We Asked Rich Bernstein and Chris Davis Why This Market Isn’t as Safe as It Feels

[00:00:00] Given how much content we publish on Excess Returns, listeners have often asked for a weekly recap that brings together the best insights from all of it. So Matt and Jack have launched a new weekly wrap-up show on our separate podcast, Two Quants and a Financial Planner. Each week, we'll share some of the most insightful clips from our recent interviews and break down the biggest lessons for investors. We've included our latest episode, where we look at lessons from Rich Bernstein and Chris Davis here in the Excess Returns feed, so you can check it out. But to keep receiving new weekly wrap-up episodes going forward, please subscribe to Two Quants and a Financial Planner on Apple Podcasts, Spotify, or wherever you listen. You can find the links in this episode description.

[00:00:27] Her portfolio has probably outperformed our fund by 500 basis points a year for almost 20 years. And you say, how's that possible? She doesn't own a single company that we don't own. We don't think this is quite the 1970s. Rather, it looks to us much more like the 1960s. And the 1960s were a period, the second half of the 1960s, were called the guns and butter period.

[00:00:54] One of the peculiarities of investing is that the more risk people feel they're taking, the less risk they are taking. If you can't afford to buy gasoline, you can't afford to buy bread, you can't afford to buy groceries, you don't care about growth in 15 or 20 years. Welcome to the Excess Returns Weekly Wrap. I'm Jack Forehand and straight out of the dentist here. Hopefully drugged up, I'm going to say some wildly controversial stuff. I've got my good friend Matt Ziegler.

[00:01:23] Listen, Steve Martin is my dentist in heart and spirit from Little Shop of Horrors. And that's the only way I roll. Luckily, clean bill of health. I know the people will be excited to know my braces less teeth as they evolved in my adult life. Cavity free. Yet again, the streak continues. Only broken once a couple of years ago. But a lot of cavities in your house, Jack. You doing okay over there? You know, not too many. I had a lot when I was a kid. I had a dentist who was incompetent, who just refused to actually acknowledge that I had cavities.

[00:01:52] So when I finally got to the adult dentist, they're like, we're going to need to do some work here. And that's when you turn to active managers and talking to them all day. Yeah, exactly. Is that the inspiration? Well, since you're not drugged up, we're not going to be able to go ahead and do... I was going to do a live Q&A with the YouTube trolls here to try to get you to say some wild stuff. But since you're not drugged up, you wouldn't do it. So we're going to have to go into the clips here instead. All right. All right, clips. We had some great guests this week. So we have some phenomenal clips in the queue here.

[00:02:19] I'm really excited to tear some of these down with you because it's an embarrassment of riches who we get to talk to. Yeah, yeah. And two guests this week. Usually we have three, but this is a great week to have two because we had Chris Davis, who's one of my greatest... My favorite thinkers on all kinds of topics. We had Rich Bernstein. You and Justin talked to him. We've got some really, really cool stuff. So should we get into it? Well, let's dive straight into it. And man, I'm jealous every time. I want one of these Chris Davis interviews. I got to get to him. We got to get you on with Chris Davis and something. Like, he's just such a good...

[00:02:49] Like, he's just such a deep thinker. And he has, like, amazing stories for it. No matter what you ask Chris about, he has, like, amazing stories for it. And this is... The first one here is probably the best story of the whole episode, which is... Here's Chris talking about how his mom outperformed him. I had a wonderful stepfather who died in the... Around 2007 or so. And my mother was all invested because he was so conservative. He was only in municipal bonds.

[00:03:17] But he'd bought 20-year municipal bonds back in the 80s, right? So he had, you know, municipal bonds yielding 9%, 10%. And so just to make the math easy, let's say she had a $3 million portfolio and she was living on $200,000 a year. But each time one of these bonds rolled over, it was going to be invested at 4% or 3%. And I was like, you know, mom, this is not going to... The math's not going to work here.

[00:03:46] So I said, don't worry. You know, I'm going to backstop you. You don't have to... You know, you're never going to be homeless or anything. She's a very frugal Yankee. Uh, and, uh, uh, but I said, look, each time a bond matures, just put it into the funds and we will, uh, you know, and over time, uh, that's going to give you this inflation protection and this cushion and so on. And she said to me, well, because as I say, she's a frugal New England Yankee.

[00:04:16] She said, uh, well, I think that would upset your siblings. And I said, what do you mean? She said, well, you know, because then I'm paying you a fee. I'm like, oh my God, really? You know, yeah. You're asking for my advice. So, you know, she's my mother. What am I going to do? So I said, look, whenever a bond matures, just call me and I'll tell you what our top holdings are. You know, they're on the internet. You can see them.

[00:04:43] Um, and, uh, you know, I'll explain to you why we own each one and then you can make your decision. And, well, her portfolio has probably outperformed our fund by 500 basis points a year for almost 20 years. And you say, how's that possible? She doesn't own a single company that we don't own. We own them all. She never put more into a company than we put in. And it's Jack, of course, it's exactly what you said. It's that she never sold a share.

[00:05:13] So, you know, Amazon might be 40% of her portfolio and Google might be 30. And, you know, and the remaining 30% might be in 10 stocks, but, you know, with all of them, she started with a three or 4% position and she just let them go. Whereas I started with a three or 4% position. And when it went to six or seven, I was like, oh, trim it back to six or five.

[00:05:39] And so any honest investor will tell you their biggest mistakes were what they sold. Um, when you find a really wonderful company, uh, but you have to balance that with two things. One, the investment act of 1940, which has rules about diversification. And then second, the idea that I'm willing to take that volatility, but that could be

[00:06:06] very hard on a teacher or a nurse who has their life savings in us and is unable to absorb a 20% idiosyncratic hit. Right. I mean, you know, they will go through a bear market or so on, but, you know, to have in one day, one stock where everybody else is doing fine, but I got hit with this. And so there are issues that would make it hard in a fund, but I will tell you that my

[00:06:34] father ran the fund until 1994 or five and he never let a position get over 5%. And that was sort of the general thinking. And, uh, when Danson and I became partners, whatever it was, 15, 20 years ago, Danson said, what's so special about five? And we ran all the models on diversification and correlation and so on. And so we said, well, we're going to make that 10 instead of five.

[00:07:02] And that was the best decision we ever made, right? That it meant that we allowed companies to go farther and, uh, we maintain a lot of price discipline. Cause as I say, there is a bull market lesson you can get wrong. Uh, you know, we saw that in some funds that had an enormous concentration and, you know, a company or two, uh, that went sideways. But I think that you're right.

[00:07:27] I, I, I think that in general, uh, especially when you adjust for taxes, you know, allowing bigger positions now, whether that position limit should be 10 or 15 or eight or 20, you know, the math sort of indicates that, that you get a lot of diversification with, you know, that sort of eight, 10% limit at the top. But that's, it's a great, it's a rich topic.

[00:07:55] And when we spend a lot of time on, and we don't want to learn the wrong lesson at the wrong time. And so as much as I love meta, as much as I love applied materials, you know, we've probably sold three quarters of the shares that we once owned. And, uh, and in our view is just, we have to have that discipline.

[00:08:18] And if our IRR used to be 14% and now it's 4%, we're just, we can't have a huge position in a company where we're modeling a four or 5%. So first of all, for, for the YouTube trolls out there, this is not like active manager outperformed by mom or whatever you can't actually do as an active manager where Chris's mom did. Um, and he points this out in the episode, like you, you have certain percentages you can hold of each company. You can't let your portfolio become 70% in one stock or something.

