Passive Investing is Broken. Here's how to fix it | Tom Sosnoff | TEDxUChicago

two of our most basic instincts is understanding the difference between right and wrong and the more it when I started to think about today's today's talk I realized you know what my dogs I have a couple dogs my dogs know the difference between right and wrong you know so so I kind of take right and wrong to a different level so today's discussion is about risk it's about financial risk it's about investing and it's about it's about over the last two or three decades we've tried to put investing and finance into a box that is defined by right and wrong and what I really want to do today is kind of break it out of that box and make it what it really should be which is about understanding and thinking about probabilistic predictable outcomes about quantitative strategies about really understanding what it's like to take risk understand risk and appreciate risk because I think we've gotten away this generation or the last couple decades actually we've marginalized risk we've become too safe we are very risk averse right now we have become the era of passive investors we put away money we hope it sits there for the next 50 years and it works for us we don't like to take a lot of risk whether it's in listed market places whether it's in just personal investments or anything else we have we have a new term it's called financial literacy and it's horrible it's destroying the world of risk because we're starting to believe that financial literacy is as basic as it's made out to be and everybody can talk about the basics of it but that's not what it is at all find true financial literacy is about taking risk so I'm going to try to change some of those perceptions today I don't have a solution to fix everything but I'm hoping that my stories will inspire I'm Tom saw snuff and let's let's go so for starters you know I never learned to type and the worst thing even worse than not learning to invest until you're 50 is not learning to type until you're 50 because my my grandmother was a legal secretary and she could type like you know a billion words a minute and when I was a kid growing up in the 70s and all the other kids took typing I hear well I don't need typing because my grandmother can type and that was my first like and I'm not kidding you know she typed anything like ten times fast anybody else so all my papers were perfect she was like an automatic spellcheck thirty years before the spellcheck and and the coolest thing is I didn't know now in my 50s that I'd be writing 250 emails a day and I really miss learning how to type so my first shot at really taking risk I took the passive route and that kind of haunted me but you know what I never forgot that never forgot it so my next step is to start to learn how to take risk so I have a fun little story I was about maybe 16 15 16 17 and I decided I need to learn how to make money and I also wanted to learn how to play golf and I could kill two birds with one stone if I was a caddy anybody any of you ever caddy before it's not exactly the most glamorous thing but it worked for me so I start catting when I'm a young kid making $20 maybe fifteen to twenty dollars a day and through the process of catting I become friends with this caddy master who is 40 years older than me 50 years old how old he was and his name was Jimmy Rocco and Jimmy Rocco and I became friends and I think he was a caddy master until he was 90 anyway we had a Caddyshack and inside the Caddyshack there was a bucket and 15 paces from the bucket there was a piece of carpet and all the caddies 50 60 100 M because the place was always busy would take 15 paces back go to the piece of carpet take a chip with a sand wedge and try to put it into the bucket and if you made it on a fly you got to keep all the money in the bucket but every time you took a shot you had to put a quarter in the bucket so I'm like wow this is my first you know kind of gambling venture this is kind of cool so every day myself and all the other caddies would go up there and we take our shots through our quarters in the bucket take our shots and we'd miss and occasionally we'd make but we never made money we lost over the summer probably hundreds of dollars shooting if that bucket Jimmy Rocco on the other hand made thousands of dollars because he understood pot odds way before we understood pot odds he would first of all he's a better golfer but second of all he would never shoot into the bucket until it made sense for him to put money into the bucket because the payout was much greater than amount of money he was putting it so he was way ahead of us as far as pot odds so over time him and I become friends and every single night well let's just say I wasn't left in his will it wasn't like that kind of friendship him and I every night we'd go out and play golf and in the process of playing golf he take every dime that I made that was how our friendship worked over seven years but the beautiful thing about it in the end was that he taught me a lot about taking risk odds pot odds quantifying risk what were my chances of a probabilistic outcome and learning this crazy sport which I really didn't need to learn anyway what's what's cool about it in the end is that I finally started to beat him and at the very end of our kind of our relationship because I had to move on and go to college and actually have a life the I played him four nights in a row and beat him four nights in a row I think I probably took $100 off him he'd beat me for a few thousand dollars I took a