Jim O’Shaughnessy guide to trading stocks in a panicMarch 20
Howard Lindzen is the founder and general partner at Social Leverage.
All opinions expressed by Howard and podcast guests are solely their own opinions and do not reflect the opinion of social leverage or stock twits.
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and we are ready to go with panic with friends.
how you doing,
Welcome back from Norway.
We'll head back from New York.
Has there ever been a panic in Norway?
Do they have anything to panic?
you're you have all that oil money? Yeah, they're around. They ran out of brown cheese the other year, and that was really bad. Did so what? How does it work there with the oil money? Do you all feel wealthy from having that? There's a surplus. You guys have, like the wealthiest sovereign fund in the world. How does that work? There's a fund that manages all the money from the oil in common, and they're managing to dig into that very well every year to make sure that we deplete that resource is much the state possibly can with a spending mean investing it. They give it away to poor countries and they get get wasted all around the world. Oh,
so so you yourself. There's no dividend that goes to each citizen every year. No, wait a minute. What's the point in doing that? I don't know. So you guys don't want it And, well, you know, there's their social service is there's free hospitals. There's, You know, there's some some good benefits from it off. We're going to get into that over the course of this panic with friends, So can you and I go way back to college. Yeah.
Uh, N b a together. We never panicked. Never, ever. Maybe a little bit more finals. We made other people panic. That was way displaced. Panic. Now, as an adult with you have two kids, I have two kids. We panic all the time. And, um, I thought this would be a good idea.
Kanoute, too, because the markets for the first time, for a lot of these Jen's ears, the markets kind of in a little bit of a panic mode. Uh, and it was getting so many calls said, Let's do a Siri's call some really smart investors and we will do panic with friend. He whipped up the jobs. Music. I think that was a little bit of jaws. A little bit of jaws. It was Obama saying hello to me. Yeah, he's very nice. Nice guy.
And then would you tell Steve what other movie you mix in there? That was not a movie that I wasn't, but I might have one for another day. All right, so we're gonna have our first guest, Jim O'Shea. Shaughnessy. Jim is a good friend of mine. Ah, a legend in the er quant space and as a management at oh, Salmon. And he's seen a few panics, and he has a lot of wisdom that he condone drop ah, around this subject. So let's let's get him on the phone, All right? Like not having video lava. We're calling Chef right now.
Jim O'Shaughnessy panicking? Yeah, well, listen, that same with the CNBC stocks in turmoil. Soon as we announced this show, the market bottomed naturally naturally when people heard that Howard's calling Jim and Jim, not heart, did not have heard get, by the way you could get a podcaster Marc shirt. What time you tell me? What are both of us? Do it. How do we have so much spare time? So you today are incorrect. Your ticket?
I am in connect. I cut. Yes.
And ah, you are here with Ah, I'm in Phoenix in my studio with Canute Jensen. He's ah, Norwegian. And we were just going to Yeah, commuting, commuting. I went thio issue together. We were just commenting that we never panicked at issue. We created panic for others. Yeah, we, uh, never panicked and
so normally my function as well. So I I hope that we managed to, you know, work up a good at a
steam here. Do you? Have you been to Norway?
I have not been to Norway. It's one of the few places in Europe I haven't been. I'd love to go.
There's rumors that doesn't even exist there.
What is even Iceland and Norway had Where's the little tech company?
Come out of there.
Spotify eyes out of cool tech company Noah.
None that I can think of then came out of Norway.
Nothing big now they met them.
The paper clip?
I don't know if that you stole the oil from the Danish,
Yeah, to a degree. But you know what a fun they have. Jim. All right, So, Jim, we're gonna get right into panic here. Let's give everybody a quick bio. Ah, the people on my and know who you are, but just, you know, it's a long bio, but you give the best buyer you have for yourself. Give me a few minutes. So we get some background.
Yeah. So I think the shortest and easiest bio is the founder and chairman of O'Shaughnessy Asset Management, which is headquartered in Stamford, Connecticut. It's a quantitative, long only in equity investment firm. Um, I wrote the book. What were some Wall Street? Which is when I get the best known for where we looked at a huge variety of factors. Things like buying stocks with Loki type E e's buying stocks with the greatest earnings gains, et cetera. Um, and that is now currently in its fourth edition. Virtually all of the things that we do our systematic in nature. Um and, um you know, we've We've got a great research team and are launching
what we think is probably
the next step of the evolution of investing in a platform called Kansas that allows a tremendous amount of flexibility for the advisor who's using it with their clients. I know that Patrick, my son, the CEO of Awesome, actually introduced it at at a conference right wealth back. And he did the Howie S and P for 95. And he asked you, What's that? What? Five stocks. You hate it. Right? So we're very excited about that. Um, and, uh, that's, uh that's what we've been working on.
And so what I want to talk about today, Jim, is you've been I don't know what got you first. Let's just go right to it. Um, do you Did you build your firm? So with panic proof and then is there such a thing? Is panic proof.
According to Jim OShaughnessy, Founder, Chairman & Co-Chief Investment Officer, OSAM LLCGold, gold bricks in your backyard or a safety deposit box might be somewhat panic proof, but otherwise, during times like this, when people are panicking, no, no asset is risk proof.
People can intellectually understand the risk, but in practice it is really hard to cope with, especially when it comes crashing down so unexpectedly.
the philosopher Jed McKenna says we're fear based creatures.
I think he's right.
Um and so I don't think,
really anything other than you know,
gold bricks in your backyard or putting him in a safety deposit box.
Panic proof I think that,
during times like this,
when people are panicked. Uh, these are the times where you have to remind people that hey, you know, you get this wonderful equity risk premium because of the
And so if you're buying a risk asset,
you really have to be prepared for really broad swings in that asset.
