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Hi, I'm Jim O'Shaughnessy and welcome to Infinite Loops.
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Sometimes we get caught up in what feel like infinite loops when trying to figure things out.
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Markets go up and down, research is presented and then refuted, and we find ourselves right back where we started.
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The goal of this podcast is to learn how we can reset our thinking on issues that hopefully leaves us with a better understanding as to why we think the way we think and how we might be able to change that to avoid going in infinite loops of thought.
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We hope to offer our listeners a fresh perspective on a variety of issues and look at them through a multifaceted lens — including history, philosophy, art, science, linguistics, and yes, also through quantitative analysis.
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And through these discussions help you not only become a better investor, but also become a more nuanced thinker.
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With each episode we hope to bring you along with us as we learn together.
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Thanks for joining us, now please enjoy this episode of Infinite Loops.
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Disclaimer: Jim O'Shaughnessy is chairman and Co-Chief Investment Officer of O'Shaughnessy Asset Management, where Jamie Catherwood is an associate.
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All opinions expressed by Jim, Jamie and podcast guests are solely their own opinions and do not reflect the opinions of O'Shaughnessy Asset Management.
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This podcast is for informational purposes only, and should not be relied upon as a basis for investment decisions.
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Clients of O'Shaughnessy Asset Management may maintain positions in the securities discussed in this podcast.
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Jim O'Shaughnessy: Well hello everyone, it's Jim O'Shaughnessy with another episode of Infinite Loops.
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And today it's going to be a super fun day for me because I have my friend Nicky Numbers.
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If you were part of Game of Thrones, would you be Nicholas Numbers, the First of His Name, Master and Lord of All Empirical Data? Or what would it be? Welcome.
2:19
Nick Maggiulli: That sounds great, Jim.
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I'm going to go with that one.
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Master and Lord of All Empirical Data. Let's assume so.
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Jim O'Shaughnessy: That's a big title, man. I like it.
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Nick Maggiulli: Yeah, great to be on the show today. I'm very excited.
2:29
Jim O'Shaughnessy: Oh I'm delighted to have you. It must get weird.
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Like you have to do a lot of podcasts, right?
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Because that's the old world tour that an old like me actually had to do.
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Get on a plane and it was horrible. But is it weird?
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I know you've done several. I listened to a couple.
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Is it weird when you're doing them with somebody who does not know you.
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Who does not like I'll tell the story of why I know you so well.
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But like is that weird or no?
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Nick Maggiulli: No, actually, I think they may not know me but they know a little bit of my work.
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I'm not saying everyone's going to be perfectly know all my work.
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But if they know some of it, they can ask about that.
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And that's usually why we have a shared interest is on some of the ideas.
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And so I don't think that's bad.
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And everyone asks different questions. That's what interesting.
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I've been getting overlap, but most of the questions have been pretty different so I've enjoyed that a lot.
3:20
Jim O'Shaughnessy: Oh that's good. Nick Maggiulli: Yeah.
3:22
Jim O'Shaughnessy: Well and now you can take a screenshot of this. I endorse this book.
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Well in fact, I did endorse this.
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Nick Maggiulli: Your name is on the back cover, Jim, yes.
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Jim O'Shaughnessy: So I know you because ever the person not wanting to have down time, you'd arranged and won a job at Ritholtz which is one of our biggest clients, thank you. At OSAM.
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And it didn't start for, I can't remember, I think it was five months, something like that.
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Nick Maggiulli: Two months, two months.
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Jim O'Shaughnessy: Two months. Oh see.
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Nick Maggiulli: Yeah, that's all I had.
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That's all we had together, Jim, two months.
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Jim O'Shaughnessy: That's it.
3:54
So Nick worked for us at OSAM for two short months, but I got to know him really well because we share a true love of empirically derived data.
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And I think that obviously I'm talking to my priors here.
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It's one of the best ways to figure a lot of stuff out.
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And so Nick has put most of that wisdom into this book. Loved the title.
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I was joking with one of my colleagues at Infinite Loops.
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I was like, "You know what would be funny?
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I should just have Nick on and I should just ask him a series of questions and his answers should be just keep buying."
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And then the questions were going to get like more and more cataclysmic and we'd end with heat death of the universe, Nick. Just keep buying.
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Nick Maggiulli: Just keep buying.
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Jim O'Shaughnessy: A great title though.
4:42
And great titles can move a lot of books.
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How did you come up with?
4:46
Just- Nick Maggiulli: So I discussed a little bit in the intro.
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I came up with it basically I have a friend named David Perell who you obviously know in the writing space.
4:56
And he had, this was really early on when I moved to New York. And even before then.
5:00
And I think he had been telling me like, "Hey, check out Casey Neistat."
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And so Casey Neistat, I was like, "Listen, I'm on YouTube."
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And he had talked about some advice he got from another YouTuber called Roman Atwood.
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And Roman Atwood said, "Here's how I got three words that got me to three million subs.
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And the three words were just keep uploading."
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And it was like consistent disciplined type of thing, right?
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And I had been writing on the stock market at the time or something.
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And I saw this and I was like, "Oh my gosh, this makes sense. Just keep buying.
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Or just keep buying over time."
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So I thought it was like a cool little title or whatever. I wrote a blog post.
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And so actually the blog post came out literally five years to the day before the book came out, right?
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So ironic like it's very ironic for a host of reasons.
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But yeah, just the name stuck. It was really easy. It makes sense.
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It's like an entire investment philosophy in three words.
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Obviously there's more to it than that and that's what the book goes into but if I had to only give three words to be like an investment philosophy that I think generally works, it's just keep buying obviously.
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Jim O'Shaughnessy: I think it's great.
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And for listeners, I know Nick very well.
5:56
I've read his entire book.
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So you might thinking, "Gee, Jim asked him a question that Jim should know if he read the book." Well, yes.
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But we're recording this podcast not for me, not for Nick, but for you, our wonderful listener.
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I used to fight with my editors back in the way, way back when I was writing my books.
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And like What Works On Wall Street, right? I named that.
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Do you know what the publisher wanted to call it?
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Nick Maggiulli: Mm-hmm (affirmative).
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Jim O'Shaughnessy: Benchmarking The Street.
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And I'm like, I'm at lunch with this woman.
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I'm looking at her and I said, "Are you trying to make it so I only sell one copy?"
6:36
And then like the book that I wrote for the general audience is called How To Retire Rich.
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And back then that worked really well because how to ... People were ...
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We didn't have the internet. Or it was nascent.
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It was just in its beginnings.
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And so people wanted how to do this? How to do that?
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And now we're in the era where I loved this title. Just keep buying.
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We're going to talk a little bit about something I chatted with you about earlier in a bit.
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But I want to dive into the book because first off, one of the reasons I love Nick is he, I'm being very serious.
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Most of what you're going to hear from Nick is not his opinion.
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Most of what you are going to hear from Nick is what the empirical evidence shows us, right?
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There's a really big distinction between those two.
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And I think that you get a lot further, rather than saying, you know what I think that debt is bad or whatever you want to say. Look, look and see.
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There's lots of evidence out there.
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And the first thing I wanted to ask you about is like I read a lot of these books.
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And people send me a lot of them.
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But you have this great notion where you say, "The first thing you got to do is get the money to invest."
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So in other words, you've got a great example in the book saving.
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Listen you went to Stanford.
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If you skip one party in San Francisco, that's going to earn you more than a thousand invested might.
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Tell me more about that and tell me how you get people to really understand that important part?
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Because a lot of people just skip to the investing.
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Nick Maggiulli: Yeah, so I think a lot of this.
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I didn't realize this at 23 when this first happened. I realized years later.
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But at the time when I was 23, I had spreadsheets and spreadsheets.
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As we talked about, I'm very empirically oriented.
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So I had a bunch of data. I'm like oh here's ...
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Am I going to be five percent bonds or 10 percent bonds.
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I was obviously very neurotic around it, to be honest, right?
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And I was doing all these analysis.
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And I got a thousand dollars invested at the time.
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Like no money really in my 401(k).
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Even if I got a 10% return, that's $100, right?
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So it's like 10%'s a decent return, whatever.
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But I was like, I was at the same time I was doing that, I was going out like every weekend with my friends.
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You do drinks, you do a round of shots, dinner, Uber, you spend $100 easy.
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So for me it was like I was spending all this time in an area that didn't really matter yet.
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I mean if I had a million dollars or 10 million dollars invested, then it would really matter, right?
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My time, you can leverage that time because you have a lot more money.
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But at the time, I should have been focused more on like thinking about my career and other things and how I can raise my income and saving more money instead of just like focusing so much on my investments.
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Now I'm not saying you shouldn't go out with your friends and do that.
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That's not the point of that.
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The point of that is where would my attention being oriented?
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And so every person listening to this is what I call on the save invest continuum, right?
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And you're basically you just need to know two numbers to figure out where you are.
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You need to know how much can I save in the next year?
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And then how much can my investments return in the next year?
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So saving let's say, I give this example.
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You could save $500 bucks a month, do for the next 12 months, that's $6k right?
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So $6000 is your first number.
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The second number, let's say you have 20 grand invested and you can get, let's say, a five percent return in expectation.
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20 grand, five percent, that's a thousand dollars.
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That's your second number. So which one's bigger?
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$6000 or a thousand, right?
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$6000 is obviously bigger which means you need to focus more on growing your income, taking that savings, getting it invested so you can raise the other numbers.
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Over time you're going to see.
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Early in your career you can probably save a lot and you won't earn a lot from your investments.
