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Interview With Charles Rotblut: Masters in Business (Audio) · Masters in Business

0:03
Speaker 1: This is Masters in Business with Barry Ridholes on Bloomberg Radio.
0:08
Speaker 1: This week on Masters in Business on Bloomberg Radio, my
0:12
Speaker 1: guest is Charlie Rotblood. Charlie is vice president at the
0:16
Speaker 1: American Association of Individual Investors and he not only is
0:21
Speaker 1: the editor who oversees the a AII Journal, but also
0:26
Speaker 1: conducts a number of surveys, sentiment surveys of individuals which
0:32
Speaker 1: have been in existence for gee, they go back to
0:36
Speaker 1: it's unusual to find a sentiment survey with the same
0:41
Speaker 1: methodology asking questions of individual investors. Going back that far,
0:47
Speaker 1: we speak about the Weekly Sentiment Survey, which I find
0:51
Speaker 1: a little noisy, but it extremes it certainly can be useful,
0:55
Speaker 1: and the A A II Ascid Allocation Survey, which I
0:59
Speaker 1: find to be tremendously useful. It has pretty much marked
1:04
Speaker 1: the bottom of every major UH market correction since UM
1:10
Speaker 1: as well as marked the top at at major highs.
1:14
Speaker 1: And and it was one of the things that were
1:16
Speaker 1: screaming up and down late early two thousand that hey
1:20
Speaker 1: market have gotten U way too way too uh frothy,
1:26
Speaker 1: and that investors are wildly overweight equities relative to their
1:30
Speaker 1: historic averages. UH. He's an interesting character. He he does
1:35
Speaker 1: a number of fascinating things for a AII. If you're
1:40
Speaker 1: interested in what individual investors are doing, thinking, saying, and
1:44
Speaker 1: how they're allocating their portfolios, I think you'll enjoy this podcast. So,
1:49
Speaker 1: with no further ado, my interview with a AI eyes
1:54
Speaker 1: Charles Rotblood. This is Masters in Business with Barry Ridholds
2:01
Speaker 1: on Bloomberg Radio. My special guest this week is Charles Rotblood.
2:06
Speaker 1: He is the vice president at the American Association of
2:10
Speaker 1: Individual Investors. He's also the editor of the AII Journal UH.
2:16
Speaker 1: He's a c f A, and he is the author
2:19
Speaker 1: of Better Good Than Lucky, How Savvy Investors create a
2:23
Speaker 1: fortune with the risk reward ratio. Charles Rotblood, Welcome to Bloomberg.
2:28
Speaker 1: Thanks for having me so. I've been following your work
2:32
Speaker 1: for a long time. I'm a big fan of of
2:37
Speaker 1: some of the surveys that aii UH performs, Not so
2:42
Speaker 1: much the day to day or weekly things, but the
2:45
Speaker 1: longer term asset allocation number I find absolutely a compelling UH.
2:51
Speaker 1: They say you don't ring a bell, but there are
2:53
Speaker 1: times when that UM survey rings a bell. But before
2:56
Speaker 1: we get into the nitty gritty of exactly the surveys
3:00
Speaker 1: and other things you do. I told my wife I
3:04
Speaker 1: was interviewing you and I described your title and she goes,
3:08
Speaker 1: she asked me, um, well, what does he actually do?
3:12
Speaker 1: When I go, I'll ask him. So when people say
3:14
Speaker 1: to you, what do you do for a living, how
3:16
Speaker 1: do you answer that? Well? I start off by just
3:18
Speaker 1: saying a magazine editor, and that of course lets you
3:21
Speaker 1: well what magazine and who publishes that? So kind of
3:24
Speaker 1: give a long answer. But main job as I am
3:27
Speaker 1: the editor of the AI Journal, which really compels really
3:32
Speaker 1: really it's a matter of providing information about how do
3:35
Speaker 1: you invest better? Uh So we do a lot stuff
3:38
Speaker 1: in the house. I reach out to a lot of
3:39
Speaker 1: smart people on Wall Street. But in addition to that,
3:42
Speaker 1: we're focused on investor education, and part of the way
3:45
Speaker 1: we do that is we provide different model portfolios. We
3:49
Speaker 1: have a Stock Superstars Report which invests in different types
3:53
Speaker 1: of strategy, so we're diversifying by strategy, growth value and
3:55
Speaker 1: not only by industry a dividend investing portfolio. We're also
3:59
Speaker 1: no of our microcap portfolio, which is run by our chairman,
4:03
Speaker 1: Jim Cluton at Investor Microcap Stock. So part editorial, part
4:07
Speaker 1: portfolio management, and also just a lot of speaking to
4:11
Speaker 1: people and and for people who may not be familiar
4:14
Speaker 1: with A I I. You're a nonprofit, you have a
4:17
Speaker 1: hundred and seventy thousand members. Is that about right? That's right?
4:20
Speaker 1: And essentially you guys have been around for over thirty years.
4:25
Speaker 1: Is that about right? Yeah, we actually started in nineteen seventies.
4:27
Speaker 1: We are actually started by Jim Clunen, who's who is
4:31
Speaker 1: a professor de Paul and he's still still at the office.
4:34
Speaker 1: Saw him on Monday. So now we know what AIII
4:39
Speaker 1: is and we know it does um. I think you
4:42
Speaker 1: guys are actually one of the largest successful subscriber newsletters
4:48
Speaker 1: that really doesn't specialize in making forecasts. Is that a
4:51
Speaker 1: fair statement? Yeah, it is. We don't. We do not
4:54
Speaker 1: make any market forecasts. We actually think people overall are
4:57
Speaker 1: better offically just didn't make any forecasts because the tendencies
5:01
Speaker 1: to have this confidence. So I'm saying this with isis
5:03
Speaker 1: I'm saying this with China. You don't worried about Janet Yellen.
5:06
Speaker 1: And the reality is it doesn't matter what the market's
5:09
Speaker 1: gonna do next week. It really matters when you're ninety,
5:13
Speaker 1: do you still have cash in your account that you
5:14
Speaker 1: can live in, and it's very hard for people to
5:17
Speaker 1: lose sight of that because that doesn't necessarily grab headlines.
5:20
Speaker 1: But as an individual investor, your goal is to really
5:23
Speaker 1: get to your last day and still have still have
5:25
Speaker 1: at least a dollar in your bank account. And let's
5:28
Speaker 1: talk about your membership. Who who's a typical AII member, Well,
5:34
Speaker 1: we care individual investors are. Average member is in the sixties, affluent,
5:38
Speaker 1: college educated, and that's really demographic. If you talk to
5:42
Speaker 1: a morning Star about their consumer division, look at various
5:45
Speaker 1: investment newsletters, it's it's all pretty much the same demographic.
5:48
Speaker 1: And I would love to get people in their twenties
5:50
Speaker 1: and thirties and involved because we could help them so
5:53
Speaker 1: much at such a young age. But in general, even
5:56
Speaker 1: when I said invest hoals in Zack previously, it always
5:58
Speaker 1: tended to be older men and who could clean, who
6:01
Speaker 1: actually had built wealth over their life for their careers.
6:04
Speaker 1: That tends to be the key demographic for really any
6:07
Speaker 1: individual investor type of newsletter or service. Well, if you
6:11
Speaker 1: want more millennials, you have to make your acronyms sound
6:14
Speaker 1: less like a r P. I think they see a
6:17
Speaker 1: A and they don't even get to the I I fart.
6:19
Speaker 1: They just see that and uh and run. You mentioned
6:23
Speaker 1: morning Star. Who do you guys consider your your competitors.
6:27
Speaker 1: Who's out there, if not an identical space, who's who's
6:31
Speaker 1: in a similar space to a AI. Yeah, there really
6:34
Speaker 1: isn't one. I mean morning Star on us do overlap.
6:36
Speaker 1: We have some competitive products, but then we have a
6:39
Speaker 1: lot of people from the organizations. I think Christine Ben's
6:42
Speaker 1: talks to more of our members than I do. Uh.
6:44
Speaker 1: But you know, better investings out there they do education,
6:47
Speaker 1: though they're more focused on investment clubs UM and they
6:50
Speaker 1: have their own stock picking system. We're really the only
6:53
Speaker 1: organization that's really focused on comprehensive investment education out there,
6:58
Speaker 1: at least that I'm aware of. And you know, UM.
7:02
Speaker 1: I interviewed Dr Robert Johnson, who was at the c
7:05
Speaker 1: FA Institute and is now president of the American College
7:09
Speaker 1: of Finance, and he's another person who advocates for investor finance.
7:15
Speaker 1: But I'm starting to wonder how successful investor education can be.
7:20
Speaker 1: It seems like people make the same mistakes over and
7:23
Speaker 1: over and over. Can we ever really reach a critical
7:27
Speaker 1: mass of people? Uh? And and prevent them from shooting
7:30
Speaker 1: themselves in the foot. You know, I'd like to do that.
