KATHY JONES: I'm Kathy Jones.

LIZ ANN SONDERS: And I'm Liz Ann Sonders.

KATHY: And this is On Investing, an original podcast from Charles Schwab. Each week, we analyze what's happening in the markets and discuss how it might affect your investments.

KATHY: Hi, Liz Ann. So this week we're doing a little something different. We're still going to look at the markets, but we're stepping back a bit and focusing on the longer term.

LIZ ANN: That's right, and I'm really excited about our guest this week. It's someone I have known in this business for well over 20 years, Barry Ritholtz. And he has a new book out called How Not to Invest, maybe the emphasis on not. So Barry and I are going to talk about things like diversification, the power of compounding, the mistakes that investors make, the dos, and maybe more importantly, the don'ts.

At times those might sound like boring topics, but frankly they drive so much success that investors enjoy, and it's important to understand how they work. So as you can guess from that title of How Not to Invest, Barry talks a lot about not making unforced errors. He's got a really interesting tennis analogy that he likes to tell, so I found that fascinating. And really it's less about picking the right stocks or the right investments and just avoiding the common mistakes: high fees, moving money based on fear, also important to understand our own biases. So really fascinating conversation. But before we get to the interview and our guests, since we last spoke, is there anything you'd like to add about your world, Kathy, the fixed income markets or the economy in general?

KATHY: For me about the only thing that's notable since we last spoke is the widening in corporate bond spreads. Now, they they're still relatively low by historical standards, but they've started to move up especially for high yield. There's a lot of distress, I think, under the surface. So on the surface things look pretty good. We're not seeing a significant rising default rate. But what we're seeing is companies are avoiding bankruptcy filings by doing distress exchanges and other forms of recapitalization. 

But it's not a good signal to see the spread start to move up. I think it underscores a good reason to be cautious on high yield in this environment. Investment grade still looks good. Those companies are still profitable. They're doing well. But in the high-yield market, you just have the less-profitable companies, the more highly leveraged companies, that always face more hurdles in terms of growth and repaying their debt holders. And there's plenty of room for those spreads to move higher. So just kind of cautious there. But elsewhere in the market, boy, the Treasury market, just wait-and-see mode. It's waiting to see about tariffs and tax policies. It's waiting to see how inflation and economic growth evolve. It's waiting for the Fed to do something and not stay on hold. So there really isn't much of a trend.

So that's why we just keep trying to hug the middle-of-the-road strategy here and stay up in credit quality and only take a moderate amount of duration risk. What about you, Liz Ann? Anything to add based on what we saw at the end of last week?

LIZ ANN: You know what I think what investors need to come to grip with instead of thinking in bigger picture terms like "Is this a bull market? Is this the start of a bear market correction?" is we're sort of in a knee-jerk market, and it's incredible how the market can quickly move in both directions, both on the upside and the downside, in some cases based on just very short utterances and even words, you know, we talked about "transitory" coming back into the language used by the Fed to describe tariffs' impact on the economy and/or in particular inflation. We've had some Trump administration officials talking about some flexibility as it relates to the upcoming April 2nd date, which we'll get more details on tariffs. And we see the market just have these knee-jerk moves based on that. That is really difficult to trade around, which is why we're telling investors within the equity portion of the portfolio, "Stick to the tried-and-true around diversification and rebalancing, not letting concentration become a problem" and just staying up in quality, similar to what your message has been on the fixed income side. Stay up in quality, focus on, as you know, factors that we tend to be focused on, which are just characteristics, those higher-quality areas, and in particular, what's been doing well this year that we continue to emphasize: low volatility as a factor. So trying to find where maybe things, the storm is a little calmer under the surface, and you get that by staying up in quality. So that's been our messaging.

KATHY: Yeah, the old port in the storm right now, I think, is what we're all looking for until we know what else is going to happen. 

So tell us a bit more about our guest.

LIZ ANN: Sure, so Barry is a friend. I've known him for a long time. He's the co-founder, chairman, and chief investment officer of Ritholtz Wealth Management. Barry also has one of the longest-running financial blogs called The Big Picture and one of the longest-running podcasts called Masters in Business. I've been on the show in his past. I was one of his early guests and then was on more recently. And as I mentioned, his latest book is titled How Not to Invest, and it's out now from Harriman House publishers, and I'll have the link to the book in the show notes. 

So Barry, you and I go way back, and you might remember the year it was when you and I were together on … was it Kudlow & Cramer, or was it just when Larry had his own show?

BARRY RITHOLTZ: So the answer is both. It was Kudlow & Cramer, but it was one of those weeks where Cramer was away. And my first ever television appearance was me, Larry Kudlow, and you in this little room. This was before they moved to the big Englewood studios on CNBC. I mean, decades before Kudlow ended up on Fox Business and Jim got his own show, but I want to say that was 2003, and I remember the next morning walking into the boardroom at the place where I worked, and the room erupted in applause. It was an experience.

