Navigating the New Bull Market w/ Barry Ritholtz

Announcer: It’s time for Marc Lichtenfeld’s Oxford Club Radio, the hardest-hitting half hour about you and your money. And now here’s Marc Lichtenfeld.

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 Marc Lichtenfeld: Welcome to Marc Lichtenfeld’s Oxford Club Radio. I’m Marc Lichtenfeld. We have got a tremendous show for you today. Coming up in a little bit, we’re going to be talking with Barry Ritholtz. He’s the chief investment officer at Ritholtz Wealth Management, the author of The Big Picture blog, the host of Masters in Business on Bloomberg Radio, which is just a tremendous program. He gets some of the biggest names in finance, and Barry’s just all over the media. He’s kind of one of those first people to become a real big media star in finance, and we’re going to talk with him about his take on the markets as well as what he’s learned from talking with some of the biggest names in finance every single week, so I’m really looking forward to that. It’s going to be a great interview, actually. It’s going to be an extended interview, so we’re going to get into that.

I’m also going to talk about contrarian stocks. Everybody likes to be contrarian, everybody likes to think they’re contrarian. It’s a very tough thing to actually do, so we’re going to talk about that in just a minute. A little housekeeping first. If you want to follow me on Twitter, I’m @StocksNBoxing, stocks, letter N like Nancy, boxing. And you can also email me by going to OxfordClubRadio.com and clicking on “Contact.” That’s OxfordClubRadio.com, click on “Contact.” You can also leave comments under the episode that you’re listening to right on Oxford Club Radio. Is this is your first time listening to the show? Go to OxfordClubRadio.com. You can subscribe for free. That way you’ll get the show in your inbox every Monday when it comes out. You don’t have to go looking for it. So please, if you’re not a subscriber, again, it’s 100% free, it always will be free, so subscribe to us on OxfordClubRadio.com.

All right, so I wanted to start off by talking about contrarian stocks, and one of the reasons is I’m going to be talking about contrarian stocks at the Money Show in Orlando this coming Thursday, so if you happen to be at the Money Show in Orlando, please definitely stop by and say hello. I’m also going to be doing a book signing there, my book, Get Rich With Dividends. I’ll be on a panel in the morning on Thursday morning, so I’ve got a lot going on at the Orlando Money Show. So I hope you’ll stop by if you are in Orlando for the event. Should be a great event.

So that’s the reason I want to talk about contrarian stocks. I’ll be talking a little bit about it in Orlando, and like I said, everybody likes to think they’re contrarian, wants to be contrarian, and basically if you’re unfamiliar with that term, contrarian basically means you’re going against the crowd, and everybody likes to think that they are, but it’s really difficult to do that. It’s really difficult to buy when everybody’s selling or to sell when everybody’s buying. An example of this, if you think you’re contrarian, were you buying in 2008 and 2009? Probably not. Were you selling in 2006, 2007 or 2000, 1999, 2000? Probably not. There is so much hype, both good and bad, when markets are very, very strong. It’s the only way you’re going to make money, it’s going to go on forever, this time it’s different, and when things are very, very bad, same thing. It’s a crooked game, it’s rigged, you can never make money in the markets, this time it’s different. So it’s very difficult to go against the grain like that – especially when sentiment is at an extreme, and that’s when you really do need to be contrarian, when it’s at an extreme. Just because a market is strong and people are bullish generally doesn’t mean that’s the time to sell it. The time to sell it is when sentiment is at an extreme, and there are different things you can look at to determine if things are at an extreme. There are all kinds of sentiment surveys like the AAII survey, there’s the VIX, which is a measure of volatility, there’s a lot of different things you can do. There’s the magazine indicator, you know, when the big magazines like Time or Newsweek are proclaiming the death of stocks or that stocks are going to go up forever, things like that. When everybody is kind of on one side, then that’s when you lean the other way.

And as far as individual stocks, here’s some of the things that I look for. When I was trained, when I was an analyst on the sell side, it was with a company called Avalon Research Group, and we were known as, you know, one of the most contrarian research shops on Wall Street, and so I had a really good education on how to find these stocks. In fact, I wasn’t allowed to recommend a stock unless it really was very, very contrarian. And one of the things that we looked at was what analyst sentiment is and, you know, everybody likes when their stocks are upgraded and hates when their stocks are downgraded, but to really be contrarian, you want to go against what the analysts are saying. So if the analysts are overwhelmingly bullish and you want to be contrarian, you would consider selling that stock or shorting it, or vice versa. You buy a stock that the analysts hate, and there’s a few reasons for that. Analysts are very often just flat-out wrong, and there’s a bunch of reasons for that I don’t have time in this segment to get into, but they don’t have a great track record generally as a collective group. So you want to go against them when they are widely on one side. If you have 10 analysts following a stock and five rate it a buy, three rate it a hold and two rate it a sell, that’s not really leaning onto one side. If nine of them rate it a buy and one has it as a hold, that’s very, very, very strong bullishness and you would lean against that.

