The transcript from this week’s, MiB: Richard Bernstein, CEO / CIO of RBA, is below.
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This is Masters in Business with Barry Ritholtz on Bloomberg Radio
Barry Ritholtz: This week on the podcast. What can I say? Rich Bernstein Rockstar, former Chief strategist at Merrill Lynch. Just an incredibly storied career who has managed to put together such a straightforward and intelligent way to approach asset management. Rather than me babble. I’m just gonna say this is a fascinating conversation. With no further ado, my discussion with Rich Bernstein Advisors. Rich Bernstein.
Richard Bernstein: Thanks, Barry. Great to be here. Thanks for the invitation.
Barry Ritholtz: I’m, I’m thrilled to have you. I thought you would be the perfect person to talk about what’s been going on these days. But before we get to that, let’s start with Bachelor’s in economics from Hamilton, MBA from NYU. What was the career plan?
Richard Bernstein: So, the career plan was, was kind of foiled, I would say, six months after graduation. So, oddly enough, when I graduated Hamilton, I wanted to be a labor economist. And people say, like, today they go labor economist. Like, what’s that all about?
Barry Ritholtz: That was a big thing at one point, right?
Richard Bernstein: It was a big deal. And so it was, you gotta remember, labor unions were very powerful in the late seventies, early eighties. There was rampant inflation. And every company had a labor relations department. Huh? It was, it was a growth industry. And so I decided I wanted to be a labor economist and got myself a job with a prestigious economic consulting firm in their labor economics department doing all kinds of government related work, private sector, but government related work. And we were consultants, which is very critical because consultants billed by the hour and literally the day after. So election day is Tuesday in 1980, November, 1980, Wednesday, 50% of our business basically went away because
Richard Bernstein: Ronald Reagan took over elected president.
Richard Bernstein: Everybody called up and said, stop billing. We wanna see what’s gonna happen under the Reagan administration. Wow. Now, I wasn’t the smartest guy in the room, but it was pretty clear to me that this was no longer a growth industry. I had taught myself Fortran, dating myself here quite a bit. I taught myself Fortran and was a pretty good computer programmer. And a friend of mine who had gotten fired from this economic consulting firm, got a job at Chase Econometrics, IDC, and said, you have to come over here. You’re a great programmer. You’re gonna love this stuff. They had the largest set of economic and financial databases in the world at the time. Goes, you have to come here. I said, I don’t, what do I wanna go to Wall Street for? I mean, like, I have no interest in Wall Street. Why would I go to Wall Street?
And he said, well, let’s be honest here. The salary is twice what you’re making. Wow. I said, I said, well, I’ll go for the interview. You know, I’ll see what happens. Well, I went for the interview. I got the job. My biggest client turned out to be the Merrill Lynch Investment Strategy Group. Huh. And that’s how I got involved in Wall Street. And I found through time that I really liked it. Went back and got my MBA, and after a while, without sounding stupid about this, realized I was a, I knew more about this stuff than many of my clients did. And so I just worked my way through Wall Street and, and eventually, you know, but if you had said to me when I graduated at Hamilton that I was gonna end up being the Chief Investment strategist at Merrill Lynch, I would’ve said, you’re crazy.
Barry Ritholtz: You would’ve laughed. It’s crazy. So, so I, I have to ask about Fort Tran. You, you’re undergraduate, your focus is economics, you get an MBA in finance. Where did the computer programming skills come from?
Richard Bernstein: So, I am the poster child for the liberal arts education. So I almost double majored in philosophy. I didn’t, I was too lazy to be perfectly frank, and didn’t want to take one of the intro courses. But I took like, I don’t know, 5, 6, 7 philosophy courses, something like that. And for all the philosophy majors out there, I’m sure they know that a good part of philosophy is symbolic logic and symbolic logic. What is computer programming? What is computer languages? It’s just symbolic logic. So when I got introduced to fortran the first day I realized I could actually read a lot of the code because it was just symbolic logic.
Barry Ritholtz: It’s so funny you say that philosophy of symbolic logic, study of law is a lot of symbolic logic. Absolutely. Obviously math, there’s a ton of symbolic logic wherever you look, that classic syllogism, right? Here’s the fact pattern, here’s the applicable Absolutely. Set of rules, programs, parameters, like this seems to be a very constant thread in a lot of areas. Right. How surprising was it to you that hey, philosophy has been really helpful on Wall Street?
Richard Bernstein: It’s, it’s been amazing. In fact, in one of the books I wrote many, many moons ago, I specifically thanked one of my philosophy professors for, you know, I took symbolic logic with him. I think I took a course in relativism with him. You know, all these different things, which have definitely been influential in my career, without a doubt. Alright,
Barry Ritholtz: So you end up at what could be my favorite advertisement, which was the EF Hutton ads. Yes. Back in the, was that the 1980s when EF Hutton talk?
Richard Bernstein: I think it was actually the seventies into the eighties. Yeah.
Barry Ritholtz: “When EF Hutton talks, right. People listen.” Yes. Like these, you can find these ads all over YouTube. There’s seminal. It was fantastic. Yeah. How did you make your way to EF Hotten from Chase Econometrics?
Richard Bernstein: So what happened was that at the time, a lot of people at Chase, IDC were very in very high demand. We were the beginning of the quant movement on Wall Street. Right. And so there were a lot of people were getting hired away. One of my friends who was more an economist as opposed to a quant guy, got hired by the Chief Economist at EF Hutton at the time, and there was an opening in the investment strategy group, and he said similar. Like, why don’t you come and interview,
Barry Ritholtz: Come double your salary again.
Richard Bernstein: Well, it didn’t do that, but, but it was, it was an opportunity. So I, I grabbed the opportunity, I worked at the time with a, a wonderful guy named Jeff Applegate, who unfortunately passed away recently. But, but Jeff was a great role model in terms of how to make Wall Street understandable to non Wall Street people.
Barry Ritholtz: Really, really interesting. And then we get the 87 crash. Right. And then the following year, you joined Mother Merrill. Right. Tell us how, how you found your way to Merrill Lynch. So,
Richard Bernstein: Merrill, you know, Hutton went outta business on basically 19 end of 87. I think it was December of 87
Barry Ritholtz: What was that? Did they go out a bit? Wasn’t it Shearon, Lehman Hutton, American Express or something like that?
Richard Bernstein: Yeah. It was like, it was became Shearon Leman Hutton, the irony of which I once worked at Shearon when they merged with Lehman Brothers. And I lost my job there. And now Shearon Lehman was merging with Hutton, and I lost my job again. So I was on the losing end of many, many mergers in the 1980s. But it was, getting to Merrill was, you know, I was out of work for a while after Hutton went outta business, I had met with a, a headhunter, and the headhunter had set me up with a, an interview with Meryl and Meryl kind of passed on me, but then called me back about four months later.
Barry Ritholtz: So their first choice turned them down? Is that what you’re saying?
Richard Bernstein: I found my personnel file years later. Yeah. I found my personnel file, and this is actually kind of funny. And in it was the headhunter letter to the hiring manager. And it described me as being the cheapest of the lot. Oh my God. With the most potential. That was the way the guy described me.
Barry Ritholtz: You’re a value stock.
Richard Bernstein: I was a value stock. And so I think what happened was the everybody else they were talking to wanted too much money, and they worked their way down and they found they got me.
00:07:45 [Speaker Changed] That’s, that’s Unbeliev. How did you get access to your personnel
00:07:48 [Speaker Changed] File? It was by accident. It was, I was, I was, it was like switching managers type thing, and somehow it got, it got put into the wrong file. Oh. The wrong set of files. That’s, and there was mine, so of course I read it.
00:07:59 [Speaker Changed] So you were at Merrill for 20 years, is that that
00:08:02 [Speaker Changed] Right? Yeah. That’s almost 20 plus. Yeah. Right. Wow,
00:08:04 [Speaker Changed] That’s amazing. You were there right up into the financial crisis. I was, what was Merrill Lynch like right in the middle of that storm?
00:08:13 [Speaker Changed] So it was, you know, I think it was, it was, it was an interesting time. And, and you know, I should say, first of all, the Merrill was a fantastic place to work. Totally. It was, you know, anybody out there who has worked at Merrill, you know, knows, knows the feeling that I have for the firm and ’cause they feel it too. And, and it was a great place to work. The corporate culture began to change in the few years before the financial crisis. And we got a little bit of ways from, from our roots. You know, our roots were very much as a, a private client oriented firm that also had great trading and investment banking and everything else. But the heart of the firm was still on the private client side for any number of strategic reasons. The firm decided that we wanted to change that emphasis. And I think, you know, it’s kind of dangerous to take a lot of risk when you don’t really have the experience doing it. Sure. And so I think that’s kind of what happened to Merrill.
00:09:06 [Speaker Changed] You know, I mentioned the EF Hutton ads, but for the people who were listening who are younger, I I wanna say in the 1970s, maybe even in the 1960s, Merrill Lynch ran a series of television ads. Merrill Lynch is bullish on America. Absolutely. With, with the thundering herd and the big bull and Right. It was pretty amazing. When we talk about the democratization of investing, that Merrill is arguably the, one of the first companies that absolutely dove into that head first. Yeah.
