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Portfolio Manager, Author, Podcaster Ben Carlson on why markets are fascinating (0:30) Private credit, banking sectors (4:40) Market cycles speeding up (8:00) Economy vs stock market (12:20) Gold and safe havens (22:50) Dividend stocks, yield, income investing and ETFs (24:30) Earnings season: Listen to how CEOs talk about consumers (28:00) AI evolution (31:20)

Transcript

Rena Sherbill: Very happy to welcome to Investing Experts, Mr. Ben Carlson. I'm sure many of you have heard him or heard of him at the very least. You are with Ritholtz Wealth Management. You manage institutions there. You have a very fabulous podcast, the Animal Spirits Podcast. You are an author too.

To wit, we are here today for the most part to talk about your newest book, Risk and Reward: How to handle market volatility and build long-term wealth. Really, really happy to have you on the show. Been listening to you, reading you for a long time. So thanks for coming on the show.

Ben Carlson: Thanks for having me.

Rena Sherbill: Talk to us. I'd be interested to hear first off, if you could share with listeners how you spend your day, how you spend your day looking at the markets, understanding them, how you digest them and then what led you to write this specific book at this specific moment.

Ben Carlson: I start my day reading the horoscope just to make sure I know what's going on there. Listen to the stars.

Rena Sherbill: Perfect

Ben Carlson: I do a lot of writing and the best way for me to do that is by doing a lot of reading. So I'm doing a lot of reading about what's going on. I pay attention to a lot of numbers and data.

And I personally think the markets are just fascinating. I know that there's some people outside of finance who think like this stuff is just it's boring numbers mumbo jumbo. I think that like the interplay between numbers and feelings and emotions in human psychology.

I think that the markets are just this like giant laboratory for studying human beings. I think it's like one of the best places to look at the different emotions that human beings have. Fear, greed, panic, euphoria, all these different things that the markets could bring about.

And so I really enjoy just following the market. So that's why like talking about them. I like writing about them.

Rena Sherbill: Why you called your podcast Animal Spirits, perhaps.

Ben Carlson: Yeah. On a daily basis, that's a lot of what I'm doing. I'm talking to our financial advisors at my wealth management firm. I'm talking to clients to get a better understanding of what they're doing.

I'm creating content. And actually, a lot of that stuff, dealing with clients and hearing their concerns and worries and what the problems they're trying to solve, that's really good for me in terms of producing content because that's the stuff that I'm trying to think about.

What are people actually worried about these days? are like regular people outside of finance? What are they worried about?

So I've been writing my blog for a little over 10 years now. And the whole point of me writing a blog in the first place, I kind of got into a little trepidation. was right when financial blogs were kind of taking off in like the early 2010s.

So I was reading Josh Brown and Barry Ritholtz, who I'm now working with. They were some of the early blog people. And I just thought that there was a lot of negativity in the world coming out of the great financial crisis. And there was a lot of pessimism and I guess rightly so in a lot of ways because we had two huge stock market crashes and two recessions in the span of 10 years. There was a lost decade for the stock market.

People were really nervous, like, oh my gosh, the financial system almost ended. All these 100-plus-year-old firms went out of business, and the government is backstopping and saving places. I think there was a lot of people who just lacked faith and trust in the financial system. I was getting all these questions from my friends and family about, you're the finance guy. Explain this to us. What's going on here? That's why I started writing my blog.

I'm always kind of glass half full kind of guy. I look for the more optimistic and I look for the good side in most things. And I just thought that there's a lot of pessimism. That was the idea for the blog.

The book is, I've received a lot of pushback over the years. There's a lot of people who've taken on like this whole idea of like long-term investing and thinking and acting for the long term. But I get all these people who look for exceptions. Well, what about this? Well, what do you think about this? Wasn't this a terrible experience?

And I think for a lot of people, the whole idea of long-term investing is just it doesn't make sense in this world. And I'm trying to prove that no, even if we open the kimono and show all the bad stuff, right? Like, let's play devil's advocate to my own investing philosophy.

I'm to go through point by point and show everything bad that's happened in last 100 years and why this form of investing still makes sense. And so that was the idea just to, I look at like the risk and reward as like the yin and yang. I say that they're attached to the hip. That's what I wanted to show that like, despite all the nasty risks out there, like the reward is still worth it for long-term investors.

Rena Sherbill: We've been talking a lot recently on this podcast about the private credit sector and how it's coming up against the banking sector. And you just talked about the great financial crisis. You talk about it in the book also, a lot of comparisons being made to what's happening in the private credit sector to the great financial crisis.

