[MUSIC PLAYING] [APPLAUSE] JOSH BROWN: Thank
you, thank you. SPEAKER: Thank you, Josh. Thank you for coming. JOSH BROWN: What an
intro, thank you. SPEAKER: I worked on it a lot. JOSH BROWN: Hi, Google. SPEAKER: All right,
well, before we get into further
establishing all of these credentials of yours
with Twitter and your books and CNBC, if you'll
humor me, I hope you'll help me copilot a
little infographic here. I don't know if you're
familiar with this, but I think it will spark
some topics of conversation, maybe some people for Q&A
at the end of the show. So what this is,
is a visualization for all of the
world's markets, OK? And one square
here, at the top-- that's $100 billion, OK? That's $100,000 million, right? If my math is correct. All right, so it
goes through-- and I don't want to spend
too much time on this, but I do want to go
through a few things here, because I think it's
interesting and it will set up with some good stuff. So here we have silver. World silver is $17 billion. This chart, incidentally,
was made by Jeff Desjardins. And I emailed him and
we have permission to go through it at this talk,
so thank you very much Jeff. And it was made maybe six months
ago, but it's still roughly-- JOSH BROWN: Probably
hasn't changed that much. SPEAKER: Not too bad,
not too much, right. JOSH BROWN: Maybe
crypto's a little smaller. SPEAKER: Maybe, or maybe
it's about the same, since it's gone up and down. So there's crypto. OK, roughly-- Bitcoin, there,
is about $100 billion or so. And you can see
it's a certain size. And then as it
goes through, this is next to the largest
companies in the world. We have Alphabet-- JOSH BROWN:
Congratulations on that. SPEAKER: Hey, thanks,
we made the list. JOSH BROWN: I always knew
you would, by the way. SPEAKER: Next we have
50 richest people. Bezos is in there. I think he just hit $100
billion if I'm not mistaken. JOSH BROWN: Probably most of
this audience is in there. SPEAKER: Yeah, a couple
of us are in there too, but we're not listed on
the chart [INAUDIBLE] JOSH BROWN: Well done. SPEAKER: As it
goes down, there's a few things I do want
to get to in more depth. But as we go down, we
have California's GDP. Remember, every
square-- $100 billion. Fed's balance sheet is
about $4.5 trillion. And as we move through,
here's where I think it gets a little interesting. We have currency and gold. Both of these markets roughly
$7, $8 trillion dollars. So just to get the crypto
discussion out of the way-- or point out of the way-- I think maybe, in
general, the bull case is that these little
dots here have room to grow if it's going to
be some form of digital gold, right? Even if it's a trillion
dollars, people are hoping that that grows. Whether that'll happen-- JOSH BROWN: I am on
the other side of that. SPEAKER: OK. JOSH BROWN: So-- SPEAKER: You think-- JOSH BROWN: Let's
just go right in-- SPEAKER: Let's go right in. JOSH BROWN: --and break
everyone's hearts. SPEAKER: That's great. JOSH BROWN: I bought Bitcoin
last summer at about $2,300, and it ran to $19,000
and I didn't sell it because I got that argument. Maybe not what percentage of the
gold market should Bitcoin be, but maybe I just
thought about it as-- this is going to be a
very important network for transactions, and then
if the ownership of Bitcoin represents renting a
piece of that network, then there would be
some value there. And I did believe that, and not
because the price went down, but I kept listening
to podcasts. And if you listen
to enough podcasts, you get so many opinions,
and so maybe mine changed a little bit. I know it's a cliché to say
you're bullish on blockchain technology but not
bullish on Bitcoin, but I actually now think that
that's the most rational way to think about it all. And the blueprint for
that is the fact that-- what Tim Berners-Lee built
and all the protocols that we use for email and
for internet connection. They have no inherent
value on their own. HTTP is not worth anything. However, it's worth
everything, but the real money has been made by
companies like Google that built the layer on top
that actually makes it usable for the consumer. So if you think about blockchain
as just another protocol-- maybe a very powerful protocol-- there's no guarantee that just
because Fortune 500 companies start to adopt
blockchain, incorporate it into their processes,
that that means that a coin, for some reason,
has to go up in value. So I think a great example
from my world is Vanguard. Vanguard manages, I think, like
$4 point something trillion. They're doing
millions and millions of transactions every day. Those transactions, at
the mutual fund level, require something
called reconciliation, which is basically people in an
office somewhere pushing paper back and forth or moving
numbers around in databases. And if that work can instead
be done by a distributed ledger where there is a
record of the buys and sells, an outside person can't come
in and change the numbers because everyone's got the
same record and it's global, then maybe there needs
to be less people who are taking basis points
in cost in the system. So maybe Vanguard shaves
a half a basis point in the cost of
running a mutual fund. And that doesn't sound
like a lot of money, but it could be
billions of dollars. There's no coin. You don't need a coin for
any of that to happen. But there's a tremendous
corporate cost savings. In the case of Vanguard,
the shareholders own it, so it's not really a corporate. But if other corporations start
to use blockchain in things like their supply chains-- which
they're all now talking about-- that's fantastic,
but that does not imply that a digital
currency somewhere has to spike in value as a
result of distributed ledger technology. So again, I know it's a cliché. I know people are saying
that at conferences. But I actually think that the
cliché, in this case, is apt. SPEAKER: Got it. So it's safe to-- JOSH BROWN: So sell all
your stupid old coins. SPEAKER: So you're saying that
though blockchain technology could be as transformative
as everyone may be saying, it doesn't mean that if
you're holding on to one of these particular coins-- even if it's Bitcoin or
Ethereum or Litecoin-- that you're going to get in
on that action, necessarily, of the world being-- JOSH BROWN: Right. In other words, the story might
be so unglamorous and so unsexy that the only place the
benefit of blockchain shows up is in the earnings