00:09:39 [Speaker Changed] If I’m not mistaken, Charlie Merrill was, his whole philosophy was bringing Wall Street to Main Street. I think he actually coined that phrase
00:09:45 [Speaker Changed] That, I think that’s right. Yeah. And later on, we had a number of the discount brokers had come out in places like Schwab and Muriel Seabert, but I always felt they had followed Meryl’s lead to Absolutely. We we’re gonna push into Main Street. Yeah. So you start out essentially as an analyst, how do you, how do you work your way up to market strategists and then chief investment strategist for, for the thundering
00:10:11 [Speaker Changed] Herd? It’s, you know, it, it’s funny, one of the things I always tell recent graduates of colleges is, don’t try to plan out your future. ’cause when you’re 21 or 22, you have no idea what you’re gonna do when you’re 25 or 27 or 30. You know, you really don’t know. And my example of, you know, the changes after the Reagan Carter election are, are pretty clear on that one. But the same thing was at Merrill. You know, I kind of, I came in as a quant analyst. I was there not for any other reason, to be perfectly frank. And I think the people involved at the time would agree with this, that in institutional investor, there was a quantitative analysis slot. Merrill had nobody who was there. They thought, well, let’s, let’s get somebody who can maybe run for this slot. We’ll get another II vote and we’ll see what happens. And I was their choice to just kind of become this quant guy. I don’t think they knew what to do with me. I don’t think they were thinking anything else other than like, you know, go do your thing and, you know, hopefully this will all
00:11:08 [Speaker Changed] Work out. Is an empty desk rich, see what you can do with this. Exactly.
00:11:10 [Speaker Changed] Right. Huh. And it was, it was actually kind of funny. I I, truth be told, now I can tell this, I lied about my age to get the job
00:11:18 [Speaker Changed] Saying You were younger saying you were older. Older, older.
00:11:21 [Speaker Changed] Oh, really? Because I was 29 when I was interviewing for this position. Yeah. And I knew that, and everybody, and back then you could ask people how old you were.
00:11:28 [Speaker Changed] Right. And they couldn’t Google you and find out.
00:11:31 [Speaker Changed] Right. And they couldn’t find out. So there was all kinds of, all kinds of stuff that they could do back then that you can’t do now or can do now. Did,
00:11:37 [Speaker Changed] Did you really get an MBA from NYU that, did you just pad your resume?
00:11:41 [Speaker Changed] No, I’m, that’s legit. That’s a hundred percent legit. But so what was happening was, I knew that if I went to these interviews and I told people I was 29, they would think I was a kid.
00:11:50 [Speaker Changed] But 30 sounds older,
00:11:51 [Speaker Changed] But 30, it’s like 29 99. Right. Like, you just round up, you know,
00:11:55 [Speaker Changed] It’s, it was a six month fib, that’s all it was.
00:11:57 [Speaker Changed] Yeah. Well, by the time I actually got the job and showed up at Merrill, I was 30. So I didn’t feel, I’ve never felt bad about it, because I was asked in every single, like, why would they ask? They wouldn’t ask unless they thought maybe I was too young. That would be the impetus for asking the que, nobody’s gonna ask the question,
00:12:12 [Speaker Changed] Well, how much are you, how much experience and seasoning
00:12:15 [Speaker Changed] Do you have? I don’t think that was the root of the question, because they had my resume. They knew exactly. And so it was really like, how old is this guy? You know, can he really do this? And so I lied. So I told everybody I was 30. And so, and, but, but
00:12:28 [Speaker Changed] That’s hilarious.
00:12:29 [Speaker Changed] Yeah, it is. It is kind of funny.
00:12:30 [Speaker Changed] And, and nobody ever figured out. Don’t, don’t they, when you’re filling out your paperwork and nobody took the time. Nobody can, nobody, if you’re a W2 employee Yeah. They get your date of birth and your social security number. Absolutely. It’s, it’s not like the data isn’t there, but
00:12:44 [Speaker Changed] By the time I got to Merrill, I was 30,
00:12:47 [Speaker Changed] So nobody thought
00:12:48 [Speaker Changed] Twice about it. Nobody, nobody thought twice about it. Yeah.
00:12:49 [Speaker Changed] That, that’s, that’s really funny. So you’re at Merrill for 20 plus years. We have the financial crisis, and you decide to launch Rich Bernstein Advisors in 2009. So in hindsight, it turns out to be perfect timing. Right. What sort of pushback did you get when you’re like, I think I’m gonna stand up my own shop into this mess?
00:13:14 [Speaker Changed] Yeah. You know, I left Merrill because I’d gotten burned out. I mean, one of the things that people don’t realize is, as a sell side analyst, the, the, the better you get at your job, the demands on your time grow exponentially. And so I was traveling all over the world. I was, I was nonstop writing. I mean, it was, I, I had burned out and I tried to leave Merrill several years before, and they had, they convinced me to stay. They said, you know, like, no, it’s okay. You know, we’ll, you know, we’ll, we’ll take care of you. Everything will be fine. Don’t worry about it. But in 2008 in the financial crisis, I turned 50. And so I’m not lying about my age. I actually did turn 50 and, and I was pretty burned out. And then the financial crisis hit and I thought, you know, it’s the wrong time to leave.
00:14:00 It’d be irresponsible for the chief strategist of Merrill Lynch to leave in the midst of a crisis. That’s, that’s just very unfair to our clients. Very unfair to the firm. You know, I rose to this level. I have a certain amount of responsibility. I can’t be selfish on this. So I stuck it out for a while. And then Bank of America bought, bought Merrill, and, and they were great. And, you know, everything was good, but it was clear to me I wasn’t gonna have more fun. Right, right. That the burned out nature was gonna continue
00:14:26 [Speaker Changed] In potentially worse. This was only gonna get worse. It
00:14:28 [Speaker Changed] Was gonna get worse. So I just figured like, why do this? So I just thought I was leaving again. Merrill was fantastic. They encouraged me to stay. I just said, no, no, no, thanks, but I’m, I’m done. You know, stick a fork in me. I’m done.
00:14:39 [Speaker Changed] Hey, 20 years is a long time. Yeah. Being a road warrior. Yeah,
00:14:43 [Speaker Changed] Exactly. And so then the question was, what was I gonna do? I had toyed with the idea of opening a, an independent research shop and that sort of thing, but that was gonna be equal amount of travel all around the world. And I, I had just done that for 20 years. Didn’t sound like a lot of fun. But then the idea came to me, well, maybe we should put some of these things that we’ve, we’ve developed through the year, put it into practice and see if we can manage money doing it. And we were kind of forming the firm and we were like, really in its infancy. And then all of a sudden, I remember exactly where I was, I was in our, our den weekly initial jobless claims had just come out, this is like in July of 2009. And the number came out and it was a blowout good number. Right. And I said to myself, this, this is a rogue number. And then I said to myself, well, wait a minute. Why is it a rogue number? Maybe things are just getting better. Because I was listening to all the talking heads who were all
00:15:41 [Speaker Changed] Still,
00:15:42 [Speaker Changed] And they were all negative as, as all get out. And I said, let,
00:15:45 [Speaker Changed] Let me stop you right there, because my next question is, I very vividly remember March oh nine. Right. And saying, Hey, US equity’s down 50%, usually pretty good entry point. I think we finished down 56, down 50, whatever, 57%. And, but the bearishness, the negativity persisted and it felt like people were really suffering from a little post-traumatic stress. A hundred percent. I, I’m curious exactly how, as you were starting to tell us how you were thinking around that, because everybody was so negative, and yet the data was clearly improving.
00:16:25 [Speaker Changed] It was definitely improving. And so, you know, the way I described to people is I said, like, you know, markets don’t move on the absolutes of good or bad markets move on better or worse. And things were horrible in an absolute sense, but they were getting better
00:16:38 [Speaker Changed] And certainly better than consensus felt like it was.
00:16:41 [Speaker Changed] Absolutely. And so, you know, I I just, I remember exactly where I was and I said, well, gee, you know, this could be like a big bull market. And, and you know, I actually at one point said to potential investors, I thought that we were entering the biggest bull market of our careers. And so
00:16:58 [Speaker Changed] You were only off by a tiny little bit. It was, it was Oh, of our careers.
00:17:03 [Speaker Changed] Of our careers. Yeah. If you think that was
00:17:06 [Speaker Changed] Thousand nine, look
00:17:07 [Speaker Changed] Nine to today.
00:17:08 [Speaker Changed] Rolling 15 year periods from oh nine to oh four was 16% a year. Yep. From the 15 year period, ending in 99 was 17% a year. And you go to the 15 years after World War II was 18. So
00:17:24 [Speaker Changed] We’re right
00:17:25 [Speaker Changed] Up there, but one of the best Yeah. Periods in modern history for sure. Absolutely. So you, you are like, Hey, this is gonna be
00:17:31 [Speaker Changed] Good. So if you’re gonna start a firm dead on, if you’re gonna start a firm, this is the time to start. For sure. So that, that’s kind of how it began. And, and, you know, I don’t wanna say that everything went swimmingly at the beginning. No. You’re starting a firm, you hem you know, like any, any startup you have, you have pluses and minuses and you, you hem and haw and you do different things. But through time it’s worked out pretty well.