And the problem,
is that we're really temporal creatures,
And so were we have been cut.
We came off particularly calm,
period in markets where where,
markets basically just went up.
Got interpreted Well by the market went up,
It went up,
it went up.
And it's kind of like, you know, if we were if we were sitting in the Pacific Ocean on just still is ocean in the world, right? And the sun is out and everything is perfect, right? We've got our drinks on the boat and, like
where Our wives, our wives nearby
It's not that good. They're not like long suffering. Thanks. Good one. But
so and then and then the storm comes and it comes like sometimes it comes,
You can see it coming,
Sometimes you see it on the horizon,
but sometimes it just comes out of nowhere.
and it's the ones that come seemingly out of nowhere.
And all of a sudden,
the Fear Index,
the VIX Index goes from four to 80 and everybody is literally gripped by fear and panic.
that's in our DNA is the way we evolved and,
you know it's actually for its purposes.
Was really smart and really good, right? We are all the descendants of, say, there's two people, right? You know, back in 50,000 BC, and they are. They're sitting on the plains of Africa and they're looking at a bush that's rustling. We are the descendants of the guy that ran away.
We are not the descendants of the guy who went.
I wonder what that is and goes over to the bush and gets eaten,
So it's fear and panic is literally built in to our are the oldest parts of our brain.
And that's the other thing.
I studied that a lot,
as you know,
and and so what's really interesting about it is people can intellectually understand risk,
And they Yes,
you should talk,
especially if it's during a calm period in the market.
you do understand that this could really swing around a lot?
sure, Yes. And you really think that you're gonna be ableto handle it when you know it's down 20%? No. Sure. I find that if you actually use dollar figures with people, it's engages them a little bit more, right? Let's say they've got a $1,000,000 portfolio. And instead of saying, Hey, um, you know, could could you handle it being down 50%? You ask, Hey,
could you handle it if you woke up and saw that this one million was suddenly 500,000? And it's interesting is because of Blair brains process. We don't do percentages. Well, we don't do math well at all. And so the other part of this is, you know, recency bias is the idea that we expect what's been going on to continue.
Yeah, I mean, the last time you looked at your portfolio was this that's that's a recent C. I mean, it really comes down to the number Oh, I had a $1,000,000 yesterday, and today I woke up in its 800,000.
In the time of uncertainty, people want definitive answers; the market is going to plunge or the market's going to recover. Unfortunately, given the times, it is impossible to tell the future with any kind of certainty.
If you look at the very long term data, since the founding of the U. S stock exchange in the late 17 hundreds, the market today is a good long term bet!
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And the other thing you gotta throw on top of this is that,
it's in times like this.
People want people who are saying very definitive things,
The market is going to plunge or the market's going to recover,
and they they gravitate towards those people who say it with the greatest amount of certainty.
we've been around this game for a long time,
you and me,
and we know the hat.
That level of certainty is kind of absurd.
The honest answer is,
you know what?
I have no idea what's gonna happen for the rest of this year,
maybe even the next three years. But if you look at the very long term data, you know, since the founding of the U. S stock exchange in the late 17 hundreds, it's a good long term bet. People don't want to hear that right. They want to hear. I know you. You know the market is going to bottom this the bottom is in the, uh the rally from Lowe's is in place. Blah, blah, blah. right. And the other thing that's really hard is we are really creatures of narrative.
We want the story to make sense. We immediately gravitate towards stories. You see me on Twitter, always making fun of the journalists who are inventing all the reasons for why the market has done something right. I joked that you know, we could probably have an AI AI program to do an even better job, right to pick the words that are most searched and work them into your headline Upper down. But people don't like to hear that, and another compounding problem is that people also don't really like to talk about money. I always say it's the last taboo, right? People will talk about their sex life until they're blue in the face. But man bring up money and you start touching all of these things that are really hot button because no one has to do with hierarchy. And as to the status it has to do with fear of not being a rule to provide for your family with tried, if you you know you've done well and it just goes on and on and on, right emotional hot buttons and,
you know, I have seen this time and time and time again. When you get conditions like this, the emotional part of your brain takes over, and evolution has made certain that those emotions are much, much stronger than willpower.
um so is it Do you remember?
we can't take passes.
The question we can't take panic out of out of our lives and some level it's it's healthy.
when you're young,
you're you know,
that's why I always told my kids,
Just have fun,
plenty of time to be stressed out,
even even my daughter.
I sent her away on spring break,
and I like she's like,
I'm like, Hey, read a book, put your phone down, seeing three days But like you're 21 years old. So Oh, plenty of time to ah worry about things. Um, do you remember the first time that you ain't forgetting girls or dances or, you know, school grades or whatever? Do you remember the first time you had enough money or didn't have enough money that you panicked?
it was later in life,
my background is I come from,
very well to do family.
And my grandfather was a very successful entrepreneur.
I kind of get a Bill Gates and Warren Buffet.
But back in the day,
he basically gave away 95% of his fortune during his own lifetime,
which I'm very proud of.
And and yet,
things were certainly not tougher for me or us.
there was a point when I was still deepest. What were some Wall Street research and building a house in Greenwich? Because I'd moved here from ST Paul with my wife and two small Children. I have three kids now, but just two when we moved and kind of was looking at the bank account and had some clients, but not many. And the bank account was getting drained by the house, and that caused me a great deal. Was concerned. So yeah, I mean, yes, I felt it very strongly then. And, you know, it's just it's one of those things in life that I think, unfortunately, even the most fortunate people at some point have to struggle with it.