reports of very boring industrial companies
that are moving things across the country
and finding ways to keep records in a
lower-cost, more efficient way. And no one's going
to be partying on a yacht as a result of that. It's not going to
be a hot thing. Ooh, I got in on block--
it's like, blockchain enables us to save $10,000 a
day in shipping costs at our loading dock. SPEAKER: Got it. JOSH BROWN: You know
what I'm saying? There's no rappers
talking about that. So I think separating
the two is-- it doesn't mean that I think the
coins have no value or that-- that's a whole other-- that could be like
five hours, we could-- that would sound like a 4:00
AM dorm room conversation. We're not going
to go there today. SPEAKER: That's why I said,
let's get that out of the way. So I don't want this to
be a Bitcoin talk, OK? But-- JOSH BROWN: No, I'll tell you
what I think about Ripple. SPEAKER: [LAUGHTER] All right. JOSH BROWN: All right, go ahead. SPEAKER: I was ready for it. OK, no, let's move on. So there's gold, all right? Around $7 trillion. So here we come to
the stock markets. And what I find
remarkable about this is just how the United
States is well over a third of the entire global
equities market. That's pretty wild to me. JOSH BROWN: So if you pop
this chart 120 years ago, in the year 1900, Great
Britain would be 25% of this. United States, I think,
would be maybe 15%. Now, Great Britain-- UK
stock market-- is 6%, and the United
States came from 0%, essentially, to half the world. And there are a lot of
implications embedded in that data, but just
the fact that we've seen one country go from being
so dominant in the world stock markets to shrinking to
almost nothing, I think, is remarkable. The other thing about
this is that China would be much bigger if
the local companies that can be traded only by locals
were open to the world. But China's exchanges
are not completely open, so there's some
interesting nuance to where the data probably comes from. SPEAKER: Got it. What I find interesting is
that for a lot of people, they feel like maybe
the buck stops here, or with real estate. But there are some other
things to get into here. The global money
supply, I believe-- this green is from
earlier on in the chart. That's physical currency
there, and then you have narrow money, broad money. This is all the
checking deposits. All the money, basically-- physical and nonphysical--
in the world. Looking at about-- looks
like, oh, $90 trillion-- $120 trillion or so. So that's interesting. But as we go here, this is
what I wanted to get into. Here's debt, and it doesn't
all fit on the screen here, but this is pretty big. $70 trillion-- JOSH BROWN: That's not
all sovereign debt. That's consumer debt-- SPEAKER: Totally,
it's all debt-- JOSH BROWN: OK, corporate debt-- SPEAKER: --in the
world, that's right. But that is an eye-opener. And as I go down, this is
the end part of the chart. I freaked out a little
bit when I first saw this chart, because-- then I come down here to-- oh, pardon me. There is real estate. This reminds me of "Sim
City" when I was in college. I don't know if anyone
played that game, but there we have commercial real
estate, agriculture real estate, and [INAUDIBLE] JOSH BROWN: See, for me it's
more like "Minesweeper." SPEAKER: "Minesweeper,"
that, too. JOSH BROWN: There are
the bombs, in that dead-- sure. SPEAKER: Totally. OK, derivatives-- this is
the bananas part, all right? This says, on here-- they don't know
exactly how big it is. JOSH BROWN: Say your
thing, and then-- I know what you're going to say. Say your thing. SPEAKER: There's a
low-end estimate. There's a high-end estimate. And the thing is is you
just scroll, and scroll. JOSH BROWN: So let me add in-- SPEAKER: Talk to me, Josh. JOSH BROWN: --a caveat. SPEAKER: All right. JOSH BROWN: That's
notional derivatives. SPEAKER: OK. I'm still scrolling. JOSH BROWN: Half of these
boxes offset the other half. That's what a derivative is. It's a contract. Both sides are
hedging or betting. So notional makes
something really big seem bigger than it is. But a lot of the
derivatives that are here, there's another
derivative in there that is the offsetting bet. So this is not a one-way
bet that everyone is making on one particular thing. This is millions and millions of
things with insurance companies hedging and investment people
playing both sides and banks betting on both sides. So it's probably less scary than
the amount of boxes implies. SPEAKER: I look at this
as almost the sportsbook at the casino, is that right? It's like I'm betting
that the game-- JOSH BROWN: That's fair. SPEAKER: [INAUDIBLE] JOSH BROWN: So
probably, the casino-- only for a portion
of the people that are playing in these markets. A lot of the people that are
playing in these markets, you think about a
company like Cargill. It's an agricultural company. They have a lot of risk. If it's a bumper crop,
prices will drop. If there's terrible weather,
there won't be enough supply. And they've got to use
commodity markets to hedge what their exposure is. You think about a bank doing
business all over the world, like Citigroup, they've
got currency exposure. They have corporate
clients all over the world. So a lot of this stuff
is really companies offloading risk, rather than
trying to take more risk. And then there are
speculators in the market. So maybe the casino aspect of
it is not quite as pronounced. The one thing the media has
done with the term derivatives is they've added a
connotation to it. It's kind of a loaded-- ooh, derivatives. That's code for-- SPEAKER: They took us down. JOSH BROWN: That's code
for, I don't understand it, so it must be bad,
or these somehow represent speculative bets. When in reality, a lot of it is
attempting to minimize risks. SPEAKER: Got it. JOSH BROWN: Feel better? SPEAKER: I do a
little bit, thank you. JOSH BROWN: That's
why I came today. SPEAKER: I did. Thanks for going through
that with me and humoring me. Hopefully that was
eye-opening for some people. I'm going to move
on, now, to you. OK, I hope this isn't too
personal of a question, but what dark past or
VH1 "Behind the Music" story leads to you becoming
the reformed broker? What's reformed? JOSH BROWN: Yeah, so I
did the book about it in-- I wrote it in 2011, which
was about a year post leaving the brokerage industry. But long story short, I come
from this really strange place on the east coast
