Practical Lessons from Ben Carlson

[00:00:00] You see the headlines, George Stirless buys a billion dollars and puts on the market, or Michael Burry says to sell everything, or this billionaire just bought this stock so he should get all into it. Bill Ackman says the world is coming to an end, any of this stuff. And I just think it's such a fool's errand because, A, a lot of times these people, you have to watch what they do, not what they say.

[00:00:21] People with a 60-40 portfolio in retirement can't be judging their portfolio against the S&P 500 or the NASDAQ 100 and assuming that that risk profile matches what they're investing in and going, why don't I own that?

[00:00:34] There probably is no perfect way to save and invest. There's no top 10 list you can read or there's no book you can read that's going to completely change your life and make it easier for you to figure it out.

[00:00:43] I think you just have to kind of pick a strategy and then stick with it come hell or high water.

[00:00:48] Welcome to Two Quants and a Financial Planner, where we bridge the worlds of investing and financial planning to help investors achieve their long-term goals.

[00:00:53] Join Matt Ziegler, Jack Forehand, and me, Justin Carboneau, as we cover a wide range of investing and planning topics that impact all of us and discuss how we can apply them in the real world to achieve the best outcomes in our financial life.

[00:01:03] Jack Forehand is a principal at Validia Capital Management. Matt Ziegler is managing director at Sunpoint Investments.

[00:01:08] The opinions expressed in this podcast do not necessarily reflect the opinions of Validia Capital or Sunpoint Investments.

[00:01:13] No information on this podcast should be construed as investment advice.

[00:01:16] Securities discussed in the podcast may be holdings of clients of Validia Capital or Sunpoint Investments.

[00:01:21] So Matt, is there a bigger Finfluencer thing you can do than to wear your own merch in your podcast?

[00:01:25] I don't think there is.

[00:01:27] I think this is a sign that you, at least, sir, have made it.

[00:01:30] Can you just like flex that badge? I need to see this again.

[00:01:34] Look at that knee here. I don't even think we actually officially have merch yet or we might.

[00:01:37] I'm not sure what Justin did with it, but I did not plan on wearing my own merch,

[00:01:41] but I just happened to have this on and I'm like, oh, I'm late for Matt.

[00:01:43] So we got to do this. So we do have the merch, but my ego has not gotten so out of control

[00:01:48] that I'm intentionally wearing our merch in the podcast.

[00:01:51] You say this now, but you also told me you're the George Clooney of this ER

[00:01:55] multiple times before he pressed record.

[00:01:57] So I think it might be going to your head just a little.

[00:01:59] I mean, off camera, I'm a monster now.

[00:02:01] As you went.

[00:02:03] He's a famous monster, ladies and gentlemen.

[00:02:04] I just can't believe we switch and we start recording, basically.

[00:02:08] I can confer with him.

[00:02:10] So anyway, we're we are going to talk about some investing related stuff today.

[00:02:13] And my head was hurting a little bit after after last week because we went way,

[00:02:16] way in depth about the impact of passive investing.

[00:02:19] So I thought we might simplify things a little bit this week.

[00:02:21] Yeah, let's simplify.

[00:02:23] Let's have a I don't know, a poverty of common sense.

[00:02:26] What can we call this episode?

[00:02:27] Tell us who we're talking about this week.

[00:02:29] Yeah, so we're going to talk about Ben Carlson.

[00:02:31] And there's two really good things about Ben.

[00:02:32] One is he's really good at taking complex topics and making them simple.

[00:02:36] But two is he's good at just talking about the things that are simple in the first place,

[00:02:39] because a lot of the blocking and tackling that makes you a good investor is those things

[00:02:43] that are simple.

[00:02:44] Like we want to talk about all kind of the crazy stuff about the impact of passive investing

[00:02:47] and stuff.

[00:02:48] But really, the things that make you a good investor are just getting these simple things

[00:02:51] right.

[00:02:52] I would definitely say everybody in the investment business, especially if you're an advisor who

[00:02:58] talks to people, if you're not studying Ben Carlson and the way that he communicates ideas,

[00:03:03] testament to these clips, these succinct bulleted points in like a minute and a half with conciseness

[00:03:09] and clarity.

[00:03:11] It's a masterclass to just watch unfold because you got to be able to tell that story to yourself.

[00:03:16] You got to be able to tell that story to other people.

[00:03:18] Very few do it at the level that Ben does it.

[00:03:21] And it's a lesson all of us have to learn, because I don't know if you remember, like

[00:03:23] before we've had Ben on twice, one time a long time ago, and then you and Justin did

[00:03:27] one recently.

[00:03:27] And like before we had the outline for what we were going to do.

[00:03:30] And before you guys started, I was like, I said to you guys, like, this might be too

[00:03:33] simple.

[00:03:34] Like, I don't know if we can do this for our audience because it's too simple.

[00:03:36] And like, I was completely wrong about that.

[00:03:38] Because like, even the most sophisticated people, like, we're going to talk about billionaires

[00:03:42] in a second, but I'll be like, well, I shouldn't be listening to billionaires.

[00:03:45] And then I'll be like, Stanley Druckenbiller is on CNBC.

[00:03:47] What, he's selling his NVIDIA?

[00:03:48] Like, I got to look at this thing.

[00:03:49] And so it's like, we all need to hear this stuff.

[00:03:52] Like, even if we think we're like above these simple things, like we all need to hear these

[00:03:55] things because they're the most important things.

[00:03:57] Yeah, we need the reminders.

[00:03:58] We just need the reminders.

[00:04:00] And this first clip, I mean, is testament to that.

[00:04:03] Tell us where we're starting.

[00:04:05] Yeah, so we're starting with Ben here talking about why you shouldn't listen to billionaires.

[00:04:09] This one always gets me.

[00:04:10] You see that, you know, in the headlines, George Stiles buys a billion dollars and puts on the

[00:04:13] market or Michael Burry says to sell everything.

[00:04:17] Or this billionaire just bought this stock so he should get all into it.

[00:04:20] Bill Ackman says the world is coming to an end.

[00:04:23] Any of this stuff.

[00:04:24] And I just think it's such a fool's errand because, A, a lot of times these people, you have to watch what they do, not what they say.

[00:04:31] Right?

[00:04:31] If you listen to Stanley Druckenmiller talk, any time over the past 15 years, you would assume this guy is shorting the market to, you know, he thinks it's coming to an end because of the way he's talking about the macro.

[00:04:40] But if you look at his portfolio, his performance in his trades, he doesn't invest like that.

[00:04:45] He's constantly moving in on positions and he's more bullish than he makes it sound like because his the stuff that he says does not necessarily match his portfolio.

[00:04:52] And the other part is these people don't know your time horizon and risk profile.

[00:04:56] They don't they don't they have a completely different you know, they can they can take the risk and be wrong.

[00:05:02] And it's not going to impact them as much as someone who just has a 401k or an IRA and is investing for their kids college fund or whatever.

[00:05:08] It's completely different risk profiles and time horizons.

[00:05:12] And and it just it makes no sense to take what these people are saying on CNBC or Bloomberg as gospel of what you should be doing for your portfolio.

[00:05:18] Yeah. And like I said, I mean, this might seem obvious, but there's you see someone who's been a really, really successful investor and you see either what they're doing or what they're saying and you want to follow it.

[00:05:31] You know, it's just like this natural inclination. Even I had it.

[00:05:33] But like there's so many things you have to realize, like they're a different person, like they don't they have so much money that it doesn't really matter to them if they get a trade wrong.

