How Not to Invest — with Barry Ritholtz

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29:25And I would argue, and I'll put forward a thesis, that the alternative investments community, and I would say a good 50 % of my friends are in this community, who recognize the most extraordinary gains relative to their talent. And by the way, they're exceptionally talented. But from kind of 1995 to 2015, I think that 20-year period will be remembered as the period where a small group of people made more money on a risk-adjusted basis than any sector in history. I had friends who were good, hardworking, worked at hedge funds, and the good, hardworking people in other industries were making$200 ,000 to$2 million a year, and they were making$20 to$30 million a year.

30:10And then that came to an end, or slowly but surely, I would say the majority of them are even out of the business over the last five or 10 years. They've stayed in the business, but their AUM's gone from$3 billion to$300 million. And my thesis is that the alternative investment sector could best be described, that's mutual funds, hedge funds, as San Francisco real estate. And that is expensive but bad. And that is, the returns have been in stocks that everybody knows. So no one's going to pay you$2.20 to buy NVIDIA. And they've been left trying to find alpha in a narrow part of the market, and they've just vastly underperformed.

30:47I think the analysis shows if you added up all the people on CNBC who come on and pitch stocks, they have underperformed the S &P by the amount of their fees. Isn't this arguably one of the biggest grifts in economic history, the alternative investment community? The Financial Times called the hedge fund a scheme to transfer money from naive investors to savvy managers. And I think that overstates it a little bit. You know, the golden age of hedge funds was pre-reg FD, where you could have an information edge. And before quants were really everywhere, to say nothing of the few quants that really put up killer numbers in the 80s, 90s and 2000s right up to the financial crisis.

31:37Jim Chanos has a wonderful quote in the book. When he started in the 1980s, there were 100 hedge funds and they all create alpha. Today, there's 11 ,000 hedge funds and more or less those same hundred are the ones that generate alpha. So my thinking on alternatives has evolved. If you can get into the elite hedge funds, the top, let's call it decile, the D.E. shores of the world, if they're willing to take your money and it's their money making fund, not their secondary under any hedge fund that's successful, always rolls out a plan B for the masses and it never does as beautifully as the first one does.

32:18Yeah, that's a great opportunity. What we've seen since the financial crisis and the era of zero interest rate has been a shift in assets instead of flowing into hedge funds. And they're still going into some degree. It's three trillion dollars. They have moved to private credit and private equity. And that seems to be the alternative that if not generating alpha over and above what the market does, at least they can make a plausible case that it's not correlated and it's diversified. We're not putting money into publicly traded stocks. We're not putting money into bonds. We are buying credit and or private companies and therefore under exposed to the equity markets.

33:11At least that's a plausible argument. I'm not so sure I fully buy into all of it, but it's a better argument than I'm going to aggressively trade on a leveraged basis public equities. I still can't help but stock pick. I want to put a couple of my core theses out there and have you respond to them. One is regarding what you said about Europe. And every year at the end of the year, I make a much prediction. So one of my predictions in November of 2024 was that we were finally going to see the flows, the rivers reverse. And that is someone told me that if you added in debt, the U.S. market accounted for 70 % of the world's value.

33:51that it was just, if it's just equities, it's 50%. But if you add a debt, the total value of the world, if you put a price tag on it, is represented, 70 % of that is the US. And I thought, okay, if I could buy the US for$70 or the rest of the world for 30, I would buy the rest of the world for 30. And so I've started rotating out of US growth and into value, some in Latam, some in China, and some in Europe. Yeah. And I read that U.S. growth is at 98%, meaning on a scale of one to 100, it's only been more expensive, 2 % of its history. And this is about a month old, so I'm sure it's changed. But European value was at 2%, meaning 98 % of its history had been higher.

34:33So granted, this is just stock picking on a more meta level. But doesn't the U.S. just generally speaking, and I'm curious if you're telling your clients this, just look overvalued? So let's start 30 ,000 feet and drill down. First, you have that itch. And the advice we always give people with that itch is set up a separate cowboy account, put 5 or 10 % of your money into it, and pick stocks to your heart's delight. Who cares? That's no fun. I'd do 30. 5 to 10%. All right. Well, you're risking another 2008 or 2009. If you blow up 5 % or 10%, who cares? It hurts, but it's not fatal. So that's number one.

