← Money Stuff: The Podcast
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- [00:00]
GiveWell Representative
GiveWell, a non profit that researches and recommends giving opportunities, takes the impact of donations seriously to ensure their recommendations withstand tough scrutiny. GiveWell had their own researchers spend months trying to identify flaws in their past work. They then publish their findings, mistakes and all for any donors to use for their giving. It's this kind of rigor that can help your donation make a big impact on the world. GiveWell has now spent over 17 years researching charitable organizations and only directs funding to a few of the highest impact opportunities they've found. Over 125,000 donors have used GiveWell to donate more than $2 billion. Rigorous evidence suggests that these donations will save over 200,000 lives. If you've never used GiveWell to donate, you can have your donations matched up to $100 before the end of the year or as long as matching funds last. To claim your match, go to givewell.org and pick podcast and specify where you heard this ad. Make sure they know that you heard about GiveWell from this podcast.
- [01:01]
Brandon Mitchell
Open source AI is available to all, not just the few. Meta's open source is free to use, enabling startups like Rightsy to innovate. Here's CEO and co founder Brandon Mitchell.
- [01:13]
Matt Levine
We use Llama Meta's free open source AI model to build Job Search Genius, an AI tool that helps candidates write their resume, practice mock interviews, and learn salary negotiation tactics.
- [01:23]
Brandon Mitchell
Learn how others are building with Meta's free open source AI at AI.meta.com Open in 15th century Florence, the great inventor Leonardo da Vinci dreamt of creating a flying machine. But something kept getting in his way. Admin. Piles of it. Luckily, Leo used the smart buying tools on Amazon Business so he could work more efficiently with the extra time. He not only invented the flying machine, but actually built it.
- [01:51]
Matt Levine
Magnifico.
- [01:52]
Katie Greifeld
Incredible.
- [01:55]
Brandon Mitchell
Whoa, easy there, Leo. Amazon Business, your partner for Smart business buying.
- [02:03]
Bloomberg Audio Studios Host
Bloomberg Audio Studios, podcasts, Radio news we haven't done this for a while.
- [02:12]
Matt Levine
We haven't seen each other in two weeks. I know, but after like 10 days of going by your desk and everyone's like, no, we don't know where she is.
- [02:17]
Bloomberg Audio Studios Host
Oh my God. Like I told them all, just if that comes by, I'm not here. No, I don't know where I've been, but I don't know either. But now we're back in the booth.
- [02:26]
Matt Levine
Back in the booth. Hello and welcome to the Money Stuff podcast, your weekly podcast where we talk about stuff related to money. I'm Matt Levine and I write the Money Stuff column for Bloomberg Opinion, and.
- [02:39]
Bloomberg Audio Studios Host
I'm Katie Greifeld, a reporter for Bloomberg News and an anchor for Bloomberg Television.
- [02:44]
Matt Levine
It's good to be back, Katie.
- [02:46]
Bloomberg Audio Studios Host
It's good to be back.
- [02:47]
Matt Levine
What's going on today?
- [02:48]
Bloomberg Audio Studios Host
Well, we're gonna talk about accredited investors. What that is, should it exist? We'll talk about Meme stocks growing up or Meme investors.
- [02:58]
Matt Levine
Meme investment firms.
- [03:00]
Bloomberg Audio Studios Host
True, true. And we're going to talk about Naughty esg.
- [03:04]
Matt Levine
It's less fun than it sounds. Accredited investors.
- [03:12]
Bloomberg Audio Studios Host
Yeah.
- [03:13]
Matt Levine
What are they?
- [03:13]
Bloomberg Audio Studios Host
So currently, $200,000 income is what you need to be. Or a $1 million net worth if I'm an individual.
- [03:21]
Matt Levine
Yeah. So there's all sorts of, like, bars, right? So, like, the way it sort of, like, casually works is that you can invest in private stuff if you're an accredited investor, and you can. And anyone can invest in public stuff. And the accredited investor bar used to be like, I don't know, like, 1 or 2 or 5% of households, and now it's like 20% of households because it's not indexed to inflation. So now you need to have an income of $200,000 a year or $300,000 for a couple, or have net worth of a million dollars, or have a Series 7 or Series 65 license. So if you have, like, the securities license, you can be an accredited investor. And if you're an accredited investor, you can invest in various sorts of private investments, mainly like startups. And people don't like these rules. Yeah, I should say. I wrote about this the other day, and he'll find out there are actually two higher bars. So there's the bar for investing in hedge funds and private equity firms, which is basically, if you're an investment manager and you want to charge performance fees like hedge funds and private equity, do you need to have qualified clients? Which basically means, like, a $2.2 million net worth. So it's a little bit of a higher bar than the accredited investor bar. And then the other thing is, like, there's certain kinds of private investments that are only open to quibs. Quantum qualified institutional buyers, which basically means an institution with at least $100 million. So, like, those are the higher bars. But anyone can invest in startups, in theory, if they're an accredited investor, which means, you know, $200,000 income, which is, like, not that uncommon these days. Like, one thing I pointed out is that, like, the number of people who meet that qualification is about equal to the number of people who own stocks directly. So it's like the investor class is pretty much overlapping with the Accredited investor class. There's this perception that like these days the good investments are the private investments.
