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October 3, 2018
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Steve: Welcome to the NewRetirement podcast. Today we’re going to be talking to Michael Batnick who is the Director of Research at Ritholtz Wealth Management about his book Big Mistakes and also why investing is hard even for world class experts, and finding your calling. Michael is a self taught market analyst who followed a pretty winding road to becoming a market researcher and analyst, author and key influencer with 55,000 Twitter followers. I’ve been following Michael on Twitter and also met him face to face at the evidence based investing conference that his firm hosts in Dana Point a couple of months ago. So Michael, welcome to our show. It’s great to have you join us.
Michael: Thank you very much for having me and I’m looking forward to this conversation.
Steve: Yeah it should be interesting. So I just wanna open up with a quick question. I’ve heard you called the oracle of Brooklyn and I was curious where that came from and if you think it’s deserved?
Michael: Well unfortunately it’s a very boring story behind this because we, the oracle of Brooklyn came about after a podcast episode that Ben and I did after I guess Berkshire released … Or maybe it was after the Berkshire conference which I think was in May and we just happened to name the podcast the Oracle of Brooklyn. That was all there was to it. So is it deserved? No, nobody has ever called me that and certainly it is not deserved.
Steve: Okay, got it. Well, it’s made its way around. I don’t know, I heard it somewhere. So I’d love to get a little bit on your back story. How you got started and how you got here and what makes you unique.
Michael: Well I had an interesting educational path in the sense in that I didn’t really have one. I didn’t take my education seriously and my career as a result, not surprisingly, suffered. I graduated during the great financial crisis and I thought I was really lucky to land a job at a financial planning company, only it turns out that it was an insurance agency. The job was to sell products that people don’t want to people that didn’t want to talk to me. So it was really not a great experience to say the least and I was fortunate enough to meet somebody who started forwarding me Ed Yardeni’s work and Breakfast with Dave Rosenberg and I got really interested in the stock market.
This is a long story so I have to try and make it short. I studied my butt off for the CFA exam, I got interested in the stock market, started trading. Couldn’t get a job. Almost was ready to throw in the towel, go become a cashier or whatever. I needed to get a real job and I met Josh Brown at the train station. We grew up in the same town. Saw that he was hiring, met him and the rest is history.
Steve: I think it’s a great story. I don’t want you to rush it too much because what I found really interesting and kind of compelling about you is … I discovered you on Twitter, you’re obviously very, I’ve read some of your stuff and I’ve been listening to some of your podcast. It’s clear you’re a very smart person but coming out from talking to you the other day, it’s like … You weren’t very focused in high school, you got into university. Didn’t really succeed the first time there, left, cranked, did some hard work, got back in and then it still wasn’t super successful and then came back to New York and made it happen.
It shows a lot of perseverance to work through that.
Michael: Well the first time that I got dismissed, that sucked but it was fair and deserved. I was certainly not ready emotionally, mentally, whatever, I just wasn’t there. The second time that hurt. That really really hurt because for obvious reasons that was humiliating. I felt like I let my father down and just everybody knew that I got thrown out of college twice. Whatever the story was, it sucked and it left a lousy taste in my mouth obviously and I paid for it. I had a realization, oh this is why people work so hard and try and advance their education and their career and stuff. Like I said I got very lucky meeting Josh at the train station because if I didn’t, I might still be paying for my lack of education.
Steve: Yeah but also before you met Josh it sounds like you really put your nose to the grindstone and figured out this passion of yours, the market, and got serious about … Not every 20 something says hey listen I’m gonna go study for the CFA, work in a library, put the hours in, take the first exam, keep going, no job. Cranking away. That says something about character.
Michael: I appreciate that and I feel like I’m still making up for lost time. I hadn’t read a single book probably for fun until I was 25 years old and now I’m cramming and it’s what I love to do.
Steve: Right. How many books a month do you read?
Michael: I don’t know, whatever. As many as I can get to.
Steve: Looks like you read a lot. All right, cool. So now you met Josh and got pulled into Ritholtz and the rest is history. You’ve been cranking. I’m curious, can you just quickly share how your meeting with Josh went? What happened that evening?
Michael: Uh-huh, yeah sure. Well Josh and I grew up in the same town. He’s several years older than me so we didn’t know each other growing up but he was my north star because everything that he was writing about at The Reformed Broker blog, I saw the exact same incentives drive behavior at the insurance agency. Maybe not as perverse but maybe in some ways even worse because this was dealing with family situations. And he was the guy that I looked up to. And so when I met him I felt like I knew him because I had been reading him for several years at that point and we really hit it off. It went great. I told my girlfriend at the time who is now my wife, it went great, if I don’t get the job it’s not because it’s anything I did or said, I’m just sure that there’s a lot of more qualified applicants that he spoke to.