called Long Island. And in the mid-to-late-1990s,
every aggressive young male got a Series 7 and became a broker. It's just what you did. If you grew up in Nebraska,
you became a football player and you were a Cornhusker. So for whatever reason, what we
did was we became stockbrokers. And it was the golden age
of being a stockbroker, because it was pre-internet. It was pre-people having
access to building their own portfolio. Charles Schwab was out there. Used to call Charles Schwab,
and you would pay like $10 to get 15 stock quotes
read to you over the phone. It's a true story. So people wanted
access to the market, and the only way they
could really get it was via a stockbroker. So there was some glamor
to being a broker, and there were high-end
versions and low-end versions. And I was screwing
around in college. Didn't really have any serious
passion to do anything. And my dad said, you should talk
to my friend from the country club that I play golf with. I think he makes a
million dollars a day. Go get a job with him. My dad, he doesn't
know anything. So I meet the guy. He hires me 15
minutes later, which should have been a red flag. But I am studying
for a Series 7, which is a very low barrier to entry. You need like a 60 IQ
to pass the tests-- also should have
been a red flag. But I passed it. They handed me a
telephone, and they said, call these 500
people today, and I did. And out of the 500 people,
50 people would talk to you. Out of those 50 people, 10
of them would have money and would be interested
in hearing from you again. You would call those people back
a week later after you mailed them a brochure that
had a sailboat on it, and you would sell
them Callaway Golf IPO. Snapple is coming public. This is like '96, '97. So I was a cold caller. Not able to sell stocks, but
introducing a senior broker. My senior broker
had five Porsches, one for each day of the week. And prior to being a
broker, he was a bouncer. I mean, when you're 20 or
21, you're like, all right, this is amazing. Everyone's getting rich. The market keeps going up. And there were all
these IPOs, and we're getting pieces of them and
we're helping people invest. And so I probably was
really, really good at it. So nobody quits something
they're good at, right? If you're good at something,
you keep doing it. And all the nagging thoughts
in the back of my head-- am I qualified to be telling
people how to invest? I don't think I am, but
they're listening to me. So I did it, and then
the financial crisis was a wake-up call,
because everything I had done for people--
and I did my best. Sell them the right stock,
mutual fund, whatever. But then you realize--
you look back and you said, all
I really did was sell people investments when I
should have been advising them. So that was a
great wake-up call. And I met my partner,
Barry Ritholtz, because he was the
guy writing the blogs. He started when you were
posting on GeoCities, back when you would
write for 30 minutes and then code for 30 minutes
to get it published-- '98, '99. But I met Barry, and Barry
was telling the truth. And I said, I could
totally do that. So I started the
blog 10 years ago. Millions and millions
of readers later, I'm still doing it
pretty much every day, although not while I'm out here. But on a daily basis,
I'm putting stuff out. And I'm like the worst nightmare
for traditional Wall Street, because I know where all
the bodies are buried, and I've spent much
of the last 10 years-- almost daily-- talking about the
ways in which traditional stock brokerage, hedge
fund, et cetera-- all the pitfalls, all
the ways that people spend more than they should. People lose money. People are tricked. People are misdirected into
investments that are not in their best interests. And I haven't made a lot of
friends south of 14th street in New York, but all
over the country, people get what I'm saying
and they agree with it. And their enthusiasm for the
truths that I've been telling have kept me at it. And now I've broken into the
mainstream financial media, which is an even worse
nightmare, because all the advertisers are companies
that I'm then saying, no, you don't really need that. But they keep booking
me, so I keep doing it. SPEAKER: Well, I
definitely appreciate the candor you bring to
the "Halftime Report." JOSH BROWN: Thank you. SPEAKER: It's an awesome
show-- everyone on it-- and I love what you do there. Can you tell me about-- you started to talk about
Ritholtz Wealth Management. Who are your customers? How does having a million
Twitter followers and this blog you've worked on for
so long-- how does that fit into your business? Can you tell me anything else,
like assets and management? JOSH BROWN: So we are
the strangest version of our type of work. Our friends call it Registered
Investment Advisory. Everyone's heard the term RIA. Basically, we're non-brokerage. Were fiduciary only. Managing money for high networth
households and small pensions, endowments. And we're very strange in
that most RIAs in the country, they look more like barbershops. It's usually a
sole practitioner, maybe has a few
people-- or she has a few people working for him
or her, but they're local. So they're in the office
complex that's on Main Street, or they might even
have a storefront. And all the customers come
because they play golf at the country club where
all the other wealthy people in town play, and it's very
familial and, you could say, incestuous. And these are relationships that
are based on personality stuff and geography. They're not really
based on-- this person's a really good investor. I think we've broken that mold. Most of our clients are
nowhere near where we're based. We're based in New York. I think our biggest client
base is on the west coast-- up from Portland, all the
way down to San Diego. And then we've got big
pockets of clientele in places like
Austin and Chicago. And a lot of clients
we've not met, or we meet them six months
into the relationship. We're already
managing their money. They tend to be
more progressive-- a lot of people that
work in technology. And what they all
have in common is that they're not hung up on
having a local office in town. They just want the best
people that there are. And if that's a telephone or
a relationship on the web, they're OK with that. We bridge the gap
by doing content-- so Twitter, blogs. We have 5 of the top 20
