Diversification Versus Hedging and Long Term

Support for the show comes from Plaod If you're an executive, small business owner, project manager, journalist, or anyone responsible for important decisions, details matter Conversations move fast and it's easy for key contacts, follow ups, and action items to slip through the cracks once the meeting ends. QD is an AI powered not taking system built around dedicated recording hardware It captures conversations, transcribes them, and turns them into searchable transcript summaries and action items So you can focus on the discussion instead of worrying about capturing every detail yourself Apply that AI slash markets to learn more and use that markets code to get up to fifteen percent on When I got a new car, I thought my insurance premium would increase and empty my bank account If between won the lottery. I've invested most of my winnings in chicken tenders because they're bone. But bro, I bought a house and it's sick, bro. I'm thinking the floor is gonna to be all trampoline, bro. ad on the roof. The contractor said it's structurally unsound. They're just being babies. But switching to GeIico saved me hundreds, so my bank account is safe. It feels good to sayve some hard earned cash. It feels good to GIico. Support for this show comes from OdDu. Running a business is hard enough, so why make it harder with a dozen different apps that don't talk to each other? Introducing Odu. It's the only business software you'll ever need. It's an all in one fully integrated platform that makes your work easier. CRM, accounting, inventory, e commerce and more And the best part, Odu replaces multiple expensive platforms for a fraction of the cost That's why over thousands of businesses have made the switch. So why not you Try Odoo for free at odoo. com That's O d oo d. com Today's number thirty one thousand five hundred. That's how many years it would take to count to one trillion That'ror I how to sex worker over my house the other night and I thought, oh no, And so I do, I got really fucked up, passed out, and I thought, oh God, he's probably left with my money and my watch. and now he wass going to take my car. and so I ran down And whew, my worst fears, all of those things. We're in the trunk What was the start? thirty one thousand five hundred days to count to a trillion? That's how many no, how many years it would take to count to one trillion? Yeah So get better get started. Yeah, I got to get started trillionaire status soon. do you think you'd want to be a trillionaire? Well, I never missed a chance to talk about myself in virtue signal, but I never imagined being a trillionaire, but when I sold L two in twenty seventeen, I had very distinct plans and a path to a billion dollars And I just I thought I thought I just likek the sound of Scott Galloway billionaire. It just felt rightiders's rain to me. It does sound good. Yeah. Doesn't it sound good? And I lost a friend and I was at that age. let me see, that was nine years ago so I was forty two fififty two and I don't want to say I had a Tiffany But I realized okay. I've got enough money, unless I fuck up again, which I have done several times I'm going to be able to do pretty much whatever I want whenever I want And I have decided and I'm kind of on this rant, but there is a purpose here Pick a number And then beyond that Um, and everyone has different needs or different appetites, but beyond that Once you get above that number, spend it or give it away. and I have not increased my net worth in nine years despite an unbelievable one of the greatest bull markets in history because I either spend it or I give it away. and I believe I am happier than your average bear Also, I believe a virus that infects The United States is hoarding. And I think hoarding capital beyond And when I I don't want to say basic needs, you know my life, I live an exceptional life But above a certain amount to believe that you're going to be a better allocator at capital and to keep striving for billions and billions and hundreds of billions I think it not only doesn't make you any happier I think it's both of you get less happy. I don't think that's true either. But I think it is a weight on society. I think hoarding infects, and I think we're going to have a really interesting conversation over the next few years And it's the following, the last two decades. we've been having a conversation or been totally obsessed with how do you create wealth I think we're going to have a more interesting dialogue in the next few years around what is your obligation around what you do with your wealth? And I'm convinced that I've got the ultimate life hack, and that is once you get to a certain point of wealth be infected or fall victim to the virus of hoarding, spend it and give it away. All right, my number is A trillion dollars. Anything beyond that? You'll give away or you' spend give it away. Have you thought about what your number is? It's just very hard because you constantly see more and more things that you might want. I mean, I walk around and I see these beautiful townhouses in Manhattan. I'm sort of like, oh, that like if I can comfortably get that, that would like It would I be Good Every I wanted is there. But then of course, I'm going to start seeing like, oh, well there's people who have houses out here in the Hamptons. there are people who have houses here in upstate New Yark. and then Scott goes to Florida sometimes. Like I just think I'll keep going So it's very hard for me to like pick a number But I certainly want to make lots of money, that's for sure Now there's a bit of a hamster wheil and there is always more. I found that. The problem is You spend so long on the hamster whele that you forget how to get off. All right, with that, let's get into a conversation where we're going to talk about how to become as rich as possible with Parry Frit Alltz A historic year for the stock market. The S and P five hundred has climbed twenty five percent in the past year and notched twenty three new all time highs along the way, and it's showing no signs of slowing down. The index has now posted nine consecutive weekly gains, its longest winning streak since twenty twenty three The optimism has extended to the IPO market as well last week SpaceX completed the largest IPO in history. debuting at a one point seven five trillion dollars valuation and reigniting excitement around the public markets. The stock been an absolute tear in its first few trading days. But the question on our minds this week is simple And that is, have we reached peak euphoria Joining us to help answer that question is a veteran investor who spent more than two decades making sense of market cycles and investor behavior, known as the blog father for his influential finance blog The Big Picture. He's one of the most respected voices on Wall Street. Here is our conversation with Barry Ritholz co founder, chairman and chief investment Officer of Rit Holz Barry. It's great to see you. Thank you for joining us on the show. I would love to start with SpaceX and then we'll get into the stock market at large. but I mean This stock is just absolutely nuts to me. Currently valued at more than two point a half trillion dollars. We'll see how that number will change by the time the episode comes out fififth most valuable company in the world, more