Transcript: Dave Nadig

Transcript: Dave Nadig 1

 

 

The transcript from this week’s, MiB: Dave Nadig, Financial Futurist at VettaFi, is below.

You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, YouTube, and Bloomberg. All of our earlier podcasts on your favorite pod hosts can be found here.

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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. His name is Dave Nadig. And if this sounds like two old friends just yammering about all sorts of market esoterica, well, that’s because it is. I know Dave for a long time, and we kind of fell in love with each other’s books, music, film, and financial history when we first met 100 years ago. And so if it sounds like just two idiots talking about really interesting stuff in great detail, and me probably speaking more than I usually do during the podcast, well, that’s probably because it is. Dave is really a fascinating person, with an incredible depth of knowledge about, well, he’s probably best known as the ETF guy.

And we literally talk about during the show, I got a tag to present to the SEC, about their new single stock product. And my answer was, well, I get all my information about this from Nadig. Why don’t you speak to him? And they said, “We already do.” But he also has an incredible depth of knowledge about market structures, about what people get wrong about thinking about systems, about what we get wrong about humans, and capitalism and finance. And I find Dave to be really just an intriguing, fascinating guy, full of great humility and insights. And I think you’ll find this conversation to be really fascinating.

With no further ado, my interview with VettaFi’s Dave Nadig.

Let’s start in the 1990s when you were at Barclays, which eventually becomes BlackRock iShares. Tell us about what you did at Barclays.

DAVE NADIG, FINANCIAL FUTURIST, VETTAFI: I mean, mostly I got coffee at the beginning. In 1992, when I joined, they gave me the highfalutin title of Managing Director of Corporate Strategy. What it really meant was I was picking up little businesses nobody else wanted to pay any attention to —

RITHOLTZ: Right.

NADIG: — through all the acquisitions they were doing. So for a while, I ran Wells Fargo’s 401(k) business because they had acquired that as part of Wells Fargo Nikko Investment Advisors. When we did the Barclays acquisition, when Barclays acquired Wells Fargo Nikko, I then spent most of my time in Asia shutting down Barclays de Zoete Wedd businesses which were brokered shops in Australia, Singapore, Hong Kong, and Japan. So I went around and sort of did some rationalization. They basically sent a young kid out to get his, you know, one hand to get fire —

RITHOLTZ: Go get blood on your hands.

NADIG: Yeah. Go fire a bunch of, you know, 69-year-old Japanese salarymen.

RITHOLTZ: That had to be a crazy experience being in Australia and Japan in the ‘90s.

NADIG: It was bonkers. To be clear, I was young and incredibly stupid.

RITHOLTZ: Right.

NADIG: Now, I’m just older and slightly less stupid.

RITHOLTZ: Isn’t that a little redundant? I say this not to mock the young, but to reflect on my own youthful indiscretions and stupidity.

NADIG: Well, the story of growing your career is recognizing how little you knew every previous move you made.

RITHOLTZ: Five years or so, right?

NADIG: Yeah, exactly.

RITHOLTZ: That five-year review is like, wow, I had no idea what the hell I was doing. Now, I know, and then you find out you really don’t.

NADIG: Yeah. So I started there. I was lucky enough to be on the edges of a product which became WEBS, which became iShares. I was absolutely not somebody driving the train on that. I was the one reviewing marketing copy and doing presentations to groups of institutions about how to use the darn things.

RITHOLTZ: Who was driving the train on that?

NADIG: Oh, my gosh, there were so many. I mean, you know, success has a thousand fathers at this point.

RITHOLTZ: Right.

NADIG: I mean, so the people I was working with on the Wells Fargo Nikko side, because this was a joint project with Morgan Stanley —

RITHOLTZ: Right.

NADIG: — and other folks like that, I was working with Don Luskin, Patti Dunn, Fred Grauer who were sort of the main group. Blake Grossman was the chief investment officer there.

RITHOLTZ: Interesting.

NADIG: He stuck around it, you know, posed into BGI for the rest of his career.

RITHOLTZ: Right.

NADIG: And so that was the crew that was really doing the hard work there. And then, you know, on the Morgan Stanley side, I was working with folks like Joanne Hill, who you know at Morgan Stanley, one of the quants there. And then, of course, all the folks who were coming in from the Amex like Nate Most. I mean, it was pretty big group of folks —

RITHOLTZ: You left out Jim. Was he there at State Street —

NADIG: Yeah, Jim Ross was at State Street a little bit after that. But that was, you know, when the SPDR build out. This was very much counter to SPY having been launched.

RITHOLTZ: Oh, really?

NADIG: We were the other side of the fence from that.

RITHOLTZ: Wow.

NADIG: Even though Amex was the key, you know, Amex was the glue holding it together because they’ve figured out how to do creation and redemption, and how to handle book.

RITHOLTZ: So let me fast-forward a couple of years, you end up at ETF.com, which clearly at least at that time was a dominant force in the ETF space, when a lot of the world of finance looked at ETFs a little askance, a little skeptically.

NADIG: Yeah. And that was really Jim Wiandt, he started something called IndexUniverse with Steven Schoenfeld, somebody else you know in the industry, who’s now working for, I believe, MarketVector Indexes. And you know, they had this vision of understanding that ETFs, which at that point, were still largely institutional vehicles, early 2000s, right? I mean, there were some advisor pickup, but you had to be kind of on the front edge of finance, or a quant, or running your own models, which in 2003, was not that common.

They had the vision there that, oh, no, this is where all of wealth management is going to head, and built a business which eventually through, you know, acquiring the right names and URLs became ETF.com. And then, you know, we, myself, Matt Hogan, Jim Wiandt, a bunch of other folks built that business up into, you know, a pretty respective chunky business that had a big conference and a huge data. I was focused almost exclusively on the data side. And then we broke that into pieces, so I ended up —

RITHOLTZ: That was sold, though. Wasn’t it broken? So when you say broke into pieces, acquires —

NADIG: In a positive way.

RITHOLTZ: Yeah. That wasn’t like —

NADIG: Yeah. You know like the pieces ended up being worth more than the part — the whole.

RITHOLTZ: Right, as a whole, which is not uncommon.

NADIG: Not uncommon at all, especially when you’re bolting together businesses that do, in fact, have silos themselves. So the data business was a natural fit for FactSet, which needed U.S. ETF data. So Elisabeth Kashner —

RITHOLTZ: And FactSet is a big, big operator in that space.

NADIG: And now, we relicensed the data that I helped build over VettaFi, right. I mean, they are now I still think the go-to source for primary ETF data. So that business continues to run over there. And now, here I am at VettaFi, doing largely a lot of the same work, also pushing a big conference that we’re excited about, ExchangeF in Miami, in Florida.

RITHOLTZ: We’re going to talk about VettaFi. We’re going to talk about Exchange, which is one of my favorite events every year. It’s always a blast. When you were running the conference beforehand —

NADIG: The old conference. Yeah.

RITHOLTZ: — this was at the Diplomat Hotel in Hollywood, Florida. It was always late January, early February, which occasionally would interfere with my vacation schedules.

NADIG: I’m so sorry.

RITHOLTZ: But, you know, to get out of New York in February and spend time with 3,000 people and just absolutely A-list speakers, you know, Derek Jeter. And I remember Joe Montana, like the sports figures were always fascinating, but so do were the finance figures, people that were very much rock stars in that space.

NADIG: Yeah. And that was an interesting time. I think the 10-years pre-pandemic, so between GFC and pandemic, whatever you’re going to call that window, it’s not a lost decade. It was a great decade. But in that window, I mean, you were on it too. The conference circuit was elite.

RITHOLTZ: Yeah, Absolutely.

NADIG: There was a really interesting finance relevant event every other week, at least, all year long.

RITHOLTZ: Well, keep in mind what was going on back then. So first, you had the rise of ETFs. You had a radical expansion of passive. My theory is post great financial crisis, mom and pop said, “You know, we’re done playing this game.”

NADIG: Yeah.

RITHOLTZ: We’re just going to put our money. Let Mr. Market do his thing and we’ll find out how we did when we get ready to retire. But you had that, you had ETFs. You have the rise of passive. But you also had this incredible, I’m reluctant to call it PTSD, but following the financial crisis, there was this pervasive negativity that lasted years and years and years, and to run around and say, “Hey, markets are positive here. You need to be more constructive because Dow 57% is a fantastic reset.” That was kind of a lonely voice for a few years. I think that’s a big part of why you had the hard metals people doing a lot of stuff. You had the rise of crypto. I mean, think about that —

NADIG: But it’s a crypto. Crypto is where that enthusiasm went. Everybody who is finance-adjacent, tech positive, growth-oriented, all went into crypto, in that window, in that sort of GFC, the pandemic window.

RITHOLTZ: That makes a whole lot of sense. So there’s a lot of other things I want to get to with you. But before we do, there’s a quote of yours that I think is a great leaping-off point for more discussion, “Finance is a problem that has been solved.” Explain.

NADIG: Yeah. So you know, when we think about finance, particularly when we think about investing, which is what we spend most of our time talking about, right? How to take your wealth and turn it into more wealth through all of these tools out there from, you know, IPOs to derivatives? How those pieces fit together is no longer a mystery. I mean, that’s really the core of it.

The academic side of how to build a portfolio, we can argue about the details, right? And certainly, we could have a whole conversation about, you know, okay, well, this combination of interest rates and inflation and expected returns on equities is different, and so maybe we need to adjust. But the tools to do that are largely baked. Anybody who has the curiosity and the basic intellectual capacity to learn about the markets can become a fairly sophisticated investor. So if you’re an advisor, and I spend most of my time talking to the wealth management institutional business, if you’re an advisor, you should not be spending a lot of your time trying to add alpha through understanding investing better than the rest of the market. That is a mug’s game, right?

So don’t try to solve that problem. It’s largely solved. You can go get some turnkey asset management program. As an advisor, you could get somebody’s model portfolio, or you could hire some, you know, three CFAs and do it yourself. But it shouldn’t be your primary focus. Your primary focus should be solving the much harder problem, which is actually working with human beings, right? The advice part of being a financial adviser is the hard part. That’s the part where you should earn the money.

We’re kind of upside down in how we compensate and how we think about markets, right? Some advisor that’s out there can say, “I have generally 1% alpha for the last three years in my model portfolio.” Everybody is going to talk about that. But when you talk to that same advisor, and they say, “Yeah, you know, they’re these five families I’ve worked with for 10 years. And because I’ve worked with them, generations of wealth are going to be preserved and these philanthropical exercises are going to be put forth. Like, that’s the real success story. I don’t need to tell you that. That’s your business, right? That’s the real success story, and that’s much harder than investing.

RITHOLTZ: Really, really, quite, quite an interesting. You have to explain to me the name of this firm. I’ve given you grief about this. What is that VettaFi?

NADIG: All right. So, well, the shortest answer about how to think about VettaFi is we’re Morningstar without a ratings business, right?

