Josh Brown is a well-known author, columnist, creator of the widely read blog The Reformed Broker, a commentator on CNBC, and CEO of Ritholtz Wealth Management, an independent investment advisory firm he founded with Barry Ritholtz. In the 1990s and early 2000s, Josh worked for 10 years as a broker at various investment firms, where he learned the hard truths about how clients are routinely treated—and how their money is sent on a one-way trip to Wall Street’s coffers.
A prolific writer, Josh co-authored two books, How I Invest Money and The Clash of the Financial Pundits, and authored two books, Backstage Wall Street, and just released You Weren’t Supposed to See That, which we discuss in this podcast. Josh stopped blogging as The Reformed Broker in 2023 and now publishes the DowntownJoshBrown.com blog.
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This podcast is hosted by Rick Ferri, CFA, a long-time Boglehead and investment adviser. The Bogleheads are a group of like-minded individual investors who follow the general investment and business beliefs of John C. Bogle, founder and former CEO of the Vanguard Group. It is a conflict-free community where individual investors reach out and provide education, assistance, and relevant information to other investors of all experience levels at no cost. The organization supports a free forum at Bogleheads.org, and the wiki site is Bogleheads® wiki.
Since 2000, the Bogleheads’ have held national conferences in major cities nationwide. There are also many Local Chapters in the US and even a few Foreign Chapters that meet regularly. New Chapters are being added regularly. All Bogleheads activities are coordinated by volunteers who contribute their time and talent.
This podcast is supported by the John C. Bogle Center for Financial Literacy, a non-profit organization approved by the IRS as a 501(c)(3) public charity on February 6, 2012. Your tax deductible donation to the Bogle Center is appreciated.
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Transcript
00:00:10 Rick Ferri
Welcome everyone to the 74th edition of Bogleheads® on Investing. Today, our special guest is Josh Brown; author, columnist, creator of the widely read blog, “The Reformed Broker”, commentator on CNBC, and the CEO of Ritholtz Wealth Management.
Hi everyone. My name is Rick Ferri, and I am 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 nonprofit organization that is building a world of well-informed, capable, and empowered investors. Visit the Bogle Center at boglecenter.net, where you will find a treasure trove of information, including transcripts of these podcasts.
Before we begin, I want to thank all the people who were involved with the 2024 Bogleheads® Conference in Minneapolis, MN. We had a fabulous event. 500 guests, 30 speakers. It couldn’t have gone better. Next year, 2025, the conference is scheduled to be in South Texas. We’re shooting for San Antonio on the Riverwalk approximately the same time. The end of September or October period. We’re already lining up some fabulous speakers. More information will come out on this podcast as well as boglecenter.net and Bogleheads®.org, when it becomes available.
Our guest today is Josh Brown. He’s a well-known author, columnist, creator of the widely read blog, “The Reformed Broker,” a commentator on CNBC, and the CEO of Ritholtz Wealth Management. During the 1990s and early 2000s, Josh worked for 10 years as a broker at various investment firms, where he learned the hard truths about how clients are routinely treated and how their money was sent on a one-way trip to Wall Street coffers.
Josh began his blog in 2008, and has since written thousands of posts and is also author or co-author of four books, the latest one, “You Weren’t Supposed to See That” is one of the topics of our discussion today. With no further ado, let me introduce Josh Brown.
Welcome to Bogleheads® on Investing, Josh.
00:02:29 Josh Brown
Rick, it’s an honor to be here. Thank you so much.
00:02:31 Rick Ferri
Well, it’s great having you on. I really enjoyed your latest book, “You Weren’t Supposed to See That.” And we’re going to be talking about that today. But before we go down that path, I always like to ask a little bit about your background, and I’d like to go way back. So, you grew up as a teenager in Long Island in the 1990s and at one time you had a dream of becoming an artist.
00:02:56 Josh Brown
Yeah, I thought I would grow up and do animation for Disney. I was a creative growing up. I played sports and stuff, but I was not a great athlete or anything like that. What I really loved was reading and art. But somebody tapped me on the shoulder and said, hey, you’re not technically proficient enough to become an animation artist at Disney, like that’s not where this is going. I didn’t have the technical skills that would be required for something like that, so I really was unmoored coming out of high school. I had no idea what to do with myself. I wasn’t particularly interested in school.
I think that I got this anti-authority streak from my parents. It’s not that they didn’t want me to do well in school, it’s just that they didn’t seem overly concerned about it. And I think I just kind of said I’m going to do whatever I want, and it did not go well for me as you as you might imagine in my in my teens and 20s.
00:03:54 Rick Ferri
You did get your start in the industry in 1996. Your father apparently knew somebody who he has played golf with who was in the brokerage industry and made the introduction, and you got a job at a brokerage firm, cold calling and getting leads for a senior broker. Talk about that.
00:04:13 Josh Brown
So, this story is not very uncommon for people in their teens or 20s in that time from where I came from. Nassau County, Long Island. Basically, if you didn’t know what to do with yourself, you became a cold caller. And Long Island had I was going to say thousands, but it’s probably hundreds, but maybe it felt like thousands of brokerage firms. Every one of those glass office towers along Route 110 in Huntington or out in Melville, Dix Hills, Hop Hog, the North Shore of Long Island, Great Neck, all of the Northern Blvd office towers had its own brokerage firm in it.
And it’s just what you did. And what was cool about it was this is before the internet. And people were genuinely interested in learning about the stock market and being offered IPOs and being called by people who purportedly were from Wall Street. So, we had a very receptive audience when we would dial the phones, and it was very simple. “My name is Josh. This is the name of my firm. And every year we help bring between 6 and 12 companies public. And the next time we’re going to do that, we’d love to be able to call you and tell you about the company.”
And everyone said yes. So that’s 1996. I was in Manhattan doing that. I think the building was 909 3rd Ave., which in the book I point out ironically is right next door to the Lipstick Building where Bernie Madoff was plying his trade. So, we thought we were the hot shots.
