Introduction

Patrick: [00:00:44] My guest today is Jason Zweig, author of many great books including the recent Devil's Financial Dictionary which everyone should own. The way that Jason speaks and seemingly premeditated and perfect paragraphs makes me wonder if his writing even gets edited. Jason's insights and advice are the result of a life of critical thinking, reading, writing, humility, and curiosity. We cover a lot but be sure to stay untill the end. This conversation crescendos into an amazing finish that is more about life than just investing.

Valuable Lessons

Patrick: [00:01:05] So I'd actually love to start our conversation by continuing the conversation that you and I had last year, which is the first time that we met in person at a CFA event. And I found what we tended towards was away from investing towards books and actually family. So first question is a family question because it's near and dear to my heart, I've got two young kids, a two-year-old and a six-month-old. And what I'm finding is that it's very hard to instill lessons in them that he's a master already of psychological warfare and manipulation, often bending me to his will not the other way around. So I'm curious and we'll talk a lot about advice today, whether it's financial or otherwise, if there are lessons things that you've instilled in your kids that you think are most valuable looking back on it now.

Jason: [00:02:17] Well, I think we'd be better off asking them that question.

Patrick: [00:02:21] Probably so.

Jason: [00:02:24] I'll be honest, my wife and I made a decision when our kids were very young, that I did not want to make money and financial decisions, a large part of what we imparted to our kids. I thought, well, we have two daughters they're both college age. And I think they would both tell you that they wish I had taught them more about money and finance when they were younger, they're learning it now. Mostly for themselves, although they are consulting with me quite a bit. I mean, my friend, Jonathan Clements, who used to write the Getting Going Column for The Wall Street Journal was adamant about indoctrinating his kids in good spending habits and saving habits. And from what I know, I think they really absorbed that and I think that's great.

I think people can overemphasize the importance of money with young kids, to the point where it becomes about the money. And that's what I really wanted to avoid, we have a rule in my house which is my rule, although my wife likes it too, which is when I'm not working I try not to think about money or the financial markets or any aspect of investing at all because that's pretty all-consuming during the workday. So when I come home, it's time to knock it off and do something else. And that's what we did raising our kids and I guess time will tell whether that was a good decision or not.

Patrick: [00:04:14] So maybe I can twist a little bit more to try to get more out of you, which is, you said maybe it's better to ask them. So I'll just ask you, what have you found? I'm fascinated with people's daily habits, things that maybe not things you do every single day, but most days where you think that these habits add up to some sense of success over time. I'm curious what the things are that you do, whether they were instilled by your parents or not, that you think are really important aspects of your daily life?

Jason: [00:04:42] Maybe let's back up one second, Patrick, and I've been doing this for, I guess, 30 years now. And I think I can distill everything I've learned about the financial markets and investing into two basic principles. I think if you don't have these two tools in your toolkit, you cannot succeed. And so one of them is critical thinking and the other is self-control. So I try to exercise those two abilities whenever I can. So a lot of what I read, I read in physical form, I still read at least The Wall Street Journal in print, although I tend to read it online as well. And I print out a lot of stuff, even things I have as PDFs, or then I get off websites. And I have this lifelong habit of reading with a red pen in my hand. I always carry a red pen, I have a red pen with me right now, as you can see which I think I've done every day of my life since I was 12 or 13 years old. So when I read, I will circle things that I like and also circle things that make no sense to me, I'm a big believer in marginalia, I write in the margins, I talk back to what I'm reading. And I think you have to do some of that every day, you might not have to do it on paper the way I do, but you certainly have to do it.

I think I can distill everything I've learned about the financial markets and investing into two basic principles. I think if you don't have these two tools in your toolkit, you cannot succeed. And so one of them is critical thinking and the other is self-control.

And the other is self-control. It's so important as an investor and frankly, as a person not to go through life in overreaction mode and just freaking out every time, some little thing goes the way you didn't anticipate it would. And the books I keep literally within arm's reach at my desk are all about the long-term. And my desk is messy, it's always snowed under with papers and documents and research reports that have to do with the short term, but the stuff that never changes is all about the long-term. And I keep it all, literally within arm's reach, I can pull all of those books down without getting up from my chair, and they helped me keep a long-term perspective. And everything for me comes back to those two principles, critical thinking and self-control. And I think investors and people who are just trying to succeed at whatever they do should focus as much of their energy as they can on those two factors. Because those are two things that you can take charge of in your own life and in the environment around you. And being skeptical and not overreacting will go a long way in a world where everybody else is short-term and gullible and chasing the next hot dot.

Life Changing Books

Patrick: [00:08:10] You mentioned some key books that are always within arm's reach. And when I went back recently and went through, just about cross my thousandth book of my reading career. And I went back, I keep like you maybe a little more modern version, I use Evernote not a red pen, but very careful notes and highlights. And when I went back through the thousand or so, I asked myself the question, "Which of these now looking back literally changed my life?" Meaning something was different about me after reading them permanently. And what I found is that there was only eight of the 1000 books that met that criteria. It sounds like probably some of these would fall under that categorization. Could you share a few of those of some, I guess, life-changing type books?

Jason: [00:08:50] Yeah, sure. I mean, the books that I keep within arm's reach of desk are primarily reference books rather than the ones that changed my thinking permanently. There was a few I would mention and now that I think of it, I don't keep them within arm's reach. I think I've internalized those so deeply. They're in my bones at this point, I don't need to keep them at my desk anymore, but I think a couple of books that changed my professional life that I can't praise highly enough or mention often enough would be the Richard Feynman books, the oral histories that his colleagues collected. Richard Feynman, of course, was the Nobel Prize-winning physicist who led just an extraordinary life. And you can read any of those books and benefit from them, because what the beauty of those books is you're seeing brilliant mind in the wild growing and responding to the surrounding world in ways that help you understand what it means in practice to be a critical thinker. And a couple of my favorites are, What Do You Care What Other People Think?

Patrick: [00:10:15] Sums up his life.

