Market Valuations: The hosts argue that valuations need context, highlighting rising profit margins and the link between forward P/E and margins, and contrasting the MAG 7 with the broader S&P 493.
Earnings vs Multiples: 2025 stock returns were framed as largely earnings- and dividend-driven with only minor multiple expansion, underscoring fundamentals over sentiment.
Diversification: For investors wary of large-cap tech valuations, they suggest diversifying into areas like small/mid caps, foreign stocks, value, dividend, and quality factors instead of moving to cash.
Credit Card Policy: Capping credit card rates at 10% was criticized as likely to reduce credit supply and push borrowers to opaque, costly alternatives, with emphasis on consumer education and fee transparency.
Industry Fees & Rewards: Discussion covered merchant fees (2–3%) subsidizing card rewards and the entrenched ecosystem, citing deals like AmEx–Delta partnerships as examples of system complexity.
Information Sources: They recommend mainstream financial media plus curated blogs/newsletters and evergreen books to build a filtered, process-driven information diet.
Retirement Strategy: Always take employer 401(k) matches, consider a mega backdoor Roth if available, and frontload saving in strong earning years while preparing for eventual bear markets.
Housing Decisions: On rent vs. buy, avoid becoming house poor; weigh career trajectory, affordability, and market appreciation, and maintain a margin of safety.
Transcript
Welcome back. This is Ask the Compound, the show where you ask and we provide the answers. I am Ben Carlson. The stock market is wildly overvalued, right? Has to be after the insane runup in prices that we've seen during this bull market. Or is it? How do you value the stock market when companies of today are nothing like companies of the past? We're going to answer that question on today's show and more. Let's do this. [Music] All [Music] right, our inbox was full this week as usual. Ask the compound show atgmail.com. On today's show, questions directly from our compound audience about how to value the stock market, how to fix the credit card business, the best sources for your financial information, how much to save in your 401k, and how to avoid becoming house poor. But today's show is sponsored by Exhibit A. At Rholtz, we know the power of content, education, communication when it comes to keeping your clients happy. Exhibit A makes your life easier as an adviser. Create charts, presentations, client decks using visuals we have created. You pick the color scheme, add your company logo, download to your devices. Um, listen, I talk to advisers all the time. They don't have time to produce content, make charts look pretty. Let us do that for you. Plus, you'll get weekly chart blast, chart of the week, bullet points that help you get clear talking points for prospects and clients, current clients alike. Um, plus you have chartmat, who's one of the best in the game and the chart game right now. If you're not using his stuff, you're missing out. So, if you go to exhibit aforadvice.com, you can learn more and start your free trial or you can get a 20inut conversation with Matt who will walk you through how the all the tools on the platform work. His fingerprints are going to be all over the show today. So, that's exhibit aforadvice.com if you're an adviser who wants to learn more. How many people are going to abuse that just to get to talk with Charip Matt? >> I know, right? He's a nice guy. >> Yeah, he is. Though, I'm still waiting on my exhibit A hat. Not to not to be a dead horse, but >> Yeah. You don't have enough hats, though. >> It's true. >> All right. True. >> Let's do it. >> All right. >> Wait, is that a Grateful Dead hat you're wearing? >> It is. It is. Rest in peace, Bob. We >> So, the the Grateful Dead story I heard this week from someone talking about the.com bubble was that there's a story that they don't know if it's true or not, but we'll we'll call it true. Um, at one point during the dotcom bubble, Jerry Garcia called up someone, its manager, and said, "Wait, what's Netscape trading at today?" That's how crazy it was. Jerry Garcia was interested in the dot bubble. >> Didn't he die in like 94? >> Jerry Garcia? I don't know. It's a good story. Don't ruin it. All right, do a question. >> Okay. Up first, we have a question from Mark. Uh, on Animal Spirits, Ben and Michael were talking about how to use >> God damn it. He died in 95. You're right. >> Wait, when did Netscape come public? I think it came public in '95. >> Okay, maybe. Maybe. >> Keep reading. >> On Animal Spirits, Ben and Michael were talking about how using historical valuations isn't helpful because the companies of today are so different than those of the past. Fair enough. But how are investors supposed to gauge the stock market's valuation proposition today? Uh, what's the alternative? >> This is kind of crazy. According to Google, Jerry Garcia died the day of Netscape's IPO. Maybe he was an early investor. Who knows? >> What are the odds? That is bizarre. >> Both on August 9th. >> That's weird. >> Okay. Um, great question. Uh, I do think a lot of people have made the mistake of relying far too heavily on historical averages for valuation, especially in this cycle. I'm not going to name any names here. There have been many prominent perma bears who have said like, listen, the past average was this. Now it's this. This is a bubble, right? I I there's people talking about this in like 2010 2011 like way back when early days of the bull market like no look at the valuations this is this is done right and the market doesn't work like that my whole thing with valuations is these things require context okay so just this past summer I think it was we answered someone question about the history of the S&P so I had Chad GPT create a little infographic for me I was fighting with AI all morning about this throw it up there uh just Just a reminder, so that people who always tell me like, "Hey, Ben, what are you doing showing returns going back to the 1920s? The S&P wasn't created until 1957." True, but the S&P 90 was created in 1926. It was 50 industrials, 20 railroads, and 20 utilities. Nothing like the companies of today. It became the S&P 500 in 1957. Still a bunch of industrials, 425, 60 utilities, 15 railroads. Financials were not added till 1976, which is kind of amazing since banks have been around forever, right? And then in 1988 they abandoned this 40 or this 400 404 4020 model and it was 400 industrials 4 40 utilities, 40 financials and 20 transports. And now it's like hey we're going to let the sector weights go where the economy is, right? So the S&P has changed drastically. The companies are obviously different. You can do chart off here. Um so it's tons of capital intensive businesses and of course today's companies are nothing like the predecessors. And this isn't just looking back 100 years or so. throw up. This is one of my favorite charts, a chart that Matt made for me. This is margins since 1990. Okay? And it shows the averages. This is so this basically tracks the internet, right? The margin averages keep going up and up and up every single decade. They keep improving. Companies keep becoming more and more efficient. They don't need as many people. They're not as capital intensive. Uh they make more money. Okay, so chart off please. So the thing is like how do you put these profit margins in context of today's levels, right? So let's do another chart on this is from duality research. This really cool chart we showed on animal spirits recently. It's worth revisiting. So this goes back to 2005 and this is forward profit margins versus forward PE ratio since 2005. And you can see the line as both as one moves up so does the other one. So valuations and profit margins are essentially moving hand in hand, right? So they are they're going up. So this this kind of shows that the rise in valuations we've seen makes sense. It's justified based on the company's profit margins rising. Okay, chart off. So this is so far. All right, it kind of this environment makes more sense. So each quarter, Michael and I do a video for clients only, right? And we put a bunch of charts up and our research team does that and um usually have to be a client to see that, but our research team has a good one. So I'm actually going to pull some straight from there. Uh this is a secret so don't tell anyone. All right. So let's do a chart here. This is the S&P 9493 versus a MAG 7. So of course taking those big seven technology stocks on the right. On the left is the other one. So you look and you say, well of course the valuations for those MAG 7 are higher. They make a lot more money. They're higher quality businesses. Their growth rates are higher. They should have a valuation that's much higher than the S&P 493. because you can see the rest of the market hasn't really kept up with valuations, right? They've they've more or less stagnated. Um, chart off, please. Now, you may be thinking, who cares? The stocks that make up a huge portion of the stock market, those are the ones I care about because that's the market, right? Who cares about the rest of the index? Which I say the valid point. Now, I'm not like a short-term market guy. I think the long-term matters more, but I think it can be helpful to look at the short term. So, here's another one that our team created for us. Put the chart on, please. This shows just for 2025. So the total return was roughly 18%. Earnings growth was more than 14%. Dividends put a 1 and a.5% on there and multiple expansion was pretty minor in 2025. Most of the growth in stocks came from fundamentals. That's a good thing, right? Earnings and dividends accounted for a huge chunk of the returns. Chart off, please. Now, obviously earnings are a big piece here, right? If expectations on earnings numbers are too high, that's probably where the trouble lies. Um, and I' I've put a bunch of visuals here. I I haven't really been pinned down. So, like BB gun to my head where I fall in valuations are they are a good starting point to understand the market, right? And where potential risks reside, but they are not a beall endall. Valuations require some context. So, you can't just say the past average was this, now it's this. Therefore, you can't make that leap. You have to put some context on these things. Believe it or not, back when I first got into the market, I bought a bunch of like single-digit PE stocks and a lot of them didn't do well. So, >> sometimes the market knows what it's doing. Not not always, obviously. Things these things can get crazy out of whack. Um, but here's the thing is if you are worried about large tech valuations, and I understand why some people are. It could be that the expectations are too far, the growth rates are going to plateau, and they're not going to keep going, right? There's plenty of other areas in the stock market where valuations are lower. Here's one more from our call. Small and midcaps traded at a pretty decent discount to large caps, right? As big as we've seen in over 20 years. >> Can you call this Smidcap? >> Sure. Want to make it easier? Smid. Uh that that's investment lingo. You're at an investment committee meeting. Someone's going to say SMID. Uh foreign stocks are cheaper. Value stocks, dividend stocks, high quality stocks, min stocks. Basically, everything is cheaper than the S&P 500. Chart off, please. >> So, if valuations of the S&P have you freaked out, diversify into something else. That's the answer. It's not like, okay, oh no, the market's overvalued, go to cash. No, diversify. That's that's the answer. >> And not to derail the show, we can dig into this, you know, on a future show if you want, but I'm I'm