Listen now (55 min) | Here at The Glenn Show, I’m taking a little break from politics and culture to talk dollars and cents. My good friend and former Boston University colleague Larry Kotlikoff is here to discuss his new book, Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life
Stocks have been and are the greatest driver of wealth for people of any socioeconomic level (but only if they invest). The media tell us constantly that only rich people own stocks (implying inheritance) but they should tell us that only shareholders—business owners—become rich.
Kotlikoff mis-represented Malkiel's "random walk" concept, interpreting it more like a walk off a cliff. Malkiel meant that you can't beat the market because the market knows more than you do (the "efficient market" theory, which has been proven wrong by many long-term successful investors) and that stocks will move around unpredictably in the near-term. He didn't say that stocks are a bad investment. As Warren Buffet's hero, Benjamin Graham, says, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
This was an interesting discussion, but I would be interested in hearing more specifics. It seems that much of Larry's advice is common sense (at least it's common sense from an economist's perspective). Larry's advice on life insurance is certainly true for example as are many of his other examples.
I don't agree with Larry's statement that the stock market is a random walk, however, and I believe that most economists can beat the market with common sense investing. There is a joke that if an economist sees a $100 bill on the ground, then the economist will not pick it up because someone else would have picked it up if there was any profit in doing so. :-) Some investors, such as Peter Lynch, Joel Tillinghast, and Warren Buffett are examples of people who have beaten the market, and it does not seem like luck to me. Let's take a concrete example. It was known five years ago that there was a big semiconductor shortage. Someone who took this knowledge and invested $10,000 in semiconductors would have $37,719 today, compared to someone who had invested in in the S&P 500 Index who would have $21,710 today. It's easy for economists to recognize these common sense investing opportunities, and they usually pay off.
Great conversation Glenn, really appreciate Larry’s willingness to “get concrete” with his advice - book ordered! Looking forward to your follow up with Larry in inflation.
You can tell Larry you sold at least one book for him. I very much enjoyed the podcast. I'd call it my favorite of all the genteel episodes. (Not that the discussion about expensive university education was without teeth. I thought I detected a little true defensiveness from Dr. Loury, though it could have been devil's advocate.) Got a kick out of Larry's allusion to what, in a less timid time, we were allowed to call MRS degrees.
With the market up so much and for so long, one must not forget 1987, 2000, 2008. 1929. I liked Larry's straightforward approach, not caring if a few toes got stepped on. I don't following financial news the way I once did, so Larry's book can bring me up to date. Great episode.
Great insights! There is so much to learn about economics and finance, and the guests that Prof. Loury invites like Prof. Kotlikoff are very erudite and illuminate the complex subject matter in a way that the ordinary man on the street can grasp.
I hate to call b.s., but its b.s. John Maynard Keynes pointed out years ago the reason stocks continue growing: profitable business reinvest profits in capital leading to increased profits on a compounding basis. Now, its clear every company has a life cycle, and probably Coke is about the only blue chip that is still around, and every company will eventually go to zero--but in the long run we are all dead.
Short-term, stock prices are a random walk. Long-term they reflect fundamentals, and rely on compounding interest, which Einstein characterized as the most powerful force in the universe.
Last night, my brother-in-law called me to talk investing because his aunt just died, leaving behind $4 million. She was a schoolteacher. Decades ago she began buying large-cap dividend stocks (I saw the list: 30 stocks including 3M, Union Pacific, manufacturing and materials stocks, etc.). These are rock-solid companies, with tens of thousands of employees generating value for shareholders.
She made her own buying decisions, though unfortunately was paying a stockbroker, perhaps unaware that transactions have been free for many years now. I encounter stories like this all the time. People with a bit of sense and control over their emotions can become wealthy on any salary. There has never been a better time to be an investor.
Interesting discussion and makes me interested to read the book.
A focus on risk-adjusted returns is important (paying off debt with fixed rate is a risk-free return that many people ignore). But, the underlying mechanics of how that risk-adjustment is determined is a material consideration along with that it depends on one's appetite and ability to bear/be compensated for risk. For instance, what's the adjusted total-factor productivity growth rate? Is the standard deviation large enough on a given time horizon to say that the adjusted TFP growth rate is zero or near zero? Equity returns get adjusted to zero based on their standard deviations...if you're a technologist optimist, keep that money in a portfolio that tracks the overall market with low fees...if you're a pessimist, maybe pay off that house note.
