Complex Financial Instruments with Prof. Paul Calluzzo (Plus Sean Silcoff on Losing the Signal) (EP.253)

25:48And maybe, I mean, there's different complex instruments. So for example, futures are usually on an entire index. So funds using futures, I think it's not surprising, at least if they're long futures, if they're short, you'd expect a lower risk. But if they're long futures, we would see that sort of relationship with more beta exposure, but not necessarily more idiosyncratic risk exposure. How do the funds with more complex instruments perform or instrument allowance perform in up and down markets? Yeah. So this was one of the really interesting things that we found, which was that we split up.

26:22If you think about what our results were so far, we found worse performance and it was actually they're taking more risk. When you put those two things together, we thought, well, if you're taking more risk, usually you perform better during up markets and worse during down markets. What we did is we split our sample and we split it a lot of different ways, but we looked at in the simplest split, just in that time period, was the market up or was it down? What we found was, and I should preface this with. So we're looking at six-month periods. In our sample over a six-month period, there was about twice as many up markets as there was down markets.

26:59So even if you do less, ideally, if you're doing well, you do better in up markets than you do in down markets. And in that, you do overall better. But even if it was like a 50-50 split, since there's more up markets, you would still perform. But what we find is actually when the funds use allowance, the magnitude of their underperformance in down markets is about three times larger than the magnitude of their performance in up markets. So that when you group those together, the performance in the up markets isn't enough to compensate them for the performance in the down markets. And I think whenever you see a result like that, I think in almost every one of the papers I've ever written, we've made sure that even if we take out the financial crisis, which was kind of an anomalous period, not to say that it can't repeat, but when you only have a 15-year sample, that's probably like a one out of 50-year event, not a one out of 15-year event.

27:49So you want to make sure that your results are not sensitive just to that time period. So we took out the financial crisis from our sample and basically found the same asymmetry in the up and down market, where they just get really crushed in down markets, which is not compensated for the returns in up markets. And I think that raises questions when you asked earlier about what are you thinking about? Why might the funds that use these underperform or overperform? And one of the things we talked about was just exposing yourself to left-tail risk that you sort of didn't really realize. And it seems like this result is consistent with that left-tail risk exposure.

28:28Interesting. Is that similar to what we talked about for covered calls, where you're keeping the left tail, but you're kind of cutting off your right tail? As a matter of fact, it is. You know, that's not something we explicitly, I don't think we explicitly mentioned in the paper, but that definitely is a pattern, right? That asymmetry is almost exactly what you'd observe for covered calls. I think the one thing that isn't in our result is you'd expect with covered calls, I would expect your median performance to increase, if that makes sense, because you're collecting the premium, but you basically don't have the upside, but you're getting smoked on the downside.

28:59So smoked isn't the most technical finance term, but there's definitely an asymmetry in the return pattern that we see, which would be consistent with what we also observe with covered calls. We have analysis that looks at the individual instruments, but not in up and down markets. I think that would be a really interesting area for future research is of the instruments that are in our sample is options instruments where you'd see those cover call strategies most sensitive to that asymmetry in the up and down markets. So we referenced this paper when we did cover calls. That's kind of how we ended up here.

29:35And you did group, I think, options selling income related strategies specifically in your paper. How did they perform in your sample? Yeah. So I'll preface this with that this analysis was in a subsample because of data availability, whereas the rest of our samples covering a really long time period, or I shouldn't say really long. There's some papers that cover 1927 or even 1800 to present. It covers a longer time period than the Amazon et al. paper, but we only had data on individual option use from, I think, 2009 through the end of our sample in 2015. So it's a smaller sample that's also sensitive to some matching issues.

30:17So it's really a subsample. But within this subsample, we do find results that are consistent with the rest of our results, which is always a good sign. It's kind of like a bit of an out of sample test. And then we also find results that are consistent sort of with the underperformance of covered calls. So we split basically option strategies into three subgroups, which is one would be head strategies, which would be like owning a stock and buying a put. One would be an unhedged strategy, which would be like buying a put or call without owning the stock. And then the third would be something like a covered call, which is buying the stock and selling the call.

30:54And what we find is that covered calls, consistent with what's been discussed, is covered calls underperform. And what's really interesting, and this validates our use of the MPP measure, is that we don't see the underperformance in the four-factor alpha. We only see it in the MPPM measure so that we interpret that as evidence of if you're looking at the wrong measure of performance, it might look like this isn't so bad. But once you properly adjust for the risk that you're being exposed for, it isn't benefiting the investor. Again, I would just preface that with it is a shorter sample. So the same concerns we had about Amazon at Al's paper only being a six-year sample, you could also argue those concerns relate to that.

31:38Maybe in years in the future, there will be a replication of this table or in a future research in this table. That's actually one thing that my co-authors and I are excited about is I think in 2019, the SEC created new regulation to better disclose the complex instrument positions of funds. That's something that we're looking at of what else can we study in this space using the new form that mutual funds are required to fill out. But I think one other interesting thing about sort of that analysis that we did was that the unhedged strategies, so just kind of the speculative positions were actually the least detrimental to the investors.

32:18We sort of didn't see outperformance, but we didn't see underperformance there. So, I mean, this is only specific to option strategies, not the broader use of all complex instruments, but the most negative performance was on the covered income strategies, which covered calls would be part of. And then the hedge strategies, which would be consistent with portfolio insurance being expensive. Sort of that makes sense. And one other interesting thing that we saw is that when they actually use these, again, specific to the option strategies, they're actually lowering their standard deviations of their total risks.

32:48So both, really, we see it across the board. We see that they have lower total standard deviation of the fund returns, lower beta exposure. And at least for the hedge strategies, we see lower idiosyncratic risk too, which makes sense if they're hedging, right? That you're cutting away some of the adjacent product volatility. So Paul, what do you think is the main takeaway for investors hoping to get superior performance from funds employing these complex products? I think the main piece is buyer beware. That at least over our sample period, and we've also extended our analysis to go back to basically when this information's first available.