[00:08:47] If you're an active manager, nor would you want to from a prudent standpoint. So obviously somebody who lets a winner run dramatically relative to what an active manager can do is going to outperform them. But I just thought there were some really cool lessons in this story. So what did you take from that? There's a bunch of cool lessons. I mean, number one, I remember I met this guy with this crazy story of very similarly, like early eighties, like buying, I think he was buying Ginny Mays on margin. So it was this like crazy trade for like a decade plus of buying Ginny May on margin,

[00:09:16] making like an absolute killing and like the roll down yield and then turning around and buying stocks with it and being like the reason he was set for life was because of this crazy Ginny May margin trade that turned into stock portion that turned into like, and this is why I didn't have to work after I was 50 years old. And I was like, ah, be nice if that was me. So in Chris Davis's mom scenario, I love the planner advice here. I love the like your reinvestment risk is actually the problem. We should actually hedge inflation.

[00:09:46] We should hedge the other side of this. That's a problem from a planning perspective. And here's a novel solution that was willing to be, I mean, the, your siblings are going to be upset about the fees part is adorable, but I love this as a novel solution because if your reinvestment risk is a problem, you should, you should change the way you think about this on a pure portfolio theory level. This, this made me happy, let alone to know it came from his mom. What were your other thoughts? Yeah. I also, I was thinking about when I heard this presentation from Robert Hagstrom recently,

[00:10:16] he was talking about this idea, I think like Legg Mason at one point owned like 10% plus of Amazon. And he was talking about like what that would be worth today if they still held it. And obviously that's the same story as before, because if they had, they can't hold it because of regulations and if they did, it would be like 99% of Legg Mason's assets or something. So they'd be running funds that are like 99% Amazon. So it wasn't realistic, but it's just interesting to think about these stories. Like when you see these companies and these huge holders and then like what ends up happening to the companies. Yeah.

[00:10:43] And it's the whole idea. I think about Chris Mayer and I think about some of the other people who have written about letting winners run and how and why in the right portfolio context for the right individual and it can't be scaled up to an asset manager size level. Hey, if you got some great companies, this can happen. You can't plan on it happening in advance. And that's the trick. And you've also got to think about the other side of it. Like we had Michael Bobison on recently.

[00:11:12] He was talking about, there was a company that had very similar characteristics in terms of its growth and it ended up being Enron. And so nobody's saying like, you know, I shouldn't let Enron run. It would have been great because you lost all your money in Enron. So it's easy to look at the ones that you should have let run versus the ones you shouldn't have let run. But you have to look back at like, what were the characteristics at the time? And was I able to, at the time, distinguish Amazon from Enron? And it's not the same timeframe, but the idea is like that. Can you distinguish the ones that are going to be the ones like Amazon versus the ones that weren't?

[00:11:41] I'm interviewing Mark Rubenstein. And he told me a story when we did our intentional investor together about, I think it was his grandfather or great grandfather was involved in some IPO in like 1920 or like the late 1800s or something. And he inherited the shares. Like they got passed down generation to generation. He's like, it's the worst thing I own. It's done nothing but go down. It's so far below the cost. Even when I inherited, it's an embarrassment. He would be rolling over in his grave if he knew I still held onto it.

[00:12:10] It's just for the sentimental value. But it's that lesson belongs tucked in alongside the amazing outcome that Chris's mom had. So this next step gets into what everybody wants to do, which is anytime you get some inflation, they want to talk about the 1970s. Richard Bernstein thought a different period might be the better one to look at. So let's start with the 70s and work our way backwards in time. I'll age myself. We'll do Mr. Peabody's Wayback Machine. Thank you. I don't know how old you guys are. Thank you for Rocky and Bull Eagle. Thank you.

[00:12:39] Yeah, yeah. Exactly. So, but anyhow, the 1970s. So in the 1970s, you had two oil shocks and you had immense demand destruction. Completely changed, you know, the way people acted and everything else. And that was largely because gasoline as a percent of wages went up very, very dramatically. And so people had to make choices. And the oil shock worked very much like the Fed tightening interest rates.

[00:13:09] It slowed down the economy pretty dramatically. Our contention is it's not going to be as dramatic this time because oil prices as a percent of wages is still very, very low. And I think it's gone up, of course, with the war, but it's still very, very low. So that doesn't mean that we can't see a recession from curtailed supply of goods. That's already happening.

[00:13:34] And, you know, you're seeing on the, you know, certain transportation sectors are starting to have problems and certain countries are having problems where the reserves aren't adequate enough for emergencies and things like that. But to say the U.S. consumer is going to fall over and play dead, I think it's very, very overdramatic, very hyperbolic because gasoline is a percent of wages. Now, that doesn't mean it won't annoy them. And you're seeing gasoline's affecting consumer confidence. That's of course going to happen.

[00:14:04] But the question is, is it changing their behavior? I'm not sure it is quite yet. So we don't think this is quite the 1970s. Rather, it looks to us much more like the 1960s. And the 1960s were a period, the second half of the 1960s were called the guns and butter period. What does that mean?

[00:14:26] So it was a period where it was widely thought that we could have a major buildup in defense spending, obviously related to the Vietnam War and the buildup to the Vietnam War. At the same time, we could have massive social programs, Lyndon Johnson's Great Society, that we could have both spending on guns, spending on butter, the social side of this. You could spend on guns and butter.

[00:14:53] It would do nothing to the budget deficit, and it would do nothing to inflation and inflation expectations. At the same time, you also had an accommodative Fed. So in retrospect, hindsight, it's always 20-20, I understand. But in retrospect, we know that that was the beginning of the inflationary spiral. And what really began to fuel inflation was that kind of miscalculation that this would have no impact. Well, today, we're not getting the exact same thing.

[00:15:21] I'm not trying to be, you know, but we're definitely getting a buildup on the gun side. The guns is definitely happening. You know, the Defense Department last week, I think it was maybe the week before, put in for a $1.5 trillion budget for defense spending, the first trillion-dollar-plus budget for the defense spending in the history of the United States,

[00:15:45] excuse me, up about 42 percent over what was actually spent or what is being spent right now or so. So a huge buildup in defense. That is there. So I think the gun side is very, very similar. The butter side's a little bit different. You know, perhaps—and again, I'm not arguing whether these are right or wrong policies. That is not my day job. I am not here to opine on politics. I'm just telling you, this is kind of what's going on here, guys.

[00:16:15] And so what you've got is you've got a lot of social programs that were actually kind of invented, if you will, or initiated during the Great Society period of the 1960s. We're actually being cut back or eliminated now, which is kind of interesting historical context as well. But we are getting the one big beautiful bill, that tax cut. Now, the president, occasionally prone to hyperbolic speech, the president has said that this is the biggest tax cut in history.

[00:16:45] Not quite sure that's true by our reckoning it's number six. Still massive, by the way, and still fits the story. So the butter side of this is more in terms of tax cuts and the effect that that will have on aggregate demand as opposed to spending. And there is still a lot of spending going on, but not as much. But we are getting this big tax cut. So the butter side is constructed a little bit different. But nonetheless, the consensus is that this should have no...

[00:17:14] Well, the consensus in Washington is that this should have no effect on inflation, no effect on the budget deficit. And by the way, we might actually get an accommodated Fed, much like we had the 1960s as well. So we think there's more similarities to the 1960s than there are necessarily to the 1970s. So yeah, Matt, what were your takes on this? I thought this was really interesting. Like, I didn't know some of this stuff about the 60s. And everybody is like, we're always asking the question on the podcast, is this going to be the next 1970s?