- [05:19]
Bloomberg Audio Studios Host
I've heard that before.
- [05:19]
Matt Levine
Yeah, like we talk about it a lot, right?
- [05:21]
Bloomberg Audio Studios Host
Yeah.
- [05:21]
Matt Levine
And so they're like, why is it that like people who don't have a lot of money can't get the good investments? And then two, why is it that like the term accredited just correlates with wealth? Like, it sort of seems like accredited means good or smart or sophisticated.
- [05:35]
Bloomberg Audio Studios Host
Perhaps you're sophisticated, you're qualified in some way.
- [05:38]
Matt Levine
Right. It seems unfair that qualified would just mean like having enough money. And so there's always this push to open it up for like a test. So it used to be only the money qualification and now if you have certain securities licenses like the Series 7, you can also be an accredited investor because people are like, you know, if you like work at an investment bank, you're probably like, you know, probably know as much as the average bear about like investments. And so the, the most recent news is that like the Senate is pushing for a bill to make the SEC write an exam that anyone can take. And if you pass the exam, then you're an accredited investor and you can buy private stuff.
- [06:12]
Bloomberg Audio Studios Host
This scratched a memory up to the surface. This is slightly different, but it's related. In April of 2022, FINRA called for comments on whether they should introduce knowledge checks before, you know, retail could buy what they defined as complex products, which basically meant like leverage and all these like funky ETFs that we talk about on this podcast sometimes. And that was met with outrage. People hated that idea.
- [06:40]
Matt Levine
Right. Because that's like those products are public. Anyone can buy this. Right. You don't have to be an accredited investor to buy a triple levered ETF or zero day options on stocks. There's all sorts of stuff that is available to the public, which basically sort of means like it's met disclosure requirements. Right? There's, there's not formally supposed to be like really substantive review of like whether it's a good investment. You know, there's like a certain amount of pressure on stuff to not be crazy stuff. But like in general there's a lot of public stuff that is risky. And there's this weird situation where a lot of public investments are very risky and dangerous and sort of hard to understand and anyone can buy them. And then there's a lot of private market stuff that's like SpaceX stock that you're not allowed to buy because it's limited to people with at least $200,000 of income. It's weird that anyone can buy the products that FINRA wants to restrict. And then they're trying to expand the qualification for the.
- [07:38]
Bloomberg Audio Studios Host
Well at the time again they opened it up for comments. They received more than 12,000 comments, which was pretty wild. That shattered the record. I don't know if it's since been shattered, if they've opened up comments to anything else crazier, but usually they get like a couple dozen comments. So this was wild. It is interesting, you know, the disclosure based sort of whatever is how we do it now. I don't know how I want to talk about that, but basically you can market all of this crazy risky stuff. As long as you put in like big bright letters that you might and probably will lose money on that that's fine.
- [08:12]
Matt Levine
Yeah. Although like a weird aspect of that is you're often buying it through your app, right?
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Bloomberg Audio Studios Host
Yeah.
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Matt Levine
Like there's no requirement that you read any of the disclosures.
- [08:24]
Bloomberg Audio Studios Host
Well, that's right.
- [08:24]
Matt Levine
The firms can't market it without all the warnings disclosures. But you can buy it, you know, if you push a button.
- [08:30]
Bloomberg Audio Studios Host
That's what one of the points that FINRA made at the time that since these rules were put in place, there's a lot more self directed investors in the market now that aren't necessarily going through a financial advisor. There's a lot of people just clicking around on Robinhood for example. That's a deep tease of what we'll be talking about next.
- [08:47]
Matt Levine
I'm excited for that.
- [08:48]
Bloomberg Audio Studios Host
And that's why they floated the idea of a knowledge check that was unpalatable. It's interesting that the Senate is pushing for some sort of test now.
- [08:58]
Matt Levine
Yeah. And private investments are the opposite. Right. You can't buy them on an app. You do have to, you know, essentially buy them through a broker or financial advisor. Right. And there's some history of skepticism about how aligned the interests of some of these brokers are with their clients. Right. I mean there's a lot of private market stuff that is very high fee, has like lots of layers of fees for products that like, you know, you could probably do better by buying a, you know, index etf. But like the advisor gets paid more for selling you the complex product. And making people pass a test might make them more resistant to getting pitched bad products. It might make just make them feel more sophisticated and then make the advisors salivate even more over selling them bad products. Right. I don't know about these tests. You know, there's not a lot of.
- [09:48]
Bloomberg Audio Studios Host
Tests I would Love to take one.