valuable than Amazon apparently. It was briefly more valuable than Microsoft Apparently I'd just love to hear your thoughts on the valuation Well, the difference between SpaceX and companies like Amazon and Microsoft is they have trillions and trillions of dollars of shares Fayed hands every day Whereas this supposedly two trillion dollar P now public company H a float of seventy five billion dollars? I mean That's walking around pocket change. That's not real company money And so whether you love Elon or hate Elon At the very least, you have to be aware that He is a brilliant engineer and I'm not talking about space or electric cars He is a brilliant Goldman Sachs level financial engineer because Really, everything he's done has been in order to drive the valuation of this. to record heights, the inclusion in The NASDAQ one hundred. Tiny, tiny float Just all of this smacks of U enngineering tends not to be fantastic for investors. I'm so glad you brought up the point about the small float. and I'd love for you to expand on that. I mean, just just to frame it for people On four percent of the shares are publicly traded. and that's what we call the float. And as we have mentioned in previous episodes The rules for NSDAQ for NSDAQ inclusion were changed. It used to be that you needed at least ten percent Um of your shares publicly traded and they changed it for spaceX and spaceX is only four percent. So it's a very, very small float. And your point is This means that it's, I guess less serious that we should take the valuation perhaps less seriously than you would a company like Microsoft or Amazon where trillions of dollars worth of shares is being publicly traded. Could you just expand on that? Why is that important And why does that smack of engineering as you say It's artificial scarcity If you want a Porsche nine hundred and eleven ST They only make one hundred of them and they're charging three hundred thousand dollars over what this should be going for. So That's a problem number one and number two. Um you know, you end up with this Crazy. imbalance, which is artificial. Look, Rolex has been doing that very successfully for ten years. They sell two million to three million watches a year Why can't you just walk into a Rolex dealer and buy the dtona you want Well, you can't because they've created this imbalance this artificial imbalance between hey, they they could double their production and not sell out still still sell out and not have a problem. keeping production low, they keep profits high, they keep demands high. they they're very foremost in buyers minds And what SpaceX did was very much the same thing percent of the float is nothing They will eventually get to almost all of the float being public But it's like a twelve month process. So we will really have a better idea of what the price discovery, what the collective belief of the true value of SpaceX is Sime in twenty twenty seven. I would add on to that. I mean, if we're making the Rolex comparison, what would happen to the price of Rolex is if there was a guy who owned The majority of the Rolexors in the world and then one day he decided, okay, now I'm going to list it on the market. Now I'm going to sell them. That would have a significant impact, which brings me to the lockups and the expiration of the lockups for SpaceX, which will happen over the course of the next hundred and fifty days ish they have a slightly strange lock up. expiration agreement. But the point is Many of the insiders cannot sell yet Eventually they will be able to sell att which point you got to ask the question All they get to sell And if they do, what will that do to the price What do you think My frame of reference is looking at the dot coms that went public, looking at Every time there's a hot sector And suddenly there's a few hundred newly minted millionaires U the weird thing and I'm going to pull from Scott's line It's never been harder to become a millionaire. It's never been easier to become a billionaire When you look at Th these companies that finally go public after a long time. You know, the challenge is, how do you keep the the staff motivated? How do you keep them working? suddenly, you tend to be a little less excited about going to work when your bank account is ten or eleven digits one' a hundred million dollar. How much are you going to be grinding away handful of exceptions like Warren Buffett who just keep working for the love of it. It doesn't matter what they're worth. So so I think you're going to see some stock shake loose Um This company has been private for a while. It's raised incredible amounts of venture and secondary financing. and there have been very slight U opportunities for liquidity But the expectation was there's going to be a big IPO. We should all sit tight And if you've been with this company for three years, five years, seven years, and you suddenly have the opportunity to ring the bell for fifty million dollars, one hundred million dollars two hundred million dollars I think any financial advisor would tell you You've won your foolish not to lock in the sort of generational wealth. And if you don't, we've seen this happen with everybody from not just the disasters like Lehman Brothers or the missteps like General Electric, but Pelatin They were hot for a while, then they weren't. and the stories were that that round trip cost insiders billions of dollars. so The general inside is cell mortem or cell At least for half and lock in never having to worry about money for yourself, your kids, maybe even their kids. The company itself has created different what I would argue, different classes of shares of stock, with lock upps that some shares are subject to and others aren't outside of the insiders But also the demand side by being included in the NSDAQ one hundred And I can't figure out if it's ten or fifty billion of incremental demand that has to go find these shares Has anyone at Bloomberg done the analysis or at Rit Holzs around when that when that demand. How long do they have to put that money to work when I mean, I look at this thing and I'm like, okay, let's agree it's overvalued, but as long as there's money out there buying at any price. continue to stay irrational longer than you can stay liquid. Do you have any sense for when that? That money from the indices is deployed and it no longer will enjoy that sugar high. Ovaluation is always relative. and Just because something is overvalued doesn't mean it's not going to get more overvalued or undervalued doesn't mean it's not going to get cheaper Um So that's number one The h hysteria around the index inclusion and I use the word hysteria purposefully was really about the big dog. It was really about the S and P five hundred which is multiples the size of the NASDAQ one hundred while it's a fun index and Like myself and my wife own it for the high octane portion of our portfolio. but it's tiny relative relative to the S andP five hundred, which is measured in trillions. like if There was a mandate and kudos to Dow Jones S andP for not giving in Elon and making an exception U It's called seasoning for a reason The company needs to trade for a year. It has to show that it's profitable. It has to show that it's got all the requirements of being a public company and all the requirements that make it appropriate for inclusion in a major index