And what about the markets? Have you ever panicked over? You know, you've built a business in the markets Humor of the first time You worried about whether it's redemptions or what's gonna happen tomorrow with your systems because you've biltmore of quantitative system. So at some point year walking away from the systems and you have to say the systems are going to do this thing you have told your LP is this is how the systems they're gonna work. Everybody signed on the dotted line that this house is gonna work and then, you know, the market doesn't sing and that it takes a system to its brink s. So walk me through that because that that's probably where the panic is in your system. Yeah, personal. It's around. Yeah,
And I really have to say that I've been very fortunate and blessed in that I have so internalized the probabilistic nature of the world that I really you know,
I have a quality which which,
can cause a lot of problems in normal times.
But during crisis,
he's I get a lot calmer,
Um and you know,
during the financial crisis,
my co c i o said to be a few years ago.
Do you realize that I looked in your office every morning.
When I came in,
I went like No,
And he goes,
It just gave me. I made me feel real good because I thought you weren't panicked. You were. You know, it was business as usual, but if you go back to 1987
craft. I didn't have a firm then, but I was trading options, right. And, um, I had come up with a pretty nifty mathematical. Uh,
stocks are on everything.
Stocks mostly remember the only extra x m IES abroad index.
And I'd come up with a pretty need,
thing that looked at that made its determinations of being long,
short or flat.
having put the ankles etcetera,
using the implied volatility differences from the Black Scholes options pricing model.
going into the crash of 87 I had a cute Now,
I'm 27 years old,
And I have a son and a daughter on the way.
going into the crash of 87 um,
I had a mask, the biggest put position I'd ever had, And it was meaningful, right? Uh, it was significant and meaningful. And this is before I had completely, you know, integrated the probabilistic way of looking at life into my into my mental models. Right? And my panel. So a lot of people haven't studied the crash. I don't remember that. It was a two day thing, not a one day. Um, Friday
to Monday. It was a Friday, but could you say I was where I was so young and I didn't have money? I was working on it on a trade desk. So I remember Friday being busy, but not because it wasn't my money. It didn't really register until Monday. So you knew something was going on that Friday,
right? Right. So But But here's what happened, right? So, you know, sometimes the trade that ends up being just on the face of it, your worst trade becomes your best trade. Because what happened Friday was the market was down. I don't know, several percent. And and I had, like, one of the first motives that hooked up to quote trying, You know,
you're a geek.
I was a total geek,
and and so I'm watching this right,
and I just literally feel the panic rising in me because I just read,
I took a lot of letters and I read everything that I could get my hands on.
consensus opinion was that if we had,
a big down day,
that would be it would be a washout.
So literally I panicked as the market started to kind of creep back up.
So it was down.
I can't remember what present significant,
right? And then it started to kind of go the other way. I thought, Damn it, This is it, man. That was the bottom. And I sold the entire put position, right? I didn't lose money, but I didn't make much money. And then, of course, the crash happened on Monday
and you would've made a fortune.
I would've made a fortune a literal fortune. But, you know, I actually wrote about it, and I'll put it up on Twitter again when you when you let this podcast out? Because it really taught me about Oh, my God. I gotta do something about these emotions. They were gonna kill me, like you know, I always say markets are largely unpredictable in the short term. But human behavior is largely predictable.
And now we're getting out of that was your life for me? It's the same thing. I had a no, I couldn't beat the market based on my own behavior. So I had to reinvent myself with the strategy that allowed me to be me and which was obviously very early stage long term liquid investing where I couldn't couldn't check the price. I didn't want to be judged by the prices every moment. So is that when you kind of said I gotta go systematic?
That was definitely that was the time that was That was my my ah ha Satori moment. Right? And I had been doing a lot of research on and by the way, you know, behavioral research.
Was that even a thing back then? Behavioral
funny. But the funny thing is now, granted, it was not
Humans are emotional and their emotions causes inconsistency in decision making, while machines will always act in a predictable, data driven way.
think swinging Dick Harris. So people probably didn't want to admit that everybody wanted to beat the markets. I didn't think it would be a thing then.
Humans are emotional and their emotions causes inconsistency in decision making, while machines will always act in a predictable, data driven way.
but it wasn't called behavioral finance.
Yet that came later.
But but the idea of studying outcomes of of systematic,
empirically direct models,
making predictions and making predictions.
The human way had been done in a variety of things,
like college admissions,
recidivism and prisoners.
whole host of these things and all and doctors making diagnoses.
And in what they found,
right is what built up,
Your finance. The systematic, empirically derived models always beat the human. And as you thought about it, it was like, Why they, you know, the human beings invented these models, right? And it was because of the inconsistency of human behavior and that inconsistency
always emotionally driven. And so, as I got deep into the psychology part of this and, you know, I wrote a really geeky papers and then when I read it now, I just laughed. But But, you know, it was it was the was the beginnings of what would go on to become the four books I wrote, especially what works on Wall Street. And that is, you know, my my saying that you know, the four horsemen of the Investment Apocalypse are fear, greed, hope and ignorant. Right? And if you look at those only ignorance is not an emotion right? Fear, greed and hope have wiped out more portfolio value than any.
So I had the ignorant.
Well, because there are if you apply yourself right and you do some homework and you reading some of the good texts on sensible investing, um, no longer ignorant And
today that's just like following you or me or somebody who's got some experience or Morgan, you know, it's a mentorship on the Web.
It exactly and and and And also you know, my one of my heroes is Richard Feinman. The two worked on the Manhattan Project, and the guy who figured out why the challenger blew up is very dramatic, right? I love this guy, and he figured out that it was the rings.