- [09:49]
Matt Levine
I wrote. I would love to write one. I would also love to. I love taking standardized tests.
- [09:53]
Bloomberg Audio Studios Host
Yeah, that tracks.
- [09:55]
Matt Levine
But it would be so fun to write this list. But just you sort of know what it would be like. It would be like compound interest. And what's that? It would be sort of like financing trivia. It would potentially give you the illusion of being sophisticated and being able to sort of see through.
- [10:13]
Bloomberg Audio Studios Host
That's all I need.
- [10:14]
Matt Levine
Yeah, but that's all your financial advisor needs, right?
- [10:16]
Bloomberg Audio Studios Host
Yeah, that's true.
- [10:17]
Matt Levine
Sell you a sort of ruinous product. If you were starting from scratch, you would not like divide the investment universe this way, right? Like, you would not let people buy all of the risky, weird products that FINRA is nervous about. When the Senate talks about this, they talk about like, you know, investing in like local small businesses, right? Like you can't, like there are exemptions to the rules, but in general it's kind of like difficult and risky for small businesses to raise money from like people in their community. Because like there are. You have to meet SEC exemptions. Like there's accredited investor tests. And it might be nicer if more people could make those sorts of private investments. And those investments in some ways seem like more appealing or more like wholesome than like triple levered ETFs or whatever the complex products that Fenrir is worried about. This is more of a niche comment, but I liked it. So I used to be a convertible bond underwriter, right? And like a lot of bonds are done under an SEC rule called Rule 144A, which basically means that you have to be $100 million institution to buy them, right? And it's just like it makes their disclosure a little bit easier. But one reader was like, why am I allowed to buy the stock of a public company but not their 144A bonds? The 144A bonds are sort of by definition safer. They're like senior in the capital structure, but he's not allowed to buy them because he doesn't have $100 million fund. But anyone can buy the stock. So there's a lot of stuff like that where it's like what gets treated as a risky, dangerous thing for retail investors and what gets treated as no problem. Anyone can buy that by clicking a button. Just doesn't track any economic or disclosure reality. So I don't know. I don't have a good solution. I've written my bad solution, which is that the SEC should give out a certificate of dumb investment where you say I know I'm buying something dumb, and they slap you and you say, no, I really want to buy something dumb. And then, like, they give you the certificate. But, like, the important thing in my original proposal was that then if the thing goes to zero, you're not allowed to complain, like, to the press or to anyone, right? Because, like, a lot of this stuff, it's like retail investors buy this terrible thing, and everyone's like, this is a terrible thing. Like, no, no, it's going to be great. And then they buy goes to zero. And like, oh, I was defrauded. I was like, no, you knew it was a terrible thing. So the idea of, like, making people sign a form saying they know they're being dumb is appealing to me because, one, it would sort of, like, obviate some complaints. And then two, like, all this stuff about accredited investors, like, it comes from a place of, like, thinking those are the smart investors who get access to the good stuff. And I suspect that the real experience is kind of the opposite where, like, those are the investors who get pitched the expensive, weird stuff. And. And when you make it a test of financial sophistication, then, like, people want to take that test, they want to pass that test, and then they pass the test like, oh, I'm so sophisticated. And then they buy the worst stuff because, like, they have this illusion of sophistication. Whereas if you make them sign a thing saying this is dumb, then it's less aspirational and, like, maybe. Maybe, like, deters them from buying the worst things.
- [13:11]
Bloomberg Audio Studios Host
That's true. I mean, it would be labor intensive to have to line up like a staffer to slap every single person that.
- [13:18]
Matt Levine
Yes, it's really a hypothetical, but, like.
- [13:20]
Bloomberg Audio Studios Host
I like it, you know, I don't know. I think we should kick it around. Write the test, Matt.
- [13:25]
Matt Levine
I'm gonna write the test.
- [13:26]
Bloomberg Audio Studios Host
We didn't insult any dentists.
- [13:33]
GiveWell Representative
GiveWell, a nonprofit that researches and recommends giving opportunities, takes the impact of donations seriously. To ensure their recommendations withstand tough scrutiny, GiveWell had their own researchers spend months trying to identify flaws in their past work. They then published their findings, mistakes and all for any donors use for their giving. It's this kind of rigor that can help your donation make a big impact on the world. GiveWell has now spent over 17 years researching charitable organizations and only directs funding to a few of the highest impact opportunities they've found. Over 125,000 donors have used GiveWell to donate more than $2 billion. Rigorous evidence suggests that these donations will save over 200,000 lives. If you've never used GiveWell to donate, you can have your donations matched up to $100 before the end of as long as matching funds last. To claim your match, go to givewell.org and pick podcast and specify where you heard this ad. Make sure they know that you heard about GiveWell from this podcast.
- [14:33]
Matt Levine
This show is sponsored by BetterHelp. BetterHelp has been revolutionary in connecting people to mental health services.