RITHOLTZ: Okay. Sort of like a financial think tank?

NADIG: Yeah. We’re in the business of sitting in between asset owners, financial advisors, institutions, retail and asset managers, right, the BlackRock, State Street, PIMCO’s of the world, and helping them understand each other. What I spend most of my time doing is helping advisor to understand the thousands of crazy ideas the asset management comes up with every year. And then I work with the asset management community to help them understand the hundreds of thousands of financial advisors and institutions who may or may not be interested in any of those products, whatsoever.

And so what that entails is a lot of good data, understanding what both sides want of each other, and understand that it means having to understand markets. Because if you’re going to understand the asset management industry, you need to understand, well, why are managed futures part of the conversation here today, but not six months ago? And it means spending a lot of time talking to individual advisors and investors who are out there trying to do the real work.

So that’s where VettaFi sits. The company like the meat and the bones underneath it, brands folks know ETF trends, ETF database. We recently merged with Advisor Perspectives, which is the largest advisor newsletter in the country. So we’ve sort of cornered the market on this dialogue between asset managers and financial advisors. And it goes both ways. We also do a lot of polling with financial advisors. We meet them at conferences. We do surveys of them. We track their behavior as they’re doing research using our data and analytics tools. And that lets us really get an interesting picture of, hey, what are advisors thinking this week?

Well, we can kind of tell you because we know what they’re researching. We know how they answered poll questions last week. We know how they answered a survey two weeks again. And then we write about that. We produced 50 odd pieces of content today.

RITHOLTZ: So here’s the question. Are your clients, the advisors, or are your clients, the institutional asset managers or both?

NADIG: Both is the real answer. I think the way to think about this is we’re a business-to-business organization in terms of if you’re going to look at the revenue lines, but with B2C responsibilities, right? We take our relationship with the financial advisor very, very seriously. In my position, that’s really almost exclusively what I focus on.

RITHOLTZ: All right. And this leads me to a question that I never in a million years thought I would get to ask on the show, but what the hell is a financial futurist? Your title is a financial futurist.

NADIG: Yeah.

RITHOLTZ: Who came up with that? What are the responsibilities? What does a financial futurist do? Like, I expect you to be in a one of little storefronts with the red light. And people go in, “Tell me my financial future.”

NADIG: And they hand you a card —

RITHOLTZ: Right.

NADIG: — through the glass.

RITHOLTZ: Right, exactly.

NADIG: The Madam Zola with the —

RITHOLTZ: Exactly.

NADIG: — and the whole nine yards like big.

RITHOLTZ: Zoltar.

NADIG: Zoltar. Thank you. Yeah.

RITHOLTZ: Right. I know my bet.

NADIG: And I think it’s actually a dude in the movie. But anyway —

RITHOLTZ: Yeah, it is.

NADIG: — neither here nor there. So look, about a year ago, I had a conversation with the senior management of a company as we were putting VettaFi together, right? And one of the things we use as a hook when we talk about the companies, we’re trying to turn it from an industry to a community. What we mean by that is that we focus in finance a lot on rules, regulations, process, operations. None of which matter at all. And we’ve often just ignore the fact that they’re human beings at the end of this equation. Now, that’s changed because of a lot of what’s gone in behavioral finance, and I think that’s great. I don’t think if it goes nearly far enough.

I think human-centered organizations are always going to win. So we really tried to skew the organization towards that. So with that context, I said, here’s a bunch of stuff I want to write about, which is the stuff we’ve been talking about, being how the how the markets work, how people fit into them. And I literally just started putting adjectives and nouns on piece of paper, trying to figure out like how do I describe the work that I think I should be doing, and that hopefully, people find at least entertaining, if not valuable? And a little from column A, a little column B, you know, I’ve spent most of my career writing and thinking about finance.

Most of what I’ve done has been taking an understanding of the status quo, which is very brief, because tomorrow it’s gone.

RITHOLTZ: Right.

NADIG: And trying to help people understand what that means for next week, and the next year, and the next decade, to position products underneath it, like ETFs in 1992, or model portfolios in 2000, or direct indexing in 2010. Right,? Really trying to focus on that. Now, it would be tokenized asset management. It’s like, you can see these things if you’re paying attention. But it’s super easy to get really excited and spend lots of money chasing them. Having some context is important.

RITHOLTZ: So you mentioned direct indexing. Let’s go there because I always disliked the broad context of direct indexing as how it was done previously. I couldn’t stand the 50 pages of stock holdings every month or every quarter. But I give you credit for the person who kind of turned me around on that. I don’t want to say it was 10 years ago, but it was probably like five years ago, maybe a little longer, that you pointed out there are a lot of things you can do with direct indexing in terms of, and you were way ahead of the software.

You had talked about things before it was available, that you could tilt towards a variety of ESG things. Hey, show me companies where the board has at least two women on it, or you could tilt towards value, or you could tilt towards small cap, or you can use it for tax loss harvesting or philanthropy. And you kind of opened my eyes up. Full disclosure, we work with O’Shaughnessy’s Canvas, which was recently purchased by Franklin Templeton. And we’re the largest client to that, about a billion or $3 billion is in that. But I give you credit because if you hadn’t opened my eyes to the advantages of what you can do with that, we might not have stepped as aggressively into it as we did. I was primed and receptive to see the things that were possible. So full credit to you. Now tell us about what is tokenized financial investment?

NADIG: Well, so you know, if you think about right now, I have a million dollars, I want to put the work. I wish I have $100,000 I want to put to work. I have lots of different ways I can get that number to go up. And ultimately, let’s be honest, that’s what you care about as an individual investor. I have $100,000, I would like to have $110,000, how do I get there? And right now we throw it into the stock market and we effectively use a tokenized system, right? I mean, nobody really carry shares around anymore. You got a ledger entry of Seton company down on Water Street, right?

Like, it’s all just this fiction that we’ve created to keep track of notional ownership. And then we built this enormous infrastructure around it. So now we have payment for order flow in 17 market centers. And you know, Reg NMS got judging what has to get broadcast to who, when. We made all this up. I think it’s really important to remember that this is fiction. We just created this system out of whole cloth. You can trace why, and there’s lots of reasons. But you could invent another one.

Inventing another one is what crypto has done. If you’re in Europe right now, for instance, and you open up an account it Ftx.De, which is you know FTX is European business in Germany. You can trade Tesla, but not as a stock. You can trade what is effectively a fungible token, right, a unit of Tesla. You and I can trade that in the FTX closed ecosystem all day long, with no trading costs, no settlement, no slippage, no nothing. It’s a bearer instrument. It’s like me handing you a pencil. You just now have the pencil, and I don’t. And the legal claim is the fact that you’ve got it and I don’t.

That’s scary for all sorts of reasons. But it’s also incredibly powerful because if you imagine that world where instead of it being this closed ecosystem in Germany, it’s just sort of how global markets work. All of the sudden, almost any beta, any risk, any ownership stake that you want, as long as you can get two people to agree on what the tokens mean, and how they unwind to unlock some sort of underlying value, we can do all sorts of crazy stuff through the crypto rails that we could never have done before.

You want to put together a portfolio? Great. Here’s a smart contract. It owns these 15 other tokens that happen to be stocks. That can be managed in real time by the contract itself. Creation redemption literally just becomes buying the thing,

RITHOLTZ: Meaning creation redemption of ETFs, where you’re assembling all the individual holdings within in.

NADIG: Right. You can create an ETF on the blockchain. People have already done this. This is not new. There’s a thing called the set protocol call. You can create a portfolio with a set of rules. And you can even put in a fee of how much you want to get paid because you came up with this smart contract. And there’s hundreds of thousands of these things out there already. So the rails for doing it, the smarts, people talking about a theory in being the world’s computer, right? There’s real truth to that. There’s work being done by a computer there to keep track of ledger entries and to move those ledger entries around, which is the entire stock market. It’s moving ledger entries around.

RITHOLTZ: So we’re recording this on the same day that Matt Levine’s BusinessWeek —

NADIG: (Inaudible)

RITHOLTZ: Right. Dropped like this is the second time in BusinessWeek’s history where one writer has written the entire —

NADIG: A book. Yeah.

RITHOLTZ: — issue, right? It’s like 50,000 words. And it begins by saying everything in the world these days that reflects ownership is a database.

NADIG: Is a database.

RITHOLTZ: You remind me of that in what you were talking about at FTX, which really raises the question, if everything is a database and the blockchain is a public and verifiable, transparent database, the pushback to crypto continues to be, hey, it’s been around for 15 years. How come it isn’t doing anything yet substantially? Why is it still so experimental and so small? And I honestly don’t know how to answer that question.

NADIG: It’s regulatory. That’s literally the one-word answer is it’s regulators.

RITHOLTZ: That’s the thing that is keeping the entirety of normal markets from collapsing and being replaced by free crypto software is the rules that won’t let that happen. And they’re rules that are there for a very good reason, right? I mean, we have a lot of securities laws in this country, not because we’re obsessed with lawmaking, but because some bad stuff happened and we fixed it by making rules about it. Right? You know, going back to the ‘20s, actually going back to the 1400s, we have rules about how we engage in these transactions and the rule of law is a big deal.

How that interacts with this sort of bearer bond instrument world, where literally ownership as the entirety of the law is unknown territory, right? We have to rewrite how we think about intellectual property, how we think about property rights themselves, how we think about ownership and escrow.

RITHOLTZ: And security is a huge one.

NADIG: And security is a huge one, knowing your customer is a big one, anti-money laundering. Those are real issues. I don’t want to pretend that those aren’t real issues, and they’re going to take years to solve. This is not something we’re not going to flip a switch tomorrow. But what I fear is going to happen is because the block is now regulatory, we’re going to end up in the world’s biggest regulatory arbitrage race. And we’ve already seen this, their jurisdictions where you can kind of get away with doing anything in crypto, and hey, I’m sorry if you lost a million dollars. Call Interpol, maybe they’ll figure it out for you, right?

RITHOLTZ: Right.

NADIG: And then there’s jurisdictions like the United States, which are quite locked down. The problem is that if I’m right, if the world does move more quickly towards this, and you start seeing capital follow it more than it even has already, you end up with these weird haves and have-nots world where the United States actually ends up on the sort of bud end of innovation, and plays catch up for the next 20 years. And another financial center will emerge, where the IPOs are happening, where private equity is really congealing, where interesting M&A activity is happening in any company in New York. I’d like to push against that. I’m kind of a fan of the United States. I wouldn’t mind us leading here.

RITHOLTZ: I think you live here also.

NADIG: I believe I do. Yeah.

RITHOLTZ: So you would like to see leadership from the U.S. and it’s just there —

NADIG: They’re hopping on.

RITHOLTZ: There’s seems to be no interest in a crypto ETF. What’s that about?

NADIG: Well, yes.

RITHOLTZ: It’s just Gary Gensler? Is that more institutional?

