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  • Bogleheads on Investing with Barry Ritholtz – Episode 39

Bogleheads on Investing with Barry Ritholtz – Episode 39

Post on: November 8, 2021 by Rick Ferri

Barry Ritholtz is an author, blogger, podcast host, and the Founder and CIO of Ritholtz Wealth Management LLC. He has been called the "blogfather" for his long-standing finance weblog, The Big Picture. Barry is also the creator and host of Masters in Business, the most popular podcast/show on Bloomberg Radio. These 60-90 minute conversations are with many of the most accomplished, fascinating people in business and finance.

Our discussion today focuses on Barry and his views on various investment topics. We discuss how he works through hundreds of articles and news stories each day to find ten relevant items for his free reading list. He also talks about the most memorable guests on his podcast, both good and bad, and how all 400 episodes can be used by listeners. Last, we hear Barry's opinions on portfolio-related topics, including cyber currency. 

You can discuss this podcast in the Bogleheads forum here.

Listen On

Rick Ferri: Welcome to Bogleheads on Investing podcast number 39. Today our special guest is Barry Ritholtz. Barry has been writing about Wall Street for more than twenty-five years. He’s the host of Bloomberg’s Masters in Business Podcast  and the CEO of Ritholtz Wealth Management.

Hi everyone. My name is Rick Ferri and I’m the host of Bogleheads on Investing. This episode, as with all episodes, is brought to you by The John C. Bogle Center for Financial Literacy, a 501c3 non-profit organization that you can find at boglecenter.net. Your tax-deductible contribution is greatly appreciated.

Today our special guest is Barry Ritholtz. Barry has been around Wall Street for more than twenty-five years. He’s worked at several different capacities as a corporate lawyer, trader, research analyst writer, book author, host of Bloomberg’s Masters in Business Podcast, and the founder and CEO of Ritholtz Wealth Management.

I’ve known Barry for many years and when I came up with the Bogleheads on Investing podcast idea I contacted Barry and he generously gave his time to give me all the technical background on  what I should be doing, and how to launch. I think you’re going to enjoy this conversation with Barry today.

We’re going to be talking about a lot of topics, including investment strategy. During the podcast I asked Barry to give us his views on active management, market timing, cyber currency, trading, and a few investment related topics. This is not a debate about these topics. It’s an opportunity to learn what our guest knows and what he thinks.

So with no further ado, let me introduce my extra special guest, Barry Ritholtz. Welcome, Barry.

Barry Ritholtz: Thank you for having me, Rick.

Rick Ferri: First of all, we’d like to wish you a happy sixtieth birthday, which was recently. Congratulations.

Barry Ritholtz: Thanks.

Rick Ferri: You’re five years away from Medicare.

Barry Ritholtz: Yes. So people say congratulations, and really all I’ve done is really avoid getting hit by a bus when crossing the street.

Rick Ferri: Okay. Can I tell you the best part about being sixty? That you’re not seventy.

Barry Ritholtz: Well no, it’s finding out all these people who are younger than me but look terrible. And I’m not going to mention names, but a handful of people said, “Wow, I’ll be there in a couple of years.” And I’m like, “Really, dude. I thought, like you were five years older than me.”

Rick Ferri: Okay. Secondly, I personally owe you a debt of gratitude because this podcast was fashioned after your podcast Masters in Business. And when I was getting started with this, the first person I contacted for pointers was you, Barry, and you gave me a lot of great pointers. So I really appreciate that.

Barry Ritholtz: My pleasure. You know, after four hundred of these or so, you get to be not too terrible at them.

Rick Ferri: Let’s find out about Barry. I want to talk a lot about what’s going on with your column and your blog and your business and so forth, and your Masters in Business podcast, all four hundred of them. But before we get to that I want to go back further so that people know who you are. A little bit about your background, as far back as you’d like to go. And go from there.

Barry Ritholtz: Really good in science and math in high school. Managed to coast through that. Go to college and suddenly learn oh, you really got to work to do this, it’s very competitive. So I end up, after a couple of years of applied mathematics and physics, switching to political science and philosophy. Finish school, don’t know what to do. Go to law school and when I actually go to register for the bar, that’s when I learned that I didn’t graduate. And after a convoluted series of legal sleight of hands, managed to graduate college and law school the same day.

And you know, practiced law for a couple of years–loved law school–didn’t  really like the practice of law. It was just granular and filled with minutia. And you know, no pun intended, I’m a big picture sort of guy, and so ended up, when opportunity came along, to join a firm that a friend was running that turned out to be the predecessor firm to E-Trade. I did that, became a trader. And why don’t we stop there, because that brings us, you know, to the mid ‘90’s.

Rick Ferri: Okay. Well before we even get that far, we have to dig into some of the more interesting aspects of you. And you were a member of the Stony Brook equestrian team and you successfully competed in the national championships back in 1981.

Barry Ritholtz: So I am at Stony Brook. I switched to poly-sci from, you know, no more double physics lab, and no more insane applied math homework. And I find myself with a little bit of time. And one day I’m reading the campus paper that Stony Brook has a competitive horseback riding team, and I’m like, “What?” And not just competitive, but like consistently nationally ranked for like years and years.

So I wander down to the barn–I’m not exaggerating, it’s like a twenty minute walk from campus–and I start talking to them: tell me about the team. What do you do? What do you have to learn? So I joined the riding team and it was just fascinating. 

