Richard Bernstein on the State of Markets Today

Barry speaks with Richard Bernstein, CEO and Chief Investment Officer of Richard Bernstein Advisors.  Rich has over 35 years′ experience on Wall Street, most recently as the Chief Investment Strategist at Merrill Lynch. Prior to joining Merrill Lynch in 1988, he held positions at E.F. Hutton and Chase Econometrics. They discuss the growth in his firm, the overall macro investment environment, and state of markets today. 

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio news. This is Masters in
Business with Barry Ritholts on Bloomberg Radio.

Speaker 2 (00:16):
This week on the podcast what Can I Say? Rich Bernstein,
rock star, former chief strategist at Merrill Lynch, just an
incredibly storied career who has managed to put together such
a straightforward and intelligent way to approach asset management Rather
than me, Babbel, I'm just gonna say, this is a

(00:38):
fascinating conversation, with no further ado, my discussion with Rich
Bernstein Advisors. Rich Bernstein, Thanks.

Speaker 3 (00:46):
Erry, great to be here, welcome the invitation.

Speaker 2 (00:47):
Oh well, I'm thrilled to have you. I thought you
would be the perfect person to talk about what's been
going on these days. But before we get to that,
let's start with Bachelor's and Economic Mixed from Hamilton, MBA
from NYU. What was the career plan?

Speaker 4 (01:05):
So the career plan was was kind of foiled I
would say six months after graduation. So oddly enough, when
I graduated Hamilton, I wanted to be a labor economist.
And people say, like today they go labor economists, Like,
what's that all about?

Speaker 2 (01:22):
It? That was a big thing.

Speaker 4 (01:23):
It One boy was a big deal, and so it was.
You got to remember, labor unions were very powerful in
the late seventies early eighties. There was rampant inflation, and
every company had a labor relations department. It was a
growth industry, and so I decided I wanted to be
a labor economist and got myself a job with a
prestigious economic consulting firm in their labor economics department, doing

(01:47):
all kinds of government related work, private sector, but government
related work. And we were consultants, which is very critical
because consultants bill by the hour and literally the day after.
So election day is Tuesday in nineteen eighty November nineteen
eighty Wednesday, fifty percent of our business basically went away.

Speaker 2 (02:08):
Because Reagan took over, and everybody.

Speaker 4 (02:11):
Called up and said, stop billing, we want to see
what's going to happen as with the Reagan administration. Now
I wasn't the smartest guy in the room, but it
was pretty clear to me that this was no longer
a growth industry. I had taught myself Fortran, dating myself
here quite a bit. I taught myself Fortran and was
a pretty good computer programmer, and a friend of mine
who had gotten fired from this economic consulting firm, got

(02:34):
a job at Chase Econometrics. I DC and said, you
have to come over here. You're a great programmer. You're
going to love this stuff. They had the largest set
of economic and financial databases in the world at the time.
You have to come here. I said, I what do
I want to go to Wall Street for? I mean, like,
I have no interest in Wall Street. Why I would
go to Wall Street? And he said, well, let's be honest.
Here the salary is twice what you're making. I said, well,

(02:56):
I'll go for the interview right now. I'll see what happens. Well,
I went for the interview the job. My biggest client
turned out to be the Merrill Lynch Investment Strategy Group.

Speaker 2 (03:04):
Huh.

Speaker 4 (03:04):
And that's how I got involved in Wall Street. And
I found through time that I really liked it, went
back and got my MBA and after a while, without
something stupid about this, I realized I knew more about
this stuff than many of my clients did. And so
I just worked my way through Wall Street and eventually,
you know, but if you had said to me when
I graduated at Hamilton that I was going to end

(03:26):
up being the chief investment strategist Meryll Lynch.

Speaker 3 (03:28):
I would have said, you're.

Speaker 2 (03:29):
Crazy, would have laughed. So I have to ask about Fortran.
You're undergraduate, your focus is economics, you get an MBA
in finance. Where did the computer programming skills so come from?

Speaker 3 (03:42):
I am the.

Speaker 4 (03:43):
Poster child for the liberal arts education. So I almost
double majored in philosophy.

Speaker 3 (03:48):
I didn't. I was too lazy to.

Speaker 4 (03:49):
Be perfectly frank and didn't want to take one of
the intro courses. But I took like, I don't know,
five six seven philosophy courses.

Speaker 3 (03:56):
Something like that.

Speaker 4 (03:57):
And for all the philosophy majors out there, I'm sure
they know that a good part of philosophy is symbolic
logic and symbolic logic.

Speaker 3 (04:05):
What is computer programming? What's computer language?

Speaker 2 (04:07):
Is?

Speaker 4 (04:07):
It's just symbolic logic. So when I've got introduced to
Fortram the first day, I realized I could actually read
a lot of the code because it was just symbolic logic.

Speaker 2 (04:15):
So it's so funny you say that philosophy is symbolic logic.
Study of law is a lot of symbolic logic. Absolutely,
obviously math, there's a ton of symbolic logic wherever you look,
that classic syllogism. Right, here's the fact pattern, here's the
applicable set of rules, programs, parameters like this seems to

(04:38):
be a very constant threat in a lot of areas.
How surprising was it to you that, Hey, philosophy has
been really helpful on Wall Street.

Speaker 4 (04:48):
It's been amazing. In fact, in one of the books
I wrote, many many moons ago, I specifically thanked one
of my philosophy professors for you know, I took symbolic
logic with him. I think I took a course in
relative with him. You know, all these different things which
have definitely been influential in my career without a doubt.

Speaker 2 (05:05):
All Right, So you end up at what could be
my favorite advertisement, which was the EF Hutton ads back
in the with that the nineteen eighties when I.

Speaker 4 (05:17):
Think it was actually the seventies into the eighties.

Speaker 2 (05:19):
When EF Hutton talks people listen like you can find
these ads all over YouTube. There's seminos. How did you
make your way to? E? F. Hutton from Chase econom Etriss.

Speaker 4 (05:30):
So what happened was that at the time a lot
of people at Chase IDC were very in very high demand.

Speaker 3 (05:38):
We were the beginning of the quant.

Speaker 4 (05:41):
Movement on Wall Street, right, and so there were a
lot of people were getting hired away. One of my friends,
who was more an economist as opposed to a quant guy,
got hired by the chief economist at E. F. Hutton
at the time, and there was an opening in the
investment strategy group and he said similar like, why don't
you come and interview?

Speaker 2 (05:58):
Come double your salary?

Speaker 4 (06:00):
Yeah, well I didn't do that, but but it was.
It was an opportunity, so I grabbed at the opportunity.
I worked at the time with a wonderful guy named
Jeff Applegate, who unfortunately passed away recently. But Jeff was
a great role model in terms of how to make
Wall Street understandable to non Wall Street people.

Speaker 2 (06:21):
H huh really really interesting. And then we get the
eighty seven crash, right, and then the following year you
join mother Meryll, tell us how you found your way
to Merrill Lynch.

Speaker 4 (06:32):
So Meryll, you know, Hutton went out of business and
basically nineteen end of eighty seven, I think it was
December of eighties?

Speaker 1 (06:38):
Was that?

Speaker 2 (06:39):
Did they go out a bit? Wasn't it? Sheerson Leman
and Hotton American Express or something.

Speaker 4 (06:43):
It was like it was became Sheerson Leman Hutton, the
irony of which I once worked at Shearson when they
merged with Lehman Brothers and I lost my job there.
And now Cherson Lehman was merging with Hutton, and I
lost my job again. So I was on the losing
into many many mergers of the nineteen eighties. But it
was getting to Merrill, was you know. I was out
of work for a while after Hutton went out of business.

(07:04):
I had met with a headhunter and the headhunter had
sent me up with an interview at Merrill, and Meryl
kind of passed on me, but then called me back
about four months later.

Speaker 2 (07:15):
And so their first choice turned them down. Is that
what actually happened?

Speaker 3 (07:18):
What actually happened.

Speaker 4 (07:19):
I found my personnel file years later. I found my
personnel file, and this is actually kind of funny, and
in it was the headhunter letter to the hiring manager,
and it described me as being the cheapest of the
lot with the most potential. That was the way that
g described your value stock.

Speaker 3 (07:37):
I was a value stock.

Speaker 4 (07:38):
And so I think what happened was the everybody else
they were talking to you wanted too much money, and
they worked their way down and they found they got me.

Speaker 2 (07:45):
That's that's UNBLI how did you get access to your personnel?

Speaker 4 (07:48):
It was by accident, it was, I was, I was.
It was like switching managers type thing, and somehow it
got it got put into the wrong file, wrong set
of files, and there was mine.

Speaker 3 (07:57):
So of course I read it.

Speaker 2 (07:59):
So you were at Mayor for twenty years.

Speaker 3 (08:02):
Yeah, almost twenty plus.

Speaker 2 (08:04):
Yeah, wow, that's amazing. You were there right up into
the financial crisis. I was, what was Merrill Lynch like,
right in the middle of that storm.

Speaker 4 (08:13):
So it was, you know, I think it was. It
was an interesting time and you know, I should say,
first of all, the Meryl was a fantastic place to work.