NADIG: So the Bitcoin ETF debate, right, and Grayscale is now suing the SEC, always a great move, suing your regulators. That always works out great.

RITHOLTZ: They love to be sued.

NADIG: They love to do that.

RITHOLTZ: They love it.

NADIG: So they just say yes after you sue them here nor there. Yeah. So people have been trying to put Bitcoin in ETF wrapper, frankly, since Bitcoin was invented. And the problem is it you have to define what Bitcoin is, because there’s certain things you can put into a mutual fund or ETF wrapper and certain things you can’t, right? You can’t put a steak dinner in an ETF wrapper. There are rules about it. And nobody has been able to agree yet whether or not Bitcoin belongs in those wrappers. So we’ve ended up with these weird edge cases where the futures-based products get approved, but the species finished product —

RITHOLTZ: Right.

NADIG: — I mean, the species products can’t be. And it’s an absolute mess. It’s the frontend of the problem we’re talking about, where crypto regulation is actually the largest problem in this space.

RITHOLTZ: So let me push back a bit because I became dramatically enamored of an idea of smart contracts and using them. Let me preface this by saying I’m not a big fan of Ticketmaster and Live Nation, which is now a monopoly. There are some just ridiculous fees. And the whole thing is just an egregious affront to free market capitalism. Hold that aside. But the idea behind smart tickets that if Taylor Swift says, “I’m going to put all of my concert seats on a blockchain, and so therefore, I’m going to offer the first round to my hardcore fans who have been newsletter subscribers for years. And the next I’m going to give to my junior fans. And then the last one, I’ll open to the public. And by the way, built into this is if you decide to sell it at a markup, I get half of that markup. But in no case is going to be higher than X.”

You know, you basically demolish the entire StubHub, SeatGeek, absolutely egregious. How do we use bots? You know, if they were just reselling tickets, it’s one thing. But they seem to have gained the system so —

NADIG: Oh, yes. They buy all the tickets. Yeah.

RITHOLTZ: They buy the tickets first. And you know, there’s a reason why artists offer their tickets at affordable prices, to their fans, and these rentiers in the middle are abusive. So all this comes back to if the technology exists for that, why haven’t we seen a major artist? Who was it? Was a Pearl Jam tried to buy —

NADIG: They tried to, yes, get out of Ticketmaster. Yeah.

RITHOLTZ: Way back when? Nobody seems to be able to come up with a way to do this.

NADIG: So the reason is because, you know, when we look at how the corporate economy works, there are investments that you have to make. Like, the Ticketmaster one is a great example because the technology to do that is trivial. We could stand up on three of the computers here in this control room right now.

RITHOLTZ: Right.

NADIG: That’s the easy part. The hard part is it’s Madison Square Garden, Friday night. It’s 7 o’clock and you have 25,000 people you have to get through the gate in the next hour, to get to the Taylor Swift concert that’s about to go live. That infrastructure, having 45 guys standing there with the scanners, going through the network, confirming your ownership, but this ticket has already been used once, it hasn’t been used twice. That infrastructure —

RITHOLTZ: But you use that right now. I saw Hadestown and they don’t even scan the ticket. You put your phone on the device.

NADIG: And it goes big. Yeah.

RITHOLTZ: Right. You’re not even looking at QR code.

NADIG: All of that is a whole bunch of trust infrastructure —

RITHOLTZ: Right.

NADIG: — that says the digital signature coming off Barry Ritholtz’s wallet is the thing that says they can go see Hadestown. Right. That infrastructure is actually the hard part because implied in that is a whole lot of rule of law stuff. Like, wait a minute, Barry and I show up at the same time with the same ticket. How do we determine which one of us is the one that actually got to go in? How do we determine which one of us owns it? What’s the recourse if you stole it from me?

RITHOLTZ: In other words, if someone took a scan of that QR code, that’s the problem with the code.

NADIG: So enforcement and the last mile of all of these things, right? This is the part that I always sort of come back to.

RITHOLTZ: Was it blockchain who solved that? I’ve been told over and over again, “Oh, Bitcoin fixes that.”

NADIG: Bitcoin solves everything, except it’s not molecular, right?

RITHOLTZ: Right.

NADIG: It’s still digital. At the end of the day, most of the things we actually give a, “You know, what about” are molecular. We want the coffee cup. We want to go to the space to see the event.

RITHOLTZ: Right.

NADIG: The sound waves propagate through the air from another human being on stage. At the end of the day, you’ve got to have that interface between the virtual and the real. Otherwise, none of this matters at all. And it’s precisely that boundary that is the problem right now.

RITHOLTZ: So let’s talk a little bit about a conference I have participated in ETF Exchange over the years. VettaFi just purchased this from Advisor Circle. I’m an investor and Advisor Circle. So —

NADIG: I don’t know any of that.

RITHOLTZ: Right. So for disclosure, we’re talking about something that I kind of have an interest in or used to have an interest in. But I’m still a participant in the event.

NADIG: Well, we’ll see what they’ll get you in.

RITHOLTZ: Right. That’s right. Listen, I always feel like more disclosure is better than less disclosure.

NADIG: Fair enough.

RITHOLTZ: So I’ll let the lawyers sort that part, but —

NADIG: The part I pay attention to is the content.

RITHOLTZ: So let’s talk a little bit about ETF Exchange. This has always been just a massive event, you mentioned earlier, in the heyday of financial conferences. This, I think, was one of the biggest events I went to each year.

NADIG: Yeah. We probably need to point out that like this is, in some ways, the spiritual successor to the old Inside ETFs event. That event is still going on and I don’t want to pretend that it doesn’t exist. It is now owned by a big conference company named Informa and they still put on those events. WealthStack was an event that you all used to do with them. That’s now part of that event.

RITHOLTZ: Right. Again, more disclosure, so Informa ran —

NADIG: Wealth Stack, Inside ETFs. Yeah.

RITHOLTZ: Right. We were partners with them for Wealth Stack, which ran one year. We were ready to do the next one when the pandemic hit. That’s the only reason that we didn’t do it at all.

NADIG: And then everything got juggled.

RITHOLTZ: And then after everything reopened, their staff had left. There was a whole craziness, the whole world sort of reset. And so we worked with Advisor Circle and Future Proof, not with Informa because they were in Europe, and they were a little skittish when the U.S. was reopening. But for all that nonsense aside, tell us a little bit about why have an ETF conference, you know, has an ETF settled area? Tell us a little bit about this event.

NADIG: Well, no, because ETFs are where everything interesting in the world is still happening. And I think that’s part of the reason I’m still in the ETF business, although I don’t have it in my title anymore, is that regardless of what you’re trying to get done with that $100,000 you’re trying to make go up. ETFs are probably the right answer under the hood in terms of the structure. So whether you’re trying to get managed futures from an active manager or, you know, two months Treasuries, T bills, like the whole spectrum is now available in lose to 3,000 ETFs we are trading here in the U.S. It’s like the mutual fund business back in the 80s.

RITHOLTZ: So you have more ETFs than there are stocks, just about.

NADIG: Getting close.

RITHOLTZ: Was it like 3,500 stocks to 5,000?

NADIG: Yeah. Well, in the world, it’s like 30,000 actual tickers out there in the world.

RITHOLTZ: Right.

NADIG: But the point is there are more ETFs than you could ever possibly use in one portfolio.

RITHOLTZ: Right.

NADIG: Most people probably only need a handful to accomplish whatever objectives they’re going to do. But the reason why we have an event around it is because so much of the interesting innovation in finance happens through that structure. because the ETF structure lends itself naturally to this sort of movement of risk from bucket to bucket in a very retail-friendly package, it’s sort of like the best thing we’ve come up with. And so people ask like, “Well, why our train has a certain width?” Well, because history just sort of got us to this configuration, where now everything runs that way, and nobody is going to invent a new gauge of train track.

RITHOLTZ: Right.

NADIG: This ditch of the rails that we have at the moment, and probably for the rest of my career, the ETF still looks like the most efficient set of rails anybody has figured out how to put down. So why have a conference about it? Well, largely, because we want to get those interesting conversations going. My perspective on Exchange is I’m there to have interesting conversations. And when I’m talking to a bunch of financial advisors and a bunch of finance investment management types, that tends to be the most interesting conversation because you get the real human use in the room, and you get the real human smarts in the room. And that’s when the magic happens.

So whether it’s getting a bunch of folks on stage to have a really interesting conversation about, you know, geopolitical concerns in Ukraine, or whether it’s just being able to have a small breakfast with four or five advisors and some academic, where we talk about behavioral finance, those are the interesting conversations. So Exchange is really all about creating that sense of community between groups of folks. And some of that is content that’s on the stage, and a lot of it isn’t. We learned that I think at Future Proof. This is a community event.

RITHOLTZ: Yeah.

NADIG: This is about people getting together and exchanging ideas. And I think that’s a lesson we’ve learned from the pandemic, not just from that conference. People want to get together and talk.

RITHOLTZ: You know, it’s funny because financial conferences, and maybe conferences in general, everything is based on an academic model, and people took the big lecture halls out as their frame of reference. Hey, a bunch people on stage talking to a bunch of people in the audience taking notes. But the most interesting part of college wasn’t necessarily the big lecture halls, it was the class lets out and you start to talk to people about, “Hey, could you explain this? I don’t understand what’s going on here.” And then the subsequent conversations, that’s the really exciting driver, not, you know, the panel of people telling you, “Here’s why interest rate is going to go up or down.”

NADIG: Yeah.

RITHOLTZ: “And what’s wrong with inflation today?” So based on that, let’s dive a little bit into some of the innovations in finance and ETFs you referenced. Let’s start with active ETFs. They were looked at kind of skeptically a few years ago. Hey, ETFs are all about low cost passive indexing. Why do I want an active ETF?

NADIG: Well, the short answer is because if you’re an active manager, it’s the only way you’re going to get any customers.

RITHOLTZ: Right.

NADIG: There’s just a bit of reality in that. I mean, at this point, we’re still something like 10%, 12% of the flows. The assets are inactive. It’s still a fairly small number.

RITHOLTZ: How much of that is just ARKK and Cathie Woods versus everybody else?

NADIG: A decent chunk. But remember, a lot of the fixed income complex is actively managed, right?

RITHOLTZ: Right.

NADIG: Most of the products —

RITHOLTZ: I want to say most or the vast majority of it.

NADIG: Well, I mean, there’s like TLT, with the big Treasury funds, LQD and HYG. And those are sort of big betas in fixed income, and that’s where the biggest funds are. But if you get below that tier, you know, all the PIMCO funds, anything sort of interesting that’d be done at the short end. Even like a lot of the short Treasury stuff is technically actively managed because it moves so fast, you couldn’t possibly want to trade that in an index.

RITHOLTZ: Right. And the academics have demonstrated that active actually creates worthwhile returns in bonds, where it’s certainly —

NADIG: At least, the evidence is a little stronger.

RITHOLTZ: Right. A lot stronger versus equities, where there’s really no argument left.