- [14:40]
Bloomberg Audio Studios Host
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- [14:42]
Matt Levine
Opening your laptop or your phone and.
- [14:44]
Bloomberg Audio Studios Host
Clicking a button and the session begins.
- [14:47]
Matt Levine
Clients are able to choose in what way they would like to communicate with me. Whether video or on the phone or chat texting, BetterHelp is there when you need it, and that's what makes all the difference. Visit betterhelp.com podbusiness to get 10% off your first month.
- [15:04]
Mikayla Shiffrin
Therapists were compensated I'm alpine skier Mikayla Shiffrin. I've won the most World cup ski races in history. But what does success mean? To me, success means discipline. It's teamwork. It's the drive and passion inside of us that comes before all recognition. And it's why Stifel is one of the fastest growing global wealth management firms in the country. If you're looking for success, surround yourself with the people who will get you there.
- [15:32]
Katie Greifeld
At Stifel, we invest everything into our advisors so they can invest everything into their clients. That means direct access to one of the industry's largest, largest equity research franchises and a leading middle market investment bank. And it's why Stifel has won the J.D. power Award for Employee Advisor satisfaction two years in a row.
- [15:50]
Mikayla Shiffrin
If you're an advisor or investor, choose Stifel.
- [15:53]
Katie Greifeld
Where Success meets Success stifel Nicholas & Co. Inc. Member SIPC and NYSE for J.D. power 2024 award information, visit jdpower.com Awards compensation provided for using not obtaining the award.
- [16:16]
Bloomberg Audio Studios Host
When meme stocks grow up, you know Robin Hood.
- [16:20]
Matt Levine
I do know Robin Hood.
- [16:21]
Bloomberg Audio Studios Host
I remember a time when their bear case on Robinhood is that, you know, you would have all these people who use Robin Hood as a gateway drug and then graduate up into proper investments such as index funds, and that they'd migrate over to like Schwab or Fidelity, for example. That hasn't really been the case, hasn't it?
- [16:43]
Matt Levine
I mean, you and I were reading this Barron's article about how Robinhood is growing up and like the stat that I found shocking is something like 10% of Americans have Robinhood account.
- [16:53]
Bloomberg Audio Studios Host
Yeah.
- [16:53]
Matt Levine
Or like American adults or whatever.
- [16:55]
Bloomberg Audio Studios Host
And Robinhood us adults.
- [16:56]
Matt Levine
And Robinhood has 0.3% of like retail.
- [16:59]
Bloomberg Audio Studios Host
Financial assets, which is 65 trillion.
- [17:02]
Matt Levine
Sure. But like they are 33 times bigger by number of people than by assets. Right. Like they have a lot of people, but like a tiny fraction of those people's assets. Or else they have only the people with a very few assets. Right. Or some companies.
- [17:16]
Bloomberg Audio Studios Host
Yeah.
- [17:17]
Matt Levine
And that does sort of suggest that that bear case had some truth to it, which is that people do the fund trading on Robinhood, but when they grow up to like their index funds, they do it somewhere else.
- [17:30]
Bloomberg Audio Studios Host
Well, two points to that. Number one, the stock is up like 110% this year. So like, in terms of it being a bear case, it's certainly not playing out in the stock market. And two, that may be the case. Robinhood is working really, really hard to grow up, which I find interesting. They had their Hood Summit in Miami. I think it was last week or the week before. But in any case, they have all these new features that are coming out. They have this desktop trading platform. That's one thing. They're offering index options for the first time. That's kind of exciting. But I thought that this was interesting. There's 1 to 3% matching bonuses for investors who transfer assets to Robinhood's platform. So they'll pay you to bring your money over to Robinhood. And as of June 2024, Robinhood has provided customers more than $200 million in matches on asset transfers and retirement account contributions. That's according to the company. So they are trying to grow up.
- [18:25]
Matt Levine
Right. It makes total sense. Right. I mean, if you're a person who has like $1,000 Robinhood account for fun and like your retirement savings at Fidelity and Robinhood is like, bring all your retirement savings over to us and we'll give you 1% of or 3% of them. Like, yeah, that sounds good.
- [18:40]
Bloomberg Audio Studios Host
Free money.
- [18:41]
Matt Levine
Right. And if you're like relatively self directed in your retirement savings are in ETFs anyway. Yeah, it's free money is some lockup on it where if you bring the money over you, you have to keep it at Robinhood for a while. So. Right. It's. It's part of the strategy for them to go from being people's like fun money shows confetti when you do a trade account to being like their main savings and investment account. The other thing that I thought was interesting about what they're doing is they're talking about getting into building out a wealth management farm where instead of just being self directed, they have some sort of advisory business. And that's probably not like opening branches with people, but it's like some sort of robo advising, some sort of automated AI driven advising where if you are not a person who wants to watch the markets all day and be on Reddit and like sort of, you know, do your own investing, but you want someone to help you do your retirement planning. If Robinhood can offer that, like that's just a ton of assets that, you know, have to be tied to some sort of advice.
