Episode 328 - Prof. Stephen R. Foerster: Pursuing the Perfect Portfolio

29:28Did he like some active management in there too, a little bit? I think the only active fund was the Wellington Fund. That was sort of a legacy from where he used to work. How did the Black-Scholes-Merton option pricing formula change the world? Where this whole notion of changing the world comes from, there's a book by a mathematician and author, Ian Stewart, called 17 Equations That Changed the World. And the Black-Scholes option pricing model was one of these equations. So that's where that came from. Myron Scholes-Fisher Black had the seminal publication in 1973 that solved this longtime puzzle.

30:04How do we price theoretically a call option? call option where you have the option to buy a stock at a particular price and you've got a certain time by which you are able to exercise that particular option. But I think their main contribution went beyond solving this puzzle, but more it created what they referred to, what Myron Scholes referred to as the technology itself, the whole notion of derivatives and how derivative securities, not just call option, but derivative securities more broadly, can help to manage portfolio risk by creating all kinds of products, futures, and swaps, and so on.

30:46What does Myron Scholl's take on the perfect portfolio? Of all the luminaries, his was the most different. The way that he looked at a portfolio was through the lens of risk management. He started backwards with what an investor might be trying to seek, some kind of goal. Imagine that you're planning to retire in 30 years. So let's start with what terminal wealth do you need to retire comfortably? And then let's work backwards to where we are right now. How can you choose a path that might lower the riskiness of achieving that particular terminal wealth goal? And so for Scholz, it was all about managing some of these tail risks, some of the disasters that really might set your portfolio back.

31:34The other thing that Scholes like to focus on is what the market can tell us. And by that, we have a very well-developed derivatives market in so many different products, a lot that then we can price based on the Black Scholes option price involved. Probably the most famous and one of the most important indices based on call options is what's known as the VIX, often referred to as the fear index, which really tries to capture investors' expectation of the volatility of the overall market, like the S &P 500, over the next three months. So Scholl's point was that this is a priced market, so we should pay attention to the signal of what that market is telling us.

32:21So unlike many others, Scholl's was a believer there is a role for active management. Schiller and Scholz were a little bit more active and the rest were a little bit more passive? Yes, that would be a good way to put it. Some still a little bit of active, but they would have been on more of the extreme. What did Robert Merton add to the Black-Scholes model? Because we call it the Black-Scholes slash Merton model. It was a friendly competition. This was academics trying to solve this race to solve this very important problem. Colleagues and yet adversaries, I'll use that in quotation marks, trying to get there first.

32:58What was happening then is that we had Black and Scholls trying to derive different parts of their model. The key to deriving this model was to come up with what was known as a hedging ratio. That was part of the secret to solving this puzzle. The question was, what should this hedge ratio look like, where you would be buying stocks and at the same time shorting calls? And then there was a way mathematically, then you could back out what the price of that call option was. What Black and Cholzen figured out is that this hedging ratio, if they got it right and they thought they did, would remove all of the market risk.

33:40In other words, back to Bill Sharpe's model, it would remove the beta risk. They delicately shared some of this with Bob Merton and he said, I don't think that's right. I don't think you have it right. Let me stew on this, and I'm going to get back to you on it. And Merton had developed a more sophisticated mathematical model for the capital asset pricing model in what's known as continuous time. So he thought, well, I'll run it by my model. And he was all excited then. I think it was on a weekend. And he came back and he said to Black & Scholes, you guys are right, but for the wrong reason. Not only does this hedge ratio eliminate market risk, it eliminates all risk.

34:18And so that was really the key insight. With that key insight, then Black and Scholes were able to come up with this model. So that's why we call it the Black-Scholes slash Merton model, because he was a real contributor to this key element that helped to really solve the mystery. What a time. Incredible. How did Merton contribute to portfolio theory? Merton is also known for what's called the Merton model. And taking these call option puzzles that were solved, applying it to not only call options, but thinking about a company as a call option. And so what he was able to contribute was using these models, there was a much better way to assess a company's credit risk.

