Michael's Worst Investment Ever (EP.127)

Episode Summary

Executive Summary: The episode mixes market commentary with a long discussion of the coronavirus, using the 1918 Spanish flu as historical context to urge calm, avoid panic selling, and maintain a long-term investing plan. The hosts also examine brokerage consolidation, free trading, inequality, mortgage decisions, FIRE critiques, and listener questions, consistently emphasizing behavior, flexibility, and avoiding all-or-nothing financial decisions.

Main Topics: Coronavirus selloff and historical pandemic context (Priority: 5/5): The hosts discuss the sharp market drop tied to coronavirus fears, compare it with historical drawdowns, and use The Great Influenza to frame how pandemics spread, peak, and eventually end. The lesson: uncertainty is high, but panic-driven portfolio moves are usually the wrong response. Investor behavior: avoid all-in/all-out reactions (Priority: 5/5): A major theme is that investors should not liquidate everything or make dramatic changes based on fear. Instead, any risk reduction should be incremental and made within a plan, since emotional trading is likely to backfire. Brokerage consolidation and the rise of wealth management (Priority: 4/5): Morgan Stanley's purchase of E-Trade is treated as part of a broader industry shift: discount brokerage, free trading, and customer acquisition pressures are forcing firms toward mergers and toward comprehensive wealth management models. Free trading, retail participation, and market behavior (Priority: 4/5): The hosts discuss how zero-commission trading has increased activity at discount brokerages, possibly enabling better access for small investors while also encouraging more trading and speculative behavior. Income inequality, mobility, and FIRE skepticism (Priority: 3/5): They revisit inequality and note research showing high turnover in top income brackets. They also push back hard on a piece arguing that frugal millennials/FIRE savers could hurt the economy, calling it unrealistic and detached from reality. Housing, mortgages, and short-horizon buying decisions (Priority: 4/5): They answer listener questions about paying for business school with retirement savings and about buying a home when planning to move within a few years, favoring flexibility and warning against stretching for assets with high transaction costs. Media, market narratives, and contrarian takes (Priority: 3/5): The hosts criticize sensational financial reporting and bearish narrative-chasing, arguing that headlines often overstate negatives while ignoring balance-sheet resilience and long-term context.

Key Arguments: Pandemic-related selloffs should be understood as one of many recurring 2%+ market declines rather than proof of permanent damage. Historical pandemics show that outbreaks can be terrifying and economically disruptive yet still end without a clear medical breakthrough. Investors should avoid moving from fully invested to fully out of markets; if risk is too high, reduce exposure gradually and deliberately. Morgan Stanley's E-Trade deal is likely motivated by customer acquisition and a broader push into wealth management rather than pure brokerage economics. Free trading appears to have increased retail trading volume materially, suggesting consumers do respond to price cuts. The FIRE/super-saver thesis is overstated; the U.S. is unlikely to experience a harmful surplus of savers. High homebuying transaction costs and short holding periods make buying a poor choice for someone likely to move within three years. Financial advisors should be judged on whether their advice is aligned with the client's goals, not on whether their own portfolio exactly matches the client's. Speculative trading can produce real emotional damage and serves as a costly lesson in investor temperament.

Data Points: S&P 500 intraday decline: -2.8% - Market opened sharply lower on coronavirus fears. Frequency of 2%+ S&P 500 drops since 1990: 260 times - Used to show that large daily declines are common over long periods. S&P 500 total gain since 1990 after those drops: 1,640% - Long-term perspective on volatility. Approximate distance from highs: 4% - Market was still only a few percent below highs during the coronavirus selloff. Roughly 3% down days since 1928: about 4 per year on average - The hosts noted these declines cluster but are not rare. Annual U.S. flu deaths: 12,000 to 60,000 - Cited while discussing influenza and pandemic risks. 1918 flu peak-to-trough drawdown: about 10.9% - Stock market decline during the Spanish flu era. E-Trade customers: 5 million - Part of Morgan Stanley's acquisition rationale. E-Trade assets: $360 billion - Retail assets Morgan Stanley could potentially cross-sell against. Morgan Stanley financial advisors: 15,500 - Shows the firm’s wealth-management scale. Schwab daily dollars traded increase after fee cuts: 74% - Used to support the idea that investors respond to lower commissions. Discount brokerage trading volume: roughly doubled from 1 million to 2 million trades - Illustrates the surge in trading after commissions went to zero. Americans in top 10% income at least once: over 50% - Cornell research on income mobility. Americans in top 1% income at least once: over 11% - Shows high turnover among top earners. Top 1% status duration: 94% only one year; 99% lose status within a decade - Used to argue income inequality cohorts are not static. Average value of NBA teams: over $2 billion - Referenced during a Knicks and sports-ownership discussion. Cable subscribers lost by Comcast: 733,000 - Used in a discussion of cord-cutting and broadband growth. Zillow home sales average loss per sale: $1,500 - Direct loss on housing transactions before broader holding costs. Additional Zillow costs including interest and holding: about $5,000 per sale - Further pressure on the homebuying business model. Zillow home division loss in 2019: $312 million before taxes - Shows the difficulty of scaling home-flipping operations. U.S. credit card debt: $930 billion - Headline cited about consumer debt hitting a record. Virgin Galactic stock move: up 23% then another 10% - Used in a cautionary tale about chasing speculative trades. MBA funding question: $200,000 needed; $80,000 available in 401(k) - Listener asked whether to use retirement savings for tuition and living expenses. Listener housing budget: $36,000 per year rent - Used in the discussion about whether to buy in DC when moving within three years.

Pivotal Quotes: "This is the two hundred sixtieth time that the SP 500 has fallen 2% or more since 1990." — Michael Batnik: Opening market perspective on the coronavirus selloff. "The worst thing that you can do is decide to go all out, pay taxes, whatever, pay capital gains, and then wait for the dust to settle." — Ben Carlson: Advice against panic-selling and all-or-nothing portfolio shifts. "It was as if the virus were a hunter. It was hunting mankind." — Michael Batnik: Describing the language in The Great Influenza to convey how pandemics spread.

Implications: Listeners should expect continued volatility from virus fears, but the bigger lesson is behavioral: avoid panic, keep a plan, and use uncertainty to reassess risk rather than abandon it. The episode also signals more consolidation, more retail trading, and continued pressure on traditional brokerage models.