Speaker 3 (08:21):
Oh it was.

Speaker 4 (08:22):
You know, anybody out there who has worked at Meryll,
you know, knows the feeling that I have for the firm,
and because they feel it too, and.

Speaker 3 (08:31):
It was a great place to work.

Speaker 4 (08:33):
The corporate culture began to change in the few years
before the financial crisis, and we got a little bit
of ways from our roots. You know, our roots were
very much as a private client oriented firm that also
had great trading and investment banking, everything else, but the
heart of the firm was still on the private line.
So for any number of strategic reasons, the firm decided

(08:55):
that we wanted to change that emphasis. And I think,
you know, it's kind of dangerous to take a lot
risk when you don't really have the experience doing it, sure,
and so I think that's kind of what happened to Meryl.

Speaker 2 (09:06):
You know, I mentioned the ef Hutton ads, But for
the people who are listening, who are younger, I want
to say, in the nineteen seventies, maybe even in the
nineteen sixties, Merrill Lynch ran a series of television ads
Merrill Lynch is Bullish on America, absolutely with the Thundering
Herd and the Big Bull. And it was pretty amazing.

(09:29):
When we talk about the democratization of investing that Meryll
is arguably the one of the first companies that absolutely
dove into that head first.

Speaker 4 (09:39):
Yeah, if I'm not mistaken, Charlie Merrill was. His whole
philosophy was bringing Wall Street to main street. I think
he actually coined that free.

Speaker 2 (09:46):
I think that's right. And later on we had a
number of the discount brokers had come out in places
like Schwab and Muriel Siebert, but I always felt they
had followed Merrill's lead to we're going to push into mainstream. Yeah,
so you start out essentially as an analyst, how do
you work your way up to market strategists and then

(10:09):
chief investment strategists for the thundering hurt?

Speaker 4 (10:12):
It's you know, it's funny. One of the things I
always tell recent graduates of colleges is don't try to
plan out your future because when you're twenty one or
twenty two, you have no idea what you're going to do.
When you're twenty five or twenty seven or thirty, you know,
you really don't know. And my example of you know,
the changes after the Reagan Carter election are pretty clear

(10:32):
on that one. But the same thing was at Meryl.
You know, I came in as a quant analyst. I
was there not for any other reason, to be perfectly frank,
and I think the people involved at the time would
agree with this that in institutional Investor there was a
quantitative analysis slot. Merrill had nobody who was there. They thought, well,
let's get somebody who can maybe run for the slot.

(10:52):
We'll get another II vote and we'll see what happens.
And I was their choice to just kind of become
this quant guy.

Speaker 3 (10:59):
I don't think they knew what to do with me.

Speaker 4 (11:01):
I don't think they were thinking anything else other than like,
you know, go do your thing, and you know, hopefully
this will all work.

Speaker 2 (11:08):
It is an empty desk, rich see what you can do.

Speaker 4 (11:10):
Exactly right, And it was. It was actually kind of funny.
I truth be told, now, I can tell this. I
lied about my age to get the job.

Speaker 2 (11:18):
Saying you were younger or saying you were older older because.

Speaker 4 (11:21):
I was twenty nine when I was interviewing for this position. Yeah,
and I knew that and everybody and back then you
could ask people how old.

Speaker 2 (11:28):
You were, right, and they couldn't google you and find out, right.

Speaker 4 (11:32):
And they couldn't find out So there was all kinds
of all kinds of stuff that they could do back
then that you can't do network and do.

Speaker 2 (11:37):
Now, did you really get an MBA from NYU? Did
you just pad your resume? No?

Speaker 4 (11:42):
I'm that's legit, that's one hundred percent legit. But so
what was happening was I knew that if I went
into these interviews and I told people I was twenty nine, they.

Speaker 2 (11:48):
Would think I was a kid, but thirty sounds thirty.

Speaker 4 (11:52):
It's like twenty nine to ninety nine, right, like you
just wound up six month fib that's all.

Speaker 2 (11:57):
It was.

Speaker 4 (11:57):
Well, by the time I actually got the job and
showed up, but Merril, I was thirty. So I didn't
feel I've never felt bad about it because I was
asking every single like, why would they ask? They wouldn't
ask unless they thought maybe I was too young.

Speaker 3 (12:10):
That would be the.

Speaker 4 (12:10):
Impetus for asking. The was gonna ask a question, well,
how much.

Speaker 2 (12:13):
Too much experience in seasoning?

Speaker 4 (12:15):
I don't think that was the root of the question.
And because they had my resume, they knew exactly and
so it was really like how old is this guy?

Speaker 3 (12:22):
You know, can he really do this? And so I lied,
So I told everybody I was thirty, and.

Speaker 2 (12:27):
So that's hilarious.

Speaker 3 (12:29):
Yeah, it is. It is kind of fun.

Speaker 2 (12:30):
And nobody ever figured out, don't don't they when you're
filling out your paperwork and nobody took the time, nobody cared.
Nobody If you're a W two employee, they get your
data birth and your Social Security number. It's it's not
like the data isn't there.

Speaker 4 (12:44):
But by the time I got to Merrill, I was thirty,
So he thought nobody nobody thought twice about it.

Speaker 2 (12:49):
Yeah, that's that's really funny. So you're at Merrill for
twenty plus years, we have the financial crisis, and you
side to launch rich Bernstein Advisors in two thousand and nine.
So in hindsight, it turns out to be perfect timing.

(13:09):
What sort of pushback did you get when you're like,
I think I'm gonna stand up my own chop into
this mess.

Speaker 3 (13:15):
Yeah, you know.

Speaker 4 (13:15):
I left Meryl because I'd gotten burned out. I mean,
one of the things that people don't realize is as
a cell side analyst, the better you get at your job,
the demands on your time grow exponentially. And so I
was traveling all over the world. I was I was
non stop writing. I mean it was I had burned
out and I tried to leave Merril several years before,

(13:37):
and they had they convinced me to stay.

Speaker 3 (13:38):
They said, you know, like, no, it's.

Speaker 4 (13:40):
Okay, you know, well, you know, we'll take care of you.
Everything will be fine, don't worry about it. But in
two thousand and eight and the financial crisis, I turned
fifty and so not lying about my age. I actually
did turn fifty and.

Speaker 3 (13:54):
I was pretty burned out.

Speaker 4 (13:56):
And then the financial crisis hit and I thought, you know,
it's a long time leave. It'd be irresponsible for the
chief strategist of Merrill Lynch to leave in the midst
of a crisis. That's that's just very unfair to our clients,
very unfair to the firm. You know, I rose to
this level. I have a certain amount of responsibility. I
can't be selfish on this. So I stuck it out
for a while. And then Bank of America bought Merrill

(14:17):
and they were great, and you know, everything was good,
but it was clear to me I wasn't going to
have more fun right that the burned out nature was
going to continue.

Speaker 3 (14:27):
It was going to get worse.

Speaker 4 (14:28):
So I just figured, like, why do this? So I
de thought it was leaving again. Merrill was fantastic. They
encouraged me to stay. I just had none, no, no thanks,
but I'm done.

Speaker 3 (14:38):
You know, stick a fork in me. I'm done.

Speaker 2 (14:39):
Hey, twenty years is a long time being a road warrior, Yeah, exactly.

Speaker 4 (14:44):
And so then the question was what was I going
to do? I had toyed with the idea of opening
an independent research shop and that sort of thing, but
that was going to be equal amount of travel all
around the world, and I had just done that for
twenty years. Didn't sound like a lot of fun. But
then the idea came to me, well, maybe we should
put some of these things that we've developed through the year,

(15:05):
put it into practice and see if we can manage
money doing it. And we were kind of forming the firm,
and we were like really in its infancy, and then
all of a sudden, I remember exactly where I was.
I was in our dan Weekly initial jobbas claims had
just come out. This is like in July of two
thousand and nine, and the number came out and it

(15:26):
was a blowout good number. And I said to myself,
this is a rogue number. And then I said to myself, well,
wait a minute, why is it a rogue number? Maybe
things are just getting better, because I was listening to
all the talking heads and they were all negative as
all get out, and I said.

Speaker 2 (15:45):
Let me stop you right there, because my next question
is I very vividly remember March O nine and saying, hey,
US equities down fifty percent usually pretty good entry point.
I think we finished down fifty six, and but the bearishness,
the negativity persisted, and it felt like people were really

(16:09):
suffering from a little post traumatic stress. It's I'm curious
exactly how as you were starting to tell us how
you were thinking around that, because everybody was so negative,
and yet the data was clearly improved.

Speaker 3 (16:25):
It was definitely improving.

Speaker 4 (16:26):
And so you know the way I described to people,
they said, like, you know, markets don't move on the
absolutes of good or bad. Markets move on better or worse.
And things were horrible in an absolute sense, but they
were getting better.

Speaker 2 (16:38):
And certainly better than consensus.

Speaker 4 (16:40):
Felt like I was, absolutely and so you know, I
just I remember exactly where I was, and I said, well, gee,
you know, this.

Speaker 3 (16:47):
Could be like a big bull market.