LIZ ANN: So 22 years ago, and you have just the model for a podcast with Masters in Business, and you were kind enough to have me on early in your start to that, and then a little bit more recently. So I've been thrilled to sit in the hot seat twice now with you, and now I'm putting you in our hot seat. You're a pro both on either side of the proverbial microphone in the podcast setting.

BARRY: Well, you know, it's a huge advantage having been early because you end up getting credit for longevity, not quality. So I hope my quality is up. We just had the SNL[1] 50th anniversary. I was in high school when the first SNL came out. And all I remember is like, "Why do I want to be home on a Saturday night watching TV?" was our initial thing. And 50 years later, yeah, there are highs and lows, but, you know, longevity is worth something. Just not dropping dead is a big advantage.

LIZ ANN: I totally agree with you. This is my, I guess, 40th year. I'm 39 years now working in this industry of Wall Street.

BARRY: I remember back in the day when you were on Louis Rukeyser, and I say Rukeyser to half my staff or anyone under, I'll say anyone under 30, but yeah, like "Who?" Like "No, no, before financial media was 24/7 thing, there was a show, it was once a week. It was an hour. That was fine. That was plenty."

LIZ ANN: I have very fond memories of those years. You know, I listened, Barry, to a recent podcast that you did, and you had a really interesting set of comments about conducting interviews or being in the hot seat for an interview and the frustration you often find with sort of the simplicity of questions that are asked, not to mention the irrelevance of questions that are asked. And you instead talked about the questions you like to ask, whether, you know, of luminaries like the Ray Dalios of the world, you know, "Talk about your investment philosophy. Who were your mentors? What lessons have you learned that you think back, 'boy, I wish I had known that back when'?"

So talk a little bit about that because that's so resonated with me. I do financial television all the time. I find the questions I often get, they're the same ones over and over that they recycle no matter who the guest, and they're actually around stuff that's just not that important. It's one of the things you address in the book, too.

BARRY: Sure, so I remember coming back from a conference in Vancouver, Canada, and having to change planes. I want to say it was Chicago and Montreal. I can't swear by it. And so you have an hour to kill. So you're in the lounge having a cup of coffee, waiting for your flight to get called, and somebody shows up on TV. I think it was CNBC. I can't swear to it. And it was either David Einhorn or Bill Ackman. I kind of like lumped the two of them together. They're tennis buddies. They know each other for forever. And this is literally 15 years ago. And it was after Bailout Nation[2] but before I had started at Bloomberg. And I remember the questions were just like offensively bad. "What's your favorite stock pick now?" Now remember, I don't remember if it was Ackman or Einhorn. Einhorn had famously been short Lehman Brothers, as my firm was back then, an institutional shop. So they're looking for the next hot stock tip. "What's your favorite stock? Hey, when is the Fed going to cut rates? Where do you think the Dow is going to be a year from now?" And all those things are meaningless to the home viewer because A, they have a shelf life of 30 seconds after the guy walks out of the studio. But B, what am I supposed to do with that information? How likely is it to be right?

You know, we always tell clients, "When you see someone on TV, they don't know your tax circumstances, your income, your financial needs, what state you live in, when you're retiring." So whatever they're saying for a general audience, and that's before we get to how wrong the odds are that their forecast is going to be. But whatever they're saying isn't geared towards your personal situation. So why do you really care about what they say? And I always thought the better questions to ask are, "Hey, you have a great track record. Who are you? How'd you get that way? How has your investment philosophy developed? How has it evolved over the years as market structure has changed? You know, we have the rise of ETFs and the rise of free trading. What has this done to your approach to risk management and portfolio management?"

But in a four-minute TV hit with a hard break in commercials afterwards, that's one question, and four minutes sucks up that whole answer. Nobody wants to do that.

LIZ ANN: Which is the beauty of podcasts. And I could not agree with you more on this subject. I'd say probably the most common question that I get from the financial media, especially if we're in a period of turmoil in the market, is, "OK, Liz Ann, what are you telling your investors to do? Get in or get out?" And I always think, "Wow, that's such a bad question." Because neither get in nor get out is an investing strategy. It's just gambling on two moments in time. And investing should be a disciplined process over time, and that's certainly what you talk about in the book, and what I loved about the book—and How Not to Invest, as we mentioned in the intro—is the way you did the sections. 

So that there's four sections: bad ideas, bad numbers, bad behaviors, and then you end with the fourth section, which is good advice. And I love that you put front and center the bad stuff, and you mentioned tennis as you were talking about Einhorn and Ackman, and I love your tennis analogy with regard to, you know, avoiding bad decisions is often more important than making brilliant ones and that investors typically often underperform due to predictable and avoidable errors. So talk about your … the way you think of it in tennis terms, because I thought that was so fascinating.