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But over time, the investments will catch up and then once you're much older, your investments are going to earn you much more than you could ever save in theory, right?
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So that's one of those things where focusing on those types of things, that's going to be really important for a lot of people.
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So figuring out where you are and then spending your attention accordingly. That's the whole idea. Jim O'Shaughnessy: Yeah.
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I think that sometimes people, especially authors who know a lot about a subject, they fool themselves in thinking ah no, I'm not going to put that in because everybody knows that.
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News alert, spoiler alert, not everyone knows that.
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And so if you can come up with a catchy phrase like your save invest continuum and underline why that's important.
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And I love how you always follow on with I'm not saying don't go out with your friends, right?
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Because I could just see people like what a dweeb?
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He stayed home and computing.
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But it's a great metaphor in your mind, right?
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Because I used a very similar one in my book How To Retire Rich.
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It was like don't buy that.
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I can't remember the example I gave.
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Don't buy that watch because that watch could be worth some huge number in the future.
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And people don't automatically think like that. So I think that's great.
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Another thing that I've noticed a lot with talking to a lot of people that you're good about is busting the myths that have become common knowledge for almost everyone.
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And you're like yeah, yeah, I knew that. But not so fast.
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The numbers would suggest this.
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One of the things I wanted to ask you about was do you think that just empirically speaking, putting all of the psychological and psychic values aside, do you think buying a house is a good investment?
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Nick Maggiulli: I mean this is a very difficult question.
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I mean if you looked over history, imagine you were dropped somewhere in history in the last 100 years and you had to say would buying a house be a better investment than, let's say, putting your money into the stock market?
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I think generally the answer would have been no.
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The issue now with saying that and I think we have to ...
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Our answers have to context dependent based on the data we're looking at.
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In the last 20 years, we obviously had a housing boom and crash.
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And now housing prices through the roof.
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So anyone who bought a house three years ago is like wow I'm crushing it right now.
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Of course, when you sell that house, you have to buy another house as equally expensive.
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So you haven't really earned your equity unless you move to a cheaper area.
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So there's these weird things about that.
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So it's not, I don't think I look at housing as an investment in that sense.
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Of course, you can own in the rental properties and that's fine.
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And for people that like to do that that's great.
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I'm not one of those people.
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I'm biased though for a host of reasons so I'm going to state my biases up front.
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Like I'm biased against physical real estate.
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However, I don't think you should look at your house as an investment necessarily.
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What you're really doing is you're locking up your housing costs.
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So I even say in the book in the buy vs. rent thing.
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What you're really thinking about is like if know you're going to be somewhere for a decent amount of time to let's say 10 years.
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You have a stable financial and personal life.
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It's not like you're going to be you're single and then all of a sudden you have a family of four.
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You obviously should be getting a place that fits for the family of four, not for your as a single person, right?
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So if you have some stability then it makes sense to own.
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And I think most people will own.
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Even people that are like oh I'm going to rent forever.
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I think a lot of people do end up owning.
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There are some headaches associated with owning that you won't get as a renter.
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However, you do lock up your housing costs.
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And I know this because I'm basically paying the market price everywhere. I've been renting.
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But I've lived in big cities, right? So I've been renting.
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And the rent has basically stayed the same until I started living alone.
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And now it's starting to go up a bit.
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So yeah, that's my take on it. Is it a good investment?
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It definitely can be I think when you're buying a house, it's more of a personal decision than it is an investment choice, I think. Jim O'Shaughnessy: Yeah.
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And brought up a really one of the mother of all biases which is the recency bias, right?
13:53
Like you say well historically, if you look at the Shiller housing index, probably not going to be as good of an investment as equities.
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And then nine out of a 10 people who bought a house like three years ago.
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"Yeah, but I'm killing it. You're crazy man.
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This is where I want to-" Well yeah, over a three year period, you might be killing it.
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But everything regresses to the mean, right?
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I'd much prefer the empirical approach that you've just outlined.
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I'm going to have to pay X number of dollars for rent.
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I'm going to have to pay X number of dollars for the mortgage.
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When this one goes below this one, all other things being equal, you're probably better off locking in your cost of living, right?
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And so I prefer, and this is one of my biases, I prefer things that are supported by evidence, right?
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And that doesn't mean that things that never happened or are very unlikely to happen won't happen. It just means that.
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They're unlikely to happen. But that happens a lot.
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So if you can empirically look at things that way, it's just a smarter way, I think, to make the decisions.
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Now absent what you put a parent around, like if you get married and have four kids, you're going to own a fucking house.
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And you're going to have a very understanding significant other, one of the two. Because you need it.
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But that leads me to my next question.
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I've talked to a lot of people about debt. Just debt in general.
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And we studied it in the most recent version of What Works On Wall Street.
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And what we found was that companies with the lowest debt which usually meant no debt did worse than the next decile which were companies with a little bit of debt.
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So in other words, debt is not black and white. Debt is not ... It's a continuum.
15:46
And you talk about that so enlighten me.
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Nick Maggiulli: Yeah, so I wasn't looking at companies like you were, but I think the principle applies.
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I think there are ways to use debt properly and use it ...
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Because a little bit of leverage is okay.
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And it's like how much ...
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You really run into issues when you get to lever.
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I mean look at Warren Buffett over his life.
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And there's Buffett's Alpha.
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It's this great paper by AQR.
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And you can like and you can look and like his leverage ratio is like 1. 6 to one.
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Like max or average over his life.
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And remember, this is one of the best investors ever.
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So if he doesn't go above 1.
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6 to one, you definitely shouldn't at all, right? So simple example there. So let's just say 1.
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5 to one is the max you should do as an investor.
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But the point about debt is like it's not necessarily good or bad. It's how you use it.
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And I think a book that really helped me a lot was called The Value of Debt and Building Wealth.
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And it talked a lot about how you can use debt and manage it properly.
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And I think the main takeaway here is the people who could best use debt are the people that don't know it. That's really the truth.
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If you could buy a house cash, you should probably use some debt, right? Like that's the thing.
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If you can't get to a 20% down payment and you're like okay, I'll just put five percent down.
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Those people are probably more likely going to run into trouble.
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And the people that could easily put 20% down and decide to use five percent. Does that make sense?
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So it's like if you don't need it, use it because then it's a benefit for you.
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And look at like what the ultra, ultra rich do like Elon Musk. He didn't even to ...
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He doesn't sell his Tesla stock, he just showed ...
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He gives it up as collateral and then borrows against it. So he doesn't ...
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And so he's taking out debt.
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This is someone who's incredibly, incredibly rich. Why would he need debt?
17:12
Because it makes more sense than to pay the cap gains bill, right?
17:15
So there's a lot of reasons why people do this and so if you can debt for basically close to nothing, I mean when rates were low.
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I mean I don't know what they're going to be in the future, that's a huge benefit I think that people can take advantage of.
17:26
So I agree with your assessment.
17:26
As companies, you can generalize that to individuals as well. Jim O'Shaughnessy: Yeah. I agree.
17:31
And it's one of those things that it's hard for people to understand like your idea.
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Socialism works only for the rich.
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In other words, debt works best for the people who don't need debt.
17:43
The Academy Awards which thankfully nobody watches anymore unless somebody is slugging somebody else.
17:50
Like the bags they give these prima donnas are like a value of $130,000. That's crazy, right? And it's like ...
18:02
But it feeds into your idea.
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The debt is best for people who don't need it.
18:07
Like there's the old joke about banks will only give you an umbrella when it's raining if you don't need one.
18:13
If you already have one, they'll give you another one.
18:20
And so it's one of those weird things is basically unfortunately true.
18:26
You're absolutely right about Buffett with the 1. 6.
18:26
We did do a study on around leverage.
18:32
Again with investments, not with people.
18:38
But the way we ran it was, okay you have perfect knowledge.
18:38
A Wall Street Journal from one year hence falls through a time tunnel and you have the 10 stocks that went up the most.
18:50
The bottom one on the list went up 700% and the stock at number one went up 10,000%.
18:57
And then I would ask people, sophisticated people, all right, I'm going to waive all of the regulations about how much money people can loan you, how much you going to borrow to buy those 10 stocks?
19:11
And people with PhDs answered me, "Infinite.
19:11
I'm going to take as much leverage as I want."
19:16
The answer is if you take more than four times, you're wiped out every time because people don't consider the path a stock takes to get up 10,000%.
19:27
And so it's one of those tricky things.
19:27
I think the Buffett example is great because everyone knows who he is and like 1.
19:32
5 and that is not intuitive for a lot of people.
19:40
So well done, Nick, on that one in terms of just looking and advocating for these very empirically supported answers.
19:59
And kind of a question and this is one that I don't know the answer to, but I'm interested, do you think that there's a significant difference generationally for the way people look at things like savings, things like debt, things like I don't know many of the great generation that's still alive that is going YOLO because they're near the end of their YOLO-ing.
20:28
But let's keep it simple.
20:28
Do you think that there's a difference between a Gen X-er who conceivably needs to read this book.
20:33
Conceivably some of the younger baby boomers didn't do it right and they need to read this book.
20:41
But is there a difference for the Gen Z and Millennials vs.
20:46
the older folk, do you think?
20:46
Nick Maggiulli: In how they look at assets and [inaudible]?
20:50
Jim O'Shaughnessy: Assets, debt, everything?
20:54
Nick Maggiulli: Yeah, there has to be.
20:55
I don't think I'd be the best person to answer this question.
20:55
This is a very Morgan Housel-esque question.
