In this exciting interview with Bill Miller, Preston and Stig gain access to one of the greatest investing minds of all time. Mr. Miller was the former Chairman and Chief Investment Officer for Legg Mason Capital Management where he managed over 75 billion dollars. Today, Miller owns and operates Miller Value Partners. Through the years, Mr. Miller has been called “The Greatest Money Manager of the Decade” by Morningstar, a member of the “Power 30” by SmartMoney, and a member of the “All-Century Investment Team” by Barron’s.

During the discussion, Mr. Miller talks about the current market conditions, bond rates, commodities, and cryptocurrencies.

In Today’s Show You’ll Learn

  • If the change in US fiscal policy will affect bond yields
  • How and why Bill Miller is using moving day average to time his investment decisions
  • Why Bill invested in Bitcoin and if he still has a position
  • The most important cognitive biases for new investors to be aware off
  • Ask The Investors: Which impact will babyboomers’ retirement have on the stock market

Tweet your comments about this episode directly to Preston, Stig, and the rest of The Investor’s Podcast Community using #TIP.

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PODCAST TRANSCRIPT AND SUMMARY (Automated)

Preston: [00:01:17] All right, so we are here with Bill Miller.  It’s always such a pleasure to have you on the show.  Thank you so much for taking time out of your very busy day to be with us. It’s always just such an honor to have you here.

Bill: [00:01:28] Oh thanks. I’m happy to do it. You guys do a great job.

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Preston: [00:01:31] Thank you sir.  Well, the story that I think everybody’s talking about is this inflation growth. The bond sell-off, the tax cuts. A little over a year ago whenever we talked. It was probably about 14 months ago. You had suggested that you agreed with Ray Dallo and some other guys that were saying that they thought the bond market was hitting a bottom in the summer of 2016, and you even told us on the show last time that you had a small short position on bonds and so far that has been an incredible call. And I’m kind of curious how you see that continuing to mature. Do you think that that trend is going to continue or do you see it kind of hitting a peak at this point?

: [00:02:15] So the short position is bigger now but I think that it all depends on the day it all depends on inflation and economic growth and the trends that we see here that I see are that it’s likely to be the case that both of those. Well certainly inflation is likely to have some upward upward pressure on over the next couple of years and that in bonds are still still too cheap or too cheap in the sense of yields are too low. Bond yields are too low in my opinion and I think that they’re going to have to move higher. But over the next couple of years that could move into the move into the force.

: [00:02:48] And I think that you know I think by the way is about 12 to 18 months behind the Fed. So I’m actually probably going to put a reasonably solid short position on him German two year in the not too distant future. Yes I think that’s going to move up to about 2 years in the next two years.

: [00:03:06] You said you think it’s going to potentially go up to three point three percent on the yield by the end of the year that I hear that correctly.

: [00:03:13] Well I think that I think that we are that the direction is higher on the on the yields. I don’t have any special insight into exactly how high. When I look at the inflation numbers that we see and the Fed still is that inflation target.

: [00:03:28] And typically when when inflation starts up it tends to move fairly slowly in the first in the first couple of years something that I think the bond bear market will be benign but we’ve got to I think we got to three grand three quarter of 2013 during the temper tantrum and that’s you know that’s a reasonable target I think.

: [00:03:47] Interesting. So in the past we have seen the Fed say one thing and then do another and most recent back in 2016 when you sold a 50 percent correction and all the talks about tightening stopped and they became a lot more accommodating. Do you think that if we should again experience a significant correction that we’ll see a similar pattern of them become a lot more accommodating once again.

: [00:04:11] I think the Fed has been fairly clear that they are what they call data driven. The question is how do they how do you assess the data and how do they weight the data back when the market sold off in 2009 and 16 year on the first in the first six weeks of that that was because of what people thought were legitimate concerns about China about Russia. Stan Fischer talked about for tightenings in 2000 in that particular year. So I think I think that the market got got spooked by it by those macro things but I think I think the Fed is unlikely to change its approach to the gradual tightening as long as the data is consistent with what I think we’re seeing right now.

: [00:04:50] So I mean I don’t see any risk to recession that I think when global synchronized recovery. But I think that the question is going to be the inflation rates are real rates going to be moving higher.

: [00:05:01] So let’s equate this to the stock market then the last time we talked you said the impact of rising rates on the stock market was highly dependent on the speed at which that bond selloff would occur. And based on that idea do you think that the speed of the bond selloff is making equity ownership concerning right now so we’ve seen the 10 year move. I don’t know what 30 40 basis points just in the last month or two. I mean it’s moving pretty fast so I’m kind of interested in hearing whether you think that that’s moving a little too quick.

