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Rational Dissent Episode 015. What Being in the Market Means — Transcript

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0:00I like to say that a bare market is
0:02time, not price, right? So, the market
0:05goes down. It's going down the day we're
0:06recording. We're having a bad finish to
0:08the week. Um, okay. Really, the question
0:12becomes, you know, not is the NASDAQ 100
0:15about to do a 10% correction, which it's
0:17on the verge of doing, but the question
0:20is how long is it going to take before
0:21it makes a new alltime high?
0:24[music]
0:30Today's episode is sponsored by Wisdom
0:32Tree. Core fixed income does not mean
0:34static fixed income. WTBN, the Wisdom
0:38Tree Biano total return fund brings the
0:40fixed income research of me, Jim Biano,
0:43and Bianco Research into a strategy that
0:46can reposition across duration, yield
0:49curve, credit, and other areas of the
0:50bond market as conditions evolve. For a
0:53more dynamic approach to corefixed
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1:00to learn more. Investing involves risk.
1:02Principal loss is possible. Before
1:04investing, carefully consider a fund's
1:07objective risk, charges, and expenses
1:09along with other information contained
1:11in the perspective available at
1:13wisdomtree.com
1:15us. Read it carefully.
1:18Hello
1:18>> everyone. Welcome back to the Rational
1:20Descent podcast. I'm your host, Alex
1:23Molus, joined by the two usual suspects,
1:26Greg Blaha, and Jim Biano, founder and
1:28president of Biano Research. Every week,
1:31we try to counter consensus thinking
1:33while we discuss the world of markets
1:35and finance. This week, we thought it
1:38probably a good time to discuss what it
1:40means to be in the market given the
1:42volatility we've we've been seeing over
1:44the past several weeks, specifically
1:46with AI stocks. I think it's most I
1:49think the best way to start here would
1:51be with the common phrase time in the
1:53market. It beats timing the market. It's
1:57probably one of the most repeated lines
1:58in investing and it's usually right. But
2:01it skips over a question what market.
2:04The saying assumes you know what you're
2:07sitting in, why you're sitting in it,
2:10and what it's supposed to do for you
2:11while you are sitting in it. For most
2:14people, the default answer is a stock
2:16index fund held forever and earning
2:19something like probably what it earned
2:21over the last decade. But each part of
2:23that answer is kind of a choice, right?
2:25Even if it doesn't feel like one. Stocks
2:27over bonds is a choice. Uh it looks
2:30different when you pay when bonds pay
2:32you now for waiting, right? Passive over
2:35active is a choice and how the money is
2:37managed. And that's a that's one that's
2:40been argued for the past several
2:42decades. And then obviously the return
2:44you expect matters because it decides
2:46whether you stay put or you bail at one
2:49of the worst moments. So today we're
2:51going to unpack this and what being in
2:54the market really means. Meaning what
2:56you own, how you own it, and what you
2:58should reasonably expect from it. So
3:00Greg's going to kick us off here.
3:02>> Yeah. So I'm totally with you. I know
3:04it's a cliche, but that saying that time
3:07in the market beats time in the market.
3:09And just the idea that if you've got a
3:11long enough time horizon, it's not going
3:13to matter. If you're buying the S&P at
3:156,600, 6,700, I mean, 40, 50 years from
3:19now, if that's the kind of your time
3:21horizon and you're looking to retire as
3:22a young kid, then you know, that's not
3:24going to matter. But, uh, it does kind
3:26of bring up the question of where does
3:29active management fit in this if at all.
3:31If you can just rely on a long time
3:33horizon and call it a day, and I think
3:36there's kind of two camps on of thought
3:37on that. that one, you know, there's
3:40some people who like to point to the
3:41Michael Burries or the Jim Chainos types
3:44that, you know, they were able to
3:45unearth things that the crowd missed or
3:48wasn't really looking at and make a lot
3:50of money by, you know, shorting either
3:52Enron or the housing market or whatever
3:54it may be. Then there's another train of
3:57thought of people who say, "Yeah, active
3:59management in general, it's a tough
4:01thing to outperform, so why even
4:04bother?" So, I want to look at maybe
4:07some S&P data. They do a report twice a
4:10year. It's called their SPIO report, and
4:12that stands for S&P index versus active.