Speaker 4 (16:50):
And you know, I actually at one point said to
potential investors, I thought that we were entering the biggest
bull market of our careers, and so we're only.

Speaker 2 (16:59):
Off by tiny little bit. It was, it was, oh,
of our careers, of our careers. Yeah, so if you
look at rolling, look at rolling today, Rolling fifteen year
periods from nine to four was sixteen percent a year.
From the fifteen year period ending in ninety nine was

(17:19):
seventeen percent a year, and you go to the fifteen
years after World War Two was eighteen a year, but
one of the best periods in modern.

Speaker 3 (17:28):
History for sure.

Speaker 2 (17:28):
Absolutely, So you're you're like, hey, this is gonna be good.

Speaker 4 (17:31):
If you're going to start it on, if you're going
to start a firm, this is the time to start
for sure.

Speaker 3 (17:36):
So that that's kind.

Speaker 4 (17:37):
Of how it began, and the you know, I don't
want to say that everything went swimmingly at the beginning.

Speaker 3 (17:43):
No, you're starting a firm.

Speaker 4 (17:44):
You have you know, like any any startup you have,
you have pluses and minuses, and you you him at
hall and you do different things. But through time it's
worked out pretty well.

Speaker 2 (17:53):
So what was you know, we stood up a firm
in twenty thirteen. I'm curious, and that experience was kind
of surprising. I'm curious, what was the most surprising things
about launching your own firm? What was like I didn't
expect to be doing this.

Speaker 3 (18:09):
So two things.

Speaker 4 (18:10):
One was that I was getting into an area that
I didn't know and I knew. I didn't know the
buyside the way I knew the cell side. I knew that,
and what I didn't know was how much I didn't know,
and so the early fits and starts were trying to
hire the right people. I didn't even know enough to

(18:31):
hire the right people. Eventually that did happen and we
hired a guy named John MacComb, who's still the president
of the firm.

Speaker 3 (18:38):
But it was kind of, you know, off and on.

Speaker 4 (18:41):
We were not doing all that well at the beginning
because largely because I didn't even know who to hire
and who not to hire, because I was so inexperienced
on the buyside. So that was surprise number one. Surprise
number two was that people would not invest with us
at the time because we were too bullish, and.

Speaker 3 (18:59):
That was.

Speaker 2 (19:01):
That just makes you more bullish.

Speaker 3 (19:02):
Oh, it did, without a.

Speaker 4 (19:03):
Doubt, I mean, but if it was, it was incredible.
We were, you know, at the time, people were very
cautious on the United States. If they wanted growth, whatever
they determined that was, it had to be in the
emerging markets. It could not be in the United States.
And we were bullish and we wanted to invest in
the United States, and people just couldn't deal with that.

Speaker 2 (19:22):
I'm going to put a little flash on what you're describing.
I vividly recall writing a market commentary. I want to
say September, but maybe it was October nine and the
title was the most hated bull rally in the market history.
Same experience, absolutely, it was.

Speaker 3 (19:39):
It was very frustrating.

Speaker 4 (19:40):
If you look at our early marketing materials, you will
find thing comments about what we called fire extinguishers, right.
And fire extinguishers were positions we would take in the
portfolio that we could pull off the wall and put
out the fire in the portfolio, right, like having you know,
cash or gold or all these different things that we
would include in our the asset portfolios so that people

(20:02):
would feel more confident in what was going on.

Speaker 3 (20:04):
No, they it worked, but it didn't really work because.

Speaker 2 (20:07):
It worked in psychologically, but it didn't work performance wise.

Speaker 3 (20:10):
No, it worked.

Speaker 4 (20:11):
It worked for us fine, but it didn't get people
across the goal line. They would not They they were
too scared.

Speaker 2 (20:17):
How long did it take before people started to say, oh,
maybe this Bunston guy is onto something.

Speaker 4 (20:22):
Yeah, well, you know everybody talks about it being like
a hockey stick. You know, the raising assets is sort
of like a hockey stick where you're think if as
a turbocharger, where you're you're kind of going along and
all of a sudden, the turbo charger kicks in and
you start really accelerating.

Speaker 3 (20:34):
That was the experience that we had in the firm.

Speaker 4 (20:36):
We had we had people who knew us as a
group were reasonably willing to invest with us, but to
the broader audience, it was it was much more difficult.
And then as they got more confident. Yeah, of course,
the turbo charger started started revving up.

Speaker 2 (20:51):
So it was that six months, twelve months.

Speaker 3 (20:54):
I measure two years. I was measured in years.

Speaker 2 (20:57):
I really Yeah.

Speaker 4 (20:57):
I think I don't remember the date of when we
hit five billion, but I'm gonna say it probably took
us five or six years at least to get to
five billion.

Speaker 2 (21:07):
And now you're over well of a fifteen billion, we're
abouts almost sixteen. Wow, So that's amazing. And this is
now fifteen years later, correct, right, So it took you
fifteen years to get to fifteen billion dollars, so a
billion a year, not to shay, right, No, not not
bad at all. So we were talking about launching the

(21:27):
firm in nine and there's a quote of yours that
has always stayed with me, which is quote. When the
cell side indicator turns positive, leaving the firm is preferable
to going on the call and telling everybody about it.
Explain that, because we were talking earlier about the sort

(21:50):
of bearish PTSD pushback to anything remotely positive your indicator,
this cell side indicator has a pretty long and story
track record, Merrill.

Speaker 3 (22:02):
It does.

Speaker 2 (22:03):
Hey, this turn positive, you guys have to change your views.
That carries no weight.

Speaker 3 (22:08):
So let me explain what it is.

Speaker 4 (22:09):
The sell side indicator is a sentiment indicator that's based
on Wall Street's consensus recommended asset allocation, so stock SPONNS cash,
how much has you put in stocks at any point
in time. I started that all the way back at
Eve Hutton you mentioned Hutton before, and we continue to
through Meryl and Meryl still runs it today. It really
just looks at the equity allocation and puts basically standard

(22:32):
deviation bands around that. And as you might expect from
Wall Street gets really bullish. That's a bearers sign. Wall
Street gets really bearish. That's a bullish sign.

Speaker 2 (22:41):
So when you said this turn positive, it was because
the street was the street.

Speaker 4 (22:44):
Got incredibly negative, incredibly negative. And so from my point
of view. And what you're referring to was that do
I stay at Meryll and try to convince everybody to
be more bullish, or do.

Speaker 3 (22:55):
I go off and start my own firm.

Speaker 4 (22:56):
And I just thought it'd be better, given all the
other things we discussed, it was better to start my own.

Speaker 2 (23:02):
Firm, preferable to going on the call and telling it
like I could just imagine the sort of pushback Bernstein is.
He's now a permeable. He's crazy. How we just during
in the middle of this crisis, How on earth can
we recommend clients buy inequities. Yeah, that's the sort of stuff.

Speaker 4 (23:21):
Yeah, And it was the kind of thing where, you know,
certainly on the private client side. For those of you
to remember, you know, in twentsyd and eight, nine, ten, eleven, twelve,
the story was all about bonds, bonds, bonds, bonds, bonds,
and nobody wanted the risk of equities. And if you
twisted their arm, maybe they would invest in large cap,
high quality, dividend paying stocks. But there was no way

(23:43):
that they were going to take any kind of beta risk.

Speaker 2 (23:46):
So no technology, no growth firms, nothing, nothing with any
amount of potential volatility.

Speaker 4 (23:52):
No volatility was terrible risk taking was terrible. They were
under their desk in the fetal position.

Speaker 2 (23:58):
And in hindsight, was there a better time ever to
put money into those sort of stocks.

Speaker 4 (24:02):
I'm not sure in our careers there has been. Maybe
maybe eighty two, right, if you think back to right
in the beginning, maybe maybe eighty.

Speaker 3 (24:09):
Two was a time. And I do remember that.

Speaker 4 (24:11):
I'm old enough where I do remember, you know, what
the sentiment was like, and certainly I was. I had
very little experience on Wall Street. I know what my
sentiment was like in eighty two. I couldn't believe that
the market would be going up.

Speaker 2 (24:23):
And but you just had a sixteen year bear market. Yeah,
you finally got over a thousand on the Dow, which
I want to say, we first kissed in sixty six
something like that, right, and so it's sixteen years later. Again,
everybody seems to always be looking backward.

Speaker 4 (24:40):
It's not absolutely, And so the lesson, the lesson from that,
you know, when I was a young pup was you know, gee,
I really know what I was talking about, and you know,
I learned that from from various people working on Wall Street,
and you know, so when it came to nine, I
was kind of determined not.

Speaker 3 (24:57):
To make the same mistake again.

Speaker 2 (24:58):
So it's funny because another quote of yours kind of
cracked me up that I always found this intriguing. You
suggest always have a ten percent annual target for the
S and P five hundred despite being bearish. I love
that that optimism, but how can you maintain that bullishness

(25:19):
when you're bare?