But basically, I worked at a firm that ended up becoming notorious. It was called Duke and Company. I was 19. It was the summer after my freshman year of college, and I was just trying to figure out how to spend the summer. But I was good at it. And I really fell in love with the stock market right then and there.
Nothing I was doing, Rick, had anything to do with the stock market. I wasn’t trading, I wasn’t investing. I was literally just cold calling, but I really loved waking up every day, getting on the Long Island Railroad, commuting into work, reading the Wall Street Journal cover to cover. I was just in love with the business.
00:06:25 Rick Ferri
I started in the brokerage industry in 1988, is when I was hired. And yeah, back then, I mean you just got a list of people and called them on the phone. And what I found worked, I was in Michigan at the time, we had a lot of municipal bond offerings for public schools. I got a map of whatever county or city was doing the municipal bond offering, and I looked for the streets that were kind of windy, which is where usually the big houses were. I call a real estate agent up and I’d say hey, I just sold my home in LA for half a million, and I’m looking to relocate here. Oh, this is the street you want to live on. They tell me where to go.
And so, then I went to the reverse directory and called all those people and said listen, there’s a bond issue coming out in your city for your schools. Would you like to support your schools by maybe participating in this bond issue? And that’s how I got my leads.
You know that was, but people would pick up the phone back then and they were very receptive. Different world today, of course, nobody picks up the phone anymore. So prospecting is much different.
00:07:22 Josh Brown
It’s a different world. And so, when I listen to the stories of other people who have become successful in the street, if they started in your era or my era in the 80s or 90s, no matter where they ended up, it’s highly likely that among their first roles on Wall Street involved cold calling.
You listen to Ron Carson tell his story of selling mutual funds out of the trunk of his car, or insurance policies. You listen to Jim Cramer talk about Goldman Sachs dropping him in a town in upstate New York. He goes to a library, he gets microfiche, and he starts looking at who the notable names of the people in the town who keep popping up in articles.
And then he gets himself a meeting in one building, and after that meeting, he uses the fire stairs to go to every floor and try to meet as many people. I mean, this is what it took on Wall Street or Off Wall Street as I started back then, just to get some traction. If you could sell, then you were useful in some way. If you couldn’t sell, you better be a CFA. You had better be an analyst of some sort because it’s like one or the other. And I definitely was not going to be an analyst.
00:08:33 Rick Ferri
Yeah, you were either an analyst or a portfolio manager and back then being a portfolio manager, you sat next to God, you know, as a portfolio manager. You talk a lot in your book about the movie The Wolf of Wall Street because it was really real for you. In fact, you actually mentioned in that book several times that some of the things that you wrote about while that movie was being written were things that you were writing about.
00:09:00 Josh Brown
So, I came into the business on the tail end of the Wolf of Wall Street era. And by the way, nobody actually called Jordan Belfort that. He kind of invented that name for himself. It was catchy, so it took. But I came in after the Stratton Oakmont era. And when Stratton Oakmont went down, there was a diaspora of people who had learned the Belfort method of selling stocks over the phone. And those people didn’t go into retirement.
They all launched their own version, and the conceit was we’re going do what Stratton did. But we’re going to do it legit. Like we’re going to do it better. Which of course was not true, but that was their pitch. So, these are the hundreds of firms that I’m talking about. They were on Staten Island. They were in lower Manhattan in the financial district.
They were on Long Island, New Jersey, Boca Raton. It was like a bomb went off and all these bodies scattered, and then they picked themselves back up and they got back on the phone. So, I worked at a couple of firms that had been run by people who came from Stratton and one of the things that I thought it was about, I mean, in hindsight, at the time, you don’t know what’s going on, but in hindsight, one of the things that was really creative that they figured out was that you don’t start off pitching the stock that your firm is making a market in.
You start off pitching Bristol-Myers. You start off pitching IBM because nobody says no to Bristol-Myers or IBM. Then the client sends a check. The account is open, it’s funded, there’s money there. The second time you call the client, that’s when you have an electronic contract manufacturer from Asia. Three and a half dollars stock in your firm’s market-making account.
You could sell it for four or four fifty—and capture fifty cents to a dollar in between. It’s not until you’re there for a while that you realize, oh, that’s why these guys drive Porsches and Ferraris, that’s what’s going on. I guess I was a slow learner. It took me a minute to figure it out, but that ended up being the game.
00:11:06 Rick Ferri
Yeah, they used to call that the rip.
00:11:08 Josh Brown
So, they had the rip, and they would bait people with respectable investments in companies. And what was interesting is that in all of these firms, there would always be that one broker who refused to go along. I think it would have been you.
00:11:25 Rick Ferri
That was me. That was me, believe me.
00:11:25 Josh Brown
Would have been you, Rick. OK. So, I would meet these guys, and I would say, hey, you seem to not… hey, you’re not cheering and clapping during the morning meetings, and you’re always reading, and you seem to have a better command of, like, the Quotron and you, like, you seem to like, be thinking more than these other gorillas. Can I take you out to lunch? And so, at every one of these firms, there was that one guy, and it was always an outcast.
Yeah, either it was a much older person, or it was the one guy who was quiet at lunchtime. And so those are the people that I found myself gravitating to because they were thinking. And the rest of the room were not thinking. They were selling.
00:12:07 Rick Ferri
So this was me. I mean, you’re describing me and my last firm that I was at, which was Smith Barney in the late 1980s, and the office manager comes into my office one day and he says, Rick, I understand that you have some issues with what we do here, he says. But I have to ask you to do one thing, and really, your job depends upon it. I don’t want you talking with anyone else in the office.
00:12:32 Josh Brown
Yeah.
00:12:33 Rick Ferri
I said, “what?” He goes. I don’t want you talking with anyone else in the office. You can believe in what you believe in, which at that time I was getting into Jack Bogle, index funds, Vanguard, ETFs even.
00:12:45 Josh Brown
Boy, were you in the wrong place.
00:12:46 Rick Ferri
Oh yeah, I was in the wrong place, but I had a contract. I had to stick around because I skipped from one firm to another. And you took the big upfront money to do it. And I redid my kitchen, and we bought a trailer, and we were trying. I spent all the money and so I couldn’t pay it back. But it was miserable, you know, working there, but yeah, I was that guy.
