Enrich Your Future 35: Market Gurus Are Just Expensive Entertainers

Andrew Stotz 00:01
Andrew, fellow risk takers, this is your worst podcast host, Andrew Stotz from a Stotz Academy, continuing my discussion with Larry swedroe, who for three decades was the head of Research at Buckingham wealth partners. You can learn more about his story in Episode 645, Larry stands out because he bridges both the academic research world and practical investing. And today we're diving into a chapter from his recent book, enrich your future, the keys to successful investing. And specifically we're talking about chapter 35 man money Larry, take it

Larry Swedroe 00:32
away. Yeah, you gotta ring the bell there for this one. I wish I used to have a bell. I don't

Andrew Stotz 00:40
know if there used to be a bell on my little thing here, but I'm ringing stuff right now, but I don't think it's coming up. We'll

Larry Swedroe 00:46
see anyway. So Jim Cramer, for those who don't know him, he was an ex hedge fund manager. He worked at Goldman Sachs, and clearly he's become one of the most recognizable faces in the world of, you know, finance, he actually rang the bell, I think it was today, on the 20th anniversary. So good timing of his show on CNBC. So he's clearly been a success in terms of entertaining. That's

Andrew Stotz 01:19
20 years would be, I would say that's pretty, you know, amazing to be that. Yeah, march

Larry Swedroe 01:23
2025, march 25 205, was the introduction of his show, and the audience numbers went up 140% in the next quarter. So clearly, has been a success as as an entertainer, the question that we really want to know the answer to is, is advice have any value, or is it just entertainment, and you're best off ignoring it, unless you like people banging bells and blowing whistles and, you know, and clowns And you know, it's my opinion, it's sad, a very smart guy has turned himself into a caricature in order to get good ratings. And I backing that statement up with the academic research that actually looked into what happens if people followed his advice. So the first study that I cite in the book is a 2018 study on the performance of his charitable trust and what those recommendations did and he had established that trust. So from its inception, the portfolio through the period they looked at, which was through December 31 2017 the fund returned a total of 97% during that same period, an investment in the s and p would have returned 204% and that, of course, doesn't even take into account Any trading costs or taxes from all of the the trading. There was another study that was done that was published in the journal investing in 2012 it looked at his buy and sell recommendations over the period July 28 oh five through December 31 2008 now, of course, this was a period of not very good returns, right? But what the researchers found was three key conclusions, one, investors were clearly paying attentions as the stocks that he recommended had abnormal returns of almost 2% on the day, uh, following his recommendations. So his show appears at night. People come in in the morning, and the stock jumps. Now, of course, that doesn't mean you made any money. Let's say the stock was at 10, and the first price, because you get all these people trying to buy is 11. Well, the stock went up 10% but you didn't make anything right? Nobody got that. That's called market impact cost, right? The returns for the recommended stocks were both positive and significant for the day of the show and the 30 days actually prior to the show. So it seems he was actually recommending stocks with short term momentum, which there is evidence of, right? However, the returns were negative and significant in the two to three days through day 30, following his recommendations. So now you have to ask who actually made money. Well, the naive retail money comes in, pushes the price up and pays their market impact cost. The sophisticated, high frequency hedge funds know the Kramer knows nothing really. The investors are naive. They drive the stock up. They come. In and go short it, and the price goes right back down. And there's a third study that basically done in 2005 is the market mad evidence for Mad Money. And it found exactly the same thing, that the prices rise overnight and very quickly they get corrected, meaning that Kramer added actually negative value for the people who try, you know, to implement, because they drove the price up when they're in their, you know, when they're buying frenzy. And then the smart money comes in. Knowing Kramer knows nothing of any real value, price reverts back to basically where it was before he made the recommendation. So that's showing really two things, investors are naive. Kramer is an entertainer, not a financial advisor who adds value. And the third thing, and maybe the most important lesson for investors, is the market is really highly efficient, and that it's very hard to beat it, because clearly, Kramer is a very smart guy. I just think his talents are wasted. Except I'm sure he's making a lot of money being paid for an entertainer, but not really for his stock skills. The last thing I'll mention in the chapter is there's a major study on this whole issue of gurus. It was done by the CXO advisory group. They covered 68 gurus, including Kramer. They looked at forecasts over the seven year period from oh five through 1260, 584 forecasts. Basically they found there are no real experts. The distribution of their accuracy looks virtually identical to a bell curve, but slightly to the left, meaning, on average, they do worse. The average accuracy was 47% which happened to be the same score as Kramer's. So of all the experts who are non expert, Kramer was average at being a non expert.