35:06And so his contribution was really a different way to think about risk. We've talked on this podcast, including with Merton himself, about his intertemporal capital asset pricing model too, which is pretty interesting stuff. What's Merton's take on the perfect portfolio? Merton has an interesting approach. It's a really simple approach, but one that not all of us could use. It's really a potential perfect portfolio. And that potential perfect portfolio would simply to be to buy tips or treasury inflation protected security. So imagine you need, let's say it's a million dollars and you need that money in 20 years.

35:48If you had enough money now to invest in these tips today that would then provide that future value of a million dollars, you're all set. Just put all of your money into these tips and you're protected against inflation. And that's the end of the story. In reality, for most of us, that's not going to do it. So you're going to have to take on some kind of risk. But still, he would have this anchor as these tips as the starting point in your portfolio. And then you're going to have to add some risk on top of that. We skipped a few in the questions that I wrote. We skipped Martin Leibowitz. We skipped Charlie Ellis, although we'll come back to Ellis, I think, in your second book, sort of indirectly.

36:28We also skipped Jeremy Siegel, which was a tough one. We had to make decisions for time. We skipped those guys. We talked about a bunch of them. What are your main takeaways from talking to these guys? Marty Leibowitz, he really helped to show pension fund managers how to better manage risk. He was a real pioneer in helping understand the whole dynamics of bonds. He and his father-in-law, Sidney Homer, who wrote a seminal book on interest rates. Charlie Ellis, we'll come back to him. He wrote a bestseller called Winning the Loser's Game. And we'll talk more about him and a tennis analogy that is really important.

37:06And I tell that story in my most recent book. Finally, Jeremy Siegel, actually my professor at Wharton back in the mid-1980s, is best known for his bestseller called Stocks for the Long Run. And his main contribution is providing a lot of long-term analysis of stock returns and risks and why stocks, if we hold them for a very long horizon, aren't as risky as we might think they are. What is your take on the perfect portfolio? I think asking anybody, what's your perfect portfolio? It's like asking the question, what should I do to be healthy? And the answer of what I should be doing to be healthy, well, it depends on what my current medical condition is.

37:52It depends on when you ask me and how medicine has progressed, what tools we have today. Part of the answers might be diet and exercise and medicine tailored to my particular situation or your particular situation. That's, I think, a good analogy in terms of what our perfect portfolio is. I would say our starting point should be developing an investment philosophy. And that's really the theme of my most recent book, what you should be doing to try to come up with an investment philosophy, really some of the principles and what your beliefs are, whether you think you can beat the market, for example.

38:31So that's got to be a starting point. Then you have to determine what your financial goals are and how much risk you're prepared to take on, how much you have in terms of saving and investing. So once you've figured those things out, you want to start with a foundation, of what I call the traditional investment stocks and bonds. And it really is then a matter of balancing expected returns and risk. And you might have to circle back and adjust how much you're planning to save and invest each year and how long you're going to save and invest each year. So as I tell my students, short answer is, it depends.

39:11The health analogy is really good. There's more dimensions too. Someone might have different preferences about what type of medicine that they'll take. You can't prescribe The Perfect Portfolio without a whole lot of information. Absolutely. I want to move on to questions about your second book. I also want to ask before we go there, how did writing this first book about those people that created this field of academic finance, how did that inspire you to write this second book, which is in some ways similar, but also quite different? A lot of the stories that we had uncovered in Pursuit of the Perfect portfolio, in particular the first chapter when we were doing a brief history of investing, along with just talking to these luminaries like Bogle and like Ellis, really inspired me then that there were more stories that we didn't include in the first book.

39:59Also, just sort of happenstance, happened to be listening to some podcasts, got some ideas as well. Where I really have evolved in my writing. I started out writing textbooks, and they were well-received, and students who had to read them claim that they enjoyed it, but it was a captive market. A textbook to me is like a lecture, and you're just telling someone something. I think we learn better through stories, through narratives. Just by telling stories, my hope is that readers will then reflect and take away their own key messages, hopefully some of the things that I would like them to take away as well.

40:40What edition is your textbook in? I've had two different textbooks, so I'm looking to create a new version of it each year. Very cool. Maybe you'll jump into the story that inspires this question. What do investors need to understand about correlation versus causation when they're analyzing stock price movements? It's one of my favorite stories. It's the first chapter in the book called, Did Ronaldo Move the Stock Market? This is one of the most contemporary stories that I include in the book. It's set at a press conference in 2021. You might remember it, or some of your viewers might remember it.