We had Samuel Smith on talking last week about how that very much is not the case. He's a big bullish guy on Blue Owl (OWL) specifically, and he was laying the case for why the banking establishment or banking institutions or those that run banking institutions are so down on the private credit space.

Any thoughts to share about that discussion and also I guess, bear markets and great big bear markets and where bearishness has you most worried?

Ben Carlson: It is interesting that the whole private credit space seems to be an outcropping of the financial crisis, right? A lot of the banks pulled back from that type of lending, so the private managers stepped in, and now they're doing it.

I think the biggest difference between what happened in 2008 and now is just these loans are long, these loans are not, it's not like an event, it's more of a process. Let's say that the people who are worried about the credit quality of these loans, and I can't really speak to the credit quality, because that's just not my expertise.

And these loans are a little harder to understand, right? But let's say that the credit quality does go bad. It's not like these things on one day are all going to go under, right? And all these companies are going go bankrupt.

It would be more like a death by a thousand cuts. So that's where I think the analogy goes. Even if you thought the worst of these investments. I tend to think that these private managers have so much money and they have so much incentive to make sure that this stuff works out.

It's hard to see this being this sort of car crash scenario. That's kind of where I fall on it.

Obviously, I think the biggest thing if I'm like tying it back into my book, is that the biggest mismatch we've seen and why you're having all of these people pull money out and look to redeem is like an asset liability mismatch. the whole,

I think my whole point of my book, one of them I hope people get from it is just the fact that when you make an investment, one of the most important things you can do is define your time horizon.

And obviously there were a lot of advisors who put clients into these funds who did not do that because all this money came rushing in and at the first sign of trouble and some bad headlines, all the redemption requests started, right?

And frankly, I think a lot of the advisors should be like kind of ashamed that they did that because these should be five, seven, 10 year holding periods for these types of funds, right? These should not be something you jump into and out of every time you worry, like they're illiquid for a reason.

And so that asset liability in this match, I think is like the biggest problem with these funds that these are loans are meant to be held, right? They have to kind of mark them to market and provide an NAV and tell clients how they're doing.

But because of the nature of these funds, they're private, these are loans that are meant to be held to maturity, right? And I think that's the thing that people got in trouble to here.

And why there were so many people freaking out is just that they didn't have that mindset going in.

Rena Sherbill: Because you manage the institutional side at Ritholtz, but I imagine you're also very much in touch with the retail investing side.

What would you say are the two things I guess you hear or the things that you hear from each of those groups? During this time when there's a lot of volatility and it's kind of hard to understand, and also maybe when it's like very bullish and exuberant.

Ben Carlson: One of the things that I will say in doing this for a couple decades now is that I think just being part of this industry, retail investors used to get a bad rap. mom and pop used to be like this derogatory term, like, the mom and pop investors, they don't know what they're doing. And I think it's absolutely true that the retail DIY investing crowd has gotten better at what they do. I think that people beating them over the head for the past 20 or 30 years about the don't run out of the burning building when the stock market goes down.

I think people have gotten better. And you've seen that in all the bear markets this decade. When things go haywire, people are buying. The flows show that the money is going in, not out, which is kind of funny because a lot of it means that the professional investors are probably selling. So I do think that retail investors have gotten better.

We have people coming to us who are DIY investors who have been very successful investing their money. They come to us not because they necessarily need help investing money. They need financial planning help. They need help with estate planning, insurance, and taxes, and all these other things.

I think a lot of people have gotten the message that we don't freak out and panic anymore when this stuff happens. And I think that's one of the reasons the market didn't go down more, because I think there's a lot of people who are beating their head against the wall going, I don't get this. There's a war in the Middle East.

Oil prices went crazy. The trade off for moves is closed. Like oil markets are in disarray right now. Supply and demand, it's all over the place. Why is the market only down? Why did the market only go down like nine percent? I think there's a lot of people who like rightfully are questioning like this doesn't make any sense.

I think 20 years ago the stock market maybe would have fallen a lot more. But I think investors have learned and become a condition to not panic as much anymore.

And I guess the second part of your question is, what do I worry about? I guess the one concern there, even though people have gotten better at, people used to say the stock market is the only store that goes on sale and people run out of the door, right? The fact that people don't do it as much anymore, my biggest concern would be that there is eventually some sort of complacency.

When there is a real risk, a real sort of financial crisis moment, not just a boy who cried wolf thing, are investors too complacent. Do they think that it's going to snap back right away when in that case where we have like a more prolonged bear market and it's more painful than people think? That'd be my one concern right now.