[00:05:41] They change, you know, a lot of like the Stanley Druckenmiller's of the world will change from week to week.

[00:05:46] You know, you might say something on CNBC and be doing the complete opposite the next week.

[00:05:49] Like they have different goals. They have different time horizons.

[00:05:51] Like everything about these people is different, but we still want to follow.

[00:05:55] The conversation that I have a lot with clients and friends about stuff like this, you'll hear Druck goes on CNBC and says something or favorite investor X goes on YouTube channel or podcast Y and says something.

[00:06:08] And always, always, always bringing it back because, you know, billionaires, they're just like us.

[00:06:13] No, we they are. But in this way, you got to ask, what's the security?

[00:06:18] You got to ask yourself, what's the sizing? And you got to ask yourself, what's the signal on this thing?

[00:06:23] So it's like they might say, I'm short junk bonds. You go, OK, how are they even putting this trade on?

[00:06:28] Then you got to ask, like, what's the sizing of this trade?

[00:06:31] Is this like point oh one percent of their net worth or are they really being like I'm all in on stuff?

[00:06:36] And we see this all the time when people are making calls that they're short this or short that.

[00:06:40] You don't know any of this stuff. And that last part, which is really a time horizon way.

[00:06:44] But I like to say it's what are the signals? Usually they're not telling you.

[00:06:47] They're not telling you the red, red light, yellow light, green light, extra little kids playing in the backyard vibes on this.

[00:06:53] What's the thing that gets them in? What's the thing that gives them a warning?

[00:06:56] What's the thing that gets them out? What's the thing that tells them when to stop?

[00:06:59] How long is that? Is that in five minutes? Is that in five years?

[00:07:02] People say this stuff. You got to have a way to, like, trace it back to what are those underlying factors if I should listen or not?

[00:07:09] And then do I even want to follow or pay any attention to this or care at all besides its entertainment value?

[00:07:15] Because for the most part, when billionaires are talking this stuff on TV, except its entertainment value, they're just keeping your eyeballs glued.

[00:07:21] Sell those advertising dollars, right?

[00:07:24] Yeah, and this is even true of the long term, guys. Like, you know, this is not just Stanley Druckenmiller changing back and forth.

[00:07:28] Like, think about Buffett. Like, everyone wants to follow Buffett.

[00:07:31] Like, my favorite one that everybody uses is Buffett's level of cash.

[00:07:34] You know, you can run, I'm a quant, so you can run all the data you want on Buffett's level of cash.

[00:07:38] There is zero indicator in Buffett's level of cash.

[00:07:41] There's nothing you can do with it.

[00:07:43] You can scale it by market cap, you know, because it should be higher now.

[00:07:46] You can do all of it.

[00:07:47] There's zero indicator in Buffett's cash.

[00:07:49] And if you think about Buffett's cash, he could be doing, he could be raising cash for a million different reasons right now.

[00:07:54] He could be raising cash because he's outright bearish, like people say.

[00:07:57] He could just say, you know, my Apple position has gotten too big.

[00:07:59] I need to liquidate some of that and I don't have anything great to invest it in.

[00:08:02] He could be setting up the portfolio for the guys that are going to follow him so they don't inherit, like, this huge Apple position.

[00:08:07] There's a million things he could be doing.

[00:08:09] We don't know which one it is.

[00:08:11] And so there is zero indication, you know, for an average investor in Buffett's cash in terms of what you should do.

[00:08:16] I love that point, especially with Buffett's cash, because it goes back to this.

[00:08:19] And I love the stoplight signals thing here.

[00:08:22] Like, we don't know what the green light is for more cash.

[00:08:26] We don't know what the yellow is or the red light is for less cash or whatever changes this way of thinking.

[00:08:31] That's internal.

[00:08:32] We're not privy to that information.

[00:08:34] So if we can't explain what those things are, we have to admit we're just speculating on what we think is going on.

[00:08:40] And if you admit you're speculating on what you think is going on, then you got to be really careful about what inferences you draw from it.

[00:08:48] So super useful example there.

[00:08:50] Now, Matt Ziegler's cash, that's a different story.

[00:08:52] I just ran the date on that the other day.

[00:08:53] Wow.

[00:08:54] Like, when you're raising cash, I need to be sure.

[00:08:56] When I'm raising cash, you better watch out, Jack.

[00:09:00] Look out below when that's happening.

[00:09:04] But anyway, so on to our next clip.

[00:09:06] And this is a great one.

[00:09:07] This was like the one I think that did the best on Twitter of all the clips we did when we had them on originally.

[00:09:11] And this is from our first interview with Ben.

[00:09:12] But he's talking about this idea that everybody wants to see you doing things.

[00:09:16] Like, people feel like if you've done the same thing for them, if the end result is the same, but they watched you do like a lot of work, they look at things very differently.

[00:09:24] So here's Ben talking about how this relates to investing in a locksmith.

[00:09:27] There's a story about like a locksmith apprentice.

[00:09:31] And he's learning the trade from a master locksmith, how to pick locks, right?

[00:09:35] So people would call him and come, you know, I locked my keys in my car, come help me.

[00:09:39] I got locked out of my house, come help me.

[00:09:41] And the guy would come with all his tools and it would take him like a half hour to pick the locks, right?

[00:09:46] He's using all these different tools and he's getting at different angles.

[00:09:48] And by the time he's done, he's all sweaty.

[00:09:49] And the people felt like, wow, this guy put a lot of work in.

[00:09:51] And they gave him a huge tip because like this guy obviously did his work.

[00:09:54] Then as he got better and he went along, it didn't take him as long because he learned the tricks of the trade.

[00:09:59] And he could get to a lock and he knew exactly what tools to use right away.

[00:10:01] And he'd put it in and he'd turn it and it would open in a minute.

[00:10:04] And he got stopped getting tips.

[00:10:06] And the people thought like, that's easy.

[00:10:08] This guy, you know, it's easy.

[00:10:09] Anyone can do this.

[00:10:10] And it's the opposite, right?

[00:10:12] So I think people in the world of finance assume that like more effort means better results.

[00:10:17] And some areas of life, that's true.

[00:10:20] But in finance, that's not necessarily the case where doing more actually helps you.

[00:10:25] And in a lot of cases, doing nothing is the right thing to do most of the time in the world of finance.

[00:10:29] I think this is a great example because if I gave people like two investment managers and one, you know,

[00:10:34] they've got this team of analysts grinding away to produce the best returns.

[00:10:38] And, you know, they've got okay returns.

[00:10:39] And then I gave him another one where I just show you a picture of a quant guy like sitting on the beach drinking a pina colada.

[00:10:44] And he's beaten the S&P by 5% a year.

[00:10:46] A lot of people are going to watch the other one better because they feel like they're actually working hard.

[00:10:51] So they feel like they should be rewarded for that hard work.

[00:10:53] You know, does the guy on the beach have like, you know, 18 monitors though?

[00:10:57] And a couple of Bloomberg terminals like Dr. Viano.

[00:11:00] Well, then that would move towards the working thing.

[00:11:01] They'd at least believe he's working if he had the monitors.

[00:11:03] Because we both know that those monitors are usually just there for show.

[00:11:07] But nonetheless, like you'd at least believe he's doing something with the monitors.

[00:11:10] You gotta believe it.

[00:11:11] And it's also like the ultimate hack because if you have like the beach over one side, these are my favorite people.

[00:11:16] I got the beach out this window and then I have all my monitors here.

[00:11:19] And now I'm just communicating best of both worlds to the people watching.

[00:11:24] This whole sweat thing, like showing how much you sweat and how much you present this is.