Not that I want to piss off anybody at NSdAQ. But what they're essentially saying is Hey, we're a minor index. We can waive the rules For Elon because we like the sexiness of it and there's we're not going to stick to our own Here are the guidelines for being admitted unless you're this guy But wasn't it also the MSCI? wasasn't there, I mean, the bottom line on again, a small flow, didnid't the inclusion in Some of these indices again create this effect of more people rushing through a small door. I guess the question is At what point do some of these this manufactured scarcity exogenous forces begin to abate and the company has to find something resembling value, if you will predecessor Ironically to SpaceX in terms of this exact issue Float profitability, trading volume an admission to an index was famously Tesla in twenty twenty Everybody knew it was going in the index. Everybody knew they had crossed all sorts of requirements And rather than jump on that, and by the way, the company had been public for a few years at that point U the S andP sat on their hands and when they finally and admitted them kind of later than sooner There were a lot of people that saw this huge artificial pop Most famously Kathy Woods of Art. She did nothing wrong U She just in twenty twenty had a giant position in Tesla as well as Bitcoin and was plus one hundred and sixty percent for the years is one of the greatest years of any mutual funds or ETF manager in history. And then of course, both Tesla and ARC came back to Earth and have been a little I don't know if I want to call it normal, but a little less frenetic Now we're seeing the same thing play out with with Space accX and to answer your question directly U I'll send you a sheet we put together internally that shows all of the individual Um dates where different share classes come live, different things happen. It's like a twelve month process. to get some, I don't say all, but some of the stock out U, But there's going to be so much excitement ar was not that this would be another Tesla, but that this might be another Facebook It's very retail. Ebody's enthusiastic about it. Not exactly the smart money and But you know, the price corore up cross two hundred bucks too long ago. It's been trading for all of forty eight hours The underwriters have to be pretty happy. When you say not exactly the smart money, the division between the dumb money and the smart money, I I've also held that view, which is I feel as though this IPO was predominantly marketed to retail investors, basically Elon Musk fans who will buy whatever he puts out there at whatever price, the price doesn't matter Um, which might sound maybe a little patronizing, but I think it's generally speaking pretty true. But at the same time I do see a lot of people on Wall Street. who seem to have a similar Sentiment who say, I mean, seasoned investors who say the fundamentals don't matter here because SpaceX is trying to save humanity, never bet against Elon Musk You know, this is like the most important company in the history of the world. You know, they're kind of buying into that hype and they are putting real capital to work here And it seems to be reflected in the stock market, though, as you say, the float is so small that it's a little bit hard to tell. I'd just be interested to hear what your conversations with other investors on Wall Street have sounded like. When it comes to space sex, And are you seeing that level of exuberance and enthusiasm from institutions, the same level we're seeing from retail Let's start with the retail first in three decades on on Wall Street. I was a newbie When Netscape went public, I was on a trading desk And I very explicitly was told Hey Nbie, stay away from the IPO. That's not for you and So that was ninety six. That was thirty years ago Over the ensuing thirty years, I have never had more people reach out to me and ask about an IPO Friends, family member colleagues, professionals, Hey, what do you think is going on here? What's going to happen? And my answer to all of them was the exact same thing Generally speaking, IPOs tend to be a crappy investment When you take them in mas A year later, most of them have underperformed the broad market This seems to have so much buzz. I expect it to before it goes down, I expect it to go up which is a very meilly mouth way of not taking any possession. because and I've said this to people over and over again Hey, I have no frame of reference. There's no history You're asking me what is the collective insanity of everybody who is You know, experiening FOMO, experiencing excitement I don't know if Elon still has the same He still definitely has a deep following But I think the cult kind of Um, God Dinged up by both H affiliation with the president and with Doge So I think the Elon brand, while still very strong and still very shiny witnessed the SpaceX IPO is definitely a little more tarnished than it was two years ago. So So generally speaking, there was a ton of interest Um but I don't know how that interest is going to translate into conviction Are these in the crypto world? Are these diamond hands O these people who just like free money. I'll flip this. I'll make thirty, forty percent. And I'm done What we're asking you to do and what every investor is being asked to do is to measure and figure out, put a number on the collective insanity of the market, which is a very difficult task. However, we have seen many moments in history where collective insanity was on display I think you could make a decent argument that it was on display in the crypto market. There was a time where people said that NFTs would change the world. And a lot of credible people said that did people with a lot of money and put a invested a lot of capital into that movement, Web three, all of that. There was, I'm sure and you've seen many more of them because you've been in this game and at the top of this game for a long time So I guess how does this compare to previous periods of collective insanity and can we draw any parallels will make any distinctions. What makes this era so challenging is that everybody's muscle memory, everybody's a recall of the last few times we saw a boom like this The obvious comparo is the dot coms And I think that's the wrong comparison to make And that comparison leaves people go down the wrong to reach the wrong conclusion and to use a totally wrong framework. So let's look at SpaceX And let's be blunt. seventy five billion dollars It's a tiny float. It's a t. If it was a seventy five billion dollars market cap with all the stock trading. It's barely in the S and P five hundred. It's in the bottom twenty percent Um Pull this speculative frenzy aside from the cult of Elon And when we look at the broader market, You have a couple of things going on that is just perplexing people and causing them to reach the wrong conclusion. So number one We have just had a series of all time highs year after year after year. And I love to say this because it pisses people off There is nothing more bullish than all time highs. There were five hundred and eighty two all time highs from nineteen eighty two to two thousand in the S andP five hundred And I guess you can make the argument that the very last one in march two thousand reallyally bad. previous five hundred and eighty one were nothing but more gains, more