I also look for a high short interest. I want to see a lot of people short the stock if I’m going to buy the stock because if they get caught leaning the wrong way and the stock goes higher, they have to buy the stock to cover their position so they don’t take an even bigger loss, and that adds demand for the stock, which shoots the stock higher. So I look for that. I look for a high short interest. Certainly high valuation. That’s not the end-all-be all. I won’t sell a stock or buy a stock strictly on valuation, but it’s a piece of the puzzle, a piece of the equation, so to speak. So if things are lining up, if sentiment is an extreme in the stock, there’s high short interest and the value is extremely low, then I might look to buy the stock. And I’d have to have a reason to buy the stock. I’m not just going to do it based on those metrics. If it’s a turnaround story like many of the stocks I have in The Oxford Income Letter, I have to believe that the company’s actually going to turn itself around. I have to have a reason, a catalyst, but once I have that and all those other pieces line up, then that kind of makes for a perfect contrarian stock, and I try very hard, especially in this market. It’s a seven-year bull market. Valuations are high. So for income stocks, for dividend stocks, I’m trying very hard to find these contrarian plays because the valuations are lower, the yields are higher and the bandwagon still has plenty of room, so people haven’t jumped onboard the bandwagon, cheering this stock. And when they do, that also pushes the stock higher.

So just a few thoughts on contrarian stocks. If you have certain things you look for for contrarian stocks, I’d love to hear about it, so shoot me an email. Go to OxfordClubRadio.com, click on “Contact.” When we come back, we’ll have my interview with Barry Ritholtz. Looking very, very much forward to talking with him. This is Oxford Club Radio. I’m Marc Lichtenfeld. Stay with us.

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 Marc Lichtenfeld: Welcome back to Marc Lichtenfeld’s Oxford Club Radio. I’m Marc Lichtenfeld. So excited for my next guest. He is just everywhere – on TV, on the radio, online, in print. Barry Ritholtz is the chief investment officer of Ritholtz Wealth Management. He also writes The Big Picture blog, he’s the host of Masters in Business on Bloomberg Radio, which is a fantastic, fantastic program. He’s also the author of Bailout Nation, which he co-wrote with my friend Aaron Task. And, Barry, thanks so much for joining us. I’m so glad you’re with us.

Barry Ritholtz: Thanks for having me.

Marc Lichtenfeld: So I want to start off by talking about your thoughts on the market in general right now and, you know, we’re at record highs. We’re at, what… we’re eight years almost into a bull market. How much longer can this go?

Barry Ritholtz: So we’re eight years off the market lows. We’re three years, going on four years, in a new bull market. Not to get hyper-technical, but we measure the start of a new bull market not off of the all-time lows or the recent lows, but from when the market breaks out into a new trading range. So in other words, it’s from when you eclipse the previous highs, not from the bottom. So a lot of people will talk about this market as, hey, it’s seven or eight years old. Well, no, you fell 57% in 18 months. You made the rubber band really stretched, and that snap back to pre-crisis levels is really just undoing what the big downside move did. So I think people sort of look at that number a little misleadingly. We’re still in the third or fourth inning of what tends to be a long-term secular bull market. I would have to say, if you want to draw a comparison to the 1982 to 2000 bull cycle, which was an unusually long and unusually outsized bull move, we’re like ’87, ’89, ’91, somewhere in that range, meaning we’re still in the first half of this bull market if historical parallels hold.

Marc Lichtenfeld: Interesting, because one of my problems that I’m having is finding value. And I tend to focus on dividend payers, so a lot of those stocks have run up, but just in general, it’s tough to find value. So where would you be looking, especially if we are in the third or fourth inning of a bull market?

Barry Ritholtz: So two thoughts about that. The first thought is you have to think internationally. If you want to find value, well, like just about every measure, the U.S. is at best fully valued and at worst richly valued. When we look around the world, Europe is considerably cheaper than the United States for obvious reasons, and emerging markets are cheaper still. So true value investors really should think about buying the worst-looking economies. You know, about two years ago, we started talking about how much more attractive emerging markets were, and any time, as all value investors know, you like something that’s cheap, there’s no guarantee it’s not going to get a little cheaper. But emerging markets last year overcame the prior year’s weakness, and they’re starting to see some gains. The big headwind for emerging markets is a strong dollar. It’s good for exports directly to the U.S. of finished goods, but for commodities, which a lot of emerging markets participate in and produce, it makes them relatively cheap. They do better when the dollar’s weak and commodity prices are high.

