September 4, 2024 • 54 mins
Our guest today has been called one of the greatest financial writers of all time. And it’s no wonder – Josh Brown started his original blog, The Reformed Broker back in 2008 as he now continues to write over at DowntownJoshBrown.com. And his latest book “You Weren’t Supposed to See That: Secrets Every Investor Should Know” just came out yesterday in which he reveals the hidden truths that make the critical difference between understanding the world and being dangerously naive. Josh co-hosts The Compound and Friends podcast where they discuss current market trends and financial strategies. And in all of his extra time, he is the manager of billions of dollars as CEO of Ritholtz Wealth Management. During our conversation today he shares why Gen Z might make more successful investors, taking a “core and explore” investing strategy rather than a simple indexed approach, what direct indexing is all about, and much more!
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Welcome to How to Money. I'm Joel and I am Matt,
and today we're talking about peering inside the finance industry
with Josh Brown. That's right. Our guest today has been
(00:28):
called one of the greatest financial writers of all time.
That's actually from in Front of the show, Morgan Housel.
He's a pretty smart guy as well. But it's no
wonder because Josh Brown. He started his original blog, The
Reformed Broker, back in two thousand and eight. He now
writes over at downtown Josh brown dot com and his
latest book just came out yesterday. It is titled You
(00:48):
Weren't Supposed To See That Secrets Every Investor Should Know.
He also co hosts the Compound of Friends podcast where
they discuss the current market trends, they discuss financial strategies
and when he's not busy with all of that, so
the CEO of Ridholt's Wealth Management, which is an investment
advisory firm up there in New York City. So we're
excited to really dive into the finance industry with you,
(01:09):
Josh Brown. Thank you so much for talking with us today.
Speaker 2 (01:12):
How are we doing, boys? Everything good, feeling great?
Speaker 1 (01:15):
Could be better. We're drinking a beer, hanging out, talking finances.
It's what we do do best, or at least enjoy
most well. And I'm going to share too. Josh felt
a little bit left out because he saw our beers
when we said hey before we started rolling, is he
cracked one? He fell left us, so he cracked open
his own Modela over there up there in New York.
I appreciate the commitments.
Speaker 2 (01:32):
Yes, we got to get on the same level as
you guys.
Speaker 1 (01:36):
Yes, down to the same level. Right, So our first
question we got to ask you, We ask everyone who
comes on the show, is what's your craft beer equivalent?
Matt and I we'd like to splurge on the fancier
craft beers, but we're still, you know, being smart, saving
investing for our future. What's what's that sports for you?
Speaker 2 (01:52):
I think it's restaurants. I I really only will go
to like the best places, and I I'll be going
out to dinner and lunch less than I do. But
I got the way I feel is like, if I'm
going to have two hours on a Saturday night somewhere,
it has to be awesome.
Speaker 1 (02:11):
And no Applebee's for Josh Brown.
Speaker 2 (02:13):
Dude, I eat at dope places and it's all over
my Instagram and I don't apologize for it. And there
are other I'm not like a car guy. I drive
like the same car I've been driving for six years.
I don't have a country club membership for me, like
the experiences that I have when I'm with friends and family,
Like I don't eat at chain restaurants, and I don't
(02:34):
eat at places that are not like memorable enough unless
it's like a go to, like local place. So that's
my big splurge.
Speaker 1 (02:42):
If you're looking for something quick, yeah.
Speaker 2 (02:44):
No, of course, of course, but just saying like if
you come out, if you come out to lunch with me,
like if I. People are always like, oh, we should
do lunch, we should do drinks, and they say like
say casually. I'm like, oh no, I have a reservation
at TARESI two wednesdays from now. It's at t Want
to meet me there. I do it like, oh wait,
this guy's not getting around. So I'm not in Manhattan
(03:07):
as much as I used to be because of all
the things that I'm doing. But when I do lunch,
I like really do lunch, and I put a lot
of thought into who I'm going with where it's going
to be. I mean, it's New York City, so it's
impossible to keep up with all the things that are
opening and oh yeah, but I try to like keeps
as up to date as I possibly can as a
(03:28):
as a forty seven year old man who lives in
the suburbs doing I'm doing Okay, I love it.
Speaker 1 (03:33):
I think that's great. And especially given the fact you
mentioned that you've mixed the country club, you're not driving
the fancy car, Like those two things alone can afford
you so many fantastic meals out with and especially I
love what you're saying there the commitment to community and
the ability for y'all to have some of those shared
memories together like that.
Speaker 2 (03:49):
Yeah, and listen, no disrespect to the boat guys, the
car guys, the country club, like everybody has. Everybody has
their thing.
Speaker 1 (03:55):
Nice. Well, Josh, this is the first time we've talked
with you. We've talked with a lot of folks there
at your but we want to get to know you
a little bit more. During our conversation here what sparked
your interest in money and then like essentially, how did
you turn it into a career. We want to kind
of dive back into your history a little bit here.
Speaker 2 (04:11):
So I have to be honest, I have no interest
in money. I'm really fascinated by investment, and so I'm
not a personal finance person. My wife is like the
CFO of my home. I don't touch the money. I
don't log into the bank, I don't pay bills, I
don't comparison shop for airline tickets. I don't do any
of that stuff. I am really primarily focused on markets
(04:35):
and tangentially the economy as it relates to markets. And
the thing that really turns me on is just this
idea of time passing and money compounding and being part
of the growth of these incredible businesses and entrepreneurial stories
(04:56):
and now forming my own business eleven years ago and
having that grow, and like, I really get turned on
by the investing process and the rise and fall of
products and companies and CEOs. So that's really what my
main thing is. It's it's not so much like money itself,
(05:18):
which I almost I sometimes find like almost too tedious
to be paying any attention.
Speaker 1 (05:23):
To it all.
Speaker 2 (05:24):
And I know, like that remark sounds like privileged or whatever.
Speaker 1 (05:28):
This blasphemy to Jelge I was like, wait, you're not
comparison shopping. I'm cutting this communication off right now.
Speaker 2 (05:33):
But my wife is an accountant's daughter, boom, and she
has an alacrity for this. She's great at it, and
she really does pay close attention. And she loves, you know,
booking something a day before the price jumps ten percent,
and she like, that's what she that's her focus. And
my focus is more on like how do we grow
(05:54):
the money or how do we allocate it? And she's
more how do we spend it? And how do we
make sure we're stretching it as far as it can go.
So I think we work really well together.
Speaker 1 (06:04):
Yeah, that's a good tandem.
Speaker 2 (06:05):
You know. I don't veer into her lane and and
you know, just like randomly like drop in and start
calling the shots. And she doesn't veer into my lane
except when when the markets drop a lot and she'll
just be like, hey, are you screwing something upwards? Just
what's going is this? Just what's going on?
Speaker 1 (06:21):
You can have someone to hold your feet to the
fire a little bit, but yeah, no, I think and
then that can be what makes a couple tick. Lots
of times it's like, hey, this is what I'm good at,
this is what you're good at, and we trust each
other to kind of hold up our endo the bargain well.
Speaker 2 (06:34):
And then the other. The other thing is that it's
essential that if you're in a long term relationship with
a husband and wife, a boyfriend or girlfriend, like, there
has to be there has to be like some baseline
agreement of how you're breaking up these these things that
need to take place. Somebody has to be thinking about
(06:57):
the long term, and then somebody has to be focused on, hey,
we got a credit card bill this morning, and you know,
I think you have to have these issues worked out
in advance for multiple reasons. And one of the reasons
is there were gonna be rough patches. And when I
first got married, I had no money, like literally no money,
negative money, and you know, we had to communicate and
(07:19):
survive that period, you know, And I wasn't a high
flying Wall Street financier. I was just a guy that
was doing retail brokerage not particularly well, and the world
was coming to an end like in six o seven
oh eight, Yeah, and we had to survive. We had
to survive that period, and so we couldn't have these
like grandiose conversations about allocating assets.
Speaker 1 (07:41):
It was like, how do we it's just about getting by, Yeah,
how do we.
Speaker 2 (07:44):
Like pay a tax bill? A property tax bill?
Speaker 1 (07:47):
So totally so that makes me I wonder too. I
mean the S and P. If you look at it
over like basically when you first started writing, like, we've
seen an increase over like six hundred percent. How much
do you think that your interest in investing has been
because of what we've seen over the past almost twenty
market yeh, yeah.
Speaker 2 (08:04):
I gotta tell you, guys. There's a scene in the
last Batman film where Bane tells Bruce Wayne, you have
merely adopted the darkness. I was born in it. My
first ten years in the business featured two almost back
to back fifty percent crashes in the S and P
(08:27):
five hundred so I got Series seven licensed in ninety seven.
Speaker 1 (08:31):
Oh geez.
Speaker 2 (08:32):
And within the first three years, the dot com bubble
had peaked and crashed. I watched the Nasdaq fall ninety percent,
everyone I knew in the business get wiped out. And
then just as we were recovering from the dot com crash,
the Enron and WorldCom scandals unraveled, and just as we
were recovering from that, it was nine to eleven. So
(08:53):
that was my first three years in the business. Okay,
five years later we had the Great Financial Crisis with
the end of bear Stearns and Lehman Brothers and Washington
Mutual and AIG and the bailout of Merrill Lynch and
Morgan Stanley and Goldman Sachs just as that was unraveling.
So that's all inside of my first ten years in
(09:14):
the business. Guys, So I would not say that I'm
a good time Charlie and the market's up, and you know,
that's why I remain interested. I have witnessed some of
the sickest, most destructive capital markets activity anyone has ever seen,
and I think I'm a better version of the professional
(09:35):
that I am as a result of those experiences. It's
not that you need to lose a lot of money
to be a good investor, but I think it helps
to witness stuff like that and go through it personally
and not just read about it in a book.
Speaker 1 (09:48):
Yeah, it makes me wonder if younger investors are somehow
potentially too wearing rose colored glasses, because like the financial
independence movement, for instance, the fire movement has grown rapidly
as this bowlmark mar has increased, and it makes me wonder, Okay,
if we sustain some sort of prolonged downturn, to those
early thirty somethings maybe not have the stomach to stick
(10:09):
with it because they we've had relatively quick market corrections
and relatively small dips.
Speaker 2 (10:15):
I don't really understand the fire movement stuff. To be
honest with you, I think because the career that I'm in, Like,
I love what I'm doing and I don't want to stop.
But if I were in a different sort of work
situation where every day I couldn't wait for the day
to be over, I would probably be able to relate
to that better. But I think this idea of deprivation
(10:36):
for twenty years just to be done working for the man,
I'm not going to say that I don't understand it
at all. I'm just going to say, like, I feel
like it's a focus on the wrong thing. The focus
should be like improving the career situation, and I know
for everyone that's not possible. So I don't want to
speak out of turn on something that like I can't
really relate to. But I disagree that the people who
(11:00):
in that fire movement, haven't seen any volatility or haven't
seen enough. Like twenty twenty two was absolutely harrowing. The
highest price for the market for the year was on
January first. It was literally all downhill from day one
that year. So if you are in your thirties and
(11:21):
you live through that, that's not nothing. That's it should
be a badge of honor for the fire people in
your audience or the people that have been allocating. But
they're young and they haven't been through a lot yet
they have they don't even realize.
Speaker 1 (11:33):
It, maybe some of the younger audiences, and maybe that's
kind of honestly just a bias on our part just
in how we see investing in how we're kind of
always looking back over a longer period of time that
it kind of looks. I mean, obviously in the moment
it's out, yeah, but when you zoom out and you
look take that bird's eye view, it's it looks pretty
looks pretty swell. But as we're talking about, I guess
younger investors makes me think of in your book, you
(11:55):
said that gen Z sees markets like a video game
that can be beaten or a puzzle that can be
and like you weren't talking smack, You're you're a kind guy.