4:16And they look at specifically the
4:18percentage of active managers who are
4:21able to beat their index. And if you
4:24want to look at the last report they
4:25had, which goes through the midpoint of
4:26the year, look at the table. And it
4:29doesn't really matter for active active
4:31equity managers. It doesn't matter if
4:33you're looking at large cap, small cap,
4:36value growth. It doesn't matter if your
4:38time frame is one year, three years, all
4:40the way out to 20 years. The large
4:43majority of active equity managers
4:45really struggle to outperform their
4:47benchmark. Um, I mean, you can look at
4:49this table. There's very few numbers
4:50that are below 50, which would indicate,
4:52you know, active managers are actually
4:54outperforming.
4:56So, [clears throat] why might that be? I
4:59would make the case that especially with
5:01equities that if you're going to be
5:02outperforming an index, you're as a
5:05manager, you're going to be overweight
5:07those things that are the hot stocks,
5:09the overcrowded trades, and probably the
5:12most overvalued. And the bet that you're
5:14kind of then making is that as an active
5:16equity manager, you're going to be able
5:18to know when it's time to run for the
5:20exit, when things are turning south
5:22before the rest of the crowd. And as the
5:25table shows, I mean, that's not
5:26something that most people can
5:28consistently do.
5:30So, I think people, you know, in the
5:32second camp that I just talked about are
5:33kind of recognizing this and saying,
5:35okay, if you're unable to outperform the
5:38benchmark, why bother? And those that
5:41crowd is kind of voting with their
5:42pocketbooks, I think. And turning to
5:44some Bloomberg data, they keep track of
5:47all the money that's in ETFs and mutual
5:49funds in the US. And they break it down
5:51to active ETFs and mutual funds and
5:54passive. And if you looked maybe a
5:56decade ago, a little bit over a third of
5:58money in ETFs and mutual funds was
6:01passively managed. Now, as of the end of
6:04September, almost 57% of all funds in
6:08ETFs and mutual funds is passive. So
6:10it's been a very slow but steady
6:13increase in the amount of passive money
6:15that's going into the market. So I mean
6:17there's you know two ways to think about
6:18one is okay we just looked at those
6:20speedaway charts and if people are if
6:22managers are not able to outperform then
6:25yeah that would make sense that people
6:27would start putting more money in
6:28passive but I think there's also another
6:30way to look at this is that most people
6:33if you're trying to put money away for
6:35retirement you're you know put money
6:37into a 401 if you look at your company's
6:40401k options you're going to see a lot
6:42of mutual funds that mimic the S&P
6:44NASDAQ you know whatever ever index you
6:46want. What you're not likely to find
6:49are, you know, Kathy Woods ARC funds.
6:52So, I mean, I think there's also a case
6:54here where a lot of money is just being
6:56funneled towards passive just because of
6:59retirement money and that's kind of the
7:00path of least resistance that that's
7:02where, you know, people are putting
7:04their retirement money. So, now what's
7:06interesting given this chart is that
7:08Bloomberg breaks it down even further.
7:10And you can look at this breakdown
7:11according to domestic equity funds in
7:14blue here. As of the end of September,
7:16twothirds of all ETFs and mutual funds
7:19were passively managed. And you could go
7:22down the line with the different types
7:23of equity funds. But what's interesting
7:25is that with fixed income funds, you're
7:28looking at 39.7%
7:31of all the money in ETFs and mutual
7:33funds on the fixed income side are
7:35passively managed. So in other words,
7:37the large majority of money in fixed
7:40income ETFs and mutual funds is still
7:42actively managed. So Jim, I guess my
7:45question for you is as someone who
7:47recently started managing an active
7:50fixed income index, why what do you
7:54prescribe this discrepancy to? Why is
7:57the majority of money in fixed income
8:00ETFs and mutual funds still active?
8:03>> It works. Thank you very much. Have a
8:05good day.
8:06>> [laughter]
8:06>> But in seriousness, I think what you
8:08need to do, and this is a mistake that
8:10investors make, not just with this
8:13topic, but with a lot of topics. And
8:15that is, okay, we've learned in equities
8:19that it's very hard to be passive. So
8:22that means that it's hard to be passive
8:24everywhere. And that's not true because
8:28different asset classes have different
8:31characteristics that change the
8:33equation. And this one of the reasons
8:35why we we picked fixed income over
8:36equities. So I'll start with a table
8:39here. And this is the same data Greg
8:41showed a minute ago from the SPA report
8:44except I I broke it down. So the top
8:46half is the four major equity categories
8:50based on the benchmark like your
8:52benchmark is the S&P 500 or the S&P
8:551500. And it's the percentage of
8:58managers that are outperforming
9:00outperforming.