00:13:04 Josh Brown
I liked those guys the best because I didn’t know anything. I didn’t have a Business School degree. Nobody taught me anything about investing. Those guys could teach me something, and I eventually became one of those guys. The more experience I had, the more I realized all of this, everything that we’re being told to do, all this training, the sales training, all of it is working directly against what’s best for the customers, all of it.
And you look, you can forestall that kind of inner conflict for two years, for four years. You can’t once it’s like a light bulb being turned on. Once it’s on, that’s it. You can’t shut it off. You can’t ignore it forever.
00:13:49 Rick Ferri
It’s a different religion. I mean, you change religions.
00:13:51 Josh Brown
You change religions. That’s… Yeah. It’s a great way to put it. So, my light bulb was on, and I wasn’t long for that world. And it wasn’t until the aftermath of the great financial crisis where I had the ability to make a life change and get away from that. That was what my first book was about.
00:14:09 Rick Ferri
Well, actually right after the financial crisis is where you began your blog. And I have to tell you, the first time I went to your website, The Reformed Broker, I was exceedingly jealous. I said, what a great name for a blog. Why didn’t I think of that? The Reformed Broker, I mean, this is fantastic. And I started reading your stuff way back when you first did it. Then you started talking about the industry, and you started to get a big audience, which was huge.
00:14:38 Josh Brown
So, I had a compliance officer at the last brokerage firm I was at, and this is like in 2008, and the world is coming to an end, and firms are closing, banks are shutting down, Madoff comes along. It’s just like one thing after another. And I remember saying to him, hey, I’m reading this guy Barry Ritholtz. He has a blog, and I want to start a blog just like Barry. And he’s like, are you smoking crack?
00:15:10 Rick Ferri
Where do you think you are?
00:15:11 Josh Brown
And I’m like, no, but I don’t own the firm. So, he told me no twice, and then the third time, he’s like, alright, listen, I don’t really care actually. I don’t even think this firm is going to be here in a couple of months. Do whatever you want. Just do me a favor for my protection. Every time you press publish, print it out, bring it to me. I’m going to put an ink signature on it and put it in the middle Manila folder. I said that’s it. He said, you do whatever you want. I’ve got bigger problems.
So that was November of 2008, and it was life-changing because I basically worked somewhere where I was liberated to say whatever I wanted. And very few people work, as you know, very few people being overseen by FINRA would have the license to say things at the firm they worked at and would have the chutzpah to just be like, hey, this is what’s really going on. So, I was very unique at the time I was able to do that, and it definitely changed my life.
00:16:14 Rick Ferri
In 1999, when I left Smith Barney, when I finished my contract and was able to leave without having to pay them any money back, is when I published my first book, Serious Money, which I self-published and then I started my own little blog and then I got picked up by Forbes and I started writing for Forbes. So that sort of put me on the map.
00:16:34 Josh Brown
You were among the first, and when I first got turned on to financial blogging and I met like Eddie Elfenbein and Tadas Viskanta, you were like consistently one of the people said you’ve got to read Rick. So I don’t know how early I was, but I definitely was fairly early.
00:16:53 Rick Ferri
Well, whatever it was about you, my blog was fairly successful. People read it. I mean, Bogleheads® started reading it because I was putting things on Bogleheads®.org, which wasn’t Bogleheads®.org at the time, was actually a Morningstar website.
But you had the, I don’t know, the persona, something about you and you know, the great name for the blog, the Reformed Broker, you started getting a lot of traction. Now you were saying really good stuff too. What your idea was, and I’ll quote here, your idea for the blog was to tell the truth no matter what. And so, for 15 years, you wrote about Wall Street, the Fed, the markets, brokerage shenanigans, and you even caused a mutual fund to shut its doors because it was so poorly run. And this is according to Jason Zweig, who apparently sent you a note that it was you who caused this. And I don’t want to say it’s a fraudulent fund, but it was not a not a good situation.
00:17:45 Josh Brown
You know what, I appreciate that. I think Jason was proud of me. It was not personal, and I didn’t say, let me shut down this fund. I was using this particular fund as an example of a category, something that investors were being sold in the aftermath of a crisis was anything but S&P 500 exposure and the more elaborate and ornate and the more derivatives and different bells and whistles could be packed into a fund, the better. And they were charging a ton of money, and they were selling a story of all weather, and this is going to be a fund that’s going to make it so you don’t have to have drawdowns, but also you’re going to get all the upside of the market.
And I look, I understand wholesalers have to do their job. Their job is to market a product and of course, fund companies want to launch expensive high-cost products because that’s where the margins are. And by the way, investors were looking for that at the time. It’s not, this was not being rammed down anyone’s throat. This is exactly what people want. After the market crashes, they want to be told the story where they could have avoided it. And still had the upside. That’s what people are looking for. A Holy Grail in every industry. Ours is no different.
So, they basically catered to the worst of human nature, and they sold the product that quite frankly could not have worked based on the way it was constructed. I watched it for two years, and I said, that’s it, I’ve had enough. And I wrote the piece and very quietly, I think a couple of months later, they closed the fund down. And I’ll never forget Jason sending me a note and saying you, you did this. I was, Rick, I was not like I wasn’t high-fiving anyone. I was horrified because it was the first time that I really got the sense that things that you could write on a blog, with no gatekeeper, no one in charge, nobody editing could have a real-world impact like that. So, it forced me to, I think, be a little bit more. I don’t want to say careful, but maybe a little bit more meticulous in what I was doing and saying because people were watching.
00:19:54 Rick Ferri
Yeah. We tend to forget how many followers we have. Then you have like, a million followers on Twitter or some crazy amount. And we tend to sometimes forget how many people are listening to this podcast and how many people are following you on various blogs and so forth. So, here’s the kind of the back story. You got yourself into a position where you were invited to hundreds of industry conferences. You got on television 1500 hours of television time. You read everything you’ve said in thousands of meetings, talked with hundreds of financial advisors, and you said something in the book, which I thought was interesting is that you weren’t outside looking at Big Ben. You were inside and you could see how the Gears of Wall Street worked.