And it turns out that I did get the job and it’s been life changing.
Steve: Right. And just for our audience for those who may not know Josh, he writes The Reformed Broker which is really about his journey from being a boiler room sales guy pushing financial products on people that are less sophisticated to try and do the right thing around providing good financial advice in a fiduciary way to his clients. He’s garnered a ton of followers from exposing what’s been going on there and a lot of people who are tired of what used to happen on Wall Street and happy to see it evolve.
On that, since you’re in New York and in this ecosystem, is there still a lot of that Wolf of Wall Street and boiler room stuff going on?
Michael: I don’t think so. I was never really in that world obviously so I don’t know but I don’t think that that exists nearly as much as it used to. I would say that it’s probably 99% shrinkage. I’m sure there’s still some guys slinging some bullshit but for the most part that’s been eliminated.
Steve: That’s awesome. That’s great to see. Just as an aside, as someone who has done, not financial product sales but been in the sales industry … It’s funny people always still quote Glengarry Glen Ross, always be closing. First prize Cadillac, second prize steak knives, third prize you’re fired. I don’t know if you’ve ever….
Michael: Yeah I am not a natural salesman. I’m not really confrontational, I don’t like to change people’s minds. There are a lot of different ways to do things so I’m very happy to not be in that role. I’m not client facing. I’m talking to the advisors on a daily basis but I’m not the one working face to face with the clients on a daily basis.
Steve: Well it’s great to hear that the culture’s changing because I think that was what tainted a certain part of the financial service industry for sure. Quick aside here, so I listened to this really good podcast on Masters of Scale with Ev Williams who started Twitter and one, it was really amazing to hear him talk. You got a real sense for him that he’s kind of a nerdy guy and I say that in a really positive way but he has this vision about what he wanted which is to connect the best ideas out there in as low friction way as possible. Also he’s had this single focus over the course of his career over really trying to carry that through. He did the work on Blogger, then he did the work on Twitter, now he’s doing the work on Medium. Just gives you a real insight to how he thinks and what he’s trying to do with services like Twitter and how it enables people like you which is like hey, you were on this really bumpy path and now you’re an emerging key influencer out there based on meritocracy, which I think is great.
Michael: It’s such a great place to learn because the more I learn every day, the hungrier I get because it’s just such an obvious realization of how little you know when you start reading about different parts of the world, the things that are very foreign to you. I feel like my hunger has compounded every day and Twitter is the best place for that. It’s where I do so much of my learning and of course there’s a lot of bullshit that you have to deal with in terms of trolls and some anonymity and some nasty people. That’s just part of the deal. That comes with the territory.
Steve: As we’ve started to get a little bit more exposure on Twitter, you start to see some of the crazy stuff that happens and how some people are out there say negative stuff and just get a rise out of people. They’re not really adding to the conversation they’re just trying to get you pissed off which is too bad but I guess it comes with the territory.
All right that’s awesome. I really appreciate hearing your story and we’re going to move onto your book but just another quick thing. As I was listening to another podcast that had the UPS HR chief and she talked about the silver spoons people that are perfectly packaging up. They come out and they’ve got all the right credentials, they’ve had all the great experiences versus the strivers. People who have had to had bumpier backgrounds and had to work through a lot of stuff to be successful and she’s always like you really need to take a look at the strivers and bring them in because those folks have persevered and worked through a lot of stuff.
Michael: Yeah you know it’s funny about that. I still feel like I’m the underdog and people like rooting for people that had trials and tribulations and eventually everybody turns on them and it’s all right enough of this guy. Hopefully I could stay out of that space but yes, so far so good.
Steve: That’s awesome. Well let’s move onto your book Big Mistakes. I have not read all of it but I have read 20-25% of it and it’s definitely good. I do wanna say I love this Confucius quote at the beginning, ‘By three methods may we learn wisdom. First by reflection, which is noblest. Second by imitation which is easiest, and third by experience which is the bitterest.’ How do you think you’ve learned the most?
