Joshua Brown, 37, is an author and investment adviser who writes the Reformed Broker blog. The CEO of Ritholtz Wealth management, Brown is also the co-author with Jeff Macke of Clash of the Financial Pundits, about how the media influence investors, and the author of Backstage on Wall Street, which recounts his experiences in the hard-sell retail brokerage business. Money Assistant Managing Editor Pat Regnier interviewed him for the October 2014 issue, from which this Q&A is adapted.
Am I better off just ignoring financial news?
Good luck with that. Most likely, you have to converse with people you do business with, people you work with, people who work for you, or people you report to. You have to be fluent in what’s going on in the economy. It isn’t a feasible solution to say, “Okay, I own the Vanguard 500 index fund. I’m going to go to a South Pacific island, so to speak, and my performance will be fine.”
My take instead is to be exposed to financial news all the time, so you can wink at it. Then when you hear a prediction that scares people, you can say, “Yeah, I hear stuff like that every day, and it never matters.” That’s how you deal with the noise.
What should I just wink at?
Predictions. Forecasts. Also, don’t necessarily act on information that’s maybe more valuable just as context. One thing financial media does that it shouldn’t is to make everything “actionable” for everyone.
What’s context good for?
[At my firm] our default is to do less—to have a high hurdle before doing something. What enables that, without a lot of stomach-churning and consternation, is paying attention to what’s going on. The more I do that, the more I realize, “Hey, most of this stuff does not demand a reaction.” It’s just the news of the day.
Some would say, “Brown’s a pundit himself—of course he sees value in what he does.”
Most of what I’m doing on my website is not saying, “Here’s why I know everything about this topic.” I’m linking to other sources of opinion or information I think are valuable.
What about when you appear on a CNBC panel? It’s a noisier medium.
I’m on a specific show [Halftime Report], and I’m biased, but I think it’s the best show on the network. And the reason why is the guests—people I respect, whose stuff I read—not necessarily because of us on the panel. We try to have a fast-paced, exciting discussion around the food for thought those guests feed us.
Do the media create bubbles?
The media are the delivery mechanism of the excitement that draws people in. In my book I talk about how the media were used to blow up the South Sea bubble in the 1700s. Daniel Defoe and Jonathan Swift, famous writers, were writing in newspapers, the Internet or CNBC of their day, bringing in people who had never heard of a stock before in their life.
Are the media doing any bubble-blowing now?
I actually think the media are working too hard at skepticism now. They’re playing catch-up because they were blamed for missing the crisis.
It’s not abnormal for the stock market to be going up. It’s normal. Here’s a fun fact. Fifty years of history, pick any day of any month of any year going back, and it turns out you have a 75% chance of the market being higher one year later.
Some investors worry about stocks’ high price/earnings ratios.
It’s good to be aware of valuations. But no one has been successful trying to time the market based on the P/E ratio. It’s not like physics, where if you run the same experiment in a lab, every time you’ll get the same result.
That said, I don’t get the sense from reading your blog that you are a pure buy-and-hold investor.
We don’t look at ourselves as market timers. But if we see something and we know it’s stupid, we’re just not going to do it.
We don’t think that U.S. Treasuries are a great buy. [Ten-year securities are yielding only 2.2%.] We recognize the value of Treasuries to a portfolio in terms of stabilizing it. But we think we can do that better with other kinds of fixed-income investments, even including money-market funds—or anything outside of just saying, “The model says hold long-term Treasuries, so we have to buy them.”
You write about how financial pundits tend to fall back on simplistic rules of thumb.
In real life, rules of thumb are helpful. They’re a shortcut way to impart a bit of wisdom or to remind someone of something that he already knows. But in investing, rules of thumb tend to contradict each other. So you get “Let your winners run,” but also “Pigs get slaughtered.” Those kinds of aphorisms are cool. They’re like nursery rhymes. But they’re not particularly helpful.
Your blog is called the Reformed Broker. Why “reformed”?
I began my career as a retail broker [selling investments for commission]. I thought I was helping people, and the markets were going up, so I guess I was. Then when the markets started not to go up, the conflicts that had been masked became apparent to me. When you sell financial products and get paid on a transactional basis, your bias is toward selling the products that pay the most and pushing more transactions.
The name was tongue-in-cheek, but within two years of starting the blog, I quit being a broker.
What should consumers know about the conflicts of people they read and see in the financial media?
Assume everyone has a bias. That bias may be driven by their politics or the way they get paid or the firm they work for. It’s that simple. People probably believe what they are saying most of the time. But why do they believe it?