Jason: [00:10:17] Yes, it does. And Surely You're Joking Mr. Feynman, although really you can open any of those books, almost any page and find something wonderful. But those books which I read in the late '80s or early '90s kind of liberated me because until then I had realized that the financial services industry is full of a lot of non-sense and received wisdom and folklore that 95% of the people in the business and probably an equal share of the investing public took for granted as truth. And there's this amazing moment in one of the Feynman books, I don't remember which one it is, where he describes and you'll probably remember this Patrick, he describes being named to the California Board of Regents high school science textbook review committee.

And so he does what of course you would do if you were Richard Feynman, which is you buy copies of all the books that you're being asked to review. And these crates of books arrive, they fill his basement and he reads every single one of the books from cover to cover, and he takes notes on what's good and what's bad about each one of them. And he takes time off from work, he takes it deadly seriously, he spends whatever it took a couple of weeks doing this. And then the committee has its meeting and he goes to the meeting and they go around the room and people start talking about which textbooks they liked the best and a bunch of their committee members if I'm remembering the story correctly and maybe correct me if I'm wrong.

Patrick: [00:12:03] So far so good.

Jason: [00:12:05] They all say, "Oh, well, we really liked the..." Whatever it might've been, I don't want to name a publisher because I'd get it wrong. "We really liked the introductory biology text, this one with the blue and green cover, and one of them holds up the book. And Feynman says he cocks his head and he says, "Hmm. You know." And they vote on it and they're starting to vote in favor of it. And he says, "Well, wait a minute. Are you sure that's the book you really want?" And they're all like, "Yeah, yeah, yeah." And he said, "Well, that's funny because mine was blank." And the publisher had not prepared the text yet, and everybody on the committee loved the book, and apparently, they liked it because it had a pretty cover or something but none of them had actually opened it. And I distinctly remember standing up when I read this anecdote and then I sort of put the book down and I said, "Oh my God, this is exactly the way the financial services industry works, everybody praises something, nobody looks inside the cover, nobody opens the hood, nobody is skeptical about what's inside." And so those books had a huge influence on me. And I think often in life, you need something like that to tell you that the emperor has no clothes. And it's okay to point out that what most people believe is true is bogus.

Patrick: [00:13:46] He's a remarkably independent thinker not conditioned by anything. And I would also encourage anyone interested in Feynman to look up his lectures on YouTube, you can find there's a wealth of video of him too. And the guy's just, I mean, you literally can do no wrong with him. Any video, any lecture, any book you will be better off having read it. So how do you find new books? I know you read a ton outside of finance, probably mostly outside of finance on the same way. And there's such a wealth of great books and I just know there are hundreds of books out there that I would adore that I'll never find. So I'm always curious to hear how people find new books. What's your method? What are your trusted sources?

Jason: [00:14:28] Well, mostly I read books that people I trust to tell me about typically in person in a phone conversation, a text, an email. I have some friends who are novelists, I have other friends who are really avid readers. And one rule I have is just getting back to what we were talking about earlier, when I'm not working I don't read any books related to investing or finance. I think it has sort of a toxic effect, your brain needs a break. And I might read a science book, I might read a history book. More often, what I'm likely to read is fiction, usually classic fiction. I read some contemporary fiction but mostly I'm an old-fashioned guy, I like 19th-century fiction primarily. But I'll read just about anything if I think it's good and I can gain a lot from it. And right now I'm reading two classic Russian novels, one extremely famous, and one that should be famous. The famous one is Anna Karenina by Tolstoy, and the one that should be famous is Life and Fate by Vasily Grossman, who was a phenomenal Russian writer in the first half of the 20th century, which is just this amazing, brilliant, gorgeous, disturbing, frightening book, and I'm enjoying both of them.

Patrick: [00:16:04] Wow. I never even heard of the second one, so I have to check it out.

Jason: [00:16:06] Yeah, he's probably one of the most unjustly neglected writers of the 20th Century.

Patrick: [00:16:13] I'm sure you do read, obviously when you're working market history, all sorts of things pertaining to markets. Do you ever worry about reading too much in that it might kill your own creativity or ways of critical thinking because you end up using it as a crutch the findings or writing of people within our business?

Jason: [00:16:32] I don't think so, I don't think you can read too much. I think the much bigger danger for writers like me, but also for consumers of financial information is that we live in more of an echo chamber, I think than ever. And social media has a wonderful quality of keeping us super informed up to the minute and can provide a diversity of opinion. But all too often, it creates a kind of confirmation bias endless loop where the more you care about something, the more that's what you hear about in your feed. And that is just really destructive to an open mind and to learning. So I think the more time you spend reading and ideally there is something special about reading a print newspaper or a physical book, because it requires you to get off your phone or get away from your iPad or your desktop or laptop, and maybe go in another room, sit in a different place.

And it opens your mind to different possibilities and cracks open the crust that the usual sources of information will layer onto your thinking. So the people I respect, I try to create a little special space for, and I think it's so important to keep your focus on thinkers who are good for you. And just as people being treated for addiction or other mental illness need to pay attention to their mental hygiene. I think investors have to pay a lot of attention to how hygienic their environment is. If you find yourself watching CNBC all day long with the sound on, then you're probably overexposing yourself to short-term influences. And it's not that there's nothing good on CNBC, of course, there is, but if that's all you're taking in all day long and you're focusing non-stop on whether the arrows are red or green, then you're really contaminating your thinking in ways that can be dangerous.

Jason's Must-Read Authors

Patrick: [00:19:16] One of the things I've noticed is probably again because of social media, that I've moved completely away from relying on The Wall Street Journal or Barron's or some other publication. And instead, have gone straight to the individual authors, it seems like the notoriety of these authors has been boosted as a result. Because I'll say, "Okay, I'm going to read anything you write or Matt Levine writes at Bloomberg View and I'm not loyal to any publication, but rather to the authors. So I'm curious who are, if any, can't miss authors for you? Where if they're publishing something you're reading it, no matter what.