: [00:05:32] The broader picture I think probably what what ended that very long period of very low volatility in the 15 straight months of the market is that we’re shifting to a regime where the where the rest of the world is probably going to be moving where the U.S. is right now in the sense of in the sense of the easy money the QE that we see especially in Europe is going to be ending I think this year and really different really moving into a different monetary regime one that can be much less accommodative than we’ve seen in the past and I think that will probably lead to greater uncertainty and probably a return to what I call normal volatility in the overall market or not the extreme quiet that we’ve had in 2013.

: [00:06:13] Recall that when we have to taper tantrum that was the first year since the 2008 crisis that we have had money going into equity funds and the market was up 30 percent that year and that was that people were actually starting to lose money and bond funds. And I think that we’re close to that right now. We’ve actually seen we actually shockingly saw inflows into our into our main Equity Fund during that decline which is very unusual. So you could say that’s you know that’s that’s complacency I think it’s people that you’ve seen with that particular fund whenever it has a sharp pullback it’s typically been a good buying opportunity. But I would expect that the overall direction the path of least resistance for stocks is higher this year and less that the pace of interest rate increases you know moves very quickly. You recall that during the 1990s a huge bull market and the 10 year average 6 percent 6 percent that decade. So you know 2.8 are two point nine percent is not a lot of competition for stocks.

: [00:07:10] Yeah now I remember you dress in that last time that was a fantastic point it’s like if we could get the 6 percent on the 10 year back then and go to a P.E. ratio way higher than where we are now what was it 35 back then.

: [00:07:24] I think the median the median P one of the ones we were we had the S&P. You know you got to get to very high very high levels in the late 1990s.

: [00:07:33] So I guess Bill is this your way of saying that this recent pullback this 10 percent pullback that we just saw that was very abrupt was a buying opportunity.

: [00:07:42] I think I think any any pullback in market history is a buying opportunity in the sense of lower prices are generally better for long term investors and higher prices and higher education czar this type of pullback especially as you know I think you have to distinguish between you know between I call them you know technical cyclical and Sequi secular declines in the market are things that are caused by that. So this decline is just purely I think the fact we had an extremely low volatility period and then we also had a 15 straight months of the market going higher and that made it vulnerable to any I think any type of dislocation.

: [00:08:18] So yeah and you know eight or 10 percent decline in the market you normally see that every you know every 12 to 15 months and I think that’s this one is perfectly reasonable given the underlying conditions I think are very solid and valuations accounting for the overall market you know caught 17 times now in this in this poll they are not demanding.

: [00:08:39] When you look at where rates are interesting so recently the White House announced this one point five trillion fiscal spending plan. And even though it’s not effective as of today the market still anticipates more growth and ensuring higher rates. So what are your thoughts on the magnitude of this do you think that this goes to the narrative of an even higher bond sell off or how do you see this effect if any.

: [00:09:07] Well you know if the supply of bonds is going to be your say the supply of government securities so you know it’s bills and notes and bonds is going to be considerably higher. You. That other things equal would mean that the prices would be would be lower. You’d be offset this. I think a point that’s been raised by especially by Ricardo Caballero at MIT that one of the things that precipitated the 2008 collapse was a shortage of safe assets and that the Wall Street engineering wizards got around. If there weren’t enough triple assets they going to make. They’re going to create them.

: [00:09:44] I think that I think there’s a lot of truth to that in the sense of especially with the new liquidity requirements for banks and high quality asset requirements. There’s a lot of demand out there for you know for what are perceived to be safe assets so yeah all things equal to trade 5n deficits would lead to would lead to higher bond yields and lower bond prices. But I don’t think it’s I. First of all it’s a ways off. And then second we we have a surplus in January that’s going to be temporary but I don’t think it’s going to be material to the overall supply demand picture what will be material prices will be inflation rates.

: [00:10:18] So you’re talking about how the banks in the U.S. are well capitalized. A lot of the changes from the 2008 crisis really kind of made those assets a whole lot safer than they used to be. But when we look over to Europe we see organizations like Bridgwater that has a fairly substantial short position on Italian banks and some other locations. Do you have as much concern as some of these other people that are putting their money where their mouth is and saying that that these banks over in Italy and the rest of Europe are as risky as they think.

: [00:10:50] I think it depends on the depends on the individual banks and the conditions in the individual countries. So we actually have a hedge fund we’ve had a position in credit Suisse for the past year so I think the city is doing a good job they are there they raise capital they don’t get the capital issues. The strategy is sound. But I think I think it’s not a case by case basis that you know that it’s certainly going to be the case that there’s weakness Deutsche Bank has doesn’t act well in the overall market for example.