Rena Sherbill: So what do you say to that? What do you say to that concern? Is there something that assuages you or is there something that furthers your concern as you look to how investors, because it does very much seem that almost everything is priced into this market. Or even the more volatile, the more priced in it is.

Ben Carlson: I think this is one of the hard parts, too, is that markets are just happening faster and faster than ever. These cycles are speeding up. And I think it's really hard to wrap your mind around how far like the I think it really started in the pandemic when the stock market kind of looked over this valley of like we shut the economy off.

And I remember when the stock market first started rallying like October or April and May of that year. And everyone said this is a dead cat bounce. There's no way that that was it.

This thing is not getting better. There was no vaccine yet at this point. was, mean, people were, you know, the economy was still in tatter. People were at home and the stock market kind of looked over this and saw like the trillions of dollars government spending and said, all right, fine, we're off to the races.

And I think a lot of people were just like in a state of disbelief. And I think that seems to be a lot of the case in a lot of these downturns is like disbelief that it could happen this fast and the market could move so quickly and decide to be more forward looking.

But I think the other side of that could be that we could have, because we have these impulses to move faster, you could see more flash crashes in the market, where you have these huge air pockets where things go down faster.

The COVID one was, I think, the fastest 30 % bear market from all time highs in history. That was a whatever, black swan, one-off event kind of deal. But I think those moves the other way could happen as well.

Rena Sherbill: What are your thoughts about how the economy is moving on its own and then maybe along with the market or how those are influencing each other?

Ben Carlson: I think one of the things I talk about in the book, I did a whole chapter about the stock market versus the economy. And one of the things that I've learned is that there are so many people who are smart and well-rounded about what's going on in the economy.

And basically, none of them can predict what's going to happen with it. There are more ways to slice and dice economic data than ever before. It's not just the headline number anymore.

You can get so granular on economic data of this specific, what goes into this number, all the different variables that go up into this number and what groups it's impacting. And it's kind of insane how much access to economic data we have now.

And everyone's still got it wrong in 2022 about like the fact that there's going to be a recession. And so the way that I look at the economy now, it's so the US economy is so big and dynamic, it's I don't know, 30 plus trillion dollars that it's kind of like turning a battleship that people think that it's going to be like a stock market where all of a sudden one day it's just going to fall.

And I don't think the economy really works like that. Unless there's some exogenous event, like a pandemic or some crazy financial crisis, it seems like the economy slows in stages and grows in stages. It doesn't just happen in one fell swoop. And I think that's the problem most investors have is they try to equate the economy and the stock market and think all of sudden, OK, here we go.

This one data point shows me that this is happening and there's just been so many headfakes. If you think about it, the COVID recession was technically one or two months and it wasn't a real recession because we threw so many trillions of dollars at it. know, people lost their jobs were in some cases paid more to stay home than they were to go to the job.

Small businesses were given loans. Everyone was kind of made whole at that point. So we haven't had a real recession. And if you can't be on it, that ended in 2009. That's like 17 years since we've had a real recession, which is kind of amazing coming out of the financial crisis when everyone thought they were going to happen all the time.

So you wonder, are the risks building or is it just that these things are happening so few and far between because government intervention is so much more prevalent than it was in the past.

Rena Sherbill: What are the economic data points that you're paying attention to? And I think also to your point, it's getting harder to understand which data points to trust more than others.

Ben Carlson: Yeah, oh yeah, I definitely agree with that. think the biggest thing is just so consumer spending makes up something like 70 % of the economy. So I think as long as the consumer is OK, the economy is probably going to be OK.

And the consumer has been shown to be really, really resilient this decade. And frankly, it's pretty surprising the fact that 9 % inflation didn't derail everything.

And consumers spent through that. And so we've had this huge rise in prices. I don't know what the cumulative inflation rate is this decade was probably 30 % or something. But on the other side of the equation, you've had these massive booms in the stock market and the housing market.

And I think that's one of the reasons the people still have jobs, even though people are really concerned about the labor market and what AI is going to do to it, people still have jobs. And the asset prices for people who own stocks and houses, which is roughly two thirds of the country have had such great wealth gains that I think the consumer has just been fine spending through this. And I think it might be until we see some serious job loss before the consumer decides to slow spending.

Rena Sherbill: If you were running the Fed, how would you handle this present moment?

Ben Carlson: I guess I'm glad I'm not running the Fed. It's a tough job because you're dealing with these external events. And you do wonder if we didn't have the tariffs stuff and then the war stuff. Would interest rates be a lot lower than they are?

