Episode Transcript
[00:00:01] Speaker A: Mark, welcome aboard to the show. I'm so happy to have you on today.
[00:00:04] Speaker B: Thank you. It's a pleasure to join you.
[00:00:07] Speaker A: Mark, I want to start with a horrifying story. I was managing a Siemens consulting business. My employee was telling me that he is making less and less money every month. And I was like, how is that possible? And what he was explaining to me is that the rate of conversion between dollars and Brazilian real was basically affecting his salary.
So to me that was horrifying. I mean, you know, you, you don't want, you know, this kind of ambiguity and how much, you know, goes into your bank from month to month. But I wanted to understand from you a little bit about exchange rates. Like what, what does that even mean? Give us the most simplistic explanation that you explained to your, you know, 10 year old son on what are exchange rates? Why do they exist? Why do they fluctuate?
[00:00:56] Speaker B: Sure.
I've been able to build a career in the foreign exchange market primarily because I truly am excited every day I wake up. The foreign exchange market is the biggest of the capital markets. It is the bank for International Settlements, which was originally designed to collect war reparations from Germany after World War I, does a survey every three years about the size of the foreign exchange market.
The last estimate was seven and a half trillion dollars a day. This is a mind boggling number. Put this in perspective for you. Global trade in a year is about $40 trillion. So you and I are talking on a Thursday. And that means that already this week we have seen enough foreign exchange turnover to cover world trade for a year just this week.
[00:01:49] Speaker A: And when we talk about this trade, this is basically one currency converting to another currency. Or is this including more stuff?
[00:01:56] Speaker B: Yes. So we talk about currencies, sort of like when a country becomes independent, they do a couple things. They get a flag, they typically want a steel company, a steel factory, and they get their own currency.
And having your own currency means that you have an independent monetary policy, that your central bank can set the interest rates for your country. The they can print the currency, a big printing press. So we'd consider that like monetary sovereignty, having one's own currency. And so nearly every country has their own currency, though of course there's some exceptions.
Many countries in Europe share a common currency called the Euro. Other countries like Saudi Arabia, the UAE peg their currency, the US Dollar. We all know that Hong Kong is part of China, but the Hong Kong dollar is pegged to the US dollar. So in this world of foreign exchange, where most countries have their Own currency, the dollar still is king. By that I mean that the dollar is still used as the key metric for how a country is doing. They report their gdp. Everything they produce in a year, they produce. They might report it in dollars. Many of the trade. Consider when Australia might sell iron ore to China. That iron ore will probably be invoiced and paid for in US dollars.
So even when the US isn't involved, you said you did some work with Siemens in Brazil. When Brazil sells soybeans to China, they're effectively going to charge US dollars. Partly, it's sort of like the dollar. The lingua is sort of the international language. Just like English might be the language of business, the dollar is really the language of international Commerce. It's not 100% true, but the bulk of it is true. Where the dollar is still a key role in the world economy. Even in China, where China wants to maybe have a greater role for their own currency, the dollar still plays a very big role in Chinese initiatives like the Belt Road Initiative, which is a development program for developing countries, infrastructure development. China also has launched an Asian infrastructure investment bank, sort of like a World bank type organization, multilateral. And they take dollars for subscriptions. To join, you know, as a member, you pay dollars. And when they make loans, initially they try to make loans in Chinese currency. But what people would do when they got that Chinese currency is to sell it and use dollars because they need to buy dollars to have to buy Caterpillar tractors, for example, or to buy iron ore or to buy copper. And so even the Asian invest. The aiib, as it's called, is also based on the US dollar.
[00:04:38] Speaker A: And so I want to break this down. I mean, any one of us that has traveled abroad knows, you know, China. So we need to change our dollars to yuhan.
Why is there even a different rate? Like, why is it not just one to one? And why do those rates fluctuate? What is causing the fluctuation of those rates between two different countries or more?