NADIG: Yeah. So this is one of those things where my personal belief system tends to, I have to check that at the door. The reality of the market right now is active management is a thing in the ETF space. While it is still a fairly small part of flows, call it between 10% and 20% in a given period, it’s an enormous part of revenue, because most of these funds charge more.

RITHOLTZ: Right. They’re not charging 5 BPS. They’re charging 75 BPS.

NADIG: Exactly. So you know, they may only be 10% of the assets, but they’re more like 30% of the revenue.

RITHOLTZ: Really? That’s an amazing —

NADIG: Active managers are a big deal in the ETF space now. And I would also point out a lot of the ones that had been successful and are continuing to gain assets, whether or not they’re putting up alpha or not, I think is always a tricky question. It seems like an easy one, but there’s a lot of missed benchmarking that goes on.

RITHOLTZ: Yeah, that’s a great cheat. We’re going to make a benchmark much easier.

NADIG: And in fixed income, this is really an issue because a lot of people just default to benching against the Agg —

RITHOLTZ: Right.

NADIG: — when they have no intention of ever owning that.

RITHOLTZ: The Bloomberg Barclays Aggregate Bond Index.

NADIG: Yeah. And you know, most people who are an active bond manager, like, they’re focused on credit, right? They’re focused on a niche. Oh, I am working on securitized stuff, whatever. They’re are not trying to eke out 50 basis points.

RITHOLTZ: Beat the 10-year. Right.

NADIG: Right. They’re not even owning the long Treasuries or any of that stuff. So the apples to apples thing is a real issue. Putting that to the side, if you look at what Cathie Woods done at the ARKK team, right, their performance —

RITHOLTZ: Really interesting.

NADIG: Their performance has been awful, and their flows have been solid, meaning money is not leaving when that happens.

RITHOLTZ: Let me annotate that slightly. Since 2020, their performance has been awful.

NADIG: Yeah. So —

RITHOLTZ: Like, leading up to —

NADIG: Oh, blow the doors off.

RITHOLTZ: In 2020, no one even came in second. They were —

NADIG: They blew the doors off. Yeah.

RITHOLTZ: I think she was plus 160% in 2020, when the market from the lows, the market was up 68%. And I think was up 18% for the year. Just astonishing of —

RITHOLTZ: Just pattern.

NADIG: — sort of high innovation growth managers. We’ve seen this several times, not just in the dot-com era, though. We have plenty of it then.

RITHOLTZ: Oh, no, it repeats all the time.

NADIG: You look over a long cycle and it’s, like, well, they kind of did what the S&P 500 did over 10 years. But, boy, it’s going to go up like —

RITHOLTZ: But more expensive. Right.

NADIG: And with crazy up and down along.

RITHOLTZ: Right.

NADIG: But if you look at that, they managed to hang on to investors. You look at things like Andrew Beer’s DBMF which is the —

RITHOLTZ: Really interesting. The hedge fund.

NADIG: — holding a $1 billion this year.

RITHOLTZ: Really?

NADIG: Yeah.

RITHOLTZ: Good for him.

NADIG: It’s up 30%. I mean, that’s why.

RITHOLTZ: Wow.

NADIG: But I also think it’s a solid strategy. You know, it’s effectively a quant model. It’s duplicating. that sort of CTA style of management has done very well. There are a lot of little pockets like that, where you can say, oh, here’s an active manager who’s providing an interesting beta that other people aren’t really getting access to.

RITHOLTZ: Right.

NADIG: And they’re doing it in a more useful and interesting way, that there’s also some story behind do you understand why you’re doing it now, you understand what it means when rates go up another 75 BPS. That I think has become pretty important. So as much as I’m personally still a pretty strong skeptic of active management, I mean, I understand the math, and the odds are not in your favor.

RITHOLTZ: Right.

NADIG: As an active manager, you have to be doing something both incredibly disciplined and incredibly well, to have any success there. I think we’re now in a market where we’ll be able to pick those people out. Now whether they’re coin flippers who just happened to looked at hedge 20 times in a row or not, history will judge. But there’s demand from advisors. There’s demand from institutions. There’s definitely demand from retail and there’s plenty of supply in the asset management business side.

RITHOLTZ: So first of all, Andrew, (inaudible) was a previous guest. I find him to be really fascinating guy. If I recall correctly, he started doing hedge fund replications in an ETF.

NADIG: Yeah.

RITHOLTZ: I don’t know how well those have done. But it wouldn’t surprise me that managed futures replication, given how much commodities have run up and run down, if you’re doing a trend following model, which a lot of the managed features do and I’m assuming he found a way to create, that could be a giant winner.

NADIG: Yeah. And it has been, right? So that is a little bit of a lightning in a bottle, right place, right time. I mean, that fund was around a year or two before people paid any attention.

RITHOLTZ: How did the hedge fund replication work out?

NADIG: So most of the hedge fund replication products have not done particularly well. IndexIQ launched a bunch of those about a decade ago.

RITHOLTZ: They’re pricey to execute. I mean, just the costs, but they’re pricey to run.

NADIG: But there’s also a mismatch. And anytime somebody says, “I’m going to replicate this unobtainable pattern of returns with this obtainable pattern of returns, because I can watch in the mirror and see what they’re doing, and then replicate it over here.” I read all those academic papers, I understand where the math comes from. I’m very skeptical about them, not because I think people get the math wrong, because I think the world changes.

RITHOLTZ: The lag is dead. You and I have talked about this before.

NADIG: The world changes constantly, right?

RITHOLTZ: In fact, you and I had a conversation that when you perceive the world, you’re already perceiving it on a lag because of how long it takes for like —

NADIG: Yeah. I mean, like, my financial future as model starts with the premise that our understanding of how humans work is wrong to start with. So just the nature of human existence, we’ve all got wrong. So therefore, any certainty you apply to anything else in the universe, you’ve got to put with a huge grain of salt.

RITHOLTZ: We’re going to talk more about that in a bit. I want to stick with ETF before we —

NADIG: Okay. Sorry.

RITHOLTZ: No, no, I brought it up because it’s so fascinating. So we haven’t talked about the thematic ETS, biblical, partisan, our friend Perth Tolle’s Economic Freedom.

NADIG: FRDM. Yeah.

RITHOLTZ: And then there’s another one that does emerging markets.

NADIG: DMCY does emerging and development markets.

RITHOLTZ: I think that’s the one.

NADIG: Right. And that’s got sort of a broader methodology. Perth Tolle’s FRDM is just emerging markets ex-China which —

RITHOLTZ: Ex-China and Russia.

NADIG: People use it as ex-China. It’s not just ex-China.

RITHOLTZ: Right.

NADIG: It’s ex-dictator.

RITHOLTZ: Right. Which has worked out. Another one —

NADIG: Phenomenal. Right.

RITHOLTZ: Another example of an idea that right time, right place this year has been another big —

NADIG: Yeah. But we both know she spent, you know, 5 to 10 years in the trenches —

RITHOLTZ: Right.

NADIG: — getting to the point for the overnight success.

RITHOLTZ: That’s right.

NADIG: That’s how that always work.

RITHOLTZ: It always takes 10 years to be an overnight success.

NADIG: So the thematic stuff, definitely interesting. I think mostly driven by advisors need to have stories to talk to their clients about. That’s not pejorative. I think that’s a real thing.

RITHOLTZ: Well, some of the stories, though, and my pushback on the thematics are, all right, I can understand the concept behind what happens if we invest in emerging markets, but leave out the worst players like Russia and China? That has worked out well this year. The ones where I only want to invest in Republican or Democratic companies, or I want to do the sort of biblical-based investing, they seemed to be more emotional and history has told us emotions are the enemy of good investing.

NADIG: Yeah. I’m not a super fan of most of that stuff. I do think that there’s a place for thinking about stewardship. And part of my longer thesis on how the world works, corporate ownership, who controls what companies do is probably a lot more important than who’s elected in office.

RITHOLTZ: We’ll talk a bit about ESG in the next segment, but —

NADIG: But that’s not all that is.

RITHOLTZ: Right.

NADIG: All that anti-woke investing stuff, that’s applying these sorts of emotional labels about the world to our investments. And I’m with you, I don’t think that that makes a ton of sense. I think there’s some threads there around voting that makes some sense.

RITHOLTZ: Right.

NADIG: But most of that stuff, I don’t like how it’s sold more than I don’t like how it’s built. Where I think things get a little tricky is what I call headline funds, you know, electric cars, future food, work from home, valid approaches, but they’re really so targeted towards, well, is there going to be a big headline, like work from home, pandemic, go, right? They’re really just headline bait. And I think those are interesting speculative plays for folks that do that for a living, but I don’t think they really belong in people’s long-term portfolio.

RITHOLTZ: I don’t recall a whole lot of work from home ETFs in 2019. Was that a thing?

NADIG: Yeah. That’s sort of my point. Yeah.

RITHOLTZ: Or is it now already coming on? So last ETF question, why on earth does anyone need a single stock ETF?

NADIG: So we’ve got a raft of these things that have come out. The SEC, I think, is going to clamp way down on them. The short answer is they don’t. The use case for a single stock ETF —

RITHOLTZ: Leverage.

NADIG: — is either it’s an access to leverage that you couldn’t get otherwise.

RITHOLTZ: 2 to 1 plus 2 to 1 is 4 to 1.

NADIG: Right. It’s how math works.

RITHOLTZ: Right. Well, you can own a 2 to 1 or 3 to 1 e single stock ETF. You could buy it on margin. So you could go 4 or 6 to 1, which is kind of against. It’s funny because I got invited to speak at the SEC thing, I’m like, “You should speak to Dave Nadig.” And they said, “Yeah, we already have him on this.”

NADIG: Yeah.

RITHOLTZ: I’m like, “That’s where I get my answer. So let me cut out the middleman, go talk to him.”

NADIG: Yeah, I’ll be talking to them about that. So like they have a use case. If you want to get leverage, and you don’t want to use your margin account, or you ran out of your margin account, yes, that’s a narrow use case. More importantly, if you want to short something, right, so TSLAQ —

RITHOLTZ: You can’t get to borrow.

NADIG: TSLAQ is like the only one that has any of the assets right now, and it’s the Short TSLA Fund. The biggest benefit of those and I can’t believe I’m saying this out loud is you can only lose all your money. Like that’s —

RITHOLTZ: You can only lose a 100%.

NADIG: You can only lose all your money. That’s it.

RITHOLTZ: Where do I sign up for that? That sounds fantastic. As opposed to futures that theoretically you put up a hundred —

NADIG: Or direct shorting. Right.

RITHOLTZ: — and you could lose a thousand.

NADIG: Direct shorting, finding, getting to locate and doing short. Theoretically, you know, you have one really bad day, and you can be out more than your account, right? Certainly more than your possession.

RITHOLTZ: Yeah. Okay. That’s fair. I mean —

NADIG: But we are splitting hairs.

