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Chapter 1: What is the main topic discussed in this episode?
This is the Rational Reminder Podcast, a weekly reality check on sensible investing and financial decision-making from two Canadians. We're hosted by me, Benjamin Felix, Chief Investment Officer and Dan Bortolotti, Portfolio Manager at PWL Capital.
Chapter 2: Why shouldn't investors panic when markets reach all-time highs?
Welcome to episode 412. We got a good interview on this episode. Yeah, it's honestly kind of surprising that this is the first time that we've had Ben Carlson on this podcast. We've kind of been creating content in parallel for years. I've read lots of his blog posts. We've had Barry and Josh, Barry Ritholtz and Josh Brown on the podcast. Oh, and Nick Maggiuli, twice.
Those are all guys that are at Ben's firm, Ritholtz. Ben writes a Wealth of Common Sense blog. He's also got a book of the same name. He's got a new book out, which is what we... talk to him about roughly. I mean, it's more like the conversation was guided by what's in the book. We didn't really talk about the book, but well, indirectly. The book is called Risk and Reward.
It's just out from Harriman House. It was a nice read. And Ben spoke about the content very well, as he always does. Ben Carlson, for people who do not know, is the director of institutional asset management at Ritholtz Wealth Management. He's been managing institutional portfolios for his entire career.
And he's also got a very popular blog that I mentioned the name of, and he is the author of four books on saving, investing and money. Now, what do you think of the conversation?
Yeah, I think Ben is really one of a small number of financial writers out there who really, I mean, he backs up what he says with the data and the evidence, but he writes with a very distinctly non-academic style. He's just very down to earth, very much common sense, very much practical, long-term wisdom. And I think that really comes across in the conversation.
I think people are going to enjoy it. A very good writer. Similar to you, Dan, honestly. You and Ben both have blogged. You read it and it's like, this is a really good writing.
Well, I appreciate that. I think that's kind of what I've always strived to do as well. It's like, yeah, of course you need to back up what you say, but I learned pretty early on in this game that if you really want to influence people and help them improve the way they invest, You can't just hammer them over the head with data.
People will push back against it if it conflicts with whatever their existing beliefs are. You need to share some insights and you need to bring it down to the level of their own personal lives.
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Chapter 3: What can we learn from Japan's historic asset bubble?
And so some writers are really good at that. Morgan Housels and other guys just maybe the best at it. And as we'll see here, Ben has got a lot to contribute to that discussion.
We talked a lot about long-term returns, risk, well, as the title of the book suggests, risk and reward. Talked about the Japan bubbling crash, 1929 crash, the difference between volatility and risk, the stock market versus the economy.
And just Ben has great thoughts on all this stuff and how that factors into asset allocation and the behavior of investors and just long-term thinking more generally. So I thought it was a really nice conversation. It was. Should we get to it? Let's go to our conversation with Ben Carlson. Ben Carlson, welcome to the Rational Miner podcast.
Thanks for having us. Glad to be here.
Glad to have you here. Ben, how worried should people be about investing at all-time highs?
They should be freaking out right now. Now, the funny thing is, is that I think some investors think the next all-time high is going to be like the high, all capital letters. It's the more people may be thought that after the great financial crisis, this is it. One of these highs is the next one.
Data actually shows if you pick any day outside of all-time highs, which only happened like 7% of all trading days or something, most of the time you're looking up at them. your returns are actually better going out one year, three years, five years from all-time highs, which kind of makes sense when you consider that bull markets last longer than people think.
One of them is going to be the peak. It's going to happen, but it's just one. Most of them are just fine.
So Ben, one of the questions that you always seem to get or many people get when they talk about the long-term potential for stocks is, what about Japan? Tell us a little bit about the Japanese counter example.
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Chapter 4: How did the Great Depression impact investor behavior?
Probably one of my favorite chapters to write in the book. There aren't that many books written about the Japan situation, which is one of the biggest market outliers and anomalies in history. And people always throw that in my face anytime I talk about long-term investing. What about Japan, idiot? I get that all the time. People love throwing that down my face.
So I actually told my publisher, can I call this book Now Show Japan? And they're like, that's a little too tongue-in-cheek. I think that's a little too inside baseball. All right, fine. Maybe if we do the Japanese version, I want to call it Now Show Japan. It was perhaps the biggest bubble of all time. It wasn't just stocks, right? Stocks trading like 100 times earnings. It was real estate too.
The imperial grounds in Tokyo in 1989 were technically worth more than the entire Canadian real estate market combined. It was one of the most insane periods in history. And they compressed all these returns in a short period of time. And then so the next three decades, if you would have invested right in 1989 at the top, you were underwater. And that's the thing people throw in your face.
How can you be a long-term investor if a situation like this exists? To me, I don't think that showing exceptions to the rule necessarily invalidates the rules.
Chapter 5: What role does diversification play in managing investment risk?
I think you have to understand those situations and help guide your actions a little bit. The outliers do exist. But I don't think you can say that a situation like that totally invalidates. Because guess what? The rest of the world did just fine after Japan peaked. Japan was pulling up the rest of the world in the 80s.
If you look at any of the returns, foreign stocks did much better than US stocks, mainly because of Japan. But the rest of the world, if you would have diversified, did just fine after Japan. And actually, the long-term returns in Japan are much better than they think. You just have to go back further.
people miss that point. The bubble required really high returns before it popped. And so if you had been investing before the peak, you actually did okay because the returns were so high.