hundred hours up he was crying like a baby he sits me down one night we're gonna play goes it's the last night we're going to play bring all your money almost like he had been setting me up but I'm okay with that he sits me down and just like a real father figure and just like a you know he starts to articulate risk and gambling to me now he was he was a very smart guy he puts his hand on his shoulder and he goes tonight I kill you that was the articulation of how he was going to take care of you that night and learn all about gambling he went out a shot a thirty he shot a 31 on a par 36 I gave him four and a half strokes that night I lost every time I had never forgot it because the lessons learned with that gambling experience over a multi-year period change the way I thought about risk forever so God loves those who take risk which is probably not true but God loves all of you God just likes the ones who take risk a little bit more what's interesting about this is that we've become I talked about marginalizing risk and marginalizing finance but we become the society where we think that that especially our youngest generation thinks that there's maybe a greater moral purpose and that moral purpose can come without a challenge or without risk I don't agree I believe that in order to create whether you want to say moral purpose opportunity there needs to be a ridiculous challenge that challenge has to include risk and that challenge has to include unlimited opportunity and we don't view everything like that anymore in fact we're actually a little scared of it at this point in time with incubators all over the place with graduate programs focus again entrepreneurship with startups abound all over we are at our lowest level of entrepreneurship in 30 years I know that seems crazy because they're all you hear is startup this entrepreneur this all this stuff but we are at our lowest level in 30 years that's crazy so I finished the story I load up my Celica in 1980 1981 and inside I'm going to come to Chicago and I'm going to go to the last bastion of free market capitalism which is the trading floors and I end up in in Chicago Board Options Exchange and I end up as a trader and I'm actually turns out I'm a pretty good trader surprisingly because there's thousands of people hundreds of thousands people to try there's a few of us that turned out to be pretty good in the process of doing all that obviously you take lots of risk but the markets are wide the opportunity was ginormous and so we take advantage of it fast forward a little bit I start to make money on a young kid I never saw my parents invest ever so I never knew how to invest because come from a generation where our parents never invested so I need to learn how to invest but I don't know how so I start asking people and I get you know somebody's brother-in-law who's an accountant who to me the last unit of an oil and gas tax shelter I get somebody's I guess somebody who's doing a limited partnership with a restaurant I started to invest and over the next 20 years amazingly I went Oh 419 now you guys all understand the law of large numbers and with any kind of reasonable probability of success it's impossible to go over 19 so either I was the worst investor ever but or just chose dumb things like I invested in a professional wrestler in WWF I invested in restaurants that had dumb concepts real estate which made no sense at all but over the years 19 years because we made a lot of money as a kid as you know during this period we made all these horrible investments and I kept thinking to myself oh there has to be something different I didn't know what it was but there has to be something different but I figured out after 20 years of investing and let's just say was 50 thousand dollars a year I invested a million dollars I lost every penny of it and then if I invested passively like I just ripped on a couple seconds ago that million dollars would have been four million dollars because it was an era where the stock market exploded even though there was no past investments back then the stock market was up huge the SNPs were up huge I would have made millions and millions and millions of dollars and the nice thing is I left it all on the table I didn't care at all all of it on the table because the lessons learned going back to the days of caddying the lessons learned going back to the days all these horrible investments I had to take something away from it well we ended up taking away from it was in late 40s we started out and we said you know what we're going to take everything we have and we're going to use all these experiences over the last X number of years and through these experiences we are going to generate opportunity for ourselves so we went out and we built a company called thinkorswim and I'm not sure how many of you are familiar with it but it was a company that was in the derivatives space online brokerage it was cool technology we built it 15 years ago even today it's the best technology in the world but we sold it we were public company we got bought out we created a billion dollars in market cap so the way I look at this was okay so I lost a few million dollars it happens and I never thought about it then I didn't think about it later but all those experiences and all that risk and rolled it into an amazing opportunity our 40s but we didn't stop there when we got oops when we got into our 50s we did it all again and right now we built a financial media company which is the fastest growing media company in the world called tastytrade and building