Transcript: Listener mailbag with the Unhedged podcast

This is an audio transcript of the Behind the Money podcast episode: ‘Listener mailbag with the Unhedged podcast’

[MUSIC PLAYING]

Michela Tindera
Hey everyone, it’s Michela. Happy Tuesday. Today’s show is a little different than what we typically do. This week we’re joining forces with the FT’s Unhedged podcast for a special two-part episode. You might remember a few weeks ago we did a callout asking you to send us questions you have about markets and finance. Well, now we have some answers.

To get those, I recently sat down with the host of Unhedged, Ethan Wu, as well as the FT’s US financial commentator Rob Armstrong and markets editor Katie Martin. Now, here’s the thing. Part of that discussion is right here. You’re about to listen to it. And the other part of the show is over on the Unhedged stream. I’m gonna put a link to that episode in our show notes, or you can search Unhedged wherever you listen to podcasts. Now let’s get started. 

[MUSIC PLAYING]

OK, so first off, I’d like to welcome our esteemed guests from Unhedged. We have Rob, Katie and Ethan all here. Hey, Rob. 

Robert Armstrong
Hi. 

Michela Tindera
Hi, Katie. How’s it going? 

Katie Martin
I’m good. How are you? 

Michela Tindera
Great. Hey, Ethan. 

Ethan Wu
Hey, Michela. 

Michela Tindera
Now, Ethan and I are gonna switch off asking questions so you’ll hear them from both of us. So let’s kick things off.

[MUSIC PLAYING]

So we have a question from Ezekiel Akinsanya. Their question is: does Japan have the ability to become the next Asian economic superpower? 

Robert Armstrong
No. (Laughter)

Michela Tindera
Why not? 

Ethan Wu
Well, it’s a funny question because this feels like a 40-year-old question. Like, this is something you’d be talking about in the 1980s if you were like my dad or whatever. 

Robert Armstrong
Good point. 

Katie Martin
What do you know about the 1980s, Ethan Wu? 

Ethan Wu
Just what I read in the newspaper, Katie. Just what I read in the newspaper. 

Katie Martin
In the history book. (Laughter)

Ethan Wu
But, you know, I mean, Japan is a little bit of a has-been economic power. They’ve had this 30-year deflationary bust where no one wanted to invest in Japan and the economy was incredibly sluggish, like a 1 per cent growth rate, which is pretty bad. And recently, there’s been a lot more optimism about the state of corporate Japan, about economic growth in the country. And that’s all good news. But you have to make, I think, like a distinction between relative and absolute, right? On a relative basis, is Japan becoming stronger? Yes, absolutely. I think there’s a lot of evidence of that. You know, the stock market in Japan has rallied to all-time highs on the back of that optimism. But on an absolute basis, is Japan becoming the next, quote unquote, China — a global manufacturing and trade hub that creates like a centre of gravity in the global economy? I think it would be a little too far to say that. 

Katie Martin
I’m with Ethan on this . . . 

Robert Armstrong
Agree.

Katie Martin
I think. You know, the market, the markets have roared back, but it’s just not a big enough country with a big enough population and the sort of demographics that you’d need to be a proper kind of contender to compete with China in global manufacturing. But hats off to Japan. Stock market has finally pulled itself out of the morass that it’s been in for decades. And that’s really something. 

[MUSIC PLAYING]

Ethan Wu
Next question. Well, this is one that may be close to Rob’s heart. Brian Gardner asks, shouldn’t options trading be regulated as gambling? 

Robert Armstrong
Oohhh, that is close to my heart. 

Michela Tindera
Rob, before we dive into your answer to that one, can you just tell us what options trading is and just perhaps why Brian might be making this comparison, that options trading is akin to gambling? 

Robert Armstrong
OK. For our listeners who are not hopeless finance nerds, an option is a contract between two parties that allows them to speculate on some other asset. So rather than owning a stock, you might make a contract with somebody else that gave you the right to buy the stock at a certain price at some point in the future. So if the stock price falls catastrophically, you’ll have a certain price locked in in the future. That’s just one example. Again, these things were invented with sensible uses in mind, but people buy them naked without owning any stocks just because their prices change a lot really quickly. So if you have a small amount of capital and you want a lot of trading oomph for that capital, options is a great way to do that. 