9:02And in red it's less than 50%, in green
9:05it's more than 50%. The bottom half of
9:08the table is the major fixed income
9:11categories, the general bond categories.
9:14You see a lot more green on the bottom
9:16half of the table than you see at the
9:17top. Meaning a lot more fixed income
9:20managers outperform
9:23relative to equity managers. In bold is
9:26anybody who's between 40 and 50%. we say
9:29that they're not outperforming as a
9:31group, but they're pretty close. There's
9:33a lot more bold in the fixed income cu
9:36bottom half than the equity top half.
9:39So, the first thing I'd point out is
9:40that when it comes to fixed income, it's
9:42a different asset class. And yes, it
9:45does work in fixed income. I've used the
9:48analogy that equity investing is like
9:51golf. PAR is 72 in most courses. PAR is
9:56the S&P 500. You go out there to try and
9:59beat the course, the S&P 500, where
10:04fixed income management is tennis. There
10:06is no objective standard. There is no
10:09benchmark to beat or clock or anything
10:12else. It's just beat the other guy. And
10:15that's why a lot of equity fixed income
10:18managers are benchmarked off of other
10:20fixed income managers where equity
10:22managers are benchmarked off of the
10:24index itself. So what is it about um fix
10:30that makes it different that active
10:32works?
10:34I've used the terms um you know allstars
10:36and problems children in equities your
10:39biggest ga your biggest gains from the
10:41index come from your allstars your
10:43magnificent seven stocks your chips you
10:47know semiconductor stocks not the day
10:48we're recording but before the the day
10:51we're recording the balance of the year
10:53they've done very well and if you're not
10:56all in on all of these stocks you
10:59underperform but in fixed income your
11:02biggest waitings Who has the biggest
11:04fixed income waitings in the index?
11:07Usually they're your problem children.
11:09your your companies that have borrowed
11:11too much, your overlevered countries
11:13like Japan with a 200 plus% GD uh GDP to
11:18um uh debt to GDP or France well over
11:22120% where the US is at 100 or your bad
11:25structures in mortgages and professional
11:28managers can identify those problems,
11:31avoid those problems and they outperform
11:35and that's what we've seen a lot of. The
11:37second thing about fixed income
11:39management is the structure of fixed
11:41income. So it's widely publicized and we
11:44talked about it here that we turned
11:47constructive on the bond market after
11:48six years about a month ago. Well, that
11:52we weren't, you know, saying that, you
11:54know, bond prices were going to rally,
11:57although they have, and I'm not upset
11:59that they have, but that we were saying
12:02that the coupons in bonds are big enough
12:06and the riskreward is such that you can
12:09buy bonds and you can hold on to those
12:11coupons. So this scatter graph I show
12:14you goes back to 1976.
12:16And on the x- axis it shows you the the
12:18yield in the bond market as measured by
12:20the Bloomberg aggregate index. It's
12:22around 5 a.5% right now. And the y ais
12:26the vertical axis shows you what is the
12:29next five-year return. The next
12:32five-year return in bonds. And there's a
12:35very tight relationship. That's what the
12:38um trend line shows you between fixed
12:42income return uh returns and the yield.
12:45So one of the reasons we turn positive
12:47on the market is there's a 5 and a half%
12:50yield and now that we've got these
12:53riskreward
12:54uh set up in such a way I can buy that
12:58five and a half% yield and the risk that
13:02prices are going to fall more, yields
13:04are going to go even higher is low. if
13:07they want to go down and give me a
13:08capital gain on top of it, fine. But I
13:10was just looking to gain that those
13:13coupons. And that's exactly what's been
13:15happening. You can buy the coupon and
13:17hold on to that coupon and moving
13:20forward, you could see the bond yields
13:22start uh doing better. So with that, I
13:25want to turn to Alex. Alex, we've talked
13:28Oh, excuse me. I forgot one more thing.
13:31Other asset classes, then I'll turn to
13:33Alex. Other asset classes also have
13:36different characteristics. Commodities.
13:39Commodities. People think about when you
13:41invest in commodities, you're
13:42speculating on whether or not the price
13:44of gold or crude oil or soybeans or
13:46whatever you're talking about is going
13:47to go up or down. That's part of it.