Now, that said, we definitely like emerging markets here and international markets. We rebalance depending on the portfolio once or twice a year, and in January we slightly shifted our tilt globally, so we went from 51 U.S. to 49 overseas, and now that’s 51 overseas, 49 U.S. That is not a “sell America” call, but it’s a slight switch, putting a little more emphasis. Now, all that said, and I think people think – and sometimes value investors fall into this misunderstanding – fair value is something that exists briefly as markets careen wildly past it to the upside or the downside. And in fact, let’s use something like the Shiller CAPE ratio, which is a 10-year cyclically adjusted PE ratio. Since 1990, that has been over the average 90% of the time. So if you avoid participating in equity markets when stocks are pricey, well, you end up missing a whole lot of moves.

Now, there is a big difference between elevated stock prices and when stock prices just completely go off the rails. I know lots and lots of people who looked at markets and… I began as a trader in the mid-’90s. By 1996, Alan Greenspan, the Fed chair then, was giving his rational exuberance speech because stocks were richly valued and you had another four-year run that saw spectacular gains. By the time we got to early 2000, Nasdaq had doubled from October 1999 to March 2000. That’s the sort of insane, frothy, “oh my God, this market has completely become unhinged” that should really make investors nervous. What we’re really seeing is a couple of factors. The economy has been gradually improving. There is for some consumer products readily available credit, like durable goods and automobiles. For others like housing, credit has become more challenging. We’re slowly recovering from the financial crisis. It’s not even a decade and we’re still dealing with the remnants of that, but we’ve also seen companies take tremendous advantage of very, very low-cost borrowing. So corporate America has cleaned up its balance sheet. A lot of them have been buying back stock very, very cheaply, and so there also is no alternative if you’re looking for any sort of yield or very little in the way of alternative. We like municipal bonds. I liked them better when they were yielding 6% than 4% or 3%, depending on where you’re looking, but when you look at what an investor’s options are for generating a return, either actual return or total return including dividends, it is definitely a challenging environment up there, especially if you are looking to find stuff cheaply. There really aren’t a whole lot of inexpensive options in the United States.

Marc Lichtenfeld: All right, let’s do this. We’re up against the clock, so we’re going to take a break, and then when we come back, I want to talk to you about some of the fantastic interviews you’ve had on your show, Masters in Business on Bloomberg Radio. You’ve talked with Jack Bogle, Bill Miller, Bill Gross, Jeff Gundlach, a litany of just the biggest names in finance, so I definitely want to talk to you about that when we come back, so please stay with us and we’ll be back with more Oxford Club Radio after the break.

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 Marc Lichtenfeld: Welcome back to Marc Lichtenfeld’s Oxford Club Radio. I’m Marc Lichtenfeld. We’re talking with Barry Ritholtz. He’s the chief investment officer of Ritholtz Wealth Management, the author of The Big Picture blog and the book Bailout Nation, and he’s the host of the excellent Masters in Business on Bloomberg Radio. And, Barry, I actually got in touch with you after your interview with John Roque, who’s a technical analyst I’ve known for many years, and I just thought that was one of the most insightful financial programs I’d heard in a long time. I mean, John is great, but you pulled so much great information out of him, so great job on that. But you had, as I mentioned before the break, just some of the biggest names in finance on your show. Give us some of the highlights. Do you have a favorite interview of all the people that you’ve spoken with?

Barry Ritholtz: That’s a really interesting question. There are a number of them that are really fascinating, and sometimes I learn crazy, crazy things that I never would have imagined.

Marc Lichtenfeld: So give us an example of something you learned that you never would have imagined.

Barry Ritholtz: You know, the more eclectic, memorable ones are the people from outside the world of finance. So there’s Bobby Flay, the restauranteur and chef and television star, and many, many years ago, my wife and I had dinner at one of his restaurants. In fact, when we had first gotten married and were living in the city, he had this tiny little out-of-the-way place called Miracle Grill. He was the chef, he didn’t own it. And I had no idea who Bobby Flay was. I don’t think anyone did back then, but when he started to become known, he had a restaurant called Sophie’s that was the toast of the town. It was highly regarded, and we had this spectacular dish, which was a clam in a Thai sort of sauce, which is kind of common today, but back then, nobody was doing that sort of fusion cuisine, and it’s in none of his cookbooks. And I got to actually ask him for my wife what the recipe was, and off the top of his head, he goes, “Well, you need…” HeHHHhh gave the whole recipe and my wife just fell off her chair when she heard it. So those sort of odd little moments.