But how do you think that this has impacted how
the younger generation, how it is that they.
Speaker 2 (12:08):
Invest I didn't say that as a dis no, not
at all, saying that in a complementary way. So I
think millennials are more fearful than Gen Z, and millennials
are more fearful than my generation Gen X. But we
were not ever afraid of the stock market, and we
were not ever like uh, We didn't have the formative
(12:30):
experiences that would have turned us off from the stock
market or the potential for volatility. For the millennials, it
was different. The millennials in high school watched their parents
get wiped out in the dot com bubble, and then
they graduated college directly into the teeth of one of
the worse recessions of all time from the global financial crisis,
(12:54):
and as a result, they put off household formation, they
put off getting married, they put off having babies. We
had an epidemic of young adults living at home with
their parents. That's the millennial generation. And it really took
them until the pandemic period. It took them a really
long time to discover the stock market. They just demonstrated
(13:16):
very little interest in opening brokerage accounts, in trading and investing.
They did four to one case stuff because they kind
of felt like they had to, but really it took
the millennials a long time. Gen Z is really different.
Gen Z embraced gambling and trading very very early, and
(13:37):
they absolutely are more engaged investors than prior generation. All
of the data suggests that they are speculators first, and
that's okay. They're at the right age where that's what
they should be doing. They do look at it as
a hackable activity and something where there are tricks and
loopholes and shortcuts that they are in pursuit of. They're
(13:59):
much more exhibitionist in the way they take losses. They
tell people about how much money they lost, they post
their l's, so to speak, in a way that a
millennial would never And it's a really big distinction is
that they want to talk about their investments in a
way that prior generations were taught. You don't talk about money.
(14:23):
Our boomer parents told us, never talk about money over
the dinner table. That's all This generation talks about good
or bad wins or losses, and I think that's the
biggest distinction between millennials and gen Z And it's really
fascinating as being neither of those two things, watching that
(14:43):
generational divide start to become apparent to everyone in the
very early stages.
Speaker 1 (14:48):
All right, Josh, you just said they should be speculating.
And I heard you say that, and I couraged a
little bit, not gonna lie, and I'm just so I'm
just curious to hear from you. Am I just being
a prude because when you look at the numbers and
just even those little bits that people are can allocate
in their late teens, Like my daughter literally just had
her first babysitting gig yesterday, and I'm you know, I'm
(15:10):
not like, hey, let's throw it into a roth ira
and to an S and P five hundred indext fund yet,
but like that day's coming soon, But like how powerful
that can be just starting at a young age and.
Speaker 2 (15:19):
Doing gimme break, she's going to compound her babysitting money
into a million dollars how how many centuries? What she
needs is formative experiences, and what she needs is to
work out the mechanics of how to buy a stock,
how to sell a stock, if you're doing that with
nineteen dollars you earned from babysitting, it's not a big deal.
(15:40):
You know her, her career ambitions are way more important
than what she does with her spare cash in her teens.
When we speak as pedantically as we do the Royalty,
all of us in the personal finance world, When we
speak as pedantically as we do about the power of
compounding and the importance of retirement, say and blah blah blah.
(16:01):
It's not that it's not true what we're saying. It's
that sometimes we don't leave room for something that's really important,
which is people making mistakes or people determining that they
might want to be more hands on with their investments
than what the experts say they need to be. So
not everybody is going to want a default to an
index approach, or to a set it and forget it
(16:24):
or a target date. There are people that are going
to take an interest in how this stuff works and
want to touch it. And if that means that they
lower their returns as a result of this excess activity,
so be it. Because there's also a chance that they
increase the weight of their returns. You could cite all
the academic literature you want, But you can't tell somebody
(16:46):
who bought five hundred years of Nvidia ten thousand percentage
points ago in twenty seventeen that they did something wrong, can't.
You can't. You could say, in theory they did something wrong.
You could say, well, what you did is not repeatable.
They still have the money, guys, you know what I mean.
Speaker 1 (17:05):
They've still got the money. No, I totally. And the same.
Speaker 2 (17:08):
Applies to Tesla and to bitcoin, and to Apple and
to Amazon. So this idea that everyone has to that
everyone has to accept this kind of calvinist strict you know,
interpretation of the book of Jack Bogel, and if anyone debates,
they're an apostate. For me, it's really lame and it's
(17:31):
counterproductive because the net effect is it turns people off
from learning how to do this stuff, even if you
don't approve of the way that they're learning. The more
you try to talk people out of taking any kind
of risk, the more you're just going to turn them
off from the process overall. So I leave, I leave
a little bit more room, and I'm a little bit
(17:53):
less doctrinaire then maybe I used to be, you know,
prior to the pandemic. I used to write about stuff
as the what We're scripture too, and I think I've
loosened up a little bit. And I think people should
have fun when they're nineteen twenty, twenty one, twenty two,
their prop betting on all the apps, they're doing football
(18:13):
bets in game and doing all this stuff. Anyway, let's
not pretend that the impulse doesn't exist. Let's just try
to guide people around it instead.
Speaker 1 (18:23):
You're really gearing that for a longer conversation if you
want to combine Calvinism and investing with Joel right here.
But I think we can absolutely agree in that it's
better to.
Speaker 2 (18:32):
Be disrespect I could have said orthodox, no totally, but
you get You get.
Speaker 1 (18:36):
My total here, Josh, if you want to. But I
do think we get. We totally agree with the ability
for especially kids to make some of these mistakes earlier
on with where there's less less money on the line.
But we're kind of diving into your investing philosophy, and
we got more that we want to talk with you about, Josh.
We're going to talk about, yeah, some active versus passive
(18:56):
investing as well. We'll get to all that right after
the Break. I were back with the Break still talking
with Josh Brown, and you work inside the finance industry.
I want to touch your new book just came out.
The title of the book is you weren't supposed to
see that? And you're basically revealing certain things that I
(19:21):
guess certain people don't want you talking about. What weren't
we supposed to see? What are you revealing in this
book that we need to know?
Speaker 2 (19:27):
So it's important to point out I work in finance,
but I started out as an outsider, and I know
nobody would look at me today and be like, oh, yeah,
you're an outsider. I get it. I'm in on the joke.
But my form of experiences writing about the industry and
the markets was that like I really was beholden to
(19:47):
no one because I was no one. I was like
a retail broker working at third tier broker dealers. I
had no pedigree and so as a result, I had
a very interesting perspective. It was interesting to the readers
in that I could pretty much say anything as long
as it was true. So I had compliance and I
had to adhere to industry standards, but outside of that,
(20:11):
there was nothing that I couldn't say, and that freed
me to, you know, kind of just say like be like, look,
I understand that so and so said this, and this
person said that. But here's the truth. And a lot
of what I ended up writing about was incentives. And
I think Charlie Munger said that, you know, with every
passing year, the more he believes that incentives drive everything,
(20:35):
the more like even he was underestimating that that power.
So much of what people need to know about what
goes on on Wall Street boils down to who's getting paid,
how they get paid, who pays them, and why. And
so if you like really look at, you know, the
substance of what I have spent the last fifteen to
(20:57):
seventeen years writing, it's really boiled down to that. And
so I think I was able to do that really effectively.
And I think a lot of what I had written,
it's not like I had been in possession of that
knowledge for years and years and years. It's like these
epiphanies that I had been having along the way, and
the willingness to say it out loud, so you weren't
(21:18):
supposed to see that. As the book title I think
encapsulates that idea. It's like Oh, you weren't supposed to
know that this actually works this way, but I'm telling
you anyway. And you know, I did that for a
long time, and I think it really helped the readers
understand what they were truly interfacing with when they were
dealing with investment industry stuff.
Speaker 1 (21:41):
I think when people when I listen to your podcast
and when I read what you write, I am reminded
typically you're looking out for your reader, your listener, that
your viewer. But there's a lot of people out there
in the industry. Is this what you're getting at? That
there's a lot of people who might say one thing
and actually maybe not mean it, but be trying to
profit off maybe talking hyping up the fear, and in
(22:02):
the background, they're trying to make a trade that profits
off you being scared. I get it makes me think
of the was it the Bill Ackman Hell is Coming
sort of comment or something like that. I mean, this
sort of thing happens all the time in the finance industry,
where people say one thing publicly, but then behind the
scenes are trying to profit. Is that is that kind
of what you're getting at?
Speaker 2 (22:20):
Yeah? So I think I used to be like on
a crew, a one man crusade early on, where it
would be like somebody would say something I disagreed with
and I would like, go to war. I don't care
that people are doing that anymore. I just feel like
I want to give the public an alternative to the
noisemakers and the people who get paid, you know, to
(22:42):
get you to subscribe to something, or the people who
predict crashes every week. I don't want them to not
say that like maybe this is cynical, but like it's
actually good that those people exist, because my career is
about saving the audience from those people, and I've been
doing it for I don't know, almost twenty years now.
(23:05):
If people are like, what have you done? Like, what
has your career been about? I hope that it's obvious
to the majority of people who've been paying attention that
I have served as a counterbalance to some of the
worst actors who are preying on the information asymmetry totally
(23:27):
and the fear and the ignorance that quite frankly are
ubiquitous amongst the American public. Like I want to be
seen as the person, not like it's not like a savior,
but it's more like, hey, I was somebody saying the
other thing.
Speaker 1 (23:42):
Yeah, Josh is part certainly part an investment firm, but
also part like labor of love as to what it
is that you're doing. And one of the things that
you wrote about in your book, you're talking about how
traditional money management firms they make their profit from the
belief of investors that they can do better than just
buying the index. We're talking about the difference between active
versus passively managed funds. What is going on right now
(24:06):
in the passive versus active debate right now?
Speaker 2 (24:08):
Yeah, it's a good question. I think the debate is dead.
I think we've basically settled on the idea that for
most people, the bedrock of the portfolio is going to
be passive, and then it's like core and explore. So
the core of most people's portfolios at this point is
some version of passive. It might be an SMA, it
(24:29):
might be a direct index, probably going to be an ETF,
maybe it's a mutual fund. But I think for most
wealth management clients, the advisor they work for, they work
with is doing some version of low cost, low fee,
low turnover, unless it's direct index. But we'll get to
(24:50):
that later. But that is where the industry, the wealth
management industry, has for the most part settled out, and
that there are these like sleeves or satellite holdings within
these portfolios that are either trying to capture something thematic
(25:11):
or trying to add a little bit of alpha as
a layer, or trying to do something more concentrated, or
trying to do something more tactical, or maybe something that's
a different asset class, like bitcoin or private equity. But
I think where we are as an industry is that
all right for my equities, I don't believe in active
management per se, and then I want to have something
(25:33):
else in addition to that. Though that kind of expresses something,
some kind of a view or some kind of a proclivity.
So for some people it's gold, you know, but it's okay,
Like every advisor doesn't have to agree with every other advisor.
It should be it should be a market. And again,
(25:53):
if somebody said ten years ago, actually I'm overweighting tech
because I think invation the earning innovation are going to
outpace the rest of the global stock market, and you know,
the purists would say, well, that's a heresy. And by
the way, you're paying an above market multiple for that
(26:14):
tech exposure. So not only is it a heresy against
the academic literature and diversification, but it's actually a heresy
against Warren Buffett. And you know, the idea of like,
you know, buying buying cheap, selling expensive. Somebody who had
done that for their clients ten years ago has absolutely
(26:35):
crushed it. Text the rate of return on a tech
heavy portfolio, even if you just think of Nasdaq versus
S and P, the differential is massive. So the problem
is ten years ago, a lot of people would have
felt uncomfortable even expressing that idea out loud. In two
thousand and fourteen, every financial commentator in blogger was talking
(26:58):
about how activist for idiots, So it just, you know,
so it goes back to what kind of active and
are you gonna get it right or not? And that's
the hard part. And so I think like not being
too doctrinaire these days and not being too heavy handed
with my opinion on every topic under the sun. I
(27:18):
don't really care what people say. We have our answer.