curious where PE even came from as a metric. Like what is the history of of this? Someone just came up with this at some point or it was like looking back and doing like a post-mortem on a certain period of time and figuring out what things usually traded at. I'm not sure if specifically if it was a Benjamin Graham thing, but obviously you had to you had to have weight it somehow, right? Back in the past, Jesse Livermore and all the people in the bucket shops, they used to just it was all technical analysis like what's going up or what's going down, >> right? >> Right. And what's the sentiment and all these things and um yeah, that that's someone had you had to anchor it somehow to something. >> Yeah. >> Right. >> Yeah. All of those price to sales, price to book. Yeah. Yeah. It's kind of interesting how that worked out. >> Let's do another one. >> Okay. Up next, we got one. Uh, lots of people, this one's kind of an an amalgamation of a lot of comments and a lot of stuff we've seen in the zeitgeist. So, it's about credit card rates. Uh, why is capping why is capping credit card interest rates at 10% such a bad idea? What are some other ways we could make credit card interest rates less crazy? >> All right, let's bring on everyone's favorite macro commentator at the firm here, Mr. Barry Rholds. >> Hey, Barry. >> Hey, guys. How's it going? >> Good. Good. Okay, so this is this is obviously an exercise in something that's probably not reality, but I think it's worth talking through and understanding this business better, okay? Because th President Trump said, "Listen, we're going to cap all credit card rates at 10%. These are too ownorous. It makes no sense." And a lot of people immediately push back. I've got a quote from JP Morgan CFO Jeremy Barnum. He said, "Our belief is that actions like this will have the exact opposite consequence to what the administration wants for consumers. Instead of lowering the price of credit, will simply reduce the supply of credit and that will be bad for everyone. consumers, the wider economy, and yes, at the margin for us. So, it's not, it sounds like this is not really a good way to go about this. Now, everyone, I think everyone can agree rates are too high. Like paying 25 30% to borrow seems insane. But the question is because people will be forced into payday lenders and buy now pay later. They'll do something else. People who rely on these revolving credit loans. So, the question is like, how do you even think about fixing something like this that is just it's kind of like, well, we've done it this way since credit cards come out in the 60s. So that's how we do it. >> So, so, so much stuff here to unpack. So, so starting from the beginning, 10% cap on credit cards sounds like a great idea. It is a terrible, terrible idea. Um, and the president doesn't have the authority to unilaterally do that. Uh if you say credit card rates are capped at 10%. The credit card companies will go fine. We're only going to give credit cards to the wealthiest households with the highest credit scores, the highest income, and the highest ability to pay these back because we know we're going to run a three, four, 5% default rate, late rate, all these different ways to track credit cards. That That's number one. >> Yeah. The industry gets nuked, >> right? That's number one. Number two, there's a big difference between saying I wish rates were lower and the usery laws that cap credit cards at 30% or 25% I is very different. So So that's second. And then lastly, I would argue that interest rates in general are about right. You can argue are they a little a few bips high, a few bips low, but historically the Fed funds rate around here and mortgages around 6 and a4% that's pretty much looking like the post-war average. A couple of points either way at different times. So the bigger question, what can you do about this? Well, you know, performative empty gestures that have no impact are easy. real government solutions are hard and and there's no fast and easy thing for this when we look at who's paying the and by the way the average credit card rate in America is something like 21 or 23% um and the reason it's up there is people don't have good credit cards card uh good credit scores they don't have good payment histories I used to have a terrible credit score nobody told me oh if you order from the Columbia Record Club and never pay them it's going to affect your your credit score. >> I would always forget to fill out the little thing every month and they'd send me another CD and have to pay for it, you know. >> That's right. So, if you if you turn around and and teach high school kids, here's how to build a budget, here's how to live within your means, here's how to maintain a good credit score, here's how to start saving uh for the future. those folks who have good credit scores, regular payment histories, their credit card rates will come down. And by the way, if you hit a certain age and you're carrying a big credit um uh balance, you're managing your income really poorly cuz you shouldn't never be paying 20% to borrow short. >> Yeah, I would say it's it's the number one rule of personal finance. Pay that down because it's 20 to 30%. I think the average balance is something like $6 to $7,000 for people who keep a revolving line of credit and make the minimum payment whatever. And I think the number is high. It's like 40 45% of people who have a credit card don't pay it off every month. And I'm sure some of them don't do it because they don't understand. My sister when she first got a credit card out of college um never paid it off and just thought like I didn't know you had to. >> Free money. >> Yes. And and so there are some people don't understand obviously. Yeah, you're right. The way to bring the rates down would probably be people have to have more there has to be more background check as opposed to just sending in a few things and then all of a sudden you're approved. There would, you know, you'd have to go through more credit checks and stuff like you do to get a loan at a bank or something. And that obviously is a worse experience. And to your point about the rates, yeah, I'm sure part of it is they they put the defaults in there, right? The rates are 20 25%, but how many people default and don't pay them back and um and negotiate for lower pay fees and stuff? I I think the one thing is that never made sense to me is the 2 to 3% merchant fees that you pay to use a credit card for a business. And that's essentially the thing that that kind of subsidizes. A lot of people think, well, it's the people who don't pay off their credit cards, they're subsidizing the rewards for the people who do. And that's partially true, but it's also those two to 3% merchant fees. That's why you get 3% cash back on your credit card, cuz the merchants have to pay 3% to let you use the credit card. That's a thing that to me is one of those things like, well, we do it this way because we've always done it this way. If you started from from scratch today, this would never be the system. >> And and you know, I don't want anybody to mistake this as a partisan political argument. This is a policy discussion, but we had the consumer financial protection board there to oversee banks from junk fees and red like $100 bounce check fees. It used to be eight bucks and all these different ways they gamed consumers and this administration has essentially submarined that on behalf of of the banking industry. You know, you can on the one hand say we want to lower costs for consumers and on the other hand say but they can charge uh whatever they want in terms of fees. In fact, if we cap interest rates at 10%, well, you're just going to push everybody into payday loaners uh pay and all that sort of stuff where the fees aren't transparent. It's not disclosed. Instead of paying an interest rate, you're paying a $250 fee here and a $100 fee there. And it looks like 50 to 100% interest. It's really quite horrific. >> Yeah. All the late fees, the overdraft fees, that's the stuff that really gets a lot of people and keeps them down. I I just >> seem like rates should change a little bit with interest rates set by the government, right? That's the part that's always got me though. Not not that there should be a cap, but it seems like shouldn't it like come down a little bit? >> Yeah. I was always screaming about this when when the Fed had rates at zero. Why weren't credit card rates lower? That's the thing that never made sense to me. And it was kind of like, well, no, it's because of the default rates. You're right that that that's a thing that never made sense to me is that they should float a little more like the rest of >> even if it was like give or take 3%. You know, like something like that would would make sense to me. >> But it it does feel like this this is so ingrained and there's so many different offshoots now. So, for example, last year the reward stuff. American Express paid Delta$8 billion for their credit card partnership. Like that's like, hey, we're going to give you the free baggage and we're going to give you the the miles and you have people sign up for a credit card. they have to use the Delta American Express or whatever to get all the points and the so like this stuff is so ingrained now it's going to be hard to change and that's obviously the worry is how do you change a system like this that is is just the way it is and I don't I don't know the easy answer. >> I don't think there is an easy answer. You really have to have an educated consumer. They really have to understand uh both the concept of rates and by the way Fed fund rates today between three and a half and three and three/4ers. Then you have to tack on inflation at 2 and 1 half to 3%. That gets you up to let's call it 6 and 1/2 and uh maybe even a little more. And what a surprise that's about where mortgage rates are 6 and a quarter 6 and 1/2. It's really a challenge. >> But it's also the people who do have a balance. Now, you can call and negotiate this stuff. You can you can consolidate that to a lower rate. Like, there's stuff you can do. And I think a lot of people just don't know it. That's the thing you have to make easier for people is like ways for them to consolidate the debt or negotiate the debt. Like, if you say like, "Listen, I can't pay this off. I owe $10,000 at 30%. I'm never going to pay it off." The credit card companies will actually work with you if you ask them. >> And and here's here's where people talk about a K-shaped economy. If you're wealthy, hey, I could move some of my Treasury bonds that I have in my personal account, do a box spread loan against it. Not only is it 3.9%. But it's taxdeductible. If you're bottom half of the economy or even middle class, you probably don't have that option. And uh you can understand why people are frustrated. It seems like the system is stacked against young people, stacked against people who aren't wealthy. And the reality is it is. >> Hopefully AI will help solve this. I really do think AI is gonna No, I I'm serious. I think AI is going to be a boon for people who don't have the ability to get financial advice. I really I hope it helps. I I >> I thought you were going to say cryp crypto fixes this. >> Well, stable co people No, people think stable coins could take away a lot of those fees. No. >> Um, >> but I I I don't know how that you're going to have a stable coin credit card or something. I don't know. So >> if if you only take away one thing from this conversation, pay off your credit card every month, right? Do not >> prioritize. You want to pay down your highest interest rate. And I know people who've taken a home equity loan for 5% and used it to pay down or 6% and use it to pay down, you know, a $20,000 22% credit card bill because lots of people I I live and die on my credit card. I pay it off each month. footnote. One of the interesting differences, and I don't know if the generations have changed this, but studies used to show when people would go out and spend cash versus putting on a on a card, when you're actually pulling cash out of your wallet, you spend less than when you just put that. Now, the current generation doesn't know what cash is. They live in they've grown up on either Apple Pay or or a bank card or a credit card. >> I don't either. I never have cash on me. So, so I don't know how that's changed, but historically the psychology of not using real money, using a piece of plastic in your wallet leads you to spend even more, which is its own problem if you're not well budgeted. >> All right, let's see another one. >> Okay, up next we got one. I don't see a name. Uh, my son is a financial adviser who loves following your articles and podcasts. He's not on Twitter, but wanted me to ask if you still recommend reading Barons and the Wall Street Journal daily or if you prefer any other sources. >> Okay, so I'm not a I'm not a hater of financial news. Like I read the Wall Street Journal and the Financial Times and The Economist and Barons and CNBC. I read all of them still because I think it's helpful. But I do think you have to have other sources of information because there's a lot of blind spots on financial media and stuff that they simply like don't or won't cover. And Barry, you were early to this obviously getting in the blogging game. Um, but it's so much easier than ever, I think, to follow this stuff now between blogs and Substacks and podcasts. I I I think you consume as much of it as as you can. And and when we were coming up, there wasn't this stuff didn't exist. There's just so many other avenues. Now, the hard part now is finding a filter for it. >> So, I have I have So, first Yeah. So, if something like this doesn't exist, go out and create it yourself. I I started that in 1998 with a market blog on geocities which no longer exists part of Yahoo. Um but I have a whole chapter on how do you filter all this nonsense from the media in how not to invest. And the short answer is you must create your own list of experts. And I put together a list of of characteristics I want them to have. I want them to have good temperaments. I don't want them running around with their hair on fire every four or five% draw down. >> Do the YouTube channel with all the fire in the background. That's a good That's a good rule. >> That's right. How it starts, how it's going. That That's a That's a warning sign. Um you want people who have a process, not someone who just got lucky once. Uh you want them to be around a few years and have seen some cycles. You want them to be proactive, not just responding to every news headline or every twitch. And and lastly, you want them to have more or less a pretty good track record. So, first create your own list. Follow their substacks, follow their blogs, tweets, podcasts, whatever. Um, also, if you really want someone to curate this for you, there's a lot of places that curate reads. Go to ritz.com. You can sign up for my daily reading list. Tatis of Normal Returns does a I read Tatis every day. I read his list every day. uh in part because he is so much more focused on the advisor side. I always learn something new and interesting from his list. My list is very broad and holistic. Little market, little fixed income, little technology, little policy, a little arts and sports and entertainment, but very, very broad. He is razor focused. So, if you're an adviser, not only should you read Tatis's abnormal returns, but he has a specific um bi-weekly email just um >> yeah, newsletter. >> These are the five most interesting stories that are useful for advisors. So, I would tell you that there are a lot of good curators, but you must be proactive. You must create your own filter. It's a fire too much stuff now. Yeah. >> Yeah. It's a fire hose and 90% of it is nonsense. So, here's something no one it seems like no one does anymore according to all the studies and the graphs and stuff. Like, have your son read some books. Like, do you realize how many hours and hours of thinking and research and analysis goes into a single book? Um, it's that's how I learned. I read I read as many books as I can about market history, about investment strategy. I read all the Buffett books. I read all the Munger books. Like, read those books that are just more evergreen because that stuff is never going to go out of style. And that that helps understand how this stuff works. And when you read a book from 20 years ago and you go, "Oh, it's still the same then it is as it is now." In most cases, like that that helps a lot, I think. >> You know, you know, you mentioned Buffett. Someone asked uh before Munger passed away, someone asked Warren and Charlie at one of the annual meetings, what do you guys do during the day? And his answer was, two of us mostly sit around and read books all day long. Right? Stop and think about it. Somebody has spent 20 years building an expertise in a field. They've spent 2500 hours writing, editing, putting this together, and you could buy that for 25 bucks. I know I'm we're both biased as authors, but is there a better bargain in the world of, you know, NYU is $100,000 a year for 25 bucks. Find a good book that can educate you on a subject and become a reader. Full stop. So Dave in the chat said he's currently reading uh Peter Bernstein's Against the Gods. One of the greatest ever written. I think it was written in 94. It's a history of math and physics and probability and statistics. It's Yeah. That's kind of book that will never go out of style. >> One of the one of the alltime best. Absolutely. >> I just asked Chad GBT for uh top top things to read in business and finance. And under thought leaders and influencers in finance, it has uh Paul Krugman and Barry Rolls. >> Oh, there you go. So, >> you could you could do worse than that pair of uh buffoons. Absolutely. >> All right, another one. >> Okay. Uh up next, we got a question from Remy. Um which makes me think of Ratatouille. I need to rewatch that. >> Oh, yeah. >> Uh hey guys, love the show. I'm 29 with $300,000 in a 401k and I make $200,000 a year. My company contributes a 7% match on my contributions plus an automatic 10% profit share yearly regardless of if I contribute. Given this, am I basically set for retirement after 60? Do I even need to keep contributing myself even if that means leaving the 7% match on the table? >> All right, so first he's doing a really good job obviously at 29 to make that much money, have that much on a 41k. >> Uh I actually had a similar uh situation at my previous employer. They gave when I first started, it was a small organization. They gave everyone a 10% contribution regardless of if you contributed. I think as it got bigger, they said, "No, no, no. You have to at least you do five and we'll do five and we'll match the other five." So they but it was and I think a lot of people did exactly what he's doing. They didn't put anything in. >> Wait, so am I understanding this math right? If he puts in 7% he gets 17%. >> Yes. Exactly. So I don't know if he'll be set for retirement or not, but you take the 7%. There's no there's no don't pass go like there's no other option. >> Free money. >> It's free money. >> So yes, you're right. He can he puts 7% in Duncan. He gets an additional 17%. He's saving a quarter of his income in his 401k now. Then he's he's really set. So you do not turn down. This is like saying like, "Do you want to turn down a 7% bonus?" I don't want it. No, you you keep it. I don't need it. Of course you take the money. Unless you have credit card debt that you can't pay off, but then you pay it off and then you take the 7%. This is You always always always take the free money. Don't even think about it. >> Yeah. Free money is usually good. So, so 100% take the free money, but let's answer Rey's question. Is he set? And the bad news is he's he the good news is he's got a good start. The bad news is he isn't remotely close to being set. So, he's at 300K, right? What's the ceiling for 401ks this year? 24.8, like less than 25 grand. He's too young to have a catchup. So 30 years times 25 grand, that's not a lot of money. It sounds like, hey, 30 years from now, he's going to have a couple of million dollars. >> Yeah, but the compounding on there, Barry, he's going to be good. >> Um, I'm going to tell you, $3 million today is not what $3 million 30 years from now is. So, someone who's making multi6 figures, I would say to a guy like that, look into the mega Roth conversion, which allows you to contribute after tax dollars to your 401k. And the benefit of that is when you retire and pull it out, you pull that money out. Um, >> okay. So, you're saying, listen, I think I think you just stressed out half the people watching this show. >> I get what he's saying. He's saying, listen, the guy makes 300K at 29. like he should be saving above his 401k as well because as a percentage of his income it's not going to be quite as big. So yeah, you're right. If if he's if he taps out that 41k and it's maxed out, he needs to be saving more. I get what you're saying. >> So another 25,000 a year post tax. Uh and not everybody does a mega Roth. Your your plan has to allow it. Your custodian has to do it. We have >> Dave area in the chat is shouting mega backdoor Roth, >> right? Mega backdoor Roth. uh we uh custody our 401k at um Fidelity. And so what ends up happening, you you end up with two different buckets. Here is your traditional 401k that the money goes in pre-tax and comes out, you owe taxes on it. The backdoor Roth, the money goes in after tax, but you pull it out, you don't owe any tax on it. So if he's putting in just about 25 into his 401k, I would say throw at 300,000 a year, you should at least be do matching that in another 25,000 >> or sorry, he's making 200 a year, but he he has 300. >> He's making good money still. Either way, you're right. He he he has multi6 figure. So that $300,000 401k, you know, the rule of thumb is you're drawing down four or 5% a year. And so 5% 4% a year means uh a million dollar that's $40,000. >> He's he's he's 29 now almost 30. Uh people are going to be living way longer. He's probably not going to retire at 60. He's probably going to retire at 70 maybe. >> And he's going to live to 70 90 or 100. So you really he really wants to get that 401k up to $10 million by the time he stops working so he can draw and $10 million in 2066 is not $10 million today. $10 million sounds like wow that's a lot of money. Think back 30 years ago, right? Go back 30 years. What were you making in 2095? you know, the the Dow wasn't even at 10,000 to give you a sense of, you know, we're 4x that. The S&P was 600. It it's so different and it's so hard to conceptualize um compound. >> Either way, count yourself lucky for a 17% match on a 41k. That's that's >> insane. Yeah. No, he's he's doing well. He he just needs to notch it up a little bit in order to make sure and and keep in mind, >> don't coast. You want the thing is you want to do it now, too, in your in your late 20s. This is when you want to be maxing these things out. If you want to like cut back later and you realize like, okay, now I know I have enough, let the compounding happen now, frontload this stuff. >> And you know, we're we just finished one of the best 15-year periods in history. At some point in the next few years, I can't tell you if it's seven years from now or next Thursday, but at some point, we're going to enter another bare market like 2000 to 2013 or 68 to 82. That's when I would tell people