And you weren’t impressed with a lot of it and you would write about it. Yeah. And I thought that was a really good way of looking. I mean, you’re an operator. You understand the back end of it. And were able to comment on it as opposed to somebody who, you know, got a degree from Harvard Business School and then became an analyst or, you know, got picked up as a portfolio manager at Fidelity or something. I mean, you were in the trenches, you started in the trenches, you see it, you saw it, and it made really interesting writing, made really interesting blogs which did lead you to this gig, if you will, at CNBC. How did that all come about?
00:21:29 Josh Brown
So, I was writing seven days a week furiously. This is 2008 to 2010. I wrote seven days a week, and I would read everything that was happening in the markets. I would read the FT, New York Times, DealBook. I read The Wall Street Journal religiously. Barrons cover to cover, and then I would spend a lot of time on Twitter where there were in those days, there weren’t a lot of people talking about finance, but there were some very successful people writing under pen names, pseudonymously, and I would absorb everything that they were saying. And then I would have an inbox filled with research because once I became prominent, everybody wanted me to read whatever research their firms were putting out.
So, I thought I was in a position where I really was getting a lot of insight from a lot of places, and my skill was never as a primary researcher. I don’t start with the spreadsheet. I start with the stories because I’m not a mathematician. So, I would try to reconcile a lot of things happening from the economy to the markets to Wall Street, you know, insider business stuff, and just try to figure out the combinations of things that are leading to what’s driving the trends. And I would try to synthesize all of that into something that was entertaining for the reader.
I was still an outsider at that time and that I think I had a really good handle on why the markets were moving, who was saying what, how the products were being created to meet the demand, how the wholesalers were connecting with advisors, who were then selling things. I just, I saw all the pieces of the puzzle and that’s what the blog was about. And before long, the people at CNBC, somebody contacted me and said, you know, we’re reading your stuff every morning in our editorial meetings as we’re trying to figure out segments for the different shows we thought we might as well reach out to you and see if maybe you would come on, and I said I’m not busy, so they gave me a shot. I did a blog post, I forget what I said, but it was I guess it was a good one for a TV show. So, they gave me a shot to come on Fast Money at 5:00 and do a remote hit, which I know you’ve done these before. You’re in a black closet with a camera lens 6 inches in front of your face. You have an earpiece so you can hear the producer, and you could hear the show, but you’re in a chamber.
00:23:50 Rick Ferri
And the light comes…
00:23:53 Josh Brown
Right, blinding light in your eyes. So that was my first appearance. But immediately, in my ear, one of the executives who happened to have been in the control room grabbed the microphone from the producer and said that was amazing. Do you want to come back? I said … Yes. What are you doing tomorrow, right?
But it was tomorrow, so I think I have a way of communicating that works well on TV, and I really enjoyed doing it. They started a new show at 12:00 coast time called the Fast Money Halftime Report, which was meant to be a spin-off of the 5:00 show. Now it’s its own thing. They were looking for cast members to be regulars, and I think I had the timing right and I hit it off with the show’s host, Scott Laughner. And the rest is history. I’ve been under contract since 2012.
00:24:45 Rick Ferri
Fantastic.
00:24:46 Josh Brown
About 12 years. It’s really been one of the best things that’s ever happened to me in my career and in my life was getting that platform and hanging on to it for as long as I have.
00:24:56 Rick Ferri
So, all of this content that you’re putting out, the blog, your first book, now on television. And you and Barry Ritholtz, who, by the way, I had on Podcast #39 decided, well, we have all this content, we have all this attention. Maybe we should start up a company and that’s what you did?
00:25:18 Josh Brown
Yeah. So, I’ve been told by my agent not to say content. It’s IP.
00:25:23 Rick Ferri
Oh, I’m sorry IP.
00:25:26 Josh Brown
You have intellectual property. Content is disposable. Intellectual property is evergreen. Rick, you have IP.
00:25:34 Rick Ferri
OK, I have IP. You do. It’s on my balance sheet at $0, though.
00:25:37 Josh Brown
Yeah, I know the feeling. So, Barry and I met through financial blogging. I got an invite by Howard Linsen to come out to a conference he was doing in Coronado Island, and I had no money. But I knew Barry would be there and Barry was my idol, and we had exchanged emails, and I just, I knew if I met him and I told him my story, that I could be useful to him. And I knew what he could do for me, given his stature at that time.
Barry was the guy who called the crash in advance, meticulously detailed why the markets would crash from 06/07. Then it finally happened in 08. And then in early 09, he’s in The New York Times 3 days before the bottom saying. Look, I’m the guy that saved you 7,000 Dow points. Spot me 1,000 points and I think you can buy them right here. And he did that. And I don’t think you can do it again. I don’t think he thinks he could do it again, but he did.
And the reason he was able, this is important, it’s a little bit of a tangent, but just bear with me. The reason Barry was able to do that was really unique. His mother was a realtor. He spent his childhood sitting at the kitchen table, listening to house stuff, and he connected this one really big idea, which is that, and I know this is audio, not visual. You can’t have housing prices do this. Go lower left to upper right and have incomes go straight across flat. That can’t go on forever. So, Barry’s insight was either every single worker in America is about to get a raise that’s triple their current salary, or none of these home prices are sustainable. And here are all the dominoes that will fall once housing prices start. That was it. That was the whole insight. But he did it, so he’s got a phone ringing off the hook with people who want to give him money. He’s not a financial advisor. He’s never done that before. He’s a strategist.
I have the opposite problem. I’m ready to give advice right now. Nobody wants it. So, I meet him in San Diego, and by the time we get back to New York, he’s calling me and he’s like, look, come over here. Meet the guys who own the RIA I work at, and let’s see if we could figure something out. And we did. And within a few months, I figured out what the real problem was. So, Barry had people emailing him. Hey, take my money, take my money. He couldn’t do it. He would just hand that off to someone else, and he had no control over what that someone else would do with the client. And of course, that’s problematic because it’s under his name.