software again and what we're doing is we're spreading the idea of financial content alternative financial content that people can actually apply it's like functional it's applicable its quantitative its logic driven and we started this in our 50s it is trying to be you know I want people regardless of age or regardless of where you are in that kind of moral purpose and the moral purpose curve that probability curve just understand that there's opportunity through experience and there's opportunity mostly through taking risk and regardless of where that risk is in the curve it's generally extremely valuable so now we've gone on kind of a career from from starting with you know caddying all the way up to all the way up to two different businesses a thousand some odd jobs a billion dollars in market cap but now I've got to do something else now I've got kids and now I've got to pass on to my kids kind of the idea that we can you need to take risk we've got to pass on hey you know what risk-taking was important to me but your generation doesn't know how to take risk your generation is very comfortable being safe and so what I've tried to do over the last couple of years is pass this message down to my kids through lots of different discussions one of the discussions and one of the opportunities I had was with my daughter who also by the way had a TED talk once my daughter when she was going to college her car got totaled and when her car got totaled the I went to visit her to get help her get a new car with the insurance money and everything else and sat down and I had this experience which I thought hey you know what this will create an opportunity for you to see what your probabilistic outcome will be meaning if this person if this salesman wants to sell a car really bad then he'll hit your bid if the salesman doesn't need to sell this car really bid then really bad then he'll walk away and luckily for me I played the pot odds and the salesman really needed to sell the car so the story goes kind of my daughter and I are sitting there and this young salesman comes in and he tries to he looks at us both and and he realized you know like like I kind of passed for homeless most of time so in fact I'll take just a quick love story I'm on it I'm on a Southwest Airlines flight one day and there's this little kid sitting next to me and she's screaming and I feel bad because I don't know what you screaming about screaming she knew how kids sometimes talk kind of in a little bit of a loud voice and they and and her mom saying to her hey what's wrong you're a great flier you shouldn't be you know this is nothing for you we haven't even taken off yet and she goes mom I'm not scared of flying I'm scared - the big guy sitting next to me that was me so so I so now I'm sitting in this car dealership and this car dealers looking at me and I know he's got lots of cars so I know the pot odds are grossly in our favor but my daughter's nervous because she's never bought a car before and she doesn't want this particular car to walk off a lot so we go through the whole process of negotiating and finally at the very end we can't come to an agreement so I take a cheque out of my pocket and on the check I write out a mount just any amount and some number that I came up with I didn't have any idea if it was real or not couple maybe a thousand dollars less than he was asking and I hand the cheque to the car dealer car salesman and he looks at it he goes we're never going to sell the car for this price I go fine then call me back in an hour because we'll be looking at other dealers and just rip up the check so it goes into the back room he comes back and he goes congratulations you own the car and my daughter the whole time was giving me that same whisper you know that loud whisper where they tell dad just do it you're ruining my life followed by the whole thing like every kid does you know don't please don't embarrass me this guy probably knows my friend everything you know I mean I was one of those parents where they dropped you off like you know a block away from the school one of those parents okay so so through the whole process then we end up and the guy comes back out and says you the cars yours he goes back in he does all the paperwork and about 15 minutes later 20 minutes later he comes out onto the into the showroom and he looks at me and he goes he goes you know he's got like fire in his eyes right now and he looks at me he says I can't believe you squeezed me for five hundred dollars because I just googled you just having some fun with it it's really important that you guys the take away from this and I hope to take away from this is that it's really good it's really helpful to learn how to take risk before you're 50 and before you're 60 and before you're 80 whatever it is because one of the most powerful things we can do in building a legacy and building legacy building wealth wealth might not even be important but just building a legacy is understanding understanding quantitative risk and how that risk relates to either what you want to do or to your legacy or anything else and very few people understand that again because we've been we've been taught now so we've been taught about so much about passive investing and so much about being risk-averse that it's scary in that sense so thank you very much

Channel: TEDx Talks

Views: 391,454

Keywords: TEDxTalks, English, United States, Business, Achievement, Behavorial economics, Finance, Investment, Money

Id: 974Igxkvf34

Length: 17min 11sec (1031 seconds)

Published: Thu Jun 18 2015