7:33
Speaker 1: I think it's always gonna be hard because people are
7:36
Speaker 1: always being torn in different directions. There's always gonna be services.
7:39
Speaker 1: Do this now that make money, do that now they
7:41
Speaker 1: make money. I'm in just a pure emotions when I speak.
7:44
Speaker 1: One of the very first slides I show actually has
7:47
Speaker 1: a quote from Charlie Ellis who said, as in Driving,
7:50
Speaker 1: the secret, the secret to success is avoiding the big mistakes.
7:53
Speaker 1: And I tell people, if you want to make a
7:55
Speaker 1: lot of money in the markets, just don't screw up.
7:57
Speaker 1: And if you avoid those behavioral errors that cause you
8:00
Speaker 1: to make a big mistake, that's gonna put you a
8:03
Speaker 1: light years aheavy game. But it's easier said than done.
8:06
Speaker 1: So in the last minute, we have in this segment,
8:08
Speaker 1: what is one of the biggest errors that investors make?
8:12
Speaker 1: You know, I think it's really panicking and selling at
8:15
Speaker 1: the wrong time, Panicking when there's a bear market, panicking
8:18
Speaker 1: when it's a market correction. Because when people do it,
8:20
Speaker 1: they just tend to stay out with the market too
8:22
Speaker 1: long and they basically lock in losses and miss out
8:25
Speaker 1: on the chance to recoup those losses. I'm Barry Ridhults.
8:28
Speaker 1: You're listening to Masters in Business on Bloomberg Radio. My
8:32
Speaker 1: special guest today is Charles Rotblood. He is vice president
8:36
Speaker 1: and editor of the American Association of Individual Investors as
8:40
Speaker 1: well as the a ai I Journal. I wanted to
8:44
Speaker 1: talk a little more about some of the sentiment measures
8:47
Speaker 1: that ai I does. Probably the most famous one is
8:52
Speaker 1: the weekly sentiment measure. Tell us about that? Sure? So
8:56
Speaker 1: we started this in eighty seven and we ask our
8:58
Speaker 1: members a very simple question. Over the next six months,
9:01
Speaker 1: I feel the market will be up, bullish, unchanged, neutral, down,
9:05
Speaker 1: bearish UH. And we've tracked this weekly and we've seen
9:09
Speaker 1: since eighty seven seven, and we've seen over time, when
9:12
Speaker 1: you know, near peaks, bull sentent hits very high levels.
9:16
Speaker 1: During bear markets hits very low levels. March five, two
9:20
Speaker 1: thousand nine, right at the very bottom of the bear market,
9:23
Speaker 1: bullish sentiment was below UH. And what's interesting about is
9:27
Speaker 1: everyone focuses on a weekly changes, but it's really when
9:30
Speaker 1: it's way off kilter, when it's just way beyond the averages,
9:33
Speaker 1: that's when you have to pay attention, particularly bull sentiments.
9:36
Speaker 1: When I've looked at it, eliminated all hindsight, when you
9:40
Speaker 1: see bull sement unusually low optimistic levels, and you would
9:44
Speaker 1: say below is how often does it hit that? Then
9:47
Speaker 1: not very often, not very many times in the history
9:49
Speaker 1: of the survey. So so the really you're you're looking
9:53
Speaker 1: to more or less that's interesting, the noisy week to
9:57
Speaker 1: week stuff, But where really is in an vestable decision
10:02
Speaker 1: is when it reaches the extreme. Yeah, And the other
10:04
Speaker 1: thing that's interesting, and I'm curious to see what's gonna
10:06
Speaker 1: happen now because we've seen it a lot of the
10:08
Speaker 1: last twelve months. But when neutral sentiments a way above
10:11
Speaker 1: its average that's also been correlated with rising markets. Has
10:14
Speaker 1: that happened previously. It's happened previously, but it's mostly prior
10:18
Speaker 1: to two thousand and so. Now over the last year,
10:20
Speaker 1: we've had several readings with it being unusually high, and
10:23
Speaker 1: kind of will let I want to let things play
10:25
Speaker 1: out to say, do we now see this correlation pop
10:28
Speaker 1: up again? It's not causal, but there's certainly a correlated
10:31
Speaker 1: link between sentiment being very off and the market's changing direction.
10:37
Speaker 1: That's that's quite interesting. So that's consistent with what I
10:41
Speaker 1: know about um sentiment. You really want to take a
10:45
Speaker 1: take a notice when it reaches um, when it reaches
10:49
Speaker 1: an extreme. So that raises the question of of when
10:53
Speaker 1: we have a whole lot of bullishness um or very
10:56
Speaker 1: little bullishness. Are these sort of booms and bus bubbles
11:03
Speaker 1: and and collapses? Is this the inevitable fate of markets?
11:07
Speaker 1: This is this just the way human beings behave? Yeah? Unfortunately,
11:11
Speaker 1: I think so. We just we tend to be greedy
11:13
Speaker 1: by nature, we tend to be risk adverse, and everyone thinks, well,
11:17
Speaker 1: risk of version means I'm afraid to lose money, but
11:19
Speaker 1: it also means you're afraid of not making money when
11:21
Speaker 1: you see everybody else making money. So read is just
11:24
Speaker 1: the inverse a panic? Yeah, absolutely, And you know it's
11:26
Speaker 1: just human nature. And we have very short histories. We
11:29
Speaker 1: have volumes of market history. Anyone can pick up security
11:32
Speaker 1: analysis and read about what happened leading up to the
11:35
Speaker 1: Great Depression. But you know next, lots of exuberance, lots
11:38
Speaker 1: of lots of frothy sentiment, and people just no longer
11:42
Speaker 1: paid attention to the traditional metrics. Yeah, you know, I
11:44
Speaker 1: think if you changed probably seven words in that whole book,
11:48
Speaker 1: reprinting a two thousand you would have thought it was
11:50
Speaker 1: about the tech bubble. It's funny. Funny you say that.
11:52
Speaker 1: There's a book by Richard Wycoth written in nine and
11:57
Speaker 1: it's called called How I Trade Stocks and Ones, And
12:01
Speaker 1: the stuff he talks about are telegraph and telecom, railroads,
12:07
Speaker 1: like a handful of major industries, And you could swap
12:10
Speaker 1: out the names of the industries you couldn't tell the
12:14
Speaker 1: difference as if it was written yesterday. No one's talking
12:17
Speaker 1: about telegraph. But if you swap telephone and telegraph for Internet,
12:21
Speaker 1: you would not be able to tell the difference. It's
12:23
Speaker 1: the exact same narrative. It's quite fascinating. Um So, so
12:27
Speaker 1: the next question, the related question to this is given
12:31
Speaker 1: that these booms and bus are inevitable, given that we're
12:34
Speaker 1: always gonna have bubbles, we're always gonna have crashes, how
12:38
Speaker 1: should investors deal with their own emotions? How do they
12:41
Speaker 1: deal with fear and greed? You know? I think that's
12:44
Speaker 1: where it ties into weight loss, where they talk about triggers,
12:46
Speaker 1: something that prompts you to eat, and I think people
12:48
Speaker 1: need to be aware what promps you to trade and
12:51
Speaker 1: setting up barriers. I I personally advocate for rebalancing because
12:54
Speaker 1: I think when you are scared or you're feeling greedy,
12:57
Speaker 1: it gives you a positive emotional outlet take in your
13:00
Speaker 1: portfolio back to your targeted allocation. So, in other words,
13:03
Speaker 1: the market has gotten she'll act, it's down where it was,
13:08
Speaker 1: and your portfolio is supposed to be making up round
13:10
Speaker 1: numbers US equities, developed x US and ten percent emerging
13:17
Speaker 1: market and all of those have moved off of those
13:20
Speaker 1: preset measures. By rebalancing, you mean you're gonna sell a
13:24
Speaker 1: little bit of everything else that's run up and move
13:27
Speaker 1: these allocations to their previous levels. So if you're supposed
13:33
Speaker 1: to be US and now it's twenty seven, you're gonna
13:37
Speaker 1: move it back to thirty. Yeah, And the beauty of
13:39
Speaker 1: it is two things. A you're buying low selling, high
13:42
Speaker 1: proven strategy, but you're also giving yourself back that sense
13:45
Speaker 1: of control where okay, this is going on, and here's
13:48
Speaker 1: something I can actually do and I know why I'm
13:50
Speaker 1: doing it, and that alone, from emotional standpoint, I think
13:53
Speaker 1: can help people a lot. It's certainly not the only way,
13:56
Speaker 1: but I like it. From a behavioral standpoints quite quite
13:59
Speaker 1: interesting thing. Um, anytime people can do something that doesn't
14:02
Speaker 1: shoot themselves in the foot, especially when they're dealing with
14:05
Speaker 1: their own emotions. Uh, is a really really good thing.