Michela Tindera
Got it. OK, now back to the original question. Should they be regulated as gambling? 

Robert Armstrong
I mean, I’ve made the argument that certain activities, namely crypto, should be regulated as gambling, but options trading, people use options to do real finance things. And this is a kind of classic finance story where something is invented for a practical purpose within the finance system, and it is quickly transformed into a vehicle for speculation. So while you need options to do things like hedge, everything from your stock position to your wheat harvest if you are a farmer, people do speculate like crazy in these things. But I would argue there is enough financial reality there that we don’t have to give them the bitcoin treatment, or rather the treatment I would give to bitcoin, which is let sports gambling regulators regulate it. What do you think, Katie? 

Katie Martin
Yeah, I’m with you on this. Options are a real thing. And, you know, they’re useful for companies all over the world, like you say, for hedging commodity costs or foreign exchange costs or interest rate risks or whatever it is. They’re a real thing. Crypto should either be killed with fire or regulated like a gambling product, which is fundamentally what it is.

Robert Armstrong
Yeah. 

[MUSIC PLAYING]

Michela Tindera
Our next question is from a listener named Mike Powell. His question is: what is your single biggest investment regret? 

Robert Armstrong
Katie, you go first. 

Katie Martin
I think over the years I’ve been overly cautious and probably stuck too much money in cash, and I probably should’ve done something more exciting with it that could have beaten inflation or something like that. But I’ve just always been a bit of a wimp, very averse to losing money. I’ve got like, money that does other things in like, pension accounts, but just sort of spare money that I have kicking around. I don’t stick it in the stock market, so I’m not like a crazy American. I just stick it in cash like a proper . . .  

Robert Armstrong
100 per cent agree, Katie. I mean, I would say I have the same regret and it stems from something good that happened to me. I was working in finance during the great financial crisis, and pretty much by luck, I sold all my equities early and then watched the market properly crash, which did something terrible to me, which is make me believe that I am intelligent. And this is an extremely dangerous thing to believe as an investor. And it gave me the false impression that I could sort of tell when the market was too expensive or when it was ripe for a correction, which I clearly cannot do, with the result that I have tended to hold too many of my assets in cash and left a lot of money on the table. 

Michela Tindera
Ethan, do you have a thought? 

Ethan Wu
I do, I mean, with the caveat that my investing career is significantly shorter than the two veterans . . .  

Katie Martin
Ice cold there from Ethan. (Laughter)

Ethan Wu
But, so when I was a wee investing lad of just 18 years old, I made a big strategic allocation towards Chinese equities on the belief that, you know, the Chinese social contract depended on growth, so they would need to generate growth, that would lift the stock market in the long term. It would be a good 20-year investment. Don’t ask me what type of 18-year-old I was to be getting into all of that.  

Robert Armstrong
Nerd! 

Ethan Wu
But I put perhaps 20 per cent of my modest wealth at that point in time into Chinese equities. It has done very poorly. Very poorly indeed . . .  

Katie Martin
So when did you put this on? How long ago were you waiting? 

Robert Armstrong
This was six months ago. (Laughter)

Michela Tindera
Things have really gone south. 

Ethan Wu
This would be 2016 or 17. 

Robert Armstrong
That was a bad time to buy Chinese equities, OK. 

Ethan Wu
It sure was. It sure was. 

Robert Armstrong
I mean, it’s a good lesson, though, in the difference between an economy and a stock market, and on the difficulty of speculating on the effects of government policies, which is a hard thing to do. 

Ethan Wu
Yeah, that’s exactly right. I might have been right at that time about the economic trajectory, at least over like a 20-year horizon, but it guarantees you absolutely nothing about whether the stocks go up or go down. 

[MUSIC PLAYING]

Michela Tindera
Coming up: Ethan, Rob and Katie answer questions about the “magnificent seven” stocks and discuss the future of AI. 