33:26So we have analysis in the paper that also includes Amazon sample period, which we don't include in our main analysis because of issues with the data not far back. But we see that there is a negative relationship between these complex instruments and performance, which is not good for investors. And then there's also a very negative relationship in really bad market periods. And we know that that's when it hurts the most, right? Ideally, we want portfolios that hedge those really bad market periods. And if it is strategies is giving us really negative returns in the worst times, that should be a strategy that outperformed because you want to be compensated for that risk.

34:05And we actually find the opposite for that. So I think that the main takeaway is sort of being cautious. Don't go into investing these lightly. And I think just as a general advice, given the results of the paper, if it was a lot of times as a finance, I'm sure that this happens with your social networks as well, but people just ask for casual investment advice. My usual investment advice is index funds, certainly not these complex instruments. So if my father, who I love dearly, came to me and said, hey, Paul, check out this new fund I'm investing in. And it's one of these funds I would try to get my brothers and I to talk him out of it.

34:44But I do think that there was recently, DFA came out with a paper that looked at liquid alternatives that in many ways was similar to our paper showing the underperformance of liquid alternatives over, I don't know if it was a 20-year sample. And what I think they looked at was market neutral strategies, long short strategies, and managed future strategies. So that'd be a subsample of the type of funds that we're looking at. And they basically showed very similar results to us that they underperformed, I want to say, the stock market, 60-40 tech portfolio over the past 20 years and with fastness who i have tremendous respect for him and both the researchers and practitioners at aqr basically took offense to the paper because they run a lot of those strategies and they basically said something along the lines and of course i'm power phrasing here but just because and i think this applies to our paper too just because on average the effect was bad doesn't mean that there could also be some good players there and our paper doesn't really address Are there ways beforehand to predict who the good players might be?

35:50And I don't know for sure that that's possible, but I think there could still be the possibility that maybe there's funds that have low fees or have a good track record of keeping transaction costs down or have a very systematic strategy that takes out a motion. Maybe those strategies won't underperform and just give investors, just like an index fund give investors access to just passive risk exposures. So I think that's just the one caveat to a finding that I would put down that I don't think it should be necessarily a criticism of the entire industry and there could still be good and bad apples in the industry.

36:31Interesting, but maybe not as straightforward as the advice to buy index funds. Yeah, yeah, no, that's definitely, there's a long line of academics. some of the great ones that have appeared on your podcast that would give that same advice that I think getting passive, low cost, diversified exposure to markets is going to be your best bet for the long term. And especially I think a really important aspect of investing is being able to stick to your strategies. And it's, I mean, when you're investing in black boxes, it's going to be really hard to stick to those strategies. So I got to ask, like, you've got these findings, you mentioned DFA had a paper with similar findings.

37:09Why do you think that we're seeing complex products grow when they don't seem to be performing that well? I mean, I think the hopeful academic would say, and I have a paper that shows that after publication of academic research, market participants change their behavior. So this isn't in context of investing in stock market anomalies. But I would argue that one contribution of our paper is that there was this paper that was very well cited from 2004 that said complex instruments, aren't necessarily bad, especially if they use as well-governed firms. And I would say that, well, now we have new evidence and maybe this new evidence will change investors' priors.

37:50Like the CFA covered our paper, like the CFA Digest, I want to say, covered our paper. I think that a public forum like this podcast will also sort of get the word out to investors and I think could potentially lead to less allowance or less fund flows going to those funds that grant allowance. So the other paper that you're talking about, I think that paper is fascinating also, but wasn't it the hedge funds that were most responsive to the research in that paper? It was. So I guess I would say this is maybe the academic channel isn't the best way for retail investors to hear academic publication, but there's other ways to disseminate information.

38:28I think the podcast's gear towards retail investors is one way to disseminate that information. So I think another thing that would be interesting area of future research is we see an increase in allowance, but we don't see an increase in use. So the proportion, I guess one question that a lot of papers look at, and I think that it would be interesting in this paper is to what extent has the impact of allowance on fund returns vary over time. So maybe as there's been more allowance granted, but not a concurrent increase in use, maybe it's been that less people that have been allowed to use it have actually been using it.

39:07So that kind of at a per fund basis, there's more funds that are insulated maybe a bit from our results. But I think the concern is always if you have that temptation of being able to use it, maybe when there could be spillover effects or indirect effects, that could still cause harm. So also just that the SEC creating this greater disclosure should also bring attention to it. So it's not something that the SEC is oblivious to, that in 2019, they completely revamped the disclosure requirements of funds using complex instruments. So that could also maybe shine a spotlight on it. I think that generally, again, there's nuance to almost every result in finance, but generally more transparency is a good thing.

39:50So shining a spotlight on it, bringing transparency to the use of these instruments maybe also improves things. So I think that that's another audience for these sorts of research. We always think about other academics. I mean, ultimately, we want our research to have impacts on the marketplace. And one way to do that is by encouraging other researchers to look through it. One way to do that is by encouraging market participants, but also through the regulatory channel. So I think that this research can help guide regulators as they're forming their rules around the complex instrument use and allowance.

40:25Awesome. That was super interesting. It's a really interesting paper. And I think you did a really nice job explaining it. Thanks a lot for joining us in the podcast, Paul. Yeah, no, thanks for having me. All right. So as promised, that was a fantastic conversation with Professor Paul Coluzzo. Who knows? Maybe we'll have him back on in the future to discuss some of the other research. Oh, I think he'd love to come back on. Be great to have him on. I love relationships like that. So much fun. Yeah. All right. Well, before we get to our conversation with Sean, let's do a quick recap of a past episode for people who are more recent listeners that haven't gone back through time.

40:56We just try to highlight past episodes that might be of interest to you. This one features Rob Carrick, who was our guest on episode 39 back in 2019. Rob's been writing about Canadian personal finance for over 30 years, and we discussed a whole wide range of topics. What is really cool about Rob is that his incredible feedback loop from his many Canadian followers on all sorts of financial topics. His most important observation is that he thinks people have too much information and need help distilling it all. His career started in the mutual fund days of the 90s and has seen a huge shift to ETFs, which is one of the most talked about topics from his readers.