[00:11:30] On one hand, it's like we're humans and we should just be aware that people present themselves this way.

[00:11:35] On the other hand, it's a reminder of the locksmith.

[00:11:38] Like, who are you chasing for this?

[00:11:40] There's this amazing, you're a Richard Feynman fan, I think, right?

[00:11:44] Like the physicist, some of the old science stories.

[00:11:47] Okay.

[00:11:47] So there's this amazing thing inside of the safe cracking stuff that he did.

[00:11:51] Where he talks about, and I can't remember if it wasn't the Pentagon, but one of those places that he is.

[00:11:56] Where he finds out when he befriends the locksmith.

[00:12:00] Like all these executives got the same safe put into their offices.

[00:12:04] And he had already made a thing about going in and cracking these safes.

[00:12:07] And it was one of those people would bet money and he had it all mapped out in his brain.

[00:12:11] Somebody can bet me that I can crack the safe in 60 minutes and I know the combinations to get there in like 45.

[00:12:16] And he was aware that he can't just go in and crack it.

[00:12:19] So he finds out that all these people got the same safe.

[00:12:21] So the locksmith tells him, you know, most people when they get the saves, all these are originally set to like, you know, one, two, three, four, space falls type of combination.

[00:12:31] He was like, most of the people never even change it.

[00:12:33] So he'd take these bets to crack these safes and he'd walk in and he'd realize really fast.

[00:12:38] Oh, this guy's just never changed from the original.

[00:12:40] But then he'd have to sit there and like pretend for a few minutes once he figures it out so that he wouldn't disappoint the people making the bets on it.

[00:12:50] Show some sweat.

[00:12:51] Sometimes you got to perform a little.

[00:12:52] Sometimes you got to work it.

[00:12:54] Sometimes you got to wear your excess returns gear to the office.

[00:12:56] I don't know.

[00:12:57] Maybe we just need to sweat more on this podcast, Jack.

[00:12:59] That's what I'm starting to think.

[00:13:01] That might be it.

[00:13:02] That might be it.

[00:13:03] But so our next one is also this is one of my biggest pet peeves.

[00:13:06] But this has been talking about how people tend to benchmark themselves to whatever's working.

[00:13:11] Well, I think this has been one of the harder things for diversified investors to do for the past 10, 12, 15 years is either the S&P 500 or the Nasdaq 100.

[00:13:20] Because the U.S. has been the only game in town, really, as far as stock markets go.

[00:13:24] And it's been mostly those index funds or growth stocks that have been doing well.

[00:13:28] And I think it's really difficult for investors to not look at those and say, why don't I just have everything in there?

[00:13:33] And why would I bother investing in anything else?

[00:13:36] Why would I have value stocks or quality stocks or dividends or foreign stocks or emerging markets or any of these other asset clashes?

[00:13:42] And why would I not just put all of my money into these one areas?

[00:13:46] And if you did that, you made a ton of money, right?

[00:13:49] You did really, really well.

[00:13:51] But I think we all know that these cycles don't last forever.

[00:13:57] Trees don't grow to the sky.

[00:13:58] Mean reversion still is a thing in the marketplace, unfortunately.

[00:14:01] I think we've been shown that the timing on that mean reversion is a lot harder than it seems.

[00:14:08] So, yeah.

[00:14:08] So, I mean, people with a 60-40 portfolio in retirement can't be judging their portfolio against the S&P 500 or the Nasdaq 100

[00:14:17] and assuming that that risk profile matches what they're investing in and going, why don't I own that?

[00:14:22] And I think the hard part these days is there's so much access to so many different strategies these days that it's never been easier to be tempted to say,

[00:14:31] why don't I have more than this?

[00:14:32] Why don't I have more than that?

[00:14:33] I should own some more of this strategy.

[00:14:35] Why didn't I invest in this stock?

[00:14:36] And I think if you're constantly tempted to, and you're benchmarking against the wrong things,

[00:14:41] it can make it really hard to stick with your own strategy and just be content with it.

[00:14:45] So, I think I've figured out the formula for benchmarking.

[00:14:47] So, first of all, we are someone, we manage all-cap portfolios that have, you know, the SMT, large-cap stocks are,

[00:14:54] I don't know how many large-cap stocks there are, but it's a very small percentage of the universe.

[00:14:58] I mean, we have a 2,700-stock universe.

[00:14:59] But the benchmark is always for everybody, the S&P 500.

[00:15:03] Like, they don't want to hear about, like, well, you know, this is what small-cap value has done,

[00:15:06] and this is how you've done relative to small-cap value.

[00:15:09] Everybody wants the S&P 500.

[00:15:10] But what I've learned in my career is it's not just the S&P 500.

[00:15:13] The benchmark is the greater of the S&P 500 or whatever's in the news that's been working right now.

[00:15:18] So, for instance, right now, it might be the two-times micro-strategy ETF because that's doing better than the S&P 500.

[00:15:25] So, it's like, oh, you've done pretty well this year, but what about this two-time micro-strategy ETF?

[00:15:28] That thing is on a huge tear.

[00:15:31] You always, always, always have to remember with benchmarking or anything else,

[00:15:34] comparison is the frame you see the rest of the thing through.

[00:15:37] So, comparison is the frame, and whatever it is.

[00:15:40] In investing, it's usually the S&P or it's the double-levered micro-strategy or NVIDIA or something stupid.

[00:15:45] Like, there's always something there that will change.

[00:15:48] Here is the frame of which I view this thing through.

[00:15:50] In comparison, by and large, the primary sin of modern life.

[00:15:54] Anytime we run into this, we just have to step back and ask some questions about it.

[00:15:58] What do you do when people question benchmarks?

[00:16:01] How do you usually respond to that kind of stuff, Jack?

[00:16:04] Yeah, I mean, we've tried to educate people about what we're doing and how it fits in their portfolio and all that stuff.

[00:16:12] But I think educating on benchmarks is, to some extent, useless.

[00:16:16] I think people, the S&P 500 is just a benchmark for most people.

[00:16:21] And even when we're doing, like, a small portion of their portfolio, so they want, like, an allocation to small cap value because they own, like, large stocks in other places.

[00:16:30] Like, it's still, like, that line item risk is so strong of just looking, even if the overall portfolio is doing fine relative to the benchmark, it's still, like, let me pick out that one thing.

[00:16:40] So I've always struggled with this.

[00:16:41] I mean, it's very, very hard, I think.

[00:16:42] And even when you talk to some of the best managers in our space, it's still a problem because people see what's doing well.

[00:16:48] And, you know, one of the problems with benchmarking the S&P 500 in recent years is the S&P 500 has just been doing so well.

[00:16:54] There's a lot of periods in history where that is not in the case.

[00:16:57] And you would have had a lot less problems with people benchmarking to the S&P 500.

[00:17:01] I mean, I'm sure they would have moved to something else that's, you know, doing better than the S&P 500.

[00:17:03] But we just happen to be in a very rare time right now where the S&P 500 has done so much better than any sort of, you know, average stock type index or, you know, small cap index or whatever.

[00:17:14] But it's just everybody's looking at that.

[00:17:16] If they are diversified, they're looking at that and trailing that and just saying, like, what's going on here?

[00:17:22] Making sure people just ask the question about why am I making the comparison.

[00:17:26] The old, and I know I've joked about it before, the old Henny Youngman joke, the, hey, how's your wife?

[00:17:31] And him saying, compared to what?

[00:17:32] But, like, you got to wonder why you're asking the question.

[00:17:36] You got to insert that in the conversation.

[00:17:38] And just like you said, just find ways to interject it.