upside, more upside And what are the odds that this all time high is going to be the last one and you're going to tap out and avoid the downdraft. So that's number one. Nber two Hold aside AI, which is a big issue U numberber two We have seen earnings across every other sector U just about every other sector hit record levels and record levels of growth So not only have earnings been at all time highs, but earnings growth pretty close to all time highs suuper powerful one two punch. If you were to say to me Hey, I'm going to put you in a room with a computer, but you're only allowed to see one data point in order to manage a portfolio. What would that data point be My answer is easy, earnings because if you look at a long term chart of stock prices follows earnings growth very, very consistently But then the third thing And this is where people kind of lose their shit over. Artificial intelligence again, is not a good comparison to the dot coms notot only because there's huge revenue, huge growth, real profits realal products, it's not clicks or eyeballs. It's enterprise level multib billion dollar Contracts Better comparison in my mind is the industrial revolution Not not mobile, not even semiconductors, which played out over time. This is so much more rapid than semis than mobile Innet This is having an impact on So many companies at such a level. you know, everybody's been talking about the magnificent seven for so long Maybe they didn't notice that last year and this year The four hundred and ninety three are doing much better than the magnificent seven two years in a row And secondly, the reason for that is we don't know which of the AI companies are going to be the winner. What were there three thousand car companies. you're left with three car companies in the United States. even just go back a couple of decades to the HPs and gateways and all these different computer companies. now it's Apple, Dell maybe a couple of other Korean manufacturers and Chinese manufacturers, but essentially what was hundreds of competitors. So it is it anthropic? Is it U Open AI, is it going to be Microsoft? Is it going to Google? I have no idea who's going to be the AI winner other than to say The rest of the market, the four ninety three that are not that that tech stack of concentrated U technology and AI focus They're all going to be more productive. They're all going to be more efficient And I think they're all going to be more profitable And that's what where the enthusiasm comes from We'll be right back after the break. and if you're enjoying the show so far, send it to a friend and please follow us on YouTube, Spotify, or wherever you get your podcasts Support for the show comes from Avon. Americans are carrying over a trillion dollars in credit card debt at rates north of twenty three percent. Meanwhile, homeowners are sitting on the largest pool of untapped equity in U.S. history Think about that asymmetry. You own a home, you built real equity, and yet When you need capital, the financial system routes you to a twenty three percent unsecured card instead of the asset you already own. Avven built the first home equity line of credit issued on a visa card. so the same swipe that used to cost you twenty three percent now costs a fraction of that saving you hundreds of dollars a month. Check your offer at no cost, with no impact to your credit score, no hidden fees. Avan holds a four point nine star trust pilot rating from over eight thousand verified customers Go to Avven. com that's avN. com Avven. Stop over paying for capital. Avven Financial Inc N MLS number two zero four two three four five cards issued pursuant to a license from Visa USA Inc by Coastal Community Bank NMLS number four six two two eight nine member FDIC equal housing lender subject to approval. Terms ofly visit aven d. com for details Core for the show comes from VCX, the public ticker for Private Tech. For generations, American companies have moved the world forward through their ingenuity and determination. And for generations, everyday Americans could be a part of that journey through perhaps the greatest innovation of all. The U.S. stock market It didn't matter whether you were a factory worker in Detroit or a farmer in Omaha. anyone could own a piece of the great American companies. But now, that's changed Today, our most innovative companies are staying private rather than going public. The result is that everyday Americans are excluded from investing and getting left further behind while a select few reap all the benefits Until now Introducing VCX, the public ticker for private tech, now available wherever you buy stocks, VCX by Funrise It gives everyone the opportunity to invest in the next generation of innovation, including the companies leading the AI Revolution, space exploration, Defense tech, and more Visit getvcx. com for more info. That's getvx. comot Carefully consider the investment material before investing, including objectives, risks, charges, and expenses This and other information can be found in the fund's prospectus at getbcX. comot This is a paid sponsorship When I scraped my car in the parking garage, I was worried that it could be a long process to take care of it Like a landscaper's first day trimming a hedge made I have definitely already been here. Now is it left, right or right left Well, maybe I'll cut a path out and find my way back later But it wasn't like that. I filed a claim in under two minutes on the GaIio app and they handled it from there. It was taken care of almost as quickly as it happened. It feels good to get help, quQuick. It feels good to GaIiCo We're back with Profty Markets One of the things you mentioned when we compare like d. com era two today to what we're seeing in AI today Um is that business models like we're seeing Real revenues agreed, incredible, like unprecedented revenue growth agreed But then you also say we're see Profets there I think. you might have a little bit of contention because The big companies that we're talking about like Op AI, like SpaceX, the profitability isn't there. They're losing billions of dollars. And in addition, if we're talking about like what metrics are real and what revenue is real and what profits are real, what we're also seeing is this issue of the circular deal making where a lot of those enterprise contracts, which are massive are being handed over by their investors. you know Google goes and buys billions of dollars worth of GPU chips from SpaceX and Google is an investor, a significant shareholder in SpaceX, which makes you question how real that revenue actually is and how long it will actually last. So that's one point that I'd like to get your views on. And the reason I bring that up is because The Dot com era had similar metrics, which seemed real when you looked at them clicks, eyeballs, how real is it really questionable? And then the second thing I want to get your reaction to You know, back in the fall There was a lot of the comparison to the dot com bubble to today. Are we seeing the same thing? And a lot of people said you know, there's an AI bubble, valuations are getting stretched. And our view on this show was Maybe there's a bubble the valuations don't hold a candle to what we saw in the dot com era But now I'm looking at the Silla PE ratio today. And as of today The ShillipPE is forty two It's