[MUSIC PLAYING]

Ethan Wu
All right. Our next question is on something a little bit more newfangled. It comes from Joe Yau: I was wondering about your thoughts on the new AI boom and if it’s a repeat of the cryptocurrency/blockchain hype cycle. Is it a handoff from one to the other? Or is it just another dotcom bubble? 

Robert Armstrong
Katie, this question is your problem. 

Katie Martin
So the question is: is it a repeat of the crypto/blockchain hype? And the pretty clear answer to that, in my mind, is no. Crypto and blockchain, I mean, time does not allow for us to fully demolish the proposed use cases for this stuff. Whereas AI is real, it has very practical applications. There is a good reason why these stocks that are related to it, you know, the kind of biggest of them all really being Nvidia, are absolutely just cresting. Whereas the crypto hype is very much based on kind of its vibes. And it’s a kind of social media phenomenon — a lot of it, not all of it, but a lot of it.

The question of whether it is a repeat of the dotcom boom is a slightly more troubling question, because some of the sort of chart patterns that you can see, some of what’s going on in markets now in 2024, does look very similar to the way that markets were behaving in the dotcom boom. But again, I would argue that there was a lot of stuff in the dotcom boom that just literally made no sense. And there were very unprofitable companies that were just like, their stocks were rocketing for no apparent reason. Whereas in AI, it is different. This certainly feels a lot realer. I mean, Rob, you were around to see both booms. Does it feel realer to you? 

Robert Armstrong
It does. I’m a big valuation guy. The valuations aren’t as crazy this time around. They may be crazy, but they’re not as crazy. So the stocks just aren’t as expensive, which makes a big difference. That said, I was talking to the NYU valuation wizard Aswath Damodaran the other day about Nvidia, a stock which he bought at 27. By the way, it’s at 800. He has since sold a lot of his position. His argument is AI is real, Nvidia is real. But if you actually project the size of the chip market and Nvidia’s share of the chip market based on Nvidia’s current share price, it’s like the market quinzipples and Nvidia owns 80 per cent of it. In other words, the price has gotten even ahead of the real story. And I think that is probably a pretty good, if slightly extreme, example of a way to think about these stocks. There’s always a difference between recognising that a technology is genuinely revolutionary and carries with it the potential for great profits, from knowing exactly who’s gonna win and lose. I mean, this industry is gonna be a knife fight in a phone booth for the next five or 10 years. Right? And who staggers out alive is still to be determined. 

[MUSIC PLAYING]

Michela Tindera
All right. We have another question from Martyn Lunn. It’s a two-parter. The first part of the question is: what do the names Chris Adams, Vin Tanner and Chico mean to you? 

Robert Armstrong
Ethan? 

Ethan Wu
Not much. 

Michela Tindera
Oh. 

Robert Armstrong
Nothing. 

Michela Tindera
Oh, no. (Laughter)

Robert Armstrong
Chico? Vin? Wait on us. 

Michela Tindera
OK. Well, they were the only members of the Magnificent Seven to survive in the John Sturges 1960 movie. 

Robert Armstrong
Oh, awesome, awesome. 

[THE MAGNIFICENT SEVEN CLIP PLAYING]

Michela Tindera
Yul Brynner, Steve McQueen and Horst Buchholz being the respective actors . . .  

Robert Armstrong
Yes. Well, I think . . .  

Michela Tindera
We failed the movie trivia. (Laughter)

Robert Armstrong
Which is especially shameful because I love that movie. And so there’s a nice analogy to stock market issues, too, in the final lines of that movie. If I’m remembering this correctly, after, you know, everybody has been shot a thousand times and there’s bodies piled high everywhere, and Yul Brynner turns to the villagers of the peaceful little village they’re defending from the bandits, and it’s like they all won.

[THE MAGNIFICENT SEVEN CLIP PLAYING]

Which is a nice metaphor. Like, maybe in AI, all the value is captured by the consumer and like, it doesn’t turn out to be that profitable a business. It just, like, creates a huge consumer surplus and everyone is happy and nobody makes great money on it. 

