Is the Stock Market Overvalued?

Summary

Podcast Summary: Ask The Compound — "Is the Stock Market Overvalued?"

Date: January 14, 2026
Host(s): Ben Carlson, Duncan Hill
Guest: Barry Ritholtz

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Episode Overview

This episode tackles the pressing question: "Is the stock market overvalued?" Ben Carlson and Duncan Hill address valuation in modern markets, the limitations of relying on historical metrics, and how current company dynamics have shifted the landscape. The team also fields a range of listener questions on credit card interest rates, best financial news sources, 401(k) strategies, and the rent vs. buy debate in the current housing environment. Barry Ritholtz joins to bring additional insights, particularly on credit cards and personal finance education.

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Key Discussion Points & Insights

1. Valuing the Stock Market: How Has It Changed?

[02:29–08:02]

• Historical valuations can be misleading:

  • Ben revisits the composition of the S&P over the past century, noting how different the index's structure and membership are today versus previous decades.
  • Example: The original S&P (S&P 90 in 1926) was mostly industrials and railroads; finance wasn’t even included until 1976.
  • “The S&P has changed drastically. The companies are obviously different.” — Ben ([03:29])

• Profit margins and efficiency:

  • Modern companies show rising profit margins decade after decade, largely due to technology and efficiency gains ([04:02]–[04:59]).
  • Ben shares a chart showing margins since 1990, highlighting the impact of the internet and reduced capital intensity on profitability.

• Valuations and margins move together:

  • Since 2005, increased profit margins are matched by rising valuation multiples.
  • “Valuations and profit margins are essentially moving hand in hand.” — Ben ([05:29])

• MAG7 vs. S&P 493:

  • The "Magnificent 7" (largest tech stocks) command much higher valuations because of higher earnings and growth, but the rest of the market (“S&P 493”) has comparatively stagnant valuations ([06:02]).

• 2025 Market Returns:

  • Most of the market's 2025 returns were from fundamentals (earnings and dividends), not multiple expansion. This is encouraging for sustainability.
  • “[In] 2025, most of the growth in stocks came from fundamentals. That’s a good thing.” — Ben ([07:30])

• Big message:

  • Valuations are a starting point, not a verdict. “You can’t just say the past average was this, now it’s this. Therefore you can’t make that leap.” — Ben ([07:48])

2. Are Low P/E Stocks Always Good Value?

[08:02–08:09]

• Duncan shares a personal anecdote about buying low PE stocks that didn’t perform well, underscoring that market pricing often reflects genuine risk or issues.

3. Stock Market Diversification in the Face of High Valuation

[08:09–09:07]

• If large tech stock valuations seem overextended, there are many other segments—small/mid caps, foreign, value, dividend, high quality, and minimum volatility stocks—trading at much lower valuations.
• “If valuations of the S&P have you freaked out, diversify into something else. … No, diversify. That’s the answer.” — Ben ([08:52])

4. History and Utility of Valuation Metrics

[09:07–09:46]

• A brief, light discussion on the origins of price-to-earnings (PE) and other valuation measures, emphasizing their imperfect nature and evolution from technical analysis.

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5. Listener Q&A Segment

Credit Card Rate Caps: Good Idea or Economic Pitfall?

With Guest: Barry Ritholtz
[10:12–20:51]

• On capping credit card rates:

  • Both Ben and Barry argue a government-imposed 10% cap would backfire:
    • “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…” — Barry ([11:20])
    • Capping rates would shrink credit supply, pushing riskier borrowers toward predatory payday lenders or “buy now, pay later” services, often with less transparency.

• Current credit card rates and consumer knowledge:

  • Average rate is 21–23%, mostly due to risk and consumer credit profiles.
  • The importance of education: teaching budgeting and credit management in schools (“…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.” — Barry [13:35]).