independent financial advisor blogs in the country. 24/7 we're putting
out our thoughts on markets, economics, the nexus
of politics with investing. And our clients know
where they can find what our thoughts are at all times. So we've built fans, and
fans have become clients, and that is the best way to
build a business, I think, in the 21st century. And I think as people
here are aware of-- and maybe in finance, it's
dawning on the industry-- the scarce resource
is not capital. You just showed me a slide. There's more capital out in
the world than ever before. The scarce resource
is attention. How do you get attention? Well, I'm not pretty enough
to get a lot on Instagram. But on the web and
on Twitter, you can get attention
by being helpful and by saying things
that are true. Maybe even things
that are uncomfortable but that have to be confronted. When you do a daily
investment blog and you're giving people
the data that they need to make smart
decisions, rather than emotional decisions, you can
get a lot of positive attention for putting that stuff out
there, not charging for it, not keeping it
gated, and not acting like you invented the truth. You're just presenting people-- here's the data. Here's the evidence for why
these types of investors do better than those
types of investors. So if it's an attention economy
and you're out there earning the right type of attention,
you can build an amazing brand, and you can build
a fan base that become clients of your service. And we started the firm
less than five years ago. We were just under $90 million,
four people managing it. We're 24 people less
than five years later. We just broke $800
million under management, and we've opened
offices in Chicago, in Newport Beach, California,
Portland, Long Island, Florida. And we're talking to advisors
all over the country that want to be part of this movement
of evidence-based investing, putting the customer first. And all of this is happening
as a result of digital. We don't take out newspaper ads. All of this is because
of social media. SPEAKER: I would think
that on certain days-- when maybe something big
happens in the market, for better or worse-- that it
saves a couple of phone calls from happening if
people can just go onto these other channels
and see exactly what you think. JOSH BROWN: That's
such a great point, and this was not intentional. We figured this
out along the way. Think about-- if you
have a wealth manager and it's a good person,
someone you trust. And then on a Tuesday morning,
think about an environment-- let's say, 2011. You guys got to pay the bills. SPEAKER: I thought I
had this not happen. JOSH BROWN: Think about
an environment like 2011, where the standard deviation
for the S&P is off the charts-- it's like 40-- and the average annual
standard deviation is 20. And 500 point swings
in the Dow are happening multiple times a day. And news coming out of Europe
is rattling US stock markets. Is Greece going to
default on Friday? Stay tuned. I mean, that was
what was going on. And people with money at stake--
people with investment capital at risk-- do I have to pay attention
to German bund auctions? Is this where we are now? It's not that we have the
answers to that stuff. I think we do a really
good job with context. If your wealth manager is
not in the office that day and you just want to-- you're reading and the app
is buzzing on your phone and you're like, this
sounds really scary. I hope my gal at
x, y, z firm, or I hope my guy at whatever
firm is reading the same thing
I'm reading, and I hope they have an answer to it. Our clients don't have to wonder
if we're on top of this stuff and we're paying attention,
because we are constantly linking to sources
of information, telling people what not
to pay attention to, pointing out people that
are being hysterical and trying to scare
the public for clicks. Not that we're the
police, but we're like-- don't read this guy. He's a nut. He's been doing this
every year for 20 years. And that kind of thing-- not just for fans, but
for actual clients-- I think that's the
future of the industry, and I really think
that financial advice is a communications
business as much as it is a financial business, right? Because you could give
somebody the best portfolio on Earth, but if they
can't stick with it, you did nothing for them. And so, so much of what
we're doing with content is designed around, let's help
people not do the wrong thing at the wrong time. SPEAKER: Awesome. I have to ask you about CNBC. Let's go there. And I have a photo of
the "Halftime Report." But the thing is is that I had-- JOSH BROWN: I look
jacked in that one. SPEAKER: You do. JOSH BROWN: I don't always-- maybe I'm flexing. The guy on the other side of me
played for the Chicago Bears, so he's definitely
stronger than me. I'm stronger than Jim,
though, I feel like. But Jim was on a
submarine for eight years during the Cold War,
some weird thing. SPEAKER: Oh, for real? JOSH BROWN: All good
people on the network. SPEAKER: I had some other
questions prepared, but I mean, I think the thing I
have to ask you about-- and here's my next slide-- is Larry. I mean, I guess you were
coworkers with this guy until just a few days ago. Larry Kudlow is going to be-- JOSH BROWN: I am next in line,
by the way, when he gets fired. SPEAKER: I thought it
was Cramer and then you. JOSH BROWN: Cramer and then me. SPEAKER: OK. So Larry Kudlow-- JOSH BROWN: By the way, my
partner, Barry Ritholtz, was on "The Larry
Kudlow Show" every week for three years heading
into the crisis. And Barry was the guy
saying, this housing thing is totally unsustainable. All you have to look at is
average incomes are doing this, and home prices are doing that. So one of two things can happen. Either average incomes
all of a sudden double nationally to justify
what home prices have done, or some radical thing happens
because an alien ship lands and hands everyone
the money that they'll need to make their payments. And neither of those
two things happened, so the third thing happened. But Barry was a frequent
guest on Larry's show, and I've known Larry for-- I think he's a fantastic guy. We are not on the same side
of the political spectrum. I think he's a good guy. And I also think he's probably
a better voice than some of the other voices that might
get into the White House, so I'm really glad
that he got the nod, and I hope he does good