Michela Tindera
Yeah, well, I’ll take it to part two of this question, which kind of dovetails into what you were just saying, Rob. Basically, in this movie, The Magnificent Seven, three members survive. There are only three to survive. So Martyn’s question is about the “magnificent seven” stocks. So that’s Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla. He wants to know which three of those you think are most likely to live long and prosper, and which four are most likely to bite the dust. 

Robert Armstrong
Wow. Are any of them gonna bite the dust? 

Katie Martin
Oohhh. We’re close to the investment advice territory here, which we definitely do not give.  

Robert Armstrong
So let’s say: which has the most durable business model? Let’s rephrase it gently like that. I’ll make the case for Microsoft having a very durable business model, because so much of its software goes into kind of business infrastructure. These are extremely sticky clients that hate change. And so Microsoft is kind of just dug in to the world computing network, which will mean, for good or ill, it is with us. Whereas you can kind of imagine a world in which we think another device is cooler than an iPhone, or another way of searching for information is better than Google, maybe an AI one, whereas Microsoft is like, you know, once your house has black mould, there’s nothing you can do to get it out of there. How’s that for a theory, guys? How do you like that, Ethan? 

Ethan Wu
I think that’s decent. I mean, I think there’s been more talk about segmenting the Magnificent Seven between the four winners and the three losers, or however you want to cut it. And I think people have most recently been down on Apple, Tesla and Alphabet. Maybe there’s some recency bias there. But those have been kind of the worst three performing stocks. I mean, Rob, you and I have talked about this on the Unhedged podcast and on the Unhedged newsletter, Alphabet, it seems like it’s one of the more reasonable valuations within the Magnificent Seven, and they basically run the entire internet advertising economy outside of Meta.

Robert Armstrong
It’s true.

Ethan Wu
That’s a pretty durable business model. Maybe it’s not growing as fast as it did 10 years ago, but advertising will be around for a long time. Apple, too, I mean, it’s just hard to see them falling off. They have such a long, you know, four decades of history of reinvention again and again and again. 

Robert Armstrong
What about Tesla? Right? I mean, we hear about the flood of electric cars that are coming out of China. I mean, I guess the competition is a little cooler now. There’s more scepticism about pure electric vehicles than there might have been a couple of years ago, but Tesla’s got to be under some fairly hot competitive pressure. 

Ethan Wu
Yeah. 

Michela Tindera
You guys have already spoken about Nvidia a bit earlier. But any thoughts on Amazon? I think that’s kind of the one we haven’t mentioned in this discussion. 

Ethan Wu
That’s the hardest one, I feel like, of all the Mag 7 to think about, because it’s two businesses stapled together with rather different growth prospects. And, you know, it faces, like, an incredible amount of antitrust scrutiny in the retail side. And then on the web services side, it faces like incredible competition from the biggest tech companies. And we also don’t know what full profitability Amazon looks like. It’s still kind of the last big tech stock in like, full growth mode, less emphasis on profitability, even though there’s been some of, you know, a bit of a pivot in the last couple of years. But Rob, I think this is probably the hardest one to say for sure. 

Robert Armstrong
Yeah, it is. My assumption is, if you are a corporation and you hire Amazon Web Services to host your website, I think the technical term is, it is an enormous ball-ache to shift to a different provider. So I think that business might be pretty sticky. And on the retail side, they do a great job. They have a lot of physical infrastructure. I’d be a little more confident than you, Ethan, in saying, you know, whatever the stock price is — too expensive, too cheap — I think Jeff Bezos has probably built a very enduring business there. That would be my guess. I’d worry more about Google. I’d worry more about Meta in terms of how the businesses can endure. Katie, I know you have something to say here. 