: [00:11:17] Interesting. So let me just shift gears here a bit. We have people like Jeff Gunlock we follow really closely here on the podcast Talking about how commodities make the place to be here in 2018 and onwards. He’s been very vocal about it.

: [00:11:31] I’m curious what you think about that statement but also how you see commodities in general the commodities super cycle is over and I think that gets to those as they tend to do. You know you know over five six seven eight 10 years you know commodities in a global synchronized recovery demand for commodities is going to go higher. You know if you look at the CRB index for example it’s been rising you know it bottomed I think in 2015 has been kind of on a you know on an irregular path higher so I wouldn’t disagree that the commodities will you should catch up in here. Get it all depends on which you know which commodity I think I think oil for example is has probably seen a peak in the mid 60s we’ve got me or the low to mid 60s.

: [00:12:16] You’ve got us shale production is rising very rapidly right now but I think if each company has its own supply demand supply demand cycle just so people understand your thought process when you would think through investing in a commodity it really just goes straight to supply to me and I know that’s what Jim Rogers suggests that the best way to invest in commodities is you’ve got to really understand that global supply demand what you agree with that.

: [00:12:40] Yes I think most investors and commodities are most traders and commodities are church oriented and highly focused on the trend’s short and intermediate term trends. And I think that’s that’s because the commodities tend to be extremely volatile and you can put a lot of leverage on if you want to so you know getting them getting the right side of that is those trends is important but at the end of the day the price is set by supply and demand.

: [00:13:07] So the last time we had you on the show we asked you about a book you would have recommended and you suggested the reminiscence of a stock operator and having read that book The approach is very similar to momentum investing and how you can be on the right side of it of a trend and similar to what you just described there with investing in commodities. I’m just curious how much of that type of approach you mix into your own investing approach. Because I know that you’re a very hard core value investing deep value investing kind of guy but do you use moving averages in those kind of things to help manage the risk of maybe catching a falling knife.

: [00:13:44] Well yes I would say also with respect to the reminiscence of a stock operator I thought that I think that is a tremendously valuable book not because of the way in which Jesse Livermore necessarily invested or traded in the short run on a momentum basis it’s much more I think important from the standpoint of market psychology behavioral finance those kinds of insights that are important and that might be the most important thing in that entire book is his point about the big money is made in the big move. So most people aren’t really thinking about that they’re thinking much much shorter term but shorter term moves. But to get to the questions you know my my my son who works with me just got he’s got to see if they just got his CMT is chartered Market Technician designation too. And I think when we think about charterer we think about momentum. What we’re really thinking about is trying to think church do they help you visualize fundamentals and they help you visualize the supply demand bounce at a price that’s that I think is valuable in taking to take into consideration. And when we do we do use that and we don’t make investment decisions based purely on you know on on a chart pattern. It’s based on fundamentals but we use that we use that supply demand as evidenced in the church to maybe help or timing from time to time and again it also helps us understand if the stock or whatever we’re buying is Bonds just really moving against us. And we think the fundamentals are positive we have to go back and take a look again at the fundamentals to make sure we haven’t made a mistake.

: [00:15:20] That’s very very interesting and I don’t know if it’s too much to ask or if you would share this with our listeners. Could you be more specific about what you seeks to use do for instance use moving average.

: [00:15:33] As you know it’s it’s move its economy it’s a combination of moving as we look at we look at 10 day I look at the 10 day the 50 day the 200 day to get a picture of that and which you know also is because other people tend to actually make decisions on moving averages. You can get a sense about where they’re coming in you know if you look at if you look at 10 percent corrections were corrections to the 200 day moving average. I think something like 80 percent of those things going back 20 years have gone through that 200 day in and undercut low for before bouncing. But yeah we we will look at that and usually then if if something like. You know something like bitcoin when it went it went through the 10 day on the upside that that that again because so many people are using using that to time those guess especially the crypto assets that told us we’re probably going to see additional additional demand additional demand coming in.

: [00:16:29] So the whole bitcoin piece is just red hot with discussion on the media with everyone and you have been a person that I’ve read about in the news relating the crypto some kind of curious to hear your position on this because we read a book and I read a book about crypto back in 2015 and after I had read the book I took a small position and crypto just because I thought it was. I just thought it was interesting you have evidently also taken a position back in 2015 as what I read and this has been a tremendous position for you. What originally got you interested in this. And then I would be curious to kind of hear your thoughts on the recent run up and run down in bitcoin specifically.