Michael: I am probably in the third bucket. When I was studying for the CFA I dropped my wife off at the train station on the way into Manhattan and then I would go to the library and I would read the newspaper, I would read Twitter, I would read books, and I would trade stocks. That was a really, really amazing learning experience for me. I did it for about two years and I thought I was investing. My method was pretty much chaos if I had to describe it in one word. I was doing, I’m using air quotes, value investing where there was nothing … Seth Climer would punch me in the face if he heard me say that but I was basically just looking at P/E ratios — price-to-earnings ratios — and determining if a company was cheap relative to its peers and obviously that doesn’t work. Then I was looking at some macro stuff, GDP numbers and CPI and that sort of stuff and then I tried doing technical analysis and none of it seemed to work obviously.
The market is supremely difficult and nobody’s going to open up an ETrade account and become a master of the universe, but I think one of the reasons why I had an ah-ha moment so early was because I was keeping a trading journal and this was just dumb luck that I just happened to be doing this and I would go back to what I wrote three months ago. And of course, not only did it not pan out, but the logic and again I’m using air quotes was utterly absurd. And it’s really hard to be delusional when you are looking at your own handwriting. If you’re not keeping yourself accountable it’s easy to keep lying to yourself, but I had the results. And they weren’t good. So I said let me just keep going. I was pretty understanding of the fact that it wasn’t going to happen overnight but I wasn’t willing to give it forever.
I learned through experience. I learned what didn’t work and I tried to do a million different things and then just watching people on Twitter. People that had an audience. It was like wait a minute, I know you’re lying because you said something yesterday and not that you’re changing your mind but you’re lying about a position you put on. I see you. That was really a good eye opening experience for me just to know that people are liars, people are full of crap. I read Jack Bogle and how hard it is to be at the market but nobody opens up an ETrade account and buys the total market index. You have to try your hand at it first. And so I did try and I failed over and over and over and over again. I never made any big mistakes, I never took any big losses, but I didn’t take very many big gains either. I learned through experience.
Steve: That’s probably true for most people. But it’s awesome to hear how quickly you learn. It’s awesome to get those mistakes out of the way. One thing that I thought about, I did read that chapter on Jesse Livermore and being a speculator and bucket shops back in the day and I was thinking of modern day day traders. I used to work at Schwab and I remember being inside of Schwab on the tech side and they had a division called CyberTrader which was really for day traders and I went to see the president talk and they threw up on the thing. Our average user’s 50 years old, brings half a million dollars to the table and loses money. The vast majority of these guys are gonna lose money. I was like, okay but Schwab’s around helping people trying to do the right thing and I do believe the company’s really good but I was kinda shocked that they knew that this was not gonna work out for most of their customers but they still enabled it. You learned that lesson yourself trying the trade this.
Michael: Nobody can tell you that beating the market is a futile endeavor. You gotta figure that out for yourself and a lot of people never figure that out. I was just fortunate enough to smell the roses at a very young age that a) being a successful investor does not require beating the SP500. Nobody at their late stages of life wishes they had earned more alpha. That’s where I am and I’m very fortunate that I came to that place.
Steve: Yep. Actually I’m gonna wheel out one quote from your book. Bernard Baruch talked about how hard it is to beat the market. He said, “If you are ready to give up everything else and study the whole history and background of the market and all principal companies whose stocks are on the board as carefully as a medical student studies anatomy. If you can do all that and in addition you have the cool nerves of a gamble, the sixth sense of a clairvoyant and the courage of a lion, you have a ghost of a chance.” I love that quote.
Steve: Page 116.
Michael: I think people for whatever reason severely, severely underestimate how ridiculously hard the market it. And I think Twitter can be toxic in the sense that it gives you distorted view of the world where you say hey wait a minute. There are so many idiots on my stream and I’m trading with them and it’s like well no you’re not. Because that idiot is trading a $3,000 account. You’re really trading against the Citadels and Renaissances of the world and they are taking your lunch every time you go to put on a trade.
Steve: Well I mean definitely our perspective is for retail investors to be passive. It’s so hard to be active. Just try to efficiently capture the returns of the market in general and go in knowing just how risky it can be. If you do try to be active, either leave it to professionals or understand your risk. You have a high degree, high chance of losing money.
Michael: I think one of the reasons why we underestimate the difficulty of beating the market is because we don’t physically see our opponents. So in other words, when you buy a share of Apple, you don’t see who’s selling it to you but Jason Zweig had a great analogy for the way that you should think about the stock market. When you are on a beach or on top of a mountain and you feel just how vast the universe is and you feel so microscopic, that’s who you should approach the stock market. You are nothing. If you saw who you were exchanging stock certificates with, maybe you would think twice but unfortunately all it takes is a button and you don’t see that on the other person.