41:34In fact, he said he could write about them constantly. He agreed with us that trashing mutual funds is unwarranted as it became an equivalency for active management. He now talks about changing from being an advice skeptic to an advice booster. Near the end, we got his advice on teaching kids about money and instilling good habits. This then led to his thoughts on the fire movement. So check out the whole episode, Rob Carrick, episode 39. All right, let's go to book review of the week, which leads to our movie review of the week. I think it's our first movie review, right, Ben? Part of the formal section.

42:06Yeah, I think so. Anyway, this is a book that you and I have had on our bookshelf since it was written back in 2015. I think we both saw a presentation back then from Sean. We both read the book called Losing the signal, the spectacular rise and fall of BlackBerry. Many listeners for sure had that incredible rush. And I remember it. It's funny. I took a train to Toronto this week, which we can talk about later. But I remember being on the train going to Montreal with my BlackBerry. I remember unpacking the box on the train. And all of a sudden it started working. I was just blown away that you could get email on this little device.

42:38It was an unreal experience. It was just such a rush to not have to be at your desk. And the power of that was just incredible. It was mind-blowing and you could see how successful whoever came up with that idea could be in growing a business. That's exactly what happened with BlackBerry. Everybody had to have this tool at the time and then you could sync it with your calendar and your contacts. It was simply incredible. I remember when 9-11 happened and the BlackBerry worked. I remember when Obama was elected and I think the article talked about or at the time he was arguably addicted to the BlackBerry.

43:11could never let it go. I remember talk radio here in town, they used to have a market, some stock market show and they talked about Blackberry seemed like every week as I listened to the show. It was the hot stock in Canada, perhaps worldwide. Everyone had to own it, everyone talked about it. It was an unreal time until it wasn't. The whole thing just blew up in unbelievably spectacular fashion. That's the story in this incredible book called Losing the signal which is written by sean silkoff and jackie mcnish again it was released in 2015 it's just a fascinating story of how these two guys you know mike lazaritas and jim balcili came together to create and market and go to market with this unreal idea and product and then how it all fell apart you know caused by competition you know the likes of apple to wireless carriers, the impact, the app store impact.

44:08It's just a wild, wild story about this company. So we invited Sean to talk about this whole time, his book, and then also about the movie, which comes out on May 12th. Sean writes about technology and innovation for the Globe and Mail and has won three national newspaper awards. So with that, let's go to our conversation with Sean Silcoff. Sean Silcoff, welcome to the Rational Reminder podcast. Thanks for having me, Cameron. Congratulations on your book and then on the movie that's coming up very shortly. Thanks. It's kind of surreal. It must be. I reread the book last week, as I mentioned to you, and loved it the first time and loved it the second time, and so looking forward to the movie.

44:48First, let's kick it off. How revolutionary was the BlackBerry phone? For a very long time before the BlackBerry came along, people were trying to figure out how to send data wirelessly. It had been talked about for many years. The first email was sent wirelessly in the early 70s, believe it or not, at the University of Hawaii, allowing students and professors to communicate between the different campuses. And so this had been something on people's minds for a while. We had the advent of cell phones. They became commercialized in the 80s, 90s. Yet no one could really figure out how to transmit data effectively to wireless devices or even what the market use of that would be.

45:30There were wireless data networks and they were kind of empty in the 90s. I mean, it was mostly geared toward IBM or Rogers delivery trucks so that you could communicate to them while they were on the road. And what passed as a wireless device was something probably about the size of a TV that would be bolted into a delivery truck so that you could communicate with the driver. And then the idea was better customer service. You could tell the customer as well, your repair person will be there on site between nine and 10 or as opposed to one and eight. And so you have these vast empty networks. You didn't have great applications.

46:06There wasn't much of a user base. And then along comes email in 1995. And suddenly we're all using email and we're inundated by email. It's everywhere. And the people at BlackBerry were working. And the company Research in Motion, as it was called at the time, was working on things like modem cards and software and what you would consider the on and off ramp and utilities of this otherwise empty data network. It was called Mobitex. And they got the idea that they wanted to put devices on this network. And then with email suddenly inundating everyone, the idea had them, why don't we create a device that can send and receive wireless email?

46:46And so they came up with this device. It was the right device at the right time for the right purpose. Suddenly people, at the end of the day, if you were a traveling salesperson, you'd come back to your hotel, you'd log in, dial up, log in. That would take like 15 minutes. Remember how painful that was. And then suddenly this torrent of email would come firing at you at nine o 'clock. You're tired. You've been collecting business cards and delivering pitches all day. and now you have to respond to 150 emails. The great thing about the BlackBerry is it enabled you to communicate for the first time ever.

47:21And you have to remember, this is like the creation of fire in the mobile communication space. You could suddenly respond to your emails when you're in a taxi, in a lineup at the airport, during a boring meeting. They pitched it the right way too, as an efficiency tool. And they really engineered the device to be super easy, not only easy, but fun to use. Michael Lazaridis, the science co-CEO of the company, talked about removing think points. And that meant like, make the devices easy to use, simplest to use, so you don't have to think when you're using it. It just works in the way you expect it to work and the way that you would want it to work.

47:57And their goal is to engineer something, an experience so ideal that if you were sitting in front of your computer, you would prefer to type on the device than actually on your computer. And it worked. And then they got into the hands of the right people. they seeded it very early on with Wall Street advisors, lawyers, and investment bankers. Well, when the Fortune 500 CEOs saw that, they're like, what is that thing? I want one too. And when the CEO suddenly, like anyone in the early days, had wireless emails, like the light went on. Wow, I can respond to emails right away. And if you're a CEO or an advisor, you want people to respond back to you like in six seconds.

48:35And people weren't used to that. Back when we were all starting to use email, you might get to your email one or two days later, there was no real urgency. The BlackBerry brought urgency to email. And because it was in the hands of people who needed information to make decisions right away, it spread like a virus. Because if you were CEO, you wanted all your direct reports to have a BlackBerry, if you had one. And then they needed one so that all their direct reports could get the information as soon as possible. So it spread like a virus that way. They employed a lot of fun, devious, sometimes interesting creative tactics, which of course we go into in the book, to make sure it got out to the right people, to make sure that the chief information officers had no choice but to install the BlackBerry enterprise server in the heart of their operations.