Jason: [00:19:52] You mentioned one of them, Matt Levine, I think he's amazing, he does just a phenomenal job of being funny and insightful and profound, I think in ways that are really impressive. So I love his work, the problem with this kind of list as you know is I'm about to offend people whom I also love by leaving them out because they just don't happen to be on the tip of my tongue, so it's-

Patrick: [00:20:22] We'll ask for their forgiveness.

Jason: [00:20:23] Yeah, exactly. It's by no means an all-inclusive list, it's just people who happen to pop into my head right now as I'm thinking about it. There's the blogger who goes by the Nom de Guerre, Jesse Livermore at philosophical economics who's great. Steve Randy Waldman at Interfluidity, Bob Seawright at Above the Market, everybody's favorites Josh Brown at The Reformed Broker, Barry Ritholtz at The Big Picture, Morgan Housel, whom you mentioned is fabulous, I love his stuff. And there's just a lot to be learned from all of those folks. And each one of them has a different perspective.

Patrick: [00:21:08] It seems like a Truth to Power underlying theme here.

Jason: [00:21:12] There is an underlying theme of that. And I think what's interesting and what all of these people have in common, and I hope to some extent maybe some of them might even if they... Well, nevermind, but I mean I think one of the challenges in mass communication has become getting the right balance between skepticism and anger or nihilism almost. There's anyone who's written online for anything that has a comments section as The Wall Street Journal does know that you only have to scratch an itch for just this massive explosion of anger to come out. And the trick is to comment about what you're observing without becoming overly engaged in the anger you're likely to provoke so that you don't come across as a kind of shrill screaming, angry maniac. It would be interesting to think about why the investing culture now has this undercurrent of anger to it. And it's probably something all of us should be giving more thought to because it's clearly there. So what all of these people I think have in common is that they don't really like the way the system works and they're skeptical and critical about it without sort of saying the whole thing should be burned down.

Financial Advisory

Patrick: [00:23:02] So let's get into that system a little bit, maybe we'll start with the industry and then get into markets a little bit more in the investing side of things. I'm curious what you think about the current state of the financial advisory businesses. So there's been, Vanguard has eaten, continues to eat a lot of the active management business. And for investors that fee active management business, it's probably good, it's certainly a good thing that that's going away to some extent. And now the next question is financial advisory, which is a much harder relationship to objectively measure, of course, an asset manager's got an NAV and you can read their performance. It's very hard to say, especially when it comes to the behavioral side, what financial advisors are doing. It's notoriously hard to pick active managers ahead of time, I think there are certainly active managers with skill but getting them in your portfolio, whether they're even accessible like Renaissance Technologies or something it's notoriously hard. And I wonder if you think the same thing is true for finding a good financial advisor because it seems certain that if you have a great one it's worth it. But the question is, can we find them ahead of time?

Jason: [00:24:11] Yeah. I mean, it's a great question, I think the financial advisory business is probably the next part of the financial services industry that will be disrupted, and man, should it be. I mean, I think a good financial advisor is worth his or her weight in, I mean, platinum or something. But one of the problems is that the fee structure makes no sense. It's a completely cockamamie legacy system that should be blown up and started over from scratch. Financial advisors who are honest will admit that to a large extent, the portfolio management function that they perform is largely a commodity service. I mean, they're assembling a portfolio of mutual funds or ETFs, some of them are trying to pick future outperformers increasingly, they're just building portfolios of index funds. A machine can do it, machines are doing it, Betterment is doing it, Wealthfront is doing it and dozens of other Robo-advisors at this point are doing it. Meanwhile, although that's a commodity service, the financial advisor, if he or she is doing comprehensive financial planning is rendering services for the client that are literally invaluable, priceless, estate planning, retirement planning, figuring out tax ramifications, college savings, mortgage decisions, all kinds of credit and other planning choices that could leave the client hundreds of thousands or millions of dollars better off or worse off if they're bad decisions.

And for those things, the typical client doesn't pay anything. So from the client's point of view, I'm paying often an entire percent of my assets every year for a commodity service that a machine could do for a 10th of the price. Meanwhile, the services that financial advisor is providing me that I do value and can benefit from if they're delivered properly are free. It makes no sense. And eventually, we have to get to the point where the public recognizes that it should be paying for what's valuable and the financial advisors, except that they shouldn't be charging for what's a commodity service. But we're probably a few years away from that.

Patrick: [00:27:00] How could that happen? How will that transition happen? Because it seems like, I'm more familiar obviously with the asset management side given that's what I do, but you take a look at the share of invested equity assets that are passive. It was basically zero, 3% or so in the early '90s. It's probably around 40 today are getting close to 40, and it's been pretty linear, right? And you can certainly see that continuing for a long time. Is there some sort of seismic event or just something that needs to happen to shake loose kind of the continued dominance of the current model? How, how could this change?

Jason: [00:27:35] I don't think my crystal ball is that good, I guess what I would say is we probably have to have more of a move toward unbundling where increasing numbers of financial advisors start to outsource the portfolio management to other firms. It could be Robo-advisors, it could be standalone investment advisory firms, and begin to refocus their own practice on financial advice. I mean, one of the things I've always found strange, and I first started hearing this in the late 1980s was when brokers and some financial advisors referred to picking portfolios of mutual funds or stocks as advice. It's not advice, I mean, it's portfolio selection. It's not advice. There are people who go to a professional and say, "Build me a portfolio," but I think many more people have a fundamental need for advice about financial decision-making, which could refer to their own behavior during bad markets or very good ones.

But more importantly, refers to all the decisions people have to make over the course of a financial lifetime. My kid was just born, how do I set up a 529 college savings plan? I want to save for a new house, where should I put the money? Are there any tax wrinkles I can take advantage of? Where should my retirement money go? These are all situations that call for financial advice and can't be solved purely through portfolio choice. They involve other technical, or regulatory, or other kinds of decisions that call for real advice. And that's what people should be charging for if they're delivering it and it's what the public should be willing to pay for if they're receiving it. So I think we have to have more competition and we have to have a better education so that investors realize they need the services to be unbundled. So I think it's going to take a while. My hunch is that we will see more firms that really are Robo-advisors, because a lot of the firms we call Robo-advisors are really at this point, just Robo portfolio managers. So there's still that confusion that's been going on for at least 30 years between portfolio management and advice.