Steve: Right. It’s easy to underestimate what’s going on out there. Where did the idea for the book come from?
Michael: Well unfortunately I wish I could take credit for it but I told Josh that I was going to write a book about the best investors and their best investments and he said uh-uh. Write about the best investors and their worst investments and I said of course, that is so obvious, what a great idea. And that was it. It didn’t take much to change my mind. I knew he was 100% right and I was given really good advice which is write a book that you would want to read and this certainly fit the bill for that.
Steve: It’s a good book. It’s interesting to read. I think it’s great because you’re combining the personal stories of these people who are these world-class investors and you share what they did well, what they contributed to the body of knowledge around investing but also how their own behavior and foibles led them astray and were all subject to this like Jesse Livermore making and losing several fortunes. He hit being worth $1.4 billion or something equivalent in today’s dollars.
Michael: He literally made a hundred million dollars shorting the market in the crash and he gave it all back and the irony of Jesse Livermore is he is the single most quotable stock market trader of all time. And every time he made a mistake, these beautiful words would fly out of his mouth in terms of lessons that he learned and why he wouldn’t do it again and why he made a mistake and the reality is that … Well he ended up taking his own life because he lost all of it but the common thread through this book is we are all human beings and nobody is able to squash their biases and it’s hard for all of us. Jesse Livermore was just a really great example of that. And just being aware of your own biases doesn’t do anything to combat them. It’s not easy.
Steve: Right. For sure it’s kind of the behavioral side is the strongest thing like analysis and technology’s getting better and better and changing very quickly and Jim O’Shaughnessy has talked about this but the one thing that stays consistent is humans and their emotional reactions. That doesn’t change very quickly and you can count on humans to make the same mistakes over and over so if you can figure out how to take advantage of that, you can be successful.
Michael: We all think we’re above average and it just doesn’t work that way.
Steve: Right. You opened up with Benjamin Graham so author of the Intelligent Investor and the father of modern investing and talked about how he was using leverage early on, had big gains leading into the Great Depression. Tries to time the bottom, gets wiped out during an 89% peak to trough decline in the dow. Any more color on what you took from him?
Michael: Yeah so he is the father of fundamental investing of fundamental analysis and value investing and he was positioned really well going to the crash. He had a lot of preferred stocks and bonds and I think that was 50 or more percent of his portfolio so he avoided the initial plunge. And because stocks were so attractively valued, he put some money to work. He was early and I think he lost 70%. He lost a big number. The lesson there is value investing, everybody wants to be a value investor and I think that intuitively it makes sense. Buy something for less than it’s worth. But why do things get to the point that they’re selling for less than they’re worth — ’cause nobody wants them. And if nobody wants them, what makes you think that you’re gonna be the one to step in? These things are cheap for a reason. And that was back when there were so few people buying and selling stock.
Now to identify an undervalued stock, what do you know that the market doesn’t? Seriously ask yourself that question and usually, always the answer is I don’t. So there are limits to value investing and that was the point behind that chapter.
Steve: One takeaway for me on this just reminds you that the Great Depression, the Great Recession, they leave these generational scars that affect entire generations. Like the silent generation has been pretty good with debt, saving money, very frugal. They are in a much better position for retirement than the following generations. The boomers are less well positioned but like the millennials coming out of the great recession — you’re in that bucket — they took some lessons from the great recession. You came out in a really tough job market, maybe saw your parents struggling or whatever and that affects how you think for your life.
Michael: Well I think that the first three years of your career affect how you view the world for the rest of time. So if I came into my career in 1986, well then I would still be picking stocks today and if I came into my career in 1931, then I would never own a stock again. A lot of this obviously is out of our hands and I am mostly a buy and hold investor but do I know what the future holds? No of course not. Do I know that I can’t beat the market? Yes I’m pretty well aware of that but I have no control over whether the dow will be 75,000 in 20 years or whether it will be right where we are today. I just don’t know. It’s an uncomfortable truth to admit but we don’t know what market returns will be in the future. It could be three percent a year, could be two percent a year, could be eight, nobody knows.
Steve: Totally. So what, from your book, what was the most surprising mistake you saw?