49:21So it began to spread that way. 9-11 happens and communications have gone in Manhattan and in Washington. The only people who can communicate on devices in that traumatic time are people with BlackBerry. So one of the first things that happens after everything gets back to normal is everyone in the House of Representatives gets BlackBerry. So very quickly it became adopted and sanctioned as the device of choice for very powerful people. And then they made a big push into consumer. They made the devices a little sexier. They added color, music. They made them fun to use. They made them thinner so they looked more like phones.

49:58They added phone service. I mean, You couldn't even make a call on a Blackberry for the first three years. It was only when they moved from the wireless networks to the main telco network that they actually had to add voice. And the first voice thing, it was like a plugin. You had to plug it into the phone and stick it in your ear. It was very ungainly at first. So they kind of backed into the smartphone part of that business. I didn't actually know that part. That's interesting. I guess I missed that in the book. You mentioned the right product at the right time. You mentioned the 9-11 story, which is funny to call that luck, but it was an event that pushed the device out to a lot of people based on necessity.

50:36That's kind of like product market fit, I guess. How important was the company's leadership as opposed to that just having the right product to its success? The leadership was important because early on, they realized that the right thing to do was to do something economical and small. And they didn't use a lot of battery power. They didn't use a lot of the bandwidth of the network. They beat back all of Silicon Valley's best and brightest that were trying to stick computers into handheld machines. And that worked. And they became the wireless email standard, the wireless device standard, by just really using it for messaging.

51:12And you had other add-ons like Calendar, but the main thing to use this for was messaging. And so they really sold this as a messaging device. And that was the payload. That was the killer app. And it worked. And so for years, they made very smart management decisions to not do a computer and a phone, and that worked. Others failed in their attempts to do that. And also to maintain their leadership in messaging, first with email, and then, of course, with BBM, which was the forerunner of WhatsApp and Signal and other popular instant wireless messaging apps. So they were doing all the right things.

51:45They were making the devices easier to use, more accessible, making all the right choices. But the key decision that they didn't make well was when the Apple came on the scene. So BlackBerry were great innovators and they were terrible followers. And the reaction to seeing the Apple was, first off, this is a computer and a phone. We've seen this movie before. It doesn't end well. It's going to suck up battery life. Your battery's going to last a few hours and that's it. It's going to hog the network because you're putting through a lot of data because BlackBerrys were built to do email and messaging.

52:17And Apple was about browsing the internet. That was a data-heavy endeavor. It's not very secure, and typing on glass kind of sucks. That was BlackBerry's reaction, so they didn't think they needed to have a reaction at first. Whereas Google, which was planning a keyboard phone like BlackBerry, took one look at the iPhone when they saw it in early 2007, when it was announced, and they tore up their plans for a keyboard phone and said, okay, we have to go all in on touchscreen, and that's what led to the Android operating system. BlackBerry were great innovators, terrible followers. When Verizon, which didn't get the Apple for the first few years, wanted an iPhone killer, BlackBerry said, we can do it.

52:56It was a big contract for BlackBerry. And what they thought would work as a touchscreen is basically a BlackBerry in touchscreen form. So it didn't have the rich software of the iPhone. It didn't have the capacity for an app store. Now, there wasn't an app store yet for Apple. That came a year later. and they thought they could just take the existing operating system, which was perfectly suited to messaging, and stick it in a new type of device that was a touchscreen. But their version of a touchscreen was a physical screen. The entire screen floated on top of the device. It was called the Storm.

53:29And you'd have to push down on the screen and the entire thing would go down. It would be like you were pressing a giant button. It would make a clicking sound. And they thought that would work. And the problem was they had too few months to put this together. It was a brand new type of machine for them. They had to redo the software. where there's a lot that could go wrong and a lot did go wrong. The devices were buggy and they were clunky. People, once they worked on a touchscreen, you know, with this nice screen that you would do that with, it was the new paradigm. It was like they were dealing with old, dead technology.

53:58It felt mechanical. And also, it wasn't delivering the kind of experience that Apple was delivering in terms of that full internet experience. So the storm was a disaster. Verizon sent back the first million devices that they got from BlackBerry because they were buggy and people didn't like them. And what did BlackBerry do at this point? Big key management decision. They didn't say, we have to now go all in on a touchscreen. First, they tried to perfect the problems in Storm. So perfect the flawed product with a Storm 2. And they were even working on a Storm 3 when the telco said, hey guys, hand it with this fake touchscreen, give us a real touchscreen.

54:33So then they figured the problem was they needed to get a browser. So they bought a browser company and things ran slow. So finally they realized, okay, we need to build a full touchscreen device from the beginning. And they encountered some indecision about what to do, how to do that. So the time they came up with the BB10, which was their full touchscreen, complete competitor to Apple and Android, it was six years later. And in tech, six years is forever. You don't have six years to come up with a competitive response. And the App Store was also really destabilizing for them because in a world before Apple came along, the carriers ruled everything.

55:11BlackBerry was fine with that. They didn't even want you to have an app store. The carriers were very controlling, and that's the way the world seemed to be for BlackBerry. These were the gods of the business. Suddenly, Apple comes along, and AT &T gives them carte blanche to come and go on their network with all this extra data to crash the network. And then a year later, they let them open up an app store. Well, in the old world before Apple, Nokia tried to do an app store and they were punished for that. BlackBerry, to get BBM out to the phones, they had to do it around the backs of the carriers and sneak it into a software update or browsers.

55:45You had to sneak it onto the network. That's the 2004 and 2005 reality. By 2008, 2009, the telecos are going, yeah, you want an app store? Sure. Remember that Google and Apple had spent years developing very robust software, great ecosystem, they had a lot of developers. So they had a ready-made set of developers ready to walk in on day one and develop great apps. BlackBerry didn't have that because they never had to have an app store because their operating system was perfectly fine for the realities of the telco. So the telco's blinking and giving Apple carte blanche really pulled out the rug from under BlackBerry in an unexpected way.