00:17:53 [Speaker Changed] So what was, you know, we stood up a firm in 2013, I’m curious, and that experience was kind of surprising. I’m curious, what was the most surprising things about launching your own firm? What was like, I didn’t expect to be doing this?
00:18:09 [Speaker Changed] So two things. One was that I was getting into an area that I didn’t know. And I knew, I didn’t know the buy side. The way I knew the sell side, I knew that. And what I didn’t know was how much I didn’t know. And so the early fits and starts were trying to hire the right people. I didn’t even know enough to hire the right people. Eventually that did happen. And we hired a, a guy named John McComb, who’s still the president of the firm. But it was, it was kind of, you know, off and on. We were not doing all that well at the beginning because, largely because I didn’t even know who to hire and who not to hire because I was so inexperienced on the buy side. So that was surprise number one, surprise number two, was that people would not invest with us at the time because we were too bullish. And that was fascinating. Fascinating. That was really,
00:19:01 [Speaker Changed] That just makes you more bullish,
00:19:02 [Speaker Changed] Doesn’t it? Oh, it did, without a doubt. I mean, but if it, it, it was, it was incredible. We were, you know, at the time people were very cautious on the United States if they wanted growth, whatever they determined that was, it had to be in the emerging markets. It could not be in the United States. And we were bullish and we wanted to invest in the United States, and people just couldn’t deal with that.
00:19:21 [Speaker Changed] I’m, I’m gonna put a little flash on what you’re describing. I vividly recall writing a, a market commentary, I wanna say September, but maybe it was October oh nine. And the title was the most hated bull rally in market history. Yeah, same experience.
00:19:38 [Speaker Changed] Absolutely. It was, it was very frustrating. If you look at our early marketing materials, you will find thing comments about what we called fire extinguishers. Right. And fire extinguishers were positions we would take in the portfolio that we could pull off the wall and put out the fire in the portfolio. Right. Like having, you know, cash or gold or all these different things that we would include in our multi-asset portfolios so that people would feel more confident in what was going on. No, it worked, but it didn’t really work because it, it
00:20:07 [Speaker Changed] Worked psychologically. It worked, but it didn’t work performance wise. It,
00:20:10 [Speaker Changed] No, it worked for, it worked for us. Fine. But it didn’t get people across the goal line. They, they would not, they, they were too scared.
00:20:17 [Speaker Changed] How long did it take before people started to say, oh, maybe this Bernstein guy is onto something? Yeah.
00:20:23 [Speaker Changed] Well, you know, everybody talks about it being like a, a hockey stick. You know, the raising assets is sort of like a hockey stick where, where like of, as a turbocharger where you’re, you’re kind of going along and all of a sudden the turbocharger kicks in, you start really accelerating. That was the experience that we had in the firm. We had, we had people who knew us as a group were reasonably willing to invest with us, but to the broader audience, it was, it was much more difficult. And then as they got more confident, yeah, of course the, the turbocharger started, started revving up. Yeah.
00:20:51 [Speaker Changed] So was that six months, 12 months? How long did
00:20:54 [Speaker Changed] It take? I would measure two years. I would say I would measure it in years, I think. Really? Yeah. I think, I don’t remember the date of when we hit 5 billion, but I’m gonna say it probably took us five or six years at least to get to 5 billion.
00:21:07 [Speaker Changed] And now you’re over, well over 15 billion.
00:21:09 [Speaker Changed] Yeah, we’re about almost 16.
00:21:10 [Speaker Changed] Right. Wow. So that, that’s amazing. And, and this is now 15 years later, correct? Right. So it took you 15 years to get to $15 billion. Yeah. So a billion a year. Not, not too, not too bad, right? No, not, not, not bad at all. So we were talking about launching the firm in oh nine, and there’s a quote of yours that has always stayed with me, which is, quote, when the sell side indicator turns positive, leaving the firm is preferable to going on the call and telling everybody about it. Explain that, because we were talking earlier about the sort of bearish PTSD pushback Yep. To anything remotely positive. Your indicator, this cell side indicator has a pretty long and story track record. It does at Merrill.
00:22:02 [Speaker Changed] It does.
00:22:03 [Speaker Changed] Hey, this turned positive. You guys have to change your views. That carries no weight.
00:22:08 [Speaker Changed] So lemme explain what it, what it is. The sell side indicator is a sentiment indicator that’s based on Wall Street’s consensus, recommended asset allocation. So stock bonds, cash, how much has you put in stocks at any point in time? I started that all the way back at EF Hutton. You mentioned Hutton before. And, and we continued it through Merrill and Merrill still runs it today. It, it’s really just looks at the equity allocation and puts basically standard deviation bans around that. And as you might expect from Wall Street gets really bullish, that’s a bearer sign. Right. Wall Street gets really bearish. That’s a bullish sign.
00:22:41 [Speaker Changed] So when you said this turned positive, it was because the street was so bad,
00:22:44 [Speaker Changed] The street got incredibly negative. Incredibly negative. And so from my point of view, and what you’re referring to was that, do I stay at Merrill and try to convince everybody to be more bullish? Or do I go off and start my own firm? And I just thought it’d be better given every, given all the other things we’ve discussed, it was better to start my own firm
00:23:02 [Speaker Changed] Preferable to going on the call and telling everybody about it. Yeah. Like I could just imagine the sort of pushback Bernstein is he’s now a permeable, he’s crazy how we, we just are in the middle of this crisis. How on earth can we recommend clients buying equities? Yeah. Right. That’s the sort of stuff you,
00:23:21 [Speaker Changed] And, and it was the kind of thing where, you know, certainly on the private client side, for those of you to remember, you know, in, in 2008, 9, 10, 11, 12, the story was all about bonds, bonds, bonds, bonds, bonds. Right. Nobody wanted the risk of equities. And if you twisted their arm, maybe they would invest in large cap, high quality dividend paying stocks. Right. But there was no way that they were gonna take any kind of beta risk
00:23:45 [Speaker Changed] With market. So no technology, no growth firms, nothing. Nothing with any amount of potential volatility.
00:23:52 [Speaker Changed] No, no. Volatility was, was terrible. Risk taking was terrible. They were under their desk in the fetal position.
00:23:58 [Speaker Changed] And in hindsight, was there a better time ever to put money into those sort of stocks?
00:24:02 [Speaker Changed] I’m not sure In our careers there has been maybe, maybe 82. Right. If you think back to
00:24:06 [Speaker Changed] 82, right, right. In the beginning of maybe,
00:24:08 [Speaker Changed] Maybe 82 was, was a time. And I do remember that I’m old enough where I do remember, you know, what, what the sentiment was like. And certainly I was, I had very little experience on Wall Street. I know what my sentiment was like in 82. I couldn’t believe that the market would be going up. And, but I
00:24:24 [Speaker Changed] Used, well, you just had a 16 year bear market. Yeah. You finally got over a thousand on the Dow, which I wanna say we first kissed in 66, something like that. Right? Yeah. And so it’s 16 years later. Yeah. Again, everybody seems to always be looking backwards, not forward.
00:24:40 [Speaker Changed] Absolutely. And so the lesson, the lesson from that, you know, when I was a young pup was, you know, gee, I really didn’t know what I was talking about. And, you know, I learned that from, from various people working on Wall Street. And, you know, so when it came to oh nine, I was kind of determined not to make the same mistake again. So
00:24:58 [Speaker Changed] It’s funny because another quote of yours kind of cracked me up that I always found this intriguing. You suggest always have a 10% annual target for the s and p 500, despite being bearish. I love that, that optimism. But how can you maintain that bullishness when you’re bearish?
00:25:19 [Speaker Changed] Yeah. So what Barry, as, as I’m sure you know, the sell side strategists are always pestered for their target. Right? What’s your target on the s and p? And I used to think that was the most watched, least important thing I ever did. Right. And so I would never put a number out, I would never give people a firm number. But I, I would always answer the question by saying, well, we don’t really have an official target, but we have a 10% expected return. And nobody ever noticed that 10% is roughly the long term average return of the
00:25:50 [Speaker Changed] SB with dividend reinvesting vestment 10 and change
00:25:52 [Speaker Changed] 10%. So I used to always say 10% and, and that would make everybody happy. And so, regardless whether it was bullish or bearish, I always answer the question saying, oh, I don’t know. We have a 10% expected return. And, and that kept people satisfied. But I, I really don’t think that the notion of what is your target is an appropriate thing to discuss as an investor. Look, if you wanna be a trader and you want to, you want to, you know, do a lot of short term trading, I get that. And I understand it for an true investor, I think it’s kind of a silly discussion, huh.
00:26:23 [Speaker Changed] Really, really amusing on your website and elsewhere, I’ve seen the phrase from you Pactiv Yes. Investing Yes. Define what pactiv investing is.
00:26:35 [Speaker Changed] Right? So pactiv, which is a trademark
00:26:37 [Speaker Changed] Term of, so that literally my next question. Yeah. I saw the registered trademark.
00:26:41 [Speaker Changed] Yeah. It is a trademark term of RBA. You,
00:26:43 [Speaker Changed] You literally did that. That’s great.