It was a whole different sport; a whole different set of rules. And, you know, horseback riding is incredibly expensive and a challenging area. But as a student at a state school I got to ride for five dollars a week, and if that sounds cheap–even back in 1980 that was cheap. So it was just great. And I did that for a couple of years and just loved it. It was a blast.

Rick Ferri: Well that’s cool. Though that you did that.

Barry Ritholtz: It was fun. It’s interesting. It was a lot of fun.

Rick Ferri: Yeah. You went to law school. You did well. You were cum laude 3.56 and you became a lawyer eventually and you were in corporate law too.

Barry Ritholtz: So when you’re at any decent sized firm, whether you’re doing corporate law or any trust or litigation and you’re entry level you’re in the library; you’re in the stacks. You’re just putting together research memos. So the partners who are actually doing the real legal work, you know you’re saving them a lot of research and a lot of writing, and you’re giving them some groundwork.

And it’s really a grinding, tedious existence. And I kind of recognized that I wasn’t motivated enough to become a partner in a law firm. To do that for seven to ten years. It’s like, now look, seven to ten years are going to go by no matter what you’re doing, but it was just an intimidating unpleasant view of your 20’s and 30’s, and I just couldn’t bring myself to do that. And so, when the opportunity came to hit the eject button from the legal profession and enter finance, I jumped at it.

Rick Ferri: And you were a trader at one time, and were you trading your own account or were you trading other people’s accounts? I mean, tell us about that.

Barry Ritholtz: You’re trading three things. A, if you have your own capital, you get to trade that. But I was young and relatively broke. B, you’re trading other people’s money. And lastly, you’re trading the firm’s order flow.

So you can either go to the market and just execute the trade in the market, or if an order comes in and you think there’s an advantage to trade around that order, or to take the position yourself and buy it cheaper, or sell something and try to cover the trade at a different price. You had the ability to operate around that, and it’s how you really learned how the market worked more than trying to buy 10,000 shares of X and then sell it a point higher later in the day.

Rick Ferri: Did you have your own clients? Were they giving you money to manage?

Barry Ritholtz: In the beginning it was mostly firm clients, and then, every now and then, someone would say, “ Hey, I have some money. You want to trade this for me?”

I was a very inconsistent trader. I found I would make money some months and then give it back the next month. And in fact, that volatility of my own P and L [profit and loss] as well as — you’re sitting on a trading desk–there’s eight or ten guys in a row–and I was always astonished, the guy on my right would be making money one month while the guy on my left was losing money. And then the next month their roles reversed and suddenly the previous month’s loser is killing it and the previous month’s winner, whatever he touches goes to hell. And between that sort of volatility and my own inconsistent trading kind of sent me down the rabbit hole of behavioral finance in the mid nineties before all the cool kids were doing it. Because I couldn’t find a rational explanation for why Shecky on my left was doing well this month and Bob on my right wasn’t. They seem to be doing the exact same thing. And over time you kind of learn it looks like they’re doing the same thing but they’re actually doing different things from an emotional psychological perspective, and that had an immense impact on their trading success.

Rick Ferri:  And you know, it’s interesting that one of the very first people that you interviewed was Jack Schweiger, who wrote a book called Market Wizards: Interviews with Top Traders. And, in fact, you interviewed him recently as well. And I listened to that interview and he was talking about people who give money to traders and who does well with it and who does not. Could you comment on both those interviews; the very first one you did and then the more recent one?

Barry Ritholtz: So the first book Schweiger wrote, Market Wizards, ostensibly it’s about trading but as you work your way through the book, really it’s a behavioral finance book; that was the first book I read about Trading. Wizards is all about things like discipline and understanding stop losses, and risk management and overconfidence. And as you go back and re-read the first book, you’ll be astonished, some of the traders are futures traders, some are bond traders, some are stock traders, some are derivative traders. All these people are in different fields. The key takeaway I got from that book was the single biggest variable with the largest impact on your results, that is within your control, is your own behavior.

That was the big takeaway, and not only did I find the book fascinating but in the back of my head, when I was first pitching Masters in Business to Bloomberg, Wizards was very much on my mind. The thought process was, “Hey, let’s find some of these really successful people, accomplished, intelligent people, who have put together not just a track record, but a methodology and a philosophy that will be beneficial to the listener, and have an intelligent adult  conversation. I don’t want to ask what their favorite stock is, I don’t want to ask them when the Fed’s going to raise, where the market will be a year from now. I want to ask them who are you and how did you get that way?

Rick Ferri: Tell me how you started to come up as a research analyst and a writer and how that evolved into doing the Masters in Business podcast.

Barry Ritholtz: I tend to be very scatter shot, easily distracted, lack of focus, and my saving grace is I have a degree of self-awareness of my lack of organizational skills. And so to compensate, or over compensate for that, I would each day write down here the earnings that are scheduled to be released; here’s the various economic releases that are coming out; here a series of stocks that are on the precipice of a breakout or a breakdown. And I just put together a whole lot of things that I thought were really interesting, and then I would tape it to my computer monitor. It started out like three by five cards and then it became bigger, four by six cards, and then eventually it was a full page. And once it became a full page, people asked me, ”Hey, can I make a copy of that.”

And what started out being xeroxed and circulated around the office started getting faxed around town and then eventually it became a Yahoo GeoCities thing. I would take all my notes and post them online, not that anybody was paying attention back in 1998. And then eventually it became a pretty substantial e-mail list, which eventually became the blog, eventually became The Big Picture, and street.com was two thousand, two, three, four. The Washington Post started publishing me 2010, 2011 something like that, and then Bloomberg started in the fall of 2013.