• Merchant fees and rewards:

  • Merchant fees (2–3%) subsidize credit card rewards, not just interest from revolving users ([15:42]).
  • “If you started from scratch today, this would never be the system.” — Ben ([15:39])

• Late fees and “junk fees”:

  • Policymaking has often failed consumers by allowing banks to replace interest caps with hidden or excessive fees.

• Advice:

  • “If you only take away one thing from this conversation, pay off your credit card every month, right?” — Duncan ([19:43])

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Best Financial News & Information Sources

[20:53–25:56]

• Ben encourages reading traditional outlets (WSJ, Financial Times, Economist, Barron’s, CNBC) but stresses the value of substacks, blogs, and curators for deeper understanding and diverse viewpoints.

• Barry’s filtering criteria:

  • “You must create your own list of experts…have good temperaments…process, not someone who just got lucky once…seen some cycles.” ([22:24])

• Recommended Curators:

  • Barry’s daily reading list (ritholtz.com)
  • Todd Us at Abnormal Returns for advisor-focused content ([23:44])
  • Read books for in-depth, evergreen insight (“Read those books that are just more evergreen because that stuff is never going to go out of style.” — Ben [24:02])

• Warren Buffett & Charlie Munger’s advice:

  • “The two of us mostly sit around and read books all day long.” — Warren Buffett, via Ben ([24:37])

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401(k) Contributions: Is a High Match ‘Enough’?

[25:58–33:36]

• Listener Remy (age 29, $300k 401k, $200k salary, generous employer contribution) asks if he’s essentially ‘set’ for retirement.

• Quick take: Always take the employer match—it’s free money ([27:09]).

• Reality check on being ‘set’:

  • Barry: “He isn't remotely close to being set.” Inflation and future cost increases mean $3M decades from now won’t buy as much as today.
  • Mega Backdoor Roth contributions can further boost long-term savings, if the plan allows ([28:49]).
  • Ben & Barry: If possible, take full advantage now, frontload savings, and consider increasing contributions, especially during future market downturns ([31:24]).
  • Barry: “He really wants to get that 401k up to $10 million by the time he stops working…” ([30:31])

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Should You Buy Now or Save for a Bigger Down Payment?

[33:49–39:46]

• Listener Dan wants to buy a home with 20% down but would be “break even” (no margin to save or invest after housing costs). Should he wait and save for a larger down payment?

• Ben’s view: Don't become “house poor.” If you can't save or invest after buying, better to wait or find a cheaper house ([36:08]).

• Barry’s view: If owning costs about the same as renting and you really want the home (especially a “forever home”), it can make sense to buy, assuming your income is stable ([36:08–39:46]).

• Dan (listener) clarifies in the chat: He would have zero margin after the purchase ([36:51]), which both hosts and Barry agree is a risk, tilting the advice toward caution unless career/income trajectory is very certain ([37:17]).

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Notable Quotes & Memorable Moments

• “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.”
  — Ben ([07:48])

• “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…”
  — Barry ([11:20])

• “If you only take away one thing from this conversation, pay off your credit card every month, right?”
  — Duncan ([19:43])

• “Read those books that are just more evergreen because that stuff is never going to go out of style.”
  — Ben ([24:02])

• “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.”
  — Barry ([30:31])

• “If you really want to be a homeowner... do it. We always regret the things we didn’t do. We rarely regret the things we do.”
  — Barry ([37:49])

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Timestamps for Important Segments

• Valuing Today’s Market & S&P Evolution: [02:36]–[08:02]
• Stock Diversification & Low PE Anecdote: [08:02]–[09:07]
• Valuation Metrics Riff: [09:07]–[09:46]
• Credit Card Rate Debate (with Barry): [10:12]–[20:51]
• How to Filter Financial Information: [20:53]–[25:56]
• 401(k) “Am I Set?” Deep Dive: [25:58]–[33:36]
• The Rent vs. Buy/Down Payment Debate: [33:49]–[39:46]

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Tone & Style

The discussion is insightful but lively, conversational, and full of gentle banter. Ben is methodical and evidence-driven; Barry provides big-picture wisdom layered with frank advice. Duncan keeps things moving and adds humor.