: [00:17:12] Sure. Well you know I forget when I first when I first became aware of this it was in 2000 8 or 9 when that was you know down at you know pennies on pennies on the dollar to somewhere in a 2000 to say 14 probably 2015 timeframe. And I then read Nicholas Popper’s digital goal which I thought was you know a useful picture in the history of that you know of it. And then I heard Wences Casares who gave a talk on on bitcoin and he was I thought very convincing about it in the sense of understanding what it is and what its potential could be under a set of circumstances and Wenceslas view was that you don’t see this kind of technological development with this kind of potential come along very often and he thought it would be useful for people to put 1 percent of their liquid net worth in it and understanding that anybody could have to for it to lose 1 percent of their of their net worth. And I thought that was good advice then. I think it’s I think it’s good advice. Now bitcoin is unusual in that it’s much less risky now than it was 10 years ago or five years ago. Because there’s the ecosystem has been is building out. We’ve got a lot more I’d say it’s on a much more firm foundation than it was when it was a bunch of I’d say libertarian anti fed people and and now and techno geeks. And I think it’s I think it’s it’s still it’s very early days. As I told people when they tell me that I’ve been a big believer I’m not I’m not adequately believe I’m sure of bitcoin evangelist and I’m not even a bitcoin believer. I’m a bit of a bitcoin observer. Like my cornerstone observation is that bitcoin is following a very classic path where disruptive innovations that have exceptional secular possibilities going back to the printing press railroad boom. Electricity radio and that in the 20s. Know and then more recently obviously the Internet the Internet boom and. And when you get I’m an investor in Bitcoin.

: [00:19:20] I’m not a trader in bitcoin and so the decline for me was you know it was costly because I have a decent position in bitcoin but it’s to me this is something I’ll pay attention to if something happens fundamentally that is that can halt or reverse bitcoin and that conduct could be regulatory it could be technological or when it reaches a price that I think begins to discount the potential out there but you know it’s it’s I consider it right now probably just to go back to Nathaniel Pomersbach the best the best thing I think of it as an uncorrelated store of store value the way that the way the gold is what you think the potential is for the market cap of something like bitcoin is in my cap comparable to gold.

: [00:20:06] Well gold is you know gold is about 7 seven and a half trillion or thereabouts. So I would I would think that something in a perfectly reasonable thing given given the way technology penetration away the way some bitcoins advantage silver gold are something in the 700 billion dollar range would be you know would be would be certainly reasonable. But ten times or seven times probably where it is or six times where it is right now.

: [00:20:34] But you know you couldn’t rule out. I certainly wouldn’t rule out a hundred thousand a bitcoin or even 500000 a bitcoin depending on what how it evolves and how the use cases of all the thing to remember about bitcoin. And also I think if your listeners look up. Brian Arthur on the internet and read some of his work on path dependence and locking in technology.

: [00:20:57] But one of the points that Brian makes is that technologies once they reach a certain level of penetration superior technology you really can’t do much about it in the in the sense that you have inferior technologies all the time. Going back to the query keyboard you know on a typewriter or more recently when when the Internet was getting going people pointed out that that the TCAP IP protocol was a really really bad and problematic thing and there were Bill Gates saying that you know that that they could have a much better protocol than that and a much more effective when it did but it didn’t matter because that had already won.

: [00:21:30] Same with the beta him Beta and VHS. So the fact that Bitcoin is you know has a lot of issues with it doesn’t mean that it won’t actually fulfill what many people think it could do. And I understand also that because it’s open source software any anything that the community really does 51 percent community decides is something to happen. They can create it. So right now you know one of the problems with Bitcoin is the is the speed of the transactions and the cost of transaction.

: [00:21:57] But this this new lightning network which has been developed it looks like that’s going to solve that problem. So I think that there’s it’s a very complex area and having a strong view one way or the other is likely I think make you make you biased when when it comes to evaluating what’s happening.

: [00:22:14] Yeah that’s a really important point. So you’re looking at that. Your argument is really the network effects and that the fact that once these network effects really kind of set in you think that it has you’re still holding and you still think it has upside potential but you’re holding those beliefs fairly loosely. And you think that that’s probably one of the most important parts probably for somebody investing in this is that they don’t get to pulled in one way or the other that they keep their mind open to the possibilities of how it could turn out.

: [00:22:44] Yeah absolutely. I mean I’m I’ve been kind of surprised at the strong views of people who are very very eminent people in the financial community the very strong views they have about you know it doesn’t engage my emotions quite the way it apparently does. Other people I’m trying to look at it dispassionately and critically.