raise your uh contributions because when you come out of the bare market you've been buying all these things as they've pulled back as they've sold off it feels terrible for 7 8 n years and then suddenly look at everybody from 2013 >> to 2020 the 401k values exploded because they were piling money into indexes in the 2000s and and it went nowhere. From 2000 to 2013, the market was essentially flat. Was up and down and up and down, but you began there and you ended there. >> Great time to save. >> Yep. >> To to put a bow on this though. So, you're basically saying that if he does do that additional 7% match, then he probably is set, >> right? Like Oh, you think more in addition to that? Okay. >> Yeah. I I think cuz cuz we we don't know what inflation's going to be. We don't know uh what the next uh bare market looks like and we don't know. All I can tell you is when I overview when I review uh our health care costs every year, our health care costs go up in the firm almost 10% a year. So the expense of doing all these things are going to go higher. I'm not a deficit hawk. I'm not a person freaking out about deficits. There's a good chance some point off in the future we're going to see higher taxes. I mean, at a certain point, >> I tell Bill everyone everyone they've been saying that my whole life and every year they every time they go >> they've been saying that my whole life. I >> never it never happens. >> Um it it >> I know you're right. No, you're right. We >> there is a point of no return where the spending is going to come down. The taxes are going to go up because there won't be any option. That could be 20 years from now. That could be 50 years from now. >> John Carlo in the chat said, "Uh, last time the Dow was under 10 10K, Princess Diana was alive." >> That's amazing. Was that 96 95? >> But Jerry Garcia was not. >> That's right. >> All right, let's see. We got one more. >> Okay. Uh, last but not least, we got a question from Dan. I've saved enough to afford a 20% down payment on a home. However, the monthly cost of carrying the home, principal, interest, property taxes, insurance, etc. would put me close to uh break even month over month, which makes me hesitant to commit, even though I know I'd come out ahead in the long term owning versus renting. Since I'm able to save and invest in my brokerage account while renting, do you think it makes sense to continue renting the next 1 to three years uh to get a larger down payment, say 40 to 50% to cut down my monthly cost when I do buy a house, or is it better to just start building equity sooner? Is there anything I'm missing or not considering? So, my understanding from the wording of this question is that the monthly housing payment would leave nothing left over to save and invest, or at least not for its brokerage. So, I'm usually pretty lenient on these things and I think I operate on the assumption that if you have a fixed rate mortgage, you can grow into the payment over time, right? I I think people should think about skipping the starter home and maybe buying something up a little bit that will stay in for 10 or 15 years or 20 years, but I don't but this sounds like you have zero margin of safety and I don't necessarily agree that you will come out ahead here by buying instead of renting. Like just the assumption that if I'm if I'm spending everything on my home, I'm for sure going to come out better and you're not be able to save and invest. I don't agree with that at all. I I think that's there's no margin of safety there. >> I read that differently. I thought when he said comes out break even, it's verse renting. Owning versus renting. I wasn't looking at that as a budget. So, I'm I'm going to say the opposite of your view. So, assume it's the same to own versus rent. Uh principal, interest, property taxes, insurance versus renting. You know, why do you want to own a home? It's going to appreciate. There's a >> So I'm Duncan be the judge here. Am I looking at this at all? >> Tie break. >> I Yeah, I I thought he meant versus renting like it's break even the same amount basically. >> So So I think that if owning and renting costs the same, >> but he's saying if while renting I can save and invest in a brokerage account. I think the assumption is he can't do it anymore if he's buying a house >> or or I think he's saying that he can accumulate that much more wealth to have a much bigger down payment. In other words, the down payment is his his uh investment account. >> That's fair. If it's Yeah, you're right. If it's the same buying versus renting, then buying makes more sense. >> Yep. You not only are you getting appreciation, but you're you're um if you wait too long, prices keep going up. At least if you own something that's rising and you want to roll into a bigger >> Everyone in the chats with me, everyone in the chat's reading it my way, saying that he's not going to have any more money to save and invest of the way because the way it's worded. We'll have to have Dan. Either way, I think if if the case is I'm going to be house poor and I can't save and invest anymore, then I think leaving zero margin of safety is a bad idea. If renting and owning is in on the same wavelength and and you still have the ability to do that and you have a 20% down payment already, then that Yeah, that makes sense. >> The way I read it was he was asking if it's not a better deal monthly to buy, is it worth buying? >> All right, Dan's in the chat right now. He says, "Basically, I'd have no margin each month. He has no margin of safety." Okay, >> so here's the problem. If you're saving, if you're saving to buy a house for one to three years, >> are you putting that in the stock market, you're running a risk of a 15 20% draw down? Set you back a year or two. I would rather find a house I like, lock in, try and and manage my cost so I can continue um investing. >> You also have to understand your career here. What's your career trajectory? Is it going to be one to two lean years where, hey, man, there's no margin of safety, but I got into this house I love. It's my dream house. I'm going to be here forever. Or is it like, oh boy, I don't know. Things are going okay now, but will it be okay in the future? I think that's part of it, too, is like, can you really >> Lot of variables for sure. Absolutely. A lot of variables. >> I just I usually am leaning on these things. I don't like having zero margin of safety. And I think maybe Yeah, you if if that's going to be the case, you need a 30% down payment then or a 40% if that's going to be the thing. Here's the flip side of all of this. >> The flip side of all of this is if there was any lesson we learned from the pandemic is life is short and we don't know what happens next. And so if you really want to be a homeowner, if you really want that house in that neighborhood and that school district, um I I always tell people, do it. You we always regret the things we didn't do. We rarely regret the things we do. At worst, you're a little embarrassed. if he can afford it. And that's a pretty big if. Uh I'm on I put on the >> Dan's in the chat. He says it be for it be a forever home, but he's not able to save extra money because the mortgage costs are too expensive. Uh >> is it binary though? Can Can Dan can you can you look for a place 10% cheaper? Or like Ben says, just start throwing in offers that are, you know, below below ask. >> I think that's the thing. Like do you have a house in mind that you know this is the house or do you have a range of houses in mind that you're looking at? Um, >> by the way, the average American moves every seven years or at least did before the pandemic. So, buying a house, letting it appreciate, hopefully you're buying something that will appreciate as much as the next house. Our housing needs change from when we're single to when we're married to when the third or fourth kid shows up. Maybe you'll be surprised and have twins as people uh have on on this call. And um you know, waiting, waiting, waiting. Uh uh we're watching houses go up, you know, three, four, five percent in especially in desirable areas. I I was shocked to see Nassau County, where I live, home prices gained like six and a half% this year. If you're waiting, you have to hope you're going to generate at least that much, not just down payment, but income in order to cover those increased payments. So, I I say jump in and and um enjoy the appreciation of the house so you don't fall behind in order to roll that into the next house. >> All right. Then you're on the other side. >> I'm more skeptical. And usually I'm not, but I I just I I think if you're really making yourself too house poor and you're not being able to save and invest, I think that can put you behind even more financially. >> How how much do you like peanut butter sandwiches? you know >> how are we talking house poor or are we talking about I can afford this and the big question comes what happens if you are laid off or >> listen obviously this Dan is doing a good job because he put he he has enough save for 20% down payment so he's obviously financially responsible right he's he's not like >> not a 10% down >> we should Seth said we should pull Dan into the into the show >> let's do it can we get him >> either way Dan Dan let us uh let us know what you decide to The specifics really matter. The details really matter. >> I can't tell if Barry is the angel or the devil or it's me on the shoulder, but we've got we gave you both sides here. >> There you go. >> Uh, all right. Um, well, thanks Barry for joining us. As always, anyone coming up on Masters of Business we need to know about. >> Uh, yeah. I have uh coming up this weekend Drew Wshaw. He's a the candidate for New York State Controller who has a fairly surprising um plan for the uh for the New York State pension fund. It's nearly $300 billion. It's the third biggest pension fund and like a billion dollars a year is spent on uh unnecessary fees and he wants to change that. So I was very I was very excited to to chat with him. And then this weekend moving political markets now too. >> No. And then and then this weekend is um one of my favorite people in the world Dick Thaylor Nobel Laurate uh with his colleague Alex Emos. So interesting so fascinating. Uh, we we got a question in the in the chat. Barry, what's your favorite car right now? >> New or used? If we're if we're talking if we're talking new, I I was just reading about the upcoming BMW M electric with a motor at each corner. Four motor. Like, it's going to be a 1500 horsepower monster. >> Each wheel has a motor. >> Each wheel has its own electric motor. >> Some insane insane number. Um, and so it's it's not out yet. It's a 2028, I think. And then, um, you know, I've been talking to Batnik about getting rid of his Audi truck. And there is a Lexus 700 trail runner, Trailblazer, whatever it is, SUV that I was in a couple of weekends ago. Um, and what a comfortable, lovely car. And when you buy a Lexus, you know, you may not get the spirited German driving experience, but what you do get is the utter Japanese reliability where these things just give it gas and oil. >> No, Michael only buys unreliable cars. Yeah, the ones that bought him. >> I I'm aware >> he's not going to get that. >> So, I would tell people, you know, do you want fun or you want reliability? Um either you're looking at Germany or or Japan. >> All right. Um email, thanks for everyone in the live chat today. That was great. I'm glad we had Dan on there. 00 people watching live right now between Twitter and YouTube. >> Awesome. Uh, email us as always, ask the compound.com. Leave us a comment on the YouTube. Uh, rate, review, all that good stuff. Subscribe and we'll see you next time. >> See you everyone.