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Summary Takeaway

The episode makes clear there are no simplistic answers: stock market valuation must be contextualized, credit card reform is complicated, and personal finance decisions are deeply individual. But timeless principles still apply: diversify, educate yourself with reliable sources, frontload your savings when young, and avoid becoming “house poor.”

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For further questions, feedback, or to submit your own inquiry, email askthecompoundshowmail.com.

Transcript

[A]

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 run up 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. Our inbox was full this week, as usual. Askthecompoundshowmail.com on today's show. 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 Ritholtz, we know the power of content, education, communication when it comes to keeping your clients happy. Exhibit A makes your life easier as an advisor. Create charts, presentations, client decks using visuals we have created. You pick the color scheme, add your company logo, download to your devices. Listen, I talk to advisors 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 blasts, chart of the week bullet points that help you give clear talking points for prospects and clients, current clients alike. Plus you have chart kid Matt who's one of the best in the game. In the chart game right now, if you're not using his stuff, you're missing out. So if you go to exhibit A for advice dot com, you can learn more and start your free trial. Or you can get a 20 minute conversation with Matt who will walk you through how all the tools on the platform work. His fingerprints are gonna be all over the show today. So that's exhibit A for advice dot Com. If you're an advisor who wants to learn more.

[B]

How many people are gonna abuse that just to get to talk with Char Kit? Matt.

[A]

I know, right? He's a nice guy.

[B]

Yeah, he is. Though I'm still waiting on my exhibit A hat. Not to. Not to be a dead horse, but yeah.

[A]

You don't have enough hats though.

[B]

It's true.

[A]

All right, let's do it.

[B]

Oh, wait.

[A]

Is that a Grateful Dead hat you're wearing?

[B]

It is. It is. Rest in peace, Bob Weir.

[A]

So the Grateful Dead story I heard this week from someone talking about the dot com bubble was that there's a story that they don't know if it's true. Or not, but we'll call it true. At one point during the dot com 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 com bubble.

[B]

Didn't he die in, like, 94?

[A]

Jerry Garcia? I don't know. It's a good story. Don't ruin it. All right, do a question.

[B]

Okay, up first, we have a question from Mark on animal spirits. Ben and Michael were talking about how to use.

[A]

God damn it. He died in 95. You're right. Wait, when did Netscape come public? I think it came public in 95.

[B]

Okay, maybe, maybe.

[A]

Keep reading.

[B]

On animal spirits, Ben and Michael, we're 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? What's the alternative?

[A]

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?

[B]

What are the odds? That is bizarre.

[A]

Both on August 9th.

[B]

That's weird.

[A]

Okay, great question. 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. 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, question about the history of the S and P. So I had ChatGPT create a little infographic for me. I was fighting with AI all morning about this. Throw it up there. 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 440, 4020 model and it was 400 industrials for 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 and P has changed drastically. The companies are obviously different. You can do chart off here. So it's tons of capital intensive businesses. And of course, today's companies are nothing like their 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, 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 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? We put a bunch of charts up and our research team does that. And usually you 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. This is a secret, so don't tell anyone. All right, so let's do a chart here. This is the S&P493 versus the MAG7. 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 MAG7 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 more or less stagnated. 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 one and a half percent 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. And I've put a bunch of visuals here. I haven't really been pinned down. So like BB gun to my head, where I fall on valuations are they are a good starting point to understand the market, right? And where potential risks reside. But they are not a be all end. All 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.

[B]

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.

[A]

So sometimes the market knows what it's doing. Not always. Obviously things, these things can get crazy, out of whack. 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 are plenty of other areas in the stock market where valuations are lower. Here's one more from our call. Small mid caps traded a pretty decent discount to large caps, right? As big as we've seen in over 20 years.

[B]

Can you call this smid cap?