BARRY: Sure, well, credit where credit is due. A paper in the, I want to say, late 1970s written by Charlie Ellis, and for people who don't know who Charlie Ellis was, he was the chairman of the Yale endowment. He was on the board of directors of the Vanguard Group. He ran Greenwich Associates. Just a legend in the industry. I think he's authored a dozen books. He took this paper called "Winning the Loser's Game" and expanded it into a full book, I want to say, in the 1990s. And he's one of the two Charlies I dedicate the book to. And Charlie Ellis' approach is, you know, when you look at tennis, it's two games in one. It's a winner's game and a loser's game. What's the winner's game? Well, that's the professional game. The professionals win by scoring points. They serve and hit aces. They hit with power. They hit with accuracy. They keep the ball away from the sweet spot of their opponent.

They want to kiss the line. They could kiss the line. They win by scoring points. That's the 0.1%. Maybe even that's generous, 0.01% of tennis players. Us 99.9% of the hackers out there like me, and I haven't been … I can't say I've been playing for that long. I've been playing for a decade or so. We lose. Amateurs lose by unforced errors. We don't win by scoring points.

We double fault on our serve. We hit the ball into the net. We hit it long. We hit it wide. We hit it right into our opponent's sweet spot. And if you just make fewer unforced errors when playing the losers game, you tend to win. Make less mistakes, and you will lose less frequently. And then the brilliance of Ellis was to say, "By the way, this whole tennis thing, that's investing."

Yeah, we know a handful of people's names that win by scoring points. Everybody knows who Peter Lynch is. Everybody knows who Warren Buffett is. But they're like the exceptions that prove the rule. We know a handful of these outlier managers that have done things that the 99.9% can't do. And so apply the same thesis to investing. Just make less mistakes, and you'll do better than 90% of your peers.

LIZ ANN: You know, one of the mistakes that you talk about is trying to either be a market timer or figure out who the person claiming to be a market timer is the right one to follow. And some of the specifics that you mentioned I think are important to go into. We all know in concept these, but we … investors just tend to still make these mistakes, whether it's missing out on the best performing days, the fact that so many major market-moving events are things that just come out of the blue, obviously COVID being a perfect example of that. Not to mention what you write about just trying to market time just leads to stress, which, you know, infiltrates decision-making and second-guessing and emotional decisions, so talk a little more detail about that.

BARRY: Sure, so I mean I could talk for hours about market timing, but there are three things that come up that are just kind of terrifying. The first one, which has been, I think people kind of getting their heads around this. I've seen this data in these charts a little more frequently than 10 years ago. You didn't really see this stuff. The big down days that everybody is so terrified and want to hop out in front of, the challenge is that very often the rubber band gets stretched too far. And then the recovery days, the big snapbacks, they're all kind of clustered together. So the odds that you're going to get out right before like a 6% collapse and then get back in right before it snaps back, really low probability bet. And, you know, it's not how we conceptualize market crashes. We imagine the market's going up and up and up and then something happens.

And then it heads straight down. And then at the bottom, they ring a bell, and you get back in when the news is better. Doesn't work that way. So you end up with these like big swings up and down and up and down. Sometimes, and I know you know plenty of technicians, lower lows, lower highs. Sometimes you stair-step down, guessing which is the right one to jump back in on is really challenging. So that's problem one. 

Problem two is even if you get out at the top, as much as the odds are against you. You have to really be a certain type of … I used to work with a guy who called some of the guys on the trading desk mutant freakazoids. You have to be so like be able to look at the world separate from the emotionality of humans. Very, very few people can do that. And you could go in with the best of intentions and say, "Look," I like to say, "Hey," someone asked me, "Hey, down 6%, 8%, are you a buyer here?" I asked, "For a long-term holding or as a market timer?" "No, as a market timer." Down 10% happens like twice every three years. It's ordinary stuff. I start to get excited down 20%. Down 30%, I'm a buyer, but you always have to have a little dry powder because as we've seen over the past quarter century, down 50% is, in the United States, broad equity markets, is a huge, fantastic entry point. 

But people who evolved as social, cooperative primates have an inherent problem with going against the crowd. You can't be a contrarian most of the time because most of the time the market's right. In fact, the crowd is the market. Most of the move up or most of the move down, it's only when the market goes from like a crowd of people watching a soccer game to an unruly mob of hooligans flipping over cars after their team lost that you have a problem, and you get swept away with it. It's very emotional. So it's really hard to get back in when everybody's panic selling. But the really crazy thing is that one of the academic studies I reference in the book, people who panic sell into a market, either a correction or a crash, almost a third of those people never return to equities. "Hey, this stock market thing isn't for me. I'm going to put my money into this." And think about the people who had that reaction post-'08, '09. Not only did they miss one of the greatest decades in market history for equity returns, especially relative to fixed income, but then you had the whole pandemic move, which was another giant leg up. Like, imagine selling at 666 on the S&P and looking at it, you know, practically 10X up. It's really astonishing. And so, you know, if you're a good market timer, I'm speaking to the 18 people …

LIZ ANN: Ever in history.