21:00
He'll be like, "You're shaped by your experiences.
21:03
Like look at people that were investing in 1929 and what happened in the '30s. They hated stocks."
21:08
And people didn't touch stocks, right?
21:08
Imagine people investing in the '70s.
21:10
Like can you imagine a, what was the Business Week article?
21:16
The Death of Equities, right? I mean you were around. You saw that published.
21:16
Like I cannot imagine a Bloomberg or someone now coming on and saying equities are dead. To me, that seems crazy.
21:24
But like that was a very real sentiment at the time.
21:27
And I think people weren't necessarily ready for the next bull market that came after that.
21:33
So it's very interesting to me to see how like yes, people's ...
21:33
Your experiences shape you.
21:37
And like that's why I'm very anti real estate because I saw both my parents.
21:40
One was [inaudible] and refi'ing the mortgage.
21:40
The other one had a second party.
21:44
This was '06, '07, right?
21:44
They were kind of getting levered up basically.
21:49
And prices collapsed and the whole party came down.
21:52
Obviously, we had an adjustable rate mortgage and then we couldn't pay it anymore because we were [inaudible] on equity and you can't just keep paying forever. So lost one home there.
21:58
My other parent lost another home.
21:58
So I saw this happen personally.
21:58
And I'm like I don't mess with that stuff.
22:02
I can buy one property but I'm never going to go and start leveraging and doing all this crazy stuff.
22:05
And there are people that can do that and they can do well.
22:09
And if you manage your property.
22:09
I know people that are property managers and they do it right and you can build wealth with that.
22:14
So I'm not against it as a philosophy.
22:14
I'm against it personally because of what I've seen and I know I'm biased.
22:18
So I think that's another key thing is like know where your blind spots are. Know your biases.
22:23
And so when you're looking at the same information, you and I will see very differently because you have very different experiences than I do, Jim.
22:29
And so that's the same thing.
22:29
So in the case of like are Gen Z-ers and Millennials different than Gen X? Of course.
22:34
And even within those generations, I bet there's a lot of heterogeneity in beliefs, right?
22:38
Like my belief is very probably different than other people's.
22:41
Like I'm a big believer in equities and there's probably people that think equities are a scam.
22:43
Or they used to think that before maybe the last couple of years. Jim O'Shaughnessy: Yeah.
22:50
And I became wildly bullish and actually wrote it out in a notebook that my wife who's an artist had blown up and made it a piece of art.
22:57
And what I wrote in 1981 was anyone who buys stocks now and through 1982 is going to look like a genius in five years because they're going to explode upward.
23:12
And literally when I was young, I was a real proselytizer, right?
23:18
So even if you didn't want to hear what I thought, you were going to hear what I thought.
23:22
And most of the older guys, right, that I would have lunch with, that I looked at honestly as mentors and certainly the guys closer to my own age.
23:35
The guys closer to my own age were "Jim, are you 75 years old?
23:35
I mean the stock market is for widows and orphans."
23:42
That was the dominant mentality back in the late '70s.
23:42
Because the '70s up until the OTTs were the worst real rate of return for equities since 1900.
23:49
Now it's the OTTs by the way.
23:56
And there's another thing we're going to talk about in a little bit because people like they don't do real vs. nominal, right? Nick Maggiulli: Oh yeah.
24:04
Jim O'Shaughnessy: And anyway, so and I also agree with you about grouping somebody as you're a boomer so therefore you believe all these things. Not really. Quite the opposite.
24:16
But I think you're bang on about it depends on what your experiences have been.
24:23
I think what's great is that you're very open in saying, "I have this bias because ..."
24:27
And then telling the bias.
24:27
Another thing you cover that I really like in the book is this is something that I've been saying a lot recently.
24:41
I didn't say it as much when I was actively trying to promote quantitative investing, et cetera.
24:48
But there's no one true path to wealth creation, right?
24:53
Talk about that a little bit because I think you do a great job of that in the book.
24:57
Nick Maggiulli: I think there's just a lot of ways to get rich.
24:58
And I think I've seen so many people in this space that just say like oh no, here's how you get rich.
25:03
You just buy stock [inaudible].
25:07
Or you just lever in real estate. Or you buy NFTs. Or you buy crypto.
25:12
And there are people rich doing all of these things in various ways.
25:12
Now obviously the success rate's going to vary in whether it's going to be successful going to the forward varies as well.
25:20
But I think just to assume that there's only one way to get rich is very silly.
25:23
It's almost like that novel from or that quote from I think it's called Anna Karenina where he's like, "All happy families are alike, but all unhappy families are unhappy in their own way." Right?
25:35
It's actually the reverse of that though.
25:35
It's like all people who got rich can get rich in a bunch of ways, but all broke investors are the same basically.
25:38
Like you only go broke one of three ways. It's mostly risk.
25:42
Like almost everyone who goes broke is from risk, right?
25:45
It's just some level of risk.
25:45
You're either levering too much.
25:49
It's mostly risk almost every time, right?
25:49
So it's like every broke investor goes broke in the same way.
25:53
Every rich investor got rich, you can rich in a bunch of different ways, right?
25:56
So it's the reverse of that quote.
25:56
But I think that's my takeaway there is like there's a lot of ways to get rich and there's no wrong way and so I don't shame people that are into real estate.
26:06
I don't shame people that are into this or that.
26:08
I generally think the approach is income producing assets so I try to use that.
26:08
There's like a fundamental value there.
26:12
That doesn't mean you can't rich with art.
26:12
You can't rich with crypto or any of that.
26:16
I'm just saying at some point there's fundamentals, right?
26:20
Like imagine a suitcase with $50,000 in it, right?
26:20
We all can be guessing what the suitcase is, but if we know there's $50,000 in it, that's the earnings, right?
26:25
If we know that fundamental, that's weight. There's something there.
26:31
Even if people are like oh suitcases? They're out of fashion.
26:31
No one wants suitcases and they get below.
26:34
And you're saying why would the suitcase ever go below $50,000?
26:34
Well look up the history. Buffett net nets.
26:38
Go look up nets and see they were literally companies that were selling below their net liquidation value.
26:44
Now of course, these are basically nonexistent today.
26:44
But when Buffett started investing, you could find them.
26:48
You could just oh look, there's the data right there.
26:48
I can literally buy this company for a hundred million and it's worth 200 million if I sold it off right now.
26:54
And this happened fairly regularly.
26:54
So I think that's the thing to keep in mind is like fundamentals matter at some point.
26:58
So I'm not saying you shouldn't buy other things.
27:03
But I'd say like 90% of your assets should probably be income producing of some sort.
27:06
Jim O'Shaughnessy: Yeah and that's a great example too.
27:07
Because another thing that I've noticed because of coming of age in the late '70s, early '80s.
27:13
I have normally expounding or recommending things that everyone said you're out of your fucking mind.
27:21
Why would we ever do that?
27:27
And so it wasn't me recommending it.
27:27
Like you with this book, it was the data, right?
27:33
It's like I written a couple ...
27:33
I almost never make a forecast and if I do, I fill it with caveats and heretofores.
27:39
But it's not me making the forecast, it's the data screaming at me ooh, this looks really pricey and not good.
27:44
Or anything above four times leverage, they all die eventually.
27:54
Or I wrote a very contrarian piece about dot com stocks called The Internet Contrarian.
28:03
But this fills into one of my ideas that the only thing that is leveragable any more, I mean in terms of arbitraging is human nature, right?
28:19
Because as you pointed out, back in Ben Graham who was Buffett's teacher.
28:25
So Ben Graham wrote Securities Analysis and The Intelligent Investor.
28:25
And like there were all sorts of net net stocks around.
28:30
He called them cigar stubs, right? Ben Graham did.
28:36
They don't exist anymore for the most part.
28:36
You can occasionally see an arbitrage opportunity but almost never because math and the internet get rid of those kind of what I call mathematical anomalies.
28:50
They don't get away with human nature.
28:56
And the reason I bring that up is because Mr.
28:56
The Internet Contrarian writing a piece in 1999 about why it's going to be the biggest crash any of us have ever seen, what did I do next?
29:07
I started an internet company.
29:07
So it becomes really smart as far as I'm concerned, if you can marry analytics, data analytics with behavioral psychology and evolutionary psychology and biology, you're going to be golden because you can understand what the data tells us, right?
29:33
But then you can understand but I'm a human being.
29:38
I'm running human OS and Jim, that idiot started an internet company like right after saying they're all going to go broke.
29:44
Are you seeing anything like that now, especially among younger people?
29:51
Are you seeing things that not just olds, but a lot of people who study data, et cetera are saying, "You probably don't want."
29:59
Like you say, 90% should be income producing assets.
30:05
Is there anything right now that you're just shaking your head and thinking, "That's not going to go well?"
30:11
Nick Maggiulli: I think if you had asked me this maybe six months ago, back in October, November, I would have said okay, obviously, like there's all these tech stocks that are through the roof.
30:24
And I've written about this publicly.
30:24
I said this will not last where I was talking about tech valuations were crazy within a subset of the market.
30:30
And then I also said the same thing about crypto. And I do have ...
30:30
I was talking about crypto land, right?
30:34
And I was basically talking about crypto getting ahead of its skis just on terms of pricing.
30:37
Not in terms of the technology or anything.
30:37
And I happened to get lucky there.
30:42
I don't think I'm a great market timer where I was just like this is just ... I thought 2021 ...
30:45
And so this is my controversial take, I thought 2021 was a crazier investment year than 2020.
30:50
Yes, 2020 we saw more crashes with COVID and all that. I saw all that.