A lot of this just began because hey, I’m really disorganized and I need to get my act together each day and just have a sense of what’s going on. And writing it out, typing it out was just a useful exercise.

Rick Ferri: Well I’m just amazed that when I read this e-mail that you send out, and the week-end reads and all of that, how in-depth you get.1You must be reading constantly.

Barry Ritholtz: Yeah. There’s a surprising method to the madness. When I first began in the industry I thought my role was to be an omnivore and consume everything there was. And eventually you kind of learn addition via subtraction. And information hygiene becomes really important. There’s a handful of pretty well-known writers and other media personalities that I think are hot death warmed over and that they’re consistently wrong and — or when they’re right they’re lucky or right for the wrong reason, and just don’t want those people in my thought process. And so there are a number of publications and a number of folks that I have found to be, you know, very click-baity but they get removed from the source.

And you know, at this point, like in the morning, I open up 50 different tabs and I work my way through them. And I open up far fewer late in the afternoon. But after doing this for twenty-five years, you know, twenty years anyway. You find that it takes a sentence or two and you can quickly identify if something is terrible. There’s also a run of folks, Jesse Eisenger to Morgan Housel to Derek Thompson to Jason Zweig to Dan Gross. I probably have thirty people, Mike Hiltzik at the LA Times. That anything they put out I’m absolutely going to read because it’s so consistently good.

And so once you have your team of all-stars, suddenly it becomes much easier, and the trick of “ten”1 is that it forces you to really curate, to really make difficult decisions. So when I said there’s a method to the madness, on any given day, the week-ends are a little different because I try and do something — Saturday is long form, and Sunday going on my way to look at really terrible policy decisions or errors, or because I don’t want to look at them all week–it’s so negative, it’s such a buzz kill. But on Sunday it’s like all right, here’s all this terrible stuff. Go to church and beg for forgiveness, because all you people are just awful and here are the things you did. So I kind of push all that negativity to Sunday.

But during the week it’s pretty much — starts out with a broad market or investing concept. Sometimes it’ll be something about trading, or some specific ETF or product, or something like that. If I find something on retirement, 401ks, that kind of works its way there. Very often I’ll put something industry related in the fourth slot. Real estate is a big part of the world, so when there’s an interesting real estate story, it shows up. Then comes whatever technology or venture capital, or trend shows up. If I find something interesting involving behavioral finance or information hygiene, something that makes people think carefully about what they’re consuming, that’ll find its way in. I leave the last two or three slots for a rotating mix of science or you know, the last spot sports. Music, entertainment is a slot. Every now and then there’ll be an interesting article about politics, and what I mean by that is not the partisan bickering nonsense, but when I find something that — I love when someone forces me to rethink my views, or uses data to challenge an underlying belief.

So there’s a perfect example. Terry McAullife bet on voters hating Trump. Turns out they dislike Democrats more. Like that sort of flip, where the obvious theme gets turned on its head and in an unexpected way, I’m fascinated by that. I’m pretty convinced that all of us live in a world of our own biases and illusions and confirmation bias. And anytime I have the opportunity to prove to others or myself, hey this deep fundamental thing you believe is wrong and here’s proof. Now go and rethink your entire world philosophy. That’s useful not just as a person, but as an investor. It forces you to not take anything for granted, and to carefully think about what you assume and believe is true.

Rick Ferri: So if one of our listeners today decided they wanted to start to get this information from you on a daily basis, how would they do that?

Barry Ritholtz: So go to ritholtz.com. You can scroll through to any of the reads and you’ll click on a sign up sheet. I just actually told someone today that because of inflation our free newsletter has doubled in price and so you can sign up for two times the regular free price.

Rick Ferri: That’s a good Boglehead price, by the way, we like that. You also wrote a book called Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy. Tell us about the book and why did you write it and what it’s about?

Barry Ritholtz: So another really long story I’ll try and make short. Bill Fleckenstein wrote the book Greenspan’s Bubbles, and that did really well for a business book. So when McGraw-Hill came back to him and said, “All right, Bear Stearns just went belly up. Let’s write about them.” He was like, thanks but no thanks. And they asked him, “Well who’s covering that?” He goes, “Oh that’s easy, Ritholtz has been screaming about Bear Stearns for months. Go talk to him.”

I ended up turning them down, I don’t know, eight times. And every time I turned them down I would give them an excuse, and each time they would address that excuse. And so that turned out to be really fortuitous because at the end of the year, when McGraw-Hill was unhappy with the manuscript I gave them that had a very critical chapter about S&P Ratings Agency, a McGraw-Hill company. Well I had already gotten final edit in my contract, because I said to them, “I don’t need to work with you. I got a very large platform. Why do I have to write a book for you and have you muck it up with your editors. I know what I want to say. Leave me alone.” And they’re like, “Oh, we’ll give you final cut.” That was kind of like the last objection.

