Yes, in these market times you're hearing about the need to diversify, but this is why diversifying is hard. You can have this portfolio that's doing well. It's an optimal portfolio relative to history, right? And still one of your asset classes is going to be losing money in like 80% of years. And this is when you've already cheated. You found the best portfolio you can given the data. And so my point here is like even when you have an incredible portfolio, you're going to lose money and it's going to happen and it's very regular. But over a long period of time, you will actually build wealth. And that's the key to remember.
That's Nick Maggiulli, chief operating officer at Ritholtz Wealth Management, the guy behind the Dollars and Data blog. And he's here for today's big interview, talking a lot about investors and their mindset, how they're dealing with the rapid recovery we've seen, how they might handle what's next, and yeah, why they struggle to diversify. He kicks things off today. Then David Trainer, founder and president at New Constructs, joins us in the baddest biker bar in the investment world, The Danger Zone, where he talks about a company that he thinks is seriously in jeopardy of missing earnings when they make their next announcement. Plus, Christopher Zook, president of CAZ Investments, is here talking long-term thematic investing in the market call. So, let's get going. There's no other choice.
Well, there might be another choice, I suppose, but we're not going to take it because we've got a great show planned and executed for you here today. Even though after the holiday weekend, I may be kind of wishing for another choice. But no, this is Money Life for July the 7th. Thank you so much for joining me. Hope you're coming back from a holiday weekend that was as good and as restful as mine. I managed to work this weekend so that I took time off from work. When I say work this weekend, I set this weekend up so that I really did not have to do any work. And it's very seldom when that happens that I really am like, yeah, I don't have much to do when it comes to work, which allowed me to work on things around the house. There are some decks on my house that we had been working on to repaint and repair, etc. Those are now completely done. We had started that process. We had been hampered by 13 straight weekends of rain that meant that we didn't get the decks done before July. But they're done now. And while I might decide, oh, I could go back and add one more coat of deck stain to it, I don't have to. That's for sure. So, got that kind of work done. Saw some friends, had a game night, spent some time in the pool, did a pulled pork. Like, yeah, it's a good weekend. I got a lot of sleep at the end of it. Just I think all that time outside working, etc., by the end of the weekend, I was just done. So, got a ton of sleep, which for me is not necessarily something. So, I'm amped up and ready to go.
Today is a really important day. You know, several of you have sent me notes about the fact that the Boston Box Lacrosse League, which I run, has lost its place to play because of a fire. And some of you said, "I hope you get your lacrosse team back." This is not a team. I own the league. So, in other words, I am the commissioner. I'm the guy who organizes everything. I'm the guy who collects, makes the money, pays the bills, hires the referees, does everything for this league. It's not a team, though I used to have a team in it that I ran. I do not run a team anymore. And I do not play on a regular basis. I will still jump in in the Boston box lacrosse league. I am now the super emergency backup goalie, by the way. That means I am the super ebug. Emergency backup goalie. Ebug. It's a thing actually in hockey. The Ebug is that guy who's there in case everybody's goalies get hurt like once every couple years. You have some guy who's like a 40-year-old who drives the Zamboni, but he also keeps his goalie gear there. Well, that's the equivalent of me is that I will step in if we have no other goalies, but I try not to do that at this point in my life. And Gail had made me say that I would lose a certain amount of weight before I would play actively again. And I'm not quite there. I'm close at this point. I could probably... I don't want to twist her arm to let me play. I'd rather be like, "Yep, you look great. Go do it." So, under any circumstance, it's not my team, it's the league. And we are at a spot where we either rescue our summer league today. So, that's the other thing I'll be doing all day besides getting ready for tomorrow's show, or the summer league is gone. And then we can start focusing in on the rest of what happens in the fall winter. It would be sad if we lose it from a lot of different perspectives. Not the least of which is, yes, a business perspective for me. But it's a thing now. Sad if you lose it, but whatever.