: [00:23:08] So let me ask you this because to hold because I mean this might clear up the 20000. We saw the price go down. I think it was 5 0 0 0 0 6 0 0 0 just recently and now it’s back up to 10000. I mean this is like the wildest roll roller coaster ride ever. How are you able to manage your emotions in this so well because you said that it’s just down to the fundamentals. If the government changes their position on it or from a technological standpoint something changes then you’d be a seller at that point but if not you’re just going to continue to ride the wave even though the wave is like a cat 5 hurricane or some kind of curious. The question is is how do you how do you manage your emotions through something like that. Maybe because I was dropped on my head when I was a baby so I know that I have that

: [00:23:55] That now that visceral reaction that many people do. I’ve always thought that you know lower prices made assets more attractive. Other things equal higher prices made them less attractive. But you know Amazon went down over 95 percent and three years later it turned out fine. And I think that the real question for me on this kind of stuff is Buffett has made a comment with respect to stocks and if you can you can’t stand to see your stocks drop 50 percent to try. And you probably should be in stocks that they can do that. And I think that’s the same thing with bitcoin. Volatility has been greater for all kinds of different reasons. But Ebiquity actually you can’t if you can’t stand to see it drop 70 or 80 percent then you probably shouldn’t be at the end.

: [00:24:39] And I think most people that kind of trade these things treat them exactly wrong which is when they’ll go they’ll buy them on a spike or they’ll they won’t buy it and the price is flat and going sideways for a while they wait till it goes up and then they buy it and then it probably goes higher because they don’t buy the exact opposite. They want to drop below their purchase price they sell it to they’re always buying you know buying high and selling wow.

: [00:25:00] And I think that with respect to me I have no ability to know exactly how much of the psychology around Bitcoin represents fraud that needs to be corrected. When I get asked what I get asked about the bitcoin correction how low would go. My comment was go low enough to shake all the people that don’t really understand what they’re doing or are afraid of losing might and wants their daughter to start back up again.

: [00:25:22] Yeah. And that’s that you know that was apparently somewhere in the you know under 6000 range down. Now it’s now it’s going up for awhile.

: [00:25:31] Interesting.

: [00:25:32] So it comes down to the fact that the investment the reason that I that I bought it that you know average cost about three hundred fifty dollars.

: [00:25:39] The reason I bought it was based on the long term rate tale of distribution and that hasn’t changed at all the change the price has changed a lot. So the gains aren’t as great as they would have been in the area 350 dollars this is worth a thousand dollars will be a perfectly acceptable price to get it.

: [00:25:59] So for me the concern. Well I don’t know if it’s a conserv it’s a good thing or what but let’s say that bitcoins successful let’s just go down that path for a second and say five years from now. Bitcoin price is 50 to 100 thousand dollars per bitcoin and this is global money at this point and it’s global money that’s easily exchanged around the world and it’s a fixed monetary base line. Do you see loans. Because I mean at that point everyone’s going to want to be using bitcoin especially if they could drop the transaction fees which I know that they’re promising with the lightning network that that might be a possibility that these transaction fees go down. I mean this is going to be a drastic change to economics around the world as we know it because who’s going to want to use the dollar. If the central banks or the euro if the central banks are just printing. I mean you’ve got a supreme currency here if this would actually happen. I mean I just I don’t know what that would look like and I think that it’s going to be a drastic transformation that I think no one really can comprehend. If that is a true statement I’m kind of curious to hear your thoughts on some of that.

: [00:27:09] I think that it’s unlikely that Bitcoin would ever challenge any of the reserve currencies precisely because it’s got a fixed fixed supply of it and it’s got a fixed schedule by which has issued the changes every four have said four years. So that that in itself makes it you know so every other currency in the world has some form of deflationary aspect to it in the sense of over a long period of time.

: [00:27:40] Once the dollar to depreciate by about 2 percent or 2 percent you don’t have the inflation rate you know and with Bitcoin having the exact opposite. So what bitcoin does is if it works as money is it deflates. Hard Assets and it deflates anything that’s priced in its term.

: [00:27:58] So if bitcoin is getting worse the way that I think of the Evangelist thing is what happens if you hold that as the price of food cars houses everything drops relative to bitcoin. So it deflates all the others other goods and goods and services. I think the problem with that is and it’s been pointed out I think by by monetary theorists is that that that kind of baked into it.