[00:17:42] So the S&P has been doing really great.

[00:17:44] Does that actually matter or move the needle on what you should be doing?

[00:17:47] Do you want to be more involved in this thing?

[00:17:50] Is there a reason why you should be?

[00:17:51] Or are there lots of reasons why you shouldn't be when we start to poke and prod at the corners of that question?

[00:17:56] And I think that's the key on everything with benchmarking.

[00:17:59] Forcing compared to what?

[00:18:00] And then the follow up of like, why?

[00:18:02] Why does this matter to you?

[00:18:03] And if it does, let's get to the heart of why it matters with you.

[00:18:06] But if not, chances are you're just chasing stuff.

[00:18:10] You know, back to Mr. Buffett and the cash position.

[00:18:12] I like to remind myself, I'm relatively broke, you know, next to Warren Buffett.

[00:18:16] But Warren Buffett's relatively broke next to Jeff Bezos.

[00:18:19] And like, you know, like I'm relatively rich compared to the bump.

[00:18:22] So it's all at a sliding scale.

[00:18:24] Be careful about these variables and what you're benchmarking to and if it's making you miserable or not.

[00:18:29] And this is something I've learned.

[00:18:30] You know, we've traditionally been more on the asset management side than the financial planning side.

[00:18:32] And it's something I've learned working with you on this is getting back to what you just said is, what are your goals?

[00:18:37] Like, what are you trying to accomplish?

[00:18:38] Like, what does the S&P 500 have to do with, you know, what you're trying to do with your kids?

[00:18:43] Or I think it is important to take a step back and say, like, what are we trying to do here?

[00:18:47] And maybe that makes us think a little bit less about the S&P 500 and a little bit more.

[00:18:51] Like, are we on track for what we're trying to do?

[00:18:53] Yeah, 90% of my day job is basically around, are we on track with what we're trying to do?

[00:19:00] What's the goal?

[00:19:01] What's the actual objective?

[00:19:02] What's the why behind the why behind the why?

[00:19:05] And reminding people in those feelings of a year like this year when you want to chase.

[00:19:11] And, you know, people who, especially when they're swapping one thing for another, when they're de-risking, especially.

[00:19:16] And it's like you de-risked and then you see the market just continue to go up.

[00:19:20] You're like, was that a mistake?

[00:19:22] Well, it depends.

[00:19:24] Are you like, well, how would you would have, how would you have felt if instead of the market being up 20 and you're up 10, if the market was down 20 and even, you know, and then you were down 22.

[00:19:34] Like, would that have been an acceptable choice here?

[00:19:36] And if the answer is like, no, that actually would have really sucked.

[00:19:39] Then, okay, we took the right decision then de-risking, right?

[00:19:44] Those conversations are super useful.

[00:19:45] They're things you have to have out loud and you can't just compare yourself endlessly, you know, in your own head.

[00:19:50] You'll make yourself miserable.

[00:19:52] And I have to assume the micro strategy thing is going to come to an end at some point here.

[00:19:55] Although he seems to have, he's somehow like issuing some sort of securities and then he's using the securities to buy the Bitcoin, which is, but he's created some sort of loop here where he like can't lose or something.

[00:20:05] I don't even follow what it is, but I have to assume at some point it's going to wind down.

[00:20:09] Jack, I'm going to let you in on a secret here.

[00:20:11] I have not yet gone to cash.

[00:20:14] Yeah, well, that's good.

[00:20:16] That's when we know that everything is going to fall apart here.

[00:20:18] That whole thing is a mess.

[00:20:20] And I, if you're curious about any of that stuff, I think the most useful person for mapping this is, or one of the most, if not the most, is Peter Atwater.

[00:20:28] He had a great thing the other day.

[00:20:30] He's been commenting a lot about the micro strategy stuff and he's commenting on it in terms of just mood and sentiment.

[00:20:36] And basically the reminder, the future definitionally is always imaginary.

[00:20:41] And whatever you're imagining the future to be is being influenced by your mood.

[00:20:45] And so when we see people like issuing securities in the way that they're doing right now, and all of us who have any background in actual finance stuff are scratching our heads going like, yikes, be careful.

[00:20:56] Mood.

[00:20:57] That's what's happening.

[00:20:58] People are in a mood and they're imagining a future in a certain way that doesn't necessarily rhyme with reality.

[00:21:03] And people like us jobs sit here and go, think about this in private, please.

[00:21:09] They asked Cliff Asens about this on the compound interview this week, and I thought his answer was really good.

[00:21:12] He's like, first of all, like the money's in Michael Saylor's account here.

[00:21:15] So we can't knock the guy.

[00:21:16] Like whatever he's doing, like it's working.

[00:21:17] The man's made a ton of money.

[00:21:18] Good for him.

[00:21:19] But he's like, the most important thing for you sitting outside of it is what do I learn from this?

[00:21:23] Like what is the lesson?

[00:21:24] And the lesson can't be do what he's doing right now.

[00:21:27] Because at some point, this is probably going to fall apart.

[00:21:30] So if your average person goes out and thinks I need to buy the 2X micro strategy ETF or whatever because of what he's doing, there's the potential.

[00:21:37] And I don't know, maybe he's come up with something to beat the system.

[00:21:39] But, you know, there's the potential that that potentially ends badly for you at some point.

[00:21:44] Yeah.

[00:21:44] So just try back to the other example before of de-risking.

[00:21:47] And de-risking is just a version of not looking like somebody's high risk.

[00:21:50] It's Buffett being poor relative to Bezos.

[00:21:53] You know, just de-risking in some way where you go, I don't have to chase this.

[00:21:57] I don't have to.

[00:21:58] Don't skate to where the puck already is.

[00:22:01] It's a basic metaphor.

[00:22:02] It's important for a reason.

[00:22:05] And it's hard to, and we'll go to the next clip here in a second, but the hardest thing with that kind of stuff, by the way, when you do have something like that going on is like taking your profits.

[00:22:11] Because you get wrapped up in this world of like, this is something that just can never go south on me.

[00:22:15] And like you've turned your $100,000 account into a million dollar account.

[00:22:19] And it's like, it's just very, very hard in the moment to have any kind of coherent strategy to try to take these profits in case this thing goes the other way.

[00:22:27] Do a lot of work with people who got very fortunate to get either involved with a company or do something where they have it.

[00:22:33] And once you have it, it's really hard to let go of it.

[00:22:38] That endowment effect is really, really strong.

[00:22:40] It's really, really real.

[00:22:42] And I do not envy the people whose livelihood is tied up inside of especially a single security or a single business or a single thing in a way where the decision to walk away and have less glamour.

[00:22:54] Like if you're not asking why, then you might ride it all the way up and all the way back down again.

[00:23:01] And this is where the why behind the why behind the why becomes so important.

[00:23:04] Because if you can't separate yourself from this unbelievable outcome that you're experiencing, it's tough.

[00:23:11] It's just tough.

[00:23:13] So switching back to the realm of maybe potentially more sensible strategies here.

[00:23:16] I hope so, at least because I'm a factor investor.

[00:23:18] Ben had a really interesting take on factor investing here.

[00:23:21] And so here's Ben talking about why he thinks factor investing might be better looked at as a means of diversification than a way to enhance returns.

[00:23:28] I've never looked at factors as a way to get alpha.

[00:23:32] I know if you look back at the research, it shows that certain factors like value or quality or momentum have outperformed the markets over time.

[00:23:39] The way that I see them is as a form of diversification.

[00:23:43] And I think this period over the last 24 months is a perfect example of it where certain stocks perform better under certain economic environments.