Andrew Stotz 07:15
You know, there's so much to unpack in that one too. Like, you know, one of the things that's really important about, you know, how to construct these types of studies. Because, as you said, if you don't take into consideration, for instance, the fact that, okay, let's just say that Kramer is a great entertainer. He gets people really excited at night. And all the buy orders compiling up before market open. And now you've got, you know, a huge amount of buy orders for this thing, instantly the stock is going to gap up. And when it gaps up, the gain is gone, yep. Now

Larry Swedroe 07:51
and then it reverts back, yeah,

Andrew Stotz 07:54
and then it comes right back to where it was. Or worse, there's

Larry Swedroe 07:59
another study, a famous one. You know, Value Line used to boast that they had these great returns, and then a group of academics took a look at it, and here's what they found. Value Line published their results Friday night, the letters went out. The investors got the information over the weekend, and the prices jump Monday morning. And guess what happens?

Andrew Stotz 08:26
You can't buy that. So the way that we can't buy it,

Larry Swedroe 08:29
if the stock closed at 10, and they're recommending at 10, you can't buy it there, but they calculated their gain from the closing price of 10. But it doesn't work that way, and maybe it persists for a few days, maybe even a bit longer, but eventually it mean reverse. So what

Andrew Stotz 08:47
we've I've done this type of testing in my own company, and the way we've solved that is a couple of ways. One way is to take five day average price after the recommendation, another way is to just take the second day or the third day and say it's going to take now, it's going to take some time for people to get into this stock. But when you look at institutional investors, there's very rarely are they going to be able to move a sizable amount of money into an idea in, you know, two or three days. So they may need two weeks or a month to go through their investment committee, if it's, if it's an active fund, and they are looking for ideas and it's a new idea for them, you know, it isn't going to happen like that. And so that's the reason why, you know, it's important to understand, you know, how people are actually measuring these types of returns? Well,

Larry Swedroe 09:43
I would add this. I don't think you even have to do any work on this, because no institutional investor is going to make investment decisions based on Cramer's recommendations, because they're aware of the literature almost. Certainly as a professional investor, and they know it has no value, right? Here's the thing, especially, and we're living through that kind of period now, while it's markets are always uncertain, nobody knows what the future is going to be and but there are times when things become or feel more uncertain, and this is certainly one of them, self imposed uncertainty because of President Trump's policies on tariffs and the tax bills and other things. So when times become more uncertain, people look to somebody. You can tell them what's going to happen. Some expert, sadly, there's only one person who knows where the market's going, and neither you or I nor anyone else on this planet will get to speak to him or her, at least while we're on this planet. So you're best off just ignoring these forecasts, because the research shows there aren't such, you know, super human beings who are great forecasters, right? Yeah,

Andrew Stotz 11:11
yeah. And, and also, the guru statistics are interesting, as you say. It's a normal distribution, but, but shifted to the left, meaning that's before trading costs. Remember, and but what I would add besides trading costs, not all of them have a promotion machine like Kramer does. So Kramer has the advantage in these numbers, if you look at it, you know in this way is that he can at least get enough people behind it to pump it up on day one, many of these gurus can't even get that kick. You know that would, you know, in theory, show that makes it look good, but isn't real. Yeah. So that's the guru statistics fascinating. And, yeah, I found this really interesting. And the question is, has any I wonder if anybody's ever measured the performance of his compensation, because I suspect the performance of his compensation has been incredible. Ryan, well, yeah,

Larry Swedroe 12:11
it's one of the most popular shows. People seem to love the entertainment. I just hope they're not listening to the advice they definitely are when he's ringing bells and slamming hammers and, you know, I just find it sad that he's turned himself, a very bright man, obviously, into a caricature. Yeah,

Andrew Stotz 12:31
There's two other things I would say before we wrap up in. The first one is that his show is showing 250 times a year, I guess, or Daily Show. So, you know, you got to think, Okay, wait, so he's going to come up with 250 outperforming idea. You know, that's impossible. So already, just logically thinking about it doesn't make sense. But the other one I was going to share is that in Thailand, as well as most of these emerging markets, brokers and the analysts and the gurus at the brokers are, all they're doing is pumping and pushing, you know, let's say one stock a day, and getting all the power of their broker behind that and pushing that stock and then saying, you know, I move the market, and that's why you need to follow me. And people see that, and they feel as though that person really moves the market. But they really unless they take an honest look at what's happening, they people gather around that type of stuff.