00:26:44 [Speaker Changed] We did that. And so PACTIV stands for the active use of passive investors in investments. And what we’re really referring to here, a lot of ETFs and you know, we’re a macro firm, we claim to know nothing about Coke versus Pepsi. Right. But rather, you know, we look at size, style, geography, and, you know, asset allocation, things like that. And ETFs are right in our wheelhouse. It’s, it is been a, a great invention. And we’re very big users of ETFs. Jack Vogel, I met many times when he was alive, and I always thought he was one of the smartest guys I ever met in my career. But one of the things that, and Jack would always say, don’t, don’t talk to an active manager. Just go buy an index. Okay, fine. But what Jack would, and that’s an interesting discussion. We can have the discussion all day long as to why that happens or doesn’t happen, whether he’s right or wrong.
00:27:31 But the one thing that Jack would never tell anybody is what index to buy and when. Right. And you know, one may say, well, that sounds silly, but there’s been many times in the past where if you had bought the wrong index at the wrong time, your portfolio suffered dramatically for an extended period of time. For instance, if you had bought Nasdaq, or even the S and PETF in March of 2000 for sure. Right. You then entered the lost decade inequities. Right. And your return for a decade was slightly negative. If you had been in other things like emerging markets or energy or, you know, all kinds of small caps, all these different things, you would’ve done fabulously. Well, you know, if you bought small caps at the peak of the small cap bull market in 1983, it took you 17 years to catch up to the s and p. Wow. So you would’ve been neutral. So, you know, everybody says, oh, I’m a, I’m a long-term investor, I’m just gonna buy an index. If you buy the wrong index at the wrong time, it, it can have a real detrimental effect. And that’s what Pactiv Investing’s supposed to be all about is the active decision making around these passive investments.
00:28:40 [Speaker Changed] So, so let’s delve into that decision making. How do you decide which index is the one that you wanna own? What data are you looking at? How, how you crunching numbers for this?
00:28:52 [Speaker Changed] Right. So Barry, I I mentioned that we are macro investors. You know, we’re not, we’re not looking at individual stocks. So everything we do is gonna fall into some macro umbrella of one form or another. And the way to think about it is it’s gonna fall into three categories. Everything we’ll look at, it’s gonna fall into three categories. Number one would be corporate profits. One of the things that I wrote about extensively, even when I was at Maryland through my entire career, is I’ve argued that equity investors spend too much time worrying about the economy and not enough time worrying about corporate profits. The stock market doesn’t really care about GDP, the stock market cares about corporate profits
00:29:25 [Speaker Changed] Because the GDP is reflected in profits if it’s trending the right way.I
00:29:29 [Speaker Changed] Mean, GGDP is gonna be a contributor, but a lot of other things contribute right to, to corporate profits. We’re looking at corporate profits and profit cycles, not economic cycles. Number two category is going to be what we call liquidity. And liquidity is gonna be anything from central banks, central bank actions to lending standards from banks, anything that’s gonna allow more leverage in greater liquidity in, in investible assets in the, in, in a stock market. And then number three is gonna be sentiment and valuation. Now, sometimes people say sentiment and valuation, why are they together? And the my answer to that is, one, one
00:30:08 [Speaker Changed] Drives the other. Right?
00:30:08 [Speaker Changed] Yeah. My answer is that valuation is a reflection of sentiment
00:30:11 [Speaker Changed] Has to be,
00:30:12 [Speaker Changed] Yeah. You can’t have an overvalued asset that people hate or an undervalued asset that people love. That, that doesn’t make any sense. So, so valuation is going to reflect sentiment. And so what we’re basically looking for, if you think about those three categories I just mentioned, we’re looking for situations where fundamentals are improving, liquidity is, is adequate or getting better and everybody hates it. Where vice versa, where fundamentals are deteriorating, liquidity is drawing up and everybody loves it. We’re gonna try and stay away from that. That’s, that’s a maybe a gross simplification of what we do, but, but that’s kind of what we do.
00:30:45 [Speaker Changed] But, but that’s pactiv that’s how you’re selecting from broad indexes, just the right index at the right time. Correct. And avoiding the wrong index at the wrong time. Correct.
00:30:54 [Speaker Changed] That’s exactly what
00:30:55 [Speaker Changed] We’re trying to do. Huh. Really interesting. One of the things that comes up when we’re talking about various style investing comes right from one of your books. Hmm. And it’s about media noise. Yes. How do you focus on the right index when there’s so much noise and so much stuff going on? And it’s, especially with algorithmic social media, it’s just a fire hose. It’s crazy nonsense. It is
00:31:23 [Speaker Changed] Crazy.
00:31:24 [Speaker Changed] How do you separate the signal from the noise?
00:31:26 [Speaker Changed] Yeah, so I, I wrote a book in 2000, so 25 years ago. Wow. I wrote a book that was called Navigate the Noise, invest, I remember that. That invest investing in the new age of media and Hype. 25 years ago I wrote about the new Age of media and Hype.
00:31:40 [Speaker Changed] You were ahead of the curve.
00:31:41 [Speaker Changed] It’s, you think it is gotten a bit worse since in the last 25 years. So, so
00:31:46 [Speaker Changed] To just as a reminder, this is pret Twitter, pre Facebook, pre LinkedIn, oh, forget Instagram, TikTok. Like, this was just like message boards and websites.
00:31:58 [Speaker Changed] Yeah. I mean, you’re just beginning to, to get websites in, in depth, but we’re really still talking about a period of hard copy research reports and television. Wow. That’s really what, you know, the mainstay of what, what, what, what people were looking at. The point of the book was to say that building wealth for an individual investor is actually not that difficult. Why don’t people do it? Why don’t people do this? Is is kind of silly and well
00:32:23 [Speaker Changed] Wait, when you say it’s not that difficult, we, we intellectually understand, like my friend Dave Tic loves to say investing is a problem that’s been solved. But the problem that hasn’t been solved is the human behavior around it.
00:32:38 [Speaker Changed] Exactly. Exactly. And so what the book tries to argue is that there’s some very sound principles that everybody should be following to build wealth. But yet there’s this siren song, if you will, if you’re into Greek mythology, there’s a siren song of things telling you of, of noise, telling you that there’s something newer, better get rich quick, you know, all these kind of things that are going on. And to continue with that, your portfolio follows that sound and crashes on the rocks if you want the mythology example. And so what the book says is, the way to solve this problem of this incessant noise is to hardcore follow a process and come hell or high water, you’re gonna stick to that process no
00:33:22 [Speaker Changed] Matter what. That’s the mask. You tie yourself to
00:33:23 [Speaker Changed] That. Exactly Right. And put the wax in your ears, the whole routine. Right. And, and that’s, that’s what we do as a firm. We have a very hardcore process. It’s macro driven, but we’re gonna follow that process, come hell or high water, you know, it’s, it’s funny People understand that and they understand what we do. We understand why they do, they understand the, the, the notion of the book. But yet they get very angry when we’re not following the siren song of what’s the newest, baddest, you know,
00:33:52 [Speaker Changed] Shiniest object. Yeah. That’s out there. It’s crazy. So, so walk us through the process. I know you have a couple of core beliefs in your process. Tell us about it.
00:34:01 [Speaker Changed] So I mentioned profit cycles. I think for us, that is, that is the most important part of our process. And as I said before, people spend too much time worrying about economic cycles and not enough time worrying about profit cycles. Now
00:34:14 [Speaker Changed] What’s the difference? Define profit cycle and, and ’cause we are all familiar with the business cycle and the economic cycle. Exactly. What is a profit cycle?
00:34:22 [Speaker Changed] So, so, you know, whereas people look at GDP growth or, or industrial production growth, and they say this is the economic cycle. Well, we’re looking at as corporate profits growth. Now let’s just as an example, we look at profit cycles all around the world. But let’s take for example, the s and p 500, the US profit cycle. What happens is the, the difference between an economic cycle and a profit cycle, number one is that profit cycles tend to boom and bust. Fortunately, the overall economy does not do that on a regular basis. And secondly, profit cycles have a shorter periodicity. So you can get multiple profit cycles in one economic cycle.
00:34:55 [Speaker Changed] Periodicity meaning
00:34:57 [Speaker Changed] The amount of time,
00:34:58 [Speaker Changed] Right? Got it.
00:34:59 [Speaker Changed] Right. So whereas an economic cycle, maybe it’s gonna take four or eight years, you could have multiple profit cycles in that four or eight year period.
00:35:06 [Speaker Changed] And so, so how do you define the peak and the trough of a profit cycle?
00:35:10 [Speaker Changed] So, so what happens is, you know, if you look at the growth rate of corporate profits, you will see it follows a pretty normal cycle through time. And our challenge as investors is to find indicators that will allow us to effectively forecast that profit cycle. Now we don’t really care whether the profit cycle, whether earnings growth is gonna be 7% or 8% or 10%, which is a very common question people get asked, or minus five or minus six or minus seven. We kind of want to know is it getting better or is it getting worse?
00:35:41 [Speaker Changed] Trending up or down.
00:35:42 [Speaker Changed] Exactly. So if profits go this 5%, what’s the probability of it going to 10% as opposed to going to zero. So we spend an awful lot of time with a lot of indicators that, that look at that. What are the indicators look at, well look, profitability is a pretty simple formula. It’s how many, how much stuff are you selling and what’s your margin per item? I mean, that’s really all profitability is.