the second highest reading ever The only time it was higher was in nineteen ninety nine, but it wasn't that much higher. It was around forty four And that was right before the dot com crash. And my point is It seems like right now valuation actually all comparable through the d. com era. yes, we're seeing significant earnings. Prices pretty high at this point at which point I'm starting to think Maybe this actually is. C all over again. I just want to get your reactions to those two points. So let's start with the Siller PE has been showing that it's the market's been overvalued prettyret much straight up since nineteen ninety one So it's a useful tool, but certainly not as a timing vehicle or even as is any particular insight as to whether or not you should be long equities. what I find the Schiller taped the cycllicically adjusted P ratio is useful for is it gives you a pretty good sense of what should your expected returns be looking out T years. I don't know why we continue to see get used so often because It's just doesn't give anybody any sort of any sort of timing U that's number one and then number two Um You threw a lot at me there, so I'm trying to unpack. I was worrying about the profitability And the fact that many of these aren't profitable and that there's the circular revenue question, which makes me question all of it. So the profitability thing is kind of shocking. from this perspective and I always think back to the initial Jeff Dzos letter from Amazon compompanies are as profitable as they want to be Like if they choose to consistently reinvest, reinvest, reinvest So they're not showing a profit. They don't have to do dividends. they don't have to pay taxes. Like Bezos famously send that letter, Hey, don't expect profits from us for twenty years and they didn't get they didn't have profits for for twenty years. So So there's that U The circular question, I think is a little overwrought All these companies have a side Vventure arm when they find something they like And they say to someone internally Hey, not for nothing, but we think these guysy going to be huge. Maybe you want to take a piece of it I'm less concerned about that circular stuff because it's still real capital investment You're getting real dollars. Now let me show you my favorite Contra to that When Cisco went public in the late eighties, early nineties They manufactured routers, which were sold to startups that were all venture funded And those venture funded companies would buy these routers Cash By the time we got to the late nineteen nineties, it was late ninety nine Cisco started a couple of years earlier a manufacturer of financing from their purchasers, sort of like Ford credit and GMAac and those sort of things, where the builder is running a separate finance arm And it turned out that Cisco was financing something like ninety three or ninety four percent of all their sales So in other words, they weren't selling all these routers They were giving these routers away and accepting a promise to pay one day from sketchy, borderline. Maybe they'll make it. mayaybe they won't VC funded startups And so when the dot com implosion happened, Cisco, which was a big stable company Because of that sort of circular financing. So those companies VCs were the same as Cisco's VCs. Everybody knew each other, everybody played each other. The problem was it was a promised to pay not actual cash. And so when the tide went out, Ciskco fell, ninety three percent. By the way, this was happening just this fortune U or Forbes, I don't remember which Cisco on the cover The one stock you have to own stock did nothing but go down for the next twenty plus years. down ninety three percent. It was only last year. It finally got back up to that level twenty five years of zero returns for the one stock you have to own. So that was truly circular If I see just like a lot of stock swaps or a lot of you know, paper and notes and Very skeptical Google is Going to the bond market to get seventy five billion dollars to buy more of these chips and build more of these data centers. This is real money. All right, so admittedly they're taking the debt It's not just a piece of paper. They're getting cash for it So Yeah, the degree of circularity is a little annoying But it's certainly nothing like what we saw in the nineties. So the farm team players, whether it was Rocket Lab or Virgin Galactic, they sold off. and I think a lot of people decided why own the farm team when you can own the Yankees But what was impressive or more shocking was that the ETFs holding NVvidia, Apple, Amazon alphabet were down the same week. Usually when you see this, there's kind of these Plers trade up in sympathy or people get excited about the market ot So It's not it's not the Rcket lab went down. It's just SpaceX was large enough to pull capital out of NvIidia, Microsoft, Amazon and Apple I'm curious if you think there are other going to be other losers here. that You know There is a finite amount of capital for IPOs are these types of companies. And when you have SpaceX on top of open AI on top of Anthropic Do you think generally speaking, the rest of the magnificent ten gets hurt I don't really think so. There There's a great chart out of Deutsche Bank that looks at the market capitalization percentage of newew issuance, new stocks, IPOs as a percentage of total Met, market cap And if you look at the last peak was twenty and twenty one during the a little bit of that backack frenzy that we saw. And at the worst point in twenty one point two percent of the total outstanding market cap of US equities where' new issuances collapsed in twenty twenty two to something like less than zero point two percent Here we are. We're just about at the halfway point of twenty twenty six And that's zero point eight percent. So not even a little more than a third. of the peak we saw in twenty twenty two. Now by the way, you go back to like the late nineties and you end up with one one, one point two, one point three. So that spAC peak was unusual If we end up at one four one five for the year Yeah, that's a high amount of money. But when you think about it You know, everybody was complaining Companies don't want to go public. There's so much cash around. theseese firms can stay private for forever So it's weird to hear people first say,, you know, there clearly is something wrong with the market that none of these companies want to go public. And then just a few short years later, oh my God, look at how much money is coming out of everybody else because these companies are going public I don't think one, one and a half, two percent All that meaningful to companies like Apple, Amazon, Google, Microsoft, it really isn't. When you think about the way prorofessional managers buy stocks And I love the phrase my partner, Josh came up with for this. And The relentless bid When you own sixty stocks in a mutual fund thirty stocks in an ETF. And flows continue to come in. This is absolutely true When it comes to four hundred one K money, every paycheck, people have a little piece of money peeled off And it goes into their four hundred one K Rrely are these managers going out and opening up a brand new position. It happens a few times a year Nine out of ten Gowose go into their existing holdings So if maybe Um a thousand dollars comes in and instead of that getting spread