Potentially. I think it's hard to, when the war first started a few weeks ago, I guess a month ago or two at this point, some people were saying, well, oil prices rose so much, we have to raise rates.

The Fed needs to raise rates, but I was kind of thinking, what good would that do? Because they would just probably lower them because this is not like an economic cycle thing. This is this outside geopolitical force that's going on. So I do think it's hard for the Fed to figure out what they need to look past and what makes more sense to them in terms of the economy.

So they're balancing on the one hand, like all this government spending and geopolitics on the one side, but then technology is kind of like AI should be deflationary.

So it's like which one matters more this like potentially largest deflationary force of our lifetimes or all this geopolitics and government spending and it's it's a hard balance to strike.

Rena Sherbill: And when you look at all these layoffs happening a lot in companies that are going towards AI as opposed to human capital, what would you say about all these layoffs that you're looking at? How are you digesting it?

Ben Carlson: I think the hard part is, and I think the bigger thing is not even the layoff so much as like, it seems like hiring has just slowed to a crawl, right?

I think one of the reasons this decade has been so hard for everyone is because everything is happening so fast. So we went from, you know, three or four years ago, maybe the hottest job market we've ever seen.

Remember there was the wage growth data showing that if you left your job, your wage growth was way higher than people who stayed at a job, right? So we had that period where all these people, there was so much activity going on in the labor market and people could kind of name their own price and get higher wages just from changing jobs because the labor market was so tight.

And now it's like the other side where we're like, okay, now no one wants to hire because what's AI going to do? Is it going to make us all more efficient? And I think the hard part is it seems to be right now, at least the young people, like just graduating college or coming out of high school that are going to have the biggest issues there because a lot of it is, well, maybe AI can do a lot of the entry level stuff for these people.

And what does that mean? So I think that's the thing that concerns me most is what does this do to young people? I think where we're going to probably see the biggest impact of AI in the labor market is going to happen coming out of a recession. I think it's easier for companies to lay people off when the economy is in a downturn. And then you wonder, do they actually hire a lot of these people back?

Or can AI replace some of these tasks. And I think that's where you're going to see the biggest potential pain from this.

Rena Sherbill: What does it do to young people who for the most part were like in school and had school disrupted during COVID? Those young people have been through a lot.

I heard somebody kind of like in the wellness space say something to the effect of when people have dark nights of the soul, happens when the change is happening to their lives at a faster pace than they can wrap their heads around, which very much feels like where we're at these days.

Ben Carlson: For a lot of people, I'm sure it feels like the ladder has been kind of pulled up in front of them or someone pulled it up behind them.

Especially if you happen to miss out on buying a home because of your stage in life or you were in school or you're too young, and then housing prices rise 50 or 60 % and mortgage rates go from 3 % to 6 or 7%. And you go, I've never been able to afford a house. think that add on to the AI fears on top of that, I do think for young people right now, you're right.

It's very challenging. And interestingly enough, we've seen like an explosion this decade of young people investing in the stock market. Like the percentage of people under under 25 who are investing in stocks has increased a lot for past generations.

And I think part of that is people realizing like I need to invest more for the future. But also, if I'm not going to be able to afford buying a house for much longer, I need to invest in something. And so that money, instead of going to save for down payment or something or going to for a new house is going towards the stock market, interestingly enough.

Rena Sherbill: And probably coincides with the democratization of financial analysis and insight and like to your point how, you know, it used to be like, what the market's going down, get your money out. Where now it's like people are starting to understand, no, this is when you get your money.

Ben Carlson: And the cool thing is too that technology has made it easier than ever to invest. Like the barriers to entry have been broken down. It used to be a lot harder to invest.

Now we have fractional shares and zero but zero dollar commissions and fractional shares and the ability to just link your bank account on your phone, invest right away after you put some money in. Yeah, in some ways, those barriers have made it easier to just trade as much as you want.

But I think it's also just the access for young people is easier than it ever was in the past. I remember when I tried to buy my first Vanguard fund 20 years ago, the minimum was $3,000. Now there's no investing minimums anywhere. So I think that's a positive as long as people are developing the right habits.

Rena Sherbill: And also it feels like to your earlier point about how people don't understand the long-term nature of investing, it seems like those quick hits and the ability to get in and out so easily lends itself to that, would you say?

Ben Carlson: Yes. And the more you trade, the more your emotions are involved. I talk about this in the book a little bit, but Jason Zweig wrote the book, Your Money and Your Brain, where he looked at the neurobiology of how money decisions impact the brain. Where are these synapses snapping off in your brain? If you lose money, what is it doing? What part of the brain is it hitting when you win money?