14:09
Speaker 1: Let's let's talk a little bit about valuations. Are our
14:12
Speaker 1: US markets expensive, cheap or fairly valued? You know, I
14:16
Speaker 1: think they're fairly valued when you look at it. Obviously,
14:19
Speaker 1: the big question is do we get earnings and revenues growth?
14:22
Speaker 1: And that that's a big question. Uh. If we don't
14:25
Speaker 1: get earnings, we don't get revenue started up, then obviously
14:28
Speaker 1: we can make an argument that stocks are of our valued.
14:31
Speaker 1: But I think right now they're probably fairly valued. Um.
14:35
Speaker 1: And you know, some people can point to CAPE saying, well,
14:36
Speaker 1: that's out of whack, but but that's been out of
14:38
Speaker 1: whack for a long time. Yeah, we actually decades out
14:41
Speaker 1: of whack. Yeah, we actually are giving an investing portflow.
14:43
Speaker 1: We actually just the numbers and thought, okay, what if
14:45
Speaker 1: we start out when races first started being raised. Uh back,
14:49
Speaker 1: I guess twenty years ago. I started when started peaked,
14:52
Speaker 1: they started coming back down from two, and we looked
14:55
Speaker 1: at the CAPE from there and based on that measure,
14:57
Speaker 1: it's about average. So if you figure, okay, we're an
15:00
Speaker 1: slow interest rate environment, it makes sense if you really
15:03
Speaker 1: are convinced the Fed's gonna raise rates and every four
15:06
Speaker 1: days aggressively, right, and every forecast about that's been wrong
15:09
Speaker 1: for six years running. Now. Uh, you know, it's it's
15:12
Speaker 1: hard to argue that stocks are expensive on that measure.
15:15
Speaker 1: What do you think is a good measure evaluation for
15:18
Speaker 1: the average individual investor? Yeah, I think on an average
15:22
Speaker 1: level looking at stocks, UM, I like price the book.
15:24
Speaker 1: I think price earnings a price of sales from the
15:27
Speaker 1: market overall. Uh, the pe is just good because it's
15:30
Speaker 1: so easy to find and it's just out there. I'm
15:32
Speaker 1: very rid helps you're listening to Masters in Business on
15:35
Speaker 1: Bloomberg Radio. My guest this week is Charles Rotblood. He
15:38
Speaker 1: is a vice president at the A A I I
15:41
Speaker 1: out of Chicago, a nonprofit association of individual investors. I
15:47
Speaker 1: mentioned earlier the A A II Acid Allocation Survey, which
15:52
Speaker 1: I've been a big fan of, mostly because it only
15:57
Speaker 1: makes really significant CAN readings on rare occasions. So first
16:03
Speaker 1: let's talk about the survey itself. Tell us about the survey.
16:07
Speaker 1: What do you ask people and how often are you
16:10
Speaker 1: asking it? Can we do the survey monthly and we
16:12
Speaker 1: ask members how much your alacane, the stocks, stock funds, bonds,
16:16
Speaker 1: bond funds, and cash. We've done it since seven. We've
16:20
Speaker 1: occasionally had people asked, we'll want to include gold, why
16:23
Speaker 1: don't you add real estate commodities? Yeah, and our reason is, well,
16:26
Speaker 1: we have this history that's been pretty stable that we
16:29
Speaker 1: can now compare it against, so to update it, we'd
16:32
Speaker 1: lose all that long term records. Yeah, what's the average
16:36
Speaker 1: long term history? What is the typical equity exposure stocks
16:41
Speaker 1: and stock funds that you get from UM your AII members.
16:46
Speaker 1: It's been so about six and I've noticed that there
16:50
Speaker 1: are times where it's significantly underweight as well as significantly overweight,
16:58
Speaker 1: But it only reaches these streams on rare occasions. In fact,
17:02
Speaker 1: you could go back to it was really at a
17:06
Speaker 1: very very low level, as overboard as I've ever seen
17:10
Speaker 1: it in in later oh two it was back to
17:14
Speaker 1: those levels early ninety levels, and then again in O
17:18
Speaker 1: nine was the lowest I've ever seen it UM. So
17:21
Speaker 1: that's what five four or five signals over over thirty
17:25
Speaker 1: years is. This is essentially the intention of the allocations survey.
17:30
Speaker 1: Very rarely does it reach those extremes. Yeah, Well, we
17:33
Speaker 1: serve our members, and we started just because no one
17:35
Speaker 1: else was tracking it? How are you allocating it? So
17:37
Speaker 1: we look at more as information, but should certainly coincides
17:41
Speaker 1: where he sees the market peaks in these market bottoms
17:44
Speaker 1: where people adjust their portfolios, and part of it's just
17:46
Speaker 1: portfolios dropping, but part of it, even though we encourage
17:50
Speaker 1: our members to be long term, they get to the
17:52
Speaker 1: point where fear takes over, our greed takes over, and
17:55
Speaker 1: their portfolio goes to extreme levels. So how did the
17:59
Speaker 1: survey come ab out? Was it simply, Hey, no one
18:02
Speaker 1: else is doing this, let's just start asking our our
18:04
Speaker 1: members how they're allocated exactly. It was really a case
18:08
Speaker 1: where we just didn't feel like anybody was giving voice
18:11
Speaker 1: to individual investors. And that's what really started the sentiment
18:14
Speaker 1: survey and the ass allocation survey. Let's give our members
18:16
Speaker 1: a voice. Let's actually figure out what they're doing and
18:20
Speaker 1: let them explain to everybody else this is what I'm
18:22
Speaker 1: actually doing, versus having people, you know, guests as to
18:25
Speaker 1: how the individual investors reacting. So you know, we've only
18:29
Speaker 1: seen four really extreme um overboord er oversold signals going
18:34
Speaker 1: back to you can even say was a was a
18:38
Speaker 1: fairly over oversold signals. So let's call it five. Where
18:42
Speaker 1: where is the allocation model today? You know, it's pretty
18:46
Speaker 1: close to average. Stocks have been running a little bit
18:49
Speaker 1: of average, but they're still in a low sixties. Uh.
18:52
Speaker 1: And the one thing I hear consistently from our members
18:55
Speaker 1: as I can't get any interests, I can't get any yield.
18:58
Speaker 1: A lot of our members because they were hire res
19:00
Speaker 1: or their near retirement, they're thinking about I need cash,
19:03
Speaker 1: I need want to earn something in my cash. So
19:05
Speaker 1: I do think there's a lot of investors who are
19:07
Speaker 1: either holding cash are investing in stocks because they just
19:10
Speaker 1: don't like bonds and they're frustrated with low interest rates
19:13
Speaker 1: and they're fearful at some point rates will rise, even
19:17
Speaker 1: though that fair has been around for a while. Now, Well,
19:20
Speaker 1: I have to think that eventually rates are gonna rise,
19:23
Speaker 1: but you don't know when that eventually is going to be,
19:26
Speaker 1: and you need the income. Now that that's why they've
19:29
Speaker 1: invented bond ladders, so you can basically, as rates go up,
19:33
Speaker 1: you sell the most recent year and and reinvested that.
19:37
Speaker 1: That should be a fairly standard approach for most bond investors.
19:40
Speaker 1: Shouldn't it be. Yeah, it should be. And even if
19:42
Speaker 1: somebody doesn't want to own bond funds, they can buy
19:45
Speaker 1: there's bullet shairs, which basically our bond ladder funds that
19:49
Speaker 1: mature a certain dates. So there's certainly options are you
19:51
Speaker 1: could even do it with CDs. Uh even I think
19:54
Speaker 1: a lot of people just look at that low interest
19:55
Speaker 1: rates and they have a hard time. They can good,
19:57
Speaker 1: I'm gonna get one percent of my interest are one
20:00
Speaker 1: and a half percent interest and it's hard conceptually to
20:02
Speaker 1: figure that out. But they're not thinking, yeah, you're not
20:05
Speaker 1: getting paid any interest, but you're also not going to
20:08
Speaker 1: lose any money. So so let's talk about the divon investing.
20:13
Speaker 1: As long as we're talking about field, you guys have
20:16
Speaker 1: in the last minute we have you have the Dividend
20:18
Speaker 1: Investing newsletter. I keep hearing from individuals that they're looking
20:23
Speaker 1: at dividend stocks as a bond substitute. Are you are
20:27
Speaker 1: you hearing anything like that? And what is the dividend
20:30
Speaker 1: Investor letter? Like, Yeah, we do, but definitely here about that.