Larry Swedroe 13:31
Yeah, what you might suggest to them is going to chat GBT and look up the terms pump and dump.

Andrew Stotz 13:41
That's a good one. All right, so Well, Larry, that was a great discussion, and it helps us to stay away from the TV. I shut the TV off many years ago. I sold my TV when I was young, and I never

Larry Swedroe 13:53
that's got to improve your investment outcome, because you can't make mistakes listening to basically, what's investment pornography? It's meant to titillate and excite you, but, you know, it doesn't have any real value. You know,

Andrew Stotz 14:09
I started as an analyst in 93 and in that time, really, market was very immature. In Thailand, it was extremely volatile, you know, and the way that we got news was the newspaper which arrived on our, you know, on our doorstep at five in the morning. So each morning I had, like an architect drawing table at my house at 5am I'd wait for that newspaper to come, make a cup of coffee, sit down, and what I would do in those days is I would cut out stories and I'd paste them into my little book, and then I'd take notes, because also I was learning at that time, it was 93 I was 28 years old, or whatever, and I was learning about the market. So I was learning about the ticker codes and the companies and what they were saying. And then I would go in, and then we would write up, you know, here's the news of the day. We weren't necessarily saying that certain stocks were going to, you know, fly that day as much as. Kramer is, but we would, you know, put together, this is what we think is interesting. Now 10 years later, let's say in 19, in 2003 I was head of Research at Citibank at the time, and I remember walking in my office at about 630 I had already been through all the papers, and as I walked in, I saw my analysts with their feet up on the desk reading the paper. I went to the sales room, and I saw the sales people all reading the paper, and then I saw the sales traders reading the paper, and I thought to myself, How the hell am I ever going to get a competitive advantage in reading the paper? And I immediately, on that day, called the Bangkok Post, and said, cancel my subscription. And I never received papers ever again after that, because I thought I got to think different. You know, I got to think, you know, I got to get away, and it's not so much. And I always tell people that don't worry too much about where you're going to go, what you're going to think, worry about getting detached from what everybody's digesting first.

Larry Swedroe 15:59
Here's the big lesson I've written about this and my books, including my investment mistake book, what you learned is to not confuse information with value added information. In other words, if you know something because it was in the newspaper, right, everyone else knows it as well. So it has no value. It's in the price, which is why, to me, one of the most ridiculous ads of all is by Barron's, which popular publication, and their ad is Barron's before the market knows you're reading a newspaper, but get the news before everyone else knows. I mean, I mean, how ridiculous is on the face of it, it's absurd. Yeah,

Andrew Stotz 16:49
I think that was an interesting thing. And then, you know, I'm sure at times you've heard podcasts, or you listen to something, and you've listened to a guy, and you try to follow what the guy's saying, and really, he's not saying he's he's presenting a lot of news, a lot of history. He definitely has a depth of knowledge of this, but he's not actually bringing any value in the conversation. Value about the judgment of, let's say, what could happen to margins going forward, what could happen in this and that, you know. And so I listened to one of these guys one morning on podcasts, and it was so clear, it was so good in the sense, that he was such a master bullshitter that made him sound so smart about the topic. But it was all about the past and this and that. And then I stopped it. And I got out of the shower. I stopped it. I sent it to my team. I said, Cut these three minutes out as an audio file, a video file, put it in my valuation master class boot camp. And then the next night, I had my students listen to and I told them, write down your notes of what you learned from this. And so I do this every single time with the students, where I asked them to write down and by the end of three minutes, they're totally confused, but they're trying to extract value. Because I'm telling them, as a teacher, listen to this because this is valuable. I don't tell them it's valuable. I just listen and get your takeaways. But in the end, I go, the whole reason why I'm showing that is that this is an example of talking aloud but not saying anything. You know well,