RITHOLTZ: Yeah.

NADIG: So the short answer, Barry, is they don’t really have much of a use case for most investors. The fake ADRs, like Roundhill had filed for like, you know, get Samsung, which doesn’t have an ADR and you can treat it like it’s an ADR. That one actually —

RITHOLTZ: That makes sense.

NADIG: That one has some utility. They shut —

RITHOLTZ: Wait. I can’t buy —

NADIG: They shut those things right down.

RITHOLTZ: Oh, really?

NADIG: Yeah. One of them is listed.

RITHOLTZ: Why? Why not?

NADIG: Because their reason is we have ADR rules, right? That’s part of the reason that you have to go through the process of getting a depository receipt listed is that then rules about what that means in terms of voting and ownership and reporting and all that jazz.

RITHOLTZ: Why doesn’t Samsung trade as an ADR on the New York Stock Exchange? I don’t understand that.

NADIG: Because they don’t want to go through the process.

RITHOLTZ: Oh, they just don’t care?

NADIG: Well, yes. I mean, they’d have to do reporting. I mean, I’m guessing a little bit because I don’t live in their boardroom.

RITHOLTZ: Right.

NADIG: But, you know, they have reporting that they’d have to do, they don’t want to do. They’ve got American investors they don’t want to have to talk to. You know, they’ve got requirements that IC would put on them.

RITHOLTZ: That’s amazing.

NADIG: Why would you bother. And also, you end up in the situation we have right now with Baba, where you end up with — I mean, Baba is not an ADR, it’s a direct list. But you end up with this issue where you’ve got multiple jurisdictions governing a country.

RITHOLTZ: Right. And it comes —

NADIG: It’s messy,

RITHOLTZ: Right. Especially anything out of China these days are really problematic. All right, I said no more ETF questions. I got to ask you the mutual fund question. And you and I again have talked about this in the past. If mutual funds were a brand new product, would they be approved in 2022?

NADIG: Absolutely not. No way.

RITHOLTZ: They would not?

NADIG: No.

RITHOLTZ: Tell us why.

NADIG: Because the ETF structure is inherently more tax fair, and that sounds like a weird —

RITHOLTZ: No, it’s a 100% true.

NADIG: The problem with mutual funds if you launch them today is that the pitch would be, “Hey, we’re going to pool our investors. But for tax purposes, if you sell out, you can take care of your own stuff. But we’re going to book that gain over here with all of these other investors.”

RITHOLTZ: Right.

NADIG: Send them all of the check and make all of them restate their bases, because you decided you went out on a Tuesday —

RITHOLTZ: Phantom tax gain.

NADIG: Exactly. That would be a nonstarter today.

RITHOLTZ: And end-of-day pricing, which by the way, works great in the 401(k).

NADIG: Yeah. So look, I try not to spend a lot of time imagining how I think the world should be today and spend more of it trying to focus on the way the world is today and might end up. We have mutual funds now; they’re not going to go anywhere because they’re baked into our retirement system. They’re a better fit for that specific purpose than ETFs because of fractional shares. There’s no economic incentive for anybody to change any of that. So I’m going to die and my 401(k) is going to be in mutual funds. That’s probably what’s going to happen, right?

Whether that’s tomorrow, or 40 years from now, I don’t think mutual funds are going away because there’s no reason for anybody to usurp it. Unless we literally throw out the 40 Act and rewrite the securities laws of this country, that mutual funds are going to exist.

RITHOLTZ: You’re channeling Ray Dalio’s quote, “It’s the role of the investor to deal with the world as it is.”

NADIG: As it is. Yeah, 100%. I’m a huge fan of that quote.

RITHOLTZ: Fascinating. So let’s talk a little bit about a quote from you that I’m perplexed about, and that is, “The answer to every question starts at the beginning, and gets just as detailed as you need it to be until you’ve satisfied the need.” What does that have to do with finance?

NADIG: Well, look, the world is infinitely complex.

RITHOLTZ: Right.

NADIG: I think we can get down that road.

RITHOLTZ: Wait. It’s not black and white?

NADIG: It’s not black and white.

RITHOLTZ: The bumper stickers aren’t the answers to our problems?

NADIG: And to get really like neurophilosophical about it, as human beings, we walk around looking for affordances. And what that word means is like, we look for the handle on the cup, right? And when we see a cup and there’s a handle on it, we can say, oh, I’ve seen this before. I understand that’s a thing I can grasp. And I understand how my hand works, and so now I can get the cup of coffee.

RITHOLTZ: Right.

NADIG: If all we’re trying to do is drink the coffee, that’s as far as we need to go. Right? We get the affordance that allows us to work in the environment that we’re in.

RITHOLTZ: Our model of the universe doesn’t have to be perfect. It just needs to be good enough to get us through the day.

NADIG: And it’s going to be imperfect. That’s the other thing I think that is an important thing for anybody who’s in the business of dealing with human beings for a living around emotional subjects, which is the job of financial advisor, understanding that, oh, everybody lives in their own little interpreted reality, where some people understand the molecular structure of the cup. And some people literally just have in their head, oh, handle coffee drink.

RITHOLTZ: Right.

NADIG: And both of those are okay, depending on what your purpose is. What does that have to do with finance? Well, in finance, we approach that constantly. The markets, we talked about the markets. Okay. Do you understand the markets? Well, yes and no, right? Yeah, you understand the basics of, like, what’s going across the ticker and what your clients need to do? Do you really understand at a really detailed level exactly how payment for order flow impacts capital requirements at the DTCC? No. You don’t need to. It’s not important to what your job is, until something breaks, right?

And so part of my job as a financial futurist is to go down a lot of those rabbit holes so that when the world blows up and everybody is like payment for order flow is the worst thing in the world, I’m not starting from square one saying what is PFOF stands for? I’ve already understood. Ah, okay, here’s the mechanics of how this go. What am I missing? I haven’t looked at it in eight weeks, maybe the world change. So I can do the update to get current. But I’m not starting from scratch every day. And hopefully, that’s some of the value.

RITHOLTZ: So funny you mentioned understanding what’s going on when the world breaks. The book I love to give to younger people who are getting started in markets is Tim Metz’s “Black Monday,” because even today, most people have no idea what happened during the ‘87 crash. And it’s exactly as you’ve described, it is the logistics, the plumbing, the day to day operations, that you don’t realize that every decision that’s made has ramifications deep into the future for how markets operate.

NADIG: I’ll give you one little weird side note on that. So ’87, I was 21 years old or something like that. I was living in Hollywood, California. I had a little tiny bit of money invested, maybe five grand that my grandfather had given me in a Smith Barney account or something like that. You know, ‘87 happened, pretty much lost most of it, whatever. But I became fascinated at that moment by what the hell just happened?

RITHOLTZ: Right.

NADIG: Years later, literally four or five years later, I’ve gone and gotten an MBA. I’m studying Investment Finance. In the back of my head constantly, I’m, like, I want to understand that so I read everything about it. I ended up working for Wells Fargo Nikko in the very early, like, ‘91 or something like that. Lo and behold, I started going through stacks of stuff on portfolio insurance because they were a huge writer of that at the time. Right?

RITHOLTZ: Right. And that was a key —

NADIG: Big index provider. And at that point, I had not been down that rabbit hole. There was no Internet to go search on that. Now, I had access to all of these internal documents about, like, what was actually going on, not that it was hidden, it was all part of congressional —

RITHOLTZ: Right. It was all out there.

NADIG: The giant SEC report that came out afterwards. Anyway, my point is, to me, it’s faster to understand how the pieces actually work versus how we think they work because they’re never the same.

RITHOLTZ: One of the things in the book that was always so vivid to me, and I’m sure I’m going to misquote this, but they used to run the prints from the Chicago Futures pits into the floor of the New York Stock Exchange. So you could see how the futures were trading, and marry that with portfolio insurance. And suddenly, it’s a vicious cycle downwards as there is no bottom and that’s how you end up with a down 22% day on the Dow, when it should have been, you know, a run of the mill 7%, 8% correction.

NADIG: But part of the reason that’s so interesting is that the mechanics of that are now gone.

RITHOLTZ: Right.

NADIG: The world doesn’t work that way anymore. But people are the same.

RITHOLTZ: Right.

NADIG: The Neanderthals are pretty much doing the exact same emotional buy, sell, you know, greed, fear, trade-off in that cycle. And so what happened in ‘87 was a cycle that, you know, I don’t know, had a cycle time of 20 minutes. Now, it has a cycle time of 20 milliseconds. But at the end of the day, you still have people making those decisions.

RITHOLTZ: So another quote of yours is “History tells us mostly about what people did when faced with a specific set of constraints and inputs.” How does that affect traders and investors in markets?

NADIG: Well, you know, you do this on your podcast, right? You talk to a lot of very professional, very successful people. That’s why it’s called Masters in Business, right? The challenge with that is I think it’s very easy to get hung up on the thing that they did, not why they did it and what they needed to be able to do it. So we look back, I don’t know, Simons, right, people who were wizards of Wall Street and we —

RITHOLTZ: Well, who I still haven’t gotten on the podcast.

NADIG: So you know, we revere Warren Buffett, right? And people write books about them and all these things. And often what they end up looking like is hero worship. The more interesting question is, okay, Buffett has been really successful. Instead of trying to figure out what is it about Buffett that was better, I think it’s much more interesting to look at, well, okay, what was the pond that he was fishing in? Who were his colleagues? What were his information sources? What kind of capital constraints did he have, or what lack of capital constraints that he had versus competitors? That’s what makes him an interesting story.

Now, of course, he wouldn’t be successful if he wasn’t also sharp and brilliant, and good at his job and good with people. But I think it’s much more interesting to look at those decisions as sort of contextual reactions to their environment, as opposed to revering them as like, well, we should all invest like Warren Buffett. No, we should all have the perspicacity to invest like Warren Buffett when presented with that exact set of situation.

RITHOLTZ: Right. It’s about process. And one of the things I really go out of my way to avoid is the classic survivorship bias. That’s why one of my favorite questions is always what do you know today that you wish you knew 25 years or so ago when you started, because I want to give people an opportunity to say, oh, I messed this up, or I didn’t know this. Otherwise, that’s the criticism of, you know, good to great. Here are 12 companies that did fantastic in the ‘80s and ‘90s.

NADIG: Yeah, exactly.

RITHOLTZ: And then you look forward a decade, and half of them are either out of business or gone, or wildly underperforming the market.

NADIG: Yeah, I think that’s exactly the point. So I get very skeptical of hero worship. I’m much more interested in understanding decision-making. So like, you know, in terms of like great business books, I’d rather focus on like “Choices, Values, and Frames” by Kahneman and Tversky versus anything Malcolm Gladwell has ever written.

RITHOLTZ: I thought you were going to go with “Moneyball” right over that.