41:15At this soccer championship, at a mandatory press conference, Ronaldo sits down. Prominently displayed were two bottles of Coke, since Coca-Cola was a major sponsor. He took the two bottles, immediately moved them out of camera sight, grabbed a bottle of water and said, Aqua, water, no Coca-Cola. And on that same day, and this was a big story in the Washington Post and elsewhere, the Washington Post headline said, Christian Ronaldo snubbed Coca-Cola. The company's market value fell by$4 billion. If you look at Ronaldo, and we think of him as an influencer. In fact, he's number one on Instagram in terms of the hundreds of millions of followers that he has.

42:00So it seems like a clear case of cause and effect, moving the bottles, and it cost Coca-Cola$4 billion. Turns out that's not the real story. That's where we get into causation versus correlation. Was there correlation? Absolutely. The same day that Ronaldo was at this press conference snubbing Coca-Cola, the Coca-Cola stock value overall fell by$4 billion. But there's a technical explanation for it, and it's a common explanation of any stock that pays dividends. It's what's known as the ex-dividend day. When a company pays usually quarterly dividends, they'll announce that in two weeks we are going to be distributing this dividend.

42:43and in two days, if you still own that stock on that day, you will get the dividend. If you buy the stock a day later, you will not. What do we expect to happen on the so-called ex-dividend date where you're not entitled to the dividends? We would expect the stock price to drop roughly by the value of the dividend. And coincidentally, that's what was happening on that particular day. In fact, the major drop in Coca-Cola stock price came as we would expect right at the opening price. And this was just before, it turned out coincidentally minutes before, Ronaldo started his press conference. And in fact, what happened to Coca-Cola the rest of the day, it went up.

43:20So we could have had a whole different scenario, a different take. So it's an important story that correlation does not imply causation. I tell another story to really drive home the point. And it has to do with what's known as the Super Bowl effect. Super Bowl started, I think it was around 1967. the champion of what was then the NFL versus the AFL. Now they're the National Football Conference and the American Football Conference. What was observed after about 10, 20 years was that there was this major tendency that if an NFL team won the Super Bowl, that year the stock market did really well.

44:04And if an AFL team won the Super Bowl, stocks tended to be down. And it was pretty dramatic. And in fact, in 1990, based on 22 years of data, in 20 of those 22 years, the Super Bowl effect worked brilliantly. And there was a famous study that was written up in the prestigious Journal of Finance. So that got a lot of attention. What do you think has happened since 1990? Well, just as we would expect, it's been a coin toss. Whether NFC or an AFC team wins, there's no predictive ability. I've asked students this, and I haven't come up with any convincing answer. How could it possibly cause the stock market to go up or to go down?

44:48And so that's really the story. You need to be careful and consider what the causation might be. So the football factor performs poorly out of sample. That's correct. It's all about how to sample, which reminds me of another saying, I've never seen a back test that I didn't like. Yeah, that's right. We talked earlier about Fama and French's factor models. I alluded to the fact that there are a lot of different factor models and hundreds of factors. How does this correlation versus causation thinking apply to the concept of factor investing? It really is quite important because this whole notion of factor investing, The whole premise is that individual stock returns are driven by a number of factors.

45:30Back to the original factor model is really Bill Sharpe's capital asset pricing model, in which there is just one factor, and that's the market then will drive or cause individual stock prices to a greater or lesser extent, depending on this beta risk measure. Balmain French and others have come along to suggest that there could be more factors. And a lot of potential factors have been identified, dividend to price ratios, unexpected earnings, leverage, price momentum, volatility, all kinds of things. In fact, famously, John Cochran described these as the factor zoo. There are literally hundreds of potential factors out there.

46:12But the important thing to keep in mind, this goes back to correlation versus causation. For a factor model to truly work, there has to be some causation. And yet through backtesting, we can identify correlations, but we've got to make a convincing case that there is some kind of causation. We have to just be really on the lookout for what might be so-called spurious correlations. What are some examples of masterly inactivity? So this is based on a chapter of my new book, Trailblazers, Heroes and Crooks. Masterly inactivity basically is the art of doing nothing. And so I give some examples before switching into an investing world.