out, amongst a hundred or five hundred stocks Maybe now it's going to be something like nine hundred and ninety dollars It really just gets lost in the wash. I don't think that's going to have a significant impact on the long term prospects of companies like Google and Apple So many crosscres, so many different things are going on always forces me to recall and to remember How little we know about the future, how little We understand about what's happening right now The predictions, the forecasts, the hot takes You know they have such a short life, such a short shelf life Every changes so rapidly and it takes a solid like I'm really amazed how many people were whining about Market concentration throughout twenty twenty five evenven as it was pretty clear Of the magnificent seven, only two of them Beat the S andP five hundred NvidDia and Google So wait, five of the seven underperform the broad index. is and the market was still up eighteen percent for the year. And by the way, that was the worst returns The rest of Europe and Asia and Japan and Korea did much better. And so sometimes you dig into the data and It's all right, we think we know it's happening, but we really don't You introdued the concept to me that I hadn't considered before, and I think it's a really novel concept and that is we have this natural instinct that when something hits an all time high we should think about selling. And you introduced me to the concept that if you invested Just on the days where the market hit all time highs, you would have done really well. Better than investing on any other day, which is mind blowing to me. Yeah, I think that's an incredibly unique concept Let me ask you this though. at some point When, and I don't know what the metric is you look at if it's not case Chiller or PE or the buuffet index. But at some point, do you bury Rd Hols wouldould you say, you know, At some point it is time start hedging and whether you hit an all time high or not, when you look at it and go, okay, Folks, we have officially entered crazy Town and it would be very I look at the valuations of these AI companies and What reminds me of ' ninety nine was this notion that we moved to a different model of economics and that this is new and these companies will compound it five times. and they're revolutionizing every portion of the economy. And that multiples are forever. there's a flaow on multiples. Yeah. A permanently high plateau was Irving Fisher's famous line in nineteen twenty nine. It's different this time is basically what they're saying again. Is there a point at which Barry Ridhold says, Okay, folks, we need to bring our cororns and what are the metrics you look at? So first startart out with the understanding that It is more art than science There isn't just a series of data points where you can say when A and B and C happens guuaranteed where the market's going next U For a couple of reasons. First, it's every the setup each time is unique because twenty twenty five is int U two thousand isn't eighty seven isn't twenty nine Like the world is very different, even though human nature, when people the line about the most expensive words in the English language or this time it's different. It's because human nature is unchanged and you can rely on people to panic at the exact work Worst possible time Number one There have only been two moments in my entire career where I said sell everything or get short and move to cash One, I was a little early in january two thousand Um And for the wrong reason, I thought Hey, everybody who's sitting on a ton of gains in ninety nine They're not going to want to pay taxes on that in April. So they sell in January. you got to april two thousand one Totally wrong, had nothing to do with it The second time was January of zero eight And I had been pounding the table for I don't know two years before that Talking about subprime mortgages, talking about the backwards low rate real estate driven economy, talking about derivatives. And I spent about a year being the biggest putts on Wall Street Because I wasn't even forecasting this. I was just saying, we are wildly underestimating the risk that is taking place today And that was zero seven and zero eight. And so at the time the firm I was at was all institutional. So it was very easy to move the model portfolio to all cash We were short companies like CIT and Lehman and AIG, by the way, very hard to hold us short even as they're heading down Because nothing goes straight down. every Jenank up just it's a knife in and twists and you're waiting for the stock to get called away and I wasn't savvy enough. to own a put with each short. All right, the stock gets called away. I have a put. Wh cares U The hedging question is really interesting. And we all hedge every day. We just don't realize it You have health insurance and auto insurance and homeowners insurance and that's a hedge against the loss of this property or an unexpected cost. We don't get upset if our house doesn't burn down. Oh, I wasted twenty five thousand dollars on homeowners' insurance I didn't make a claim But when it comes to investors and I want to say to somebody You have a ten million dollars portfolio I need about four hundred thousand dollars to hedge your downsides totally And there's no guarantee it'll work. All it means is You're going to we're going to prevent the downside from being too large while still maintaining the upside Um, People are upset that wait, I I'm taking a four percent hit and the market if you did that in twenty five and the market's up eighteen percent. I spent almost half a million dollars or ten million dollars. I have nothing to show for it Well, you were hedged. you ow your downside. You have a whole year of no worries about downside People hate that. So in my personal account, fool around with a few hedges. I am long emerging markets, I'm long Japan. I'm short silver. I think as this is before. The war was ended or settled or I don't even know what the hell to call the is it a war? Is it a military action? Is this a is this a u Temporary truce, like we'll find out sometime Um But as oil prices and commodities start to come down you should see gold lose a little bit of its luster and silver, which had a crazy run For me to really want to hedge my portfolio. I would have to see a lot of things start to go wrong Right? And keepe in mind, this has been an incredibly robust economy I continue to see profits growing What's the other side of that? Well, the mayhem of this presidency is a risk factor Um the tariffs were a problem I'm long companies like Ford and GM and I previously were long things like Walmart that did well when the tariffs were overturned Um so we survive that The war, maybe this is over. So this risk factor is done. All of the ice stuff, which is contributing factor to Sentnimon at record lows Um, That's another factor and on top of the K shaped economy where, you know, you can't have the top ten percent driving half all of the consumer spending Like that's just not a sustainable situation. So I look at all those factors And I'm tracking sentiment, which is useless except at extremes. So when the sentiment is at record lows, at least short term, that tends to be bullish U We're not seeing massive layoffs we're not seeing a whole lot of hiring and we're only seeing modest wage increases, like all the