It works for us, it works for our clients, and
you know, somebody else could have a different answer, and
I don't have to go to war with that person
on the internet.
Speaker 1 (27:29):
Yeah, so somebody who's like solidly in the wealth building
phase of their life, how like what percentage of their
portfolio would you dedicate towards that explore part of their portfolio.
Speaker 2 (27:38):
So I can't give you a mathematical answer to that,
because so much of this is about personality. And if
I have to give you a portion of your portfolio
dedicated towards something that I wouldn't necessarily want to, but
I have to do that in order to keep you
focused on the big picture. Like I'll as an advisor,
(27:59):
I'm a fiduciary, I'll do that. I might try to
talk you out of it. So if you're one of
these people that just no matter what you came to me,
you have a huge position in Apple, and in my
opinion it should be smaller. But then it goes up
another five hundred percent and I forced you to sell
(28:20):
out of it just so that your portfolio would align
with my other seventy clients. You're never going to forgive me.
So part of my job is a fiduciary is to say, Okay,
look here's the situation. You have this concentrated position, you're
definitely taking more risk than you need to. It's been
rewarded risk in the recent past. But we're going to
(28:41):
work out a plan by which we divest of a
certain amount of this concentrated holding. And it could be meta,
it could be whatever. We're going to do this methodically
over time. We're not going to be emotional about it.
We're going to try to offset the gains with tax
losses elsewhere, and by the end of this period of time,
your portfolio will be more imbalanced with what I think
(29:03):
your risk reward is. But you're not going to hate
my guts if this stock price troubles. What I've just
described is the essence of financial advice. It's not just
what's the best portfolio for mister Anderson, it's what's the
best portfolio given mister Anderson's goals and given what I
think he and his wife can live with.
Speaker 1 (29:25):
Well, there's so much behavior too, right. That's one of
the big selling points of a financial advisor, is kind
of helping people through difficult times, whether it's a life
circumstance or whether it's a macroeconomic circumstance. That is one
of the main roles of a financial advisor. And you
just mentioned taxes too, Josh, which is something that doesn't
get talked about enough, but tax savings from smart portfolio
(29:45):
management can be substantial. How important is tax efficiency and
walking clients through preferential tax treatment strategies in what you do.
Speaker 2 (29:54):
It's a huge component to the value add that we
bring to clients. It's not instead of investing. It's really
an important piece of the investing process is understanding the
tax ramifications for the things you're doing. At the high
high end, when you have clients come to you and
they have fifty eight different investments in private equity, and
(30:15):
they have like a state things going on, and like
you have to be able to speak that language in
order to effectively advise it. Because at the high end
it's no longer a nice to have, it becomes mandatory.
If you can't speak tax fluently and help people with
their tax related issues, you cannot do wealth management at
(30:36):
that level. And so I think the firm of the future,
the aria of the future, maybe they'll outsource it, but
I think the really successful firms are going to build
it into what they're doing for clients day and day out.
Speaker 1 (30:50):
That makes sense, I mean, and I think you run
in your book too, that it's something like if you
are able to increase performance by ten thousand dollars crease
your returns for somebody with an investment, that's equal to
saving them one thousand dollars. Like there's like a ten
x multiplier when you save somebody money with taxes because
of the fact that like it's guaranteed, Like that's just
money that you no longer have to pay the government.
(31:12):
So it's like a slam dunk.
Speaker 2 (31:14):
It's a weird thing. If a client is owed to,
you know, is owed something back from you know, their
state or something for like a thousand dollars, that's like
the equivalent of making them ten thousand dollars in the market,
because the ten thousand dollars you make them in the market.
Like you didn't do that, The market did that. You
just facilitated it.
Speaker 1 (31:33):
Well, and it's still fluid, it's still liquid. You could
it depends where the market goes after that. But it's
just a fascinating psychological computer to.
Speaker 2 (31:39):
Find an error in somebody's like tax situation and you
tell them, hey, you're making a really big mistake here
that your accountant should have picked up on. That that's
that pays dividends.
Speaker 1 (31:51):
Oh yeah, they'll financial Yeah, they can give you a
big old kiss. Hey, Josh, you mentioned direct indexing earlier.
It seems like it's the hot new trade. Can you
define it? Tell us why it's coming on so strong.
Speaker 2 (32:03):
So direct indexing is really a thirty some odd year
old concept. It's it's what's what I think has thrust
it into the limelight in the wealth management space is
the advent of commission free trades. If you wanted to
do direct indexing for a client and for the listener
who's not familiar. Direct indexing is this idea of Okay,
(32:24):
i'll get us and P five hundred exposure, but rather
than give it to you in the spy ETF, I
will actually give you the five hundred holdings and will
buy those stocks proportionately to the index, and then we
will trade them so that it keeps pace with the index.
What is the purpose of doing that? Like, why is
that better than the ETF wrapper? For many clients, it's not.
(32:49):
You really have to beat a certain dollar level where
it makes sense.
Speaker 1 (32:53):
This is high end clients.
Speaker 2 (32:54):
Yeah, I think so. I mean, I know, like Fidelity
and Schwab, they want to they want to go downstream
with it and bring it to like retail. But I
think for wealth clients, one of the ideas that makes it,
one of the things that makes it so powerful is
the ability to tax loss harvest and so have index
level returns, but be able to harvest losses through replacing
(33:18):
different securities. And you can obviously you're not going to
be able to do that in an ETF rapper that
just owns the index. I think the ability to screen
out certain securities for ESG. Purposes or you know, corporate
governance reasons or whatever, or even concentration. So like if you, guys, Matt,
(33:38):
if you called me and said, hey, my net worth
is eight million and six million dollars of that is
in Facebook stock, if I buy you the triple cues,
it's almost malpractice, like I'm just giving you more of
the exposure that you already have too much of. So
that I mean that is just revolutionary for the wealth industry.
I don't think it's applicable necessary for like, you know,
(34:01):
retail one hundred thousand dollars in under accounts and we're
certainly not using it for that purpose. We love ETFs.
But the reason why all of a sudden it's taken
the industry by storm is three reasons. The first is
there hasn't been There hadn't been any innovation there for decades.
It was a pre existing technology. There was kind of
(34:23):
one company that that you know, had pioneered it and
really owned it, and they were a division of you know,
some other brokerage firm, and it just like kind of
sat there and it was this curiosity. And then all
of a sudden, in twenty nineteen, Schwab and then TD
and then Fidelity dropped their trading fees on stocks to zero,
(34:47):
and then all of a sudden, it's like, well, wait
a minute, this is crazy. So now if I'm an
advisor and I want to do direct indexing, I don't
have to negotiate asset based pricing with my custodian because
all the stocks are going to trade free. So now
this strategy, which I know is great, has the chance
(35:07):
to be super efficient a lot cheaper, and I can
actually do this. So Vanguard and has a direct index
and now everyone in the industry has a version of it,
and advisors are becoming very adept at incorporating it into
how they allocate their client's assets.
Speaker 1 (35:24):
Nice Josh we got a few more questions, including we
want to know what keeps you up at night. We'll
get to a few more questions with Josh Bright after this.
Speaker 2 (35:38):
Ow.
Speaker 1 (35:38):
We're back from the break, so we'll talk about Josh Brown.
We are speaking behind the curtain of the finance industry,
and Josh, you are quoted in the book What Went
Wrong with Capitalism. The premise of that book is that
government and fed over each are doing damage to the
future of the market. Basically, bailouts, loose monetary policy are
going to have this blowback effect at some point in
(36:01):
the future on the stock market. I'm curious to hear
your thoughts on that.
Speaker 2 (36:04):
So you know, we have this chart that we show
people and it's earnings growth plotted alongside the S and
P five hundred its price return, and they were in
lockstep with each other. So yeah, for sure, like when
there's loose monetary policy, definitely people take more risk, and
maybe that's good for stock market multiples, but that's like
(36:28):
in the very short term. Over the long term, the
most important thing you need to understand about the returns
of the market is that they almost perfectly match the
gains in corporate profits. In earnings. So this idea that
the market is only up because of the government's intervention. Again,
in March of twenty twenty, can we say that the
(36:48):
market bottomed because of government intervention? Yeah, of course we can, like,
of course, But now it's August of twenty twenty four,
So would we say the stock market doubled as a
result of what they did in March of twenty twenty. No,
And the Fed has been raising rates and has kept
generationally high interest rates for now eighteen months, and the
(37:10):
stock market has continued to rise. So what are you
going to attribute that to? So I don't play this
game where I look for culprits from why investments went
up or didn't go up. I feel like in the
long run, interest rates and earnings are the two most
powerful factors affecting markets. Economic policies come and go. You
(37:34):
get Republicans, you get Democrats, you get Congress controlled by
one party or the other, you get to split Congress,
you get every permutation. But one of the things that
doesn't change is that corporate executives and boards of directors
wake up every day thinking about only one thing. How
do we increase the profitability and hence our compensation of
(37:59):
this company, and that is what the stock market is
really about. And yes, of course things change around it.
But like in the end we talked about incentives a
few questions ago, the number one incentive that drives American
style capitalism is get the stock price up. Do whatever
you have to to get the stock price up. And
(38:19):
I don't think it matters who's in the White House.
That impulse is not going to change. So talented corporate
executives all over America, in every industry, we'll figure out
a way to get things done, figure out a way
to improve processes, figure out a way to enrich themselves
and their fellow shareholders. And almost nothing, almost nothing can
(38:42):
stop that over the long term. So if you believe
in that, if you believe in that, then you don't
worry so much about how interventionist the government is being
in any given year. Yeah.
Speaker 1 (38:52):
No, And I appreciate your how optimistic you are and
how optimistic you encourage your listeners and viewers to be, because
I do think optimism is warranted. Actually, you know, when
you look at history and when you look at kind
of the type of economy we have here in the
United States, and the incentives that are at play for
business owners. You just mentioned though, this focus on share price.
Do you think there's been more of a focus on
(39:12):
share price from some of these larger companies and maybe
less of a focus on longevity of a company. I
guess is there any downside to companies thinking too much
about what shareholders are going to experience in the next
six months versus what their customers are going to experience
over the next six years.
Speaker 2 (39:28):
I think there's a paradox inherent in that question. Right now,
So much of the way a company is perceived amongst
its employees and its vendors and its suppliers and its
customers is wrapped up in what the stock price is doing. There,
you know, there is no there is no doubt that
(39:53):
the share price and the sheer size and scale and
market caps of companies like Meta and Alphabet that plays
in their favor as they move and shake and throw
their elbows around the negotiations, like it's not a thing
that can be easily disintermediated, like let's just focus on
the business and not the share price. A lot of
(40:14):
times the share price is the business. And one really
great example of that is what we witnessed last spring
with Silicon Valley Bank, you had this self reinforcing cycle
where people would write an article that they're concerned about
the bank, the share price would fall, and even more
people would be concerned about the bank, which would prompt
(40:36):
another wave of articles which would prompt the share price
to fall even more, and that process plays out until
it's game over. So in financials, this is actually one
of the few areas of the markets, but not the only.