00:36:05 [Speaker Changed] Well, but there’s a couple of factors that go in. What is the cost of capital and credit? Exactly. The inflation rates.
00:36:11 [Speaker Changed] But that would be in your margin, right? I mean, and, and so
00:36:14 [Speaker Changed] Which affects profits,
00:36:15 [Speaker Changed] Which affects profits. So all our indicators are either gonna try to figure out how much stuff is, is let’s take the s and p 500, our s and p 500 company’s gonna sell, and what’s gonna be their margin per product. So margin as you point out, could be interest rates. It could be labor costs, it could be pricing power because of inflation. People forget inflation isn’t bad for a lot of corporate profits, for
00:36:36 [Speaker Changed] Equities for sure. Right. Because we certainly learned that during the pandemic.
00:36:39 [Speaker Changed] Exactly. So, so those are the type of things that we’re looking at in terms of profit cycle. And as I said, we look at profit cycles all around the world. We look at them by region, by country, we look at by sectors, you know, we look at profit cycles for say the tech sector for the consumer staples sector or something like that as well.
00:36:56 [Speaker Changed] So, so profit cycle is a one of the key triads the key. It’s the key. All right. What, what are the other elements that you’re considering in addition to the profit cycle? So
00:37:06 [Speaker Changed] Next would be liquidity. Okay. And liquidity is a function of, of several different things. It’s obviously a function of monetary policy. We follow monetary policy in 43 countries around the world. I know that sounds silly and, and obviously in the G seven or G 10 you get a lot more information than you would in, but you know, some weird emerging market country. But we do follow central bank policy. We follow yield curves. The slope of the yield curves, right? Whether you’ve got a bullish steepening of the curve, in other words are, are interest rates coming down, but the curve is steepening interest rates going up, but the curve is steepening or is the curve inverting? I mean, we look at all these different things. They have different implications for sector rotation and things like that as well. So, and then we follow things like bank lending standards. Now that’s obviously you can only get that in the most developed countries, right? But that’s an important consideration as well. Are banks tightening credit or, or easing credit? People say, well, doesn’t, doesn’t the central bank control that? Well, not really. You can kind of lead a horse to water, but you can’t make it lend. And, and so, so you wanna look at both central bank policies and the willingness of banks to lend,
00:38:16 [Speaker Changed] How, how does the role of fiscal stimulus and spending play into liquidity issues?
00:38:22 [Speaker Changed] Yeah. So to some extent it does, and it, it’s gonna affect more, it’s gonna feed into our more through the corporate profit side in terms of how much stuff are you going to sell, right? Because fiscal stimulus is trying to stimulate consumption or, or aggregate demand. If you prefer to be a real economist here, it’s gonna try and stimulate aggregate demand. And that’ll show up in our stuff, type type
00:38:47 [Speaker Changed] Variables. Alright, so, so we have the profit cycle, we have liquidity, and what’s the third part of the
00:38:52 [Speaker Changed] Project? The third is sentiment and valuation. Right? Okay. So obviously we want, we prefer to look at, at more undervalued situations, sentiment, we’re trying to look for basically assets that people hate. Valuation will reflect that if something’s really undervalued, something’s really cheap, it reflects that people don’t like it. You know? And, and it’s just like any other good in any other market. If something’s really expensive, it means people like it.
00:39:19 [Speaker Changed] So two questions from that. The first is how do you distinguish, and I already know the answer to this, but how do you distinguish between a stock that is disliked and cheap and a stock that’s cheap because it’s in trouble?
00:39:35 [Speaker Changed] Yeah. So what you’re referring to now, we wouldn’t do this for individual stocks. So we would do it for, for regions or sectors or whatever, you know, the, the commonly called the value trap. Yes. The value trap is something that’s cheap for good reason. And so what we do, we have models that try to look at various industry sectors, countries, whatever, that are trying to look for not only cheapness, but some acceleration in corporate profits. Right? And, and we won’t invest in anything just ’cause it’s cheap. That doesn’t mean anything to us. It’s,
00:40:03 [Speaker Changed] It’s cheap plus some other indicator. Correct. So, and then, and then the la other question is, consumer sentiment seems to have gone off the rails post pandemic. If you look at where, and I suspect this is a measurement problem, but I want to get your sense. So if you look at the University of Michigan consumer sentiment data for the better part of the past five years, it’s worse than the worst part of the pandemic, worse than the financial crisis, the 87 crash, like on and on, it’s shocking worse than nine 11. And the.com implosion like, wait, things aren’t that bad.
00:40:41 [Speaker Changed] No, they’re not that bad at all.
00:40:42 [Speaker Changed] What’s going on with that sort of sentiment? And what, how do you use sentiment when you’re trying to manage around this?
00:40:50 [Speaker Changed] You’re asking I think a more complicated question. Maybe even you, you think you’re asking, but you know, everybody knows that we’re in a very uncertain environment. And I think that those consumer sentiment readings right now reflect that immense uncertainty. If you were to ask normal people, they might not use the word uncertainty. They might use the word chaos, they might use, there’s all kinds of different words that people would use. I think that’s what’s being reflected in those consumer sentiment numbers right now is is the uncertainty, the impact that’s having, you know, there’s other surveys out there that are showing similar type levels of uncertainty or concern that aren’t related to the consumer. But, but I think it’s a reflection of this. It’s become a hackneyed word, uncertainty, right? I think that’s what you’re
00:41:35 [Speaker Changed] Seeing. I, I prefer the la lack of clarity to uncertainty. But let me bring this back to your book. Navigate the Noise. How much of this is a function of algorithmic social media? Which there was recently a study, I wanna say it was Oxford Reuters, that said, Americans now get more of their news from social media than anywhere else. Yeah, yeah, yeah. Big, big issue. And then secondly, it seems like in, in the world of clickbait absolutely crazy headlines. The media itself, if, if not the news stories or columns, but the headlines certainly seem to be more and more extreme.
00:42:15 [Speaker Changed] Unbelievable. So, you know, I, I don’t, I don’t know how to answer that from a societal point of view, but I can answer it from my point of view as sort of a fiduciary and, and an investor of other people’s money. I think it is my obligation, two things. It is my obligation, number one, to be as dispassionate about my politics as I possibly can. I mean, if you wanna go have a beer, we can talk politics, that’s fine. But I’m saying when I’m investing, you have to be as dispassionate as you can possibly be. And number two, I think it’s incumbent all of us who manage money to search for truly unbiased sources. Not who’s gonna give us the most frequent news, but who’s gonna give us news that is unbiased. And I think it’s incumbent on all of us to do that. And I have found that in the last year or so, that my choices of news media and what I read and what I pay attention to has changed because of that. Flesh
00:43:17 [Speaker Changed] That out a little bit. Give feel free to name names.
00:43:19 [Speaker Changed] You know, a lot of people, I, I think one of the questions you would plan to ask me was, what are you reading these days? My answer is, I don’t read an awful lot really of these days because there’s so much going on. But what I, what I have begun to do is listen to podcasts.
00:43:35 [Speaker Changed] Okay, go on. Tell me about
00:43:37 [Speaker Changed] This
00:43:37 [Speaker Changed] Podcast thing. Like this one.
00:43:39 [Speaker Changed] No, but I, I’m, I’m buttering you up here. All
00:43:41 [Speaker Changed] Right. But go on. More, more, more slaking up. Sure. There’s
00:43:45 [Speaker Changed] Three that I would, I would recommend to everybody. One is actually right here at Bloomberg, Bloomberg Law. And you’d say like, why
00:43:52 [Speaker Changed] Bloomberg Grasso? Yeah, yeah, yeah, exactly. Why would you listen
00:43:55 [Speaker Changed] Really good? Why would you listen to Bloomberg Law? No,
00:43:57 [Speaker Changed] It’s, it’s fascinating.
00:43:58 [Speaker Changed] And my answer is because everything these days is ending up in the courts, right? Have we ever had more issues with government in the courts than ever before? Certainly I’m not a lawyer. I don’t know squat about, you know, constitutional theory and everything else. I, and I’m sure most people don’t either, but they’re gonna listen to some wackadoodle guy, right. Talk about this. I’d rather listen to people who have, are well-grounded opinions and understand the history of law in terms of doing that. So this is
00:44:27 [Speaker Changed] One I’m so, I’m so glad you brought that up because we went through a, a run starting in 2020 where every talking pundit Yahoo first they were an epidemiologist. Yeah, exactly. Then they were A-A-A-A-A virologist, then there were a constitutional scholar, then there were a military strategist. You know, when someone asked you was COVID from the wet lab or wet wet market or escape from the lab. Yeah. It’s okay to say, how the hell do I know? Who knows? Have, have no expertise in that. Exactly. Why are you
00:44:59 [Speaker Changed] Asking me? Right? But everybody had an opinion,
00:45:00 [Speaker Changed] So it seemed
00:45:01 [Speaker Changed] Right. Yeah, exactly. Exactly. And so, yeah, the other thing along with that, that I love is that Wellknown epidemiologists or idiots, but the guy down at GNC who sells me protein powder, he’s a genius. And he knows my health better than anybody there.