20:34
Speaker 1: We hold twenty four dividend paying stocks. We focus on
20:37
Speaker 1: growth and low evaluations, so I do think they can
20:40
Speaker 1: supplement income. But I think investors need to view bonds
20:43
Speaker 1: as this is what I want to use for safety,
20:46
Speaker 1: to protect my short term assets, and maybe dip into
20:48
Speaker 1: when I need to buy stocks on a dip, versus
20:52
Speaker 1: as solely the sources of income. And I think dividends,
20:54
Speaker 1: particularly for retired investor can help. But even for someone
20:58
Speaker 1: away from retirement, you know, you're just basically juicing the
21:01
Speaker 1: game because you get the increasing in your stock price
21:03
Speaker 1: and then you're in cash on the side that you
21:05
Speaker 1: can then reinvest in stocks and obviously get more dividends
21:08
Speaker 1: from doing that reinvestment. I'm Barry Reholts. You're listening to
21:12
Speaker 1: Masters in Business on Bloomberg Radio. My special guest this
21:15
Speaker 1: week is Charles Rodblood. He is vice president at the
21:19
Speaker 1: American Association of Individual Investors. He is also the author
21:24
Speaker 1: of Better Good Than Lucky, How Savvy Investors can create
21:27
Speaker 1: a fortune with the Risk Reward Ratio, as well as
21:31
Speaker 1: editor of the a AII Journal. So we've been talking
21:35
Speaker 1: a lot about sentiment and what it means for investing.
21:40
Speaker 1: Let's let's get into a little more of the details
21:43
Speaker 1: the segment. How important is sentiment analysis to the average
21:48
Speaker 1: stock market investor? Yeah, I think it provides some colors
21:52
Speaker 1: to what's going on. Um. I definitely think it can
21:55
Speaker 1: be an alert to go look closer, particularly if you
21:58
Speaker 1: see sentiment being way off, that should be a signed
22:01
Speaker 1: what else is going on. I don't think sentiment initially
22:04
Speaker 1: higher low drive stock prices in the other direction, but
22:07
Speaker 1: it's usually assigned there's some other things going on. Maybe
22:10
Speaker 1: evaluations are too high, maybe evaluations too low. Maybe there's
22:14
Speaker 1: too much fear being priced into the market. Uh So
22:16
Speaker 1: I think it's a good alert to take a step
22:18
Speaker 1: back and start looking at the broader forests instead of
22:21
Speaker 1: focusing on one tree and asking yourself, have things swung
22:25
Speaker 1: too far? And what's causing them to swing too far? Interesting? Um?
22:31
Speaker 1: And relevant to this. When do you think sentiment analysis
22:36
Speaker 1: works best. Is it something that's just there in the
22:39
Speaker 1: background for color, or is there time where it seems
22:43
Speaker 1: to be more astute than others? You know, I think
22:45
Speaker 1: it's very astute. Whenever you see the market getting very
22:47
Speaker 1: expensive or very cheap um. And I think that's the
22:50
Speaker 1: time where you can start getting a sense that maybe
22:52
Speaker 1: people are going overboard. Uh. I mean we saw this
22:54
Speaker 1: with housing when you get to two thousand seven, where
22:57
Speaker 1: people were buying no interest loans, you know, over paying
23:00
Speaker 1: on houses where everyone's saying, oh, housing can't lose um
23:03
Speaker 1: and you start seeing things on magazine covers, it's usually
23:05
Speaker 1: a sign that maybe there's too much greed being put
23:08
Speaker 1: into the system. And anytime you hear filling the blank
23:11
Speaker 1: can't lose, you know there's trouble comming. Absolutely so that
23:14
Speaker 1: raises another question. How significant is investor behavior to their
23:19
Speaker 1: own ability to generate decent returns. I think it's absolutely critical.
23:24
Speaker 1: There's a study I can't recall where it was done,
23:26
Speaker 1: but they looked at professional traders and they actually gave
23:29
Speaker 1: them cortisol the racer stress hormones, and what the researchers
23:32
Speaker 1: figured out was that as the stress hormones were raised,
23:35
Speaker 1: these traders who are professionals, became more and more risk adverse.
23:39
Speaker 1: Uh So, I think there's definitely a biological components um
23:42
Speaker 1: as Conoman and diverse Key found out Daniel Koneman and
23:45
Speaker 1: Mr vers Key Bill Laureate Winners and Economics for their
23:49
Speaker 1: psychology work. Exactly, they figured out that we're risk adverse
23:52
Speaker 1: and we'll pretty much do everything we can to avoid
23:55
Speaker 1: occurring losses. Are to limit the pain of losses were
23:58
Speaker 1: more focus as humans on avoiding the pain of losses
24:01
Speaker 1: than we are gain those gains we feel we feel uh,
24:06
Speaker 1: the pleasure of gains half as intensely as we do
24:09
Speaker 1: the pain of losses. A rule of thumb, yes, I
24:13
Speaker 1: mean really, I find the stuff endlessly um fascinating. So
24:18
Speaker 1: from a related perspective and and from your seat dealing
24:22
Speaker 1: with a lot of different individual investors, what do you
24:25
Speaker 1: think that the average American investor is overly concerned with?
24:30
Speaker 1: I know you had mentioned ISIS and the election, but
24:33
Speaker 1: those are kind of passing news events. What from a
24:37
Speaker 1: thirty thousand foot view, are they consistently over um concerned with? Yeah?
24:44
Speaker 1: I think in the day, it's what's front of front
24:47
Speaker 1: of mine, what's going on right now? Why are they
24:49
Speaker 1: sing at versus thinking long term? I think they just
24:52
Speaker 1: succumbed too often to recency bias versus thinking I have
24:56
Speaker 1: this portfolio and it needs to last for the end
24:58
Speaker 1: of my life, and not even realizing that if you're
25:00
Speaker 1: a ter at sixty nowadays, you can be looking at
25:04
Speaker 1: thirty or forty years more of life and not thinking
25:07
Speaker 1: in terms of those long periods. And it's hard to
25:09
Speaker 1: do I think everyone's too focused on the very short term,
25:12
Speaker 1: on the immediate headlines, and not thinking over the long
25:16
Speaker 1: term and what has history suggested works over the long term.
25:19
Speaker 1: I know I'm gonna mangle the statistic because I'm doing
25:22
Speaker 1: it from memory, but I recall reading something along the
25:25
Speaker 1: lines of if as of today, you make it to
25:29
Speaker 1: age seventy five, you have a two and three chance
25:33
Speaker 1: of making it to ninety or or something along those lines.
25:36
Speaker 1: It's because when you look at the longevity the average lifespan,
25:40
Speaker 1: it's relative to you know, how many people died in childbirth,
25:45
Speaker 1: and there's a whole series of things that affect the
25:47
Speaker 1: average lifespan. But if obviously you make it seventy five,
25:51
Speaker 1: you've bypassed all those things, the odds of making it
25:54
Speaker 1: to ninety just go up dramatically versus uh the average person,
25:59
Speaker 1: which significantly impacts how much money you're gonna need across
26:04
Speaker 1: the course of your retirement. Yeah. Absolutely, I mean there's
26:07
Speaker 1: things that happened throughout life. People diarly because the diseases,
26:09
Speaker 1: their accidents, what have you. And you're right, people get
26:13
Speaker 1: to a certain age and then life inspectancies actually started increasing.
26:16
Speaker 1: The average life inspectacies, because once you get to seventy five,
26:20
Speaker 1: you have all those people that have lived to a
26:22
Speaker 1: hundred or older pushing their number reports. So have you
26:25
Speaker 1: guys come down on the active versus passive debate? I
26:29
Speaker 1: can't say I've seen anything recently along those lines. How
26:32
Speaker 1: how do you guys feel about indexing and how important
26:36
Speaker 1: is active stock selection to long term returns? Yeah? We're
26:41
Speaker 1: both um and I tell people, look, if you have
26:43
Speaker 1: no interest, you just don't want to spend time on it.
26:46
Speaker 1: Too passive and really passive investing should be your benchmark.
26:50
Speaker 1: Can you do better? Can you get more return and
26:52
Speaker 1: more income? But I think someone who's willing to take
26:55
Speaker 1: some control, particularly if they're willing to step outside the
26:58
Speaker 1: SP five hundred and really look at the other several
27:01
Speaker 1: thousand stocks that never get mentioned. Uh, they certainly can
27:04
Speaker 1: get much higher returns than the SNP five hundred over
27:07
Speaker 1: the long term. Are you seeing individuals using a lot
27:10
Speaker 1: of e t f s. I know that they're cranking
27:13
Speaker 1: out a million of them now has got to be
27:14
Speaker 1: over a thousand e t f s. How um useful
27:18
Speaker 1: have these become as a tool for individual investors? I
27:22
Speaker 1: think it's split I see some people are are using
27:24
Speaker 1: them a lot, I think particularly it's I can't really
27:26
Speaker 1: say what type. I do think a lot of people
27:29
Speaker 1: are using them, but I still see people who are
27:30
Speaker 1: fearful about using them. They hear about the higher frequency
27:33
Speaker 1: traders UM and these you know, things being kind of
27:36
Speaker 1: wild and some bad news when you have some of
27:38
Speaker 1: these specialized ones that really just trade out of whack.