Speaker 4 (25:19):
Yes, so what Barry is as I'm sure you know,
the cell site strategists are always pestered for their target.
That your target on the S and P. And I
used to think that was the most watched, least important
thing I ever did right, And so I would never
put a number out. I would never give people a
firm number, but I would always answer the question by saying, well,

(25:40):
we don't really have an official target, but we have
a ten percent expected return. And nobody ever noticed that
ten percent is roughly the long term return.

Speaker 2 (25:49):
Of the SMB we dived and reinvest and change two percent.

Speaker 4 (25:53):
So I used to always say ten percent, and that
would make everybody happy. And so regardless whether as bullish
or bearish, I always answer the question saying, I don't know,
we have a ten percent expective return, and and that
kept people satisfied. But I really don't think that the
notion of what is your target is an appropriate thing
to discuss as an investor.

Speaker 3 (26:13):
Look, if you want to be.

Speaker 4 (26:14):
A trader, and you want to, you want to, you know,
do a lot of short term trading. I get that,
and I understand it. For a true investor, I think
it's kind of a silly discussion.

Speaker 2 (26:22):
Huh really really amusing on your website and elsewhere, I've
seen the phrase from you, pactive investment. Yes, define what
pactive investment?

Speaker 3 (26:35):
Right? So pactive, which is a trademark term.

Speaker 2 (26:37):
So literally my next question. I saw the registered trademark.

Speaker 3 (26:41):
It is a trademark term.

Speaker 2 (26:43):
You literally did that. That's why we did that.

Speaker 4 (26:45):
And uh so pactive stands for the active use of
passive investors and investments. And what we're really referring to
here are a lot of ETFs And you know, we're
a macro firm. We claim to know nothing about coke
versus pepsi, but rather, you know, we look at size, style,
geography and you know, acid allocation, things like that and

(27:06):
ETF's are right in our wheelhouse. It's been a great
invention and we're very big users of ETFs. Jack Bogel
I met many times when he was alive, and I
always thought he was one of the smartest guys I
ever met in my career. But one of the things
that and Jack would always say, don't talk to an
active manager, just go buy an index. Right, okay, fine,
But what Jack would and that's an interesting discussion. We

(27:27):
can have the discussion all day long as to why
that happens or doesn't happen, whether he's right or wrong.
But the one thing that Jack would never tell anybody
is what index to buy.

Speaker 3 (27:34):
And when right.

Speaker 4 (27:36):
And you know, one may say, well, that sounds silly,
but there's been many times in the past where if
you had bought the wrong index at the wrong time,
your portfolio suffered dramatically for an extended period of time.
For instance, if you had bought Nasdaq or even the
S and P ETF in March of two thousand, for sure, right,

(27:57):
you then entered the Lost decade inequities, and your return
for a decade was slightly negative. If you had been
in other things like emerging markets or energy or you know,
all kinds of small caps, all these different things, you
would have done fabulously well, you know, if you bought
small caps at the peak of the small cap bull
market in nineteen eighty three, it took you seventeen years

(28:20):
to catch up to the S and P, so you
would have been neutral. So you know, everybody says, oh,
I'm a I'm a long term investor, I'm just going
to buy an index. If you buy the wrong index
at the wrong time, it can have a real detrimental effect.
And that's what pactive investing is supposed to be all about,
is the active decision making around these passive investments.

Speaker 2 (28:40):
So let's delve into that decision making. How do you
decide which index is the one that you want to own?
What data are you looking at, how you're crunching numbers
for this.

Speaker 4 (28:52):
So Barry I mentioned that we are macro investors. You know,
we're not looking at individual stocks. So everything we do
is going to fall there some macro umbrella of one
form or another. And the way to think about it is,
it's going to fall into three categories. Everything we look
at it's going to fall into three categories. Number one
would be corporate profits. One of the things that I
wrote about extensively even when I was at Maryland through

(29:13):
my entire careers. I've argued that equity investors spend too
much time worrying about the economy and not enough time
worrying about corporate profits. The stock market doesn't really care
about GDP. The stock market cares about corporate profits.

Speaker 2 (29:25):
Because GDP is reflected in profits.

Speaker 4 (29:28):
If it's right, GDP is going to be a contributor.
But a lot of other things contribute right to corporate profits.
We're looking at corporate profits and profit cycles, not economic cycles.
Number two category is going to be what we call liquidity.
And liquidity is going to be anything from central banks,
central bank actions, to lending standards from banks, anything that's

(29:52):
going to allow more leverage and greater liquidity and investable
assets in a stopworker. And then number three is going
to be sentiment and valuation. Now, sometimes people say, well,
sentiment and valuation, why are they together? And my answer, yeah,
My answer is that valuation is a reflection of sentiment. Yeah,

(30:12):
you can't have an overvalued asset that people hate or
an undervalued asset that people love. That that doesn't make
any sense. So valuation is going to reflect sentiment. And
so what we're basically looking for if you think about
those three categories I just mentioned. We're looking for situations
where fundamentals are improving, liquidity is adequate or getting better,
and everybody hates it, or vice versa, where fundamentals are deteriorating,

(30:36):
liquidity is drawing up and everybody loves it. We're going
to try and stay away from that. That's that's maybe
a gross simplification of what we do, but but that's
kind of what we do.

Speaker 2 (30:46):
But that's pactive. That's how you're selecting from broad index
is just the right index at the right time and
avoiding the wrong index at the wrong time.

Speaker 3 (30:54):
Correct. That's exactly what we're trying to.

Speaker 2 (30:56):
Really interesting, one of the things that comes up when
we're talking about various style investing comes right from one
of your books, and it's about media noise. How do
you focus on the right index when there's so much
noise and so much stuff going on, and it's especially

(31:18):
with algorithmic social media, it's just a firehouse nonsense. How
do you separate the signal.

Speaker 3 (31:25):
From the noise?

Speaker 4 (31:26):
Yeah, so I wrote a book in twenty so twenty
five years ago I wrote a book that was called
Navigate the Noise. I remember investing in the New age
of media and hype. Twenty five years ago, I wrote
about the new age of.

Speaker 2 (31:39):
Media and you were ahead of this.

Speaker 4 (31:41):
You think it's gotten a bit worse since just twenty
five years.

Speaker 2 (31:45):
So just as a reminder, this is pre Twitter, pre Facebook,
pre LinkedIn, forget Instagram, TikTok, Like, this was just like
message boards and websites.

Speaker 4 (31:58):
Yeah, I mean you're just beginning to get websites in depth,
but we're really still talking about a period of hard
copy research reports and television.

Speaker 3 (32:09):
Wow, that's really what, you know.

Speaker 4 (32:10):
The main stay of what people were looking at the
point of the book was to say that building wealth
for an individual investor is actually not that difficult.

Speaker 3 (32:20):
Why don't people do it? Why don't people do this
is kind of silly, and.

Speaker 2 (32:23):
Well, wait, when you say it's not that difficult, we
intell actually understand. My friend Dave Nadig loves to say
investing is a problem that's been solved, but the problem
that has been solved is the human behavior around.

Speaker 4 (32:38):
It, exactly exactly. And so what the book tries to
argue is that there's some very sound principles that everybody
should be following to build wealth, but yet there's a
siren song if you will, if you're into Greek mythology,
there's a siren song of things telling you of noise,
telling you that there's something newer, better get rich quick,
you know, all these kind of things that are going on,

(33:00):
and to continue with that.

Speaker 3 (33:02):
Your portfolio it follows.

Speaker 4 (33:03):
That sound and crashes on the rocks, if you want
to get the mythology example. And so what the book
says is the way to solve this problem of this
incessant noise is to hardcore follow a process and come
hell or high water, you're going to stick to that process.

Speaker 2 (33:21):
That's the mass. You tie yourself to.

Speaker 4 (33:23):
That exactly right, and put the wax in your ears,
the whole routine right. And and that's that's what we do.

Speaker 3 (33:30):
As a firm.

Speaker 4 (33:31):
We have a very hard core process. It's macro driven,
but we're going to follow that process, come hell or
high water.

Speaker 2 (33:37):
You know.

Speaker 3 (33:37):
It's it's funny.

Speaker 4 (33:39):
People understand that, and they understand what we do, We
understand why they do. They understand the notion of the book,
but yet they get very angry when we're not following
the siren song of what's the newest, baddest, you know.

Speaker 2 (33:52):
Shiniest object that's out there, so walk us through the process.
I know you have a couple of core beliefs in
your tell us about it.

Speaker 4 (34:01):
So I mentioned profit cycles. I think for us that
is the most important part of our process. And as
I said before, people spend too much time worrying about
economic cycles and not enough time worrying about profit cycles.

Speaker 2 (34:14):
To find profit cycle. And because we are all familiar
with the business cycle and the economic cycle, what is
a profit cycle?

Speaker 4 (34:22):
So you know whereas people look at GDP growth or
industrial production growth and they say, this is the economic cycle,
Well we're looking at is corporate profits growth? Now let's
just as an example, we look at profit cycles all
around the world. But let's take for example, the S
and P five hundred, the US profit cycle. What happens
is the difference between an economic cycle and a profit cycle.
Number one is that profit cycles tend.

Speaker 3 (34:44):
To boom and bust.