[A]

Sure. Want to make it easier? SMID that. That's investment Lingo. You're at an investment committee meeting, someone's going to say, smid foreign stocks are cheaper value stocks, dividend stocks, high quality stocks, Minval stocks. Basically, everything is cheaper than the s and P500. Chart off, please. So if valuations of the S and 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 the answer.

[B]

And not to derail the show. We can dig into this on a future show if you want, but I'm curious where PE even came from as a metric. What is the history of this? Someone just came up with this at some point, or it was looking back and doing a postmortem on a certain period of time and figuring out what things usually traded at.

[A]

I'm not sure specifically if it was a Benjamin Graham thing, but obviously you had to. You had to have weighted somehow. Right. 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 yeah, that. That's. Someone had. You had to anchor it somehow to something. Yeah, right.

[B]

Yeah, all of those. Price. Sales price to book. Yeah, yeah. It's kind of interesting. Haven't worked out.

[A]

Do another one.

[B]

Okay, next. We got one. Lots of people. This one's kind of 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. 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?

[A]

All right, let's bring on everyone's favorite macro commentator at the firm here, Mr. Barry Ritholtz.

[B]

Hey, Barry.

[C]

Hey, guys. How's it going?

[B]

Good. Good.

[A]

Okay. So 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 President Trump said, listen, we're gonna cap all credit card rates at 10%. These are too onerous. 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, we'll 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 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.

[C]

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. And the president doesn't have the authority to unilaterally do that. 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 3, 4, 5% default rate, late rate, all these different ways to track credit cards. That's number one.

[A]

Yeah, the industry gets nuked, right?

[C]

That's number one. Number two, there's a big difference between saying I wish rates were lower and the usury laws that cap credit cards at 30% or 25% 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 six and a quarter percent, 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 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%. And the reason it's up there is people don't have good credit cards, card 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.

[A]

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.

[C]

So if you, if you turn around 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 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 balance, you're managing your income really poorly because you shouldn't never be paying 20% to borrow short term.

[A]

Yeah, I would say 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 it 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, never paid it off and just thought like, I didn't know you had to free money.

[C]

Yes.

[A]

And, and so there are some people who don't understand it. Obviously 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, and negotiate for lower pay fees and stuff? 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 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 2 to 3% merchant fees. That's why you get 3% cash back on your credit card because the merchants have to pay 3% to let you use the credit card. That's the 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 scratch today, this would never be the system.

[C]

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 like hundred dollar bounce check fees which used to be eight bucks and all these different ways they gamed consumers. And this administration has essentially submarine 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 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 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 $100 fee there and it looks like 50 to 100% interest. It's really quite horrific.

[A]

Yeah, all the late fees, the overdraft fees, that's the stuff that really gets a lot of people and keeps them down. I just think the rate should change.

[B]

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 have like come down a little bit.

[A]

Yeah, I was always screaming about this one. 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. Well, no, it's because of the default rates. But you're right, that's the thing that never made sense to me is that they should float a little more like the rest of the year.

[B]

Even if it was like give or take 3%, you know, like something like that would make sense to me.

[A]

But it does feel like this is so ingrained that there's so many different offshoots now. So for example, last year the rewards 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 miles and you have people sign up for a credit card so they have to use the Delta, American Express or whatever to get all the points in 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.

[C]

I don't think there is an easy answer. You really have to have an educated consumer. They really have to understand both the concept of rates and by the way, Fed funds rates today between three and a half and three and three quarters. Then you have to tack on inflation at two and a half to three percent. That gets you up to, let's call it six and a half and maybe even a little more. And what a surprise. That's about where mortgage rates are six and a quarter, six and a half. It's really a challenge.

[A]

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 we 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.

[C]

And here's, here's where people talk about a K shaped economy if you're wealthy. Hey, I can 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 tax deductible. If you're bottom half of the economy or even middle class, you probably don't have that option. And 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.