And he showed, it's funny because the people who are getting into trading all the time and stuff, sometimes the worst thing that can happen is that you're actually right.

So he showed that the brain scans of someone who is making money in the short term in the market is indistinguishable from someone who is high on cocaine or methamphetamine.

And that's the idea that like if you get one score in the market, like you win, you go, my God, you made an option trade and the company reported great earnings and you have a huge victory. Then you go, I need that hit again. You don't just walk away. I need to do that again. And again, then you lose and you go, well, I need to make the money back to break even. And that's where like the market can play head games with you because it turns you into more of a gambler than an investor.

Rena Sherbill: What would you say about how gold has been behaving since the war, that it hasn't been behaving as a safe haven sector? What would you say about kind of things that are coming out in the face of the conflict like gold and also maybe energy names? How are you looking at those two spaces?

Ben Carlson: It is funny how a lot of the ways that people used to view gold in the past have been kind of turned on their head this decade. if you look back to the past history, and I've looked at this before, gold in the stock market tend to like trade off good and bad decades.

Gold did really well in the 70s and the stock market did really bad. Then in the 80s and 90s, the stock market did good and gold didn't really go anywhere. Then it flipped in the 2000s and gold did really well in the stock market had a lost decade. And then it flipped again in the 2010s. And now this decade, for the first time in 50 or 60 years, gold and stocks have both risen at a good clip at the same time.

And it's really weird because gold used to have this thing where it would of track real interest rates in some ways. If real interest rates were lower, gold did better because gold doesn't pay a dividend or income or anything. And if real interest rates were higher, then it was bad for gold. But gold has actually done pretty well in the face of higher rates this decade. And it was doing really well before that.

What happened to gold in the war was the returns were so strong going into it that it turned into like an ATM what happens a lot of times is that flows might matter more than fundamentals. And what happens is when people want to sell something, when there's volatility and they want to just get out and raise some cash, the first thing you sell is whatever has the best returns, right?

For a lot of people that was gold because the returns have been so strong these past couple years. So this decade gold's doing well, but even the last couple years, it's just been on a crazy streak. So I think that is a lot of what happened is sometimes the flows matter more than what's going on in the markets.

Rena Sherbill: What would you say about dividend paying stocks or the income investing space?

Ben Carlson: It's interesting because there is something psychological about just receiving that steady paycheck that people, some investors really, really love.

And I think it's interesting that there's been more people branched out into other forms of income this decade. So there's a lot of like option trading funds, that sell puts to create income. And I think a lot of times people just look at the yield as the be all end all and they go, my gosh, this dividend banks fund is paying me three or 4%, but this option strategy has given me 12, 15, 20 % in some cases.

Why wouldn't I pick the 20 % one? And I think where investors get themselves into trouble is by investing based exclusively on the yield as opposed to the total return. Because a lot of times, sometimes that high yield is essentially just paying you back your own money in some cases. You're not getting a 20 % annual return. You're getting money back to you.

I do think that the yield space is another place where there's been a lot of happenings in the fund world and a lot of innovation, but it also makes it harder to understand for investors because they look at these other old blue chip stocks that are paying 3%, 4%, 5 % and go, why would I settle for that when I can get way higher yields in these other investments, not understanding the risks in them.

Rena Sherbill: And then what would you say about something that we've been talking about the past couple of years is like the high number of ETFs that are in the space right now and they're so specialized. What would you say about, what are your thoughts on that growth in the ETF space and how do you kind of encourage investors to think about it?

Ben Carlson: It is interesting because investors now have access to funds and strategies that they just didn't in the past. And I think we're seeing things this decade. And it started off with just like index ETFs, and then it went to the kind of smart beta.

And now it seems like this decade, the big leaps forward have been like more derivatives and structured products. So I talked about the options based income, but you have like these buffer ETFs that allow you to kind of define your upside and your downside.

And it gives you more of a range of results and they call it defined outcome investing. those kind of, you know, again, using options and futures and these types of things and those strategies didn't exist for investors in the past.

But I do think that you need to either really understand that stuff yourself or have like a financial advisor who does because a lot of these strategies you have to kind of actively manage around them depending on like when these options mature and how what the strike price is and when that certain end dates on these things are.

It requires a lot more knowledge, these strategies are now more complicated because they have different features than regular long only strategies. But you really have to understand what you're getting yourself into.

Again, I think it's kind of a leap forward for investors, but complicated strategies can make it harder from a portfolio management perspective to know when is the right time to lean into the pain and buy more, and when's the time to like pull the ripcord and get out of it.