: [00:28:21] Then there’s this behavioral paradox where you could theoretically reach a point where nobody wants to sell their bitcoin right. So it just goes and goes just hyperbolic or parabolic up and and then so it can’t be used for transactions because no one wants to transact it at some point.

: [00:28:40] What happens is it reverses then it collapses so it has built into it much higher volatility than anything that usually would be thought of as as money. But the idea that the that the volatility by itself makes it not money is is you know ridiculous on its face because you can look at the Venezuelan Bolivar and see what’s happened to it and it’s it’s volatility or the German German market in the 1920s or the Zimbabwe Zimbabwe.

: [00:29:08] There are extraordinary ball they would be collapsing all the time. But there were money in legal tender in those countries. There’s efforts underway. I think you know I think the folks at the MIT you know crypto currency Lam are trying to devise a you know a coin which is called trade coin which is actually can be an alternative to to the reserve the reserve currencies and a better store of value in and everything else.

: [00:29:35] But I do think as Susan Athey of Stanford said if Bitcoin can be a threat to the Venezuelan bolivar or any of these countries that have their own currencies that aren’t reserve currencies and that and that countries like Argentina where you know they seize your assets they’ve they inflated you out of assets of banks they’ve inflated you out over the decades. Bob Short I think it I think at Davos Bob Shiller pointed out that he was in Lithuania and the Lithuanians were bullish on Bitcoin because they said you know I’ve talked to many of them whose families when Russia took over Lithuania the government seized their bank accounts and they said that if you had if you own stocks then you were sent to Siberia. So but you were you were you were wiped out which which can’t happen if you get to an internet connection or you have a phone and Wi-Fi you can you can move those assets as Bitcoin assets.

: [00:30:28] Quick very interesting and very interesting hearing in value investor talking about bitcoin like that. So Bill recently you gave an incredible incredible generous donation to Johns Hopkins University of 75 million dollars specifically to the philosophy department. How has philosophy influenced your investment approach. Could you please elaborate on your thought process about philanthropy.

: [00:30:56] Yeah I did. I didn’t go to a business school so you know I. I don’t have that business school training and I think that that with philosophy the great benefit to me of philosophy in addition to being I think personally enriching enriching my life. But the analytical techniques and the critical reasoning skills that are part and parcel of philosophical analysis are absolutely what is you know what they are incredibly valuable in capital markets especially when you think about most people in capital markets suffer from some kind of confirmation bias to where once they’ve made up their mind on something then then the way they wait evidence and the way they look at things and feel like they have to defend that is it just a natural psychological tendency. And it’s not that everybody has had a tendency as everybody does. But I think if you’re if you spend several years in graduate school in philosophy they pretty much knocked that out of you because that’s not that’s not the way that the reasoning process works and not in philosophy. So when you when you have people with strong opinions on things whether it be like bitcoin or Amazon or so for so long typically means that that reasoning skills can probably provide some insight that that can’t be provided elsewhere.

: [00:32:11] You know the the Austrian philosophy with the gift that Stein talked talked many times about about crisscrossing the land is that it is so solid destination’s about crisscrossing a landscape and looking at problems from many different perspectives and an angle. And then and then even more practically I mentioned somewhere that that with respect to Bitcoin I’d gotten some insight from a from a book by a preeminent philosopher named John Searle who’s out in Berkeley. And he wrote a book called The construction of social reality and it deals with it deals with things like money marriage property rights things like that that he considers you know a socially constructed. And he contrasts those with with things that he called brute facts which are facts that are true no matter if there are any people at all like that. The earth is 93 million miles from the sun whereas you know that doesn’t depend on people but monetary systems do. I learned philosophy from studying William James and John Dewey and Charles Sanders purse that the true false dichotomy is not often very helpful. I found Cyril’s but whether what he said was anything he said in it which is true for a philosophical standpoint it was very useful to me and underly and illuminating it.

: [00:33:24] And so when James talked that’s what the what the American pragmatist focused on was true as usefulness and dying and true this part of a long term quest and not something which is you know just externally sort of Immaculee conceived amazing.

: [00:33:40] So with all that said there’s all these cognitive biases out there. I don’t know if you’ve ever seen this chart that the Visual Capitalist website put together but they tried to list all these different cognitive biases. It was really cool chart in fact we’ll throw it in the show notes of this interview so people can look at it but I’m curious what you were you’ve been around new investors. We’ve got so many listeners of the show that are fresh out of college or are they just completed an MBA. What cognitive bias do you think tricks a lot of new investors.