46:58Going back to 200 BCE, we all have heard stories of the famous military master, Carthaginian Hannibal Barca, one of the greatest military commanders in history. And there's this image of him going through the Alps with his army of elephants and wreaking havoc as he moves through the Roman Empire. Quintius Fabius had the unenviable task of being appointed Roman dictator and having to try to stop Hannibal. What he did was he got an army together and he set a camp up fairly near where Hannibal was. And when Hannibal found out about this, he was all itching for a fight and came out and said, OK, let's fight.

47:44And Fabius did nothing, didn't engage and just bided his time. And the reason he was doing that is because he didn't feel the timing was right. And so he wanted to bide his time and basically do nothing, wait until he could get some reinforcements and be in a much stronger position. And it really paid off and he had this huge military upset. And so this is where the term masterly activity or Fabius victory was started. in the sports realm, 1974, a great example of masterly activity in Zaire, Africa, now known as the Democratic Republic of Congo, probably the greatest boxer of all time, most famous, Muhammad Ali, who at this time was in his 30s, had been the world championship, but was a conscientious objector in the Vietnam War, and so refused to serve, and so was stripped of his title.

48:40He eventually worked his way back into the ring. And he was coming up against this world champion, George Foreman, who many of your viewers and listeners might identify with George Foreman Grill, where he made more money after the boxing, after his boxing meets. But he was a stronger fighter. He had a longer reach. In terms of some odds makers, Ali was a 40 to 1 long shot with this particular fight, which became known as the Rumble in the Jungle. What was Ali's strategy? It was really masterly activity, became known as rope-a-dope. And Ali, throughout most of the fight, just protected himself, went against the ropes, let the ropes absorb some of the punches, until after about six, seven rounds, Foreman had tired himself out.

49:25And that's where Ali came back and had this huge upset knockout. So classic masterly activity. As it pertains to investing, thing, we come back to Jack Vogel, who founded the Vanguard Group in 1975. Really, this introduction of the first mutual fund index fund is a great example of mass inactivity. If I buy and hold an index fund, then I don't have to do anything else. Vogel had a famous saying, if your broker calls up and tells you you need to do something, just reply. Don't just do something, stand there. Such an important lesson for investors. It's one of few fields, well, you gave a couple of examples there, I guess, that are not investing related, but there aren't many things where you can do less and have a better outcome.

50:13But investing, if you try and do more, you probably have a worse outcome. Absolutely. What were the big lessons for investors from Madoff's massive Ponzi scheme? At the time this was happening, Bernie Madoff was actually a very well-respected professional in the industry. He was really a technology innovator. It also appeared that he had a really successful side gig. This side gig appeared to be a hedge fund that was purportedly able to provide these double-digit annual returns with almost no risk. Well, of course, as we know, as we found out later, it was just a huge Ponzi scheme, the biggest Ponzi scheme in the world.

50:54it had gone on for decades and investors lost billions of dollars. So a lot of important lessons come out of this. We want to be skeptical if anyone brings you a low risk, high return investment promise, because usually higher expect return comes with a higher risk. And of course, it's the classic, if something appears too good to be true, it probably is, especially if it purports to show a really high Sharpe ratio going back to the Bill Sharpe metric. Other messages, you want to look for red flags in terms of investment advisors who overstate their credentials, which in retrospect is something that Madoff did, as well as lacking transparency.

51:39Due diligence, I think, for any investor is really important. I love Ronald Reagan's favorite Russian proverb that he used with Mikhail Gorbachev, trust but verify. It's good to be trusting, invest with somebody we trust, but you really want to make sure that they're above board. Another takeaway is that when we think about risk, risk is more than just volatility. So the risk abroad is something that's really important as well. How old is the art of FOMO investing into hot assets? Fear of missing out. We have documented evidence that it goes back at least three centuries. And it goes back to Sir Isaac Newton, a steam mathematician, physicist.