Patrick: [00:30:32] I wonder if you had czar like abilities, Bill Simmons always jokes about the fact that the country needs a sports czar to just change ridiculous rules if you were the country's investments czar let's say. And this could be something within the education system, it could be rules, something like the DOL that's been in the news a lot recently. Are there things that you would just decree or change that you think would have a meaningful impact on some of these outcomes?

Jason: [00:30:57] I think the first thing that I would do is I would like to get more focus on what fees are for. And if you open the form ADV, which is the basic disclosure form of just about any registered investment advisor in the country, the baseline fee still tends to be something like 1% a year, and that could be a bargain or a rip off depending on what the firm does. And there are thousands of firms out there assembling portfolios of index funds for individual investors charging up to 1% a year, sometimes more for that, who don't even really provide comprehensive financial advice. And those fees tend to be negotiable, most people tend to not negotiate them. And I think if we had a rule that turned the percentage, that's automatically deducted into a dollar charge, we might start to get a little more attention put on it. And I think that would be a good thing.

Patrick: [00:32:21] I read a lot of businesses in Canada and they just had, or about to have a new piece of legislation that where the statement is going to show, not the percentage, but actual dollars kind of itemized. And it will be very interesting to see how that changes the whole thing.

Jason: [00:32:37] Yeah, I wouldn't think it would make at least, I think it would make at least a start.

Patrick: [00:32:42] Yeah, I'm curious how your own getting into portfolio selection a little bit. I know, obviously that you're a huge advocate of probably the plaintiff's vanilla, probably a Vanguard client index investing. I'm not trying to forecast or beat the market. Was there any evolution to that? Did you start differently than that when you began investing yourself or have you always been a dyed in the wool index fan?

Jason: [00:33:08] Definitely. I have evolved and I made my first investment I've written about this and I wish I had the link handy but I can-

Patrick: [00:33:19] We'll find it, we'll put in the show notes.

Jason: [00:33:23] But I bought my first stock in 1975 or '76 and for a high school kid, I made a ton of money on it actually, I made something like a 35%, I'm going from memory, of course. But I basically made a third on my money in a very short period of time. And I sold it, I did a round trip trade and I was incredibly pleased with myself. The very fortunate thing for me was that at that age in high school, I was interested in everything and I just was more interested in the other things that were occupying my time at that point and I just let it drop.

It was probably the single luckiest thing that ever happened to me was that I got distracted because if I had kept investing or more accurately trading, I surely would have lost my share. But I patted myself on the back and then just moved on to the other things I was passionate about at that point. And that was a very lucky choice. In my mid to late '20s, I invested quite a bit in actively managed mutual funds and did a little bit of what today I would probably regard as market timing, which again was more successful than not. I also bought a few individual stocks when I was working at Forbes, I was very careful obviously to act within the conflict of interest rules there. So I didn't buy anything I was writing about, or any of my colleagues were writing about. And there was a, I believe a six-week minimum holding period and I kept most of these for six months to a year.

And I learned that I was quite good at buying, but not very good at selling. And I had a good eye and I think a good mind for finding undervalued securities, but I became an emotional wreck when my predictions came true, and I had a very hard time figuring out when to let go. And then in the early '90s when I started advocating index funds for my readers, I decided I should just do it myself. And at this point, other than a few vestigial positions in a very old IRA account, essentially all my money is in index funds. Although, it's important to throw in a quick caveat which is when you are a full-time working financial journalist, index funds make sense for all the reasons they make sense for investors as a whole, plus a professional reason, which is I don't ever want my readers to think I'm recommending any individual security because I have a personal stake in it or the potential to profit from it, or to be on the other side of a trade from anyone who's reading anything I write. So the last trade that I made was in the fourth quarter of 2008 when I took a tax loss and I swapped one Vanguard equity index fund for another. So that was eight years ago. And I haven't made a trade since, other than my regular monthly dollar-cost averaging.

Patrick: [00:37:28] So that's a special circumstance and let's take a different kind of circumstance. Obviously, that was a catastrophic one, let's take a euphoric one. So let's say that markets double from here, or just to pick a random level, and it's trading at a multiple similar to let's say the late 1990s, I think highly unlikely, but certainly possible. With the focus on fees, I'm always concerned that people aren't worried about the other fee they're paying, which is the multiple of earnings or sales or cash flows, whatever you want to pick that they're paying to get these stocks, is there a value side of this? And obviously, this is a little getting a little bit into timing and active and not a pure passive buy and hold approach. But would there be a valuation based reason, like the panic in '08, I was a tax reason for you to say, "Okay, time to take some of this off the table because these are outlandish prices?"

Jason: [00:38:21] Yeah, I think there could be, I don't think we're there yet. Part of my thinking is always that I'm skeptical about everything, including my ability to be correctly skeptical. And in 1999 and early 2000, I was convinced really to the core that tech stocks were in a bubble and it would end disastrously. And that turned out to be correct as we all realize today, but it's a lot easier to be right about that when Yahoo is trading at whatever it was 350 times earnings or something like that. And the S&P 500 for that matter is at 44 times it's adjusted in long-term earnings than it is at a time like today when there are pockets of overvaluation that I don't think are extreme, they're severe, but I don't think they're extreme. I mean, if you think about the markets as a kind of, I don't know indicator on the dashboard of your car or something like that, in late '99 and early 2000, the indicators, they weren't just flashing red but they were sort of like Crimson red, at least that's the way I saw them. And today, they're yellow and they're orange, they're starting to turn red in some aspects of the market maybe, but I would take action, but I would want to have a lot more conviction than I do and in a market like today's.