00:45:15 [Speaker Changed] I mean, it’s just
00:45:16 [Speaker Changed] Like,
00:45:16 [Speaker Changed] Come on. There was a New Yorker cartoon that I vividly remember right in the middle of a pandemic. It’s the body of an airplane and there’s a guy standing up in row 17 B right. Saying, ah, we’re tired of these pilots telling us what to do, who’s with me? And it was like that just sort of Exactly. Let the pilots fly the plane. Exactly. Just sit down. So
00:45:38 [Speaker Changed] Bloomberg Law is one that I listen to. I, I’m not gonna say regularly because I, I don’t have the time to listen to every single one all the time.
00:45:46 [Speaker Changed] Yeah. I think that’s,
00:45:46 [Speaker Changed] But if I get a chance, I, I listen to
00:45:48 [Speaker Changed] It. And that’s a fascinating show. I’m, I’m like, you’re, you’re surprising me. ’cause I I do the same as you. Yeah. I listen to let me, a lot of ’em tell us the other two.
00:45:56 [Speaker Changed] Yeah. So the other two are actually on NPR, which I realize people have now suddenly decided I’m a wide IED liberalism.
00:46:04 [Speaker Changed] Can I tell you my wife, every time I get into the car and she’s been driving my car, it’s on NPR on satellite radio. And I had the same thought until you listen to a few of them. Yeah. And they’re fascinating. They are.
00:46:17 [Speaker Changed] And there’s two shows in particular that I would recommend, two podcasts in particular that I would recommend from NPR. One is called Left Right and Center, which is the name implies you have three people talking about issues, one from the left, one to the right and one from the center.
00:46:31 [Speaker Changed] Wait, they’re gonna give us all views. Who, who could have imagined such?
00:46:34 [Speaker Changed] Who could imagined that? Exactly. And they pick a topic. And sometimes I’m really interested in topics, sometimes I’m not. But whatever. The fact that you’ve got left, right, and center in the same podcast is extraordinarily rare. You don’t get that a lot. So that’s number one. And the other one is another NPR podcast called Open to Debate. Huh. Which is very similar. They pick a topic and, and this is more like a traditional debate where they have debating rules and all kinds of things, but it’s a, it’s a debate and, and you’re gonna hear two sides of, of an issue. Now look, sometimes the issues you don’t care about, sometimes they’re very important, sometimes they’re really cool, sometimes they’re not. I get that. But I, I think it’s incumbent on, on us as a class of money managers and, and fiduciaries to search out those kind of shows. I, I would argue if you are a fiduciary and you are constantly listening to M-S-N-B-C or Fox or newsmax or whatever Right. You’re, you’re doing a disservice to your clients.
00:47:35 [Speaker Changed] For sure. So, so there are two things I have to share with you. ’cause you’re, you’re right, right. In my favorite space, one is Planet money on NPR Yeah. Is something that they take this obscure, fascinating little topic and we’ll do a whole like way down the rabbit hole. Yeah. Deep dive. I don’t know if you recall during the Clinton administration, hey, we’re having problems with wealth equality and so we’re gonna cap how much we can pay CEOs in cash. Right. If you wanna give them risky stock options, you can. Yeah. Yeah. And the unintended consequences, is it 10 xd the wealth gap and just stories like that that are fascinating. The other thing is, you, you raise a a point, I know you are not a lawyer, but I’m a recovering attorney and the most applicable thing to investing you learn in law school is you have to be able to not just argue your case, you need to know the other side’s case better than they do.
00:48:40 Yeah. And that translates into equities as you can’t be bullish unless you can really state the bearish case. Right, exactly. And vice versa. Correct. You wanna be bearish, you better know what, what are the best arguments for being bullish here? And I can’t tell you how many people fail that test. Yeah. And I bet you see it back to post oh nine. Yeah. If you are super bearish, the only question I have for those people give me what the bull case is and if they can’t even imagine it, well now I’m going leveraged long. Yeah. ’cause that failure of imagination Yeah, yeah, yeah. Means everybody’s too bearish. Yep,
00:49:17 [Speaker Changed] Yep. And it is interesting you said that there are times we don’t do this regularly, but there are times where we do point counterpoint in our investment committee meetings Exactly. For that reason.
00:49:28 [Speaker Changed] Just so you’re making both sides of the So we’re,
00:49:30 [Speaker Changed] We’re, we’re being seen
00:49:31 [Speaker Changed] It, it’s, it’s one of these things that until you go through the exercise Yeah. It it, like if you have an extreme position and you come out the other side of that discussion and you still have that extreme position, either someone wasn’t making the argument well or hey, maybe the world really is coming to an end. Yeah. But most, so far that’s been the losing the losing bet. Yeah. Yeah. Yeah. So given what’s going on with technology and AI and automation and all the latest, greatest newfangled things, is anybody today a better investor than they were 10, 20, 30 years ago, 50 years ago? Has the bar since Charles Dow launched Barron’s in 1890, has anything improved for the average investor?
00:50:22 [Speaker Changed] I think, I think the amount, the amount of information that an investor can get obviously has gotten greater. Right? I mean, even if you think private,
00:50:30 [Speaker Changed] But it’s all public, it’s Reg fd. So does it help them?
00:50:33 [Speaker Changed] No, I don’t think it does. And I think, I think that, you know, the notion that somehow we have evolved and we are smarter, better investors than ever before. I think that’s hogwash. I think that’s complete hogwash. People are still underperforming, like they always did
00:50:50 [Speaker Changed] So it, it, it’s not, it’s not the strategies, it’s not the vehicles. Although we get great tax and cost benefits with ETFs, how much of this is just simply comes down to human behavior and human nature. Right. And people are still people and we’re still making the same mistakes over and over and
00:51:07 [Speaker Changed] Over again. Yeah. Yeah. I mean, there is something to be said for behavioral finance, right? And, and the biases that we bring to the table, it’s pretty hard to not be human.
00:51:16 [Speaker Changed] It, it very much is. So let’s bring this back to, you know, where we are in the market today and what’s going on. We just made new all time highs in the s and p and in the nasdaq. I always learn that all time highs are the most bullish thing you can see, perhaps not the very last one, but the hundred before it Yeah. Right. Are super bullish. How do you look at the market and say, everybody seems to dislike this market and yet we made fresh all time eyes.
00:51:46 [Speaker Changed] Yeah. So I think Barry, I think that we’ve said a number of times that we think it is a mistake right now. Do you think of the market sort of in quotes, that that’s what people are, are very, very focused on right now? And we think that’s a mistake. Why is it a mistake? Because the market is dominated by seven or 10 or 15 companies and, and we really have an extraordinarily bifurcated market in that respect. And I’m not saying anything that people don’t know. Of course, everybody, everybody knows about the Magnificent seven who doesn’t.
00:52:19 [Speaker Changed] Although they’ve, I think they’ve, the Mag seven have been the lag seven for most of this year.
00:52:24 [Speaker Changed] Correct? Correct. Now that’s, that’s, that’s where I was going exactly right. The, that, but the enthusiasm surrounding those, those seven stocks is, is not changing. And, and our view has been that, okay, you wanna go play those seven stocks, go play those seven stocks. Right? You don’t need us. We’re looking at everything else in the world. And, and I’ve just, I’ve, I’ve said to our investors many times, are there really only seven growth stories in the entire global equity market? Of course not. There’s tons of them. And, and we’ve shown people how many companies are actually growing earnings 25% or more, and how the Mag seven doesn’t really even fit into that group. That there are companies that are growing, you know, much faster for, and with, with, you know, similar consistency. And so I think if you’re invested in an s and p index fund, or you are invested solely in the Mag seven or solely in nasdaq, I think the next 3, 5, 10 years might be very disappointing.
00:53:21 [Speaker Changed] Huh.
00:53:22 [Speaker Changed] I think if you’re in everything else, and we could define, you know, that’s, I’ll leave it to everybody else to define how they def define everything else. But, but I think if you’re in everything else, I think you’re gonna do just fine. I think you’re gonna have a great time.
00:53:35 [Speaker Changed] So, so let’s talk about, not everything else, but one of the else things which has been international stocks. When we look at either developed X US or emerging markets, these are areas that have underperformed the US for 10, 15 years. Yeah, absolutely. And over the past year, we’ve started to see signs that, hey, maybe this underperformance isn’t gonna persist. Yeah. Persist. ex-US stocks have been doing much better than us certainly year to date in 2025. And we are recording this late June, maybe it’s been about a year or more about performance. How, how do you look at the world of international stocks? Yeah. What parts of the world look interesting to you?