You know that, right? Right,
But he did it,
like with such great here theatrical nature.
He gets them to bring him up a couple of ice,
and he takes from a journal that the old rings are made.
Argument drops in to the cup of ice,
and it disintegrates.
And he goes,
I think there's your problem,
And But he had this great.
He's I mean,
if you read several books.
He's written himself,
Surely you're joking,
Professor. Fine men. Um, and then books written about him. He's just really incredible polymath. And one of the things that I quote to people all the time is you got to remember, the first rule is don't fool
yourself because you're not the
easiest person to fool. And and once you once you really download that and get rid of that ignorance part, right, you still gotta deal with few degree note, and you don't have a process in place to do it. You're gonna lose because the emotional parts of our brains are more powerful again, if you think about sort of the evolution of our brain the most, the newest part of our brain is the pre probable cortex executive. Right? Uh, the most ancient portions of our brain, the
reptile brain. I mean, ancient mean, So I thought it's all one bursts of what you mean by that quickly.
Actually, the brain developed, uh, various components over time.
Okay, So the most Mason is gonna
most recent is the executive prefrontal cortex, which makes modern society possible.
Yeah, That's in charge of Netflix. That part exactly. microwave
and and WiFi on airplane at all that cool.
Before that, I was just Oh, who's gonna We're gonna take it down.
Yeah, exactly. And and fear and greed, Right? So, greed. Why? Because food wasn't plentiful. If you came on like a bush full of really tasty Berries, you might not. You know, you learn to share. But you ate a bunch first, right? Because you were hungry and you're greedy,
right? But the Norwegians do that with oil. I resemble that remark. So exactly. Okay, that's interesting.
Yeah, yeah, but So anyway, those those centers of our brain are much, much older and much more powerful. And quite literally, you can see this. And this is why I advocate everyone keep, like a journal.
I mean, so we get right to that. If you feel shitty right now, the number one thing in a panic mode is write shit down. I mean, the greatest thing that's happening. I think this might be idea to quickly do this show on the spot is panic is it's like walking into the dead sea with a cut. You know, the markets are going to find that you shaved your armpits before he went into the Dead Sea. The markets are going to find that place to cut you.
The markets will always find your weakest link. And that is where they will attack.
They will attack your fear,
ignorance and greed.
um so that's good.
if I've done my homework,
which I never do,
we'd probably have led with Dad and,
the But that's the beauty of podcast.
And we gotta listen to the whole thing.
knowing that let go now to what people should do when they first time invest.
So So you have kids,
you talk to them.
Maybe about investing or not. But everybody was listening here is, like, obviously gonna be interested in hearing what we think about panic. So it's happened like it's too late. We're in the middle of it and fear, greed, hope, ignorance, the remote, the window like, let's help people understand what's happening. And you know what they're supposed to do. Um, when they're panicked. Do you have any advice for people when they're panicked?
write it down,
because that is a very cathartic experience,
It's one of the reasons why and talk if you have a really good friend or your husband,
Talk about it,
and explain it because there's this idea in psychology,
it's called talk therapy,
And what they found is people who are who are able to simply express verbally write or in writing their fears.
um, you know, the things that they're really worried about, etcetera. It really helps him. And what's really interesting is the Who you're talking to, you know, it doesn't have to be a trained psychologist now. Obviously, probably be better trained. Psychologist. They're trained, asked, you know, a pertinent
question. I have a professional. Do you see a professional Happy?
Uh, not No, no, no, not for markets or anything.
No, I'm just in general. In life.
Well, so yeah. I mean, I actually, I I have this thing that is way too long to explain which is called the mind body problem. Uh, and
eso your you believe in the whole system
of it? I do. Yeah, I know. And and And And I think so. I think that, um it's very healthy to be able to Thio be able to talk with someone else about things that are bothering
do that. Write it down and then and then, you know, contemplate. And don't do anything right now. Right? So? So maybe you were overexposed equity, right?
Everybody is. When I cut like this just happened. I only was 50% exposed. And I wake up and I was stressed. That's why I had the idea to do this. Like, I don't like seeing my account down even under, you know, 50% bonds, 50% stocks, forgetting homes and other junk and all our stuff. But what happens is you just start people to start staring. We all D'oh! Maybe not. Maybe not. You are maybe not 10% of the population, but all I know is you might as well shut everything down because everybody's internally focused on their own wounds.
Yeah, and actually, that starts a chain reaction, right? Yeah, where you telescope, you're
all in the I love that word. We need to see it in people's eyes. Like people would call me, and I'm you know, I want to help the companies, but I got my own shit that I gotta deal with because I know when I opened up my my account, I'm going to see Red. I'm going to see big number losses, so we've telescoped our attention. And so people need to understand that that's happening to everybody.
And and what happens is that starts a very short, uh, loop feedback Friday. So you're looking at those numbers, as you say right there. Read that start that increases your panic. It increases your court, and probably everything becomes bad thing to see. There's a you know, Google rectangular activating system. And basically, that's the idea behind the particular activating system is you literally seen what you're focusing on. So as an example, you know, if you don't normally have done this, it's really interesting. It really works if you don't normally think about cars of a certain taking the car color you like and come up with it and medicated with three car and I thought, you know, and now for the next 24 hours, I'm gonna try to see how many green card is. I and I was nothing that I would be like
five. Write you something.
behind that is because the particular activating system was activated. It said, Look for a green car And so my God focused on that. Lala there are bringing car. Same thing happened, except in a bad way. U telescope Your attention. You're very short, looping back systems, everything. It is bad news, right? You literally become blind to Newt.