Academic Empirical Research on Markets

Patrick: [00:40:18] You gave a speech to, I think it was the Morningstar conference probably soon after the bubble started to burst, or at least it was in its bursting phase. And everyone always quotes, "The four most dangerous words being it's different this time." But you used a different set of four, which I actually like even better. And your forwards were "studies have shown that'. And we certainly live and I'm part of the problem here, so to speak, but we live in an age of academic empirical research on markets, all markets now, searching all the data that we now have available and can very easily sift through with computers to find patterns and then more often than not offer products on the backside of those findings. Can you talk a little bit about your just general skepticism about data, about academia, doing research on markets? And maybe even going further back, we have these assumptions that the equity markets are always going to do well over time because of hundreds of years of data, maybe touch a little bit on your thoughts on the use of empirical research for building strategies and just in general.

Jason: [00:41:20] It's a great question, Patrick, and where would I start? I mean, I could literally talk for an entire day of answering that question, I guess we have to be careful about the worship of the empirical, data without the application of common sense, it's like loading your gun with numbers instead of bullets, except the numbers can do even more damage than the bullets. I mean, you can really kill yourself as an investor if you blindly follow poorly constructed or biased data samples. And here's a really simple example, a lot of the people listening to us are probably aware of the popularity right now of so-called factor investing. And essentially what academics have done is they've re-analyzed many decades of data and that they've identified at least a half dozen. And in fact, we're probably pushing several hundred if it counts-

...data without the application of common sense, it's like loading your gun with numbers instead of bullets, except the numbers can do even more damage than the bullets. I mean, you can really kill yourself as an investor if you blindly follow poorly constructed or biased data samples.

Patrick: [00:42:33] It's 300 now.

Jason: [00:42:33] Yeah. So good. Thank you. But commonly cited, we've got at least-

Patrick: [00:42:40] Value, momentum, quality.

Jason: [00:42:41] Right, we've got at least a half dozen kinds of core approaches that purport to be outperformers. So let's just take a handful of them, so we've got companies with high dividends, we've got companies with low volatility. We have value companies trading at a low multiple of their profits typically. We have for that matter high-quality companies that are highly profitable and we have small stocks and there are vendors, the other 300 factors that we won't even going to-

Patrick: [00:43:20] Which just to be clear, tend to be permutations of those categories, right?

Jason: [00:43:24] Tend to be, tend to be.

Patrick: [00:43:26] There's 30 value factors.

Jason: [00:43:26] Right. But it's really important when you're presented with this kind of evidence to start exercising common sense. So sure, there's a plausible reason why value stocks would outperform, they tend to be beaten up, they tend to have gone through a period of greater risk than the market as a whole. A lot of them are damaged in some way, and you can easily come up with a plausible theory as to why they would underperform. But it becomes a little harder once you realize that a lot of these factors form pairs, they form opposing pairs. And if value stocks tend to outperform and someone else is saying that high-quality stocks also tend to outperform, you have to ask yourself, well, aren't they more or less the opposite of each other? And can we really have a situation where investors are incorrectly undervaluing both beaten up stocks and stocks that are highly popular?

And the answer doesn't have to be that you disbelieve in one or the other, but you do need to be skeptical. And the simplest way to back up, I think, and put all of these ideas in context, is that to be persuasive, a strategy based on data should I think conform to a few basic principles. One, and probably most importantly, you have to have an underlying motivating theory. Why would this be the case? The second is, you have to have the longest possible series of data. If it doesn't go back many decades, then I wouldn't give it any credence at all. And then the third is you have to have a testing period outside the historical period that has been already studied.

And in this sense, what we're talking about is no different from good principles of scientific review, it's basically you're applying the scientific method to financial markets. And Carl Sagan had a wonderful saying that I refer to a lot, which is you have to keep an open mind but not so open that your brains fall out. And his real point was that if there's no theory that could explain why something would be true, then maybe it's not true. And certainly, if we have 300 factors that are all supposed to lead to outperformance, but we have only 500 stocks in the S&P 500, it starts to defy credulity. I mean, you can't have every kind of investment outperforming in the past or the future.

Patrick: [00:46:55] Well, I think I'm a cynic about this because I think there are now more large-cap indexes and there are large-cap stocks. Many of them built using factors like this and it's obviously a way, at least in the interim of charging higher fees to sort of tilt, say the S&P 500 towards value or quality or whatever and tell a neat marketing story around it. I think that one of the bigger issues too, and I bet you'd agree is the behavior side. So everyone says value works, which is true. There's unbelievable, empirical evidence that it works. And I think a really good behavioral explanation, and I actually agree I don't think there is a behavioral explanation for quality. I don't think that makes any sense but in an empirical one, to some extent.

The question though is, can anyone actually do this other than maybe the asset managers who have been fine men, not the ones that had never even opened the book? Because what I tend to find is that you really have to get into this data and it tends to get ugly very quickly. So the question though, is can anyone do it? Because value has underperformed now for seven years, and that is an eternity when kind of if you check your portfolio with any regularity or exciting growth stocks have done well. I've classified growth like an Amazon or a Facebook as the opposite of value, more so than quality. But that's the bigger question and for those listening, I think the key is education.

Again, like anything is opening the book, getting comfortable with the data yourself, even if you're not getting the data and doing the backtests, but reading the studies, understanding the pros and cons, and then having the resolve to stick with it for decades, because that's probably the only horizon over which if you're really disciplined, you can be assured to some extent, whatever that word means, that you might be able to capitalize on one of these advantages. So I'm curious, and I think I know the answer, but if there are active managers that you have come across may be interviewed or know well, whose process or personality you respect that you would recommend people learn from or read what they've written. Does anyone fall in that category?

Jason: [00:48:57] Well, yeah, for sure. Although I immediately want to preface this with a caveat, which is I have to be careful because in my role at The Wall Street Journal, I don't want anything I say to come across as being an investment recommendation or an endorsement. But I mean, there are tons of really thoughtful active managers out there. And just to reinforce a point, although I've been really a resolute advocate of index funds for well over 20 years. I don't believe and I never have believed that there's no such thing as a good active manager or that we would be better off if all active managers were somehow eliminated. I mean, if you believe that markets are more or less efficient, that doesn't imply that no one can outperform. I think identifying people in advance who can outperform is very difficult, but what I would say is that outperformance isn't the only logical reason for a client to choose an active manager.