: [00:34:10] The most well first of all all of them tricked investors and everybody is everybody is subject to them to one degree or another. The two that I think probably combined to create the most problem are the reasons or recency bias and myopic lots of version. So what happens is people in recency biases you know people overweight the most recent information and a lot of times that information is price action and not fundamentals. But even when it’s fundamentals that tend to overweight it if it’s negative or positive for that matter you get extremes on both sides. And then the loss aversion kicks in because you know it takes a coefficient of loss or most people lose two to one and so they have to have twice as many gains to offset you know a certain level of loss. And more importantly they feel the pain of a loss twice as losses or twice as painful as the same amount of gains. And so you put those two things together it causes people to overreact dramatically to declining prices and especially if there to fundamentally you know fundamentally driven. And you said over and over and over again and one of the things that you know there’s a study done of credit default swaps after the after the financial crisis because that was what people were you know keying in on as to how risky were bonds because well what were the credit default swaps selling out.

: [00:35:28] What was the implied probability of the bond going going under and. And then after the whole thing was over and now the markets have recovered the academics you know looked at it and the credit default swaps had almost no predictive power with respect to defaults. They over the overestimated the defaults radically because we were in a financial crisis and when the financial crisis ended and those probabilities completely reversed I think that the most important message that I could tell investors new investors especially is that the economy grows most of the time and stocks go up most of the time. And so the risk to people’s financial wealth long term is not the drawdowns that you get during the occasional correction or even a recession or even of financial crisis.

: [00:36:19] It’s it’s being under invested systematically in equities during the periods when when the market is going up which is most of the time stocks are going up 75 percent of the time 75 percent of the years since 1950 and the economy’s growing 77 percent of the years since 1950. So if you if you had if you had a probability of of doing well 75 percent of the time you had a CEO that had a 75 percent edge you wouldn’t be worried too much about the few times that you lost. But people are obsessively concerned about you know believe this because of recency bias and loss aversion with those losses that they take during you know three months six months a year or even two years.

: [00:36:58] So let me ask you this. You feel that a person who’s trying to protect against systematic risk meaning the whole credit cycle kind of evolves and starts to crash. Do you think a person is trying to protect against that. Is that a fool’s game or is that something that you can actually hedge against by using moving averages or some other metric that you think would be important when the bond yield curve inverts or something like that. I’m kind of curious to hear your thoughts on it.

: [00:37:22] I think the question you have to get clarity on is what exactly are you trying to protect against.

: [00:37:30] And so once you once you can definitively say this is what I want to protect against then you can come up with instruments that will you know that will probably do that in one fashion or another and all the things that you mentioned you don’t have roles to play depending on what people or what people are trying to do. So I think that I think if you’re worried about you know steadily rising inflation that’s you know you want the floating rate bonds you don’t want fixed rate bonds if you’re worried about deflation then you want a fixed rate. Long term you know bonds of one sort. One sort or another. So it all depends on that. I think that again though I think that people way are way too sensitive to the volatility and perceived risk. One of the things that we’ve done and our funds is that believed going to turn out to be correct that what happened with the financial crisis was people would become you know risk and volatility phobic if you could just make one and made one decision you know 2000 eight or nine it will be whatever the market thought was the riskiest thing buy it and put it away.

: [00:38:34] And that’s that would do really well over the next 10 years which it’s done so in consideration if you pined about the recency bias. Have you heard a very popular belief out there in the mob it’s away also discounting the magnitude of what’s being said.

: [00:38:48] Whenever I hear it sort of extreme predictions or predictions given with great emotion and emphasis I would tend to believe that that’s those are probably wrong. These three things don’t happen very often. And and also that having a dogmatic opinion in the market is a very risky and dangerous thing to do. One of the one of the things that always annoys me when I here is when people say Well the easy money has been made. And I hear that a lot in defending after something is going up a lot. And I’ve never really I’ve never heard anybody say there is easy money to be made doing this. And so you know all these people that use that locution I want them to tell me when there is easy money to be made because ordinarily that’s you know I probably see that easy money has been made in this in this bull market probably beginning you know six months after March of 0 9 and repeated repeatedly over the next eight or nine years that the easy money has been made.

: [00:39:46] So I’m curious what book would you say would you recommend for cognitive biases for people that are listening to this.

: [00:39:53] Oh I would say probably you know account economists Thinking Fast and Slow is a very very good assessment of very good assessment of that Dorst book is fantastic too I would highly recommend that to people I had lunch with Ed not long after the Long Term Capital Management collapsed and he said that he had looked at that and he said that the probability of ruining there was close was close to one as you can get. Not he said because basically the amount of leverage that they were that they were using and the fact that those tickler bets might have had a very high degree of probability that it didn’t take much to get that to go around with that leverage to send you right over the cliff. No doubt correctly.