Financial is one of the few areas of the market
where actually the share price affects the fundamentals, or the
share price affects how potential customers think about the safety
(40:59):
of dealing with that financial institution. So we can't divorce
these two things. One of the things that we can say,
go back and read what Larry Fink wrote in his
annual letters to black Rock shareholders this spring. He talks
about these conversations that he had with world leaders and
they all looked at what the differences between America and
(41:23):
all of these other countries since the Great Financial Crisis
or even since the end of the pandemic. Why have
we recovered so much better than everywhere else? And one
of the key attributes of our system versus all of
these other economic systems around the world is the strength,
(41:45):
the depth, the breadth of our capital markets. And Larry Fink,
I think, wrote very eloquently, very succinctly on this idea
that world leaders, like in France and in Japan and
in China, they're all enacting these reforms to unshackle their
own stock markets and build up the strength of their
(42:08):
domestic capital markets in order to compete in the new era.
And what that translates into is we need higher stock prices,
we need more investors, we need higher valuations for our
publicly traded assets, we need more institutional activity. We just
need to be more like America because one of the
things that we do better than anywhere else is provide
(42:30):
incredible capital markets that enable the creation of companies, the
underwriting of risk, the ability for somebody with a great
idea to be connected to somebody with excess capital, like
we do that better than any country. So you can't
divorce what's happening with your share price with the fundamentals
of your business, and on a more global level, on
(42:52):
a country by country basis, you can't say the stock
market is not a great barometer for how a country
is doing economics as badly as you want to, because
the truth is, the stock market is the mood ring
of how the working and investor class are truly, not
how they feel politically, but how they are actually doing.
(43:13):
And from that standpoint, we want to make sure that
we recognize that connection and not try to sever Hey,
I just run my business. The West takes care of itself.
Not true. Not true. The business is reflected in the
share price, and the share price reflects back upon the
health of the company.
Speaker 1 (43:30):
Based on what you just said, it makes you want
to get a screaming bald eagle tattoo on my back
and pledgely just the American flag, and it makes you
want to invest only in American stocks. What do you
think about the difference between based on what you just said,
is there a home country bias in investing mostly in
US stocks and US in foreign stocks?
Speaker 2 (43:48):
You know, if you would ask me that question in
two thousand and nine, I would say it's a big
mistake to have a home country bias. Because the US
stock market, the S and P five hundred experienced the
last decade, it returned zero percent over ten years from
two thousand and two thousand and nine, and We talked
earlier about the reasons why you had two fifty percent
crashes in the SMP during the course of that decade.
(44:10):
But while that US stock market stagnation took place, people
made money in China and Mexico and Brazil and the
brick theme and small caps went up, and hits went up,
and there were a lot of things that worked while
the S and P five hundred didn't. So you know,
we're going to have these periods of time where just
(44:30):
because we're America, that doesn't mean you're gonna have positive
returns in the SMP. And there are stock markets all
over the world. In any given years, some of them
do outperform the S and P. It's been harder lately
because we have these tech giants and most countries don't.
But that's not I don't think that'll be forever. Maybe
it will be, but I don't know that I would
(44:52):
make that bet. And in the press in the last
few weeks a lot of stories about the venture capital
scene in Paris, around the Paris Olympics and in France
and McCrone going out of his way to try to
make the stock more Only three percent of people in
France own shares of stock three.
Speaker 1 (45:11):
Wow.
Speaker 2 (45:11):
In the United States, it's like sixty something. Do you
know why? Because they don't need to take risk. They
have a pension guaranteed. That's their system. But that's also there,
so that sounds nice, but that's also their long term downfall.
Why there's a lack of dynamism in their economy. It's
why the national sport is protesting. You know. One of
(45:35):
the things that the French have recognized is exactly what
Larry Fink wrote about. And now all these articles are
coming out about their AI sector, and France has some
incredible AI startups and they are raising money at the
scale and level of their counterparts in Silicon Valley, and
they recognize, all right, we missed the Internet, screwed that up.
(45:58):
We missed wireless too. Oh well, maybe let's not miss
AI software. The dynamism of the American economy and the
innovation of our technology companies probably explains the majority of
the discrepancy between returns that we've experienced in other countries,
and other countries are going to figure it out. You
(46:20):
think the Netherlands doesn't understand how much better off they'd
be if they had five companies like ASML and not
just one. You think the British don't feel stupid for
allowing armholdings to be listed in the United States and
for a period of time owned by a Japanese holding company.
Of course they feel stupid. This is being figured out,
(46:41):
and I do think. Look, I'm going to show you
stock Mercado Libre Meli. This is the largest company now
publicly traded company in all of Latin America. Did you
know that? No, Basically it's eBay and PayPal combined. I
would say Amazon, eBay and PayPal, so it's and then
(47:01):
they have this payment app which is wildly popular. I
think they have two hundred million users. The company is
Delaware incorporated, but headquartered in Uruguay. I'm assuming it's the
biggest company in Uruguay. It's one hundred billion dollar market cap, guys,
or one hundred and ten billion dollar market cap, and
(47:21):
if you look at the returns of that stock, it
blows away the performance of almost every US tech stock.
So I don't accept this idea that the United States
will be the only country that has large tech giants.
It's just that we have a really great headstart, yea,
and we have a really great political and capital system
(47:41):
to support these things. So you're probably always going to
be overweight America to some extent. I don't think you
want to be one hundred percent anything.
Speaker 1 (47:49):
Yeah, it's hard to argue with free markets and as
proponents of investing in the total US stock market as
well as the SMP five hundred. I think this is
a great note to end it on. But Josh, where
can folks learn more about you in your book? If
they're interested in buying it, you.
Speaker 2 (48:03):
Could buy it everywhere Barnes and Noble, Amazon, probably airports
and stuff. But here's the last thing I want to say.
I put my heart and soul into this book. It's
my fourth book. The last two books I wrote I
had a co author, but those were like projects. I
was more of an editor. This book was like literally
all of me, Like I put everything. Yeah, I like
(48:25):
put everything I have into this thing. So if you
like me, you're going to love the book. Don't like me, don't.
Speaker 1 (48:32):
Worry about it.
Speaker 2 (48:33):
A lot of days I don't like me either. But
if you really want to understand what it's been like
to be a professional investor over the last fifteen years,
and we live some of the highs and lows and
really absorb the biggest, most important lessons that I have
(48:53):
learned throughout the course of my career. This is the
right book for you, and load it like in a
really personal way, and I hope people appreciate that, and
I hope they enjoy it well.
Speaker 1 (49:08):
Four thumbs up for Matt and Joel over here, Josh,
we appreciate you, man, and we'll linked all the to
where people can buy the book in the show notes
as well. Thank you so much for joining us today.
Speaker 2 (49:15):
You guys are awesome. Thank you so much for having
me and keep doing what you do.
Speaker 1 (49:19):
All right, Joel. It's refreshing, I think to talk with
somebody who just is so deep into this one thing,
like Josh Brown is a specialist and his specialty is investing,
and that is all he does. He doesn't compare uson shop,
so I don't know if y'all can be friends. Yeah,
the fact she had his wife on too, maybe she's
maybe so will have her next week. But now, it
(49:41):
really was fascinating to talk with another one of the
fellas over there at Ritholtz. There are a lot of
great minds over there who are thinking about investing in
a I think a really healthy way. But what was
your big takeaway wow for the conversation today. Yeah, First,
I just love what he said, we're an alternative to
the noisemakers. That's what you and I strive to be
here totally too. But I actually liked it in the
beginning when we were talking about dabbling in alternative investments
(50:02):
or having some wiggle room to the explore portion of
the pot when he said he said, leave room for
mistakes and desire. And you definitely you don't have to
learn from your mistakes. You can learn from other people's mistakes.
You can learn from the books you read, you can
learn from the podcast you listen to. But I do
think it's okay if especially you are interested in pursuing
(50:22):
some different ways of investing with a portion of your portfolio,
and even if you fall flat on your face with that,
and again that's why we suggest a smaller portion of
your portfolio to do that with, so that you're doing
the smart thing with the bulk of the majority of
your assets. But I think if that hands on approach
actually creates even more of a desire to be a
savvy investor and to be involved in markets moving forward,
(50:44):
I think that's ultimately good thing. So think Josh is
actually kind of right on that. We probably disagree on
some of those little details, but I think ultimately, directionly
he's right on. There's an overall desire to keep the
majority of your portfolio on track, and if you need
to have this little pressure release valve that allows you
to stay this the straight and arrow with the majority
of your funds by kind of exploring and dabbling a
little bit on the sides. Yeah, I feel like that
(51:04):
gives us license to continue to say at least, hey,
at least what we talk about here on the show,
five percent or less of your overall portfolio. But this
doesn't mean that you have to do that, right, And
so with Josh, he's talking about how he's just really
fascinated with product releases and CEOs who migrate through different
organizations and how they impact the success and the stock
price of those companies. But not everybody has that interest,
(51:26):
and so I don't want people to think that, oh,
well I should be doing that and start if you
don't have any interest in doing that, well don't do that,
And you could just invest in the overall SMP. But
one of the things he was pointing out, I guess
when he was talking about or we were talking about
your daughter earning some money, and he was kind of jabbing,
you know, elbing you a little bit as far as
investing her earnings. But I think the bigger lesson to
(51:47):
take away there from that comment was the fact that, hey,
if you're going to make mistakes, make mistakes when you
are younger as opposed to older. And so what I
see there is and he commented on gen z their
ability to more freely take gamble, to take bigger risks
than maybe the millennial generation has taken before, but the
ability to take those risks early on where there are
(52:07):
a fewer zeros behind those numbers as supposed to say,
in your thirties or forties, when you're thinking, oh, no,
this is what I need to do in order to
make sure I've got enough set aside for retirement. I
think there's a whole lot that you can learn, like
you said, through that life experience, especially early. On flip
side of the coin, we've also seen some of our
listeners say, hey, listen, I went a little too heavy
in that direction in kind of the speculative trading mentality.
(52:29):
A couple of years ago, and I'll also give in money.
Now I'm starting from scratch again, trying to build wealth
through my future. I want to do it kind of
the prudent way. So I think there's a difference between
prudent and prude. We don't want to be prudes here
on the show, but we do want people to be
prudent and to be thoughtful about their money because, yeah,
I guess airing too hard in that direction can create
some misery too so, but at least I mean a
lot of those hooks are younger though. I guess that's
(52:50):
what I'm saying is the time to the cover. Yeah. See,
folks make those errors early on while they still have
decades of ability to continue to earn money and invest
and be set for their future, versus taking more of
that mindset later on in their career. That would be
potentially catastrophic to their finances. But uh yeah, really fun conversation.
The beer you and I enjoyed today was called Solid.
This is a pilsner by Burial Beer Company. As it
(53:13):
looks like a collab with shilling out of what is
that Littleton, New Hampshire. What do you think about this beer?
Didn't love it not my favorite really well yeah, I mean,
Josh mentioned, I think, or at least before we started recording,
that he likes pilsners, he doesn't like IPAs, and I
like IPAs, and I don't love pills rs as much.
Although I kind of am down with the laid back
pills er, this one was a little more bitter and
(53:33):
off putting though to me, I don't know why. Yeah, yeah,
not my favorite. You do sound like you're a little
stopped up. Maybe you're not tasting it to the you
getting all the flavors there, Joel, maybe not. I thought
it was super solid, so I totally disagree with you.
Kay tasted crisp fresh, didn't have any notes that felt
like that they're out of place or whatever.
Speaker 2 (53:49):
You know.