- [19:40]
Bloomberg Audio Studios Host
Yeah, they basically want to be like the one stop shop, don't they?
- [19:43]
Matt Levine
Which is like. But you know, with like Fidelity and all these people, like they have some roots in being self directed discount brokerages, but they're all like, you know, trying to help people, you know, give people advice on their retirement accounts.
- [19:52]
Bloomberg Audio Studios Host
I should have looked into it. But don't they have a credit card as well or.
- [19:55]
Matt Levine
They do have a credit card, yeah. That's like a. Yeah.
- [19:58]
Bloomberg Audio Studios Host
Didn't Goldman have some painful news about that this week? It seems hard to just create a credit card.
- [20:04]
Matt Levine
I don't know if you have money market funds, like there's like a synergy there. I have to assume that when Robinhood started, you started from nothing. You're like, there's so much opportunity in like showing people confetti when they do trades, right? Like the pool of money that you can extract by like helping people do fun trades on their phone is enormous. Right? And it is enormous, but it's like, you know, it's a tiny fraction of the pool of money from people like saving for retirement, right? And so like when you get big enough, you're like, the way to go to the next level of scaling is to get people's retirement money and not just their fun trading money. Now I will say the other thing about the bear case of people graduating from meme stocks to retirement funds is that Robinhood so far makes a lot of its money on trading for order flow, right? And two stylized facts about that are one, if you are just buying ETFs for retirement, you're not trading that often, right? So Robinhood is getting less money from your buy and hold investing than they are from your frantic day trading. And then two, where they get most of their money from payment for order flow is options and crypto, right? Like frantically trading stocks. Less good for them financially than frantically trading options in crypto and buying and holding stocks, even worse than frantically trading stocks. So there is like a margin compression as they go to the, to the higher dollar retirement funds, but hopefully you make it up on volume.
- [21:28]
Bloomberg Audio Studios Host
Yeah. Another bear case that you could put in there, and this falls more into the psychology category, is we might have moved past this for Robinhood, but I was wondering when we were watching the fantastic fall of all these meme stocks and just so much money was destroyed of retail dollars, whether instead of graduating into index funds, et cetera, whether or not people would just get totally disenchanted and leave the market altogether. But it seems like that hasn't been too bad for Robinhood.
- [21:59]
Matt Levine
Yeah, I don't know. I think a lot of people interpret meme stocks as themselves a phenomenon of disenchantment where people feel like they can't get ahead, and so they put a lot of money into gambles rather than investing it sensibly in index funds or whatever. And I don't know what comes after disenchantment with that. Right. Like, I think some people are like, I'm going to stop gambling and start saving responsibly. Some people were like, were disenchanted before, and now they're extra disenchanted. Right.
- [22:27]
Bloomberg Audio Studios Host
I don't know. I feel like it has sort of played out with crypto. Like, I think that so many people lost money on crypto. I'm talking about just like day traders lost money on crypto. Because this time around with bitcoin got pretty close to 70,000 sometime in the past few weeks. It just feels like Bitcoin at 70,000 this time around is a lot different than before. Like the FTX collapse, when I think that did disenchant a lot of the retail community.
- [22:54]
Matt Levine
I agree. Although. Then I want you to tell me why bitcoin is back at 70,000.
- [22:58]
Bloomberg Audio Studios Host
I. The podcast just ends.
- [23:02]
Matt Levine
No, I agree. But, like, this is my crypto skepticism coming out.
- [23:05]
Bloomberg Audio Studios Host
Like, go ahead.
- [23:06]
Matt Levine
If you got into crypto for gambling and you got disenchanted and you stopped being in crypto, that's all totally consistent, right? Because it's like, should beep this out. But it's essentially a gambling product. Right? Not all stablecoin, whatever. Right. But the stuff that you see on CoinMarketCap is essentially a gambling product. Whereas if you got into the stock market for gambling, that's a tiny fraction of why people are in the stock market, of what you can do with the stock market. It's mostly you're just like, you're investing in the growing productive capacity of the world. That's what the stock market is, companies. And you have economic growth, so the companies make more money and that accrues to their shareholders. Right. So if you get into the stock market for gambling purposes, and there's a thing you can stay for that isn't gambling purposes, with crypto, I'm not so sure that's true. There are people in crypto building good products, blah, blah, blah, blah. Right. But if you're buying the tokens, it's hard to invest in those things anyway.
- [23:59]
Bloomberg Audio Studios Host
All right, Matt's in it for the.
- [24:01]
Matt Levine
Tech, but no, I mean. Right, I agree. If you get into meme stocks and you lose all your money and you get disenchanted and you decide that investing in capitalism is bad, then that is probably bad for your net worth. The popular perception of meme stocks is they got into meme stocks because they thought investing in capitalism was bad. So the disenchantment will maybe point them in a better direction. Should cut all of this.