[00:05:02] Speaker B: Yeah, I think you're right. So even if we begin off with two countries that, say, have very integrated economies that are roughly the same level of industrialization, say the US and Canada, the currency does fluctuate. It turns out that the Canadian dollar fluctuates less than the other G10 currencies, highly integrated with the US but the reason why Canada has rejected taking the dollar, say, as their currency, why don't Canada just adopt the U.S. dollar? Canada is about 1/10 the size of the U.S. the U.S. buys something like 80% of what Canada exports. So on one hand, it would make sense Canada just should accept the dollar, the US Dollar. But ultimately what the exchange rate does is it offers a bit of a shock absorber. The US Canadian economies are dynamic. Trade between them fluctuates. And so you want something so that they think of it like what a shock absorber does for a car. You don't want the passenger in the car to have to. There are all these bumps, especially in the US Roads with a lot of potholes and things like that. And so what you want to do is have these shock absorbers inside the car that absorb the shock so the passenger doesn't have to in a similar way, that's what I think that the capital markets do at their best, and that is after the shock absorber. So the price of money, and that's what we talk about ultimately when we talk about currencies, we all know that interest rates are the price of money. You want to borrow money, you, there's the price of it, interest rates. But when you take your money outside the country, the price of it is really denominated in foreign currency. So how many euros can the dollar buy? Or how many Canadian dollars, how many dollars can the Japanese yen buy? And so the currency is still really the price of money.
And because the economies are dynamic, you want to have some flexibility to absorb the shocks. The drivers of the foreign exchange market, though, people like myself, we build a career around it in the sense that it's not always clear what drives the currencies. There's, I'd say, two big schools of thought. One school of thought is based on things that you'd be familiar with, macroeconomics, inflation, interest rate differentials, trade balances, those kind of macroeconomic factors and the currency markets, I thought to bring those macro factors into balance, whether it's interest rates or inflation, the idea is currencies ought to move to bring some of these, bring a macroeconomic force into closer balance.
[00:07:32] Speaker A: So let's simplify this because really you've said two, I think, important reasons, which in their most simplistic form, it's the supply and demand. So if somebody wants a lot of that currency, then the price, keep me honest here, is going to go up. Now, if there's an excess of that currency, like of any other goods, we're looking at currency as a good, then there's an excess of that currency, then the price goes down. And really what the price is, it's the price to get that currency with any other currency. So we're kind of looking at money as a good something that can be bought and sold. And that's really what we're doing.
But the other aspect that you said I think is more interesting and this is this idea of inflation. If I, you, if I as Canada decide to basically use the US dollar, what am I giving up? I'm giving up the ability to print money. So I'm basically not able to get what we would call senior tax or to kind of create that kind of inflation. Is this true? Is this a reason why countries would consider you their own currency versus the dollar?
[00:08:48] Speaker B: I think it's partly that. I think that it's really a question of sovereignty. And if you can print off your own currency, that means you can respond to factors that are hitting your economy that might be different than our factors that are hitting the US Economy. So for example, recently Canada's had a couple of large port strikes, dock workers going on strike, that disrupts trade. And so that's a shock that goes to Canada that might not be in the U.S. so maybe, I mean, it's not quite true in this case, but say this unique shock hits Canada and Canada would like to cut interest rates to help stimulate their economy.
If they have monetary sovereignty, they can do that. They can cut interest rates and as a consequence, as part of reducing the cost of money, the currency would fall. And that's really what's happened this year. The bank of Canada is among the most aggressive central banks in cutting interest rates. They've cut interest rates about 125 basis points since about the middle of the year. And the Canadian dollar has weakened as one would expect.
And so far I'd say that Canada would allow a weaker currency because it's part of the effort to help stimulate the economy that central bankers typically want the currency to go in the same direction as monetary policy. So bank of Canada is cutting interest rates. They seem to be accepting a weaker Canadian dollar as a result.
[00:10:11] Speaker A: So this seems counterintuitive. Like why would a weaker Canadian dollar, in what ways would that actually be beneficial for the country?
[00:10:20] Speaker B: Yeah, that's a good question. So when we think about it, you think about the whole chain of causation like, so what happens when you have a weaker Canadian dollar? Well, one thing it does is it boosts the costs of imports.
If it boosts the cost of imports now, you as a Canadian would be paying more to import goods. But also it allows domestic producers to raise their prices too because the foreign competition price has gone up. So basically it allows businesses to raise prices that would be over time inflationary. In addition, by the Canadian dollar weakening, that makes Canadian exports more attractive, it lowers the price of those exports. And that would, all else being equal, the lower price of Canadian goods would help boost the demand for that. And so even though maybe domestic demand is weaker because of this shock that Canada's been hit with that weaker Canadian dollar, lower interest rates stimulates foreign demand, which then also helps come in and helps lift the, helps provide extra prime, that pump priming exercise to help the domestic economy. These things take place over time to have effect, right?