That is not bad. So the first thing is turn off the TV, close your computer. Go look at the sun, get some perspective. But yes, it's hard to do. But that's the first thing you gotta do because you've got to get out of the telegraph. First, you should realise other people have doing doing the exact same thing. You're not alone, secondly, so you gotta have some context for the second thing has gotta have some respect for the other people having this telescope of attention. So you you know, this is going on around everybody and put that in perspective. But then second, you have to now start paying attention. How do you now start paying attention to what your next move is?
That's and you hit on a really important thing that I want 100 alive. You know, I can't remember who did it. But one of the financial advisors who followed me on Twitter he helping with am Because it's saying about what a purifying waters and what do you do about it? And my answer to him was my worst behavioral By being
a bad connection.
The should be calm right back.
I think we're gonna try that real quick.
Jim will call you right back,
but we'll pick right up.
We'll pick right up there.
Bummer about the reception.
We're gonna get everybody ready.
Don't try to hang on to what?
You were just getting right to it.
Get into the Nerva.
Annick, no panic needed. Hey. Hey. So I guess you're in a bunker.
I'm not in the bunker. I'm in my house.
You're lathered in Purell. I've got those wealthy walls. Okay, so go ahead. Way. This is better.
Did we capture
the way? Capture
everything? Yeah. Okay. Okay. So So? So The idea is that you get on. That I want to underline is this is not unique to you. All the listeners to your podcasts, right? Guides. This is, everybody thinks is a big boat and we're all in it because we're human beings and don't, like, feel like, Oh, I'm in crime I
Everybody's thinking about the one guy on Twitter's a short the market and it's just that the lying the listen, I try and be also people like, even though it's 50% long and I've been considered, you know, and not making as much money as everybody on the way up, I try and remind people. It's like we're all long. We all lost money. Never just randomly hanging up on Jim. You should
should still be there. I'll be there, Jim. Yeah,
Okay. Sorry. I don't know. I think I don't know. It's just a bad connection. What about? So anyway, so everybody is in position. We all lost money, so keep going.
Yeah. So? So the solution for people in general, right, is break the connection. You said it yourself. Turn the TV off, Go for a walk. You go to dinner with your spouse. Any exercise exercise helps a lot. So if you got access to a treadmill, use it. If you are in a nice weather place like you are in Arizona, go up for a walk
or a big what size pet would it be OK to hit the pet? Is it heavy towns? Did I say something? I would
go to hell
I don't know what I'm allowed to say,
because it's just a party.
So So we didn't trick Jim.
you disrupt that?
I think Right there.
we have to tell people to be honest with themselves.
when you have too much lover,
don't lie to yourself.
Don't be ignorant.
even though we hate saying sell something even into a panic. Sometimes you have to be not ignorant and sell something into a panic. So you can also lie to yourself, like go outside first, take a walk. You know, talk to the person that you want to talk to come clean with, Really? What your leverage is to a situation and what you really are comfortable with. And if that means selling into a panic, don't Don't the text. There is no textbook. You have to get yourself. You cannot destroy the mothership. You need to give yourself off a flea. Was it flea versus looking in the bush?
You have to give yourself an out. We left him off. Yeah, I know. I get a professional over operation. You're over the panic office. Exactly. We're not panicked at all. No, I'm not panicked. I can't fire you. Don't work any of the equipment. Now he's got another podcast call. He's in such high demand to call his wife about something trying to get the We were getting their We'll edit a little bit of this together, but I just want to get it out. Hence the joy of, Ah, we're in a professional studio before Jim, I think is in the basement somewhere.
So So we were saying, uh, go ahead.
you're absolutely right.
You try to just get perspective,
and it's really hard for a lot of people to do that,
I'm very lucky in that.
I I look at it the world kind of like under a probable probability function,
And so I'm never,
totally certain or one way or the other.
I know I have convictions,
But you if you lock yourself in right to a particular point of view,
uh, then you you you start equating that with you Friday, you often see people say, Oh, I'm gonna die on this hill, right? And and and I'm more along Ah, patents lines of No, no, no. Make the other poor dumb bastard die on his hill. Right, So So when you when you equate your opinions or your convictions with your ego, that is a really bad combination, because you start doing things for the wrong reasons, and again you get into a bad cascade and feedback, and that's good.
So and basically
have a process that you that you can let work and then the hard part, you know, let
it work. Let it work. First, write it down, find someone to talk to be honest with yourself. Get rid of the the the ignorance at all levels. You test yourself own ignorance. Ah, and then stay in the game is obviously very important. In 2009 maybe it came from experience. You you felt or maybe maybe in hindsight, you're even not happy about it. But it did work out. You wrote this long piece about, you know, everything was gonna be okay, right? Yeah. You linked to it. Like what made you so confident or conviction in 2009 that the other side was here?
Yeah. So? So again, the numbers. Right. Um, at that period, what I wrote that piece is called a generational buying opportunity.
And when was that? It was, uh,
March of 2009 that I published
it. Yeah, I wrote I wrote something the same in March 2009 but it was a paragraph. So it's the same thing. I just It was like a tweet.
Yeah. So the mine was like, most things. I I let the the empirical facts guide what I think. And, you know, at that point in time, we were seeing all kinds of things that had happened since, Like the 19 forties, for example, the 30 year treasury had outperformed the S and P for the previous 20 and 30 years. You know, that only happened that two other times in the historical data that we have that was in, You know that 38 years, 20 years ending, 1942.
So that was a signal to you.
Yeah, but then also just valuations. Um you know, uh, we also looked at Okay, let's look at the 50 worst 10 year performance. Right?