work on behalf of America. So that's my take on Larry. SPEAKER: Hope so, too. Yeah. JOSH BROWN: Very nice man,
and he loves the country. And even if you don't
like his economic policies and you don't agree with
tax or tariffs or whatever, he's a good person,
and I think he wants what's best for everyone, so. SPEAKER: You're probably the
dozenth person that's said that on television about him, too. I mean, he seems liked by all. Everyone says, I don't agree-- not everyone. But everyone who
doesn't agree with him says, I have the utmost
respect for Larry. JOSH BROWN: Well, listen,
he's a free trade, cut tax-- I mean, not everyone
agrees with that. But no one that has
met him personally-- he doesn't have enemies. He has people that disagree
with him on policy. There are legit
guys out there that could be in that spot
that have enemies because they're bad people. So it's good that it's going
to be Larry rather than someone dangerous, I guess,
is how I would say it. Now, I disagree with a
lot of the economic stuff, but everyone disagrees
with everyone, so. SPEAKER: Yeah, there's
not a lot of screaming at each other on CNBC. Sometimes, but not too much. It's nice to go to a
channel and there's a more rational discourse. I have a few other-- I'll just throw it back
to this slide, here. Before we move to the Q&A
here in just a little bit, I have a couple
other questions here. So who is the life of the
party off camera at CNBC? I imagine there's a green room. Everyone's vaping--
someone's got to be. David Faber, who is it? JOSH BROWN: Is that what you-- SPEAKER: Yeah. JOSH BROWN: Vaping what? SPEAKER: Tobacco. It's New York, right? JOSH BROWN: Much
more molly than-- no. So Jon Najarian and
his brother Pete are two of my favorite
people that I've ever met. Both of them were
in the NFL briefly. And then they transitioned to
the options and futures markets in Chicago, which is where
they learned finance. Did very well for themselves. Now they're options specialists. But exactly what they act like
on camera, they are off camera. Two of just the nicest,
best people I've ever met. And they're a generation
or two older than me, and I've learned
so much about how to be an entrepreneur, how to do
media and be true to yourself. And these guys come
on in ponytails. They look like wrestlers. But they are genuine, and
that really stands out. And I think that's
why fans of CNBC really like them and appreciate
what they bring to the table. And similar to
Larry, they're people that-- everyone that's
met them likes them. So when I look at
them and I say, all right, I'm doing media. What is the right
way to do it so that I can be taken seriously
and be myself and not put on airs or act
like I know everything or become pompous because
I'm on financial TV? Those guys are really
great models for that. SPEAKER: Nice. I think we're going to move to
the Q&A portion of the program, if that's all right. This is fun, Josh. JOSH BROWN: OK, what
should I ask you? SPEAKER: Well, we're going
to open it to the audience. If you'd like to
ask me something, but I have to throw
this to you if you're going to ask a question. JOSH BROWN: What is that? SPEAKER: This is a microphone
inside of a foam Google square. And whoever catches it-- if
you want to ask a question, you just hold the microphone. And then when you
ask your question, you throw it to the next person. Here it comes. OK, question for-- [LAUGHTER] AUDIENCE: So we talk into this? SPEAKER: Talk into it. AUDIENCE: How are you doing? SPEAKER: It's crazy, I know. JOSH BROWN: Yes, sir,
you with the box. [LAUGHTER] AUDIENCE: OK. Kind of an odd question. So I actually do a good
amount of investing. I go out and raise capital
and match deals and dollars. I spent a lot of
time in real estate and look at the market a lot. And my question is, I
started a REIT in 2010 when it was obvious that
the opportunity was there. Today, it feels like we're
much closer to the ceiling than we are the floor,
which it kind of feels like in the market as well. And my question-- which I know
is a bit of a vague question-- is, what do you do when
everything in your gut tells you that the risk
isn't there with the reward? Where do you go? How do you identify what
the next thing to do is? Or do you just sit on capital,
waiting for the next 2010, maybe missing some
more of the upside? But what I found was by
having capital at that time, I was able to make
a lot of money. While everybody was running
out of the building, we were running in. JOSH BROWN: Yeah, but you had to
have been liquid at that time. AUDIENCE: Correct. JOSH BROWN: You couldn't
have been fully invested and then taken advantage
of the opportunity. AUDIENCE: Understood,
and it's not about, necessarily-- it's not really
about knowing the exact ceiling and the exact floor. We happened to do it in 2010,
on the real estate market. But what do you do
when you start feeling like you're almost there? JOSH BROWN: So real estate is
very different than the stock market question, right? Because if you feel that
way with real estate and you want to do something
to prepare for the down cycle, you need months
and years in order to start liquidating properties. You can't just sell. Stock market is different. If you want to be tactful
in the stock market-- a portion of our
client portfolios are. So our investment beliefs-- just to give you a
little bit of background, and then I'll answer your
question specifically. Our investment beliefs
are that less is more. There are simple
answers to complexities. Not every complexity needs to
be met with more complexity. Cost matters. After tax returns matter
a lot more than what particular investment you buy. So we've got this
overarching philosophy of-- let's not go in there and
twiddle the knobs every day. Let's let markets
do what they do, and let's build durable,
rules-based portfolios where the rules
are set in advance and we're not using our
gut instincts for things like market timing. Now, that works for, let's say,
80% of the client's assets, and then maybe 10% or 20%
we'll manage more tactically. That will also be
rules-based, but that's going to be a function of trend. And again, we don't have to
do this with real estate. We're fortunate. We can do this with
zero-cost treasury bond ETFs and near-zero cost equity ETFs. And we can say, in an uptrend
we want to be fully invested. In a choppy market, we want
to do as little trading as possible so as