- [24:23]
Bloomberg Audio Studios Host
No, this is good. I will say we're talking about Robinhood's ambitions to become this one stop shop and grow up a little bit. It is, for context, good to point out that Charles Schwab, fidelity, they have 10 trillion and 14 trillion in total assets, respectively. Robinhood is clocking it at $143.6 billion in assets as of the end of the second quarter. So it's a long hill to climb.
- [24:51]
Matt Levine
It's an intriguing strategy of being the salient fun brokerage and then trying to pivot from there to being the next Schwab. Like, I don't know, it's actually like a reasonable thing to do and like, kind of cool. Yeah, I don't know. But yeah, you're right.
- [25:04]
Bloomberg Audio Studios Host
If I was a CEO and like.
- [25:05]
Matt Levine
By the way, you're like, yeah, they have a long way to go. Like, yeah, they have like 100 times upside in assets. Like, that sounds like a pretty good position to be in.
- [25:11]
Bloomberg Audio Studios Host
I wonder if it's an easier pivot to make to like be the fun investment firm and then try to become the mature one versus like, you know, much easier.
- [25:18]
Matt Levine
Can you imagine Fidelity be like, ah, we've got confetti, right?
- [25:21]
Bloomberg Audio Studios Host
Hey, fellow kids, Right?
- [25:23]
Matt Levine
Yeah, it's so much easier. It's so much easier because also like age moves in a direction, right? Like, if you, if you're like a 23 year old and you start on Robinhood and then you become like a 33 year old and you're still on Robinhood, you're like, oh, I'm going to save for retirement. Right? Whereas like, if Fidelity is like average, you know, account holder is older, like, they're not going to be like, oh, like maybe they have like a midlife crisis and get into meme stock gambling, but like, you know, it's a better move to start to hook them young and then sort of grow up alongside.
- [25:47]
Bloomberg Audio Studios Host
So true. Yeah, it's like me with Taylor Swift.
- [25:56]
GiveWell Representative
GiveWell, a nonprofit that researches and recommends giving opportunities, takes the impact of donations seriously. To ensure their recommendations withstand tough scrutiny, GiveWell had their own researchers spend months trying to identify flaws in their past work. They then publish their findings, mistakes and all, for any donors to use for their giving. It's this kind of rigor that can help your donation make a big impact on the world. GiveWell has now spent over 17 years researching charitable organizations and only directs funding to a few of the highest impact opportunities they've found. Over 125,000 donors have used GiveWell to donate more than $2 billion. Rigorous evidence suggests that these donations will save over 200,000 lives. If you've never used GiveWell to donate, you can have your donations matched up to $100 before the end of the year or as long as matching funds last. To claim your match, go to givewell.org and pick pod and specify where you heard this ad. Make sure they know that you heard about GiveWell from this podcast.
- [26:56]
Katie Greifeld
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- [27:55]
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- [29:03]
Bloomberg Audio Studios Host
ESG Naughty ESG Wisdom Tree I'm not rapping, but WisdomTree was fined $4 million for mismarketing their ESG ETFs. A selection of them in the world.
- [29:18]
Matt Levine
A lot of people are worried about greenwashing, right? Like there's this idea that people market ESG products funds or market their companies ESG or whatever, and they don't really mean it and they're doing bad stuff. They're like secretly doing coal or whatever.
- [29:32]
Bloomberg Audio Studios Host
They might have a point.
- [29:33]
Matt Levine
So one, they have a point, sure. But like two, I think most people get mad about that. Would like someone to police that according to their own beliefs about esg, right? So like, you know, people get mad at like blackrock for having ESG funds that like sometimes vote for the directors of coal companies or whatever, right? And like people like, oh, they shouldn't do that. And you know, it's like, it turns out there's no like single accepted standard for what is ESG or like what an ESG fund should do. And so different issuers of ESG funds have different opinions and they do different things. And if you have like a strict view, then you'll be mad at like ESG issuers who have less strict views. And there's like nothing you can do about it. I mean, you can like put your money in a different fund, but like the SEC is not going to say to a big ESG fund what you are doing is not esg because like the SEC doesn't have a substantive definition of what ESG is. And you can imagine that changing, but not really in the current state of American politics and SEC rulemaking. It's just going to be ESG is this sort of somewhat voluntarily defined concept. But what the SEC can do is look at every ESG firm's definition of ESG and see if they're following it. And it turns out A lot of them aren't. And the reason they're not, by the way, is these ESG ETFs, where it's fairly low expense ratio and they don't have a huge staff of people, you know, investigating everything. They, like, buy data from data vendors and like, sometimes they mess it up and then they don't do ESG things, but they don't do what they said. So WisdomTree got in trouble, had this ESG ETFs, and it described them in fairly strict terms, you know, instead of some of them, like, they don't invest in companies that have any involvement in fossil fuels or tobacco. Like, regardless of how much revenue they get from, if they have any involvement, they're screened out. And the way they did that is like they went to some data vendors and they bought lists of companies that do things right. And like, the lists were not quite right for the thing they described. So they bought lists of companies that were involved in tobacco. Lots of, like, big stores carry cigarettes. Right. And like, the cigarettes make up, you know, 1% of revenue or whatever. Like, they are on the shelves. And the data vendor would only flag a company, a retailer, if more than 10% of its revenue came from cigarettes. And so, like most retailers, that's not the case.