Rolling take yet. That's the number that I worked off of. Like the Rolling performed. It was like he couldn't. It was the It was the worst sense of thirties,
actually. Uh, yeah, it was the second worst 10 year riel. Inflation stripped out returns
for the nuptial night
rather than in May of 1920. Okay, so what we did was say OK, look at these 53 find out what happened. One year after three years, after five years 7 10 and once you ignored the one year after every number was positive. 357 and 10. And again, it's this kind of reversion to meet and markets always overdue on both. And so literally every number was screaming at me. This is a massive, massive buying opportunity. But then you ask what makes Katie the conviction? Well, what gave me the conviction was,
you know, because I was scared. I mean, we were all scared, but we still knew still, when I was writing in March 2000 and obviously I had already taken a beating by buying too early. But but so it buffets. So what a lot of people. Um, you're still nervous, even though you have conviction?
nobody knows the future,
back the probabilistic thinking,
The probabilities at that time just so overwhelming that,
I who basically,
make fun of forecasts predict also office,
felt you know what?
Every number is screaming at me that I gotta write this, and you know what's really interesting? So I also did it on the Internet, right? And it's, um it's another piece which also linked to when you when you post this, you know, mistakes were made and yes, by me. So So I wrote I wrote a piece, uh, called the Internet contrary in in 1999 right in which again, guided by the numbers, I was like, seven gang. You know,
when this bubble burst, 85% of these companies are going to be carried out of here feet first, even if you can identify the companies that are going to go on to win, and I think you're going to be able to buy it at some point in the next five meters for maybe 90% lower price. It is right.
That is thought. I mean, that is the harder letter to write the generational buying. I guess I could never write that letter. I can write the generational by
So that little
that you wrote both really interesting about that. That piece I got Maur Hate both really nailed 1999. But email as well then I'd ever gotten on anything I'd ever published. Never
saying. Yeah, it definitely does. Right? Because you are. You are not. You're not drinking from the same punch bowl and people get crazy,
get crazy on the upside and crazy on the downside. Crazy on the upside is even a little bit.
Yeah, it is. Because what happens is you know, you're making so much money and you know you again Because of the way were constructed because of evolution. Because human nervous systems psychology it is really hard not to think that a man I am the ship. I am the king. I really know howto do this and you don't you got and yeah, you might be better. You might, you know, conceivably be 10 to 15% better men. Those odds If you're just 10 or 15% better, you're gonna You're gonna rule
for Patrick. You're some Patrick's running the business. Loved the young guy. He's 11. Is hell is 12 years old taken when he
was five 35 next month.
So So we have obviously a good relationship with both of you.
So it's just cool because,
I like to think,
that I could have that good relationship.
You know what I do in a way.
we're always relating our relationships.
Whether it's Ellen telling,
if you wish you could be more like that guy,
you don't even know that fucking guy.
you know, we all want to be like him in our business in our business could end it. All of us are gathering financial twitter and stocked What's It's like a with human Patrick. They both around on the Web. Patrick's running the debt family business, and there's complete transparency and trust, and nobody's embarrassed. We all embarrass each other, but you guys seem to have this great camaraderie and respect around, you know, not embarrassing each other and and truly being, you know, comfortable in that role of father, son and business owner, operator and chairman. So is it something?
Is there something about invent like this is what's so exciting like that? I'm excited about the panic and fear. Ah, because it we need the next generation to experience the cut. Right to know that Well, you can't be a good investor unless you've been cut. It's like a fighter who doesn't. You know, you don't. You know, it's not a fine till you're bleeding or whatever into the first hit is blown. So it's kind of been a fake market for the last and enough 67 years in many ways. Um, for stock investors, like up pick any software name and it's doubled in triple. So I'm kind of get excited about this,
but at the same time, I hate losing money. So, you know, I'm taking one for the team. So everybody learns, What do you think about the next generation? Should they, uh, embrace this? Uh, should they embrace investing, or should they do something more noble or, you know, where do you think about the world of investing and in the idea of what's happening and all these people being on board it and robo advisers. Well, I'm pack a few of these things, but this will be the last part of the The interview is where are we in in in this world of investing and we're in a good spot.
So so I yes, I think we're in a good spot. I think, actually, history will show that we are in maybe one of the best spots going forward that the next generation can take advantage of.
I totally agree, but,
you know, and so again, you know, talking my own book. But our canvas platform is doing what I tried to accomplish 20 years ago with a company called Met Folio.
You were one of the original. I mean, you were the original before e trade before
you trade with around
you around. But it inspired, obviously net full of meaning you net folio was something that he trade needed. It was like e trade allowed. Net flew to kind of do what it did
Craig portfolios and the actions of all things the
polio was an online investment advisor. I even got a patent for controlled Senate that I should have tried to enforce. But so canvass, you know, is Patrick Take on that right. And, um, it is a world of optionality. And by that I mean, um, you can now do things like text manage portfolios that get that generate tax Alfa right, Taxable investors. All too often, you know it's impossible. Right, too. If you have a mutual fund or even an e t f t get the kind of tax Alfa that you can get if you have a separately managed account that his tax man, it's great you can like the holiday e P.
Give me 500 stocks less the noise with the worst customer support without contrast. And
let's say you're let's say you work for Google. Um, and you got a lot of Google or alphabet stock. Well, you can now customize your portfolio emphasized tech, right, because you're so heavily exposed to it personally, there's there's the flexibility, and then, of course, he s G. If you wantto put together an E f G portfolio, our platform is like the most neutral right? One of the problems that I have with a lot of E S T funds is they're making these moral decisions for you, right? And saying, you know, we don't care what your beliefs are. You can reflect your beliefs using the campus platform, Um, in a way that is unique to you.