Long again, long story short, I pulled the manuscript. I gave them an updated chapter on McGraw-Hill which was much less hysterical, hair on fire, the world’s coming to an end, and much more database than calm. Which coincidentally had the consequence of being much more devastating to S&P than the original. Like it would have been very easy to say, “Oh, this guy’s crazy.” The rewritten chapter was, “oh that’s a lot of data, oh those guys did what? Oh wow, that’s just terrible.” I made it far less histrionic and more factual and data-driven and it made it more devastating and they refused to accept that one, so I pulled the book, put it up for auction and it ended up, Wiley ended up buying it. It turned out to be a successful partnership. We sold a decent amount of copies, I don’t remember the exact number but it was somewhere north of 30,000. Again, for a business book, is really pretty good.

Rick Ferri: Then eventually let’s circle around to your Masters in Business which I think you’ve probably become most famous, for in many ways because of the guests that you interview, and one of the Bogleheads was asking can you talk about your most memorable guests. They’re good, better, and different, but they were the most memorable.

Barry Ritholtz: So I’ll give you a good one and a bad one. Well let’s start with the bad one. The bad one was somebody who had written a book and had kind of become famous but he had just continuously blown up. Like made a fortune, blew up, made a fortune.

Rick Ferri: Well that could be anybody.

Barry Ritholtz: Not at this level. It’s one thing to say, “Oh, look I got a hundred thousand dollars in my 401k, oh it’s 25,000. It’s something else to say I’m worth tens of millions of dollars and it’s like “where’d it all go?” and do the same thing over and over again. And when I had a conversation with him he spoke in a normal cadence. I thought would be a pretty interesting interview and instead each question was greeted with a heavy sigh and then he would answer the question, and so a 90 minute interview was about 45 minutes of material and 45 minutes of someone that seemed like a cry for help and like maybe 15 minutes into the interview I have a producer in my ear going none of this is usable. Let’s just throw him out and be done with it.

But what we eventually did was just edit out all of those gaps and it became like a what sounded like a normal interview, but when you’re experiencing it it was just like do I need to call a mental health hotline?  Is this person a danger to himself? I mean it. I guess I forced him to think about things he hadn’t thought about for decades and so it was really–so that was the worst one.

The best one, and I’m going to call out Mike Batnick about this because he gave me so much grief about this about five years ago. I thought on the 15th anniversary or so of September 11th it would be worthwhile to interview the special master of the 9/11 funds, Ken Feinberg, and you know he’s a lawyer, he’s kind of public–it’s been a long time since 9/11– he hasn’t really been out talking about it, maybe there’s something interesting here.

Rick Ferri: Just to clarify, this was the person who had to decide how the money was going to be divided from 9/11.

Barry Ritholtz: The Congressional 8 billion dollar allocation to the victims of September 11th, right.

So we do the interview and two weeks later it goes live and that Monday Mike walks in. He’s like, “I can’t believe how wrong I was.” That was amazing. There were several moments in that interview where I wanted to cry and give him a hug. I’m like, right, the guy is just amazing. It’s an amazing story and then five years later there’s a movie, and there’s this and there’s that. But that was one of the most astonishing. Just to able to just gently nudge him along through discussing all these different things and of course he’s very intelligent, very articulate. He has an incredible breadth of not just experience but empathy. And as a lawyer there’s a very specific formula that you basically operate off of when there’s an accidental death and there’s civil litigation.

There are all these different factors. Yeah, there’s pain and suffering, and there’s this and there’s that, but the prime driver is the economic loss of future income to family. And I know that’s kind of crude and blunt, but that’s what evolved over, you know, hundreds of years. And so you end up with this really insane story.

I’ll give you one. It’s a little disturbing but he tells the story of the bond trader who jumped from the 105th floor of the World Trade Center so he didn’t burn to death and lands on a fireman and, of course, they both die. Now the bond trader is making millions of dollars a year and the fireman is making a hundred thousand dollars a year. Why are their lives worth so different amounts? And he had to come up with a way that got everybody, all the families, all the estates, to buy into and — talk about an impossible, Solomonic task to split that baby. This guy is a true American hero who took on an impossible, thankless task and did it as well as anyone could have possibly hoped for. A great and horrible story, right.

Rick Ferri: Yes, I remember that story. I remember that.

Let’s go on to other Masters in Business. And because you’ve done 400 of these I guess my question on this whole thing. You know you’re interviewing all of these people who are the top of the top in their industry and some who are not so top like me. You interviewed me one time, but other than that–I mean does any of all of this help let’s say a person who’s trying to trade their account, trade their portfolio, outperform the markets, if you will. Does any of all these interviews help anyone do that?

Barry Ritholtz: That’s an interesting question. When there is an opportunity to sit down and have an adult, thoughtful conversation with someone who has been incredibly successful both in finance and investing and in life, there are lessons to be learned there. Basically it’s like a bookshelf, a library of 400 books about everything from behavioral finance to investing, to technology, to venture capital, to psychology. To go down the whole list.

Hey, if those 400 books, if you can’t find a little something that makes you a little smarter, a little more thoughtful, a little more aware of your limitations and teaches you how to take better advantage of your skills you’re doing something wrong. I mean there’s no magic bullet but dear lord, you know Howard Marks and Ray Dalio and the head of fixed income at DoubleLine, and PIMCO, and the head of private equity at Blackstone, and just go down the list. There’s so much to learn from these people.

And I mean I used to say I’ll let you in on a little secret but I’ve said this enough times that it’s no longer a secret, I do these for an audience of one. I do this for myself because I have the opportunity to get a Richard Thaler or a Danny Kahneman and I’m going to spend 90 minutes sucking as much knowledge out of them into me. And anyone who’s listening should be able to figure out something. Think about Bill McNabb. I think I interviewed him three times. Or Jack Bogle, to say the least, Bogle was a fascinating conversationalist, and he plowed straight through for ninety minutes. That’s just an astonishing, astonishing moment in time, and I know for a fact that there’s something to be learned from these because I get e-mails all the time from business school professors who assign these out as class projects in MBA classes.