BARRY: … out of 300 million American, right? Who, who like have an intuitive feel and do that well, great, knock yourself out. If you're the other 300 million people, you're wasting your time, money, and leaving just so much money on the table trying to play this game. To say nothing of capital gains taxes.

LIZ ANN: It makes me think of some of the sort of advice that that I've given to investors over the years. You, earlier in that that answer, you talked about missing some of the best days, and we've done studies on this. Some of the best individual days have come exactly the day after some of the worst individual days, so the combination, the back-to-back nature of some of these extreme moves, is a good reminder of what you say. And then also, I always think about when we talk about big drawdowns in the market, you mentioned the epic 50% kind of declines, not to mention you love being a buyer at down 20 or 30%. This is a weird thing, the stock market. It's the only market I know of where a huge sale happens, and everyone runs in the opposite direction.

I don't know, anybody's favorite store that suddenly has a 30% off or a 50% off, we're knocking down the doors to get in. And that's the emotional side of this.

BARRY: I'm looking at my desk and I, you know, sometimes my wife just throws my mail on my desk, and I have "25% off Intelligentsia Coffee" arrived in the mail. "Tommy Bahama, 25% off, free shipping." Like I have a stack of these, and it's like, "Do I need anything from any of these companies? Hey, 25% off is like, hey, that's a substantial discount." 

When you get 25% off in the market, it reaches us on a very primal level because it's not coffee or bathing suits. It's, "Oh my God, what's going on in the economy? What does this mean for my job? I could kiss my bonus away this year. I hope I still have a job next year. If I lose my job, what does that mean? Are my kids going to have healthcare? What if somebody needs surgery?" On and on it goes. It just becomes this spiral. You know what? "Maybe I'm just going to sell here, and I'm going to wait for the dust to settle." And when … and you know, of course—you've been doing this long enough—you know the best entry point is when the news flow is awful. 

In fact there have been studies that said, "Hey, if you can wait for it to improve from terrible to awful, like awful is a little better than terrible, that's your ideal entry point." But when you … the news flow is terrible, nobody wants to put money in stocks. They want to go the other way. There's this great old trading … I started on a trading desk, and I've heard every terrible trading joke there is, but I always love the one where, in the middle of a crash, someone says to a fund manager, "Hey, how's it going?"

"Sleeping like a baby."

"Really? Market's down 27%? You're sleeping like a baby?" 

"Yeah, I wake up every two hours, wet myself, cry for mommy. I'm sleeping like a baby."

And it's, you know, it's really that sort of gallows humor always was good on trading desks because it forces you to compartmentalize your emotions a little bit. And, you know, the single best line I could tell people for both good times and bad is "This too shall pass."

LIZ ANN: Well, speaking of good times and bad, a lot of what you just talked about is the fear side of emotions, but there's also the greed side of emotions, manias, speculative bubbles. So talk a little bit about the greed side of our emotional spectrum as investors.

BARRY: Sure, and obviously these are two sides of the same coin. It's your limbic system that covers fear and greed, fight and flight, pleasure and pain. It's the same neurological apparatus that runs that. I love the quote from Bill Bernstein, neurologist and investor, who said, "Your success as an investor is determined by how well you control your limbic system, the center of pleasure and pain. Fail to control that, and you will die poor." It's like a very focusing statement. And so, you know, when you see the crowd panicking, A, we're social creatures, cooperative creatures, so, you know, we have neither fangs nor claws nor armor, and the only way we survive in a hostile world as soft, chewy, delicious creatures is cooperation and working as a group.

Think of a group of monkeys where there are lookouts, and there are, you know, some of the bigger stronger ones, and there's a way to prevent getting picked off by leopards because you're working as a group. That manifests as, when the market's heading down, we panic, and when the markets heading up, "Well, how is my neighbor four doors down, who we all know is an idiot, how is this guy making so much money?" I think it was the Mencken quote, his definition of rich was "As long as I have a hundred dollars more than my brother-in-law, I'm rich." So we … we're very peer focused. We try and keep up with the Joneses. "Hey, this guy's making money in …" fill in the blank—Bitcoin, Mag Seven, AI. It doesn't matter. If someone else is doing it, and the stock market's moving up, we all want to participate in it. It's just that sort of crowd behavior, and again, you go back to the original comment, the person who's speculating in, whatever, "Do they have the same financial goals as me? Are they making the same income? Do they have the same savings? What's their goal? What's their target? What's their needs? Why should I be concerned about what they're doing?" To say nothing of the iceberg problem. The iceberg problem is, you know, a tiny little bit of the iceberg is visible, and most of it is below the water level. You see the person with the big house, the fancy car, the slick watch, it's like, "OK, how much?" This literally … just had a conversation with an advisor about this. Person comes to them about making … putting some money away for an investment. They have a pension. They have this. And they go over all their finances, and this person was, unbeknownst to them, essentially broke. 