Katie Martin
I, I mean, last time I looked, Tesla was not even one of the seven biggest stocks in the US anymore. You know, it’s fallen down the rankings quite substantially. I think Eli Lilly is taking its place or UnitedHealth or maybe even both of them. I mean, so it’s lost a lot of ground. As Rob says, it’s got incredible brand recognition. But that’s the one that I think people are most jumpy about. Amazon, I agree, is probably the most difficult to really pin a view on. But, yeah, you know, none of these companies should assume that just because they’ve been top of the pile for a long time, they’re gonna stay there. None of these companies should imagine that they have any, you know, God-given right to carry on existing and being as successful as they have been. 

[MUSIC PLAYING]

Ethan Wu
OK. Final question. This question comes from Sean Jamison. What are your favourite books about finance and what single book changed your worldview the most? 

Robert Armstrong
Katie, you go first. 

Katie Martin
Look, it’s recency bias and I know I’ve gone on about it a lot, but I really love The Fund by Rob Copeland. Just the inside story of Bridgewater is an eye-popper. I know I keep going on about it, but it was great. Everyone knows that Ray Dalio’s Bridgewater has a very kind of specific corporate culture, that it has his rules and principles that are kind of run through everything that it does. But when you read this book and you find out how they are used in practice, in everyday life, in a hedge fund where you’re trying to figure out anything from who changed the stickers that you need to get your car into the car park, to who is leaving pee on the floor of the men’s toilets, to, you know, just all kinds of like tiny rules for everything in your life, the way that this is executed is just mind-boggling. I mean, no spoilers, read the book. But it really is quite an eye-opener into how a big hedge fund can get big ideas about itself, and it can look extremely strange to the outside world. 

Robert Armstrong
I’m gonna recommend two books. I would like, Katie, I’m gonna pick some narrative books that really changed my point of view. And there was this New Yorker author in the ‘60s and ‘70s called John Brooks, and he wrote several books about the stock market. One is called Once in Golconda, and one was called The Go-Go Years. And they’re absolutely hilarious and insightful and well-reported reflections on and histories of periods where the stock market and Wall Street went bananas. So The Go-Go Years is about the ‘70s and the Nifty 50 and the conglomerate boom of the ‘60s and ‘70s. Once in Golconda is mostly about the ‘30s. And you read these books and you realise insanity was not invented yesterday. All the weird stuff you see, all the weird stuff you see in Wall Street and the stuff you kind of can’t believe, and it’s bananas, you realise all of these are things that have always existed in American stock markets and just take on new forms. And so those books definitely changed the way I not only think about finance, but the way I think about doing my job. 

Michela Tindera
Ethan, what about you? 

Ethan Wu
Well, this is actually a book that Rob recommended me two or three years ago that really influenced my view. And it’s called The Misbehavior of Markets: A Fractal View of Risk, Ruin, and Reward by the Yale mathematician Benoît Mandelbrot. And it’s basically a book all about the idea of markets being non-linear. So this is like the the math-person speak for random stuff happens a lot of the time. And it’s very hard to say when or why or how. And he, you know, I think he uses a really interesting analogy about the kind of jaggedness of shorelines, that, you know, waves are a totally deterministic process, but they end up creating these kind of jagged shores, and that stock markets are a little bit like that, too. There’s a roughness to stock markets that if you look at a chart of prices on a one-month horizon or a six-month or a one-year or a 20-year or 100-year horizon, in some ways they kind of look similar. And he sort of traces both the math of it and the connection to kind of an underlying roughness of nature. And it’s really interesting and just kind of made me better understand, on an intuitive level, why markets are so hard to grapple with and why, you know, no one can beat the market. It’s just a . . . it’s an organism that’s really a lot more sophisticated than we can really understand. 

[MUSIC PLAYING]

Michela Tindera
Thanks for listening. Don’t forget, if you want to hear more of me, Ethan, Rob and Katie, head over to the Unhedged podcast feed linked in our show notes. We answer a different chunk of questions over there.

Behind the Money is hosted by me, Michela Tindera. Saffeya Ahmed is our producer. Topher Forhecz is our executive producer. Sound design and mixing by Sam Giovinco. Cheryl Brumley is the global head of audio. We’ll be back to our regular schedule next week. See you on Wednesday. 

[MUSIC PLAYING]