[00:17:41] And it's interesting to think like, maybe there's another period that's a better analog. I love the historical analog just because I think it's useful. I also love it as the reminder of as soon as you start to time travel into it, you immediately start to think about all the ways life is just wildly different. So it's like, even when we talk about the 70s or somebody tries to seriously lay down, like, here's what happens in oil shocks based on data we have from the 70s.

[00:18:07] It's like, okay, but the cars, the fashion, the sociopolitical stuff, households, like, you know, not to make it a gender thing, but it's like, what are most of the females doing versus what are most of the men doing in the household? How does that yield to consumption? How does that control all these things? And all these factors start to come into play just to realize how ridiculous these things are, but there's still some useful lessons. So with this oil shock and the way that he teases it out is like,

[00:18:34] don't just think about oil because there's the net importer, net exporter piece of it, the reality of the US, but then also think about what's the government doing? Like, how is the government spending money? And he brings in the 60s and he says, like, let's talk about spending policies in the 60s. Let's talk about the deficit in the 60s, where in a much more similar way, oil had a lesser impact on consumption in the 60s than it did in the 70s. And on top of that, you had these government spending programs and he brings up the guns and butter thing.

[00:19:04] So very, very interesting. Not a direct analog today, but very informative, especially when he layers in the Fed to say, if the government is pro-growth, if the Fed is accommodative, if the oil shock isn't allowed to hit the consumer and take away from consumption and change patterns, this doesn't hurt as bad now as you might feel like it will. With the giant caveat, the 70s come after for a reason too.

[00:19:32] And I think that's the look forward that you got to pay attention to. Yeah, that oil low relative to wages point was a really, really important one because the percentage of income people are spending on oil is obviously going to be a big, have a big impact on how something like this, you know, impacts the economy. Obviously, oil going up impacts the economy because everybody spends on oil and then demand's not going to go down for oil much, you know, because the price went up. So it's going to come out of something else. But his point was like, it's less impactful maybe than it used to be. And then many people think it could be. Yeah.

[00:20:01] And that impact is what determines everything because the impact is what changes the behavior. So if we're going to have a recession, we're going to have a drop in consumption. Consumption is still 70, 80% of the U.S. economy. And to get a drop in consumption, you need something that changes behavior, not just for a week, not just for whining. You know, my wife and I were getting out of town the other week and I'm filling up the car and I'm like, thanks straight to Hormuz. Like that was 50% more, but we're still going to go away for that weekend trip to go see some friends.

[00:20:27] The reality is if that keeps happening week after week after week, month after month after month, that's when the behavior starts to change. That's when you have that paradox, that down cycle starts. So we're not there yet. I like the 60s. 60s are fun. Yeah. As long as we don't get the 70s after, right? Which hopefully we won't. Hey, we'll see what comes next. Who we got next? Our next step is Chris Davis again. And this idea of how people perceive risk.

[00:20:57] And again, he's got great stories for everything. But here's Chris talking about risk perception. You're very right that one of the most idiotic expressions is unprecedented uncertainty. Right. It is always uncertain. I think that the underlying shifts, though, are those three vectors are massive in that we can say in 50 years, we hadn't seen anything to unwind globalization.

[00:21:26] We hadn't seen anything but a falling price of money and falling inflation. And we hadn't seen anything like, well, I was going to say a technology that has such a wide cone of uncertainty. You could argue that, you know, if you think about factory automation and globalization,

[00:21:52] you know, those were massive changes that require, you know, that just put whole factories and business models out of work. And but I would say that those three vectors are not unprecedented in history, but but you certainly the idea that they're happening at the same time, the confluence. Now, the stage is set for something to shock the system. And that is, of course, unpredictable.

[00:22:22] That's where the we are always uncertain. I used to say, you know, it's like risk. What really changes is not the level of risk. It's our perception of the risk. So before 9-11, you know, we all felt flying was safe. And after 9-11, we were all scared to death. And of course, the opposite was true. After 9-11, flying was far safer. Before 9-11, it was far riskier. We just didn't know the risks we were taking.

[00:22:52] And therefore, one of the peculiarities of investing is that the more risk people feel they're taking, the less risk they are taking. And I learned that in a really fascinating way, which is not going to sound fascinating when I tell you where I learned it. I learned it at the College of Insurance, where I could have been the captain of the football team. I'll tell you that. It was down in Tribeca.

[00:23:21] It's now been absorbed into St. John's. But it was the College of Insurance. And I took a lot of courses there over the years in underwriting science and actuarial science and so on. And I had a teacher down there. And I don't know if you remember. I think the Ford Explorer and the Mazda Miata were introduced around the same time. I could be wrong. But that was the analogy that we were looking at together.

[00:23:51] And he said, you know, Chris, there's something very unexpected because which car is more dangerous? And I said, well, of course, the Miata. You know, you're in this little tin can, you know, flying down the highway. And the Explorer is one of the first big SUVs. And you have all this metal around you. And he said, yeah, but the data says the opposite, that the Explorer was far more dangerous. And I said, why?

[00:24:19] The Miata is unquestionably a less safe car. He said, yes. But when you drive the Miata, you feel that lack of safety and you adjust your driving. So and similarly, when people began transitioning to SUVs, one of the most dangerous things is they felt safer. And they were up high. They said, I've got four wheel drive. You know, four wheel drive doesn't make you stop sooner.

[00:24:46] You know, it's so, you know, and failing to stop is the number one cause of accidents. Right. You know. And so people drove worse feeling safer. And so this wonderful teacher said to me in a very Malthusian way that if you really wanted to save lives on American highways, you would install a sharpened metal spike on the steering column pointed at the driver's heart.

[00:25:18] And, you know, there would be a few unfortunate impalings and so on. But nobody was going to be doing their nails and nobody's going to be texting. I mean, people are going to be driving like, oh, my God. And and so, again, the perception of risk alters the behavior. And and how could investing be different? So we're at an all time high in the market. People feel great.

[00:25:47] You know, the mag seven is the talk of the town in the way the nifty 50 was or the three horsemen of the Internet or fang or whatever other hot acronym generally points to a bubble in a sector. And and people just, you know, no price is too high. You've just got to get on the train. And that's that's a pretty that's a pretty risky setup simply because people feel like those are sure things.

[00:26:16] Have you ever owned a Ford Explorer or a Miata? Either of those ever entered your garage? No, I have not. My uncle had a Ford Explorer. They used to drive around when I was a kid. He let me borrow it. But I've never actually owned either one of them. OK, you and me both on this. I love that Chris took it into this direction. Well, what were your big takeaways on Chris's comments here besides car talk? I thought that the car thing is a really good example because everybody would say like a Mazda Miata should be more to insure.

[00:26:42] But but the idea that people, you know, when you feel safe, you take more risk than you otherwise would have. That's the part that really applies to investing. And, you know, I guess also the other part is like if you're an Ford Explorer and you run over another car, you could do a lot more damage to the other car. Like I'd assume like a cyber truck is probably I don't know this, but I would assume it's probably pretty expensive to insure, even though like the cyber truck is going to win every collision it's in because of the just the destruction it's going to unleash on the heads. It's going through the other cars.