It's just a really long mean reversion. You got like 22% per year from 1970 to 1989 in Japan. Small caps in Japan did 30% per year for two decades. It's insane. The returns almost had to be poor after that. If you put them together, the boom with the bust, it's like almost 9% per year. It's kind of crazy. Over 50 years, the long-term worked.
It's just that over that 20 or 30 year period, it didn't work so well because yeah, the Nikki didn't get a new high until like 2024 after peaking 1989. It's crazy.
Yeah, it is crazy. Other than Japan, what have been the worst market crashes in history?
The Great Depression is the one that I always keep coming back to. I read Andrew Ross Sorkin's book, 1929.
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Chapter 6: What are effective long-term hedges against inflation?
It's a fascinating period of time for me. So the US stock market crashed like 86%. I can't imagine that happening today. And one of the reasons that society didn't just completely fall apart, and what it felt like it kind of did, I guess, no one really invested in the stock market back then.
That was one of the surprising things to me in my research is that it was like 1% or 2% of US households had any money in the stock market. It was more the economy that really took people down. And 20%, 25% unemployment rate, the economy going nowhere, and Fed officials and government officials making it worse. So a lot of people have asked me, do you think that could happen again?
Never want to say never when it comes to the markets. But I have a hard time thinking that we could allow the US stock market to fall 80%, 90% these days just because so many more people are involved in the markets now. Government officials... just have more institutional knowledge about how to step in and save these things and act as a lender of last resort than they did back then.
The Fed was still pretty new when the Great Depression happened. They didn't have all the power they have today. That one is really scary. The numbers are just insane. There are still records from back then in terms of down months and down days and down years that just will probably never be seen again.
So tell us about what happened after the 29 crash. And then more broadly, what tends to happen after market crashes like that?
It's funny. I show one of my favorite stats in the book is I look at historical rolling monthly 30-year returns on the S&P 500. And the worst 30-year return came if you invested at the peak in September of 1929, which is actually was better than you would think. It was like a total return of 850% and annual returns of almost 8% per year.
So that's the worst 30-year return in the last 100 years or so. And then what happened afterwards after you had that huge crash and stocks fell 85% or whatever, Then you had the best 30-year return. And it was, I don't know, 15% or 16% per year. And so you went from worst to best in three years. And I looked at some of the numbers too.
What if we just took the Great Depression completely out of the US stock market history? The stock market has given investors roughly 10% per year for 100 years. Let's just take that situation out and start it a few years later. I think the returns go to like 11% or something.
That's a lot for compounding wise, but it's not like it completely changed the ballgame considerably, considering it was such a huge, huge crash.
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Chapter 7: Why is market timing often a poor investment strategy?
The thing that happens after the crash is that like your returns improve. The expected returns are higher after you go through the crash. And that was obviously the biggest one ever for US stocks, at least.
We talked about Japan crashing, Great Depression, 1929 crash. What are the best ways to manage the risks of a stock portfolio?
I love the mindset that there really are no free lunches when it comes to investing. There's always something that you're going to be angry about or it's not going to work. But I think diversification is about as close as you can get to a period like that. Actually, US bonds did pretty well, did okay during the Great Depression.
So if you had some sort of liquidity or you probably did okay to have all your money overlaid on the stock market like many people did who were investing at the time, The other form of risk management is understanding yourself. What's going to leave you worse off? What is your blind spot? Do you overreact to these crashes? Do you need some more conservative investments?
Or are you a person who like, I just need to be aggressive at all times and I'll take what comes in terms of volatility and the ups and downs. That's a big form of risk management. Really, it's just like understanding like what's the lesser version of yourself that's going to cause you the most pain.
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Chapter 8: What is the difference between volatility and risk in investing?
So in the broader picture, how would you say that you think people can win at investing other than, of course, picking stocks and timing the market perfectly?
Yeah, that's easy. I do think most people outside of finance, the biggest thing for them is like, are you just on track to achieve your goals? Jason Zweig at the Wall Street Journal did this story a number of years ago where he went to Florida. He interviewed all these people in this beautiful golf course resort in Boca Raton or something. And he was asking them, how did you do it?
How did you retire down here? What did you invest in? He asked one guy, did your portfolio outperform the S&P 500? And the guy thought about it for a second and he said, I don't care. What does it matter? I ended up in Boca. That's the point. There are no points for degree of difficulty or style points when it comes to investing.
I think it's just like, how do you reach your goal and minimize risk along the way to achieve whatever your goals are? I think that's the biggest thing for most people. That's the benchmark that matters.
I like that answer. How problematic is inflation for long-term investors?
I think on the psyche of investors, what we've learned this decade is that it's very problematic. My favorite thing to study about markets is behavior and psychology and how people react to these things. Having read all these books about psychology, I totally underestimated how angry inflation would make people.
The fact that it came roaring back for the first time, maybe it's just because we haven't had it in so long. I think the sentiment part of it is really interesting to watch how people react. And even if your wages rise, it doesn't matter. The wages, that's me, that's my hard work. But inflation, that's like someone else, that's a government or corporations or whoever.
But I think the big thing for investors with inflation is just, it shows you, this is why you have to invest your money. Because your dollar is getting eaten away by rising prices over time. You can complain about it and bury your money in the backyard, but good luck with that. You have to invest it in something if you want to try to keep up with or beat the rate of inflation.
People have lots of ideas of what kinds of assets they should purchase as hedges against inflation. What do you feel are the best ways for most households to do that?
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