27:42
Speaker 1: But I think it's mixed, and I haven't necessarily seen
27:44
Speaker 1: in a trend where everyone's shifting. The t fs are
27:46
Speaker 1: there not UM. You know, I think when people look
27:49
Speaker 1: at it really comes down to what's easy and also
27:52
Speaker 1: how are you investing if your dollar cost averaging A
27:55
Speaker 1: mutual fund works better just because you can buy this
27:58
Speaker 1: fractional shares, but you know, a commission explained fractional shares,
28:01
Speaker 1: because I bet some listeners are not familiar. You buy
28:04
Speaker 1: any TF, you're buying one share of THETF. But with
28:07
Speaker 1: the mutual funds, the mutual fund you can buy you know,
28:09
Speaker 1: point one oh weight shares. You can buy a thousand
28:12
Speaker 1: dollars worth of things that turns out not to be
28:14
Speaker 1: an even number. You get the fractional share and they
28:16
Speaker 1: can track that exactly, so your entire money goes into
28:19
Speaker 1: worth an E T F. Uh. You know, if you
28:21
Speaker 1: have an et F and I RA, maybe you have
28:23
Speaker 1: twenty dollars and fifty cents and change sitting there in
28:26
Speaker 1: cash because it's not enough to buy share of anything,
28:29
Speaker 1: single share and over time that on a dollar coast
28:31
Speaker 1: averaging basis, that can add up to a lot of money. Absolutely,
28:35
Speaker 1: So let's talk a little bit about your book, because
28:37
Speaker 1: we really didn't get to that last segment. Better Good
28:40
Speaker 1: than Lucky, tell us what is the risk reward ratio? Well,
28:44
Speaker 1: I came out with a ten point plan for analyzing
28:46
Speaker 1: a stock, looking at valuation, looking at growth rates, looking
28:50
Speaker 1: at the balance sheet, and the idea was, how can
28:52
Speaker 1: you analytically look at a stock to determine as at
28:55
Speaker 1: risky or is it actually a good value um? And
28:58
Speaker 1: the whole idea is really has some quantitative where you
29:00
Speaker 1: can actually measure stock against. What I'm doing right now
29:03
Speaker 1: is I'm actually refining the strategy, trying to actually simplify
29:06
Speaker 1: it a little bit more because I really realized at
29:09
Speaker 1: the end of the day, if you just get value momentum,
29:11
Speaker 1: those two factors which are completely uncorrelated, low value and
29:15
Speaker 1: upward moving price. That alone is the cornerstone you need.
29:19
Speaker 1: And then just overlay some of factors to get rid
29:22
Speaker 1: of the junkier stocks, the stocks with bad balance sheets,
29:25
Speaker 1: the stocks are less profitable and add to it. So
29:28
Speaker 1: I'm actually revising the strategy right now. But the ideas
29:31
Speaker 1: you have a quantitative measure that you can use to
29:34
Speaker 1: analyze the stock and determine whether or not it's a
29:37
Speaker 1: good value or not. So ultimately, if you are looking
29:41
Speaker 1: to identify are these when you say good value, is
29:44
Speaker 1: it lower cost stocks or is it just good value
29:47
Speaker 1: relative to other characteristics? What what matters most? You know?
29:51
Speaker 1: I I look for a low valuation, low price the
29:53
Speaker 1: book I'm actually testing right now looking at absolute which
29:56
Speaker 1: I used in my book originally looking for a price
29:59
Speaker 1: that earnings below twelve price the book below too, but
30:03
Speaker 1: I'm also now trying to test it below twelve price
30:06
Speaker 1: of the book below too correct? And how does that
30:08
Speaker 1: compare to the historical averages for both of those metrics,
30:13
Speaker 1: And they tend to actually be in a lower over time.
30:16
Speaker 1: I mean obviously at the exactly yes, absolutely times you're
30:21
Speaker 1: a little bit higher at the times a little bit lower.
30:23
Speaker 1: But in general that seems to mesh pretty well over
30:25
Speaker 1: the long term. And and so how does one use
30:29
Speaker 1: this metric? Is it just a matter of sorting And
30:32
Speaker 1: here's a list of these are the cheapest stocks straight down?
30:35
Speaker 1: Is that? Is that the upologe? Yeah? The ideas you
30:37
Speaker 1: can use it for a screen or if you know,
30:39
Speaker 1: you're watching news and someone says ACTE Incorporated is the
30:42
Speaker 1: new company, it's great. You can then take this measure. Okay,
30:45
Speaker 1: I'm hearing about the stock. How does it actually stack up?
30:48
Speaker 1: And I think for investors, even if they're not using
30:50
Speaker 1: that system, just having a set of quantitative measures where
30:53
Speaker 1: we can take any stock and measure it against We'll
30:56
Speaker 1: give you a quick five minute you know analysis. Is
30:59
Speaker 1: this something worth pursuing or is this something I should
31:01
Speaker 1: walk away from? And if people want to learn more
31:04
Speaker 1: about AII, where would they go to find out more information?
31:09
Speaker 1: AII dot com write our websites and they could they
31:12
Speaker 1: could become a member, they could subscribe to the journal
31:14
Speaker 1: there and your writings are on the AII blog. There
31:17
Speaker 1: is that correct, Yes, on the blog. I do actually
31:20
Speaker 1: do a weekly email, the AI Investor Update that's on
31:23
Speaker 1: the website. Uh, if people want to join it's twenty
31:26
Speaker 1: nine dollars a year, so it's very cheap to actually
31:29
Speaker 1: subscribe and be a member. That sounds great. We've been
31:33
Speaker 1: speaking with Charles Rodblood. He is the vice president of
31:36
Speaker 1: the American Association of Individual Investors. If you enjoy this conversation,
31:41
Speaker 1: be sure and stick around for the podcast extras, where
31:44
Speaker 1: we keep the tape rolling and continue chatting about all
31:48
Speaker 1: things investing. Be sure and check out my daily column
31:52
Speaker 1: on Bloomberg View dot com. Follow me on Twitter at
31:56
Speaker 1: rit Halts. I'm Barry rit Halts. You're listening to Masters
32:00
Speaker 1: and Business on Bloomberg Radio. Welcome back to the podcast.
32:03
Speaker 1: I don't know why I do this every time, Charlie,
32:06
Speaker 1: thank you so much for doing this. This is really interesting.
32:08
Speaker 1: I have been either reading your surveys, following the asset
32:13
Speaker 1: Allocation model, or or seeing your name in print for
32:17
Speaker 1: I don't know how long have you been with them.
32:19
Speaker 1: It's been years and years and yeah, I've been there
32:20
Speaker 1: about six and a half years now, Okay, but I
32:23
Speaker 1: and I've been following a I I stuff, especially that
32:26
Speaker 1: asset allocation model, which I've posted on the blog a
32:29
Speaker 1: few times for I don't know how long, for for decades.
32:34
Speaker 1: I've always anything that generates a signal very infrequently becomes
32:39
Speaker 1: really fascinating and people forget about it. Oh yeah, this
32:44
Speaker 1: thing hasn't thrown off a signal in in fifteen years.
32:48
Speaker 1: Just just ignore it, they said in nine and then
32:52
Speaker 1: it went from moderley overweight to aggressively overweight to wow,
32:57
Speaker 1: we've never seen this at seventy seven percent when average
33:00
Speaker 1: is that's pretty significant. So people kind of forget that
33:06
Speaker 1: these things exist because they're most of the time they're
33:10
Speaker 1: in the middle of the range. But once they get
33:13
Speaker 1: to these extremes, it's really it's really quite fascinated. Yeah,
33:17
Speaker 1: and absolutely, I think you're right. People forget what history
33:19
Speaker 1: is and it's very easy to do it. But as
33:21
Speaker 1: I said earlier, it really comes down to if it's
33:24
Speaker 1: reaching those levels, it's a good little trigger stop, look
33:28
Speaker 1: what's going on, because it usually one hits his extremes. Uh,
33:31
Speaker 1: usually it's pretty close to market bottom or usually pretty
33:34
Speaker 1: close to our market peak, and there's usually some other
33:37
Speaker 1: things going on. But you're in a day to day
33:39
Speaker 1: news the headlines, it's very easy to lose sight that
33:42
Speaker 1: you have these longer term indicators, and you can even
33:45
Speaker 1: point to the Shiller's Cape and other things where there
33:49
Speaker 1: there are long term but once they hit those levels,
33:52
Speaker 1: it's really worth paying attention and taking a step back
33:55
Speaker 1: and doing that broader analysis. So how did you find
33:59
Speaker 1: your way to a AII You've been there for six
34:01
Speaker 1: and a half years. How did you Let's let's go
34:03
Speaker 1: way back. Where did you tell us about your background?