Like, wait, "You're making a lot of money. You have two houses with a giant mortgage on each. You're driving expensive leases, so you have no equity in your vehicles. You spend money at the jeweler like you're going to the supermarket. And you know, you're not that far away from retirement. You have zero dollars saved and a tiny pension." And P.S., most of these pensions are going away. 

And this, by the way, is very much for the Instagram, TikTok generation who see all these flexes on social media, especially algorithmic social media designed to outrage and inflame. That's their stock and trade. When we see this, we forget that it's double-entry bookkeeping. "Hey, here are the assets. They look great. What were the expenses? What are the liabilities on the other side?"

And you know, other people have written so much about the hedonic treadmill. I don't want to spend too much time on that, but I've had the conversation—I'm a car guy and have been since I was a kid—but I've had conversations with, "Hey, you're better off with like a recently used Miata. That's a great little Japanese car that's fun to toss and roll your way through the gears. It's very tossable on a curvy road. That you could buy for 15 even practically new $20,000. You're better off with that than some expensive Ferrari or Bentley that's going to be expensive to maintain and a lot of costs and a lot of … like, understand that's a whole 'nother level of commitment. Don't be envious of them. Say, like I … some of the car groups I'm with, one of my buddies, he has his mechanic on retainer, and he has his flatbed driver on speed dial. Now that's not true for every car, but it's kind of a joke. You don't need to go down that path if you're going to want to spend money on creating experiences and having fun with friends and family. It's not the amount of dollars you have. It's how rationally you spend them. 

I'm a little skeptical of some of the spending scolds, but all of that comes back to … all these things that you see flexed out there, there's a little bit of denominator blindness, or a little bit of framing bias. Because you're not seeing the other half of the equation. The guy with the Miata that's fully paid, takes the top down and goes for a ride in the mountains. It's paid off. He's wealthier than the guy carrying multi-six figures of debt and spending a ton of money on maintenance and everything else.

LIZ ANN: You mentioned denominator blindness, which I think is a fascinating topic. And you address it, I think, in the bad numbers section of the book and how numbers can play tricks on us. So talk a little bit about that, because I also heard you talk about it in a podcast. And I thought it was just a fascinating way. I talk about this a lot, especially when talking about valuation multiples. There's the denominator. There's the numerator. Both are important.

What do you mean by denominator blindness?

BARRY: So I grew up on Long Island. When I was a kid, Peter Benchley's book Jaws came out, and I vividly remember Jones Beach, no one stepping into the water. People were terrified of shark attacks. And then the movie comes out, the Spielberg movie, just absolutely like did damage to the economies of beach towns for a while. But then you look at the numbers, and it's like, wait, there's 20 shark attacks around the world? Four or five of which are fatal? Out of eight billion people? Why do we care about shark attacks? Yeah, they're big, and the movie was exciting, but mathematically, you're something like a hundred times more likely to be hit by lightning than you are for a shark attack. P.S., every human-shark encounter that has led to a fatality over the past two centuries is a pittance compared to the number of human deaths each year from mosquitoes who carry malaria and dengue fever and all these other … encephalitis, all these other terrible diseases. Like, why are we concerned about sharks? We should really be concerned about eradicating human beings' most deadly enemy, the mosquito. 

But when you apply that to the markets, we're afraid of things like market crashes and hyperinflation and things that happens so infrequently that they don't really matter, and we ignore things like excess trading and taxes and internal cost structures, and you know, the mundane, boring things that, over time, accumulate. We're terrified of sharks and terrorists. We should really be much more concerned with our cholesterol levels and our blood pressure.

You know, we're afraid of market crashes. We're afraid of these big splashy events that just happen so infrequently. Instead of being afraid of sharks, wear your seatbelt, stop smoking, maybe cut the alcohol down a little bit, your health will improve dramatically. Instead of worrying about market crashes, take a look at how much you're trading. Take a look at your portfolio allocation. Look at these expensive one-off investments you make. Every time I get a client or a prospective client say, "I'm thinking of investing in a restaurant." I know that the portfolio is going to be a disaster because a great restaurant is a great business. But generally speaking, restaurants fail on a regular basis, as do plays, as do, you know, go through all the lists of these one-offs and startups. So focus on getting the basic blocking and tackling right. Focus on the things that are going to be an ongoing drag on your returns. 

Yeah, I understand Japan peaked in '89, and it took 40 years to get back there. But that's the exception that proves the rule. Show me that … pretty much any other major economy. And by the way, people forget when you look at the data, the Japanese bubble, which was across housing, business, and investing at the same time, was 5X our Nasdaq dot-com bubble in the late '90s. So not a surprise. It took Nasdaq about 13 years to get back to new highs. It took the Japanese four times as long, but the bubble was four times as big.