NADIG: Well, no, but like, actually, “Moneyball” is a great counterexample where that’s a great narrative. It’s a great story. But I think that the lesson some people get out of “Moneyball” is, oh, there was this one sharp kid in the right place at the right time. And he really did something amazing, and got just enough people to pay attention, and got really lucky. And it’s not a great story. Where the real thing is, okay, what is it about that environment that made a difference? This was somebody who focused on data when other people thought data was irrelevant. They got nerdy when people were thinking it was hunch.

The same thing happens to markets all the time, right? When people get nerdy, but other people are focused on the emotions, there’s often real opportunity there, right? Because now you’re dealing with the system, not with the people.

RITHOLTZ: You’ve mentioned another book that I think is fascinating as history, “The Right Stuff.” Tell us about what “The Right Stuff” has to do with investing.

NADIG: Yeah. Again, I’m glad you made that bridge because I think “Moneyball” is an interesting example there. To me, “Moneyball” is interesting, not for, like, the act of this dude, but as a character study, to understand how human beings reacted there. So like, in “The Right Stuff,” which was the example I was using and the email I sent you, like a lot of people my age and Gen X fascinated by the Apollo Program and read everything and seen very documentary, and built all the models when I was a kid.

RITHOLTZ: Yeah.

NADIG: I mean, it was the wild west of our year.

RITHOLTZ: You’re too young to have been called down to the assembly when one of the Apollo, I think the first Apollo landed on the moon or so.

NADIG: Yeah. But I remember watching on TV as a kid sitting on a couch, right? So like, very, very real to me. And so I felt like by the time I was 16, I felt like I had a pretty nerdy understanding of the Apollo Program. But then you start reading stuff like Tom Wolfe and “The Right Stuff.”

RITHOLTZ: Did you read it? Or did you full disclosure, I watched the movie. I never —

NADIG: No. I read the book.

RITHOLTZ: Yeah.

NADIG: I read the book when it came out. And the reason I loved it, again, was not because it told me anything about how they made the landers. It was because it was, like, holy crap, this was an ego farm. Like, they felt like Wall Street. Okay, here are a bunch of extremely high performance, almost exclusively dudes, with enormous egos, who are going to work collectively to do something nearly impossible. That’s why that’s an interesting story.

It could be about, you know, the Dream Team Hockey, right? The fact that it was about these like super high performance people, all interacting with each other for a common goal, that’s what I think was interesting about it. And I think if you learned something from the Apollo Program, it should be about that. Not about like, well, government spending did this and we invested. No, no, no. This was about creating a community of people around a common goal.

RITHOLTZ: So you mentioned what we get wrong about markets. What else do we get wrong about the state of the world?

NADIG: Well, so much. So the most interesting thing I think that’s markets related is probably what’s going on in economics. I’m a big fan of Ole Peters’ something called ergodicity economics from the London —

RITHOLTZ: Define ergodicity because every time I look it up, it seems Google gives me a different, you know, reductionist answer.

NADIG: So look, with the caveat that I’m neither a mathematician or an economist, neither are you either of those things by training, fundamentally, we assume certain things about how money and markets work. A big one is that when you average something over time, you end up with similar answers to when you average things over populations, right? So —

RITHOLTZ: Meaning a snapshot versus a longer term picture.

NADIG: Right. If you flip a coin a thousand times, we can come up with similar expected values too if we have a thousand people flip a coin once. The connection between those is the ergodic assumption —

RITHOLTZ: Right.

NADIG: — as I understand it, and if I’m wrong, I’m sure people send me hate mail. A lot of what we do in economics is based on that sort of fundamental mathematical assumption that you don’t have to worry too much about those things. The problem with that is that it’s frankly not true. Something as simple as starting conditions, you can do this with just the coin flip experiment, right? If you and I flip coins and you flip heads four times in a row, top to bottom, and I just randomly, you know, heads, tails, heads, tails. But we’re betting $100 on each one, I will probably never catch up to you, because you were —

RITHOLTZ: Path dependent.

NADIG: Your path dependency on those starting conditions of like, you flip that coin heads five times in a row, you now have capital. You have opportunity. You can make smaller bets that are lower Kelly number. Like, you get all the —

RITHOLTZ: You get the flywheel.

NADIG: You get all sorts of stuff going on. And because I flipped two tails off the beginning, I’m screwed.

RITHOLTZ: Right.

NADIG: That is a non-ergodic function, right? Because that’s not the same as saying, well, we’re going to have 10,000 people go through that same experiment. On average, everybody is going to flip heads and tails about even.

RITHOLTZ: So you’re saying sequence of returns matters. And you’re agreeing with Bill Sharpe that that’s one of the toughest problems in all of finance —

NADIG: Absolutely.

RITHOLTZ: — is how do you model drawdowns and withdrawals in retirement if you get unlucky or lucky at the beginning of your retirement.

NADIG: The implications are actually much more profound than that, however, which is that because we’ve set up capitalism, not just your portfolio, but global capitalism bakes these assumptions in, we end up with things like runaway problems, which we see all over the place, right? The rise of the billionaire class, it is no longer the case in modern democratic capitalism. That the best idea best executed is the one that will win. It’s the best idea that’s best executed that also has very good starting conditions and access to capital. That’s the one that wins.

RITHOLTZ: So another quote of yours, “The here and now is never an accident. It’s the result of myriad actions and influences. And understanding those influences provides important context for planning ahead.” In other words, path dependency is enormous, and it’s not just a function of a single roll of the dice. It’s the whole series.

NADIG: Absolutely. And also, from the advice perspective, part of the reason I put it that way is because, boy, I just get this emotional reaction myself. Like, I look at the market and it’s down 5%, or I look at my portfolio value and it’s not what it was six months ago. It’s so easy to get caught up in that regret of what happened and I could have done things differently. Or if I had put this trade on Tuesday, I would have made more money, and have that dictate what you do today. And that is stupid. What you do today should be based on the markets today. And the markets today are not the markets that were there two weeks ago, when you didn’t put on that options trade that would have been brilliant. So the ability to let go —

RITHOLTZ: Can we talk about that options trade? My regret was not going; I should have gone bigger. It’s killing me. And I’m looking at this —

NADIG: But this is the point —

RITHOLTZ: That’s hindsight bias.

NADIG: But you’re hung up on this.

RITHOLTZ: Right.

NADIG: And the reality is like, I don’t know.

RITHOLTZ: And it’s a rounding error to my portfolio.

NADIG: The only constraint you should have when you’re thinking about your money today is what are the transaction costs of not being in what I’m in right now?

RITHOLTZ: Right.

NADIG: Because if the answer was zero, then every single morning, you should start in cash and make a whole new set of decisions about what you’re invested in today, in a purely frictionless world.

RITHOLTZ: I said we were done with ETFs. Wasn’t there a new ETF that wants to invest —

NADIG: The Nights. Yeah.

RITHOLTZ: — from the close to the open and —

NADIG: And it’s by NightShares. Yeah, I love that idea.

RITHOLTZ: I mean, to me, you see, I’m fascinated by people not understanding. Well, isn’t that double or triple the amount of time? Isn’t that just time compounded? If we’re open from 9:30 to 4:00, six and a half hours, you’re closed a lot more. You would think you would be up more over time, right?

NADIG: Right. Well, except, of course, liquidity and sorts of other issues like that.

RITHOLTZ: That’s kind of interesting. All right. So the biggest question I saved for towards the end here, which is, what do we get wrong about human beings?

NADIG: Oh, boy. I think there are a couple of big ones and these are fairly recent revelations to me and some of them are slightly philosophical. I think recognizing the inherent unknowability of reality is an important first step. You know, you mentioned the 200 millisecond lag on perception. Anil Seth has a great book called is it “Being Human” or “Being You.” I always get it wrong. He’s the one who put forth the scientific proof that, effectively, we hallucinate reality. Like, what goes on in our heads is a model of the molecular world around us.

RITHOLTZ: Do we want to call that a hallucination, or is it just our model of the universe?

NADIG: Well, like, if you imagine this coffee cup is here, right? You’re already perceiving it delayed from its existence here.

RITHOLTZ: Plus, it looks solid when we know 99% of it is empty space.

NADIG: In the quantum level, we know this is all empty space, et cetera.

RITHOLTZ: Right.

NADIG: And that can all get very woo woo, and who cares?

RITHOLTZ: Right.

NADIG: And so that’s fine. It can be woo woo and who cares? But you have to start from there and build up. And if you accept that, fundamentally, I cannot prove the table exists, then getting really worked up about Tesla earnings is even more ridiculous, right? Because now, when you have an opinion about Tesla earnings, it’s based on our set of information that is incredibly incomplete.

RITHOLTZ: Right.

NADIG: I don’t care whether you’re the most storied Tesla analyst on the world. I don’t care if you’re Elon Musk. Elon Musk on the conference call, talking about earnings, has no idea what’s going on in the floor right now.

RITHOLTZ: Right.

NADIG: For all he knows, his factory is burning down while he’s talking, right? So we’re inherently always wrong about the state of anything that we are asserting truth on.

RITHOLTZ: So it’s about being less wrong when we’re trying to make these assessments about, I like this say the future is inherently unknown and unknowable. You’re saying the present is inherently unknowable.

NADIG: Inherent, yeah, absolutely unknowable. It’s all probabilistic, right? And you know, fundamentally, you start thinking about quantum computing, right? Quantum computing largely ends up being about convincing yourself you’re not sure, right? Because you can’t actually measure the state of a qubit in real time because then the wave collapses and it’s no longer a quantum computer.

RITHOLTZ: Right.

NADIG: So managing uncertainty turns out not just to be a managerial tool for guys who sit around and talk about money; it’s actually the fabric of the universe is based on managing probability, not understanding certainty. So if you approach everything from that perspective that, okay, whether or not I’m going to go on the subway to get down to the hotel, that there’s an inherent level of uncertainty in that journey, and that I have to be willing to accept it’s. So I go, okay, well, 65% of the time subway is going to be faster. But here’s all the things that could go wrong there.

RITHOLTZ: Right, 25% of the time, it’s slower. And 2% of the time, you’re stuck there. Right.

NADIG: I’m going to get hit by a car, or whatever. Right. So I think that, you know, there’s a level of humility that comes from acknowledging the inherent unknowability of whatever it is you think you’re an expert on. But at the same time, I think thinking probabilistically, I mean, I think Jim O’Shaughnessy talks about, you know, learning how to think probabilistically in a probabilistic world as opposed to determine it realistically. And that, I think, is very true. So you know, learning to understand that thinking bets I think is really important. Any Dukes book on this, I think it’s one of the key pieces of reading people should have, because it makes it very human, right? This idea of thinking in bets, thinking in probabilities, probably the best thing online poker has ever done to the country.

That’s interesting. And now I know why you and I get along so well, because we both have the same belief system about how little is actually knowable. And why probabilistic thinking is the only way to approach risk assets.

RITHOLTZ: That’s interesting. And now I know why you and I get along so well because we both have the same belief system about how little is actually knowable and why probabilistic thinking is the only way to approach risk assets.