- [31:48]
Bloomberg Audio Studios Host
Yeah.
- [31:49]
Matt Levine
And so they weren't flagged. And so the SEC looked and WisdomTree was investing in some of these, in some retailers that like, you know, sold some cigarettes. And they said in their materials they didn't invest in companies that sold cigarettes. I was like, you did not do the thing you said you were going to do.
- [32:02]
Bloomberg Audio Studios Host
Yeah.
- [32:02]
Matt Levine
Because of, like, a data error. Right. They said we wouldn't invest in fossil fuels. And so they bought the list from the data vendor that's like listed companies in the energy sector. And then like, it turns out they're investing in, like, railroads that transported coal. So they got in trouble for that. So that's like the level of policing, of greenwashing that the SEC can do is like, if you say something and you don't do that due to, like, laziness or like buying the wrong data set, then you'll get in trouble.
- [32:31]
Bloomberg Audio Studios Host
Yeah, I do like that. The defense is probably like, well, it's just a little bit of cigarettes. You know, if I have a cigarette a month, it's not that bad.
- [32:39]
Matt Levine
Right. I mean, like, I mean, like, they didn't invest in tobacco companies, but they invested in, like, drugstores that sold cigarettes.
- [32:45]
Bloomberg Audio Studios Host
Yeah. I also think it's interesting, and this was a point raised by my colleague Vildana Hyrich, that, you know, WisdomTree was fined here $4 million, not necessarily the third party data provider.
- [32:55]
Matt Levine
Well, my impression is that the data provider actually for the most part accurately described its data sets. Something I could point out.
- [33:01]
Bloomberg Audio Studios Host
So, like the ETF description and prospectus didn't match up with the data that they were buying.
- [33:06]
Matt Levine
They weren't like buying an index. They were like, we're excluding companies that do this. And then the way they excluded companies that did that is like going to a data provider and saying, what companies do this? So it wasn't like. It wasn't like the data provider's name was on the etf.
- [33:16]
Bloomberg Audio Studios Host
Yeah.
- [33:17]
Matt Levine
That's interesting, the tobacco stuff. I'm actually, I'm not sure if they got it right. But like in general, the data provider accurately described what was going on.
- [33:23]
Bloomberg Audio Studios Host
Yeah.
- [33:23]
Matt Levine
And WisdomTree just bought the wrong data.
- [33:26]
Bloomberg Audio Studios Host
I've never smoked a cigarette. Just so everyone is clear. It is interesting. This kind of tracks with what we were talking about.
- [33:31]
Matt Levine
I swear, this podcast is basically for Katie's parents.
- [33:33]
Bloomberg Audio Studios Host
I've never smoked a cigarette, I swear to God.
- [33:36]
Matt Levine
I believe you.
- [33:37]
Bloomberg Audio Studios Host
Anyway, moving swiftly along, this is similar to what we were talking about a couple weeks ago. You were saying that the SEC won't define esg. It really is the same for all principles based investing.
- [33:49]
Matt Levine
We talked about the biblical. We were talking about wwjd, what would.
- [33:53]
Bloomberg Audio Studios Host
John do and how they were bible washing. I think about that all the time. Yes, that's a great phrase. But yeah, principles based investing, it's hard to define, but it seems easy to run afoul of doing what you said you wanted.
- [34:07]
Matt Levine
No, I mean in the general case, you can't define principles best investing because you could have any set of principles you want. It's just the SEC is going to check up on your principles. One gets the sense that the SEC as an institution sort of likes some sort of ESG principles and would like investors to invest in things that are environmentally and socially un governance minded. Right. That's why the SEC has proposed rules about climate change disclosure. Not just because it thinks the disclosure is interesting, but because it thinks investors might like to invest in greener companies and avoid browner companies. I get the sense, I could be wrong, that the SEC is less interested in biblically based investing and the SEC doesn't think that investors should try to avoid companies that contribute to like gay rights charities.
- [34:52]
Bloomberg Audio Studios Host
Right.
- [34:52]
Matt Levine
Speculation on that.
- [34:53]
Bloomberg Audio Studios Host
Yeah, one might think that speculation.