30:50
And but that makes sense.
30:56
Like the world economy grinded to a halt.
30:56
What else would you expect? 33%, that's it?
31:01
I thought we were going to see a 60% drop at times. I didn't know, right?
31:05
And so at the time, it was scary and it made sense.
31:05
But it made sense to be scary, right?
31:10
But what happened in 2021 made no sense to me.
31:10
Because you had things like people buying these random dog coins are now multimillionaires.
31:15
Like things that just don't make sense.
31:15
Like when the economy stops, like yes, price [inaudible] should crash. This makes sense. This is rational.
31:25
2021 was not rational to me.
31:25
I saw people, I knew a guy that got ... He had his crypto stuff. Started with $100,000. Got it up to 1.
31:29
2 million in a year, right?
31:29
Just day trading crypto stuff, right?
31:34
And he's like, "I think next year."
31:34
He's like he did like 12X this year.
31:37
"I think I'm just going to do 8X next year and I'll be good, right?"
31:40
And next thing you know crypto prices drop.
31:40
Like literally the second he said within a couple of months, crypto prices are down 60%, right? Or something crazy.
31:44
Like all these dog coins and everything.
31:48
And I'm just like that's the stuff that was making me go what is happening here? Like that is wild.
31:51
People are like, "Oh I just did that last year.
31:56
I'm just going to do it again."
31:56
I'm like 8X, 10X, that is not normal, you should not expect that.
31:59
And I try to tell them without telling them. Like I don't say that.
32:03
I'm going to be a friend that's like, "Hey, just be careful.
32:03
Maybe take a little bit off the table."
32:06
He's like, "No, I'm doing good."
32:06
I was like, "Okay, I just ..."
32:09
I'll throw the idea out there.
32:09
If they don't bite, I back out.
32:09
I'm not willing to risk the relationship. I like them as people.
32:12
Doesn't mean I'm going to give them investment advice or anything like that.
32:16
So that's the stuff where I'm like what's happening?
32:19
So in the last few months, like I've seen all the stuff already start to happen.
32:23
Now what's going to happen going forward, I have no idea.
32:23
But I doubt we have repeat of 2021 where just things that made absolutely no sense are 10X-ing, 100X-ing and it's just wild.
32:32
Jim O'Shaughnessy: Yeah, I like the way you look at that.
32:35
The terms of yeah, 2020, yeah did it make rational sense for the market to go down maybe 50 or more percent? Yeah.
32:43
When you close the economy and the central banks of the world don't do anything, well gosh, hmm, that doesn't look like a good situation.
32:57
But that also brings up the indicator that I told you that you and you alone were going to have access to.
33:06
And I want to make public that I'm laying claim to I get to be the only other guy who gets the nod from you.
33:17
And that is the Nicky Number, Nick Maggiulli indicator of the number of times, you got to keep track of this, that you are publicly called a moron for writing a book with the title Just Keep Buying.
33:29
Because I can guarantee you that the next bear market we have, there are going to be a bunch of people on Twitter, a bunch of people on social media saying, "If you want a really example of a real idiot, look at this book. Just Keep Buying.
33:48
Oh thanks, Nick, I'm down 40%."
33:54
And the indicator is going to be on a histogram when it peaks about a week later, the market is going to bottom.
34:03
You are going to have exclusive access to this because you're going to be able to see all of these haters and the rest of us will only be able to see a couple.
34:15
But man, like I think that might have been the first question I asked you when we had that lunch that time. Nick Maggiulli: Yeah.
34:21
Jim O'Shaughnessy: I'm like, "Dude, you do realize that you are going to have access to like one of the coolest indicators ever and it's going to be called the Nick Maggiuli is an idiot, Just Keep Buying indicator."
34:32
Because the more people calling you an idiot are calling you out for a book that just says Just Keep Buying, the closer we are to a market bottom. Nick Maggiulli: Okay. I hope that's true.
34:41
I mean I hope I also don't want people calling me an idiot, but hey, I know it's going to happen.
34:45
And I'm saying I could publish it and the next week, the market crashes and that's the irony of it.
34:55
But yeah, I mean it's going to exciting to see.
34:55
And I will definitely ...
34:55
You will have the inside track, Jim, to that.
34:58
I'll say, hey I got 10 this week.
34:58
I'll start plotting it and stuff.
35:01
You'll have an inside track to this moment, to this data, Jim.
35:05
Jim O'Shaughnessy: As the recipient, as one who's been on the recipient end of that, it's going to be a lot more than 10, my friend. A lot more than 10.
35:14
I once joked that the best way to look at an active stock manager's career is look at a sine wave.
35:20
So genius, idiot, genius, idiot.
35:20
And like it gets to the point, I remember when, like in my early 30s when I read the first review of my book, Invest Like The Best. And it was negative.
35:38
It was like if I was a crier, I would have been bawling, they don't understand.
35:38
And then like I'm virtually impossible to offend these days. Because it's axiomatic.
35:44
People are such hyperbolic discounters.
35:54
And they don't know they are.
35:54
They don't also know to ask what the fuck does the term hyperbolic discounting mean?
35:59
It means that you discount anything in the future more than two weeks away.
36:05
And that you are like oh, I don't know, a hummingbird or a gnat with your attention span.
36:11
And so people do that and it's just axiomatic that this title is so great.
36:19
And people will understand that if they have the guts to just keep buying during a wicked bear market.
36:36
Like that and that's my next question for you.
36:36
Like so my thing has been like the only consistent arbitrage that you can exist in the market today is arbitraging human behavior.
36:51
How do you recommend that people handle their emotions during the next bear market?
36:59
We had a minor correction.
36:59
For the indexes, the high tech stocks got absolutely crushed.
37:08
We look at a basket of it was down 70% so that was real terror time.
37:08
But if somebody's indexing and not doing what I would recommend they do and that's hire Ritholtz and use the O'Shaughnessy canvas platform.
37:22
Kidding, kidding, just plugging the firms.
37:30
What do you counsel people, like if a friend called you, let's say the market's down, I don't know, 30%.
37:35
You've got the idiots on financial TV, this one's going to be the worst ...
37:41
The market's never going to recover. My hair's on fire.
37:41
And they call you and they're like, "Nick, I'm fucking terrified here."
37:46
What are you going to tell them?
37:50
Nick Maggiulli: Well, I'd ask a few questions.
37:50
I say like okay, do you think the market's going to recover?
37:53
If they say no, it'll never recover then I'm like if you really believe that, I don't agree with this.
37:57
I think history shows is even there's long times.
38:03
It takes time to recover.
38:03
I mean there are markets that haven't recovered. Think if Greece '08.
38:06
You can think of how long will it take Russia to recover from what just happened?
38:11
There are exceptions to this rule, of course, right? But do you think the U. S.
38:14
is in one of those situations? If so, we can discuss.
38:17
But I would say like if you give me a recovery time, I can then back out.
38:17
I can back out the expected return you get from buying today, right?
38:22
So very simply, let's say the market's down 50% or let's say the market's down 33% like it was in March 2020.
38:26
It takes a 50% gain to recover.
38:32
Let's just do, obviously this is not exact compounding math because I can't do this in my head.
38:35
But let's just say you think oh it's going to take five years to recover, right? 50% divided by five.
38:37
That's a linear extrapolation. That's about ...
38:41
You'll get about 10% a year.
38:41
If you actually compound that, it's like 8.
38:41
5% a year compounded, right?
38:45
So it's like do you want 10% a year from buying today or do you not, right?
38:48
And let's assume it take five years.
38:48
In the instance of what we just had, it was down ...
38:53
Within six months it was back at an all time high.
38:53
So you're looking at over 100% annualized return in that six months, right?
39:01
So that's what I would say is like think about the long term.
39:01
And you're like oh it's going to take two years.
39:03
Okay, well you're looking at like a 25% annualized return if you're buying right now.
39:07
Like do you not 25% returns?
39:07
And if yeah, if you don't think it's going to recover.
39:12
If you really are like this, oh the market's never going to recover, then why are you investing at all?
39:15
Sell everything, go to canned goods. Get your house in order. Buy ammo. You see what I'm saying?
39:18
Like do you see how ridiculous this is for me to say that?
39:23
If you think this is the end of the world then it's not going to matter what your investment portfolio does anyways, right?
39:27
Jim O'Shaughnessy: Exactly.
39:28
Nick Maggiulli: So that's my take. And the quote I love.
39:28
My favorite quote on investing is "Fear has a greater grasp on human action than does the impressive weight of historical evidence." Jeremy Siegel. And that's the thing.
39:37
I always come back to that quote because it's true.
39:37
And like the evidence is just there's so much of it or so long.
39:41
And of course, we could be like oh we're having the turkey problem.
39:45
[inaudible] This is the turkey problem.
39:45
We have 100 and something years of evidence and we're getting more and more confidence in the system and it all collapses one day and we all ...
39:51
And if it does, who cares?
39:51
It's not going to matter then.
39:55
It's like if we're in this terrible scenario, I can guarantee you your investment portfolio is going to be the least of your worries.
40:01
I guarantee you're going to be more worried about protecting your family, getting food, whatever it is then oh, did I get a good dividend return this year, right?
40:08
So I think when it comes down to it, it's like an upside option.
40:08
There's no downside to investing because if there's a true long term just absolute crash, humanity's going to be screwed either way. So there's no point.
40:17
Like oh I could have saved cash. For what? It's useless anyway. So that's my take.
40:22
Jim O'Shaughnessy: I love it. And I love that take.