35:20Number two, sometimes stocks are expensive or cheap for a reason. You could look back for the past 15 years, other than really briefly after the financial crisis, it's hard to say U.S. stocks have been cheap any time in the past 10, 15 years. They're expensive for a reason. It's the highest profit growth. It's the best or at least it was up until the craziness we're dealing with now with tariffs and all sorts of other potential risk raisers. But when you look around the world, Europe has a structural problem and has had that problem for a long time. We have a lot of advantages. We have the reserve currency.

36:08You know, it's not a coincidence that all of the big tech companies primarily start here. I have a vivid recollection of a business trip in 2000 to London and Brussels. and in the U.S. during the dot-com collapse, you walk down the streets in Manhattan, the fear was palpable. Shit, if I get fired, I lose my healthcare, my kid can't get that surgery, Cobra is crazy expensive, I'm screwed. In Europe, it was kind of like, well, I got unemployment, my student loans, I don't have student loans, my education is paid for, my retirement is paid for, my healthcare is paid for, all right, so we have a recession, who cares?

36:48The flip side of that is you don't get the Larry Ellison's, the Bill Gates, the Steve Jobs in Europe the way you get them here. So sometimes stocks are cheap for a reason and they can stay cheap for far longer than we would expect. 98 is kind of a warning. So that's number one. Number two, I'm not a fan of putting money into China because they basically say if you're not a local Chinese investor, you're a second class citizen. And I think the numbers are from 1989 to 2023. You're essentially flat in China. I mean, you missed two of the greatest bull markets in history and China gave you nothing because the B shares don't trade the same way the A shares do.

37:40And there's a lot of friction, unlike in the U.S. So I know everybody seems to think China is the big winner. It turned out the way to get exposure to China was not through putting money into China, but buying Australia, who who supplied a lot of energy, a lot of commodities, a lot of things to China and did really well on a much more steady basis without the governments, the Chinese centrally planned government putting a thumb on it. But the other aspect, and you and I have talked about what I'm about to say before, most investors never find their edge, right? 90 plus percent of us, we have some idea as to what's going on, but really not a full understanding.

38:32We're overconfident. We're arrogant. We suffer from all the Dunning-Kruger effects. And so we make bad decisions. But some of us, and I include you in that group, have an edge. You have an expertise, digital marketing, content creation. Look at your successful history on the entrepreneurship side. If you can trade your expertise for entree into some of these alternatives where you're getting a, hey, let's swap. I'll swap my not charge you a fee and you don't charge me a fee. That's a tremendous advantage that you should be very comfortable taking advantage of. When I first found you because of your presentation on The Four, which eventually became the book, The Four, and it was clear to me that you had a huge insight into these companies, even as late as the early 2010s, I would say, check yourself and say, do I still have the advantage that I had when I bought these companies at a fraction of where they are today?

39:46Let me ask you this. There's two big exogenous factors that I think you have to acknowledge and maybe adjust for. And I'm curious how you're adjusting your client's portfolios to these two opportunities, risk, whatever you want to call it. The first is the Trump administration and all that brings kind of, you know, America first generously or tariffs, however you want to frame it. And to AI, how are you adjusting your clients' portfolios based on those two factors? So let's start with AI first, you know, and you and I are not that far apart age wise. So we've lived through the financial crisis.

40:25We've lived through the dot com implosion, what happened with the Internet. I think we're both old enough to remember when computers, desktop computers first came out. And there's this sort of land rush. And by the way, this has happened with every technology. Go back to telegrams, radio, telephones, computers, Internet, AI is no different. There's a rush to try and find the winners, the NVIDIAs. But what ends up happening is we're not a dot-com company, but every modern company today has a website, has email, uses business intelligence and connectivity to make themselves more efficient, more productive, more profitable.