[00:27:08] But but yeah, that idea that like when you feel safe is maybe that the times you feel like you are safe are not the times that you actually are safe. I think it's really interesting. Yes, behavioral psychology. That's what this boils down to. I go back to that, you know, one of my Roy Dimson or whoever said the quote, the risk means more things can happen than will happen. And it's what gets you inside of that is the confidence that you know which one of those things are going to happen.

[00:27:34] And if you put somebody in the confidence seat of the car or I just had this experience to on on vacation with the rental car. I'm not. Besides our private jet, I'm not using like I don't have a fancy cutting edge like top of the line vehicle that's like the day to day get around car. So I get very excited when I get into a rental car and I'm like, oh, my favorite thing. I love the blind spot sensors. Do you have those are you don't have that in your regular car?

[00:28:01] I got to get past 2017 at some point here. I'm I'm due. I'm time for an upgrade. It's definitely time for an upgrade in the Ziegler household. I'm stubbornly holding out separate financial planning therapy episode. We can get into my the car that I'm stubbornly holding on to. However, those blind spot sensors and those other things, they give you a lot of comfort and confidence, especially if you're driving a car somewhere else. You haven't had something like this. And you're like, oh, this is amazing. The rear backup cameras, the stuff like that. You think about some of these advancements.

[00:28:31] They actually do change behavior. And there's there's marked differences. And this is why the insurance companies look and ask on what you have in your car or whatever before they insure these, not just a replacement cost to weigh these out. So the idea that how you price risk is also dependent on the confidence of the person entering into the equation that will either cause the good or bad outcome. I think that is a profoundly insightful thing. And I will say that I'm very complacent over here because I just got a new car last year.

[00:29:00] Like you can't back into anything because it just stops. If you try to back into anything, like if you try to turn into a lane with another car, like it's fighting you with the wheel lights making that turn. And it's like, it makes it very, very difficult to do anything wrong. But I think you're right. I mean, I think you probably feel too safe. Like you like I'm sure there is a way that I could back into something and I might feel too safe and eventually do it. You'll feel too safe. You'll eventually do it and you'll be shocked. And same thing. I'm in this like fancy car.

[00:29:27] I'm backing into a spot in a garage in a strange town and whatever else. And I'm like backing the spot. And yeah, that the brake sensor that was like, no, you're close enough. I'm like, I see on the camera. I can go like four more inches. It's like, you're close enough, sir. You stop right now. Man, this is libertarian paternalism has come for all of us, I guess. Who we got next? This next step is a short one, but I just thought it was interesting to talk about. It was a small part of the episode, but there's been a lot of talk about the Fed's 2% target. So here was Rich Bernstein's take on that.

[00:29:57] And the way I describe it to people is, look, the Fed is still using a 2% inflation target. That's probably pretty antiquated. And that maybe if they were to modernize that target, they'd be talking about 3 to 3.5. If you want to get excited, say maybe 4. But if you still think that the proper inflation target is 2, it says to us, the Fed's going to have an awful lot of inflation fighting to do to get to that 2%.

[00:30:25] And I don't think, especially with the new Fed chair, I don't think they have the gumption for that kind of battle. I don't think they want to do that politically. I don't think they want to do it economically. So I think we should be talking about a 3 to 3.5 or 3 to 4% inflation target rather than the 2% that they're using right now. You say it's antiquated. And I think I'm hearing that statement a lot lately.

[00:30:53] And I'm also channeling it to the conversation of this rule's only kind of been there since 2012. Yeah. You know, it's barely a teenager in age. That, to me, says there is precedent for the Fed updating this and they could go there. What do you think the likelihood is? How would you think about it? I think politically they will not do it. I think they're going to stick to that 2%. I've said this for a long time, by the way. This is nothing new.

[00:31:19] They will stick to that 2% inflation target much longer than is appropriate because by the time they change the target, it will be widely accepted, not just kind of a weird saying, like outcast people. But I think it'll be widely accepted that 2% is the wrong number. And then they'll give in because I think politically, whether Democrats, Republicans, whatever, I don't think any administration wants to stomach changing that inflation target.

[00:31:48] I just think this is really interesting from the perspective of like what's going on right now is like there really isn't a 2% target, but we're not saying it out loud because if we said it out loud, then there would be bigger problems, which is kind of what he got at in the clip. So I just think it's interesting. Like the Fed is not really targeting 2% right now. If they wanted to target 2%, they could be hiking and they could target 2%. But they're not going to do that. But they also, you can't just say, you know, we're charging three and a half now or something like that. You can't do that because then the market's going to go nuts. So it's like, we're going to target something different. We're not going to really tell you we're creating something different.

[00:32:18] It's just an interesting dynamic right now. And the way that Rich broke that down, so we got into the point and I think Cameron Dawson brought this up before too, of just the reminder that the 2% target hasn't been here that long. It's not like this isn't since the beginning of the Fed that we had this target. This is like, this is a post GFC. And it's not like there's some crazy logic for either. Like why it has to be 2%. It like came from New Zealand or whatever.

[00:32:44] It's not like there's not like some crazy economic theory that says why 2% is the ideal rate of inflation. Yeah. It's basically make sure there's a little bit of growth. Zero is bad. Zero and deflation are both bad. So you need a small positive number. And right now this experiment and putting the horse blinders on for 2% is really interesting because to your point, it's like, we're just not going to talk about it. And that's the best way to deal with it, which this is a strategy inside of my own family.

[00:33:13] You know, like I was raised on like, just don't talk. Hey, just bottle it up. Everything's fine. Just bottle it up. But this bottle it up 2% target, it does concern me a little bit because, and I get it. This is where it's like, you have some problems in credit. You have problems in other places. If chat GPT were the Fed governor based on the rule book and 2% was the demand, then we turn around and we'd be like, well, hike rates. And with labor, okay.

[00:33:38] And inflation up, I'm really glad we're not following it with autopilot Fed. But this is a really strange thing. I always think about Cullen Roche when we talk about this, because he's been the one who's been like, just put the Fed on autopilot. Get rid of the whole governors. Get rid of the whole board and basically just have an automated system that determines rates. I mean, it'll never happen in the real world, but it would be interesting to think how it would play out. Yeah, because look at the nuance inside of this.

[00:34:03] Because count me at least as one that I would be scared right now if the Fed was like, start hiking yesterday. That would be one of those things where it's like, okay, I feel like we're going to break something. And if we ever did that, by the way, like as soon as we had a crisis or something, people would just override the auto Fed. Because like the auto Fed wouldn't be cutting fast enough or something. It would be like, so long to the auto Fed, we're bringing the people back in and we're cutting. Yeah, the best thing that could ever happen to you as a politician is to have your opponent

[00:34:28] get the auto Fed in place because you can reverse that so fast and take such great advantage of that decision. So this next clip is Chris Bloomstran talking about durability. So here's Chris talking about that. Well, they may be durable, but at a smaller level, right? See, this is where the valuation comes in. You know, I think it's going to be very hard to dislocate and rip out, you know, software from a company like SAP.

[00:34:55] But the difference between paying 40 times earnings for that and 15 times earnings for that, you don't need the same wildly optimistic future. That's part of having resiliency is not overpaying. Because remember, the more cash a company generates up front, the more they can adapt as well. So I think you could have over euphoria in software, which we certainly did a few years ago.

[00:35:22] Look at some of the private investments that were being done in software companies that were forecasting 50 percent margins for a decade and 20 percent growth rates for a decade. And those are really hard to achieve. I think fewer than 2 percent of companies have grown their revenue at a 20 percent rate for more than a decade. And I think fewer, if I remember right, fewer than two tenths of 1 percent have maintained margins above 50 percent for more than a decade.