[00:11:34] Speaker A: So as all things in economics, there's winners and losers, right? So I mean, really, okay, if I have a weaker currency and I'm exporting, maybe that's a good thing for me because what that means is that I am cheaper to purchase from me than maybe a competitor of mine in another country because my currency has basically been devalued. However, if I'm importing, what that means is that I can buy less with my currency. So really what that means is we have winners and losers and every change, right, it creates these winners and losers. And it's not a good or a bad objectively, it's really thinking about who and how much are these winners of losers. I really appreciate that. I wanted to go through something that is incredibly curious and interesting. This idea of printing money.
What does that do if the government, let's say, has a million dollars available everywhere in the market and it decides to print another million dollars, what actually happens to our currency due to that? Very simplistic example.
[00:12:42] Speaker B: Yeah. So I think going back to what you were saying about supply and demand, I think that's a good insight that money should be thought of in some ways. We should think about money in the same way we think about other goods and subject to the supply, subject to the law of supply and demand. And so what that means then is that one way to think about currencies, the value of currencies, one of these macro equilibrium factors, one of these factors that currency should bring into equilibrium is that if your country is printing off more money than mine, so your money supply, call it going up faster than my money supply, that is to say, the quantity of Canadian dollars is increasing faster than the quantity of US Dollars, all else being equal, you'd expect that the Canadian dollar would weaken, just more supply, you assume demand is constant. That doesn't always work that way. But I think just as the first cut of the pie, and that makes sense to begin with, that the price of currencies adjusts to Equalize underlying interest rates. We call that interest rate covered parity.
Currencies could move to equalize a basket of tradable goods. You probably see that in the Economist magazine. Sometimes they look at the Big Mac. We call that purchasing power parity. And what you were just talking about with the quantity of money, that currencies ought to equalize the quantity of money. So if your money supply is greater, it's growing faster than mine, your currency should weaken and mine should strengthen again, bring those things, those factors into some kind of equilibrium.
I would just add one other thing, and that is so far we've really been talking very much of a state centric model or a central bank centric model. But it turns out, for example, that if I were to go to my local bank and borrow $1,000 from my local bank, in effect, they're printing that money for me. They're going to credit my account with. They're going to say, we'll loan you $1,000. I go, well, give me the thousand dollars. They say, well, we're going to credit your checking account with $1,000. I go back to my ATM, I say, wow, they put $1,000. It's just, it's two things to say about. One is, I know a lot of people are fascinated with the idea of a digital currency and cryptocurrency. I want to say that the seven and a half trillion dollar a day foreign exchange market is already digital. That is, we're not really taking money, a suitcase of money, and bring it from one bank to another. It's all done electronically and on these spreadsheets, basically. It's not quite blockchain, but it's not so different from that either. And the other thing to say too about this, I think, is that it's not just governments that create money. We really have to think about how banks create money through the act of lending and what happens. So the bank credits my account with $1,000 and I have to pay that thousand dollars to this carpenter I hired to fix, to fix a bedroom. You can see I have a hole in my wall. I need a carpenter to fix that. And so that thousand dollars that's credited to my account, I am now going to transfer it to the carpenter's account. So in effect, my bank created $1,000. I owe them $1,000. They've got that asset and liability. And now my carpenter has this new asset and that's also basically on deposit at my bank until he moves it.
[00:15:57] Speaker A: I think the interesting thing is that, you know, banks Lending money.
This surprised me. Where does that money come from? So banks lend, they have their interest rate, they're actually lending money in credit cards. Right. They're floating you for a month and then if you don't pay within that month and they're taking interest on that, how can they even loan money? Where is that money coming from?
[00:16:18] Speaker B: Yeah, no, that's. This is the amazing thing, I don't think, you know, when we all study like Econ101 in college, they don't really tell us all these kind of like the nuances, how this really works on this kind of basis.
Again, I think that we have a couple of key principles. One is called the marginal reserve system. So if you deposit $100 at a bank, the bank can lend out $99 if it wanted to.
[00:16:45] Speaker A: Isn't that brilliant? They're lending somebody else's money.