41:10So with AI, the thought process is, is NVIDIA too expensive? Is it too cheap? When does Netflix and Microsoft and Apple, when do those companies achieve full value, overvalue? I don't know. I have no idea. People have been betting that it was over for forever and they've been wrong. To me, what makes AI so exciting isn't the Magnificent Seven. It's the other 493 companies in the S &P 500 that every single one of them is going to be using artificial intelligence to make themselves more productive, more efficient, more profitable. And that's the upside. Sure, NVIDIA is a$3 trillion company. Is it going to be a$4 trillion or a$5 trillion?

41:58I haven't the slightest idea. But I can tell you the rest of the S &P 500 is going to benefit from AI and become much more productive. So that's your second question first. The Trump issue is kind of fascinating because there are two sides to this, and you have to be able to hold two conflicting thoughts in your head at once. The first is, if I'm investing for retirement, generational wealth transfer, philanthropy, I'm thinking out 10, 20, 30 years. I'm certainly thinking out beyond 2028. And so you have to kind of tune out the noise and look past all of the craziness that's going on today. But the flip side of that, and, you know, I've never met a one handed economist.

42:49It's always on the one hand and on the other hand. But the flip side of that is there can be no doubt that risks are rising. This is a piece I put out last Monday, and we identified seven areas where the possibility of risks, they're still low, but they're higher than they were before January 20th. And that includes the risk of a recession, the risk of a contraction in the economy, the risk of a volatility spike, which we've already seen. We're now over 23, which is a big, relatively higher number, not high enough to say, gee, I got to start buying with both hands. But it's above where we were.

43:35That was kind of steady. I'm concerned about the risk of the rule of law. I don't understand this nonsensical strategic crypto reserve. The world using the U.S. dollar as the reserve currency of choice has been called America's exorbitant privilege. Why on earth would you do anything to put that at risk? Sam, why is it put at risk with the Bitcoin reserve? Why would you want to create an alternative to the dollar and endorse that? It you know, if you have an asset that's enormously valuable, you don't want to do anything to screw that up. And arguably, I try and think of Bitcoin as like a large tech company.

44:22It's halfway between Facebook and Google to put it into context at like a trillion, seven trillion, eight. It's right in between the two of them. Although Bitcoin came out a year or two after the iPhone, the iPhone is ubiquitous and indispensable. We're still waiting for Bitcoin to actually become an actual functionality. But back to the question about Trump and tariff and layoffs at the federal government, you know, we're sort of in a wait and see. Will these things withstand judicial scrutiny? Do they actually have the authority to not spend money that Congress authorized? There's a lot of questions, but you can't just completely tune everything out.

45:11You have to be aware we're seeing risks rise. We're seeing the possibility of recession increase. I'm not a giant fan of the various Federal Reserve GDP real time measures before you get the quarterly update. But the Atlanta Fed's GDP now just printed yesterday negative 2.8 percent for Q1 GDP. That's the first two months or so of data imply that we're going to be in a contraction when all these tariffs and all these layoffs get calculated in Q1. That's obviously a substantial risk. you just can't tell how much of this is negotiating, how much of this is going to go in effect. We're recording this 12 hours after the tariffs went into effect.

46:03The first time they were postponed. I'm hoping, I have a little wishful thinking on my part, that this will be negotiated away. But in the meantime, the market's still within 5 % of its all-time highs. It's a little early to panic, but it's not too early to say, gee, this is starting to get a little more volatile and a little more choppy. And lots of areas that have been pretty, you know, sedate and operating properly are now starting to tick up. They're still low, but they're much higher than they were four weeks ago, six weeks ago. We'll be right back.

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49:57We're back with more from Barry Ritholtz. So I can't help it. I want to talk about individual theses looking for Alpha and get your response. I'm wondering, I'm trying to find the silver lining and basically America abandoning its allies with respect to Ukraine and ignoring 80-year-old alliances with huge economies in Europe. And I'm obviously laying bare my political bias here, but it just seems insane to me. And the silver lining I see is that the Europe is about to substantially increase its military spending. And I see that possibly as a form of stimulus, not only economically, but it might inspire a decent amount of technology spillover into the private sector.