Speaker 4 (34:45):
Fortunately, the overall economy does not do that on a
regular basis. And secondly, profit cycles have a shorter periodicity,
so you can get multiple profit cycles in one economic cycle.
Periodicity meaning the amount of time, right, got it right?
So where's an economic cycle? Maybe it's going to take
four or eight years. You could have multiple profit cycles
in that four eight year period.

Speaker 2 (35:07):
So how do you define the peak and the troth
of profit size?

Speaker 4 (35:10):
So what happens is, you know, if you look at
the growth rate of corporate profits, you will see it
follows a pretty normal cycle through time, and our challenge
as investors is to find indicators that will allow us
to effectively forecast that profit cycle. Now, we don't really
care whether the profit cycle, whether earning strowth is going

(35:30):
to be seven percent or eight percent or ten percent,
which is a very common question people get asked, or
minus five or minus six or minus seven. We kind
of want to know is it getting better or is
it getting worse?

Speaker 2 (35:42):
Scending up exactly?

Speaker 4 (35:43):
So if profits go thus five percent, what's the probability
of going to ten percent as opposed to going to zero.
So we spend an awful lot of time with a
lot of indicators that look at that. What are the
indicators look at?

Speaker 2 (35:55):
Well?

Speaker 4 (35:56):
Look, profitability is a pretty simple formula. It's how much
what stuff are you selling? And what's your margin per item?
I mean, that's really all profitability is.

Speaker 2 (36:05):
Well, but there's a couple of factors that go in.
What is the cost of capital and credit exact inflation rates.

Speaker 4 (36:11):
But that would be in your margin, right, I mean,
and so which affects profits, which affects produits. So all
our indicators are either going to try to figure out
how much stuff is. Let's take the SMP of one
hundred or s and p F one hundred companies going
to sell, and what's going to be their margin p products.
So margin, as you point out, could be interest rates,
it could be labor costs, it could be pricing power

(36:32):
because of inflation. People forget inflation isn't bad for a
lot of corporate profits, right.

Speaker 2 (36:37):
But you can currently learn that during the pandemic exactly.

Speaker 4 (36:40):
So those are the type of things that we're looking
at in terms of profitsycle.

Speaker 3 (36:43):
And as I said, we look at.

Speaker 4 (36:44):
Profit cycles all around the world. We look at them
by region, by country, we look at by sectors. You know,
we look at profit cycles for say the tech sector,
for the consumer staples sector or something like that as well.

Speaker 2 (36:56):
So profit cycle is one of the I try, it's
the key, all right, what are the other elements that
you're considering in addition to the profit side.

Speaker 4 (37:06):
So next would be liquidity, okay, And liquidity is a
function of several different things. It's obviously a function of
monetary policy. We follow monetary policy in forty three countries
around the world. You know that sounds silly, and obviously
in the G seven or G ten you get a
lot more information than that would in but you know,
some weird emerging market country. But we do follow central

(37:29):
bank policy. We follow yield curves, the slope of the
yel curves, right, whether you've got a bullish steepening of
the curve in other words, or interest rates coming down,
but the curve of steepening, interest rates going up, but
the curve of steepening, or is the curve inverting. I mean,
we look at all these different things. They have different
implications for sector rotation and things like that as well.

(37:50):
So and then we follow things like bank lending standards.
Now that's obviously you can only get that in the
most developed countries, right, But that's an important consideration as well,
our banks tightening credit or easing credit. People say, well,
doesn't doesn't the central bank control that?

Speaker 3 (38:05):
Well not really.

Speaker 4 (38:07):
You can kind of lead a horse to water, but
you can't make it lend and and so so you
want to look at both central bank policies and the
willingness of banks to learn.

Speaker 2 (38:16):
How how does the role of fiscal stimulus and spending
play into liquidity issues?

Speaker 4 (38:22):
Yeah, so to some extent it does, and uh, it's
going to affect more. It's going to feed into ours
more to the corporate profit side in terms of how
much stuff are you going to sell? Right, because fiscal
stimulus is trying to stimulate consumption or aggregate demand if
you prefer to be a real economist here, it's going
to try and stimulate aggregate demand and that'll show up

(38:45):
in our stuff type type.

Speaker 2 (38:47):
All right, So, so we have the profit cycle, we
have liquidity, and what's the third.

Speaker 4 (38:52):
The third is sentiment and valuation, right, Okay, so obviously
we want we prefer to look at more under valued situations.
Sentiment we're trying to look for, basically, assets that people hate.
Valuation will reflect that, you know, if something's really undervalued,
something's really cheap, it reflects that people don't like it,

(39:13):
you know, And it's just like any other good in
any other market. If something's really expensive, it means people
like it.

Speaker 2 (39:19):
So two questions from that. The first is how do
you distinguish and I already know the answer to this,
But how do you distinguish between a stock that is
disliked and cheap and a stock that's cheap because it's
in trouble.

Speaker 4 (39:35):
Yeah, so what you're referring to, you know, we wouldn't
do this for individual stock, so we would do it
for for regions or sectors or whatever you know commonly
called the value trap. Yes, the value trap is something
that's cheap for good reason. And so what we do.
We have models that try to look at various industry, sectors, countries, whatever,
that are trying to look for it not only cheapness,

(39:56):
but some acceleration of corporate profits. Right, And and we
won't invest anything just because it's cheap. That doesn't mean
anything to us.

Speaker 2 (40:03):
It's cheap plus some other indicators.

Speaker 3 (40:06):
Correct.

Speaker 2 (40:06):
And then the other question is consumer sentiment seems to
have gone off the rails post pandemic if you look
at where and I suspect this is a measurement problem,
but I want to get your sense. So if you
look at the University of Michigan consumer sentiment data for
the better part of the past five years, it's worse

(40:28):
than the worst part of the pandemic, worse than the
financial crisis, the eighty seven crash, like on and on,
it's shocking, worse than nine to eleven in the dot
com implosion, Like, wait, things aren't that bad.

Speaker 3 (40:41):
No, they're not that bad at all.

Speaker 2 (40:42):
What's going on with that sort of sentiment? And what
how do you use sentiment when you're trying to manage
around this?

Speaker 4 (40:50):
You're asking, I think a more complicated question, maybe even
you think you're asking. But you know, everybody knows that
we're in a very uncertain environment, and I think that
those consumer sentiment readings right now reflect that immense uncertainty.
If you were to ask normal people, they might not
use the word uncertainty. They might use the word chaos,

(41:11):
they might use there's all kinds of different words that
people would use. I think that's what's being reflected in
those consumer sentiment numbers right now, is the uncertainty of
the impact that's having. You know, there's other surveys out
there that are showing similar type levels of uncertainty or
concern that aren't related to consumer but I think it's
a reflection of this. It's become a hackneyed word uncertainty.

(41:35):
I think that's what you're.

Speaker 2 (41:35):
Saying I prefer the lack of clarity to uncertainty. But
let me bring this back to your book, Navigate the noise.
How much of this is a function of algorithmic social media,
which there was recently a study I want to say
it was Oxford Reuters that said Americans now get more
of their news from social media than anywhere else. Ye,

(41:58):
big issue. And then secondly, it seems like in the
world of clickbait crazy headlines, the media itself, if not
the news stories or columns, but the headlines certainly seem
to be more and more extreme, unbelievable.

Speaker 4 (42:16):
So you know, I don't know how to answer that
from a societal point of view, but I can answer
it from my point of view as sort of a
fiduciary and an investor of other people's money. I think
it is my obligation to things. Is my obligation number one,
to be as dispassionate about my politics as I possibly can.

(42:36):
I mean, if you want to go have a beer,
we can talk politic that's fine, But I'm saying when
I'm investing, you have to be as dispassionate as you
can possibly be. And number two, I think it's incumbent
of all of us who manage money to search for
truly unbiased sources. Not who's going to give us the
most frequent news, but who's going to give us news

(42:58):
that is unbiased. I think it's incumbent on all of
us to do that. And I have found that in
the last year or so that my choices of news
media and what I read and what I pay attention
to has changed.

Speaker 3 (43:15):
Because of that.

Speaker 2 (43:18):
Feel free to name names.

Speaker 4 (43:20):
You know a lot of people. I think one of
the questions you would plan to ask me was what
are you reading these days? And my answer is I
don't read an awful lot of these days because there's
so much going on. But what I what I have
begun to do is listen to podcasts. Okay, go on,
tell me about like this podcast, Like no, I'm buttering

(43:40):
you up here, but go on. There's three that I
would I would recommend to everybody. One is actually right
here at Bloomberg Bloomberg Law. And you'd say, like, why.

Speaker 2 (43:52):
June Grasso, Yeah, yeah, yeah, why would you listen?

Speaker 3 (43:55):
Why would you listen to Bloomberg?

Speaker 2 (43:57):
It's fascinating?

Speaker 3 (43:58):
And my answer is because everything these days is ending
up in the courts.

Speaker 4 (44:03):
Have we ever had more issues with government in the
courts than ever before.

Speaker 3 (44:08):
So I'm not a lawyer.