: [00:40:37] Yeah he’s while you talk about brilliant. Yes you’re right sir. Very very brilliant. But Bill thank you seriously. Thank you so much for coming on our show. It is such an honor to have you here and just the kind of pick your brain for an hour is just very very thankful for that. So thank you sir. Thanks great. All right. So this is the point in the show where we’re going to go out and play a question from a member of the audience and this question comes from Lisa Wu.

: [00:41:03] Hi pressing the state. My name is Teresa. I’m a university undergraduate student. I really enjoyed listening to Cass and listened to them every week. I just want to say thank you first for providing this society such a great opportunity. Children are more about finance and the stock market. So my question as we all know about the baby boomers and we all know that they are approaching an age of retirement. So my question is What do you think as the Baby Boomer generation is approaching retirement as their capital gets released to the society. What do you think that fact is going to be on the stock market or the economy.

: [00:41:52] Q I think the bigger concern for that generation is just the lack of yield that they can get on their retirement. I think that for me that’s the bigger story. I think moving forward getting you know 3 percent yield for somebody who’s in retirement and they’re trying to live off of that I think is a very big concern.

: [00:42:14] I guess I try to sway my bias of the stock market is bound to crash when I say this. But when I look at some of the stocks you know we’re looking at one point five million Americans turning 70 just last year and over the next 15 years you’ll continue to see something like that. And the thing is that generation have a lot of the portfolio in equities. We’re talking upwards of 70 percent and that’s a lot especially because as Preston mentioned before you don’t have a lot of yield. So the stock I’m looking at here and I guess you can find similar stats or it would say less a memoir but here it says that the Everard’s boom has only one hundred thirty six thousand safe retirement. So whenever you have that kind of money or you don’t have that kind of money because it’s not a lot to live off whenever you retire. You know I can see why you would take risk from vestments you might keep being in stocks even though what I think might happen is that a lot of baby boomers might look at higher you’ll up at Unitus which will entail a lot of risk especially in these times where the yields are so low. So if you say that the average person would need something like 45000 a year even lower than that you would need a lot of yield. This huge generation that’s all coming out the same time to sustain a decent way of living. And just one thing I would like to add to this I guess something that might be even more concerning is if you look at some of the s mandatory minimum drawdowns or your retirement plans.

: [00:43:53] You know you are all one case. You know you were forced to withdraw at least 5 percent of the value of the plan each year. And if a lot of people of course do that is just going to go on to have significant impact on the market the way that I see this. Now this is the trick. You know it’s very easy to look at this story and say you know this means that the mogę will Reisz. You’re saying you know the price of the stock market. It’s the man supply. This will mean that a lot of people Saulny out the price has to go down. And why that is true. If you look at this isolated that’s not necessarily what will happen because you have a lot of other players out there that have a different opinion and the different incentive to take this in another direction. One thing might be that you have seen the banks and they know that this is going to happen. So what are they going to do when everyone is just selling out. OK. They might put a lot of liquidity out there. What does the glomming going to do. Well that probably do a lot of fiscal policy and really grow the economy despite growth. So it’s one of those this one factor isolator yes that should mean that we will have a significant bear market. But it’s only in isolation.

: [00:45:06] So Lisa awesome insightful question. Thank you so much for recording it and putting it there on the show show your appreciation. We want to give you our intrinsic value course that we have on our IPO Academy page on our website. This is typically a PE course but we’re going to give it to you completely for free just to show your thanks. And for anybody else out there if you want to get your question played on the show and get a free course go to ask the investors dot com you can record your question at all. Take a minute and we’d love to hear from you.

: [00:45:35] All right guys. That was all the press that I had for this week’s episode of the investors podcast. We see each other again next week. Thanks for listening to see IP to access the show notes courses for forums go to the investors podcast dot com

: [00:45:51] To get your questions played on the show. Go to Aspe investors dot com and win a free subscription to any of our courses on Antti IP Academy. This show is for entertainment purposes only. Before making investment decisions consult a professional. The show is copyrighted by the IP network. Written permission must be granted before syndication. We’re rebroadcasting.

BOOKS AND RESOURCES

Bill Miller’s Company: Miller Value Partners

Preston and Stig’s discussion of one of Bill Miller’s favorite books, Thinking Fast and Slow

Preston and Stig’s interview with Edward Thorp about his book, A Man For All Markets

Every single cognitive bias in one chart

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2018-03-25T02:36:57+00:00
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