52:22He was apparently a student investor because after he retired from his academic position at Cambridge, he became the master of the Royal Mint. He knew a thing or two about investing. However, in 1720, he succumbed to a really bad case of FOMO. It involved the South Sea stock, and there's a whole story to be told, but we'll leave that aside in terms of the South Sea stock. But what happened in 1720 is that South Sea stock went from, in January, around£100 per share up to£1 ,000 per share by the summer, and then crashed back down to£100 by the end of the year. What happened with Newton, he was invested in South Sea stock.

53:07He watched the price go up and he decided to sell. And he made the equivalent of what would have been millions of dollars. After he sold, he watched as the stock price went up more and more and more. And this is where he got this FOMO. So he went back in the market and not only what he had sold, but even he pushed all the chips all on red and he went all in and it was probably at the worst time and he lost the fortune. And purportedly, he came up with this famous saying that I can calculate the motions. of heavenly bodies, but not the madness of people. What's the science behind FOMO? FOMO has been studied for a long time.

53:46There's a research paper that goes back to 2013. They had an interesting definition of FOMO. They called it a pervasive apprehension that others might be having rewarding experiences from which one is absent. And their context, I think, rings true today was in a social media context. And what they found is they conducted surveys and found that by their particular measure of FOMO, those that had high FOMO scores tended to have high levels of social engagement, but these individuals were less satisfied. It's one who is engaged in something, but it's not giving you that satisfaction. And you're always looking out for what you might be missing out on.

54:35How do you think investors can avoid losing money on FOMO bets? So this is where I think we have to be aware of our emotions when it's time for us to make investment decisions. I think the best thing that you can do once you've sold a security, don't ever look at it again. That's one way to avoid FOMO. Don't try to time the market. Timing the market is very difficult. Be disciplined. Have some kind of well-thought-out plan and then stick to that plan. Dollar cost averaging is a great strategy where each month or on a regular basis, you invest a certain amount of money. Certainly in this day and age of social media, really try to avoid peer pressure or somebody's claim that there's a hot tip.

55:23All good tips. Speaking of FOMO, a lot of people FOMOed into SPACs a few years ago now. What lessons from history would have suggested if people had read the history that SPACs may not have been the wisest investments? So SPACs, first of all, are special purpose acquisition companies. They're also known as blank check companies. And the way they work is you invest a certain amount of money and there's someone who's promoting this particular fund, and they say, okay, give me your money. And within the next, usually it's within the next two years, I'm going to invest it in something. And this something is going to be really good.

55:59Just trust me on this. It's going to be really good. The story I tell in the book, Trailblazers, Sheriffs and Crooks, is set in 1720. And I call this sort of the, pardon, tongue-in-cheek, the original SPAC. It has some parallels with the original a blank check company. And this was right around the time of the South Sea Company, where its stock was skyrocketing. New companies were coming to market. They later became known as bubble companies. There was a crook, we don't know his name, it lost to history, a promoter from Horn Hill. And his claim was that he had a company for carrying on an undertaking of great advantage, but he wouldn't reveal what the nature of the business was.

56:43Not for another month. And in another month, he was going to reveal it. So he set up shop one day, and it really sounds like these blank check companies. Set up shop, took in, again, the equivalent of a million dollars. That night, he closed up. He went to the continent and was never heard from again. And so, obviously, it didn't end well. I think it's a cautionary tale. Obviously, with today's SPACs, something like that extreme wouldn't happen. But even if there isn't a good investment or if it's even only a mediocre investment, you've got this two-year period where you've got a real opportunity cost of your money hanging around.

57:21And so we had this what, in retrospect, appears to be a bubble around 2021, 2022, I believe it was, where a lot of SPACs came to market, but the investments themselves, once they acquired another company, for the most part, with a few exceptions, haven't panned out very well. What do you think investors can learn from value investors like Hedy Green or Warren Buffett? Both Hedy Green and Warren Buffett appear in my stories as well. Her story, I call that chapter Hedy Green, the Queen of Value Investing. It's set in New York City back in 1907. She's not as well known but was a real trailblazer and at one point was known as both the world's richest woman and also the greatest miser, which I think really rings true from a value investing perspective.