[A]

Hopefully AI will help solve this. I really do think AI is going to. No, 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.

[B]

I thought you were not sure.

[A]

I hope it will.

[B]

Crypto fixes this.

[A]

Well, stable people. No, people think stable coins could take away a lot of those fees.

[C]

No, not going to.

[A]

But I don't know how that you're going to have a stablecoin credit card or something. I don't know.

[B]

If you only take away one thing from this conversation. Pay off your credit card every month, right?

[C]

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 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 a bank card or a credit card.

[A]

I don't either. I never have cash on me.

[C]

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.

[A]

All right, let's do another one.

[B]

Okay, up next. We got one. I don't see a name. My son is a financial advisor who loves following your articles and podcasts. He's not on Twitter, but wanted me to ask if you still recommend reading Barron's in the Wall Street Journal daily or. Or if you prefer, any other sources.

[A]

Okay, so I'm not a hater of financial news. Like, I read the Wall Street Journal and the Financial Times and the Economist and Barron's 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. But it's so much easier than ever, I think, to follow this stuff now. Between blogs and substacks and podcasts, I think you consume as much of it as. As you can. 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.

[C]

So I have so first, yeah, so if something like this doesn't exist. Go out and create yourself. I started that in 1998 with a market blog on geocities, which no longer exists. Part of Yahoo. 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 4 or 5%.

[A]

Don't do the YouTube channel with all the fire in the background. That's a good, that's a good rule.

[C]

That's right. How it starts, how it's going, that, that's, that's a warning sign. You want people who have a process, not someone who just got lucky once. 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 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, podcast, whatever. Also, if you really want someone to curate this for you, there's a lot of places that curate reads. Go to ritholtz.com you can sign up for my daily reading list. Todd Us at Abnormal Returns does a great. I read TARDIS every day. I read his list every day. 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 advisor, not only should you read TARDIS's abnormal returns, but he has a specific bi weekly email just.

[A]

Yeah. Newsletter. Yeah.

[C]

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.

[A]

Too much stuff now.

[C]

Yeah, yeah, it's a fire hose. And 90% of it is nonsense.

[A]

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? 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.

[C]

You know you mentioned Buffett, someone asked 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 2,500 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.

[A]

So Dave in the chat said he's currently reading Peter Bernstein's against the Gods. One of the. My favorite, One of my favorite ever written. I think it was written in 94. It's a history of math and physics and probabilities, statistics. It's. Yeah, that's kind of book that will never go out of style.

[C]

I need to read one of the, one of the. All time best. Absolutely.

[B]

I just asked you beat for top, top things to read in business and finance and under thought leaders and influencers in finance. It has Paul Krugman and Barry Rose.

[C]

There you go. So you could, you could do worse than that. Pair of buffoons. Absolutely.

[A]

All right, so another one.

[B]

Okay. Up next, we got a question from Remy, which makes me think of Ratatouille. I need to rewatch that.

[A]

Oh, yeah.

[B]

Hey guys. Love the show. I'm 29 with $300,000 and 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?

[A]

All right, so first, he's doing a really good job, obviously at 29, to make money, have that much on a 401k. I actually had a similar 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.

[B]

Wait, sorry. My understanding of his math, right, if he puts in 7%, he gets 17%.

[A]

Yes, exactly. So I don't know if he'll be set for retirement or not. But you take the 7%, there's no don't pass go. Like there's no other option.

[C]

Free money.

[A]

So yes, you're right. He puts 7% in Duncan, he gets an additional 17%. He's saving a quarter of his income in his 401 now. Then he's really set.

[B]

That's wild.

[A]

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.

[B]

Yeah, free money is usually good.

[C]

So. So 100% take the free money. But let's answer Remy'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 catch up. 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.

[A]

Yeah, but add the compounding on there, Barry, he's going to be good.

[C]

I'm going to tell you. You're thinking $3 million today is not what $3 million 30 years from now is. So someone who's making multi six 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.