[00:16:50] Speaker B: Yes, it's really this picture.
[00:16:51] Speaker A: It's not their money, it's our money that they're lending back to us.
And they're hoping that they won't run out of money, which is really, you know, the bank run situation, which we can talk about too. But when I heard that, I was like, this is brilliant. They're taking other people's money, they're putting an interest rate, they're lending it, quote unquote back to us. And that's how they're running their business to a certain degree.
[00:17:11] Speaker B: Yeah. Sometimes I think about like what banks do and I'd say that's partly like a maturity matching service where I'm bringing them my paycheck and I want to have it in my checking account, which means I can get access to whenever I want. Now the bank will take that money that I just deposited from my paycheck and if I get paid $1,000, they can lend out, basically, they can lend it all out.
The game, the hope then is that they're lending it out to say someone who maybe to you who want to buy a house. And so they're borrowing from me for the short term because I get that money as soon as I want it. They lend to you on a 30 year mortgage. And so borrowing short term, I deposit lending long term. And this is like, I want to say this is maybe the first or second oldest profession and invariably you could see the difficulty and why it would be posed risks. And this is why, whether banks get what they want and regulate themselves or the government regulates them because of the difficulty in managing this maturity match, short term borrowing, long term lending, we have these periodic crises and the periodic crisis I think is almost, it's very like almost predictable in the sense that we make a mistake. Call it the Great Depression. And so out of that Great depression comes new rules and regulations to make sure that pipes that we're moving around this money are strong. And I think Joseph Stiglitz, Nobel prize winning economist up at Columbia University, had this during the great financial crisis. He said, what we want is a prize fight. And for a prize fight we need a referee and strong rules. Without that we get a ballroom brawl, not a prize fight. And so what happens is every so often we have these crises, we say, okay, we're repenting, we're going to make rules and regulations to prevent this from happening again. And a few years later we forget why we had these rules in the first place. And someone, a new generation, a new group of politicians come along and say we don't need these rules and regulations anymore, let's dilute them. It's too much government interference and that's sort of where we are now. We came out of the great financial crisis, the 0809 financial crisis.
We had new rules, new rules regulate the banking system. And in recent years and going forward there's efforts to try to dilute them thinking that we don't need quite that these rules are too strong and we don't need these rules. And banks can regulate themselves and that's sort of where we are. We're at the sort of the downside of that cycle now where people, where the banks, commercial real estate exposure, for example, very big, small regional banks.
And there's an effort I think in Washington and post election be even more of this deregulation effort to say the pipes, we strengthen the pipes too much, let people become responsible for their own decisions again.
[00:20:12] Speaker A: And this is so incredibly interesting the mechanics of how this happens, right, These financial crises, right? Because really when you lend money to somebody, you're taking a certain amount of risk, right? So you know, maybe this person can give the money back, maybe not. Now the way that banks kind of hedge or insure themselves against that rich, that risk is basically our interest rate. So if you're a higher risk customer, then you're going to pay more money basically to take this loan. And if you're a lower risk customer, then well, we trust you, you've always paid back your bills. So we'll give you quote unquote cheaper money.
Now this is an incredibly simplistic know explanation but the way I understand what we call the subprime or 2008 crash is really? Because we, we didn't look at the risk properly. We were giving people loans that are at high risk and we were kind of aggregating and saying, no, these guys aren't that risky. And the way we did it is by just selling our to each other. Is that a fair description, hyper simplistic of what happened in 2008?
[00:21:24] Speaker B: I think that partly right. I mean, we used to call those kind of loans that you're describing. We call them NINJA loans. NINJA meaning no income, job or assets.
But I want to say something very important here too though. That's not just these errors of judgment.
[00:21:39] Speaker A: Yes.
[00:21:42] Speaker B: Because it wasn't just subprime homeowners that got hurt. Regular mainstream homeowners got hurt as well. That's not just the excesses, it's not just the market failure by having these NINJA loans. Because I want to say that this was not a defect, this was the design. I'll give you an example why. How could this be? These MBAs, these people who have the degrees from the Ivy League MBA programs, they're the best and the brightest. How can they make these NINJA loans? And not just once, but repeatedly over a course of a career. And there's a very, I think a good explanation and why it's also rational and why it's part of the way the system works.
