Josh Brown is not your average Wall Street pundit.
Brown is chief executive of Ritholtz Wealth Management, a financial advisory firm in New York, and his blog, the Reformed Broker, is popular reading for those interested in the financial markets. The blog and his Twitter account are often witty, sarcastic, irreverent and peppered with pop culture.
In recently discussing the correlation between stock and bond prices, for instance, Brown wrote that “correlations are like Kristen Stewart — moody and unfaithful,” invoking the “Twilight” actress and her tabloid-fodder love life.
Brown, 40, also has a large social-media presence — his @ReformedBroker has more than 1 million followers on Twitter — and he’s on CNBC’s “Halftime Report.”
He’s a big proponent of setting up a diversified, long-term portfolio for investors that helps them avoid being rattled by the markets’ daily sudden moves. The Times asked Brown about the stock market’s wild ride lately. Here’s an excerpt:
What’s your overall reaction to the market’s gyrations after it set record highs Jan. 26?
It’s normal and it’s not normal. It’s normal in that pretty much 5% and 10% corrections are an annual event if you look back through history. What’s abnormal was the speed with which this one happened. According to one data source I came across, it’s the first time in history where we went from making a new high to being down 10% inside of nine days.
2017 was the aberration. We spent the entire year within 3% of an all-time high. That is not what any investor should expect. Even in bull markets that’s beyond rare.
How do you account for that?
What’s different this time is market structure. I think almost every trade that goes off is programmatic these days.
What does that mean?
In the 1960s and ’70s, the stock market was owned by individuals, meaning not just in mutual funds. They literally owned stocks. Your parents owned stocks, my parents owned stocks. People own ETFs [exchange-traded funds] now, they own baskets of stocks in an index or they own funds in a 401(k). Now there’s a different relationship people have with their holdings, which you could make the case makes them even more disposable in a crisis.
People own shares of SPY, which is the S&P 500 ETF, for example. They have no personal connection to any of the stocks that are in it. You do see a little of that with stocks like Apple or Facebook. But those are exceptions. The rule is that people do not feel any sort of personal connection to the underlying equities.
When there’s short-term volatility and they feel the need to do something about it, to alleviate the feeling of losing money, they don’t think twice because it’s not a stock that they know, it’s not a company they care about. It’s a ticker symbol of an ETF and they just sell it. That’s one aspect of why you can have a 10% correction in nine days from an all-time high with no fundamental change in the economy whatsoever.
Then this isn’t the start of a bear market?
We’re not in a downtrend. We had a correction, but we’re still in an uptrend.
How should investors view what’s happened lately?
If somebody is investing because they want to use the money a year from now, they’re making a mistake because in any given year you’re going to have 10% drawdowns. But if you have a 10-year time horizon, you have an 88% likelihood that the stock market is higher when those 10 years are up. That’s starting in any month of any year going back to 1926.
If you have a 20-year time horizon, it’s 100%. There are zero 20-year periods where the stock market is down from the month and year you started. If you understand that and then you’re talking to somebody who’s 35, you ask them, are you using this money in the next 10 years or 20 years?
When it comes to a 401(k), someone who’s 30 is not using the money for 35 years. Historically there is a 0% probability that their portfolio will be worth less. And it’s even better than that. The way in which they invest, if you’re young, is periodically adding to the portfolio.
You mean through additional contributions?
Right. So, what should a 35-year-old want? They should want a 10% correction to happen tomorrow on top of on the one we just had. They’re putting money in, they’re accumulators. Why would you want to buy at all-time highs? You’re not using the money.
If you understand that, then when the market goes down 10% you should not be calling me because you’re worried, you should be calling me to find out how much you can wire into your account right this minute.
Our job as advisors is to train people to think that way. The media’s job — no offense — is to train people to think that a falling market is negative. Maybe it’s negative if you’re 80 and you have 100% stock exposure, yeah it sucks. You might not recoup it between now and when you die. But wealthy 80-year-olds are probably not even investing for themselves, they’re probably investing money for the next generation. So even they should be cheering for the market to fall.
You urge investors to set up a plan, stick to it and tune out the daily noise, right?
Yes. We do what’s called evidence-based investing. You need rules set up in advance, and the rules should be based on what you know to be true about what works over long periods of time.
The probability is stocks will increase over a long period of time. The probability is that stocks will do better than bonds because bonds are less volatile and less prone to fear and greed influencing the price. All these things are pieces of evidence. You’re constructing portfolios that are based on things that are not true every day but are true over long periods of time.
What’s the difference between a millennial investor today and that same-age person 30 years ago?
We know there are differences. If you’re 35 years old right now, think about what your impressions of markets must be from growing up. When you were in high school you saw your parents get blown up by the dot-com bubble. Your first awareness of capital markets was a 50% selloff in the stock market and your parents losing all their money in stocks.
Then you go to college and graduate. It’s 2008, the stock market gets cut in half again just seven years after the last time. Your first two formative experiences with the stock market were the dot-com bust followed by the great financial crisis. Now you start making money. Is the first thing you want to do with your money to put it into the stock market?
Now contrast that with the baby boomers’ first experience. In the late ’50s it’s one of the greatest bull markets in history, then the go-go 1960s. That experience was very different.
But what about the millennials watching the nine-year-bull market in stocks since 2008?
If you weren’t in it, it’s not tangible. We know millennials missed it. A lot of them had student debt that prevented them from putting disposable cash in a brokerage account. A lot of them were shell-shocked by what they watched their parents go through. A lot of them were hurt because of the job market” after the 2008-09 recession.
When stock prices are tumbling, bond prices often rise as investors seek an alternative. But that didn’t happen last week. Why not?
The reason stock prices went down was because bond prices were going down. It’s called a growth scare. All of a sudden payroll data, wage data, started coming in hotter than expected. The reaction among investors was that they don’t want to be in fixed-income securities if inflation is coming. So people sold bonds. And the selling of bonds triggered the selling of stocks because inflation long term is not great for the multiples of stock prices.
In this case, bonds did not act as a diversifier in the first week of the correction because bonds were the epicenter of the reason for the correction. However, it’s very rare for bonds and stocks to continue to fall together. The last calendar year where an investor lost money in both asset classes was 1969, or 50 years ago.
Why would bonds still be attractive?
Bonds offer a competition to stocks for new money. If you look at the hardest-hit sections of the stock market this year, they’re the high-dividend sectors. Utilities and REITS [real estate investment trusts] are both down 15% year to date. Why is that? Because people are saying that in a utility I can earn 3.75% but I have equity volatility. With a Treasury bond, I can earn almost 3% but have very little volatility. Treasuries offer a competition for the other asset classes.
Do you have a forecast for what the stock market does next?
Those who are emphatic about what the market is going to do short term are interesting for people to listen to, because human beings crave certainty and they’re offering certainty. It’s false, but it sounds great.
I am every bit as emphatic as those people pounding their fists on the table with predictions, except the thing I’m emphatic about is that no one knows what will happen.