[00:35:52] And you compound those on each other. And you don't want to have that be your baseline assumption to justify the price you're paying. So I think in this world of change, you have to... It's an amazing thing. I'll digress just to say it's an area where you could really be hurt, I think, as an index and passive investor because the indexes can be very slow to adapt. You sort of have to go down with the ship.

[00:36:21] And so an example that I've been thinking of a lot lately is Kodak. I was an avid photographer in my youth, had a darkroom even into the 1990s. And by 2001 or 2002, I think 10 million digital cameras had been sold. That was the year that digital camera sales crossed film camera sales.

[00:36:47] You only had to use it once to know that film was dead, right? It's just... You just think of how crazy that model, what a huge quantum improvement it was in your life. Not to drive to the store, buy the yellow canister, put it in your camera, take 36 pictures, drive back to the store, drop it off, drive home, drive back to the store three days later, pick it up, look at your pictures and see your kid's eyes were closed, right? I mean, now you just take it like, we got to do that one again.

[00:37:18] I mean, it was like 10 million people knew that. And Kodak was still in the top third of the S&P 500. And if you were a person who based, who invested based on dividend resiliency, you know, history, you'd be like, oh my God, it's got a 3% dividend. And, you know, that's a dividend aristocrat. And it was dead. It was bankrupt five years later. So I think the index...

[00:37:47] And that was when the indexes might have only been 20% or 30% of shares. Now, realistically, the indexes in one form or another, maybe 50% to 70%. And so I think that you could be in for some surprises as business models adapt or fail to adapt. And, you know, there are going to be some dead men walking. What was interesting to me here is this relationship between valuation and durability.

[00:38:14] And so, like, the most durable cash flows are going to have the highest valuation. And so part of talking about what's going on with software right now is saying, is it as durable as it used to be? The answer is no. But the other part of it is if the valuations come down enough that the level of durability kind of matches to those valuations, you can still have an opportunity in less durable businesses than they were before. This in combination with the idea of quality, this in combination with some clips we're going to get to,

[00:38:43] because Rich Bernstein talked about this too when he was talking about, like, preferences for dividend yields, cash flows, stuff like that. But it's really interesting because durability lets you understand what kind of valuation multiple you should place on something and feel confident on where the risk actually goes. Does the risk actually belong in some dramatic upside to the forecast? Or does the risk actually go to, like, when this is undermined or the upside's not really there,

[00:39:11] but you can't take this really core away? There's beautiful nuance inside of the way he's explaining this. And this is interesting too, because going back to that Hagstrom presentation I mentioned that I had attended, like, there was a Fordham professor who gave this talk about what is a compounder. And, like, there's all this talk about what a compounder is. But what he came down to, which I think is interesting, is, like, the duration that they can maintain their high return on capital. Like, where that is the very long period of time, that's a compounder.

[00:39:38] And where you want to bet as an investor is where you think that duration is longer than what the market thinks. And that plays a lot into what's going on with software right now, because that duration has been coming down, right? And justifiably, it's been coming down. Like, the duration these software companies can return, you know, can have a high return on capital is falling. And as investor in software, you have to decide, like, do I think maybe some of those do actually have a long duration that they're going to retain return or have a high return on capital? And that's my opportunity to make a bet.

[00:40:07] And inside of that, too, is the idea of the money now. So this doesn't happen in the companies. Back to autopilot Fed. You don't have autopilot CIOs. So the company who's in this spot where their business model is challenged or whatever else, but they've been durable up to this point, now has more cash returning to the company at the front end here. So even if the duration on their expectations is coming in and that's causing stress or dropping stock price or whatever else,

[00:40:35] these are the companies flush with the most cash, the most free cash flow to then turn around and go like, oh, maybe we should pivot the business. Maybe we should pursue something else. Maybe we should rethink the path that we're on. And his example of Kodak is a good one in terms of, like, the way things can go south on this. Like, I don't know if you remember, like, I don't have many memories of taking, like, photos with those things. But I do remember, like, you know, right now if you're taking a photo with the family and, like, your kid's eyes closed, you, like, have the immediate feedback. Like, the eyes were closed. Let's take another one.

[00:41:04] Like, you had to send the thing off. And it's like, oh, no, we just did all this and the eyes were closed. I think he mentioned that in the clip. But it is amazing, like, where we've come from there. It is an amazing thing. And there was nothing like, I can't remember which member of the family it was. There was a thing growing up with the predisposable camera when you would buy, like, the plastic camera, you know, and you had to learn how to load, oh, you loaded it wrong. You ruined the first, like, three pictures. Now you got to scroll past them or whatever on the little scroll bar.

[00:41:30] And there was some family member who, no matter what, would, like, either cut off everybody's heads or, like, you know, it'd be, like, your neck up or something weird like that. Like, they could never get the view right. And this was, like, the debate. It was like, oh, if they're going to be taking the pictures, like, this whole thing is junk. But you wouldn't find out until, like, three months after vacation. That's me, by the way. Like, I almost intentionally try to take bad pictures just because I don't want to be the person to have to always take the pictures. So my wife, who's, like, a photographer, is always attacking me on how horrible my pictures are.

[00:41:59] And I'm not really working to improve it, but it hasn't worked. I'm still having to take the pictures. And I'm just getting criticized for the pictures being bad. One of the people that I used to work with, it was, so she was, like, in charge of operations in this office. And she was, like, one of the most important pieces of advice anytime you started a new place that, like, you should hear and took a liking to me. And so, therefore, I got this advice because otherwise it was her responsibility to do many of these things. She was, like, never under any circumstance admit, even if you know, that you know how to fix the photocopier.

[00:42:29] That's right. Never tell anybody. Because if anybody knows, the sharks smell blood and they will all come to you to fix the copy machine. But if you just insist you have no idea like everybody else, that buck is eternally passed. So I support your bad photo taking habit. By the way, I do wonder how, like, AI is going to change all this because now it's like, you just, like, Claude, how do I fix the copier or whatever? Like, there's no way to hide anymore from, like, not being able to fix these things. Like, anybody can type this in and be like, here's the 12-step process of how you fix the copy.

[00:42:59] I mean, it terrifies me that I've been able to, like, a dumb fix, not a real fix. I am not. I am a child. I am a child from another era who has no awareness of future tools. But, like, I fixed a lawnmower last summer, like, with perplexity in YouTube. And, yeah, that's just, this is troubling. We're going to be on the hook for so many more things, Jack. It's terrifying. Yeah, well, the big downside is this doesn't, like, I don't know how to do this. It doesn't work with your kids anymore.

[00:43:27] So, like, your kids are like, I want you to do this complicated thing. You're like, yeah, unfortunately, I don't know how to do it. They're like, Daddy, chat, GPT. But, like, I can't, I can no longer get out of doing anything now. Like, I pretty much, since the world's knowledge is at my fingertips, I have to do it all now. That's a problem. All right. Don't tell my dogs. I think they're still safe. They probably won't be figuring it out. So, anyway, moving on to the next clip. This is Richard Bernstein again. And this is interesting. He's talking about the importance of having cash now in a world where inflation's higher. So, here's Rich talking about that.

[00:43:57] If you go back to the beginning of this bull market, which I would argue was 2009, 10, 11, 12, you'll find that all people wanted were dividends. The story back then was that everybody wanted large cap, high quality dividend paying companies. That that was the core of everybody's portfolio. And didn't you understand that? Because it was a reaction to what people had seen during the global financial crisis. Like, oh, equities are too risky. I don't want risk. I want dividends.