One very important reason, which you were alluding to earlier, Patrick, is that for strategies to work over the long term for the client, the client has to be there in the long term. And so, I mean, we talk about investment management firms, we don't really talk about invest or management firms, but managing for anyone who's in the portfolio of management business, managing your investors is at least as important as managing your investments because there is a reason why value stocks tend to outperform over the long run. It's because they're risky in the short term a lot.

Patrick: [00:50:59] And painful often.

Jason: [00:51:00] And painful. And if they weren't painful and risky then they wouldn't outperform. I mean, basically the whole idea of discovering these factors that appear to drive outperformance, in every case, if they're logical and they make sense and they work, the whole reason they work in the long run is because they fail in the short run. And for any investor to be able to capture a premium return from any factor, you have to be there long enough to participate.

So there are a lot of active managers who have a great approach and philosophy and implementation, but I think the ones who are most admirable are the ones who think a lot about managing their investors as well as the investments. I mean, I guess a few, I would just mention because you did ask Seth Klarman at Baupost has a phenomenal record and also is a master at communicating with his investors and building a base of like-minded people because that's so important. Every investment management firm really is a community that the manager has the opportunity to build around himself or herself. Howard Marks at Oaktree is another person who's just super admirable. Although their performance in recent years has not been super impressive, I'm still a big admirer of the people at the Longleaf Funds, Southeastern Asset Management in Memphis, Mason Hawkins, and Staley Cates. And I'd say the same for the Oakmark folks in Chicago, all of these firms have done really impressive work, they have put a lot of emphasis on bringing their investors along for the ride.

Patrick: [00:53:04] Yeah, it seems again, the common thread here is really good writers, a lot of those people, frequent writers, honest, a little bit humble, it definitely seems to be a good collection of attributes. Are there people that you forget performance and all that nice integrity stuff? Are there people that you've just enjoyed interviewing over the years? Any fun stories about characters in this business that maybe people haven't heard?

Jason: [00:53:29] Well, the first person who pops in my head is a man named Joe Rosenfield. He was one of Warren Buffett's best friends, I interviewed him in, I'm going to say 2001, might've been 2000 when he was 97 years old. He had been chairman of the Midwestern Department Store Younkers and was one of the wealthiest people in Des Moines, Iowa. But most importantly, he was chairman of the investment committee at Grinnell College. And he had gotten to know Bob Noyce the co-founder of Intel. Noyce had been an undergrad at Grinnell majoring in physics and had been expelled for stealing a pig from a neighboring farm for a fraternity Lew Ayres roast. And the dean was categorical, "You're expelled, go home, don't come back." And then the chairman of the physics department intervened and said, "This young man is the best physics student I've ever had in my lifetime. You can't expel him." And so they actually let him back and he, of course, worked at Fairchild Computer and then found an Intel, and ended up offering Grinnell the opportunity to participate in a private equity offering that basically as I recall, and I could be wrong about the numbers. I think the college had the opportunity to own a third of Intel before it went public. It might've been as low as 10%, but it was a double-digit percentage. And Joe Rosenfield got to know Noyce and immediately agreed. So here you have this small private college violating every known rule of diversification and holding onto the shares through thick and thin.

And of course the company went public. And I think now it's coming back to me, I think initially they had put about 10% of the endowment into Intel when it was private. And then once it went public, it very quickly was well over a third in the endowment. And so as Joe Rosenfield recalled, every day Bob Noyce would call him and would beg him desperately to sell some of the stock because he, Noyce, was terrified that if Intel failed, it would take his college down with him. The college that had given him a second chance, and Rosenfield refused. But finally, Noyce wore him down, and after a couple of years, Rosenfield agreed that they would take some of the stock off the table and I think they sold half of it or something like that. And so here I am interviewing this man and he's 97 years old and he looks at me and he says, "You know, that was one of the worst decisions I ever made." He said, "I bet that cost the college a couple of hundred million dollars." And of course, I had already done the math on this and I didn't have the heart to tell him that at that point, I think it was something like a foregone profit of two or $3 billion.

Patrick: [00:57:21] That's pretty amazing. What is the kindest thing that someone has done for you professionally?

Jason: [00:57:28] Wow, that's such an amazing question because there are so many things I can't even... I mean, the list is a mile long. The longer I work in my field, the more I become convinced that personal relationships are just immensely important. The first kind of junior grunt job I ever had in journalism, I was hired for and 25 years later or something like that, I found the person who had hired me who had been retired. And I insisted, "I have to take you out to lunch." And I said to him, "Why on earth did you hire me?" I mean, I had no experience, I looked like a slob. And there was no reason for you to do that. I mean, I had no credentials, no experience, no track record, no nothing. And he said, "You just seemed like the kind of person I should take a chance on." And that's certainly one example of somebody who was kind to me, but maybe there's a story about luck I should tell. So because it was kindness, but I think it was kindness almost by nature rather than by action.

So in 2002, I attended a conference and there were hundreds of people there, including a lot of journalists. And I saw a former colleague of mine, somebody I was, and still am very fond of Nina Munk with whom I had worked at Forbes and who then went to Fortune and I hadn't seen her in a while. And I was talking with a bunch of my best friends and I saw her across the room and I said, "I'll be right back. I want to say hi to Nina." And I plowed through the crowd the way you have to do and it was worked because there were a lot of people there. And eventually, I found her and we had a really nice chat and we both said, "Oh, I'm so glad we both took the time to say hi." And a few months later, my phone rang and it was a young editor at HarperCollins who said, "We have this book, it's really old but it still kind of sells and we need somebody to polish it up. And would you be interested?" And I said, "Well, what is it?" And he said, "The Intelligent Investor by Benjamin Graham." And I said, "Yes." And he said, "Well, do you want to think about it?" And I said, "No."