56:19So I'm just trying to answer your question by pointing out that they needed to act very quickly, but they were also dealt a tough hand. And it's hard to imagine in some ways how they might have overcome that. Here's one of the most challenging disruptions to BlackBerry. When Android came out with this device, Verizon, which had been very tough on app stores just three or four years earlier, said, yep, you can have an app store. So boom, they have an instant app store. And then what Android does is very sneaky. Their 30 % cut of app sales, they gave that to the carriers. They didn't need it. They just wanted to get search and Google services onto every phone.

56:54So it's basically saying to the carriers here, You sell our devices. Here's some free money. What would you like to do with this free money? So what do you think the carriers did? They stopped selling BlackBerry and they started pushing Android devices. And then on top of all this, BlackBerry for years had been ordered en masse by corporations issued to their staff. After the 2008-2009 recession, companies are looking to cut money. They cut costs. So they say to people, you know what, the devices you use at home, you can bring them in. We'll add them to the network. Bring your own device was devastating for BlackBerry because on the weekends and at nights, people weren't using BlackBerrys for fun.

57:31They were using Apples and Androids. So all these things add up and it's really, really hard for management to deal with that. So you could argue that the moment the iPhone appeared, BlackBerry had to do everything right and they had to do it fast. They did everything wrong and they took to it. Another answer to your question is you had two CEOs, two co-CEOs. You had the business leader, Jim Balsillie, and you had the technical leader, Mike Lazaridis. The idea was Mike was left to run the engineering science side of the business. Jim was left to run the business part of the business. They trusted each other.

58:03That was great. That kind of arrangement works really well until it doesn't work at all. We saw a couple of tension points in that Jim, because he wasn't a technical person, trusted Mike and maybe didn't lend as much of a critical voice to some of the technical decisions that were being made at critical times. And then Jim, on the business side, they were doing a lot of stock options backdating. You might recall in the early 2000s, 1999 era, stocks were extremely volatile for tech companies. Your stock could be worth$30 one day and$100 the next day and then$40 the day after. If you're issuing stock options to bring on employees, how the heck are you supposed to value that when one day you're making a millionaire and the next day you're making a pauper?

58:43You want to retain all these people. So what BlackBerry would do, which a lot of tech companies were doing at the time, was they were backdating options, picking a date in the past after the date someone hired and picking the right stock price to sort of basically maximize the gains that they could get. Well, that worked fine for years until the Securities and Exchange Commission came along. And because BlackBerry was an email company, and because there was all this, frankly, record back and forth about all the conversations internally about who would get options granted. So they were kind of made the poster child of this problem, and they got penalized.

59:20And during the very harrowing meetings with SEC and with regulators, Mike Lazaridis didn't know what this was. His signature was there, but he trusted all this to Jim. And he didn't want to go to jail. He didn't want to lose his company. So he cut a deal for more lenient treatment with the regulators. And Jim felt betrayed by that because he felt like these two had led the business shoulder to shoulder for years. Jim had helped deal with some of Mike's mistakes. and now Mike was sort of throwing him under the bus. That kind of ruined their relationship at the worst possible time as everything is starting to come off with Apple.

59:57Unreal. That part of the book, of all of that, of their response to Apple and all the little details in there, like I think that there's one quote, I don't remember it verbatim, but from Jim about being asked about the iPhone and he kind of brushes it off saying, I haven't seen one or something like that. That whole part of the book is just like, oh, it's always hard to read, but it's incredible. Absolutely incredible. Jim was always selling. He was selling what he had, and he was always a loyal soldier to the company. So even when he was saying things like that, it was mostly bravado. But internally, he was struggling.

1:00:29He had what he called the strategic confusion. He didn't know how to handle all these issues. Like, how do you build an app store when you're not built to build an app store? Do you start over with software? There was a lot going on, and the answers weren't obvious. How impactful were the company's internal struggles to the decline? Pretty significant. Now, you have to remember, this was a hardware company and not a software company. Their sales at points were going up 25 % quarter to quarter. And it's easy enough with software to scale up. But when you're stamping out metal and plastic and you need to increase your capacity, you're trying to secure manufacturing around the world, they ran into some serious quality issues.

1:01:09Things were falling off the machines. They weren't working well. And this was also happening at the time. And I think that helped to create part of the schism. I mean, Jim and Mike not getting along was a big part, but then you had the sales organization and the machine building part of the organization that also weren't getting along because they were pointing fingers at each other and the problems weren't really getting solved. They also had a COO, a tough guy named Larry Conley. He'd come from Motorola, very tough performance culture when he was growing up there. And he really made the trains run on time at BlackBerry.

1:01:42and he got everything in line. He got production schedules, he built forecasts, all the kinds of things that were lacking in BlackBerry. He left in 2009, just the worst time for the company. Things got a little lax and a little off the rails once he left. What effect do you think Canada's so-called tall poppy syndrome had on the company? I don't think it had much impact at all. I think the one thing actually is that they were very proudly based in Waterloo. Like when a big company from New York or LA or San Francisco would call up Waterloo, call up Jim and say, oh, you know, we'd love to meet with you.

1:02:22Jim would say, great. Why don't you get up to Waterloo? Come on the next plane. We're not going to leave little Waterloo to come to the big city. If you want us, you come to us. And I think growing up in Waterloo, they became very successful, but they lacked a bit of the Silicon Valley creative destruction element in their DNA, I think. And I think it would have helped BlackBerry RIM, Research in Motion, to have an office and have some serious brain trust in Silicon Valley that was a bit more tuned in with the trends that could bring a bit more of that terror, the terror of being overtaken and overwhelmed back to Waterloo.

1:03:03I think the fact that they did this, that they created the wireless communications business, and they did it from Canada was an enormous point of pride. And I think a certain sense of self-satisfaction probably crept in, particularly on the engineering side, on Mike's side. I think they were always looking over their shoulders, but only the paranoid survive line that's famous. I think they needed a little bit more of that. I think that was part of it. But it's hard. What do you do when the iPhone comes along? And it looks a lot like the types of devices you were seeing seven or eight years earlier that you had defeated.