Rena Sherbill: What metrics do you focus on the most when you're looking at stocks and how do you digest earnings season?

Ben Carlson: So I learned early on in my career - I read all the Peter Lynch books and Warren Buffett books early on, like all of us go through that phase. And I learned that I am a better investor when I have rules in place, as opposed to me trying to pick the stocks.

And I still do try to pick stocks, and sometimes it works and sometimes it doesn't. But my strategy is more deal with my active strategies more deal with picking stock based on a set of factors, right?

So it could be value and quality and momentum. And I think having a rules based framework tends to work better for me and my personality, because it takes my emotions out of the equation.

Having said that, the whole earnings side of things, I think it's fascinating to watch because I really do think it's one of these things that like that's you mentioned you asked me earlier, like what do you look for in terms of like economic data? I think you can glean a lot of information from the way that the CEOs talk about consumers.

And a lot of them, if you've been paying attention, have been saying consumers remain resilient, consumers continue to spend. I think that's actually listening to those earnings calls is actually a great economic indicator as well. You listen to like the credit card companies and the banks and a lot of the retail corporations and their executives. And they can tell you a lot about what's happening with the consumer because they see it in their data.

Rena Sherbill: Do you feel like that there are metrics that investors tend to pay attention to that you feel like are not worth paying attention to or should be taken with more context?

Ben Carlson: I do think that a lot of investors have gotten into trouble using valuations during this bull market and saying like, the line in the sand used to be 20 times earnings. Pick a number. This market is richly valued. And then stocks just keep going up. And I think the reason for that is because they were using a historical average that was kind of useless in the current environment.

And what I mean by that is that the companies of today are so much different than the companies of the past. If you just look at the margins, because there's more technology companies and because these companies are more efficient margins, I have a chart that I've used in my blog before I show average margins by decade.

And it's like a stair step up. It's like up, up, up, up. It's like up into the right where margins just keep improving. So I think if these companies are more profitable and have higher margins, it's really difficult to compare the valuations of today with the valuations of the past because in a lot of ways, the companies of today deserve higher multiples than companies of the past.

They don't need as many employees. They don't make as many capital outlays in terms of their fixed spending. It's more intangible assets and these types of things. That's, I think, something that a lot of investors have gotten in trouble with is just having this hard line of there has to be mean reversion.

We have to go back to those levels of valuation because that's what the average was in the past. And so I think a lot of people have called the market overvalued for 10 or 15 years now without the understanding that the averages have changed.

Rena Sherbill: To that point, how are you thinking about the tech space and the evolution of it?

Ben Carlson: Well, it's interesting because I mentioned like higher margins and more intangibles. The tech space is like going under a huge shift now where they're having more outlays.

They're spending so much money. There's so much capex going on in the AI space in this race for the AI arms race. It's interesting because all these data centers are turning them into more capital intensive businesses. That's something you have to think about.

Is this actually going to hurt their valuations going forward if they have to constantly reinvest in these data centers and constantly put more money in and have more physical assets?

Or do you get returns out of those right away and the investment made sense? I think that's the hard part people are grappling with right now. It's just when do we see the return from these data centers and all the trillions in spending that these hyperscalers are doing versus how much they're going to to spend in the future?

And is that going to impact the valuations at all?

Rena Sherbill: How do you think about it?

Ben Carlson: I think it's a big risk, right? These companies have had insane margins for so long and they've been the biggest best companies for so long. I think it's a huge risk.

But it's funny because I guess besides Apple maybe, they've all just decided to go in together, right? All these companies are putting out all this money. And it's funny because it seems like the winter changes on like a month month basis.

The first winner was OpenAI (OPENAI), then Microsoft (MSFT) made an investment in them, and it's like, okay, Microsoft is going to win. And then it shifted. It's like, okay, now Google (GOOG) (GOOGL) is going to be the winner. And now it seems like, of course, Anthropic (ANTHRO) is the winner.

And it's funny to see though these shifts in the ideas change and how fast everything is moving. And that's just the one thing I wouldn't want to try to do right now is pick the winners. also the other interesting thing to me is, you know, most innovative bubbles, and I guess I'm calling this a bubble just because how much money is being spent, not because I think it's going to burst or something, investors spend their time searching for the winners, right?

Who are the winners going to be? Who's going to come out on the other side of this in a better position? And what we've seen in the past 12 months is that investors are more concerned almost now with picking who the losers are going to be. So all the software stocks got crushed, right?

Consulting firms have fallen off a cliff because they're worried about AI. So it's interesting to me to see investors push down the prices of certain stocks, think that AI is going to disrupt in the future.