40:25
I love that you use a Platonic or Aristotlean way of asking questions and getting them to listen to their answer and think oh that's really fucking stupid.
40:41
Why would I ever think that, right?
40:41
One of the things that I have seen time and time and time again, not my first rodeo, as you know.
40:49
And I've been doing this a long time.
40:54
I mean I was on Howard's Panic With Friends which he stated. That was a great name.
41:00
And I was like one of the first people on it right near the March bottom. And you know me. I'm a long term.
41:03
My time horizon is infinite.
41:09
I do not think that our world here in the U. S. is going to collapse.
41:09
And the odds favor, I think that this is a great time to buy.
41:15
The number of people who could communicate with me chose to communicate with me and they're like, "That is totally irresponsible.
41:21
This is a whole different world, dude. You don't get it. You're fucking old.
41:27
You don't understand that the world is ending."
41:32
And like it's so funny because very smart people do this. Very dumb people. It's just human. It's human to do it.
41:38
So I love the like okay, so you don't think the market's ever going to recover. Okay. So hmm.
41:44
The time that I saw where that happened historically was Russia.
41:52
Not now, but Russia in 1917 when they closed the market and it didn't open for another 75 years. That happened.
41:59
But if you're using that as your example, get the hell out of Russia, baby.
42:10
Nick Maggiulli: Yeah, exactly.
42:10
And I'm saying you should be a diversified investor anyways.
42:14
If God forbid, something were to happen to U. S.
42:14
markets where that happens, I mean I'm assuming international markets would be screwed.
42:18
But let's just assume it only affected the U. S.
42:21
It didn't affect anyone else.
42:21
You should be diversified.
42:21
You should have assets in other places as well.
42:25
So I think just having all of your money in one market and one asset class is also not proven either.
42:29
So you should be okay if you have some diversification somewhere.
42:33
And whether that means you have crypto, you have some physical art.
42:37
Whether you have some physical real estate or you own REITs, whatever it is.
42:40
I think if you diversify enough, you should ...
42:40
I mean yes, it's still going to be terrible. Like don't get me wrong.
42:44
Going through a great depression's going to be terrible for anyone no matter how you cut it.
42:47
And I think global asset prices will probably fall together, like correlations will go to one.
42:50
But there's a chance that if you just get one of this idiosyncratic hits like what Russia had where it went down 80% in a month that you'd be okay if you had some diversification, right?
42:58
So that's the key takeaway there. We're not ...
43:02
If you come into one of these scenarios that's very rare like there's not much ...
43:06
There's going to at some point where there's nothing we can do, right?
43:06
It doesn't matter good your ...
43:09
Or how sea worthy your boat is in the typhoon, right?
43:09
Like at some points, there's just too much someone can take.
43:13
But for the most part, as long as we aren't in one of those scenarios, you should be fine.
43:19
Jim O'Shaughnessy: Yeah, I did an interview with a Wall Street Journal writer who was like me, a huge fan of the Walking Dead, the TV show.
43:23
And the story was about the investment secrets of the Walking Dead. Now it got bad.
43:36
It jumped the shark and I stopped watching it.
43:36
But like there were a lot.
43:42
Like if there is a zombie apocalypse, probably better to buy rifles and ammo and antibiotics and fine purchase that are very hard for dead people to get you, right?
43:59
And so like all of the world is ending tomorrow, right?
43:59
So (a) people need to realize that that is the world's second oldest profession.
44:07
We all know what the world's oldest profession is.
44:12
The world's second oldest profession is to say the world is ending tomorrow and here's why.
44:18
And lo and behold, the world keeps not complying and continues to go on its marry way.
44:23
So but back to a more serious thing.
44:23
You've mentioned diversification several times.
44:30
I agree with you by the way.
44:30
But if somebody was trying to corner and they're like, "Nick, okay, I love this book.
44:37
I read everything and everyone, when they're talking about asset allocation, they're either 60/40 or the really old guys are well you take 100 minus how old you are and that's what you put in equities and you put the balance in bonds."
44:54
What's your answer to people who are looking for an asset allocation that they could just keep?
44:58
Do it once and set it and forget it?
45:07
Nick Maggiulli: I think it's really tough because things change.
45:10
I mean the 60/40 was a great option for most of history.
45:10
But with yields as low as they are, you're not going to get ...
45:15
I mean you'll get the risk reduction, but you're also going to see probably lower returns today than you would have seen historically, right?
45:22
And so you have to be a little bit mindful of that.
45:22
So I think a lot of times set and forget is fine.
45:26
But if you do that forever, if the underlying system changes which I think it has in some ways, you might have to reduce your bond allocation in order to generate some return.
45:36
Now that's a little unfortunate because now that means you have to make more risk to get the same level of return you were getting before.
45:42
And I mean maybe the world is just ...
45:42
I mean this is just an unfortunate truth, but like return free risk, I'm sorry, risk free return is just not as what it used to be, right?
45:51
And that's just unfortunate, right? We have more ...
45:51
Think of it just in terms of competition, right?
45:54
Like just the history of just we can just America, right?
45:54
Imagine you're a man working in the '50s, right?
45:58
There weren't as many women working out there.
45:58
You have less competition.
46:02
You probably could have got a higher paying job while having lower skills, right?
46:04
You add women into the workplace, you start allowing minorities in the workplace more because of less discrimination, because of civil rights law, et cetera, right? You start seeing ...
46:10
Now you have more competition.
46:14
Now your skills aren't worth what they used to be. So like that ...
46:14
You're seeing this degrading thing.
46:17
That's true of everything.
46:17
Like that's going to happen with yield.
46:20
That's going to happen with investments.
46:20
I think we're already starting to see that.
46:22
Why is most government debt in the world negative yielding?
46:22
Because there's a lot less risk.
46:28
There's a lot of things that are causing that.
46:30
I'm not an expert on macroeconomics or anything like that.
46:30
But I'm just saying we're seeing that stuff happen where like you can't just have that risk free return anymore in the same way we used to get.
46:38
I mean and I don't know if that's going to come back.
46:41
And that's one of my other hot takes which I don't know if it's going to come back.
46:41
I still think people should own bonds for the risk reduction. I do think it matters.
46:44
But saying I'm going to set one asset allocation and keep it forever, I think, is very tough to do.
46:51
I mean you can try and do it, but I think you have to every couple of years look and say, does this still make sense.
46:54
I'm not saying to jump ship and sell all our bonds.
46:58
I mean I think all the big moves are where people get in trouble.
47:01
I think anyone that goes from 100% equity to 100% cash, that's almost always a bad decision or vice versa.
47:06
Like you want to slowly phase in and out of them.
47:10
You don't want to make too big of decisions.
47:10
Because if you're wrong you want to keep the costs of being wrong low, right? So let's say 60/40.
47:14
Let's say when yields recover, okay, if you were 75/25, you're taking too much risk now.
47:19
Then maybe you slowly go back into a 60/40 or something, right?
47:23
So that's the kind of idea is figuring out what's the balance and how you make shifts over time.
47:27
And there's no perfect answer either.
47:31
And I think for most people what matters more is your plan and what you plan on doing with your life.
47:34
And not the exact percentages.
47:34
If you're 60/40 or 75/25.
47:38
If that makes enough of a difference for you, you probably had other things you had to deal with in life, right, then like the exact percentages, right?
47:42
So that's what I would tell people to focus on.
47:47
Jim O'Shaughnessy: Yeah, James Grant, who is a famous bear on everything most of the time, wrote a piece called That Long Treasuries Have Gone From Risk Free Returns to Returned Free Risks.
48:02
And he was wrong by a lot because he wrote that about seven years ago or eight years ago.
48:07
And that's why I always am suspicious of any indicator or anything that is an absolute, right?
48:13
Like I remember reading about some indicator they used in the 1950s.
48:20
And if the earning, I can't remember exactly what it was, but if the earnings yield of the stock market which is the PE [inaudible], right? [inaudible].
48:32
If the earnings yield of the stock market falls to less than half of the current yield on the long treasury, be out of stocks forever until that returns. Well, guess what?
48:41
Never ever returned after the earnings yield of stocks going down because they didn't take into account compounding.
48:48
I love your take on other things happen and your skills set, unless you improve it, goes down in value.
48:56
And it's like we just did the first episode of The Great Reshuffle that the series that Infinite Loops is going to do.
49:07
And one thing I would add is guess what privileged people in America, The Great Reshuffle because of COVID just added a billion competitors to you.
49:20
Because people are now willing to hire people regardless of where they are.
49:26
And before COVID, that was not cool.
49:26
After COVID, yeah, sure, you're in India. You don't want to move. Yeah, no problem.
49:31
And so this idea of having a fixed anything, right?
49:39
It's like everything is relative.
49:39
And you even look at emotions and anything that's fixed, like envy and greed, right?
49:47
It's been proven through God knows how many studies that replicate, that actually replicate that if you offer people a pill that will make them three inches taller but everyone around them will go up four inches, they all say no, I don't want that.
50:02
So everything is relative.
50:02
Most envy and greed is caused by you comparing yourself to someone close to you and there's a bunch of jokes about it, right?
50:15
Being a success is making $100 more than your wife's sister's husband, something like that.
50:23
Nick Maggiulli: Yeah, exactly.
50:25
Jim O'Shaughnessy: But it's true, right?
50:27
It's true that you can't ...
50:27
You've got to take those things in ...
50:27
Like as an equity guy, I hate bonds.
50:32
I don't own any bonds, right?
