Where Were You at the Bottom (EP.72)

Episode Summary

Executive Summary: The episode blends personal reflections on investing through the 2009 market bottom with broader market lessons: active management’s challenges, the persistence of fee compression, the impact of rising rates on cash and hedge funds, and how behavioral biases shape decisions in portfolios, housing, and debt. The hosts also discuss recession frequency, retirement savings, valuation of IPOs like Lyft, and practical consumer finance moves such as high-yield savings and mortgage recasting.

Main Topics: 10-year anniversary of the 2009 market bottom (Priority: 5/5): The hosts reflect on where they were during the financial crisis bottom and how the experience shaped their investing behavior, risk tolerance, and career development. Ben describes buying aggressively through the panic, while Michael recalls the emotional impact and family stories tied to the crash. Active management, persistence, and mean reversion (Priority: 5/5): They discuss how difficult it is for active managers and famous investors to sustain outperformance. They cite studies showing short-term winning funds rarely repeat, and argue that investor behavior often compounds the problem by chasing recent winners and selling losers. Fee wars and the evolution of investing products (Priority: 4/5): The conversation covers ultra-low-cost ETFs and the shrinking importance of shaving basis points compared with bigger issues like trading costs, taxes, and behavior. They also note that large firms like JPMorgan and Goldman entering the race may push prices even lower. Cash yields, savings inertia, and high-yield alternatives (Priority: 5/5): A major theme is how much money remains trapped in near-zero-yield bank savings accounts despite available higher-yield options. The hosts argue the real barrier is inertia and small-account psychology, not lack of access or complexity. Hedge funds in a low-rate world (Priority: 4/5): They discuss how higher rates can help long/short funds through short rebates and how hedge funds have struggled in the post-crisis era. The broader point is that cheap money and one-way markets have made alpha generation and fee justification more difficult. Recessions, market cycles, and structural stability (Priority: 4/5): Using Morgan Housel’s chart, they note that recessions are less frequent and less severe than in the pre-WWII era, likely due to a more services-based economy and a more active Federal Reserve. This helps explain why many predicted recessions never materialized. Consumer finance, housing decisions, and valuation stories (Priority: 4/5): They cover record credit card debt, a survey on debt tradeoffs, mortgage recasting, why people move, and why story matters in valuing young companies like Lyft. The common thread is that financial decisions are often driven by psychology and narrative rather than pure spreadsheets.

Key Arguments: The 2009 bottom was a rare, powerful buying opportunity; staying invested during panic was rational because retirement money had a long horizon. Even great investors and legendary managers struggle to sustain performance; manager selection should be based on process and discipline, not recent returns. Small changes in ETF fees matter far less than trading costs, taxes, and investor behavior; fee compression has become more about PR than economics. Huge amounts of savings remain in low-yield bank deposits because people underreact to incremental gains and do not bother moving small balances. Higher interest rates can improve long/short hedge fund economics by increasing short rebate income, but many hedge funds still struggle because the post-2009 market has been unusually favorable. Recessions are now less frequent and less damaging than in prior centuries, which helps explain why fear-based recession forecasts often prove premature. Valuing IPOs and young companies is driven more by narrative and expectations than by current financial statements. Mortgage recasting can lower monthly payments, but it may not be optimal if the borrower already has a manageable fixed-rate mortgage and better uses for capital. People move primarily for lifestyle and housing quality, not just jobs or commute reduction, which means housing decisions are partly emotional and strategic rather than purely financial.

Data Points: S&P 500 since 2009 bottom: up 407.5% - The hosts cite the gain through Monday afternoon since the March 2009 market bottom. Fed funds rate: 2.5% - Used in the discussion of rising rates and bank savings yields. Commercial bank savings deposits: almost 86% of total U.S. savings deposits - Used to show how much consumer cash sits in bank savings accounts earning little. Total savings held in bank accounts: over $9 trillion - The amount of cash trapped in low-yield savings accounts. Average recession frequency pre-WWII: about every 2.5 years - Historical comparison of recession timing from the 1850s through World War II. Average GDP contraction pre-WWII: 22% - Average recession severity from the 1850s through World War II. Average GDP contraction since WWII: 2.3% - Shows modern recessions are much shallower than earlier ones. Average recession frequency since WWII: about every 5.5 years - Shows recessions are less frequent in the modern era. Workers maxing out 401(k)s at Vanguard: 13% - Used to show retirement savings behavior is stronger than expected. Workers maxing out 401(k)s at Fidelity: 9% - Used to show retirement savings behavior is stronger than expected. U.S. credit card debt: $870 billion - Bloomberg data cited for December 2018. Age group share of credit card debt, 50-59: 25% - Largest age cohort in the credit card debt breakdown. Age group share of credit card debt, 60-69: 18% - Shows debt is skewed older as well as middle-aged. Survey respondents willing to give up vacationing for 10 years: 1 in 5 - From a survey on sacrifices people would make to eliminate credit card debt. Survey respondents willing to give up going out to eat: 22% - Debt sacrifice survey result. Survey respondents willing to give up internet: 5% - Debt sacrifice survey result. Survey respondents willing to give up phone: 6% - Debt sacrifice survey result. Survey respondents willing to give up driver's license: 3% - Debt sacrifice survey result. Mortgage example rate: 7.9% - 1995 fixed mortgage rate used in the recasting example. Mortgage example payment reduction after recasting: $184 per month - If $20,000 were applied to principal and the loan reamortized. Mortgage example payment reduction after larger principal payment: $945 per month - If $100,000 were applied to principal and the loan reamortized. Consumers expecting higher savings rates: 37% in 2018 vs 28% in 2015 - YCharts survey data on expectations for savings account rates.

Pivotal Quotes: "you can notice a fly on someone else, but not an elephant on yourself" — Michael: Used to describe his own hypocrisy about brunch and parking behavior. "There's no investment product so good gross that there isn't a fee that could make it bad net." — Cliff Asness (quoted by Ben): Used in the discussion of hedge fund fees and why costs can overwhelm product quality. "When valuing young companies, it is the story that drives your numbers and valuation, not historical data or current financials." — Oswat DeMotorin (quoted by Ben): Used to frame the challenge of valuing Lyft and other IPOs.

Implications: Listeners are urged to focus on behavior, patience, and structural costs rather than chasing headlines, tiny fee differences, or recent manager performance. The episode suggests practical gains come from using cash better, staying diversified, and respecting how narratives and incentives shape markets.