Michael: Hmm. The most surprising mistake. I don’t know if this is surprising. I’m not sure that’s the right word but I thought the Mark Twain chapter was really one of the most interesting. He was … So many lessons in that one. I think with the obvious one is don’t throw good money after bad. If you’re down 20%, 30%, just stop digging. At some point you have to have an exit strategy. Don’t get married to an investment. Another lesson is intelligence is not enough and success in one field does not translate into success in the investing markets. He was so deep in debt that he literally had to do an around the world stand up comedy tour to repay his debts because he just couldn’t help himself. He was so emotional and he was so bitter towards the money that he lost and he did something that revenge trading where you try to make it back the same way you lost it. That was probably one of the most fun chapters I had researching.
Steve: That’s interesting. I didn’t know that. You learn all these things about people and you see a different side of them. You hear one thing about Mark Twain and his quotes and stuff like that in his books but you don’t hear….
Michael: Yeah so he has some of the best investing quotes ever. If he were alive today he would be the best person on financial Twitter bar none.
Steve: Maybe someone should open a fake Mark Twain account and just repost this stuff. Okay that’s awesome. All right. Anything else you wanna cover from your book in terms of biggest lessons or biggest takeaways from writing it?
Michael: This book, it is not a how not to book. The goal with writing this book, I just wanted people to get a sense of how freaking hard investing is. Whether you’re trading, whether you are buying and holding, whatever you’re doing. And one person’s mistake is another person’s discipline and there’s many ways different to do this but just, it’s hard. It’s really hard and you’re gonna make mistakes and just have a little bit of empathy for yourself. Don’t put yourself in a position where you’re gonna make a really big mistake. Don’t take too much risk, more than you’re comfortable with and just put yourself in a position to fight another day and when you make a mistake, take it in stride and don’t become paralyzed by what might happen next.
Steve: I would say for most people don’t be active traders. Be passive or get a professional who shares your approach to the market but it is so hard out there not just with other smart people but with the computers and how quickly they’re trading and everything else and the positions you’re up against.
Michael: Just one last thing. If you are new to investing and you want to learn about … Well I’m smart, why can’t I beat the market? I would recommend reading Michael Mauboussin has written a lot about the difference between luck and skill and more importantly the standard deviation in terms of the top performers has really collapsed over time. So there used to be a huge difference between the best trader and the second best trader and between the second best and the third best. But now, and I think he used an analogy of why haven’t we seen another .400 hitter in baseball and that’s just the perfect, perfect analogy for how the stock market has evolved over time.
Steve: I mean one last personal story on this. I used to trade more actively when I was younger and like you have done some stuff. I’ve traded options, I’ve traded currencies for a small amount of money, less than five thousand bucks.
Michael: It’s fun.
Steve: It’s crazy. You can take 101 leverage. I was like oh this is stupid. I think I made money. I was like this is still stupid so I got out of it thankfully. It’s amazing what kind of leverage you can put on and what kind of risk you can take but the other day I was like all right, I like Tesla. I like what they’re doing, I like what they stand for but I was like man this stock is highly valued. It seems like a total story stock and I was like you know, maybe we should short Tesla, take some really out of the money put options on this thing. Literally two days later Elon‘s like-
Michael: “Funding secured.”
Steve: “Funding secured.” We’re gonna take this thing private for 420 a share. It’s like, if I had done something like that I would have gotten crushed so I don’t do that stuff. You never know what’s gonna happen.
Michael: One last point on that. Money earned from luck is indistinguishable from money earned from skill. People do get lucky in the stock market and that’s what keeps you coming back for more. I have no problem with people that trade. If you like trading stocks, if it’s a passion, a hobby of yours, fine then do it. But be responsible. Scratch an itch if it’s there but don’t do it with the bulk of your money. Do it with 5% of your portfolio and it will probably if nothing else serve as a reminder of why you’re not doing it with the other 95% of your money.
Steve: Yep, totally. Well look, appreciate you covering the book. I want to move on a little bit and talk about the market and financial services trends since we’ve got you and you’re in New York and you see this closer than we do. I know you probably don’t make predictions but any color commentary with where we are with the yield curve and potential recessions or trade wars? Anything like that. I don’t know if you prognosticate on that stuff at all.
Michael: Oh I certainly do not prognosticate. I think that … I mean I guess I have opinions but I don’t really believe them. You know what I mean? I don’t act on them. I think nobody would say that the stock market is cheap. Nobody would say that we’re in the early innings. What I would suggest is a rational way to approach the market is to expect and prepare for lower returns and more volatility and a harder path forward. If that doesn’t pan out and we continue to see double digit returns, well fantastic. Of course we’re not going to. I’m loosely expecting mid single digits and if we exceed those expectations fantastic. But it’s funny because people make the point that we’re in the 11th inning and it’s only gonna get harder and therefore you should maybe make some more adjustments but the market is much more forgiving in a bold market.