00:54:19 [Speaker Changed] So I will, I will twist your question a little bit. And I will say that one of the thing, one of the aspects, one of the segments of the global equity markets that we are very bullish on is what I will call international quality non-US quality stocks. That’s
00:54:34 [Speaker Changed] Not a twist. That’s,
00:54:35 [Speaker Changed] Well, I’m just saying, as opposed to a country, right. Or something people like to talk about countries. But, but I think the reason I say this is that the median projected growth rate among high quality non-US stocks is actually equal, maybe even a touch higher than the median growth rate among the magnificent seven. Wow. So we’ll talk basically similar type growth. They offer dividend yields of three, four, maybe a little percent, maybe even four and a half percent depending on how you look at this. But let’s say three to 4% dividend yield, and they sell for a third to a half of the valuation of the magnificent seven. So the way I describe it to people is if somebody came to you and offered you a Maserati for the price of a Chevy, or to be fair here, if somebody offered you, Manolo belongs for the price of hush puppies, right? I think we would all say, yes, I will do that. By the way, can I have two? Right? But when we get to the stock market, this is like an unimportant to people. They don’t understand that, that there’s a value assessment made in everything we do all the time. But for some reason it stocks, it, it doesn’t appear. So the, the way I describe it is, you know, the niks and the Maseratis are on sale. We think that’s a great thing to do. We’ll take two. Thank you.
00:55:49 [Speaker Changed] So, so you’re naming two Italian company. Well, I, it’s just
00:55:55 [Speaker Changed] Paris, I just chose them because, because
00:55:57 [Speaker Changed] Everybody knows. But, but the reason I bring that up is you are not stock pickers, you are geography sector. Correct. Style selectors, right? So if someone says, Hey, that Rich Bernstein is onto something, I want exposure to fast growing high quality, inexpensive companies, what sectors are they looking
00:56:18 [Speaker Changed] At? So, so for us, I will, I will name the ETF that we hold with all due legal disclaimers here, right? That we hold the CTF, we have held it, we still hold it, blah, blah, blah. You know, however I can alert people that we, I’m, I’m talking my book a little bit here. The, the, it’s, it’s the IQLT is the ticker symbol, the international quality ETF. And it’s a great way, it’s actually, I believe EFA based. So you’re getting multiple countries.
00:56:49 [Speaker Changed] It’s probably about, so that’s Europe in the far far east and Asia. Asia,
00:56:52 [Speaker Changed] Correct. It’s probably gonna be Australia, it’s probably gonna be about 60 to 70% Europe. I don’t have the stats in front of me, but something like that. So I think, you know, that’s, that’s an area that people aren’t thinking about at all.
00:57:06 [Speaker Changed] So here’s the macro pushback, and I’m not saying this is, let me just play devil’s advocate. Europe has structural problems. Brexit is an issue. Now with the Trump administration, Europe’s gonna have to step up and fund more of their own military and defense Europe is, has problems and they’re not gonna be clear these for decades.
00:57:27 [Speaker Changed] And that could be true or that might not be true. Okay. But is it relevant? But notice, notice what I said was that they offer earnings growth
00:57:35 [Speaker Changed] That
00:57:35 [Speaker Changed] Is comparable to that of the Mag seven. And I think that’s the point that I’m trying to make, that despite all these problems that everybody is well familiar with, somehow these companies are putting, you know, are or have earnings growth, projected earnings growth that’s roughly similar, a little bit more than the magnificent seven.
00:57:53 [Speaker Changed] And these are quality companies and they’re X US, XU US all. And so if you have a huge home country bias and you want a little diversification, it’s, it’s, you can look overseas to, to correct reasonably price quality companies.
00:58:06 [Speaker Changed] And if you think the dollar’s gonna weaken, it’s
00:58:08 [Speaker Changed] All the better What we down eight, eight point a half percent. So like that year date, something like that. Yeah. So I know you’re not a currency analyst and you don’t make those sort of calls. How do you look at what happens post April 2nd liberation day and the ongoing weakness in the dollar? Does this come into your calculus or is this just more noise that nobody is, is
00:58:33 [Speaker Changed] It does not, not in terms of, of, you know, the, the short intermediate term, the way most people would think. But we think there are structural issues in the United States that transcend the current politics, transcend the current politics, and have been around for longer than people think and are detrimental to the US economy. And, and we find that very interesting that, you know, you hear all the time about debt and deficits and there’s some day of reckoning coming
00:58:58 [Speaker Changed] My entire adult life I’ve been hearing.
00:59:00 [Speaker Changed] Yeah. And I, I love that because the, the speaker usually is saying, I have some insight and for some reason the markets don’t appreciate my insight. Right. And I love that, like, you know, we’re all so smart and the market’s stupid. No, it’s actually the other way around. The markets have figured this out over the past 10 to 15 years. And what I’m talking about is, if you look at the spread between treasuries and AAA rated sovereign debt through time, what you will find is when the United States was rated aaa, our guilds were roughly in line with other AAA rated sovereign debt since the initial downgrade in 2011. And since then, nonstop, we have sold at a risk premium yield. In other words, we’re trading more like a lower quality bond relative to AAA rated sovereigns,
00:59:46 [Speaker Changed] Meaning all this negativity is in the price, right?
00:59:49 [Speaker Changed] It’s, it’s, it’s, it’s there, the markets have been well aware of it. There’s no day of reckoning. It’s like a slow bleed, right? And so what’s been, if you think about how everything in the United States priced off the 10 year mortgages, right? Munis corporate bonds, everything’s priced off the 10 year, the fact that we’re paying it at, you know, right now it’s just under 200 basis points of extra yield because of our lack of fiscal discipline that’s translating through to higher interest costs throughout the entire economy. It’s not just the government, it’s through the entire economy. Why don’t people, why aren’t people aware of this? Well, because over the past five to 10 years, we’ve had low absolute rates of interest. The point I’m trying to make is we’ve still been penalized relative to other countries, despite that absolute low rate of interest. And people haven’t realized that. So we’re already being penalized. And I think there’s, there’s a a, a real, I think everybody should be concerned about that. It’s clear that neither party has a real interest in fiscal discipline right now. So we should assume that, that that penalty against the United States is going to continue to exist, if not expand.
01:00:58 [Speaker Changed] So let me push back and, and play a little devil’s advocate about that. Hey, uncle Sam was borrowing it next to nothing. We’ve been running up deficits for a hundred years. COVID happens. Everybody’s stuck at Home Cares Act one is the biggest fiscal stimulus as at least as a percentage of gdp p right. Since World War ii. Then you add the second Cares Act under Trump, the third Cares Act under Biden to say nothing of the other tenure. Fiscal stimulus plans passed under Biden. And that pig working its way through the Python caused a giant spike in inflation plus supply chains, blah, blah, blah. And now that, that’s come out the other end. And so the Fed had a response whether, whether, whether the Fed brought inflation down or it was simply unwinding naturally is another debate. But once the Fed brings rates back down, this penalty will go away if and when the Fed finally does that. Well,
01:01:58 [Speaker Changed] The, the, that’s important because remember in the period I’m talking about, which is almost 15 years now, you’ve got periods, you’ve got multiple, multiple presidents, you’ve got multiple fed regimes, and the penalty doesn’t go away. And I think that’s, that’s so
01:02:14 [Speaker Changed] No matter, even at zero we were paying a pen because other Absolutely. Other countries had negative interest rates and negatives. Right. So there was still the penalty there. We were
01:02:21 [Speaker Changed] Still being penalized. It’s, it’s crazy. And that, that I think is something that’s lurking in the background that people are not paying attention to, especially people who say that there a day of reckoning is coming.
01:02:30 [Speaker Changed] You saying it came and it’s still here, it’s been here, it’s ongoing. It’s
01:02:34 [Speaker Changed] Ongoing. It’s just not big enough for anybody to notice. It’s, it’s like, it’s, as I said, it’s like water torture,
01:02:39 [Speaker Changed] The slow bleed, the slow bleed. That’s really, that’s really fascinating. Let’s jump to our favorite questions. Starting with, you mentioned some of the podcasts you’re listening to. What, what else are you streaming? What’s keeping you entertained these days? So,
01:02:52 [Speaker Changed] Streaming. I’m, I’m, I’m, I’m in a little bit of a rut in streaming right now. Oh, really? Yeah. I’m having tr everybody, you know, like everybody’s got their favorite, you know, streaming show that they like. And if you ask anybody, people come up with like four of them, oh, you gotta watch this, you gotta watch this. And all of a sudden it’s like, it all blends together and you can’t keep it together. So I, I’m a touch lost right now in, in terms of streaming, I won’t say, give me suggestions because I won’t remember it as soon as I leave here.
01:03:19 [Speaker Changed] I’m just gonna give you one. Okay. ’cause it’s quirky and interesting. Okay. It’s called Department Q.
01:03:24 [Speaker Changed] Department
01:03:25 [Speaker Changed] Q. Right. So this is a limited nine episode series on Netflix. Detective is shot, his partner is injured, the third person is killed at, at the site, and he basically is appointed head of the cold case division. Interesting. Which they’re just standing up. That’s
01:03:53 [Speaker Changed] The kind of stuff
01:03:53 [Speaker Changed] I love. I love that stuff. And it’s in Scottish, and I normally don’t love police procedurals. Yeah,
01:03:58 [Speaker Changed] Yeah, yeah.
01:03:58 [Speaker Changed] This is kind of fascinating. It’s department
01:04:00 [Speaker Changed] Q
01:04:01 [Speaker Changed] It’s, it’s, it sort of builds slowly over time. Like I could give you a hundred others that you, you wouldn’t care about, but I kind of know the sort of of stuff.
01:04:12 [Speaker Changed] Good.