Larry Swedroe 18:17
what I try to do when I try and write, when I write my columns on sub stack and other places, and people want to I get asked, what's going on? I got asked the question often in the last several months now, is this the end of us exceptionalism, right with the change in policies and de globalization and tariff wars and all this other stuff. But so instead of making forecasts, because I learned long ago, you have to be very humble about making a forecast, right, all I tried to do was point out, here are the facts, here are the risks. Here's what could happen, here's the impact on your portfolio, and what are the things you might want to think about, right? So in my article is this, you know, a new era is the great rotation begun. I pointed out that here are, these are the facts, it's possible, you know, the US could end up causing recessions, right? We could see all kinds of issues. I list them, and then I said, and by the way, US stocks, which have outperformed for the last 17 years, which is why we have this issue of us exceptionalism, and I pointed out the reasons why people believe US stocks have outperformed, including better labor laws for businesses, easy to hire and fire people as one simple example, more freedom of capital. It's easier. You know? To get businesses started much the world's deepest capital markets. Entrepreneurs find it much easier to raise capital than, say, in Thailand, right? But I also pointed out that in that 17 year period, the vast majority of us outperformance came not from earnings growing faster they did, but not that much faster. It was mostly because PES of US stocks went way up, and which means future expected returns are now lower, and PES of foreign stocks actually went down. And if that just ended, foreign stocks should outperform. But what if? Now people believe the US was no longer this exceptional place and capital started to flow out. People were worried about, you know, trade restrictions and capital, you know, being confiscated even right? So it could reverse. So you want to think about, are you willing to live with those risks, or should you build a more diversified portfolio? So I'm not making any forecast, because I know I write this off, and my crystal ball is always cloudy. So want to just think about the risk and what risks you're willing to bear,

Andrew Stotz 21:21
yeah, and, you know, 17 years ago, emerging markets were like a little baby coming out of the crib, and now they have, you know, consumer, you know, consumption is is much higher, and wealth levels are higher in the middle class and, you know, and there's a lot of intra Asian trade, you know, that's significant, you know, so it's, it's a different world. It's going to be interesting to see on the next, you know, five or 10 years ago in that,

Larry Swedroe 21:48
yeah, we're looking at emerging markets and international developed markets trading, you know, like at 30, 40% discounts. In fact, two recent studies have found if you take, I'll just make this example pop so it'll be directionally correct. You take, say, General Motors. Let's take a different one. Let's take a Pfizer, a US multinational, global pharmaceutical company, and Hoffman La Roche, a global, international pharmaceutical company, but one is listed on the New York Stock Exchange, and the other is listed on some international stock exchange. If you did studies and found hundreds of companies that look the same, except for their listing. So they're both global, so they might have both say 40% of their sales internationally, right? The US stocks traded something like a 40% or more premium, even though their sales around the globe are the same. It doesn't make sense, really. So that's why, in particular, I think you're likely to see us companies. I just wrote this up the other day, buying up international stocks because you're taking your stock with trading at 25 PE and you're buying the same company basically at a 15 PE. So you're using your cheap capital to buy an expensive company that's got much higher cost of capital. So there are, your returns are going to be higher when you buy it, you immediately convert their earnings from a 15 PE to yours at 25 simply because of the listing.

Andrew Stotz 23:45
Yeah. And one of the reasons why Asia and particularly emerging markets, are trading at a discount is their profitability is at a discount. But one of the things that's interesting about Asia is that, like America, the markets are dominated by large companies, yeah. But unlike America, those large companies are not trading at massive multiples. No, they're not. So what that means is that the whole the mid cap space in Asia is exposed. It shows, you know, that they're not hidden, they're low PES and stuff like that. But if you look at America, I think the last statistic I saw, I don't know if you've seen this, but it's like 30% of mid size or small size listed companies in America were losing money.

Larry Swedroe 24:34
It's certainly I don't think that's true of mid size, but it is certainly true of the stocks in the Russell 2000 which is the smaller part

Andrew Stotz 24:43
of so it's something like, is that? Is it 30% what was it like? It may be higher. It may even be 40, yeah. And so the result is that actually a huge part of the US market is in very serious trouble, not doing that well. But when you look at the overall profitable. The

Larry Swedroe 25:00
companies are staying private, or were taken private,

Andrew Stotz 25:03
yeah. And so my point is that, though the US market looks like really, you know, high PE and in earnings have risen quite a bit at these large companies, there is a nasty underbelly that if those seven, you know, 10 largest companies, pe started to come down and became less sensational all of a sudden. What would be exposed is, Whoa, there is a lot of companies in the mid and particularly small case, small cap space, that are struggling,

Larry Swedroe 25:33
and I'll point out that they are trading at lower valuations. But let's we could dig a little bit deeper, having a little fun here on this so US stocks have performed well, but a big chunk of their earnings increase was that they were able to extend the duration of their debt at much lower interest rates Up until 2022 and which they did, unlike our US government, which foolishly kept funding short, unlike Austria, for example, who issued 100 year debt at under 1% Janet Yellen has to go down as the dumbest Secretary of State in history,

Andrew Stotz 26:16
in my opinion. Yeah, she missed a huge opportunity on that one? Yes,