You can underperform in a bold market and still do fine because the margin for error is much wider. But if we’re going to earn only 2% returns and you think that you’re going to be able to jump in and out and be tactical and opportune. Come on. Nobody can see the future. You’re not that smart and just have a little dose of humility. But as far as the yield curve goes, I don’t know what it’s signaling. I don’t know what inning we’re on. I don’t know what the future holds. But I would expect lower returns going forward certainly.
Steve: Yeah well that’s great. I think that’s what a lot of people are expecting so we’ll see how it evolves but it’s good to have people set expectations appropriately and counsel people to think about hey what are you gonna do if it does this or does that? How are you gonna react? Do you have those conversations with your clients?
Michael: I don’t personally but our advisors do all the time. You know what is directly in our control? How much we save. And for people that are fortunately enough that earn enough money to save, they’ll do it. Contribute to the 401K. Get the employer match. That’s free money. And even if we have two, three percent returns going forward, at least you’re saving money. It’s money that you are saving for your future that you would otherwise be spending. So I don’t see what the alternative is. If you’re super bearish then fine you hoard gold. What do you want me to tell you?
Steve: I think you have to have the attitude of save money, invest, stick with it. Be prepared for some volatility in lower terms and that’s the best practice. I think from our perspective we wanna look at what does the evidence show, what does history show and just behave accordingly and take all the emotion out of it. You can only behave as optimally as you can and that’s it. There’s no magic silver bullet here.
Michael: Well history shows a few things. History shows that nobody knows what the future holds. History shows that every time is different and history shows that the more you pay for something the less you should expect to get. Valuations do matter in the long run but in 2013 when we finally got above the ’07 highs, the CAPE ratio was at 25. It was certainly not cheap. We’re up almost 100% since then. All of the valuation arguments made a lot of sense back then. They still make sense today. I’m not saying valuations don’t matter. I’m just saying to the point that I wrote about Ben Graham there are limits to valuations and things change and just be humble. You just don’t know and I think that valuations are not a timing tool, they’re an expectations tool in my opinion. Higher valuations, lower your expected returns.
Steve: Got it. One of the things that I saw at your EBI conference was the chief economist for Vanguard got on and he had his statement that one of the biggest trends facing the globe … He thought the biggest trade in risk facing the global economy is job automation and they had some forecast that 50% of US jobs may be automated away in eight years, 77% of Chinese jobs. Do you look at things like this and say okay how is this gonna affect what we’re doing?
Michael: No but I think that that is a legitimate concern and I think that it’s playing out today. I wrote a piece called the Scapegoat yesterday where I looked at income equality and all of the ills plaguing our society I believe stem from that. I think that we will continue to see a division between the left and the right with unfortunately politicians going further out on the tribal spectrum and that is something that really, really concerns me because pensions are underfunded, people are living longer, bankruptcies are up. It is really, really hard out there economically for the average American. I don’t know what the answer is, I don’t know what the solution is. I wrote that blaming buybacks are probably the wrong boogeyman but there are problems.
Jeff Bezos, Bill Gates and Warren Buffet have as much money as the bottom 50% of the country and that’s an issue. That’s a really big issue. And I don’t know at what point the many start coming for the few and storm the castle. I don’t wanna be hysterical and say there’s gonna be pitchforks in the street but yeah that concerns me big time.
Steve: I totally agree with you. That’s some of the stuff that we look at, longevity healthcare, some of these big trends that are happening. Definitely wealth inequality is huge. There’s historical context for this too. I don’t know if anyone’s done this but if you get to a certain level of inequality, I think during the French Revolution there was a certain level of inequality that got hit and then boom, people are revolting, screw this. Or China the communist revolution. Actually that affected my family. My family in China on my dad’s side, they were wealthier. The Communists came, tossed everyone, they fled to Taiwan, lost everything and for a few generations it’s been… They had the cultural revolution and putting all the educated people into work out in farms. It was crazy. Held the country back for decades. And now they’re obviously storming back. It happens.
Michael: Tara Siegel Bernard wrote that bankruptcies in people 65 and over has tripled since 1991. Pension benefits are getting cut. So what happens to people who spent their entire life doing what they were told, preparing for this day, can no longer make ends meet because they got screwed. I don’t know … What is the answer? I wrote that change is a constant in capitalism. It’s a dynamic system and that’s why it works but the difference between today and say 50 years ago or a hundred years ago is that people are living to 90, to 100. How do they pay the bills? I don’t know what the answer is. It’s very, very scary.