13:50That's called the spot return. But a big
13:53part of a commodity return is what's
13:55called the roll yield. And we talked
13:57about this in episode eight. Um and in
14:01the roll yield
14:03uh that is whenever you buy a commodity
14:06futures contract and it expires you roll
14:09to the next contract. Are you rolling at
14:12a higher price contango or are you
14:15rolling at a lower price backwardation?
14:18You always want to be rolling at a lower
14:19price backwardation because if you're
14:22buying crude oil at $100 and the
14:25contract expires and you roll to the
14:27next contract that's 94 and the spot
14:30price stays the same, that $94 will
14:33creep back up to $100, you'll make $6 in
14:36gains. That's why, as we talked about in
14:39episode 8, a big part of the returns in
14:42commodities, especially crude oil this
14:44year, has been that role yield. So a lot
14:46of people when they invest in
14:47commodities are not thinking about ro
14:49yield. That's a different characteristic
14:51altogether and active management can
14:54understand ro yield better than an
14:56index. And then finally we've got some
14:58new asset classes coming on board.
15:00Compute futures are coming to the
15:02Chicago merkantel exchange and other
15:04places. GPU contracts are coming. I saw
15:09Gavin Baker of Artemis Capital talking
15:12about compute futures being in in um uh
15:15in contango, meaning that they're in
15:17higher uh every contract out in the
15:19future is higher, which means that
15:20there's huge demand for compute in the
15:23future. And I I chuckled to myself. I
15:26was like, "Yes, Gavin, you're right.
15:28They are in contango, and that's what it
15:30means." Yeah, we could put you in the
15:31soybean pit now. You understand how to
15:34trade commodity contracts as well. So
15:36now, Alex, I'll go to you and I'll say I
15:39we talked about, you know, about
15:42equities. I went over bonds. We
15:44mentioned commodities and we mentioned
15:47um may some new asset classes and
15:49they're all different. What do investors
15:53expect out of these markets, not just
15:55what have they been doing?
15:57>> Yeah, great. I mean, you kind of set me
15:58up perfectly because I want to talk
16:00about exactly that. I want to talk about
16:01what people expect once they've made
16:04that choice because I think the
16:06expectation ends up mattering a bit more
16:09than people think and it's usually kind
16:11of what decides whether you're staying
16:14put in the market, you know, being in
16:16the market time in versus trying to time
16:18it. So, back in episode one, we asked
16:23why investors expect so much and we kind
16:26of went through all the different
16:27aspects of how we thought about that.
16:29Greg pointed out that the S&P has
16:32returned about 17% a year since QE
16:35started in 2009. The longer run average,
16:39you know, back 200 years, it's closer to
16:41eight. So this time I kind of wanted to
16:45put some more nuance on those
16:46expectations and I looked at it at at
16:48three different investor groups, right?
16:50Individual investors, institutions and
16:53then what the market itself would expect
16:56as you know over the long run. So
16:59individuals expect about a 15% a year
17:03return nominally institutions about
17:06seven and what the market valuation
17:08implies roughly zero that's real. So you
17:11can get a positive return a little bit
17:12but you know the the the return
17:16excluding inflation near zero. So a
17:19quick note on how I got there. I
17:21essentially used surveys. Naxis did a
17:24survey last year uh in 2025 on
17:27individual investors expectations in the
17:29market. BCG did one earlier this year in
17:32April on institutional investors and I
17:35just said the market version of this is
17:37the cape model that we talked about in
17:39episode one. So if you look at this look
17:42at these three against each other each
17:44step kind of cuts that number in half in
17:48so let's starting at the top here
17:50individuals kind of have a reason to
17:52expect 15%. I just said that Greg
17:56mentioned that you know since 2009 the
17:59average yearly return is somewhere
18:01around 17. You go back the past several
18:04years meaning you know since co that
18:06number is also pretty high. We've had
18:08several years of double-digit returns,
18:11right? So, one of the other things the
18:13survey found is that Naxis found a lot
18:16of them feel like the last couple years
18:19makes investing look pretty easy, right?