[00:23:53] And I've written on my blog over the years that it's not a certain, you know, it's not the only input.

[00:23:59] But value stocks tend to do better when inflation is higher rising and interest rates are higher rising.

[00:24:04] And we just haven't had that environment in a long, long time.

[00:24:06] So everyone thought, well, value is dead because for 10 or 12 years, growth stocks kind of crushed them.

[00:24:11] But that was an environment of falling inflation and very low interest rates.

[00:24:14] And it was a much better setup for growth stocks.

[00:24:17] And now that we've seen the opposite of that, I think owning different stocks and different factors like that can help you in different economic environments.

[00:24:23] And I think that's the biggest case for owning different factors in your portfolio is just you're diversifying by different market environments.

[00:24:32] And having a value tilt in your portfolio in some ways can help with a situation like this or high quality or dividends or however you want to define it.

[00:24:39] I think it can help when you have a different market environment that doesn't help.

[00:24:44] So I've never been a person who likes to go to extremes and I'm going to own all tech stocks or all dividend stocks or all value stocks or whatever.

[00:24:52] I like to have a little bit of each because I don't think I have the ability to predict what the future is going to hold.

[00:24:57] And I don't have the ability to predict which factors or which strategy is going to perform best.

[00:25:01] And so that's why I think diversification is such a strong tool because it doesn't mean you're going to outperform, but it definitely means that eventually you're going to hold the winners depending on the environment.

[00:25:10] So I think this is like a great time to play this clip.

[00:25:12] And obviously I'm the factor investor shaking my fist at the world here because basically nothing is beating the S&P 500 no matter which factors you use.

[00:25:20] But I think in a world we live in right now, you have to look at the S&P 500 and say that's something that's very concentrated in certain names right now.

[00:25:29] And that may work out. I mean, they're the biggest companies in the world.

[00:25:32] So if I wanted to be concentrated in anything, those are probably the companies, you know, I'd want to be concentrated in.

[00:25:37] But like I think you can make a good pitch for like small cap value or for factor investing in general right now as a diversifier, as don't get rid of your S&P 500 position.

[00:25:46] That's working. That's fine. You know, factor investors have been talking about how that that's going to come to an end for a long time and it hasn't happened.

[00:25:52] But think about maybe there is a different version of the world that could happen here.

[00:25:56] And do I want to own some smaller stocks for that version of the world?

[00:25:59] Do I want to own stuff based on, you know, value and things like that for that version of the world?

[00:26:03] So and I think that plays into what Ben is saying, which is factor investing might be a really good diversifier long term.

[00:26:09] But I think it also might be a really good diversifier in the world we live in right now.

[00:26:13] I think that is a beautiful framing of it.

[00:26:16] And I love I love Ben's idea of think about factor diversification or factors as diversification.

[00:26:23] Think about them as just a different way to tell a similar story.

[00:26:26] Bottom line, calf weighted indices coming into the end of 2024 here have put up two above average years in a row, which doesn't usually happen.

[00:26:35] And when it does, you usually don't get a third out of it.

[00:26:38] Doesn't mean you can't.

[00:26:39] It just means we're in above average, meaning non-average scenarios right now.

[00:26:45] So you start looking for stuff that maybe is diversifying and diversifying here.

[00:26:50] I would also relate to, I don't know, the extreme angle would be in, you know, call up Jason Buck for this one.

[00:26:56] Like maybe it's comparative religions.

[00:26:58] It's like you should be a little bit Buddhist and a little bit Catholic about stuff.

[00:27:01] The simpler version that I understand is, you know, one night eat out at the Italian restaurant.

[00:27:06] The next night you go get Thai food.

[00:27:08] You know, on the weekend you might get Chinese food and a good old American burger.

[00:27:13] Diversifying these things in a way, it yields greater results.

[00:27:17] It gives you compliments to the thing.

[00:27:19] If you go all in on one thing, you run the risk of eventually being wrong.

[00:27:23] And yeah, you don't have to get rid of American food from your diet.

[00:27:27] Although maybe there's a lot of reasons.

[00:27:28] Should ask the future surgeon general on that.

[00:27:31] But you do want to have a diversified approach to how you think about this stuff.

[00:27:35] Factors force the diversified approach to our thinking about investments.

[00:27:39] And now, of course, just because I'm getting excited, because we've seen a broadening of the rally recently.

[00:27:43] We've seen better performance from these types of stocks.

[00:27:45] I'm sure like NVIDIA is going to invent a chip that like enables life on Mars or something like next week.

[00:27:49] And this will all just go right back to where it was in the first place.

[00:27:52] Exactly.

[00:27:53] A.I. is coming.

[00:27:54] So this next one is a problem that I suffer from and I think everybody suffers from.

[00:27:58] Although all of us, I think, want to pretend that we don't, which is it's been talking about the issue of overconfidence.

[00:28:02] I think a lot of it is a lot of people think that trans that success in one area of life translates into another one.

[00:28:09] So I'll give you an example.

[00:28:11] We often hear in my line of work and wealth management that like some of the worst investors of all time are engineers and doctors.

[00:28:18] I'm not trying to disparage people in those lines of of work.

[00:28:22] But what you get is those people have gone through a lot of education, a lot of school.

[00:28:26] They're very intelligent.

[00:28:28] They've worked really hard to get what they have.

[00:28:30] And they assume that that success that they have in their current career will automatically translate into the markets.

[00:28:37] And they don't realize, like you said, that there there's almost always going to be someone smarter than you.

[00:28:41] And the hard part about the markets is that I think sometimes you can be too smart for your own good and try to assume that you can outthink the market and that you're smarter than the market.

[00:28:52] And it's just it's not as easy as you think.

[00:28:56] And I think people see crazy stories in the market about stocks going nuts and going up 30 percent one day or down 30 percent.

[00:29:02] And there's all these pieces of the market that are that are pretty wildly inefficient.

[00:29:07] And they assume that must mean it's easy to beat that without understanding that the market is still a very difficult place to beat, especially because you have to make these decisions ahead of time.

[00:29:17] And it's easy to look back at the past and say, oh, well, that was easy to see that this was going to happen and that was going to happen.

[00:29:23] But, yeah, it's very difficult, I think, for even intelligent people because you get really overconfident in your own in your own abilities.

[00:29:31] So this is something that he references this idea of like people that are very successful in their careers tend to overstate how successful they'll be investing.

[00:29:39] And one of the things that's pretty widely known, like for anybody doing this, but I've seen it a lot with our clients, is like sometimes doctors are the worst investors because like these people who have been very successful, like think I'm just going to take this skill set.

[00:29:52] I'm going to translate it, you know, to investing and I'm going to be way better.

[00:29:56] And it's just it's something all of us struggle with, even those of us that are in investing struggle with overconfidence.

[00:30:00] But this is something you see a lot. And I even see it for myself, like outside of investing, I'll think because I might be good at investing, I'm going to be good at this other thing.

[00:30:08] And it just doesn't work that way. Like sometimes these skill sets don't translate from one thing to another.

[00:30:13] I think just knowing that, just knowing like your skill sets don't all translate, a lot of them do, but your skill sets transfer more philosophically than they do tangibly.

[00:30:24] That simple observation, which works across most of life, like philosophically, you'll find things that rhyme.

[00:30:30] I know when I'm hanging blinds in my house that basically, A, I'm not a carpenter.

[00:30:36] I should never do anything that has to do with this type of manual labor or whatever else, but I can operate like the screw, you know, the, I can do all the stuff just enough to be, to function.