not to get whipsawed. And in a defined downtrend--
and not a downtrend where I'm like, hey, that
looks like a downtrend-- but mathematically defined by
the slope of what the index is doing on a monthly,
moving average basis, we want to have less exposure. Even if that means there
is this cataclysmic event and then the market
rebounds and we're forced to buy back and hire
as a new uptrend, that's fine. We look at it as insurance. It's not an alpha strategy,
what we're doing tactically. But by marrying strategic,
long-term investing with a tactical piece-- I talked all about
investor behavior. It's not lip service. It's literally--
what we do is manage the psychology of investors. So if what we need to do is
limit how much equity exposure they have in a bear market,
it's OK if Jack Bogle disagrees. I have to face investors. He doesn't. So it's nice to have a
grandiloquent, overarching philosophy of never do anything. Just buy and close your eyes. But I'm in the
business 20 years. I know that's not real. So I think we've married the
two approaches that we just saw. We just saw the Nobel
Prize for economics awarded to-- for the first time ever-- three economists at once. I forget the third guy, but
importantly, Bob Shiller-- he wins. His theory's about bubbles
and cycles driven by emotion. He wins at the same time
as Gene Fama, who says, there are no bubbles,
and markets are perfectly efficient at all times. How could they both win
and share the same prize? Our portfolio
resembles that win. So we say, in the strategic
portion of your portfolio, the market's going to be
right more than it's wrong. The market is
smarter than we are. Just saying the market
is mostly efficient is not the same as saying
the market's always right. But we want to do as
little as possible because, Gene Fama's math backs
up the capital asset pricing model and how the markets work. But then part of us realized
that there are bubbles and there are cycles and
there are emotional moments, and the pendulum
does swing too far. So that's why we marry
those two approaches. So seeing those two gentlemen
step up and win the Nobel Prize together perfectly aligns
with how we manage money. It's perfectly intuitive to us. So the answer to your question
is yes, you should sell. AUDIENCE: Perfect. I'm out. JOSH BROWN: The answer to your
question's, how do you know? You do not know. You will not know. But you have to
be willing to say, if I feel this way and
I'm not rules-based; and it's real
estate, not stocks-- there's no moving
average for a building-- you have to be
willing to say, I'm willing to forgo some upside,
even if it takes three years. Because I think I would
have more regret-- and remember, all of this
is regret minimisation. What would you regret more,
missing the next 20% up and cap rates keep exploding,
or seeing a 20% downdraft and having no capital? It sounds like you
already know your answer. So you should start
to sell right now. AUDIENCE: Perfect. JOSH BROWN: Like, leave
the room and just listen. AUDIENCE: I'm out. I'm leaving. JOSH BROWN: All
right, throw that box. SPEAKER: All right, who's next? Throw the box. Let's toss it back. All right. AUDIENCE: So you were
talking about the housing market earlier. And so we're kind of seeing
now the market is getting just super high-- housing,
adding the stock market, and with the recent tax cut. And I know that
the administration is pushing to roll back a
lot of the regulation that was put in place,
like Dodd-Frank and all of that kind of stuff. JOSH BROWN: Already
in progress, yeah. AUDIENCE: Right. How do you feel? What's your take on that? Do you think that the banks have
kind of learned their lesson? Or do you think that greed
will take the day again? JOSH BROWN: We'll blow up again,
but it doesn't necessarily have to be centered
around the banks. We've had plenty
of financial crises where the banks
were fringe actors. They weren't necessarily
in the center of it. If you would've told me-- so September '08, Lehman
Brothers becomes the largest bankruptcy in US history. It's like $200 billion or
whatever the number is, dwarfing anything that
even comes close to that. It makes Enron look
like a walk in the park. And then a month later,
two months later, December, the Madoff
stuff starts to come out. If you had told me in
that moment, right-- Bayer, AIG, Washington
Mutual, Wachovia, Merrill gets rescued, Lehman doesn't,
Madoff, $50 billion Ponzi-- If you had told me
that within 10 years we would be rolling
back financial regs, I would say, no way. What could possibly
be going on that we would be anti-regulatory,
like voting in people that want less regulation, right? Well, I'll tell you
what could go on. How about a nine-year nonstop
rally in stock prices? How about the too big
to fail regulations that perversely cause
the four biggest banks to get even bigger, right? How about free money all over
the world as central banks essentially monetize debt? In Japan, they're not
just buying bonds, they're buying stock ETFs. Japanese central
bank is buying REITs. Like, how about that? Maybe that could cause
the kind of environment where we're saying, we
need less regulation, because everything's fine. So the good thing about
Dodd-Frank and capital controls and Basel III-- which is like
the global agreement on how much leverage
banks should take-- the good thing about
all that, perversely, is going to become a bad thing. The good thing is that banks
have never had better balance sheets, never. They have never been
in better shape. You look at leverage ratios,
you look at their ability to do pretty much anything they
want and return capital to shareholders-- big
dividends, big buybacks-- never been better. So, of course, now
is a great time to loosen up the regulation. But we have not had a crisis
in 10 years, so that's why-- that's the new mode. The other thing
that's happened is I think the Republicans
have done a really good job at convincing blue collar
workers that somehow removing restrictions on payday
lenders is good for them. I don't know, it's very odd. But I think what
they've been able to say to people is freedom is
being infringed upon-- the freedom to drill an oil well
in your backyard, the freedom to strip mine Yellowstone
Park, our freedoms are over. And it worked. And not every regulation
is a good regulation. And Dodd-Frank is-- we
call it Frankenstein. It's not [? pretty. ?]