Speaker 1 (53:50):
It wasn't like some amazing Most of the time when
we drink a hazy ipa or something like that, we're
just like, oh, yeah, that's great. So I don't know,
maybe with this, I'm like, all tasted refreshing, and it
was also very non offensive, which maybe in my book
that that's a solid pillsoner. But either way, it doesn't
really feel like work when we get to enjoy beer
while we talk with somebody about money for sure, talking
to cool people. All right, we'll link to Josh's new book,
(54:12):
his website and all the like up on our website
at howtomoney dot com. But Matt, until next time, Best
friends out, Best Friends Out,
Welcome to How to Money. I'm Joel and I am Matt,
and today we're talking about peering inside the finance industry
with Josh Brown. That's right. Our guest today has been
(00:28):
called one of the greatest financial writers of all time.
That's actually from in Front of the show, Morgan Housel.
He's a pretty smart guy as well. But it's no
wonder because Josh Brown. He started his original blog, The
Reformed Broker, back in two thousand and eight. He now
writes over at downtown Josh brown dot com and his
latest book just came out yesterday. It is titled You
(00:48):
Weren't Supposed To See That Secrets Every Investor Should Know.
He also co hosts the Compound of Friends podcast where
they discuss the current market trends, they discuss financial strategies
and when he's not busy with all of that, so
the CEO of Ridholt's Wealth Management, which is an investment
advisory firm up there in New York City. So we're
excited to really dive into the finance industry with you,
(01:09):
Josh Brown. Thank you so much for talking with us today.
Speaker 2 (01:12):
How are we doing, boys? Everything good, feeling great?
Speaker 1 (01:15):
Could be better. We're drinking a beer, hanging out, talking finances.
It's what we do do best, or at least enjoy
most well. And I'm going to share too. Josh felt
a little bit left out because he saw our beers
when we said hey before we started rolling, is he
cracked one? He fell left us, so he cracked open
his own Modela over there up there in New York.
I appreciate the commitments.
Speaker 2 (01:32):
Yes, we got to get on the same level as
you guys.
Speaker 1 (01:36):
Yes, down to the same level. Right, So our first
question we got to ask you, We ask everyone who
comes on the show, is what's your craft beer equivalent?
Matt and I we'd like to splurge on the fancier
craft beers, but we're still, you know, being smart, saving
investing for our future. What's what's that sports for you?
Speaker 2 (01:52):
I think it's restaurants. I I really only will go
to like the best places, and I I'll be going
out to dinner and lunch less than I do. But
I got the way I feel is like, if I'm
going to have two hours on a Saturday night somewhere,
it has to be awesome.
Speaker 1 (02:11):
And no Applebee's for Josh Brown.
Speaker 2 (02:13):
Dude, I eat at dope places and it's all over
my Instagram and I don't apologize for it. And there
are other I'm not like a car guy. I drive
like the same car I've been driving for six years.
I don't have a country club membership for me, like
the experiences that I have when I'm with friends and family,
Like I don't eat at chain restaurants, and I don't
(02:34):
eat at places that are not like memorable enough unless
it's like a go to, like local place. So that's
my big splurge.
Speaker 1 (02:42):
If you're looking for something quick, yeah.
Speaker 2 (02:44):
No, of course, of course, but just saying like if
you come out, if you come out to lunch with me,
like if I. People are always like, oh, we should
do lunch, we should do drinks, and they say like
say casually. I'm like, oh no, I have a reservation
at TARESI two wednesdays from now. It's at t Want
to meet me there. I do it like, oh wait,
this guy's not getting around. So I'm not in Manhattan
(03:07):
as much as I used to be because of all
the things that I'm doing. But when I do lunch,
I like really do lunch, and I put a lot
of thought into who I'm going with where it's going
to be. I mean, it's New York City, so it's
impossible to keep up with all the things that are
opening and oh yeah, but I try to like keeps
as up to date as I possibly can as a
(03:28):
as a forty seven year old man who lives in
the suburbs doing I'm doing Okay, I love it.
Speaker 1 (03:33):
I think that's great. And especially given the fact you
mentioned that you've mixed the country club, you're not driving
the fancy car, Like those two things alone can afford
you so many fantastic meals out with and especially I
love what you're saying there the commitment to community and
the ability for y'all to have some of those shared
memories together like that.
Speaker 2 (03:49):
Yeah, and listen, no disrespect to the boat guys, the
car guys, the country club, like everybody has. Everybody has
their thing.
Speaker 1 (03:55):
Nice. Well, Josh, this is the first time we've talked
with you. We've talked with a lot of folks there
at your but we want to get to know you
a little bit more. During our conversation here what sparked
your interest in money and then like essentially, how did
you turn it into a career. We want to kind
of dive back into your history a little bit here.
Speaker 2 (04:11):
So I have to be honest, I have no interest
in money. I'm really fascinated by investment, and so I'm
not a personal finance person. My wife is like the
CFO of my home. I don't touch the money. I
don't log into the bank, I don't pay bills, I
don't comparison shop for airline tickets. I don't do any
of that stuff. I am really primarily focused on markets
(04:35):
and tangentially the economy as it relates to markets. And
the thing that really turns me on is just this
idea of time passing and money compounding and being part
of the growth of these incredible businesses and entrepreneurial stories
(04:56):
and now forming my own business eleven years ago and
having that grow, and like, I really get turned on
by the investing process and the rise and fall of
products and companies and CEOs. So that's really what my
main thing is. It's it's not so much like money itself,
(05:18):
which I almost I sometimes find like almost too tedious
to be paying any attention.
Speaker 1 (05:23):
To it all.
Speaker 2 (05:24):
And I know, like that remark sounds like privileged or whatever.
Speaker 1 (05:28):
This blasphemy to Jelge I was like, wait, you're not
comparison shopping. I'm cutting this communication off right now.
Speaker 2 (05:33):
But my wife is an accountant's daughter, boom, and she
has an alacrity for this. She's great at it, and
she really does pay close attention. And she loves, you know,
booking something a day before the price jumps ten percent,
and she like, that's what she that's her focus. And
my focus is more on like how do we grow
(05:54):
the money or how do we allocate it? And she's
more how do we spend it? And how do we
make sure we're stretching it as far as it can go.
So I think we work really well together.
Speaker 1 (06:04):
Yeah, that's a good tandem.
Speaker 2 (06:05):
You know. I don't veer into her lane and and
you know, just like randomly like drop in and start
calling the shots. And she doesn't veer into my lane
except when when the markets drop a lot and she'll
just be like, hey, are you screwing something upwards? Just
what's going is this? Just what's going on?
Speaker 1 (06:21):
You can have someone to hold your feet to the
fire a little bit, but yeah, no, I think and
then that can be what makes a couple tick. Lots
of times it's like, hey, this is what I'm good at,
this is what you're good at, and we trust each
other to kind of hold up our endo the bargain well.
Speaker 2 (06:34):
And then the other. The other thing is that it's
essential that if you're in a long term relationship with
a husband and wife, a boyfriend or girlfriend, like, there
has to be there has to be like some baseline
agreement of how you're breaking up these these things that
need to take place. Somebody has to be thinking about
(06:57):
the long term, and then somebody has to be focused on, hey,
we got a credit card bill this morning, and you know,
I think you have to have these issues worked out
in advance for multiple reasons. And one of the reasons
is there were gonna be rough patches. And when I
first got married, I had no money, like literally no money,
negative money, and you know, we had to communicate and
(07:19):
survive that period, you know, And I wasn't a high
flying Wall Street financier. I was just a guy that
was doing retail brokerage not particularly well, and the world
was coming to an end like in six o seven
oh eight, Yeah, and we had to survive. We had
to survive that period, and so we couldn't have these
like grandiose conversations about allocating assets.
Speaker 1 (07:41):
It was like, how do we it's just about getting by, Yeah,
how do we.
Speaker 2 (07:44):
Like pay a tax bill? A property tax bill?
Speaker 1 (07:47):
So totally so that makes me I wonder too. I
mean the S and P. If you look at it
over like basically when you first started writing, like, we've
seen an increase over like six hundred percent. How much
do you think that your interest in investing has been
because of what we've seen over the past almost twenty
market yeh, yeah.
Speaker 2 (08:04):
I gotta tell you, guys. There's a scene in the
last Batman film where Bane tells Bruce Wayne, you have
merely adopted the darkness. I was born in it. My
first ten years in the business featured two almost back
to back fifty percent crashes in the S and P
(08:27):
five hundred so I got Series seven licensed in ninety seven.
Speaker 1 (08:31):
Oh geez.
Speaker 2 (08:32):
And within the first three years, the dot com bubble
had peaked and crashed. I watched the Nasdaq fall ninety percent,
everyone I knew in the business get wiped out. And
then just as we were recovering from the dot com crash,
the Enron and WorldCom scandals unraveled, and just as we
were recovering from that, it was nine to eleven. So
(08:53):
that was my first three years in the business. Okay,
five years later we had the Great Financial Crisis with
the end of bear Stearns and Lehman Brothers and Washington
Mutual and AIG and the bailout of Merrill Lynch and
Morgan Stanley and Goldman Sachs just as that was unraveling.
So that's all inside of my first ten years in
(09:14):
the business. Guys, So I would not say that I'm
a good time Charlie and the market's up, and you know,
that's why I remain interested. I have witnessed some of
the sickest, most destructive capital markets activity anyone has ever seen,
and I think I'm a better version of the professional
(09:35):
that I am as a result of those experiences. It's
not that you need to lose a lot of money
to be a good investor, but I think it helps
to witness stuff like that and go through it personally
and not just read about it in a book.
Speaker 1 (09:48):
Yeah, it makes me wonder if younger investors are somehow
potentially too wearing rose colored glasses, because like the financial
independence movement, for instance, the fire movement has grown rapidly
as this bowlmark mar has increased, and it makes me wonder, Okay,
if we sustain some sort of prolonged downturn, to those
early thirty somethings maybe not have the stomach to stick
(10:09):
with it because they we've had relatively quick market corrections
and relatively small dips.
Speaker 2 (10:15):
I don't really understand the fire movement stuff. To be
honest with you, I think because the career that I'm in, Like,
I love what I'm doing and I don't want to stop.
But if I were in a different sort of work
situation where every day I couldn't wait for the day
to be over, I would probably be able to relate
to that better. But I think this idea of deprivation
(10:36):
for twenty years just to be done working for the man,
I'm not going to say that I don't understand it
at all. I'm just going to say, like, I feel
like it's a focus on the wrong thing. The focus
should be like improving the career situation, and I know
for everyone that's not possible. So I don't want to
speak out of turn on something that like I can't
really relate to. But I disagree that the people who
(11:00):
in that fire movement, haven't seen any volatility or haven't
seen enough. Like twenty twenty two was absolutely harrowing. The
highest price for the market for the year was on
January first. It was literally all downhill from day one
that year. So if you are in your thirties and
(11:21):
you live through that, that's not nothing. That's it should
be a badge of honor for the fire people in
your audience or the people that have been allocating. But
they're young and they haven't been through a lot yet
they have they don't even realize.
Speaker 1 (11:33):
It, maybe some of the younger audiences, and maybe that's
kind of honestly just a bias on our part just
in how we see investing in how we're kind of
always looking back over a longer period of time that
it kind of looks. I mean, obviously in the moment
it's out, yeah, but when you zoom out and you
look take that bird's eye view, it's it looks pretty
looks pretty swell. But as we're talking about, I guess
younger investors makes me think of in your book, you
(11:55):
said that gen Z sees markets like a video game
that can be beaten or a puzzle that can be
and like you weren't talking smack, You're you're a kind guy.
But how do you think that this has impacted how
the younger generation, how it is that they.