00:28:09 Rick Ferri
Well, you have liability, I think in a way. I mean, maybe not direct liability, but I mean, if you’re given a referral to somebody and you don’t know what they’re doing.
00:28:16 Josh Brown
It’s a moral liability that you have. How could I just turn this over and then not have a stake in what happens? So, we start taking clients on jointly. I’m the advisor. Barry is on the portfolio side. We thought we knew what we were doing. It turns out like we really needed to add more team members to figure out the right way to do it. But that’s the origin.
00:28:39 Rick Ferri
And what was the year that this occurred?
00:28:41 Josh Brown
This is 2010.
00:28:43 Rick Ferri
2010 because I think the very first time I went to your offices was maybe a year or two later and you were still spinning. You maybe had three people working there or something, but OK, go ahead. So, finish the story. But the IP marketing idea where you’re putting out content. Barry’s putting out content. You realize that this is the key. A master key to getting clients. And then you started creating or you started bringing other people on who could also produce IP.
00:29:21 Josh Brown
Yeah, but they had to have another job. Also, this is the key, Rick. Everyone had to wear 5 or 10 hats in those days. So, we bring on Michael Batnick. We didn’t bring him in to do a blog. It turns out he’s a great writer. He’s a great communicator. He ends up doing a podcast with Ben. We bring in Ben. Ben’s going to be the head of institutional. So, he’s going to work with larger-sized accounts. And that’s the world he came from. He was managing money for a hospital system in Michigan. We bring in Blair, Blair is going to manage hundreds of millions of dollars as an advisor and then also have a blog. So, the idea was not let’s get a bunch of talented writers because I think anyone can do that.
It’s, let’s fill this firm with people who are practitioners, dealing with clients all day, doing research, building portfolios, trading accounts, managing money and let’s give them the ability to say what they want to say. But in the end, we’re all espousing a philosophy of the right way to treat clients and the right way to think about costs and taxes and asset allocation, and when we had that thing humming for the first time, it wasn’t until we launched our own firm in 2013. I don’t think we really figured out how powerful this could be until 2014/2015. And that’s when we had really started to hit our stride.
00:30:46 Rick Ferri
I remember being in your office the day that you announced it. We’re about to announce that you hit a billion in assets.
00:30:52 Josh Brown
Yeah, absolutely.
00:30:53 Rick Ferri
Yeah. So, it was a big day for you, but your firm could grow by then, and I want to just truncate this a little bit, but now you’re into different things. You have a media production company, you just finished a huge conference for advisors on the West Coast. So just talk about those two things briefly.
00:31:09 Josh Brown
So we launched the Compound Media because the shows have gotten so big that you’re talking about millions and millions of views on YouTube and millions of downloads for the podcasts, and it just gets to the point where it’s like if we want to maintain the quality, we’re going to need help, we’re going to have to bring people on who are going to be full-time helping us produce this content professionally. Yeah, the IP. Make sure it gets out on time. Make sure all the compliance labeling has to be on it, etc.
So, it led to really like a full-blown media business. And that media business has enabled us to do what we do at a very high level and audience engagement with the fans, live events. We went to California in late April. We did a live event there, brought out a few hundred people who lived in the LA area, who were die-hard fans. All of that takes money and a lot of help and full-time employees. You can’t really ham and egg that kind of thing and do it with contractors. So that was the idea behind doing a media company as opposed to just trying to do a pod, and I think it’s obvious at this point it was not obvious 10 years ago that that was the route we were going to go. So, it’s really exciting because there’s another thing I never had any experience doing and I’m learning on the job.
00:32:35 Rick Ferri
So, I’m going to put you on the spot here. So you wrote this in the book, by the way. You were very open in the book and very honest in the book about where you’re sitting right now. So, in the book, you wrote about something that Jason Zweig’s father said to Jason. And it really was impactful to you. And I had heard this before, but I want to read it because it’s really pertinent to the investment industry. Jason’s wife’s father said that there are three ways to do business.
#1. You can lie to people who want to be lied to and you will become rich. #2. You can tell the truth to people who want to hear the truth, and you’ll make a living. #3 You can tell the truth to people who want to be lied to, and you’ll go broke.
Great quote because I’ve always felt #2 is where you want to be. You want to tell the truth to people who want to hear the truth. And you make a living doing that, which is the reason I left the brokerage industry. And the reason you started your Reformed Broker. I mean, the Reformed Broker, you weren’t making any money at all. I mean, you were scrapping at that time, correct? But you wanted to tell the truth and that’s the whole point.
So now I’m going to put you on the spot ahead a little bit. You stopped blogging under the Reformed Broker last year and you said in part because it caused conflicts with the advisors, fund managers, brokerage firms, investment banks, software providers, trading firms, asset management companies. But I have partners and vendors all over Wall Street that I can’t afford to offend. Aren’t you violating #2 now?
00:34:24 Josh Brown
I don’t think so. I think I’ve carved out a lane for myself where I can say I respect other people’s opinions. I respect other people’s ideas about investing and I don’t have to agree with them in order to get along with people. I think that I’ve matured as a person. I used to throw bombs. I used to pick fights. I used to go looking for cases of other people’s wrongdoing and drag it out into the light, but when you see people doing that, a lot of the time there’s a projection involved or a lot of time there are just people who are bitter about how life turned out for them. And so, they turned that bitterness outward. And they want to make other people miserable. And I just didn’t feel that that was the road that I wanted to spend the rest of my life going down. It didn’t feel that it was representative of the person that I had become.
So, I think I’m more tolerant now of people who I disagree with. I think I try to put myself in their shoes and understand where they’re coming from, but I don’t think that I pull punches when I come across what I believe is just an elemental truth about the right way to do things and an example of that is what I wrote yesterday. Within my industry right now, there is a massive debate about the right way to structure a firm for the client’s benefit and for the benefit of the advisors who work there, and a lot of money has come pouring in with a different interest than what’s best for the client.