58:09But really, she was a value investor before Ben Graham, who's considered really the first proponent of value investing, obviously his famous disciple, Warren Buffett. She had this real knack of buying things when prices were low and nobody wanted something and then selling when there was some kind of buying frenzy. She was able to avoid a bank run. She identified a particular bank that she thought was not on the up and up. She claimed partly tongue in cheek that the men who ran that bank were too good looking. And that's why she didn't trust them. But it turned out she got her money out before there was a bank run during the panic of 1907.

58:51But at the time, New York City was almost going bankrupt, and she provided some major loans that helped save the city. But in terms of what we can learn from Hedy Green and Warren Buffett and Ben Graham and other value investing is sometimes it does pay to be a contrarian investor. It's important to have a disciplined approach. There's interesting anecdotes about both Hedy Green and Warren Buffett. They just didn't have this gut feel and say, oh, wow, this price is down, so I'm going to buy it. But they did their homework. They did a lot of research. I tell the story of Warren Buffett and American Express.

59:29He did a lot of research where he saw this disconnect between Main Street and Wall Street. Wall Street had punished American Express, but he thought Main Street thought that its credit cards, its traveler's checks were pretty solid. So really doing your homework can pay off. Greed can get in the way of sound analysis. As part of the American Express story, Buffett really identified that long-term value can trump short-term profits. Short story is that it looked like American Express was trying to prop up a subsidiary that had got involved in a salad oil scandal when they really didn't have to.

1:00:04They could have just let it loose. They felt their reputation was at stake. Other shareholders disagreed with Buffett, who was really supportive, but what management was doing. And so this was a case of where long-term value can and did trump short-term profits. And the last thing I would say is that it really comes down to a famous saying of Buffett. It pays to be fearful when others are greedy and greedy when others are fearful. Stocks might be overvalued when everyone wants them and then undervalued when no one wants them. Tough for people to do in practice, which is why those two are so special, I guess.

1:00:40Exactly. We briefly touched on Charlie Ellis earlier. What are the common threads between winning at tennis and winning at investing, or I should say not losing, I think, at investing? These stories are set around 1975. And we really have two trailblazers here, both bestselling authors. One is Cy Rammel, who was a really fascinating character. I think he passed the age of 100. He was the oldest person to get a patent in the US. He wrote on many areas. He was instrumental in forming a company that developed some of the first intercontinental missiles, made a lot of money there. On a quirky topic, he wrote a book called Extraordinary Tennis for Ordinary Players.

1:01:23What he showed in this book, or what he claimed in this book, is that really there are two different games of tennis. There's the tennis that amateurs like you and I play, and then there's the game of tennis that the professionals play. The professionals play this beautiful game and they have these long rallies. They hit the ball in a very precise way after long rallies. They rarely hit into the net and it's really a whole winning game. You win by being precise and just outdueling your opponent. But that's not the type of tennis that most amateurs play. Most amateurs will hit the ball into the net or hit the ball wide outside of the court.

1:02:02And really, the way that tennis is played by amateurs is you end up losing. And so the point that Ramo was making, if you want to be successful as an ordinary tennis player, then you should play to not lose. And that's the winning strategy is don't try to do these fancy shots. Just try not to lose, don't try to replicate this game that is played beautifully by the professionals. When Charlie Ellis read this book, he really got inspired and saw the parallels with investing and ended up writing his own bestseller called Winning the Loser's Game. And his key message, and before the book, he wrote a paper in 1975, which really inspired Jack Bogle to come up with the index funds, because the best way to not lose is to try to not outperform, and that's simply buy and hold an index fund.

1:02:55And so really not losing is the key. By trying to replicate what the professionals are doing, that can lead to excessive trading, for example, and excessive trading has been shown to lead to underperformance. So index funds and target date funds have largely automated investing. What are the risks of overreliance on automated investment decisions and platforms like that? So this is a story I tell called Autopilots Gone Wrong, which on the surface doesn't appear to have anything to do with investing. It features a trailblazer called Lawrence Sperry, who back in 1912 invented the autopilot system.

1:03:34The main part of the story occurs in 1994 aboard an Aeroflot flight from Moscow to Hong Kong, where one of the pilot's two children are invited into the cockpit. and while the autopilot is on, they're invited to fly the plane. Obviously, they're not really flying the plane, but get the feel that they are flying the plane, or so it seems. One of the children sits in the pilot seat, everything is fine, and then the other child happens to override the autopilot. It's really 18 minutes of cockpit drum, and the way the story ends, I don't want to give away everything, but it ends with the pilot saying, everything's fine.