Is the Stock Market Overvalued?
Summary
Transcript
Welcome back. This is Ask the Compound, the show where you ask and we provide the answers. I am Ben Carlson. The stock market is wildly overvalued, right? Has to be after the insane runup in prices that we've seen during this bull market. Or is it? How do you value the stock market when companies of today are nothing like companies of the past? We're going to answer that question on today's show and more. Let's do this. [Music] All [Music] right, our inbox was full this week as usual. Ask the compound show atgmail.com. On today's show, questions directly from our compound audience about how to value the stock market, how to fix the credit card business, the best sources for your financial information, how much to save in your 401k, and how to avoid becoming house poor. But today's show is sponsored by Exhibit A. At Rholtz, we know the power of content, education, communication when it comes to keeping your clients happy. Exhibit A makes your life easier as an adviser. Create charts, presentations, client decks using visuals we have created. You pick the color scheme, add your company logo, download to your devices. Um, listen, I talk to advisers all the time. They don't have time to produce content, make charts look pretty. Let us do that for you. Plus, you'll get weekly chart blast, chart of the week, bullet points that help you get clear talking points for prospects and clients, current clients alike. Um, plus you have chartmat, who's one of the best in the game and the chart game right now. If you're not using his stuff, you're missing out. So, if you go to exhibit aforadvice.com, you can learn more and start your free trial or you can get a 20inut conversation with Matt who will walk you through how the all the tools on the platform work. His fingerprints are going to be all over the show today. So, that's exhibit aforadvice.com if you're an adviser who wants to learn more. How many people are going to abuse that just to get to talk with Charip Matt? >> I know, right? He's a nice guy. >> Yeah, he is. Though, I'm still waiting on my exhibit A hat. Not to not to be a dead horse, but >> Yeah. You don't have enough hats, though. >> It's true. >> All right. True. >> Let's do it. >> All right. >> Wait, is that a Grateful Dead hat you're wearing? >> It is. It is. Rest in peace, Bob. We >> So, the the Grateful Dead story I heard this week from someone talking about the.com bubble was that there's a story that they don't know if it's true or not, but we'll we'll call it true. Um, at one point during the dotcom bubble, Jerry Garcia called up someone, its manager, and said, "Wait, what's Netscape trading at today?" That's how crazy it was. Jerry Garcia was interested in the dot bubble. >> Didn't he die in like 94? >> Jerry Garcia? I don't know. It's a good story. Don't ruin it. All right, do a question. >> Okay. Up first, we have a question from Mark. Uh, on Animal Spirits, Ben and Michael were talking about how to use >> God damn it. He died in 95. You're right. >> Wait, when did Netscape come public? I think it came public in '95. >> Okay, maybe. Maybe. >> Keep reading. >> On Animal Spirits, Ben and Michael were talking about how using historical valuations isn't helpful because the companies of today are so different than those of the past. Fair enough. But how are investors supposed to gauge the stock market's valuation proposition today? Uh, what's the alternative? >> This is kind of crazy. According to Google, Jerry Garcia died the day of Netscape's IPO. Maybe he was an early investor. Who knows? >> What are the odds? That is bizarre. >> Both on August 9th. >> That's weird. >> Okay. Um, great question. Uh, I do think a lot of people have made the mistake of relying far too heavily on historical averages for valuation, especially in this cycle. I'm not going to name any names here. There have been many prominent perma bears who have said like, listen, the past average was this. Now it's this. This is a bubble, right? I I there's people talking about this in like 2010 2011 like way back when early days of the bull market like no look at the valuations this is this is done right and the market doesn't work like that my whole thing with valuations is these things require context okay so just this past summer I think it was we answered someone question about the history of the S&P so I had Chad GPT create a little infographic for me I was fighting with AI all morning about this throw it up there uh just Just a reminder, so that people who always tell me like, "Hey, Ben, what are you doing showing returns going back to the 1920s? The S&P wasn't created until 1957." True, but the S&P 90 was created in 1926. It was 50 industrials, 20 railroads, and 20 utilities. Nothing like the companies of today. It became the S&P 500 in 1957. Still a bunch of industrials, 425, 60 utilities, 15 railroads. Financials were not added till 1976, which is kind of amazing since banks have been around forever, right? And then in 1988 they abandoned this 40 or this 400 404 4020 model and it was 400 industrials 4 40 utilities, 40 financials and 20 transports. And now it's like hey we're going to let the sector weights go where the economy is, right? So the S&P has changed drastically. The companies are obviously different. You can do chart off here. Um so it's tons of capital intensive businesses and of course today's companies are nothing like the predecessors. And this isn't just looking back 100 years or so. throw up. This is one of my favorite charts, a chart that Matt made for me. This is margins since 1990. Okay? And it shows the averages. This is so this basically tracks the internet, right? The margin averages keep going up and up and up every single decade. They keep improving. Companies keep becoming more and more efficient. They don't need as many people. They're not as capital intensive. Uh they make more money. Okay, so chart off please. So the thing is like how do you put these profit margins in context of today's levels, right? So let's do another chart on this is from duality research. This really cool chart we showed on animal spirits recently. It's worth revisiting. So this goes back to 2005 and this is forward profit margins versus forward PE ratio since 2005. And you can see the line as both as one moves up so does the other one. So valuations and profit margins are essentially moving hand in hand, right? So they are they're going up. So this this kind of shows that the rise in valuations we've seen makes sense. It's justified based on the company's profit margins rising. Okay, chart off. So this is so far. All right, it kind of this environment makes more sense. So each quarter, Michael and I do a video for clients only, right? And we put a bunch of charts up and our research team does that and um usually have to be a client to see that, but our research team has a good one. So I'm actually going to pull some straight from there. Uh this is a secret so don't tell anyone. All right. So let's do a chart here. This is the S&P 9493 versus a MAG 7. So of course taking those big seven technology stocks on the right. On the left is the other one. So you look and you say, well of course the valuations for those MAG 7 are higher. They make a lot more money. They're higher quality businesses. Their growth rates are higher. They should have a valuation that's much higher than the S&P 493. because you can see the rest of the market hasn't really kept up with valuations, right? They've they've more or less stagnated. Um, chart off, please. Now, you may be thinking, who cares? The stocks that make up a huge portion of the stock market, those are the ones I care about because that's the market, right? Who cares about the rest of the index? Which I say the valid point. Now, I'm not like a short-term market guy. I think the long-term matters more, but I think it can be helpful to look at the short term. So, here's another one that our team created for us. Put the chart on, please. This shows just for 2025. So the total return was roughly 18%. Earnings growth was more than 14%. Dividends put a 1 and a.5% on there and multiple expansion was pretty minor in 2025. Most of the growth in stocks came from fundamentals. That's a good thing, right? Earnings and dividends accounted for a huge chunk of the returns. Chart off, please. Now, obviously earnings are a big piece here, right? If expectations on earnings numbers are too high, that's probably where the trouble lies. Um, and I' I've put a bunch of visuals here. I I haven't really been pinned down. So, like BB gun to my head where I fall in valuations are they are a good starting point to understand the market, right? And where potential risks reside, but they are not a beall endall. Valuations require some context. So, you can't just say the past average was this, now it's this. Therefore, you can't make that leap. You have to put some context on these things. Believe it or not, back when I first got into the market, I bought a bunch of like single-digit PE stocks and a lot of them didn't do well. So, >> sometimes the market knows what it's doing. Not not always, obviously. Things these things can get crazy out of whack. Um, but here's the thing is if you are worried about large tech valuations, and I understand why some people are. It could be that the expectations are too far, the growth rates are going to plateau, and they're not going to keep going, right? There's plenty of other areas in the stock market where valuations are lower. Here's one more from our call. Small and midcaps traded at a pretty decent discount to large caps, right? As big as we've seen in over 20 years. >> Can you call this Smidcap? >> Sure. Want to make it easier? Smid. Uh that that's investment lingo. You're at an investment committee meeting. Someone's going to say SMID. Uh foreign stocks are cheaper. Value stocks, dividend stocks, high quality stocks, min stocks. Basically, everything is cheaper than the S&P 500. Chart off, please. >> So, if valuations of the S&P have you freaked out, diversify into something else. That's the answer. It's not like, okay, oh no, the market's overvalued, go to cash. No, diversify. That's that's the answer. >> And not to derail the show, we can dig into this, you know, on a future show if you want, but I'm I'm curious where PE even came from as a metric. Like what is the history of of this? Someone just came up with this at some point or it was like looking back and doing like a post-mortem on a certain period of time and figuring out what things usually traded at. I'm not sure if specifically if it was a Benjamin Graham thing, but obviously you had to you had to have weight it somehow, right? Back in the past, Jesse Livermore and all the people in the bucket shops, they used to just it was all technical analysis like what's going up or what's going down, >> right? >> Right. And what's the sentiment and all these things and um yeah, that that's someone had you had to anchor it somehow to something. >> Yeah. >> Right. >> Yeah. All of those price to sales, price to book. Yeah. Yeah. It's kind of interesting how that worked out. >> Let's do another one. >> Okay. Up next, we got one. Uh, lots of people, this one's kind of an an amalgamation of a lot of comments and a lot of stuff we've seen in the zeitgeist. So, it's about credit card rates. Uh, why is capping why is capping credit card