Steve: Yeah. I’ve been looking at the pension issue myself. It’s tough. You have all of these underfunded pensions, especially in the public and municipal sector that are bankrupting towns. Vallejo around the corner from where I live, the Richmond. They’re basically gonna declare bankruptcy because they cannot afford to make the promised pension obligation but it’ll be somewhere in the middle. The obligations, you’d have to crank up taxes to be like so high that it’s unsustainable for people and people would leave. So it’ll be somewhere in the middle where probably promise payments will have to come down or get delayed a little bit. And taxes will have to go up. And people will have to work longer. I think fundamentally, and that’s something we talk a lot about. You need to be really thoughtful about things like social security and pensions.
In fact I was talking to a friend of mine the other day who is asking us about his situation. He is a doctor and he’s in his 60’s, his wife is over a decade younger and he was going to claim social security in his mid 60s and we were like you really should think about claiming social security at 70 because really it’s not your income. You don’t really need the income in your mid 60s but when you’re 90 and pass away and your wife is in her 70s, she’s gonna get your full payment and it’s gonna be 30% bigger because you delayed it a few years. And plus inflation adjustment. It’s just a huge thing but people don’t think about it that much but in 25 years, it’s gonna be game changing.
Michael: I think that there will be a continued divide between the left and the right, between old people and young people. I don’t know how we get through the boomer generation and the generation before that but I’m actually pretty bullish on millennials long term. I think we will be okay, even though things are tough right now for 30 year olds I think that it won’t be that way forever.
Steve: Well the hope is productivity goes up. We continue to do better, making more stuff with less resources and on the good side, global poverty is down significantly so worldwide everyone’s doing better. It’s just inside the US this inequality’s getting stretched in a huge way. And I think even some of the wealthy people … I know Bill Gates and Buffet they’re like I don’t know X billion, tens of billions. I don’t need this. I’m actually trying to put this money back to work. Fixing malaria or whatever the different causes they have. Some other people wanna keep it all but it doesn’t help our society to have create an oligarchy where there’s a few people born into tons of wealth and they keep it for generations and they use it to influence politics. That is not how this country got created and is not gonna help us longer term.
It’s a short term strategy. It might help you for 10 years but when you think about your family 30 years in the future, you may be really messing things up.
Michael: I was talking to colleagues the other day and they said things are so much better than they used to be and it’s true. Absolute poverty is at a record low but relative poverty is exploding and we don’t compare ourselves to our ancestors, we compare ourselves to our neighbors. And that’s why lower income people that can afford a smartphone, that doesn’t mean that life is hunky-dory for them.
Steve: Right. Well it’s a challenge. Hopefully we navigate through it. There’s definitely volatility in our society right now that’s a little scary. I do know that you guys, I see obviously you guys have a political or at least some people have a political bias on the more probably liberal side in your organization. Does that affect your customer base at all?
Michael: Yes. 100%. Your clients tend to look like you. Certainly politically, socioeconomically for sure. I stay pretty far away from that, I think Josh and Barry do enough of that. I would say it’s certainly alienated one side and it’s too late to peel it back. It is what it is at this point.
Steve: It’s fair to speak your mind and take your positions and that’s part of the dialogue. If you can have respectful dialogue that’s good. I think that’s one thing that unfortunately is seeming to be lost in this country where it’s hey, I can disagree with you but still have respect for you as a person and then have an intelligent dialogue about it. That’s something that’s core to moving things forward.
Michael: It’s easier said than done.
Steve: I think one thing that happens is, things like Twitter and the digital environment, just like trading, you can have your position, you can say whatever you want, you can say inflammatory things and you don’t see the other side of it and you don’t personalize it so you’re like I’m right, everyone else is a jerk and you can be really inflammatory. But you travel this country. JD Roth is a blogger I follow, he writes Get Rich Slowly and he’s like I took this 15 month road trip and he drives around the country. He’s like when I drive around the country and I sit with people, you know what? We’re all the same. We want the same things. We wanna take care of our families, we wanna have enough income, we wanna enjoy our lives, we wanna help other people. People wanna help each other. It’s not like different parts of the country don’t wanna help other people.