1:04:17Well, not everything was fine. And so we'll leave that for our readers to see what happens. The message here is that with an investing parallel, really things like index funds, things like target date funds, which based on your age will move you gently from a portfolio that's heavily invested in equity. And over time, it becomes more heavily invested into bonds. Those are really auto pilots. And so it's important for us to identify there are benefits to these, but there are also limitations. Let me use an example in terms of index funds. We think of an index fund for a particular country as being one that's very diversified, and it's very efficient from a low-cost perspective.

1:05:02But there are limits. A couple of stories, a Canadian story, a Finnish story, around the late 1990s, again, what became known as the dot-com bubble. In Canada, one stock, Nortel Networks, represented over a third of the overall index. And in Finland, Nokia was even more dramatic. I want to say it was over 60 % of the index. So while you might think, great, I'm diversified, autopilot, I'm buying an index fund, in fact, you were taking on a huge amount of risk. Same thing with target date funds. Bob Merton is a real critic of target date funds because target date funds make the assumption that the only consideration in terms of your risk is how old you are.

1:05:47Merton and others have argued that there's a lot more nuance to that. While these target date funds are on autopilot and have some positive features, they might not necessarily capture all of your risk exposure, what your risk tolerance is. Why do you think it's important to tell the stories that have shape modern finance as you've done in your last two books? I love this quote purportedly going back to Mark Twain who said, history doesn't repeat itself, but it often rhymes. I think we can learn so much from history so that we don't repeat the mistakes that others have made. I mentioned how I've evolved from writing textbooks that are sort of lectures to narratives.

1:06:29I really think we learn better from stories. And so even if you're a novice investor, hopefully by reading the stories, you'll have a good feel for some of the pitfalls to avoid. There are just so many fascinating people and fascinating stories, such as Bill Sharp and his life and his times that are really important stories to tell. How do you suggest that investors take this information? They take all these stories about how academic finance came to be and all the other stories in your second book. How do you take that type of information and use it to form your personal investment philosophy?

1:07:06The problem that my book is trying to solve is really the need for individuals to develop their own investment philosophy. Many novice investors just take the plunge into investing and buy what others on social media are telling them they should buy without really understanding sound investing principle and concepts like the importance of diversification, like identifying the difficulty in earning returns in excess of the market, really understanding the riskiness of investing and also the common mistakes that we need. And so really, this is where you need to develop an investment philosophy. I would say that we don't always act rationally when it comes to investing.

1:07:49And what I would like readers to take away after you've read my stories, ask yourself honestly if any of these ring true for you. Do you get excited and look at investment opportunities through rose-colored glasses and not look at anything that might harness your perspective? Are you overconfident in your stock-picking abilities? There have been all kinds of studies in psychology. One classic study asks individuals simply to rank your own driving abilities, above average, average, or below average. Well, I know for sure that I'm above average. And I would guess, Ben and Cameron, that you're above average, or you would self-assess that you're above average as well.

1:08:30And yet, 80 % of individuals claim that they're above average. Well, we can't all be above average. And so that's where the conference comes into play. The other thing that might ring true is we often think that if a company makes, let's say, its cutting-edge products, do we ignore how expensive the stock is? And we could have a great company, but that might not be a great investment. And the last one, coming back to Sir Isaac Newton, do we convince ourselves that if we bought a stock and we've sold and the price continues to go up, are we going to regret it and want to hop in again? So lots of things that we can take away from this.

1:09:09Our final question for you, how do you define success in your life? Success is that if you contribute in some kind of way to leave the world a better place, it could be anywhere you choose. It could be small. It could be large. And the second thing is that to me, happiness is equated with success. So if you can make others happy and be happy yourself, then in my books, you're a success. Great answer. Great to see you. Thanks for joining us, Steve. This has been an incredible conversation and beautiful work that you've done. Thanks. Appreciate it, Ed. It's been my pleasure. Really enjoyed chatting with both of you.

1:09:45Great. Thanks, David.