So, for example, typically you would think that a bank would lend you money because of your ability to repay. Like you said, you have a lower credit rating, you have to pay a higher interest rate. Do you have a better credit rating, you get a lower interest rate. That all makes sense. But what happens though is that at parts of the business cycle, the bank will not make a loan to you based simply on your ability to repay it.
It'll make the loan to you based on the value of your collateral.
Which is why banks can lend to, say the oil patch in Texas or in Oklahoma and not be concerned. If oil is $100 a barrel, I'm happy to lend you money.
It's only when oil goes down, when the collateral is worth less than the loan, that becomes an issue.
Similarly with housing market. Same thing, the MBA types, these bankers, everybody thought house prices could only go up because that's what we've seen them do for a generation. House prices went up. So I'm willing to loan to you even if you don't have a job, income or assets. I will loan you money because if you do not pay me back, I take your house and your house only goes up in value. So no problem there. Same Thing with the oil patch, and this is what gets a lot of banks into problems then, is that when it comes time to get that collateral, we find out that all collateral doesn't go up in price. House prices don't always go up.
The oil prices don't always go up. Even if there's a shortage of oil or a limited supply of oil, sometimes oil prices fall.
[00:23:57] Speaker A: And would it be fair to say that Silicon Valley bank, which crashed very recently, this is just a few years ago, was exactly that. They invested, you know, undiversified in one asset. The asset went down. They're like, whoops, we don't have enough money. And a lot of entrepreneurs basically, you know, lost their money that was in the bank.
[00:24:17] Speaker B: Yeah, I think that oftentimes, I think that oftentimes we are the way we are sort of hardwired as people. We like those sort of straightforward explanations. But I often find that in the biggest developments, I'd say rather than mono causal explanations, which the opposite I'd say is overdetermination. Something has many causes. So for example, Silicon Valley bank had several different problems that they had. And so it's not just one, but also that, for example, that they thought the deposit base was more secure than it was people. I mean, I probably banked at the same bank for the last 20 years. So we've seen these.
[00:24:59] Speaker A: It's quite an aggressive assumption when all of your customers predominantly have one type and they're all entrepreneurs. I mean, that feels like a hairy explanation to me.
[00:25:08] Speaker B: Exactly. It leads to consolidation, risk. And that's the other part of the problem is that in our society we sort of think that, and I think there's a lot of studies that show different ways that this could be expressed. We sort of think that people have money, are smart or they deserve their money, or they're smarter than us normal people. And instead I think it's much more complicated than that. And that the, that when people have a lot of money, they typically don't think they have to listen to other people. And the regulators were telling Silicon Valley bank they had some problems and they were reluctant to address them because why should they how fast they grew, Isn't that a sign of their own success? Yes. And so I think that a self like reinforcing cycle and the other element here to bring in would be this economist named Minsky, Hyman Minsky, and he basically suggested that if you have an asset that continue that goes up consistently over a long period of time, that stability, that stable rise, turns into its opposite. Because more and more people get out of that train, that trend, and they leverage themselves up. And I think that's what's not talked about much with the great financial crisis or even some of these commercial real estate exposures is what kills people and businesses isn't always making the wrong decision. Hell, we make wrong decisions all the time. When I would hire, when I was at a hedge fund, we'd hire traders. We wanted them to be right, that is, take profits 60% of the time, only 60% of the time. Have your average winner be bigger than your average loser, take profit 60% of the time. You can't help but make money. That's very hard for even professionals to do. So making the wrong decision is not the thing that puts businesses. That hurts businesses or careers.
I think what hurts that, what hurts careers and businesses is the leverage.
If you have a stock and it goes down 20%, it hurts. You feel it. But imagine how you leverage 5 to 1, which is a relatively low leverage 5 to 1. Now you've wiped out your whole principle.
That's what happens. Leverage is what kills and sinks businesses and individual careers. Not so much making wrong decisions. We make wrong decisions all the time, and that's why they're easy to reverse. Oftentimes you have a stop in the market. You protect yourself.
[00:27:34] Speaker A: Every single one of us is leveraged to a certain degree because we're all taking mortgages.
And, you know, in the mortgage case, the asset that you talked about, right, that's backing up that loan, because leverage is really a loan. So we take out this loan, the asset that's backing that up means that, oh, you're not going to lose your shirt, you know, completely because, well, you have a house that's worth, I don't know, $300,000.