So you believe in stock picking or you're not? I would say, Are you a robo proponent? More people? I don't want to start a fight, but, you know, I'm very I'm very anti rowboat,
but actually a good conversation because our clients are financial advisors, right? So So there's an intermediary between us, Andy and user who is a financial professional. And so that financial advisor and professional now has more flexibility built in with the canvas platform for his client or her client than they ever have had. Historically, never. And because of that, we think that that this idea of customization and all of the benefits that you can draw from it from tax harvesting to de emphasizing something you're personally heavily exposed t s t to whatever you want. I mean, let's you know, if you hate five stocks, you're out of it. And so I think that that is where we're evolving. And I think that That's a great thing, because
it's the greatest time.
Like like if you maybe a little ahead of the curve,
cause we can't predict when the end of this quote passive active debate ends and what is passive and what is active.
But I have been sick and tired of vanilla,
six wonderful flavors of investing,
60 40 70 30.
you could just grab it off a shelf in a supermarket.
Risk and reward.
the old man yelling at the TV for the last 15 years and not because it put me out of business.
I'm fine. Yeah. Bye Bye. Bye, Danker. Putting me out of business, I found the business that I truly love. Once I was honest with myself that it's stupid to try and beat Vanguard everything you know. Then everything started happening for May, right? But at the same time, I hate I don't hate vanguard a hate robo advisers, and the V sees that that that took people down this path that oh, that you know, an algorithm can solve all this. Well,
first of all, algorithm can't sell behavior, and secondly, an algorithm shouldn't be building portfolios, right? Right now you have an algorithm that has 15% of the money and every robo adviser of betterment Orwell front in negative yielding debt in Europe.
So So So So our position as I noted, right our client's way. You have something very important there.
And of course I did. I just don't know what it was what was. I'll tell you what it's like growing up
said that, uh, algorithms and robo advisers cannot deal with emotions. Absolutely 100% true. That's why we built canvas toe work specifically with financial professionals who have clients. Right, Because there they gotta be there to help with the emotion at the end of the day. And it's really interesting. By the way, when you look at all of the research, essentially, what you find is one ship. Once a person gets to a certain level of wealth, it depends on which study you look at. But it's around
$1000. They want, they want a human being, And and you could argue until you're blue in the face,
you gotta have a financial advisor.
No, I don't. Because we're you know we're in that business.
So what? I don't know. You're not helping us here. Just lie occasionally. Well, I just winked at you through the podcast.
Of course, Howard.
Of course I do. But you know what I mean. I even have Charlie. I've delegated this to an advisor. You you you just literally don't ask anybody.
Well, we'll see again. This is our business, right? And we have a family
off. You believe that people should have family financial?
Absolutely 100%. And that's a big change of my belief structure, By
the way, way. Meet even five. I made fun of financial advisors, and I still do because, like lawyers, most of them are good. But there is nothing more important than a financial advisor.
And I came to that understanding.
just and so,
the world is going to be good financial advisors oyster.
you you started this question with should the next generation that well,
of course they should.
You have to write.
the government could make all sorts of promises, right? Oh, yeah. You'll get social security. Oh, yeah, You'll get there, so yeah, you'll get that. Well, I don't know. We'll
And don't count.
And by the way,
that one of the greatest tax of all time which doesn't get enough credit I used to make fun of the app is like acorns.
once it's the greatest hacked to pay yourself first.
there used to be the saying that,
you just pay yourself first.
I don't know what the fuck that means.
I get my page jacket and pay my bills.
I sit down on my desk of and I put everything in Quicken and I realized I had a negative 400 a month,
But with these tricks, like this is where an algorithm and whatever works the way out, you know, you hook a kid's account up, and I think everybody's knocked off a current, but the fact is, my son, who doesn't make enough to live but I taught him how to hook up is a current account to make sure that everything that rounds up a couple four times a month money is going into a saving is going into an investing account, meaning there was a hack that actually works, meaning worry about it later. But you've saved something off the top for yourself. So that is a great tool for the next Gen Er if kids aren't on acorns or or their bank is an offering of four savings products, you are cheating yourself of the joy of investing because the whole eye is like an imbecile. I don't have money. No, you first build a hack so that you start directing money or you beg your parents to do this for you,
I completely agree.
And so I honestly think that,
the next 2030 years are gonna be incredibly exciting in investing,
not just in public markets,
by the way,
which is my specialty,
but in private markets like your specialty and and guys like Brent Be Shore,
who are family Office,
says a pretty big investment with who buys micro cap private companies and where it requires,
a CZ brand size like he's got.
It requires a lot of steak dinners and get to know people,
all that kind of stuff.
And so I just think that particularly people in in America, because this is kind of the epicenter, for it's all getting invented here, um, are really gonna have so many incredible opportunities and options that it's good for the younger. And by the way, this also gives me the opportunity to to let's stop with the millennial bashing.
You know, it's a joke, right? These kids are so smart.
You're so smart. And so just cut it out. Just stop. It's, you know, it's it's silly to me, right? And
I want it I own and operate to, like I say, Hey, I know and
I am free.
Yeah, so and it was a year is a career. You've done something while you've got a comedian, you've got a writer. You've got an operator. E mean, Everybody's an entrepreneur in the O'Shaughnessy. Your wife's a photographer. Yeah, I'm a very crackpot. You're the crack
the so kids shouldn't best.
They should hit on people like us,
the old farts to hold their hand.
We're here to hold their hands.
We want these kids.
Can't get panic out of your life.
Doesn't mean you should continue to chase panic.
That's part of the ignorance part.
Panic is not something you should be chasing.