[00:30:46] Like I can handle hanging blinds. I'm not that incompetent.

[00:30:48] But at the same time, I got to take things I know from, I don't know, maybe not podcasting, but certainly my regular work where it's like have patience, read the instructions.

[00:30:58] Don't just rush into it. I'm never good when I just rush into something like that.

[00:31:01] I will only do it wrong or hang the thing backwards the first time or screw this stuff up.

[00:31:06] So if I remember just to slow down, pay attention, focus, and like follow all the steps, everything's okay.

[00:31:13] But that's the philosophy that I take to other things I do being applied, not the actual tactical, like just because I'm a brain surgeon means I should be a hedge fund high frequency trader or something.

[00:31:23] Those translations are really important to remind yourself of, but philosophically they can carry.

[00:31:27] And that's where, hey, engineers aren't the only bad investors.

[00:31:30] Like artists can be terrible investors too.

[00:31:33] Vice versa. They can find ways to do good work.

[00:31:36] Yeah. And you can't get rid of this is the big thing to learn.

[00:31:38] If you listen to Daniel Crosby and other people like this, this is not something you're going to be like, oh, I'm going to get rid of my overconfidence.

[00:31:44] Like I certainly haven't gotten rid of mine, but if it's something that if you're aware of it, you can be better.

[00:31:48] Like if you, if you're thinking about like for me as an investor, I'm thinking about like my overconfidence, but also if you came from somewhere else and you're now thinking that translate to investing, just, just question yourself some and say, you know, this might not just because I'm good at this thing.

[00:31:59] I might not be, that might not translate perfectly to the world of investing.

[00:32:03] Absolutely. And focus on those core tenants. Take it back to the philosophy of that stuff.

[00:32:06] If you're a doctor, say first, do no harm. Okay.

[00:32:09] How am I potentially doing harm to myself in this decision to aggress, aggressively invest or allocate to this crazy active manager or something?

[00:32:17] Just ask yourself the philosophical underpinning questions to, if you know, you're going to be overconfident in some areas, have your default balancing mechanism to humble yourself in those areas too.

[00:32:28] Now, having said that I was with my son at the bouncy house place this weekend, I drained several three pointers.

[00:32:32] Um, so with the little basketball thing. So I'm thinking I'm going to try out for the Knicks soon because I, I think those skills are going to translate very well into the actual basketball court.

[00:32:40] Jack, it's never too late for you to go pro. Don't let anyone tell you it's in their eyes.

[00:32:44] I'm in my mid forties. I'm like the least athletic person in the world.

[00:32:47] But, uh, that's one of those cases where like you could accomplish anything doesn't really apply.

[00:32:51] Like you always like to tell people you could accomplish anything, but like me as a five 11 guy, he's like, I cannot do that.

[00:32:57] Um, it's just not going to happen.

[00:32:58] Let's be clear. You're not only the George Clooney of excess returns. You're also the Alan Iverson of excess return.

[00:33:04] That's right.

[00:33:05] So this next one was, it was actually, we use this in our, uh, we asked the closing question at the end of every episode of excess returns, which is you could teach one lesson to the average investor.

[00:33:13] What would it be? And this is one of my favorite answers. This is Ben's answer to that question.

[00:33:16] I think there probably is no perfect way to save and invest. There's, there's no top 10 list you can read or there's no book you can read.

[00:33:21] That's going to like completely change your life and make it easier for you to, to figure it out. I think you just have to kind of pick a strategy and then stick with it.

[00:33:29] Come hell or high water. Cause I think one of the hardest parts is these days we can always see how other people are saving and investing.

[00:33:36] And this person is investing in this. And I think it's probably never been a better time to be an individual investor in terms of the strategies and products and tools we have available.

[00:33:44] I mean, if you think about some of the strategies that are now offered in a tax efficient ETF that were only available to rich individuals or institutions or hedge funds back in the day, and individuals can now use these same strategies for pennies on the dollar in terms of costs.

[00:33:58] That's a great thing. The problem is there are so many choices these days for what you can invest in that it makes it much harder for people to stick with a strategy.

[00:34:06] So I think for most people, the good strategy you can stick with is vastly superior to the great strategy that you can't stick with. It's just really hard for people to find that one strategy and stick with it.

[00:34:14] So I think that's, that's kind of the lesson I did part on a lot of people is just, if you find a strategy that works for you, don't worry what everyone else is doing and just stick with your own strategy and call it a day.

[00:34:23] So this idea, this is one we run into all the time and it's something you run, I run into myself as a factor investor, which is this idea that you can build the perfect portfolio.

[00:34:33] That you always should be going to get like that best, you know, get a little bit more return or a little bit more risk adjusted return.

[00:34:39] And you've suddenly built the perfect portfolio that all of your clients should be invested in.

[00:34:43] And the reality is that like all of this is about that person you're talking to on the other side, or if you're investing your own money, all of this is about you.

[00:34:52] And this is about the portfolio you believe in. This is about the portfolio you can stick with.

[00:34:56] And that's why there is no perfect portfolio for any individual person. As much as I can run my back tests all day, it doesn't exist in the real world.

[00:35:04] Your perfect strategy is the one you can stick to.

[00:35:07] I also think about this one a lot. There's a lot of, it's one of those quotes that we could find 18 instances of it, but it's a, and it's not a Mark Twainism.

[00:35:16] It's a bad like nineties into early two thousands rapism, which is a version of, you know, in the rap game, I'm nobody because nobody's perfect.

[00:35:24] And this is one of those things where there's, there's no perfect.

[00:35:28] You can say that it's a kitschy line, but like, there's no reality or backing this thing up.

[00:35:33] And if nobody's perfect, that certainly means you're not perfect. And it also means you get to embrace this reality.

[00:35:39] Nobody has the thing that you can solve. You can just do what's best for you on this course.

[00:35:44] Back to the overconfidence thing. Super, super humbling, but go be diverse.

[00:35:49] Go figure it out and find the things that you can stick to because there's a lot of paths to success in investing.

[00:35:55] And you and I have seen many of them, Mr. Levered 16 times micro strategy investor, Jack Forehand.

[00:36:01] Now, if you can stick with that, it's not the perfect investment.

[00:36:04] I assume that's going to zero at some point. So you probably won't, I assume no one could actually stick to it, but it has to be within the realm of something that actually is a legitimate long-term strategy.

[00:36:14] It has to be a legitimate long-term strategy and it might be a legitimate short-term business for Mr. Saylor if he cashes out enough of this stuff, but who knows?

[00:36:22] I think, I mean, you certainly can't just like when, you know, we've told in the podcast, the story, like how we launched our ETF on the same day as Kathy would.

[00:36:28] But we launched a small cap value ETF, which obviously doesn't exist anymore.

[00:36:31] And she's made huge success. So you can't, you can't take anything away from him.

[00:36:34] I mean, it's, it's, she's, she's done better than us.

[00:36:36] No, you take the shots.

[00:36:37] Whether it makes sense long-term or not has worked out way better than us.

[00:36:40] And the same thing with Saylor, like the guys, the guys laughing all the way to the bank.

[00:36:43] So it's who, who am I as the value investor to sit here and criticize him?

[00:36:46] You got to acknowledge it in both directions. It's part of being humble.

[00:36:50] This next one was an insight from when you and Justin talked to Ben in like, I had thought, I had never like seen this the right way.

[00:36:57] Like it's something I guess I realized behind the scenes, but I'd never like heard it out loud.

[00:37:00] And I think it's a really, really good insight.

[00:37:02] So here's Ben talking about how people always think things are at extremes.