Rena Sherbill: Are you going to be focused on Tesla earnings this week?

Ben Carlson: Tesla has always kind of been my two hard pile, I guess.

I will say it's funny that it's a stock that has been, I feel like people have been betting against it for years and years and years and it just keeps going up. It's honestly one of the more volatile names out there.

The only thing I'm really paying attention to is like what will the SpaceX (SPACE) IPO do to Tesla?

And does that sort of suck some of the oxygen out of the room from Tesla? Because Tesla, think one of the things it has more than anything else is this loyal base of shareholders, right?

That has allowed Elon Musk to have this long-term vision or whatever and do all the things and continue to raise money and even in the face of people betting against it.

I wonder if it kind of sucks some of the oxygen out of the room or if he's going to have to eventually bring all his companies together, right? It's going to have to be the AI company and SpaceX and Tesla under one umbrella.

So he doesn't have all these companies that are sort of competing for mind share and attention from his shareholders. That's kind of thing that I think is interesting to think about.

Rena Sherbill: Are there specific names that you're going to be focused on in this upcoming earning season?

Ben Carlson: So like I said, I think paying attention to some of the retail names and there's a few ways that I kind of pay attention to earnings. So Quarter is an app that allows you to listen to the company earnings. And I like doing that because you can kind of skip through right to the Q &A and you can listen to the transcript and you can look at all the reports. To me, I think paying attention to the consumer companies is interesting, right? So that's retail and then it's like the banks and the credit cards to see if they're in trouble.

I think the credit card companies have been one of the biggest tells this entire decade for how the consumer is doing. And they're the ones that are telling you whether the consumer can continue to spend or whether they don't. So I think paying attention to those credit card companies is interesting.

Rena Sherbill: And like to the point of long-term investing, if you were talking to your average retail investor who's on the young side of things and your average retail investor who's on their older side of things, and given the moment that we're in right now, how would you broadly or feel free to get specific, but how would you encourage them to think about where they're at and how to think about long-term investing as opposed to short-term trades or even short-term investing?

Ben Carlson: I do think like the way that you laid it out, like a young investor and an older investor, I think risk means different things to different investors at different parts of their life cycle, their investing life cycle.

So when you're young, a bear market doesn't matter nearly as much to you as if you're an old person who is in retirement or approaching it. So I think young people should actually hope for a bear market so they can put money to work at lower prices, lower valuations, higher dividend yields.

That's a good thing because for young people, the biggest asset you have is not financial assets, yet it's human capital. It's like your future savings, your future earnings. So you have the ability to save over time. And so I think having a bear market is not a risk to you at all as a young person.

You should hope for those and put money to work. Whereas a retired investor who has no more income coming in, a bear market can be very scary and very painful because you don't want to sell stocks when they're down if you don't have new money coming in to purchase them, right, or a way to lean into the pain.

I think the risks of those two groups are vastly different and I think that's how you have to think about building a portfolio to account for that.

Rena Sherbill: Anything like more specific in terms of things that may be misnomers or misunderstood in terms of those different timelines?

Ben Carlson: I think one of them is like, if you just look at a spreadsheet, you know, like by the numbers, young people could probably have all of their money in stocks, right, especially if we're talking about like retirement assets. But some young people don't have the stomach for it.

And they just they know their personality is I can't handle losses, I need to have some conservative investments to like, allow me to let the stock market run. And I think that's okay as long as you understand the trade-offs you're taking. think that's, knowing yourself and understanding like your, what's gonna make you feel worse?

What are you gonna regret more? Giving up on potential higher gains or like living through bone crushing volatility and losses. A lot of people are able to handle a 100 % equity portfolio as a young person and deal with the volatility. Some people are not.

I think it really comes down to defining the things that impact you more as a person and like on your psyche.

Rena Sherbill: Yeah, I feel like if you had a pie and like the pie was the important characteristics you need for investing, I feel like I and maybe others, many others used to think about it like the biggest slice of that pie needs to be how right you're going to be.

Whereas I feel like now it's like the biggest slice of pie needs to be like you need to understand your own constitution to understand like how you should be invested.

Ben Carlson: That's a really great point. And the other thing, as you get older and now you have more financial assets, those losses can be more painful, right?

So if you have a $10,000 portfolio and you're just starting out, you lose 50%, you lose $5,000. If you have a million dollar portfolio and you lose 10%, you're down $100,000. And so sometimes the difference between seeing a percentage loss versus a dollar loss can really impact how you view those. And some people can't.

When you make more money, you have the idea, I don't want to have to make it twice. So maybe as you get older, you do have more conservative investments because you don't want to have the big ups and downs anymore. again, it depends on what you can stand and what you can deal with.