Hey, the market's gotten back to record highs. It has done this where I think people are hoping that we keep going. But this week is tariff deadline approaching. So, it's going to be a very busy, very important week in terms of what we see happening next. And I would suggest you want to stay buckled up. And if you're going to stay buckled up, well, that means you're going to be diversified. So, you're going to get some of that talk with Nick Maggiulli today. And it's a really important point that he's making there, which is that he's taken a look and done the best he could do in terms of what the data says. And you still find under the best of times, knowing that you're building the best outcomes, you're still going to have an asset class that is in the tank. But to get what you're hoping to get, which is some measure of diversification and the ability to have a portfolio that over time does really well, but at any given time doesn't take the full brunt of the market, also doesn't give you necessarily the full upside. That's trickier. So, really good interview with him and I'm excited. He's going to be back in two weeks basically talking about his new book. So, we've got a lot of good stuff going and I hope you are excited about it.
You can reach me
[email protected] with your questions, your comments. Maybe you want my recipes. I used a rub I had never used before that I kind of made up myself. I jokingly referred to it as the kitchen sink rub because I was looking for something different on this pulled pork that I made. Turned out fabulously. Basically cooked it overnight. Set it up to cook and got it going and then let it run while I was sleeping. I like that. Like that a lot. Benefits of having a pellet smoker. I know some people are like, I don't like a pellet smoker. Okay, I get it. But that's what I have at this point and I'm going to make the most of it and I can't worry about being a purist or whatever. I just want to make great food. But yeah, write me about that too or send us your picks for Quick and Dirty for the Market Call, etc. We've got a lot of stuff that we'd love to be able to help you with. If you've got questions, we're going to try to get you answers. But right now, let's get you some talk. It is Nick Maggiulli, David Trainer, Christopher Zook. It is a great day to get us back to business after the holiday weekend. So, buckle up. The big interview starts us off right after this message.
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Welcome to the big interview on the July 7th edition of Money Life. Joining me now, Nick Maggiulli. He is chief operating officer at Ritholtz Wealth Management. He is the blogger behind Dollarsanddata.com. And if you are not familiar with Dollarsanddata.com, make yourself familiar. You will really enjoy the stuff that he writes there. He's got a book coming out and he'll be back on the show discussing that on the 22nd of July when the book releases. The book is The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life. I have an advance copy. Yeah, I'm super excited that we'll be doing the interview about the book and we're giving away a couple of copies in the run-up. But again, if you want to learn more, well, Dollarsanddata.com will get you to Nick's latest thoughts other than the ones he's going to give us here. Nick Maggiulli, it's great to have you back on Money Life.
Thanks for having me, Chuck. Appreciate it.
Let's talk just a little bit about mindset because one of the things I love about your work, and I will point out I have to fight the urge to see you post something on LinkedIn or see you post something out of Dollars and Data and turn it into the Money Life quote of the day routinely because like you're up and coming in terms of how many times we've used something you've said as our quote of the day. But how much right now when you look at the disconnect between hard and soft data that everybody talks about where all the emotions are bad but all of the economics are okay, etc. Do you worry that people are worrying and stressing themselves into something bad? Or is worry and fundamentally having these concerns okay if it keeps us from getting too excited about good stuff so that we keep our nose to the grindstone?
I think there's a little bit of both going on. And you know, Kyla Scanlon, she put forth this idea, the vibe session, which is like all the data is good but everyone doesn't feel good about it. And so I think it's because there's a lot of uncertainty in the economy, especially earlier this year with tariffs. It's like they're on and off again. No one knows what's going on anymore. It just all seems a little, you know, crazy. And in addition to that, like inflation, yes, it's not what it was before, but people are still worried about inflation kicking off again, right? You're seeing gold prices hitting record highs, all these different things that are happening around, you know, in the last few months where it's concerning people and they are worried about a lot of these things. So I think the worry makes sense even though the data is still good, because you never know. I think it's just more of the political climate that's creating this, right, with this, oh, we're going to cut spending and we're going to do this and all of a sudden we have this big beautiful bill which is doing the exact opposite, right? So it's like it's the back and forth. No one knows kind of what's going to happen. I think that uncertainty is causing some of this and it's very fair to feel that way.