[A]

Okay, so you're saying, listen, without tax.

[B]

I think you just stressed out half the people watching this.

[A]

No, no, no, 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 he taps out that 401k and it's maxed out, he needs to be saving more. I get what you're saying.

[C]

So another 25,000 a year post tax. And not everybody does a mega Roth. Your, your plan has to allow it. Your custodian has to do it.

[B]

We have a Mega Barry in the chat is shouting, mega backdoor Roth.

[C]

Right? Mega backdoor Roth. We custody our 401k at 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, 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 matching that in another 25,000 or, sorry, he's making.

[A]

200 a year, but he has 350. All right, so 200. He's making good money either way. You're right.

[C]

He, he, he has multi six figure. So that $300,000, 401k, you know, the rule of thumb is you're drawing down 4 or 5% a year. And so 5%, 4% a year means a million dollars. That's 40,000.

[A]

He's, he's, he's 29 now. Almost 30 people are going to be living way longer. He's probably not going to retire at 60, retire at 70. Maybe, maybe later he's going to live.

[C]

To one 7090 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, 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's so different and it's so hard to conceptualize either way.

[A]

Count yourself lucky for a 17% match on a 401k. That's, that's insane.

[C]

Yeah, no, he's, 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.

[A]

You want, the thing is, you want to do it now too, and you're 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, front load this stuff.

[C]

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 bear market, like 2000 or 2013 or 68 to 82. That's when I would tell people, raise your contributions. Because when you come out of the bear market, you've been buying all these things as they've pulled back, as they've sold off, it feels terrible for seven, eight, nine 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 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.

[A]

Great time to save.

[C]

Yep.

[B]

To put a bow on this, though. So you're basically saying, though, if he does do that additional 7% match, then he probably is set. Right. Like you're just.

[C]

I think he needs more.

[B]

Oh, you think more in addition to that. Okay.

[C]

Yeah, I, I think because, because we, we don't know what inflation's going to be. We don't know what the next bear market looks like and we don't know. All I can tell you is when I. Overview, when I review 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.

[A]

Tell Bill, everyone, everyone, they've been saying that my whole life and Every year, every time they go to office.

[C]

They've been saying that my whole life.

[A]

It never happens. It. I know, you're right.

[B]

No, you're right.

[A]

We.

[C]

There is a point of no return where the spending is going to come down, the tax is going to go up because there won't be any option.

[A]

That could be 20 years from now. That could be 50 years from now. Nothing's history.

[B]

John Carlo in the chat said last time the dow was under 10, 10K, Princess Diana was alive.

[C]

That's amazing. Was that 96, 95.

[A]

But Jerry Garcia was not. That's right. All right, let's see. We got one more.

[B]

Okay, 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 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 one to three years to get a larger down payment, say 40 to 50% to cut down my monthly costs 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?

[A]

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 think people should think about skipping the starter home and maybe buying something up a little bit. It'll 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 the assumption that if I'm, if I'm spending everything on my home, I'm for sure gonna come up better and you're not being 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's.

[C]

I read it differently. I thought when he said comes out break even, it's versus renting. Owning versus renting. I wasn't looking at that as a Budget. So I'm going to say the opposite of your view. So assume it's the same to own versus rent, principal interest, property taxes, insurance versus renting. You know, why do you want to own a home?

[A]

It's going to appreciate there's a. Duncan, be the judge here. Am I looking at this tiebreak?

[B]

Yeah, I thought he meant versus renting. Like it's break even the same amount, basically.

[C]

So I think that if owning and renting cost the same, but he's saying.

[A]

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.

[B]

House or I think he's saying that he can accumulate that much more wealth to have a much bigger down payment.

[C]

Because in other words, the down payment is his investment account.

[A]

Look, that's fair. If it's. Yeah, you're right. If it's the same buying versus renting, then buying makes more sense.

[C]

Yep. You. Not only are you getting appreciation, but you're. 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 big.