It's not perfect. But the fact that they've
been able to message the American public, that by
allowing those regulations it's hurting them, it resonated. So I'll see you in
the next crisis. [LAUGHTER] But the thing is we
would have one anyway. I can wheel off 25 crises
that have happened. It doesn't matter, high
regulation, low regulation, because risk finds a way
and everyone's memory is wiped clean
relatively quickly. So I don't think we can
regulate financial crises out of existence. SPEAKER: OK, next question. You just handed the box,
you didn't throw it. But that's OK. AUDIENCE: OK, that's fine. SPEAKER: Let's move along. AUDIENCE: I'll toss it later. Yeah, I'm interested
in your take on the companies that don't use
advice or news to make bets. They just use mathematics,
like Renaissance. And a lot of the people
who run those companies, they come from the same
places a lot of us come from-- academic, mathematics,
and computer science. And as far as I
understand, they're the most successful
traders on Wall Street. JOSH BROWN: Yes, at the
current moment, absolutely. AUDIENCE: And so,
but it's interesting, because they don't care
whether Steve Jobs dies. They just trade
according to formulas. And I'm just curious about
what you think about that. JOSH BROWN: Right,
so if you walked up to an average person,
a savvy person, and you said, in 2011
I know for a fact that Steve Jobs is going
to die in 30 days-- buy, sell, or hold Apple? What percentage of people
would say buy Apple? AUDIENCE: A few. JOSH BROWN: 10% maybe. Everyone would say,
oh no, the magic man. And I would've said that,
because I don't know anything. Apple was worth $300
billion when Jobs died. It's worth a trillion
dollars now almost. So it's tripled under
the chief operating officer as the new CEO. He's created more value
than Steve Jobs did. It makes no sense,
completely counterintuitive. So an algorithm doesn't
care who's the CEO. Now, that's not the same
as saying that algorithms won't react to news though. So many of the trading
algorithms are-- what they're really doing is
scanning headlines and they're looking for
things like bomb, White House. And so there was a hacking
attack on the "60 Minutes" Twitter account and said a bomb
went off at the White House, and the stock market
lost like 3% in minutes. Now, that's not humans reacting. It happened too fast. So those are trading
algorithms that have specific keywords
in their instructions and they were fooled by
a hacked Twitter account. So I don't know if
machine-trading hedge funds are quite as invincible as
they might look at the moment. We're talking about
like Renaissance, which is Jim Simons. And it's an amazing story
and their returns are insane. No one even comes close. And they don't talk
to Wall Street. They don't talk to analysts. They don't attend conferences. They definitely don't
watch me on CNBC. They're PhDs running
around and codebreakers and nontraditional
financial people trying to reverse-engineer
what drives markets and figure out micro-profits
on a minute-by-minute basis. The thing with that is
that it's not novel. One of the best books ever
written about investing is "The Money Game." It was written in the 1960s. And there's a chapter
with a computer, that all the Wall Street
people are in line and they want to put
some information into it. Vonnegut wrote "Player
Piano" before the-- It's not a new thing. There's just a
new version of it. And the reason why they
won't be invincible is because anything
that's got success, it will attract competition. And so now what you
actually have going on is a quant arms race
amongst hedge funds. Steve Cohen is hiring quants. Paul Tudor Jones
is hiring quants. All of the big hedge funds
are loading up their firms with data scientists,
data analytics people, and they will nullify
each other's edges. Like any other business,
competition eventually arrives. So the thing with Renaissance
which has made them remarkable is, they didn't
invent one algorithm and then live with it. They constantly are
coming up with new ways. That's the only answer. It's a tough, arduous process. Most people won't
be able to do it. And by the way, if you
wanted to give them money, there's no 800 number. They don't want your money. And so they're an
amazing success story. There aren't that
many other companies that will come along and
be able to replicate that. SPEAKER: Speaking of the
algorithms real quick, in case there's another question. But I notice a lot with-- JOSH BROWN: Oh, wait. We're all waiting, by
the way, on Wall Street for the Google hedge fund that's
rumored every six months or so. And you guys probably
have more data about consumer activity,
business queries. So once the Google
hedge fund launches, maybe that'll do even
better than Rentech. We'll see. SPEAKER: No comment. JOSH BROWN: No, I know, I know. SPEAKER: [LAUGHS] What I
was going to ask about-- when you see after
hours, maybe an earnings report for a company
happens and it does seem like there
may be certain keywords in their report and you
see a tick down big time and then it recovers right away,
is that basically keywords, algos, dropping it and then
real people going in like, don't worry about it? Bye, bye. JOSH BROWN: And just
saying it's an algo, that doesn't imply it's a big firm
with a really sophisticated-- there are platforms
now like Quantopian, and they are trying to
democratize the use of data amongst regular investors. So there are people that were--
they call themselves prop traders, they used to call
themselves day traders, before that they were