Speaker 2 (12:08):
Invest I didn't say that as a dis no, not
at all, saying that in a complementary way. So I
think millennials are more fearful than Gen Z, and millennials
are more fearful than my generation Gen X. But we
were not ever afraid of the stock market, and we
were not ever like uh, We didn't have the formative
(12:30):
experiences that would have turned us off from the stock
market or the potential for volatility. For the millennials, it
was different. The millennials in high school watched their parents
get wiped out in the dot com bubble, and then
they graduated college directly into the teeth of one of
the worse recessions of all time from the global financial crisis,
(12:54):
and as a result, they put off household formation, they
put off getting married, they put off having babies. We
had an epidemic of young adults living at home with
their parents. That's the millennial generation. And it really took
them until the pandemic period. It took them a really
long time to discover the stock market. They just demonstrated
(13:16):
very little interest in opening brokerage accounts, in trading and investing.
They did four to one case stuff because they kind
of felt like they had to, but really it took
the millennials a long time. Gen Z is really different.
Gen Z embraced gambling and trading very very early, and
(13:37):
they absolutely are more engaged investors than prior generation. All
of the data suggests that they are speculators first, and
that's okay. They're at the right age where that's what
they should be doing. They do look at it as
a hackable activity and something where there are tricks and
loopholes and shortcuts that they are in pursuit of. They're
(13:59):
much more exhibitionist in the way they take losses. They
tell people about how much money they lost, they post
their l's, so to speak, in a way that a
millennial would never And it's a really big distinction is
that they want to talk about their investments in a
way that prior generations were taught. You don't talk about money.
(14:23):
Our boomer parents told us, never talk about money over
the dinner table. That's all This generation talks about good
or bad wins or losses, and I think that's the
biggest distinction between millennials and gen Z And it's really
fascinating as being neither of those two things, watching that
(14:43):
generational divide start to become apparent to everyone in the
very early stages.
Speaker 1 (14:48):
All right, Josh, you just said they should be speculating.
And I heard you say that, and I couraged a
little bit, not gonna lie, and I'm just so I'm
just curious to hear from you. Am I just being
a prude because when you look at the numbers and
just even those little bits that people are can allocate
in their late teens, Like my daughter literally just had
her first babysitting gig yesterday, and I'm you know, I'm
(15:10):
not like, hey, let's throw it into a roth ira
and to an S and P five hundred indext fund yet,
but like that day's coming soon, But like how powerful
that can be just starting at a young age and.
Speaker 2 (15:19):
Doing gimme break, she's going to compound her babysitting money
into a million dollars how how many centuries? What she
needs is formative experiences, and what she needs is to
work out the mechanics of how to buy a stock,
how to sell a stock, if you're doing that with
nineteen dollars you earned from babysitting, it's not a big deal.
(15:40):
You know her, her career ambitions are way more important
than what she does with her spare cash in her teens.
When we speak as pedantically as we do the Royalty,
all of us in the personal finance world, When we
speak as pedantically as we do about the power of
compounding and the importance of retirement, say and blah blah blah.
(16:01):
It's not that it's not true what we're saying. It's
that sometimes we don't leave room for something that's really important,
which is people making mistakes or people determining that they
might want to be more hands on with their investments
than what the experts say they need to be. So
not everybody is going to want a default to an
index approach, or to a set it and forget it
(16:24):
or a target date. There are people that are going
to take an interest in how this stuff works and
want to touch it. And if that means that they
lower their returns as a result of this excess activity,
so be it. Because there's also a chance that they
increase the weight of their returns. You could cite all
the academic literature you want, But you can't tell somebody
(16:46):
who bought five hundred years of Nvidia ten thousand percentage
points ago in twenty seventeen that they did something wrong, can't.
You can't. You could say, in theory they did something wrong.
You could say, well, what you did is not repeatable.
They still have the money, guys, you know what I mean.
Speaker 1 (17:05):
They've still got the money. No, I totally. And the same.
Speaker 2 (17:08):
Applies to Tesla and to bitcoin, and to Apple and
to Amazon. So this idea that everyone has to that
everyone has to accept this kind of calvinist strict you know,
interpretation of the book of Jack Bogel, and if anyone debates,
they're an apostate. For me, it's really lame and it's
(17:31):
counterproductive because the net effect is it turns people off
from learning how to do this stuff, even if you
don't approve of the way that they're learning. The more
you try to talk people out of taking any kind
of risk, the more you're just going to turn them
off from the process overall. So I leave, I leave
a little bit more room, and I'm a little bit
(17:53):
less doctrinaire then maybe I used to be, you know,
prior to the pandemic. I used to write about stuff
as the what We're scripture too, and I think I've
loosened up a little bit. And I think people should
have fun when they're nineteen twenty, twenty one, twenty two,
their prop betting on all the apps, they're doing football
(18:13):
bets in game and doing all this stuff. Anyway, let's
not pretend that the impulse doesn't exist. Let's just try
to guide people around it instead.
Speaker 1 (18:23):
You're really gearing that for a longer conversation if you
want to combine Calvinism and investing with Joel right here.
But I think we can absolutely agree in that it's
better to.
Speaker 2 (18:32):
Be disrespect I could have said orthodox, no totally, but
you get You get.
Speaker 1 (18:36):
My total here, Josh, if you want to. But I
do think we get. We totally agree with the ability
for especially kids to make some of these mistakes earlier
on with where there's less less money on the line.
But we're kind of diving into your investing philosophy, and
we got more that we want to talk with you about, Josh.
We're going to talk about, yeah, some active versus passive
(18:56):
investing as well. We'll get to all that right after
the Break. I were back with the Break still talking
with Josh Brown, and you work inside the finance industry.
I want to touch your new book just came out.
The title of the book is you weren't supposed to
see that? And you're basically revealing certain things that I
(19:21):
guess certain people don't want you talking about. What weren't
we supposed to see? What are you revealing in this
book that we need to know?
Speaker 2 (19:27):
So it's important to point out I work in finance,
but I started out as an outsider, and I know
nobody would look at me today and be like, oh, yeah,
you're an outsider. I get it. I'm in on the joke.
But my form of experiences writing about the industry and
the markets was that like I really was beholden to
(19:47):
no one because I was no one. I was like
a retail broker working at third tier broker dealers. I
had no pedigree and so as a result, I had
a very interesting perspective. It was interesting to the readers
in that I could pretty much say anything as long
as it was true. So I had compliance and I
had to adhere to industry standards, but outside of that,
(20:11):
there was nothing that I couldn't say, and that freed
me to, you know, kind of just say like be like, look,
I understand that so and so said this, and this
person said that. But here's the truth. And a lot
of what I ended up writing about was incentives. And
I think Charlie Munger said that, you know, with every
passing year, the more he believes that incentives drive everything,
(20:35):
the more like even he was underestimating that that power.
So much of what people need to know about what
goes on on Wall Street boils down to who's getting paid,
how they get paid, who pays them, and why. And
so if you like really look at, you know, the
substance of what I have spent the last fifteen to
(20:57):
seventeen years writing, it's really boiled down to that. And
so I think I was able to do that really effectively.
And I think a lot of what I had written,
it's not like I had been in possession of that
knowledge for years and years and years. It's like these
epiphanies that I had been having along the way, and
the willingness to say it out loud, so you weren't
(21:18):
supposed to see that. As the book title I think
encapsulates that idea. It's like Oh, you weren't supposed to
know that this actually works this way, but I'm telling
you anyway. And you know, I did that for a
long time, and I think it really helped the readers
understand what they were truly interfacing with when they were
dealing with investment industry stuff.
Speaker 1 (21:41):
I think when people when I listen to your podcast
and when I read what you write, I am reminded
typically you're looking out for your reader, your listener, that
your viewer. But there's a lot of people out there
in the industry. Is this what you're getting at? That
there's a lot of people who might say one thing
and actually maybe not mean it, but be trying to
profit off maybe talking hyping up the fear, and in
(22:02):
the background, they're trying to make a trade that profits
off you being scared. I get it makes me think
of the was it the Bill Ackman Hell is Coming
sort of comment or something like that. I mean, this
sort of thing happens all the time in the finance industry,
where people say one thing publicly, but then behind the
scenes are trying to profit. Is that is that kind
of what you're getting at?
Speaker 2 (22:20):
Yeah? So I think I used to be like on
a crew, a one man crusade early on, where it
would be like somebody would say something I disagreed with
and I would like, go to war. I don't care
that people are doing that anymore. I just feel like
I want to give the public an alternative to the
noisemakers and the people who get paid, you know, to
(22:42):
get you to subscribe to something, or the people who
predict crashes every week. I don't want them to not
say that like maybe this is cynical, but like it's
actually good that those people exist, because my career is
about saving the audience from those people, and I've been
doing it for I don't know, almost twenty years now.
(23:05):
If people are like, what have you done? Like, what
has your career been about? I hope that it's obvious
to the majority of people who've been paying attention that
I have served as a counterbalance to some of the
worst actors who are preying on the information asymmetry totally
(23:27):
and the fear and the ignorance that quite frankly are
ubiquitous amongst the American public. Like I want to be
seen as the person, not like it's not like a savior,
but it's more like, hey, I was somebody saying the
other thing.
Speaker 1 (23:42):
Yeah, Josh is part certainly part an investment firm, but
also part like labor of love as to what it
is that you're doing. And one of the things that
you wrote about in your book, you're talking about how
traditional money management firms they make their profit from the
belief of investors that they can do better than just
buying the index. We're talking about the difference between active
versus passively managed funds. What is going on right now
(24:06):
in the passive versus active debate right now?
Speaker 2 (24:08):
Yeah, it's a good question. I think the debate is dead.
I think we've basically settled on the idea that for
most people, the bedrock of the portfolio is going to
be passive, and then it's like core and explore. So
the core of most people's portfolios at this point is
some version of passive. It might be an SMA, it
(24:29):
might be a direct index, probably going to be an ETF,
maybe it's a mutual fund. But I think for most
wealth management clients, the advisor they work for, they work
with is doing some version of low cost, low fee,
low turnover, unless it's direct index. But we'll get to
(24:50):
that later. But that is where the industry, the wealth
management industry, has for the most part settled out, and
that there are these like sleeves or satellite holdings within
these portfolios that are either trying to capture something thematic
(25:11):
or trying to add a little bit of alpha as
a layer, or trying to do something more concentrated, or
trying to do something more tactical, or maybe something that's
a different asset class, like bitcoin or private equity. But
I think where we are as an industry is that
all right for my equities, I don't believe in active
management per se, and then I want to have something
(25:33):
else in addition to that. Though that kind of expresses something,
some kind of a view or some kind of a proclivity.
So for some people it's gold, you know, but it's okay,
Like every advisor doesn't have to agree with every other advisor.
It should be it should be a market. And again,
(25:53):
if somebody said ten years ago, actually I'm overweighting tech
because I think invation the earning innovation are going to
outpace the rest of the global stock market, and you know,
the purists would say, well, that's a heresy. And by
the way, you're paying an above market multiple for that
(26:14):
tech exposure. So not only is it a heresy against
the academic literature and diversification, but it's actually a heresy
against Warren Buffett. And you know, the idea of like,
you know, buying buying cheap, selling expensive. Somebody who had
done that for their clients ten years ago has absolutely
(26:35):
crushed it. Text the rate of return on a tech
heavy portfolio, even if you just think of Nasdaq versus
S and P, the differential is massive. So the problem
is ten years ago, a lot of people would have
felt uncomfortable even expressing that idea out loud. In two
thousand and fourteen, every financial commentator in blogger was talking
(26:58):
about how activist for idiots, So it just, you know,
so it goes back to what kind of active and
are you gonna get it right or not? And that's
the hard part. And so I think like not being
too doctrinaire these days and not being too heavy handed
with my opinion on every topic under the sun. I
(27:18):
don't really care what people say. We have our answer.