We’ve had private equity firms effectively colonize the RIA space. They’ve created 15 or 20 aggregators or super aggregators. And what those aggregators want to do is collect as many smaller independent advisory firms as possible and their employees and their clients assets under management, and make their LPs in their PE funds happy. And as Peter Malek said on stage last week at future proof, private equity doesn’t give a shit about your clients.
00:36:27 Rick Ferri
No, of course not. I learned that very, very hard in my own portfolio management company when I sold to a private equity person in 2017. That’s exactly right. You hit the nail on the head.
00:36:41 Josh Brown
So, I’m not categorically opposed to private equity investments in RIA’s. The question is, as an entrepreneur in our space, do you want to build something that has values and a culture and a cohesive group of advisors who are all saying the same thing to their clients and who are all singing from the same hymn book?
Or do you want to build a platform where anybody can work there and say whatever they want and all you care about is that they’re kicking up their percentage upstairs? And so I wrote that yesterday and I know I didn’t make any friends writing that, I think I’ve just tried to become less of a bomb thrower and more of a person who’s willing to take some risk in espousing opinions that are unpopular, but for the right reasons. And I don’t know where the line is always.
00:37:30 Rick Ferri
Although you did write something, you missed that old you in a way because you wrote, you said you wished you could go back to saying whatever I want. I mean, you did write that in the book. So now I have to tell you. OK, I’m about 20 years older than you. I no longer own an asset manager company. I don’t owe anybody anything on Wall Street anymore. And maybe if you get to my position, you know, 20 years from now, you will become more like me.
I’ve lost a lot of friends in this industry because I have now become very honest about things like advisor fees and the next thing we’re going to get into, which is simplicity, and I really pumped that and that has cost me within the advisor industry. I mean, I don’t get invited to conferences.
00:38:18 Josh Brown
But would you change any of that?
00:38:20 Rick Ferri
But I don’t have to change it because I’m financially independent. So yeah, I’m beyond that.
00:38:24 Josh Brown
No, but emotionally, because I have this struggle, so you start writing this blog, you’re scrappy, you say whatever you want. You let the chips fall where they may. And I did that for a long time. But then, at a certain point, you say to yourself, if I continue down this road, it’s going to make it very hard to build a business, support a family. I don’t know the right answer for anyone else, but …
00:38:49 Rick Ferri
I agree with you 100% where you are is different from where I am, so I’m saying I’m 20 years older than you, right? I’ve been through what you went through. You’re much bigger than I ever got. But the point is that my kids are all done with college. I have 8 grandkids now, you know, I mean, we have our money, we’ve got our homes, everything’s paid for, you know. I’ve got a pension coming in from the military.
I mean, you know, I can say the things that maybe you can’t say right now. Jack Bogle was this way. I mean, he didn’t have to spend his entire life pounding the table about low fees and index funds and, you know, keeping it simple. He didn’t have to do that.
00:39:24 Josh Brown
But Rick, let’s double click on that. He also, though, had a massive firm behind him doing things that he didn’t always agree with till the end of his life. He never liked ETFs. It’s one of the biggest businesses Vanguard’s ever been in. So, there was an incongruency there.
And in the book I wrote prior to this one, I quoted him in the introduction because Jack Bogle gave an interview sometime near the end about his own asset allocation, and he was allocating money to his son’s mutual fund, which was not a low cost, it was an active mutual fund or a hedge fund even.
00:40:04 Rick Ferri
I completely agree. Look, I know Jack Bogle up until the day he died. He wrote one of the forwards on my book and the fact is he was a mutual fund operator. I mean, he created mutual funds, and he ran mutual funds. When it came to his own portfolio, I remember at the Bogleheads® Conferences, we would ask him, so what does your portfolio look like? And he had to sit there and think about it.
And I actually think he was just making stuff up to go along with the narrative. But he got better at it over the years, he said, oh, you know, I own mostly index funds and this and that. But my point is that, he never really gave asset allocation much thought, I don’t believe. And yes, he did invest money with his son’s company. And you know he owned the Wellington Fund for years as well.
00:40:45 Josh Brown
Some things are messy, some things in life are messy.
00:40:49 Rick Ferri
By the way, he’s not the only one. I have asked many high-level people at Vanguard. What does your portfolio look like? Some of them can’t even tell you.
00:40:55 Josh Brown
Yeah, I’ve seen the opposite. I’ve heard stories about some of the most famous 2 and 20 hedge fund managers who keep all of their personal money at Vanguard. Multiple stories. Multiple stories.
00:41:08 Rick Ferri
I have had that too. Before I was leaving the brokerage industry at Smith Barney. I went to Smith Barney if you can believe it, and I tried to get them to create ETFs. This is an industry that we have to get into. This is the future. Look at Spider, look at MDY, Mid East, I said we should be we should be doing this and of course, they said, hey, there’s no money in that, and we are not going in that direction.
But the person I was talking with, who used to be a senior person at Lehman, who was now working at Smith Barney at a very, very high level, beautiful office overlooking the Statue of Liberty. Anyway, I asked him about Spider. And he says, oh, Spider, yeah that’s all I own in my own account is Spider. I love them. I said, well, why don’t we do that? He goes. Yeah, no money in that.
So, but you’re right. I mean, they’re great. Yeah. We’re going to get off this topic and go into just some other things. You wrote investing in stock is no longer a luxury, it’s a necessity. Younger people who may not have a defined benefit plan may fear that Social Security may not be around, career mobility is all over the place. The fact is that they have come to realize that investing in stocks is a necessity, and you just always must be there. I thought that was great insight.
00:42:30 Josh Brown
You know what percentage of the stock market in France is owned by households, like regular people, not institutions, not banks?
00:42:39 Rick Ferri
I’m going to guess small.
00:42:41 Josh Brown
3%. Why? Pensions. Their future is already written for them. It’s a pension and it’s all they need. And if you know middle-class people from Spain and France and Germany, then one of the things that you know is that they are living on a very fixed income and they count every euro they spend, and they know when they can spend a little bit more or when they can spend a little bit less. They can do that a few times throughout the course of the year, but there’s no potential upside. There’s no variability and it’s a mentality and they’re comfortable with it. And of course, it seems like they’re starting to now go the other way, and maybe you want to become a little bit more capitalist, which probably means a lot more protests and things lit on fire on the way to getting there.
