Why Markets Don't Panic Anymore + How to Build Real Relationships at Work

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1:45on Reddit, they say, Hi, Scott, love your stuff, and thanks for what you do. I don't trade individual stocks except for my company through the Employee Stock Purchase Program, which I liquidate as it becomes eligible to buy index funds. Therefore, the S &P is really what matters to my returns. I keep hearing you and others express fascination at the resilience of the market in the face of pandemics, tariffs, elections, wars, and AI. Could part of what's going on here be advances in electronic trading tech that are modulating reactive trading? I'm talking about so-called robo-traders, but I feel like it's more nuanced than that.

2:18As AI is further integrated into market strategy and trading tech, is it better at dampening emotion and panic that would have led to severe market downturns in the past? Is AI better at buying the dip? Do we know about AI traders and the risks involved? Thank you for your thoughts. My immediate reaction is it's always dangerous to think it's different this time and the market is resilient. As a matter of fact, you just saying that is, in my opinion, a little bit of a sell signal. I remember in the late 90s when the NASDAQ surged past any rational number, there was an article in the Wall Street Journal saying, maybe we have moved to a different evolution of our economy where valuations should be fundamentally repriced.

2:59And of course, 2000 came and said, no, fundamentals still matter. So what this question really gets to is the following. Has the market composition changed so fundamentally that the old emotional panic dynamics no longer apply in the same way? The honest answer is yes, maybe. No, the honest answer is maybe, but we don't know. Where you do see what I'll call buy the dip sooner, creating shallower dips, is in geopolitical meteors. So the war in Iran, you would think, wow, massive dip, 9-11, pandemic. But what you've seen with these geopolitical occurrences is there's a dip and the market almost always in the following year, sometimes the following months, rips back.

3:47So the market has a memory and says, well, why don't we buy back sooner and make money so the dips have become less severe, as evidenced by the fact that the S &P is at an all-time high. as we continue to, what feels like, enter into a deeper and deeper quagmire in Iran. So what do we know? Algorithmic trading accounts for roughly 60 to 75 % of total trading volume. Think about that. Three quarters of trading is a computer in the equity market. In the US, algorithmic trading grew from about 15 % of equity volume in 2003 to over 70 % by 2010 and has since plateaued around 70 to 80%. So if you think you're a stock picker, Just keep in mind you're competing against an algorithm that looks at millions of points of data designed by a ton of PhDs making a lot of money all in a room who do nothing but try and pick up on signals.

4:38And you're watching CNBC or deciding because you see a long line outside of Chipotle that you're somehow informed on the markets. Anyways, which begs the question, what even is the market anymore? Index funds now account for 57 percent of equity funds by assets, up from 36 percent in 2016. In 2024, U.S.-based equity index funds registered inflows of$415 billion year-to-date compared to outflows of$341 billion for active managers. Passive investors, by definition, don't panic. They just rebalance on a schedule. In 2024, the assets under management of passive funds surpassed that of active funds for the first time, and its market share continues to climb.

5:19Institutional investors account for 61 % of the algorithmic trading market. The retail segment is expanding, but at a much smaller base. So does algorithmic trading really affect volatility stocks? Here's what the research says. Algorithms don't really panic. They don't read a scary headline and sell everything. Studies suggest algorithms reduce volatility partly by dampening investor sentiment and herd behavior. Basically, they stop the crowd from stampeding. In stable periods, algorithmic trading provides a steady stream of orders that keeps markets liquid and prices tight. But during severe stress, though, a firm's decision to scale back can create a sudden liquidity gap.

6:00And when every algorithm steps away at once, there's no one left to buy. So see above another type of stampede. The October 2024 yen flash crash is a recent example, a 3 % drop in 90 seconds triggered by algorithms hitting their own kill switches in a feedback loop. And in some cases, algorithmic traders can actually exploit volatile periods, placing directional bets that generate even more volatility. Researchers call it chicken and egg problem because the causal evidence still isn't settled. So what to do with this? First off, you had said that as soon as you got liquidity in your stocks you sold.

6:36I think that's a good idea. I mean, if you're on the inside and you see that your company is just compounding like crazy and it feels like a decent valuation, okay, maybe leave some in. But generally speaking, you could sell everything you have in your company and you'd still be heavily invested because your most important capital is your time. So you're investing a lot of capital into one company. But I'm a big fan of diversifying once you have an asset base. And all these stories about Mark Zuckerberg reinvesting in his company or Steve Ballmer borrowing against his stock in Microsoft to buy more stock in Microsoft, those make the headlines.

7:12What doesn't make the headlines is what happened to me. And I fell into this bullshit notion that my venture capitalist instilled in me that, Scott, are you in it to win it? And when I started coming to go red envelope and I took every penny I had and kept reinvesting in red envelope. And then when it went bankrupt in 2008, I woke up at 42 and had nothing, actually less than nothing. I think I wasn't dead. So diversification is really powerful. Also, you're going to be tempted to pick stocks. Occasionally, you might get some sort of asymmetric opportunity to invest in a private company where you think there's a lot of upside.