How much do people have to get out of their own way?
I guess it depends on what we're talking about. I think you know you don't want to get so caught up with what's going on in the news cycle that you, you know, stop investing, you stop, you know, saving money, you stop doing all these other things that you were doing previously or you start, you know, getting distracted by certain asset classes and thinking, oh, I need to put everything into gold or bitcoin or something like that. You know, I think those can be mistakes because the future's uncertain, but I also don't think the future is going to be very, very different from the past. I think a lot of things tend to, you know, history doesn't repeat but it rhymes, as Mark Twain said allegedly, right? And so thinking about that and how you think about the future, understanding history, I think is very helpful in this regard. Of course, the future's not going to be like the past, but you know, human nature doesn't evolve as quickly as people think.
I should have had you on as the market was going crazy because in your blog you had something that doesn't happen often, which is you had perfect timing in that on April the 8th, the low after Liberation Day, you published a piece going, how long does it take for the market to recover? You talked about the variance in the data, etc. But I'm curious what you think of the emotion that go with that data as well because we recovered so quickly that I've heard people talk about how, you know, they're now not worrying about what the next downturn will be, etc. They may worry about not being able to buy their groceries, but stock markets just bounce back the way they just did. That's not a fair thing, is it?
I think it's a bad lesson to learn and it's only bad because it's been happening over and over again in bigger and bigger ways. Like the fact that, you know, in March 2020, you know, we bottomed and then the data was getting worse and the market was already on the way back up. And so like the data was getting worse into April in COVID. I mean, everyone who's listening to this knows that, right? The data, you know, wasn't good in 2022 and then the market, you know, came back in '23, right? This year, all the tariff stuff happened. It's not like all the tariffs were figured out by the end of the month and everyone's happy. It's like, nope, tariffs are still uncertain. There's still a lot of unknowns here, but you know, market moved back quickly. And so I think information is moving faster or at least markets are moving faster than they used to. So a lot of the data I had was historical analysis when, you know, people were using newspapers and all sorts of ways to, you know, spread information and now it's changing. And so I think recoveries can be faster, but at the same time if you expect, oh, it's always going to come back, it's always going to come back, at least on a very short time scale, I don't think that's the right lesson. I think over a long time scale, I think it's a fair thing to say, hey, markets usually recover even from really bad, you know, catastrophes. There are a few exceptions to that throughout history, like we can look at, you know, Greece or a few others, or Japan had a really long extended multi-decade drawdown. But for the most part, you know, if you're buying over time in a globally diversified basket of equities, you're going to build wealth, right? And that's been true historically, at least the last century. Of course, there are situations where that won't be true, like nuclear war or something like that. But let's hope, I think your investment portfolio is going to be the least of your worries in that scenario.
Yeah. Interestingly, while we haven't had nuclear war, we've had multiple wars. We've had the market and all the observers worrying about all of those impacts and those impacts have been pretty much negligible. Does that continue? Like is there, whether it's the geopolitics stuff we worry about that the market seems to price in and then the market seems to forget because it's not happening, or is there a reckoning coming?
I have no idea. You're asking me to predict the future and I don't know the future. That's the truth. You know, I'd hope the markets are pretty smart. They're usually pretty good, you know, most of the time, but yeah, they make mistakes. There could be a massive error that market participants are making right now around either the conflict in the Middle East, the conflict with Russia, a possible conflict between China and Taiwan. I mean, people have been talking about this stuff for years and it's happening in ways that we don't know. And so, we'll see. I hope none of that stuff happens. I hope we can get along as a species and we stop, you know, having wars and disagreements and all this, but I can't predict the future.
But in terms of market impact, do you get to a spot where you see it and you go, I'm more likely to see market impact when a ship gets stuck in the Suez Canal than I am when war breaks out?