NADIG: Yeah. I mean, at the at the base, all beliefs are wrong, right? By definition, if I can’t prove that I’m in this room, if I can’t prove that fundamental reality is phenomenologically true —

RITHOLTZ: I could prove the table is real by just accelerating your skull towards it rapidly. Does that disprove it, or am I being too literal? And I’m not being sarcastic.

NADIG: No. Working with material objects is where everybody falls down on this. The problem is, like, what’s actually going on when you’re holding onto this table is just a set of somatic inputs and visual input —

RITHOLTZ: So the way we perceive it is sufficient for our purposes, but objectively isn’t real.

NADIG: Exactly, right. As a species, right, we have learned these affordances, ways to interact with the environment, I am fairly certain if I hit a table, it will always be there.

RITHOLTZ: Right.

NADIG: That is, of course, not true when you walk into a really well-made illusion. It’s not true when you put on a VR headset, right?

RITHOLTZ: Right.

NADIG: So we’re accepting this version of our perception as somehow phenomenologically real. But when we put on the VR headset, we have a brain space where we’re like, well, I know the table is not really there. But then again, most people put on that VR headset, and they fall down when they go to lean on the table that’s not there.

RITHOLTZ: Oh, is that true?

NADIG: Oh, I mean, you’ve seen the video. You’ve watched millions of these videos of people doing hysterically stupid things with VR helmets on.

RITHOLTZ: Well, it’s when you look at them, when you’re not in the same VR.

NADIG: Exactly. And you’re like, they’re idiots. No, they’re not. They are perceiving a different reality than you are. And their model got confused and thought that the table was real because they’re so used to seeing a table and thinking the table is real.

RITHOLTZ: And I still think of VR as kind of blocky. You know, when the technology accelerates to the holodeck from Star Trek, where the differences, they’re imperceptible —

NADIG: Then it’s like this.

RITHOLTZ: — then, right, how do you know what’s real and what’s not? And then —

NADIG: And I’m not one of these guys who’s, like, we all live in a simulation. And I don’t want to go into that —

RITHOLTZ: I hate that argument.

NADIG: Whatever. I think they’re entertaining. But my point is, from a very practical real world perspective, let’s bring it back to dollars and cents. You have to have the humility of your convictions. Like, I look at my Schwab account right now and I say, oh, I get the snapshot of reality of what it is. It’s in these things right now. I had good reasons to put them in the emerging markets fund, or whatever. But every day, I should be asking myself whether that’s still true, because the world changes rather quickly if you haven’t noticed.

RITHOLTZ: You and I could do this —

NADIG: Forever.

RITHOLTZ: — for four hours. And in fact, we have on a canoe, on a lake, talking about this endlessly. But we only have the studio for another few minutes. So I’m going to jump to my favorite questions.

NADIG: Ok, great.

RITHOLTZ: But I’m going to mix a few of these up and they’re not going to be the same questions. I think what are you streaming these days is getting a little long in the tooth, if I’m asking about video. So I want to mix it up and ask you what music are you listening to?

NADIG: Oh, I’ve been on a big music tier lately. It trends out on Twitter, one of my most engaged threads I’ve ever done is I just sort of post a new song like every couple days in there. I’m a big believer that you have to be paying attention to the now if you want to have any hope of understanding the now. So I try to only listen to new music.

RITHOLTZ: Really?

NADIG: It doesn’t mean that I don’t occasionally toss on an old Bowie tune that I love or something like that.

RITHOLTZ: Right.

NADIG: But four to six hours a day, I’m listening as much as I can to brand new music.

RITHOLTZ: No kidding.

NADIG: And I tend to really listen to basically college radio.

RITHOLTZ: Right.

NADIG: I’ve been listening to college radio since like 1983 and I sort of never stopped. Now, most of that is intermediated either through SiriusXMU, on SiriusXM, where I find podcasts held like this one sometimes, or various blogs. Like, remember blogs, they’re big music blogs.

RITHOLTZ: I remember.

NADIG: Big music blogs back in the day.

RITHOLTZ: Sure.

NADIG: Like, Gorilla versus Bear, BrooklynVegan, these guys are all still around.

RITHOLTZ: Right.

NADIG: And they’re amazing, and they’re an incredible source of new music. And I think that we’re in a golden age of independent music like in the last two or three years. But then again like it has been phenomenal.

RITHOLTZ: There has been a number of articles about streaming has gone classic rock 30, 40, 50-year-old music, and new music has a really difficult time being discoverable on all the streaming services.

NADIG: It is.

RITHOLTZ: So if you want to discover new music, how do you do that?

NADIG: So Gorilla versus Bear and brooklynvegan.com, both of them are blogs where every day, like literally, I think one of them posts, “Here’s the 26 songs that were released today,” every day.

RITHOLTZ: And you can work with new music in the background? It’s not terribly distracting?

NADIG: No, I mean, I skip stuff I don’t like.

RITHOLTZ: Right.

NADIG: I don’t want to pretend that I just like universally love everything. But you know, somebody who’s putting up a playlist that’s new music every week. You know, there’s a Top 40 alternative charts that I listen to, that’s new every week based on college radio airplay. And so I’ll just put that on repeats, the same playlist, just keep it to repeat, but it’s new stuff every single day. The stuff coming out, particularly like Philadelphia and Chicago and the new music scene, all Zoomers, like all kids in their 20s, just amazing stuff.

Like, a couple bands of note, Wet Leg is one that I’m a big fan of, very much a Sonic Youth kind of vibe; Horsegirl out of Chicago, again a very Sonic Youth kind of vibe. Philadelphia, there’s so many bands down there, Alex G just dropped an incredible album down there. You know, Dehd, D-E-H-D, another incredible band there out of Chicago as well. But these little DIY music scenes in a couple of major cities, just unbelievable creative stuff, a lot of it’s very experimental 14-minute songs.

RITHOLTZ: I’m hearing a lot of alt rock and new synth, but not hip-hop in that list.

NADIG: I don’t listen to a ton of what I would consider mainstream hip-hop.

RITHOLTZ: It’s very distracting if you’re trying to read or write.

NADIG: Exactly. That’s the big issue is that the —

RITHOLTZ: The lyrical content —

NADIG: You’re right. The lyrical content is very important.

RITHOLTZ: The lyrical content, its words —

NADIG: I will listen to hip-hop generally on headphones, like sitting down in a chair with headphones on to listen, which I don’t think that many people do and I wish more people did. But you know, in that space like Run the Jewels, I’m a huge Run the Jewels fan and that’s more of like an Indie hip-hop artist. So that kind of stuff is a little bit more my jam. I was really into hip-hop back in the, you know, ‘80s, ‘90s era. But you know, not at the level I know some of your boys are at Ritholtz.

RITHOLTZ: Yeah. My hip-hop stopped with Paul’s Boutique from the Beastie Boys.

NADIG: Yeah. I mean, we’re both Beastie guys.

RITHOLTZ: Which really is the ultimate —

NADIG: For you, that’s The P.

RITHOLTZ: Right. I mean, but the law changed and you couldn’t sample the way —

NADIG: Yeah.

RITHOLTZ: I mean, they sample Beatles and Sergeant Pepper. You couldn’t do that today without being sued?

NADIG: Well, the interesting thing is now in the DIY community, in the sort of true Indie community, that stuff is really rampant, but it’s happening outside of the boundaries of the big record companies, right? It’s literally, you know, one artist in Philadelphia calling up another artist in Chicago saying, “Hey, I love the beat you put down on that half-made track you dropped on Bandcamp. Can I sample that in my next thing?” And that’s happening like crazy. But they’re not going back to the old blue note, you know, archives, like the Beastie Boys got to. They’re not getting to sample a whole lot of love.

RITHOLTZ: So it’s funny, if I’m writing and I want some music on in the background, I’ll go to a weekly show by John Pizzarelli called Radio Deluxe. And it’s the classic American Songbook from the ‘30s, ‘40s, ‘50s and jazz, and I can have that operating in the background and it doesn’t interfere with my ability to read or write. The songs are familiar, and it’s more music. It’s more music than lyrics. So the jazz side of it allows me to function. I think what you’re describing would be really hard to work with in terms of writing.

NADIG: It totally depends on the kind of work that I’m doing in the moment. If I’m reading academic work, if I’m looking at RED legislation, and you know, reading news and catching up on Twitter, I can listen to anything.

RITHOLTZ: Right.

NADIG: If I’m actively taking the words out of my head and putting them on paper, generally, I’m in complete silence.

RITHOLTZ: Yeah.

NADIG: But I tend to compose in my head and then write all at once. So I’ll write something in my head for three or four days, and then I’ll put 5,000 words out in 30 minutes.

RITHOLTZ: Yeah. You, me, Morgan Housel says the same thing, that the most important part of writing is the couple of days before you sit down.

NADIG: Yeah. The most important part of writing to me is the two-hour walk at 6:00 a.m.

RITHOLTZ: Right.

NADIG: That’s the most important part of writing. Then I sit down at 8:00 and start writing, and that’s the easy part.

RITHOLTZ: My wife makes fun of me. But if I’m giving a presentation, that gets written in the shower.

NADIG: Yeah, 100%.

RITHOLTZ: And she’s like, “What are you saying in the shower?” I’m like, “I’m just rehearsing.”

NADIG: I have to be moving. For me, there’s a somatic —

RITHOLTZ: I need soap and shampoo. That really helps to get the articulating —

NADIG: By massaging the head keeps things moving.

RITHOLTZ: That’s right. So my second question is about mentors. So I want to ask this question because from Barclays to ETF.com to VettaFi, who helped shape your career?

NADIG: Oh, my gosh, a million people. You know, probably, not necessarily people who will know, but like there was a guy who was sort of my uncle, growing up, who was a Vietnam vet war surgeon and had blown off his hand, and he was just sort of growing up in Lenox. He was an uncle of a friend of mine. And he was probably the model that I put in my head when I’m sort of, like, what would so and so do? You know, it would definitely be Al Robertson, who is a businessman of some note.

But in terms of my direct career, you know, I look back at those early days at Wells Fargo Nikko, and for sure, I needed to be taught stuff back then. And I give Patti Dunn and Fred Grauer and Blake Grossman a lot of credit for that, because I was very young. They’re all probably 10, 15 years my senior at that time, and they were incredibly important. But honestly, if I pick one, principally, Matt Hogan, who’s 10 years my junior.

RITHOLTZ: I was going to say you’re —

NADIG: I’ve been working with him since ‘96 or ’97. He was a biotech analyst when I was running money. He and I just have stayed incredibly close over the years. And if there’s like one person who I was, like, if I had a business decision, like career choice, ethical quandary, something like that, there’s no question he’d be the first person I’ll call.

RITHOLTZ: He seems to be a very sensible, thoughtful person, and not given to, you know —

NADIG: He’s a main guide. I mean, that’s how he started in life. He was literally in college, got his guiding certificate in Maine, and we know what those guys are like, right?