LIZ ANN: You know, Barry, there's two things that you said that resonated with me. I want to kind of combine them into a single topic. You talked about Japan and their long cycle. So the way we think long term about markets going through secular cycles, and maybe the one in particular, the long secular bull market in the U.S. from 1982 to 2000. But it also brings up the whole numerator/denominator because I've heard you talk about an era like that and what was driving that 18-year bull market in terms of valuation in particular.

BARRY: Sure, so first, a lot of this is very squishy and imprecise. It's much more art than science. But we see societies and economies like the United States move in these long arcs of time. The first example that comes to mind is the war ends, mid-1940s, World War II. All these GIs come home. They all have the GI Bill, which is like the equivalent of something like $1,200 or $1,500 a month. They to go to college. So you have millions of returning war veterans going to college. And when we look at the next, let's call it 20 years, '46 to '66, we see the build out of suburbia. We see really the rise of automobile culture, the rise of civilian aviation. The interstate highway system comes out.

We see the rise of the electronics industry and the seeds planted for the rise of semiconductors and computers. And so over that 20 years, yeah, the market kind of went up and down. There were some recessions along the way. But over that 20-year period was just a huge run of expansion, increased economic activity, increased revenue for corporate America, increased profits. What a surprise, stocks went up during that period.

We hit 1966, everything started getting concentrated—sounds a little familiar, the Nifty Fifty[3]—and then you run into a little bit of a malaise. We have the Arab oil embargo in the '70s. Watergate sort of cast a pall on America. I used to jokingly say, "And disco and polyester came along in the same decade." And so you go from the …

Dow roughly kisses a thousand in 1966. You fast forward 16 years, 1982, and the Dow still hasn't gotten over a thousand on a permanent basis. So you're flat for 16 years. Inflation adjusted, and depending on which measure of inflation you use, you're down 60, 70, 75% in real terms. And so what happens? So first, Ronald Reagan gets elected, and it's morning in America. But more importantly, Paul Volcker is chairman of the Federal Reserve, and he cranks rates up to an ungodly level and breaks the back of inflation and kicks off a 40-year bond bull market. But also, as rates are starting to come down from inflation being broken, and that was structural inflation in the '70s, not what we saw during the pandemic, which was, I'll use the T word, I'll say "transitory." Transitory took a little longer than most people expected, but that was a complicated unwind of the supply chains and everything else. But you had a 40-year bond market from '82 to, let's call it, 2022 when the Fed crank rates up 500 basis points. But you also had the slow falling rates led to a resurgence in innovation and technology.

Some of the Reagan deregulation and tax cuts certainly helped with that also. I'm not going to suggest it was all Volcker. So now in 1982, you're back over the levels that were reached in 1966, which is 16 years earlier. And that's the start of a new bull market. People always like to date markets to the lows, but we both know it's when prices exceed their previous trading range. And so from '82 to 2000, the Dow goes up, you know, a thousand percent. It's a huge move. The general markets move higher. One of the things, you mentioned valuation earlier, one of the things that I think investors don't understand, "I don't want to buy stocks here. They're pricey." Well, half the time stocks are pricey, and I want to say a third, a quarter of the time, they're maybe even less fair value, and maybe a quarter of the time they're cheap.

Morningstar just had a report recently, stocks are 5% below fair value after this recent sell-off. I don't know their methodology, but the pushback was, "Oh my God, how can you say stocks are anything but pricey?" When you look at that 1982 to 2000 bull run, earnings went up, but they didn't go up to justify a thousand percent gain.

We started with the S&P 500® at a P/E ratio, price-to-earnings ratio, of 7. We finished with a P/E multiple of 32. And it turns out about three-quarters of the gains over that period were not due to earnings improvement. It was due to multiple expansion, which we know is driven by sentiment. It's driven by psychology. And that's why my definition of a bull market is the increased willingness of investors to pay more and more for that same dollar of earnings. 

So if you're just going to say, "Hey, I'm only going to buy the market when the S&P has a price-to-earnings ratio of 15," you're going to be sitting out of the market two-thirds of the time because the way these runs go, and the way the psychology of FOMO and greed and fear work, is that … and I've heard this on Rukeyser, probably the first place I ever heard this, was bull markets run longer, last longer, go higher and further than anyone has any right to rationally expect. And if you're just going to say, "Stocks are cheap, I'm in," or "Stocks are expensive, I'm out," you're eliminating two-thirds of the time. And really the advantage of markets is the power of compounding. And so whether stocks are expensive or cheap, hey, over the course of 30 or 40 years until you retire, they'll be both, but try not to interfere with the market's ability to compound.

LIZ ANN: So Barry, before we wrap up, I just want to get your final takeaways and thoughts. I wanted to ask you another bigger picture question that's really relevant to the times in which we live right now. And we've talked a lot on this show so far about emotions. You also mentioned, you just threw in Instagram and TikTok as examples of social media. Obviously, there's formerly Twitter, now X, and other sources.