Larry Swedroe 26:21
a huge opportunity was missed there for political reasons. So shame on her. That's not her job, right? Is to get someone elected or whatever, at any rate. So a lot of the margin increase was because interest expenses came down. Now you've got tariffs. Someone's going to eat that tax. Could be foreign companies, but there's only a limit to that, depending on competition, right? It could be consumers having to eat it, or it could be companies having to eat well, the odds are it's probably going to be spread among them. No one knows exactly where, so there is at least a reasonable chance that corporate margins will come down in the US, if we're at an all time high in margins, which historically run between about six and 10% of GDP corporate profits. And so when we're in a boom time and corporations profits tend to grow, we're in recessions, they come down, and then things reverse, right? We get this reversion. We are way above the historical average, and now those margins come down. Interest costs are going to go up because the interest rates are now higher when loans roll over. You know, it seems likely to me, at least there's the risk that US profit margins could come under pressure, and when you're trading at such high multiples, you're trading almost as if you will, that the news is price for perfection is, I point out there is that risk. You don't have as much risk in the international stocks because they're trading at about their historical averages, right? These in the roughly 15 for developed and emerging markets may be a bit lower, and value stocks internationally are trading much lower, more like 10. So maybe we'll get a rotation to value, or maybe we get a continuation the last 17, where growth continues to outperform. So

Andrew Stotz 28:40
and that's interesting, because if you get a falling margin and a D rating in multiples, that's the double whammy that causes, you know, a fast crash, yeah,

Larry Swedroe 28:57
you know, just think, I think most people think there's at least a reasonable chance of a US recession, especially if they don't solve this tariff war situation fairly quickly. US corporate earnings on average, in the average recession, which is a GDP, fall of about 2% drop about 11% Yeah, well, if your profits drop 11% just from the recession, and then margins, I mean you, but profits drop 11% PES come down from, say, 20 to 15, which would still Be just average. PE, not like low like in 2008 we went into single digits. Well, you get a 25% drop from the PE multiple falling. You get another 10% or so drop from profits and margins falling. And you could see the market wouldn't shock me if you know. Well, we saw the market drop 30% or something, down to 4000 or some number like that. I'm not in any way predicting that, but if you get the trade situation continuing, or worse, we get problems with Russia or China decides to take advantage and invade or blockade Taiwan or who knows what, right? I mean, you know, 4000 wouldn't shock me at all. Yeah, and just

Andrew Stotz 30:27
to get that, to make that clear, let's say a company's profits start falling. What's going to happen is that, if nothing happens to their share price, then their PE is going to rise as the earnings fall. So when we talk about the actual fall in PE down, you know, to a more normal level, you're talking about a real serious fall in price.

Larry Swedroe 30:53
So that's what happens, because the PE, the higher PES, are built on the expectation of fairly rapid growth in earnings. The market was expecting going into this year, a 13% increase in earnings. Well, if you get it instead a 10% drop, well, that's a 24% difference, roughly, and that's just the earnings going down. And then you have to say people are certainly going to demand a bigger risk premium because things are more uncertain, and that's how you get big bear markets. Again. I really want to emphasize I am not predicting anything here. I'm just pointing out that your financial plan should include the possibility that that should happen, could happen, and if, if if you couldn't take that loss, or you panic and sell and you wouldn't sleep well at night, then you're taking too much equity risk in the first

Andrew Stotz 31:48
place. So to follow up and wrap up on the the data that we talked about, about the number of companies that had negative earnings according to data that I'm finding as of 2024 within the s and p5 106% of companies are have negative earnings, meaning they're losing money within the Russell mid cap, as you said, it's it's more than that. It's 14% but as you also said, within Russell 2000 the latest number is 42% which is up from 14% two decades ago. What's going on with the Russell 2000

Larry Swedroe 32:27
Yeah, it's a lot of these companies that are story stocks that you know have raised capital, spent a lot of money on investment and have not yet turned profitable. And investors seem to like, you know, these, what are called lottery stocks, but the more profitable ones, which were not trading at high multiples, the private equity firms have come in and bought them up and taken them private, or they've been acquired by big companies who were using their cheap, high priced equity to buy lower price, you know, profitable companies, yeah.

Andrew Stotz 33:05
Well, what a great discussion again. And I look forward to the next chapter. The next chapter is chapter 36 fashions and investment. Follow me for listeners out there who want to keep up with all that Larry's doing, you can find him on x at Larry swedrow, you can find him on LinkedIn, and you can also find him on sub stack. Now this is your worst podcast host, Andrew Stotz, saying, I'll see you on the upside. You.