18:22It's a pretty funny thing to say, but
18:24most of these individual investors also
18:27describe themselves as either moderate
18:29or conservative, but they're still
18:31expecting double-digit returns. And then
18:33when you ask them where what risk means,
18:36where that lies, they're talking about
18:38volatility, they're much there there's
18:41not many there's not much talk about is
18:44it a risk that I don't actually achieve
18:46the goal my my return goals. What are my
18:49return goals? So I think that makes
18:52sense when you think about individual
18:54investors when you think about who they
18:55answer to to themselves and individual
18:59investors really only accountable to you
19:01know themselves. So the last 10 years
19:04become their own baseline.
19:06Institutions though, you know, that's a
19:08whole different story. And this goes
19:10back to, you know, what Greg talked
19:11about earlier in the SPA report and what
19:14Jim mentioned also. Beating the index is
19:17hard and most people who are paid to do
19:20it don't. So institutions know that and
19:23they know that they can't plan on just
19:26simply outperforming because of raw
19:28talent or they got some magic formula or
19:31anything like that. Maybe you could put
19:33some firms in that aspect but you know
19:35most institutional managers are not in
19:37that category. So they have to manage
19:40risk instead of chasing that return.
19:42Which is why you see that large step
19:44down between individual investors
19:46expectations and institutions. Because
19:49when your job is making sure that the
19:51money is there when it's needed, you
19:54have to build your expectations around
19:56what you can defend and what you not
19:58what you'd like to get, but what you
20:01what the goal should be for that set or
20:04that portfolio or what you're managing.
20:06And then there's the market. Right? So,
20:08in episode one, Greg, like I said, Greg
20:10showed that when valuations get this
20:12high, the following decade
20:15doesn't really do all that well. You
20:16know, the returns are either flat,
20:18slightly negative. Um, it doesn't tell
20:22you much though about what happens in
20:23the next month or the next year. It's
20:25not a timing tool, but it tells you what
20:29today's prices, today's market
20:31structure, market valuation tends to
20:34deliver over the long stretch. You know,
20:35markets have been around for a long
20:37period of time. So, you can't just
20:39discount history because the last
20:43certain period has been different,
20:46right? You could slice and dice markets
20:47in different time periods and get all
20:49different types of returns, which is,
20:51you know, effectively a method of
20:53cherrypicking historical data, but the
20:56long run average is just as important.
20:59So that kind of brings me back to where
21:01we started that timing in the market
21:03usually beats timing the market and it's
21:05usually true. It assumes you actually
21:08stay in though. So this is kind of where
21:10I want to conclude my thoughts about why
21:13expectations matter is because if you
21:16expect 15% from a market priced for
21:19something closer to, you know, zero
21:22slightly positive, you could be setting
21:24yourself up to be, you know, really
21:26disappointed. And disappointment is
21:28usually what turns people in the market
21:30into trying to time things. They sell
21:33after a bad stretch or a bad day or, you
21:36know, they pile in uh when they've
21:38underperformed into the, you know, the
21:40asset of the moment to try to make up
21:43that difference. No one usually plans to
21:46become someone who needs to time the
21:49market. you usually just because of high
21:52expectations, you just seem to find your
21:54way into doing it without really
21:57thinking about it. So being in the
22:00market starts with, you know, like Jim
22:02said, understanding the different asset
22:04classes, like Greg said, understanding
22:07how the how you want to uh manage those
22:11that portfolio,
22:13but also understanding what it should
22:16realistically what you should
22:18realistically expect and what it should
22:19give you. And that's kind of where I
22:21wanted to kick off the discussion with
22:22this first question I have kind of for
22:24both of you here. Are high expectations
22:27always a problem? So I think optimism
22:30the way I'm looking at it now is
22:31optimism you know might be what keeps
22:33people invested in the market you can
22:35think about the AI trade now you know
22:38the the group of the market that is all
22:41in on AI just like crypto or different
22:43you know different things that have
22:45arisen in the past their optimism is
22:48what kept them in but you know it also
22:51could be something that eventually
22:53pushes you out if it's too much or too
22:55little so I guess I'm going to turn to
22:57you guys and think what do you think of
22:58that. Are high expectations always an
23:01issue or or what are your thoughts?