There's an incredible amount of noise and political extremes. What is your practical advice for investors in trying to work their way through the emotions attached to all of this noise and inflamed in many ways by social media?

BARRY: I love to show people a long-term chart of the market and remove the dates along the x-axis and say, "Show me Watergate, show me Bill Clinton's impeachment, show me 9/11, show me all these things that have happened that in the moment feel horrible.

You know, we lost Laszlo Birinyi a few years ago. His shop puts out this book that I love, which is just a collection of headlines and a couple of paragraphs from The Wall Street Journal, The New York Times, The Washington Post, The Atlantic. Go through the list, Barron's. Go through list of all the media. And it's not that these things are wrong. They're mostly right. But once you know how the story ends, once the dynamic tension of "We don't know what's going to happen," that stress inducing "Oh my God, I don't know what comes next." Once that goes away and you look back at these sort of headlines, you realize, oh, the resonance wasn't the underlying facts. The resonance was the emotionality. 

In fact, when any of the mainstream media, whatever shows up in print is one way, but what shows up online is always more histrionic, more clickbait, more like they need to be heard through the din. And so, you know, there's a firehose of stuff. We shouldn't just randomly accept it as true. I could give you a couple of fun examples. But the thing that's the takeaway is, you can't just say, "No, I'm not going to listen to anybody. I'm just going to…" I mean, you can buy a broadly diversified portfolio, don't look at any media for 40 years. Not realistic for most of us, but there are people that are out there, I put you in this group as well, that they have a good track record, they've been through a few cycles, their approach is rational, defendable. It wasn't just an outlier one-off luck sort of thing. It's like, oh, this person really knows what they're talking about. 

When Jason Zweig talks about people's behavior, hey, here's a guy who's been doing this for decades, worked with Danny Kahneman. I'm really interested in what Jason Zweig says. When Sam Rowe talks about market structure, or Dave Nadig talks about ETF, want ETFs, I want to hear about that. Jonathan Miller discussing real estate. I have a … and I'm leaving a ton of people out, but I have an all-star team that I've assembled. I don't pay them a penny. I just subscribe to their stuff. Cost me next to nothing. 

But you know, there are a dozen or two dozen people. It's probably different for every person. I'm not saying, "Hey, here's the Olympic '84 basketball team." It's "Find the people who have been consistently more right than wrong." Nobody's going to be perfect, but more right than wrong. The way they look at the world, understand cycles. They understand, you know, that not everything is a hair-on-fire run around. And I found that relying on that sort of group of people has been really useful. We all have our own biases. We all tend to let our emotions get the better of us at times. And when you have a person who's been through this before, knows how the movie ends, knows that panic is not going to be useful, being able to access those sort of people through their blogs, their podcasts, their Substacks.

And it's not that hard to assemble these folks. Derek Thompson, writing just generally about the way business unfolds, Dan Gross. I give you … this list goes on and on, but it's the theory … tou know, Ted Sturgeon was a science fiction writer in the '50s. Someone asked him, "How come so much science fiction is so bad?"

And Sturgeon's answer was "90% of everything is crap." And it sounds a little extreme, but hey, that was 75 years ago. He's been kind of proven correct. You look at the SPACs, you look at the mutual funds that haven't survived, you look at just the endless firehose of cover stories and headlines, and a lot of these just don't age well. They're exciting in the moment, but a big part of what I did in the book was look back at these things. Hey, how do these things look when we know how the movie ended? And it turns out that a lot of these things are just terrible advice. And so I want to warn investors: be aware of your information diet, understand what you're consuming. All right, so we're recording this towards the end of the first quarter.

I saw this thing that cracked me up on TV the other day about the FedEx warning. So FedEx lowered guidance, and as I was listening to the report, it just made me think, "Why should I pay attention to this?" Give me one sec, I'm just going to pull this up on the computer.

"JP Morgan cutting its price target on FedEx from $323 to $280, highlighted by weak management guidance and outlook going forward." The stock is getting hammered. It's down 9% in the pre-market. I like recorded that off of TV. So three quick questions that anybody dipping into the media firehose. What's this analyst's track record on the stock and on the sector and on the market? Should I care about a target?

Reduce from $323 to $280 when the stock is $230. Does that help me at all? How useful is management guidance? Is it late? it early? Is it just boilerplate legal noise that they have to kind of get out of the way if they're going to have a bad quarter? And then down 9% in the pre-market. As a trader back 25 years ago, I know that, 30 years ago, I know pre-opening trading is thin. It frequently reaches extremes for people panicking out before the market opens. What does down 9% mean for future performance? What's the track record? And the takeaway from all that is, it's not that anything they said was inaccurate or incorrect. Everything they said was right, but it all turns out to be pretty useless without that context. And I could tell you from my experience, having gone and answered those questions, the answer is all of it is just completely noisy filler and not useful for anybody who's thinking about 529 investing for their kids' college, saving to buy a house, saving for retirement, generational wealth transfer, philanthropy, go down all the list of things that you're doing with your money. If you're giving away money either to your favorite charity or your kids and grandkids, who the hell cares what happens on a random Monday relative to they're getting this money decades from now? It's just not relevant.