34:06
Speaker 1: Where did you start in in finance? Yeah, I actually
34:09
Speaker 1: started finance for a small business valuation firm. And what
34:13
Speaker 1: happened was I actually my degrees in journalism, worked in
34:16
Speaker 1: advertising for six years UM and then I was doing
34:19
Speaker 1: some temp work and I got a call to work
34:21
Speaker 1: for a firm and I joined. It was a small
34:23
Speaker 1: business valuation firm, so we were valuing closely held businesses
34:27
Speaker 1: and I knew Microsoft Excel and the owner when the
34:30
Speaker 1: owners of the company said to me, I think it's
34:32
Speaker 1: easier to teach accounting than Microsoft Excel. And this is
34:36
Speaker 1: the mid nineties where a lot of people weren't computer literate. Uh,
34:40
Speaker 1: just happened to be a good fit and that was
34:42
Speaker 1: I guess twenty two years ago. I'm assuming you're still
34:46
Speaker 1: a regular user of Excel absolutely? Do you like the
34:49
Speaker 1: latest version that I was so annoyed. They all the
34:52
Speaker 1: buttons that I've grown to love, They've moved hidden, made
34:56
Speaker 1: more difficult to find. Oh, I hate the new menu.
34:59
Speaker 1: I wish they would go back to the old one.
35:00
Speaker 1: I can't find exactly how I feel. You know, I
35:03
Speaker 1: kept an old one for as long as I could,
35:06
Speaker 1: but eventually the upgrades around it, the operating system upgrades,
35:10
Speaker 1: eventually it broke the old Excel, which was just so
35:14
Speaker 1: much better than than No. One. Yeah, I don't mind
35:17
Speaker 1: when itows ten, but I just hate the way Office
35:19
Speaker 1: in General's design. I wish they just give me the
35:21
Speaker 1: option to have the old menus back. So I'm waiting
35:24
Speaker 1: to go on Stephanie Rules Show a couple of months ago,
35:28
Speaker 1: and I'm just sitting there reading through my mail, and
35:30
Speaker 1: I look up and there's Bill Gates standing all by
35:33
Speaker 1: himself in the back of the room. So I walk
35:36
Speaker 1: over and introduced myself. Hey, you should come on our podcast,
35:38
Speaker 1: blah blah blah, and uh, I had to tweet something
35:43
Speaker 1: and I couldn't just tweet. Met Bill Gates in the
35:45
Speaker 1: green room at at at Bloomberg Go. So I I
35:49
Speaker 1: swear this is on Twitter, I added complained to him
35:52
Speaker 1: about the buttons on on the new Excel, asked to
35:55
Speaker 1: go back to the old style, and people like yelled
35:58
Speaker 1: at me, like I actually did that. You know, he's
36:01
Speaker 1: not a Microsoft anymore. It was a joke exactly. So
36:05
Speaker 1: I'm glad to hear when when someone else is an
36:07
Speaker 1: Excel Power user and hates those buttons. I used to
36:11
Speaker 1: know my way around the program, and now I feel
36:13
Speaker 1: like I'm wandering in a in a jee I've never
36:16
Speaker 1: been in this town before, and it's been like three years.
36:19
Speaker 1: I still haven't adapted to everything. Yeah, I've learned where
36:21
Speaker 1: certain things are, if I still find myself clicking on
36:23
Speaker 1: things Where's this, Where's that? Because it used to be
36:26
Speaker 1: so intuitive. It used to be right there, it's prettier.
36:29
Speaker 1: Now it's just much less useful. Absolutely, I completely agree. Um, so,
36:33
Speaker 1: so you start out from journalism, how did you eventually
36:37
Speaker 1: get to to a AII. Well, so, I started working
36:40
Speaker 1: for a small Missis valuation firm and I think it
36:42
Speaker 1: was there for about six months and my boss, who's
36:45
Speaker 1: also my mentor, looked at me and said, I think
36:47
Speaker 1: you should take the CFA exam. I don't think you
36:49
Speaker 1: should pass it, but I think you should try, and
36:52
Speaker 1: so I took it ended up passing all three on
36:54
Speaker 1: the first try. So I go to him, Yeah exactly.
36:57
Speaker 1: I guess he knew how to motivate me. And then
36:59
Speaker 1: from there, um, I went to work for well, what's
37:01
Speaker 1: now Investorals Think or Swim back then it was Telscan
37:05
Speaker 1: back then worked for them part of t D exactly exactly. Um,
37:10
Speaker 1: So I was with them for about five and a
37:12
Speaker 1: half years. Uh. Then I actually took a job in
37:15
Speaker 1: Denver working for Curian Capital, which was under the Jackson
37:19
Speaker 1: National Life credentials a big shop at one point. Yeah
37:22
Speaker 1: it was, and I was working for him. They were
37:24
Speaker 1: still pretty much in start up stage. Worked there for
37:28
Speaker 1: almost a year. Uh. True. Sequence of events, we had
37:31
Speaker 1: our holiday party investco Field, they let the president go,
37:35
Speaker 1: and then they had a massive layoff at the firm,
37:37
Speaker 1: all in about a span of about six weeks. Yeah.
37:40
Speaker 1: So what what led you eventually to to this gig? Well,
37:44
Speaker 1: I was in Chicago working for ZAS afterwards, and our
37:47
Speaker 1: vice president, Ai is an old Fratorney brother of mine
37:50
Speaker 1: from college, and one night he called up and said,
37:53
Speaker 1: we have this position. Our editor is retiring. You should
37:57
Speaker 1: come in and talk to us and I looked at
37:59
Speaker 1: my wife and I said, I know what the organization is.
38:01
Speaker 1: I don't know much about this position. By no, Adam
38:04
Speaker 1: still going and talk, and pretty soon I into the conversation,
38:07
Speaker 1: I realized this could be a really good fit. Yes,
38:11
Speaker 1: so it's the Wall Streets old boy network at work. Yeah,
38:15
Speaker 1: absolutely so. So you mentioned one of your early mentors earlier,
38:20
Speaker 1: but you didn't get any more specific. Who were your mentors? Uh? Well,
38:24
Speaker 1: I think for investing, probably my biggest mentor was Jeff Schumacher,
38:27
Speaker 1: my first boss. He passed away several years ago, but
38:30
Speaker 1: he was a CPA that focused on business valuation, and
38:32
Speaker 1: he just really understood the concept of evaluation. And I
38:36
Speaker 1: know a lot of people get their start on Wall
38:38
Speaker 1: Street working with a big investment banks, but there's something
38:41
Speaker 1: about I think working on that private side where you're
38:43
Speaker 1: really being hands on and really look at these small businesses,
38:46
Speaker 1: understanding how they're actually being run, having to really look
38:50
Speaker 1: at the cashlow statement, and I think having evaluation, if
38:53
Speaker 1: it goes to court, you're able to defend it. I
38:55
Speaker 1: think it definitely. I think from my standpoint, it gave
38:58
Speaker 1: me a better background. Quite quite intriguing. Um So he
39:04
Speaker 1: was a mentor. What other investors influenced the way you
39:08
Speaker 1: think about investor? Yeah, I think Warren Buffett actually did
39:12
Speaker 1: his name comes up all the time. Yeah, And and
39:14
Speaker 1: really because of Warren Buffett, I sat down and read
39:16
Speaker 1: Security Analysis, the whole whatever you have, the whole eight
39:19
Speaker 1: hundred pages or whatever it is. Um. I read Phelip
39:22
Speaker 1: Fisher's Common Stocks and Common Profits. That that's the second
39:26
Speaker 1: time that book has come up in the past a
39:29
Speaker 1: couple of weeks. It's it's one of those things that
39:32
Speaker 1: is just a classic. Yeah, it is, it really is.
39:35
Speaker 1: And so I read a lot of books because of that. Um,
39:38
Speaker 1: you know, and that what other investors, you know, other
39:40
Speaker 1: investors that influenced me. I mean he's the best a
39:42
Speaker 1: lot of people. I just look at things they do. Uh,
39:45
Speaker 1: Carl Richards, I try to look at his stuff all
39:47
Speaker 1: the time. He does a sketch column for the New
39:50
Speaker 1: York Times, and I just love his ability to simplify things. Um.
39:54
Speaker 1: I do find myself constantly look at Jim and Shoughness
39:57
Speaker 1: sees what works on Wall Street where he book basically
40:00
Speaker 1: looks at various indicators for stocks, varias measures how they've worked.
40:06
Speaker 1: But I just try to read what other people say.
40:08
Speaker 1: This is a really famous book where the customers yachts.