50:32
And the last time I recommended bonds was to my father in 1984 when there were double digit ...
50:39
I lived in Minnesota at the time.
50:45
There were double digit, non-callable, revenue based Minnesota municipals that were 30 year duration and double digit.
50:51
And I went to my father and I'm like, "This is the only place where you're going to put any of your money because there's no way, even what a bull I am about the stock market, there's no way after taxes you're ever going to be able to beat that return."
51:10
But again, it was empirically derived. And then like the ...
51:10
Morgan makes this point all the time, right?
51:17
And he makes it to bop the nose of people like me.
51:17
Oh yeah, you're such a great stock picker, when did you start your career?
51:22
Hmm, 1982 when interest rates were double digit and then they went down for the next 40 years?
51:28
That's a nice environment to have a stock picking career, my friend.
51:34
It leads us to stock picking though.
51:34
I know like so we're quants as you know.
51:39
And we use factors to ... We don't buy ...
51:39
Like I would never buy ...
51:46
I don't know, pick a name, whatever, Twitter.
51:46
Much in the news when we were talking- Nick Maggiulli: You should have bought Twitter last week.
51:53
Jim O'Shaughnessy: Yeah, that would have been great.
51:54
Nick Maggiulli: Based on when we're recording this, yes.
51:55
Jim O'Shaughnessy: Yeah, if I had a time machine, I probably would have done that.
51:57
Nick Maggiulli: Before Elon.
51:59
Jim O'Shaughnessy: Right, before Elon Musk decided to swing his considerable social weight behind Twitter.
52:06
I loved that too by the way.
52:06
That would be like the simulation is finally going to let us have some fun.
52:10
But we don't pick individual stocks.
52:10
We picked stocks based on the factor profile that they belong to.
52:16
But you make a pretty good argument for don't buy individual stocks.
52:24
Tell people listening or watching right now why you give that advice.
52:30
Nick Maggiulli: Yeah, so I'm going to assume most of your listeners have heard what I call the financial argument or the performance argument against picking individual stock which is basically like don't pick individual stocks because most active stock pickers or active managers or whatever you want to call them can't beat the market.
52:43
Especially after multiple years, after fees, like 60 to 80% underperform.
52:47
Your audience has probably heard that so many times over.
52:51
I explained that argument briefly in the book because that's the context of it.
52:56
The argument I make though and I think the most important argument is what I call the existential argument which is the idea that you shouldn't have the bulk of your wealth in individual stocks and shouldn't be picking individual stocks because it's very hard to know if you're good at it.
53:08
Like there's so many endeavors in life here there's a very short feedback loop, right? You shoot a basketball.
53:12
It either goes in or it doesn't, right?
53:15
You can do that enough times and we can know if you're skilled pretty quickly, right?
53:18
Same with a computer program.
53:18
You try and run the program, it's either going to work or it's not going to work, right?
53:21
And of course, even within that, even if it works doesn't mean the error checking's good.
53:24
There's an error handling or whatever, right?
53:27
But the point is the feedback loop is small, right? You hit enter. The result comes back. You shoot the ball.
53:31
It either goes in or it doesn't where you get the result quickly.
53:35
With picking stocks, like you can pick just stocks and you may not get the result for a year, two years, three years before you realize if you're good or not and even then, or it could be chance, right?
53:41
You could have one stock that just outdoes all the others.
53:44
Like if you bought Dominoes or Netflix or something, right, when they IPO'ed like you would have absolutely crushed it even if the rest of your portfolio was junk, right?
53:52
So I think that's my argument is like you don't know if you're good at it.
53:52
And so like the evidence shows that they can identify about 10% of people actually have skill let's say right.
54:00
So let's say we could just say with certainty 10% have skill with certainty.
54:04
10% we can identify have absolutely no skill.
54:04
That means the middle 80%, four out of five people, we don't know if they have skill, right?
54:11
And imagine looking in the mirror, waking up every day like oh I'm a stock picker and you don't know if you add any value.
54:14
And I think that for me it was just bother me personally.
54:17
So I'm saying that in there.
54:17
But that's the reason why I say you don't do it because I think it's really tough to know and you're going to take a long time before you know if you're actually good.
54:23
And so just buy [inaudible] funds, be diversified and do that.
54:27
And of course, if you want to do that, put five percent of your portfolio in there and have fun with it. I even remember.
54:30
You talk about you're the guy who said the internet can turn.
54:33
You have an internet company.
54:33
I'm the guy who says don't buy individual stocks and I have like about one percent of my net worth which is just fun.
54:39
Just fun stuff I do with my friends individual stocks.
54:39
I have 200 individual stocks. I will not name them. They're down badly.
54:43
They're tech stocks is all I'm going to say.
54:46
So that's all I'll say on it and just like yes, I do the same things.
54:46
I'm the person, I literally wrote a chapter.
54:50
The chapter is called Do Not Buy Individual ...
54:50
Like I was sending my transcript to my editor and a month later, I'm like buying individual stocks.
54:59
So it's like and let me tell you, we all do these little things. For fun.
54:59
I didn't do the bulk of my network obviously.
55:03
But still it's like why did I do that?
55:03
I can't explain it to you. So it was for the fun.
55:07
For the [inaudible] of it.
55:10
Jim O'Shaughnessy: Yeah and that's really funny because that is what actually drove me to become a quant at first.
55:16
What it matters is what are the factors?
55:16
What's the batting average for that kind of factor?
55:17
But that's why I became a quant.
55:17
Because, like you, I'm like I don't even know if I'm going to be any good at identifying which stock is good.
55:22
So I guess I'm going to do the simple thing and just see what worked historically, right?
55:29
So does buying low PE stocks actually work? If it does, how much?
55:29
I mean that's what What Works On Wall Street is based on.
55:35
And so I tried to short circuit that time by saying, "Okay, I can show you, in some cases, 100 years of data that this particular strategy I'm advocating that I won't override because I'll know I'll fuck it up.
55:50
It's won like 89% of all rolling 10 year periods."
55:59
That's something I think you can hang your hat on.
56:03
But like you, if people are not interested in factor based investing, I tell them index.
56:10
Because I have the same bias as you which is like people get emotionally involved and so I always say, I used to always say Enron, one stock.
56:16
Everyone loved this stock.
56:16
And they turned out to be a fraud. Well okay.
56:22
Have a global financial crisis and your portfolio is down 65%.
56:24
So I agree to the diverse set of assets. But would you ...
56:25
This one's just bugs me and so I'm going to put you on the spot.
56:25
Would you really recommend that somebody like your age buy like say a 10 year government piece of paper that has a negative yield where you're guaranteed to lose your money?
56:38
Nick Maggiulli: I don't own any negative yielding stuff so I'm ... I mean the U. S.
56:42
bonds are still positive yields so I wouldn't recommend buying ...
56:42
I'm like my bond thing is very simple. Like I only own U. S. Treasuries. And so (a) U. S.
56:52
Treasuries still have a positive yield.
56:52
With inflation, it's probably negative, let's be honest.
56:56
I know inflation's high now, but even with the two percent inflation, it's probably still going to be close to negative.
56:58
Jim O'Shaughnessy: You also knew that I was going to throw tips at you so go ahead.
57:03
Nick Maggiulli: Yeah, so I would say generally like I don't, I wouldn't own negative yield stuff.
57:07
If that's your only option you're going to lose money, then why just not hold cash?
57:11
Because the cash is going to lose more than the ... I don't know.
57:14
So that's what you have to look at.
57:14
Those are the first things you have to look at.
57:16
So I only do it for risk.
57:16
So I don't like oh why don't you just do muni bonds or something else or some of these other types of bonds, right?
57:21
So unless you have like a tax free muni in your state or something.
57:21
That's where it would make sense.
57:24
Outside of that, like take risk in your equities.
57:24
Don't take risk in your bonds, right?
57:29
So I only treasuries and treasuries, to this day, still have a positive yield, at least before inflation.
57:32
So we can leave it at that.
57:36
So I would not recommend people go and buy 10 year negative yielding debt. And if the U. S.
57:38
yield goes negative, I think we do have to have another discussion about whether we should own bonds or how much bonds we own, right?
57:42
[inaudible] you should hold cash, right?
57:45
And that's now, I think, a ...
57:45
I mean do you just hold cash instead of bonds and maybe bonds get phased out?
57:49
I don't know what the answer to that is.
57:49
But that's a question, the yields have to come down a bit before we get to hat.
57:57
Jim O'Shaughnessy: See one of the things that I love about you, Nick.
57:58
And I learned that in just the short two months that you were with us is like you can throw almost any question at you and rather than like spouting off like what your opinion is or whatever, you immediately go to the framework of okay, well, let's see what the yields are.
58:16
Is holding cash going to cost more?
58:16
I love the way that you immediately go to that model framework.
58:21
Because what it allows you to do, and this is something I always try to hammer for listeners is like the more that you can reduce your own ego in put into a decision, the way better it's going to be.
58:40
Like they've proven that if you read Influence about how to persuade people to do things, one of the things in there is Cialdini is the author.
58:50
If you guys haven't read Influence, please go out and buy it.
58:56
Nick Maggiulli: It's very good, yeah, read it. Jim O'Shaughnessy: Yeah.
58:58
So but one of Cialdini's things is get them to publicly commit, right?
58:58
Because then they've got skin in the game, right?
59:05
Which I happen to believe in, right?
59:11
So it's weird because getting somebody to publicly commit on like Enron, right?
59:11
It's probably apocryphal.