[A]

Everyone in the chat's 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 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 on the same wavelength and you still have the ability to do that and you have a 20% down payment already, then that. Yeah, that makes sense.

[B]

The way I read it was he was asking if it's not a better deal monthly to buy, is it worth buying?

[A]

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.

[C]

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% drawdown, set you back a year or two. I would rather find a house I like, lock in, try and manage my costs so I can continue investing.

[A]

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.

[C]

A lot of variables, for sure, Absolutely.

[A]

A lot of variables. I usually am leaning on these things. I don't like having zero margin of safety. And I think maybe, yeah, 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.

[C]

But if you're going to be. 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, in that school district, I always tell people, do it. 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. I'm.

[A]

I put on Dan's in the chat. He says it'd be a forever home, but he's not able to save extra money because the mortgage costs are too expensive.

[B]

So I 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.

[A]

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?

[C]

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 have on, on this call and, you know, waiting, waiting, waiting. We're watching houses go up, you know, 3, 4, 5% in especially in desirable areas. I was shocked to see Nassau county, where I live, home prices gained like six and a half percent 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 say jump in and enjoy the appreciation of the house so you don't fall behind in order to roll that into the next house.

[A]

I'm.

[C]

You're on the other side.

[A]

I'm more skeptical, and usually I'm not. But I just, I think if you're really making yourself too house poor and you're not being a save and invest, I think that can put you behind even more financially.

[B]

How. How much do you like peanut butter sandwiches? You know, how.

[C]

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?

[A]

Listen, obviously this Dan is doing a good job because he put. He has enough save for 20% down payment. So he's obviously financially responsible. Right.

[C]

He's not like borrowing not a 10% down.

[A]

Yeah, we should.

[B]

Seth said we should pull Dan into the show.

[C]

Let's do it.

[A]

Can we get it anyway? Dan, Dan, let us, let us know what you decide to do.

[C]

The specifics really matter. The details really matter.

[A]

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. All right. Well, thanks, Barry, for joining us as always. Anyone coming on Masters of businessman you didn't know about?

[C]

Yeah, I have. Coming up this weekend, Drew Warshaw. He's the candidate for New York state comptroller who has a fairly surprising plan for the. For the New York state pension fund. It's nearly $300 billion. It's the third biggest pension fund and like a big billion dollars a year is spent on unnecessary fees. And he wants to change that. I was very excited to, to chat with him.

[A]

All right, and then this weekend, political markets now, too.

[C]

No. And then, and then this weekend is one of my favorite people in the world, Dick Thaler, Nobel laureate, with his colleague Alex Emas. So interesting, so fascinating.

[A]

Yeah.

[B]

We, we got a question in the, in the chat, Barry. What's your favorite car right now, new or used?

[C]

If we're, if we're talking. If we're talking new. 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.

[A]

Well, each wheel has a motor.

[C]

Each wheel has its own electric motor. Some insane, insane number.

[B]

Wow.

[C]

And so it's not out yet. It's a 2028, I think. And then, 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. 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.

[A]

No, Michael only buys unreliable cars. Yeah, he's not the one that bought him.

[B]

He's not gonna get that.

[C]

So I would tell people, you know, do you want fun or you want reliability? Either you're looking at Germany or Japan.

[A]

All right, thanks everyone in the live chat today. That's great. I'm glad we have Dan here.

[B]

There's 1,600 people watching live right now between Twitter and YouTube.

[A]

Awesome. Email us. As always, askthecompoundshowmail.com, leave us a comment on the email YouTube Rate Review all that good stuff. Subscribe and we'll see you next time.

[B]

See you, everyone.

[D]

Thanks for listening to Ask the Compound. All opinions expressed by Ben Carlson, Duncan Hill, and any of their guests are solely their own opinions and do not reflect the opinion of Ritholtz Wealth Management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ritholtz Wealth Management may maintain positions in the securities discussion discussed in this podcast.