It works for us, it works for our clients, and
you know, somebody else could have a different answer, and
I don't have to go to war with that person
on the internet.
Speaker 1 (27:29):
Yeah, so somebody who's like solidly in the wealth building
phase of their life, how like what percentage of their
portfolio would you dedicate towards that explore part of their portfolio.
Speaker 2 (27:38):
So I can't give you a mathematical answer to that,
because so much of this is about personality. And if
I have to give you a portion of your portfolio
dedicated towards something that I wouldn't necessarily want to, but
I have to do that in order to keep you
focused on the big picture. Like I'll as an advisor,
(27:59):
I'm a fiduciary, I'll do that. I might try to
talk you out of it. So if you're one of
these people that just no matter what you came to me,
you have a huge position in Apple, and in my
opinion it should be smaller. But then it goes up
another five hundred percent and I forced you to sell
(28:20):
out of it just so that your portfolio would align
with my other seventy clients. You're never going to forgive me.
So part of my job is a fiduciary is to say, Okay,
look here's the situation. You have this concentrated position, you're
definitely taking more risk than you need to. It's been
rewarded risk in the recent past. But we're going to
(28:41):
work out a plan by which we divest of a
certain amount of this concentrated holding. And it could be meta,
it could be whatever. We're going to do this methodically
over time. We're not going to be emotional about it.
We're going to try to offset the gains with tax
losses elsewhere, and by the end of this period of time,
your portfolio will be more imbalanced with what I think
(29:03):
your risk reward is. But you're not going to hate
my guts if this stock price troubles. What I've just
described is the essence of financial advice. It's not just
what's the best portfolio for mister Anderson, it's what's the
best portfolio given mister Anderson's goals and given what I
think he and his wife can live with.
Speaker 1 (29:25):
Well, there's so much behavior too, right. That's one of
the big selling points of a financial advisor, is kind
of helping people through difficult times, whether it's a life
circumstance or whether it's a macroeconomic circumstance. That is one
of the main roles of a financial advisor. And you
just mentioned taxes too, Josh, which is something that doesn't
get talked about enough, but tax savings from smart portfolio
(29:45):
management can be substantial. How important is tax efficiency and
walking clients through preferential tax treatment strategies in what you do.
Speaker 2 (29:54):
It's a huge component to the value add that we
bring to clients. It's not instead of investing. It's really
an important piece of the investing process is understanding the
tax ramifications for the things you're doing. At the high
high end, when you have clients come to you and
they have fifty eight different investments in private equity, and
(30:15):
they have like a state things going on, and like
you have to be able to speak that language in
order to effectively advise it. Because at the high end
it's no longer a nice to have, it becomes mandatory.
If you can't speak tax fluently and help people with
their tax related issues, you cannot do wealth management at
(30:36):
that level. And so I think the firm of the future,
the aria of the future, maybe they'll outsource it, but
I think the really successful firms are going to build
it into what they're doing for clients day and day out.
Speaker 1 (30:50):
That makes sense, I mean, and I think you run
in your book too, that it's something like if you
are able to increase performance by ten thousand dollars crease
your returns for somebody with an investment, that's equal to
saving them one thousand dollars. Like there's like a ten
x multiplier when you save somebody money with taxes because
of the fact that like it's guaranteed, Like that's just
money that you no longer have to pay the government.
(31:12):
So it's like a slam dunk.
Speaker 2 (31:14):
It's a weird thing. If a client is owed to,
you know, is owed something back from you know, their
state or something for like a thousand dollars, that's like
the equivalent of making them ten thousand dollars in the market,
because the ten thousand dollars you make them in the market.
Like you didn't do that, The market did that. You
just facilitated it.
Speaker 1 (31:33):
Well, and it's still fluid, it's still liquid. You could
it depends where the market goes after that. But it's
just a fascinating psychological computer to.
Speaker 2 (31:39):
Find an error in somebody's like tax situation and you
tell them, hey, you're making a really big mistake here
that your accountant should have picked up on. That that's
that pays dividends.
Speaker 1 (31:51):
Oh yeah, they'll financial Yeah, they can give you a
big old kiss. Hey, Josh, you mentioned direct indexing earlier.
It seems like it's the hot new trade. Can you
define it? Tell us why it's coming on so strong.
Speaker 2 (32:03):
So direct indexing is really a thirty some odd year
old concept. It's it's what's what I think has thrust
it into the limelight in the wealth management space is
the advent of commission free trades. If you wanted to
do direct indexing for a client and for the listener
who's not familiar. Direct indexing is this idea of Okay,
(32:24):
i'll get us and P five hundred exposure, but rather
than give it to you in the spy ETF, I
will actually give you the five hundred holdings and will
buy those stocks proportionately to the index, and then we
will trade them so that it keeps pace with the index.
What is the purpose of doing that? Like, why is
that better than the ETF wrapper? For many clients, it's not.
(32:49):
You really have to beat a certain dollar level where
it makes sense.
Speaker 1 (32:53):
This is high end clients.
Speaker 2 (32:54):
Yeah, I think so. I mean, I know, like Fidelity
and Schwab, they want to they want to go downstream
with it and bring it to like retail. But I
think for wealth clients, one of the ideas that makes it,
one of the things that makes it so powerful is
the ability to tax loss harvest and so have index
level returns, but be able to harvest losses through replacing
(33:18):
different securities. And you can obviously you're not going to
be able to do that in an ETF rapper that
just owns the index. I think the ability to screen
out certain securities for ESG. Purposes or you know, corporate
governance reasons or whatever, or even concentration. So like if you, guys, Matt,
(33:38):
if you called me and said, hey, my net worth
is eight million and six million dollars of that is
in Facebook stock, if I buy you the triple cues,
it's almost malpractice, like I'm just giving you more of
the exposure that you already have too much of. So
that I mean that is just revolutionary for the wealth industry.
I don't think it's applicable necessary for like, you know,
(34:01):
retail one hundred thousand dollars in under accounts and we're
certainly not using it for that purpose. We love ETFs.
But the reason why all of a sudden it's taken
the industry by storm is three reasons. The first is
there hasn't been There hadn't been any innovation there for decades.
It was a pre existing technology. There was kind of
(34:23):
one company that that you know, had pioneered it and
really owned it, and they were a division of you know,
some other brokerage firm, and it just like kind of
sat there and it was this curiosity. And then all
of a sudden, in twenty nineteen, Schwab and then TD
and then Fidelity dropped their trading fees on stocks to zero,
(34:47):
and then all of a sudden, it's like, well, wait
a minute, this is crazy. So now if I'm an
advisor and I want to do direct indexing, I don't
have to negotiate asset based pricing with my custodian because
all the stocks are going to trade free. So now
this strategy, which I know is great, has the chance
(35:07):
to be super efficient a lot cheaper, and I can
actually do this. So Vanguard and has a direct index
and now everyone in the industry has a version of it,
and advisors are becoming very adept at incorporating it into
how they allocate their client's assets.
Speaker 1 (35:24):
Nice Josh we got a few more questions, including we
want to know what keeps you up at night. We'll
get to a few more questions with Josh Bright after this.
Speaker 2 (35:38):
Ow.
Speaker 1 (35:38):
We're back from the break, so we'll talk about Josh Brown.
We are speaking behind the curtain of the finance industry,
and Josh, you are quoted in the book What Went
Wrong with Capitalism. The premise of that book is that
government and fed over each are doing damage to the
future of the market. Basically, bailouts, loose monetary policy are
going to have this blowback effect at some point in
(36:01):
the future on the stock market. I'm curious to hear
your thoughts on that.
Speaker 2 (36:04):
So you know, we have this chart that we show
people and it's earnings growth plotted alongside the S and
P five hundred its price return, and they were in
lockstep with each other. So yeah, for sure, like when
there's loose monetary policy, definitely people take more risk, and
maybe that's good for stock market multiples, but that's like
(36:28):
in the very short term. Over the long term, the
most important thing you need to understand about the returns
of the market is that they almost perfectly match the
gains in corporate profits. In earnings. So this idea that
the market is only up because of the government's intervention. Again,
in March of twenty twenty, can we say that the
(36:48):
market bottomed because of government intervention? Yeah, of course we can, like,
of course, But now it's August of twenty twenty four,
So would we say the stock market doubled as a
result of what they did in March of twenty twenty. No,
And the Fed has been raising rates and has kept
generationally high interest rates for now eighteen months, and the
(37:10):
stock market has continued to rise. So what are you
going to attribute that to? So I don't play this
game where I look for culprits from why investments went
up or didn't go up. I feel like in the
long run, interest rates and earnings are the two most
powerful factors affecting markets. Economic policies come and go. You
(37:34):
get Republicans, you get Democrats, you get Congress controlled by
one party or the other, you get to split Congress,
you get every permutation. But one of the things that
doesn't change is that corporate executives and boards of directors
wake up every day thinking about only one thing. How
do we increase the profitability and hence our compensation of
(37:59):
this company, and that is what the stock market is
really about. And yes, of course things change around it.
But like in the end we talked about incentives a
few questions ago, the number one incentive that drives American
style capitalism is get the stock price up. Do whatever
you have to to get the stock price up. And
(38:19):
I don't think it matters who's in the White House.
That impulse is not going to change. So talented corporate
executives all over America, in every industry, we'll figure out
a way to get things done, figure out a way
to improve processes, figure out a way to enrich themselves
and their fellow shareholders. And almost nothing, almost nothing can
(38:42):
stop that over the long term. So if you believe
in that, if you believe in that, then you don't
worry so much about how interventionist the government is being
in any given year. Yeah.
Speaker 1 (38:52):
No, And I appreciate your how optimistic you are and
how optimistic you encourage your listeners and viewers to be, because
I do think optimism is warranted. Actually, you know, when
you look at history and when you look at kind
of the type of economy we have here in the
United States, and the incentives that are at play for
business owners. You just mentioned though, this focus on share price.
Do you think there's been more of a focus on
(39:12):
share price from some of these larger companies and maybe
less of a focus on longevity of a company. I
guess is there any downside to companies thinking too much
about what shareholders are going to experience in the next
six months versus what their customers are going to experience
over the next six years.
Speaker 2 (39:28):
I think there's a paradox inherent in that question. Right now,
So much of the way a company is perceived amongst
its employees and its vendors and its suppliers and its
customers is wrapped up in what the stock price is doing. There,
you know, there is no there is no doubt that
(39:53):
the share price and the sheer size and scale and
market caps of companies like Meta and Alphabet that plays
in their favor as they move and shake and throw
their elbows around the negotiations, like it's not a thing
that can be easily disintermediated, like let's just focus on
the business and not the share price. A lot of
(40:14):
times the share price is the business. And one really
great example of that is what we witnessed last spring
with Silicon Valley Bank, you had this self reinforcing cycle
where people would write an article that they're concerned about
the bank, the share price would fall, and even more
people would be concerned about the bank, which would prompt
(40:36):
another wave of articles which would prompt the share price
to fall even more, and that process plays out until
it's game over. So in financials, this is actually one
of the few areas of the markets, but not the only.
Financial is one of the few areas of the market
where actually the share price affects the fundamentals, or the
share price affects how potential customers think about the safety
(40:59):
of dealing with that financial institution. So we can't divorce
these two things. One of the things that we can say,
go back and read what Larry Fink wrote in his
annual letters to black Rock shareholders this spring. He talks
about these conversations that he had with world leaders and
they all looked at what the differences between America and
(41:23):
all of these other countries since the Great Financial Crisis
or even since the end of the pandemic. Why have
we recovered so much better than everywhere else? And one
of the key attributes of our system versus all of
these other economic systems around the world is the strength,
(41:45):
the depth, the breadth of our capital markets. And Larry Fink,
I think, wrote very eloquently, very succinctly on this idea
that world leaders, like in France and in Japan and
in China, they're all enacting these reforms to unshackle their
own stock markets and build up the strength of their
(42:08):
domestic capital markets in order to compete in the new era.