I mean there is a ton of stuff to be learned here. You just have to be thoughtful and approach the topics with a little skepticism. I’m not going to tell you that everything said by every person is gold and is guaranteed to make you money, but if you can’t find some useful information, some ideas, not the usual TV buy this, sell that, because that’s got a shelf life of about thirty seconds. But things about methodology and how to create a mental model that allows you to deal with certain changes in the market or how to deal with adversity and brush yourself off and keep going.

One of things I love about the Ray Dalio interview. His whole career is based on recognizing, “oh I’m wrong, I’m going to be wrong frequently.” How can I take these strikeouts at bat and become a better hitter. His entire career is: expect to be wrong, but if you just leave it there you’re going to be wrong regularly. If you expect to be wrong and then learn something about why you were wrong and what you should do differently next time and incorporate that into your thinking process and incorporate that into the way you invest and trade, so each time you are wrong it should make you a little better. I mean that’s gold, Jerry, gold. I don’t know how somebody can hear any of that conversation and not come away better for it.

Rick Ferri: Well thank you Barry. I mean you get into these interviews and you start asking questions and it’s always fascinating to listen to some of the answers because it’s so insightful. Kind of move along here to something you said and I twisted it a little bit quite frankly. But I was listening to you. I can’t remember, you were on a podcast somewhere and you were talking about news and the dissemination of news and you were talking about how a lot of news has way too much weighting in people’s minds than it’s actually worth and what I took away from that was that news is equal weighted but that the stock market is cap weighted.

Barry Ritholtz: Sure. So there are two things that speak directly to that philosophy. One was a series of pieces I did for the Washington Post about signal to noise ratio and how to get more signal and less noise, and generally this is part of that evolution from omnivore to very selective Michelin star rated restaurant consumer. And when I was younger I would eat anything. When you’re older you kind of like, oh maybe I should be a little more selective and so what ends up happening is you really become choosing in what you consume in terms of information so that was the setup and that was a couple–five years ago, last summer, the summer of 2020–so I do these quarterly calls for clients and we try and keep it under a half hour through two or three dozen charts and we just click through a lot of them, and basically this comes from questions from clients and advisors and most of it is nonsense we hear on TV and elsewhere. Like a perfect example would be stagflation. You know, more recently people are talking about stagflation. Well go back and look at the data and the 1970’s and the 2020’s are not even remotely similar on any of the data points that would relate to that. So over the summer of 2020 when the market was not only off the lows set in the month of March but by August it regained the previous highs and kept going.

The question we kept hearing over and over again is, “I keep looking around and the economy looks terrible and the market goes higher and higher. This doesn’t make any sense. I’m really perplexed and I want to liquidate my portfolio.” So we looked into this and said, “Okay. Let’s see how realistic this assessment is.” And so when you look around your neighborhood you see a bunch of restaurants and a bunch of dry cleaners and a bunch of retail stores and they’re all doing really poorly in the middle of the pandemic. But for the most part, none of those companies are publicly traded. They’re relatively not just small business, they’re really small businesses. They’re tiny and not related to anything that’s publicly traded. Hey, what’s doing well? Well it was Netflix and Apple and Amazon and Microsoft and Zoom and Google and Facebook and all the big tech companies. And wait a second, those are global companies that allow everybody who is stuck at home during the pandemic to work remotely, and not only are they not suffering, their business is up significantly from the previous year.

Well of course they are doing well and so the next step–and again my secret weapon Michael Batnick runs through all the different sectors and subsectors of the S&P 500 and we end up looking at things on a market cap weighted basis–so the big six, the FAANG, or I don’t even know what you now call that Facebook is Meta, the MAMA stocks. Those companies are like 25% of the S&P 500. You look at airline stocks. They’re less than 1 percent. Hotel stocks, they’re less than 1 percent, even the vertically integrated energy companies because gasoline sales were down, even those stocks were like one or two percent. In fact you could take, I think it was the bottom 50 sectors out of a few hundred sectors when you break them down into the, not the seven big industry groups but the subsectors and sub-subsectors. If you eliminated the bottom 50 sectors from the S&P 500 right–hospitality and entertainment and all these things–it turned out to be six percent of the entire value of the S&P 500.

And so that makes perfect sense. It turns out the market is rational. The big cap technology companies were thriving and global in nature, they were doing really well and all the little companies, and they were even not public, or so small that it was almost irrelevant to the S&P 500. And so when you look at it in that way it makes perfect sense.

Now when you look local dry cleaner and the little antique store that had to shut down and they’re closed and out of business and yet the market goes higher and higher that makes no sense but those aren’t even market cap weighted, those are just, wow that’s a shame that those companies went of business but that’s not the same as why the market is going higher and higher. And the answer was that big companies were doing well and your local neighborhood shops are not in the S&P 500.

Rick Ferri: You know, so like I said, news is equal weighted. We get hit with all this and it’s like this is terrible, this is horrible. How can the market be going up with oil prices going up and so forth. The bottom line is it’s just not a big factor. But the news makes it. You get the same amount of the news about all these other things that are not really a factor in the cap weighted index.