- [34:54]
Matt Levine
But the SEC doesn't get to choose. The SEC just looks at your list of principles and says, did you buy the right data set to adhere to your list of principles? And sometimes with both ESG and with biblically based investing, the answer is no. And then the SEC finds you. It's like a non substantive. It's just like going around checking the boxes. It's not interested in the substance of the things.
- [35:15]
Bloomberg Audio Studios Host
I will say it's been kind of fun to watch. There is this big demand for esg, or at least, you know, a lot of these fund companies would tell you that there was all this fantastic demand, but I think that they just wanted to launch products because now you have a lot of ESG funds that have been closing. That's the case in the U.S. well.
- [35:34]
Matt Levine
There was a lot of demand and.
- [35:35]
Bloomberg Audio Studios Host
I don't know, I think it was all black trash.
- [35:37]
Matt Levine
Backlash, backlash, backlash.
- [35:39]
Bloomberg Audio Studios Host
It was a huge backlash, backlash, backlash. Maybe there was demand backlash rhymes with blackrock somehow, I don't know. I think that a lot of fun companies launched a lot of ESG products because it was in vogue and then the demand maybe wasn't there to the way that maybe some of those fun companies thought there would be.
- [36:00]
Matt Levine
Yeah, it was in vogue among fun companies. And I think there was a sense that, like, you're getting ahead of the giant wave of demand that was coming and that wave was not quite coming.
- [36:10]
Bloomberg Audio Studios Host
Well, I have a parallel to make sure. Well, first of all, you're seeing hundreds and hundreds of ESG funds shutter now both in the US and in Europe. It's sort of similar to how all of these automakers were. Like, we are going to phase out internal combustion engines and pivot to EVs. And a lot of these legacy automakers have had to take a lot of losses because the EV demand isn't really there. And of course, when it comes to that, it's probably a combination of range anxiety. The charging infrastructure in the United States isn't quite there. EVs are more expensive for now than normal cars. But you could draw a lot of parallels to the ESG fund space.
- [36:48]
Matt Levine
I think that, like ESG investing is so interesting because part of the thesis for ESG investing is we're going to avoid fossil fuels because in the future there will be such public backlash against fossil fuels that it will be impossible for fossil fuel companies to be profitable. There'll be regulation stopping them. There'll be, you know, carbon taxes. There'll be something that makes it uneconomical to run a fossil fuel company. And to have that investing thesis, you have to have this, like, view of the future of public opinion. That's, like, really quite stark, right?
- [37:19]
Bloomberg Audio Studios Host
Yeah.
- [37:19]
Matt Levine
You see the same thing here, right? If you're an automaker and you're talking to, like, your shareholders who are investment firms that are launching a lot of ESG funds, there's this, like, widespread view of, like, the consumer demand for clean energy and, you know, avoiding fossil fuels is going to be so strong in the future that, like, you'll need to have a robust EV business or, like, you'll need to have a lot of ESG funds. And like, you know, evidence for that was kind of, it was like a little bit wishful thinking by ESG investors. And it turns out that the projections about future consumer demand were not right.
- [37:53]
Bloomberg Audio Studios Host
There's so much more to say, Matt, but I actually literally have to go get the oil on my car changed right now. It's not electric. That was a choice I made because I don't know where I would charge it.
- [38:04]
Matt Levine
There you go. And that was the Money Stuff Podcast. I'm Matt Levine.
- [38:14]
Bloomberg Audio Studios Host
And I'm Katie Greifeld.
- [38:15]
Matt Levine
You can find my work by subscribing to the Money stuff newsletter on Bloomberg.com.
- [38:19]
Bloomberg Audio Studios Host
And you can find me on Bloomberg TV every day on Open Interest between 9 to 11am Eastern.
- [38:25]
Matt Levine
We'd love to hear from you. You can send an email to moneypodloomberg.net Ask us a question and we might answer it on air.
- [38:32]
Bloomberg Audio Studios Host
You can also subscribe to our show wherever you're listening right now and leave us a review. It helps more people find the show.
- [38:38]
Matt Levine
The Money Stuff podcast is produced by Anna Mazarakis and Moses Andam. And special thanks this week to Kel Brooks.
- [38:44]
Bloomberg Audio Studios Host
Our theme music was composed by Blake.
- [38:46]
Matt Levine
Maples, Brendan Frances Newnham is our executive.
- [38:49]
Bloomberg Audio Studios Host
Producer, and Sage Bauman is Bloomberg's head of podcasts.
- [38:52]
Matt Levine
Thanks for listening to the Money Stuff Podcast. We'll be back next week with more stuff.
- [39:04]
Bloomberg Audio Studios Host
Thanks for listening to the Money Stuff Podcast. If you never want to miss a story, become a Bloomberg. Com subscriber today. Check out our special intro offer right now@bloomberg.com podcastoffer or click the link in our show notes. You'll also unlock deep reporting, data and analysis from reporters around the world.