59:17
But one of my salesman who used to work for me, no longer does, told me this story about he met a mutual fund guy who had doubled down on his Enron position.
59:30
And my guy said, "Why on Earth would you do that?"
59:30
Because this was the beginning of their real troubles that people really new, these guys are probably frauds.
59:35
And the guy's answer was, "Because I went to a barbecue at Enron CFO's house where all of the senior people at Enron were there and they assured me that the stock was way too low and that they were loading up."
1:00:00
And so like I hear something like that and I start to twitch, right?
1:00:05
It's like because the people who were committing the fraud told you you should trust them, you doubled up on your allocation.
1:00:11
And yet, a lot of times it doesn't end up that obvious and that's why I vastly prefer analytical frameworks that ...
1:00:25
Listen, the world's smarter than I am.
1:00:25
That's all there is to it.
1:00:29
And all of the millions of actions that get distilled down into price and where that price is going are smarter than me and you and like almost everybody.
1:00:36
And yes, of course, we can point to the guy who shorted the real estate bonds, okay.
1:00:42
One guy did that and he's now a billionaire.
1:00:53
How has the rest of his trades worked out?
1:00:57
And the point is follow a process because you made the point just a moment ago.
1:00:57
You can have a good process and a bad outcome.
1:01:04
Or the one that really fucks you up is you can have a bad process and a good outcome.
1:01:09
Suddenly like your crypto guys, oh no, Nick, no way.
1:01:16
I'm going to be a little more conservative this year. I did 10X last year.
1:01:16
I'm going to cut it to 5X. I'm going to be modest.
1:01:22
You had a bad process with a good outcome.
1:01:22
And that really hypnotizes people.
1:01:30
So I love that you advocate for what you do.
1:01:39
But it leads me to yet another question.
1:01:39
Lump sum or dollar cost averaging? This is a huge debate. Where do you come down?
1:01:47
Nick Maggiulli: So I want to say on quick thing.
1:01:50
In the book, I don't call that form of investing dollar cost averaging because there's a misconception.
1:01:55
There's two definitions basically.
1:01:55
My understanding is the original dollar cost averaging when Ben Graham was talking about which is buying over time.
1:02:03
As soon as you get paid, you buy.
1:02:03
Or you're buying over time.
1:02:06
But what's really happening is you're getting paid and then you're making an investment as soon as you get paid, right?
1:02:10
Now what you're talking about here, this, the second definition is like you just got an inheritance of $100,000 or you just sold a company for a million bucks.
1:02:19
Do you put that money in now lump sum?
1:02:19
Or do you slowly average in what I call average in, in the book?
1:02:24
Do you average in to the market over time?
1:02:27
And the data overwhelmingly, like you said, you're talking about 89%, winning 89% of rolling 10 year periods, this is like 80 something percent of, 70, 80% of rolling one year periods, lump sum beats dollar cost averaging, right?
1:02:37
Or that form of dollar cost averaging average in.
1:02:41
And so it beats it and look, I don't just do this for U. S. stocks.
1:02:44
I do this for international stocks. I do this bitcoin.
1:02:44
I do this for every asset I find. I did it for gold. I did it for everything.
1:02:48
And lump sum beats most of the time. Because guess what?
1:02:52
Most of these assets go up in price.
1:02:54
Just because inflation- Jim O'Shaughnessy: Bingo.
1:02:55
Nick Maggiulli: [inaudible] inflation going to [inaudible] if everything's going up and to the right.
1:02:58
And obviously the whole ..
1:02:58
You're like well that's not true, not everything goes up to the right.
1:03:01
Why are you investing in it then?
1:03:01
Why is your money going ...
1:03:01
Why are you even considering buying a U. S.
1:03:04
stock or anything if you don't think it's going to go up, right?
1:03:09
So it's like the whole premise, like the fact of it oh I'm just going to average [inaudible], it's like okay, I understand there's risk reduction there.
1:03:12
But I'm like the point of investing is you think it's going to go up.
1:03:16
Otherwise, why are you doing it?
1:03:19
So the premise of just averaging in, it just doesn't make sense to me because like you expect it to go up, right? So that's one thing.
1:03:23
And then, two, the averaging is also problematic because the time when it outperforms that lump sum is when it's falling.
1:03:32
And that's when behaviorally, you're least enthusiastic to buy when the market is crashing.
1:03:37
Tell me someone who was like early March 2020 who was like oh my gosh, this is great.
1:03:38
I just can't wait to average in even more.
1:03:38
Maybe some people did that and I'm not going to say there aren't any.
1:03:42
But there's some people that saw that and said, "Oh, no I'm going wait until it's down lower, lower."
1:03:45
And then next thing you know it's up, six months later, an all new time high.
1:03:48
And you just got left in the dust.
1:03:51
Like I've just seen it happen too many times.
1:03:54
I've had people in my comments, I see all the Twitter comments.
1:03:54
Oh you'll regret this in a year.
1:03:57
And then like six months, an all time high.
1:03:57
I'm like where is this guy, person now?
1:04:01
I can come back and dunk him.
1:04:01
I could have a whole day where I just sit there and dunk on people from March 2020.
1:04:04
And I can have a whole day doing that, just be an a-hole in Twitter.
1:04:07
I'm not going to do that but I could do that.
1:04:09
Because it's just like yeah, don't get me wrong.
1:04:12
My version of the world turned out to be cracked.
1:04:12
And that's not saying it's always going to happen.
1:04:15
But I think a lot of times markets surprise us and I remember the worst ...
1:04:20
I remember this from The Great Depression, a Diary, Benjamin Roth if I remember was his name who wrote this.
1:04:24
And he said, "The worst winter in the history of United States, like economically, was the winter of '32 going into '33."
1:04:28
The market bottomed in June '32.
1:04:33
So like imagine the market's already revving up and the conditions, the physical conditions on the ground are getting worse, right?
1:04:36
And that's what happened in COVID.
1:04:41
Things were getting worse in April, May 2020 even as the market was correcting already.
1:04:46
So this happens a lot more frequently than people realize. And we forget. And it happens a lot.
1:04:49
And so I think markets, as you said, all that information comes into price and it's moving very quickly.
1:04:56
And the one thing, just a quick little side, I know earlier we were talking about factors and like oh maybe I don't believe in factors.
1:04:59
If you're really an indexer, you're secretly, don't tell anyone, you're kind of a momentum investor.
1:05:05
Jim O'Shaughnessy: Of course you are.
1:05:06
Nick Maggiulli: A little bit.
1:05:06
If you think about the S&P 500 is really you're kind of just momentum, right?
1:05:08
And you're just like let prices do what they're going to do.
1:05:11
And so you're like oh they dropped this stock out, why? Because it's not great.
1:05:15
Oh they added this stock, why? Because it's going up. It's not right.
1:05:18
You're kind of a momentum investor and you're just indexing on the momentum factor as an indexer.
1:05:21
So to say like factors don't work, I don't think I would say that.
1:05:21
I think I do believe they work.
1:05:25
Obviously they change certain measures.
1:05:25
They may change over time.
1:05:29
Either price to book isn't as good.
1:05:29
Or price to earnings isn't as useful, but I think they tend to work.
1:05:33
It's just a question of like I don't think you necessarily have to load up on them.
1:05:36
You definitely can if you want.
1:05:36
Diversify across factor strategies, but being an indexer is a factor in its own, right?
1:05:40
Jim O'Shaughnessy: Sure, yeah, and what I love about it, the title of your book, Just Keep Buying, there are a lot of pretty simple answers to a lot of these questions.
1:05:50
And people just don't like those simple answers.
1:05:55
I love the answer about dollar costs vs.
1:05:55
lump sum because Will Rogers, the humorist from the '30s used to say, "I do well in stocks because I buy stocks."
1:06:09
And they go, "Well what if they don't go up?"
1:06:09
And he says, "I don't buy them."
1:06:09
In other words, he was saying I'm a momentum investor, right?
1:06:14
And one time I was giving a guest lecture at Professor Ibbotson's class in Chicago.
1:06:20
And I took him aside afterwards because I loved his data.
1:06:26
And so I'm like, "Roger, I don't mean to be rude or anything, but how often do you rebalance the small stocks portfolio?" "Every five years."
1:06:38
And I'm like, "Could you maybe not be measuring the performance of momentum stocks as opposed to exclusively small cap stocks if you're waiting five years to rebalance?
1:06:47
Because maybe one of those tiny stocks went up like a thousand or 2000 or 3000% and it's not a small stock anymore?"
1:06:59
And he's like, "I hadn't thought about that."
1:07:04
And I'm not saying that because I still venerate ... The guy is a genius.
1:07:04
Like his books are amazing.
1:07:10
They were how I cut my teeth on all of this stuff.
1:07:10
But like there's a lot of things that we forget or don't think about or whatever that you're ...
1:07:15
The S&P, well you're kind of a momentum guy then.
1:07:21
And so I think that the preference, the way that I try to prefer to get people to think is have a process.
1:07:29
Have a process that is good for you, right?
1:07:36
Like so I'm a risk junkie.
1:07:36
I like market risk, right?
1:07:36
And so I take unreasonable by many people's assumption, unreasonable risks in markets for somebody my age, right?
1:07:54
I'm very comfortable with that, right?
1:07:54
But there's someone else who might be 20 years younger than I am. Like Morgan.
1:08:00
Morgan's a great example.
1:08:00
Morgan is very risk averse and but it's right for him, right?
1:08:06
And so I think that your book works really well in this because what you're doing is you're saying yeah, like don't be an idiot.