Because they are a big company, maybe we should be paying more attention to what is going on in Google, but should we be even paying attention to a gas pipeline company, or not. Maybe not. It’s certainly, it’s not going to affect your index fund.

Barry Ritholtz: So that’s exactly right. I just use this expression today, and I’m going to repeat it because I love it. The days are long but the decades are short. That is the fascinating expression that sums up how humans experience time. We live in the here and now, right. Our memories, are these fallible, nostalgic-tinged, aerolated re-imaginings of the way the world was in the past, and the future is some combination of wishful thinking and hopes and dreams, and imagining how it’s going to be. But neither of these is relevant. We exist in the here and now, in the moment. And that’s why these day-to-day just distractions, it’s noise and people get so sucked in by the noise.

Rick Ferri: Okay. We’re going to drill down more now into portfolio management. And so all the next topics that I’m going to talk about are going to be portfolio management topic, so maybe you could give us a couple of minutes on each one of these as I hit these topics. So the first one, a 70/30 portfolio–70% stocks, 30% bonds–is the new 60/40. And I know you know the 60/40 of 60 stocks/ 40 bonds. Do you think that people need to have more equity exposure now.

Barry Ritholtz: There’s two factors that are driving this, interest rates are part of it. Bonds serve two purposes in a portfolio. One is that they throw off some yield and the other is to provide some ballast to offset the volatility of equity markets. And so you’re not getting the yield that we’re used to on the bond side, so you have to take a little more risk in order to generate similar returns and one way to do that is 70/30.

But that’s only one of the two factors that I think are most important in driving this. The other factor is that for the investor class, and I can’t believe I have to use that preface, but for most people who are saving for retirement and have a 401k, their lifespans have continued to extend and mid ‘80s is not uncommon any more. I mean not everybody gets to live to 100 but the old days of having a life expectancy of 72, those are long behind us and you have to make sure your money is going to last you throughout the entire retirement. And people generally are working later. They may be working throttling back to part-time but they’re working later in their lives. Their retirement is more active. They’re doing more things and spending more money in that part of their life. And then you know the cost of healthcare has continued to go up.

And so the way to achieve the sort of returns that seem to be rational for that group of folks is not to go too far out on the credit curve or the duration curve or the risk curve and not to go 90/10 or anything crazy but to move from 60/40 to 70/30 is a pretty reasonable shift because today’s 70 year olds are really the 60 year olds of thirty years ago.

Rick Ferri: A three percent withdrawal rate, the safe withdrawal rate now or is it still four percent?

Barry Ritholtz: In one of the interviews I did was with William Sharpe and he called this the most challenging question in all of finance and he said, “You know we use four percent because it plus or minus seems to work. Not that there’s any mathematical basis for it.” It’s not a terrible number. I don’t know if the three percent number is — it clearly would give you a longer runway draw on that drawdown, but if you can’t live on three percent, well then you may not have a choice. I’m relatively comfortable with four percent. I haven’t seen anything conclusive that says four percent is problematic, so for now I’m going to stay with that, but I certainly think that somebody will eventually come up with a number that is more defensible and mathematically valid. And if someone were to say to me, “Listen, I’m concerned about running out of money in my retirement and four percent is too much, three and a half percent is not a terribly unreasonable number.

Rick Ferri: To the next question, and a Boglehead had this question. Is active versus passive. How do you feel about A. all active; B. all passive; or C. somewhere in the middle?

Barry Ritholtz: So the problem with all active is pretty obvious. First, you don’t know who the good active managers are until after the fact, and even if you started with some of the best active managers in the world there’s no guarantee to continue that streak. Very few have so, but a handful of people have done really, really well over time and more so than could be explained by mere luck. There are some really skillful managers so that is the first issue.

The second issue is clearly cost. When you look at a lot of active managers, some of them aren’t consistently outperforming  and so they don’t justify the cost of entry. And lots of them are closet indexers and so come for the high fees, stay for the beta-like performance. That doesn’t make any sense.

However, I interviewed Robbins Wiggleworth who wrote the book Trillions and basically gives the history of indexing. And it’s kind of interesting that he throws certain firms like DFA [Dimensional Fund Advisors] into the index basis. So into that pile, so I don’t know if you are going to have a value or a momentum or a small cap or a quality bias. To me that decision seems to be a little bit active, but if you want to have 25 percent of your portfolio with that sort of bias I can’t say that’s the worst thing in the world. You’re putting a little money at risk on the possibility of outperforming but you’re paying a low fee and there’s a lot of academic evidence that supports it.

Or there, if you wanted to, or someone said to me, “Hey, I want to have 10 or 20 percent in Fidelity’s Will Danoff’s fund [Contrafund] or Warren Buffet’s Berkshire or you go down the list of some of these people who have just put up incredible numbers for decades I wouldn’t object to that. That’s reasonable. If you want to put all your money into one fund that seems imprudent and if you wanted to go 100 percent active across six different managers it seems like that’s a recipe for expensive underperformance. You know 100 percent indexing is the easy way and so somewhere in between– you know even Vanguard is 25 to 30 percent active now–so I’m okay if someone wants to have a reasonable amount in their portfolio in active or factor-based equity.

Rick Ferri: And it has to be very long term. I mean this is not a trade. Going into some sort of a  factor fund, somebody’s going to go with a small-cap value tilt, and so it’s got to be a 25 year thing.