1:03:37Who's to know this isn't just another one that's heading to the ground shape? I mean, a lot of tech companies, big ones, have had failed products. Google has had tons of them. So maybe this is just going to be another one. And they felt, well, we kind of nailed messaging. People love messaging. That's great. What they didn't anticipate is that people would fall in love with internet in your palm as much as they did and didn't foresee how much of the economy would be created and moved on to our handheld devices. And it's extraordinary now if you think about it. We order Ubers. We order all our food online.

1:04:10Whole giant, multi-tens of billions of dollar valued businesses were created based on the thing you hold in your hand now that were not possible 10 or 15 years ago. We do so much on these devices. And that just was not something that BlackBerry could have anticipated, but that Apple did. I mean, a lot was happening on library devices, don't get me wrong. But Steve Jobs could see this was where the puck was going. And he said that, which was kind of a clever dig at Research in Motion when he introduced this. He'll pull out a Wayne Gretzky quote with a Canadian smartphone company up there, prominently featured on his slides at the big release in January 2007.

1:04:51So what do you think makes this story so compelling to be told in a movie? First of all, it's a rise and a fall. It's about an innovator. This is at a time, remember, where we are seeing a lot of business narratives reaching the big screen and the small screen. Social network, the founder about Ray Kroc from McDonald's, you've got the Theranos story from the Bad Blood book, even the Tetris movie. This is an era where we are appreciating the character of the entrepreneur, the tech entrepreneur. This is a great and significant character in 21st century world we live in. I'm surprised we don't have an Elon Musk movie yet, but I'm sure we will.

1:05:29People are really drawn to and intrigued by these characters and their flaws, the companies they build, the people that they are. There's a lot of drama here. This story has lots of classic dramatic elements in it. Remember, it's a rise and a fall. That's a classic narrative arc. It's about two people who couldn't be more different, who come together and then break apart over an issue that we first brought to light in our book, Losing the Signal. And it's about a technology that changed the world. Really, it changed the way we live. Those are extraordinary elements. In the hands of these filmmakers, they've turned into a really intriguing movie.

1:06:06It's fast, it's fun, it's edgy. It sort of takes you into the pit of innovation and what it takes to build a company and some of the sacrifices that are made along the way. The fact that it's not just one person, but two people and the tensions that that relationship creates. And also how hard it is to keep up with the drumbeat of disruptive, destabilizing innovation. It's really well rendered. It's obviously different than the book. We had 250 pages to tell a definitive story for the first time, really, because people did not know the Blackberry story at all. And they have two hours to keep you in your seats, entertain, munching on popcorn with our book and their movie.

1:06:46I think we each did a great job. And the great thing about an adaptation is a typical adaptation, and this is no different, they'll play around with dates, they'll play around with names, they'll create composite characters, they'll move some facts around. And in fact, the filmmakers even very interesting say this is a fictionalization, which just gives them a bit more creative license to tell the story they want. Although it's very faithful to a lot of the key narrative elements that define the story up to the beginning of the painful fall. And so I liken it to Sound of Music or Hamilton. I don't know if you've seen the show Hamilton, but it's about the life of Alexander Hamilton.

1:07:22It's one of the best musicals ever made. It's based on a book that's like this big, which is probably one of the best historical biographies ever written about anyone or an American, certainly an American and Founding Father. The musical is not a definitive history, but the book is a terrible musical. You read that book and you're like, how could anyone make a musical out of this? And so it's interesting. It's a real artistic process to adapt a piece of work for a different medium and then to try to speak the language of that medium and communicate in the way that that medium is meant to do. It's a very interesting process to see that.

1:07:54I read Hamilton, the book, and I watched the show and I felt like I had a greater, richer understanding of the character, both the way they evoked him on stage and the way he's represented the page. And I hope people will have that same experience, both reading our book and seeing the movie. You mentioned that in your book, you kind of told the story for the first time. If you distill it down, what do you think, at least from your perspective, are the main lessons for business leaders from this story? Never take for granted the industry contours that you operate in. Don't think that the people you're competing against now are the people you're going to be competing with in the future.

1:08:28Technology, software is disrupting everything. Your competitor might be Apple, even though Apple has nothing to do with your business. Your competitor might be Google. The monetization and creation out of thin air of data means that your business model might be entirely different because there's new ways of making money off of what you do. Photography was upended by math. Think about that. Photography became a math and a computing problem. Who would have ever thought that the camera makers would be competing against software companies or that everyone would become a photographer, but on handheld devices with the bare minimum photographic capabilities of a proper camera.

1:09:09Don't take for granted the things that seem etched in stone. Like with BlackBerry, they have these monolithic, giant, rich, powerful carriers and how the carriers defined the world was what they lived in. But what if the telcos get disrupted or if they get disintermediated, it's a new, new game. And so you always have to be mindful of not only the existing competitors, but the unseen competitors. And don't take for granted the four walls around you and the ground underneath you will always be there. And if it starts to shake and tremor, you have to start to think, okay, what's our contingency plan?

1:09:47So I think every company needs forward-thinking people who are a little bit paranoid and who question all the assumptions and can push back and live in the world of the what if. Now that doesn't mean you should chase every single innovation, every single change. That's the hard part. Some of these things are just murmurs. It's like Clubhouse. Remember Clubhouse? It came out a couple of years ago and everyone was using Clubhouse for like three months. And this was going to be the new way of things. And now what's Clubhouse? People don't even tell you. It's now a joke. It's like MySpace. It's social network.

1:10:19I mean, MySpace was a failure. Facebook is huge, But who's to say Facebook is going to be something that our kids all want to use? They don't. So what's going to happen as we get older? Or Google. Look at Google. Google became the all-powerful advertising and search engine. And now we have ChatGPT and everyone's saying, well, what's going to happen to Google? OpenAI comes out with ChatGPT. And overnight, companies that are in the business of providing student aids, whether it's textbooks or whatnot, are suddenly vulnerable because now you've got all this great information at your fingertips. So there's lots of destabilizing forces out there.