01:04:12 [Speaker Changed] That’s a good one you like, but it’s quirky and weird, but really interesting. Good. If there, if you’re gonna have any complaint over it, and I don’t think this is a complaint, but the complaints I can imagine are, well, this builds slowly. I’m like, yeah. It’s not just, just That’s okay. You know, if you wanna open with a chasing Yeah. Yeah. James Bond and Mission Impossible. There you go. You know where to go find this is a little, a little more cool. Okay. So we’ll, well, I’m curious to see how you Department Q, department q such a, such an odd, let’s talk about mentors. You referenced one of them. Who were the folks who helped shape your career?
01:04:46 [Speaker Changed] So I would say there were, there were several. One that had an immense impact on me was the person who hired me at Merrill, Chuck Klau. Chuck Klau at the time was Merrill’s chief strategist. He’s,
01:04:57 [Speaker Changed] He’s, I know that name from way back when. Yeah,
01:05:00 [Speaker Changed] Yeah, yeah. He was the chief strategist at, at Merrill from 87 to 2000, something like that. Wow. And Chuck gave me two pieces of advice, which, which he, he claims he doesn’t remember that he gave me, but I’m sure he does. The first was my first day when I walked in at Merrill and I kind of said like, what do you think I should be focusing on? And he said to me, I don’t really care. Just don’t make a fool of yourself,
01:05:27 [Speaker Changed] By the way. That’s good advice for anybody, anywhere, anytime
01:05:30 [Speaker Changed] It was. And I, at first I was very put off like, this guy doesn’t care about me. Like, what is this all about? You know? But what he was saying was, you’re a grownup. Right.
01:05:38 [Speaker Changed] Right. Act like it don’t,
01:05:39 [Speaker Changed] You don’t, yeah, exactly. You don’t need me to tell you what you should do, but be aware, don’t make a fool of yourself. Right. Don’t, don’t do stupid things. Second thing he told me, which I live by to this day, and I tell this to people all the time, he said, make sure you’re a star and not a Roman candle. Huh. Which I thought, I still think to this day is fantastic advice.
01:06:01 [Speaker Changed] So persistency not, don’t just flame out.
01:06:04 [Speaker Changed] Don’t flame out. Don’t be the 10 minute, you know, thing. Be be the star that, to be a star is harder than you think. And, but be a star. Don’t be a Roman candle that I still to my day live my professional career that way.
01:06:18 [Speaker Changed] I, I I think, I think that’s great. You said you don’t read a lot, but you’ve written several books. I know there are books that have influenced you. What are some of your favorites? Do you read anything on vacation?
01:06:30 [Speaker Changed] So I do what I tend to read. I, I don’t have any one book that I would give you, but I, I will tell you, I tend to read a lot of espionage, spy and espionage type stuff. Okay. And the reason why is that as these things progress and as the stories progress, not, not like, as you said, not like James Bond type stuff. Right. But, but it’s, it, it’s almost like solving a puzzle or, or completing, you know, completing a puzzle in, in some way. And, and I find that fascinating. I find, you know, I was always in high school, my favorite math was, was geometry because everything was a puzzle to me. There was like, we had different tools. How do you solve the problem? And that’s kinda the way I, I view spies and espionage is that there’s different tools, but how do you solve the problem and how do you get where you want to go?
01:07:19 [Speaker Changed] Be in the spot. I got, I have another recommendation for you.
01:07:23 [Speaker Changed] This is why it came today. It
01:07:24 [Speaker Changed] Was a charming, it was one of these films that like, oh, this looks interesting. Netflix recommended, let’s try this black bag Black also set in the uk, MI six, husband and wife Yeah. Worked together. And there’s a mole somewhere in MI six and people, somehow each of them are led, I wanna say it’s, is it Kate Wins led, it’s one of the Kates. Hmm. And I forget who’s the lead husband, lead the man, the husband. But each of them begin to suspect the other. Oh,
01:08:00 [Speaker Changed] Interesting. And
01:08:02 [Speaker Changed] Shockingly interesting. Like, normally you go into a movie you have no idea about and let’s see how this is. And we both were like, wow, this was surprisingly good. So again, I know your wheelhouse. Yeah. Black Bag, black Bag and Department Q. You have now a film, a series, and a book. I’ve taken care of your, your summers there, entertainment. And so anything else you’re, you wanna mention that you’re reading?
01:08:30 [Speaker Changed] No, there’s not. You know, I, no, I haven’t, I haven’t been reading a lot recently For fun, I have to admit. But what I do read, you know, pretty religiously is, is getting back to the whole issue of, of being dispassionate. I I do read The Financial Times, I do read The Economist. To me that’s, that’s a must read for people in
01:08:48 [Speaker Changed] Industry. I have found the British papers. Yeah. Generally, like what we think of as left of center is sort of dead middle Yeah. To them. Yeah. And they look their right is kind of our middle. Like, it’s not like our spectrum feels wider. Our our political range. I think that’s right. And they, everybody seems to be clustered somewhere around, it’s either center right or center left, not extreme Right. Or extreme left.
01:09:15 [Speaker Changed] Exactly. And I actually don’t, I, I don’t care whether people are right or left, as long as I can figure that out. What I care for is factual content. Right, right. I fact, fact checking has to be, has to be good these days.
01:09:29 [Speaker Changed] So our final two questions. What sort of advice would you give to a recent college grad interested in a career in either investing or asset management or, or quantitative strategy?
01:09:39 [Speaker Changed] Yeah, so I, I mentioned this briefly before I, the advice I do give recent college ga graduates or, or seniors or or whatever, is not to pigeonhole yourself early in your career. Don’t, don’t say, this is what I have to do and this is what I’m going to do. You know, if you’re a doctor, if you wanna be a doctor, if you wanna be a lawyer, you have that. Some of that you have to do. I get that right. But if you want to go into the financial services industry in any format, you have to be, you have to enter that with an immense amount of flexibility. Our industry changes so dramatically and so quickly that what seems super interesting to you is a college graduate could be obsolete in two or three years. Right? Right. And you don’t wanna paint yourself into a corner where that’s all you know, and that’s all you’re willing to do and you’re unwilling to do other things or unwilling to learn other things. I think if you’re coming into financial services, you should, you should be one who likes to learn and likes to morph through time. Hmm.
01:10:41 [Speaker Changed] Really, really interesting. And our final question, what do you know about the world of investing today that might have been helpful to know 40 years or so ago? Oh, when you were getting started.
01:10:51 [Speaker Changed] Oh man. I mean, I will tell you, I have gone back and read reports that I wrote 20 years ago or 25 years ago. And I read them today and I say like, what a moron. I mean, I’m amazed at my own stupidity. And, and so
01:11:08 [Speaker Changed] Let me, I’m gonna interrupt you right here to say, so Professor David Dunning of University of Michigan. Yeah. He of the famous Dunning Kruger Effect said, if you look at work that’s five years old and you don’t think it’s awful, you’re not progressing or growing.
01:11:23 [Speaker Changed] Is that right? Oh,
01:11:23 [Speaker Changed] Is that right? Swear ab I said on it. Right, right. Sitting where you were sitting
01:11:26 [Speaker Changed] That,
01:11:27 [Speaker Changed] That’s, it’s fascinating. And said, if’s fascinating. If you’re not, if you don’t hate what you did 10 years ago, you haven’t grown at all
01:11:33 [Speaker Changed] Professionally. I, I, I
01:11:34 [Speaker Changed] Cringe. How fantastic is
01:11:35 [Speaker Changed] That? I cringe. I mean, some of the, some of the ideas I wrote about we still use and they’re, they’re still the crux of what I, but I’m just saying, I look at my writing, I look at how I expressed myself, I looked at how I thought something was so important, that type of thing. And I cringe today, I absolutely cringe. And the moral of the story there is I’ve come to grips with the fact that no matter how smart I think I am, I’m really not very smart. And there’s a lot more to learn. And so I think as I’ve gotten older, I’ve wanted to learn more through time, I kind of immersed myself. And it’s, it’s funny because my friends react to me down there. They’re like, how did you know that? And it’s only because I’m reading all kinds of different things and doing all kinds of different things and paying attention to different things because I kind of think of myself as a perpetual moron. I, I don’t, I don’t know how else to describe it, but that’s really how I view myself.
01:12:23 [Speaker Changed] All I know is that I know nothing. I, yeah. Go back to Phil philosophy. What is that? Aristotle? So, yeah. So we, we will, we will end where we began. Rich, thank you for being so generous with your time. We have been speaking with Rich Bernstein, founder, chief investment officer of Rich Bernstein Associates. If you enjoy this conversation, well be sure and check out any of the 550 we’ve done over the past 11 years. You can find those at Bloomberg, iTunes, Spotify, YouTube, wherever you feed your podcast fix. Be sure and check out my new book, how Not to Invest the ideas, numbers, and behaviors that destroy wealth and how to avoid them. How not to invest wherever you find your favorite books. I would be remiss if I did not thank our crack team that helps put these conversations together each week. Anna Luke is my producer. Sage Bauman is the head of podcasts at Bloomberg. Sean Russo is my researcher. Peter Olino is my engineer. I’m Barry Riol. You’ve been listening to Masters in Business on Bloomberg Radio.
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