[00:37:05] The hard part for a lot of people is that investors want to assume that we're always at an extreme, right?

[00:37:11] This is either the bottom and it's a buying opportunity is the top and it's a selling opportunity.

[00:37:15] Whereas most of the time we're actually somewhere in the middle, right?

[00:37:18] Then the market is just doing its thing and we can still have corrections and we still have setbacks.

[00:37:23] But most of the time, the market is kind of just, just, you know, chugging along and it's not at the extremes.

[00:37:29] That's why being a contrarian is such a hard, a hard strategy to, to take part in because it really works.

[00:37:37] It works really well if you do it at the extremes, but those extremes don't happen very often.

[00:37:40] One of my favorite examples of this is after the 2008 crisis and people read the greatest trade ever about John Paulson shorting subprime mortgage bonds, right?

[00:37:50] People watched the big short and they assumed, oh, I'll just do that all the time and I'll get rich.

[00:37:54] Where it's called the once in a lifetime trade for a reason.

[00:37:58] These extreme situations don't happen that often.

[00:38:00] And I think people, especially following the 2008 crisis, decided to spend 90% of their time worrying about stuff that happens maybe 5% or 10% of the time, right?

[00:38:10] We don't get these crashes all the time.

[00:38:11] We don't get financial crises or recessions.

[00:38:13] That stuff can and will happen, but it doesn't happen as much as you think.

[00:38:16] And I think that's the problem where people think they're going to outsmart the market is, oh, I'll just get out now and I'll wait till the dust settles and then I'll get back in.

[00:38:23] And it usually doesn't work that easily.

[00:38:25] This is so true, though, and I don't know if it's because we need excitement in our lives or whatever it is, but like if you think about where we are with the market right now, you've got kind of two camps of people.

[00:38:34] You've got people, we are at the beginning of the AI revolution in 1994 or whatever, and we're going to the moon.

[00:38:39] And you've got people, this is the biggest bubble like in the history of markets.

[00:38:42] Like there seem to be most people in those two camps and there aren't too many people that are like, yeah, we might put up 6% or 8% next year.

[00:38:49] Those people don't seem to really exist.

[00:38:50] So this is a problem I think all of us have.

[00:38:52] Not only is it a problem we all have this, and this is something I draw from the music and the arts background, is there's no resolution.

[00:39:02] There's no resting place or confidence without tension first.

[00:39:06] So part of this take where you're always looking for tension, you're always looking to either like be contrarian or take something to an extreme.

[00:39:14] You're also always looking just to dial up that tension.

[00:39:16] You want to get it as far away as you can so you can point at the resolution on the other side and say we're going from here all the way to there.

[00:39:23] The reality is like most of the time we're in the middle somewhere and we haven't hit those extreme points.

[00:39:29] You can make all narratives and all stories and all arcs have to start at that point of extreme tension.

[00:39:35] And that's why you hear lots of stuff pitched or framed or presented to you in that way.

[00:39:39] It's the most compelling way to communicate the story.

[00:39:43] But the reality, the actual human history is most of life is pretty friggin boring.

[00:39:48] Like we don't live in TV shows.

[00:39:50] We don't live in like 70s, you know, cinematic movie masterpieces.

[00:39:55] My life is not Scorsese.

[00:39:57] My life is eating, you know, the other half of the Italian hoagie I got last night from the place down the street for lunch before I record a podcast in between lion calls.

[00:40:06] And that's okay.

[00:40:08] It's just hard to admit and remember that stuff.

[00:40:10] I love the way that Ben frames this so much.

[00:40:13] And the other thing to remember is like the people on the other side of this know this too.

[00:40:17] So the people creating YouTube videos know that you like extremes and they want to put the extremes out there.

[00:40:22] You know, they want to put like this bearish thing or, you know, the crazy, like the markets or what would Kathy would say?

[00:40:28] Like GDP was going to grow 50% a year or something.

[00:40:31] Like people know this stuff and like they're going to take advantage of this.

[00:40:33] So it's important to keep in mind when you're seeing these predictions that like understand you have this need to want to believe these extremes.

[00:40:40] And you probably should, you know, look at them with a grain of salt.

[00:40:42] If you want to market an idea, you're basically marketing a solution to a problem.

[00:40:47] You're marketing the resolution to some piece of tension.

[00:40:51] And you have to, have to, have to get in front of people by highlighting the tension first.

[00:40:56] You got to create and build that tension.

[00:40:57] And everybody who's presenting it to you, a wonderful default assumption is just asking,

[00:41:02] how are they building the tension that they're next going to resolve with their brilliant idea?

[00:41:06] That's going to sound brilliant if they built the tension up right.

[00:41:09] Not saying none of us are immune to this.

[00:41:11] We're all susceptible to this up to a point.

[00:41:13] And it's oftentimes the only way we get anything done in life, but stop and ask that question.

[00:41:18] What is the tension that's being built?

[00:41:20] Is GDP really going to go up 50% a year?

[00:41:22] Or is that a really compelling case for a growth investor to make?

[00:41:26] And what's crazy is when these things end up being right, like we forget them if they're wrong.

[00:41:30] And then these people will just, you know, they'll emphasize it forever.

[00:41:33] Like if they end up being right.

[00:41:35] And like, one of the things I always thought would be like,

[00:41:36] if I was a, someone who wanted to just grow a YouTube channel or build a following for being a market forecaster,

[00:41:41] what I would do regularly is I would always predict a 40% chance of a crash.

[00:41:45] Because you basically cannot lose in that situation.

[00:41:48] Like if you predict it's only, it's 40%.

[00:41:50] So you could say, well, I thought it was less likely than more likely, but then it's of a crash.

[00:41:53] So it's something that's very extreme.

[00:41:55] So if I'm right, like the chances of a crash in like market history are not in anywhere near 40%.

[00:41:59] So I basically have one either way.

[00:42:02] So you see these kinds of predictions and then I could just say I'm right.

[00:42:04] And we forget about it if I ended up being wrong.

[00:42:06] Yeah.

[00:42:06] The broken clock industry is alive and well.

[00:42:09] Many a newsletter is running on, you know, the 40% of a crash call that they got right, you know, 10 years ago.

[00:42:17] And the best is when they get it right for the absolute wrong reasons.

[00:42:19] They predict something and then something totally different happens.

[00:42:22] And sometimes it's a beautiful thing because somebody gets something right.

[00:42:25] That was a knockout effect from something else.

[00:42:27] I appreciate that too.

[00:42:28] But yeah, this is, you just got to be aware of this stuff.

[00:42:32] People are presenting it to you as stories, be an educated consumer.

[00:42:35] Uh, they're not going to tap the glass usually.

[00:42:37] So you got to be smarter than that.

[00:42:39] Just follow the match cash levels and ignore everything else.

[00:42:41] Yeah.

[00:42:42] I publish them regularly on my, uh, your blog or whatever.

[00:42:46] Yeah.

[00:42:46] On my, I don't know what's my subreddit.

[00:42:49] What a discord on my discord.

[00:42:51] Where would people share?

[00:42:52] It's such critical.

[00:42:54] Only the people here know it information.

[00:42:57] I tape it to the side of a mailbox, you know, in rural Pennsylvania.

[00:43:04] So this last one is another one that I think all of us tend to do, even though we don't realize, you know, I think we realize it's not the right thing.

[00:43:11] We tend to do it.

[00:43:12] But here's Ben talking about the persistence of outperformance.

[00:43:14] The persistence of outperformance is the hardest thing in active management strategies, right?