[00:44:26] And so they lowered the beta, if you will, the market sensitivity of their portfolio. They lowered the beta of their portfolio to about 0.75. In other words, one being the same market sensitivity as the market overall. 0.75 is less than market sensitivity. And that's because of the dividends. Well, today, that 0.75 is at 1.3. They, as I said, they don't care a lick about dividends, which says to us that there's got

[00:44:55] to be an opportunity there, right? 15 years ago, we're trying to get people to accept beta. Their beta was 0.75, less than market exposure. We're saying we're at the beginning of a bull market. You got to have more beta in your portfolio. People don't want to do that. No, we just want high quality dividend paying stocks. And that's it. Now we're at the other extreme. So we have this big dividends. Okay. So why does it work in an inflationary environment? There's many ways to say this, but I'll kind of repeat what I said before.

[00:45:25] When you get more inflation than people expect, they need more cash return up front to pay their near-term expenses, right? It's all great to talk about investing for the future. But if you can't buy gasoline, if you can't afford to buy gasoline, you can't afford to buy bread, you can't afford to buy groceries, you don't care about growth in 15 or 20 years. You care about being able to buy groceries and gasoline today.

[00:45:55] And so that near-term cash flow becomes more and more important. I can assure you, I won't use the word guarantee because that's a no-no word to use. I can assure you that if we get a boatload more inflation than people think, I don't know, this is not our forecast, but let's play with this for a second. A boatload more inflation than people think, I would bet you things like cryptocurrencies do

[00:46:20] really, really badly because cryptocurrency, you're betting on something happening out there in the future. And meanwhile, you can't afford to buy gasoline and bread. You're not going to care a lick about what's going to happen in 15 years. You're going to care what's going to happen in 15 days. And everybody's mindset will change. Now, that's not our baseline forecast. I'm not trying to put fear in everybody's heart. But I think it shows you the need to do that.

[00:46:49] Again, think of what I said earlier about colleges and universities right now where their costs are going up dramatically, but yet they're all in these super long duration alts that aren't paying anything. By the way, that may mean that in the next five years or so, there's a huge opportunity in the secondary alts market because they may have to all puke their alts, right? And you may be able to buy good investments at 50 cents on the dollar or something, but we're not there yet. I'm not saying that's going to happen.

[00:47:17] But I think that's the way you should be thinking right now is if there is more inflation than people think, the need for near-term cash will be greater than people think. Like, let's not put it in absolutes, but it'd be just more than people think. So yeah, he talked about a bunch of different things here. He talked about this idea that like coming out of 2009, you had to like fight people to get them to take some degree of risk. And then it can kind of go the other way. But he's also talking about this idea that inflation, he wasn't predicting inflation is going to be higher than expectations.

[00:47:46] But if it is, the importance of focusing on things, and he was talking about dividends and some other things, like the importance on things that generate cash now. This portfolio preference, I think is so interesting. You're going to love this. I can't remember if I've told you this story. We skirted around it in the interview. But so at Merrill, they ran this great factor portfolio thing where there was basically like, here's like 250 different single factor or like easy combination factor portfolios.

[00:48:15] And here's how they've all done. And this was a report that they've been running for years, if not decades already coming into the GFC. So these are always only meant to tell you like what factors are working and why. And like it was either price to free cash flow or like EV to free cash flow, something like that in the financial crisis. Out of all those, like all the 250 versions of these different, different like stock picking models, that one like blows the lights out.

[00:48:43] It's like it's down 10%, set it down 30 or 40. And so all the knucklehead advisors are like, we want that portfolio. And, and I remember this in real time, partly because Rich was there as a strategist, but also just because like watching this happen, they were like, I want to buy that portfolio. Now what they neglected was this was a paper portfolio. So that portfolio, that factor basically went from like, there were no constraints they would actually manage a model by.

[00:49:09] So it was like, yeah, there were only 11 stocks in there at the time you got to like the thick of the crisis. Every single thing got screened out of the universe, except for like 11 things that weathered the storm best and still had positive free cash flow or whatever the requirement was through this cycle. And it was ridiculous. And they actually had to turn around and create a new screen to actually meet some minimum portfolio standard. So you couldn't actually do it, which negated the whole purpose.

[00:49:35] But the demand was so strong, it forced this thing into existence. And I think about that. Yeah. You'll see that all the time. Whenever you have like, whenever you, cause I've generated a lot of screens or, you know, factor screens in my career. Like whenever you give anybody like a huge list of factor screens, like they immediately just go to like whichever ones worked best and they're going to do that. And, you know, we'll see. And it has obviously hasn't been the value stuff recently, but it will be again in the future. Like it's a richest point on dividends. Like eventually people will, and people love dividends in general, as you know, Matt.

[00:50:04] So like once, once price to dividend or whatever is taken off, like people are going to be going nuts, like buying dividend stocks. They'll go nuts. They'll pile in. It's the way it always works. And then it's the slow bleed out. And it's just so interesting that we're now back at a point in the cycle where growth has worked so well for so long. It seems almost insane to think about it any other way. And this idea that this is the kind of environment when these things should start to work. I just think it's very prescient that he's bringing this up now and pointing out how little

[00:50:34] the draw is to be invested in this style. By the way, just as an aside on the dividends, did you see that clip I put posted from Michael Mobuson's interview? Like the one lesson he would teach the average investor, which was effectively like dividend don't matter. Did you see that? Like I posted that on Twitter. I didn't see that you posted it. I just bring this up because the and Rich is very, very right. This is the type of thing that could lead to investing in these dividend companies being a good thing again. But anytime you talk about dividends on Twitter, you've got to be very, very careful because

[00:51:03] you've got the dividend supporters. And these people were just going after Michael Mobuson on this. And he's 100% right. There's no possible way to argue against him. And I was just thinking, if there's anybody you do not want to challenge based on the facts on Twitter, like Michael Mobuson would be that person. But these trolls were like nothing. They wasn't holding a bet. They weren't holding that. They didn't care that like he had all he had the argument completely in his favor. And it wasn't about like you should buy dividend stocks or anything. It was more about like dividends.

[00:51:31] Like if you think about your total return over time, like dividends don't really matter, which is true if you look at the finance theory. But I just thought that was interesting. Like anytime you talk about dividends, you bring these people out. Dividends, unfortunately, are a religion. And this is one of those things where it's just you're not getting into a logical conversation. You're getting into a religious debate. And for the people who attack Michael Mobuson on Twitter for dividends, you're savages. All of you are savages. There is like there is no chance I'm ever disagreeing with Michael Mobuson like commenting on Twitter.

[00:52:00] Like he's like the last person on the face of the earth. Like he knows this stuff so well, like there is zero chance I would ever do it. That's why you only pick fights with Cliff Asnes, right? Yeah. As you know, Matt, I pick fights with nobody. And I just say thank you. I really enjoyed you sharing our podcast episode. And that's pretty much my extent of my Twitter account. Well, this kindness, I think, is a perfect leeway into this next Chris Davis clip on people, which I thought was absolutely. Yeah.

[00:52:24] This is this is our question of like what's the one thing you you you believe that you disagree with the majority of your peers with on. And we asked Chris about that and he talked about this idea of people. I think that people matter a lot more. Than is generally realized. I think we have a society that believes in equality and believes that, you know, it's very quick to figure that the people that did well got lucky.