1:10:54And everyone needs to be paranoid in business all the time, I think, more so than ever. So similar to Ben's question, Sean, what are the lessons for investors? Buckle up. Read up, inform yourself, read religiously all the news, find new news sources, read up on AI. Question what you're invested in now and how the business dynamics of that could change. Oil and gas is an interesting one. If you go back 30, 40, 50 years, who thought that the oil and gas business would be going through this crossroads they're at now, where the oil and gas business will probably be a great place for investors for the next couple of decades still.

1:11:35That's an example of a business that's being disrupted, but what's the pace of disruption? And it's for the betterment of the planet, frankly. But if you're an investor with a 10-year horizon, maybe oil and gas investments are the best things out there. I just take that as an example, purely hypothetically. You need to arm yourself with more knowledge and question your own assumptions. Everyone thinks the banks are rock solid, but it turns out that the business of banks is not loans or savings accounts, it's confidence. And when the confidence goes away, like what happened with Silicon Valley Bank, you don't have a bank anymore.

1:12:06It just goes away overnight, quickly. or commercial real estate. That's been a bedrock investment. I actually worry for all the pension funds because they own so much commercial real estate. And here we all are working from home. Those office buildings are probably going to be devalued. They're going to be worth less. I don't think it's happened yet. I think it's just starting to happen. So how are our cities going to change? Everyone has to arm up a little bit and do their research and ask the tough questions and try to navigate this. I don't think there's a silver bullet, an obvious answer, But I think we just need to be mindful.

1:12:41And like anyone who's an investor asks, what are the areas that are oversold? Where are the opportunities people don't see yet? And a managed account would have a portfolio. You place a few bets here and there. You don't put everything on one stock. You'd put maybe a bit in real estate, a bit in energy, a bit in technology, and so on and so forth. And then within those portfolios, you would carve it out a little bit more early stage, later stage, and so on and so forth. Although, here's a question for you. How is ETF management going to change? Do we continue to rely on the algorithms and the programs that have worked marvelously well for decades?

1:13:19Or do you think that that's going to require some tweaking if indeed the world is being disrupted to such a degree? I'll give you my interpretation of the investor takeaways after reading your book, which I think answers your question about ETFs. The big thing for me reading it was idiosyncratic risk. I mean, look at RIM, it's just this fantastic company. And like you just articulated, it continued to be a fantastic company, but Apple just basically blew them up. And we could argue maybe they could have responded differently. I don't know, but it wasn't obvious. And it wouldn't have been obvious to investors either.

1:13:50Idiosyncratic risk matters. And it shows up with an individual company, not even necessarily an individual sector. And then as you just mentioned, diversification is one of the ways to solve that. When you look at the history of technological innovation with respect to investing in public markets, at least, the innovative sectors and companies tend to give terrible returns to investors. I mean, you look at railways versus software over the last, I don't know, 50, 75 years. Railways is an industry of decline significantly. Software has exploded. but railways outperform software historically. I think by owning the whole market, when you own everything, when we talk about ETFs, we're typically referring to just owning the market.

1:14:31When you own the market, you own the disruptive industries, you own the declining industries. The declining ones tend to outperform, which is super counterintuitive, but it's the way it tends to go. Then there will be superstar companies that come out like Amazon or like Apple within the disruptors. If you own everything, you own the declining industries, you own the disruptors, including the companies that happen to be the ones that go to the moon, you're in pretty good shape. I don't think that has changed with the current state of the world. Interesting. Well, congratulations again, Sean. Looking forward to the movie, which comes out tomorrow if you listen to this on the 11th when this show is released.

1:15:05Looking forward to that very much. Thanks for joining us. Yeah. Thanks for having me on, guys. Really appreciate this. All right. Well, that's pretty cool, Ben, to have two guests, one episode. Yeah. Lots of fun. Two really interesting conversations. Yeah. So it's great to have Sean join us. So this is the after show. I want to talk about you becoming more active and I would say a little more assertive on Twitter. I occasionally have inspiration to write Twitter threads and I did a couple recently and people seem to like them. Lots of fun. And I'm going to put a plug out for you. You put your Calendly link.

1:15:42Well, I did as well, but I'll plug yours. Your Calendly link in your Twitter profile. So if someone wanted to take advantage of that, I'm just saying it's there to be taken advantage of. I don't know if I like the idea of being taken advantage of, but thank you for the plug. Take advantage of the opportunity to get a chance to talk to you. Anyways, you know, I learned this week there's advisors in Canada who aren't allowed to recommend index funds by the company. It just blew me away. I mean, that's one way to solve the whole deferred sales charge issue. Index funds never paid the back-end load DSC commissions, right?

1:16:20And now those are gone. So now you just outlaw index funds altogether. Got to find a way to keep money in the high-fee products somehow. Oh, interesting. Yeah. Right? Yeah. It's still incredible to me, given all the evidence. Yeah. That's a real problem. So I shared on Twitter today, the Future Proof announced officially, we knew this, but it's been now officially announced that we're going to be doing a live recording at the Future Proof conference this fall. So any advisors that are considering going, and I'd love to meet you and see you there. We're going to have our special guest, Hal Hirschfield is going to join us in that live recording, which is pretty cool.

1:17:00Hal's become a good friend of us on the show. So I mentioned the rail service earlier. I went to Toronto by train. I think I dropped you a note. I'm not going to do that again. This country desperately needs, I don't know if we can afford it, but we desperately need high speed rail in the, especially the corridor between Quebec city and Windsor, I guess, but it's just so slow. And the train is just so old and clickety clackety and it's can't work. You can't write. It's just, it just doesn't, today's day and age, it's just not great. It was on time though. I will say that it was on time. I knew what I was getting into.

1:17:35This is a shame on me. What do you make of the news that Robinhood is going to be going to 24-hour trading for some limited securities? Apparently, it's from 8 in the morning on Monday till 8 p.m. on Friday. You'll be able to trade starting Monday the 12th. You'll be able to trade more than 40 stocks and ETFs, including Apple and Tesla. This is an exciting upgrade, apparently, that allows you to take advantage of opportunities no matter what time of day they arise. I just can't wait for the research paper that comes out looking at the difference in returns between people who trade during normal hours and people who trade during off hours.