I really wish you would do more economic podcast episodes! The financial market is such a scary place for the layperson and I personally like understanding how I’m getting screwed. And knowing is half the battle! Ha ha
Stocks have been and are the greatest driver of wealth for people of any socioeconomic level (but only if they invest). The media tell us constantly that only rich people own stocks (implying inheritance) but they should tell us that only shareholders—business owners—become rich.
Kotlikoff mis-represented Malkiel's "random walk" concept, interpreting it more like a walk off a cliff. Malkiel meant that you can't beat the market because the market knows more than you do (the "efficient market" theory, which has been proven wrong by many long-term successful investors) and that stocks will move around unpredictably in the near-term. He didn't say that stocks are a bad investment. As Warren Buffet's hero, Benjamin Graham, says, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
This was an interesting discussion, but I would be interested in hearing more specifics. It seems that much of Larry's advice is common sense (at least it's common sense from an economist's perspective). Larry's advice on life insurance is certainly true for example as are many of his other examples.
I don't agree with Larry's statement that the stock market is a random walk, however, and I believe that most economists can beat the market with common sense investing. There is a joke that if an economist sees a $100 bill on the ground, then the economist will not pick it up because someone else would have picked it up if there was any profit in doing so. :-) Some investors, such as Peter Lynch, Joel Tillinghast, and Warren Buffett are examples of people who have beaten the market, and it does not seem like luck to me. Let's take a concrete example. It was known five years ago that there was a big semiconductor shortage. Someone who took this knowledge and invested $10,000 in semiconductors would have $37,719 today, compared to someone who had invested in in the S&P 500 Index who would have $21,710 today. It's easy for economists to recognize these common sense investing opportunities, and they usually pay off.
Great conversation Glenn, really appreciate Larry’s willingness to “get concrete” with his advice - book ordered! Looking forward to your follow up with Larry in inflation.
You can tell Larry you sold at least one book for him. I very much enjoyed the podcast. I'd call it my favorite of all the genteel episodes. (Not that the discussion about expensive university education was without teeth. I thought I detected a little true defensiveness from Dr. Loury, though it could have been devil's advocate.) Got a kick out of Larry's allusion to what, in a less timid time, we were allowed to call MRS degrees.
With the market up so much and for so long, one must not forget 1987, 2000, 2008. 1929. I liked Larry's straightforward approach, not caring if a few toes got stepped on. I don't following financial news the way I once did, so Larry's book can bring me up to date. Great episode.
Great insights! There is so much to learn about economics and finance, and the guests that Prof. Loury invites like Prof. Kotlikoff are very erudite and illuminate the complex subject matter in a way that the ordinary man on the street can grasp.
I hate to call b.s., but its b.s. John Maynard Keynes pointed out years ago the reason stocks continue growing: profitable business reinvest profits in capital leading to increased profits on a compounding basis. Now, its clear every company has a life cycle, and probably Coke is about the only blue chip that is still around, and every company will eventually go to zero--but in the long run we are all dead.
Short-term, stock prices are a random walk. Long-term they reflect fundamentals, and rely on compounding interest, which Einstein characterized as the most powerful force in the universe.
Last night, my brother-in-law called me to talk investing because his aunt just died, leaving behind $4 million. She was a schoolteacher. Decades ago she began buying large-cap dividend stocks (I saw the list: 30 stocks including 3M, Union Pacific, manufacturing and materials stocks, etc.). These are rock-solid companies, with tens of thousands of employees generating value for shareholders.
She made her own buying decisions, though unfortunately was paying a stockbroker, perhaps unaware that transactions have been free for many years now. I encounter stories like this all the time. People with a bit of sense and control over their emotions can become wealthy on any salary. There has never been a better time to be an investor.
I love that you both spoke of grit. If despair is the path of least resistance, the creative employment of one's grit is its antidote.
Interesting discussion and makes me interested to read the book.
A focus on risk-adjusted returns is important (paying off debt with fixed rate is a risk-free return that many people ignore). But, the underlying mechanics of how that risk-adjustment is determined is a material consideration along with that it depends on one's appetite and ability to bear/be compensated for risk. For instance, what's the adjusted total-factor productivity growth rate? Is the standard deviation large enough on a given time horizon to say that the adjusted TFP growth rate is zero or near zero? Equity returns get adjusted to zero based on their standard deviations...if you're a technologist optimist, keep that money in a portfolio that tracks the overall market with low fees...if you're a pessimist, maybe pay off that house note.
I really wish you would do more economic podcast episodes! The financial market is such a scary place for the layperson and I personally like understanding how I’m getting screwed. And knowing is half the battle! Ha ha