Well, I see that and I think the reason why is, well, when a war breaks out, where's the war? How is it impacting supply chains? And how is that impacting capitalism? You know, that's what the stock market is, it's all discounted future earnings. And so if there's some isolated conflict somewhere, you know, let's just pick a random, you know, a country in Africa that maybe is not integral to the world supply chain, that's not going to really have an impact on that. So that should have almost no impact on the market despite as terrible as it might be on a humanitarian basis, right? And so I think that markets are just reacting rationally to the information. So a ship getting stuck, preventing a lot of goods coming through and all that can be far more market moving than a conflict where there's, you know, human lives involved.
Unfortunately, you talked about having a globally diversified portfolio. Diversification is great insurance as a general rule that doesn't cost us anything and yet people do a horrible job of diversifying because it forces you to buy stuff that's not necessarily doing all that well. Is diversification getting to where it's going to pay off? And it's paid off at some point, but I've already talked to people who are like, "Yeah, that rally you've seen in Europe, etc., that was nice. Still going to focus mostly on the US because that's mostly over."
Yeah. So I hear those arguments and the problem is I actually did an analysis on Dollars and Data, you know, years ago where I went and I got all these different asset classes, US stocks, international stocks, emerging market, gold, real estate, bonds, all this different stuff. And I put them into an optimizer and it says what was the best portfolio per unit of risk, like highest return per unit risk over the last, you know, 40 years. And it gave me the portfolio. And then I said, "Okay, how did that portfolio actually perform?" Right? And in one in four years, it lost money. This was mathematically, I cheated. I basically looked at the answers on the test, right, ahead of time and I said, "Let me get the highest return I can per unit risk." I cheated on the test and I still would lose money in 25% of years. And in every year, I think it's like in basically every year, there was one asset losing money. So you can have this portfolio that's doing well. It's an optimal portfolio relative to history, right? And still one of your asset classes is going to be losing money in like 80% of years. And this is when you've already cheated. You found the best portfolio you can given the data. And so my point here is like even when you have an incredible portfolio, you're going to lose money and it's going to happen and it's very regular. But over a long period of time, you will actually build wealth. And that's the key to remember.
Well, I guess the other question would be once you found that ideal portfolio, separate from the data, do you think most people could do it? And I say that because when I first started writing about mutual funds at the Boston Globe in the 1990s, I wrote a column that sort of said, you know, the ideal mutual fund would be that's in the top 10% of its peer group over a decade without ever spending a quarter in the top 10 or the bottom 10, right? That you can avoid those extremes. And of course, readers wound up going, "Okay, smarty pants. What funds do that?" I proceeded to work with data researchers and whatever and they came up with a list and it's like, oh, I wouldn't want to own half of these fund companies, etc. I would not necessarily want to own these funds even though long term they had done really well. So I guess that's the other question in that ideal portfolio, could you actually buy? Do you think most people could follow that to buy it let alone hold it?
Yeah. Well, that's the question, right? And it's like even obviously in the optimal portfolio, I'm telling you ahead of time, hey, this was the great, the best answer to the past doesn't mean it's going to be the best answer to the future, right? But at the same time, like once again, it's difficult to hold. So you have to, your portfolio is not going to be the optimal portfolio. It's very unlikely that's going to be the case, right? So assume that's true. Say, hey, come up with a reasonable mix that makes sense and hold it and own it. If you don't want to own international stocks, you don't have to. I think you should because there are periods like 2000 to 2010 where US stocks did terribly and international stocks did very well. Since then it's been the opposite, which is why we're even having this conversation, but I could see another period where US stocks underperform European stocks or, you know, Asian stocks, etc. Just international outperforms and so figuring that out, it's hard to predict the future. You can have theories and those theories might be right but they also might be wrong. So that's the difficulty with this.