40:10
Speaker 1: I know that's been mentioned. It's very funny. Yeah, you know,
40:13
Speaker 1: people don't realize it's really a very amusing book. Absolutely,
40:16
Speaker 1: and the education sort of sneaks in when you're not
40:19
Speaker 1: paying attention. Yeah. And actually recently for an article, I
40:21
Speaker 1: picked up Peter Lynch's One Up on Wall Street and
40:24
Speaker 1: there's something through that. It was amazed how much in
40:27
Speaker 1: that book never gets pointed out too. And he has
40:29
Speaker 1: a lot about selling stocks, and all people think is, oh,
40:33
Speaker 1: Peter Lynch by what you know, But there's far more
40:36
Speaker 1: to strategies than that. He's he's really a fascinating guy.
40:40
Speaker 1: I think he's still chairman emeritus or something like that
40:42
Speaker 1: at Fidelity up in Boston. Yeah. I don't know what
40:45
Speaker 1: his status is right now in terms of career what
40:47
Speaker 1: he's doing. It could be possibly. So he stepped down
40:50
Speaker 1: um from was it Magellangell like just fantastic time and
40:57
Speaker 1: got there ranked wracked up fantastic numbers for a decade,
41:02
Speaker 1: oh not even a little less step down at the
41:04
Speaker 1: top and kind of just became a marketing person for them.
41:08
Speaker 1: But man, what an amazing track record he accrued in
41:11
Speaker 1: in a very short period of time. It's really impressive,
41:15
Speaker 1: and it would have been curious to see what he
41:16
Speaker 1: would have done afterwards. And I think the one advantage
41:19
Speaker 1: Warren Buffett has ever Peter Lynch is not having them
41:21
Speaker 1: worry about those outflows. And you know, put Peter Lynch
41:24
Speaker 1: in a warm buffet type situation where he doesn't have
41:26
Speaker 1: to deal with inflows and outflows, it would be interesting.
41:29
Speaker 1: It would have been really interesting to see what he
41:31
Speaker 1: would have done. So you mentioned a handful of books.
41:33
Speaker 1: You mentioned Common Stocks on Common Profits. What other books
41:36
Speaker 1: do you find especially important, influential, or just enjoyable. Well,
41:42
Speaker 1: one book called point Out it's coming out later this year,
41:44
Speaker 1: a little self serving. Our chairman and founder Jim Clinton's
41:47
Speaker 1: writting a book called Investing at Level three UH, and
41:51
Speaker 1: it's gonna be somewhat controversial because he's basically taking on
41:54
Speaker 1: the whole notion of portfolio management UM and his view
41:57
Speaker 1: of risk is not the day to day volatility, UH,
42:00
Speaker 1: having enough money to last you through the rest of
42:02
Speaker 1: your life. So he's really advocating long term going for stocks,
42:06
Speaker 1: and he's actually going to make the mathematical argument over
42:09
Speaker 1: the long term, not only should you be mostly the stocks,
42:12
Speaker 1: but you should actually use some leverage. Uh. If you're leverage,
42:17
Speaker 1: he did the calculations, you'll never have a margin call
42:19
Speaker 1: over a long period of time, but you'll choose returns.
42:23
Speaker 1: But what is so the worst crash we saw huh
42:28
Speaker 1: uh nine is gonna be a a near eight percent collapse.
42:35
Speaker 1: Wouldn't wouldn't that have generated a margin call? He said?
42:37
Speaker 1: Even if you just a little bit to you still
42:39
Speaker 1: would have hit it. Yet if you if you went over,
42:42
Speaker 1: you would have but that limit, you still have enough
42:44
Speaker 1: in there. I mean, you had fifty seven percent recently.
42:47
Speaker 1: That shouldn't generate margin call if you so. And I'm
42:51
Speaker 1: gonna assume he's in the Nick Murray camp of no bonds,
42:55
Speaker 1: just just doing equities. Yeah, his arguments just have about
42:57
Speaker 1: four years of bonds, so if you're retired, you have
43:00
Speaker 1: money to actually withdraw. And that's a Now I've been
43:03
Speaker 1: hearing a lot the ideas for four years, meaning what
43:06
Speaker 1: something he depends What depends on the size of your portfolio.
43:08
Speaker 1: It's really four years of living expenses. So you know,
43:11
Speaker 1: where are you getting some security? What are you getting
43:13
Speaker 1: in pensions? And then maybe have annuities and what you
43:15
Speaker 1: need outside of that to live on. That's going to
43:18
Speaker 1: be a controversial book. Yeah, that'll that'll be interesting to
43:21
Speaker 1: see when that comes out. What other books really stick
43:24
Speaker 1: out in your mind? Uh? You know, I pointed out
43:27
Speaker 1: what works on Wall Street. That's why I have I
43:29
Speaker 1: have that in the office and at home. It's a tome,
43:33
Speaker 1: but it's terrific. Absolutely, it's terrific. One book that came
43:36
Speaker 1: out earlier this year, uh, that I don't think really
43:38
Speaker 1: got of attention. It's called The Art of Execution by
43:41
Speaker 1: Leaf Freeman. Sure, he's an art of execution exactly, and
43:46
Speaker 1: it's all about selling. He he's a manager, really, he's
43:49
Speaker 1: a money manager in London. He basically separated his accounts
43:52
Speaker 1: around I can't remember how many traders, many traders, and
43:56
Speaker 1: then he looked to see, okay, what were the traitors
43:58
Speaker 1: who are doing well? What were it? Happits? Were they
44:00
Speaker 1: do they have? And the ones you were doing, pully,
44:03
Speaker 1: what were they doing? And he actually separated into five
44:05
Speaker 1: different tribes, rabbits, hunters, and he basically found commonalities between
44:10
Speaker 1: the guys that, like I think rabbits, he said, tended
44:12
Speaker 1: to dig a hole when they were down. Versus had
44:15
Speaker 1: some other investors where assassins. If a stock fell by
44:18
Speaker 1: thirty percent, they would just cut the position and get out.
44:22
Speaker 1: He had one group, he said, kind of source, which
44:24
Speaker 1: were the most successful long term investors, but they took
44:27
Speaker 1: profits over time, so they weren't always trying to sell
44:30
Speaker 1: once or just wait for that one big thing, but
44:33
Speaker 1: gradually get off of the stock. And it was It's
44:35
Speaker 1: interesting because no one really talks so much about selling,
44:38
Speaker 1: and he did a very good analysis of it. I
44:41
Speaker 1: was gonna say there was one other book I'm familiar with,
44:44
Speaker 1: and I want to say it came out in the
44:46
Speaker 1: eighties or maybe even earlier, maybe even the seventies by
44:50
Speaker 1: Justin Mamis, called When to Sell. But for that book,
44:54
Speaker 1: the really you're hard pressed to find a book that says, Okay,
44:58
Speaker 1: if you're gonna buy individual stocks, here's what you're selling.
45:01
Speaker 1: Discipline should be. It's an amazingly overlooked part of of
45:05
Speaker 1: the investing experience. So the name of this book again
45:08
Speaker 1: is called the Art of Execution. Art of Execution, and
45:12
Speaker 1: is the whole thing on uh, when to jettison stocks?
45:16
Speaker 1: Or is it more a broader portfolio. It's it's his
45:20
Speaker 1: analysis of those traders, of what each tribe of traders
45:24
Speaker 1: actually did and what their commonalities were. So and so
45:27
Speaker 1: the book is based on a study he did on
45:29
Speaker 1: exactly how many traders did he look at. I try
45:32
Speaker 1: to remember, right, you know, I cannot remember the numbers.
45:36
Speaker 1: I've drunk a blank on it. But it was a
45:37
Speaker 1: pretty I'm gonna guess it's a pretty significant that's a
45:40
Speaker 1: pretty central size on there. Um. All right, So let's
45:43
Speaker 1: keep going. So you've been in this industry for a while.
45:46
Speaker 1: What has changed for the better and for the worst.
45:50
Speaker 1: You know, I think for the better in terms of
45:51
Speaker 1: people's ability to do research. You know, when I started,
45:54
Speaker 1: if I needed to do research, I remember gonna Rice
45:57
Speaker 1: University in Houston where I worked, and Hugh's done and
46:01
Speaker 1: and go Alexis Nexus, go through periodicals, occasionally through microfish.
46:05
Speaker 1: And now you have sites like SSRN where you can
46:07
Speaker 1: just anyone can do research. Kenneth French's website on data
46:12
Speaker 1: people want long term data on viouation ratios, just tremendous amount,
46:16
Speaker 1: completely free. Chiller also has a huge of It's amazing
46:22
Speaker 1: how much information academics not only are they publishing. But
46:26
Speaker 1: they are doing a huge um it's a huge benefit
46:30
Speaker 1: to anyone who's willing to roll up their sleeves and
46:32
Speaker 1: wade into it because all the numbers are there. You
46:35
Speaker 1: don't have to rely on anecdotes or myths or best guesses.