Barry Ritholtz: It better be because the past decade small-cap value has stunk the joint up.

Rick Ferri: Okay. Let’s go to the next thing, tactical asset allocation. I mean, is it possible? I’m going to say possible, it’s always possible, but is it probable that someone can outperform in either risk-adjusted or nominally by timing the markets?

Barry Ritholtz: It’s really a complicated answer. Short answer. A handful of people have had to put together a good track record. Real world answer: The value of tactical, at least as we do it, is not to outperform the market. The value of tactical is to have a small slug of money that from a behavioral and emotional perspective allows you to leave your real money alone.

And so perfect example, we were talking about 60/40. If you have a 60/40 portfolio for four-fifths  of your investable assets and then you have a tactical portfolio for the last 20 percent, and it doesn’t have to be great, it just has to be pretty good, so that in an environment like last year, it doesn’t have to get out at the exact top; it doesn’t have to get in at the exact bottom. But if in 2020, let’s say you missed you know rollover started somewhere in the middle of February. If you got out of the way for most of March and you missed the April re-entry, and you didn’t get back in until May you’re going to underperform the S&P, but if that portfolio goes to 80 percent  bonds or 100 percent  bonds during the month of March when you know the S&P fell 30 percent  and you left the rest of your portfolio alone because you could rationalize it by saying,” All right I was 70 /30,  now I’m 50/ 50 and down 30 percent. I mean so my portfolio’s down 15 percent. I could live with that.”

And then eventually you get back into equities on a rule-based system.  It will have served its emotional release valve purpose. I don’t know a lot of firms that behave that way. Ritholtz Wealth Management does. That was the whole thinking behind creating our own in-house tactical. Have it be a trend-based system; have it be rules-based. It’s not Barry rubbing his chin saying, “Now’s the time to get in; now’s the time to get out.” So having a rule space system that operates as a release valve.  You don’t have to miss 57% down in ‘08-’09,  but if you missed 30 or 40 percent of it people feel like they’ve done something. They’re not just frozen in fear, and “all right I’m going to ride this out with my long-term asset classes because I know equity will eventually come back” and this makes it a little less painful. 

Now my personal trading account, that’s nothing but bitcoin and leveraged 100 that’s crushing it, right.

Rick Ferri:  I’m sure it is. All right, let’s go on to the next thing. One of the big areas of investing these days is ESG [Environmental Social and Governance] which is — for people who have been around a while — it’s social responsible investing only with some extras added on. People who go down this path, should they expect better returns, worse returns, same returns, higher fees? Barry, what do you think?

Barry Ritholtz: So ESG is complicated. It’s a little challenging and I’ll give you one example. If you have a low carbon portfolio, not a lot of energy or oil stocks, well when the price of oil was falling the ESG portfolio did well because those stocks did poorly, and here we are oil back over 83 so the oil stocks themselves are doing well and a low carbon ESG portfolio is going to underperform relative to that. So I think that’s the wrong way to think about it.

I think the right way to think about it is first you can use ESG  as a screen to eliminate potentially risky companies, especially on the governance side.The higher ranked governance companies tend not to have the sort of “Me Too” moments that so many other companies with poor corporate governance have found themselves getting into. So that’s number one.

Number two. You know thanks to software products like Canvas which is something we use and direct indexing, you can really fine-tune the S&P 500 and say “I don’t want gun stocks, I don’t want any companies that don’t have at least one woman on their board of directors, and I don’t want any companies that subsidize gambling or alcohol” or whatever is your personal preference. And so the ability to be far more granular and specific today than the early days of socially responsible investing really allows people to be specific. No animal cruelty, okay, let me pull that out of my index. The ability to be that fine-tuned, that specific, is really, really impressive and I think for some people that’s a great way put your money into the market in a method that reflects your values and I think you just have to be willing to accept that maybe there’s a performance cost, maybe not.

Rick Ferri: Okay, this is the big one. Now this is the last question before we wrap it up. Cyber Currencies, Bitcoin, Ether; all of these. You, first of all, your overall comments about coins or cyber currencies as investments, and then, if so, if you think they belong in a portfolio, how do you do it?  And how much?

Barry Ritholtz: So really really good question. So first it’s challenging to look at a new technology come along and slowly develop a foundation and develop an infrastructure and develop an ecosystem around it and ignore it, right. I mean as much as I respect Warren Buffet,  when he said in the mid ‘90s, and then again in the late 2000’s “I don’t really understand the internet or technology and I’m not investing there.” Well good for him for sticking to his knitting. But he eventually became a huge Apple investor and left ungodly amounts of money on the table because–what are you telling me, Apple is a value stock in 2013 but it wasn’t a value stock in 2002– when it was 15 dollars with 13 cash and it just had introduced this newfangled ipod which was the forerunner of the iphone.

So I always want to avoid the mistake of, “that’s complicated, I don’t understand it, and I’m not going to take the time to learn about it and become a smarter investor.” So you really want to avoid that sort of “hey you kids, get off my lawn” attitude. So that’s number one. Number two, the crypto coins as opposed to blockchain and the technology around it. So generally speaking crypto coins are a commodity and commodities are speculative trades, not really long-term investments. However, there are people clamoring to put money into this. My problem with things like bitcoin is it’s trading for trading’s sake and the speculation around it seems to be far too much. In a subgroup of this, this isn’t everybody, this is the group that I think is very visible, is the you know “Lambo [Lamborghini] going to buy some bitcoin and then I’m going to make so much money I’m going to go buy me a Lambo.” Like that sort of approach to trading, non-investing, to speculating it’s rife with problems and it has all sorts of issues. And I think that is the sort of thing that you want to avoid.