So that's basically going to help you pay back the loan. But if that house suddenly loses half of its value, then it becomes very, very hairy. Now, if you also did something which is actually illegal, you took a loan to pay your mortgage, right? Or your down payment. Now you're leveraged on leverage on leverage. So you get into really, really bad spots. So you really want to think about what does it mean when you're taking out these loans and how you're paying for them. I actually heard a banker tell me a story that a customer was saying, what do you care where I get the money from? The bank for the down payment was like, well, you know, I need to know that this is not a loan. It's like, why? What does it matter what's my money. They gave me the money, it's in my bank account. And it was just such an interesting dynamic to be like, well, you know, yes, this actually impacts in a very significant way the risk that we have in giving you this money. And it was just such an interesting, you know, discussions. I appreciate that.
[00:28:56] Speaker B: I, I think there's another element too to think about and that is when I bought this sport jacket, I knew that I was paying a retail price for it and I knew that the shop probably paid a wholesale price for it.
When it comes to money, I want to say it works the same way. Yes, there's a retail price for money and there's a wholesale price for money. And sort of like one of these things where if, if you don't know the difference, you're probably paying the retail price for money. Here's how it works. Right now banks charge each other about 4.75%. That's the wholesale price for money. That's what banks charge each other to borrow overnight.
My credit card wants to charge me 23%.
That's the retail price for money.
That's something with a fairly good credit rating. But borrowing the money and a credit card more than 20% wholesale price.
[00:29:50] Speaker A: We should just say that that's a scam and nobody should borrow money through their credit cards. You should go and get, if you need a loan, go get it with your bank, talk to your bank. Never borrow money through your credit card because you'll probably get a 10%, a 12%, it won't be 24% depending on your situation and your assets. So, so that, that is a bad way to borrow money.
[00:30:09] Speaker B: But.
[00:30:09] Speaker A: But absolutely yes. The interest rates on credit cards are very high and you know they can pull people down. Absolutely.
[00:30:18] Speaker B: Yeah. And so I think it pays to keep in mind that there's a difference between wholesale and retail. And what you want to do. I think to your point is you don't want to pay the extreme retail price like your credit card. There's probably smarter ways to finance purchases or consumptions or investment without paying that such an exorbitant price for a credit.
[00:30:41] Speaker A: I love that this has been a lot of fun. I think there's so much gray and interesting things when it comes to finance and economics that we really don't teach this at school. I mean, unless you're going to really specialize in this. If I had to make the argument I teach junior achievement, I would say this should be part of everybody's school learning the basics of money and interest and Investment.
I have a simple question to you. If you had to give a few pieces of advice, or maybe even one to every single person in our audience about their own personal finance, what are the big mistakes that you're seeing people are doing from a personal perspective?
[00:31:24] Speaker B: Good question.
I think that, you know, in the United States, we have made this.
We've evolved from a defined benefits pension program to a defined contribution. What this means is that we ourselves are responsible for our retirement money. So we might get some money taken out of our paycheck. Maybe if we're lucky, an employer will help match part of it. And that is what we have to manage. We individuals are responsible for managing this, and we need it when we retire. And that's what they. So a typical employee will give you a. It's like a Chinese menu, and it's got all these things you can put your money in. Here's a bunch of funds you can put your money in. But they don't really tell us how to go about thinking about it, how we should do this. And so I think that.
I think that managing one's own money is very difficult if one is not. One doesn't. If one hasn't spent the time and effort for the skills. There's a lot of other things that are on our plates besides trying to figure out, is this a mutual fund I want to invest in? Should I invest in small caps? Should it be large caps? Should I invest in US Stocks? Should I invest in foreign stocks? All these questions and we don't get really a lot of answers. And so I think that one thing I would say is that it's a huge responsibility to manage your own money, to manage your own pension money. Our parents didn't have to do that. Our grandparents didn't have to do that.
They were given a pension, a fixed pension. They knew they would get maybe a percentage of their salary after they retired. We don't have that our generation.