Speaker 4 (44:10):
I don't know squat about you know, constitutional theory and everything,
and I'm sure most people don't either, but they're gonna
listen to some wack adoodle guy talk about this. I'd
rather listen to people who have our well granded opinions
and understand the history of law in terms of doing that.

Speaker 2 (44:27):
So I'm so glad you brought that up because we
went through a run starting in twenty twenty where every
talking pundit Yahoo. First they were an epidemiologist exactly. Then
they were a virologist, then they were a constitutional scholar,
then they were a military strategist. You know, when someone

(44:47):
asked you was COVID from the wet lab or wet
wet market or escape from the lab, It's okay to say,
how the hell why I have no expertise in that,
why are you asking me?

Speaker 4 (44:59):
Every But he had an opinion, so it seemed right,
exactly exactly.

Speaker 3 (45:03):
And so yeah.

Speaker 4 (45:05):
The other thing along with that that I love is
a well known epidemiologists or idiots. But the guy down
at GNC who sells me protein powder, he's a genius,
and he knows my health better than anybody.

Speaker 3 (45:15):
I mean, it's just like, come on.

Speaker 2 (45:17):
There was a New Yorker cartoon that I vividly remember,
right in the middle of the pandemic. It's the body
of an airplane and there's a guy standing up in
row seventeen b right, saying, we're tired of these pilots
telling us what to do. Who's with me? And it
was like that just sort of let the pilots fly
the plane, just sit down.

Speaker 4 (45:38):
So Bloomberg Law is one that I listened to. I'm
not gonna say regularly because I don't have the time
to listen to every single one all the time. Yeah,
I thought, if I get a chance, I listened to it.

Speaker 2 (45:49):
That's a fascinating show. Like you're you're surprising me because
I do the same as you. I listened to a
lot of them. Tell us the other two?

Speaker 4 (45:56):
Yeah, so the other two are actually on in which
I realize people now suddenly decided I'm a wide eyed liberally.

Speaker 2 (46:04):
Can I tell you my wife every time I get
into the car and she's been driving my car. It's
on NPR on Saturday Light Radio. And I had the
same thought until you listen to a few of them,
and they're fascinating.

Speaker 3 (46:17):
They are.

Speaker 4 (46:18):
And there's two shows in particular that I would recommend.
Two podcasts in particular I would recommend from MPR. One
is called Left, Right and Center, which is the name
implies you have three people talking about issues, one from
the left, one to the right, and one from the center.

Speaker 2 (46:31):
Wait, they're gonna give us all views who could have imagined?

Speaker 4 (46:34):
Who imagine that exactly? And they pick a topic and
sometimes I'm really interested in the topic, sometimes I'm not.
But whatever, the fact that you've got Left, Right and
Center in the same podcast is extraordinarily rare.

Speaker 3 (46:48):
You don't get that a lot. So that's number one.

Speaker 4 (46:51):
And the other one is another MPR podcast called Open
to Debate, which is very similar. They pick a topic
and this is more like a traditional debate where they
have debating.

Speaker 3 (47:01):
Rules and all kinds of thing.

Speaker 4 (47:02):
But it's a debate and you're gonna hear two sides
of an issue.

Speaker 3 (47:07):
Now.

Speaker 4 (47:07):
Look, sometimes the issues you don't care about. Sometimes they're
very important. Sometimes they're really cool.

Speaker 3 (47:11):
Sometimes they're not.

Speaker 4 (47:12):
I get that, but I think it's incumbent on us
as a class of money managers and fiduciaries to search
out those kind of shows. I would argue, if you
are a fiduciary and you are constantly listening to MSNBC
or Fox or Newsmags or whatever right you're you're doing

(47:33):
a disservice to your clients for sure.

Speaker 2 (47:36):
So there are two things I have to share with
you because you're right in my favorite space. One is
planet money on NPR is something that they take this obscure,
fascinating little topic and we'll do a whole like way

(47:57):
down the rabbit hole deep dive. I don't know if
you recall during the Clinton administration, Hey, we're having problems
with wealth inequality, and so we're going to cap how
much we can pay CEOs in cash. If you want
to give them risky stock options, you can. And the
unintended consequences is it tenext the wealth gap and just
stories like that that are fascinating. The other thing is

(48:20):
you raise a point. I know you're not a lawyer,
but I'm a recovering attorney, and the most applicable thing
to investing you learn in law school is you have
to be able to not just argue your case, you
need to know the other site's case. Better than they do.

(48:40):
And that translates into equities as you can't be bullish
unless you can really state the bearish case and vice versa.
Correct you want to be bearish, you better know what
what are the best arguments for being bullish here? And
I can't tell you how many people fail that test,
and I bet you see it back to post nine

(49:03):
if you're super bearished. The only question I have for
those people, give me what the bulk case is and
if they can't even imagine it, well, now I'm going
leverage long because that failure of imagination means everybody's too baish.

Speaker 4 (49:18):
And it's interesting you said that there are times we
don't do this regularly, but there are times that where
we do point counterpoint in our investment committee meetings exactly for.

Speaker 2 (49:26):
That reason, just so you're making both so we're being seen.
It's one of these things that until you go through
the exercise, it like if you have an extreme position
and you come out the other side of that discussion
and you still have that extreme position. Either someone wasn't
making the argument well, or hey, maybe the world really

(49:50):
is coming to an end. But most so far that's
been losing. The losing bad So, given what's going on
with technology and AI and automation and all the latest greatest,
newfangled things, is anybody today a better investor than they
were ten, twenty, thirty years ago, fifty years ago. Has

(50:13):
the bar Since Charles down launched Barons in eighteen ninety,
has anything improved for the average investor?

Speaker 4 (50:22):
I think I think the amount of information that an
investor can get obviously has gotten greater, right, I mean
even if you think probably.

Speaker 2 (50:30):
But it's all public, it's reg FD, So does it
help them?

Speaker 3 (50:33):
No? I don't think it does.

Speaker 4 (50:34):
And I think I think that you know, the notion
that somehow we have evolved and we are smarter, better
investors than ever before. I think that's hogwash. I think
that's complete hogwashed. People are still underperforming like they always did.

Speaker 2 (50:50):
So it's not it's not the strategies, it's not the vehicles.
Although we get great tax and cost benefits with ETFs,
how much of this is just simply comes down to
human behavior and human nature, and people are still people,
and we're still making the same mistakes over and over
and over again.

Speaker 4 (51:08):
Yeah, I mean, there is something to be said for
behavioral finance and the biases that we bring to the table.
It's pretty hard to not be human.

Speaker 2 (51:16):
It very much is. So let's bring this back to
where we are in the market today and what's going on.
We just made new ald time highs in the SMP
and in the Nasdaq. I always learned that old time
highs are the most bullish thing you can see. Perhaps
not the very last one, but the hundred before it

(51:38):
are super bullish. How do you look at the market
and say, everybody seems to dislike this market, and yet
we made fresh old time highs.

Speaker 4 (51:46):
Yeah, So I think, Barry, I think that we've said
a number of times that we think it is a
mistake right now. Do you think of the market sort
of in quotes that that's what people are very very
focused on right now, and we think that's a mistake.

Speaker 3 (52:03):
Why is it a mistake.

Speaker 4 (52:04):
Because the market is dominated by seven or ten or
fifteen companies and we really have an extraordinarily bifurcated market
in that respect. And I'm not saying anything that people
don't know. Of course, everybody everybody knows about the Magnificent seven.

Speaker 2 (52:17):
Who doesn't although they even think that they've the mag
seven have been the lag seven for most of this year.

Speaker 3 (52:24):
Correct.

Speaker 4 (52:25):
Correct, Now that's where I was going, exactly right. But
the enthusiasm surrounding those seven stocks is not changing. And
our view has been did okay, you want to go
play those seven stocks, go play the seven stocks. You
don't need us. We're looking at everything else in the world.
And I've just I've said to our investors many times,

(52:46):
are there really only seven growth stories in the entire
global equity market?

Speaker 3 (52:51):
Of course not, There's tons of them.

Speaker 4 (52:52):
And we've shown people how many companies are actually growing
earnings twenty five percent or more, and how the MAG
seven doesn't really even fit into that group that our
companies that are growing, you know, much faster and with
with you know, similar consistency. And so I think if
you're invested in an S and P index fund, or

(53:12):
you were invested solely in the MAG seven, were solely
in Nascac, I think the next three, five, ten years
might be very disappointing.

Speaker 3 (53:21):
Huh.

Speaker 4 (53:22):
I think if you're in everything else and we could
define you know, that's I'll leave it to everybody else
to define how they define everything else. But but I
think if you're in everything else, I think you're gonna
do just fine. I think you're gonna have a great time.

Speaker 2 (53:35):
So let's talk about not everything else, but one of
the else things, which has been international stops. When we
look at either developed x US or emerging markets, these
are areas that have underperformed the US for ten fifteen years, absolutely,
and over the past year we've started to see signs that, hey,

(53:59):
maybe this under performance isn't it to persist? Persist? X
US stocks have been doing much better than US, certainly
year to date in twenty twenty five, and we're recording
this late June, maybe it's been about a year or more.
About performance, How do you look at the world of
international stocks? What parts of the world look interesting to you?