LIZ ANN: All right, Barry, final question. You're in an elevator with a bunch of people who are interested in you or the book. You're going five floors, and you have to do the key takeaway. Before I ask you for yours, I just want to … because I think you and I think about investing in markets in a very similar way. And I often will conclude a client event that I'm doing with "It's not what we know about the future that matters because it's inherently unknowable. It's what we do along the way." So what is your … five floors in an elevator—what's the takeaway? Generally your philosophy or maybe specific to this book?

BARRY: Allow the markets to compound over time. Don't interfere with it. The whole behavioral section. It's worse than overconfidence. Our ability to actually do things we want to do in the market, the Dunning-Kruger effect, our ability to evaluate our own skillset is pretty mediocre other than people at the top of their game. Just own a broad set of low-cost index funds that are diversified across different geographies, strategies, styles; rebalance every few years; and stay the hell out of your own way. Now if you want to have, "Hey, I like India. I like emerging markets, small-cap value. I like momentum, I like shareholder yield," you can decorate that tree however you want, but the core of what you're doing, certainly half should be just, you know … you will never achieve alpha if you fail to achieve beta, right? You will never outperform the market if you can't get just what the market's giving you. And so, hey, why don't we start with … because most investors, and this is shocking, most investors underperform their own investments. So why don't you at least get what the market's giving you before you start complicating things?

LIZ ANN: Barry, you are truly one of the best, and it's a thrill to have you allow me to turn the tables and act as a host to you as a guest. I strongly encourage all of our listeners to check out the book How Not to Invest, emphasis on "not," but Barry, we've known each other for a long time. I love our conversations. I think you're brilliant at what you do. So thanks for joining us.

BARRY: Well, thank you so much for having me. It's absolutely been my pleasure.

KATHY: Always great to hear from Barry, and I love the title of that book, How Not to Invest. So Liz Ann, what's on your radar for next week?

LIZ ANN: Well, we get a lot of labor-market data out next week. We get the Job Openings and Labor Turnover Survey, JOLTS for short. And although that lags other labor-market data by a full month, the Fed pays close attention to it. So two of the components that tend to be the headline grabbers are the number of job openings, but also things like the quits rate, what percentage of people working are voluntarily quitting. And that gives a sense of confidence in the labor market. We also get the Institute for Supply Management (or ISM) version of the Purchasing Managers Indexes, the PMIs, both on the manufacturing side and on the services side. We got the initial read in S&P Global's version of those. Manufacturing actually went back into contraction. Services actually improved a bit. So we'll have to see whether the ISM version of this sends a similar message. And then, you know, unemployment claims, I think, will continue to be important. And we'll try to remember to always post on my social media feed, both the traditional unemployment claims, but also federal unemployment claims, because most federal workers file separately. And I think it's important to look at those. And then of course, you know, the big jobs report at the end of the week. How about you, Kathy, what's on your radar?

KATHY: All of those same things. Anything involving employment right now is top of the list just to have an understanding of where the economy is going and where the Fed might go. And of course, then we have April 2nd, which is the day we're supposed to find out about tariffs. And I think the market is really antsy about that, trying to understand the extent of the tariff policy. So maybe some clarity around that.

LIZ ANN: Yeah, and you know, speaking of that, one other set of data points that we're going to get that will be this week, but after what's happening now, you and me taping this part of the episode, is the Fed's preferred measure of inflation, so Personal Consumption Expenditures price index, the PCE price index, so some of the data that we got in the Consumer Price Index and the Producer Price Index, which, in total those reports were relatively benign, but some of the components that map to PCE were a little less benign, so that could be potentially of interest.

KATHY: That's it for us this week. Thanks for listening. As always, you can keep up with us in real time on social media. I'm @KathyJones—hat's Kathy with a K—on X and LinkedIn.

LIZ ANN: And I'm @LizAnnSonders on X and LinkedIn. Don't follow one of my many imposters. Try to follow the actual @LizAnnSonders. And you can read all of our written reports. They often have lots of really great charts and graphs at schwab.com/learn. And if you've enjoyed the show, we'd really be grateful if you'd leave us a review on Apple Podcasts, maybe a rating on Spotify, or feedback wherever you listen. And you can find all of our episodes on YouTube. Just search for the "On Investing" podcast, and we will be back with a new episode next week. Thanks as always for tuning in.

KATHY: For important disclosures, see the show notes or visit schwab.com/OnInvesting, where you can also find the transcript.

[1]Saturday Night Live

[2]Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy by Barry Ritholtz; Wiley, 2009.

[3]https://en.wikipedia.org/wiki/Nifty_Fifty