We are responsible for that money ourselves. And so it makes sense either to do it yourself, which means to take that time and effort and educate ourselves on how to think about money, or find a good financial planner, basically outsource it to someone else who might know what they're doing. Hopefully there's a certification process, professionalization of that part of the industry. I think that we as individuals in the us, as workers, we have a huge responsibility, and few of us are really equipped for that. The second thing I would say is that it seems like what ultimately happens is people who make money in the markets are not Right. More often, that's sort of, I want to say, a bit of a game that maybe strategists like me or people you see on TV might be playing who can be right, who's right more often. But the people who get money out of the market, it's not that they're right more often. What they are are better and disciplined risk managers.
Everybody knows what to do when they buy a stock and it goes up.
It's really how to manage a loss. At what level do you say, I was wrong and I need to liquidate my position as opposed to, I want to stick this out. I really have confidence that whatever stock XYZ is going to go up. So it's a question then of learning the skills and the tools that are available for risk management besides doing your homework. I want investments to make.
It is about managing the risks associated with those investments, those downside risks, whether it's interest rate risk, currency risk, commodity risk, political risk, a lot of risks. It's really about managing those risks that are the difference between making money and losing money.
[00:34:44] Speaker A: Yeah. And, you know, I talk to a lot of people about these topics. Very intelligent people. Right. Engineers and scientists. And, you know, if they're not economists or, you know, went to some kind of education, they don't know basic things about, you know, even the simplest type of technique to mitigate risk, which is really just diversification.
So, you know, I think these concepts would be highly valuable if just everybody knew what it meant to diversify a portfolio and diversification over time. Very basic concepts that can help us make smarter decisions when it comes to saving money. Compounding interest, I think, is another one of those that, you know, I honestly would advocate that they should teach this at school to every single American.
It's beyond me why that doesn't happen.
[00:35:31] Speaker B: No, I agree. And I tell you, too, I was very active in junior achievement in my high school years. It was a great experience. And I think that those are the kind of programs. I know they've brought out a great school for younger people as well, younger children as well. But I think it's a great experience learning about business, learning how to run a book of a business, learning what it means to sell stock, thinking about how to make a product that's competitive, that people want to buy, that they're not just buying it from you because you're a student. I think, yeah, I can't speak highly enough about junior achievements and giving young people experience and exposure to understand how the economy works.
[00:36:11] Speaker A: Yes, they actually have a program and this is the one I don't care to advertise. Junior Achievement, they're a nonprofit. They're a wonderful organization. I volunteered with them for many years. They have a program where the young students can basically come to this computer simulation and kind of simulate stock trading and kind of understand all these concepts of, you know, buying and selling. And so I think that's absolutely wonderful. And the children that went through that day, it's a full day that they come on site. The feedback is phenomenal. But my frustration is like, why? Why is this not just done by every single school in the United States and taught to the teachers, by the teachers? Why do they need volunteers like me? And I love doing it. But my thought is, well, this should be everywhere to everyone. And that's my only frustration. It's not a frustration at Junior Achievement. It's kind of a frustration with our educational systems. Like, this should be bread and butter, in my opinion.
[00:37:04] Speaker B: Yeah, I think you're right. There's something about the education. I think in the US I had this luxury of studying the great books, the classics going back to Plato and Aristotle, and.
But somewhere along in the 80s and 90s, early 2000s in the US we got much more interested, I think, in what does the education mean for careers. And so it began like stem, which is, you know, focusing on skills that people need for business. And I think that maybe we've gone too far in that direction. Maybe it's not just business skills, but we. I think we want to teach, like, people, critical thinking skills. And I know this with my students. You know, I often found when I first began teaching, I found that my students couldn't really. It was hard for them to tell the difference between a sentence and a paragraph. And after teaching for 20 years, I think that schools have done a much better job in teaching students how to write.
What I thought was a greater difficulty was in understanding or evaluating conflicting claims. So, for example, the Financial Times could have an op ed piece about why America was the last major country to have national health care, which we still don't fully have. And then you'd read the Wall Street Journal and says, national healthcare, America's sliding into socialism. And my students would often tell me, like, they would either know or they would tell me the last thing they read right, which is some of my colleagues do the same thing. It's like, how to know, like, recently by these issues, the last person you read is the most persuasive. And I think we've gone a bit too far in this business Skills and not enough in the skills of making people good citizens, civic responsibility, critical thinkers. So what does it really mean when it says, when the TV commercial says 4 out of 5 dentists recommend a particular chewing gum. Really, what does that mean? And so I think because so much of the data that we have to deal with as individuals is. Is quantifiable statistical data, we have to be sharper so we don't get fooled. I think that's a real reason why we should study these wide range of subjects just so other people don't fool us so easily.