And what that translates into is we need higher stock prices,
we need more investors, we need higher valuations for our
publicly traded assets, we need more institutional activity. We just
need to be more like America because one of the
things that we do better than anywhere else is provide
(42:30):
incredible capital markets that enable the creation of companies, the
underwriting of risk, the ability for somebody with a great
idea to be connected to somebody with excess capital, like
we do that better than any country. So you can't
divorce what's happening with your share price with the fundamentals
of your business, and on a more global level, on
(42:52):
a country by country basis, you can't say the stock
market is not a great barometer for how a country
is doing economics as badly as you want to, because
the truth is, the stock market is the mood ring
of how the working and investor class are truly, not
how they feel politically, but how they are actually doing.
(43:13):
And from that standpoint, we want to make sure that
we recognize that connection and not try to sever Hey,
I just run my business. The West takes care of itself.
Not true. Not true. The business is reflected in the
share price, and the share price reflects back upon the
health of the company.
Speaker 1 (43:30):
Based on what you just said, it makes you want
to get a screaming bald eagle tattoo on my back
and pledgely just the American flag, and it makes you
want to invest only in American stocks. What do you
think about the difference between based on what you just said,
is there a home country bias in investing mostly in
US stocks and US in foreign stocks?
Speaker 2 (43:48):
You know, if you would ask me that question in
two thousand and nine, I would say it's a big
mistake to have a home country bias. Because the US
stock market, the S and P five hundred experienced the
last decade, it returned zero percent over ten years from
two thousand and two thousand and nine, and We talked
earlier about the reasons why you had two fifty percent
crashes in the SMP during the course of that decade.
(44:10):
But while that US stock market stagnation took place, people
made money in China and Mexico and Brazil and the
brick theme and small caps went up, and hits went up,
and there were a lot of things that worked while
the S and P five hundred didn't. So you know,
we're going to have these periods of time where just
(44:30):
because we're America, that doesn't mean you're gonna have positive
returns in the SMP. And there are stock markets all
over the world. In any given years, some of them
do outperform the S and P. It's been harder lately
because we have these tech giants and most countries don't.
But that's not I don't think that'll be forever. Maybe
it will be, but I don't know that I would
(44:52):
make that bet. And in the press in the last
few weeks a lot of stories about the venture capital
scene in Paris, around the Paris Olympics and in France
and McCrone going out of his way to try to
make the stock more Only three percent of people in
France own shares of stock three.
Speaker 1 (45:11):
Wow.
Speaker 2 (45:11):
In the United States, it's like sixty something. Do you
know why? Because they don't need to take risk. They
have a pension guaranteed. That's their system. But that's also there,
so that sounds nice, but that's also their long term downfall.
Why there's a lack of dynamism in their economy. It's
why the national sport is protesting. You know. One of
(45:35):
the things that the French have recognized is exactly what
Larry Fink wrote about. And now all these articles are
coming out about their AI sector, and France has some
incredible AI startups and they are raising money at the
scale and level of their counterparts in Silicon Valley, and
they recognize, all right, we missed the Internet, screwed that up.
(45:58):
We missed wireless too. Oh well, maybe let's not miss
AI software. The dynamism of the American economy and the
innovation of our technology companies probably explains the majority of
the discrepancy between returns that we've experienced in other countries,
and other countries are going to figure it out. You
(46:20):
think the Netherlands doesn't understand how much better off they'd
be if they had five companies like ASML and not
just one. You think the British don't feel stupid for
allowing armholdings to be listed in the United States and
for a period of time owned by a Japanese holding company.
Of course they feel stupid. This is being figured out,
(46:41):
and I do think. Look, I'm going to show you
stock Mercado Libre Meli. This is the largest company now
publicly traded company in all of Latin America. Did you
know that? No, Basically it's eBay and PayPal combined. I
would say Amazon, eBay and PayPal, so it's and then
(47:01):
they have this payment app which is wildly popular. I
think they have two hundred million users. The company is
Delaware incorporated, but headquartered in Uruguay. I'm assuming it's the
biggest company in Uruguay. It's one hundred billion dollar market cap, guys,
or one hundred and ten billion dollar market cap, and
(47:21):
if you look at the returns of that stock, it
blows away the performance of almost every US tech stock.
So I don't accept this idea that the United States
will be the only country that has large tech giants.
It's just that we have a really great headstart, yea,
and we have a really great political and capital system
(47:41):
to support these things. So you're probably always going to
be overweight America to some extent. I don't think you
want to be one hundred percent anything.
Speaker 1 (47:49):
Yeah, it's hard to argue with free markets and as
proponents of investing in the total US stock market as
well as the SMP five hundred. I think this is
a great note to end it on. But Josh, where
can folks learn more about you in your book? If
they're interested in buying it, you.
Speaker 2 (48:03):
Could buy it everywhere Barnes and Noble, Amazon, probably airports
and stuff. But here's the last thing I want to say.
I put my heart and soul into this book. It's
my fourth book. The last two books I wrote I
had a co author, but those were like projects. I
was more of an editor. This book was like literally
all of me, Like I put everything. Yeah, I like
(48:25):
put everything I have into this thing. So if you
like me, you're going to love the book. Don't like me, don't.
Speaker 1 (48:32):
Worry about it.
Speaker 2 (48:33):
A lot of days I don't like me either. But
if you really want to understand what it's been like
to be a professional investor over the last fifteen years,
and we live some of the highs and lows and
really absorb the biggest, most important lessons that I have
(48:53):
learned throughout the course of my career. This is the
right book for you, and load it like in a
really personal way, and I hope people appreciate that, and
I hope they enjoy it well.
Speaker 1 (49:08):
Four thumbs up for Matt and Joel over here, Josh,
we appreciate you, man, and we'll linked all the to
where people can buy the book in the show notes
as well. Thank you so much for joining us today.
Speaker 2 (49:15):
You guys are awesome. Thank you so much for having
me and keep doing what you do.
Speaker 1 (49:19):
All right, Joel. It's refreshing, I think to talk with
somebody who just is so deep into this one thing,
like Josh Brown is a specialist and his specialty is investing,
and that is all he does. He doesn't compare uson shop,
so I don't know if y'all can be friends. Yeah,
the fact she had his wife on too, maybe she's
maybe so will have her next week. But now, it
(49:41):
really was fascinating to talk with another one of the
fellas over there at Ritholtz. There are a lot of
great minds over there who are thinking about investing in
a I think a really healthy way. But what was
your big takeaway wow for the conversation today. Yeah, First,
I just love what he said, we're an alternative to
the noisemakers. That's what you and I strive to be
here totally too. But I actually liked it in the
beginning when we were talking about dabbling in alternative investments
(50:02):
or having some wiggle room to the explore portion of
the pot when he said he said, leave room for
mistakes and desire. And you definitely you don't have to
learn from your mistakes. You can learn from other people's mistakes.
You can learn from the books you read, you can
learn from the podcast you listen to. But I do
think it's okay if especially you are interested in pursuing
(50:22):
some different ways of investing with a portion of your portfolio,
and even if you fall flat on your face with that,
and again that's why we suggest a smaller portion of
your portfolio to do that with, so that you're doing
the smart thing with the bulk of the majority of
your assets. But I think if that hands on approach
actually creates even more of a desire to be a
savvy investor and to be involved in markets moving forward,
(50:44):
I think that's ultimately good thing. So think Josh is
actually kind of right on that. We probably disagree on
some of those little details, but I think ultimately, directionly
he's right on. There's an overall desire to keep the
majority of your portfolio on track, and if you need
to have this little pressure release valve that allows you
to stay this the straight and arrow with the majority
of your funds by kind of exploring and dabbling a
little bit on the sides. Yeah, I feel like that
(51:04):
gives us license to continue to say at least, hey,
at least what we talk about here on the show,
five percent or less of your overall portfolio. But this
doesn't mean that you have to do that, right, And
so with Josh, he's talking about how he's just really
fascinated with product releases and CEOs who migrate through different
organizations and how they impact the success and the stock
price of those companies. But not everybody has that interest,
(51:26):
and so I don't want people to think that, oh,
well I should be doing that and start if you
don't have any interest in doing that, well don't do that,
And you could just invest in the overall SMP. But
one of the things he was pointing out, I guess
when he was talking about or we were talking about
your daughter earning some money, and he was kind of jabbing,
you know, elbing you a little bit as far as
investing her earnings. But I think the bigger lesson to
(51:47):
take away there from that comment was the fact that, hey,
if you're going to make mistakes, make mistakes when you
are younger as opposed to older. And so what I
see there is and he commented on gen z their
ability to more freely take gamble, to take bigger risks
than maybe the millennial generation has taken before, but the
ability to take those risks early on where there are
(52:07):
a fewer zeros behind those numbers as supposed to say,
in your thirties or forties, when you're thinking, oh, no,
this is what I need to do in order to
make sure I've got enough set aside for retirement. I
think there's a whole lot that you can learn, like
you said, through that life experience, especially early. On flip
side of the coin, we've also seen some of our
listeners say, hey, listen, I went a little too heavy
in that direction in kind of the speculative trading mentality.
(52:29):
A couple of years ago, and I'll also give in money.
Now I'm starting from scratch again, trying to build wealth
through my future. I want to do it kind of
the prudent way. So I think there's a difference between
prudent and prude. We don't want to be prudes here
on the show, but we do want people to be
prudent and to be thoughtful about their money because, yeah,
I guess airing too hard in that direction can create
some misery too so, but at least I mean a
lot of those hooks are younger though. I guess that's
(52:50):
what I'm saying is the time to the cover. Yeah. See,
folks make those errors early on while they still have
decades of ability to continue to earn money and invest
and be set for their future, versus taking more of
that mindset later on in their career. That would be
potentially catastrophic to their finances. But uh yeah, really fun conversation.
The beer you and I enjoyed today was called Solid.
This is a pilsner by Burial Beer Company. As it
(53:13):
looks like a collab with shilling out of what is
that Littleton, New Hampshire. What do you think about this beer?
Didn't love it not my favorite really well yeah, I mean,
Josh mentioned, I think, or at least before we started recording,
that he likes pilsners, he doesn't like IPAs, and I
like IPAs, and I don't love pills rs as much.
Although I kind of am down with the laid back
pills er, this one was a little more bitter and
(53:33):
off putting though to me, I don't know why. Yeah, yeah,
not my favorite. You do sound like you're a little
stopped up. Maybe you're not tasting it to the you
getting all the flavors there, Joel, maybe not. I thought
it was super solid, so I totally disagree with you.
Kay tasted crisp fresh, didn't have any notes that felt
like that they're out of place or whatever.
Speaker 2 (53:49):
You know.
Speaker 1 (53:50):
It wasn't like some amazing Most of the time when
we drink a hazy ipa or something like that, we're
just like, oh, yeah, that's great. So I don't know,
maybe with this, I'm like, all tasted refreshing, and it
was also very non offensive, which maybe in my book
that that's a solid pillsoner. But either way, it doesn't
really feel like work when we get to enjoy beer
while we talk with somebody about money for sure, talking
to cool people. All right, we'll link to Josh's new book,
(54:12):
his website and all the like up on our website
at howtomoney dot com. But Matt, until next time, Best
friends out, Best Friends Out,
Hosts And Creators
Joel Larsgaard
Matthew Altmix
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