interest rates at 10% such a bad idea? What are some other ways we could make credit card interest rates less crazy? >> All right, let's bring on everyone's favorite macro commentator at the firm here, Mr. Barry Rholds. >> Hey, Barry. >> Hey, guys. How's it going? >> Good. Good. Okay, so this is this is obviously an exercise in something that's probably not reality, but I think it's worth talking through and understanding this business better, okay? Because th President Trump said, "Listen, we're going to cap all credit card rates at 10%. These are too ownorous. It makes no sense." And a lot of people immediately push back. I've got a quote from JP Morgan CFO Jeremy Barnum. He said, "Our belief is that actions like this will have the exact opposite consequence to what the administration wants for consumers. Instead of lowering the price of credit, will simply reduce the supply of credit and that will be bad for everyone. consumers, the wider economy, and yes, at the margin for us. So, it's not, it sounds like this is not really a good way to go about this. Now, everyone, I think everyone can agree rates are too high. Like paying 25 30% to borrow seems insane. But the question is because people will be forced into payday lenders and buy now pay later. They'll do something else. People who rely on these revolving credit loans. So, the question is like, how do you even think about fixing something like this that is just it's kind of like, well, we've done it this way since credit cards come out in the 60s. So that's how we do it. >> So, so, so much stuff here to unpack. So, so starting from the beginning, 10% cap on credit cards sounds like a great idea. It is a terrible, terrible idea. Um, and the president doesn't have the authority to unilaterally do that. Uh if you say credit card rates are capped at 10%. The credit card companies will go fine. We're only going to give credit cards to the wealthiest households with the highest credit scores, the highest income, and the highest ability to pay these back because we know we're going to run a three, four, 5% default rate, late rate, all these different ways to track credit cards. That That's number one. >> Yeah. The industry gets nuked, >> right? That's number one. Number two, there's a big difference between saying I wish rates were lower and the usery laws that cap credit cards at 30% or 25% I is very different. So So that's second. And then lastly, I would argue that interest rates in general are about right. You can argue are they a little a few bips high, a few bips low, but historically the Fed funds rate around here and mortgages around 6 and a4% that's pretty much looking like the post-war average. A couple of points either way at different times. So the bigger question, what can you do about this? Well, you know, performative empty gestures that have no impact are easy. real government solutions are hard and and there's no fast and easy thing for this when we look at who's paying the and by the way the average credit card rate in America is something like 21 or 23% um and the reason it's up there is people don't have good credit cards card uh good credit scores they don't have good payment histories I used to have a terrible credit score nobody told me oh if you order from the Columbia Record Club and never pay them it's going to affect your your credit score. >> I would always forget to fill out the little thing every month and they'd send me another CD and have to pay for it, you know. >> That's right. So, if you if you turn around and and teach high school kids, here's how to build a budget, here's how to live within your means, here's how to maintain a good credit score, here's how to start saving uh for the future. those folks who have good credit scores, regular payment histories, their credit card rates will come down. And by the way, if you hit a certain age and you're carrying a big credit um uh balance, you're managing your income really poorly cuz you shouldn't never be paying 20% to borrow short. >> Yeah, I would say it's it's the number one rule of personal finance. Pay that down because it's 20 to 30%. I think the average balance is something like $6 to $7,000 for people who keep a revolving line of credit and make the minimum payment whatever. And I think the number is high. It's like 40 45% of people who have a credit card don't pay it off every month. And I'm sure some of them don't do it because they don't understand. My sister when she first got a credit card out of college um never paid it off and just thought like I didn't know you had to. >> Free money. >> Yes. And and so there are some people don't understand obviously. Yeah, you're right. The way to bring the rates down would probably be people have to have more there has to be more background check as opposed to just sending in a few things and then all of a sudden you're approved. There would, you know, you'd have to go through more credit checks and stuff like you do to get a loan at a bank or something. And that obviously is a worse experience. And to your point about the rates, yeah, I'm sure part of it is they they put the defaults in there, right? The rates are 20 25%, but how many people default and don't pay them back and um and negotiate for lower pay fees and stuff? I I think the one thing is that never made sense to me is the 2 to 3% merchant fees that you pay to use a credit card for a business. And that's essentially the thing that that kind of subsidizes. A lot of people think, well, it's the people who don't pay off their credit cards, they're subsidizing the rewards for the people who do. And that's partially true, but it's also those two to 3% merchant fees. That's why you get 3% cash back on your credit card, cuz the merchants have to pay 3% to let you use the credit card. That's a thing that to me is one of those things like, well, we do it this way because we've always done it this way. If you started from from scratch today, this would never be the system. >> And and you know, I don't want anybody to mistake this as a partisan political argument. This is a policy discussion, but we had the consumer financial protection board there to oversee banks from junk fees and red like $100 bounce check fees. It used to be eight bucks and all these different ways they gamed consumers and this administration has essentially submarined that on behalf of of the banking industry. You know, you can on the one hand say we want to lower costs for consumers and on the other hand say but they can charge uh whatever they want in terms of fees. In fact, if we cap interest rates at 10%, well, you're just going to push everybody into payday loaners uh pay and all that sort of stuff where the fees aren't transparent. It's not disclosed. Instead of paying an interest rate, you're paying a $250 fee here and a $100 fee there. And it looks like 50 to 100% interest. It's really quite horrific. >> Yeah. All the late fees, the overdraft fees, that's the stuff that really gets a lot of people and keeps them down. I I just >> seem like rates should change a little bit with interest rates set by the government, right? That's the part that's always got me though. Not not that there should be a cap, but it seems like shouldn't it like come down a little bit? >> Yeah. I was always screaming about this when when the Fed had rates at zero. Why weren't credit card rates lower? That's the thing that never made sense to me. And it was kind of like, well, no, it's because of the default rates. You're right that that that's a thing that never made sense to me is that they should float a little more like the rest of >> even if it was like give or take 3%. You know, like something like that would would make sense to me. >> But it it does feel like this this is so ingrained and there's so many different offshoots now. So, for example, last year the reward stuff. American Express paid Delta$8 billion for their credit card partnership. Like that's like, hey, we're going to give you the free baggage and we're going to give you the the miles and you have people sign up for a credit card. they have to use the Delta American Express or whatever to get all the points and the so like this stuff is so ingrained now it's going to be hard to change and that's obviously the worry is how do you change a system like this that is is just the way it is and I don't I don't know the easy answer. >> I don't think there is an easy answer. You really have to have an educated consumer. They really have to understand uh both the concept of rates and by the way Fed fund rates today between three and a half and three and three/4ers. Then you have to tack on inflation at 2 and 1 half to 3%. That gets you up to let's call it 6 and 1/2 and uh maybe even a little more. And what a surprise that's about where mortgage rates are 6 and a quarter 6 and 1/2. It's really a challenge. >> But it's also the people who do have a balance. Now, you can call and negotiate this stuff. You can you can consolidate that to a lower rate. Like, there's stuff you can do. And I think a lot of people just don't know it. That's the thing you have to make easier for people is like ways for them to consolidate the debt or negotiate the debt. Like, if you say like, "Listen, I can't pay this off. I owe $10,000 at 30%. I'm never going to pay it off." The credit card companies will actually work with you if you ask them. >> And and here's here's where people talk about a K-shaped economy. If you're wealthy, hey, I could move some of my Treasury bonds that I have in my personal account, do a box spread loan against it. Not only is it 3.9%. But it's taxdeductible. If you're bottom half of the economy or even middle class, you probably don't have that option. And uh you can understand why people are frustrated. It seems like the system is stacked against young people, stacked against people who aren't wealthy. And the reality is it is. >> Hopefully AI will help solve this. I really do think AI is gonna No, I I'm serious. I think AI is going to be a boon for people who don't have the ability to get financial advice. I really I hope it helps. I I >> I thought you were going to say cryp crypto fixes this. >> Well, stable co people No, people think stable coins could take away a lot of those fees. No. >> Um, >> but I I I don't know how that you're going to have a stable coin credit card or something. I don't know. So >> if if you only take away one thing from this conversation, pay off your credit card every month, right? Do not >> prioritize. You want to pay down your highest interest rate. And I know people who've taken a home equity loan for 5% and used it to pay down or 6% and use it to pay down, you know, a $20,000 22% credit card bill because lots of people I I live and die on my credit card. I pay it off each month. footnote. One of the interesting differences, and I don't know if the generations have changed this, but studies used to show when people would go out and spend cash versus putting on a on a card, when you're actually pulling cash out of your wallet, you spend less than when you just put that. Now, the current generation doesn't know what cash is. They live in they've grown up on either Apple Pay or or a bank card or a credit card. >> I don't either. I never have cash on me. So, so I don't know how that's changed, but historically the psychology of not using real money, using a piece of plastic in your wallet