50:43If you look at Israel spending on the military, obviously the U.S. is spending on military. I would argue that on the whole, you could argue, in addition to the actual defense buttressing, it's been in many ways good for the economy long-term. I think of basically the most valuable companies in the world have just built a thick layer on top of technology innovation that originally came out of the defense sector. Do you think that there's a possibility, and this is me trying to talk myself into the fact that Europe becomes a union again, spends more in military, and that it kind of ignites through stimulative impact and kind of an inspiration in its tech sector, that Europe might become a union and this might kind of set off not only leadership, where they kind of command the space they own, largest economy in the world, take us a whole, but it might be a starting gun for kind of a bull run in Europe.

51:36Or am I just, am I just painting a story to make myself feel better here? So we have a tendency to think of the world in black and white and, and we've, you know, binary terms and it's never that clear cut. It's always nuanced and complex. And so you're, you're touching on a couple of really interesting things. So, so let me caveat this by saying, I am neither a defense expert nor a foreign policy expert nor a geopolitical expert. Doesn't stop me, Barry. Stop being so fucking measured. Just make declarative statements. Well, that's where I was going with this, where I was going in one direction.

52:15Pretend we're on CNBC. Just say shit like it's God's gospel. So the funny part about what you're saying is this chapter in the book called Epistemic Trespass, And experts in one area have a tendency to believe that their expertise. In fact, it was Professor Dunning who introduced me to Nathan Ballantyne at Arizona University, who's the expert on epistemic trespass. What happens when people with legitimate expertise in one area bleed over to another? And the answer is exactly what you would think. They're terrible in those adjacent spaces. But all that said, I think the nuance of the realignment is such that Europe has been skating by under the NATO alliance and the American leadership and umbrella.

53:06And while it certainly appears to be an unforced self-error, you know, your own accidentally own goal by giving that up, the United States giving that up, it is going to make Europe much more cohesive, much tighter. And whereas we used to be the counterpart, the offset to the Soviet Union, now Russia, Europe is going to become that. So that's the first part. The second part that's kind of interesting is an amazing article in The New York Times yesterday about not only how bloody and horrific the war in Ukraine has been, but how over the course of three years, the casualties, the injuries and deaths are now 70 percent inflicted by drones.

53:57The old regime of tanks and artillery and expensive aircraft has moved to a totally different type of warfare. It's no longer Lockheed Martin. It's now Palantir. It's that sort of shift. And so whereas we have all of these legacy issues, those other companies and to some degree, the new European alignment are not stuck with that. And so it potentially can kick off a whole new wave of innovation, not just in defense, but other areas. We see it in the US, we see it in Europe. I can't imagine the United States is going to sit by and let Europe sell all these expensive, profitable weapons to everybody else.

54:55They'll have a lead if we back off. And so it's really hard to judge how any of these things are going to work out. There's always ramifications and unintended consequences and reflections. It's not just that I think, I don't know what's going to happen geopolitically, but it's never clean and neat. There's always so many variables, which is why predicting the future has become all but impossible. A thesis, I want you to respond to this. We talked about this when we were at dinner. I've determined that the 0.1 % all want to live in a handful of places, Dubai, London, New York, Palm Beach, Aspen, some in L.A., and then I'm sure there's one city in Asia I'm missing.

55:43Do you think there's a strategy or do you think it makes sense to invest? Or what I've been doing is I've been buying real estate in those places. Do you buy into this 0.1 % strategy as an investment thing? Well, on the one hand, we just got the most recent data that says half of consumer spending in the United States are driven by the top. Yeah, it's bonkers. And, you know, when you have a certain amount of money, you become pretty price insensitive. I jokingly, if you've ever dealt with a contractor in the Hamptons, I'm assuming it's the same in Aspen. I know it's the same in Manhattan. Crazy.

56:21There's a Hamptons tax that you're going to pay. Crazy. And that's the contractors know they can mark it up. And so they they want a part of that. That's on the one hand. What we talked about at dinner with the and we've talked about this for years, the widening inequality, both on the wealth side and the income side, although on the income side, it surprisingly got better post pandemic with a lot of Keynesian fiscal stimulus. I mentioned unintended consequences earlier. We weren't all that far from a president, Bernie Sanders. That could have happened. And as much as I see the far right sniping at AOC, it's completely understandable.

