean, for people that are like, should I buy now? It's like, come on. Like why it's fine if you want to, but what's your reason? And is a good reason. and I don't know what a good reason is at this point. And I'm not saying there isn't one. I just not sure I recognize what it is. No, the good reason is you're afraid of missing out on further gains.

16:33Like that's it, but it's up 40 % of the last month. It's up 80 % of the last six months or something like that. Like if you want to own Bitcoin, listen, I get it. I do own Bitcoin, but if you're like FOMO. Yeah, but you're a long time holder. So it's a little different. Yeah. If you're FOMOing now because you're afraid of missing out, like that certainly makes me want to sell if anything, you know? Yeah. I mean, it's not an unreasonable thought. But slowly working through the calendar, I'm looking at April 2024. I'm seeing tech giants report record earnings. You'd sort of mentioned it earlier.

17:01It sort of feels like AI rode to the rescue in November of, wait, was it 22 or 23? It was 22. Yeah, ChatGBT came out. Actually, Sam Altman tells a story about how when they were going to release, he didn't realize it was going to release. And the reason it's called ChatGBT is someone texted him being like, what should we call this thing? And this was supposed to be an internal name. and they never really branded it. And so here we are. But I feel like in general, it was around April when a lot of the headlines and people started coming out talking about like, wait, is the market too concentrated?

17:33Give me your thoughts. What do you think about market concentration at this point in S &P 500? Yeah, I would say be careful what you wish for because concentration is a feature of bold markets and the unconcentrating of indexes happens in a bear market. So I would share the concerns to the extent that there are concerns if these companies were not justifying their premium multiple, their percentage of the index is justified based on fundamentals. There's not some sort of conspiracy. It's not money printing. It's not the Fed propping it up. These companies are earning the lion's share of the profits.

18:07And so it's not surprising that they're going to be a big portion of the index. So I'm not concerned. Would I prefer, I guess, a more broadly diverse right market? I guess I suppose intuitively that makes sense. But given that the data doesn't suggest that, no, I'm not concerned. And earlier in 23, yes, the MAX 7 was providing a gigantic portion of the index. And same thing in early 24. And Josh and I spoke a lot about this. I would have been nervous if the rest of the market was melting down. And it was only the giants that were propping up the index. That wasn't happening. The rest of the market, if you look at the equal way, it was sort of going sideways while these were chugging higher, if the RSP was crashing and the market cap weight was going up, yes, that would have been like, oh shit, we saw that in 2000.

18:50That would have been worrisome, but that wasn't the case. And so I wasn't worried. And it's not something that I spent a whole lot of time worrying about. Well said. I got a lot of stuff on that that I'll link into the show notes at the longterminvestor.com. As I keep going down through the timeline, another headline I see in May 24th, so Fed Reserve Signals Potential Rate Hikes. So it's a big like, oops, did we cut too soon moment. We did start a little bit of a sell-off later. Actually, let me move to the next one. So there's like US-China trade tensions escalate. And basically all economists agree that tariffs suck.

19:24It seems like maybe more on the way, which just increases prices to consumers. I'm not trying to tackle this from a political standpoint. I'm just saying, do you think at all about tariffs? Let me start there. Not a whole lot. I mean, I don't get what they're doing, what he's doing. I mean, I get like why he's doing it, but it doesn't seem to make economic sense. I don't think that there are any economists on either side of the aisle that think it's a great idea. But is it something that I spent a lot of time thinking about? I don't know. I mean, I'm sure there will be flare ups and like it's going to raise prices for individual items and I don't get it.

19:56How about this? The idea of tariffs coming down the pike or more tariffs coming down the pike are already incorporated in market prices, but they aren't necessarily incorporated in consumer expectations about their future spending. Okay. Not a super interesting point, but I feel like we're hearing so much about tariffs. Let's see, I'm skipping over June. I'm looking at July, the shift from tech to small cap stocks. So kind of what you were talking about earlier, you start to see a little broadening. And is it fair to say it's like never been more difficult to be a diversified investor? I mean, you're in my whole career, we could have just bought the S &P 500 the whole time and looked really smart, but yet I would like to think we We are smart and we're globally diversified and like own other stuff.

20:37I mean, I feel like the type of investor typically calls into me is a do-it-yourself investor. And they're always owning a lot of VTI and VOO. Since they're probably tired of hearing my voice on the topic, what do you tell these people who are US heavy at this point? Oh boy, Peter, this is not an easy one because I do believe in cyclicality. I do believe in global diversification, but I also do believe that investors respond to the last, forget about the last 15 years, the last five years, the last three years, the last 10 years. And of course, the question is like, do the valuation spreads make it compelling enough to own things other than the S &P 500?

21:12And I just don't think it's great to put all your eggs in one basket, despite the fact that it's been the best, strongest, sturdiest basket. So where that dial is appropriate for you, I'll leave that up to the end listener and their advisor. But I still think it makes sense to diversify because you don't know what the future holds and stocks are trading rich. I'm not saying they've deserved the rich valuation, but is this going to continue forever? I don't know. I hope so. I mean, I wouldn't be mad if the US just outperforms forever. It would make my life a little bit more difficult, but it'd also be - It'd probably net be good for us, even though we'd trail the market.

21:43Yeah, I don't know. I'll talk about circus because I don't know the answer. It's hard. I can't see the future. I wish I could make my job a lot easier. You know, there are three periods in which cash beat the S &P 500, like a 12-year, a 15-year and a 17-year period, but I have it buried in a giant PowerPoint that is only 33 % open, now 75 % open. I don't think that does a good job persuading people, even though you and I know it to be right. It's like, listen, we don't know that the future is going to look like the past in any shape or form, but that's what diversification is for. And if you believe that the future is uncertain, you diversify.

22:11And if you believe that you can see the future, then you concentrate, I guess, and good luck. Yeah. I think one of the most detrimental voices or things said by a really influential great voice was Warren Buffett when And he told the world, all I'm going to own is the S &P 500 in my estate. And it's like, well, cool. You have billions of dollars. You can sit through long periods of time in which U.S. stocks trail everything else. I have on screen three periods in which U.S. stocks lost to cash, one of which wasn't that long ago. From 2000 to 2012, cash beat the S &P 500. There's a 17-year period that started 1966 to 1982.