RITHOLTZ: Sure. That’s a tough gig.

NADIG: The most practical people in the God dang planet.

RITHOLTZ: Right. How do you survive and not get trampled by an elk? I mean —

NADIG: Exactly.

RITHOLTZ: Or attacked by a bear when you’re out hunting moose or bear? It’s all about reality. They’re talking about recognizing reality. The penalty there for being wrong —

NADIG: Is death.

RITHOLTZ: Right. It’s not my account is down 6%. It’s, oh, a bunch of bears disemboweled me.

NADIG: That’s why I’m such a fan of being outside in general, honestly, is because like if you’re three miles in on the Appalachian Trail in the middle of the woods —

RITHOLTZ: And a storm comes up.

NADIG: That’s as real as the world gets. Right?

RITHOLTZ: Yeah.

NADIG: When you’re at a cellphone coverage standing in your sneakers in the middle of the woods, that’s as real as the world gets. There’s no buddies. There’s no people. There’s no stuff. There’s no manmade anything. That’s base state reality.

RITHOLTZ: I’ve had this conversation with people who are out on the water on boats. It’s like, listen, you can’t flip on channel 2 and get the weather forecast. You need the marine forecast because if it’s 6 foot swells and 40-mile an hour winds coming up, you need to know that and basically stay in the marina and not go out.

NADIG: Correct.

RITHOLTZ: Not, oh, it’s going to be sunny out today. That sort of Dunning-Kruger, hey, you need to really know what you don’t know and not assume you’re good at this. Outdoors, Mother Nature is a cruel mistress. There is no fooling around.

NADIG: Oh, and I’ve run into this all the time, I live in the woods up in the Berkshires of Massachusetts. I run into New Yorkers who come up to go hiking all the time, who are heading off cliffs. Like, I mean, it’s almost every hike that I go out. And particularly this time of year, it’s so easy to get lost if you’re not used to walking around in the leaves, in the woods. And just this last weekend, I was walking around just on a trail and I was just like, what the heck are these people doing going over that ridge line? I’m like, hello, don’t go there. That’s not good to go there. One more step is a doozy.

RITHOLTZ: Yeah. They’ll figure it out. Let’s talk about books. We’ve mentioned a lot. Give us some of your favorites and what you’re reading currently.

NADIG: Oh, boy. The most impressive book I’ve read in the last couple of years is “The Matter with Things” by Ian McGilchrist, which is 1,500 pages.

RITHOLTZ: It’s thick, right? It’s a ton.

NADIG: 1,500 pages of neuroscience and psychology, I would say. It’s probably the best way to describe that.

RITHOLTZ: How do you attack a book like that? You don’t sit down and start plowing through.

NADIG: Oh, no. So like, we haven’t talked about this, “How to Read a Book,” you know.

RITHOLTZ: Right.

NADIG: Do you know “How to Read a Book?”

RITHOLTZ: I think I do because I read a lot of books —

NADIG: No, there’s a book called “How to Read a Book.”

RITHOLTZ: Yeah. Okay. So let’s talk about —

NADIG: So “How to Read a Book” is something that I was handed when I was —

RITHOLTZ: You need a pamphlet.

NADIG: — 8 years old or something like that. And it basically outlines, it’s written in the ‘30s or something like that.

RITHOLTZ: Right.

NADIG: It’s a very straightforward system for breaking down a book. And it starts with like, okay, you have been handed a book, here’s what you do in the first 10 minutes. And it’s not for fiction where you’re worried about spoiling something.

RITHOLTZ: Right.

NADIG: It’s really for nonfiction. And there’s a process they go through of like, okay, you read the first four paragraphs of the introduction, you go through and you read all of the chapter headings, and usually through the table of contents to try to understand the flow. There’s something you don’t understand, go read the first paragraph of that chapter, so that you now understand the flow. Then go read the introduction to the concluding chapter. And by that point, you should understand does this book have anything in it for me?

RITHOLTZ: Right.

NADIG: And in that modality, you probably reject half the books you open, right? You can even do that in the bookstore literally, right? Because that’s a 10-minute process.

RITHOLTZ: It’s funny you said that because what you’re describing used to be my bookstore routine.

NADIG: Exactly. So that would be a Level 1 read. A Level 2 read is with whatever speed you want, you consume the available content of the book itself. So that’s literally just reading the book. Now, I tend to do that very quickly.

RITHOLTZ: Same.

NADIG: That kind of reading, I can be very, very quick with, and that’s a Level 2 read.

RITHOLTZ: I don’t mean speed reading, I mean, just turn pages, understand and take it all in.

NADIG: Understand what’s important, you’re not going to read every single word on the page, but again get the gist of every major point made in the book, right? You’re doing your own spot —

RITHOLTZ: Unless it’s a Bill Bryson or an ED Chancellor, or somebody who’s writing as dense and deep, and you really need to think about each sentence and each paragraph.

NADIG: Yeah. Well, so even in the modality of how to read a book, a Level 2 read, even that you would skip through a little bit, because the objective of a Level 2 read is to understand everything that the book has to offer you. Right? So like, what are all its key points? Whether it’s, you know, salient observations, whether it’s facts that you haven’t gotten. A Level 3 read, which I can say I’ve probably done for 10 books in my life, is when you go through and every concept you don’t understand, you go down the rabbit hole. They mentioned a book that you haven’t read, you go read that book.

RITHOLTZ: That was grad school for me. That was —

NADIG: And that’s a very rare thing to do there. So on a book that’s this big, the honest truth is I start at Level 1. Now, my Level 1 read on “The Matter with Things” probably took me a week because it’s 1,500 pages. So just to go through and read the opening paragraphs of each chapter, and read the conclusions, and be like, nope, I didn’t get that. I have to go back, without actually reading the book, it probably took me a week. Then Tom Morgan from KCP and I spent, I want to say, three months —

RITHOLTZ: Tom has, by the way, a fascinating Twitter feed. He’s phenomenal.

NADIG: Yeah. And he’s way out there on this stuff. He’s my Sherpa on the sort of phenomenology and consciousness end of things. But then we’re going through it together, which helped a lot. And we would bounce ideas back and forth with each other, and compare notes with where we were. And I did a full Level 2 read of that book over about a three-month window, reading it every day.

RITHOLTZ: Wow. Give me one more book because we’ve talked about so many already.

NADIG: So I’ll go with a comic book, “Transmetropolitan” by Warren Ellis is one of my favorite comic books. It could not be more relevant for the modern world right now, about a journalist named Spider Jerusalem, covering the apocalypse in a major city. And it feels like it was written about today.

RITHOLTZ: Interesting. Our final two questions. What sort of advice would you give to a college grad who thinks they want to be a financial futurist?

NADIG: Well, probably invent a better title. But to do like the kind of work that I’m doing, the biggest advice I have is be curious, right? Never allow a good rabbit hole to go unexplored.

RITHOLTZ: We’ve had conversations about that phrases come up. How much time do you spend down various rabbit holes?

NADIG: I mean, all.

RITHOLTZ: All day?

NADIG: I mean, pretty much anytime that I’m not doing something else, like if I have something in front of me and I’m reading, 90% of the time, it’s something that is way deeper than it needs to be because I really want to understand it at a core level.

RITHOLTZ: Okay. So let me fast-forward, actually, by the time this comes out, this will be old news. But I did a blog post about how the Fed is causing inflation. The Fed, by raising rates, is causing the CPI inflation prints to be higher because the crazy way BLS measures the cost of shelter. And the only way I was able to put that together, and I’m bringing this up because I know you’ll appreciate it, is because I lived in that rabbit hole during the 2000s. But I was arguing BLS is underreporting inflation because of —

NADIG: Oh, we’ve had that conversation.

RITHOLTZ: Right.

NADIG: Yeah.

RITHOLTZ: But that was in the 2000s. So the Fed had taken rates down too quickly, too low. And that led to a spike in the cost of shelter, which the BLS reports the inverse of. Fast-forward 20 years, 15 years —

NADIG: Yeah, it’s happening. Yeah.

RITHOLTZ: — now the Fed is raising rates and that leads the BLS CPI to overreport inflation because the way they measure owner’s equivalent rent. Because for many people, a home is an asset. But if you’re a renter and it’s going up, how do you measure that? And it’s not this grand conspiracy. It’s just a complex modeling problem, which as you’ve described, we get wrong.

NADIG: Yeah. And I think that those are endemic. They’re everywhere. I mean, during the GameStop run-up, people were talking about, well, we had to make cap. You know, why did DTC have to have a capital? Call in Citadel, and this must be somebody buying Ken Griffin a yacht.

RITHOLTZ: It’s a scam. You know, it’s a scam. Robinhood there —

NADIG: It’s so easy to disprove that, but only if you’ve already spent a year down the rabbit hole of understanding capital requirements and settlement bureaus.

RITHOLTZ: We all talk about our priors. But if your priors were down the rabbit hole, then you have a frame of reference to understand this complex endemically.

NADIG: With the enormous caveat that everything you knew about financial markets —

RITHOLTZ: Is no longer true. Right.

NADIG: — in 2005 is probably wrong.

RITHOLTZ: It’s now. Right.

NADIG: It’s only if you know that.

RITHOLTZ: And P.S., so first, in the post, I cite something, I had quoted from 2013 from I think it was a Cleveland Fed or an Atlanta Fed look at OER. And then fortunately, my buddy Invictus said, hey, you know that the Federal Reserve, and maybe it was the Cleveland Fed just did a piece on this like three days ago. So I was able to cite like, oh, and here’s the latest change. The Fed, everybody is aware that this is a problem, that they’re changing the way they measure this. But this all goes back to we’re wrong. The models were wrong. We have to get it right.

All right, final question, what is it that you know about the world of investing today or the world today that you wish you knew 25 years or so ago when you were first starting out?

NADIG: Oh, well, I mean, it’s beating a dead horse here, but that I was wrong. And whatever the question is, the answer is I was wrong. Right? That fundamental shift in my perception, which really only happened in the last three or four years, the pandemic helped a lot to recognize the inherent fallibility of human experience, and approach every conversation with the humility that that implies. If I could go back and beat that into my 25 year old self, I would do it in a heartbeat.

RITHOLTZ: Fantastic. Dave, thank you for being so generous with your time. We have been speaking with Dave Nadig, financial futurist for VettaFi. If you enjoy this conversation, well, be sure to check out any of the previous 440 we’ve done over the past eight years. You can find those at iTunes, Spotify, and now YouTube, or wherever you feed your podcast fix.

We love your comments, feedback and suggestions. Write to us at mibpodcast@bloomberg.net. Follow me on Twitter @ritholtz. You can sign up for my daily reading list at Ritholtz.com. I would be remiss if I did not thank the crack team who helps put these conversations together each week. Sarah Livesey is my audio engineer. Atika Valbrun is my project manager. Paris Wald is our producer. Sean Russo is my head of Research.

I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

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