[00:52:53] Or if I had had that idea, I could have done it. And they don't have the same feeling about basketball. Right. Nobody looks at LeBron and thinks like, oh, you know, I could do that. You know, I wish I had that job. Right. He'd be like, you know, the guy is just a different animal. What he can do. And what I've learned, it's a little bit like the the great man or the great person theory of history. It is amazing what a difference one person can make at a business.

[00:53:21] And now it can become dangerous because then the company becomes synonymous with Jamie here. But, you know, to look at what, you know, Jamie and I started in business almost the same time. I mean, I owned, invested and met Jamie when he was the CFO of commercial credit. And that became Prime America. And that became Travelers and then Aetna and then Citi and had Solomon and Solomon Smith Barney.

[00:53:50] And Jamie leaves there and goes to Bank One, which I had studied but not owned, and writes one of the best first annual reports. And ends up at J.P. Morgan, which has completely lost its way. I mean, it's gone from preeminence to almost irrelevance by that time and turns it into a company that's not even in the same category as most of its peers.

[00:54:17] And, you know, if you were to look at Peter Lewis at Progressive, you know, people like that. So I think that I place way more value, I think, than most people investing, not just on the bold-faced leaders, but just, you know, you go and visit a company. And, you know, I was just visiting six or seven energy companies.

[00:54:42] And you meet one person there who is just, they're just better. It's like watching, you know, LeBron play as an 18-year-old and thinking, oh, yeah, he's different. And I think people underestimate that in business. You know, they equate Capital One with other banks without saying, what is it about Rich Fairbanks that he could start a bank with no brand,

[00:55:06] no branches, and build it into the fifth or sixth largest bank in the country and still be running it. And, you know, with essentially no branches. I mean, they have a small retail presence and no brand, right? They basically just use Visa, but just by looking at it differently. So a little bit like Moneyball. And, you know, I love that idea of. And so that might be my, it's certainly my favorite part of the job.

[00:55:33] And there's a risk of hero worship, but I hate the opposite more than hero worship. I hate this proclivity we have to tear down people that have built, you know, incredible, incredible businesses that employ tens or hundreds of thousands of people that provide services that delight their customers. And then we want to vilify their success. This was great for me to hear because I'm a quant guy. So, like, I don't really care about people. Like, my investment strategy has nothing to do with people.

[00:56:03] But he's right. Like, if you see stars in other areas, like you see Michael Jordan, it's not like, well, I could be Michael Jordan. Like, I could just create a system and I could be Michael Jordan. It's like, and I think that is true. There are star managers in investing. There are people that are just really, really good at what they do. And they overcome all of that. Like, they can, you know, they can take a company that maybe is a so-so company and they can elevate that company. And I think a lot of the things Chris has invested in over the course of his career sort of bear that lesson out that, like, investing with really great people can be really important.

[00:56:33] And that's hard to say for a quant guy. In every field and every aspect of life, there's nothing wrong for looking to people who have, for whatever reason, could be track record, could be intuition, could be a mix of both, who just seem exceptional at this. And you got to be careful that you don't pick Bernie Madoff. Like, you got to be careful. You got to be open to the idea that there are bad actors out there in the world too. Don't be naive. But at the same time, it's like, there are just special people in different industries.

[00:57:01] And even sometimes like you or I might identify, I say this as mere mortals. I'm lumping you into that category with me, Jack. Like we might look at somebody and think somebody's really smart and they turn around and they're like, oh my God, I'm not the smart one. Have you ever met this person? How many times in interviews does that come up too? And just understanding with many of these people we're doing is we're celebrating people who get really good at stuff and then stay good. And instead of tearing them down or worrying about like waiting for their fall, welcome to back to the savages on YouTube and on the internet.

[00:57:31] Look for people who do something at an amazing level and see how you can either ride some coattails or be in the orbit of those people. And it is worth looking for. It makes my life is better because Michael Jordan existed and had that run with the bulls. What an amazing thing we got to bear witness to or Leo Messi or any of the greats. Like I love just awareness of people on that light. Yeah. Like Apple isn't Apple without Steve Jobs. And like people like me, I could have dug into the financials of Apple all I wanted at the time when Steve Jobs came on and I wouldn't have found anything that would have

[00:58:01] told me like what was going to happen, you know, what was going to happen actually happened. So it's like you just have to, you have to recognize that. I mean, it's not the type of investing I do and there's different ways to invest, but you have to understand like good people is a huge thing. And like if you can find one of these people who's consistently good at what they do, I mean, clearly people like Chris have generated great returns doing it. Not a bad thing. It sounds like Chris's mom and dad were also not so bad either, which maybe there's a theme building there. Yeah. Yeah. No, it's, it's definitely running the family with him. I haven't read that book, The Davis Dynasty.

[00:58:31] It's an excellent book. That's one of the books. This is one of the things, this is one of the few things I miss about working in an office and granted my work from home office. I have lots of great books. I actually have a bunch of books that. So when you're working around a bunch of other professionals in an industry such as ours and people exit said industry, it always blew my mind how many people would abandon like the bookshelves, but they're always like performative office bookshelves. So like the person would leave to go to another firm or whatever.

[00:58:58] I would always walk in and be like, what's on the bookshelf? What do they have? And this is one of those books that I like found on a bookshelf and I got, and of course, like never opened, never cracked just there. That's where I got, I think my two copies of the intelligent investor and a bunch of other great things that came off these shelves. But that's one of those books where you read it and you wonder, you're like, did the person,

[00:59:25] the person who left this behind a should have read this B like internalizing some of this stuff because there's so much humility in that book. Not just in how markets changed, but how the generations changed, how they each perceive things differently, what got passed down. I need to revisit that one. That was a very, very profound understanding of how the investment philosophy evolved across generations and across those decades. By the way, I've been saying this, but we need to do a show at some point where you basically

[00:59:54] interview people and all you have to work with is the bookshelf behind. You just have to pop in, see the books that are on the bookshelf and you just have to go from there and you'd probably do a really good job with it because you're very good at figuring out like, and we've got a lot of bookshelves. I mean, Cameron Dawson has a good bookshelf behind her. Like Bobesson, we have him on. Like that's, that's a huge number of books. You could probably do a lot of work with that. We could probably do a lot of work with that. So basically we do like the, the Criterion collection videos, or I know Discog says like a music version where people like, they have to bring like five books and talk about them or five records or five movies. Like we do something like that.

[01:00:24] Yeah. The problem is it would become like a self-fulfilling thing because people would then, if they know you're doing the show, then they would change the bookshelf to be like what they think should be on the bookshelf versus what was actually on the bookshelf. And so what we need to do is we need to add like a bonus segment of like, we're pausing the recording. You're going to go back to that bookshelf and pull one thing off and like, tell me a story. I don't know. All right. We need to brainstorm this one. I like, I like where this is going and I like the idea. I also love when I can recognize something and I hate, I hate when like what Cameron did

[01:00:52] on the last click beta because the little box in this thing, you know, shrinks it up. But I, I still can't believe like the goth book from the guy from the cure was right there and I didn't see it until we were editing the episode. I was like, I know you'll get into it next time. Oh, I'm holding grudges. I'm holding grudges on that one. With mine with my kids right now, you would see like the pout pout fish and stuff like that. So I'm not, I'm not exactly sure what you do with that, but I don't know what the variety of children's books. All right. I mean, listen, some great children's books out there.