But they’re going to go for it. Because I think they’ve come to the realization that there has to be more risk tolerance in our society in order for there to be more upside. And so you’ll see Macron posing for photo ops with people who are founding AI companies in Paris. That is not the way things have been there for 25 years, but it might be where they’re headed, and in America, it’s very different. Very few people other than Social Security have anything guaranteed coming to them, and we’ve basically turned everyone into an erstwhile portfolio manager.
We’ve said to people you are responsible for your own retirement. We’re going to give you a tax benefit to defer spending by putting money into a 401K or an IRA and you have to make the decisions on how that money is going to be allocated. And it looks as though when I look at the data from Fidelity and some of the other studies, it looks as though by and large, the American people have done a good job with this.
00:44:29 Rick Ferri
I think so. A Vanguard study also shows the same thing.
00:44:32 Josh Brown
Vanguard study as well. They’re buying stocks. They’re not screwing with their allocation during bear markets, in 2022, nobody budged. The money is coming in every two weeks. Regular people who know absolutely nothing about investing are investing very well for themselves and the balances in 401K’s at Vanguard, at Fidelity, the allocations are evidence of this. They don’t get enough credit. I’m going to take it a step further and say that basically, we have engineered the way American Society works in such a way that if you don’t have assets, you’re locked out, you’re not part of it. We are increasingly seeing wealthy people use their stock and bond market portfolios to borrow against, and that way they’re having their cake and eating it too. They can buy the vacation home, but keep their investing portfolio. They don’t have to liquidate assets. Now, of course, someone said, well, we’ll all come crashing down. So OK, hasn’t happened yet.
And so, we are seeing now the rules be rewritten. You must have financial assets that you can use to support your future spending. Borrow against today to quote-unquote unlock, you know, the other half of your balance sheet you have to be in the game. And I tell this to young people, this is not oh, I’m not interested in stocks. That’s not the world we live in anymore. So, you must own real estate. You must own stocks. And if you don’t, it’s not that the police are going to come. It’s just going to make it really hard for you to participate in being middle class in America. There’s not even upper class. This is middle class. So, we see this everywhere. 529 plans have had a huge impact on who can go to what college. It’s not going to go into reverse. So, I do agree with what your statement was. It’s now an essential feature of American life, the ability to put money away, keep it invested, and bear risk.
00:46:27 Rick Ferri
With that to the next level, people are not afraid to invest in The Magnificent 7, even though they are higher price. Now, why is that? I think that the younger people have come to the realization that this is where the growth is. Yes, they might be high price, but this is also where the earnings are.
So even though you may now work in a tech industry, let’s say you work at Ford, you’re not going to buy Ford stock? No, but you will put your money in an index fund that is 50% allocated to tech and you like that. You see that.
And maybe it’s because of social media, you know, getting away from what we used to have back in the 1990s where it was just very limited outlets for gathering information. There’s just so much more of it out there, including the Bogleheads®, including podcasts, including what you’re doing. Where people are becoming more educated, becoming smarter, so not only are they investing in equity, but they don’t mind owning these equities, even at a what may seem like a high valuation because that’s where the growth is.
00:47:32 Josh Brown
Yeah, I’m going to do you one better. Most of the professionals 10 years ago, 2014/2015 when these large-cap tech started to become mega caps – that’s really the moment, by the way, the actual starting gun for the FAANG Magnificent 7 phenomenon – was the first time Amazon in 2016 reported a surprise profit. Weren’t supposed to report a profit. AWS was growing so fast and so profitably that they shocked Wall Street one night. I’ll never forget it. I was on TV actually. I was in Times Square on Fast Money and it was a starting gun being fired because it was the first time that it became apparent off and on Wall Street that these companies were special.
They were different from other large cap tech from eras past they had this captive platform audience that would almost be spending forever and have no choice. Now, of course, the smartest people on Wall Street said, that’s not how it works. You can’t just buy the most popular companies and expect to make money, because all that popularity is already priced in. Boy was that wrong. The regular investor, the know-nothing who just bought the companies that they do business with, I’m always going to have an iPhone. I’m always going to use Amazon to buy my stuff. I’m always going to use Microsoft at work, the know-nothing person who just bought those stocks has done way better than any professional, especially the professionals who were reading CAPE ratio blog posts.
00:49:12 Rick Ferri
By the way, CAPE is Schiller’s valuation for where the market is not necessarily predictive.
00:49:17 Josh Brown
Right. You could throw that out. It has no value. I said 10 years ago there’s no value. Very simple insight. The companies that now comprise the S&P 500 have 30% profit margins and they’re growing revenue and earnings 30 to 40% a year. There’s no comps to that. We didn’t have companies in the 70s or the 80s that could do that. It didn’t exist. The companies in the S&P 500 in the 70s had 4% profit margins because they were smelting copper, OK?
So, software and semiconductors literally changed the way capitalism worked forever. I feel confident saying that it’s been 25 years of this.
00:50:22 Rick Ferri
And it also changed the way that the market reacted to rising interest rates. So, remember Marty Zweig, right? Three steps and a stumble, which was supposed to be when the Fed increased interest rates three times. You got to get out of the market. Well if you did that, yeah. After the Fed started increasing rates you would have missed a huge bull market. You know, why is that that wasn’t supposed to happen? Well, it’s because the economy has changed. It’s because these companies are not capitalizing themselves with debt. You could raise interest rates.
00:50:24 Josh Brown
Right. We do not have companies that dominate the S&P 500 that are reliant on overnight rates at the banks. And I’ll tell you two incredible things. You have a company like Apple with $180 billion in cash. When the Fed takes rates from zero to 5%, Apple makes more money, not less.
00:50:43 Rick Ferri
More money, they make more money.