7:42or you just have a lot of confidence in something, fine, have at it. Pretend you can pick stocks better than other people. Take 30%, no more, of your portfolio and have some fun with it. And then over the long-term, your winners will stay front of your prefrontal cortex or front of your lobe, and you'll convince yourself you're better than Warren Buffett. You aren't, but have at it, have some fun. And who knows, maybe you get some opportunities other people don't. But I do believe the majority should go into index funds. Now, here's the wrinkle. The S &P is no longer an index fund. It's a fund that's basically betting on big tech, specifically 10 companies which compromise 40 % of the S &P.

8:21So I think if you're going to do index funds, you want to be diversified across asset classes and just as importantly, across regions. My kind of stock pick for 2025 was big tech was Google and also emerging markets who had underperformed the U.S. for 15 years. And I thought that you'd see a reversion in the flows of the rivers of capital. And we've begun to see that. Anyways, in sum, I think that it is more reason to be diversified and more reason to be an index and low-cost diversified index and maybe quant funds. Because you are up against PhDs and technology that your brain and your gut and your patterns of observation around, oh, my gosh, a ton of people going into Zara.

9:07I just love this Zara top. I'm going to buy it. That was kind of the Peter Lynch 80s method of investing. I would be really careful with that. Diversification, low cost, index funds. And also, I think you're smart to be selling regularly shares in your company because you're already very invested there. Thanks for the question. Hi, Scott. I'm a quieter, more introverted person, and I struggle with social anxiety and some imposter syndrome at work. I know building relationships with senior leaders is important, but I feel like I don't have much in common with them. And I'm not great at small talk or banter.

9:45How do I actually connect better with them without it feeling forced or awkward? Thanks for taking my question, Daniel. I relate to this. So, and I think a lot of people relate to this. I'm paid to be an extrovert, but I'm actually an introvert. And my first firm was a firm called Profit Brand Strategy. I started my second year business school. And my job was basically to go get new clients and then deliver kind of the final consulting, you know, the final sort of consulting findings. And consulting essentially back then was you established a proxy, you know, kind of a proxy father-son, brother-to-brother.

10:24And I used mail. It was all men back then. When I was consulting in the 90s, all my kind of biggest clients, once I got above CMO, were men. And I worked with the CEOs of Williams-Sonoma. Levi Strauss and Company, Dryers, you know, just these big companies. And you would establish these deep or really strong relationships. And I found it exhausting. One of the things I did when I sold the company is I literally made it to the conscious decision. I am never going to play golf again. It's a wonderful sport, but six hours on a Sunday takes you away from your family. I just and I didn't like constantly trying to establish these friendships the best the best wealth managers the best salespeople are extroverts and it just comes naturally to them they just like people you can't fake it and because I was younger and really hungry I could sort of fake it but as I've gotten older I've become much more introverted so what can you do So introversion is usually to a certain extent that you are not comfortable being very social in a certain medium.

11:33What do I mean by that? You're not as social in the office, in person. However, you can be social and thoughtful in different mediums. So there are people in my company who will forward stuff to me or write really thoughtful emails about stuff or create connections that establish a bond. And that is they do good work, they send a congratulatory email, but they're not extroverted. Also, I do think that as the world becomes more competitive, the kind of intra-office relationships and ass-kissing has become less important. Unfortunately, it probably hasn't. But I do think there's other ways of establishing credibility other than being kind of the guy or gal with the bright, shiny suit.

12:22One, you're going to have to have a certain level of comfort around people. That's just, it sucks to be a grownup. If you want to be a senior executive, you have to figure out a way to present. But being sort of the quieter one who shows up prepared, who writes really well, thoughtfully, sends notes of gratitude, sends notes of congratulations. And also, I think there is a lot of room for the person who's more measured, listens more than they speak, and kind of shows up with their work and their data and their kindness. So I don't know if I have, and also I would avoid sales jobs, but I think being kind of the more reserved person who just lets your work speak for them, I think there's a certain power and grace and dignity in that.

13:05So I wouldn't be too worried. I think you let your work show up and do the pitching for you, But do try to develop and establish relationships in other formats. You know, when I give bonuses or I do something for people, some of them, a third of them will send me a card to saying, I very much appreciate working here. I mean, you don't have to be an introvert or an expert to do that. You just have to be thoughtful and go to, you know, and send a card or send an email. And that's a form of relationship building. Another way to build relationships, introverts are sometimes better at building relationships with people below them.

13:44And that is really try to champion them, mentor them, take them aside, teach them, be a player coach. What does that mean? Sit down with them, show them. Don't give them feedback, give them instruction. This, you could edit this a little bit better. This is how I would do it. Pull up the chair next to them and do it. I found that extroverts are great at managing up at managing out, but sometimes introverts are better at managing sideways and down because they have an easier time or a little less, I don't know, intimidated by their junior employees, but can play a role in mentoring them and helping upskill them.

14:20And your senior managers will know that. I know the people. People notice. I always say to the employees, I've never run a big company, but I've run small and medium-sized companies, and the employees make the mistake of thinking we don't notice. and that is if you take the time to mentor younger people and train them and provide them really robust feedback, really thoughtful, supportive feedback, especially young people who need a lot of watering, notes, praise, instruction, senior managers notice. So I don't know if I have any blinding insight here, my man, other than to say that introverts, a lot of introverts do really, really well and I feel you.