23:04>> I'll jump in first and say yeah, they
23:06are. You know, there's the old adage
23:07that markets are driven by fear and
23:09greed. And high expectations are people
23:11that are driven by greed. They're more
23:13worried about missing a gain than the
23:16market stumbling on themselves. And so
23:19that's why when you have high
23:20expectations, you get a lot more
23:22risktaking in a market. And when you get
23:26more risk-taking in the market, that's
23:27when you're vulnerable to having markets
23:30stumble or you're vulnerable to people,
23:33you know, putting themselves in a bad
23:35position. If you, you know, just the the
23:38whole explosion of levered ETFs in the
23:41last couple of years is driven is the
23:43greed is the greed trade. I, you know,
23:45not only do I want to own these things,
23:47I want to own them on leverage because I
23:48I'm fearing that there's going to be a
23:51big gain without me as opposed to
23:53protecting my capital. The other thing I
23:56think that happens is that you wind up
24:00getting, you know, your risk tolerances
24:02all off sides. I like to say that a bare
24:07market is time, not price, right? So,
24:09the market goes down. It's going down
24:11the day we're recording. We're having a
24:12bad finish to the week. Um, okay. Really
24:16the question becomes, you know, not is
24:18the NASDAQ 100 about to do a 10%
24:22correction, which it's on the verge of
24:23doing, but the question is how long is
24:26it going to take before it makes a new
24:27all-time high? By the way, the old
24:29all-time high was 3 weeks ago, October
24:326th. Um, how long does it take to
24:34rebound to that old high? Is it going to
24:37take, you know, a couple of weeks to a
24:39month or is it going to take several
24:42years? And it depends. I'll use the
24:45retail example. Where are you on the
24:47risk spectrum? What if I told you it's
24:51going to take several years and you're
24:5368 years old? You don't want to hear
24:55that. You You want to retire. You want
24:58to have your net worth be protected. you
25:00shouldn't be investing in AI dominated
25:04stocks at that point. But what if you're
25:0738 years old? You might actually turn
25:10the equation around. Go, I hope we have
25:12a bare market. I would like $2 cost
25:15average as I make more money into my 40s
25:19at lower prices. So when we have the
25:22next big bull market, I've got a lower
25:26base with a bigger pile of assets to see
25:29gains off of that. Uh and so those those
25:33expectations when you have high when you
25:35have high expectations, those kind of
25:37risk parameters, they get thrown out the
25:40window and you get a bunch of
25:4168-year-old people buying, you know,
25:44fiveact levered, you know, ETFs
25:47asking the question, what are they
25:48trying to accomplish? And if they slip
25:51up and the market stumbles badly, do
25:54they have the time to make it up? If you
25:57are 38, you do, but do you have that
25:59time at 68? I think the only thing that
26:02I would really add on top of that is if
26:05you ask an active manager, are
26:07expectations too high? 100% of the time,
26:09the answer is yes. And while that might
26:12be kind of self- serving, you know, you
26:14think of it again in terms of we're
26:16talking about valuations being real high
26:18and how that usually works out over the
26:20ensuing decade. I mean, that's great to
26:23look at and say, okay, so maybe don't be
26:25so exposed to equities over the next
26:27decade, but if you're an active manager,
26:29you don't have 10 years to sit around
26:31and say, okay, we're not going to be
26:32investing in all these AI and tech
26:34stocks because you'll be out of a job
26:36before you ever get to that the end of
26:38that decade. So, you know, that's part
26:40of the problem with active management is
26:43that you got to perform today and right
26:44now. And when the outcomes are kind of
26:48looking a little bit dimmer on the
26:49equity side, it's kind of like, okay,
26:51well, what do you do then? The
26:53expectations are still there that we're
26:54going to print 17% a year if that's what
26:56we've been doing. But historically, you
26:59know, you're looking at zero or maybe
27:01even slightly negative on a real basis.
27:03So, you know, are expectations too high?
27:06Yeah. especially for our active manager
27:08standpoint.
27:09>> Um, a year ago, if we were doing this
27:12podcast a year ago, it was literally a
27:14year ago this week that we hit $126,000
27:18on Bitcoin and the expectations for
27:22Bitcoin were through the roof. You know,
27:24we had people like Tom Lee calling for
27:27$1 million Bitcoin. Uh, you know, he was
27:30calling for, you know, quarter million
27:32dollars by the end of the year, which
27:34was two months later. And here we are
27:37under 80,000 right now and the
27:39expectations for Bitcoin are radically
27:42different. Now I'm using that as a
27:45launching point to ask the question if
27:48investors have too high an expectation
27:50and they expect 15 or 17% a year. Is it
27:54just going to take a period of poor
27:56performance to change that? Or is there
27:59something else that could change their
28:01expectations before they wind up doing
28:04the Bitcoin thing? the market goes down,
28:06they don't make money, they lose some
28:07money, and then they finally dial in
28:09their expectations.