As an attorney, you are taught never to ask a witness on the stand a question that you don’t know the answer to, because you don’t want to be surprised in court. As an interviewer, asking questions when you have no idea where the answer’s going to go to ends up being really, really fascinating. Some of the interviews I’ve done with some of the musicians and rock and rollers were quite fascinating. Larry Juber, who is Paul McCartney’s guitarist and is an acoustic guitar prodigy, pulled out the guitar and started some playing some stuff. It was insane. Steve Miller was a fascinating conversation. Ken Feinberg, the special master of the 9/11 victim’s fund and an American hero in my book, was telling these stories about what it was like to deal every day with just the relentless brutality and death and just everything associated in the post-9/11 period and how he got through the day and how he didn’t let it turn his life into a swirling vortex of despair, and ultimately it’s a tremendously uplifting story. Those sorts of things really stay with you. Those are the non-financial people.

When you speak to the finance people, Cliff Asness is one of those rare quants. He runs AQR, which is one of the biggest hedge funds in the world, $100-plus billion. He’s a guy who not only is another math prodigy, but he also is very articulate. It’s rare to get people who can speak from both sides of their brains, as I like to say. And he also is sort of this mischievous kid with a devilish sense of humor. So that was really a fascinating conversation. Jack Bogle, who you had referenced earlier, it’s everything you would imagine to sit down with him for 90 minutes. He’s still full voice, 80-something, full voice – we should all have our wits, be as sharp at 80-something as he is. It’s just fascinating.

And then there’s a run of academics who are just fantastic. So professor Galloway, Scott Galloway at NYU Stern, who focuses on digital marketing. Aswath Damodaran is the valuation expert, also at NYU Stern. Richard Thaler from the University of Chicago, here’s the guy who essentially invented behavioral economics. Also another guy with a devilish sense of humor. Danny Kahneman, amazing, the guy who won the Nobel Prize in economics for his work on psychology. That will show you how influential that was. Philip Tetlock from Wharton, who essentially is the person who quantified how bad forecasters actually are, and then while working with the NSA and CIA, came up with methodologies for how people can actually improve their forecasting ability within a certain range. There are certain things you can do to not make bad forecasts. And I’m leaving out a dozen other people from the world of academia, but really insightful, really just brilliant, deep-dive focuses into a very narrow aspect of its psychology, its sociology, its finance, its history, its technology. All these things combine to allow some of these people who you normally don’t have access to.

You know, I have been complaining about the failings of the financial press for literally  decades. Someone sent me something I wrote in ’05, and within that column in ’05 called “Lose the News,” I had actually written, “the best thing the media does is grant you access to people you normally wouldn’t have access to.” And that sort of thing is really the purpose of Masters in Business. You know, to be a fly on the wall in a conversation with some of these people who are just so successful and so accomplished and so intelligent and have added to the sum total of human knowledge, I say this all the time, it’s the most fun I have all week.

Marc Lichtenfeld: I’m sure. And if anybody wants to go back and listen to some of these interviews, you can go to Bloomberg.com/podcasts/masters_in_business, and there’s an underscore in between masters and in and between in and business. That’s Bloomberg.com/podcasts/masters_in_business. We only have about 90 seconds left, but I did want to ask you since you do have exposure to all of these great minds, have you learned something or has your investment philosophy been altered at all by having exposure to all these people?

Barry Ritholtz: I learn something every single week. Sometimes it has to do with best ways to deploy capital. More often than not, it’s about things like organizational alpha. Howard Marks describes how an organization, regardless of how they invest, can optimize how the firm performs on behalf of their clients. The same thing with Ken Fisher. Ken Fisher has built one of the biggest RIAs, $76 billion, in the country, and he explained how he’s built the business and choices he’s made. Those sorts of conversations are just absolutely fascinating to me, and I’m thrilled people are willing to sit down and be so generous with their time. Bill Gross was two hours. Jeff Gundlach was almost two hours. Those sorts of conversations are just astonishing.

Marc Lichtenfeld: That’s awesome. And I’m so glad that we had the chance to talk with you today. Thanks so much for your time, and I know I’m going to go back and listen to a lot of those podcasts over the next several weeks, so thanks very much, Barry. It’s great to talk to you.

Barry Ritholtz: My pleasure. Thanks for having me, Marc.

Marc Lichtenfeld: All right, that’s Barry Ritholtz, chief investment officer of Ritholtz Wealth Management, author of The Big Picture blog, Bailout Nation, and host of Masters in Business on Bloomberg Radio. We’ll be back next week, same time. Until then, I hope your longs go up and your shorts go down. I’m Marc Lichtenfeld.

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