[01:01:21] Dragons love tacos. Another, another outstanding one. You probably don't know these, but these are. I don't. I don't know that one either. All right. All right. Let's, let's throw it down. I got to get you some new children's books. This is a, I get some gifts for you. We'll get some Norse mythology in there. Give the kids something to have nightmares about. So we should, we should probably head into the last clip here. This is a rich person. And this is, this is very pertinent now with AI out here, which is the difference between an economic story and an investment story. So here's Rich talking about that.

[01:01:47] We're kind of in a very similar environment, at least financially relative to that, to that tech bubble of the, of the early 2000s. And, you know, narrow leadership, kind of uniform idea about what growth is all about and everything else. And of course, back then it was, it was the internet today. It's AI. It's AI. And so first, let me preface this for one second by saying, I think people have a very

[01:02:15] tough time differentiating between an economic story and an investment story. The economic story, will AI change the economy? Of course it will. Of course it will. Why, why would any, and it may change the economy in ways we could never imagine right now. Right. I, I, I'm pretty sure that's going to happen, but we're not here for economic stories. We're here for investment stories. And, you know, investing is your, your longer term return on investment is generally predicated by the scarcity of capital.

[01:02:45] Are you the only person, you know, kind of providing capital? I used to joke all the time about being the one banker in a town with a thousand borrowers. Oh, fantastic. You know, you're going to set the interest rate on every single loan. Um, and, and longer term themes are, are really a function of that. The scarcity of capital. Well, I think it's very hard to argue that anything related to AI right now is stored for capital, right? They're all being inundated with capital.

[01:03:12] I mean, if the three of us got together, got a couple of engineers together, you know, and called ourselves like, you know, Matt, Justin and rich AI, we could probably get funding. Right. And, and that's kind of silly when you think about it, you know, but we probably could. And, um, you know, case in point, I don't want to name names, but I, I'm pretty sure a shoe company just, just saved themselves from bankruptcy by saying that they all of a sudden they were an AI company.

[01:03:40] I mean, so I'm not that far off in saying Matt and Justin and rich AI, you know, we're not that far off. Um, and, and, and so that tells you that the long-term rates of return are probably going to be lower than people think, despite the fact that the economic story comes to fruition. I think that that is definitely what happened after the internet. I mean, if you bought NASDAQ at the peak of the bubble in March of 2000, you did not break even for 14 years. Right. That's unbelievable.

[01:04:09] And, and there were a couple of companies that just recently made new highs for the first time since, since 2000, 26 years later, you have some big name companies just hit highs in the last couple of weeks. Um, and, and so I think we're in a very similar environment today where it's inconceivable to people that some of these big companies won't provide huge returns, uh, over the next five, 10, 15 years.

[01:04:34] Meanwhile, what ends up happening is that because this one theme, the uniform theme sucked in so much capital, the rest of the economy becomes capital starved. And because it becomes capital starved, that's where the investment opportunities are. And so when you see bubbles or speculative periods start to deflate, you see the rest of the economy start to do much better.

[01:04:59] And the rest of the stock market rather start to do much better because everybody's starting to realize, oh, well, like, you know, we gave too much money to this side of the economy, but look at the potential over here. And so everybody starts moving in that direction and the stocks do very well. And I think that's what we're looking at again. And this is kind of the whole thing with AI, right? Is obviously AI is going to be a good economic story. I mean, I can't find anybody who doesn't think that's going to be a case. I mean, obviously there's the layoff side of it. So there could be a negative side of the economic story too, but most people expect us to all

[01:05:28] be better off because of AI. But the question becomes like, where are we in the investment cycle? And are people pricing in such a positive outcome with AI that it's not a good investment story, even though it's a good economic story? The idea that we're not going to get productivity or some type of lift here seems insanely low, especially for, I mean, just even over a Google search. Like there's just so many things that just get so much better, so much faster. It's staggering.

[01:05:56] But yeah, it doesn't mean that the investments are going to necessarily all pay off or all be worth it. There's going to be malinvestment in this. And that's, I think, and I think Rich would agree with this too. This is one of the things that like helps in the next economic story. All likelihood, AI is not the last economic story. This isn't some like peak end state where we achieve whatever and it's all over from here. It's like, no, no, this is going to beget the next thing that becomes like the next new thing.

[01:06:23] And that's an important part of this cycle here too, between economic stories and investment stories and how they roll. And it's important to remember there's two sides to this. Like the market is trying to, with the investment story, price in what's going to happen with the economic story. Right. And to Rich's point, like in most of these bubbles slash booms, the investment story has gotten way ahead of the economic story. But there is another world that exists as a value guy. I have to like start thinking the other way. Like there's a version of the world where the economic story is better than the investment story right now with AI and where we've got a big run ahead of us.

[01:06:53] Like it's just thinking about the difference between those two things and how they interrelate is really the interesting part about it. Not necessarily what the conclusion is. Yeah. And back to what Dave Nodig said about his optimism around small businesses, which I share. And Kai Wu, when he was talking about the, what was it? The companies that do like storage and like washing machines or whatever, where he was like, they're getting the biggest actual trackable documented lift from AI so far. Yeah.

[01:07:20] He was looking at like earnings reports with AI and he was talking about the companies that are actually talking about like the benefits. And a lot of them were not like the chip companies you would think about. A lot of them were companies you're like, like concrete. I don't know what it was, but it's like, how is this company possibly can take a benefit of AI, but they actually were. Yeah. I was like storage and concrete in some places like this. And Hey, this is another case where, where the economic benefits accrue sometimes aren't where you expect them to accrue.

[01:07:45] And that will change both where the money ends up back to earlier in the conversation of like, and thinking about how this stuff like trickles down from the larger companies that changes where the money comes from for the next investment cycle too. So it's fascinating to step back and see it this way. And that's a great example of the other side of this too, because public storage, I think was one of the examples you mentioned that he, that he talked about, but nobody's out there like touting the economic story of AI and public storage right now. Like, wait, wait, let's be clear. There's some like hustle bro. Yeah. Somebody on Reddit.

[01:08:15] Who's like, this is the greatest thing ever. Well, it also public storage is a bad one because that's become one in Twitter that got a little bit out of control. Sometimes I was like, there were a bunch of, there were like storage guy or whatever that was like people that were all excited about rolling up these public storage things. So we're not talking about that. We are talking about the idea because those people probably dramatically overpaid in public storage, I can imagine. But there is an AI story in public storage and you know, the public market is probably not thinking too much about this idea. They're thinking about more of the chip companies and stuff like that. So that's just a great example of how this can work both ways in terms of the interplay

[01:08:44] between the economic story and the investment story. Yeah. It's going to tell us, oh, time will tell who is the next industry to get rich off of this next, but it will be fascinating to watch what they do with those proceeds that their winnings. The downside, Matt, is that if it is the storage, people are going to have to hear from them on Twitter again. They're going to be all going crazy. And like, it's kind of good that that like went a little bit south because it like it toned it all down on Twitter. I think also the change in the algorithm has probably affected that too, because I don't show any interest in storage. So I probably don't get the storage stuff anymore.

[01:09:13] I don't know if like storage bro becomes the next Elon Musk or something in 10 years. I don't know, man. That's all I hope that's not the way it plays out, but that's probably a good note to wrap up on, Matt. You can take us out as usual. Make sure you go to the excess returns substack. We take every one of these guests. We take the transcripts. We take lessons from many of them, and we put them up as posts. Subscribe. This is the tool that we've all agreed would be the thing we wish we had 10 or 15 years ago. So excess returns on substack.

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