28:11>> It's funny, that's pretty much the exact
28:13same question I was going to try to
28:14pivot off of uh to you guys. But to
28:17answer the question uh that you're
28:19asking and that I'm going to also throw
28:21back at you guys afterwards, I think we
28:24are in a bit of a unique period where
28:27you can't really
28:29expect there would be there would need
28:31to be something that happens to push
28:33investors to understand
28:35that is not the norm. And know we we
28:38talk about things that are outside the
28:40norm a lot, right? Like we talk about
28:42the 2010 to 2020 period of rates being
28:46the abnormal period versus rates now. I
28:51think what you could say is especially
28:54thinking like the the the stat I
28:56mentioned earlier with Greg is 2009 to
28:58now the average return being around 17%.
29:02We have to consider that a lot of that
29:04was you know QE uh QE period and money
29:06flowing in. But to get to the heart of
29:09the question, I think the sentiment
29:13especially for retail investors, I think
29:15institutional investors, you know, they
29:17have a mandate to manage risk depending
29:20on the return depending on what the
29:22return mandate is, right? If you're ma
29:24if you're an adviser, you have
29:27individual mandates by your clients. If
29:29you're an if you're an institutional
29:30manager man managing firm money, you
29:32know, it's slightly different. So the
29:35expectations there kind of vary but in
29:40terms of individual investors I think
29:42that's where the disconnect really shows
29:44up in terms of what is actually a
29:47realistic expectation
29:49and what changes that is really going to
29:52have to be a large period of shock and I
29:57don't necessarily want to make that meme
30:00the index has to fall x amount what What
30:03I mean is that there would have to be
30:06kind of a realization that the market
30:10structure simply can't provide enough
30:14space for those extra those those
30:17further returns. We're going to get to a
30:20point where valuations might not matter
30:23yet or what a firm or a company can
30:28deliver does not matter just this moment
30:30but it will. those cash flows have to
30:33show up eventually and it will ha there
30:36will have to be kind of a I don't want
30:38to say a reckoning but there will have
30:39to be a moment where retail investors
30:42and and you know investors in general
30:45come to the understanding that markets
30:48require someone to be willing to accept
30:51the price that they're buying at and at
30:54one point or another that just doesn't
30:56make any sense. it doesn't make sense to
30:58buy something when the cash flows in the
31:00future are so astronomically
31:03impossible to justify right so I think
31:07it need not require a major correction
31:11but it's going to require a correction
31:13in sentiment
31:16are all investors basically sports fans
31:18it just depends on how your team has
31:20done in the last 10 minutes and that's
31:21what their opinion is as far as uh where
31:23the markets are going to go in other
31:25words we invented the term DJ Jen for
31:27degenerate gambler to basically sum it
31:30up u or or do you have a different
31:33thought on that?
31:34>> I mean it's not a bad analogy. I mean if
31:37you do well in the past it's easy to
31:39expect it in the future but uh
31:42>> you know again keep pointing back to the
31:44valuation scatter graph and if history
31:47holds you know you're not looking at
31:49anything too pretty on the equity side
31:50here over the next decade or so. So you
31:53know you got to change your expectations
31:55accordingly. And and I'll emphasize,
31:58you're right. If if the equity numbers
32:00do hold and there is a struggle in the
32:02market over the next year or so, if
32:05you're 68 years old, that's bad news.
32:07But if you're 38 years old, that maybe
32:09not. If you look at it in the right way,
32:11that's not bad news. I keep my job. I
32:13keep earning money. I keep stocking it
32:14away in my, you know, um, in in my 401k
32:19or if my company has a matching plan
32:22where I can invest it. And then once
32:25we've worked through this AI period or
32:27whatever the reason is that we struggle
32:30and we're ready for the next bull
32:31market, I'm in at a cheap price in a
32:35major way and let's go or should I say
32:38LFG uh then at that point that the the
32:41market is uh ready to hop. And I think
32:44that wraps it up for this week's episode
32:47of Rational Descent. Hopefully you found
32:49this conversation engaging and
32:50interesting. If you did, be sure to
32:53like, subscribe, and leave any comments
32:54you have below. We'll see you next week.

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