Now if you are of the belief that, hey, cryptocurrencies and blockchain and the whole infrastructure around it is internet 3.0 and smart contracts and this new technology, this is an opportunity to get into the internet circa late 1990s, okay. So the way to do that is to create some form of an index so you probably own some bitcoin and some ethereum as the next biggest coin, and then another 10 or 20 coins after that, so you’re not gambling on this is the dogecoin of the day, or this is the– what was the one that ran up 260% before collapsing to zero– you, that’s just speculative nonsense, you don’t want to play that game. So rather than go for the lottery ticket, take an indexing approach.

You know it turned out Jack Bogle was right about that, and if you want to put three percent or five percent of your cash or your portfolio into that I could live with that. So 2017 we had an email come into the office. “I bought a whole bunch of bitcoin in 2010. It’s worth 40 million dollars today and I don’t know what to do with myself.” Okay, this guy’s a truck driver. What do you want to do with this?  I don’t know.

Rick Ferri: He wants to buy an island. I remember that ad–he bought an island that…

Barry Ritholtz: right, that was the night the tow truck driver in the late ‘90s, right. But this was a bitcoin investor in 2016 or 17 who reached out to us and said, ”Hey I have 40 million dollars worth of bitcoin. What do I do?”

And you know there’s no upside to telling people what to do because if it works out they’re a genius, and if it doesn’t, you’re an idiot. And so I find that’s a thankless task. So rather than say sell, buy this, sell that; I like to tell people:

“Well, put this in the context of regret minimization. If you sell it and it goes up, how do you feel?” 

“I would feel terrible.” 

“What  if you don’t sell it and it crumbles?” 

“I would feel terrible.”

“All right, so maybe you might want to think about selling half and holding on to half.”

“But 40 million dollars is a lot of money.”

“Half of it even after taxes pays for your retirement, pays off your mortgage, pays your kids college, pays their kids college. That’s a lot of money to just keep in the merry-go-round and take a risk that it collapses.”

So a rational approach is to try and create an index of crypto and if you give me a couple of months I could probably cobble something together for you on this.

Rick Ferri: Okay, now at the end of all of your podcasts you ask various questions to your guests and unfortunately we’re running out of time here so I’m just going to cut the three questions down to one question. And then there’s also another question that was really important to one of the Bogleheads, and I’ll ask that one last. So here’s the question that I think would be helpful. What advice would you give to a recent college graduate who is interested in coming into the investment industry?

Barry Ritholtz: So first it’s a fascinating industry. It’s in the middle of flux and it’s very much changing. So that’s number one. Number two, if you decide you want to come into this industry I would tell them not to worry about their first job, that’s really a stepping stone and that the most important thing that I’ve learned in my career is that you have to develop and build a skill set that will serve you no matter what job you have. And you just keep improving and becoming better and better, learning more and more, developing more skills. Make yourself invaluable to your employer and to any employer who may want to hire you in the future. And if you do that you’ll have a successful career no matter what you do.

Rick Ferri: And the very last question. This is an important one. You often talk about coffee in your– when you write and you when you speak– and so one reader was just dying to know is it drip coffee, Keurig French press, auto drip, perk pour over. I mean what is it? How do you make your coffee?

Barry Ritholtz: Wow. So I have three main ways to make coffee. Most days it’s the Breville Grind and Brew with beans on this side, water goes in the middle, there’s a timer. It goes off at 4:30 in the morning so when I roll out of bed 10-15 minutes later I have a fresh hot pot, freshly ground, electric, pour it- drip into a thermos and that keeps me going for like four or five hours.

So that’s Monday to Friday. On the weekends I will grind up some beans and I love a good fresh French Press, and then last year I got the biggest, baddest programmable cappuccino maker, also from Breville, that was an insane amount of money, but I had these points that were about to expire and so I used that to order the coffee maker. So I know emotionally that I should not be taking points, credit card points, and points. Intellectually I understand that all money is fungible and I should really be taking it in cash but I do like taking in points because it allows you to make these very irrational spending decisions and not feel bad about it. It was free. We paid for it with points. Part of my brain knows that that’s completely wrong, and the other part of my brain is just like, dude just shut up and enjoy the cappuccino.

Rick Ferri:  Well Barry, it’s been wonderful having you on Bogleheads on Investing. You’ve talked about a lot of things here. You gave us your opinion about how you would do things, and that’s all important for us to hear. I want to thank you on behalf of the Bogleheads, and I hope you have a great weekend.

Barry Ritholtz: Oh thanks so much Rick. As always, a lot of fun. Let me know the next time you’re in town we’ll grab another meal.

Rick Ferri: Sounds great.Thank you Barry.

This concludes Bogleheads on Investing, episode number 39. Join us each month as we have a new guest and talk about a new topic. In the meantime visit Bogleheads.org and the Boglehead wiki, check out the Bogleheads new youtube channel, Bogleheads twitter, Bogleheads Facebook, and find out about your local Bogleheads chapter and tell others about it.Thanks for listening.

  1. Barry Ritholtz publishes 10 interesting points every day. So there are 10 items people should look at, maybe 10 articles. []

About the author 

Rick Ferri

Investment adviser, analyst, author and industry consultant



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