[00:39:22] Speaker A: That is so delightful. I'll make a confession. My daughter absolutely hates me for this. She is only 10 years old, but I'm forcing her to read Thinking Fast and Slow by Daniel Koelman and Amos Tversky, which they are the fathers of. You know, cognitive biases, basically, right? Richard Thaler basically got his Nobel laureate based on their work, which is incredibly common, right? Each scientist builds up the next.
And I, you know, I can see through her studying this book, absolutely hating my guts for making her do this. I can see how her critical thinking is evolving because, you know, I won't ask her, oh, what did you read? Tell me about this. I'll ask her a question and I'll say something like, okay, so if you have. And this is real, this is part of Richard Taylor's research outside of the book, separately, he was like, okay, if all you do is you want to increase the number of people that get that give, donate blood or donate organs, then you have two forms. One of them is already checked, and you need to unselect that. You need to say, I want to opt out. And then the other form says, I want to opt in. Now you want to have as many possible people, you know, donate organs. What should you do? Should they need to opt in or opt out? Now, it turns out that you can increase the percentage of people who will actually donate by just having the need to opt out. Meaning, say, I don't want to, because what is the truth? Most people just leave it as it is.
That is the God's honest truth. And you wouldn't think, you would think people would read a question with a serious question like organ donation. They would ask themselves, you know, oh, is this the right thing to do or not? But no, that's not what happens. What they do is like, oh, that's probably right. Like, oh, I'll just not do anything is what people do. So I think these topics of critical thinking. And I'll say another thing, right? We've somehow emotionalized everything in America. Right. We've somehow turned it all into political and we've turned it all into something that it's. Now you're coming on a personal attack and we've kind of removed this of like, well, let's think about the pros and cons. And if the only thing that we could learn to do in America again is take an issue, put a list of pros, put a list of cons and for a second ignore the emotions and just acknowledge that everything has a winner and a loser, then I think we'll be so much better off. And I apologize, I went for a little of a rant because what you said is so. It's so important to me personally that I just feel so very strongly about it. So I appreciate you bringing that up. Good, wonderful, Mark. So this is, we're way over time. This has been so much fun. Last question. I promise, if you had to. And this is a personal question, it's the only scripted question we had. If you have to go back to 20 something year old mark, what's the advice that you would give him?
[00:42:21] Speaker B: Buy that lottery ticket.
[00:42:23] Speaker A: That's not a no, it's hacking. Buy bitcoin. Buy Microsoft. Those answers are not allowed.
[00:42:29] Speaker B: No. You know, I think that I'm a pretty serious person and I think I would tell my younger self not to be quite as serious, that there's two things, right? One is gravitas, that's the seriousness of something. And the other is levitas, levity. And I think we need both of them and to be able to see humor and to see like. Yeah, I mean I just like sometimes struck by our species. I mean imagine this, right? A naked ape who has lost his hair has this concept of God, the concept of the infinite, how amazing that is. And to be able to relish that as opposed to just so focused on the seriousness. Just thinking about like, yeah, what, Like a profound, brilliant moment. And I think that sort of enriches when I think about that. It really makes, it really makes me. It really helps put things in perspective.
[00:43:33] Speaker A: We try not to go theological in this show, but I started doing hydroponics and you would think that the most spiritual experience I had was when my child was born, which probably that makes me a terrible father that it wasn't. But that's probably because we're so wrapped up with our minds about oh my God, I'm going to be a dad. So you're not thinking about the miracle in that. So for me, one of the experiences was basically with hydroponics. I grew the seed into a plant, and I was like, this is, like, this is basically magic. Like, how the hell does this even work? And to your point, if we would just take a moment to appreciate how much delight and incredible things are happening around us every day, then maybe we could all put a little bit more of a smile on our face. So I appreciate your comment, Mark. What an absolute pleasure. I appreciate you coming on the show today.
[00:44:29] Speaker B: Thanks a lot for having me. It's a lot of fun talking with you.
[00:44:32] Speaker A: Wonderful. I appreciate you, too.