We remind people all the time that the show is called Money Life, not because money comes before life, but because Money Life sounds stupid. Just doesn't roll off the tongue. So we are living the money life here. But you've written a number of pieces particularly recently and I think some of it may have been as well as other things you were thinking about as you were working on The Wealth Ladder, the new book, really tried to talk about keeping money in perspective. And in some of those ways, I don't think you've taken on the financial independence, retire early movement, the FIRE movement, but you certainly have stuck a fork in them a little bit. I get it. I think FIRE, it's a great acronym, but to me, I tried to work out something that would be Fig Newton, financial independence gaining, you know, because to me, financial independence gaining choice would be it, but FIG C just doesn't do anything for people. But how much are people sort of institutionally because of the way the financial services business is, missing out on life experiences because of the money? And I think just about like people are told get this much money, you know, here's the formula, you'll be able to live off of 4% of that and your money will last a lifetime. Well, your money lasting a lifetime without ever diminishing is really good for the financial advisor and it's really good for heirs that are going to inherit that money, but it's not always that good for you. So, how much have we institutionalized choices that place money ahead of life?
I think, you know, there has been some movement in the other direction, which is like the whole Bill Perkins Die With Zero, which I don't think the book is perfect, but I think it's directionally accurate. I think dying closer to zero is what we want to get people to do, especially those who have very large portfolios because you're right, you spend all this time, energy, all this stuff to get all this money and then it's very unlikely that, you know, that money is going to actually be drawn down. Most retirees don't even reduce their principal. They just live off the interest, right? And a lot of them don't even, they live off of even less than the interest so they have extra money at the end of the year to reinvest. So over time their portfolio values tend to go up for those that actually have portfolios, right? For those that don't, they're just living on social security. That's a whole another conversation. But you know, my point is like a lot of people, they don't focus on those things and as a result, you know, they can end up in a place where they have much more than they need. And so I think, you know, you're right, it has been institutionalized in some way. It's what we talk about a lot. But that's, you know, it's measurable. That's the thing, it's easy. You know, it's easy to measure. It's easy to see your bank balance or your retirement account balance. It's much harder to be like, "Oh, well, how much have you actually lived the life that you've wanted to live?" You can't put that, you can't just open up an account and see, you know, how well you've lived your life, right? In the same way compared to like a bank statement. So, it's just something to keep in mind.
With that in mind, how much should people be investing in what they are comfortable doing and saying, "Okay, I may not be getting optimal returns, but I'm sleeping at night. I'm not freaking out all the time about my money" versus, you know, go after maybe it's that optimal portfolio, holding those things that make me uncomfortable because that's supposedly going to give me a better in quotes outcome?
You have to own the portfolio that you can hold the longest. In my opinion, if that means you can't own an asset that might actually, you know, improve your portfolio, then you have to forgo it. And so, at the end of the day, there is a lot of behavior here. I wish it was all just math and optimizers and whatnot, but no, there's a lot of behavioral pieces here. And you have to, if you don't feel comfortable, like if someone's like, "Oh, well, given your age, you should have a 70/30." And you're like, "I don't feel comfortable with a 70/30." Then you need to own a 60/40 or 50/50 or whatever it is. If that's what it is, then find another way to get more financial resources. Maybe it's focus on your income or your career or something else and not your portfolio. That's the takeaway I would have is like, "Hey, I don't feel comfortable taking this much risk." And if you want to grow your wealth, if you need more of that growth, you're going to have to find it elsewhere in your financial life.
When it comes to planning, all of the studies say that, you know, planning makes people calmer. It leads to better outcomes, etc. You are a leading light in the financial planning world. You work for a firm that certainly is an example a lot of people want to emulate and follow. But the fact is that it is still a business that is driven on sales and that to solve the problems and get past people's emotions, we are creating all kinds of new products. They may be new products that really are better and that work great, but they're not new products that are well understood necessarily by the public. Are we getting to where the planning industry is fighting with itself or getting to a spot where you're going to see, you know, the guys like you who kind of say, "We're going to build you that portfolio that works" versus the other guys who say, "Hey, let us put together a portfolio and trust in us and it'll turn out."