Rena Sherbill: What would you say has been your proudest moment as an investor and your most humbling?

Ben Carlson: Well, that's a great question. I really do like seeing, I think sometimes we like people in the wealth management industry, spend too much time thinking about like returns and numbers and values. And one of the proudest things I see is that we have clients who come to us and show like, here's what I turned my portfolio into. Here's the convertible I bought, or here's the cruiser on the world that I took my family on, or here's this trip we took where we climbed to the top of mountains. Here's my vacation home.

Seeing people that I've worked with turn their portfolios in that money into actual like what they want to do with their dreams, their financial dreams and goals. That part is really, really cool to deal with.

I think this decade has been very humbling as an investor. Just all the ups and downs we've seen. I think if you would have given me the headlines of what's going to happen, you know, from the pandemic to oil prices going negative and then going up to like $150 a barrel and two wars and 9 % inflation and the liberation day stuff and everything that's happened.

I think just if you would give me all that without knowing what's going on in the market and having me try to guess what's gonna happen, there's no way I would have guessed this would be the outcome, right? And I think the longer that you're invested in the markets, the more you realize like no one has this all figured out.

This decade has been humbling for a lot of people, it's been a good reminder to me that, like you said, being right all the time, sometimes it's not about being right. It's about just surviving and staying in the game and not making mistakes at the wrong times.

Rena Sherbill: Yes, indeed. Yes, indeed. I've started asking guests that I feel like will have a good answer if they have a motto that they live by or invest by. Do you have one?

Ben Carlson: I guess if I had to put them out of that, I think I've signed this in some of my books. I have a motto that just less is more. And I think it's really easy to allow your finances and your portfolio to get overly complicated. And I think a lot of times simplifying is a better way of going about things. And you and I have talked about all the different products and services available these days. And it's been great for investors.

You also have to have like a good filter in place and define the stuff that you just won't invest in to like save yourself some mental bandwidth. Like, you know what, those investments or that sector or that strategy might be good for certain investors, but it just isn't right for me.

And I'm just going to leave it over there. I'm going to leave it alone. And I think that that whole less is more. I think it's that's that seems to have served me well and just keeping things simple. So I don't freak out when things don't go as planned.

Rena Sherbill: Is the do not touch pile like names like Tesla you mentioned, does it also pertain to like sectors or columns of sectors?

Ben Carlson: I've definitely learned over time that just, I guess, more and more of my money has gone into like simple indexes and more broad-based strategies that try to like cast a wider net to get the winners as opposed to me trying to pick the winners myself.

But again, I think that's more like personality-based. But I also think for investors, I think it's a great way to have, I talk about it in my book a little bit, like a carve out portfolio to see how you do trying to pick those winners, right?

And you take 10 or 15 or 20 % of your portfolio and say, I'm going to try to pick the winners, but I have this other part of my portfolio that's in more of a long-term, you know, don't touch, don't mess up kind of strategy. And you can kind of compare and contrast, like how am I actually doing compared to that?

That's a good way to figure out whether it's because honestly following individual stocks is actually is, I think, quite entertaining and interesting. Like you said, the earnings, like it's intellectually stimulating. That's one of the reasons that filing the markets is so entertaining.

But I think you have to separate that from, is it actually good at this? Because some people are very good at it, like filing the earnings reports, understanding where the expectations are maybe mismanaged or mismatched. But I think you also have to like gauge yourself against some sort of, you know, simple benchmark.

And after a while, have to say, is all this work actually in my portfolio helping me beat some sort of benchmark or am I just doing this because I really enjoy it and then maybe you like size it correctly. I think like position sizing is really important for people in these kinds of endeavors.

Rena Sherbill: Yes. Yes. Ben, I really appreciate you coming on the show. Really appreciate you so much time. I hope you'll come on again soon. I would really encourage listeners and investors especially to check out your book. It's very well done and lays things out very clearly and edifyingly.

What would be your final last words if you feel like we missed anything of value in this conversation and also how people can get in touch with you?

Ben Carlson: Yeah, wealthofcommonsense.com is my website. You can sign up for the newsletter there and then you can find my book anywhere you find books, Barnes and Noble and Amazon. And I we have it in paperback, in Kindle and actually because I've, so used to microphones and podcasts and I read the audio book myself as well.

Rena Sherbill: Nice. I love when authors are able to do their own audio books.

Ben Carlson: It was the first time I've ever done it and it was a long experience, but I really enjoyed it. So yeah, can listen to me read the book as well.