57:10We were never close to a president, Elizabeth Warren, But but I think a president AOC is a genuine issue, at least for the point one percent you're talking about. And I'm not I'm not referring to the carried interest deduction or any of the other loopholes. I'm talking about, hey, guess what? There's going to be a new tax bracket. And if you make ten million dollars a year, there's an alternative minimum tax and you're going to pay it. And so the risk with all this mania that we're seeing now is and the risk with wealth inequality is when the backlash comes. I don't think the U.S. is ever going to become a socialist or communist regime.

57:57But we could go back to a 1950s or 60s era of taxation that look, you look at the history of taxes over the past century. individual mom-and-pop citizens pay a much higher share today than they used to versus corporate America and the top 10, 1, or even 0.01%. And don't be surprised if that pendulum swings the other way. I'm not smart enough to figure out an investment thesis for that five years down the road, but it's certainly a factor that should be considered. Barry, you've literally interviewed 500 of the most successful investors or influential people in the world of finance. I mean, you were sort of in this game of podcasting before it was cool.

58:46What are the two or three things you've taken away, not only around investing, but kind of life lessons? I have a few lessons or sayings that I've always held on to that have been nice, guiding lights for me. What have those been for you? The single biggest one, which kind of surprised me, and I'm pretty alert to false modesty when people are bullshitting, blowing smoke up my ass, has been the role of luck and serendipity in people's lives. Uh, there were a group of, a group of fund managers who as, uh, business school majors at Columbia carpool together. And it was like a crazy Leon Cooperman.

59:28And I'm trying to remember one of them told me like these four guys who all would go on to become billionaires were carpooling together at school. And one of them had said, every person I went to school was as smart as me or smarter was as hardworking or, or, but sometimes they just didn't catch that break where they're in the right place, right time at the right moment. And things just fell their way. And it, you know, if you hear it once or twice, it's false humility. Stop. When you hear it a hundred times from people who are just wildly, wildly successful, that's the, the first thing that really stood out.

1:00:12Like luck really. Hey, listen, hard work and smarts. Those are table stakes. That's just what it takes to enter the arena. The second thing is, and this really took me a while to like the luck thing. I got right away. The second thing that really kind of surprised me is the concept of being grateful for what you have. And look, if you want to be miserable, go to Zillow, circle the area around East Hampton or Amagansett and click sold. And look at the houses that sold for twenty five, thirty, thirty five, forty million. These aren't outliers. This is like every other fucking house is 10, 20, 30 million dollars.

1:00:59Your head explodes. And your first instinct is to say, what the hell am I doing wrong in my life that I don't have access to one of those? And then the second thought is because you didn't get lucky there, you have a very nice house and a very nice car and a very nice this and that. Be grateful for what you have and stop comparing yourself to other people. There's always someone with a bigger boat. If that's your measure of success, you're always going to be unhappy instead, not to get zen on you, but if you count your blessings, appreciate what went your way and be grateful for what you have, you'll be much happier and enjoy life more than, say, somebody who is pretty consistently comparing themselves.

1:01:48You know, hey, you're Bill Gates. You were the wealthiest person in the world. And then Elon Musk comes along. If there's always going to be somebody that's going to surpass you, that should never be your measure of happiness and life satisfaction. satisfaction. Barry Ritholtz is the co-founder, chairman, and chief investment officer for Ritholtz Wealth Management. He's also the host of Masters in Business, the most popular podcast on Bloomberg Radio. Barry's latest book, How Not to Invest, The Ideas, Numbers, and Behaviors That Destroy Wealth and How to Avoid Them, is out next week.

1:02:28this episode was produced by jennifer sanchez our intern is dan shalon drew burrows is our technical director thank you for listening to the prop g pod from the box media podcast network we will catch you on saturday for no mercy no malice as read by george han and please follow our prop g markets pod wherever you get your pods for new episodes every monday and thursday

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