1:18:06Someone recommended the podcast Goodfellas to me this week, which I'd never heard of. Bad on me because this is a regular podcast you listen to, but it's fantastic. It is. John Cochran, Neil Ferguson, and HR McMaster. It's really civilized. I love their debate. I love how they change each other's minds. They're not locked into their positions. Yeah, that's a good podcast. So what's your other top podcast that you listen to? Silence. No other main ones you listen to? Nope. Wow. Not even like Lex Friedman? Nope. Conversations with Tyler? Sometimes. Okay. Sam Harris? Nope. Used to, but nope. Yeah, a lot I listen to a lot less.

1:18:50One of the things I've noticed is that I do a lot of podcast searching based on the topic or the speaker, which is interesting. like I wanted to do some research this week on Craig Wortman, professor at Kellogg. So I just looked up his name and he's on a lot of interesting podcasts and had very different conversation, different podcasts. That's kind of cool. I do that quite often. Well, I do that for guests. If we have a guest coming up, then I'll go and find all of their past podcast appearances and listen to them. Yeah. But even if you're reading a book, right, you can go check out the author.

1:19:23I like doing that. So I find I'm doing that more and more, just kind of doing a and run on it. Let's go through some of the recent reviews. You want to do the first one? Sure. John Ota from the United States says, great investing podcast. Highly recommended. Great guests being asked excellent questions, well-researched deep dives on relevant investing questions and in-depth book reviews, all backed by hosts who don't speak down to their audience. It's good. The number of times Ben and Cameron or one of their guests have raised and expanded upon a question I wasn't fully aware of is astounding.

1:19:54For example, the popular definitions of risk based on volatility never felt entirely satisfying. Listening to the rash reminder has improved my understanding of how to better define and quantify risk in a way no other source has. That's pretty cool. After following the podcast for a year and listening to many episodes on a wide range of topics, I have never once had the desire to skip one. It's a pretty good compliment. That's pretty cool. Thomas Warfield from the United States said, best personal finance pod around. Absolutely fantastic pod. They have a great deal of respect for their listeners, which I absolutely appreciate.

1:20:24This is by far the best personal finance pod I've ever listened to. I mean, the thing is, and maybe the Rational Reminder community is an even more concentrated version of this, although I doubt that, our listeners are really smart. I'm the dumb guy trying to learn from other people in the Rational Reminder community. The people that listen to this podcast are, they're very smart. That is why we don't speak down to our audience and have a great deal of respect for our listeners and our guests. Definitely. Ricard zero CP from Canada says, great podcast. The content has had a profound impact on the way I approach personal investments and happiness.

1:21:03And the insights have encouraged me to think more critically about my own choices. Hosts never interrupt their guests and let them complete their ideas. I'm grateful for the time and energy you both put into creating such valuable content. Keep up the excellent work. And I look forward to continuing to learn more from your content. Very nice. Speaking of very nice, had a couple of people kindly reach out to me on LinkedIn. Christine from Massachusetts said she just checked out the pod and can't wait for the next episode. Well, you can go back to 252 episodes, I guess, plus your crypto series. And then Jordan Toronto thinks it is excellent and finds it truly one of the most informative sources for financial information.

1:21:40So I love hearing from people on LinkedIn. I don't know about you, but I've had a couple of people reach out lately offering like service to source guests for us, which I kindly say, this is something we enjoy doing ourselves. So all of our guests, we find ourselves. It's all homegrown energy that we do. I get pitched sometimes too, but it's not a path that we plan on taking anytime soon. No, no. Reminder meetups, Los Angeles, September 9th, Toronto, September 20th. And any follow-up on the Edmonton possibility? Well, Braden, I think, is confirmed to be speaking at that conference. He'll be there and I intend to go there also, but we have that overlap issue where we've got to be in Toronto for the first day of the Edmonton conference.

1:22:30I've just got to decide if I want to, I guess, fly to Toronto for five hours or something and then fly straight to Edmonton. Sounds terrible, but probably will do that. Probably. Talking about my future self though, so we'll see how future Ben feels about that decision. So funny. All right. Anything else on your mind this week? No, no. It was really cool to have that whole cycle, I guess I could call it, with Paul, where I wanted to learn about covered calls. And I remembered that his paper had looked at that. So read back through the paper, used it in our piece. And then to be able to reach out to Paul and ask if he'd come on and having him review the notes on covered calls, that whole thing was just awesome.

1:23:13I mean, that's one of the cool things about having this podcast is that we have people like that that are in the community that are willing to engage and willing to help. So yeah, I think it's probably good for Paul to have his research talked about like that. I mean, he even talked about that when we were on, that that's kind of the impact that he wants to have. So I mean, that whole thing is just really personally rewarding. And I just think it's a really cool aspect of having this whole thing. Plus, you had a lot of engagement on that on Twitter. A lot of people reached in chatting about that.

1:23:46Yep. Yep. Covered calls is a big deal. Wait till I do the CSI video on that. People are going to be. So apparently covered calls is on the same level as dividends in some circles. Yeah. Oh yeah. That's what I've been told. Wow. You're really going to be the skunk at that garden party. It sounds like it. Yeah. It sounds like it. I also did a, I did a Twitter thread on structured products. That was interesting. I wasn't expecting most people on there were agreeing like, yes, these things are generally garbage, which was my argument. Not that they're all garbage all the time and not that they're never useful, just that for the most part, retail investors are getting hosed in structured products.

1:24:25And I think we'll do a reminder episode on that in the future. But the thing that surprised me is that there are a lot of people who were defending them and were dividend level upset about the evidence. There were, I don't know how many papers, eight papers maybe that looked at big samples of structured products and showed that relative to the underlying payoffs, investors, retail investors were overpaying between four and 8 % depending on the paper for the payoffs in these products. But then there are people coming in saying, you don't know what you're talking about. Structured products are good.

1:24:58It's just the evidence it's just the evidence yeah anyway anything else i think we're i think we're good awesome thanks everybody for joining us this week