things that are risk factors that would make me say Hey, I want to get out of these equities or at least hedged my core portfolio. and get out of the I own the cues. I own an AI ETF BAI, which is, you know, doubled over the last year All of the wacky high growth high oane stuff That's the first thing I would do when I start to say And again, more art than science All right. pretty close to the top I'm going to cut this this and this. I've held them long enough that the taxes are going to be as low as I'm going to get And then Let me start watching these factors. but It's so much feel and so much intuition. and so much craft and so little Science that You're making these decisions and in the back of your head, you're constantly saying What happens if I'm wrong? What where's my line in the sand whereere I say, because I start on a trading desk. And there's no difference between being early and being wrong Right? If you tap out at fifty thousand down and it goes to sixty thousand and on a way to thirty thousand You weren't early. you were wrong. You could have tapped out at fifty five or sixty or wherever the hell that number is. So so the the biggest Biggest warning sign is going to be a major trend break in a number of these different sectors and broad indices. We're not seeing that. We're seeing positive momentum. We're seeing all time highs Yeah, there I say this every cycle absolutely one hundred percent is a top out there. There's a top coming There's a shit storm coming away. There's going to be an ugly, ugly market downown twenty, twenty five, thirty, thirty five percent I just don't see it happening tomorrow. or the rest of this week or probably not the rest of this month And when I take my magic Aateball, the outlook is cloudy beyond that We'll be right back and for even more markets content, sign up for our newsletter at propertymarkets. com Support for the show comes from Odu Running a business is hard enough So why make it harder? with a dozen different apps that don't talk to each other Introducing Odu It's the only business software you'll ever need. It's an all in one fully integrated platform that makes your work easier. CRM, accounting, inventory, e commerce and more And the best part, OdDu replaces multiple expensive platforms for a fraction of the cost That's why over thousands of businesses have made the switch. So why not you Try Odoo for free at odoo. com. That's O dOo d. com Support for the show comes from Odu Running a business is hard enough, so why make it harder with a dozen different apps that don't talk to each other Introducing Odo It's the only business software you'll ever need It's an all in one fully integrated platform It makes your work easier CRM, accounting, inventory, e commerce and more And the best part, OdDu replaces multiple expensive platforms for a fraction of the cost That's why over thousands of businesses have made the switch. So why not you Try Odoo for free at odoo. com That's O d oo d. com This episode is brought to you by Google Chrome You think you know a browser, but Gemini and Chrome, that's new. It can help you with practically anything on the web, like restoring a vintage motorcycle from a fifty page restoration block, or finally break down that long article you've had open for weeks. Gemini and Chrome is here for it. Ready to make anything online makes sense? There's no place like Chrome. Check R responses set upp required compatibility and availability varies eighteen plus We're back with prorofty Markets. I think that a decent lesson and I want you to validate or nullify the thesis, but when people immediately go to the notion of hedging What I would suggest they do is they think about diversification as opposed to hedging. I think people use the phrase hedging incorrectly So my favorite example of hedging was when Yahoo bought broadcom dot com And Mark Cubin said Oh my Godd, not only am I suddenly a billionaire All of this is tied to Yahoo stock And I think he was limited with what he could do for six months and then put on a zero cost collar, which is just a way of saying, listen, I'm not selling the stock. I'm locking it in this tiny range. And if it goes over that range, it gets sold and if it goes under that range, sold, but I'm stuck here So it doesn't look like a sale until it's sold. And of course, Yahoo proceeds to drop ninety percent And he sold somewhere around two hundred U and it was it was a one of the greatest trades of all time That's a legitimate hedge How do I prevent downsize from affecting this specific holding. When people are broadly invested in indexes or Broad mutual funds you end up with a different situation where Markets are down one out of four years. If you look at the history of the S andP going back to nineteen twenty nine It's about twenty six percent of the time Markets are negative on the calendar year And if you look at fiveive percent drawdowns happen two or three times a year. you get a ten percent drawdown I think it's like every one point two years on average. Meaning it doesn't come along like clockwork. Sometimes you get a few of them in a row, sometometimes you don't get any. The downown twenty percent is like once every three or four years, and the down thirty percent are kind of generational It's ten, fifteen, twenty years. You know, if that's what you're trying to hedge That's just the normal course of how markets run. But and a lot of this is semantics. what you just described with Mark Cubin, I would say is diversification, not a hedge He didn't go short the stock He didn't buy puts K legally sold the stock effectively such that he could put the money in something else without triggering a capital gain. And that zero cost collar includes as part of one of the legs is a put that when the stock fell He's essentially locked in from there So but then he did roll it into a whole bunch of other things, including the Dallas Mavericks.. He he did, you know, I love that approach of saying Maybe this doubles from here, but I don't want to be greedy. I want to lock in a big win and then do really good things with it Um so, so diversification is useful if any given sector or geography where style falls out of favor back to you know, the first quarter of twenty twenty or think back to zero eight or nine In a real crisis, all correlations go to one. and everything moves in lockstep down And so that's the risk youo always facing when peopleeople say, am I diversified? Do I need to hedge? I really look at that as two different questions. If you're diversified Two things. first in a real crisis, it won't matter for the most part But second, Being diversified means there's always something in your portfolio that you have to apologize for. We spent the better part of the twenty ten s apologizing. overseas equityity forsces Europe, Asia, even South America, they all did really poorly And yet over the past two and a half, almost three years They've been significantly outperforming the U.S Perhaps this is the start of a ten year period of overseas outperforming So could the U S crash and not drag the rest of the world down Most of the time we do drag the rest of the world down U Maybe if we have just let's say we're up fourteencent, fifteen percent for the year Let's say we give that up by the end of the year and the rest of the world is done isn't doing this poorly is doing okay You're not