Speaker 4 (54:19):
So I will twist your question a little bit, and
I will say that one of the things, one of
the aspects, one of the segments of the global equity
markets that we are very bullish on is what I
will call international quality non US quality stocks. That's not
a stocks' well, I'm just saying as opposed to a country, right,
something people like to talk about countries.

Speaker 3 (54:39):
But I think.

Speaker 4 (54:41):
The reason I say this is that the median projected
growth rate among high quality non US stocks is actually
equal maybe even a touch higher than the median growth
rate among the Magnificent seven, so we'll talk basically similar
type growth.

Speaker 3 (54:56):
They offer dividend.

Speaker 4 (54:57):
Yields of three four maybe a little pers even four
and a half percent, depending on how you look at this,
but let's say three to four percent dividend yell and
they sell for a third to a half of the
valuation of the Magnificent Seven. So the way I describe
it to people is if somebody came to you and
offered you a Maserati for the price of a Chevy,

(55:18):
or to be fair here, if somebody offered you Manolo
Bloonnis for the price of hush puppies. I think we
would all say, yes, I will do that. By the way,
can I have two? But when we get to the
stock market, this is like unimportant to people. They don't
understand that there's a value assessment made in everything we
do all the time, but for some reason stocks it

(55:41):
doesn't appear. So the the way I describe it, as
you know, the Blonnics and the Maseratis are on sale,
we think that's a great thing to do.

Speaker 3 (55:48):
We'll take two, thank you.

Speaker 2 (55:49):
So you're naming two Italian I just chose them. But
the reason I bring that up is you're not stock pickers.
Your geography, sector cor style selectors. So if someone says,
hey that Rich Bernstein is onto something, I want exposure

(56:12):
to fast growing, high quality, inexpensive companies, what sectors are
looking So for us, I.

Speaker 4 (56:20):
Will I will name the ETF that we hold with
all do legal disclaimers here that we hold this CTF,
we have held it, we still hold it, blah blah blah.
You know, however, I can alert people that we I'm
talking my book a little bit here. It's it's the
IQLT is the ticker symbol the International Quality ETF, and

(56:43):
it's a great way. It's actually I believe EPHA based.
So you're getting multiple countries.

Speaker 2 (56:49):
But that's about Europe in the far far Eastern Asia.

Speaker 4 (56:53):
Correct, it's probably going to be Australia. It's probably going
to be about sixty to seventy percent of Europe. I
don't have this stats in front of me, but something
like that, so I think, you know, that's that's an
area that people aren't thinking about at all.

Speaker 2 (57:06):
So here's the macro pushback. And I'm not saying this
is let me just play Devil's advocate. Europe has structural problems.
Brexit is an issue now with the Trump administration, Europe's
gonna have to step up and fund more of their
own military and defense. Europe is has problems, and they're
not going to be clear these for decades.

Speaker 4 (57:27):
And that could be true or that might not be true.

Speaker 2 (57:29):
Okay, but is it really?

Speaker 4 (57:31):
But notice, notice what I said was that they offer
earnings growth that is comparable to that of the mag seven.
And I think that's the point that I'm trying to
make that despite all these problems that everybody is well
familiar with, somehow these companies are putting, you know, or
have earnings growth projected earnings growth that's roughly similar a

(57:51):
little bit more than the Magnificent seven.

Speaker 2 (57:54):
And these are quality companies and their x us xus
W and so if you have a huge home country
bias and you want a little diversification, you can look
overseas to reasonably priced, quality comp And if you think
the dollar is going to weaken, it's right. But we
down eight eight and a half percent of year to
date something like that. So I know you're not a

(58:15):
currency analyst and you don't make those sort of calls.
How do you look at what happens post April second
Liberation Day and the ongoing weakness and the dollar. Does
this come into your calculus or is this just more
noise that nobody is.

Speaker 4 (58:33):
It does not in terms of you know, the short
inter media turn the way most people would think. But
we think there are structural issues in the United States
that transcend the current politics, transcend the current politics, and
have been around for longer than people think, and are
detrimental to the US economy. And we find that very
interesting that. You know, you hear all the time about

(58:54):
debt and deficits and there's some day of reckoning coming.

Speaker 2 (58:58):
My entire adult life, I've been here.

Speaker 4 (59:00):
Yeah, and I love that because the speaker usually is
saying I have some insight and for some reason, the
markets don't appreciate my insight. And I love that, Like,
you know, we're all so smart and the market's stupid. No,
it's actually the other way around. The markets have figured
this out over the past ten to fifteen years. And
what I'm talking about is if you look at the

(59:21):
spread between treasuries and triple A rated sovereign debt through time,
what you will find is when the United States was
rated triple A, our yields were roughly in line with
other triple A rated sovereign debt. Since the initial downgrade
in twenty eleven, and since then non stop, we have
sold at a risk premium yield. In other words, we're

(59:42):
trading more like a lower quality bond relative to triple
A rated sovereigns.

Speaker 2 (59:46):
Meaning all this negativity is in the price.

Speaker 4 (59:50):
It's there. The markets have been well aware of it.
There's no day of reckoning. It's like a slow bleed.
And so what's been If you think about how everything
in the United States priced off the ten year mortgages, munis,
corporate bonds, everything's probably off the tenure. The fact that
we're paying it at you know, right now it's just
under two hundred basis points of extra yield because of

(01:00:11):
our lack of fiscal discipline. That's translating through to higher
interest costs throughout the entire economy. It's not just the government,
it's through the entire economy. Why don't people Why aren't
people aware of this? Well, because over the past five
to ten years we've had low absolute rates of interest.
The point I'm trying to make is we've still been
penalized relative to other countries despite that absolute low rate

(01:00:35):
of interest, and people haven't realized that. So we're already
being penalized. And I think there's there's a real I
think everybody should be concerned about that. It's clear that
neither party has a real interest in fiscal discipline right now.
So we should assume that that that penalty against the
United States is going to continue to exist, if not expand.

Speaker 2 (01:00:58):
So let me push back in and play a little
Devil's advocate about that. Hey, Uncle Sam was borrowing it
next to nothing. We've been running up deficits for one
hundred years. COVID happens. Everybody's stuck at home. CARES Act
one is the biggest fiscal stimulus at least as a
percentage of GDP since World War Two. Then you add

(01:01:20):
the second Cares Act under Trump, the third Kars Act
under Biden, to say nothing of the other tenure fiscal
stimulus plans passed under Biden. And that pig working its
way through the Python caused a giant spike in inflation
plus supply chains blah blah blah. And now that that's
come out the other end. So the Fed had to respond.

(01:01:42):
Whether whether the FED brought inflation down or it was
simply unwinding naturally is another debate. But once the FED
brings rates back down, this penalty will go away. If
and when the FED finally does that, well.

Speaker 4 (01:01:58):
That's important because remember in the period i'm talking about,
which is almost fifteen years now, you've got periods, you've
got multiple, multiple presidents, you've got multiple FED regimes, and
the penalty doesn't go away.

Speaker 3 (01:02:13):
And I think that's so.

Speaker 2 (01:02:14):
No matter even at zero, we were paying a penalty
because other countries had negative had negative, so there was
still the penalty.

Speaker 3 (01:02:20):
We were still being penalized. It's crazy, and.

Speaker 4 (01:02:23):
That that, I think is something that's lurking in the
background that people are not paying attention to. Especially people
say that a day of reckoning is coming.

Speaker 2 (01:02:31):
You're saying it came, and it's still here ongoing.

Speaker 3 (01:02:33):
It's ongoing.

Speaker 4 (01:02:34):
It's just not big enough for anybody to notice. It's
it's like it's as I say, it's like water torture.

Speaker 2 (01:02:39):
Ah, the slow bleed, the slow blade. That's really that's
really fascinating. Let's jump to our favorite questions, starting with
you mentioned some of the podcast you're listening to what
what else are you streaming? What's keeping you entertain these days?

Speaker 4 (01:02:52):
So streaming, I'm I'm I'm in a little bit of
a rut instagra right now. Yeah, I'm having everybody, you know,
like everybody's got their favorite, uh, you know, streaming show
that they like, and if you ask anybody, people come
up with like four of them. Oh you gotta watch this,
you gotta watch this, And all of a sudden, it's
like it all blends together and you can't keep it together.

Speaker 3 (01:03:10):
So I'm a touch lost right now.

Speaker 4 (01:03:13):
In terms of streaming, I won't say give me suggestions
because I won't remember it.

Speaker 2 (01:03:18):
It's just like I'm just gonna give you one because
it's quirky and interesting. Okay, it's called Department Q.

Speaker 3 (01:03:25):
Department Q.

Speaker 2 (01:03:26):
Right, So this is a limited nine episode series on Netflix.
Detective is shot, his partner is injured, the third person
is killed at the site, and he basically is appointed

(01:03:48):
head of the cold case division. Just they're just standing up.

Speaker 4 (01:03:52):
That's kind of stuff.