We’re not that different but you watch some of the news stuff. It’s like CNN presents it one way, Fox presents it in another way. You can see the bias. Listen, I am a strong supporter of the media but it’s pretty interesting to see that there is this division that doesn’t necessarily need to be there if people were actually more present with each other.
Michael: Well I think yes, I think that if people sat down with one another I think it would go much better. I think that the digital world is a dangerous place because when you’re not face to face with somebody you’ll say whatever you want that you would ordinarily never say to their face. And from the media’s point of view, they’re giving people what they want and people wanna be riled up and that’s what the advertiser’s are paying for. And I hate to be so cynical but that’s what it is and it’s not gonna go the other direction. It’s probably only going to get worse from here.
Steve: I’ll have to post up, I saw Heineken did this funny advertisement thing where they basically said okay we’re gonna pick two people that are completely opposite and would normally hate each other’s guts and not talk and we’re gonna bring them in, have them do some work to build something. And then they build a bar, sit down and have a beer and then they’re gonna discover that they normally would not like each other and what they found was oh, look, all these people got along especially after they did something together.
All right I just wanna cover a couple more things. I thought, this isn’t directly related but I thought your EBI conference was pretty useful. I thought the most memorable thing was when Josh got up there and said, ‘Hey what we’re doing is we got this boy band analogy and we are bringing you the best bloggers and key influencers together and that’s actually working.’ Was that a strategy from the beginning or just kinda happened?
Michael: No, definitely not. I was very green when Josh hired me. I knew nothing. We were never on the lookout for acquiring talented writers. It just evolved that way and I think that we are definitely stronger together. A lot of my success is because I was riding the back of Josh and Barry and of course I built my own audience and stuff but they gave me … They certainly gave me a boost. I would not be where I am today without them. But no it was not the vision. It worked out really well and I think one of the things that we figured out was leveraging our voice makes our advisor’s jobs a lot easier.
Steve: For sure. Another thing that was memorable which I thought was kind of crazy was Ken Fisher got up there and was talking about his business. He’s built this hundred billion dollar wealth management business which generates probably a billion dollars in fees. One thing is, one I thought I would not like this guy but he was actually pretty likable. He’s actually doing some good stuff too. He went to Humboldt. He’s got this Fisher lab there, they’re trying to save the redwoods. We live in northern California so I totally appreciate that. He also did some interesting stuff around running his business efficiently. The fact that he sees his business as unsuccessful that when you look at the total universal wealth and how much is advised and how much they advise which is a tenth of a percent and he’s like we’re totally failing even though he’s the biggest probably independent wealth group out there.
Michael: Yeah that was an interesting take. All right. Seemed like a little bit of false modesty. Oh we’re failing we only have a hundred billion dollars. And I get the point that he’s making in the terms of nobody’s market share which is interesting but I don’t know. That’s weird.
Steve: Yeah. Look, I don’t love everything they do for sure. Not trying to pump him up either because I think what we’re doing is somewhat competitive with him but it was interesting to hear him. And he made this ridiculous Christmas tree joke which I was like wow….
Michael: Oh my god.
Steve: That was ridiculous.
Michael: He was entertaining. That guy, he could have spoke all day and I would have watched.
Steve: Yeah it was not what I expected. I would not expect Chuck Schwab to get up there and give the take that he took. Obviously completely independent he’s like I can do anything I want here. So was kinda interesting.
All right well look we’ve covered a lot of stuff here. I appreciate you talking about your book and your views on things. Anything else you wanna touch on when we’re on this?
Michael: No, I appreciate you having me on. This is a fun conversation.
Steve: Yeah, no it’s great to get your take and appreciate the New York perspective and hearing your story. Where you’re going and what you’re doing. I’m looking forward to continuing to watch what you’re up to and I will finish the book. I was actually gonna give it to my 17 year old and say hey listen give me a book report but he was too sick last night.
All right, awesome. Anything else? I don’t know. We’re good. I’ll just wrap it up real quick and we’ll close it up.
Thanks Michael for being on our show, I appreciate it. Thanks Davorin Robison for being our sound engineer. Anyone listening, thanks for listening, hopefully you found this useful. Just a couple quick comments. We actually have a Facebook group that if you wanna find us, look for us at NewRetirement on Facebook. Also @NewRetirement on Twitter and — I heard this on Masters of Scale so I’m gonna ask for it — if you like this podcast, feel free to write a review. We’re starting to get some review on iTunes and I saw we’re starting to get ranked so would love to push this up. That’s about it. Thanks everyone. Appreciate your time.
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