46:39
Speaker 1: The data is actually there. Yeah, I think even just
46:42
Speaker 1: a speed helps. You Remember probably in the nineties, if
46:44
Speaker 1: you downloaded a ten K from the SEC's website, you
46:47
Speaker 1: click on the link and then you'd go make dinner
46:49
Speaker 1: and come back and it might be finishing up just
46:51
Speaker 1: then you've got mail exactly. How that the dial up modems,
46:56
Speaker 1: you weren't moving files, if it wasn't text exactly, who
47:00
Speaker 1: could be bothered waiting for that? I totally, I totally
47:04
Speaker 1: get that. Um. So, technology clearly has changed how how
47:09
Speaker 1: we do business. The amount of information available is tremendous.
47:14
Speaker 1: But if everybody has access to the same information, what
47:18
Speaker 1: advantage does it beget to any individual investor? Yeah? I
47:22
Speaker 1: think it comes down to being disciplined. Um. I think
47:25
Speaker 1: individual investors, as I said earlier, I really need to
47:27
Speaker 1: think about looking at the whole span of stocks, not
47:30
Speaker 1: just you know exactly, not just what you hear about
47:34
Speaker 1: in the media because those large institutional investors, as you know,
47:37
Speaker 1: they have so much money to invest below certain market capitalization,
47:40
Speaker 1: they just can't allocate it. They'd have to buy the
47:43
Speaker 1: entire company. Um, And so I think investors need to
47:45
Speaker 1: do that. I always encourage investors to just go slow,
47:49
Speaker 1: you know, put your trade order in, step up, take
47:51
Speaker 1: a deep breath, and just think about what you're doing.
47:54
Speaker 1: These high frequency traders, if they're concerned about milliseconds, I
47:58
Speaker 1: don't care what app you're used, how speaks are not
48:01
Speaker 1: going to be exactly. You have to play a different
48:03
Speaker 1: game exactly. Yeah, playing a different different sandbox. I can't
48:09
Speaker 1: say I I agree. More so, given given what's changed,
48:13
Speaker 1: what do you see as the next shifts that are
48:15
Speaker 1: going to take place in finance? Yeah, it's interesting. Um,
48:18
Speaker 1: I definitely think the robot advisors are probably gonna continue.
48:22
Speaker 1: We'll see what happens with a dictionary rule. Uh yeah.
48:25
Speaker 1: I think we're gonna see probably new products from Wall Street.
48:27
Speaker 1: We're seeing with ets right now, where they're really reaching
48:30
Speaker 1: with new ideas. So, um, I think at some point
48:34
Speaker 1: someone's probably gonna come up with some new idea that
48:36
Speaker 1: hasn't been created yet. Uh, not sure what's yet you
48:40
Speaker 1: always have those big changes that always unexpected. But I
48:44
Speaker 1: definitely think there's just too much money, too much creativity,
48:46
Speaker 1: and too much type A personalities out there for something
48:49
Speaker 1: not brand new to be created. I'm working on a
48:53
Speaker 1: robo advisor that all it does is create new types
48:55
Speaker 1: of ETF. So every day cranks out twenty new ETFs.
48:59
Speaker 1: The goal as we want to have a million ETFs
49:01
Speaker 1: by the end of the decade. It feels like that
49:04
Speaker 1: sometimes if you look at the number of new names
49:06
Speaker 1: that that keep coming out. Um, and now we're down
49:09
Speaker 1: to my last two and my favorite questions. So someone
49:14
Speaker 1: who's a recent college graduate or a millennial comes to
49:18
Speaker 1: you and ask for advice on a career in finance,
49:22
Speaker 1: what would you tell them? Yeah, I think the one
49:24
Speaker 1: thing more than anything else is just figure out how
49:26
Speaker 1: can you explain things asn't simple and asn't simple English
49:30
Speaker 1: as possible. I know you've been at conferences. I've been
49:33
Speaker 1: at conferences where we get a conversation and I just
49:36
Speaker 1: want to say to him, I know what you're saying,
49:38
Speaker 1: but let's speak English. And I think the ability to
49:40
Speaker 1: just communicate these very complex concepts and very simple, concise
49:44
Speaker 1: language that alone is invaluable. I couldn't possibly agree more.
49:49
Speaker 1: When people ask me what I do for a living,
49:51
Speaker 1: that was a question I asked you. But I always say,
49:54
Speaker 1: my job is to take these complex, hard to understand
49:59
Speaker 1: sit you nations, and make them simple and easy to understand.
50:04
Speaker 1: My wife teaches art, my mother is a retired school
50:08
Speaker 1: retired real estate agent. If I can make so when
50:12
Speaker 1: they say to me, explain to me what h F
50:14
Speaker 1: T is. If I could make somebody both very smart
50:18
Speaker 1: but just not in in a field that uses a
50:22
Speaker 1: lot of jargon and a lot of math and a
50:25
Speaker 1: lot of uh specific financial terms, if I can make
50:30
Speaker 1: them understand something in a way that, oh, that makes
50:32
Speaker 1: sense and it's not complicated. I know, I've I've achieved something,
50:37
Speaker 1: And yours seem to be saying the same thing. Taking
50:40
Speaker 1: complex situations and making them easy to understand, that's uh,
50:46
Speaker 1: that's something that is important. How does that apply to
50:50
Speaker 1: a millennial or someone just starting out in a career
50:52
Speaker 1: of finance. Well, I think that's one of the things
50:54
Speaker 1: that I think gives them an edge, being able to
50:56
Speaker 1: communicate those things no matter you know, whether they want
50:59
Speaker 1: to be very calm on a tablelea base where they
51:01
Speaker 1: want to do more journalism or editorial. Just having that
51:04
Speaker 1: skill set. A lot of people don't have it. It's
51:06
Speaker 1: a lot of very smart people that can't necessarily break
51:10
Speaker 1: things down to layman's terms. And and that's one skill.
51:13
Speaker 1: If you can do it, and you ever have a
51:14
Speaker 1: situation where was a bad bear market and it's tough
51:17
Speaker 1: to find a jump in finance, you then have that
51:19
Speaker 1: skill set where you can't carry it to somewhere else.
51:22
Speaker 1: But if you want to work in finance, I think
51:24
Speaker 1: it just opens doors for you. But I would say
51:26
Speaker 1: I do think in the cf A helps immensely. It's
51:29
Speaker 1: definitely helped my career um goods of knowledge base, and
51:33
Speaker 1: I think in the industry it's very much smiled upon.
51:36
Speaker 1: I know that sounds self serving, Um No, it's absolutely true.
51:39
Speaker 1: It's it's we've we've heard that if it's you versus
51:41
Speaker 1: another candidate and you're a c f A and they're not,
51:44
Speaker 1: you're you, as a c f A very well may
51:46
Speaker 1: have have a big advantage there. I found it to
51:49
Speaker 1: be completely invaluable in my career. And the final question
51:52
Speaker 1: I have, what is it that you know about investing
51:55
Speaker 1: today that you wish you knew twenty years ago. Yeah,
51:59
Speaker 1: I think probably behavioral finance, and I wish I recognized
52:03
Speaker 1: that I knew about it twenty years ago. I think
52:05
Speaker 1: not only would have helped me and made me more
52:06
Speaker 1: discipline twenty years ago, but I think it might have
52:09
Speaker 1: changed the way talk about things and how I view things.
52:12
Speaker 1: And I it's probably the last five or six years
52:15
Speaker 1: I really started studying and really started grasping it, and
52:17
Speaker 1: it just really like when I started really painted to
52:20
Speaker 1: the value that really meshed. Behavioral finance really meshed. So
52:24
Speaker 1: I really wished twenty years ago I knew more about it.
52:26
Speaker 1: And certainly there's a lot more now about a lot
52:29
Speaker 1: more that's come out of the last twenty years than
52:31
Speaker 1: existed back then. But I think it explains a lot
52:35
Speaker 1: of things, not only what other people do, but also
52:37
Speaker 1: why we do certain things, and it allows people to
52:40
Speaker 1: clear myself, to set up barriers and sub systems so
52:42
Speaker 1: I don't make the same mistakes. Really interesting stuff. Charlie Roplitz,
52:47
Speaker 1: thank you so much for coming to Bloomberg. We've been
52:51
Speaker 1: speaking to Charles rod Blood of the American Association of
52:54
Speaker 1: Individual Investors. If you enjoy these conversations. Be sure and
52:59
Speaker 1: look up an entry down an inch on Apple iTunes
53:02
Speaker 1: and you could see the other ninety or so of
53:04
Speaker 1: our podcasts. I would be remiss if I did not
53:08
Speaker 1: think Mark our recording engineer, Taylor Riggs, our booker, Michael
53:13
Speaker 1: bat Nick, our head of research who helps prepare all
53:17
Speaker 1: of these questions, and Charles Wilmer, our producer. Uh, thank
53:21
Speaker 1: you for listening. I'm Barry Ritolts. You've been listening to
53:24
Speaker 1: Masters in Business on Bloomberg Radio