And then I called my wife and said, "Is this okay?" So after I finished the project which took four months of working seven days a week, by the way, exclusively, I took him and his boss out to lunch. And I said, "Why did you guys ask me?" And his boss said, "Oh, well, we published this book by Nina Munk and I was asking her, we have this other thing, who do you think could do that?" She said, "Oh, there's only one person who should do that. You should ask Jason Zweig." And it immediately occurred to me that if I hadn't kind of plowed my way across that room a few months earlier to find her, I wouldn't have been at the top of her mind. She might have mentioned me or she might've said, "I'm not sure, I'd have to think about that." And it was definitely kind of her to think of me, but it was also lucky that we had both taken the time to talk to each other. So, serendipity and luck are so important in life, and even people who are-

Patrick: [01:01:31] When you make the effort to, it's an important part of that story.

Jason: [01:01:34] Well, that's how serendipity differs from luck.

Patrick: [01:01:38] There you go.

Jason: [01:01:39] And there's a wonderful book by the great sociologist, Robert Merton called Serendipity about the history and sociology and science of the idea. And luck happens to you, but serendipity is something you can influence, you can shape. And ever since I read his book, which he co-wrote with Elinor Barber, I've been a huge believer in breaking out of yourself and your usual routines. And if you always walk down the street to a certain way and you always turn left here and then you go 500 yards and turn right there, do it in a different way the next time, don't always be on your phone, don't always be talking to the same people, open yourself to the potential for having unexpected new experiences and go the extra mile. And actually, let me mention one related thing, Patrick, which is in, I don't know, 10 or 15 years ago, I read a very wonderful, although it's light but it's a really wonderful book by a British psychologist named Richard Wiseman. And I forget the title of the book, it has the word luck in it. And in the book he tells an amazing story. Wiseman is a professional magician who also is an experimental psychologist. And he has a real sense of fun and play in his work. And he surveyed thousands of people about luck. Do you have good luck or bad luck? Are you lucky? What makes you feel lucky or unlucky?

Luck happens to you, but serendipity is something you can influence, you can shape.

And he got one survey back and this was in the days when people filled these things out on paper, and he got one survey back that really made him sit up and I might be garbling the details, but it was basically right. This woman describes her circumstances, I think her husband had left her, someone in her family had died. I think she might've had a form of cancer. But she described herself as incredibly lucky and she sounded like somebody who would walk past a building and a brick would fall off and hit her. And so Wiseman was immediately intrigued and he got in touch with her and he got her on the phone and he said, "Well, you've had all these terrible things happen to you," but yet you say, you're incredibly lucky. Why do you feel you're so lucky?" She said, "Oh, I always have a date on Saturday night." And so then he asks her to explain how and she said, "Well, I developed a rule, which is before I walk in a room, whether it's a big room or a small room I think of a color. And then when I walk in the room, I will walk up to every single person wearing that color. And I introduce myself and I say, 'Hello.'" And before I leave, someone asks me out. And right there, that's the definition of serendipity, that's you take charge of your environment and your circumstances, and you just try to change it so that it tilts a little bit your way. And that's one thing I really have tried to hammer home with our kids is the importance of getting out of yourself and imposing simple rules because for people who are shy and I'm certainly one of them as a lot of journalists are, you need to impose some kind of discipline on yourself so that you can break your self-imposed chains a little. And a little rule like that is enormously helpful.

Patrick: [01:05:45] What an amazing story. The way that I do it, just because it's something everyone out there can replicate very easily is there's an app on your phone called The Way of Life. And it's literally just a checklist and you basically build a chain of green, you get a green dot, if you check that mark that day and it's nice to rewarding to build up a chain through time. And there's one in there that I call level up, and level up means that that day I did something that was different, better, unique relative to maybe not what I've ever done but certainly in the recent past, just to sort of a nudge, a way of nudging yourself to do something like pick the color, that sort of thing

Jason: [01:06:27] So how do you keep yourself from kind of arbitrarily declaring that tying my right shoe before my left is a step up?

Patrick: [01:06:42] I use the, I can't remember which Supreme Court Justice it was, the line about pornography, and you know when you see it.

Jason: [01:06:48] Potter Stewart.

Patrick: [01:06:49] Yeah, Potter Stewart. So same honesty system that I'm not trying to... No one gets anything from these green dots except for me, so I just use my best judgment and I'm sure I give myself a check mark maybe sometimes when I shouldn't, but the goal which has certainly been met, thanks to this simple genius little app is to just try to do something interesting and new. And actually this podcast, the first episode of this podcast was a result of one of those green check marks and hopefully it grows into a lot more.

Jason: [01:07:22] It's amazing because you're reminding me of something which is there's a wonderful speech that Benjamin Graham gave on his 80th birthday, which we have a transcript of. And I believe he said in that speech, or he said elsewhere that every day he tried to do something new, something nice and something surprising. And I might be misremembering the adjectives, but there were three, and I'm pretty sure one of them was surprising.

Patrick: [01:07:56] Yeah, it's a powerful tool because I don't do it every day, but if you can just remind yourself to try something like that and almost everything good that's happened to me in my career has been the result of what the hell type mentality, great story about serendipity. So last couple of questions and then we'll wrap up. Some of them book-related because that's where we started, I think that's where our relationship kicked off, I credit Jason with my recent fascination with Twain and with Chesterton, who both of whom I had read a little bit of, but really not gone deep into until we talked about them, a year ago or so. So first starting with your own books, if there was one that you had to choose for people to start with if they're unfamiliar with your work, and it could be the Intelligent Investor or a kind of a pure play like Your Money and Your Brain or your most recent one, which is probably my favorite, The Devil's Dictionary, Devil's Financial Dictionary, I should say. Where would you have people start with your own work?

Jason: [01:09:00] Well, with the caveat that I'm not necessarily saying, you should read me as opposed to anybody else.