leads you to spend even more, which is its own problem if you're not well budgeted. >> All right, let's see another one. >> Okay, up next we got one. I don't see a name. Uh, my son is a financial adviser who loves following your articles and podcasts. He's not on Twitter, but wanted me to ask if you still recommend reading Barons and the Wall Street Journal daily or if you prefer any other sources. >> Okay, so I'm not a I'm not a hater of financial news. Like I read the Wall Street Journal and the Financial Times and The Economist and Barons and CNBC. I read all of them still because I think it's helpful. But I do think you have to have other sources of information because there's a lot of blind spots on financial media and stuff that they simply like don't or won't cover. And Barry, you were early to this obviously getting in the blogging game. Um, but it's so much easier than ever, I think, to follow this stuff now between blogs and Substacks and podcasts. I I I think you consume as much of it as as you can. And and when we were coming up, there wasn't this stuff didn't exist. There's just so many other avenues. Now, the hard part now is finding a filter for it. >> So, I have I have So, first Yeah. So, if something like this doesn't exist, go out and create it yourself. I I started that in 1998 with a market blog on geocities which no longer exists part of Yahoo. Um but I have a whole chapter on how do you filter all this nonsense from the media in how not to invest. And the short answer is you must create your own list of experts. And I put together a list of of characteristics I want them to have. I want them to have good temperaments. I don't want them running around with their hair on fire every four or five% draw down. >> Do the YouTube channel with all the fire in the background. That's a good That's a good rule. >> That's right. How it starts, how it's going. That That's a That's a warning sign. Um you want people who have a process, not someone who just got lucky once. Uh you want them to be around a few years and have seen some cycles. You want them to be proactive, not just responding to every news headline or every twitch. And and lastly, you want them to have more or less a pretty good track record. So, first create your own list. Follow their substacks, follow their blogs, tweets, podcasts, whatever. Um, also, if you really want someone to curate this for you, there's a lot of places that curate reads. Go to ritz.com. You can sign up for my daily reading list. Tatis of Normal Returns does a I read Tatis every day. I read his list every day. uh in part because he is so much more focused on the advisor side. I always learn something new and interesting from his list. My list is very broad and holistic. Little market, little fixed income, little technology, little policy, a little arts and sports and entertainment, but very, very broad. He is razor focused. So, if you're an adviser, not only should you read Tatis's abnormal returns, but he has a specific um bi-weekly email just um >> yeah, newsletter. >> These are the five most interesting stories that are useful for advisors. So, I would tell you that there are a lot of good curators, but you must be proactive. You must create your own filter. It's a fire too much stuff now. Yeah. >> Yeah. It's a fire hose and 90% of it is nonsense. So, here's something no one it seems like no one does anymore according to all the studies and the graphs and stuff. Like, have your son read some books. Like, do you realize how many hours and hours of thinking and research and analysis goes into a single book? Um, it's that's how I learned. I read I read as many books as I can about market history, about investment strategy. I read all the Buffett books. I read all the Munger books. Like, read those books that are just more evergreen because that stuff is never going to go out of style. And that that helps understand how this stuff works. And when you read a book from 20 years ago and you go, "Oh, it's still the same then it is as it is now." In most cases, like that that helps a lot, I think. >> You know, you know, you mentioned Buffett. Someone asked uh before Munger passed away, someone asked Warren and Charlie at one of the annual meetings, what do you guys do during the day? And his answer was, two of us mostly sit around and read books all day long. Right? Stop and think about it. Somebody has spent 20 years building an expertise in a field. They've spent 2500 hours writing, editing, putting this together, and you could buy that for 25 bucks. I know I'm we're both biased as authors, but is there a better bargain in the world of, you know, NYU is $100,000 a year for 25 bucks. Find a good book that can educate you on a subject and become a reader. Full stop. So Dave in the chat said he's currently reading uh Peter Bernstein's Against the Gods. One of the greatest ever written. I think it was written in 94. It's a history of math and physics and probability and statistics. It's Yeah. That's kind of book that will never go out of style. >> One of the one of the alltime best. Absolutely. >> I just asked Chad GBT for uh top top things to read in business and finance. And under thought leaders and influencers in finance, it has uh Paul Krugman and Barry Rolls. >> Oh, there you go. So, >> you could you could do worse than that pair of uh buffoons. Absolutely. >> All right, another one. >> Okay. Uh up next, we got a question from Remy. Um which makes me think of Ratatouille. I need to rewatch that. >> Oh, yeah. >> Uh hey guys, love the show. I'm 29 with $300,000 in a 401k and I make $200,000 a year. My company contributes a 7% match on my contributions plus an automatic 10% profit share yearly regardless of if I contribute. Given this, am I basically set for retirement after 60? Do I even need to keep contributing myself even if that means leaving the 7% match on the table? >> All right, so first he's doing a really good job obviously at 29 to make that much money, have that much on a 41k. >> Uh I actually had a similar uh situation at my previous employer. They gave when I first started, it was a small organization. They gave everyone a 10% contribution regardless of if you contributed. I think as it got bigger, they said, "No, no, no. You have to at least you do five and we'll do five and we'll match the other five." So they but it was and I think a lot of people did exactly what he's doing. They didn't put anything in. >> Wait, so am I understanding this math right? If he puts in 7% he gets 17%. >> Yes. Exactly. So I don't know if he'll be set for retirement or not, but you take the 7%. There's no there's no don't pass go like there's no other option. >> Free money. >> It's free money. >> So yes, you're right. He can he puts 7% in Duncan. He gets an additional 17%. He's saving a quarter of his income in his 401k now. Then he's he's really set. So you do not turn down. This is like saying like, "Do you want to turn down a 7% bonus?" I don't want it. No, you you keep it. I don't need it. Of course you take the money. Unless you have credit card debt that you can't pay off, but then you pay it off and then you take the 7%. This is You always always always take the free money. Don't even think about it. >> Yeah. Free money is usually good. So, so 100% take the free money, but let's answer Rey's question. Is he set? And the bad news is he's he the good news is he's got a good start. The bad news is he isn't remotely close to being set. So, he's at 300K, right? What's the ceiling for 401ks this year? 24.8, like less than 25 grand. He's too young to have a catchup. So 30 years times 25 grand, that's not a lot of money. It sounds like, hey, 30 years from now, he's going to have a couple of million dollars. >> Yeah, but the compounding on there, Barry, he's going to be good. >> Um, I'm going to tell you, $3 million today is not what $3 million 30 years from now is. So, someone who's making multi6 figures, I would say to a guy like that, look into the mega Roth conversion, which allows you to contribute after tax dollars to your 401k. And the benefit of that is when you retire and pull it out, you pull that money out. Um, >> okay. So, you're saying, listen, I think I think you just stressed out half the people watching this show. >> I get what he's saying. He's saying, listen, the guy makes 300K at 29. like he should be saving above his 401k as well because as a percentage of his income it's not going to be quite as big. So yeah, you're right. If if he's if he taps out that 41k and it's maxed out, he needs to be saving more. I get what you're saying. >> So another 25,000 a year post tax. Uh and not everybody does a mega Roth. Your your plan has to allow it. Your custodian has to do it. We have >> Dave area in the chat is shouting mega backdoor Roth, >> right? Mega backdoor Roth. uh we uh custody our 401k at um Fidelity. And so what ends up happening, you you end up with two different buckets. Here is your traditional 401k that the money goes in pre-tax and comes out, you owe taxes on it. The backdoor Roth, the money goes in after tax, but you pull it out, you don't owe any tax on it. So if he's putting in just about 25 into his 401k, I would say throw at 300,000 a year, you should at least be do matching that in another 25,000 >> or sorry, he's making 200 a year, but he he has 300. >> He's making good money still. Either way, you're right. He he he has multi6 figure. So that $300,000 401k, you know, the rule of thumb is you're drawing down four or 5% a year. And so 5% 4% a year means uh a million dollar that's $40,000. >> He's he's he's 29 now almost 30. Uh people are going to be living way longer. He's probably not going to retire at 60. He's probably going to retire at 70 maybe. >> And he's going to live to 70 90 or 100. So you really he really wants to get that 401k up to $10 million by the time he stops working so he can draw and $10 million in 2066 is not $10 million today. $10 million sounds like wow that's a lot of money. Think back 30 years ago, right? Go back 30 years. What were you making in 2095? you know, the the Dow wasn't even at 10,000 to give you a sense of, you know, we're 4x that. The S&P was 600. It it's so different and it's so hard to conceptualize um compound. >> Either way, count yourself lucky for a 17% match on a 41k. That's that's >> insane. Yeah. No, he's he's doing well. He he just needs to notch it up a little bit in order to make sure and and keep in mind, >> don't coast. You want the thing is you want to do it now, too, in your in your late 20s. This is when you want to be maxing these things out. If you want to like cut back later and you realize like, okay, now I know I have enough, let the compounding happen now, frontload this stuff. >> And you know, we're we just finished one of the best 15-year periods in history. At some point in the next few years, I can't tell you if it's seven years from now or next Thursday, but at some point, we're going to enter another bare market like 2000 to 2013 or 68 to 82. That's when I would tell people raise your uh contributions because when you come out of the bare market you've been buying all these things as they've pulled back as they've sold off it feels terrible for 7 8 n years and then suddenly look at everybody from 2013 >> to 2020 the 401k values exploded because they were piling money into indexes in the 2000s and and it went nowhere. From 2000 to 