You should be chasing a calm state.
But you should understand when there's periods of panic that they are actually periods of opportunity,
which we won't get to on this one.
But I'll talk.
We will talk about another time,
cause panic creates opportunity.
And I think that when people start writing shit down and get in the habit of writing shit down,
they'll start realizing that panic leads to new trends, new ideas. And that's why you're bullish right now. And, uh, well, that's exciting. The if you were an investor starting today? Yeah, at you. What's the first thing they should do? Open a brokerage account or what's those things?
So should d'oh. I think you know.
So I think they have a good job. They want to get 10 grand grand.
Yeah, I think that, you know, getting started with kind of a broadly diversified portfolio. Um you know, uh,
should they pick their own favorite companies, or should they go? Oh, and by the way, you
again that that's a matter of disposition.
Um I think that another thing I really came to understand is my way is not right for most people,
So when I started O'Shaughnessy Capital Management,
which was the first derivation of ocean with the asset management,
I designed all of the portfolios to be balls to the wall.
Because I didn't care about volatility,
it was like command and I was young,
And I was like,
yeah, you don't you want a portfolio that could be 1000 basis points ahead of its benchmark? And the answer is, most people dancers? No, because that volatilities side is something I didn't have enough respect for. I have a deep respect for it now. And so the the the the best advice I can get right is yet investing as early as you possibly kept because that's, you know, compounding. They always talk about the magic of compounding. It's true, right? If you start like, let's say you're out of college in your 23 you get a job, start then
and like I said, trick yourself like you so grateful. Acorn exist whatever they whatever, they're turning because it's a explain.
Yeah, and honestly, you know, it's the first thing you invest in is an E T s that covers. You know that the the broad market is
large cap and stuff
happened. Yeah, fine. If you find that you're one of these people love to live and breed the market. Sure been good on that. You know, it's gotta be The ultimate advice that I get right is it's gotta fit you and everybody's different. And everybody has different things that they want to achieve. Its like our friend Margaret Morgan, right? He he writes about this really, really well because he talks about his own way of doing things, and it's it's not as risk seeking is somebody like somebody like me might say, Hey, Morgan, your kid, you should be
doing this. Yes,
right. But it's right for Morgan. That wisdom already is a young man that it's gonna work for him because it's right for you. And that brings us right back to financial advisors. When you can afford one, hire them because they will work with you to find out what is right for you and literally and again. It's why I get so excited by canvas. Everybody's different. Yes, of course, we could make Jen rule categories right. But the fact is, if you can't stick to the underlying process, it's worthless. If you invest thinking that you, you know you're going to invest for Alfa and then you sell when the market's down or your portfolio's down 10%. You made the wrong choice, and you need to learn from that, and you need to adjust your the way
you are. Is there a fast way? Is there anything that is out there that people can learn to figure out what type of risk tolerant how, if people want to be honest with themselves? Or is that just based on age? If you're 20 stop
were based on age,
I think it was Jason's legs.
Who said this?
But I think it's a great metaphor.
Like most risk management models are like showing a picture of a snake to somebody,
And he goes,
a realist management model would be throwing a live snake in their lap.
had I think he's right,
A picture of a steak.
I can deal with that little snake in your left.
You probably gonna freak out,
so yeah, I think the answer your question. And I wish that were true. But the the again is a very nuanced things. Yeah, start with age. Right. So So, look, if you're gonna be reckless, be reckless when you're young, right? Because you've got so much road ahead of you, and and so you know, But again, this requires some introspection That's requires talking to people.
You know, One thing that might work is asking closest friends. Hey, what do you think You think I'd be able to withstand, you know, a 10 or 15%? Because again, there's a lot of studies that says that what we're hopelessly bad at categorizing ourself, right? Like classic example is, uh, you know, uh, in 10 buckets. The bucket number one is 10% of drivers who are the best. Fucking 10 is 10% of their worst.
Where were you? While men are worse than women about this, but then always put themselves in bucket one or two. And yet when you asked him the question Hey, Jim, where would you put Howard in his driving ability? You haven't driven together? Uh, the fact that you asked close friends about about their friends ability they're pretty spot on about were there at. So ask your friends
I just put
it's a tough one, though. But, you know, at the end of the day, if you're young, get started investing. The world is gonna open up to you. You're gonna have amazing things on the investment.
I think we did a good job of discussing panic.
The other side of this will be good.
don't be ignorant state,
take a deep look.
Don't hide from your portfolio or the red,
kind of embrace it.
Don't ignore it.
take a walk around the block.
Look at it. Uh, doesn't matter if you have to take losses. Uh, what you have to avoid is, you know, compounding those losses, you've got to get yourself in a position of strength and, you know, doing all those things, even if it means selling at the bottom like cares like you got to protect the franchise. Umm you know, and then you start over from scratch. Give yourself a chance to start over from scratch, and I appreciate everything you do Jimbo, for, ah, financial community. Thanks for spending time with me and canoe today. Thank you.
Absolutely. Thank you. Canoed. Nice to meet
Howard, as always. Always have a good time, uh, talking and being with you. So this is no exception.
All right, but I talk to you soon.
We live still.
So there you have a gym ocean?
what you think,
I feel calmer is Yeah,
I'm I'm about to.
That's a calm I am.
He has a lot of knowledge,
and it said,
we're going to talk with my partner,
A compound who is going to be talking way more.
way more data driven. Jim's a date. A guy, but he has the ability just being around for so long, having so much wisdom to kind of hide the data. I'm going to try and get more data to Charlie so we'll have the opposite coming up in our next episode on So everybody I hope you enjoyed will see Lou own Episode two of Panic with friends.