hedged, but you're diversified and that offsets the risk of a concentrated U. S. domestic portfolio You mentioned earlier that there's a difference between being early and wrong that if you If you think you're going to see a correction Um, and you some action based on that belief, either you sell or you hedge or whatever it is And then the market goes up another ten percent after that then you were wrong and I guess I want to hear a little bit more about that philosophy because I'll just tell you how I'm feeling about this market Um, I think it is frothy. I think these valuations are crazy. I think SpaceX has a giant red flag. I don't think the valuation makes any sense. I don't necessarily think we're going to see dot com again, but I think that we might see something like twenty twenty two. and by the way, you mentioned the the SPAC supply, which did proceed almost immediately this pretty negative year for the markets, especially negative for tech companies in twenty twenty two. And my expectation my feel No one knows, I don't know, is that We'll see something like a twenty twenty two start to transpire over the next callall it six months or so And then the question becomes like What do you even do about it if that is your belief My view is that it would make sense to start thinking about how to hedge against that event But if I have it in my head that I need to make sure that I time it correctly such that I'm correct, as you say, between the difference between being early and wrong. then I don't know, that's another thing to deal with. So I guess how how do you think about that? You said that you don't see this market turning negative in the next. day or the next week or the next month. but if you think it's going to happen over the next I don't know, six months or over the next twelve months, then what would be your approach to hedging in that situation or market's end or cycle's ends. And this will, like every other cycle before us will eventually reach its natural or unnatural conclusion When you make the decision to, hey, this market is crazy, frothy, overvalued, whatever You are making three decisions and most people Don't think about the third decision So decision number one is, all right, I have too much exposure to this equity, whether it's technology or US or just equities in general. So you're choosing where you're overexposed Decision two is All right. so maybe I think I could pick the top and I'll try and get out there or maybe I think I can And I'll peel ten percent of my holdings down to wherever I want to take them Every month, the opposite of dollar cost averaging dollar cost liquidation. So all right, I'm not going to get the exact top, but I'll get enough of the curve By the time Everything gets really ugly U I'll have a cost price sale way above where we are But the third decision is the one that people forget which is just simply What are the rules, what are the parameters that and what what will trigger me re entering these markets. And I can't tell you how many people, we were getting emails, not just twenty ten twenty thirteen, fourteen, fifteen Hey, I followed you out of US equities in january two thousand eight And when you jumped back in in march zero ninth, I thought you were nuts And by the way, I'm still sitting in cash. That's the realil realk. Like you can't miss that recovery because like the market very quickly recovered It took til twenty thirteen. from the from the zero seven, October zero seven peak March zero nine lows to twenty thirteen like if you're not back in then, you're never going to get back in PS accademic research has found peopleople who panic cell into a crash thirty percent of them never come back to equities So you want to avoid that. I think that's really, really great advice. And by the way, I would just put another option out there, which is another one that I'm considering, which is Do nothing And stay invested for the long term. Ed, how old are you? Becauseuse I think you're a little younger than me and Scott. twentyw seven. So wait, you have a forty year time horizon. Exactly. your responsibility is don't just do something, sit there because The math of bear markets is kind of fascinating. Think about two thousand to twenty thirteen or nineteen sixty six to ' eighty two in anticipation of the eighty two to two thousand bull market. If you dollar cost averaged into either of those periods, You know,, you lost seventy five percent on a on a In real terms, in inflation adjusted terms of the money you put to work from sixty six to eighty two. And as soon as eighty two ross and we started this bull market You are just accumulating assets of unloved indexes at deeply discounted prices And they exploded higher overver the next You know, the market had a series of giant rallies and sell offs. Incing seventy three seventy four, which was very equivalent, fifty six percent to zero eight hundred zero nine. And so if you religiously dollar cost averaged You ended up at the end of that period of no returns, zero returns in nominal terms and minus seventy, seventy five percent in real inflation adjusted returns You just own everything so much cheaper And it's weird to think about this But as much as we love the bull market and that's where the gains start to show up setetting up for that during a bear market, especially if you have decades to look out Scott and I have a few years left, but I don't think we have forty years of dollar cost averaging in us You will find that Nobody like the equivalent today is the eighty seven crash Right? Not even forty years ago Right? So someone your age in nineteen eighty six If they just kept buying straight through that the worst one day twenty two percent crash. likeike yeah, I'm a buyer. Yeah, I got forty years. I don't care Think about the market which had born from like nine hundred 's a six hundred on the Dow It's now fifty thousand That's what having a poor decade. timeim Horizon does for you And the other side is What are the odds that you'll get out remotely close to the top and get back in rememotely close to the bottom If ever, if at all. Yeah. And I think, you know, every time I talk about any reasons to feel bearish whatsoever. And I've said, I think we're kind of close to the top. I think your point is important one and it's something I would like to make on this show right now. I'm not saying when I say that Oh, you should sell I mean, I should be very clear about where I am, I'm still very long equities in my full portfolio position. Just because I think that stocks might go down tomorrow doesn't mean I'm like, oh my God, we got to sell everything now. That's not the implication The reality is weve got to talk about markets because we're here and we're talking about markets. sometometimes they go down, but ultimately, yeah, we should all be long equities. We should all be invested. So I'm glad that you. point that. By the way This is the reason I love having a cowboy account Take five percent, four percent of your liquid net worth Pray to your heart's desire by crypto short What it silver Get long, whatever you want. speculate on the Gidideous meme stocks and shitcoins. There are. Yes. And the beauty of that is twofold. So first When it's not your real money and stuff is running, you can let it run because it's a small portfolio. Um You know, very often we'll speak to people