1:08:20
Do this with a process over time.
1:08:20
And you end it with a great thing about time.
1:08:20
And how young people are time billionaires. I'm not.
1:08:33
I hope with all that's going on that I am a time multimillionaire at least hopefully. Probably not.
1:08:39
But I think the phrase you use which I love which is "You start life as a growth stock.
1:08:44
You end it as a value stock."
1:08:44
And when I reading that I was thinking to myself, I got to tell Nick that I want to end life as a distressed value play so that people will rush in to keep me going.
1:08:55
But talk about that for a little bit.
1:09:01
Nick Maggiulli: So yeah, I think we begin our lives as growth stocks, end our lives as value stocks was ...
1:09:05
So obviously your audience knows a little bit about growth stock is a growth stock for high expectations.
1:09:09
You bid it up and you're expecting a lot for it in the future, right?
1:09:13
And then value stocks are the stocks that have been beaten down but they can outperform because there's these upside surprises.
1:09:16
Oh no one was expecting that from them, right?
1:09:19
And I think if you actually look at some of the happiness data, you actually look at that's how a lot of us live our lives.
1:09:26
In our early 20s, where maybe that you're 18, 20 years old whatever, you have a lot of expectations for your future.
1:09:31
By the time I'm 31, this, this, and this.
1:09:31
You have all these ideas and plans and all these things.
1:09:33
And what they find is for most people a lot of those things don't come true. Not everything.
1:09:37
But parts of your life that you expected, maybe it's not going to be perfectly what you idealized and that's fine.
1:09:43
Then you have the slump in happiness where people start to get down on themselves or midlife crisis type stuff.
1:09:47
And then people expect their lives to not be as good in the future.
1:09:51
But then you find there's certain things, you just get joy out of things that you never would have thought and you have all these upside surprises.
1:09:55
And so then your happiness starts to recover and it goes up, right?
1:09:58
And so it's one of those things where we begin our lives with these expectations, those growth stocks.
1:10:02
And then we end them as value stocks.
1:10:02
And it's kind of just a poetic thing, but I saw this myself.
1:10:05
When I was like in early 20s, I'm like I want to have half a million dollars by the time I'm 30.
1:10:08
Because Buffett had a million when he was 30. I want to have half. I'm not Warren Buffett.
1:10:12
Plus remember, that's where I'm adjusting for inflation.
1:10:15
If you adjust for inflation, Buffett had nine million so let's not count that.
1:10:18
Let's not tell anyone that.
1:10:18
Jim O'Shaughnessy: Right.
1:10:19
Nick Maggiulli: So I was going not only like 1/9 of that, but having 1/18th of Buffett so I was like let me get to that.
1:10:23
And I still didn't make that by the time I was 30.
1:10:23
And I was a little disappointed by it.
1:10:28
But I was like hey, just be positive and keep going out there.
1:10:28
This is what life's about.
1:10:33
We don't always make the things we want to in life.
1:10:33
But it's kind of an interesting experience for me.
1:10:38
But that now allowed me to think more about, like that moment when I had that realization, it allowed me to think about that and it allowed me to reflect more on time and how we think about it.
1:10:47
And so it was very helpful for me just therapeutically to think about that.
1:10:50
And then to realize that oh my gosh, this happened to so many other people.
1:10:53
Like we're just crazy when we're young.
1:10:53
We're like oh we're going to get to these very high highs and it doesn't always work out that way.
1:10:56
So just keep that in mind for some people.
1:11:00
Jim O'Shaughnessy: It's a great and poetic way because what you say is absolutely right.
1:11:02
And the other thing that you point out that people, I think, resonated with, at least I did, was this happens to everybody.
1:11:13
It's like if you're being hard on yourself and like you, you didn't have the God damn half a million dollars by the time you were 30 and you're beating yourself up over that, like so is everyone else who didn't ...
1:11:23
And maybe their goal wasn't having half a million.
1:11:28
Maybe their goal was I want to be married and have three kids by 30.
1:11:28
Or I want to be doing this. And guess what?
1:11:32
Everybody is doing the same thing. Damn it.
1:11:37
My mom used to say, "Too soon old, too late smart."
1:11:37
But the point is as you get older, like 61, right?
1:11:44
I just read, I can't believe this.
1:11:44
Because I'm normally a very cheerful person.
1:11:49
But like apparently, people in their 60s, my age bracket, are the happiest people on the planet. And like I can see it. I have grandchildren.
1:12:00
I love my grandchildren because I have all the fun and none of the duties, right? It's like papa's here.
1:12:06
That's what they call me.
1:12:06
Papa, papa, give them candy, give them money, get them all rubbed up and then leave.
1:12:12
And Patrick and Lauren have to deal with them.
1:12:18
And so you're absolutely right. And I love the ...
1:12:18
For such a young guy, you've already got a perspective on the world that I think is very helpful and that's why I highly recommend your book.
1:12:31
And I read the back and I did it, I wrote on the back.
1:12:36
Nick Maggiulli: I wasn't lying there, Jim. Your blurb made it.
1:12:40
It made it from the cutting room.
1:12:40
It didn't fall on the cutting room floor somehow, Jim.
1:12:45
Jim O'Shaughnessy: Generally speaking, that's where my blurbs end up.
1:12:48
Well this has been great fun.
1:12:48
I wish you all the best with the book.
1:12:48
I end my podcast the same way my son stole a really good one.
1:12:55
Didn't steal, came up with the kindest thing anyone has done for you.
1:13:01
And when I was on his podcast, I was like, "Well, Patrick, I think the kindest thing I did for you was create you."
1:13:15
But so I have to go a different route and I get two things.
1:13:15
And of course, now when my grandson, Pierce, has his podcast, he'll be asking for three or four things.
1:13:20
Inflation hits everything.
1:13:24
But we are going to make you the emperor of the world for a day.
1:13:29
You can't kill anyone and you can't re-educate anyone in a camp.
1:13:36
But you can incept people.
1:13:36
You've seen the movie, Inception, I hope?
1:13:40
Nick Maggiulli: Mm-hmm (affirmative).
1:13:41
Jim O'Shaughnessy: Yeah, okay.
1:13:42
Nick Maggiulli: Yes, yes, yes.
1:13:43
Jim O'Shaughnessy: So I'm going to hand you a magical microphone.
1:13:46
You're going to say two things into that microphone.
1:13:46
And the next morning, wherever morning happens to happen for those people, the entire population of the earth is going wake up thinking the two things that you put into their minds, incepted, is their own idea and they're going to start doing it. What do you got for me?
1:14:03
Nick Maggiulli: Let me think. It's a great question. I think. I don't know.
1:14:06
I guess I would say something like be kind.
1:14:11
Try and like if everyone was just kinder to people, I think the world would be a lot nicer just generally.
1:14:16
Like if just a general have kindness towards people.
1:14:20
And of course, there's always ...
1:14:20
There are cases like I'm not saying I've always been kind my whole life? No.
1:14:24
Will I probably make mistakes in the future? Yes.
1:14:24
But if I try to do things, like try to be kind to people, I think that's the key.
1:14:30
Jim O'Shaughnessy: That's a great one.
1:14:32
Nick Maggiulli: There's a lot rage out there.
1:14:32
Especially in today's age.
1:14:34
We're so divided, I feel like.
1:14:34
And like the last time I felt like we were even ...
1:14:37
Like in the United States we were united was, unfortunately, after 9/11.
1:14:37
That's like the time when I saw stuff I had never seen in my life.
1:14:42
Like I mean I haven't seen since with like in terms of how united we were.
1:14:46
People just being nice to each other all the time.
1:14:49
Like I wish we had that without a 9/11 happening.
1:14:52
I wish we could just flip a switch and have that type of thing.
1:14:52
So that's what I would ...
1:14:57
Something of that nature.
1:14:57
Jim O'Shaughnessy: That's great. But that's only one. You've got another one.
1:14:59
So people are going to be- Nick Maggiulli: I've got another one, okay.
1:15:04
Jim O'Shaughnessy: You have two.
1:15:04
People are going to be kind.
1:15:06
They're going to be kind.
1:15:06
Nick Maggiulli: Let me think.
1:15:09
And I wish people would just exercise more probably.
1:15:09
Something about exercise.
1:15:17
I think that would be helpful.
1:15:17
Because it would help people's health.
1:15:17
It would help them be happier.
1:15:20
There's tons of evidence on this.
1:15:22
It would bring down health care costs in the United States.
1:15:22
I mean there's a lot of benefits across the board if people were just like hey, I feel like I should exercise more.
1:15:25
And they really believed it.
1:15:27
And they started doing it.
1:15:27
I think that would be helpful.
1:15:30
Jim O'Shaughnessy: I tell you what, man.
1:15:30
Those are two great ones.
1:15:33
And of course, because of your analytical and empirical nature, you know about those studies that when you're kind to people, my mom used to say, "Catch a lot more flies with honey than with vinegar." Yeah, you do. And exercise.
1:15:44
What's so cool about exercise is it's also a great example of the power of long-term positive compounding. So exercise, be kind.
1:15:59
The world's going to be ...
1:15:59
The Nickverse is going to be awesome.
1:16:03
Nick Maggiulli: I hope so.
1:16:05
Jim O'Shaughnessy: Listen, great to have you on, my friend.
1:16:05
As usual, always love seeing you and chatting.
1:16:07
I wish you the absolute best with this book and hopefully I'll see you soon.
1:16:12
Nick Maggiulli: Yes, of course. Thanks, Jim. Thanks for having me on.