I mean, I think at the end of the day, it's what are you actually selling? Are you selling the product and how are you being, you know, compensated as well, right? If you're just saying like, "Hey, I'm being compensated just like an AUM fee." That's one thing. If you're like, I get compensated based on, you know, commissions relative to the products I sell you, it just changes your incentives. And so, understand the incentives of, you know, whatever planning relationship you go into. And like, you know, a fee-only type planner or most RIAs, you're going to do something where it's like, hey, I only just have an AUM fee. Okay, in that case, I'm incentivized to have you invest as much money as you can and have a higher balance so I make more fees. Right? If you're going through that logic there, right? Just think about what's the compensation model and how could that possibly impact the advice, right? That's the question. And so obviously you want to be a fiduciary and do the best thing for the client. But to say that incentives don't matter is definitely not true. Incentives obviously matter and they impact everybody.
Nick, I wish we had more time. We do, but it's going to be for our interview when we talk about the new book which will be on our show on the day it releases on July 22nd. Meanwhile, thanks so much for this conversation.
Thanks, Chuck. Appreciate it.
That's Nick Maggiulli. He's chief operating officer at Ritholtz Wealth Management. He is the blogger behind Dollars and Data, which you find at dollarsanddata.com. And yeah, his upcoming book, in case you want to be figuring it out before it comes out, is The Wealth Ladder: Proven Strategies for Every Step of Your Financial Life. And you will learn more about that on the 22nd of July when we talk about the book then. But you've got more to learn on today's edition of Money Life. So settle back and relax. We'll take a quick break. Be right back at it in just a moment.
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If you're looking for trouble, belly up to the bar because you're in the right place. This is the danger zone.
Yes, you're in the baddest biker bar in the investment world. That's what we call the danger zone, which is where we on Money Life talk with the experts from New Constructs, a research firm that evaluates securities on a scale of most attractive to most dangerous. They do it by bringing together discounted cash flow analysis and forensic accounting. They dig in at the footnotes level and work their way up. And what they find is that the skin-deep take of most firms, well, at times it's misleading. Now, if it's misleading and the real numbers work in your favor, that would make something attractive. That's not really what we focus on here. We're looking at the stuff that could get ugly. If you want to find out about how it works and you want to find out who's on the most attractive and most dangerous lists and more, go to newconstructs.com. David Trainer is founder and president at New Constructs. David, welcome back to Money Life.
It is great to be back, Chuck. Thank you.
Who's in the danger zone this week?
Danger. Caesars Entertainment. It's ticker symbol CZR. And I know they're not here for no reason at all. So, what's the problem that brings them into the danger zone?
Chuck, they are on our list of companies most likely to miss earnings for the second quarter of 2025. We are bringing back an old product, right? For a long time we used to do who's most likely to beat and miss every quarter. We dropped it for a while because we were focused on some other things. But we're bringing this back. We want to talk about core earnings more. Our core earnings indices managed by Bloomberg are doing extremely well, outperforming this year, and this is a popular product. We're glad to bring it back and Caesars makes the list.
So, first, are they at the top of the list, or are they a particularly obvious candidate for one or another reason?
They're not at the top of the list, but they have significant unusual income that is...
causing their reported earnings to be overstated and their street estimates to be overstated. And yeah, we chose them out of five because it's one of the largest market cap names and they've got some interesting things in the footnotes.
Well, out of five is in a report that you guys wrote about where street estimates are too high. But let's also quantify the problem here because you look at who's overstated and there are a lot of companies whose street earnings in your estimation are overstated. So help people understand street earnings, why they're overestimated, what percentage of companies out there you look at that are overestimated.
We're seeing right now in the S&P about 39% of companies are overstating their earnings by an average of around 14%. So, it's a pretty big number. This number fluctuates back and forth, not a ton. You'll see big spikes typically in market downturns where earnings get understated more than overstated. But, yeah, we're seeing about a third of the S&P 500 right now has got overstated earnings.
Of that, as you said, the average overstatement, 14%. So when we're talking about Caesars, how bad is it?
Caesars' earnings are overstated by 46%.
There's a few things. The big one is a $269 million gain on the sale of property, equipment, trademark, and businesses in the last 12 months. And then there's also $335 million in transaction and other costs that we found in the footnotes as well.