Speaker 2 (01:03:53):
And it's in Scottish and I normally don't love police procedurals. Yeah,
this is kind of fast name. It's it's it's sort
of builds slowly over time. Like I could give you
one hundred others that you wouldn't care about, but I
kind of know the sort of stuff good you like.
But it's quirky and weird but really interesting. If the

(01:04:17):
if you're going to have any complaint over it, and
I don't think this is a complaint, but the complaints
I can imagine are, well, this builds slowly. I'm like, yeah,
it's not just you know, if you want to open
with a chasing James Bond and mission impossible, you know
where to go find. This is a little a little
more okay. So well, I'm curious to seem Department Q

(01:04:39):
such a such an odd Let's talk about mentors. You
reference one of them, who were the folks who helped
shape your career?

Speaker 4 (01:04:46):
So I would say there were there were several. One
that hand an immense uh impact on me was the
person who hired me at Merrill, Chuck Clough. Chuck Clough
at the time was Merrill's chief strategist.

Speaker 2 (01:04:57):
He's he knows that name from way back when.

Speaker 4 (01:04:59):
Yeah, yeah, yeah, he was the chief strategist at at
Merrill from eighty seven to two thousand something like that.

Speaker 3 (01:05:05):
Wow, And Chuck gave me two.

Speaker 4 (01:05:08):
Pieces of advice, which he claims he doesn't remember that
he gave me, but I'm sure he does. The first
was my first day when I walked in at Merrill
and I kind of said, like, what do you think
I should be focusing on? And he said to me,
I don't really care, just don't make a fool of yourself.

Speaker 2 (01:05:27):
By the way, that's good advice for anybody, anywhere, anytime.

Speaker 4 (01:05:30):
It was, And at first I was very put off,
like this guy doesn't care about me, Like what is
this all about?

Speaker 2 (01:05:34):
You know?

Speaker 4 (01:05:35):
But what he was saying was you're a grown up,
right right, Like yeah, exactly, you don't need me to
tell you what you should do, but be aware, don't make.

Speaker 3 (01:05:44):
A fool of yourself. Don't do stupid things.

Speaker 4 (01:05:47):
Second thing he told me, which I live by to
this day and I tell this to people all the time,
he said, make sure you're a star and not a
Roman candle. Huh, which I thought, I still think to
this day is fantastic advice.

Speaker 2 (01:06:01):
So persistency, not don't just flame out.

Speaker 4 (01:06:04):
Don't flame out, don't be the ten minute you know thing,
be be the star. That to be a star is
harder than you think. And but be a star, don't
be a Roman candle that I still to my day
live my professional career that way.

Speaker 2 (01:06:18):
I think. I think that's great. You said you don't
read a lot, but you've written several books. I know
there are books that have influenced you. What are some
of your favorites? You read anything on vacation.

Speaker 3 (01:06:30):
So I did what I tend to read.

Speaker 4 (01:06:33):
I don't have any one book that I would give you,
but I will tell you I tend to read a
lot of espionage. Spy and espionage type stuff, okay. And
the reason why is that as these things progress and
as the stories progressed, not not like as you said,
not like James Bond type.

Speaker 3 (01:06:50):
Stuff, but it's it's almost.

Speaker 4 (01:06:53):
Like solving a puzzle or or completing you completing a
puzzle and in some way, and I find that fascinating.
I find you know, I was always in high school
my favorite math was was geometry because everything was a
puzzle to me. There was like we had different tools,
how do you solve the problem? And that's kind of
the way I view spies and espionages that there's different tools,

(01:07:16):
but how do you.

Speaker 3 (01:07:17):
Solve the problem?

Speaker 4 (01:07:17):
And how do you get where you want to go?

Speaker 2 (01:07:19):
I got I have another recommendation for you.

Speaker 3 (01:07:23):
This is why I came today.

Speaker 2 (01:07:24):
It was a charming It was one of these films
that like, oh, this looks interesting, Netflix recommend let's try this.
Black Back, also set in the UK, and six husband
and wife work together, and there's a mole somewhere in
MI six and people somehow each of them are led.

(01:07:47):
I want to say, it's is a Kate Winslet. It's
one of the Kates, and I forget who's the lead husband,
the man, the husband, but each of them begin to
suspect the other. Oh interesting and shockingly interesting, Like normally
you go into a movie you have no idea about. Yeah,

(01:08:08):
let's see how this is. And we both are like, wow,
this was surprisingly good. So again, I know your wheelhouse,
black bag, and Department Q. You have now a film,
a series and a book. I've taken care of your
summer's entertainment. So anything else you want to mention that

(01:08:29):
you're reading?

Speaker 3 (01:08:30):
No, there's not, you know, I No, I haven't.

Speaker 4 (01:08:33):
I have been reading a lot recently for fun, I
have to admit, but what I do read, you know,
pretty religiously is getting back to the whole issue of
of being dispassionate. I do read the Financial Times, I
do read the Economist. To me, that's that's a must
read for people.

Speaker 2 (01:08:48):
I have found the British papers generally like what we
think of as left of center is sort of dead
middle to them, and they look their right is kind
of our middle, like it's not like our spectrum feels
wider our political range, and they everybody seems to be

(01:09:10):
clustered somewhere around. It's either center right or center left,
not extreme right or extreme left.

Speaker 3 (01:09:15):
And I actually don't.

Speaker 4 (01:09:16):
I don't care whether people are right or left as
long as I can figure that out. What I care
for is factual content right right. Fact fact checking has
to be has to be good these days.

Speaker 2 (01:09:29):
So our final two questions, what sort of advice would
you give to a recent college grad interested in a
career and either investing or asset management or quantitative strategy.

Speaker 4 (01:09:40):
So I mentioned this briefly before. The advice I do
give recent college graduates or or seniors or whatever is
not to pigeonhole yourself early in your career. Don't say
this is what I have to do, and this is
what I'm going to do. You know, if you're a doctor,
if you want to be a doctor, if you want

(01:10:00):
to be a lawyer, you have some of that.

Speaker 3 (01:10:02):
You have to do.

Speaker 4 (01:10:03):
I get that, right, But if you want to go
into the financial services industry in any format you have
to be you have to enter that with an immense
amount of flexibility. Our industry changes so dramatically and so
quickly that what seems super interesting to you as a
college graduate could be obsolete in two or three years later. Right,

(01:10:26):
And you don't want to paint yourself into a corner
where that's all you know, and that's all you're willing
to do, when you're willing to do other things or
willing to learn other things. I think if you're coming
into financial services, you should. You should be one who
likes to learn and likes to morph through time.

Speaker 2 (01:10:42):
Really really interesting. And our final question, what do you
know about the world of investing today that might have
been helpful to know forty years or so ago when
you again it started?

Speaker 4 (01:10:51):
Oh man, I mean, I will tell you I have
gone back and rid reports that I wrote twenty years
ago or twenty five years ago, and I read them
today and I say, like, what I'm more on, I'm
amazed at my own stupidity, and and so.

Speaker 2 (01:11:08):
Let me I'm gonna interrupt you right here to say so.
Professor David Dunning of University of Michigan, he of the
famous Dunning Kruger effect, said, if you look at work
that's five years old and you don't think it's awful,
you're not progressing. Is that right? I said it right
right sitting what you were saying, and said, if you're

(01:11:29):
not if you don't hate what you did ten years ago,
you haven't grown it all. Actually, I how fantastic is that?

Speaker 4 (01:11:36):
I mean, some of the some of the ideas I
wrote about we still use and there there's still the
crux of what it. But I'm just saying I look
at my writing, I look at how I expressed myself.

Speaker 3 (01:11:44):
I looked at how I thought something was.

Speaker 4 (01:11:46):
So important that type of thing, and I cringed today,
I absolutely cringe. And the moral of the story there
is I've come to grips with the fact that no
matter how smart I think I am, I'm really not
very smart. And there's a lot more to learn. And
so I think as I've gotten older, I've wanted to
learn more through time, I kind of immerse myself. And

(01:12:07):
it's funny because my friends react to me down there,
You're like, how did you know that? And it's only
because I'm reading all kinds of different things and doing
all kinds of different things, and paying attention to different
thing because I kind of think of myself as a
perpetual moron. I don't know how else to describe it,
but that's really how I view myself.

Speaker 2 (01:12:23):
All I know is that I know nothing. I will
go back to philosophy. What is that Aristotle? So will
end where we began. Rich. Thank you for being so
generous with your time. We have been speaking with Rich Bernstein, Founder,
chief investment officer of Rich Berstein Associates. If you enjoy
this conversation, we'll be sure and check out any of

(01:12:45):
the five hundred and fifty we've done over the past
eleven years. You can find those at Bloomberg, iTunes, Spotify, YouTube,
wherever you feed your podcast fix. Be sure and check
out my new book How Not to Invest The ideas, numbers,
and behaviors that destroy wealth and how to avoid them

(01:13:07):
How Not to Invest wherever you find your favorite books.
I would be remiss if I do not thank our
cracked team that helps put these conversations together each week.
Anna Luke is my producer. Sage Bauman is the head
of Podcasts at Bloomberg. Sean Russo is my researcher. Peter
Nicolino is my engineer. I'm Barry Ridholts. You've been listening

(01:13:27):
to Masters in Business on Bloomberg Radio.