Patrick: [01:09:06] say that. I've been read them all.

Jason: [01:09:10] I would definitely start with the Devil's Financial Dictionary and I'll explain why. I mean like a lot of professional writers, I have a basic rule which is whenever I work on a book and I've done several at this point, it invariably seems to break down into three-thirds, and one-third of it is fun, one-third of it is work or drudgery, and a third of it is agony.

Patrick: [01:09:49] Think you might have those portions around we got.

Jason: [01:09:52] It's somewhere between 25 and 40% in each of those three buckets, so let's put it that way. And it never really seems to change. Every book I've worked on has always been like part fun, part drudgery, and part just sheer misery. And most professional writers will say the same thing. Though, really, for me, the remarkable thing about the Devil's Financial Dictionary is it was just nothing but fun, and I didn't hate a minute of it. And in fact, I loved every second that I was working on it and the main discipline it required of me was not to work on it during my day job. And because for the time I was working on it, it was actually all I wanted to do because it was so much fun. So on the theory that if I had that much fun working on it, maybe you might have some fun reading it, I think that's where I would start. And my goal for that book was to make it equal parts educational or instructive and entertaining. And it's meant to be funny, which is always risky in our business, but it's also meant to be educational. And people do seem to like it, the beauty that I think it has is that you don't have to read the whole thing, you don't have to read a whole page. You can open it at random anywhere. The single highest compliment that I got was from somebody who said, "You could read this book on the toilet or in front out loud of a finance class." And I thought that was actually a pretty nice thing to say about it.

Patrick: [01:11:43] Something I have to add about this book, and this is coming from someone that reads 99% on a Kindle, on an iPad. You have to get the physical copy of this book because maybe books or something else that needs a little bit of disrupting every book's the same, same size, black and white, all texts, kind of boring and sometimes hard to get through, especially when there's so many distractions. This book is it's small, it doesn't have a jacket, it's got like a very tactile cover and it's filled with these neat images, prints, all sorts of really cool stuff. My answer would be the same of your books and it's just very accessible and there's probably no quicker way to really getting something than through a little bit of satire. And I think that that's why I would recommend the book, but get the physical book because it really, I've actually read it both ways. And there's something about the physical version of this book in particular, all your other books, oh Jason's other books feel free to buy on Kindle if that's how you like to read, but this one makes sure you get the physical copy.

Jason: [01:12:44] Yeah. And I guess, one thing I would add Patrick, is I think it's always risky for any author to talk about his own work for one thing it's boring and for another writers are usually wrong about their own work. Just read any biography of any writer and you'll immediately see what I mean. But I think this book has a quality that makes it very unusual, which is you really can open it to any page at random and you don't have to read any further if you don't like it. I mean, if it's not your style, stop, I'm not here to sell you the book- ...But I mean, opening it at a page at random as I just did because I did bring a copy with me. I mean, maybe this will give people a flavor of it. And remember, of course it is a dictionary, so first is the term then the part of speech then the definition. But this might give you a little flavor of what it is I'm trying to do, which is to combine a little bit of a sense of humor with a lesson in the shortest pithiest way I can.

So here's one definition, potential conflict of interest, noun, an actual conflict of interest. And so, I mean, I hope that definitions like that are actually useful to people because that bit of cynicism which I've modeled after Ambrose Bierce who wrote the original Devil's Dictionary is exactly what the financial services industry needs. It's really interesting, nobody has complained to me that the book is unfair or mean. And I wrote a lot of definitions where I could almost hear the hiss of people seething with anger and nobody has said to me, "Oh, that was unfair." I think people in the industry kind of appreciate that I was calling them out on their own, you know what.

One Book that Every Person Should Read

Patrick: [01:14:47] So last book question, and then one final question. So if you had to pick a book, we'll go back to your czar like powers that we bestowed you with earlier. And you could choose a book that every, let's call it, 22-year-old had to read and absorb. So they not just glance through it but really spend time with a book. What would you pick?

Jason: [01:15:09] Wow. So any book.

Patrick: [01:15:11] Any book. I'm counting on it.

Jason: [01:15:15] For any person.

Patrick: [01:15:16] Yep.

Jason: [01:15:17] You really stumped me because that is one hard question. The book that I think I would most miss if I had never read it is probably the essays of Michel de Montaigne, the 16th Century French writer. It's not for everybody, I mean, it's a pretty literary choice, but he was a phenomenal writer and thinker. And boy, it's a great way to learn how to view the world and how to think about things and what it means to think for yourself. Of course, he lived in a very different time from ours, but you can see a great mind at work trying to make sense of the world with the tools he had available to him. So I think that's where I would start with the warning that for some people it might not be fast-paced enough.

Patrick: [01:16:27] So for me, that answer really completes a circle for our talk because you mentioned at the beginning Feynman and so Montaigne was also a huge influence on Emerson, and more modern example who a lot of people know is Nassim Taleb. And I think all four of those guys accomplish and maybe what you do is try a little bit of each like Jason's recommendation, just to pop his book open, maybe try a little of each of those four. But each of them seems to communicate the same message of hands-on, worry-free exploration of the world trying to figure things out for yourself and don't just rely on experts and conditioning and what everyone says is right-

Jason: [01:17:11] Exactly.

Patrick: [01:17:11] ... but really do the investigation anyhow.

Jason: [01:17:13] Yeah, and it's really important to remember that Montaigne chose the word essay to describe these short little things he was writing for which there was no word in French or English or any other language at the time because it means attempt. And that's just such a profound and humble and realistic way to think about the task each of us will face as we confront life and financial decision-making, be bounded in your expectations. I mean, you're not trying to solve the problems in the universe. You're just making an attempt to make a little more sense of the world around you. And I mean, if that isn't what life is about, I don't know what it's about.

Patrick: [01:18:06] Jason, I think we have to leave it there, that's as good a point as I could hope to close on. So thank you so much again for what has been, what always is a great conversation, really appreciate your time.

Jason: [01:18:17] Thanks for having me, Patrick. Great fun.

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