00:50:45 Josh Brown
Berkshire in the same category, so that’s one. Two, actually, there was a study that came out earlier this year. It’s astonishing. It turns out that S&P 500 companies’ borrowing costs actually fell. The amount of money they were paying, interest, actually fell. Since they started raising rates in late 2022. Like everything that used to work a certain way has changed. Now we could say, oh it’s a blip, things are about to go back to normal or we could say, hey, sometimes things change and we can’t rely on a formula that we once could, as religiously as we used to, and I’m in that latter camp and a lot of these smart alecks on social media, they like to do this tweet where somebody says something optimistic. And then they quote, tweet it, and right above they’ll write, it’s different this time. Yeah. You know what, it might be. And then you can keep sending your tweets and everybody else will make money. My argument is it’s different every time.
00:51:44 Rick Ferri
Interesting. You know, we can go pivot this direction here because you wrote in this book very distinctively that bad news is what gets the eyeballs. In fact, conflict is what creates revenue for social media companies like I think that Elon Musk buying X and saying we’re going to have freedom of the press and everybody’s going to be able to say whatever they want was in a way a brilliant idea because it’s conflict that brings in people and therefore that brings in revenue.
00:52:12 Josh Brown
It didn’t work that way for Elon though.
00:52:13 Rick Ferri
Well, all I’m saying is what you wrote in the book about the fact that you have. Conflict sells. Especially pessimism. Pessimism sells better than anything to me. It’s no surprise that and when I got to get into politics. But this presidential election is all negative, negative, negative, negative, negative. Why? Because people actually pay attention to the negative stuff rather than the positive stuff.
Anyway, let’s go into a couple more things, and we have a few more minutes left. Your big thing, and I want to just end with this. This. This topic and I completely agree with it and it’s an epiphany, by the way, is simplicity over complexity. You wrote no one on Earth will ever convince me that complexity is better than simplicity when it comes to investing. No one. I call this an enlightenment. And I say complexity is job security in the investment industry. The industry needs a lot of complexity so that they can show how smart they are so that you know you’ll pay them fees. But in reality, what works for investors is simplicity.
00:53:06 Josh Brown
Yeah. Yeah. Well, I think that you were partially one of my big inspirations for having come to that realization. As I mentioned you were one of the people I’ve seen you speak. I’ve read your stuff and you were definitely I think very early to arriving at that. I’d throw Zweig into the mix and of course, Jack Bogle.
My partner Barry, I remember reading an article where somebody was interviewing Jack White and of The White Stripes. And they were putting out maybe their third or fourth album, and they were asking Jack White like, why isn’t there anyone else in the band? It’s just you and Meg White playing the drums and we think she’s your ex-wife. We’re not sure you guys have never confirmed that, but you make a whole album. You make 15 songs and it’s just the two of you in a room. And it’s a guitar, a piano. You switch off one or the other, and a drum kit and like, that’s it. Like at this point, you’re one of the biggest rock acts in the world. You could have the London Philharmonic Symphony Orchestra at your disposal. You could be making Sergeant Pepper.
And Jack’s comment was, I don’t know the exact words, but it was about when you’re forced to do a lot with a little. That’s where the creativity comes from and I’ve always felt that limiting the options and then making the most of the options that you have is a much more powerful way to invest. If the canvas is blank and you could do anything you want to it with any paintbrush, any color, it’s paralyzing.
00:54:53 Rick Ferri
Absolutely.
00:54:54 Josh Brown
At the time I wrote that, everybody was kind of in agreement. Hey, you need like 5 ETF’s that had become the mainstream way of thinking. So now we’re in this period of time, the pendulum has swung so far in the other direction. At this point, I think the internet-generated this Cambrian explosion of. Now it’s SPACs and it’s 80 different versions of crypto. And now we have these alts, platforms and there are thousands of alternatives and every alternative does a different version of what an alternative would do.
Share classes and SMA’s. And it’s just, it’s bewildering. And I’m not on the investment committee at my firm. There are six people on the investment committee, and they’re all much smarter than I am. But whenever I’m privy to their conversations or they ask what I think, I always default to strip away, less, less. How can we accomplish the same thing that you’re talking about, but with less moving parts, less cost, less? I’m not puritanical about it, and I’m not a hey, just buy the S&P 500 and move to a desert island and lose your password. But there are worse things that you could do. Yeah. And so, I think you and I are kindred in that mentality.
00:56:10 Rick Ferri
Well, it’s good to hear you say that. And even though you’re not going to burn bridges, you may have just burned a few with that.
00:56:17 Josh Brown
You know what I think reasonable people who are extremely excited about alternatives, they could listen to my words and say he’s wrong. And they might have a whole ream of literature, but that’s fine. We don’t have to agree. I respect everyone’s opinion, and I don’t need somebody to think everything I think.
If that were the case, it would be impossible to live in today’s day and age, because as you pointed out, it’s one of the most divisive periods of time. And I have friends on both ends of the spectrum. I think they’re all insane. I think only my opinion is the sane opinion and they probably think the same way. So, if we make everything personal and we feed into the division we can’t function, right?
00:56:58 Rick Ferri
Well, it’s been wonderful having you on Josh. I mean, really enjoyed this conversation. We have a lot in common and I wish you great luck with your continued career, the new book, and thank you again for being a guest on Bogleheads® on Investing.
00:57:12 Josh Brown
Rick and let me just say thank you so much for all of the people that you’ve inspired with everything that you’ve done and written and said. People may not always agree with you, but I think everyone respects you and everybody wants to hear what you have to say, whether it’s controverting something that they believe or not. People definitely value your opinion, and I want to thank you for everything I’ve learned from you.
00:57:33 Rick Ferri
Thank you, Josh. I appreciate it. This concludes this episode of Bogleheads® on Investing. Join us each month as we interview a new guest on a new topic. In the meantime, visit boglecenter.net, bogleheads.org, the Bogleheads Wiki, Bogleheads Twitter, the Bogleheads YouTube channel, Bogleheads Facebook, Bogleheads Reddit, join one of your local Bogleheads chapters and get others to join. Thanks for listening.