[00:43:17] Stand-in and employers have done a lot of studies on this showing that the, the amount of funds that outperform over three years for them to go and outperform in the next three days is a very low percentage of funds that actually do that.

[00:43:26] So that's the hard part.

[00:43:27] I think the other hard part about active strategies, especially when you're dealing with someone who's just thinking through a discretionary based strategy as opposed to like a rules based is that it's very hard to know when you should lean into the pain.

[00:43:38] Right. If you invest in an asset class or a rules based strategy, you know that it's going to come in and out of favor.

[00:43:44] And I think if you have that as part of your allocation, you have a 10 percent allocation to this rules based factor strategy that that's active.

[00:43:51] But I kind of know it has this history of over and underperformance.

[00:43:55] And then when it does underperform, I can lean into the pain and I'm going to rebalance.

[00:43:59] But with an active strategy, it's much harder to know is now the time to lean into the pain.

[00:44:04] And that's, that's one of the things I always tell people.

[00:44:06] I've done a lot of institutions in the past and they, they have these color coding systems of like red, yellow, and green for their active managers.

[00:44:15] They have right.

[00:44:15] Green is a, everything's fine.

[00:44:17] We're going to stay in it.

[00:44:17] And that's, that means performance is good.

[00:44:18] Yellow is a performance is pretty bad right now, but it's been good in the past.

[00:44:22] Well, they're on the watch list.

[00:44:23] And then red is okay, this, this manager is awful.

[00:44:26] Let's get rid of them.

[00:44:27] And my question to them is always, you know, when you've gotten this manager in the first place, you knew a period of underperformance was going to come.

[00:44:34] So would you be willing to lean into the pain and double down on that manager or not?

[00:44:37] And if it's not, and that's time to get rid of them.

[00:44:39] But that's the hard part is you don't know which ones are going to come back and which ones are just down forever.

[00:44:43] Yeah.

[00:44:43] This is something that just, I mean, it's so ingrained in investing.

[00:44:46] I mean, I don't think there's anything we can do about it, but it's just important to keep it in the back of our minds.

[00:44:49] Like we always want to think whatever's doing well is going to keep doing well.

[00:44:54] And we always want to stay away from what's not doing well.

[00:44:56] And one of the things we've learned, like with any of these types of strategies, especially the kind that I run, is these periods where they don't do well can be very, very long.

[00:45:04] And so if you're going to be the person who's going to do this, I mean, it's going to be bad no matter what, if you're going to be the person that's going to do this.

[00:45:12] But there are certain types of strategies you just don't want to be involved in if you're going to be the person who thinks like what's been going on for these last three years is going to continue in the future.

[00:45:20] Because certain types of strategies just do not work.

[00:45:22] And maybe no strategy works with that, but certain types of strategies really do not work with that.

[00:45:25] It's amazing.

[00:45:26] It's just a through line to everything we're talking about.

[00:45:29] It's a through line to overconfidence.

[00:45:30] It's a through line to benchmarking.

[00:45:32] It's just the reality of the persistence of outperformance is just really hard.

[00:45:37] And some great ways to do that.

[00:45:38] You could pick the frame you see it through.

[00:45:40] You could always compare yourself, for example, to Cash.

[00:45:43] You could be Kramer on that Seinfeld episode where he does the karate classes.

[00:45:48] Do you remember who he took the karate classes with?

[00:45:51] I don't know.

[00:45:52] Yeah.

[00:45:52] Here's a great lesson in benchmarking.

[00:45:54] He's taking karate classes.

[00:45:55] He's advancing really quick until you find out he's taking children's karate classes as a grown man.

[00:46:00] Oh, yeah.

[00:46:00] I do remember that now.

[00:46:02] Pick your benchmarks.

[00:46:03] Pick the frame through which you see the world.

[00:46:05] Pick the ways that you compete and where you create your attention, but pick them accordingly.

[00:46:10] And then know that outperforming, if you're on the track, it's really hard to sustain outperformance.

[00:46:16] The tree doesn't grow to the sky.

[00:46:17] All those metaphors apply.

[00:46:20] You know, and if you're going to compete, figure out the scenario to be an adult at the kid's karate class.

[00:46:25] Like, you can have a lot of success at that for a while until you get the boot, if that's your bag.

[00:46:29] And Ben mentioned in the clip, but institutions do this.

[00:46:32] Everybody does this.

[00:46:32] Like, in theory, if you believe in a strategy and you invest in a strategy and the strategy is in one of its periods of underperformance, you should be adding to the strategy.

[00:46:40] I mean, that's what you should either be doing nothing or you should be adding to the strategy.

[00:46:43] But nobody does that.

[00:46:44] Like, even the most sophisticated, you know, endowments in the world.

[00:46:48] I mean, you see this everywhere, that people just do not get this as much as the data is obvious that this is the case.

[00:46:53] Yeah.

[00:46:54] I mean, do the Girl Scouts throw in the towel on Girl Scout cookie sales after, you know, a rough year?

[00:46:59] Or I don't even know what COVID did to them, but I imagine that was rough.

[00:47:02] Do consumers just throw in the towel on eating those, you know, sweet, sweet cookies and say, I wish the Boy Scouts made Boy Scout brownies or something instead?

[00:47:09] No.

[00:47:10] If a strategy works, if you believe it to be durable over time, then you have to have that behavior too, where you're willing to double down on it or willing to go like, hey, this is still viable.

[00:47:18] Because it's out of favor, because it's failed to outperform, it's persistently underperformed.

[00:47:24] I tip my hat to you value investors everywhere.

[00:47:26] If it's persistently underperformed and you still believe in it, then take your shot.

[00:47:31] Take your shot.

[00:47:32] That's the only way you have a shot at outperformance anyway.

[00:47:35] Now you've got me into the Girl Scout cookies, and I don't know if it's anywhere near the time of year where they're going to come around.

[00:47:38] I don't know where that came from.

[00:47:40] Those tangalong ones, the ones with the chocolate, the peanut butter in the middle, oh, they're just so good.

[00:47:43] I know.

[00:47:43] I buy boxes and consume all the boxes within several days of buying.

[00:47:47] It's a dangerous thing.

[00:47:48] My health does not need for this to be that time of year, especially pre-holiday seasons.

[00:47:54] But man, I could crush a stream of Thin Mints right now.

[00:47:59] I don't think we're going to be able to, because I think it might be a long time until they come back.

[00:48:03] I should know what time of year they come, but I don't know.

[00:48:05] Can we get some excess returns labeled Girl Scout cookies for a mid-year consumption?

[00:48:11] I guess as a YouTuber, we're supposed to say right in the comments, like when the Girl Scout cookies are coming or something like that.

[00:48:16] But I would like to know if anybody knows.

[00:48:19] But anyway, I guess that's a good thing to wrap up on.

[00:48:21] Thank you, everybody, for joining us.

[00:48:22] We'll see you next time.

[00:48:23] Hi, guys.

[00:48:24] This is Justin again.

[00:48:26] Thanks so much for tuning into this episode.

[00:48:28] You can follow Jack on Twitter at Practical Quant.

[00:48:32] You can follow me on Twitter at JJ Carbono.

[00:48:34] And follow Matt on Twitter at Cultish Creative.

[00:48:37] If you found this discussion interesting and valuable, please subscribe in either iTunes or on YouTube, or leave a review or a comment.

[00:48:45] Also, if you have any ideas for topics you'd like us to cover in the future, please email us at excessreturnspod at gmail.com.

[00:48:52] We would like this to be a listener-driven podcast and would appreciate any suggestions.

[00:48:56] Thank you.