2013, the market was essentially flat. Was up and down and up and down, but you began there and you ended there. >> Great time to save. >> Yep. >> To to put a bow on this though. So, you're basically saying that if he does do that additional 7% match, then he probably is set, >> right? Like Oh, you think more in addition to that? Okay. >> Yeah. I I think cuz cuz we we don't know what inflation's going to be. We don't know uh what the next uh bare market looks like and we don't know. All I can tell you is when I overview when I review uh our health care costs every year, our health care costs go up in the firm almost 10% a year. So the expense of doing all these things are going to go higher. I'm not a deficit hawk. I'm not a person freaking out about deficits. There's a good chance some point off in the future we're going to see higher taxes. I mean, at a certain point, >> I tell Bill everyone everyone they've been saying that my whole life and every year they every time they go >> they've been saying that my whole life. I >> never it never happens. >> Um it it >> I know you're right. No, you're right. We >> there is a point of no return where the spending is going to come down. The taxes are going to go up because there won't be any option. That could be 20 years from now. That could be 50 years from now. >> John Carlo in the chat said, "Uh, last time the Dow was under 10 10K, Princess Diana was alive." >> That's amazing. Was that 96 95? >> But Jerry Garcia was not. >> That's right. >> All right, let's see. We got one more. >> Okay. Uh, last but not least, we got a question from Dan. I've saved enough to afford a 20% down payment on a home. However, the monthly cost of carrying the home, principal, interest, property taxes, insurance, etc. would put me close to uh break even month over month, which makes me hesitant to commit, even though I know I'd come out ahead in the long term owning versus renting. Since I'm able to save and invest in my brokerage account while renting, do you think it makes sense to continue renting the next 1 to three years uh to get a larger down payment, say 40 to 50% to cut down my monthly cost when I do buy a house, or is it better to just start building equity sooner? Is there anything I'm missing or not considering? So, my understanding from the wording of this question is that the monthly housing payment would leave nothing left over to save and invest, or at least not for its brokerage. So, I'm usually pretty lenient on these things and I think I operate on the assumption that if you have a fixed rate mortgage, you can grow into the payment over time, right? I I think people should think about skipping the starter home and maybe buying something up a little bit that will stay in for 10 or 15 years or 20 years, but I don't but this sounds like you have zero margin of safety and I don't necessarily agree that you will come out ahead here by buying instead of renting. Like just the assumption that if I'm if I'm spending everything on my home, I'm for sure going to come out better and you're not be able to save and invest. I don't agree with that at all. I I think that's there's no margin of safety there. >> I read that differently. I thought when he said comes out break even, it's verse renting. Owning versus renting. I wasn't looking at that as a budget. So, I'm I'm going to say the opposite of your view. So, assume it's the same to own versus rent. Uh principal, interest, property taxes, insurance versus renting. You know, why do you want to own a home? It's going to appreciate. There's a >> So I'm Duncan be the judge here. Am I looking at this at all? >> Tie break. >> I Yeah, I I thought he meant versus renting like it's break even the same amount basically. >> So So I think that if owning and renting costs the same, >> but he's saying if while renting I can save and invest in a brokerage account. I think the assumption is he can't do it anymore if he's buying a house >> or or I think he's saying that he can accumulate that much more wealth to have a much bigger down payment. In other words, the down payment is his his uh investment account. >> That's fair. If it's Yeah, you're right. If it's the same buying versus renting, then buying makes more sense. >> Yep. You not only are you getting appreciation, but you're you're um if you wait too long, prices keep going up. At least if you own something that's rising and you want to roll into a bigger >> Everyone in the chats with me, everyone in the chat's reading it my way, saying that he's not going to have any more money to save and invest of the way because the way it's worded. We'll have to have Dan. Either way, I think if if the case is I'm going to be house poor and I can't save and invest anymore, then I think leaving zero margin of safety is a bad idea. If renting and owning is in on the same wavelength and and you still have the ability to do that and you have a 20% down payment already, then that Yeah, that makes sense. >> The way I read it was he was asking if it's not a better deal monthly to buy, is it worth buying? >> All right, Dan's in the chat right now. He says, "Basically, I'd have no margin each month. He has no margin of safety." Okay, >> so here's the problem. If you're saving, if you're saving to buy a house for one to three years, >> are you putting that in the stock market, you're running a risk of a 15 20% draw down? Set you back a year or two. I would rather find a house I like, lock in, try and and manage my cost so I can continue um investing. >> You also have to understand your career here. What's your career trajectory? Is it going to be one to two lean years where, hey, man, there's no margin of safety, but I got into this house I love. It's my dream house. I'm going to be here forever. Or is it like, oh boy, I don't know. Things are going okay now, but will it be okay in the future? I think that's part of it, too, is like, can you really >> Lot of variables for sure. Absolutely. A lot of variables. >> I just I usually am leaning on these things. I don't like having zero margin of safety. And I think maybe Yeah, you if if that's going to be the case, you need a 30% down payment then or a 40% if that's going to be the thing. Here's the flip side of all of this. >> The flip side of all of this is if there was any lesson we learned from the pandemic is life is short and we don't know what happens next. And so if you really want to be a homeowner, if you really want that house in that neighborhood and that school district, um I I always tell people, do it. You we always regret the things we didn't do. We rarely regret the things we do. At worst, you're a little embarrassed. if he can afford it. And that's a pretty big if. Uh I'm on I put on the >> Dan's in the chat. He says it be for it be a forever home, but he's not able to save extra money because the mortgage costs are too expensive. Uh >> is it binary though? Can Can Dan can you can you look for a place 10% cheaper? Or like Ben says, just start throwing in offers that are, you know, below below ask. >> I think that's the thing. Like do you have a house in mind that you know this is the house or do you have a range of houses in mind that you're looking at? Um, >> by the way, the average American moves every seven years or at least did before the pandemic. So, buying a house, letting it appreciate, hopefully you're buying something that will appreciate as much as the next house. Our housing needs change from when we're single to when we're married to when the third or fourth kid shows up. Maybe you'll be surprised and have twins as people uh have on on this call. And um you know, waiting, waiting, waiting. Uh uh we're watching houses go up, you know, three, four, five percent in especially in desirable areas. I I was shocked to see Nassau County, where I live, home prices gained like six and a half% this year. If you're waiting, you have to hope you're going to generate at least that much, not just down payment, but income in order to cover those increased payments. So, I I say jump in and and um enjoy the appreciation of the house so you don't fall behind in order to roll that into the next house. >> All right. Then you're on the other side. >> I'm more skeptical. And usually I'm not, but I I just I I think if you're really making yourself too house poor and you're not being able to save and invest, I think that can put you behind even more financially. >> How how much do you like peanut butter sandwiches? you know >> how are we talking house poor or are we talking about I can afford this and the big question comes what happens if you are laid off or >> listen obviously this Dan is doing a good job because he put he he has enough save for 20% down payment so he's obviously financially responsible right he's he's not like >> not a 10% down >> we should Seth said we should pull Dan into the into the show >> let's do it can we get him >> either way Dan Dan let us uh let us know what you decide to The specifics really matter. The details really matter. >> I can't tell if Barry is the angel or the devil or it's me on the shoulder, but we've got we gave you both sides here. >> There you go. >> Uh, all right. Um, well, thanks Barry for joining us. As always, anyone coming up on Masters of Business we need to know about. >> Uh, yeah. I have uh coming up this weekend Drew Wshaw. He's a the candidate for New York State Controller who has a fairly surprising um plan for the uh for the New York State pension fund. It's nearly $300 billion. It's the third biggest pension fund and like a billion dollars a year is spent on uh unnecessary fees and he wants to change that. So I was very I was very excited to to chat with him. And then this weekend moving political markets now too. >> No. And then and then this weekend is um one of my favorite people in the world Dick Thaylor Nobel Laurate uh with his colleague Alex Emos. So interesting so fascinating. Uh, we we got a question in the in the chat. Barry, what's your favorite car right now? >> New or used? If we're if we're talking if we're talking new, I I was just reading about the upcoming BMW M electric with a motor at each corner. Four motor. Like, it's going to be a 1500 horsepower monster. >> Each wheel has a motor. >> Each wheel has its own electric motor. >> Some insane insane number. Um, and so it's it's not out yet. It's a 2028, I think. And then, um, you know, I've been talking to Batnik about getting rid of his Audi truck. And there is a Lexus 700 trail runner, Trailblazer, whatever it is, SUV that I was in a couple of weekends ago. Um, and what a comfortable, lovely car. And when you buy a Lexus, you know, you may not get the spirited German driving experience, but what you do get is the utter Japanese reliability where these things just give it gas and oil. >> No, Michael only buys unreliable cars. Yeah, the ones that bought him. >> I I'm aware >> he's not going to get that. >> So, I would tell people, you know, do you want fun or you want reliability? Um either you're looking at Germany or or Japan. >> All right. Um email, thanks for everyone in the live chat today. That was great. I'm glad we had Dan on there. 00 people watching live right now between Twitter and YouTube. >> Awesome. Uh, email us as always, ask the compound.com. Leave us a comment on the YouTube. Uh, rate, review, all that good stuff. Subscribe and we'll see you next time. >> See you everyone.