the SOES bandits-- but there have always
been independent traders trying to build their own edge. And a lot of them have
adopted software that allows them to write programs. It doesn't mean
they're sophisticated. It doesn't mean they're smart
programs or they've done well. But, yeah, there are
absolutely moments where you look at a tick down
or up in a security and you know it's a machine. You know that's not a person
that's gone through even half of a cycle of a thought. So it happens every day. So long-term investors
have it easy. They can ignore all of that. SPEAKER: Any other questions? Toss that box, boom. We'll get you next. AUDIENCE: Hi, Mr. Brown. What technology do you see,
or what emerging firms do you see if you have names, that
you think may come and disrupt these financial markets,
especially on the retail side? Like for us, do we by
ourselves, invest-- JOSH BROWN: So for
do-it-yourself traders? So I think what
software you use is going to be a function of
how much time and attention you want to put into
doing your own trading. So people ask me about
Robinhood everywhere I go. It's the app that lets
you trade stocks for free. And they've clearly built a big
audience amongst millennials and they've opened
tons of accounts. Like, no one's making any
money from that really, which in this part of
the cycle, that's OK. The investors, the people that
back things like that, they want to see user growth. They don't really care
what a user's worth yet. They figure if you-- remember
we taught that, the attention economy? Once we have scale and
attention from a lot of people, we'll figure out a way
to make money from that. So maybe Robinhood feels pretty
revolutionary in that they're allowing young people
to open accounts, buy fractional shares. So a share of-- how much is
a share of Google right now? $1,200-ish? I own it. I don't look at every tick. So let's say it's $1,200. Can somebody doing their
first stock transaction buy 100 shares at $1,200? Probably not. So the fact that they
can buy four shares by entering in a dollar amount
rather than entering in a share amount-- it sounds weird. That sounds so simple. No one else did it
until they came along. They said, why can
you buy mutual funds in fractional shares, but
not individual stocks? So that feels like
somewhat revolutionary. I don't know how
profitable it is, but there's stuff like that
for the retail investor. And then some of the
algorithmic things. Every week there's a new one. I don't know that any of them
have built a lot of traction, because there aren't that many
do-it-yourself investors who want to spend hours of
their day building trading algorithms for themself. I think it's a very small
slice of the overall investor universe. So none really come
to mind specifically that have captured a big
amount of the market, because the market is a
narrow market to begin with. SPEAKER: Nice. I think we had one final
question up here in the front. We got time for one more. Boom, OK. AUDIENCE: All right,
can you hear me? SPEAKER: Yep. AUDIENCE: All right, big
fan of "Halftime Report." JOSH BROWN: Thank
you, I appreciate it. AUDIENCE: No sweat. So just combining the
financial question with the media question-- it's a highly-opinionated show. Do they give you any specific
instructions or cadence? Or are you waiting
for someone to tap you on the shoulder that said, hey,
that comment was out of line? Or any of the suits
at NBC kind of give you any frame of reference
in terms of what is off limits? JOSH BROWN: Well, CNBC has
a really big responsibility, because if people say
something on their air and it moves the price of
an investment instrument, they want that thing that
was said to have been true. And then each
individual person that comes on the air, if they're
an investor and not just a TV personality, has their
own compliance regulations to contend with. So I can't speak
for everyone else, but I can tell you that I have
to disclose all of my holdings. And during the show they pop
it up, Josh owns these things. What they don't want people
to do is say one thing but do the other thing. So they don't want people to
come on and say, I love Target, and then be shorting the
stock after it pops up, for obvious reasons. And I don't think there's
a lot of that going on. It would be so counter
to your interests if you were doing media
on a regular basis to pull off one trade and try to
make a couple of percent on it. So I don't think a lot
of that's going on. The other thing is we can't
talk about stocks that are below a certain market cap. So they don't want us going on
talking about a stock trading on the pink sheets
that could double based on a mention on TV. So if you watch a show, most
of what we're talking about are S&P 100 companies. We really can't move
them with our remarks, unless there's news breaking. But that wouldn't be coming
from panelists like myself, that would be coming
from the reporters. Separating who's a reporter
and who's a commenter is important for the audience. Just like when you watch
political news or sports news, there are some people who are
stating a fact as a reporter, and then there are people
who are on the fact. And I think keeping those two
things separate in your mind is probably the
best thing you can do when you encounter
any kind of news program, financial or otherwise. SPEAKER: That was a
great question to end on. Thank you. I think we're out of time. Thank you very much to Josh. [APPLAUSE] JOSH BROWN: Thank you
so much, everyone. I appreciate it. SPEAKER: I appreciate
you coming.