15:00The other thing is just to say yes a lot. I was around this weekend. I got invited out Friday and Saturday night. I didn't want to go out. I went to dinner with my sons. But then I forced myself to go out after and meet with people. A lot of the times, do you really feel awkward or would you just rather be doing something else? And if it's just you would rather be doing something else, then okay, make the effort, go out, talk to people, get to know them. I find as I get older, the bands within, you know, the boundaries within which the people and situations I'm comfortable in are narrowing. And what I have to do is push them out by saying yes more.

15:38Anyways, say yes more. Mentor your younger employees. Find different mediums where you can be a little bit more extroverted, whether it's posting things or writing about things or sending people notes. But the world, you know, they say the meek will inherit the earth. I don't buy that, but there are a lot of introverts who do really well by showing up and communicating non-verbally with their kindness and their work and their confidence. Thanks for the question. We'll be right back after a quick break.

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17:32welcome back question number three comes from skinny skeptic on reddit you said that every Every person should be in a city, but I've also said that larger cities, including New York, are tough for those who aren't wealthy. How do you square the ROI of city living with the real cost of living associated with that? Given the odds of being a baller in the top 10 percent, 9 ,500 people who take that advice will struggle. Thanks. Fair question. So that's why you want to get to a city when you're young. When I moved to New York out of UCLA, I lived with a friend from UCLA, a guy named Monty Yort, who was this all-American water polo player who just emailed me and I haven't gotten back to him.

18:11Monty, if you're out there, I'm going to follow up and we'll get together in New York. I'm sorry. Yeah, in New York when I get back there. We rented a one-bedroom and there were three of us in there. And it was$1 ,900. I slept in the living room. I think Monty had a bedroom and the other person slept in what was the entryway. You can do that when you're young. And then after work, we would all pull our vouchers, our car vouchers and our per diem. If you work past eight or 9 p.m., you got a$25 per diem. So there'd be four of us. We had a hundred bucks and four cars or vouchers for cabs or cars, and we'd go out and have fun.

18:46And I just didn't spend a lot of money. And you can dance between the raindrops when you're really young. Now, having said that, it's gotten much harder in big cities because of inflation. I think it goes to structural policy. I think we need to lower taxes on earners, especially lower earners, less than, say, a quarter of a million dollars. We could do that by just enforcing our tax code. The tax gap is$750 billion and having an alternative minimum tax on corporations and the wealthy, but that's another talk show. And also tax credits for more building, more housing. Anyway, I'm not going to get it.

19:19Anyway, I recognize it's gotten harder, but it's never going to be less hard than when you're young because where cities become almost impossible or impractical is when in 2010, when I had, or 2011, when I had a newborn and a three-year-old and was living in faculty housing at NYU, making$160 ,000 a year, I just couldn't afford to be in New York. I just couldn't do it. And so we moved to Florida. Now, having said that though, being in New York from 2000 to 2011 was incredibly productive for me. I made a lot of progress, established. I'd like to think a lot of credibility, teaching at NYU, started my company L2, which ultimately I went on to sell for about$160 million.

20:03And then I did an arbitrage, I moved to Florida, where we rented a house on the water on the intracoastal for$4 ,500. And my kid's school went from being$58 ,000 a year to$12 ,000 or something. Anyways, my point is, it is hard, it is expensive, and it is doable typically when you're younger. And it is not doable when you get older and start collecting dogs and kids unless you're making a shit ton of money. So I acknowledge that it's very expensive, but I think it's a great training. I think it's hard. I think it's difficult. I think it's motivating. But generally speaking, even if you decide to leave, which most people do ultimately decide to leave big cities that are expensive, usually when they have kids.

20:47I think it's a good training. I think from a lifestyle and a life experience, it's a fantastic experience. The density of ideas, capital, creativity, and culture, you know, ideas need to have sex and you're just going to bump off more ideas and more opportunity in a city. In some, I feel you. It's not an option for 90 % of people, but it probably is an option for about half of young people. There's a lot of service workers. You can make good money as a waiter in New York. Can you live in a fat apartment in Soho? No, you probably have to take a train out to Gowanus or Queens, but there are people who do it every day.

21:25I think the number of people who live in Manhattan is actually two or three million, but during the day it's eight million because people come in to service all the wealth. In sum, I stand by it. If you're an economic animal, two-thirds of economic growth is going to happen in one of 20 cities. Get to the city. Do it while you're young because to your point, it gets increasingly hard and sometimes just not doable as you get older. Thanks for the question. That's all for this episode. If you'd like to submit a question, please email a voice recording to officehours at propertymedia.com. That's officehours at propertymedia.com.

22:00Or if you prefer to ask on Reddit, just post your question on the Scott Galloway subreddit, and we might feature it in an upcoming episode. This episode was produced by Jennifer Sanchez and Laura Genere. Kami Rieke is our social producer. Brad Williams is our editor. And Drew Burrows is our technical director. Thank you for listening to the PropG pod from PropG Media.